Monthly Archives: July 2022

Weekly Roundup: July 8-14, 2022


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This roundup contains a collection of the posts published on the Forum during the week of July 8-14, 2022.

Combatting Racial Inequity: A Two-Year Retrospective


The Proposed SEC Climate Disclosure Rule: A Comment from Jon Lukomnik and Keith Johnson


Shareholder Resolutions in Review: Political Spending


How Gold Medal Boards Prioritize Their Time




Poised for Change? Boardroom Diversity Survey


Q2 2022 Audit Committee Newsletter: Helping You Prepare for Your Next Meeting




Supreme Court Decision Casts Doubt on SEC’s Climate Proposal and Other Regulatory Initiatives



SEC Requests Comment on Regulation of Information Providers Under the U.S. Investment Advisers Act




Twitter vs. Musk: The Complaint



Statement by Chair Gensler on Adoption of Amendments to the Rules Governing Proxy Voting Advice

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Today, the Commission will consider adopting amendments to the rules governing proxy voting advice. I am pleased to support these amendments because they address issues concerning the timeliness and independence of proxy voting advice, which would help to protect investors and facilitate shareholder democracy.

Institutional investors—and their investment advisers—often find it helpful to turn to specialized businesses called proxy advisory firms to provide them with voting recommendations concerning important corporate matters such as the election of directors, merger transactions, and shareholder proposals.

It is critical that investors who are the clients of these proxy advisory firms are able to receive independent and timely advice.

In 2020, the Commission adopted a rule that addressed several matters concerning proxy advisory firms. That rule provided important benefits for investors and market participants by improving disclosure of conflicts of interest in proxy advisory firms and expressly including proxy voting advice within the definition of a proxy solicitation so that the investor protections of the federal proxy rules extend to such advice.

We have, however, continued to hear from many investors that certain conditions in the 2020 rule might restrain independent proxy voting advice. Given those concerns, we have revisited certain conditions and determined that the risks they impose to the independence and timeliness of proxy voting advice are not justified by their informational benefits. Therefore, the rule before us today would repeal those conditions. Separately, other amendments would address potential risks of confusion regarding the application of liability to proxy voting advice that was unintentionally created by the 2020 rules while affirming that proxy voting advice is generally subject to liability under the proxy rules.

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Statement by Commissioner Peirce on Adoption of Amendments to the Rules Governing Proxy Voting Advice

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Mr. Chair. I appreciate the staff’s diligence, graciousness, professionalism, and hard work throughout this rulemaking process. Staff’s valuable time, however, could have been put to better use. For example, staff could have worked immediately on addressing outstanding issues around proxy plumbing and, in several years, on conducting a retrospective review of the 2020 Rules. [1] Instead, the request made of the staff was a difficult and pointless one—find a way to redo a freshly adopted rule without any new information to suggest that such a rewrite is warranted. I am sorry that I cannot support the resulting rule. [2]

When the Commission proposed these latest amendments nine months ago (the “Redo Proposal”), [3] nothing had changed since we adopted our 2020 Rules to justify repeal, so I voted no. [4] The feedback we received during this proposal’s brief comment period confirmed my initial view. [5] As one of many commenters who were baffled by the “regulatory whiplash” [6] put it:

We find it difficult to understand the Commission’s decision to propose amending the proxy solicitation exemption qualification requirements prior to having any data on their actual impact or cost. . . . It is not possible to conduct an economic or cost benefit analysis for a rule that has not gone into effect, and the decision to amend a finalized rule without such data may have the unintended consequence of establishing an undesirable precedent impacting regulatory stability going forward. [7]

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Twitter vs. Musk: The Complaint

This post provides the text of the complaint filed on July 12, 2022 by Twitter in its widely-followed case against Elon Musk. This post is part of the Delaware law series; links to other posts in the series are available here.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

TWITTER, INC.,

Plaintiff, v.

ELON R. MUSK, X HOLDINGS I, INC., and X HOLDINGS II, INC.,

Defendants.

Verified Complaint

Plaintiff Twitter, Inc. (“Twitter”), by and through its undersigned counsel, as and for its complaint against defendants Elon R. Musk, X Holdings I, Inc. (“Parent”), and X Holdings II, Inc. (“Acquisition Sub”), alleges as follows:

Nature of the Action

1. In April 2022, Elon Musk entered into a binding merger agreement with Twitter, promising to use his best efforts to get the deal done. Now, less than three months later, Musk refuses to honor his obligations to Twitter and its stockholders because the deal he signed no longer serves his personal interests. Having mounted a public spectacle to put Twitter in play, and having proposed and then signed a seller-friendly merger agreement, Musk apparently believes that he—unlike every other party subject to Delaware contract law—is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away. This repudiation follows a long list of material contractual breaches by Musk that have cast a pall over Twitter and its business. Twitter brings this action to enjoin Musk from further breaches, to compel Musk to fulfill his legal obligations, and to compel consummation of the merger upon satisfaction of the few outstanding conditions.

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The Proposed SEC Climate Disclosure Rule: A Comment from the U.S. Chamber of Commerce

Tom Quaadman is Executive Vice President and Evan Williams is Director of the Center for Capital Markets Competitiveness, both at the U.S. Chamber of Commerce. This post is based on a comment letter submitted by the U.S. Chamber of Commerce to the U.S. Securities and Exchange Commission regarding the Proposed SEC Climate Disclosure Rule.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.

This post is based on a comment letter submitted to the SEC regarding the Proposed SEC Climate Disclosure Rule by the U.S. Chamber of Commerce. Below is the text of a segment of the letter with minor adjustments to eliminate the correspondence-related parts.

The U.S. Chamber of Commerce appreciates the opportunity to comment on the proposed rules (the “Proposed Rules”) of the Securities and Exchange Commission (“SEC” or “Commission”) governing climate and the environment in Release No. 33-11042 (the “Proposing Release”). Combating climate change requires citizens, governments and businesses to work together. American businesses play a vital role in creating innovative solutions and reducing greenhouse gases (“GHGs”) to protect our planet. The SEC, working in coordination with other government agencies whose primary responsibility it is to protect the environment, also has a role to play to the extent climate risk implicates the SEC’s tripartite mission of investor protection, maintaining fair, orderly and efficient markets, and facilitating capital formation.

The Chamber believes that policy solutions addressing climate change should serve the goal of reducing emissions as much and as quickly as possible based on what the pace of innovation allows and the feasibility of implementing technical solutions at scale. The Chamber also believes that practical, flexible, predictable and durable market-based solutions and mechanisms are at the core of efforts to address climate risk and are reflected in the actions of the Chamber’s members. Promoting private sector innovation across industry sectors will be central to solving climate change.

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Board Diversity Action Expands to Courtrooms, Regulators, and Investors

Matthew Fust serves as a board member for several publicly traded and venture-backed biopharmaceutical companies and is a corporate finance and strategy advisor in the life sciences industry. This post is based on an NACD BoardTalk publication. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David Weiss; Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; and Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine, Jr.

In the year since my colleague Fabrice Houdart wrote that LGBTQ+ inclusion in the boardroom is simply good governance, the board diversity landscape has heated up, become more complex, and provided glimpses into what the future may hold in this interesting area of corporate governance. Below are a few key themes that I expect will characterize the board diversity landscape.

When attention is focused board diversity can increase quickly, but the gains may be narrow. Much of the action on corporate board diversity over the past few years has been catalyzed by legislative action (notably in California, where two laws aimed at board diversity were struck down this spring, but not before leaving their mark) and the national reckoning on racial justice, both serving as wake-up calls for many corporations.

The impact of California’s landmark 2018 legislation requiring gender diversity on the boards of public companies headquartered in the state has been stunning. In 2018, nearly one-third of public company boards in California were composed of all men. According to the most recent report from the California Partners Project, today fewer than 2 percent are. In addition, women hold 32 percent of public company board seats in California, double the number of seats held in 2018. In 2022, two-thirds of California public companies have three or more women directors—six times as many as in 2018. However, progress has been uneven. For example, although California’s population is nearly 20 percent Latino, a recent report by the Latino Corporate Directors Association found that between the September 30, 2020 enactment of California’s AB 979 legislation, the second board diversity law, and the end of 2021, the share of California public company board seats held by Latinos grew by only one percentage point, to 3 percent of California’s public company board seats.

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SEC Requests Comment on Regulation of Information Providers Under the U.S. Investment Advisers Act

Whitney Chatterjee, Don Crawshaw, and Eric Diamond are partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Chatterjee, Mr. Crawshaw, Mr. Diamond and Amy Dreisiger.

Summary

On June 15, 2022, the Securities and Exchange Commission (the “SEC”) issued a request for information and public comment (the “Request for Comment”) on matters related to the activities of index providers, model portfolio providers and pricing services (referred to by the SEC as “information providers” or “providers”). The SEC states that the role of such firms “has grown in size and scope in recent years, significantly changing the face of the asset management industry,” that “[t]he development and nature of these services may raise investment adviser status issues” under the Investment Advisers Act of 1940 (the “Advisers Act”) and that comments are requested “to facilitate consideration of whether regulatory action is necessary and appropriate to further the [SEC’s] mission.” [1]

The Request for Comment asks 40 questions with a total of 145 subparts. Consistent with Chairman Gensler’s approach on several other recent initiatives, the comment deadline is accelerated, with comments due on August 16, 2022 or 30 days after the Request for Comment is published in the Federal Register, whichever is later. [2]

The implications of the Request for Comment could be significant for index providers, model portfolio providers and pricing services that currently take the position that their activities do not subject them to registration or regulation under the Advisers Act. Any potential regulatory action following the Request for Comment would likely impose significant costs on firms that provide these services and may impose limitations on their operations.

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The Proposed SEC Climate Disclosure Rule: A Comment from the Business Roundtable

Maria Ghazal is Senior Vice President & Counsel for the Business Roundtable. This post is based on a comment letter submitted by the Business Roundtable to the SEC regarding the Proposed SEC Climate Disclosure Rule. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here), both by Lucian A. Bebchuk and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.; Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

This post is based on a comment letter submitted by Business Roundtable to the SEC regarding the Proposed SEC Climate Disclosure Rule. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.

This letter is submitted on behalf of Business Roundtable, an organization whose CEO members lead America’s largest companies, employing over 20 million workers. The total value of Business Roundtable companies, over $20 trillion, accounts for half the value of all publicly traded companies in the United States. Business Roundtable companies spend and invest over $7 trillion a year, helping sustain and grow tens of thousands of communities and millions of medium- and small-sized businesses.

We appreciate the opportunity to comment on the proposed rules (the “Proposal”) issued by the Securities and Exchange Commission (the “Commission” or “SEC”) on March 21, 2022, to require expansive new climate-related disclosures by registrants. While Business Roundtable supports efforts to enhance climate-related disclosure, we believe a number of key provisions in the Proposal, as drafted, are unworkable and would impose requirements that could not be satisfied in the manner and timeframe proposed, and may not result in decision-useful information for investors. Among other concerns, the Proposal would require registrants to produce overwhelming amounts of information that would not be comparable, reliable or meaningful, much less material, for investors. The Proposal would also subject registrants to significant liability for disclosures that inherently involve a high degree of uncertainty. For these reasons, as well as those laid out below, we urge the SEC to publish a revised proposal addressing these concerns for further comment.

Climate Disclosure Leadership

Business Roundtable has been a leader in advocating for a more comprehensive, coordinated and market-based approach to addressing climate change. Business Roundtable shares the concerns articulated by investors and other stakeholders that many parts of the economy are facing growing risks from climate change, including physical risks (e.g., extreme weather) and transition risks (e.g., technological and market shifts and regulatory and policy risks).

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Supreme Court Decision Casts Doubt on SEC’s Climate Proposal and Other Regulatory Initiatives

Christina Thomas and Andrew Olmem are Partners and Katelyn Merick is an Associate at Mayer Brown LLP. This post is based on their Mayer Brown memorandum.

On June 30, 2022, the U.S. Supreme Court decided West Virginia et al. v. Environmental Protection Agency, holding that the EPA lacks authority under Section 7411(d) of the Clean Air Act to limit greenhouse gas emissions from power plants through “generation shifting,” i.e., increasing the use of cleaner energy sources like wind and solar and reducing the use of dirtier sources like coal. [1] For a brief summary of the case, see our memorandum, Supreme Court Limits EPA’s Power To Regulate Greenhouse Gas Emissions From Power Plants. [2]

Although the case centered on the interpretation of the EPA’s authority under the Clean Air Act, the Court’s reasoning could apply to other federal agency actions where an agency is seeking to issue significant new regulations. Indeed, questions have already arisen about the implications of the decision for the U.S. Securities and Exchange Commission, which, under Chair Gary Gensler’s leadership, has sought to establish a series of new regulatory standards, including its climate-related disclosure rule proposal and its efforts to regulate digital assets as securities. This post provides a few initial observations on the practical impact of the WV v. EPA decision for the SEC on those two matters.

Climate-Related Disclosure Rules

With respect to the SEC’s climate-related disclosure rule proposal, [3] it is unlikely that the SEC will significantly modify the proposed rule prior to finalization in response to the decision in WV v. EPA. In our view, the SEC is committed to adopting broad and extensive climate-related disclosures and is willing to face legal challenges to its final rule.

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How Issuers and Investors Can Find Common Ground on ESG

James Killerlane is the Corporate Secretary, Managing Director and Deputy General Counsel of BNY Mellon. This post is based on a BNY Mellon report.

Related research from the Program on Corporate Governance includes Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach, and Robebrt H. Sitkoff; and Exit vs. Voice by Eleonora Broccardo, Oliver Hart and Luigi Zingales (discussed on the Forum here)

The global focus on climate change, alongside pandemic challenges and social justice movements, which helped highlight social concerns, have helped drive sustainability activities to the top of the agenda across the corporate world. As BNY Mellon discovered in a recent survey, investor pressure on issuers echoes these societal changes. Consequently, issuers and investors are increasingly focused on the disclosure and engagement practices related to environmental, social, and governance (ESG) topics.

Our research finds that ESG considerations are rapidly becoming a core element of Investor Relations, enhancing IR teams’ practices for engaging with investors. As a result, IR teams that are just beginning to make ESG a standard part of their process can use our findings in two ways. First, we identify common disconnects to avoid. Second, we provide actionable insights on creating productive, informative ESG engagement (i.e., an approach for establishing and maintaining these focused relationships).

On the demand side, investors want increased ways to understand companies’ sustainability practices. They look for the disclosure of reliable data alongside engagement on key areas of focus, in order to integrate ESG considerations into their decisions. This confluence of investor demand and issuer communications in our research shines a light on additional potential disconnects. We also uncover valuable insights on what to disclose and when to disclose it (i.e., the specific data and information used to communicate ESG risks, activities and impacts).

Disconnects and Demands

Disconnect: Investors want more than what issuers are currently offering, but issuers think they are offering everything that’s being asked.

Disconnect: There is a shift in investor thinking from viewing ESG as a risk-mitigation exercise toward it being a driver of returns. Hence, issuers need to focus on and understand growing or changing investor demands.

Demand: Investors want more transparency on ESG topics, more quantitative (vs. qualitative) data and more consistency in reporting.

Demand: Investors want more focus on material issues and those with the greatest impact.

Demand: Up until now, there has been a strong focus on environmental issues but investors also want issuers to focus on social and governance issues in ESG reporting.

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