Yearly Archives: 2022

New SEC Rule Mandates Electronic Filing of Form 144s and “Glossy” Annual Reports

Posted by Eric Orsic, McDermott Will & Emery LLP, on
Thursday, July 7, 2022
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Eric Orsic is a Partner at McDermott Will & Emery LLP. This post is based on his MWE memorandum.

On June 3, 2022, the US Securities and Exchange Commission (SEC) adopted amendments to Rule 101 of Regulation S-T that eliminate the option for issuers and filing persons to file a number of forms in paper format. The amendments mandate that issuers and filing persons electronically submit the following forms on EDGAR:

  • Form 144 for sales of securities of issuers subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act
  • “Glossy” annual reports to security holders
  • Form 6-K filings [1]
  • Notices of exempt solicitations and exempt preliminary roll-up communications
  • Filings made by multilateral development banks
  • Certifications made pursuant to Section 12(d) of the Exchange Act and Exchange Act Rule 12d1-3 that a security has been approved by an exchange for listing and registration.

In Depth

Form 144

The amendments have important implications for Form 144 filers as the SEC is looking to increase transparency and make these filings more accessible to investors, analysts and other market participants. According to data cited by the SEC, less than 1% of Form 144s submitted are done so electronically. The balance of Form 144s are either submitted in paper format or via email by virtue of the filing relief initially adopted during the COVID-19 pandemic. [2] The paper forms are not digitized by the SEC but are instead kept in its Public Reading Room in Washington, DC. Handwritten and offline, paper Form 144s are difficult for the public to access, track and analyze. Third-party service providers routinely scan the paper filings and make them available to their subscribers. However, the SEC noted that these third-party services are subscription based and not generally accessible to the public without charge. The SEC also noted the lag between the time the filings are made and when they become available via third-party service providers, with several days’ lag being the norm. Form 144 will now be an online fillable document similar to Forms 3, 4 and 5, making all filings machine readable and easily accessible online.

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Hidden Agendas in Shareholder Voting

Posted by Scott Hirst (Boston University), and Adriana Robertson (University of Chicago), on
Wednesday, July 6, 2022
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Scott Hirst is Associate Professor of Law at Boston University and Adriana Z. Robertson is Donald N. Pritzker Professor of Business Law at the University of Chicago Law School. This post is based on their recent paper, forthcoming in the Yale Journal on Regulation.

Nothing in either corporate or securities law requires companies to notify investors what they will be voting on before the record date for the meeting. In a forthcoming paper, we show that, overwhelmingly, they do not. The result is “hidden agendas”: for 88% of shareholder votes, investors cannot find out what they will be voting on before the record date. This poses an especially serious problem for investors who engage in securities lending: they must decide whether the expected benefit of voting exceeds the expected benefit of continuing to lend their shares (or making them available for lending) without knowing what they will be voting on. All investors who engage in share lending are affected, but the problem is particularly acute for large investment managers that have fiduciary duties related to voting. At present, they must discharge these duties in the dark.

We propose a simple amendment to the Securities and Exchange Commission’s proxy rules that would solve the problem of hidden agendas: a requirement that public companies file proxy statements at least five days before the record date for the meeting. This simple change would give investors the information they need to make an informed decision about whether to retain the right to vote or not. If we believe that shareholder voting is important, and that investment managers and others should make informed decisions around voting, we should give them the information they need to do so.

Despite the centrality of shareholder voting to corporate governance, the rules and practices that hold them together can seem like a hodgepodge of corporate law rules, securities regulation, and market practices. The intersection of these rules and practices can lead to peculiar outcomes. Our paper focuses on one such outcome. While companies are free to publish a meeting’s agenda before its record date, there is no requirement that they do so. We find that, overwhelmingly, they do not. Our empirical analysis demonstrates that for 88% of shareholder votes, investors are unable to find out what questions they will be voting on in time to decide whether they wish to vote on them. We refer to these situations as “hidden agendas.” We note that our use of this term does not suggest that these companies have an ulterior motive for not disclosing their agenda prior to the record date; only that their agendas are not publicly available.

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The Proposed SEC Climate Disclosure Rule: A Comment from Twenty-Two Professors of Law and Finance

Posted by Lawrence A. Cunningham (George Washington University), on
Wednesday, July 6, 2022
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Lawrence A. Cunningham is the Henry St. George Tucker III Research Professor at George Washington University Law School. This post is based on a comment letter by Professor Cunningham and 21 other Professors of law and finance.

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 by Leo E. Strine, Jr. (discussed on the Forum here); Stakeholder Capitalism in the Time of COVID, by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Corporate Purpose and Corporate Competition by Mark J. Roe (discussed on the Forum here).

This post is based on a comment letter sent to the SEC by Stephen M. Bainbridge (UCLA), Jonathan B. Berk (Stanford), Sanjai Bhagat (Colorado), Bernard S. Black (Northwestern), William J. Carney (Emory), Lawrence A. Cunningham (GW), David J. Denis (Pittsburgh), Diane Denis (Pittsburgh), Charles M. Elson (Delaware), Jesse M. Fried (Harvard), Sean J. Griffith (Fordham) Jonathan M. Karpoff (Washington), F. Scott Kieff (GW), Edmund W. Kitch (Virginia), Katherine Litvak (Northwestern), Julia D. Mahoney (Virginia), Paul G. Mahoney (Virginia), Adam C. Pritchard (Michigan), Dale A. Oesterle (Ohio State), Roberta Romano (Yale), Christina P. Skinner (Pennsylvania), and Todd J. Zywicki (George Mason). Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.

The enthusiasm of many Commissioners and Staff of the Securities and Exchange Commission (the “SEC”) to participate in the global debate about climate change is understandable. After all, protecting the earth’s sustainability is perhaps the most compelling issue of our time. It’s an issue all must take seriously and everyone must do their part. But each of us, and particularly governmental authorities, must always act in accordance with law and fairness.

The undersigned, a group of professors of law and finance, are concerned that the SEC’s recent proposal to impose extensive mandatory climate-related disclosure rules on public companies (the “Proposal”) exceeds the SEC’s authority. In addition, rather than provide “investor protection,” the Proposal seems to be heavily influenced by a small but powerful cohort of environmental activists and institutional investors, mostly index funds and asset managers, promoting climate consciousness as part of their business models.

The framework of this post traces the potential sources of the SEC’s authority, which are a function of federal statutes and other federal laws. The statutes that created the SEC in the 1930s authorize the SEC to promulgate disclosure regulations that are “necessary or appropriate in the public interest or for the protection of investors.” Amendments to those statutes in the late 1990s instructed the SEC to report on whether a proposed regulation will promote efficiency, competition, and capital formation.

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2022 Say on Pay & Proxy Results

Posted by Todd Sirras, Austin Vanbastelaer, and Justin Beck, Semler Brossy LLC, on
Wednesday, July 6, 2022
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Todd Sirras is a Managing Director, Justin Beck is a Consultant, and Austin Vanbastelaer is a Senior Consultant at Semler Brossy LLC. This post is based on a Semler Brossy memorandum by Mr. Sirras, Mr. Beck, Mr. Vanbastelaer, Alexandria Agee, Sarah Hartman, and Kyle McCarthy.

Breakdown of Say on Pay Vote Results

26 Russell 3000 companies (2.7%) failed Say on Pay thus far in 2022, 9 of which are in the S&P 400. 17 companies failed since our last report (bolded in the table later in this post). The failure rate has increased 80 basis points since our last report (1.9%).

Say on Pay Observations

  • The current Russell 3000 average vote result of 90.4% is similar to the index’s average vote at this time last year (90.4%); the current S&P 500 average vote result of 88.3% is below the index’s average at this time last year (89.6%), and is consistent with the year-end vote result in 2021.
  • The 210-basis point spread between the current average vote results for the Russell 3000 and S&P 500 is equal to the spread at year-end in 2021; and wider than the 90-basis point spread at this time last year.
  • The failure rates for the Russell 3000 and S&P 500 are lower than the failure rates at this time last year: the Russell 3000 is 40 basis points lower at 2.7% and the S&P 500 is 100 basis points lower at 3.4%.

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The Proposed SEC Climate Disclosure Rule: A Comment from Eight U.S. Senators

Posted by Senator Brian Schatz (D-HI), Senator Elizabeth Warren (D-MA), and Senator Sheldon Whitehouse (D-RI), on
Tuesday, July 5, 2022
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Brian Schatz is U.S. Senator from Hawaii; Elizabeth Warren is U.S. Senator from Massachusetts; and Sheldon Whitehouse is U.S. Senator from Rhode Island. This post is based on a comment letter sent to the U.S. Securities and Exchange Commission by Senators Schatz, Warren, Whitehouse, and five other U.S. Senators.

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 Senator Brian Schatz, Senator Sheldon Whitehouse, Senator Elizabeth Warren, Senator Sherrod Brown, Senator Martin Heinrich, Senator Alex Padilla, Senator Tammy Baldwin, and Senator Jeffrey A. Merkley. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.

We write to express our strong support for the Securities and Exchange Commission’s (SEC, the Commission) proposed amendments to its rules under the Securities Act of 1933 and the Securities Exchange Act of 1934, which would require registrants to provide climate-related information in their registration statements and annual reports. We thank you for your leadership in ensuring investors have the detailed, consistent, comparable, and reliable information they need to make informed capital allocation decisions.

This comment specifically addresses the Commission’s proposed new subpart to Regulation S-K, which would require disclosure of a registrant’s: 1) governance of climate-related risks; 2) material climate-related impacts on its strategy, business model, and outlook; 3) climate-related risk management; 4) greenhouse gas (GHG) emissions metrics; and 5) climate-related targets and goals. As the Commission notes, these disclosures are “fundamental to investors’ understanding the nature of a registrant’s business and its operating prospects and financial performance.” [1] It is therefore imperative that they be filed rather than furnished, and presented alongside other key information about a registrant’s business and financial condition.

We also strongly support the Commission’s proposed provisions under Regulation S-X that would require disclosure of climate-related financial metrics in a note to a registrant’s financial statements. Senator Reed is leading several of our colleagues in submitting a separate comment related to the proposed Article 14 of Regulation S-X, and we point your attention to that parallel effort as we focus on the provisions under Regulation S-K.

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Sustainable Investing with ESG Rating Uncertainty

Posted by Abraham Lioui (EDHEC Business School), on
Tuesday, July 5, 2022
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Abraham Lioui is Professor of Finance at EDHEC Business School. This post is based on a recent paper, forthcoming in the Journal of Financial Economics, by Professor Lioui; Doron Avramov, Professor of Finance at IDC Herzliya; Si Cheng, Assistant Professor of Finance at the Chinese University of Hong Kong Business School; and Andrea Tarelli, Assistant Professor of Mathematics for Economic, Financial and Actuarial Sciences at the Catholic University of Milan.

Related research from the Program on Corporate Governance includes Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value Add Value? (discussed on the Forum here), by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Corporate Purpose and Corporate Competition by Mark J. Roe (discussed on the Forum here).

Earlier this year, regulatory bodies such as the Securities and Exchange Commission (SEC) for the US and the European Securities and Markets Authority (ESMA) for the EU launched an extensive consultation about ESG disclosure regulation, i.e., about firms’ environmental, social and governance (ESG) related risks and opportunities. Three phenomena triggered this regulatory activity: i) a considerable growth in the demand for socially responsible vehicles, ii) an impressive disagreement amongst ESG data vendors about the ESG profiles of companies, and iii) visible or latent ESG- and green-washing by companies and asset management firms.

As the ESG objective is becoming a primary focus for all business sectors, the reallocation of capital has major implications for portfolio decisions and asset pricing. However, ESG investors often confront a substantial amount of uncertainty about the true ESG profile of a firm. Without a reliable measure of the true ESG performance, any attempt to quantify it needs to cope with incomplete and opaque ESG data and nonstructured rating methodologies. While such uncertainty could be an important barrier to sustainable investing, to date, little attention has been devoted to the role of ESG uncertainty in portfolio decisions and asset pricing. Our paper Sustainable Investing with ESG Rating Uncertainty (forthcoming in the Journal of Financial Economics) aims to fill this gap.

We consider an economy populated by agents who extract nonpecuniary benefits from holding stocks. The nonpecuniary benefit is directly linked to the ESG profile of the firm. Due to uncertainty about the ESG profile, stocks are perceived to be riskier. Consequently, the demand for equities falls due to ESG uncertainty, even for green firms. While green stocks should have lower expected returns due to the nonpecuniary benefits from holding them, there is an offsetting force in the presence of ESG uncertainty because the higher perceived risk essentially commands a higher premium. The ultimate implications of ESG preferences with uncertainty for the greenium (i.e., the spread between green and brown stocks’ returns) are thus inconclusive. For perspective, previous literature which considers ESG preference but ignores ESG uncertainty documented an increasing demand for risky assets and a negative greenium, i.e., brown stocks always outperform green stocks.

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The Critical Role of the Board Chair in Driving Board Performance

Posted by Rusty O'Kelley, Rich Fields, and Laura Sanderson, Russell Reynolds Associates, on
Tuesday, July 5, 2022
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Rusty O’Kelley co-leads the Board and CEO Advisory Partners in the Americas, Rich Fields leads the Board Effectiveness practice, and Laura Sanderson co-leads the Board and CEO Advisory Partners in Europe at Russell Reynolds Associates. This post is based on a Russell Reynolds memorandum by Mr. O’Kelley, Mr. Fields, Ms. Sanderson, PJ Neal, Jemi Crookes, and Elena Loridas.

While all directors can contribute to the board’s success, the board chair has a unique set of responsibilities, both in the tone that they set, and their influence on how time and resources are deployed. The best board chairs are facilitators who get the best out of the collective expertise of the board—yet many chairs fail to play that role successfully. Year over year, we are constantly amazed at the sizable gap between observed chair behaviors on typical boards and those on Gold Medal Boards (boards whose directors rate their board effectiveness as a 9 or 10 on a 1-10 scale, and report the company as having outperformed relevant TSR benchmarks for two or more consecutive years), as shown below:

Source: Russell Reynolds Associates’ 2022 Global Board Culture and Director Behaviors Survey. Percentage of directors saying they “always” or “often” observed their board chair demonstrating the specific behavior. N=678. 2022.

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Shareholder Resolutions in Review: Lobbying Disclosures

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Monday, July 4, 2022
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Subodh Mishra is Global Head of Communications at Institutional Shareholder Services, Inc. This post is based on an ISS memorandum by Paul Hodgson, Senior Editor at ISS Corporate Solutions.

Shareholder resolutions filed in the 2022 proxy season reflect continuing investor concern over lobbying activities and whether they are consistent with a company’s public positions and aligned with shareholder interests. However, the passage of only two such resolutions indicates that the majority of shareholders are satisfied with company efforts to address these concerns.

In this series of snapshots, ISS Corporate Solutions examines the key corporate issues raised by this season’s shareholder resolutions. This time, we look at resolutions on lobbying, including activities focused on climate. Voting results are based on filings by companies up to June 13, 2022.

More shareholder resolutions were filed during the 2022 proxy season than the previous year, with 586 environmental and social shareholder proposals submitted at U.S. companies so far, compared to 561 in 2021. Though many have since been withdrawn, many have been or will be voted on. According to data from ISS Corporate Solutions, 569 shareholder resolutions on ESG issues have either been voted on or are pending in annual meetings through November this year.

Some 31 proposals on lobbying were filed during this year’s proxy season, including three focused on climate, 27 of which have been voted on. Of those, just two received majority support, at Netflix and The Travelers Companies, Inc. A proposal at Gilead Sciences received 49.9% support. Overall, average support was at 31.8%. While many shareholders remain concerned about companies’ lobbying activities, both direct and indirect, the failure rate of such proposals indicates that the majority of investors are convinced that additional disclosures made by companies that have long been targeted by such proposals mark a sufficient improvement over past practices.

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What the Volume and Diversity of Comment Letters to the SEC Say About its Climate Proposal

Posted by Lawrence A. Cunningham (George Washington University), on
Sunday, July 3, 2022
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Lawrence A. Cunningham is the Henry St. George Tucker III Research Professor at George Washington University Law School.

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.; and Stakeholder Capitalism in the Time of COVID, by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

The Securities and Exchange Commission presents its new climate proposal as a modest evolution in its longstanding rules requiring environmental disclosure. While supporters echo that pitch, most recognize the proposal as a large leap beyond the SEC’s traditional focus on material financial matters.

Who has the better of it may be inferred from the breadth of comments the SEC’s proposal received during the three-month comment period that ended June 17.

By sheer number, the proposal is record setting. The SEC has posted some 14,000 letters it received: These letters come from an astounding array of people and organizations, a far larger and diverse group than SEC rule proposals usually attract.

By comparison, only a handful of the thousands of SEC rule proposals have garnered anywhere near the level of comment letters as this one, and few with the diversity of views. For instance, the SEC’s proposal rules on disclosing compensation ratios and political contributions both drew large volumes of form letters (30,000 and 1.2 million!), neither drew as many tailored letters as the climate rule (those drew ~1500 and ~3400 respectively).  Notably too, while the climate rule comment period has been open 3 months, those were open far longer: 1 year and 6 years, respectively.  Suffice it to say: the climate rule is attracting inordinate attention.

While the SEC simply posts comments as received, with no attempt to classify them, here is a rundown based on my own classification effort:

  • ~1,000 substantial substantive letters written by a diverse range of authors who clearly spent dozens to hundreds of hours on each
  • ~ 3,000 less detailed but many nuanced and equally impassioned from individual investors not otherwise identifying an affiliation
  • ~10,000 following about 30 different form letters that others energized, both for and against (few nuanced).

A breakdown of most of the first category by type illuminates.

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Developments in Unfair Prejudice Litigation

Posted by James Whitaker and Riku Ode, Mayer Brown LLP, on
Saturday, July 2, 2022
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James Whitaker is partner and Riku Ode is a trainee solicitor at Mayer Brown LLP. This post is based on their Mayer Brown memorandum.

Introduction

Companies—both public and private, and in multiple sectors—continue to grapple with the challenges of today’s economic climate. Nuanced, complex and consequential (perhaps even existential) decisions must often be made under significant time pressures. As a result, the interests and views of shareholders—particularly minority shareholders—may not always receive the attention they deserve, or require. Increasingly, those shareholders are looking for means of redress.

In this post, we look at unfair prejudice actions, which have long formed an important weapon in shareholders’ arsenals. These allow minority shareholders to seek redress for perceived injury or prejudice they have suffered, unfairly, as a result of corporate action (or inaction), at the hands of those who manage the company, perhaps in breach of some promise or agreement.

The growing number of unfair prejudice actions over recent years, and months, reflects the dual emerging trends of stakeholders—particularly minority shareholders—litigating to protect their rights, and of courts considering, and perhaps expanding, the scope of the unfair prejudice jurisdiction.

These trends are likely to continue. We consider some of the factors to keep in mind when preparing, or responding to, unfair prejudice petitions.

What are Unfair Prejudice Petitions and How Do They Work?

Aggrieved shareholders, unhappy with the performance of those running the company, commonly have two potential courses available to them (absent a wish to seek to wind up the company). First, in specific (and rather limited) circumstances, they may be able to pursue a so-called derivative action, in the company’s name, against its directors. Secondly, they may be able to establish that their interests have been unfairly prejudiced through the conduct of the majority shareholders, and/or, increasingly, the directors of the company, and obtain relief by way of an unfair prejudice petition.

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