Yearly Archives: 2022

The Rise of Rule 10b5-1 Enforcement and How Companies Can Mitigate Risk of DOJ and SEC Actions

Posted by Jina Choi, Edward A. Imperatore, Brian K. Kidd, Morrison & Foerster LLP, on
Tuesday, November 29, 2022
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Jina Choi, Edward A. Imperatore, and Brian K. Kidd are Partners at Morrison & Foerster LLP. This post is based on their Morrison & Foerster memorandum. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation (discussed on the Forum here) by Jesse M. Fried. 

The U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have recently intensified their scrutiny of insider trading under Rule 10b5-1 trading plans. The emerging trend of enforcement investigations and actions in this area shows that regulators and prosecutors are keen to hold executives accountable for insider trading. Companies and executives should adopt best practices to mitigate the risk that trading pursuant to a Rule 10b5-1 plan could result in an insider trading investigation.

Key Takeaways:

  • The SEC and DOJ are increasingly using data analytics to identify and initiate investigations of suspicious trading under Rule 10b5-1 plans, which are intended to shield companies and executives from insider trading allegations by letting them schedule transactions in advance;
  • Rule 10b5-1 plans, standing alone, cannot insulate corporate executives and employees from insider trading liability;
  • Insiders cannot possess material nonpublic information (MNPI) when they put a Rule 10b5-1 plan in place; otherwise, the plan will not serve as an affirmative defense to an allegation of insider trading;
  • The SEC has proposed amendments to the rules for Rule 10b5-1 plans, including a “cooling-off” period of at least 120 days between enacting the plan and when trading pursuant to the plan can begin;
  • The SEC’s view of information that constitutes MNPI may be expanding, and what is considered material will be assessed with hindsight; and
  • Companies should consider adopting the following for Rule 10b5-1 plans:
    • Institute a Cooling-off Period: Companies and executives should consider a “cooling-off” period between enacting the plan and when trades begin under the plan. Although no such restriction is currently in place, the SEC has proposed a period of at least 120 days, which would span an entire quarter, meaning that no trading could occur under a Rule 10b5-1 plan adopted in a particular quarter until after that quarter’s financial results are released. Adopting a cooling-off period designed to delay trading under a Rule 10b5-1 plan until after quarterly earnings are publicly announced can support an argument that the plan was created in good faith.
    • Ensure Robust Internal Controls: Companies should ensure that they have robust internal controls that are consistent with SEC rules and enforcement developments. They should look closely at their insider trading policy, enforcement of trading windows for enactment of Rule 10b5-1 plans, and review modifications to Rule 10b5-1 plans. Because the SEC has proposed heightened disclosure requirements for Rule 10b5-1 planned trades, companies may also want to prepare for possible disclosure of executive plans.
    • No Overlapping Plans: The SEC’s proposed rules prohibit “overlapping” Rule 10b5-1 trading plans. The SEC explained that, under the current rules, an insider can exploit Rule 10b5-1 plans by using them to establish multiple pre-existing hedged trading arrangements that temporally overlap and are timed to occur around dates on which the the issuer is likely to disclose earnings or other material information. An insider may decide later which trades to execute and which to cancel under the plans after the insider  becomes aware of MNPI but before the MNPI is made public. Under the proposed amendment, the affirmative defense would not be available for any trades by a trader who has established multiple overlapping trading arrangements for open market purchases or sales of the same class of securities. Companies should understand how directors and officers are using these plans and consider adopting a policy of prohibiting multiple overlapping plans.

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Trends in E&S Proposals in the 2022 Proxy Season

Posted by Daniel Litowitz, and Lara Aryani, Shearman & Sterling LLP, on
Monday, November 28, 2022
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Daniel Litowitz and Lara Aryani are Partners at Shearman & Sterling LLP. This post is based on a Shearman & Sterling piece by Mr. Litowitz, Ms. Aryani, George Casey, William Kim and Lucas Wherry and is part of the 20th Annual Corporate Governance Survey publication of Shearman & Sterling LLP. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions (discussed on the Forum here) by Scott Hirst.

OVERVIEW

2022 has seen yet another record-setting proxy season,[1] with Russell 3000 companies fielding 813 shareholder proposals filed as of mid-July, 2022, representing approximately a 3% increase from 2021. Companies in the S&P 500 experienced a slightly higher year-over- year increase, receiving 642 proposals this season, representing a 5% increase from 2021. While the number of compensation-related proposals received by Russell 3000 companies remained generally consistent with 2021 and governance proposals decreased by approximately 15% in 2022, environmental and social (E&S)-related proposals continued their upward trend, with a record 471 E&S proposals submitted in 2022, a 15% increase over 2021. The number of E&S proposals continues to represent a majority of all shareholder proposals received by Russell 3000 companies, comprising 58% of proposals in 2022 compared to 51% in 2021.

Source: “Shareholder Voting Trends (2018-2022),” The Conference Board, https://www.conference-board.org/topics/shareholder-voting/trends-2022-brief-1-environmental-climate-proposals and https://www.conference-board.org/topics/shareholder-voting/trends-2022-brief-2-human-capital- management-socialproposals.

In 2022, there was a significant increase in the number of E&S proposals that were put to a vote in comparison with 2021 (from 47% to 59%). This was likely partly an effect of Staff Legal Bulletin No. 14L, issued by the Securities and Exchanges Commission (SEC) in July 2021, which made it harder for companies to exclude E&S proposals from proxy statements under the ordinary business exclusion pursuant to Rule 14a-8(i)(7) or the economic relevance exclusion pursuant to Rule 14a-8(i)(5).[2]

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The Unicorn Puzzle

Posted by Rüdiger Fahlenbrach (Ecole Polytechnique Fédérale de Lausanne), on
Monday, November 28, 2022
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Rüdiger Fahlenbrach is Swiss Finance Institute professor at Ecole Polytechnique Fédérale de Lausanne (EPFL) College of Management. This post is based on a recent paper by Professor Fahlenbrach, Professor René M. Stulz, Daria Davydova, and Leandro Sanz.

Unicorns are private companies with pro forma valuations of at least $1 billion. In our paper “The Unicorn Puzzle,” recently posted on SSRN and available here, we investigate the puzzle of why controlling shareholders of certain startups find the unicorn status more valuable than being a public firm and the closely related question of why the number of unicorns increased so much recently. Our key findings are that unicorns differ from other VC-funded firms in that they rely more on organizational capital as well as network effects and the internet. Unicorn status enables startups to access new sources of capital. With this capital, they can invest more in organizational intangible assets with less expropriation risk than if they were public. As a result, they are more likely to capture the economies of scale that make their business model valuable.

We create a new unicorn database. Our sample consists of 639 U.S. unicorns. We have 427 active unicorns at the end of our sample period and observe 212 unicorn exits. Our sample covers all U.S. unicorns since the beginning of the 2000s until the end of the third quarter of 2021. We document the evolution of the number of unicorns and find that the number increases at an accelerating pace over our sample period. Even though 2021 has the highest number of unicorn exits, unicorn births outpace exits and the number of unicorns in existence increases in 2021. The increase is surprising because one would have expected the high valuations of 2021 to represent a unique opportunity for startups to enter public markets rather than seek to attain unicorn status.

Unicorns have reached a size that is much larger than the size of the typical IPO firm. To evaluate why founders find it valuable for their startups to stay private even though they have a much larger size than the typical IPO, we assess how the benefits and costs of being public may differ for unicorns from those of other startups. Since the unicorn phenomenon is a new phenomenon that did not exist before the 2000s, it has to be that either (1) the net benefit of being public (benefit minus cost of being public) became negative for many existing firms with private valuations of $1 billion or more, or (2) a new type of firms emerged for which the net benefit of being public is negative even at private valuations exceeding $1 billion. We show that both forces are at play. Funding has become increasingly available for firms with a valuation of at least $1 billion, which has decreased the funding and liquidity benefits of being public for these firms. In addition, a new type of firm that relies more on organizational capital and network effects has emerged. These firms are highly valuable if they succeed at capturing the benefits associated with the organizational capital and network effects that are central to their business plan, but they may not succeed in their efforts to build sufficient organizational capital and create network effects if they have to do so as public firms. These two effects constitute our proposed explanation for the unicorn phenomenon.

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The corporate director’s guide to overseeing deals

Posted by Maria Castañón Moats, Paul DeNicola, Colin Wittmer, PricewaterhouseCoopers LLP, on
Monday, November 28, 2022
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Maria Castañón Moats is Leader, Paul DeNicola is Principal, and Colin Wittmer is Deals Leader at PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.

Introduction

The deal volume in 2021 reached levels not seen in recent years, a trend that continued into the first part of 2022. But since then, the markets have shifted.

With rising inflation rates, geopolitical uncertainty, continued supply chain interruptions, and a lingering pandemic, deal volume began to slow significantly as 2022 progressed.

A period of economic contraction will certainly influence transactions. This flows through inflationary, and borrowing rate pressure, real wage challenges, consumer spending variability, and other factors. The markets in 2022 still have an abundance of capital for both corporate and private equity (PE) to fund deals. As market volatility stifles IPO activity, alternative sources of capital (including from PE) become more appealing.

Some of the same forces creating market uncertainty also are driving dealmaking imperatives. Whether a company needs to transform its capabilities, supply chains, or go-to-market approach, the market is impatient and one of the fastest ways to accelerate transformation is through M&A.

Navigating this rapidly-evolving market presents a challenge for any business leader. But in any environment, a well-tailored deals strategy will open opportunities. And the current environment still poses a fiercely competitive deals marketplace as companies look to unlock value in new ways.

Overseeing deals and your company’s portfolio strategy

Having a focused deals strategy is critical to success. Along with organic growth through increased sales and new products and services, growth can also come through acquisitions, mergers, joint ventures, and other deals. What’s critical for the board is understanding the ins and outs of the deal, and how various transactions a company has done or wants to do are tied together in a portfolio strategy.

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Linking Executive Compensation to ESG Performance

Posted by Merel Spierings, The Conference Board, Inc., on
Sunday, November 27, 2022
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Merel Spierings is a Researcher for the ESG Center at The Conference Board. This post is based on her Conference Board memorandum, in partnership with ESG analytics firm ESGAUGE and compensation advisory firm Semler Brossy. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Paying for Long-Term Performance (discussed on the Forum here); Pay without Performance: The Unfulfilled Promise of Executive Compensation; and Executive Compensation as an Agency Problem, all by Lucian Bebchuk and Jesse M. Fried.

Introduction

As companies address two fundamental and related shifts—the intensified focus on environmental,
social & governance (ESG) issues driven by investors, employees, consumers, business partners, ESG rating agencies, and regulators, [1] and the shift to a multistakeholder form of capitalism [2] —corporate boards are not only incorporating nonfinancial matters into discussions of company strategy and business plans, but also increasingly considering ESG performance measures in incentive plans. At the same time, there are concerns about the benefits of incorporating ESG measures into compensation, the risks of doing so (e.g., rewarding the wrong behaviors, setting inadequate targets, and creating guaranteed bonuses), and challenges in providing investors with what they view as sufficient transparency and specificity in ESG-based pay plans. These concerns have now been compounded by skepticism about whether ESG can actually drive financial performance for companies and investors alike. [3]

Insights for What’s Ahead

  • The vast majority of S&P 500 companies are now tying executive compensation to some form of ESG performance—growing from 66 percent in 2020 to 73 percent in 2021. The most significant increase was found in companies’ use of diversity, equity & inclusion (DEI) goals, rising from 35 percent in 2020 to 51 percent in 2021, as investors and other stakeholders continue to focus on diversity—making it a priority for companies as well. And as a result of the ever-growing attention to climate change, the share of S&P 500 companies that tied carbon footprint and emission reduction goals to executive pay also grew considerably, from 10 percent in 2020 to 19 percent in 2021.
  • Companies are embracing different approaches to factoring ESG into executive pay and are continuing to refine their ESG measures as they expand their reach. For example, some companies are moving from including ESG measures as part of the often-qualitative individual performance section of the annual incentive plan to incorporating ESG performance as a more quantitative modifier of the company’s overall financial performance rating, which is more aligned with investors’ preferences and expectations. Other companies are expanding the scope of those whose compensation is affected by ESG measures beyond the C-suite, reflecting that achieving ESG goals requires the collective effort of the employee base more widely.
  • Leading reasons companies are incorporating ESG measures into executive compensation, according to a poll of roundtable participants, are to signal that ESG is a priority, to respond to investor expectations, and to achieve ESG commitments the firm has made. While these are valid reasons, they also raise concerns. For example, some large institutional investors are skeptical about tying compensation to ESG measures, especially if there is not a strong business case for doing so and if the ESG goals are not sufficiently challenging or specific. Further, there are other less costly and disruptive ways of signaling ESG is a priority, including building ESG factors into professional development, succession, and promotion practices. Companies can also convey or achieve their commitment to ESG by enhancing disclosure on ESG performance.
  • Companies should consider using ESG operating goals for one to two years before including them in compensation. That allows time to see if those goals are truly relevant for the business, develop strong management and employee buy-in, and address any kinks in measurement methodology and reporting. It is especially important for companies to take time to validate and socialize ESG goals before rolling them out as part of compensation plans for a broader management or employee base.
  • It takes time to develop and compile reliable, meaningful data that can be used to measure and report actual performance against ESG goals. Companies can start by putting together a steering committee with representatives from various functions (e.g., compensation, finance, sustainability) who are engaged in the company’s strategy, and understand and have access to the data needed to measure and report on ESG performance.
  • Companies can link executive compensation to ESG successfully; however, they will need to go beyond simply “following the trend.” Actions companies will need to take include 1) identifying goals that are material, durable, and auditable, 2) assessing whether what the firm’s peers are doing in this area is instructive, 3) deciding whether to make performance measures absolute or relative to the market, and quantitative or qualitative, 4) determining the scope of those whose compensation is affected by ESG goals, 5) considering timing and assessing whether the ESG goal is appropriate for the annual or long-term incentive plan, 6) ensuring the type of metric reflects the firm’s corporate culture, 7) carefully considering the reaction of various stakeholder groups, and 8) reevaluating goals periodically to ensure that the ESG measures are still relevant and effective.
  • Companies will need to explain why including or adjusting ESG goals in compensation programs makes business sense and will “move the needle” on the firm’s performance and impact. Investors will want to understand how modifying the company’s compensation is necessary to achieve the firm’s financial, operating, and ESG goals—and whether the goals are sufficiently challenging to put compensation “at risk.” Those covered by the compensation programs will want to understand why a portion of their compensation is now linked to ESG goals. In some cases, the rationale may be obvious, such as when a company includes compliance-related goals in the wake of a widespread compliance failure. In other cases, boards and senior management will want to carefully consider whether they have a compelling narrative for adopting or adjusting such goals, especially as most companies say that including ESG measures in executive compensation is no more than “medium important” to their overall ESG efforts.
  • Measuring the full impact of including ESG performance goals in compensation is more challenging than measuring the impact of traditional operating or financial metrics. Companies should consider what they are trying to achieve by including ESG measures in compensation programs: is it to improve the firm’s ESG performance, to enhance its operating and financial performance, to signal that ESG (or a specific ESG metric) is a priority, to have a meaningful impact on society and the environment, or some combination of all four? If companies are actually seeking to have a broader impact on society and the environment, they may want to give serious consideration to how, if at all, they are incentivizing executives to work collaboratively with others in the industry and across the firm’s value chain—because making a measurable difference may require collective action.

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The PCAOB Is Missing In Action on Climate Risk

Posted by Thomas L. Riesenberg, Ceres, on
Saturday, November 26, 2022
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Thomas L. Riesenberg is a Senior Regulatory Advisor at Ceres. This post is based on his Ceres piece.

Scores of U.S. and non-U.S. financial regulators have in recent years been addressing climate change through rulemakings, risk assessments, and other activities. But one actor has been absent – the Public Company Accounting Oversight Board.

The PCAOB (technically a nonprofit corporation, not a U.S. government agency) was created by the Sarbanes-Oxley Act to oversee the performance of public company audits and the auditing profession. Its five board members are appointed by the Securities and Exchange Commission. Last year, the SEC replaced all five Trump-era members, with SEC Chair Gary Gensler stating his hope that this would set the PCAOB “on a path to better protect investors by ensuring that public company audits are informative, accurate, and independent.”[1]

The PCAOB laid out that path in its PCAOB’s Draft Strategic Plan, issued in August of this year. [2] The draft plan sets forth the organization’s goals for 2022 through 2026, including the need to address many “emerging trends,” such as “new approaches to raising capital (including through special purpose acquisition companies), digital assets, the war for talent, and increased remote work at public companies, broker-dealers, and audit firms.” These trends, the Draft Plan stated, are “transforming auditing and financial statement preparation,” requiring the PCAOB to “anticipate and respond to developments in the audit profession” and moderniz[e] our standards to drive changes in auditing practices and enhance investor protection.”

No mention is made in the draft plan of any actions the PCAOB might take with respect to climate change. This is puzzling for several reasons, as Ceres, a sustainability nonprofit, explained in a comment letter submitted to the PCAOB. [3] Most significantly, a few months before the PCAOB issued its draft plan, the SEC published in March 2022 its proposed climate disclosure rule, and that rule would directly implicate the PCAOB’s work by requiring that independent third-parties, such as accounting firms registered with the PCAOB, provide assurance of certain SEC registrants’ reports of their greenhouse gas emissions. Given that potential requirement, the SEC’s proposing release includes references to the PCAOB more than a dozen times. For example, the SEC asked for comment on the question “[w]hat, if any, additional guidance or revisions” of the PCAOB standards might be needed if the proposed rule were adopted? Further, because the rule proposal would allow firms that are not PCAOBregistered accounting firms to perform this work, the SEC asked whether it should “direct the PCAOB to develop a separate registration process for service providers that are not otherwise registered?”[4]

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Lessons from the Chancery Court Decision in P3 Health Group

Posted by Gail Weinstein, Steven J. Steinman, Brian T. Mangino, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Friday, November 25, 2022
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Gail Weinstein is Senior Counsel, Steven J. Steinman and Brian T. Mangino are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Steinman, Mr. Mangino, Andrew J. Colosimo, Randi Lally, and Erica Jaffe and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, Darius Palia, and Ge Wu; and The New Look of Deal Protection (discussed on the Forum here) by Fernán Restrepo and Guhan Subramanian.

In P3 Health Group, private equity firm Hudson Vegas Investments SVP LLC, which was the second-largest unitholder of P3 Health Group Holdings, LLC (the “Company”), challenged the Company’s de-SPAC merger. The Company’s sponsor, private equity firm Chicago Pacific Founders Fund, L.P., controlled the Company (a Delaware LLC) by virtue of its majority equity ownership, board designees, and contractual rights. Hudson claimed that the merger, which stripped it of $100 million of stock options and its contractual rights with respect to the Company and was effected over its objection, violated its contractual veto right over affiliated transactions.

The Delaware Court of Chancery recently issued five important decisions in the case (dated November 3, October 31, October 28, October 26, and September 12, 2022), rejecting dismissal of most of Hudson’s claims.

Background. Chicago Pacific provided the start-up capital for the Company and soon thereafter, Hudson invested $50 million in the Company. Soon thereafter, a de-SPAC merger was structured with Foresight Acquisition Corp. (a SPAC formed by an unaffiliated businessperson), which contemplated a three-way merger that included another Chicago Pacific portfolio company (known as “MyCare”). Hudson objected to the transaction. Chicago Pacific and the Company then restructured it to exclude MyCare (but allegedly contemplated including MyCare later in a follow-on transaction). Hudson unsuccessfully sued to enjoin the merger. Following the closing, Hudson asserted claims against Chicago Pacific and certain of its and the Company’s key managers and officers for their roles in arranging the merger. Hudson also added a claim that its initial investment in the Company was fraudulently induced. In a series of recent pleading-stage decisions, Vice Chancellor Laster rejected dismissal of most of the plaintiff’s claims.

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Weekly Roundup: November 18-24, 2022

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, November 25, 2022

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This roundup contains a collection of the posts published on the Forum during the week of November 18-24, 2022

Remarks by Commissioner Uyeda at the 2022 Cato Summit on Financial Regulation

Posted by Mark T. Uyeda, U.S. Securities and Exchange Commission, on Friday, November 18, 2022
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Remarks by Commissioner Peirce before FINRA’s Certified Regulatory and Compliance Professional Dinner

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on Friday, November 18, 2022
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SEC Releases Final Rules Regarding Clawback Policies for Public Issuers

Posted by Jamin Koslowe, Gregory T. Grogan, Karen Hsu Kelley, Simpson Thacher & Bartlett LLP, on Saturday, November 19, 2022
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Boards: Stepping Up as Stewards of Sustainability

Posted by Frederik Otto, Rachael De Renzy Channer, Ashley Summerfield, The Sustainability Board Report, on Sunday, November 20, 2022
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Updating Annual Report Risk Factors

Posted by Maia Gez, Era Anagnosti, Melinda Anderson, White & Case LLP, on Monday, November 21, 2022
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The Evolution of ESG Reports and the Role of Voluntary Standards

Posted by Ethan Rouen (Harvard Business School), Kunal Sachdeva (Rice University), Aaron Yoon (Northwestern University), on Monday, November 21, 2022
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Bylaw Amendments, Shareholder Activism, and Flying Close to the Sun

Posted by Leonard Wood, Derek Zaba, Kai H.E. Liekefett, Sidley Austin LLP, on Monday, November 21, 2022
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Fifth Circuit Declines to Rehear Sweeping Decision That Hamstrings SEC’s Enforcement Program

Posted by George S. Canellos, Tawfiq S. Rangwala, John J. Hughes III, Milbank, on Tuesday, November 22, 2022
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Boardroom Racial Diversity: Evidence from the Black Lives Matter Protests

Posted by Anete Pajuste, Maksims Dzabarovs and Romans Madesovs (Stockholm School of Economics), on Tuesday, November 22, 2022
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The Playing Field

Posted by Ali Saribas, Marianne Mitchell, Anais Sachiko Gaiffe, SquareWell Partners, on Tuesday, November 22, 2022
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EU’s New ESG Reporting Rules Will Apply to Many US Issuers

Posted by Emma Bichet, Jack Eastwood, and Michael Mencher, Cooley LLP, on Wednesday, November 23, 2022
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Universal Proxy Creates New Type of Proxy Fight

Posted by Pat Tucker, Garrett Muzikowski, Alanna Fishman, FTI Consulting, on Wednesday, November 23, 2022
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Review of Comments on SEC Climate Rulemaking

Posted by Cynthia A. Williams (Indiana University) and Robert G. Eccles (Oxford University), on Wednesday, November 23, 2022
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Review of Comments on SEC Climate Rulemaking

Posted by Cynthia A. Williams (Indiana University) and Robert G. Eccles (Oxford University), on
Wednesday, November 23, 2022
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Cynthia A. Williams is Visiting Professor of Law at Indiana University Maurer School of Law and Professor of Law Emerita at the University of Illinois College of Law; and Robert G. Eccles is Visiting Professor of Management Practice at Oxford University Said Business School. This post was authored by Professor Williams, Professor Eccles, Nathan Chael, Christy O’Neil, and Alex Cooper.

Introduction

 In June, the comment period closed on the SEC’s proposed rulemaking on “The Enhancement and Standardization of Climate-Related Financial Disclosures” (the Proposal). The SEC received more than 5,000 comments on the Proposal. The Commonwealth Climate and Law Initiative has conducted a review and analysis of the more than 1,000 comments made by trade associations, politicians, NGO and third sector entities, companies, investors and academics, as well as lawyers, professional organisations, regulators and standards bodies (these latter four groups are categorised as Other in the chart below as the absolute numbers are relatively small). Form letter comments and comments made by individuals were excluded from the review on the basis that the review focused on certain arguments which were not commonly addressed in such comments.

The review classified the major arguments used in each comment, but focused on arguments related to legal authority, Scope 3 emissions disclosures, and materiality and the 1% threshold. The review also categorized every commentator as For, Against, or Neutral with respect to the Proposal in general terms; a commentator who made suggestions in relation to the Proposal may have nevertheless been categorised as generally For the Proposal. This article summarises the key findings of the review at a high level.

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Universal Proxy Creates New Type of Proxy Fight

Posted by Pat Tucker, Garrett Muzikowski, Alanna Fishman, FTI Consulting, on
Wednesday, November 23, 2022
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Garrett Muzikowski is a Director, Pat Tucker is a Senior Managing Director, and Alanna Fishman is a Managing Director at FTI Consulting. This post is based on their FTI Consulting memorandum. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst.

In American politics there has been a long tradition of candidates for elected office running on a campaign platform defined solely by one issue. These politicians often have a view that simply by running for election it will drive attention to the issue, thus forcing change. This is exactly what happened when the U.S. Securities and Exchange Commission put into effect the Universal Proxy rules this September—it opened the door for single issue candidates in the annual election of board directors. The potential rise of single-issue candidates has important implications for how boards engage with investors, discuss oversight of key issues and protect the reputation of board members.

Proxy Fights a Mandate for Change

Prior to the universal proxy, traditionally contested director elections were primarily the territory of hedge funds in pursuit of strategic change at the company. An activist investor would focus on persuading shareholders that the company needs to change and all or some of the current board members are not up to the task. Investors voting by proxy were forced to choose either the management card, representing the existing board, or the dissident card, representing the activist’s nominees. Winning a proxy contest was as much winning a mandate for change as it was securing the election of new directors.

With the universal proxy, all nominees appear on one slate – even if multiple activists put forth dissident nominees at the same annual general meeting. Investors will now be able to hand-pick their own combination of directors they’d like to elect.

Universal Proxy Collides with Shareholder Influence Evolution

The adoption of the universal proxy comes at a time when the market is already witnessing an unprecedented level of shareholder influence. Two powerful trends in the market highlight this paradigm shift. First, shareholders now have the ability to drive favorable proxy outcomes with minimal amounts of investment. The days of needing 5% or more of shares outstanding to have influence are gone. Second, the investors that are pushing companies to change through shareholder proposals or other avenues have never been more prevalent or impassioned. Equally influential is the fact that the universal proxy rules lower the costs of a proxy campaign.

Universal proxy has connected influence, interest and cost in a way that opens the door for more funds to consider putting forth a board candidate for election.

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