2024 U.S. Proxy Season: Recent Proxy and Annual Report Developments

Laura D. Richman is a Counsel at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Ms. Richman, Jennifer J. Carlson, Lawrence A. Cunningham, Anna T. Pinedo, and David A. Schuette

Recent Proxy and Annual Report Developments

INSIDER TRADING DISCLOSURES

In December 2022, the U.S. Securities and Exchange Commission (the “SEC”) amended rules relating to insider trading arrangements and related disclosures. The amendments added conditions to the availability of the affirmative defense to insider trading liability contained in Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Exchange Act”). The amendments were designed to address concerns regarding alleged abuse of the rule by insiders to trade securities on the basis of material nonpublic information (“MNPI”). In addition, the amendments imposed new disclosure requirements regarding an issuer’s insider trading policies and procedures and the adoption, modification, and termination of Rule 10b5-1 plans and similar trading arrangements by directors and officers, as well as new disclosure requirements for executive compensation for certain equity awards made close in time to the issuer’s disclosure of MNPI.

Quarterly Disclosures. New Item 408(a) of Regulation S-K requires disclosure of whether during the company’s most recently completed fiscal quarter (which would be the fourth quarter in the case of an annual report) any director or officer adopted, modified, or terminated a Rule 10b5-1 plan or a similar trading arrangement. For quarterly reports on Form 10-Q, this disclosure is to be provided in Part II, Item 5(c). For annual reports on Form 10-K, this disclosure is to be provided in Part II, Item 9(b). See “Share Buyback Disclosures – Narrative Disclosures” below for similar requirements applicable to a company’s adoption or termination of a Rule 10b5-1 trading arrangement.

Disclosures must include the material terms of the plan or arrangement, such as the name and title of the director or officer, the adoption or termination date, the duration of the plan or arrangement, the aggregate number of securities to be sold or purchased pursuant to the plan or arrangement, and whether the arrangement is intended to satisfy the requirements for use of Rule 10b5-1’s affirmative defense. However, the disclosure is not required to include the pricing terms of the trading arrangement. This disclosure may be provided in tabular or narrative form.

On August 25, 2023, two SEC compliance and disclosure interpretations (“C&DI”) were issued related to these quarterly disclosures.[1] C&DI 133A.01 states that Item 408(a)(1) of Regulation S-K does not require disclosure of termination of a plan that ends due to expiration or completion of the plan in accordance with its terms, without any action by an individual. C&DI 133A.02 specifies that the Item 408(a) disclosure requirement applies to any Rule 10b5-1 plan or similar trading arrangement covering securities in which an officer or director has a direct or indirect pecuniary interest that is reportable under Section 16, where the officer or director has made the decision to adopt or terminate the plan or arrangement.

Because this quarterly disclosure was required in the first filing that covers the first full fiscal period beginning on or after April 1, 2023, companies, other than smaller reporting companies (“SRCs”), with a December 31 fiscal year-end were already required to include this disclosure in their quarterly reports on Form 10-Q and should continue to do so for the period ending September 30, 2023, as well as in their annual reports for the fiscal year ending December 31, 2023. Companies, other than SRCs, with a June 30 fiscal year-end must first provide this quarterly disclosure in their Form 10-K for the fiscal year ended June 30, 2023. SRCs have until their first full fiscal period beginning on or after October 1, 2023 to comply with the quarterly disclosures, so SRCs with a December 31 fiscal year-end must make their first quarterly disclosures in their annual report on Form 10-K for the fiscal year ending December 31, 2023, while SRCs with a June 30 fiscal year-end will make their first quarterly disclosures in their Form 10-Q for the quarter ending December 31, 2023. See C&DI 120.26.[2]

Annual Disclosures. There are also new annual disclosures relating to insider trading arrangements. New Item 402(x) of Regulation S-K requires narrative disclosure concerning the company’s option grant policies and practices regarding the timing of option grants and the release of MNPI, including how the board determines when and whether to grant options, and, if so, how the board or compensation committee takes MNPI into account when determining the timing and terms of an award.

In addition, new Item 402(x) of Regulation S-K requires new tabular disclosures if, during the most recent fiscal year, the company made an award of stock options, stock appreciation rights or similar option-like instruments to any named executive officer during a period starting four business days before, and ending one business day after, the filing of a periodic report on Form 10-Q or Form 10-K or the filing or furnishing of a current report on Form 8-K that discloses MNPI (other than a Form 8-K disclosing a material new option award grant). If it has made such an award, it must disclose in tabular form:

  • The identity of the named executive officer:
  • The grant date;
  • The number of securities underlying the award;
  • The exercise price of the award;
  • The grant date fair value of the award; and
  • The percentage change in the closing market price of the underlying securities between the trading day before disclosure of the MNPI and the trading day after disclosure of the

Finally, Item 408(b) of Regulation S-K and Item 16J of Form 20-F require public companies to disclose whether they have adopted insider trading policies and procedures for directors, officers and employees, and, in the case of Item 408(b), the company itself, reasonably designed to promote compliance with insider trading laws. Companies that have adopted insider trading policies and procedures will be required to file such policies and procedures as an exhibit to their annual report on Form 10-K or 20-F. For companies reporting on Form 10-K, this policy should be filed as Exhibit 19. If a company has not adopted such policies and procedures, it will be required to disclose why it has not done so.

A longer transition period applies to these new annual disclosures, including the requirement to file insider trading policies and procedures as exhibits to an annual report. According to C&DI 120.26, companies, including SRCs, with a December 31 fiscal year-end do not need to provide these annual disclosures until their Form 10-K or 20-F for the fiscal year ending December 31, 2024. Companies, other than SRCs, with a June 30 fiscal year-end, have until their Form 10-K or 20-F for the fiscal year ending June 30, 2024 to first provide the new annual disclosures. SRCs with a June 30 fiscal year-end have until their Form 10-K or 20-F for the fiscal year ending June 30, 2025 to provide their first annual disclosures.

With respect to proxy disclosure, C&DI 120.27 provides that companies other than SRCs need not include the new disclosures until their proxy or information statements relating to their first election of directors after completing their first full fiscal year beginning on or after April 1, 2023. SRCs have until their proxy or information statements relating to their first election of directors after completing their first full fiscal year beginning on or after October 1, 2023 to include the new disclosures. Companies, including SRCs, with a December 31 fiscal year-end need not provide this disclosure until their first election of directors after December 31, 2024.

Although a longer transition period applies to these disclosures, it would be worthwhile to review and update insider trading policies and procedures well in advance to reflect the amendments to Rule 10b5-1 and, otherwise, to consider whether any revisions would be appropriate or advisable.

XBRL. Companies must tag the narrative insider disclosures, as well as quantitative amounts within the disclosures, in Inline XBRL. For more information, see our Legal Update, “SEC Adopts Amendments to Rule 10b5-1’s Affirmative Defense to Insider Trading Liabilities & Related Disclosures,” dated December 19, 2022.[3]

SHARE BUYBACK DISCLOSURES

In May 2023, the SEC adopted new disclosure requirements for purchases of an issuer’s equity securities by or on behalf of the issuer or an affiliated purchaser, commonly referred to as “buybacks.” These amendments require quantitative and qualitative disclosure of buybacks on a day-by-day basis and revise and expand the existing periodic disclosure requirements for buybacks. For issuers that file SEC reports on Forms 10-Q and 10-K, any purchase made by or on behalf of the issuer or any affiliated purchaser of shares or other units of any class of the issuer’s equity securities registered under Section 12 of the Exchange Act must be disclosed quarterly, including on new Exhibit 26 for tabular disclosures. This quarterly disclosure requirement starts with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023. Calendar year-end companies must include the buyback disclosures for the fourth quarter of 2023 in their annual report on Form 10-K for the year ended December 31, 2023.

Foreign private issuers (“FPIs”) that file SEC reports using FPI forms, other than Canadian companies preparing reports under the SEC’s multijurisdictional disclosure system (“MJDS”), will need to disclose buybacks annually on new Form F-SR, beginning with the Form F-SR that covers the first full fiscal quarter that begins on or after April 1, 2024. The Form 20-F narrative disclosure that relates to the Form F-SR filings will be required starting in the first Form 20-F that is filed after the FPI’s first Form F-SR has been filed. For FPIs with a calendar year-end: their first Form F-SR will be required with respect to the second quarter of 2024, which will be due on or before August 14, 2024, and the narrative disclosure will be required in the Form 20-F for the year ending December 31, 2024.

Registered closed-end investment management companies that are exchange traded must provide the buyback disclosures beginning with their Form N-CSR which covers the first six-month period beginning on or after January 1, 2024. For such companies with a calendar year-end, this means their first disclosures will be in the Form N-CSR for the semi-annual period ending June 30, 2024.

Tabular Disclosures. There is a required tabular format for the daily buyback disclosures providing the following information for each day shares were repurchased:

  1. The date of the repurchase;
  2. The class of securities purchased;
  3. The total number of shares (or units) purchased, including all issuer repurchases whether or not made pursuant to publicly announced plans or programs;
  4. The average price paid per share (or unit);
  5. The total number of shares (or units) purchased as part of a publicly announced repurchase program;
  6. The aggregate maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under publicly announced repurchase programs;
  7. The total number of shares (or units) purchased on the open market, which includes all shares (or units) repurchased by the issuer in open market transactions (excluding tender offers and put options);
  8. The total number of shares (or units) purchased that are intended by the issuer to qualify for the Rule 10b-18 safe harbor; and
  9. The total number of shares (or units) purchased pursuant to a plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).

A footnote to the table must disclose the date of adoption or termination of any plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) for the buybacks. In addition, a checkbox above the table must indicate whether directors or Section 16 reporting officers (or, in the case of FPIs, senior management) purchased or sold shares that are the subject of the issuer’s share repurchase program within four business days before or after the announcement of such program or the announcement of an increase of an existing share repurchase plan or program.

Narrative Disclosures. Amended Item 703 requires narrative disclosures describing the objectives or rationales for the issuer’s share repurchases, the process or criteria the issuer uses to determine the amount of repurchases and any policies and procedures relating to purchases and sales of the issuer’s securities during a repurchase program by its officers and directors, including any restriction on such transactions. In addition, details are required regarding purchases other than through publicly announced programs, including the nature of the transactions, such as whether the purchases were made in open- market transactions, tender offers, in satisfaction of the issuer’s obligations upon exercise of outstanding put options issued by the issuer, or other transactions). The details for publicly announced programs, include disclosure of announcement dates, dollar amounts approved, expiration dates, if any, programs that expired during the covered period and programs being terminated prior to expiration or under which the company does not intend to make further purchases.

In addition, Item 408(d) of Regulation S-K requires disclosure of whether, during the company’s most recently completed fiscal quarter (which would be the fourth quarter in the case of an annual report), the company (as opposed to any director or officer) adopted or terminated a Rule 10b5-1 trading arrangement. Disclosure must include the material terms of the arrangement, including the adoption or termination date, the duration of the arrangement, and the aggregate number of securities to be sold or purchased pursuant to the arrangement. However, the disclosure is not required to include the pricing terms of the arrangement.

XBRL. Buyback disclosures must be made using Inline XBRL. Detail tagging is required for the quantitative amounts disclosed within the required tabular disclosures and block text tagging and detail tagging is required for narrative and quantitative information.

“Filed” Disclosures. These disclosures are considered “filed,” meaning issuers will be subject to liability for misleading statements under Section 18 of the Exchange Act for these disclosures, and such information will be incorporated by reference into other filings under the Securities Act of 1933, which are subject to Securities Act Section 11 liability.

For more information, see our Legal Update, “SEC Adopts New Share Repurchase Disclosure Rules,” dated May 8, 2023.[4]

CYBERSECURITY PROCESS DISCLOSURE

In July 2023, the SEC adopted final rules aimed at standardizing and enhancing disclosure relating to cybersecurity incidents and risk management processes. These rules require public companies to report (1) material cybersecurity incidents on new Form 8-K Item 1.05 or Form 6-K for FPIs (other than Canadian issuers using MJDS) and (2) cybersecurity risk management processes in a more standardized manner annually on Form 10-K in accordance with new Item 106 of Regulation S-K or Form 20-F for FPIs (other than Canadian issuers using MJDS). The annual risk management process disclosure is relevant for the 2024 proxy season because this disclosure requirement begins with annual reports for fiscal years ending on or after December 15, 2023. The cybersecurity incident reporting on Forms 8-K or 6-K commences December 18, 2023. SRCs will have an additional 180 days to comply, or until June 17, 2024.

Item 106 and the corresponding section of Form 20-F requires disclosures of (1) the company’s processes, if any, for identifying and managing cybersecurity risks, (2) the board of directors’ role in oversight of cybersecurity risks, and (3) management’s role in managing cybersecurity-related risks and implementing the company’s cybersecurity policies and procedures. Companies should consider disclosing:

  • Whether and how their cybersecurity processes have been integrated into their overall risk management system or processes;
  • Whether the company engages assessors, consultants, auditors, or other third parties in connection with any such processes; and
  • Whether the company has processes to oversee and identify material risks from cybersecurity threats associated with its use of any third-party service provider.

In addition, companies must describe:

  • The board of directors’ oversight of risks from cybersecurity threats and, if applicable, identify any board committee or subcommittee responsible for the oversight of cybersecurity risk; and
  • If applicable, the processes by which the board or the applicable committee is informed about cybersecurity risks.

Companies are not required to disclose the frequency of the board’s discussions of cybersecurity risk, and whether and how the board considers cybersecurity risks as part of its business strategy, risk management and financial oversight. The SEC also added a materiality qualifier, requiring companies to describe

management’s role in assessing and managing the company’s material risks from cybersecurity threats. Companies should address, as applicable, the following non-exclusive topics as part of a description of management’s role in assessing and managing the registrant’s material risk from cybersecurity threats:

  • Whether and which management positions or committees are responsible for managing cybersecurity risk, and the relevant expertise of such persons;
  • The processes by which such persons or committees are informed about and monitor the prevention, mitigation, detection and remediation of cybersecurity incidents; and
  • Whether such persons or committees report on cybersecurity risk to the board of directors or a committee of the board of directors.

For additional information regarding cybersecurity disclosures, see our Legal Update, “SEC Adopts Final Rules on Public Company Cybersecurity Disclosures of Incidents and Processes,” dated July 28, 2023.[5]

PAY VERSUS PERFORMANCE DISCLOSURE

During the 2023 proxy season, public companies needed to comply with the SEC’s “pay versus performance” rule for the first time in proxy and information statements in which executive compensation information is required to be included pursuant to Item 402 of SEC Regulation S-K. This rule requires companies to disclose in a clear manner the relationship between executive compensation actually paid and the financial performance of the company.

Pay versus performance disclosure is governed by Item 402(v) of Regulation S-K, which requires:

  • A new pay versus performance table;
  • A clear description of the relationship between the compensation actually paid to the principal executive officer (“PEO”) and to the average of the compensation actually paid to the other named executive officers (“Remaining NEOs”) and the company’s performance across each measure included in the pay versus performance table, which may be presented as a narrative, a graph or a combination of the two; and
  • A tabular list of the most important financial performance measures that the company uses to link named executive officer compensation to company performance (other than SRCs).

The pay versus performance table must disclose the compensation paid to the PEO and the average compensation paid to the Remaining NEOs as compared to the following performance measures:

  • Company total shareholder return (“TSR”);
  • Peer group TSR (other than SRCs);
  • Net income; and
  • A company-selected financial performance measure (“Company-Selected Measure”) (other than SRCs).

The rule generally requires disclosure of five years of pay versus performance data. As a phase in, companies, other than SRCs, were allowed to provide the pay versus performance disclosure for three years, instead of five years, in the first filing in which they provide this disclosure, providing disclosure for an additional year in each of the two subsequent annual filings in which this disclosure is required. SRCs were allowed to provide the pay versus performance disclosure for two years, instead of three years, in the first filing in which they provide this disclosure, providing disclosure for an additional year in the next subsequent annual filing in which this disclosure is required. As a result, companies that disclosed three years (or two years, for SRCs) of pay versus performance disclosure in the 2023 proxy season will need to provide four years (or three years, for SRCs) of data for the 2024 proxy season.

Because the pay versus performance disclosure requirement was new last proxy season, it would be useful for companies to review their peers’ disclosures to determine if there are any emerging market practices, for example, with respect to Company-Selected Measures, tabular lists, use of supplemental information, and descriptions of the relationship between pay and performance. Companies may also want to consider whether they want to update their compensation discussion and analysis to further emphasize their own view of pay for performance (which might be different from the prescriptive requirements of the pay versus performance requirements of the Item 402(v) requirement). Companies should also monitor SEC developments in this area such as comment letters, C&DIs and other guidance based on the SEC’s experience with the first year of disclosures.

For additional information regarding pay versus performance disclosure, see our Legal Update, “SEC Adopts Pay Versus Performance Disclosure Rule,” dated August 31, 2022. [6]

CLAWBACKS

The SEC adopted Rule 10D-1 in October 2022, directing national securities exchanges to establish listing standards that prohibit the listing of any security of a company that does not adopt and implement a written policy requiring the recovery, or “clawback,” of certain incentive-based executive compensation. In keeping with the schedule required by the SEC, the NYSE and Nasdaq proposed clawback listing standards closely tracking Rule 10D-1 in February 2023, which they amended in June 2023 to provide for an October 2, 2023 effective date and a 60-day implementation period. Shortly thereafter those amendments were filed, the SEC approved the listing standards. As a result, listed companies have until Friday, December 1, 2023, to adopt and implement a compliant clawback policy. The NYSE and Nasdaq clawback listing standards are contained in Section 303A.14 of the NYSE Listed Company Manual and Rule 5608 of the Nasdaq Rulebook, respectively. The NYSE is requiring its listed companies to confirm via Listing Manager, no later than December 31, 2023, that they adopted a compliant clawback policy by December 1, 2023 (or that they are relying on an applicable exemption).

After listed companies have adopted their listing standards clawback policies, they will need to file them as exhibits to their annual reports on Form 10-K, Form 20-F or Form 40-F, as applicable. For companies reporting on Form 10-K, this policy should be filed as Exhibit 97. There are also two checkbox disclosures on the covers required on Form 10-K, 20-F, or 40-F relating to clawbacks, one asking whether any financial statements contained in the report reflect the correction of an error to previously issued financial statements and the other asking if any of those corrections are restatements that required a recovery analysis of incentive-based compensation.

In addition, the SEC has adopted new subsection (w) to Item 402 of Regulation S-K, which requires disclosure in proxy and information statements if during or after its last completed fiscal year a listed company either (1) was required to prepare an accounting restatement that required a clawback under the company’s compliant clawback policy or (2) had an outstanding balance of unrecovered excess incentive-based compensation under such policy relating to a prior restatement.

For more information on Rule 10D-1 and the related listing standards, see our Legal Update, “Compensation Clawback Listing Standards Requirement: U.S. Securities and Exchange Commission adopts Final Rules,” dated November 3, 2022,[7] and our Legal Update, “SEC Approves Dodd-Frank Clawback Listing Standards with October 2, 2023 Effective Date,” dated June 13, 2023.[8]

EXECUTIVE OFFICER DETERMINATIONS

The 2024 proxy season may be a good time for public companies to re-evaluate which individuals should be treated as executive officers. While being an executive officer of a public company is prestigious, such status subjects individuals to short-swing liability under Section 16 of the Exchange Act and related reporting obligations, as well public disclosure of their compensation and employment agreements depending upon on their positions and their relative compensation within the company. The ramifications of being an executive officer have recently changed. Executive officers now face additional restrictions under Rule 10b5-1, including longer cooling off periods before they may trade under Rule 10b5-1 trading arrangements, as well as potential clawback of their incentive-based compensation in the event of a restatement on a no-fault basis.

As is the case for officers subject to Section 16, the new Rule 10b5-1 conditions and the clawback listing standards adopted pursuant to Rule 10D-1 require the executive officer group to include the president, principal financial officer and principal accounting officer. However, there are other individuals who may be deemed executive officers based on function, such as any vice president in charge of a principal business function and any other officer or individual who performs a policy-making function and, in some cases, executive officers of parent or subsidiary companies, which may require a company-specific facts and circumstances analysis. In light of the fact recent regulation has made status as an executive officer potentially more burdensome, companies may want to re-examine past determinations of the individuals treated as executive officers to assess if the current facts justify a smaller group of officers being designated as the executive officers of the company for SEC purposes.

Endnotes
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