Monthly Archives: October 2024

Uncertainty on Governance Rights in Stockholders Agreements Continues Pending a Decision in the Appeal of Moelis

Posted by Gail Weinstein, Philip Richter, and Steven Epstein, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Wednesday, October 9, 2024
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Gail Weinstein is a Senior Counsel, Philip Richter is a Partner, and Steven Epstein is a Managing Partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Steven Steinman, Maxwell Yim, and Adam B. Cohen, and is part of the Delaware law series; links to other posts in the series are available here.

Important recent Delaware developments on the issue of the facial validity of governance rights granted by corporations in stockholders agreements have included (i) the issuance by the Court of Chancery of three major decisions (all by Vice Chancellor Laster)—West Palm Beach Firefighters Pension Fund v. Moelis (Feb. 23, 2024); Wagner v. BRP Group (May 28, 2024); and Seavitt v. N-Able, Inc. (July 25, 2024); and (ii) the enactment by the Delaware legislature of amendments to the Delaware General Corporation Law, which became effective August 1, 2024 (the “Amendments”).

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Technology Leadership in the Boardroom: Driving Trust and Value

Posted by David Kenny and Nora Denzel, NACD, on
Tuesday, October 8, 2024
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David Kenny is an Executive Chairman at Nielsen, and Nora Denzel is a Lead Independent Director at AMD and Board Member at NACD. This post is based on a report of the NACD Blue Ribbon Commission.

Each year, NACD leverages the perspectives and experience of its members and appoints a Blue Ribbon Commission, an experienced collective of directors, investors, subject-matter experts, and leading governance professionals. The Commission examines and develops recommendations and tools to address the most challenging issues facing boards.

Blue Ribbon Commission Reports (BRCs) have been strengthening corporate governance for three decades. In recent years, Commissions have developed comprehensive guidance to significantly rethink or elevate topics such as board oversight of corporate culture, talent, and new disruptive risks. These reports helped set the standard for effective board practices in these areas and have been used by investors and policymakers.

BRCs play a key role in helping to empower directors and transform boards to be future ready.

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A Diverse View on Board Diversity

Posted by Vyacheslav Fos (Boston College), Wei Jiang (Emory University), and Huasheng Nie (UCLA), on
Tuesday, October 8, 2024
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Vyacheslav Fos is a Professor of Finance at Boston College Carroll School of Management, Wei Jiang is the Asa Griggs Candler Professor of Finance at Emory University’s Goizueta Business School, and Huasheng Nie is a PhD candidate in Finance at UCLA Anderson School of Management. This post is based on their recent paper.

Corporate governance centers on the board of directors, a critical group responsible for guiding an organization’s strategic direction and overseeing its operations. In recent years, research on board diversity has significantly increased, with most studies indicating that it brings positive effects, ranging from enhanced economic performance to broader societal benefits. The concept of “board diversity” itself is multifaceted, covering demographics such as gender, race, and ethnicity, professional backgrounds like work experience and industry expertise, and even social values and political stances. Despite this complexity, research has predominantly focused on gender and race/ethnicity, primarily because organizations are committed to addressing historical disparities.

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SEC Enforcement Sweep Picks up Multiple Companies and Insiders with Late Filings

Posted by Cydney Posner, Cooley LLP, on
Tuesday, October 8, 2024
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Cydney Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum.

Can we call it a year-end tradition yet? It’s almost the end of the SEC’s fiscal year, and, as it did last year around this time, the SEC has just announced a big Enforcement sweep of multiple companies and some individuals—23 in total—for failing to timely file Section 16(a) short-swing trading reports (Forms 3, 4 and 5)  and Schedules 13D and G (reports by beneficial owners of more than 5%) on a timely basis.  Two public companies were charged with failing to make filings on behalf of insiders after having volunteered to do so, and then failing to report the delinquencies in their own filings, as required by Reg S-K Item 405.  Surprisingly, the sweep also captured a public company that was charged with failure to timely file Forms 13F—reports that institutional investment managers are required to file regarding certain large securities holdings. The SEC used data analytics to identify those charged in the sweep.  The penalties aggregated over $3.8 million and ranged from $10,000 to $750,000. According to the Associate Regional Director of the SEC’s Division of Enforcement, “[t]o make informed investment decisions, shareholders rely on, among other things, timely reports about insider holdings and transactions and changes in potential controlling interests….Today’s actions are a reminder to large investors that they must commit necessary resources to ensure these reports are filed on time.”  It appears that the SEC is continuing to send messages that late filings are not ok…and lots of late filings are really not ok. It’s also clear that the SEC views companies that do volunteer to make filings on behalf of their insiders—a common practice—and that don’t follow through to be potentially contributing to their insiders’ filing failures; the SEC will hold the companies responsible if the insiders’ filings are not timely.

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2024 proxy season recap: Disclosures catch up with investor expectations

Posted by Ray Garcia, Paul DeNicola, and Matt DiGuiseppe, PricewaterhouseCoopers LLP, on
Monday, October 7, 2024
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Ray Garcia is a Leader, Paul DeNicola is a Principal, and Matt DiGuiseppe is a Managing Director at PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.

Proxy season at a glance

Just 26 companies in the Russell 3000 stock index failed to gain majority support for their compensation plans. In addition to overall pay and performance alignment, to comply with new disclosure rules, companies have begun reporting new compensation information that gives investors a deeper understanding of these plans.

Average support for shareholder proposals advocating for positive action on environmental and social issues continued to decline from a high of 39% in 2021, dropping to 20% this year. New regulations that are triggering expanded disclosures combined with ongoing market forces explain the trend.

Average director support at Russell 3000 companies was 94.8%, the highest level since 2020. Some of the increase can likely be attributed to the increasing quality of proxy statement disclosures.

Management slates won out in 14 of the 16 proxy contests that went to a vote. One impact of universal proxy cards may be limiting votes to situations when there are irreconcilable differences between the two sides rather than differing opinions on the margins.

Nineteen percent of no-action requests were granted based on micromanagement, up from 8% last year. While requests on such grounds may have seemed futile in recent years, the increasing specificity of shareholder proposals may have reached a tipping point.

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Sustainable Investing: Evidence From the Field

Posted by Alex Edmans (London Business School), Tom Gosling (London Business School), and Dirk Jenter (London School of Economics and Political Science), on
Monday, October 7, 2024
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Alex Edmans is a Professor of Finance at London Business School, Tom Gosling is an Executive Fellow in the Department of Finance at London Business School, and Dirk Jenter is a Professor of Finance at London School of Economics and Political Science. This post is based on their recent paper.

In our paper, Sustainable Investing: Evidence from the Field, which was recently made available on SSRN, we survey 509 equity portfolio managers from both traditional and sustainable funds on whether, why, and how they incorporate firms’ environmental and social (“ES”) performance into investment decisions. The answers reveal several interesting results, organized into four groups, that point to a more complex model of investor behavior than currently used in the academic literature.

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Key Updates to the DOJs Evaluation of Corporate Compliance Programs

Posted by Andrew M. Good, Avia M. Dunn, and Zaneta Wykowska, Skadden, Arps, Slate, Meagher & Flom LLP, on
Monday, October 7, 2024
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Andrew M. Good and Avia M. Dunn are Partners, and Zaneta Wykowska is an Associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Good, Ms. Dunn, Ms. Wykowska, Ryan D. Junck, and William E. Ridgway.

On September 23, 2024, the U.S. Department of Justice (DOJ) updated its Evaluation of Corporate Compliance Programs (ECCP) guidance. First published in 2017, the ECCP sets out factors that DOJ Criminal Division prosecutors will consider when evaluating the compliance program of a company facing a criminal enforcement action. While primarily intended for prosecutors, the ECCP also serves as a valuable resource for companies to assess how their programs might be judged by the DOJ. A company with an effective compliance program is more likely to receive a favorable resolution in an enforcement action, including reduced monetary penalties and less burdensome ongoing compliance obligations, as part of the resolution terms.

Several revisions to the ECCP since its inception highlight the DOJ’s focus on understanding the rationale behind the program’s design, evolution over time and functionality in addressing the relevant company’s risk profile.

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Sustainability and ESG: Where Are We Now?

Posted by Leah Malone and Emily Holland, Simpson Thacher & Bartlett LLP, on
Sunday, October 6, 2024
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Leah Malone is a Partner and Emily Holland is a Counsel at Simpson Thacher & Bartlett LLP. This post is based on a Simpson memorandum by Ms. Malone, Ms. Holland, Alexis Capati, Tenzin Dolkar, and Chayla Sherrod.

As we near the final quarter of 2024, in a year with global temperatures looking to break new records (again), achievement of various 2025 or 2030 targets set by companies (such as progress against objectives to advance the UN Sustainable Development Goals, which had an initial deadline of 2030, or interim Paris Agreement emissions reductions targets) looking less likely by the day, and a host of seismic political elections around the world inevitably shifting the global sustainability path, we summarize key developments in legal sustainability matters impacting U.S. and multinational corporations, financial institutions and private equity sponsors. In this alert, we discuss:

  • The continued rollout of the EU’s ambitious, progressive legislative path against the backdrop of continuing regulatory uncertainty in the U.S.;
  • The status of both state and federal anti-ESG efforts, including important court decisions impacting those efforts;
  • Proxy season results that demonstrate lower-than-ever support for environmental and social shareholder proposals;
  • The mix of legal factors impacting corporate diversity, equity and inclusion (“DEI”) programs and goals; and
  • How various climate-based multi-stakeholder initiatives, meant to convene actors to solve complex global issues, are faring under increased legal scrutiny.

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2024 Top 250 Annual Incentive Plan Report

Posted by Jose Furman, FW Cook, on
Saturday, October 5, 2024
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Jose Furman is a Consultant at FW Cook. This post is based on an FW Cook memorandum by Mr. Furman, Ian Kim, and Michael Kenney.

EXECUTIVE SUMMARY

Our 2024 Annual Incentive Plan Report provides a comprehensive review of the annual incentive plans of the top 250 largest companies in the S&P 500 by market capitalization. Annual incentive plans are critical tools used to align executive compensation with a company’s short-term goals and support talent attraction, motivation and retention objectives. This report examines trends in financial and non-financial metrics, goal-setting practices, and actual payouts, comparing findings over 2-year and 5-year periods, which coincide with our 2022 and 2019 reports. ESG trends are analyzed based on findings from the last 3 years, corresponding with our 2023 and 2022 Use of ESG in Incentive Plans Reports.

Please note that while this report references 2024 as the publication year, it primarily reflects 2023 compensation practices. Similarly, references to 2023, 2022 and 2019 publication years correspond to 2022, 2021 and 2018 compensation practices, respectively.

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ESG Shareholder Resolutions

Posted by Lindsey Stewart, Morningstar, Inc., on
Friday, October 4, 2024
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Lindsey Stewart is Director of Investment Stewardship Research at Morningstar, Inc. This post is based on a Morningstar memorandum by Mr. Stewart and River Meng.

Key Observations

  • Average support for ESG-focused shareholder resolutions in the US stabilized at 23% in the 2024 proxy year, after a steep decline in 2023. Excluding a growing cohort of resolutions by anti-ESG filers, the 2024 average is 27% (2023: 26%).
  • Support for governance resolutions rebounded in 2024 to 36% from a low of 30% in 2023 (excl. anti-ESG filers), amid a growing focus on shareholder rights.
  • Over the same period, support for environmental and social resolutions fell further to 19% from 22% (excl. anti-ESG filers). The declining trend slowed in 2024.
  • The number of well-backed key resolutions hit a five-year low in 2024: just 37 – down from a peak of 103 in 2022. Key resolutions are those backed by at least 40% of a company’s independent shareholders.
  • This contraction is driven by large asset managers’ votes, as they increasingly question the merit of many environmental and social (E&S) proposals.
  • By extending our analysis to proposals with at least 30% adjusted support, we see greater stability, even growth, among bronze-tier resolutions that are more consistently backed by other asset managers.
  • The two largest managers, BlackRock and Vanguard, further cut their support for E&S proposals, seeing many as “prescriptive,” “redundant,” or “not material.”
  • State Street – third of the Big Three index fund managers – significantly reduced its E&S support in 2024, breaking the firm’s prior moderate-but-stable support trend. The firm has so far not reported on this.
  • Managers with a pro-ESG voting history did not mimic the steep decline in support by the Big Three. There was a slight drop in the average of four managers we reviewed, but their support remained high overall.

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