In prepared remarks on June 23, 2021, Chair Gary Gensler of the Securities and Exchange Commission (SEC) provided additional insight into the commission’s recently announced regulatory agenda and its shift in priorities. His statement and the agenda show that new public company disclosures will be at the forefront of upcoming and pending rulemakings. In response to the regulatory agenda, the two Republican commissioners, Hester Peirce and Elad Roisman, issued a joint statement voicing concerns about efforts to undo certain recently adopted rules.

Although the timing and ultimate outcome of the new rulemakings remain to be seen, public companies should expect to see a number of proposals in the coming months, which will be subject to public comments before final adoption by the SEC. Significant proposed and final SEC rulemaking items from both the short-term agenda and long-term agenda are summarized below.

Short-Term Agenda

ESG Disclosures. Chair Gensler, then-Acting SEC Chair Allison Herren Lee and senior members of the SEC staff [1] have made a number of statements this year about environmental, social and governance (ESG) issues. The commission now expects to adopt proposed rules to require enhanced ESG disclosures in the following areas:

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As calendar year-end companies received shareholder proposals for their 2021 annual meetings, they faced a variety of uncertainties and challenges, including navigating the COVID-19 pandemic, addressing the racial inequities brought to the fore by the killings of George Floyd and others, and steering through a hyper-partisan and unprecedented U.S. presidential transition. The shareholder proposals received by companies reflected many of these broad themes.

Unlike in the prior three years, the staff of the Division of Corporation Finance (Staff) of the U.S. Securities and Exchange Commission (SEC) did not issue new guidance regarding companies’ ability to exclude shareholder proposals from their proxy statements heading into the 2021 season. Although this may have hinted at some stability in the no-action process, that was not to be the case. The Staff issued significantly fewer no-action response letters than in previous years, opting instead to respond mostly through informal decisions that were included in a chart on the SEC’s website. Because these informal responses provided the Staff’s conclusions without additional explanation, the Staff’s reasoning in a number of decisions was unclear.

Nevertheless, whether by response letter or chart entry, there were a number of notable no-action decisions and trends. As in prior years, many of these concerned the ability to exclude proposals as relating to a company’s ordinary business. In addition, some related to procedural items that might have seemed fairly straightforward. Reviewing the guideposts provided by Staff decisions from the 2021 proxy season helps in attempting to understand the Staff’s current approach to shareholder proposals.

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In October 2019, for the third consecutive year, the Staff of the Division of Corporation Finance (Staff) of the U.S. Securities and Exchange Commission (SEC) issued guidance concerning companies’ ability to exclude shareholder proposals from their proxy statements by addressing the significance of a proposal through a board analysis. That guidance also discussed the ability to exclude proposals on the basis of micromanagement. The 2020 proxy season witnessed a small but potentially meaningful uptick in the number of successful no-action requests containing a board analysis, as well as limits on the success of micromanagement arguments.

During the summer of 2020, the Staff informally indicated that it was not planning on issuing further guidance on these topics this year. As a result, taking stock of the guideposts provided by no-action letters from the 2020 proxy season is critically important as calendar year companies anticipate the wave of shareholder proposals they are likely to receive over the coming months.

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On September 26, 2019, the Securities and Exchange Commission (SEC) adopted new Rule 163B and related amendments under the Securities Act to expand the permitted use of “testing-the-waters” communications to all companies regardless of size or reporting status, including business development companies (BDCs) and other registered investment companies. The new rule enables any issuer, including those that are not an emerging growth company (EGC) or any person authorized to act on the issuer’s behalf, to make oral and written offers to qualified institutional buyers (QIBs) [1] and institutional accredited investors (IAIs) [2] before or after the filing of a registration statement to gauge investors’ interest in an offering.

This new rule is a much-anticipated development that will level the playing field for issuers seeking to evaluate market interest prior to a registered public offering and represents an additional example of the SEC taking concerted action to encourage public capital formation.

The rule will become effective 60 days following its publication in the Federal Register.

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On August 8, 2019, the Securities and Exchange Commission (SEC) announced proposed amendments to modernize the rules requiring description of business, legal proceeding and risk factor disclosures pursuant to Regulation S-K. The proposed amendments are intended to improve the readability of disclosures for investors and simplify compliance requirements for companies. Below is a summary of the highlights from the proposal.

Proposed Amendments

Notably, the proposed amendments eliminate certain prescriptive requirements to reflect a more principles-based approach to disclosures relating to the description of business (Item 101) and risk factors (Item 105), by focusing on information that is material to an investor’s understanding of a company’s business and avoiding redundant disclosures. Although the proposal contemplates potentially incorporating parallel changes across all forms filed by foreign private issuers, including annual reports on Form 20-F, the proposed changes regarding risk factors would apply to foreign private issuers filing registration statements on Forms F-1, F-3 and F-4.

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In November 2017, the staff of the Division of Corporation Finance (Staff) of the Securities and Exchange Commission (SEC) issued guidance concerning companies’ ability to exclude shareholder proposals from their proxy statements under the “ordinary business” and “relevance” grounds of Rule 14a-8. In particular, Staff Legal Bulletin No. 14I (SLB 14I) invited companies to include in their no-action requests their board’s analysis of the significance of a proposal under these exclusions, emphasizing that a well-developed discussion of that analysis would assist the Staff in its review of these requests. Virtually every company that went down this path, however, was unsuccessful, and after the 2018 proxy season many questioned the utility of providing a board analysis.

Perhaps due to this skepticism, heading into the 2019 proxy season the Staff released guidance in Staff Legal Bulletin No. 14J (SLB 14J) that, among other things, reiterated its view that a board analysis could be helpful in analyzing no-action requests and provided a nonexclusive list of items that might be included in a “well-developed discussion.” In addition, SLB 14J provided guidance concerning the micromanagement prong of the ordinary business exclusion and on proposals relating to senior executive compensation. While this guidance led to an increase in successful micromanagement arguments, it also created confusion for companies seeking to exclude proposals touching on senior executive compensation.

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In the period leading up to the 2018 proxy season, the staff of the Division of Corporation Finance (Staff) of the Securities and Exchange Commission (SEC) published Staff Legal Bulletin No. 14I (SLB 14I), which provided new guidance concerning companies’ ability to exclude shareholder proposals from their proxy statements under the “ordinary business” or “relevance” grounds of Rule 14a-8. Although some viewed the guidance as a significant shift that would increase the likelihood of excluding shareholder proposals from proxy statements, to date that has not been the case.

This lack of early company success, coupled with the need to use limited board or board committee resources to utilize the guidance, may create the impression that SLB 14I represents a dead-end street to be avoided. Lessons learned from this first year, however, suggest the Staff’s guidance may yet represent a viable and worthwhile avenue to exclude certain shareholder proposals.
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On February 2, 2018, the SEC approved the New York Stock Exchange’s proposal to permit qualifying private companies to use “direct listings” to list their shares on the NYSE and become publicly traded without conducting an initial public offering so long as the direct listing is accompanied by a concurrent Securities Act resale registration statement. Direct listings may provide an attractive alternative to a traditional IPO for private companies that do not need to raise public capital but desire to provide greater liquidity for existing shareholders and/or make their shares a more attractive currency for mergers and acquisitions activity.

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