August 03, 2020

MONTH-IN-BRIEF: Securities Law

Alan J. Wilson, Rani Doyle

Securities Regulation

Amendments to DGCL Signed into Law on July 16, 2020

By Sullivan & Cromwell

On July 16, 2020, Delaware’s Governor signed House Bill 341, amending key provisions of Delaware’s General Corporation Law (“DGCL”).  Among other things, the amendments modify existing statutory provisions governing boards of directors’ power to adopt emergency bylaws, address other emergency board powers and effect changes to provisions enabling the indemnification of corporate officers.

Referencing the impacts of the COVID-19, amendments relating to DGCL Section 110 emergency powers took effect retroactively as of January 1, 2020 and include:   

  • Expanding the circumstances where a board of directors can implement emergency bylaws to include “an epidemic or pandemic, and a declaration of a national emergency by the United States government.” The revised statute no longer requires that the catastrophe prevent a quorum of the board from convening a meeting. Emergency bylaws may now be adopted by the normal voting procedures of the board or, if a quorum cannot be readily convened for a meeting, by a majority of the directors present.
  • Providing a board of directors, under emergency conditions described in DGCL Section 110(a), with discretion to postpone or change the place of a stockholder meeting – including to hold the meeting solely by means of remote communication. Public companies may notify stockholders of such a change solely by a document that is publicly filed with the Securities and Exchange Commission.
  • During emergency conditions described in DGCL Section 110(a), new DGCL Section 110(i)(2)(ii) permits a board of directors to delay the record date and payment date of a dividend payment for which the record date has not yet occurred without incurring liability to stockholders.

Other amendments, either retroactive to January 1, 2020 or effective July 16, 2020, relate to:

  • Liability and indemnification and definition of “officer” for purposes of Section 145(c) (retroactive to January 1, 2020)
  • Stockholder meetings and notice
  • Electronic signatures
  • Holding company mergers

For more information, see our July 22, 2020 publication.

SEC Proposes to Increase Form 13F Reporting Threshold

By Bella Zaslavsky, K&L Gates LLP

On July 10, 2020, the Securities and Exchange Commission (“SEC”) proposed an amendment to Form 13F that would raise the Form 13F reporting threshold for institutional investment managers to $3.5 billion in Section 13(f) securities from the current $100 million threshold. This is the first change to the threshold by the SEC since 1978.

The change, in part, is intended to provide relief for smaller managers. The SEC estimates that under the new threshold, disclosure of over 90% of the dollar value of the holdings data currently reported would be retained while at the same time eliminating the Form 13F filing requirement (and associated costs) for the close to 90% of filers that are smaller manager.

Included in the proposal is a direction for SEC staff to review the Form 13F reporting threshold every five years and propose any adjustments to the SEC. The proposal also removes the exception that allows managers to omit certain smaller holdings from their Section 13(f) filings and amends the instructions relating to confidential treatment requests.

The proposal is subject to a 60 day comment period.

SEC Adopts Amendments to Proxy Rules

By Anna T. Pinedo, Mayer Brown

On July 22, 2020, the SEC adopted amendments to the proxy rules, which amend the definition of “solicitation” in Exchange Act Rule 14a-1(l) in order to make clear, consistent with the SEC’s longstanding view, that it includes proxy voting advice, with certain exceptions.  The amendments also revise Rules 14a-2(b)(1) and (b)(3), which provide exemptions from the information and filing requirements of the proxy rules.  Reliance on these exemptions will be available subject to satisfaction of specified conditions, which include conflicts of interest disclosure, and the adoption of and public disclosure of written policies and procedures designed to ensure that registrants that are the subject of proxy advice have available to them such advice when it is disseminated to the proxy advisory firm’s clients.  There are several non-exclusive safe harbors in order to provide certainty that the proxy advisory firm’s policies and procedures satisfy the principles-based requirements.  The amendments also modify Rule 14a-9 to include examples of when the failure to disclose certain material information in proxy voting advice could, depending upon the particular facts and circumstances, be considered misleading within the meaning of the rule.  The amendments will be effective 60 days after publication in the Federal Register, but affected proxy voting advice businesses subject to the final rules are not required to comply with the Rule 14a-2(b)(9) amendments until December 1, 2021.

The SEC supplemented prior guidance issued to investment advisers regarding their proxy voting responsibilities.  The SEC’s prior guidance discussed how the fiduciary duty and rule 206(4)-6 under the Investment Advisers Act of 1940 relate to an investment adviser’s exercise of voting authority on behalf of its clients.  This supplemental guidance will assist investment advisers in fulfilling their proxy voting responsibilities in light of these amendments to the solicitation rules under the Exchange Act.  The guidance will be effective upon publication in the Federal Register.

See the press release and fact sheet; the final rule; and the guidance.

NYSE Proposes Rule Change Allowing Fundraising in Direct Listings

By Bella Zaslavsky, K&L Gates LLP

The New York Stock Exchange (“NYSE”) filed with the SEC Amendment No. 2 to its proposed rule change to allow companies to go public through a primary direct listing allowing. Direct listings are currently only available to companies listing shares of existing shareholders but not for the issuance of new shares by the company. This is the NYSE’s third attempt to provide for an alternative to a traditional initial public offering, following filings made in November and December of last year.

The comment period for the rule closed on July 21, 2020.

SEC Adopts Amendments to Exemptive Applications Procedures

By Melissa Sanders, Fox Rothschild LLP

On July 6, 2020, the SEC adopted procedures designed to expedite the review process for certain exemptive applications under Rule 0-5 of the Investment Company Act of 1940. In order to qualify for the expedited review process, applicants must have submitted and obtained exemptive relief for at least two applications “substantially identical” to the application at issue in the three-year period prior to submitting such application. The amendments are intended to benefit the companies that typically rely on exemptive relief by providing an efficient process, while also benefiting their shareholders by ensuring that statutory standards continue to be applied. Under the revised procedures, the SEC will respond within 45 days of the date the application is filed, unless the SEC determines that the application was not eligible for expedited review or that more than 45 days is needed to appropriately consider the application. The amendments also provide procedures for applications that are not eligible for the expedited review process.  

The U.S. Government Accountability Office Reviews a Sample of Public Company ESG Disclosures and Discusses Options to Improve Such Disclosures

By Rani Doyle, EY*

In July 2020, the GAO issued a report entitled Disclosure of Environmental, Social and Governance Factors and Options to Enhance Them. The report was commissioned by Senator Mark Warner, a member of the Senate Banking Committee who has advocated the SEC to require public companies to disclose important details about human capital management. Prepared in accordance with generally accepted government auditing standards, the report examines in detail three topics:

  • Why investors seek ESG disclosures
  • Public company disclosures of ESG factors
  • The advantages and disadvantages of ESG disclosure policy options

The GAO interviewed institutional investors, officials and staff at the SEC’s Division of Corporation Finance and reviewed the Form 10-Ks, proxy statements and voluntary corporate social reports of the four largest companies in eight industries representing the U.S. economy.

Investors told the GAP that they seek ESG information to “better understand risks that could affect company performance over time.” In addition, they use ESG disclosures to inform voting at shareholder meetings; create ESG funds or portfolios; and make investment decisions. They reported to the GAO that they seek better and more consistent quantitative disclosures that they can use to compare the company’s progress on an ESG matter over time and that they want useful, non-boilerplate narratives to supplement quantitative disclosures. 

Options to address issues regarding the clarity, utility, consistency and comparability, noted the GAO could include new SEC regulation or interpretive releases or the SEC’s endorsement of an ESG disclosure framework developed through private-market initiatives led by organizations such as the SASB, GRI and the International Business Council of the World Economic Forum.

Following the report’s issuance, Senator Mark Warner called on the SEC to establish a task force to determine a “robust set of quantifiable and comparable ESG metrics” that all public companies can use.   

Diversity Metrics Expected to Be in Focus for 2021 Proxy Season

By Alan J. Wilson, Wilmer Cutler Pickering Hale & Dorr LLP

With preparations for the 2021 proxy season already underway, proxy advisory firms and institutional investors have begun outreach to companies requesting race/ethnicity data, indicating that diversity will again be an area of focus for 2021 annual meetings of shareholders. 

Institutional Shareholder Services (“ISS”) has begun sending letters to companies, requesting information about the self-identified race/ethnicity of each of the company’s directors and named executive officers (“NEOs”), to the extent that the company and the individual directors or NEOs are willing to provide it. 

The New York City Comptroller and three New York City retirement systems are seeking more detailed information, requesting that a selection of 67 S&P 100 companies disclose annual EEO-1 Report data to illustrate the composition of their entire workforce by race, ethnicity and gender.  The companies were selected for having issued “recent statements, affirming their commitments to racial equality and diversity and inclusion.”  In addition to providing the board and management with “distinct advantages” (e.g., signifying progress in diversity and inclusion practices), the Comptroller’s press release also notes, “to the extent there is widespread adoption, another salutary effect of the disclosure may be the ability of the board to benchmark the company’s own data to those of its peers, thereby facilitating the board’s oversight of company human capital management practices.”  See the full press release here.  

It remains to be seen how companies will respond to these requests, whether other stakeholders will begin to submit similar requests and how the data provided will influence the development of voting policy recommendations, shareholder proposals or other engagement activities.

*Material included in this Month-In-Brief publication is for general informational purposes only and does not represent the advice of Ernst & Young LLP or any of its professionals as to any client or particular set of facts; nor does it represent any undertaking to keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome.

Alan J. Wilson

Senior Associate, WilmerHale

Alan J. Wilson is a Senior Associate in WilmerHale’s Transactional Department who routinely counsels public company clients on a variety of matters concerning corporate governance and compliance with federal securities laws, particularly with regards to the intersection between law and accounting.  He also advises public and private companies from a range of industries on navigating transactional and strategic matters, including securities offerings, mergers and acquisitions, joint ventures, and activist shareholder engagement.

Rani Doyle

Executive Director, EY Center for Board Matters

Rani is an executive director in the EY Center for Board Matters.  She has extensive experience working with executive management and boards at public and private companies on a wide range of corporate governance and business matters.