As we enter the 2023 proxy season, there are a number of new regulatory requirements, both technical and substantive, that have been implemented, and many more on the horizon. For example, many companies will need to comply with pay-versus-performance disclosure requirements in 2023 (see Section 1.A. below) and annual reports are now, in most cases, required to be submitted via EDGAR (see Section 4.C. below). The U.S. Securities and Exchange Commission (SEC) has also indicated that it will continue to seek enhanced disclosure in relation to certain existing requirements where it determines that current company filings may be inadequate (see Section 1.B.). As in past years, shareholder and proxy advisor views continue to evolve with increasing focus on board leadership and diversity, time commitment, and risk management (see Sections 1.C and 1.D.), and we will continue to see shareholder activism in all forms, which highlights the ongoing importance of year-round shareholder engagement (see Section 3). Below is a high-level summary of applicable rule changes, guidance, and disclosure considerations for the 2023 proxy season for public companies, as well as some reminders for what is on the horizon for public company governance and disclosure.

1. Disclosure and Governance Considerations

1. New Pay-Versus-Performance Disclosure. On August 25, 2022, the SEC approved final rules on the correlation between executive pay and company performance (pay-versus-performance). The final pay-versus-performance rules fulfill rulemaking requirements mandated by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). Companies must comply with the new rules in proxy or information statements for fiscal years ending on or after December 16, 2022. Therefore, calendar-year companies will first need to include this information in their proxy or information statements filed in 2023.
   
   The pay-versus-performance rules add new Item 402(v) to Regulation S-K and require a company’s proxy or information statement to include a:
   • Table of up to five years of specified executive compensation and company financial performance measures;
   • Description of the relationship between executive compensation and company performance, using the information shown in the table; and
   • List of the most important performance measures used by the company to link executive compensation to company performance (not required for smaller reporting companies).

   In the first proxy or information statement that includes the disclosure, companies will be required to provide the pay-versus-performance information for three years only, with an additional year of information in each of the two subsequent proxy or information statements that require this disclosure. Smaller reporting companies may provide two years of information in their first filing, with an additional year in subsequent proxy or information statements, and are subject to other scaled disclosure requirements.

   Foreign private issuers, registered investment companies, and emerging growth companies (EGCs) will not be subject to the new pay-versus-performance requirement.

   Companies should be preparing now for inclusion of the pay-versus-performance requirements. In particular, companies should consider which performance measures will be included in the tabular list of most important performance measures (if applicable), and consider retaining a professional service firm, as needed, to assist with the complex calculations required for the pay-versus-performance table. For a detailed discussion of the pay-versus-performance rules, please refer to our previous client alert.

2. Board Leadership and Risk Oversight Disclosure. Item 407(h) of Regulation S-K requires disclosure in proxy statements of the board’s leadership structure, why its leadership structure is appropriate, and “the extent of the board’s role in risk oversight, such as how it administers its oversight function and the effect that [it] has on the board’s leadership structure.” For the past several months, the staff (Staff) of the SEC’s Division of Corporation Finance (Division) has been reviewing disclosures relating to board leadership structure and the board’s role in risk oversight and issuing comment letters requesting expanded disclosure in future filings. Companies should consider the themes in the comment letters with a view to evaluating their disclosures in their upcoming proxy statement. In these comment letters, the SEC has generally requested that companies bolster their disclosure about the board’s leadership structure, how the experience of the lead independent director bears on the board’s role in risk oversight (if applicable), the board chair’s or lead independent director’s responsibilities, and certain board risk oversight practices.
3. Board Diversity. Board diversity continues to be an area of focus for the SEC, stock exchanges, states, institutional investors, and proxy advisors.
   • SEC Disclosure Rules. In January 2023, the SEC published its latest rulemaking agenda, and indicated that the Division is considering recommending that the SEC propose rule amendments to enhance director diversity disclosures. The anticipated timeline of these proposed rules is Fall 2023.
   • Nasdaq Requirements. In August 2021, the SEC approved new board diversity listing standards for companies listed on The Nasdaq Stock Market LLC (Nasdaq). Under the first phase of these new listing standards, companies were required to include a board diversity matrix in their proxy statement or on their website in 2022. Under the second phase of these listing standards, Nasdaq-listed companies will be required to have one diverse director or explain why they do not have one diverse director no later than December 31, 2023. Companies will have additional time (based on their listing tier) to add the second diverse director, if applicable. If the company does not have at least one diverse director in 2023, then it will need to provide an explanation as to why it has not satisfied this diversity objective either in its proxy statement for its 2023 annual meeting (or Form 10-K or 20-F if it does not file a proxy statement) or on its website by December 31, 2023. If a company opts to make this disclosure on its website, then it must notify Nasdaq in a Company Notification Form via the Nasdaq Listing Center or email a URL link to the disclosure to drivingdiversity@nasdaq.com, in either case within one business day of posting. For more information on the Nasdaq board diversity listing standards, please refer to our previous client alert.
   • NYSE Requirements. Although the New York Stock Exchange (NYSE) has no corresponding requirement, our 2022 Silicon Valley 150 Corporate Governance Report, which reviews the disclosure and governance practices of the region’s largest technology and life sciences public companies, showed that 13.5 percent of NYSE-listed companies in the Silicon Valley 150 (SV150) voluntarily included some form of a board diversity matrix or board diversity graphic in their proxy statements and another 75 percent included other board diversity disclosure.
   • California Board Diversity Rules. Under California state law, publicly held companies with principal executive offices in California (regardless of their jurisdiction of incorporation), as disclosed on the cover of their Form 10-K, are required to have a certain minimum number of female directors and directors from underrepresented communities, and report compliance with these diversity mandates by completing and filing the California Corporate Disclosure Statement (Form SI-PT) with the California Secretary of State. As discussed in our previous client alert, both of these board diversity mandates were struck down by the California courts. While the State of California is appealing both cases, an injunction on implementation and enforcement of these laws is currently in effect pending disposition of the appeals. We are continuing to monitor developments in these cases.
   • Collection of Director Diversity Data. Companies not governed by stock exchange, state, or other legal requirements related to board diversity may nonetheless consider collecting board diversity information in their annual D&O questionnaires in preparation for anticipated SEC rulemaking, and proxy advisor and shareholder focus in this area.
   • Investor Letters. Several companies have received letters from institutional investors requesting that they report the racial, ethnic, and gender composition of their board in the proxy statement for their 2023 annual meeting of shareholders. Many signatories to these letters have previously been proponents of Rule 14a-8 shareholder proposals on diversity, related to nomination of women and racially and ethnically diverse candidates for board service and/or appointment to senior leadership positions; adoption of policies and reporting of strategies to increase workforce diversity; annual disclosure of workforce diversity, specifically EEO-1 data; conducting racial equity and impact audits; and reporting of pay and other employment-related disparities based on gender, race, or ethnicity. Companies that receive a letter from one or more institutional investors outside of the Rule 14a-8 shareholder proposal process should consider conducting a meaningful process for board or committee evaluation of the request.
   • Proxy Advisors. In 2023, Glass Lewis & Co. (Glass Lewis) transitioned to a percentage-based requirement for gender diversity for companies in the Russell 3000 Index and will generally withhold or vote against the chair of the nominating committee if the board is not at least 30 percent gender diverse. In addition, Glass Lewis will generally withhold or vote against the nominating committee chair if the board of a company in the Russell 1000 Index does not include at least one director who self-identifies as belonging to an underrepresented community.¹ Institutional Shareholder Services (ISS) will now generally withhold or vote against the nominating committee chair of all companies where no women serve on the board, not just companies in the Russell 3000 and S&P 1500 Indices. Consistent with last year, ISS will also generally withhold or vote against the nominating committee chair of companies in the Russell 3000 or S&P 1500 Indices where the board has no apparent racially or ethnically diverse members.²
4. Director Overboarding. Institutional investors and proxy advisors continue to be concerned about the number of public company boards on which directors serve, often referred to as director overboarding. Both ISS and Glass Lewis have director overboarding policies and many large investors have implemented their own voting policies regarding overboarded directors. Companies should review their corporate governance guidelines against any overboarding policies that have been adopted by significant shareholders. A sampling of some of these policies is set forth below, but is limited to only those firms that have published updated voting guidelines for the 2023 proxy season.³ The numbers in the table below are the maximum number of boards on which the individual may serve (including, if applicable, the individual’s home board or the board for which the individual is a nominee).

 

Firm Name	General Standard	CEO Director (including own board)	Additional Standard (if applicable)
ISS	5 total	3 total
Glass Lewis 1	5 total	2 total 2,3	3 total for executive chairs
Blackrock	4 total	2 total 2
Fidelity	6 total	3 total
Vanguard	4 total	2 total 2
1 Glass Lewis will consider recommending a vote against an audit committee member who sits on more than three public company audit committees, unless the audit committee member is a retired CPA, CFO, controller, or has similar experience, in which case the limit shall be four committees. 2 Applies to named executive officers (Vanguard) or executive officers (Glass Lewis and BlackRock), not just CEOs. 3 Due to the limited business operations of SPACs, when a director’s only executive role is at a SPAC, Glass Lewis will generally apply a higher limit of five public company boards.

1. Environmental and Social Considerations. With increased regulatory and investor focus on environmental and social matters, the following are a few considerations for companies preparing for the 2023 proxy season:
   • Social and Environmental Shareholder Proposal Trends. Last year, social issues comprised over 41 percent of shareholder proposals voted on (compared to approximately 30 percent in 2021), and environmental proposals comprised over 11 percent of shareholder proposals voted on (compared to less than 9 percent in 2021).⁴ Some proposals received majority support for the first time, including proposals pertaining to civil rights and racial audits, sexual harassment issues, and gender pay equity.⁵ As with the larger universe of public companies, many of the shareholder proposals at SV150 companies related to social policy and environmental concerns, including employee rights and safety issues (six proposals) and racial equity audits (five proposals). The SV150 companies saw a significant rise in human rights shareholder proposals (eight in 2022, compared to one the prior year) as well as environmental proposals (five in 2022, compared to one in 2021).
   • Disclosure Consistency - Climate Disclosures. In September 2021, the Division published a sample comment letter regarding climate-related disclosures. In 2022, the Staff issued several comment letters to companies related to climate disclosures, many of which included comments identifying inconsistencies across company disclosures. Companies including environmental-related disclosures in their proxy statement should carefully compare these disclosures to existing and planned disclosures across all channels, including, but not limited to, statements in other SEC filings, website disclosures, sustainability reports, and investor presentations, as applicable, to ensure consistency.
   • Proxy Advisors - GHG Emissions and Governance. Glass Lewis may now recommend voting against director nominees at companies that face financially material risk from their greenhouse gas (GHG) emissions. ISS will generally recommend voting against or withholding votes from the incumbent chair of the responsible committee (or other directors on a case-by-case basis) if a company that is a significant GHG emitter does not take the minimum steps outlined by ISS to understand, assess, and mitigate climate-related risks to the company and the larger economy.

2. Proxy Advisor Voting Guidelines

In late 2022, Glass Lewis and ISS released their updated voting policy guidelines for 2023 shareholder meetings, effective for meetings held on or after January 1, 2023, and February 1, 2023, respectively. The updates covered a wide range of issues, including officer exculpation, board diversity, and climate-related concerns, among others. See “Board Diversity” and “Environmental and Social Considerations” above for updates related to board diversity and climate-related concerns.

Both proxy advisors addressed officer exculpation in their updated voting policy guidelines for 2023, given the recent amendments to the Delaware General Corporation Law permitting companies to amend their certificate of incorporation to eliminate or limit the personal liability of officers for claims of breach of the fiduciary duty of care. Glass Lewis will review proposals on a case-by-case basis, but will generally recommend against officer exculpation proposals unless the provision is reasonable, and the company provides a compelling rationale. Following publication of its updated guidelines, it has generally not supported these proposals. ISS will evaluate officer exculpation proposals on a case-by-case basis, though it has generally supported these proposals.

For further information on Glass Lewis and ISS updates, please refer to our previous client alert.

3. Shareholder Engagement and Activism

1. Review of Rule 14a-8 Proposals in 2022 Proxy Season. The 2022 proxy season was the first following the publication of Staff Legal Bulletin No. 14L (SLB 14L). SLB 14L rescinded previous guidance on excluding shareholder proposals and significantly reduced the availability of the ordinary business and economic relevance exceptions⁶ to including shareholder proposals in a company’s proxy statement. Under SLB 14L, the Staff “focus[es] on the social policy significance” and considers whether the shareholder proposal “raises issues with a broad societal impact” in deciding whether to grant no-action requests to exclude shareholder proposals from a company proxy statement rather than just looking at the impact on the company alone. As expected, this realigned approach had the effect of meaningfully increasing social and environmental proposals included in 2022 proxy statements, which offers insight into what may be expected in the shareholder proposal arena in 2023. The number of shareholder proposals increased overall in the 2022 proxy season, with a noticeable rise in proposals related to social or environmental matters (see “ESG Considerations” above). According to one survey, a total of 941 proposals were submitted in 2022 compared to 837 in 2021, with 562 voted upon in 2022 compared to 435 in 2021.⁷
   
   Similar trends were evident in our 2022 Silicon Valley 150 Corporate Governance Report. The report found that 71 shareholder proposals were included in the 2022 proxy statements of the SV150 companies, compared to only 47 in the prior year. Although the overall level of majority support for shareholder proposals at the SV150 companies did not increase significantly (approximately 14 percent of proposals were approved in 2022, versus 10 percent in 2021), the 10 proposals that did receive majority support in 2022 included, among others, three on employee rights and safety and one on each of racial audit, lobbying, and political contributions. All of these were in addition to typical corporate governance-focused proposals that were approved (two in opposition to supermajority voting standards and two for special meeting rights for stockholders).
2. Universal Proxy Rules and Related Disclosure. New Rule 14a-19 under the Securities Exchange Act of 1934 (Exchange Act) requires the use of a universal proxy card in all non-exempt solicitations for contested director elections (i.e., proxy contests).⁸ If applicable, the universal proxy card must include the names of all nominees standing for election to the company’s board of directors, including company and dissident shareholder nominees, thereby allowing shareholders to split their votes among competing director slates. For a discussion of the procedural requirements under new Rule 14a-19, please refer to our previous client alert.
   
   In addition, following adoption of the universal proxy rules, the Division issued guidance relating to Rule 14a-19 in the form of compliance and disclosure interpretations (CDIs).⁹ In connection with adoption of Rule 14a-19, the SEC amended Exchange Act Rule 14a-5(e) to require disclosure in proxy statements, under an appropriate caption, of the deadline for dissident shareholders to provide notice of their intended director nominees pursuant to Rule 14a-19 for the company’s next annual meeting. One of the new CDIs addresses this requirement, clarifying that the notice period in Rule 14a-19(b)(1) is a “minimum, not a maximum, notice period for a dissident shareholder to inform the registrant of its intent to presents its own director nominees.” The CDI goes on to state that where a company’s “advance notice provision requires earlier notice than Rule 14a-19(b)(1), then the registrant disclosing only the earlier advance notice bylaw deadline would satisfy Rule 14a-5(e)(4).” For reference, many advance notice bylaws provide for a notice period of between 90 to 120 days before the next annual meeting, which is earlier than the 60 days set forth in Rule 14a-19(b)(1). The CDI notes that “Rule 14a-19(b) requires specific information to be included in the notice, such as a statement that the dissident shareholder intends to solicit the holders of shares representing at least 67% of the voting power of shares entitled to vote on the election of directors.” Accordingly, if the company’s “advance notice bylaw provision does not require the same information as that required by Rule 14a-19(b), then the registrant’s proxy statement must clearly state the need for a dissident shareholder to comply with the additional requirements of Rule 14a-19(b).” This disclosure may vary depending on how the company discloses the deadlines under Rule 14a-5(e), and whether the company has amended its bylaws to include Rule 14a-19-related updates. For considerations relating to potential advance notice bylaw updates, please refer to our previous client alert.

   The universal proxy rules also clarified that if state law gives legal effect to votes against a nominee, then the proxy card must include an option to vote “against” each nominee and an option for a shareholder to “abstain” from voting. This rule is especially relevant for companies transitioning to majority voting in director elections. In addition, the new rules affirm existing practice by requiring disclosure of the treatment and effect of a shareholder withholding authority to vote for a nominee in a director election, if applicable.

3. Shareholder Engagement. We recently published a client alert discussing shareholder engagement priorities for 2023. That client alert highlights steps to be taken now to better engage with shareholders.

4. Compliance Reminders

1. Form 10-K Cover Page Check Boxes. On January 27, 2023, the Division published new CDIs clarifying certain outstanding questions, including relating to the two check boxes that will be required on the cover page of Form 10-K (and Form 20-F and 40-F) and which relate to the recently approved clawback rules. In new Question 121H.01, the Division clarified that these two new check boxes are now included in the Form 10-K (and Form 20-F and 40-F), but it does not expect companies to provide this disclosure (i.e., check either box) until they are required to have a clawback policy under the applicable listing standard. For further information on these new CDIs, please refer to our Known Trends post. The updated Form 10-K is available here, and the two new check boxes are as follows:
   
   
   If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ▢
   
   Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ▢
2. Say-on-Frequency Proposals and Related Disclosure. The SEC requires companies to conduct a shareholder advisory vote at least once every six calendar years to give shareholders the opportunity to express a view on how often the company should hold its say-on-pay vote. The say-on-pay rules first took effect during the 2011 proxy season. Accordingly, those companies that first became subject to the say-on-pay rules in 2011 generally were required to include a “say-on-frequency” proposal in their proxy statements in 2017, and will be required to include a say-on-frequency proposal again in their 2023 proxy statement. Other companies should check when they last held their say-on-frequency vote to confirm whether or not the proposal will be required in 2023. Shareholders must be given four options: to vote for a frequency of every one, two, or three years, or to abstain from voting. Although companies may include a recommendation as to how shareholders should vote, the company must make clear that (1) shareholders are not voting to approve or disapprove the company's recommendation; and (2) the results of the say-on-frequency vote are not binding on the company or its board of directors (as is true of the results of the say-on-pay vote). Companies are also required to disclose in their proxy statement the current frequency of the say-on-pay vote and when the next scheduled say-on-pay vote will occur.
   
   Within four business days of the date of the annual meeting, companies must disclose the results of their say-on-frequency vote in their Form 8-K containing the results of the meeting. Companies must also disclose their decision with respect to how often they will hold the say-on-pay vote, regardless of whether that decision is consistent with the frequency chosen by shareholders. Although disclosure of this decision may be delayed, we recommend that companies that have made a final decision regarding the frequency of their say-on-pay vote include that decision in the same Form 8-K.¹⁰ Failure to report the company's decision on Form 8-K will result in a loss of Form S-3 eligibility for 12 months.
   
   EGCs are exempt from the say-on-pay and say-on-frequency votes. Once an EGC ceases to qualify as an EGC, it must hold its first say-on-pay¹¹ vote by no later than the first anniversary of the date on which it ceases to so qualify (or, if the EGC qualified for less than two years after it went public, by no later than the third anniversary of the date it went public).
3. Mandatory Electronic Submission of Glossy Annual Reports. In June 2022, the SEC adopted amendments to Rule 101 of Regulation S-T (June Amendments) mandating the electronic submission of certain documents on EDGAR, including “glossy” annual reports. In connection with annual stockholder meetings, companies are required to file and distribute to stockholders annual meeting proxy statements. In addition, companies are required to send annual reports to stockholders, which must precede or accompany the annual meeting proxy statements.¹² While these annual reports are not required to be filed with the SEC, prior to the June Amendments, companies were required to furnish copies of their glossy annual reports to the SEC by either mailing hard copies to the SEC or submitting the glossy annual report via EDGAR. In practice, companies typically relied on prior guidance (which has been withdrawn based on the June Amendments) from the SEC staff that permitted a company to satisfy this obligation by posting an electronic version of its annual report to its investor relations website. Based on the June Amendments, after January 11, 2023, companies must furnish their glossy annual reports electronically on EDGAR in a PDF format no later than the date on which the report is first sent to shareholders. The submission will not be deemed “filed” unless the company explicitly incorporates the annual report by reference into an SEC filing. The PDF of the annual report cannot be reformatted or otherwise redesigned from the original format.
4. Mandatory Electronic Filing of Form 144. In the June Amendments, the SEC also mandated the electronic filing of Form 144 that relates to securities of public companies. Following a transition period, and effective April 13, 2023, applicable reporting persons will be required to file all Forms 144 for the sale of securities of public companies electronically via EDGAR. The amendments will also eliminate the requirement that a copy of the Form 144 be separately sent to the stock exchange on which the company’s securities are listed. Under the prior rules, paper filings were typically only available for review in person at the SEC. As a result of these new compliance requirements, Form 144 filings will immediately become public and searchable on EDGAR, which could increase scrutiny of these filings. Companies should discuss Form 144 filing practices with the brokers for directors and executive officers to confirm whether current practices will continue (historically, brokers would submit Form 144 filings to the SEC), and ensure compliance with filing requirements.

5. Additional Items to Consider

1. Rule 10b5-1 Plans and Related Disclosures. On December 14, 2022, the SEC approved final rules amending Rule 10b5-1 to impose additional conditions to the availability of the affirmative defense under Rule 10b5-1(c)(1), and requiring new company disclosures relating to Rule 10b5-1 trading plans, insider trading policies, option grant policies and procedures, and certain option award grants made to named executive officers, as well as new disclosure requirements for Section 16 reporting persons. The final rules become effective on February 27, 2023. Under the final rules:
   • Any Rule 10b5-1 plans adopted or modified on or after February 27, 2023, will need to satisfy all of the conditions (including the new conditions) in Rule 10b5-1(c)(1). Any Rule 10b5-1 plans entered into prior to the effective date would be grandfathered under the previously existing Rule 10b5-1(c)(1), unless modified on or after the effective date.¹³
   • Section 16 reporting persons will need to comply with amended Rule 16a-3, which requires the disposition of any bona fide gifts to be reported on a Form 4 before the end of the second business day following the transaction, for any bona fide gifts made on or after February 27, 2023; reporting persons will no longer be able to delay reporting gifts on a Form 5.
   • Section 16 reporting persons will need to comply with the amendments to Form 4 and 5 for beneficial ownership reports filed on or after April 3, 2023. This includes adding a check box to Form 4 and Form 5 to indicate whether a reported transaction was made pursuant to a Rule 10b5-1 plan, and checking the box, if applicable. In addition, if the transaction was made pursuant to a Rule 10b5-1 plan, then the reporting person must disclose the plan adoption date in the “Explanation of Responses” section of the form.
   • Companies will be required to comply with the new disclosure and tagging requirements in periodic reports on Forms 10-Q, 10-K, and 20-F, and in any proxy or information statements that are required to include Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the full fiscal period that begins on or after April 1, 2023 (except this date is extended to October 1, 2023, for smaller reporting companies). Accordingly, calendar year-end companies will need to first comply with quarterly disclosures in their second quarter 2023 Form 10-Q.

   For a detailed discussion of the new rules, please refer to our previous client alert.
   
   Although the option grant policies and procedures disclosure, and named executive officer option grant disclosure, under the new rules is not required in Form 10-Ks for fiscal years ended December 31, 2022, certain option disclosures may be required in the upcoming Form 10-K if the company has made spring-loaded compensation awards (defined as options or other awards that are timed to be granted shortly before the announcement of material positive news that may increase the stock price). Under Staff Accounting Bulletin 120, which was published in November 2021 and effective upon publication, companies that have granted options (or other awards tied to stock price) while aware of material nonpublic information must include additional disclosure relating to the fair value estimation of such awards in the critical accounting estimates section of Management’s Disclosure and Analysis (MD&A) and in the financial statement footnotes.

2. Equity Plan Checkup. Ensure that:
   • There are sufficient shares in your equity plans for planned grants in 2023.
   • Your equity plans are not expiring soon.
   • All necessary equity plan shares have been registered on a Form S-8 registration statement and appropriate filings have been made with the applicable stock exchange.
   • All forms of award agreements have been filed.
3. Director Pay Litigation. Given the litigation environment surrounding director pay, consider whether to have shareholders approve director pay. Previously, companies typically did this by including meaningful limits in a compensation plan that shareholders were asked to approve. Based on recent litigation in Delaware, director pay will likely be subject to an entire fairness standard of review unless shareholders approve actual director compensation or a hardwired formula by which director compensation will be paid. However, to date, only a small number of companies have followed these more protective approaches.

6. On the Horizon

1. New Clawback Rules. On October 26, 2022, the SEC approved final rules that will ultimately require public companies to adopt, enforce, and disclose policies to recover (or “clawback”) excess incentive-based compensation from current and former executive officers in the event of an accounting restatement, whether or not the executive officer was at fault for the restatement. The final clawback rules have been long in the making, as they were mandated more than 12 years ago by the Dodd-Frank Act.

   The final clawback rules include the following:

   • New Rule 10D-1 under the Exchange Act, requiring stock exchanges to enact listing standards requiring each listed company to adopt and comply with a written clawback policy, or be subject to delisting;
   • New Item 402(w) to Regulation S-K requiring certain disclosures in the company’s annual report on Form 10-K and proxy statement if there was a restatement that triggered a clawback during the last fiscal year, or if there was an outstanding balance of excess incentive-based compensation from a prior restatement;¹⁴ and
   • New Item 601(b)(97) to Regulation S-K requiring the filing of the clawback policy as an exhibit to the Form 10-K, and two new checkboxes on the cover of the annual report indicating whether the filing contains the correction of an error to previously issued financial statements and whether any of those error corrections resulted in a restatement that triggered a clawback analysis.

   The timing for compliance is based on November 28, 2022, the date when the SEC’s final rules were published in the Federal Register. Because the rules will be implemented through stock exchange listing standards, we will need to review the final exchange rules when they are issued to have certainty about the relevant timing. Stock exchanges have until February 27, 2023, to submit their proposed listing standards to the SEC for approval, and those listing standards must be effective no later than November 28, 2023. Once the applicable stock exchange listing standards become effective, listed companies will have 60 days to adopt their clawback policies, and will need to comply with the clawback disclosure requirements in the first SEC filing following adoption of the clawback policy.

   For a detailed discussion of the clawback rules, please refer to our previous client alert.

   Given the potential impact on compensation for executive officers, companies should begin to prepare for implementation of the new rules. In particular, companies should consider taking the following steps:

   • Review the stock exchanges’ proposed rules, once submitted to the SEC;
   • Review executive compensation policies and procedures and determine which are based wholly or partly on financial reporting measures and may be subject to clawback;
   • Work with counsel and compensation consultants to consider any changes to executive compensation policies and procedures that may be advisable in light of the incentive-based compensation that will be at risk under clawback rules and policies;
   • Review any existing clawback policies and consider amendments that may be necessary to comply with the new listing standards that will be adopted by the stock exchanges; and
   • Educate executive officers whose compensation will be subject to the final clawback rules.
2. SEC Rulemaking Agenda. On January 4, 2023, the SEC’s Fall 2022 Regulatory Flexibility Agenda was made publicly available, and provided an update on the agency’s anticipated final and proposed rulemaking schedule for the upcoming year. The SEC anticipates proposing 23 new rules in 2023 and finalizing 29 previously proposed rules. Although the SEC does not always meet its projected timing, the agenda provides a useful glimpse into the SEC’s near-term priorities. Some of the most important rules slated for adoption in 2023 (along with the month of their anticipated adoption) include:
   • Share repurchases (April). Requires reporting through a new Form SR for daily share repurchases by a company or its affiliates and enhances periodic disclosures in Item 703 of Regulation S-K. For information on the rule proposal, please refer to our previous client alert.   
   • Cybersecurity (April). Requires disclosure regarding cybersecurity risk management, strategy, and governance disclosures and the timely notification of material cybersecurity incidents. For information on the rule proposal, please refer to our previous client alert.
   • Climate change disclosure (April). Requires enhanced disclosure regarding climate-related risks and opportunities. For more information on the rule proposal, please refer to our previous client alert.
   • Beneficial ownership (April). Accelerates the deadlines for filing Form 13D and Form 13G, adds cash-settled derivatives to those reporting obligations, and clarifies the rules regarding groups. For more information on the rule proposal, please refer to our previous client alert.
   • Shareholder proposals (October). Amends Rule 14a-8 to update certain bases for excluding shareholder proposals (including the substantial implication exclusion, the duplication exclusion, and the resubmission exclusion). This rule proposal is discussed below.

   The SEC is also considering proposing rules regarding the following key issues in 2023 (in the month indicated below):

   • Human capital management disclosure (April). This has become a topic of significant interest to institutional investors and other shareholders. Our 2022 Silicon Valley 150 Corporate Governance Report found that voluntary disclosure of human capital management increased significantly, from 28 percent in 2021 to almost 73 percent in 2022. Most companies in the report described human capital management qualitatively, although 42 percent of companies provided quantitative measures.
   • Board diversity (October). An SEC proposal would aim to enhance company disclosures about the diversity of board members and nominees.
   • Rule 144 (October). The SEC is considering reproposing amendments to Rule 144, a non-exclusive safe harbor that permits the public resale of restricted or control securities if the conditions of the rule are met.
3. Rule 14a-8 Procedural Amendments. In July 2022, the SEC proposed amendments to modify three standards under which companies may exclude shareholder proposals pursuant to Rule 14a-8.

   The first proposed amendment affects Rule 14a-8(i)(10), which allows companies to exclude shareholder proposals that “the company has already substantially implemented.” Currently, in determining whether a proposal has been substantially implemented, the Staff assesses whether a company’s particular policies, practices, and procedures “compare favorably” with the shareholder proposal and whether the company has addressed the essential objectives of the shareholder proposal. In contrast, the proposed approach would only allow a company to exclude a shareholder proposal as substantially implemented “[i]f the company has already implemented [all of] the essential elements of the proposal.” So, for example, if a shareholder proposal asks for a report from a company’s board of directors and the company provides a similar report from its management, under the SEC’s proposed amendment the shareholder proposal would be less likely to be excludable on the basis that it is substantially implemented.

   The second proposed amendment affects Rule 14a-8(i)(11), which allows companies to exclude shareholder proposals that “substantially duplicate[] another proposal previously submitted to the company by another proponent that will be included in the company’s proxy materials for the same meeting.” Currently, the Staff considers shareholder proposals duplicative if they share a “principal thrust” or “principal focus,” even if their terms or scope are different. The proposed amendment would change the analysis so that only shareholder proposals that “address[] the same subject matter and seek[] the same objective by the same means” are excludable as substantially duplicative. So, for example, if a company received two shareholder proposals that require different means to achieve a similar objective, such as one shareholder proposal calling for that company to provide enhanced disclosure of racial and ethnic characteristics among its employees and the other shareholder proposal asking for the company to conduct a racial equity audit, the company would be less likely under the SEC’s proposed amendment to be able to exclude one of the two shareholder proposals as substantially duplicative of the other shareholder proposal.

   The third proposed amendment affects Rule 14a-8(i)(12), which allows companies to exclude shareholder proposals that “address[] substantially the same subject matter as a proposal, or proposals, previously included in the company’s proxy materials within the preceding five calendar years” if the shareholder proposal was voted on at least once in the last three years and received support below certain specified quantitative thresholds.15

   Similar to the Staff’s current “substantial duplication” analysis described in the previous paragraph, the Staff’s current approach to assess re-submission is to look at whether a shareholder proposal shares the same “substantive concerns” as a prior shareholder proposal. In addition, also consistent with the proposed amendment described in the previous paragraph, the third proposed amendment would provide that a shareholder proposal may only be excluded by a company as a re-submission if it “addresses the same subject matter and seeks the same objective by the same means” as a prior shareholder proposal that satisfies the other criteria under Rule 14a-8(i)(12).

For more information on proxy season matters, please contact any member of the firm's public company representation, employee benefits and compensation, or shareholder activism practices.

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[1] Glass Lewis defines “underrepresented community” as Black, African American, North African, Middle Eastern, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaskan Native, or gay, lesbian, bisexual, or transgender. Note that this definition differs from the definition of “underrepresented minority” in the Nasdaq listing standards, which does not include Middle Eastern or North African.

[2] ISS includes an exception to both board diversity policies if there was gender diversity or racial and/or ethnic diversity on the board at the preceding annual meeting, as applicable, and the board makes a firm commitment to appoint at least one gender diverse or racial and/or ethnic diverse member, as applicable, within a year.

[3] For proxy voting policies for the 2022 or earlier proxy season, please refer to our previous client alert.

[4] See A Look Back on the 2022 Proxy Season, Georgeson  (the “2022 report”); see also 2021 Annual Corporate Governance Review, Georgeson, downloadable at https://www.georgeson.com/us/news-insights/annual-corporate-governance-review (2021 report). The 2022 report surveys companies in the Russell 3000 Index, and the 2021 report surveys companies in the S&P 1500.

[5] See 2022 report.

[6] The ordinary business exception and relevance exception to the obligation to include shareholder proposals are found in Exchange Act Rule 14a-8(i)(7) and Rule 14a-8(i)(5), respectively.

[7] See the 2022 report.

[8] Rule 14a-19 does not apply to registered investment companies or business development companies.

[9] SEC Division of Corporation Finance, Compliance and Disclosure Interpretations, Proxy Rules & Schedule 14A/14C, Section 139. Rule 14a-19, Questions 139.01 through 139.06, https://www.sec.gov/corpfin/proxy-rules-schedules-14a-14c-cdi. The CDIs address contested solicitations and address issues relating to the process for a dissident shareholder to submit additional or alternate director nominees, circumstances when there are multiple dissident shareholders with separate slates of director nominees, a dissident shareholder’s failure to comply with the company’s advance notice bylaws, and solicitation requirements for the dissident shareholder.

[10] If the decision is made after the Form 8-K is filed, companies must amend their previously filed Form 8-K to disclose how often they will hold a say-on-pay vote no later than 150 days after the vote, but in no event later than 60 days prior to the deadline for submission of Rule 14a-8 shareholder proposals.

[11] The JOBS Act is silent as to when the first say-on-frequency vote must be held after EGC status ends and does not provide the same transition period as it does for say-on-pay. Accordingly, companies may need to provide a say-on-frequency vote before they are required to provide a say-on-pay vote.

[12] See Exchange Act Rule 14a-3(b).

[13] Under the final rules, a modification to the amount, price, or timing of the purchase or sale of the securities under a Rule 10b5-1 plan will be treated as the termination of the existing plan and adoption of a new plan.

[14] Generally, if the company files its annual meeting proxy statement within 120 calendar days after the end of its fiscal year, it would not include this information in its annual report on Form 10-K, but would instead forward incorporate Item 402 of Reg S-K information by reference from the proxy statement. Foreign private issuers will be required to include this information under new Item 6.F. in their annual reports on Form 20-F, and certain Canadian issuers will be required to include this information under new Item 19 in their annual reports on Form 40-F.

[15] Less than 5 percent (5%) of the votes cast if previously voted on once, less than 15 percent (15%) of the votes cast if previously voted on twice, and less than 25 percent (25%) of the votes cast if previously voted on three or more times.