United States: Preparing For The 2023 Proxy And Annual Reporting Season: Key Issues And Considerations

Companies are beginning to look ahead to the upcoming 2023 proxy and annual reporting season, and there are a number of key issues to consider as preparations commence. This alert provides an overview of these issues and other significant updates in several key areas, including, among others, Security and Exchange Commission (SEC) disclosure and filing requirements, pending SEC rulemaking, executive compensation matters, and corporate governance trends.

A number of the proposed rules discussed in this alert were targeted for final consideration by the SEC late this year and early next year. However, the timeline has been delayed in some instances due to a technical glitch affecting comments that were submitted electronically, resulting in some comments not being received by the SEC. The error required the SEC to reopen public comment periods, and it is not known when proposals will take effect or whether there will be any legal challenges. Companies should monitor proposed rules as they get organized for the 2023 proxy and annual reporting season with an eye toward the impact that proposed regulatory changes might have on their reporting obligations.

SEC Disclosure/Filing Requirements

Management's Discussion and Analysis (Authors:Tess N. Wafelbakker and Adam Rainone)

Management's Discussion and Analysis (MD&A) is a central feature of a company's annual report on Form 10-K, as it provides “material information relevant to an assessment of the financial condition and results of operations of the registrant.” This includes both a backward-looking description of matters that have materially impacted operations in the previous year as well as forward-looking matters that management determines are reasonably likely to impact future operations. The MD&A should provide a current view, through the eyes of management, evaluating the company's financial statements and other data points that management believes will allow a reader to understand the company's financial condition, cash flows, and other changes to its financial condition and operations.

Among other disclosure, the MD&A must provide information regarding the company's liquidity and capital resources, results of operations, and critical accounting estimates. This discussion may reasonably include, among other things, (i) the impact of credit and equity market conditions, both in the company's industry and more broadly on the company's or its customers' ability to obtain financing; (ii) the impact of inflation on the company's current liquidity position as well as its reasonably expected impact in the coming year; (iii) any known material trends that have impacted the company's operations in the past year and are reasonably likely to do so in the coming year; and (iv) any impacts of estimation uncertainty in accordance with generally accepted accounting principles (GAAP) that are likely to materially impact the financial condition or results of operations of the company, including the source of the assumptions used in making such estimates. While some of this information may remain static from year to year, given the significant shifts in the global economy over the past few years and increasing investor and proposed rulemaking focus on environmental, social and governance (ESG) matters, management should give fresh consideration to how these trends have materially impacted the business and are likely to impact the business in the future. For example, topics such as inflation, interest rates, lingering supply chain constraints, changes in the workforce, political instability and sanctions have been emphasized by the SEC – through guidance as well as comment letters – as matters that may necessitate specific discussion within the MD&A (as well as in “Risk Factors,” as discussed below).

It is important to keep the MD&A free of complicated or boilerplate language; companies should instead focus on drafting using plain language that makes these trends easy to understand. Further, to the extent companies are using non-GAAP financial measures to present results in a manner that seeks to isolate the impact of what may be shorter-term trends or infrequent events, the SEC continues to pay close attention to Regulation G and Regulation S-K Item 10(e) compliance under the Securities Exchange Act of 1934 (the Exchange Act).

Risk Factors  (Authors: Suzanne K. Hanselman and David H. Brown)

A company's disclosure documents, including securities offerings documents, annual reports on Form 10-K and quarterly reports on Form 10-Q, must describe material risks that the company faces that could have a material adverse impact on its business, financial condition and results of operations. Among other requirements, the risk factors should be tailored and limited to those that are specific to the company, be organized logically and be presented in order of importance. Because risk factors should provide investors with management's perspective on the factors that might adversely impact the company's business, it is critical to solicit input from senior management and various business functions within the company and consider whether the matters raised through a company's enterprise risk management assessment (including any risks that have come to fruition rather than being merely hypothetical) are adequately addressed.

As recent global events may have impacted a company's business, creating risks not previously disclosed to investors, it is important to update annual report risk factors accordingly and consider whether these disclosures may need further updates from quarter to quarter. Such developments might include general macroeconomic and political conditions such as capital markets volatility, inflation and rising interest rates, supply chain disruptions, the impact of Iranian protests, and the war in Ukraine and related tensions between Russia and the United States, including sanctions. Others that might impact a company's business and create risk are real or potential cyberattacks and other data security breaches and the impact of climate change, which continues to receive significant attention from the SEC and investors alike. Companies should also take a fresh look at their existing COVID-19 risk factor disclosures and update them to account for the introduction of vaccines, variants and overall impact on the relevant sector of the workforce. It may be appropriate for some companies to eliminate certain COVID-19-related disclosures or scale them back to reflect risks that are no longer expected to be material.

In May, the staff of the SEC's Division of Corporation Finance (the Staff) published guidance and a  sample comment letter to companies regarding potential disclosure obligations related to the direct or indirect impact Russia's invasion of Ukraine and the related international response have had or may have on the companies' businesses. The guidance includes a non-exhaustive list of potential impacts and issues for companies to consider when drafting their disclosures. Specifically, the guidance advises that to the extent material or otherwise required, companies have an obligation to provide detailed disclosures regarding (i) direct or indirect exposure to Russia, Belarus or Ukraine through their operations; employee base; investments in Russia, Belarus or Ukraine; securities traded in Russia; sanctions against Russian or Belarusian individuals or entities; or legal or regulatory uncertainty associated with operating in or exiting Russia or Belarus; (ii) direct or indirect reliance on goods or services sourced in Russia or Ukraine or, in some cases, in countries supportive of Russia; (iii) actual or potential disruptions in the companies' supply chains; and (iv) business relationships, connections to or assets in Russia, Belarus or Ukraine. Additionally, the guidance suggests that regardless of whether a company has operations in Russia or Belarus, the company should consider the broader effects of Russia's invasion of Ukraine on its business, including the impacts of heightened cybersecurity risks, supply chain disruptions and volatility in the prices of commodities. The guidance notes that any impacts or issues related to Russia's invasion of Ukraine may require enhanced disclosures in financial statement footnotes, MD&A or risk factors. Such impacts or issues may also affect a company's governance or management processes, requiring updates to the company's disclosure controls and procedures, among other things. Accordingly, while this guidance is not exhaustive, companies should carefully review this guidance in connection with the preparation of their annual reports on Form 10-K and other filings, regardless of whether they have operations in Russia or Belarus.

As new risk factors are added, companies should remember the requirement to provide a summary risk factor where the section exceeds 15 pages and that risk factors that are not specific to the company should be categorized as “General Risk Factors.”

Human Capital Management (Authors: Janet A. Spreen, Charlotte W. Pasiadis and Caroline H. Mills)

Human capital management (HCM) disclosures have remained a priority for the SEC over the past two years since the agency amended Item 101(c) of Regulation S-K in November 2020, and there has been sustained momentum toward enhancing disclosure requirements.

Companies are now required to include human capital–related disclosures as a topic in the business section of their annual reports on Form 10-K to the extent such disclosures are material to an understanding of the company's business. A company should disclose its human capital resources, including human capital measures or objectives that it focuses on in managing the business. “Human capital” is not defined in Item 101(c); instead, the SEC adopted a principles-based framework that allows companies to tailor disclosures according to their circumstances. The SEC provided, however, that examples of human capital measures and objectives may include the number of employees and the attraction, development and retention of personnel.

Typical disclosure has included human capital measures and objectives focused on diversity, equity and inclusion and relating to employee recruitment and retention initiatives; employee training, development and engagement; and employee physical and mental health and well-being. The extent of each company's disclosure in its annual report, however, has varied widely, with some providing quantitative information and many limiting the discussion to general principles and objectives. With respect to quantitative data, the most common has tended to be a gender or race/ethnicity breakdown, and significantly more companies provided this data in the second year of required disclosure than in the first. The second year of disclosure also generally saw companies provide a more in-depth approach.

However, this response utilizing the principles-based approach has been criticized as insufficient. SEC Chair Gary Gensler asked the SEC staff in 2021 to propose recommendations for required metrics beyond the number of employees, such as workforce turnover; skills and development training; compensation; benefits; and workforce demographics, including diversity, health and safety; and HCM appeared on the SEC Rulemaking Agenda with a target of October for proposed rules.

Separately, pressure from institutional investors and other stakeholders has resulted in companies increasingly including human capital disclosures beyond those on Form 10-K in their sustainability/ESG reports and proxy statements. For example, many institutional investors and shareholder proposal proponents have requested that companies make publicly available the data included in the EEO-1 reports submitted to the U.S. Equal Employment Opportunity Commission. Some investors are imposing a policy of withholding votes from or voting against the compensation committee chair if such information is not provided. Other areas of emphasis include pay equity, including commitments to conduct an audit, report results and discuss plans to address findings, and employee turnover.

Companies should pay close attention to the evolving policies of their significant investors and consider what comparable disclosure is being provided by their peers, in addition to any rulemaking developments from the SEC, in approaching both Item 101(c) and any supplemental HCM disclosure in 2023.

Filing Fee Modernization (Author: Tess N. Wafelbakker)

On Oct. 13, 2021, the SEC adopted amendments to modernize filing fee disclosures for certain forms and schedules as well as filing fee payment methods related to such filings.

The amendments, effective as of Jan. 1, require companies to present the filing fee disclosures in a tabular format using Inline eXtensible Business Reporting Language and to include the appropriate tables as an exhibit to the filing rather than the previous requirement of a single fee table on the cover page of each form. Among the forms and schedules subject to the rules are registration statements on Form S-1, simplified registration statements on Form S-3 and definitive proxy statements on Schedule 14A.

With respect to payment methods, previously, companies were permitted to pay filing fees via wire transfer, paper check or money order. Under the new rules, the SEC will accept payments through wire transfer, automated clearing house (ACH), debit card or credit card. Companies will be able to pay via debit card, credit card or ACH through the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, and the U.S. Treasury's Pay.gov webpage will complete the processing. The SEC also voted to amend specific rules for companies that are claiming an offset but do not rely on Rule 457(o). Generally, the amendments permit companies to reallocate, prior to effectiveness, the filing fees for two or more classes of security included in a registration statement. For additional information on these amendments, see our  alert “SEC Filing Fee Disclosure and Payment Methods Modernization,” dated Nov. 12, 2021.

Status of Pending SEC Proposals and Related Guidance

Climate Change in Disclosures (Author: Matthew Sferrazza)

On March 21, the SEC proposed amendments to Regulations S-K and S-X that would require significant disclosures regarding the impact of climate change on a company's business.

The proposed rules would require public companies to disclose the following:

• The company's processes for identifying, assessing and managing climate-related risks.
• Any climate-related risks that have had or are likely to have a material impact on the company's business and consolidated financial statements.
• How any identified climate-related risks have affected or are likely to affect the company's strategy, business model and outlook.
• The oversight and governance of climate-related risks by the board and management (see “Board Expertise and Governance Process Disclosure” below for further discussion regarding the board expertise and governance aspects of the proposal).
• Greenhouse gas (GHG) emissions resulting directly and indirectly from the company's operations and, in some cases, obtain third-party attestations regarding such emissions.
• Climate-related targets, goals, transition plans and, if desired, any opportunities.
• The impact of climate-related events (severe weather events and other natural conditions as well as other physical risks identified by the registrant) and transition activities (including transition risks identified by the registrant) on the line items of the company's financial statements and related expenditures, as well as financial estimates and assumptions impacted by such climate-related events and transition activities.

If adopted as proposed, the rules would be phased in for filings by larger companies in 2024 and by smaller registrants in 2026.

The proposal is modeled after existing international recommendations, including but not limited to the Task Force on Climate-related Financial Disclosures and the Greenhouse Gas Protocol. The requirements would be implemented through the addition of eight new items under Regulation S-K (Items 1500-1507) that cover the disclosures about governance, climate risks and their impact on the company, and climate-related targets, goals and transition plans. The proposal would also require an attestation for GHG disclosures. The amendments would also add a new Article 14 to Regulation S-X, which would call for supplemental financial statement information regarding climate-related disclosures. While the proposed amendments would significantly elevate the quantity of, and associated burden to provide, climate-related disclosures, they would also seek to standardize climate-related disclosures so that investors can assess companies' climate risks and make comparisons between companies. The SEC had targeted October for consideration of the final rules, but as of the date of this alert, the final rules have not yet been adopted. For additional information on this proposal, see our  alert “SEC Proposes Rules for Climate-Related Disclosures and Extends Deadline for Public Comments,” dated May 11.

While these rules remain proposals, as noted above, companies should nonetheless consider what disclosures should be included within the MD&A, risk factors and other aspects of their filings to convey the material impacts of climate change and other ESG-related factors on their businesses, plans and prospects under existing disclosure requirements and in response to investor demands for such information. Further, the SEC has emphasized in its  sample comment letter on climate change disclosure that companies should consider whether more expansive information provided in sustainability and ESG reports should also be included in filings based on the notion that it is material to investors.

Cybersecurity  (Author: Janet A. Spreen)

On March 9, the SEC released proposed rules to mandate public company disclosure of material cybersecurity incidents as well as cybersecurity risk management, strategy and governance. The proposed rules would add:

• Item 1.05 to Form 8-K, which would require disclosure of material cybersecurity incidents within four business days of determining the event is material, which determination must be made “as soon as reasonably practical after discovery of the incident.” Companies would also have to disclose the following information to the extent that it is known at the time of filing: (1) when the incident was discovered and whether it is ongoing; (2) a brief description of the nature and scope of the incident; (3) whether any data was stolen, altered, accessed or used for any other unauthorized purpose; (4) the effect of the incident on the company's operations; and (5) whether the company has remediated or is currently remediating the incident. This disclosure may be required before a company has been able to complete its investigation of the matter and could not be delayed to facilitate an investigation by law enforcement; however, disclosure is not expected to have a level of detail that would impede response to or remediation of the incident.
• Item 106(d) of Regulation S-K, requiring companies to disclose on Form 10-K or Form 10-Q any material changes or updates related to previously disclosed incidents for the period in which changes or updates occur or are discovered, such as any material impact on the company's operations and financial condition, remediation efforts, and resulting changes in the company's policies and procedures. The foregoing types of information and updates would also be required to be disclosed if a series of previously undisclosed immaterial cybersecurity incidents became material when viewed in the aggregate. It is not clear over what period of time incidents would need to be viewed for making the determination of materiality.
• Item 106(b) of Regulation S-K, requiring companies to disclose whether they (1) have implemented a cybersecurity risk assessment program and to describe the program; (2) engage third parties in connection with such program; (3) have policies and procedures to oversee and identify cybersecurity risks related to third-party service providers; (4) undertake activities to prevent, detect and minimize the effect of cybersecurity incidents; (5) have business continuity, contingency and recovery plans in place; (6) made changes to governance, policies and procedures or technologies informed by previous cybersecurity incidents; (7) determined that incidents have affected or are likely to affect results of operations or financial condition and, if so, how; and (8) consider cybersecurity risks as part of business strategy, financial planning and capital allocation and, if so, how.
• Item 106(c) of Regulation S-K, requiring disclosure of oversight of cybersecurity risk by the board of directors and management. Board-related disclosures would include (1) whether the entire board, specific members or a board committee is responsible for oversight; (2) the process by which the board is informed about risks and the frequency of discussion on this topic; and (3) whether and how the board or board committee considers cyber risks as part of business strategy, risk management and financial oversight. Management-related disclosures would include (1) whether certain positions or committees are responsible for measuring and managing cybersecurity risk, including prevention, mitigation, detection and remediation of incidents, and the relevant experience of such persons; (2) whether the company has a chief information security officer (or comparable position) and, if so, to whom the individual reports within the organizational chart and the relevant expertise of any such person(s); (3) the processes by which responsible persons or committees are informed about and monitor prevention, mitigation, detection and remediation of incidents; and (4) whether and how frequently responsible persons or committees report to the board or board committee on cyber risk.
• Item 407(j) of Regulation S-K, requiring disclosure of the cybersecurity expertise of members of the board. If any member of the board has cybersecurity expertise, the company would have to disclose the name of any such director and describe the nature of the expertise. The proposed rule states that Item 407(j) is not intended to increase the duties or liability of the person with such expertise or decrease the duties or liability of other board members. (See “Board Expertise and Governance Process Disclosure” below for further discussion regarding the board expertise and governance aspects of the proposal.)

The original comment period for the cybersecurity disclosure proposals ended May 9, but due to the technical glitch affecting comments submitted electronically, the comment period was reopened until 14 days following publication of the reopening release in the Federal Register, which occurred Oct. 18. For additional information on these proposed rules, see our  alert “SEC Proposes Rules on Disclosure of Material Cyber Incidents and Cybersecurity Practices for Public Companies,” dated March 11.

Share Repurchase Disclosure (Author: Brittany Stevenson)

On Dec. 15, 2021, the SEC proposed amendments to the disclosure requirements regarding issuer repurchases of their equity securities (often referred to as buybacks) under Item 703 of Regulation S-K and through a new Form SR, intended to provide greater transparency for investors. Generally, issuers may repurchase their shares through various transactions, including open market purchases, tender offers, private negotiated transactions and accelerated share repurchases, and these activities are typically only disclosed at the time they are authorized by the board of directors and in the required periodic report long after they are completed.

The amendments to Item 703 would require additional details in connection with disclosures in quarterly reports, including:

• The objective or rationale for share repurchases and the process or criteria used to determine the amount of repurchases.
• Any policies and procedures relating to purchases and sales of the company's securities by its officers and directors during a repurchase program, including any restrictions on such transactions.
• Whether repurchases were made pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) and, if so, the date the plan was adopted or terminated.
• Whether repurchases were made in reliance on the Rule 10b-18 nonexclusive safe harbor.
• Whether any officers or directors subject to Section 16 of the Exchange Act purchased or sold shares or other units of the class of the company's equity securities that is the subject of an issuer share repurchase plan or program within 10 business days before or after the announcement of an issuer purchase plan or program.

The proposed Form SR would impose daily disclosure obligations on companies that repurchase shares, with the filing due within one business day following the transaction. The proposed amendments seek to eliminate any information gaps or opportunities for abuse by improving the quality, relevance and timeliness of information related to share repurchases. The SEC had targeted October for its share repurchase disclosure modernization rules, but on Dec. 7 extended the comment period to allow for consideration of the impact of The Inflation Reduction Act of 2022. For additional information on this proposal, see our  alert “SEC Proposes Amendments to Share Repurchase Disclosures,” dated Dec. 21, 2021.

Rule 10b5-1 Proposals  (Author: Brittany Stevenson)

On Dec. 15, 2021, the SEC proposed amendments to Rule 10b5-1 that seek to enhance disclosure requirements and strengthen protections against insider trading. Rule 10b5-1 established a safe harbor from liability for insider trading when it is apparent that a trade was not made based on material nonpublic information because the trade was made under a trading arrangement (a Rule 10b5-1 plan) adopted when the insider was not aware of such information. The proposal includes updates to Rule 10b5-1(c), which provides an affirmative defense to insider trading liability by adding the following conditions to the availability of the affirmative defense:

• A minimum “cooling off” period after the adoption or modification of a Rule 10b5-1 plan of (i) 120 days for a director or officer (as defined under Section 16 of the Exchange Act), and (ii) 30 days for the company, in each case, before trading may begin under the new or modified plan.
• At the time of adopting or modifying a Rule 10b5-1 plan, directors and officers would be required to provide to the company a written certification stating (i) that they were not aware of material nonpublic information regarding the company or its securities, and (ii) that they are adopting the plan in good faith.
• The affirmative defense under Rule 10b5-1 would not be available for multiple overlapping plans for open market trades in the same class of securities.
• The affirmative defense under Rule 10b5-1 would be available for only one single-trade plan in any 12-month period.
• A Rule 10b5-1 plan must be entered into and “operated” in good faith and not as part of a plan to evade the rule.

The amendments also would require disclosure in quarterly reports, annual reports and proxy statements about companies' policies and procedures related to insider trading and for granting options in advance of the release of material nonpublic information, as well as insiders' use of Rule 10b5-1 plans and gifts of securities. The rules are on the SEC's open meeting agenda for Dec. 14; however, when final rules would take effect is unknown. For additional information on these amendments, see our  alert “SEC Proposes Amendments to Rule 10b5-1 Trading Arrangements and New Disclosure Requirements,” dated Dec. 17, 2021.

Schedule 13D/G and Section 16 Proposals (Author: Samuel F. Toth)

Section 13D/G Proposals

On Feb. 10, the SEC proposed amendments that would accelerate Schedule 13D and 13G filing deadlines in order to improve transparency regarding acquisitions and beneficial ownership of 5% or more of a public company's registered securities and the intentions of the reporting investor with respect to influencing or gaining control of the company. Under the current reporting regime, beneficial owners must file an initial Schedule 13D within 10 days after acquiring more than 5% of an issuer's registered class of securities, and any amendments must be filed “promptly” to report any material changes. The proposed rules would shorten these deadlines by requiring the initial schedule to be filed within five days after crossing the ownership threshold and any amendments to be filed within one business day after any material change.

The current deadlines for Schedule 13G filers depend on whether the reporting person is a qualified institutional investor, an exempt investor or passive investor. Under the existing rules, qualified institutional investors and exempt investors generally must file an initial Schedule 13G within 45 days after the end of the year in which they acquired more than 5% beneficial ownership. The proposed rules would shorten this requirement to within five business days after the end of the first month in which they met this threshold. The initial Schedule 13G requirement for passive investors would be shortened from 10 days to five days after acquiring more than 5% beneficial ownership. Each type of Schedule 13G filer is currently required to file an annual amendment within 45 days after the end of the year to report any changes. The proposed rules would shift this to a monthly obligation to report any material changes within five business days after the end of each month. Lastly, qualified institutional investors must file an amendment within 10 days and passive investors must file such amendment “promptly” after acquiring more than 10% beneficial ownership and, thereafter, upon any increase or decrease of more than 5% beneficial ownership. The proposed rules would shorten this requirement to five days for qualified institutional investors and to one day for passive investors.

Section 16 Proposals

On Dec. 15, 2021, the SEC proposed amendments that would impact the Section 16 reporting requirements of insiders with respect to transactions under Rule 10b5-1 plans and gifts. In addition to enhancing the disclosure requirements of Rule 10b5-1 plans in a company's public filings, as discussed above, the proposal would also add a Rule 10b5-1(c) checkbox to Forms 4 and 5, which would require an insider to affirmatively indicate whether a reported transaction was made according to a Rule 10b5-1 plan, provide the date such plan was adopted and allow the insider to provide additional information relevant to the reported transaction.

The proposed amendments would also accelerate the deadline by which insiders must report gifts under Section 16. Currently, bona fide gifts of a company's equity securities are required to be reported on Form 5 within 45 days after the company's fiscal year-end and may be voluntarily reported early on Form 4. Under the proposal, insiders would be required to report gifts on Form 4 within two business days following the transactions, mirroring the same standard deadline for other reportable transactions such as open market purchases and sales. The SEC Regulatory Agenda set April 2023 as the target date for consideration of final rules regarding the Section 13D/G and Section 16 proposed amendments, but as of the date of this alert, the timing for final rules and when they may take effect is unknown.

Executive Compensation Matters

SEC Clawback Regulation (Authors: Stefan P. Smith and Matthew Sferrazza)

On Oct. 26, the SEC adopted final rules that will require companies to implement policies for recovery (a clawback) of erroneously awarded incentive compensation, implementing Section 10D of the Exchange Act, which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The SEC originally proposed clawback rules in 2015 and reopened the comment period in October 2021. The final rules add new Exchange Act Rule 10D-1 and add new disclosure requirements under Item 402 of Regulation S-K. The new disclosure requirements apply to annual reports, information statements and proxy statements.

Rule 10D-1 mandates that national securities exchanges adopt listing standards that require listed issuers to adopt, disclose and enforce a compensation recovery policy. Such policies will apply to both material accounting errors that require a restatement of prior years' financial results (commonly referred to as “Big-R” restatements) as well as to errors that are corrected in the current year's results (commonly referred to as “little-r” restatements) and require all executive officers of such issuers to repay all performance-based compensation received in excess of what should have been received based on the restated financial reporting metric. The scope of potential recovery extends to all incentive-based compensation received by any current or former executive officer who served at any time during the three fiscal years prior to when a restatement becomes required. Incentive-based compensation is defined to include any compensation that is granted, earned or vested based wholly or in part upon the attainment of a financial reporting measure. New Item 402(w) of Regulation S-K will require detailed disclosure of all amounts that have been recovered, are in the process of being recovered or that will not be recovered due to the application of one of the three available impracticability exceptions; namely, the cost of recovery exceeds the recoverable amount, recovery would violate the issuer's home country law or recovery would cause a retirement plan to lose its tax-qualified status.

With respect to timing, exchanges must submit listing standards to the SEC by Feb. 27, 2023, and the listing standards must become effective by Nov. 28, 2023. Exchange-listed issuers must submit clawback policies to exchanges within 60 days of the listing standards becoming effective (between April 27, 2023, and Jan. 27, 2024, depending on how quickly listing standards become effective). Since listing standards become effective between 90 days and one year after publication of the final rule, companies should be prepared to submit their compensation recovery policy as soon as the first half of 2023. For additional information on this final rule release, see our  alert “SEC Adopts Final Rule Requiring Recovery of Incentive-Based Compensation Awarded in Error,” dated Nov. 18.

Pay-Versus-Performance Proposals (Authors: Stefan P. Smith, Adam W. Finerman and Macy T. Munz)

In August, the SEC adopted final pay-versus-performance rules requiring companies to disclose, in both tabular and narrative formats, how their executive compensation is paid in relation to their financial performance. The new disclosure will draw from the presentation of the year's total compensation to its principal executive and financial officers and other highest-paid executives in the “Summary Compensation Table” required under Item 402 of Regulation S-K, with some recalculations of those amounts, and provide some comparative information with respect to the performance of the company's peers.

More specifically, companies must present tabular disclosure of the following items for the company's five most recently completed fiscal years:

• The Summary Compensation Table measure of total compensation for the principal executive officer (PEO).
• A measure reflecting “compensation actually paid” for the PEO.
• The average Summary Compensation Table measure of total compensation for the other named executive officers (NEOs).
• A measure reflecting the average “compensation actually paid” to the NEOs.
• Total shareholder return (TSR) for the registrant.
• TSR for the registrant's peer group.
• The registrant's net income.
• A “Company-Selected Measure” of financial performance.

In addition, companies must provide a clear narrative, a graphical or combined narrative, and a graphical description of the relationship between (i) executive compensation actually paid and the company's TSR, (ii) the company's TSR and peer group TSR, (iii) executive compensation actually paid and net income, and (iv) executive compensation actually paid and the Company-Selected Measure. Moreover, new Item 402(v) of Regulation S-K requires companies to provide an unranked list of three to seven of the most important performance measures that link executive compensation actually paid to the company's NEOs during the past fiscal year to company performance.

Smaller reporting companies are exempt from disclosing the peer group TSR and Company-Selected Measure and must disclose all other items only for the three most recently completed fiscal years. Companies must begin to comply with the new disclosure requirements in their annual reports, proxy statements and information statements that are required to include Item 402 disclosure for fiscal years ending on or after Dec. 16. Therefore, the new rule will generally apply for the upcoming 2023 proxy season. Companies may provide the disclosure for three years instead of five years in the first filing in which they provide pay-versus-performance disclosure. For additional information on this final rule release, see our  alert “SEC Adopts Dodd-Frank Act Pay-Versus-Performance Rules,” dated Sept. 1.

Say When on Pay Proposals (Authors: Janet A. Spreen and Tess N. Wafelbakker)

In January 2011, the SEC adopted final rules relating to shareholder advisory votes on the frequency of conducting say-on-pay votes. Companies must hold a shareholder advisory vote (a say-on-frequency vote) at their annual meeting on whether the say-on-pay vote should be held every one, two or three years. The say-on-frequency vote must be held at least once every six years. Following the say-on-frequency vote, companies must disclose under Item 5.07 of Form 8-K how often they will hold the say-on-pay vote based on the results of the say-on-frequency vote.

For companies that first included the say-on-frequency vote in 2011 when the rules took effect and are holding such vote every six years, the say-on-frequency vote will need to be included again in 2023 and companies will need to make appropriate disclosures on Form 8-K.

Other Annual Meeting Matters and Corporate Governance Trends

Proxy Rules Reform – Universal Proxy  (Author: John J. Harrington)

The SEC's universal proxy rule (Rule 14a-19 under the Exchange Act) was adopted in 2021 and became effective for shareholder meetings after August of this year. While there have been a few proxy contests to date involving universal proxy cards, 2023 will be the first full proxy season with the rule in effect, so it remains to be seen whether and how the rule impacts the frequency or course of proxy contests.

The rule requires that, in contested elections, both the registrant and any dissident soliciting proxies must include each other's nominees on their proxy cards. The effect is that shareholders can vote for whatever combination of nominees they choose, replicating what a shareholder could do by voting in person at a meeting. Prior to adoption of this rule, shareholders voting by proxy in contested elections were generally limited to voting for one slate or another.

Under the rule, a dissident must notify the registrant of its nominees 60 days in advance of the anniversary of the prior year's annual meeting and the registrant must notify the dissident 50 days in advance (in each case, the deadlines are subject to customary adjustment if the meeting is moved by more than 30 days). Dissidents must file definitive proxy statements by the later of 25 days in advance of the meeting and five days after the registrant files its definitive proxy statement. In addition, dissidents are required to solicit 67% of the voting power (and must disclose the intent to do so in the notice to the registrant). Finally, the rule includes presentation and formatting requirements so that all the nominees are fairly presented on the proxy card and the voting options are clear.

For the majority of registrants not facing a proxy contest, the foregoing requirements will not come into play. However, all registrants have an obligation to disclose the Rule 14a-19 deadline in their proxy materials. If the registrant has an advance notice bylaw requirement with an earlier deadline, which is often the case, then the registrant can disclose just that earlier deadline as long as the need for the dissident to comply with the requirements of Rule 14a-19 is made clear.

Submission of ‘Glossy' Annual Reports  (Author: Samuel F. Toth)

On June 3, the SEC adopted amendments that would require the electronic submission of “glossy” annual reports that are prepared in accordance with Rule 14a-3 of the Exchange Act and delivered to shareholders with proxy materials. The compliance date for the mandatory electronic filing of glossy annual reports begins Jan. 11, 2023, and, therefore, companies must comply with the new requirement for the upcoming proxy season.

Companies will need to submit a PDF of their glossy annual report through the SEC's EDGAR system that contains the same graphics, styles of presentation and prominence of disclosures (for example, text size, placement, color). In other words, the glossy report should not be reformatted, resized or otherwise redesigned for purposes of the EDGAR submission.

The amendments eliminate the requirement to furnish paper copies of the annual report to the SEC; however, companies that use the “notice and access” model for proxy solicitation will still be required to publish their glossy annual report on a website other than EDGAR that is specified in the notice. Therefore, if a company already posts a PDF version of its glossy annual report on its website, these amendments will just add the simple step of submitting that PDF on EDGAR. Amended Rule 14a-3(c) provides that the glossy annual report must be submitted to the SEC, solely for its information, not later than the date on which such report is first sent or given to security holders or the date on which preliminary copies, or definitive copies if preliminary filing was not required, of the proxy statement are filed with the SEC pursuant to Rule 14a-6, whichever date is later. The glossy annual report will not be deemed to be “soliciting material” or to be “filed” with the SEC.

Proxy Voting Advice and Institutional Investor Vote Reporting (Authors: Suzanne K. Hanselman, David H. Brown and Salmon Hossein)

In July, the SEC adopted amendments to its rules governing proxy voting advice as proposed in November 2021 by rescinding various provisions governing the timeliness of proxy voting advice, written responses by companies to proxy voting advice, liability provisions and guidance regarding the Investment Advisers Act of 1940 (IAA). The final amendments respond to concerns expressed by proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis by aiming to avoid burdens on proxy voting advice businesses that may impair the timeliness and independence of their advice. The amendments also address misconceptions about liability standards applicable to proxy voting advice while seeking to preserve investors' confidence in the integrity of such advice.

The amendments rescind certain conditions to the availability of exemptions from the information and filing requirements of the proxy rules for proxy advisory firms. The most significant changes reverse the requirements that (i) proxy voting advice be made available to subject companies before or at the same time it is made to proxy advisory firm clients, and (ii) proxy advisory firm clients be provided with a means of becoming aware of any subject company's written response to such proxy voting advice. Furthermore, the amendments rescind changes made in 2020 to the proxy rules' liability provisions and clarify that soliciting materials, such as proxy voting advice, are subject to the proxy rules' anti-fraud provisions that prohibit false or misleading soliciting material. Lastly, these amendments rescind prior guidance issued in 2020 to investment advisers regarding their proxy voting obligations under the IAA. The prior guidance was intended to assist investment advisers in assessing how to consider company responses to proxy voting advice regarding proxy voting advice businesses' electronic vote management systems and related disclosure obligations. The amendments are subject to multiple legal challenges that may impact the SEC's decision to move forward with their implementation. As of the date of this alert, the SEC has successfully defended one challenge alleging that its proxy advisory voting rules violated federal rulemaking procedure, but others remain. In June 2021, the Staff announced that it was considering whether to recommend that the SEC revisit the amendments and that it would not recommend enforcement action based on the amendments during the period in which the SEC is considering further regulatory action.

On Nov. 2, the SEC adopted rule and form amendments requiring additional disclosure on Form N-PX about a registered fund's proxy votes. These amendments also require institutional investment managers to report how they voted proxies regarding certain executive compensation (or say-on-pay) matters, identify their votes by categories so that investors can focus on topics they find important, and disclose the number of shares a fund or manager voted (or was instructed to vote), as well as the number of shares a fund loaned out but did not recall. Before these amendments, it was difficult for investors to analyze these reports, given a lack of standardization and structured data language. Now there should be consistency, transparency, enhanced information and, with it, usefulness for investors about the proxy voting of both institutional investment managers and investment funds, given the significant voting power they wield on behalf of millions of investors. The amendments will be effective for votes occurring on or after July 1, 2023, with the first filings subject to the amendments due in 2024.

Shareholder Proposals

Staff Review (Authors: Robert A. Weible and Connor A. Gibbons)

On Nov. 3, 2021, the Staff issued  Staff Legal Bulletin (SLB) 14L, which (i) provided new guidance limiting the permissible bases for excluding shareholder proposals from a public company's proxy statement under the Rule 14a-8(i)(7) ordinary business exclusion and the Rule 14a-8(i)(5) relevance exclusion, and (ii) rescinded SLBs 14I, 14J and 14K. Under the rescinded SLBs, when a company sought no-action relief for excluding a shareholder proposal on the theory that the issue raised was not sufficiently significant to “transcend ordinary business” under the ordinary business exclusion, the board of the company was asked to submit an analysis to the Staff demonstrating the excludability of the proposal. Under SLB 14L, however, the Staff will no longer evaluate the significance of the nexus between the subject of the proposal and the company's business and, instead, will focus on whether the proposal touches on issues of “broad societal impact.” In addition, the Staff restricted which proposals may be excluded as “micromanagement” under this rule by explaining that proposals that request specific details or the promotion of time frames will not automatically be excludable, especially if they relate to climate change goals.

In SLB 14L, the Staff also revised its guidance on Rule 14a-8(i)(5), which permits companies to exclude proposals that relate to operations that do not account for at least 5% of the company's total assets (as of the end of the prior fiscal year) or 5% of its net earnings and gross sales for the prior fiscal year, unless the proposal is otherwise significantly related to the business of the company. The Staff, in the rescinded SLBs, encouraged companies to submit board-prepared analyses explaining the lack of significant relationship to the company's business. However, under SLB 14L, this submission is no longer part of the no-action analysis, as proposals that “raise issues of broad social or ethical concern related to the company's business” cannot be excluded even if they fail to reach the economic thresholds for inclusion. For additional information, see our  alert “New SEC Staff Guidance on Shareholder Proposal Exclusions,” dated Dec. 8, 2021.

Proposed Amendments to Rule 14a-8 (Authors: Suzanne K. Hanselman and David H. Brown)

On July 13, the SEC proposed amendments to Rule 14a-8, which addresses when a company must include a shareholder's proposal in its proxy statement and identify the proposal in its form of proxy when the company holds an annual or special meeting of shareholders. Currently, Rule 14a-8 outlines 13 substantive bases on which companies may exclude shareholder proposals from their proxy materials. The proposed amendments would narrow three of those bases for exclusion: substantial implementation, duplication and resubmission. In a release, Gensler stated that the proposed amendments would provide a clearer framework for the application of Rule 14a-8 and help shareholders exercise their rights to submit proposals for consideration by their fellow shareholders.

The proposed amendments would provide that a company has “substantially implemented” a proposal if the company has already “implemented the essential elements of the proposal.” A determination of whether a proposal has already been substantially implemented would be done on a case-by-case factual basis. The proposed amendment would further provide that a proposal “substantially duplicates” another proposal if it “addresses the same subject matter and seeks the same objective by the same means as” another proposal previously submitted to the company. Lastly, the amendments would harmonize the definition of a resubmission with the “substantially duplicates” standard when applying the resubmission thresholds, thereby harmonizing terms within Rule 14a-8. Within the proposal are specific examples of bases that would help the company and the company's counsel determine whether inclusion or exclusion of a shareholder's proposal would be appropriate. The comment period has now closed. Until the amendments are adopted by the SEC, companies currently receiving shareholder proposals should continue to analyze those proposals under the current rules.

Delaware Amendment Allowing Additional Exculpatory Language  (Authors: Asim Grabowski-Shaikh and Matthew D. Gases)

Following an amendment to Section 102(b)(7) of the Delaware General Corporation Law (DGCL), effective as of Aug. 1, the scope of available exculpatory protections for personal monetary damages for breach of fiduciary duty now extends beyond directors to corporate officers. Under the amendment, a Delaware corporation can now take action to adopt a charter provision that effectively eliminates its covered officers' personal liability for breach of the duty of care for direct claims by stockholders (including class actions). These types of claims commonly arise in the context of an M&A transaction.

Notably, however, the amended Section 102(b)(7) does not eliminate liability of officers for breach of fiduciary duty arising out of claims brought by the corporation itself or for derivative claims brought by the corporation's stockholders in the name of the corporation, a significant difference from how the DGCL treats the exculpation of directors. The amendment also precludes elimination or limitation of liability for the types of claims with respect to which exculpation of directors is not permissible, such as (i) a breach of the duty of loyalty, (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, and (iii) any transaction from which the officer derived an improper personal benefit. Finally, the amended Section 102(b)(7) only applies to certain covered officers, as further described in the statute.

A Delaware corporation seeking to expand the benefits of the newly amended Section 102(b)(7) to its corporate officers must take action to do so, as the protections will not spring to life until and unless the corporation's certificate of incorporation provides for it, and then only to the extent provided for. When a new Delaware corporation is in the formation stage, organizers should therefore consider including a provision expressly providing exculpatory protections for both directors and officers. An existing Delaware corporation, on the other hand, may want to consider amending its certificate of incorporation to include a provision expressly covering officers that, depending on the corporation's organizational documents, may require both board and stockholder approval. After obtaining the requisite approvals, a certificate of amendment must be filed with the Delaware Secretary of State in order to effect the amendment. For additional information on this amendment, see our  alert “Corporate Officers May Be Exculpated from Personal Liability Under New Amendment to Delaware Law,” dated Aug. 9.

Virtual Annual Meetings (Author: Tess N. Wafelbakker)

An initial consideration for the 2023 proxy season is the format that companies will use for their 2023 annual shareholder meeting. Many companies are continuing to take advantage of virtual annual meetings. Options include virtual-only meetings with a live webcast, hybrid meetings with an option to attend in person or virtually, and audio-only meetings in the form of conference calls. Companies must consider the requirements of the SEC, applicable state law, governing documents and exchange requirements for the format that is permitted; notice requirements; and how to address adjournments, postponements, shareholder lists and interactions among shareholders in their decision to hold the annual meeting virtually rather than in person.

For Delaware corporations, recent amendments to the DGCL affect these requirements. Section 219 of the DGCL was amended to eliminate the requirement that a company make its stockholder list available during stockholder meetings (whether virtual or in person). Instead, Delaware corporations will be required to make the list of stockholders available for inspection for a period of 10 days ending on the day before the meeting date, either at the company's principal place of business or on an electronic network. If a company's existing bylaws track the previous statutory requirement, in the absence of a bylaw amendment deleting this requirement, the company would still have to comply with the requirement to make a stockholder list available during stockholder meetings going forward. Affected companies should consider whether to update their bylaws to reflect the updated statutory language.

In addition, Section 222 of the DGCL, which relates to the requirement to give notice of stockholder meetings, was amended to clarify that a notice of a meeting of stockholders may be given in any manner permitted by Section 232 of the DGCL, which specifically allows notice by electronic transmission. Unique to virtual stockholder meetings, amended Section 222(c) clarifies that a meeting of stockholders held by means of remote communication may be adjourned to address a technical failure to convene or continue the meeting unless the bylaws otherwise require. Further, notice need not be given if the time, date and place of the adjourned meeting are (i) announced at the meeting, (ii) displayed during the time scheduled for the meeting on the virtual platform used for the meeting or (iii) set forth in the notice of the meeting. A Delaware corporation conducting a virtual meeting may want to inform stockholders of adjournment notice procedures in its meeting notice and on the virtual meeting site to address the possibility that technical issues may arise while convening or holding the virtual meeting.

Board Composition

Board Diversity  (Author: Tess N. Wafelbakker)

In August 2021, the SEC approved Nasdaq's proposal, as amended, to implement diversity requirements for companies listed on the Nasdaq exchanges. At a high level, and with some exceptions, the board diversity rule requires any company listed on the Nasdaq exchanges to (a) have or explain why it does not have at least two diverse directors on its board, including at least one director who self-identifies as female (regardless of gender designation at birth) and at least one director who self-identifies as either an “Underrepresented Minority,” as defined in the Nasdaq rule, or as LGBTQ+, and (b) annually disclose directors' self-identified gender, race and ethnicity in a standardized board diversity matrix. Newly listed companies have additional time to comply with the diversity requirements, and companies with boards of five or fewer members will be in compliance with only one diverse director. Beginning Aug. 7, 2023, all Nasdaq-listed companies must have or explain why they do not have at least one diverse director. Beginning Aug. 6, 2025, companies listed on the Nasdaq Global Select and Nasdaq Global Market exchanges must have or explain why they do not have two diverse directors, and by Aug. 6, 2026, companies listed on the Nasdaq Capital Market exchange must have or explain why they do not have two diverse directors. The requirement for the board diversity matrix disclosure, which may be provided in a company's proxy statement (or if companies do not file a proxy, on Form 10-K or 20-F) or on its website, took effect during 2022. For additional information on Nasdaq's board diversity requirements, see our  alert “SEC Approves Nasdaq Board Diversity Proposal,” dated Aug. 18, 2021.

Beyond Nasdaq, many other parties are focused on enhanced board diversity. There have been laws adopted in California (but subsequently found unconstitutional) requiring a certain representation of diverse members on the boards of companies with principal offices in California. Proxy advisory firms and institutional investors have further enhanced their policies for 2023 with bright-line rules about the diversity they expect in the boardroom. These groups will seek to encourage this outcome by recommending a vote or voting against the chair or all members of the nominating/corporate governance committee in light of the committee's perceived lack of effectiveness in identifying and recommending sufficiently diverse director nominees. In order to assess where board composition stands relative to these policies, investors, as well as some regulators, believe that increased disclosure regarding diversity characteristics is needed. For example, the NYC Comptroller launched a boardroom accountability initiative, calling on the boards of 151 U.S. companies to disclose the race and gender of their directors, along with board members' skills, in a “matrix” format – and to enter into a dialogue regarding their boards' “refreshment” processes. The SEC also identified board diversity disclosure on its Regulatory Agenda for early 2023, following several years of commentary from the SEC about the need to increase the diversity information provided in proxy statements. Thus, this disclosure is becoming widespread, not just for Nasdaq-listed companies, and is recommended as a way to get out in front of potential shareholder proposals and negative voting recommendations.

Board Expertise and Governance Process Disclosure  (Authors: Janet A. Spreen and Tess N. Wafelbakker)

Item 401(e) of Regulation S-K requires public companies to provide biographical information about directors, including a brief discussion of the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director of the company, in light of the company's business and structure. In addition, Item 407(h) of Regulation S-K requires a public company to disclose the extent of the board's role in the risk oversight of the company, such as how the board administers its oversight function and the effect that this has on the board's leadership structure.

Many companies also include a director skill matrix that highlights the primary skill sets relevant to serving on the company's board and identifies how many of the individual directors have those skills to further enhance investors' understanding of the directors' qualifications to serve. With respect to risk oversight, however, company disclosure is often more limited, and the SEC has recently issued comment letters seeking more detail in this area.

As discussed above, recent SEC proposals regarding climate change and cybersecurity also seek to give investors additional insight into these areas of director expertise and how this supports the oversight function of the board.

The SEC'S proposed rule on climate change disclosure would require disclosures on Form 10-K about a company's governance, oversight, risk management and strategy with respect to climate-related risks, including:

• The identity of any board members or board committee responsible for the oversight of climate-related risks.
• Whether any member of the board of directors has expertise in climate-related risks, with disclosure in such detail as necessary to fully describe the nature of the expertise.
• The processes by which the board of directors or board committee discusses climate-related risks, including how the board is informed about climate-related risks and the frequency of such discussion.
• Whether and how the board of directors or board committee considers climate-related risks as part of its business strategy, risk management, and financial oversight.
• Whether and how the board sets climate-related targets or goals and how it oversees progress against those targets or goals, including the establishment of any interim targets or goals.

Considering the extent and complexity of the proposed rule, some companies may establish a separate sustainability committee dedicated to focusing on these issues and, even before the rules are finalized, may want to review their climate change oversight functions and assess whether any governance steps may need to be taken to prepare to address the new requirements. Many companies have already formed a sustainability or ESG committee, although, to date, it has been more common for sustainability or ESG responsibilities to be combined with the role of the governance committee or divided among committees based on the areas of expertise of such committees and their members.

The SEC's cybersecurity proposal is similarly intended to enhance and standardize disclosures regarding cybersecurity risk management, strategy and governance, in addition to cybersecurity incident reporting. With respect to board oversight, companies would be required to disclose the following:

• Whether the entire board, specific board members or a board committee is responsible for oversight of cybersecurity risks.
• The processes by which the board is informed about cybersecurity risks and the frequency of its discussions on this topic.
• Whether and how the board or board committee considers cybersecurity risks part of its business strategy, risk management and financial oversight.

The proposal would also require disclosure about the board's cybersecurity expertise, if any. The term “cybersecurity expertise” is not defined, but the proposal provides criteria to be considered, including prior work experience, possession of relevant certifications or degrees, and specific knowledge or skills in cybersecurity. Companies would be required to disclose the names of any directors with cybersecurity expertise, with disclosure in such detail as necessary to fully describe the nature of the expertise.

Given the extent of the disclosures that may be required in the event the SEC adopts the rules as currently proposed, and given the significance of these issues to institutional investors and other stakeholders, companies may want to consider the extent of cybersecurity or climate change expertise currently possessed by their board members as part of succession planning and director education discussions.

Directors' and Officers' Questionnaires  (Author: Tess N. Wafelbakker)

Companies should consider whether their Directors' and Officers' questionnaires require any of the following updates:

• Adding questions regarding self-identified diversity characteristics, as well as consent to disclosing those characteristics, for Nasdaq compliance and/or voluntary board diversity disclosure.
• Expanding the consent to being named as a nominee for director to also cover inclusion in any dissident's proxy statement, if applicable.
• Including questions addressing potential Clayton Act issues, such as interlocking directorships, given increased regulatory attention to Section 8 of the act.
• Reviewing questions relating to SEC disclosure requirements under the Iran Threat Reduction Act, including the extension to certain Russian individuals and entities, to ensure that questions include applicable Russian parties.
• Adding questions that solicit information specific to areas of board expertise shown in the director skill matrix, including, as applicable, areas of significance to investors, such as ESG oversight, HCM, climate change and cybersecurity, as needed to comply with the related disclosure proposals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.