On December 4, 2017, the U.S. Securities and Exchange Commission (“SEC”) approved the New York Stock Exchange’s (the “NYSE”) proposed rule change to amend Section 202.06 of the NYSE Listed Company Manual to prohibit listed companies from releasing material news after the NYSE’s official closing time until the earlier of the publication of such company’s official closing price on the NYSE or five minutes after the official closing time. The new rule means that NYSE listed companies may not release end-of-day material news until 4:05 P.M. EST on most trading days or until the publication of such company’s official closing price, whichever comes first. The one exception to the new rule is that the delay does not apply when a company is publicly disclosing material information following a non-intentional disclosure in order to comply with Regulation FD. Regulation FD mandates that publicly traded companies disclose material nonpublic information to all investors at the same time.
Cyber risks are an increasingly common risk facing businesses of all kinds. In a recent speech given at the New York Stock Exchange, SEC Commissioner Luis A. Aguilar emphasized that cybersecurity has grown to be a “top concern” of businesses and regulators alike and admonished companies, and more specifically their directors, to “take seriously their obligation to make sure that companies are appropriately addressing those risks.”
Commissioner Aguilar, in the speech delivered as part of the Cyber Risks and the Boardroom Conference hosted by the New York Stock Exchange’s Governance Services department on June 10, 2014, emphasized the responsibility of corporate directors to consider and address the risk of cyber-attacks. The commissioner focused heavily on the obligation of companies to implement cybersecurity measures to prevent attacks. He lauded companies for establishing board committees dedicated to risk management, noting that since 2008, the number of corporations with board-level risk committees responsible for security and privacy risks had increased from 8% to 48%. Commissioner Aguilar nevertheless lamented what he referred to as the “gap” between the magnitude of cyber-risk exposure faced by companies today and the steps companies are currently taking to address those risks. The commissioner referred companies to a federal framework for improving cybersecurity published earlier this year by the National Institute of Standards and Technology, which he noted may become a “baseline of best practices” to be used for legal, regulatory, or insurance purposes in assessing a company’s approach to cybersecurity.
Cyber-attack prevention is only half the battle, however. Commissioner Aguilar cautioned that, despite their efforts to prevent a cyber-attack, companies must prepare “for the inevitable cyber-attack and the resulting fallout.” An important part of any company’s cyber-risk management strategy is ensuring the company has adequate insurance coverage to respond to the costs of such an attack, including litigation and business disruption costs.
The insurance industry has responded to the increasing threat of cyber-attacks, such as data breaches, by issuing specific cyber insurance policies, while attempting to exclude coverage of these risks from their standard CGL policies. Commissioner Aguilar observed that the U.S. Department of Commerce has suggested that companies include cyber insurance as part of their cyber-risk management plan, but that many companies still choose to forego this coverage. While businesses without cyber insurance may have coverage under existing policies, insurers have relentlessly fought to cabin their responsibility for claims arising out of cyber-attacks. Additionally, Commissioner Aguilar’s speech emphasizes that cyber-risk management is a board-level obligation, which may subject directors and officers of companies to the threat of litigation after a cyber-attack, underscoring the importance of adequate D&O coverage.
The Commissioner’s speech offers yet another reminder that companies should seek professional advice in determining whether they are adequately covered for losses and D&O liability arising out of a cyber-attack, both in prospectively evaluating insurance needs and in reacting to a cyber-attack when the risk materializes.
Read Commissioner Aguilar’s full speech here.
Recently in Then National Law Review was an article by Louis Lehot, John D. Tishler, Edwin Astudillo and Nina Karalis of Sheppard, Mullin, Richter & Hampton LLP regarding the NYSE Limiting Broker Voting:
On January 25, 2012, the New York Stock Exchange issued an Information Memo to its member organizations stating that effective immediately, brokers may not vote on corporate governance proposals supported by company management without instructions from their clients. NYSE’s rules affect the voting of all shares held in “street name” by NYSE member organizations, regardless of whether the vote is for an issuer listed on the NYSE. This new position follows a recent regulatory and legislative trend disfavoring discretionary broker voting. The notification is a significant departure from historical practice where brokers used their discretion to cast votes on behalf of “street name” shareholders who fail to provide voting instructions with respect to what were previously viewed as “routine” matters. The NYSE’s new position will affect the voting dynamics for company-supported governance proposals, including those that companies may put forward this proxy season to avoid shareholder proposals on similar matters.
NYSE Rule 452 allows a member organization (broker) to use its discretion to cast votes on behalf of “street name” shareholders who do not return the proxy card to the broker within 10 days prior to the shareholder meeting. However, such discretionary voting is not permitted with respect to “non-routine” matters. Historically, corporate governance proposals that were supported by company management were considered routine matters. Beginning in 2010, the NYSE prohibited broker discretionary voting in the context of director elections, which was codified in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Dodd-Frank Act also prohibited brokers from voting shares on executive compensation proposals without specific client instruction. The NYSE’s new position with respect to company-supported corporate governance proposals is the most recent limit on broker discretionary voting. When brokers do not vote a share they hold in street name because of a lack of instructions, it is referred to a “broker non-vote.”
The Information Memo indicated the following examples of company-supported governance proposals that would no longer be considered routine:
- de-staggering a company’s board of directors;
- majority voting in the election of directors;
- eliminating super majority voting provisions;
- providing for the use of written consent;
- providing rights to call a special meeting; and
- certain types of anti-takeover provision overrides.
Why is this significant?
Brokers that typically voted in favor of these type of company-supported proposals will no longer have discretion to do so. These proposals usually must be implemented through an amendment to the company’s articles or certificate of incorporation, and as such amendments typically require the affirmative vote of at least a majority of the outstanding shares, broker non-votes will have the same effect as “against” votes. Depending on the composition of shareholders, the loss of broker discretionary votes may have a material effect on the ability of a company to obtain shareholder approval for a company-supported governance proposal. The problem will be exacerbated where a proxy advisory firm recommends against the proposal. Until this rule change, discretionary broker votes countered to some degree the negative votes from holders that followed the recommendations of proxy advisory firms.
Under Delaware law, where brokers have discretionary authority to vote on any matter on the ballot, all shares they hold in street name will be considered present for quorum purposes. If brokers do not have discretionary authority to vote on any matter, shares that were not instructed on any matter are not considered present for quorum purposes. In the past, a company-supported governance proposal would be discretionary and therefore would be enough on its own to cause all street name shares to be present at a meeting for quorum purposes. That will no longer be the case.
What should you do now?
If you plan to have a company-supported governance proposal on your annual meeting agenda, it will be more important than ever to analyze the shareholder base and consider early engagement with key shareholders and the likely recommendations of the proxy advisory firms. Proxy solicitation firms can be invaluable in this analysis, and can also help to “get out the vote” of holders that may not otherwise return instruction cards.
These new rules should also be taken into account in connection with consideration of pre-empting a received or expected shareholder proposal on corporate governance matters.
Finally, if there will be other proposals on the agenda and obtaining a quorum for the meeting is a potential concern, companies might consider another proposal to support a quorum. Ratification of auditors and an increase in authorized common shares are examples of proposals that brokers may still vote uninstructed shares.
Copyright © 2012, Sheppard Mullin Richter & Hampton LLP.