The current proxy season presents new challenges and opportunities for U.S. companies as they face shifting expectations regarding board diversity. There are a number of notable developments. The Fifth Circuit Court of Appeals decision to vacate the Nasdaq diversity rules, which required Nasdaq-listed companies to disclose board diversity statistics and have a minimum number of diverse directors was the first. This ruling, along with recent updates to the proxy voting guidelines of proxy advisory firms and institutional investors, has created uncertainty and variability in the board diversity landscape. Moreover, recent presidential executive orders have put increased scrutiny on such initiatives. In this Legal Update, we discuss these developments and highlight some practical considerations for U.S. companies preparing for the upcoming proxy season.

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On February 12, 2025, the staff of the Division of Corporation Finance (the “Staff”) of the U.S. Securities and Exchange Commission issued Staff Legal Bulletin No. 14M (“SLB 14M”), which rescinds in part Staff Legal Bulletin No. 14L (“SLB 14L”). In addition, SLB 14M provides guidance and clarification on the Staff’s views on the scope and application of Rule 14a-8(i)(5), Rule 14a-8(i)(7), and certain other aspects of Rule 14a-8, which governs the conditions under which a company can exclude a shareholder proposal from consideration in its definitive proxy statement. SLB 14M also provides guidance for companies that previously submitted and/or plan to submit no-action requests, pursuant to which the Staff agrees not to take action against the company for excluding a shareholder proposal on such grounds, during the 2025 shareholder proposal season.

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On February 10, 2025, the Ninth Circuit Court of Appeals ruled in favor of Slack Technologies LLC, dismissing an investor class action lawsuit brought under Sections 11 and 12(a)(2) of the Securities Act.  This decision follows the 2023 U.S. Supreme Court ruling, which held that the Slack plaintiffs must trace their purchased securities to the particular registration statement alleged to be false or misleading in order to bring a Section 11 claim.  The Supreme Court declined to render judgment on the Section 12 claim.  At that time, the case was remanded back to the Ninth Circuit for reconsideration.

In the context of Slack’s direct listing, the traceability requirement posed challenges for investors.  In order to satisfy the requirement, an investor must show a direct connection between the shares purchased and the specific document containing the alleged misstatement.  In traditional IPOs, this chain of title is typically well-documented.  However, because a direct listing involves the simultaneous public trading of pre-existing shares—without underwriters or lockup periods—the mingling of registered and unregistered shares makes it challenging to trace their individual origins.

On appeal for the Section 11 claim, the Slack plaintiffs sought to establish traceability through a statistical analysis.  They argued that traceability should not require proving the registration status of particular shares but rather whether the plaintiffs can plausibly allege that at least some registered shares were purchased pursuant to the registration statement.  According to the plaintiffs, traceability should be established by simply relying on the statistical inference that given the number of shares purchased and the percentage of shares on the exchange that were registered (approximately 42%), “the likelihood that none of the 30,000 shares was registered is infinitesimally small.”  However, the appeals court rejected the plaintiff’s statistical inference theory as both factually and legally flawed and inconsistent with applicable judicial precedents.

The appeals court also separately confirmed that the tracing requirement similarly applies to a Section 12(a)(2) claim.  Under Section 12(a)(2), a plaintiff must show that the security was offered or sold by means of a prospectus containing a material misstatement or omission.  The appeals court rejected the Slack plaintiffs’ argument that the provision should cover non-public offerings or exempt transactions.  Since the Slack plaintiffs conceded that it was impossible to trace their shares back to the registration statement, they failed to state a claim and the appeals court reversed the district court’s decision and remanded with instructions to dismiss the complaint in full and with prejudice.

The court’s ruling narrows Sections 11 and 12(a)(2) liability by requiring investors to prove that their shares are linked to an offering’s registration statement to have standing to sue for disclosure deficiencies.  This narrowing of liability is likely to influence how companies consider direct listings as a means of listing their securities in the future.  Going forward, companies may see direct listings as more favorable for avoiding certain types of liability, given the added complexity in tracking which shares are linked to the registration statement.  A link to the court’s opinion can be found here.

In late 2023, California enacted “first-of-its-kind” climate-related disclosure laws, addressing disclosures on greenhouse gas emissions and climate-related financial risks as well as disclosures aimed at increasing transparency and accountability around certain climate-related claims and use of voluntary carbon offsets. In this Legal Update, we provide a high-level refresher of the requirements of (and recent updates to) these laws, and identify key steps that businesses can take to prepare for compliance.

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Last week, the U.S. Securities and Exchange Commission’s (the “Commission”) Division of Corporation Finance revised two Compliance and Disclosure Interpretations (“C&DIs”) relating to beneficial ownership disclosures on Schedules 13D and 13G.  Schedule 13D is required to be filed to report 5% or greater ownership of a class of equity securities of a public company, while the short-form Schedule 13G is available to certain beneficial owners who meet the Schedule 13G eligibility requirements. In order to report on Schedule 13G, the beneficial owner must certify that the subject securities  were not acquired and are not held “for the purpose of or with the effect of changing or influencing the control of the issuer.”  The C&DIs, which replaced existing guidance, will lead asset managers and other investors to carefully weigh their approach to engagement with SEC reporting companies if they wish to avoid Schedule 13D reporting, as opposed to the less-onerous Schedule 13G reporting.  This change is one of several the SEC has made in recent weeks that seem to align with the current Republican-led Commission’s pro-issuer stance, especially as relates to shareholder involvement in social policy issues.

As revised, C&DI 103.11 states that The Hart-Scott-Rodino (“HSR”) Act provides an exemption from certain HSR Act provisions for an acquisition of securities made “solely for the purpose of investment,” where the acquiror has “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.”  The C&DI clarifies that an acquiror who is unable to rely on this HSR Act exemption is not necessarily required to file a Schedule 13D.  Instead, the acquiror should determine its eligibility to file a Schedule 13G based on a facts-and-circumstances analysis of factors such as “whether the shareholder acquired or is holding the subject securities with the purpose or effect of changing or influencing control of the issuer” (as “control” is defined in Exchange Act Rule 12b-2). 

Revised C&DI 103.12 addresses the circumstances under which a shareholder’s engagement with an issuer’s management could disqualifying a shareholder from certifying that the subject securities were not acquired and are not held “for the purpose of or with the effect of changing or influencing the control of the issuer,” such that the shareholder would be required to report on Schedule 13D.  Similar to C&DI 103.11, the C&DI states that this determination must be made via a facts-and circumstances analysis, considering whether the shareholder acquired or is holding the subject securities with a purpose or effect of “changing or influencing” control of the issuer (as “control” as defined in Exchange Act Rule 12b-2). 

However, the C&DI goes on to state that the subject and/or the context of the shareholder’s engagement with management can be important in making this determination.  The C&DI draws a line between a shareholder who discusses their views on an issue with management and one who “exerts pressure on management to implement specific measures or changes to a policy,” which is more likely to result in an obligation to file a Schedule 13D.  Specifically enumerated examples of shareholders who may be ineligible to file a Schedule 13G include:

  • A shareholder who “recommends that the issuer remove its staggered board, switch to a majority voting standard in uncontested director elections, eliminate its poison pill plan, change its executive compensation practices, or undertake specific actions on a social, environmental, or political policy and, as a means of pressuring the issuer to adopt the recommendation, explicitly or implicitly conditions its support of one or more of the issuer’s director nominees at the next director election on the issuer’s adoption of its recommendation; or
  • discusses with management its voting policy on a particular topic and how the issuer fails to meet the shareholder’s expectations on such topic, and, to apply pressure on management, states or implies during any such discussions that it will not support one or more of the issuer’s director nominees at the next director election unless management makes changes to align with the shareholder’s expectations.”

Find the revised C&DIs here.

Seminar: February 24, 2025
6:00 – 8:00 p.m.
Register here.

Join the leaders of prominent university corporate governance centers for a discussion on one of the hottest topics in the field: Delaware’s continued leadership in the corporate chartering business. Delaware’s legislature began considering reforms to its corporate law addressing oversight of controlling shareholder transactions. See our recent post. We will discuss during our session.

Panelists

  • Lawrence A. Cunningham, Director, John L. Weinberg Center for Corporate Governance, University of Delaware, Alfred Lerner College of Business and Economics, and Henry St. George Tucker III Research Professor of Law Emeritus, The George Washington University Law School.
  • Sean J. Griffith, Former Director, Fordham Corporate Law Center, and T. J. Maloney Chair in Business Law, Fordham University Law School.
  • Dorothy S. Lund, Co-Director, Ira M. Millstein Center for Global Markets and Corporate Ownership, and Columbia 1982 Alumna Professor of Law, Columbia University Law School.
  • Edward Rock, Co-Director, Institute for Corporate Governance & Finance, and Martin Lipton Professor of Law, New York University Law School.

Moderator

  • Anna T. Pinedo, Capital Markets Partner, Mayer Brown, Adjunct Professor, The George Washington University Law School, and Member of Advisory Board of The George Washington University Center for Law, Economics & Finance (C-LEAF).

On February 11, 2025, Institutional Shareholder Services, Inc. (ISS) announced that it will be halting consideration of certain diversity factors indefinitely when making vote recommendations with respect to the election and re-election of U.S. company directors under its Benchmark and Specialty policies. ISS will no longer be considering the gender, racial or ethnic diversity of company board members in shareholder meeting reports published on or after February 25, 2025. This shift in voting recommendations is in response to the January 21, 2025 executive order, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” which called on agencies to “combat illegal private-sector DEI preferences, mandates, policies, programs, and activities.” For more information about the executive order, see Mayer Brown’s legal update: President Trump Issues Executive Order on Diversity Efforts by Government Contractors and Private Employers.

This announcement comes at a time when public companies are already grappling with questions about diversity-related disclosure in their annual reports and annual meeting proxy statements.  A combination of the actions of the Trump Administration, ISS’s announcement and similar announcements by some large asset managers, and the overturning of Nasdaq’s Board Diversity Listing Requirements, have led many companies to consider refinements to their disclosures about board diversity and DEI programs in general compared to prior years. At the same time, companies should note that certain diversity-related line item disclosure requirements have not changed. Companies are still required under Item 407 of Regulation S-K to disclose, “whether, and if so, how the nominating committee considers diversity in identifying nominees for director.” Item 401(e) of Regulation S-K also requires companies to describe briefly the specific experience, qualifications, attributes or skills that led to the conclusion that a person should serve as a director, which may be interpreted to mean that criteria, such as that specified in Item 407 of Regulation S-K, be disclosed under Item 401(e) of Regulation S-K if it was a consideration. Finally, Item 101 of Regulation S-K requires companies to disclose, “any human capital measures or objectives that the company focuses on in managing the business,” including measures or objectives that address the development, attraction and retention of personnel.

A link to the ISS announcement can be found here.

On February 17, 2025, the Delaware legislature introduced Senate Bill 21 (SB21) and Senate Concurrent Resolution 17 (SCR17).  SB21 proposes amendments to the Delaware General Corporate Law (DGCL) that expand the safe harbor afforded in the context of certain interested transactions, while also proposing amendments to the DGCL 220 concerning books and records inspections.  SCR17 would require the Delaware Bar to produce recommendations on attorney’s fees awards.

The introduction of these bills comes at a time when companies are increasingly considering leaving Delaware—now being referred to as “DExit”—in favor of reincorporating in other states.  Recently, the Delaware Supreme Court further facilitated this shift by making the path to reincorporation more accessible.

Report Attorney’s Fees Awards

Attorneys’ fees also have dominated the news cycle.  In December 2024, the Court of Chancery granted $345 million in attorney’s fees in Tornetta v. Musk and in January 2025 approved a settlement that awarded the lawyers who negotiated the settlement $176 million in fees in Police & Fire Ret. Sys. of the City of Detroit v. Musk.

SCR17 directs the Council of the Corporation Law Section of the Delaware State Bar Association to produce a report with recommendations for legislative action concerning the awarding of attorney’s fees in specific corporate litigation cases.

Interested-Party Transactions

Section 144 of DGCL (“DGCL 144”) was enacted with the specific purpose of preventing certain transactions—those involving a corporation’s directors and officers with a personal interest—from being automatically void under common law.  SB21 proposes to expand DGCL 144 to include “controlling stockholders” and “control groups” and provide a safe harbor for transactions in which these parties have interests that might render them conflicted.  SB21 introduces specific procedures for controlling stockholder transactions and distinguishes between “going private” transactions and “not-going private” transactions.  SB21 replaces current DGCL 144(b) and a controlling stockholder transaction that does not constitute a going private transaction may be entitled to safe harbor protection if the transaction is (1) approved or recommended by a committee of disinterested directors; or (2) approved or ratified by a majority of the votes cast by disinterested stockholders.  For going private transactions, SB21 proposes new DGCL 144(c), which stipulates that such transactions may receive safe harbor protection if the transactions:  (1) are negotiated and approved or recommended by a committee of disinterested directors; or (2) they are approved or ratified by a majority of the votes cast by disinterested stockholders.

SB21 proposes defining key terms in DGCL 144(e), including:

  • Controlling Stockholder as any person that either owns or controls a majority of the corporation’s voting stock, or exercises equivalent control by owning at least one-third of the voting stock or having influence over a majority of the board’s voting power and corporate management;
  • Control Group as two or more persons who, though not individually controlling stockholders, collectively form a controlling stockholder through an agreement, arrangement, or understanding;
  • Disinterested director as a director who is not involved in the transaction, has no material interest in it, and has no significant relationship with anyone who does; and
  • Disinterested stockholder as a stockholder who has no material interest in the transaction and no significant relationship with anyone who does.

The proposed amendments also define “Controlling stockholder transaction,” “Fair as to the corporation,” “Going private transaction,” “Material interest,” and “Material relationship.”  The amendments proposed by SB21 also specify that controlling stockholders and control groups, in their capacity as such, cannot be held liable for monetary damages for breaches of the duty of care.

Finally, SB21 preserves common law protections, stating that the amendments do not displace any safe harbor procedures or other protections available at common law.

Books & Records

SB21 also proposes amendments to Section 220 of the DGCL (“DGCL 220”) concerning stockholders’ rights to inspect corporate books and records.  DGCL 220 does not define “books and records.”  SB21 proposes defining “books and records” as including all of the following:

  1. Company’s certificate of incorporation
  2. Company’s bylaws
  3. Stockholder meeting minutes and signed consents documenting all actions taken by stockholders without a meeting (last three years)
  4. All communications in writing or by electronic transmission to stockholders (last three years)
  5. Board of directors meeting or board committee meeting minutes and records of any action taken by the board or any such committee
  6. Materials provided to the board of directors or any committee concerning actions taken by the board or committee
  7. Annual financial statements (last 3 years)
  8. Any agreement entered into under DGCL Section 122(18)

The amendments also establish specific conditions that stockholders must meet to inspect corporate books and records.  SB21 clarifies that any information obtained through a DGCL 220 inspection will be deemed to be incorporated by reference into any complaint filed by or at the direction of a stockholder on the basis of information obtained through a demand for books and records.  Newly proposed DGCL 220(b)(4) would confirm that the amendments under SB21 do not create new inspection rights but preserve any independent rights that already exist.  New DGCL 220(f) would empower the Delaware Court of Chancery to compel corporations to produce additional relevant records if the specified documents are unavailable and the requested records are necessary for the stockholder’s proper purpose.

SB21 requires a greater than majority vote for passage as the Delaware Constitution requires the affirmative vote of two-thirds of the members elected to each house of the General Assembly to amend the DGCL.

Conclusion

These proposed amendments mark a significant shift in Delaware corporate law, addressing corporate governance, stockholder rights, and judicial oversight concerns. SB21 and SCR17 seek to modernize Delaware’s legal framework.  There is certain to be more to come on these important issues.

In January, Securities and Exchange Commission Commissioner Hester Peirce discussed her desire to reevaluate the SEC’s shareholder proposal process, suggesting that the SEC do “a better job protecting investors from having their resources diverted to deal with shareholder proposals that are not aimed at maximizing corporate value.”  Commissioner Peirce pointed out that the number of shareholder proposals related to topics other than corporate governance, such as the environment and other social policy issues, has increased, and suggested that the financial and opportunity costs of such proposals are too high for companies.  Instead, she recommended that the SEC work to “ensure that a proponent has some meaningful economic stake or investment interest in a company” and reconsider the operation of Exchange Act Rule 14a-8 as a basis to exclude proposals.

Subsequently, on February 12, the Staff of the Republican-led Commission issued new Staff Legal Bulletin No. 14M (“SLB 14M”), rescinding old Staff Legal Bulletin No. 14L (“SLB 14L”) and providing new guidance for companies and shareholders regarding shareholder proposals.  Among other changes, SLB 14M clarified the Commission’s interpretations of Rules 14a-8(i)(5) and 14a-8(i)(7), both of which it will interpret narrowly, on a company-specific basis, without looking to broad societal impacts.  Rule 14a-8(i)(5), the “economic relevance” exclusion, allows exclusion of a shareholder proposal that relates to operations accounting for less than 5% of the company’s total assets, net earnings or gross sales, and is not otherwise significantly related to the company’s business.  Rule 14a-8(i)(7), the “ordinary business” exclusion, permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.”  Historically, matters focusing on a significant policy issues were not excludable because they “transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.”   

Pursuant to SLB 14M, the SEC’s analysis under both Rules will focus more strongly on the significance of any proposal to the company’s business, rather than on any related social policy and/or broad societal impacts.  In both cases, excluding a given proposal will be a facts and circumstances decision based on the “total mix” of information about the company, and significance will not be determined by blanket rule extending to all companies.  While a proponent can raise social or ethical issues to support significance, these must have a direct connection to matters significantly and actually impacting the company’s business. 

In addition, the Commission reinstated previously rescinded guidance regarding proposals that (i) seek to “micromanage” a company under Rule 14a-8(i)(8) and (ii) deal with senior executive and/or director compensation.  SLB 14M also encourages companies to omit board analyses regarding shareholder proposals from their submissions to the staff, on the grounds that these analyses were generally not helpful.  Last, SLB 14M clarifies guidance on the use of images in shareholder proposals and proof of ownership letters and related deficiency letters, suggests some best practices for the use of email in connection with shareholder proposals, and provides FAQs as to how the guidance will apply in the current shareholder proposal season

Commissioner Caroline Crenshaw responded to SLB 14M, sharing her disapproval of the SEC’s changes to the shareholder proposal process “smack dab in the middle” of proxy season.  She argued that the new guidance creates uncertainty for both proposal proponents and companies at a time when many shareholder proposal have already been submitted to the SEC for consideration, at potentially significant costs to all parties, and when only companies, not shareholders, have additional time to revise their requests.  Commissioner Crenshaw finished by stating that “[i]nstead of taking a measured approach that would ensure market stability and a meaningful consideration of cost and benefit, this leadership has rushed out staff guidance for the sake of political expediency, and at significant cost to shareholders, corporations, and SEC staff resources.”

Over the past few weeks, the Commission and its Staff have taken several new positions along party lines.  SLB 14M is likely to make it more challenging for proponents of shareholder proposals to succeed in having their proposals included in a proxy statement for social policy reasons, and requires proponents to tie proposals closely to a company’s business for a chance of success.  Public companies, shareholders, and those in other roles dealing with the federal securities laws, including investment advisers and asset managers, should continue to watch closely for new developments, perhaps continuing the trend of addressing the items Commissioner Peirce pointed out in January.

Read Commissioner Peirce’s speech here, Staff Legal Bulletin No. 14M here, and Commissioner Crenshaw’s statement here.

On February 4, 2025, the Delaware Supreme Court (the “Court”) overturned a prior ruling by the Delaware Court of Chancery, which subjected TripAdvisor Inc.’s (“TripAdvisor”) and Liberty TripAdvisor Holdings Inc.’s (“Liberty”) corporate conversions to Nevada to an entire fairness review. Instead, the Court determined that the business judgment rule was the appropriate standard of review, as no board member—alleged controller included—received a material non-ratable benefit from the conversions.

A key aspect of the decision was the Court’s rejection of the Chancery Court’s view on the significance of “temporality” in assessing whether an alleged non-ratable benefit, such as reduced litigation exposure, was material.  After an extensive analysis of Delaware precedent, the Court emphasized that temporality plays a critical role in determining materiality.  Since no existing or imminent litigation claims were identified as being impacted by the conversions, the Court concluded that the alleged benefit was too speculative to be deemed material.  The Court also highlighted that the board made its decision to reincorporate on a “clear day,” without the shadow of pending legal threats.

Background

In February 2024, the Delaware Court of Chancery ruled that TripAdvisor and Liberty could proceed with their conversions into Nevada entities, despite objections from plaintiffs who sought to keep the companies in Delaware.  However, the ruling allowed breach of fiduciary duty claims to continue, leaving open the possibility of monetary damages if stockholders were harmed.

The Court of Chancery applied the entire fairness standard, reasoning that both companies were controlled entities and that the conversions provided a non-ratable benefit—namely, reduced litigation risk—to the controller and approving directors.  The ruling noted that the business judgment rule could have applied had the companies followed the MFW framework by securing approval from both an independent special committee and a majority of disinterested stockholders.  However, because neither safeguard was implemented, entire fairness was deemed the appropriate review standard.

Appeal to the Delaware Supreme Court

In April 2024, the Court accepted an interlocutory appeal to determine the appropriate standard of review for corporate incorporation.  Oral arguments were heard in October 2024 after both parties submitted briefs.  In January 2025, plaintiffs sought to dismiss TripAdvisor’s appeal as moot, citing TripAdvisor’s planned acquisition of Liberty, which they argued would eliminate the company’s controlling stockholder.

Defendants opposed dismissal, arguing that (1) the merger had not yet been finalized and remained subject to stockholder approval; (2) plaintiffs’ claims extended beyond the alleged benefit to the controller, as they also alleged that directors were personally interested in the conversions; and (3) the legal principles at issue were significant and warranted resolution regardless of mootness concerns.  The Court denied the motion to dismiss, ruling that the case remained live because TripAdvisor still had a controlling stockholder and the issue of whether directors were personally interested in the conversions persisted.

Key Findings

On the merits, the Court concluded that the Court of Chancery erred in determining that the conversions conferred a material non-ratable benefit warranting entire fairness review.  Instead, the business judgment rule should govern.  The Court reaffirmed that for entire fairness to apply, an alleged non-ratable benefit must be significant enough to compromise directors’ ability to fulfill their fiduciary duties.  It rejected the notion that merely improving a controller’s position or providing general protection against future liability automatically qualifies as a material benefit.  The Court emphasized that temporality is crucial in determining materiality when assessing reductions in liability risk. Delaware precedent has consistently required more than hypothetical concerns to justify heightened scrutiny.  The Court distinguished between actions that limit directors’ liability for past conduct, which could warrant entire fairness review, and those that merely alter potential future exposure, which generally do not.  The Court took issue with the Court of Chancery’s skepticism toward the temporality distinction, noting that Delaware law routinely limits plaintiffs’ ability to pursue speculative claims. The court cited Delaware’s standing and ripeness doctrines as further support for requiring concrete allegations rather than hypothetical risks.  Finally, the Court stressed the importance of respecting the corporate governance frameworks of different states.  It declined to weigh the relative merits of Delaware’s and Nevada’s legal regimes, emphasizing that corporate directors and state legislatures are best positioned to make those assessments.  The Court cautioned against substituting judicial judgment for that of directors.

Conclusion

The Delaware Supreme Court’s ruling reinforces the principle that for entire fairness review to apply, an alleged benefit to controllers or directors must be both non-ratable and material—with temporality playing a key role in that determination.  By upholding the business judgment rule as the appropriate standard in this case, the Court underscored Delaware’s long-standing reluctance to scrutinize corporate decisions based on speculative liability concerns.