TheCorporateCounsel.net

August 31, 2016

Another Whistleblower Hits the Jackpot. . .

Yesterday, the SEC announced the second largest whistleblower award in its history – more than $22 million. This award was topped only by a $30 million award made in 2014.  The press release announcing the award said that the individual’s “detailed tip and extensive assistance helped the agency halt a well-hidden fraud at the company where the whistleblower worked.”

Media reports quickly identified the enforcement action giving rise to the award, but the SEC closely guards whistleblower confidentiality, so neither the announcement nor the SEC’s order said anything about the matter.

The SEC’s order did note that the claimant decided “not to contest” the award – definitely a good call there, claimant!

SEC: More Than $100M in Whistleblower Awards Since 2011

The SEC followed up this news by announcing that more than $100 million in awards had been paid since the whistleblower program’s inception in 2011.  The announcement went on to highlight several other program metrics:

– The Whistleblower Office has received more than 14,000 whistleblower tips from individuals in all 50 states and the District of Columbia and 95 foreign countries.

– Tips from whistleblowers have increased from 3,001 in fiscal year 2012 – the first full fiscal year that the Whistleblower Office was in operation – to nearly 4,000 last year, an approximately 30 percent increase.

– More than $107 million has been awarded to 33 whistleblowers, with the largest being more than $30 million.

– The assistance provided by these whistleblowers enabled the SEC to bring enforcement actions involving more than $504 million in sanctions, including more than $346 million in disgorgement and interest for harmed investors.

The announcement also noted actions that the SEC has taken to protect whistleblowers, including the recent enforcement proceedings involving provisions in confidentiality and severance agreements that deterred whistleblowing.

The SEC accompanied this announcement with a “Top Ten List” containing information about the 10 largest awards, the whistleblower process, and the number of tips received from each state.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Restatements Hit a New Low
– ISS’ “2016 Board Practices Study”
– Is Tracking Stock Making a Comeback?
– Audit Report Transparency: Netherlands Trumps US – Hands Down
– Omnicare Applied to Audit Reports

John Jenkins

August 30, 2016

Books & Records: “Chutzpah Strategy” a Winner in Delaware

This comes from Delaware Vice Chancellor Glasscock’s opinion in Pogue v. Hybrid Energy, a books & records case.  Here’s the setting:

The Plaintiff was an employee of the Defendant Hybrid Energy. He alleges that, at the time he was hired in 2011, the Company issued to him a stock certificate representing one million shares of Hybrid common stock. Despite this fact, the record demonstrates that Hybrid, at the time, had no treasury shares available to distribute; its certificate of incorporation authorized the issuance of only 1,500 shares, which were all then outstanding, held by its principal.

The company responded to the plaintiff’s books & records suit by saying that only a stockholder could assert a right to inspect corporate records under Delaware law, and the plaintiff wasn’t a stockholder. The outrageousness of this position prompted the Vice Chancellor to drop the following footnote:

This Court has defined the useful Yiddish word “chutzpah” as “an audacious insolence; a mixture of nerve and gall.” . . .  The paradigm example often given is of a murder defendant, who has killed his mother and father, throwing himself on the mercy of the court as an orphan. Another is alleged here: a company that issues a void stock certificate to an employee to defraud him of his services, defending a books and records request on the ground that said employee is no stockholder.

“Audacious Insolence”? Perhaps. Effective? Definitely – The Vice Chancellor granted the defendant’s motion for summary judgment.

Disclosure Effectiveness: Disclosure Overload Prompts IR Innovation?

This post from “Jim Hamilton’s World of Securities Regulation” highlights NIRI’s comment letter on Corp Fin’s Reg S-K disclosure effectiveness project. NIRI’s concerns center on the problem of disclosure overload, which it attributes to Congressionally-mandated disclosure requirements, fear of litigation, and the desire to satisfy outstanding staff comments or avoid new ones.

Due to its concerns about overload, NIRI urges the SEC to avoid any new disclosure requirements that wouldn’t pass muster under TSC Industries v. Northway’s materiality standard — and to take into account the many voluntary initiatives that companies have undertaken to improve investor disclosure when considering any new mandate.

It’s in discussing these voluntary initiatives that NIRI makes its most interest point — that disclosure overload has prompted companies to innovate in order to give investors what they want:

As a result of this information overload, many companies no longer rely solely on their periodic Exchange Act filings to provide detailed information about their businesses to analysts and investors. Instead, many issuers are presenting professionally designed slide decks during investor day events, non-deal road shows, or at industry conferences.

Many companies have created extensive IR websites with information on the company’s operations, financial metrics, historical stock price performance, company fact sheets, and earnings guidance (where applicable), and to broadcast and replay quarterly earnings calls. In recognition of the importance of these disclosure tools, some companies have hired consultants to improve the readability, visual appeal, and effectiveness of their presentations and/or IR websites.

Attributing most of the IR department’s functions to the fallout from disclosure overload seems like a bit of a stretch  — but there’s no doubt that the overall level and quality of investor engagement has risen sharply over the past decade.  So NIRI may be on to something when it sees a link between increasingly burdensome disclosure mandates and innovation in voluntary disclosure practices.

Our Executive Pay Conferences: 10% Reduced Rate – Only Two Weeks Left!

Here’s the registration information for our popular conferences – “Tackling Your 2017 Compensation Disclosures: Proxy Disclosure Conference” & “Say-on-Pay Workshop: 13th Annual Executive Compensation Conference” – to be held October 24-25th in Houston and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.

Discounted Rates – Act by September 9th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a reduced rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by September 9th to take advantage of the 10% discount.

John Jenkins

August 29, 2016

BRT’s Updated Governance Principles: What’s Good for the Goose…

The Business Roundtable recently updated its “Corporate Governance Principles” for the first time since 2012.  The updates focus on encouraging more shareholder engagement, boardroom diversity, and cybersecurity.  But the most interesting part of the update may be its call for increased shareholder responsibility & accountability.

The BRT contends that an increase in shareholder access to the boardroom requires an increase in transparency regarding the “nature of [a shareholder’s] identity and ownership, even in cases where the federal securities laws may not specifically require disclosure.”  But its call for shareholder responsibility goes well beyond that:

More fundamentally, we believe that the responsibility of shareholders extends beyond disclosure. We sense that there is a rising belief that shareholders cannot seek additional empowerment without assuming some accountability for the goal of long-term value creation for all shareholders. Moreover, we believe that shareholders should not use their investments in U.S. public companies for purposes that are not in keeping with the purposes of for-profit public enterprises, including but not limited to the advancement of personal or social agendas unrelated and/or immaterial to the company’s business strategy.

Well, when you put it that way – sure, personal and social agendas that aren’t material to the company’s business have no place in the shareholder dialogue.  We can’t argue about that, right?

Should Shareholders Be Engaging Over Social Issues?

Okay, maybe we can argue about that. There are a lot of investors who would take issue with the BRT’s position on advancing “personal or social agendas.”  Some heavy hitters contend that the environmental, social and governance (ESG) issues that others would lump into this category are closely linked with long-term value creation.  For example, here’s an excerpt of what BlackRock’s Investment Stewardship team says on the subject:

ESG considerations are integral to our investment stewardship activities. Our clients are long-term investors and it is over the longer term that ESG risks and opportunities tend to be material and have the potential to impact financial returns. The best companies ensure that their investors, as well as other constituents of the company, have enough information to understand the drivers of, and risks to, sustainable financial performance.

When it’s put like this, disagreeing with the importance of ESG issues sounds akin to disrespecting mom or apple pie.

The problem with this debate is that vague concepts like “sustainable financial performance,” “long-term value creation,” and the need to avoid agendas “that are not in keeping with the purposes of for-profit public enterprises” don’t add a whole lot to the conversation about where to draw the line between legitimate investment concerns and frivolous personal agendas.

Poll: Should Shareholders Be Engaging Over Social Issues?

Please take a moment to participate in this anonymous poll:


survey services

John Jenkins

August 26, 2016

Disclosure Effectiveness: Item 400 Series “Proposal”

Yesterday, as the latest in Corp Fin’s disclosure effectiveness project, the SEC posted an 8-page “request for comment” on the disclosure requirements in Subpart 400 of Regulation S-K. The scant press release named three topics in particular – management, certain security holders & corporate governance – but it didn’t use the buzz word of Item 402’s executive compensation (probably because the title of Subpart 400 in S-K is “management, certain security holders & corporate governance”).

Item 402 is indeed open for comment! In fact, Item 402 was already open for comment as the SEC made clear in the S-K concept release that it welcomed comments on all aspects of S-K (even though that release focused on business & financial information). Some from the SEC have been saying that Item 402 is a lower priority for the disclosure effectiveness project.

Maybe if enough folks request changes in the 402 area, the SEC will propose something there – but I doubt it given the magnitude of that undertaking & the fact that Item 402 got its last overhaul a mere decade ago (which is why Item 402 is a lower priority for this project). The “request for comment” notes that the comments received will assist the SEC in “carrying out the study of Regulation S-K required by Section 72003(a) of the FAST Act” – that’s probably why the SEC decided to issue this “request for comment” on top of the earlier S-K concept release (as Ning Chiu explains in her blog).

As Broc has blogged before, we have no idea why this is a “request for comment” – and not a “concept release” – but given the short length of the “request for comment,” the difference must allow the SEC to avoid the regulatory trappings of a full-blown concept release.

By the way, the SEC also extended the comment period for the resource extraction/mining disclosures rulemaking a few days ago – the extended comment period ends on September 26th…

Using “Behavioral Ethics” in Compliance Programs

The “Conflict of Interest Blog” provides this roundup of recent articles addressing the use of the emerging field of “behavioral ethics” in corporate compliance programs.  Behavioral ethics focuses on how people actually behave when confronted with an ethical dilemma, in order to understand why they so often act in a manner contrary to their best intentions. (Take a look at this Harvard Magazine article for a more in-depth discussion of what behavioral ethics is all about).

According to this blog– from Philip Morris’s Chief Compliance Officer – incorporating insights from behavioral ethics into compliance programs makes them more effective:

Leading behavioral ethics researchers, including Ann Tenbrunsel of Notre Dame and Linda Trevino of Penn State, have shown that concepts such as leader and peer influence, ethical fading, and blind spots have practical implications for compliance programs.  This research has firmly established that compliance programs with communications, training and controls informed by behavioral ethics learnings are more successful in reducing the likelihood of misconduct and increasing the likelihood of whistle-blowing behaviors.

Transcript: “How to Apply Legal Project Management to Deals”

We have posted the transcript for our recent DealLawyers.com webcast: “How to Apply Legal Project Management to Deals.”

John Jenkins

August 25, 2016

Hi. I’m the New Guy.

Hello everybody, I’m John Jenkins – the newest editor here at TheCorporateCounsel.net.  Some of you may have noticed me lurking around the “Q&A Forums” while Broc has been struggling valiantly to get me up to speed.  You’re going to be hearing more from me over the next several weeks, so I thought it would be a good idea to introduce myself.

I’m a partner in the Cleveland office of Calfee, Halter & Griswold, where I’ve worked since I started my career in 1986.  I’ve worn a lot of hats over the past 30 years – capital markets, Exchange Act compliance, public and private M&A, SEC & SRO investigations, board and special committee work, etc. I also taught a law school M&A class for 10 years. You tend to cast a pretty wide net in a mid-sized firm – and I hope that’s given me a perspective that you’ll find interesting.

Broc & I first connected back in 2003, when he invited me to join his advisory board after I gave a presentation on some obscure aspect of Sarbanes-Oxley at an ABA meeting.  Since then, I’ve done a number of webcasts and written several articles for Deal Lawyers – and even did a bit of blogging on the DealLawyers.com site a few years ago. I’ve always thought TheCorporateCounsel.net family of sites was a great resource, and I’m really looking forward to my new role here.

That brings me to the point of this post – Broc has decided to head out for a real vacation (with no email!). After 15 years or so, everybody deserves a little time off.  He told me when to feed the dog & water the plants, gave me his Netflix password & the keys to the Chevy, and then basically said – “You’re on your own, pal. Don’t burn the place down.”

So, for the next few weeks, I’ll be handling the blogging and other duties on this site, DealLawyers.com and CompensationStandards.com.  Remember when you were a 16 year-old first learning to drive? Yeah, I’m that kid, except I’m a lot older and have a much slower reaction time. So, I guess what I’m saying is – fasten your seatbelts, because this may be a bumpy ride.

Shareholder Approval: NYSE Revises Bunch of Its “Equity Compensation Plan FAQs”

As Mike Melbinger blogged on CompensationStandards.com yesterday, the NYSE revised its “Equity Compensation Plan FAQs” recently for the first time in nearly a decade. The revised FAQs are the ones that have “Clarified August 18, 2016” written beneath them. As Mike blogs, FAQ C-1 clarifies the NYSE’s position that an amendment of an equity incentive play to allow for maximum tax withholding is not necessarily a “material amendment”…

September-October Issue: Deal Lawyers Print Newsletter

This September-October issue of the Deal Lawyers print newsletter has been posted – & also sent to the printers – and includes articles on:

– “This is the Business We’ve Chosen…”
– Shareholder Votes & Standards of Judicial Review
– Schedule 13G “Passive” Investor Status: When Being a Little Active Is Still Passive!
– Delaware Upholds Decision on Mis-Valuation of Cancelled Stock Options
– A Primer on Private Equity: Basics for Counsel to Middle Market Companies

Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online. Try a “Free for Rest of ’16” no risk trial now!

John Jenkins

August 24, 2016

Shareholder Proposal Proponents: Why Do Individuals Bother to Do It?

This Cooley blog describes this new study by Professors Larcker & Tayan about why individual shareholder proponents bother to submit shareholder proposals to companies. I appreciate the professors mentioning my article about the Gilbert brothers (who are mainly responsible for the initial growth of proposals as a tactic to pressure companies) – and I note that the professors spoke to nine individual proponents to write this new study…

SEC Enforcement: Disclosing “Accelerated Monitoring Fees”

Here’s the intro from this WSJ article:

The Securities and Exchange Commission is investigating whether private-equity firm Silver Lake properly disclosed fees it earned when selling companies or taking them public, part of the regulator’s expansive push to make sure buyout firms are being upfront with investors. The SEC is looking into one-time “accelerated monitoring fees” that Silver Lake collected when it sold companies or took them public, according to people familiar with the matter and Silver Lake investor letters reviewed by The Wall Street Journal.

Buyout firms like Silver Lake collect a range of fees from both portfolio companies and directly from the funds they raise to buy the companies. The SEC has pressured firms to disclose more about these fees to fund investors, typically pensions, endowments and wealthy individuals. The SEC’s Silver Lake investigation is continuing and may not result in any action, but the inquiry is another sign that the agency is taking a broad view of its ability to monitor the $4.2 trillion private-equity industry.

Stats: Number of SEC’s Enforcement Actions Decline

Here’s news from this blog by Kevin LaCroix:

The SEC’s enforcement activity so far this fiscal year trails the record levels in the 2015 fiscal year. According to a recent report from Cornerstone Research, the SEC’s enforcement activity through the end of the fiscal third quarter (on June 30, 2016) is 8% below the activity levels during the same period in FY 2015, largely as a result of an activity decline in the third quarter.

Broc Romanek

August 23, 2016

Our Revised “Non-GAAP Financial Measures Handbook”

Just revised for the new CDIs! By popular demand, this comprehensive “Non-GAAP Financial Measures Handbook” covers a challenging topic, from the basics to everything you want to know about Regulation G, Item 10(e) of Regulation S-K & Form 8-K’s Item 2.02. This one is a real gem – 110 pages of practical guidance – and its posted in our “Non-GAAP Disclosures” Practice Area. Big HUGE hat tip to Joe Alley of Arnall Golden Gregory for revising this beast!

Rule 12b-25: How Common Are Late 10-Ks

This blog by Audit Analytics includes a bunch of interesting statistics about how often companies file Form 12b-25s in order to facilitate a late filed 10-Q or 10-K. The stats show that NT 10-Ks have decreased significantly over the past 15 years (about 45%) – and that they are more prevalent among small companies; fairly rare for the Russell 1000…

Check out our “Late SEC Filings” checklist for more on this topic…

It’s Done: 2017 Edition of Romanek’s “The In-House Essentials Treatise”

We are happy to say the 2017 Edition of Romanek’s “The In-House Essentials Treatise” is done – and it has been sent to the printers. Here’s the 90 pages of our “Detailed Table of Contents” listing the topics – so you can get a sense of the Treatise’s practical nature. You will want to order now so you can receive it as soon as possible.

With over 1700 pages, this tome is the definition of being practical. You can return it any time within the first year – and get a full refund if you don’t find it of value.

Broc Romanek

August 22, 2016

How to Write a Good Earnings Release

This MarketWatch article has some great tips for writing an earnings releases that should help drafters. Here’s an excerpt:

Do a full earnings release

First, something basic: Investor-friendly companies always do a full press release that includes detailed financial tables, distributing it through a newswire that ensures fast distribution to all the major financial news and information publishers. Increasingly, companies are releasing truncated versions and linking to their websites for the rest. We’d prefer not to search multiple places for information when time is of the essence, and we’ve seen companies’ websites drag when thousands of investors are trying to reach them at the same time.

Many companies still do this. Department store chain Kohl’s Corp. produced one of the season’s cleanest, easiest-to-follow releases — and we thanked them for it.

Advancement of Legal Fees: Most Expansive of Conflicting Provisions Likely to Prevail

As noted in this Simpson Thacher memo, companies typically include mandatory advancement provisions in their bylaws – but they may also sign indemnification agreements with individual officers & directors that contain advancement provisions. If the advancement rights provided in each of these documents differ in scope, a question can arise as to whether the two documents should be read together or separately. The Delaware Court of Chancery – in Narayanan v. Sutherland Global Holdings – recently addressed this issue in a case involving an indemnification agreement that contained a condition precedent to the director’s right to be indemnified or to receive expense advances. That condition precedent was not, however, found in the indemnification provisions of the company’s bylaws. The Delaware Chancery held that, absent evidence of intent to the contrary, each document conferring advancement rights is a separate and independent source of advancement rights.

The Sutherland decision has practical implications. The decision highlights that – unless there is evidence suggesting contrary intent – Delaware courts will likely apply the most expansive among conflicting advancement provisions. So when drafting indemnification agreements, bear in mind that a more restrictive or conditional right to advancement than that provided in the company’s bylaws is unlikely to be enforced in the face of broader rights set forth in another instrument. You should ensure that the scope of all potential sources of indemnification-related rights are aligned – and if you wish to create an enforceable right to advancement that is narrower than that contained in the company’s bylaws, you must ensure that the indemnification agreement unambiguously expresses the intent of the parties that the agreement operate in conjunction with the company’s bylaws. Hat tip to Simpson Thacher’s Yafit Cohn for this!

Escheatment: Pennsylvania, Massachusetts & Arkansas Join the Fray

A recent question in our “Q&A Forum” (#8863) highlights how states other than Delaware are getting aggressive in the escheatment area. Here’s part of the answer to that query – thanks to Reed Smith’s Diane Green-Kelly for her expertise (also see our “Escheatment Handbook“):

It is important that each company consult with counsel on the degree of authority to provide to the transfer agent and the manner in which records are made available. It is important, as well, that in the end of the audit if shares are deemed abandoned, the test for last contact precisely fit the particular state’s definitions. Each state has a slightly different standard, and a company can become at risk for a claim of negligent escheat if shares are escheated prematurely.

Kelmar takes a “one size fits all” approach in these audits, which is incorrect. A number of companies have had to save shares from escheat in a number of equity audits by Kelmar because of this incorrect interpretation of the law.

You should consult with counsel who are familiar with these audits. For a few thousand dollars in legal advice, you can save yourself from considerable liability and headaches.

Broc Romanek

August 19, 2016

How Virtual Reality Might Impact Our Working Lifestyles

While spending time out in Berkeley for my oldest son’s graduation from Cal back in May, I was reminded that this truly could be the year that virtual reality starts to go mainstream. The Oculus Rift was released earlier this year. Late last year, the NY Times gave away 1.2 million sets of Google Cardboard viewers. The NBA has streamed games through NextVR. And now Pokemon Go – which has “augmented” VR – is truly a sensation. This is all just the beginning. And this will not flame out like Google Glass. VR is here to stay.

So what does this mean for you? VR will be much more than just entertainment. It’s an entire new computing platform that promises to have profound implications for our lifestyles – both at home and at work. And it ultimately will impact the laws. If you want to get up-to-speed, start with this a16z podcast with Chris Milk about the new language of storytelling using VR – and then listen to this podcast that more generally talks about the VR industry. This stuff will blow your mind. Trust me.

VR & Movie Theatres

Let’s dig a little into how VR will change our lives. One concern often expressed about VR is that people will stop going to the movies. We have heard the death knell before. Thirty years ago, the introduction of VHS cassettes, the rise of Blockbuster and “video stores” spelled doom. More recently, the growing popularity of Netflix, Hulu and Redbox meant trouble. Yet, many still go to the theatre.

VR could prove different for the movie theatre industry. Or maybe not. But interestingly, my son recently watched a movie while virtually sitting in a theatre (so he had the contraption on and placed himself in a theatre that had a movie playing). Imagine doing that with your far-flung friends and family, perhaps watching an old home movie. Or maybe with a large group of like-minded people.

VR opens new ways to watch movies – and virtual theatres might well be economically viable on their own. The overhead would sure be low – and the key would be marketing a niche type of movie or movie-going experience that would be uniquely shown in your theatre.

VR & Courtrooms

Technology is increasing deployed during trials to influence jurors and judges. These days, a wide range of technology is used to produce reconstructions, reenactments and demonstrations. This includes:

– Three-dimensional stop action animation – use of objects which are photographed with a stop-action film or video camera to create a frame.
– Key frame animation – inputting data into a computer program where the programmers specify an object, its location and its destination.
– Scripted animation – programmer determines the position of objects in each frame, rather than leaving it to the computer to fill in gaps.

As noted in this old Nixon Peabody memo, courts consider several factors in admitting videos and computer animation as demonstrative evidence where methods of producing such evidence other than the traditional video camera are used. If the purpose of the video is to demonstrate the expert’s opinion rather than to replicate what actually happened, courts have been inclined to admit the evidence, assuming proper foundation is laid.

Now imagine having the judge and jury observe a reconstruction or reenactment using VR. This would be a much more powerful illustration of the incident central to the case – or pertaining to an aspect of it.

Trials continue to fascinate a big chunk of the public. TV is filled with procedural dramas built around trial lawyers – and that’s been the case for decades, from “Perry Mason” to “L.A. Law” and “Matlock” to modern shows like “Law & Order” and “The Good Wife.” Not to mention reality TV like “The People’s Court” and “Judge Judy.”

Imagine being allowed in the courtroom to witness a case firsthand, particularly for a “Trial of the Century” case like O.J. Simpson’s murder trial. And the VR experience could even enhance the actual trial – with commentators voicing over explanations of what is happening or providing expert analysis about a lawyer’s or judge’s specifications.

At least for me, attending oral arguments before the U.S. Supreme Court sends chills down my spine. Not only is there the drama of the lawyers for both sides being peppered with questions by the nine Justices, but there are historical practices that go back centuries that make the experience like no other. For example, at the beginning of each session, after all the Justices magically appear at their seats from behind a long red curtain, the Marshal of the Court announces: “The Honorable, the Chief Justice and the Associate Justices of the Supreme Court of the United States. Oyez! Oyez! Oyez! All persons having business before the Honorable, the Supreme Court of the United States, are admonished to draw near and give their attention, for the Court is now sitting. God save the United States and this Honorable Court.”

The Supreme Court still adheres to its ban on televising or videotaping its proceedings (it does make audio and transcripts available), but if it ever opened its eyes to allow a VR experience – it would teach many how the court operates and how special it is.

Broc Romanek

August 18, 2016

Corp Fin’s Non-GAAP Comments: MD&A’s Executive Summary

Here’s a blog by Duane Morris’ Rich Silfen: As many of us have noticed, the first comment letters from the Staff in the SEC’s Division of Corporation Finance, following Corp Fin’s recent issuance of new CDI guidance on the presentation of non-GAAP financial measures, have become available publicly. The comment letters shed additional useful light on Corp Fin’s views concerning non-GAAP presentations.

One of the comment letters sent to Alexandria Real Estate Equities on June 20th provides a particularly helpful glimpse into Corp Fin’s views about the use of non-GAAP information in the executive summary of MD&A. The staff’s letter includes the following comment in reference to MD&A in the registrant’s 2015 Form 10-K:

We note that in your executive summary you focus on key non-GAAP financial measures and not GAAP financial measures which may be inconsistent with the updated Compliance and Disclosure Interpretations issued on May 17, 2016 (specifically Question 102.10). We also note issues related to prominence within your earnings release filed on February 1, 2016. Please review this guidance when preparing your next earnings release.

Indeed, the executive summary portion of the MD&A – when initially conceptualized in the SEC’s 2003 release providing interpretive guidance in the preparation of MD&A – was supposed to include an overview to facilitate investor understanding. The overview was intended to reflect the most important matters on which management focuses in evaluating operating performance and financial condition. In particular, the overview was not supposed to be duplicative, but rather more of a “dashboard” providing investors insight in management’s operation and management of the business.

Looking back at the release to write this blog entry, I note references, with regard to Commission guidance on preparation of the MD&A overview, explaining that the presentation should inform investors about how the company earns revenues and income and generates cash, among other matters, but should not include boilerplate disclaimers and other generic language. The Commission even acknowledged that the overview “cannot disclose everything and should not be considered by itself in determining whether a company has made full disclosure.”

Many companies have presented in their MD&A overview those non-GAAP measures used by management to operate the business and otherwise manage the company. Where appropriate, references typically are made to the information appearing elsewhere in the document, presented to enable compliance with applicable rules and guidance for non-GAAP presentations. Interestingly, the staff, in its comment, questions the “prominence” of the non-GAAP presentation in the context of the earnings release (noting that the staff provides less specificity in the portion of its comment relating to the MD&A overview).

This focus on prominence – to the extent the staff’s concerns relate to the MD&A overview – is worth further consideration in preparing MD&A disclosure. In this connection, query whether the staff – in questioning prominence – could be expressing a view that when management analyzes for investors the measures on which it focuses in managing the business, if management relies on non-GAAP measures, it necessarily must focus on (and explain) – with no less prominence – the corresponding GAAP measures.

Evolving Director Compensation

In this 23-minute podcast on CompensationStandards.com, Russ Miller & Yonat Assayag of ClearBridge Compensation Group discuss the evolution of director compensation, including:

1. What is the upshot of the recent director compensation lawsuits?
2. Why haven’t boards been sued more frequently since there is the tricky circumstance that directors set their own pay?
3. How are companies reacting by changing their plans? (see their study: “S&P 500 Trends in Director Pay Limits“)
4. Are directors resisting the movement to amend their pay plans & place limits on their pay?
5. What is the role of the compensation consultant in helping directors set their own pay?

This podcast is also posted as part of my “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…

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More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Books & Records: Private Company Employees Get Smart
– Advancement of Legal Fees: “Fee on Fee” Awards
– NASAA: Proposed Policy on Electronic Offering Documents & E-Signatures
– SEC Enforcement: Financial Fraud Cases
– Internal Controls: Leads to Auditor Opinion-Shopping?

Broc Romanek