February 22, 2017

GCs as Whistleblowers? SOX Trumps Attorney-Client Privilege in Retaliation Case

This Baker Donelson memo discusses Wadler v. Bio-Rad Laboratories – a recent whistleblower retaliation case in which a jury awarded a former general counsel $8 million. This case is particularly interesting because the plaintiff was permitted to use attorney-client privileged information in support of his claims:

In a seminal trial court decision, the federal court in the Northern District of California ruled in a whistleblower retaliation case that a fired general counsel of Bio-Rad Laboratories could use as evidence otherwise privileged materials. The Sarbanes-Oxley Act’s protection of whistleblowers preempted the attorney-client privilege and provided key evidence leading to an $8 million jury verdict in plaintiff’s favor.

The former general counsel raised concerns about suspected illegal payments in violation of the Foreign Corrupt Practices Act that led to his termination. After he unsuccessfully reported to management, he went to the audit committee, whose internal investigation concluded no violation had happened.

General counsel-turned-whistleblowers previously have not been allowed to use attorney-client protected materials, and this case may signal a new approach. We’re posting memos about this case in our “Whistleblowers” Practice Area. And tune into our upcoming webcast: “Whistleblowers: What Companies Should Be Doing Now.”

IPOs: First Publicly Traded Benefit Corp Hits the Market

Rick Alexander at B Lab blogs that Laureate Education has just become first publicly traded “benefit corporation” – and he isn’t a shrinking violet when it comes to expressing his views on the importance of this milestone:

The most important event to take place in the financial world in 2017 has already happened. It was a simple stock offering. But one facet of that otherwise unremarkable transaction signals that the capital markets are open to a change that might just save the planet.

On January 31, Laureate Education completed an initial public offering, raising $490,000,000. Laureate was the first company to go public as a “benefit corporation,” a corporate form that did not even exist ten years ago. While 4,500 benefit corporations have now been created, each of them was privately held until last week’s IPO.

We’ve previously blogged about benefit corporations – which are organized under separate corporate statutes designed to permit boards to consider additional stakeholders alongside shareholders, & give the board discretion to determine the relative weight to place on shareholders’ and other stakeholders’ interests.  The “B Corp” concept has gotten a lot of traction in recent years – 30 states now have benefit corporation statutes – and it will be interesting to see how the concept fares among public investors.

There’s one point in Rick’s blog that I want to correct – although Laureate is the first benefit corporation to go public in the US, it isn’t the first publicly traded benefit corporation.  As Broc noted several years ago, that honor goes to Natura, which is Latin America’s largest cosmetics company & is publicly traded in Brazil.

Update: Cydney Posner points out that Laureate’s IPO took quite some time to cross the finish line – she first blogged about it in 2015!

Our “Q&A Forum”: The Big 9000!

In our “Q&A Forum,” we have blown by query #9000 (although the “real” number is much higher since many of the queries have others piggy-backed on them). I know this is patting ourselves on the back, but it’s over 15 years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been well over 28,000 questions answered.

You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis & that any answers don’t contain legal advice.

John Jenkins

February 21, 2017

Earnings Calls: Technical Difficulties – Please Stand By. . .

Last week, I blogged about problems retail investors have had with the use of company websites to distribute earnings releases.  Here’s a different type of problem – technical snafus on the earnings call itself. Hey, it happens – so what should you do if it does?  Sysco experienced technical problems that prevented some listeners from hearing its recent earnings webcast. Check out this 8-K filing to see how Sysco addressed that problem.  Other companies have dealt with technical problems too – these recent 8-K filings by Devon Energy and Premier addressed similar situations.

The short answer in these situations seems to be to furnish an 8-K under Items 2.02 (Results of Operations & Financial Condition) and 7.01 (Reg FD Disclosure), and attach a copy of your earnings call transcript and any other relevant communications to investors about the glitch.

Sysco’s 8-K also includes upfront references to the GAAP information that’s most comparable to the non-GAAP information that it used during its conference call.  Although this information is already included in the presentation slides, my guess is that the decision to put it in the body of the 8-K itself represents an effort to conform to Item 10(e) of S-K’s “equal or greater prominence” requirement – which wouldn’t have applied to the conference call, absent the decision to file the materials in response to the glitch.

Earnings Calls: The Trump Factor

This WSJ article notes that there’s a new “elephant in the room” during corporate earnings calls – the President of the United States:

Of the 242 companies in the S&P 500 index that held conference calls or other investor events in January, half mentioned Mr. Trump directly or indirectly, according to a Wall Street Journal analysis of transcripts.

When CEOs or analysts discussed Mr. Trump on conference calls, indirect references were more common. Mr. Trump’s name was used about a third of the times that participants mentioned him or his administration. Half the time, participants simply invoked the “new administration.”

The article says that most references to the new president were full of praise, and criticism was muted. That shouldn’t come as a surprise – after all, as this article points out, nobody wants their company to be on the receiving end of one of POTUS’s tweetstorms.

By the way, if your company does find itself in the cross-hairs of the leader of the free world’s Twitter account, don’t despair – this Cleary memo provides advice on how to deal with the situation.

Delaware: Decision on Supermajority Bylaw May Have Broad Implications

I recently blogged about the Delaware Chancery Court’s decision in Frechter v. Zier – where it invalidated a bylaw requiring a supermajority stockholder vote to remove a director.  This K&L Gates memo says that the Court’s decision may have an impact on other bylaws purporting to require a supermajority vote for shareholder action:

This decision also has broader implications for any bylaw provision requiring supermajority stockholder votes to take action for which the DGCL provides a specific voting threshold.  Post-Frechter, some examples of potentially problematic bylaw provisions include bylaws providing for a supermajority stockholder vote for the approval of mergers, significant asset sales and dissolutions, all of which explicitly require a simple majority vote of a corporation’s stockholders under the DGCL.  Corporations should consider moving any such supermajority voting requirements from bylaws to the certificate of incorporation.

However, the memo notes that bylaw provisions requiring a supermajority vote to amend the bylaws themselves are likely still valid following Frechter.

John Jenkins 

February 17, 2017

Enforcement: Acting SEC Chair Trims Subpoena Power

Mike Piwowar may only be “Acting” SEC Chair – but he’s never going to be accused of just keeping the seat warm for Jay Clayton.  This WSJ article reports that Piwowar has revoked subpoena authority from about 20 senior Enforcement staffers. That action leaves the Director as the sole member of the Division of Enforcement with the authority to approve a formal order of investigation & issue subpoenas.

Traditionally, the Staff had to obtain the full SEC’s sign-off on a formal order before issuing subpoenas. Former Chair Mary Shapiro gave the Staff temporary subpoena power in 2009, in the wake of the Bernie Madoff fiasco – & the SEC adopted a rule making that authority permanent a year later.  Interestingly, because that rule was deemed to relate solely to internal agency procedures, the SEC adopted it without notice & an opportunity to publicly comment.

Acting Chair Piwowar has long been a critic of both the delegation of this authority to the Staff & the manner by which the SEC accomplished it.  Here’s an excerpt from his 2013 remarks to the LA County Bar:

Finally, the delegation of authority for approval of formal orders was deemed by the Commission to relate solely to agency organization, procedure, and practice, and therefore not subject to the notice and comment process under the Administrative Procedure Act. The mere fact that we can institute certain rules without obtaining comment from the public does not necessarily mean that we should. Given the significant ramifications for persons who are on the receiving end of a subpoena issued pursuant to a formal order, we should make sure that public comment is allowed on any review of the formal order process.

This action – which ironically occurred without a public announcement – is consistent with Piwowar’s longstanding concerns that the Staff has had too much power & too little oversight when it comes to investigations.

Conflict Minerals Case: Is a Final Judgment Looming?

This blog from Steve Quinlivan reports that a final judgment from a DC federal district court in the long-running challenge to the SEC’s conflict minerals rule may be on the horizon.  Judge Jackson has ordered the parties in National Association of Manufacturers, et al, v. SEC to file a joint status report by March 10, 2017 “indicating whether any further proceedings are necessary, and whether the Court should enter an order of final judgment to effectuate the Circuit’s decision.”

As Broc blogged at the time, the DC Circuit previously rejected the SEC’s appeal of an earlier ruling holding that the rule’s requirement to disclose whether products were “not found to be DRC conflict free” violated the 1st Amendment.

Acting SEC Chair Mike Piwowar recently announced that Corp Fin’s 2014 guidance for compliance with the conflicts minerals rule was also under scrutiny by the agency.

Audit Committees: Top Concern Is Risk Management

According to KPMG’s Global Audit Committee Survey, risk management heads the list of concerns for audit committees:

The effectiveness of risk management programs generally, as well as legal/regulatory compliance, cyber security risk, and the company’s controls around risks, topped the list of issues that survey participants view as posing the greatest challenges to their companies. It’s hardly surprising that risk is top of mind for audit committees—and very likely, the full board—given the volatility, uncertainty, and rapid pace of change in the business and risk environment. More than 40 percent of audit committee members think their risk management program and processes “require substantial work,” and a similar percentage say that it is increasingly difficult to oversee those major risks.

“Tone at the top,” corporate culture & short-termism also feature prominently in audit committee concerns.

John Jenkins

February 16, 2017

Our New “Form S-3 Handbook”

Spanking brand new. By popular demand, this comprehensive “Form S-3 Handbook” covers the entire terrain, from “baby shelfs” to “automatic shelfs” and everything in between. This one is a real gem – 108 pages of practical guidance – and it’s posted in our “Form S-3” Practice Area.

T+2 Settlement Adopted – But Firm Commitments Stay Put

Bryan Pitko notes that the SEC approved the Nasdaq & NYSE’s proposal to move from a three-day (T+3) to a two-day (T+2) settlement cycle for securities transactions.  However, despite earlier concerns, it looks like firm commitment underwritings may continue to follow a T+4 settlement cycle.  Here’s an excerpt from the blog:

The SEC’s adopting release does not, however, address the shortening of the T+4 settlement standard currently in place for certain firm commitment offerings under the exemption in Rule 15c6-1(c), as previously discussed in our prior posting (available here). It appears that, for now, despite contemplating such a change and soliciting for comment in the proposing release, the SEC and SROs are content to retain T+4 settlement for firm commitment offerings.

You Can Go Home Again (If You’re Mary Jo White)

The NYT Dealbook reports that Mary Jo White has decided to return to Debevoise & Plimpton, the firm she left when President Obama appointed her to serve as the SEC Chair.  She joins former SEC Enforcement Director Andrew Ceresney, who also returned to Debevoise when he left the agency at the end of last year.

John Jenkins

February 15, 2017

Earnings Releases: Rethink Using Your Website to Get the Word Out

MarketWatch’s reporters have been reading your earnings releases – and this article says they’re not impressed. It surveys a number of major companies’ releases, concluding that they’re generally a “confusing mess.”

However, the article saves its most pointed criticism for the practice of using releases simply to point readers to corporate website pages for earnings information:

MarketWatch has written before about the delay caused when companies make investors, and the reporters who serve them, search for earnings on a website, which almost invariably crashes under the strain of so many attempting to access it at the same time. The worst offender, in our view, is the video-streaming giant Netflix. This season, Netflix shares had moved almost 10% by the time most news services had started reporting the numbers, suggesting a clear advantage for institutional investors with machine-readable trading services that can scrape websites for relevant information at high speed. Retail investors are losing out.

My guess is that this practice is intended to provide shareholders with access to a more robust earnings presentation than what could be provided within the confines of a press release – but it looks like it’s giving retail investors the short end of the stick, and needs to be rethought.

Update: One of our members pointed out to me that for microcap companies, the costs associated with using news services for extensive earnings releases are often a factor – and that issuing a brief release directing investors to the website for more information is much more cost-effective for them. I think that’s a point worth acknowledging.

Enforcement: SEC Targets Control Contest Disclosures

Yesterday, the SEC’s Division of Enforcement announced two new actions involving disclosure violations that took place in the heat of takeover & activist battles. Disclosure in this arena seems to be an area of emphasis for the SEC – it recently sanctioned Allergan for failing to disclose merger negotiations with third parties while it was the subject of a tender offer from Valeant.

The first proceeding involves allegedly inadequate disclosures about “success fees” payable by CVR Energy to two investment banks that it retained to help fight off a tender offer. The second targets failures by individuals and investment funds to comply with beneficial ownership reporting obligations under Section 13(d) and 16(a) of the Exchange Act in connection with their joint efforts in several activist campaigns.

It’s interesting to note that disclosure of banker success fees was addressed in one of the new tender offer CDIs (159.02) issued in late 2016. Last month, I flagged a Cooley blog that said market practice on success fee disclosure would need to change as a result of the new CDI. The SEC’s press release notes that CVR’s cooperation and remedial actions resulted in a decision not to impose any monetary sanctions on it – but I suspect the fact that the company’s disclosures may have been consistent with market practice might have played a role in it as well.

Public companies and their advisors can be excused for enjoying the predicament of the targets of the second enforcement action – they’ve long complained about activists playing fast and loose with beneficial ownership disclosure requirements, and undoubtedly are relishing their comeuppance in this instance.

Speaking of disclosure requirements, there’s now one less – the SEC’s resource extraction rules are no more. This Davis Polk memo has the details.

Transcript: Privilege Issues in M&A

We have posted the transcript for the recent webcast: “Privilege Issues in M&A.”

John Jenkins

February 14, 2017

GAAP: Settlements Reveal Enforcement Trends

Last month, the SEC settled no fewer than seven enforcement proceedings involving alleged GAAP violations. Drinker Biddle’s Steve Stroup reviews the results of these proceedings – and draws some conclusions about trends & priorities in accounting enforcement actions.  Here’s an excerpt on the SEC’s increasing reliance on non-fraud based allegations:

The SEC has pursued fraud-based claims in accounting matters with less regularity in recent years and, in turn, has increased its reliance on the less-imposing strict-liability provisions under Section 13 and negligence-based antifraud provisions under Section 17. January was no exception. None of the accounting settlements during the month included alleged fraudulent conduct, even though, in several instances, the tenor of the settlement language arguably signaled a more culpable state of mind than the violations required.

Until recently, fraud-based allegations were routinely raised in these proceedings. The ensuing legal battle often focused on whether the SEC could establish the scienter required under Rule 10b-5. Under the current enforcement landscape, the absence of non-fraud claims takes the scienter issue off the table, and often incentivizes cooperation and settlement.

Tomorrow’s Webcast: “Activist Profiles & Playbooks”

Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Bruce Goldfarb of Okapi Partners, Tom Johnson of Abernathy MacGregor, Renee Soto of Sotocomm and Damien Park of Hedge Fund Solutions identify who the activists are – and what makes them tick.

Broc & John:  Beach Podcasting is Now a Thing. . .

Because no sacrifice is too great for our members, Broc & I recently held an intensive, multi-day strategic planning retreat at’s winter headquarters in Siesta Key. We took a break when the saloon made us clear out our tab – and headed down to the beach to record this 5-minute podcast on the appointment of a deal lawyer as SEC Chair & “Weekend at Bernie’s.”

This podcast is also posted as part of our “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…

blm logo

John Jenkins

February 13, 2017

Financial Choice Act: The Wish List Gets Longer

Cooley’s Cydney Posner blogs about a number of reported changes relating to corporate governance & executive compensation that have been incorporated into the latest version of the “Financial Choice Act” – Rep. Jeb Hensarling’s bill to consign Dodd-Frank to the ash heap of history.  Changes to the bill include new provisions that would:

– Modernize shareholder proposal & resubmission thresholds for inflation

– Raise SOX 404(b) internal control audit threshold from $250 million to $500 million

– Prohibit SEC from promulgating a rule to require the use of “universal proxies”

– Modernize Section 12(g) registration requirements for smaller companies, including increasing the revenue/shareholder thresholds, indexing the revenue test for inflation and eliminating annual verification of accredited investor status

– Increase Rule 701 cap from $10 million to $20 million with an inflation adjustment trigger

– Expand provisions of Title I of the JOBS Act to apply more broadly by allowing all companies, not just emerging growth companies, to “test the waters” & file IPO registration statements with the SEC on a confidential basis

– Increase Reg A+ ceiling from $50 million to $75 million annually with an inflation adjustment trigger

So does any of this have a prayer of getting through the Senate without Republicans eliminating the filibuster?  Maybe. It’s been suggested that some aspects of the bill might be passed under “reconciliation,” which requires only a majority vote & can be used for legislation that changes spending, revenues or the debt limit.

By the way, kudos to Bass Berry’s Jay Knight who – in this blog – tracked down the memo from Jeb Hensarling that started all the speculation about “Financial Choice Act 2.0.”

FASB: 2016 in Review

This BDO report reviews FASB’s work in 2016 – which was a very busy year.  Here’s the intro:

During 2016 the Financial Accounting Standards Board (FASB) completed several major, long-term projects, and also issued guidance to resolve related practice issues. The FASB and the International Accounting Standards Board (IASB) focused on implementation issues related to the new revenue recognition standard, which resulted in several clarifying amendments during the year. Both boards also issued their respective lease standards, and the FASB finalized guidance on the classification, measurement and impairment of financial instruments.

In addition to reviewing last year’s guidance & previewing coming attractions, the report includes a helpful appendix showing the effective dates of recently issued accounting standards.

Transcript: “Conflict Minerals -Tackling Your Next Form SD”

We have posted the transcript for our recent webcast: “Conflict Minerals: Tackling Your Next Form SD.”

John Jenkins

February 10, 2017

Audit Committees: Disclosures Improving

Here’s the 3rd annual “Audit Committee Transparency Barometer,” jointly issued by the Center for Audit Quality (CAQ) and Audit Analytics. As noted in this Audit Analytics blog, among the highlights are:

– 31% of S&P 500 companies’ proxy statements present enhanced discussion of the audit committee’s considerations in recommending the appointment of the audit firm, up from 13% in 2014. 21% of MidCap companies show enhanced discussion (up from 10% in 2014) compared to 17% of SmallCap companies (up from 8% in 2014).
– 17% of S&P 500 companies’ explicitly stated the role audit committees play in negotiating audit fees, more than doubling from 8% in 2014.
– 34% of S&P 500 companies disclose the evaluation or supervision of the audit firm, more than quadrupling from just 8% in 2014.

Transcript: “Audit Committees in Action – The Latest Developments”

We have posted the transcript for our recent webcast: “Audit Committees in Action – The Latest Developments.”

Study: 14 Years of Audit Fees (& Non-Audit Fees)

As noted in this blog from Audit Analytics, audit fees have increased by 9% over the past year. The ratio of audit fees over revenue (including audit related fees for tasks such as due diligence, accounting consultations, and internal control reviews) increased to a 2015 value of $599 per $1 million of revenue…

FASB’s New Cash Flow Guidance

Recently, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the Emerging Issues Task Force)…

Broc Romanek

February 9, 2017

Conflict Minerals: Executive Order Banning Rule for 2 Years?!?

Lights, camera, action! There certainly is a lot of action so far by President Trump. Here’s an excerpt from this Reuters article:

President Donald Trump is planning to issue a directive targeting a controversial Dodd-Frank rule that requires companies to disclose whether their products contain “conflict minerals” from a war-torn part of Africa, sources familiar with the administration’s thinking.

Reuters could not learn precisely when the directive would be issued or what the final version would say. However, a leaked draft that has been floating around Washington, D.C., and was seen by Reuters on Wednesday calls for the rule to be temporarily suspended for two years. Reuters could not independently verify the authenticity of the document.

Someone sent me this draft executive order – but as Reuters notes, it’s unclear if it’s the real deal. This executive order apparently will be based on a “national security interests” rationale.

Anyway, conflict minerals filings are still due on May 31st – until we know otherwise. I’ll post the transcript from our recent webcast on conflict minerals in the next day or so (audio archive available now)…

Here’s a Mother Jones article about the impact (or lack thereof) of the conflict minerals disclosure rule…

Challenged in Court: Trump’s “2-for-1” Regulatory Order

Last week, I blogged about President Trump’s executive order that requires federal agencies to eliminate two regulations for every new one created. This order doesn’t apply to the SEC & other independent agencies. This order has been challenged now in this lawsuit: Public Citizen v. Trump. Here’s a press release from Public Citizen – and this blog summarizes the complaint.

White House’s Interim Guidance Encourages “Net Zero” Rulemaking

Meanwhile, the Administration issued this interim guidance last week about how to implement the “2-for-1” executive order – which includes language that encourages independent agencies that aren’t subject to the order – including the SEC – “to identify existing regulations that, if repealed or revised, would achieve cost savings that would fully offset the costs of new significant regulatory actions.”

Broc Romanek

February 8, 2017

Snap’s IPO: Sexting Arrives for Edgar!

Loving this CNet article about Snap’s impending IPO (Snapchat was renamed “Snap” last year; the company, not the app). The first sentence of the article is: “This may be the first time the word “sexting” has been included in an SEC filing.” Also see this CNet article about Snap’s Form S-1.

By the way, as noted in this article, Snap’s proposed governance structure is controversial – only non-voting stock is being offered to the public. Here’s a CII press release expressing anger about this structure…

Raytheon Adopts New Recognition Revenue Standard Early!

This blog from “The SEC Institute” tells us that Raytheon – in its 4th-quarter earnings release – announced it has adopted the new revenue recognition standard as of January 1, 2017, a full year before the required adoption date. Raytheon elected the full retrospective adoption method.

CII Report: How Proxy Access Private Ordering Is Faring

Last week, CII released this 11-page report about proxy access & private ordering. The conclusion states in part:

Reliance on private ordering (rather than a more standardized approach envisaged by the SEC in 2010) has meant that this area is even more complex, with the potential for various creative ways to block or frustrate what shareowners would see as legitimate uses of the mechanism. For example, some remarkably broad provisions require a nominating shareholder to file with the SEC anytime it communicates with another shareholder, regardless of whether that communication triggers a filing requirement under the SEC’s own regulations. CII is monitoring these and other onerous provisions, and intends to release an update to its 2015 Best Practices document in the second half of 2017.

Broc Romanek