E-Minders December 2016

In This Issue:

E-Minders is our monthly e-mail newsletter containing the latest developments and practical guidance for corporate & securities law practitioners.

We view TheCorporateCounsel.net as the gathering place for the community and encourage those who may not yet be members to take advantage of a "Free for Rest of '16" No-Risk Trial to see what you are missing. Here are 10 Good Reasons to try us now.

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It's Done! 2017 Executive Compensation Disclosure Treatise: We just wrapped up Lynn, Borges & Romanek's "2017 Executive Compensation Disclosure Treatise & Reporting Guide" - and it's been sent to the printers. Over 1600 pages - with comprehensive coverage of the coming pay ratio rules.

How to Order a Hard-Copy: Remember that a hard copy of the 2017 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately. Act now as this will ensure delivery of this 1600-page comprehensive Treatise right away. Here's the "Detailed Table of Contents" listing the topics so you can get a sense of the Treatise's practical nature. Order now.

It's Printed! 2017 Edition of Romanek's "In-House Essentials Treatise": We are happy to say the 2017 Edition of Romanek's "The In-House Essentials Treatise" is printed & mailed. 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.

It's Printed! 2017 Edition of Romanek's "Proxy Season Disclosure Treatise": Broc Romanek has wrapped up the 2017 Edition of the definitive guidance on the proxy season - Romanek's "Proxy Season Disclosure Treatise & Reporting Guide" - and it's been printed. With over 1500 pages - spanning 32 chapters - you will need this practical guidance for the challenges ahead. Here's the Detailed Table of Contents listing the topics so you can get a sense of the Treatise's practical nature.

Upcoming Webcasts on TheCorporateCounsel.net: Join us on January 10th for the webcast - "Non-GAAP Disclosures: Analyzing the Comment Letters" - to hear Meredith Cross of WilmerHale; Brink Dickerson of Troutman Sanders; Steven Jacobs of E&Y; and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster provide practical guidance about what to do now with your non-GAAP disclosures given Corp Fin's new batch of comment letters.

And join us on January 18th for the webcast - "Pat McGurn's Forecast for 2017 Proxy Season" - when Davis Polk's Ning Chiu and Gunster's Bob Lamm join Pat McGurn of ISS and the proxy season expert to recap what transpired during the 2016 proxy season and what to expect for 2017.

And join us on January 24th for the webcast - "Audit Committees in Action: The Latest Developments" - to hear Morgan Lewis' Rani Doyle, Deloitte's Consuelo Hitchcock and Gibson Dunn's Mike Scanlon catch us up on a host of new SEC & PCAOB developments that impact how audit committees operate - and more.

And join us on February 2nd for the webcast - "Conflict Minerals: Tackling Your Next Form SD" - to hear our own Dave Lynn of Morrison & Foerster, Ropes & Gray's Michael Littenberg, Elm Sustainability Partners' Lawrence Heim and Deloitte's Christine Robinson discuss what you should now be considering as you prepare your Form SD for 2016.

There is no cost for these webcasts if you are a member of TheCorporateCounsel.net. If you are not a member, take advantage of our no-risk trial to access the programs. You can sign up for this no-risk trial online, send us an email at info@thecorporatecounsel.net - or call us at 925.685.5111.

Upcoming Webcasts on CompensationStandards.com: Join us on January 11th for the webcast - "The Latest Developments: Your Upcoming Proxy Disclosures" - to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance about how to overhaul your upcoming disclosures in response to pay ratio and say-on-pay - including the latest SEC positions, as well as how to handle the most difficult ongoing issues that many of us face.

And join us on February 13th for the webcast - "Pay Ratio: The Top Compensation Consultants Speak" - to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance "tell it like it is. . . and like it should be" about the upcoming implementation of the pay ratio rules.

No registration is necessary - and there is no cost - for these webcasts for CompensationStandards.com members. If you are not a member, take advantage of our no-risk trial to access the programs. You can sign up online, send us an email at info@compensationstandards.com - or call us at 925.685.5111.

Upcoming Webcasts on DealLawyers.com:Join us on January 19th for the webcast - "Privilege Issues in M&A" - during which Alston & Bird's Lisa Bugni, Bass Berry's Joe Crace and Akin Gump's Trey Muldrew discuss how to deal with the attorney-client privilege in M&A transactions - including practical guidance on how to address privilege issues in acquisition agreements and the latest on the applicability of the "common interest" doctrine to M&A communications.

And join us on February 15th 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 - want what makes them tick.

And join us on March 29th for the webcast - "Structuring, Negotiating & Litigating Public Deals: Has the Pendulum Moved?" - to hear Greenberg Traurig's Cliff Neimeth, Richards Layton's Ray DiCamillo and Richards Layton's Mark Gentile analyze how recent Delaware case law and statutory changes are influencing the way that M&A deals are structured, negotiated, and litigated.

No registration is necessary - and there is no cost - for these webcasts for DealLawyers.com members. If you are not a member, take advantage of our no-risk trial to access the programs. You can sign up online, send us an email at info@deallawyers.com - or call us at 925.685.5111.

Upcoming Webcast on Section16.net: Join us on January 31st for the webcast - "Alan Dye on the Latest Section 16 Developments" - to hear Alan Dye of Section16.net and Hogan Lovells discuss the most recent updates on Section 16, including new SEC Staff interpretations and Section 16(b) litigation.

ISS Issues '17 Voting Guidelines

In late November, ISS issued its 2017 policy updates, which applies to meetings starting in February (here's the policy updates for outside the US). Similar to Glass Lewis, the ISS' updates aren't too significant for existing public companies - but there are several new & revised policy changes related to equity plans, including on director compensation. Davis Polk's Ning Chiu gives a rundown of the most significant changes in this blog...

Glass Lewis Issues '17 Voting Guidelines

As noted on their blog, Glass Lewis posted 49 pages of "Guidelines for the 2017 Proxy Season" in mid-November, which includes a summary of the policy changes on the first page. Dorsey & Whitney has a new blog - and Kimberley Anderson has blogged some analysis of the policy changes there...

Glass Lewis: Companies Allowed to Review Rudimentary Draft Reports! Get In Early!

In mid-November, Glass Lewis also announced "open enrollment" in its "Issuer Data Report" program. This enables companies a chance to access - for free! - a data-only version of their Glass Lewis report. This is an opportunity for companies to weigh in prior to Glass Lewis completing its recommendations for the upcoming proxy season!

As Glass Lewis doesn't provide drafts of its voting recommendations report for companies to review like ISS does (for the S&P 500), this is your only chance to review what Glass Lewis factors into its recommendations. Open enrollment ends on the earlier of January 6th - or when Glass Lewis decides its annual limit has been reached. So do it now!

See these blogs by Gibson Dunn, Dorsey & Whitney and Mike Melbinger...and don't forget our "Proxy Advisors Handbook"...

Financial Choice Act: One Provision Could Destroy the SEC's Rulemaking Abilities

The "Financial Choice Act" is much more than merely repealing big chunks of Dodd-Frank. There are a handful of provisions that would render the SEC's ability to conduct rulemaking much more difficult. But this provision in particular - infamous "Section 631" - just blows Broc away:

SEC. 631. CONGRESSIONAL REVIEW. If the agency classified a rule as "major," according to specified criteria, the rule would require a joint resolution of Congress to go into effect, unless the President finds that an emergency requires that it be effective (for 90 days). Congress would also have the right to disapprove certain non-major rules.

Read that provision again. A joint Congressional resolution to adopt a "major" rule - and even some non-major ones! Its goal appears to be neutering the so-called "independent" federal agencies that govern our financial institutions & markets. Talk about putting partisan politics into "independent" agencies. And here Broc was worried that having Congress involved in the SEC's budget process was too much meddling with a federal agency!

Remember that federal agencies are part of the executive branch of government. Not to mention that members of Congress don't have the expertise, resources or time to understand what the various rules of an agency are. This would be a major windfall for lobbyists who would be able to effectively pay Congress to stop an agency from doing anything. Either the Senate or the House could stop a rulemaking - by simply sitting on their hands. The polar opposite of needing an "Act of Congress" to change something. It's brazen & breathtaking - and a whole lot of other things that we can't mention in this family-oriented blog.

The ironic thing is that many of those rules that you despise are the product of Congress. Since SOX was enacted 15 years ago, the vast majority of the SEC's rulemakings have been mandated by one piece of Congressional legislation or another. Not many initiated by the agency itself...and here's a nugget from this blog by Steve Quinlivan:

President-Elect Trump's "Contract with the American Voter" contains a pledge to implement a requirement that for every new federal regulation, two existing regulations must be eliminated. So it would place many in a conundrum. If you want to implement a universal proxy card, what two SEC regulations do you want to jettison? Maybe SEC Rule 14a-8? What else?

As for what the regulatory environment might look like going forward, check out these memos on the Trump Administration transition ...and this Steve Quinlivan blog summarizing a recent House hearing about the SEC...

Former SEC Commissioner Karmel: "Threats to the SEC's Independence"

Former SEC Commissioner Roberta Karmel delivered this moving speech before the ABA's Federal Regulation of Securities recently. It's worth reading all 9 pages. Here's an excerpt:

In my opinion, while a background in government is useful, an agency like the SEC needs some commissioners who have had real world experience in business or the private practice of securities law. Nevertheless, we do not need SEC commissioners who do not believe in the mission of the SEC or who would like to take a hacksaw to all government regulation. I am very afraid that the Trump Administration and the Republican Congress will try to destroy the SEC, or in any event, the SEC's independence.

Today, neither the SEC Chair nor the President seems to enjoy the freedom to choose non-partisan candidates who will be confirmed by the Senate. Qualifications are based on ideological correctness rather than expertise. This has led to very contentious and partisan decision making with many 3-2 decisions, or even worse, 2-1 votes, on important issues. Moreover, the selection of commissioners in this manner results in strong dissents designed to enable affected constituencies to appeal rulemaking to the United States Court of Appeals for the District of Columbia Circuit and prevail by upending new regulations. I am not opposed to dissents; I authored a few when I was a Commissioner, but these were based on principle, not party. Partisanship has been a historical hallmark of some agencies, like the National Labor Relations Board, where labor and management commissioners are often at odds. It was not traditionally the case at the SEC where the agency's mission is to police the securities markets and protect investors, and where influence by outside political forces once was rare.

In my opinion, partisanship has undermined the SEC's mission and credibility and made it very difficult for the SEC to complete rulemaking mandated by statute. It took five years for the SEC to complete the bulk of mandated rulemaking under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), in part because Republicans in the Congress and at the SEC objected to many statutory provisions. In the meantime, Congress passed the JOBS Act, which mandated new deregulatory rules, and again the SEC was slow to pass rules implementing this law because Democrats found it objectionable. When the agency operated in a collegial manner, I believe it was more effective and respected and was able to pass rules without so much rancor.

The Jawing Over "Midnight" Rulemaking

As noted in this blog, in mid-November, House Majority Leader Kevin McCarthy sent a letter to government agencies warning them against finalizing any pending rules or regulations in the waning days of the Obama administration. SEC Chair White testified before the House Financial Services Committee that same day & said that there would not be any last-minute rulemaking before she leaves. Then, the House passed legislation - "The Midnight Rules Relief Act" (HR 5982) - that would amend the Congressional Review Act. It's doubtful that President Obama would sign the legislation if the Senate passed this bill too.

Here's the intro from this WSJ article by Andrew Ackerman:

Financial regulators are scrambling to complete a series of unfinished rules designed to rein in Wall Street, dismaying congressional Republicans and some business groups that have urged policy makers not to rush new regulations as President Barack Obama's term winds down. The government's consumer finance watchdog is pushing to finish a contentious measure that could make it harder for financial firms to force consumers into mandatory arbitration. The Federal Reserve and the Securities and Exchange Commission could each wrap up postcrisis measures that would force banks and swaps dealers to add to their books costly new buffers protecting against big losses during periods of market distress. The SEC also wants to limit risky derivatives in mutual funds sold to the public, while a fellow market regulator wants to adopt new curbs on speculation in oil, gold and other commodities.

Other high-profile measures are in doubt. Mr. Obama has for two years pushed a committee of agencies to complete limits on executive compensation, aimed at curbing Wall Street risk-taking. The six agencies required to write the rules are racing to complete them but may run out of time before the change in administration, according to regulatory officials.

The efforts to complete the rules before President-elect Donald Trump takes office on Jan. 20 buck calls from Republicans who want the agencies to wait, even on noncontroversial measures required by the 2010 Dodd-Frank financial overhaul, until the new administration takes over. "This type of 'midnight rulemaking' is neither conducive to sound policy nor consistent with principles of democratic accountability," Texas Rep. Jeb Hensarling, chairman of the House Financial Services Committee, told SEC Chairman Mary Jo White at a Nov. 15 hearing. Mr. Hensarling is reportedly under consideration to serve as Mr. Trump's Treasury Secretary.

Regulators deny they are rushing to finish initiatives ahead of the transfer of power and say they are merely working through their normal process to finish rules that were targeted for completion this year. Ms. White, who plans to leave the agency in January, told lawmakers she is finishing rules she had long publicly described as top priorities.

Before Mr. Trump's surprise win earlier this month, some financial firms and their lobbying groups backed the regulators' efforts to complete their work. At the time, these groups assumed a victorious Hillary Clinton, under pressure from progressive Democrats like Massachusetts Sen. Elizabeth Warren, would adopt a more adversarial approach to Wall Street oversight than the Obama administration. With Mr. Trump's victory, however, they anticipate policy makers who favor a lighter regulatory touch will be appointed.

Sen. Schumer: "Have Votes to Block Dodd-Frank Repeal"

Here's the intro from this Bloomberg article:

Incoming Senate Minority Leader Chuck Schumer, drawing a line in the sand for the next administration, said he has the votes to stop President-elect Donald Trump from repealing the Dodd-Frank Act and "the rules we put in place to limit Wall Street." Schumer predicted that the Senate's Democratic minority would get help from Republicans in any such fight. "We have 60 votes to block him," Schumer said in an interview on NBC's "Meet the Press."

Wow. Did Dodd-Frank Just Get Repealed?!?

To say that we are in a state of uncertainty is one of the few certainties Broc knows in the wake of the Presidential election. But he would say that the odds of at least a partial repeal of Dodd-Frank certainly improved, whether it be in the form of the "Financial Choice Act" (see this Cooley blog for a summary of the provisions) - or perhaps even a stronger rebuke to Dodd-Frank. Here are other open questions Broc is asking:

- How fast would a repeal come? Companies are preparing to comply with the adopted pay ratio rules now - even though disclosure wouldn't be seen until 2018.

- What will be the fate of the SEC's disclosure effectiveness project? It's seemingly non-partisan. But the SEC may be busy with rulemakings mandated by this shift in power to deal with projects they started themselves for quite some time...

- Does the sole sitting GOP SEC Commissioner - Mike Piwowar - become the SEC Chair? There is precedent for a non-lawyer in that role (ie. Arthur Levitt; Piwowar is an economist). Piwowar almost certainly will become interim Chair once Chair White vacates her seat. It might take a while for a Trump Presidency to tap new agency heads, as that is the norm. As noted in this WSJ article, former Commissioner Paul Atkins is heading up the President-elect's transition team that oversees the SEC, CFTC & other financial regulators that historically operate independently of the White House...

- I used to think a "risk factor" for political instability & unrest was reserved only for non-US jurisdictions. Will we see some in the US now?

Financial Choice Act: Death to Interpretive Guidance at the Commission Level?

Recently, Broc blogged about how Section 631 of the Financial Choice Act would seriously damage the SEC's ability to conduct rulemaking. If that didn't move you, try Section 412 on for size:

The notice and comment requirements of section 553 of title 5, United States Code, shall also apply with respect to any Commission statement or guidance, including interpretive rules, general statements of policy, or rules of Commission organization, procedure, or practice, that has the effect of implementing, interpreting, or prescribing law or policy and that is voted on by the Commission.

As I understand it, Section 631 wouldn't impact guidance at the Staff level; only guidance issued by the Commission itself. Whew, otherwise it would be nearly impossible to get no-action letters & CDIs out the door. But this would impact the occasional interpretive release that the SEC issues after the Commissioner vote upon it (here's a list). And while going through the Administrative Procedures Act process is doable - it's a lot of work and would take much more time to implement...

The Arrival of the Trump Risk Factors

In early November, Broc predicted that we would see risk factors related to the change in Administration. This blog by Steve Quinlivan notes that the first batch of these have been filed...

Trump Transition: Plenty of Resources

This new Davis Polk blog devoted to explaining the nuances of how this transition in power might be the same - or different - from past changes in Administration is awesome. Also check out the numerous memos about the transition posted in our "Regulatory Reform" Practice Area.

And in this 14-minute podcast, Aaron Cutler - a Hogan Lovells Partner & Former Senior Advisor to House Majority Leader Eric Cantor - discusses what the future holds in Washington DC for corporate & market regulation, including:

- Who will be taking the lead in overseeing the markets in Congress going forward?
- What are the prospects of legislative changes in the near term, including a full - or partial - repeal of Dodd-Frank?
- What type of SEC Chair might we see?
- Can the SEC operate with just two Commissioners (Chair White leaves in January bringing the number of Commissioners down to two)?

Proxy Access: First Use of Access Bylaw to Nominate Director!

The first Schedule 14N! Back in July, Broc ran a poll asking when we'd see the first proxy access nominee - only 11% of responders thought it would happen this year. The other 89% were wrong - including the 24% who said 'never'! Here's the intro from this Gibson Dunn blog:

In what appears to be the first use of a company's proxy access bylaw, GAMCO Asset Management filed today a Schedule 13D/A and a Schedule 14N announcing that it has used the proxy access bylaw at National Fuel Gas (NFG) to nominate a director candidate for election at NFG's 2017 Annual Meeting. According to the 13D/A, GAMCO and its affiliates beneficially own in the aggregate approximately 7.81% of NFG's Common Stock and yesterday delivered a letter to NFG nominating Lance A. Bakrow to the Board of Directors.

NFG amended its bylaws in March 2016 to include a proxy access bylaw & its terms are pretty typical:

The Bylaws provide that a shareholder, or a group of up to 20 shareholders, owning 3% or more of the Company's outstanding Common Stock continuously for at least three years may nominate and include in the company's proxy materials directors constituting up to 20% of the board, provided that the shareholders(s) and the nominee(s) satisfy the bylaw requirements. Here is NFG's proxy access bylaw.

In this blog, Davis Polk's Ning Chiu also lays out the circumstances...

A few weeks later, National Fuel Gas rejected Gamco's nominee, as reported in the company's Form 8-K. Here's an excerpt from letter from the company to Gamco filed as an exhibit to the 8-K, which lays out the reasoning:

A stockholder that seeks to use the Company's proxy access By-Law provision must make certain representations and warranties to the Company. If these representations are not correct, the stockholder is not eligible to use proxy access. These representations include that an Eligible Stockholder:

(i) acquired the Proxy Access Request Required Shares in the ordinary course of business and not with the intent to change or influence control of the Corporation, and does not presently have such intent.

In this Schedule 13D/A, Gamco reported that its nominee had "informed GAMCO this morning that he has decided to withdraw [his] name as a candidate for Director of National Fuel Gas Company. GAMCO will not pursue Proxy Access." Hat tip to Steve Quinlivan for first reporting on this new development (and see this Ning Chiu blog)! We're posting memos on this in our "Proxy Access" Practice Area...

Proxy Access: No-Action Letter Allows Exclusion of "Fix-It" Proposal

Here's the intro to this blog by Cooley's Cydney Posner regarding this no-action letter to Oshkosh (we're posting memos in our "Shareholder Proposals" Practice Area):

In September, I blogged about several pending no-action requests seeking exclusion of proposals from the McRitchie/Chevedden group to revise existing proxy access bylaws on the basis that they had been "substantially implemented" under Rule 14a-8(i)(10). As I described it back then, the burning question was whether there would be any "evolution" in Corp Fin's position in H&R Block, in which the staff refused to grant no-action relief to a proposal to amend the company's existing proxy access bylaw - a so-called "fix-it" proposal. In particular, there were two pending no-action requests that applied different approaches in efforts to overcome the result in H&R Block (and two more similar requests have subsequently been submitted). Corp Fin has now acted on all four of these letters. One of them received a favorable response.

As you may recall, the fix-it proposal at issue in H&R Block (which also came from the prolific James McRitchie) requested that the board amend its existing proxy access bylaw provisions as specified in the proposal. The company sought to exclude the proposal on the basis that it had already been "substantially implemented" under Rule 14a-8(i)(10), contending that the staff had previously allowed exclusion of dozens of proposals as substantially implemented based on the companies' representations that the proxy access bylaws that had been adopted addressed the proposals' "essential objective." (See this PubCo post.) No-action relief was granted in those cases so long as the companies' bylaw provisions contained the same percentage and duration of ownership thresholds (3%/3 years) as in the proposal, even though the bylaws also included "certain procedural limitations or restrictions that were inconsistent with or not contemplated by the proposals."

In the case of the fix-it proposal at issue in H&R Block, however, the Corp Fin staff refused to allow the company to exclude the proposal, responding that it was unable to conclude that the company had "met its burden of establishing that it may exclude the proposal under Rule 14a-8(i)(10)." (See this PubCo post.) As a result, companies that adopted versions of proxy access that McRitchie et al viewed as "proxy access lite" have begun to see new proposals for amendments to those proxy access bylaws. According to Agenda, fix-it proposals have now been submitted to over three dozen companies.

Keep in mind that, where the proposal related to initial adoption of proxy access, Corp Fin has continued to grant no-action relief and permit exclusion under Rule 14a-8(i)(10), even where the proponent has identified specific elements of the proposal that he views to be essential.

CDIs: A Big One on Reg D's Integration; Three Small Ones for Reg A

Nicely timed with the annual "Small Business Capital Formation Forum," Corp Fin released 3 CDIs on Regulation A & one on Reg D in mid-November. As noted in this Stinson Leonard Street blog, the Reg D one is about integration:

- Reg A CDI 182.12
- Reg A CDI 182.13
- Reg A CDI 182.14
- Reg D CDI 256.34

Filing Fee Calculations & Form S-8: Two New CDIs (& Two Revised Ones)

In mid-November, as noted in this Cooley blog, Corp Fin issued two new CDIs on Form S-8 & Rule 457 (regarding filing fee calculations) and two revised ones:

- Revised CDI 126.06 of Form S-8 (also Securities Act CDI 240.16)

- Revised CDI 126.42 of Form S-8 (also Securities Act CDI 240.11; 126.42 is missing from Corp Fin's New" page)

- New CDI 126.43 of Form S-8 (also Securities Act CDI 240.15)

- New CDI 126.44 of Form S-8

We've updated our "Form S-8 Handbook" and "SEC Filing Fees Handbook"...

PCAOB: New '17 Budget & 5-Year Plan - & Hanson Dissents!

In mid-November, as noted in this press release, the PCAOB approved its 2017 fiscal-year budget of $268.5 million and its 2016-2020 strategic plan. The total accounting support fee for 2017 is $268 million, with $232.6 million allocated to public companies and $35.3 million to brokers. The budget still has to be submitted to the SEC for its approval.

The big news is that there was one dissent among the 5 PCAOB Board members when voting on their budget! Jay Hanson dissented, as noted in his statement. Here's a note from Lynn Turner on this:

I understand this is the first vote since the PCAOB was created in 2002, in which a board member voted not to approve their budget. It appears the principle point of disagreement is over economic analysis. Interesting, the US Treasury Committee did recommend the PCAOB do more analysis through a fraud center. However, as I understand it, some on the board do not support research that may result in unfavorable data for the profession becoming public.

Interestingly, the PCAOB inspects only a couple hundred audits each year of the total audits of public companies and broker-dealers which totals over 10,000 entities. Those inspections have consistently found a 20-40% rate of non-compliance with generally accepted auditing standards, despite the auditor saying in their report they had complied.

St. Petersburg Exchange Listings Rise Again!

They're doing it again! Just like in 2013, some companies are receiving letters from the St. Petersburg Stock Exchange stating that they have been admitted into the non-quotation section of the list of securities admitted to regular trading of the exchange. This is happening without the company's consent!

If you go to this page and scroll down, you will see many well-known - and non-Russian - NYSE/Nasdaq companies included on the list. Look to the far right column - those are the dates that companies are effectively listed (a bunch became effective yesterday).

According to the letter that companies are now receiving, the admission of the securities into the non-quotation section of the list does not impose any obligations on the company. Specifically, the company is not required to disclose information and perform any other obligations under the Russian securities and insider trading legislation.

Remember that back in 2013, as noted in this blog, a number of companies responded to those original letters and requested that their securities not be admitted to trading on the Exchange - and the Exchange generally did not proceed with the admissions.

But then the Russian securities laws were amended in July 2014 to relieve foreign issuers from Russian reporting & disclosure obligations with the listing of their securities and allowing the Exchange to proceed with the listing without a company's consent. Since then, the Exchange has been actively admitting foreign securities to the "non-quotation section" of the list of securities admitted to trading - but it's really picking up steam now. So far, it appears that attempts by companies to cease the listings have been unsuccessful. Thanks to Brian Breheny & Justin Kisner of Skadden for their help on this!

Pay-for-Performance: ISS Supplements TSR With 6 New Metrics

In early November, ISS announced changes to its pay-for-performance methodology for companies in the US, Canada, and Europe that will become effective on February 1st. Following feedback from constituents, ISS will present relative evaluations of return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth to supplement ISS' legacy (and continued) use of TSR as the key metric for P4P.

Pay-for-performance updates for US companies include:

- A new standardized comparison of the subject company's CEO pay and financial performance ranking relative to its ISS-defined peer group will be added to ISS' benchmark policy proxy research reports beginning Feb. 1, 2017. Financial performance will be measured by a weighted average of multiple financial metrics including return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth. The metrics and weightings will be based on the company's four-digit GICS industry group, and are based on extensive back-testing over multiple years. The financial performance and pay ranking information will be displayed for all companies subject to ISS' quantitative pay-for-performance screens. While this information will not impact the quantitative screening results during the 2017 proxy season, it may be referenced in the qualitative review and its consideration may mitigate or heighten identified pay-for-performance concerns.

- Relative Degree of Alignment (RDA) assessment will only be considered in the overall quantitative concern level when the subject company has a minimum of two years of pay and TSR data. Companies that only have one year of data will receive an N/A (not applicable) concern for their RDA test.

ISS' peer submission window will be open starting on November 28th - and will close on December 9th...

Proxy Advisors: A New GAO Study

Nearly a decade after its last study on proxy advisors, the GAO issued this 49-page report in mid-September on the state of the proxy advisor industry. Taking a quick swing through it, we didn't see anything all that surprising. Several factors have led to increased demand for proxy advisor guidance (eg. rise of institutional investing & voting requirements) - but views are mixed on the extent of their influence. Proxy advisors have increased the level of shareholder engagement. And more.

It's a nice summary of the state of the industry as we know it. Nice graphic on page 22 to illustrate how ISS & Glass Lewis communicate their policy-formulating process. All that might change soon enough with Section 1082 of the "Financial Choice Act" or whatever reform legislation gets enacted with a new Administration coming in soon...

The "GAO" is the "Government Accountability Office," the investigative arm of Congress charged with examining matters relating to the receipt & payment of public funds...and of course, if you really want to know about the proxy advisors, read our "Proxy Advisors Handbook"...

SEC Enforcement: MD&A Tagged for Faulty Segment Reporting

This blog from Steve Quinlivan notes a recent settled SEC enforcement proceeding against PowerSecure International involving allegedly inadequate segment reporting. Here's an excerpt:

According to the SEC, PowerSecure's Form 10-K for the year ended December 31, 2015, outlined errors in prior period disclosures and revised its segment reporting disclosure to reflect information for the years ended 2012 to 2014 on a basis consistent with its 2015 reportable segments. In its 2015 filing, PowerSecure also concluded that its disclosure controls and procedures for that three year period were not effective due to a material weakness in its internal control over financial reporting that it identified in 2015 related to its misapplication of GAAP related to segment reporting.

Segment reporting has long been an area of intensive focus by Corp Fin. Determining the appropriate reportable segments is often a complex process involving a lot of judgment - & this means that staff comments often create some anxiety for a company's accounting personnel.

In his own experience, John has seen a number of clients receive multiple, highly detailed comments probing how they determined their reportable segments. Responding to these comments often results in several rounds of follow-up comments - & has occasionally culminated in a Staff request for a conference call involving several Staff accountants & senior company officials. Those calls are fun. . .

This is another area where a regular review of peer company comments & responses can be a very valuable exercise. Comment letters often provide an early warning of the Staff's interest in segment reporting practices within a particular industry & allow companies to see how their peers have responded to challenges to their own decisions about reportable segments.

Glossy Annual Reports: No Longer Need to Furnish 7 Copies to Corp Fin (If You Post Them)

On the heels of Corp Fin's announcement back in January that it would no longer scan & post glossy annual reports on Edgar, Corp Fin issued this CDI in early November (note that the CDI is unnumbered):

Question: Exchange Act Rule 14a-3(c) and Rule 14c-3(b) require registrants to mail seven copies of the annual report sent to security holders to the Commission "solely for its information." A similar provision in Form 10-K requires certain Section 15(d) registrants to furnish to the Commission "for its information" four copies of any annual report to security holders. Can a registrant satisfy these requirements by means other than physical delivery or electronic delivery pursuant to Rule 101(b)(1) of Regulation S-T?

Answer: Yes. The Division will not object if a company posts an electronic version of its annual report to its corporate web site by the dates specified in Rule 14a-3(c), Rule 14c-3(b) and Form 10-K respectively, in lieu of mailing paper copies or submitting it on EDGAR. If the report remains accessible for at least one year after posting, the staff will consider it available for its information.

This is good news as there has been a ton of confusion, as evident from a few threads in our "Q&A Forum" over the years (see #8728 and #7894). Companies have had the option to Edgarize their annual report & have that count as furnishing the 7 copies for a while - but that's a real hassle & can be costly with graphics, etc. So this is an early holiday present from the Staff. We've updated our "Annual Report & 10-K Wrap Handbook"- including addressing the issue that Broc blogged on the "Proxy Season Blog" about "The NYSE Doesn't Think 'Proxy Materials' Includes the Glossy Annual Report?"...

You might wonder what the Corp Fin Staff does with all those glossy annual reports over the years. They're stuffed into metallic cabinets & rarely touched - at least back in Broc's day (when the '34 Act reviews were fairly rare). There was a stir back then after Mustang Ranch tried to go public in '89 - and Broc can't remember what the filing was, perhaps the red herring - but it was in a cabinet for some reason & created a stir...

Form S-3's "Baby Shelfs": A New CDI

As noted in this Cooley blog, Corp Fin also issued this new CDI 116.25 about Form S-3's General Instructions I.B.1 to I.B.6 in early November:

Question: An issuer with less than $75 million in public float is eligible to use Form S-3 for a primary offering in reliance on Instruction I.B.6, which permits it to sell no more than one-third of its public float within a 12-month period. May it sell securities to the same investor(s), with a portion coming from a takedown from its shelf registration statement for which it is relying on Instruction I.B.6 and a portion coming from a separate private placement that it concurrently registers for resale on a separate Form S-3 in reliance on Instruction I.B.3, if the aggregate number of shares sold exceeds the Instruction I.B.6 limitation that would be available to the issuer at that time?

Answer: No. Because we believe that this offering structure evades the offering size limitations of Instruction I.B.6, the securities registered for resale on Form S-3 should be counted against the issuer's available capacity under Instruction I.B.6. Accordingly, an issuer may not rely on Instruction I.B.3 to register the resale of the balance of the securities on Form S-3 unless it has sufficient capacity under Instruction I.B.6 to issue that amount of securities at the time of filing the resale registration statement. If it does not, it would need to either register the resale on Form S-1 or wait until it has sufficient capacity under that instruction to register the resale on Form S-3.

Shareholder Proposals: Apple Must Include "Hire Multiple Comp Consultants" Proposal

Recently, Corp Fin posted this no-action response to Apple about "engage multiple outside independent experts or resources from the general public to reform its executive compensation principles and practices." The retail investor proponent - Jing Zhao - appears to have represented himself in rebutting the company's (i)(3), (i)(6) and (i)(7) arguments. Corp Fin's response to the ordinary business argument is that "the proposal focuses on senior executive compensation."

The proponent's supporting statement cites Professor Thomas Piketty of France, the darling of the income inequality movement. There likely will be more income inequality-oriented proposals in the coming years...

In this no-action letter, Apple also lost its battle to exclude a proxy access shareholder proposal from Jim McRitchie...

Crowdfunding: So Where's the Crowd?

This blog from Montgomery McCracken's Ernie Holtzheimer reviews the first five months of crowdfunding under Regulation CF. So far, the results have been underwhelming:

In its first thirty days, Reg CF got off to a promising start with forty companies raising a total of about $2 million. Although the total amount of money raised was not large by Uber's standards, the number of offerings was more than double the amount of Reg A offerings made between 2009 and 2012. Since the first month, however, only ten more companies have filed a Reg CF offering, leading to the question - where is the crowd?

Reg CF's critics point to its $1 million funding cap as a reason for this lackluster performance. And some companies seem to be opting to use new Reg A+ - with its much higher funding limits - instead of Reg CF.

Delaware Says "No" to Director's Books & Records Request

Every now & again there's a case that isn't likely to have a big practical impact, but is worth noting just because it exists - and the Delaware Chancery Court's recent decision in Bizarri v. Suburban Waste Services is that kind of case. Most corporate lawyers believe that directors have a virtually unlimited right to access books & records. As this blog from Francis Pileggi notes, it turns out that there are some limits after all:

This opinion provides a rare instance in which the court denies a director unfettered access to the books and records of a corporation on whose board he serves, but this case also involves somewhat extreme facts which are not often replicated.

The court found during trial that the director and stockholder, who was also a member and manager of an affiliated LLC, engaged in efforts to compete with and inflict reputational harm on the entities. The plaintiff's actions in that regard were "driven by his intense hatred of the entities' other two owners and principals." Together with the familial relationship of the plaintiff with one of the entities' main competitors, it makes the "prospect of the plaintiff misusing the books and records both real and troubling."

There's a strong presumption in Delaware that a director is entitled to "unfettered access" to books & records - and it's up to the company to demonstrate an improper purpose. This is one of the rare cases where the company was able to meet that burden.

Insider Trading: CEO Has Right to Remain Silent & Make One Earnings Call

In this edition of "Strange But True Corporate Stories," we present Hexagon - a Swedish company that held its quarterly earnings call last week. The company had good news to report - sales & earnings were both up. Was there any bad news? No, nothing really. . .well . . .maybe there's this one tiny issue that wasn't worth mentioning during the call:

Swedish measurement technology firm Hexagon has defended the time it took to announce the arrest of its chief executive for alleged insider trading after it came to light he was under arrest during last week's earnings call with analysts.

After being detained in Sweden on Oct. 26, Ola Rollen was allowed by the Swedish Economic Crime Authority to present Hexagon's third-quarter results in a conference call on Oct. 28, the agency told Reuters on Tuesday, adding two of its police officers were with Rollen during the call. Analysts on the call were not told Rollen had been arrested or that police were in the room.

The company finally announced - three days after the conference call - that authorities had accused its CEO of insider trading in connection with an investment in a Norwegian company.

John's favorite part of this story is the idea of two police officers sitting with the CEO while he was on the conference call. John is sorry, but he can't get the picture of Joe Friday & Bill Gannon out of his head.

Brexit: UK Parliament Must Okay EU Withdrawal

These memos in our "Europe" Practice Area address the recent UK High Court decision to require the UK government to seek approval of British Parliament before notifying the EU of its intention to withdraw. A few weeks ago, the High Court held that the government did not have the constitutional authority to notify the European Council of the UK's decision to leave the EU without the prior approval of Parliament. The UK government has announced that it intends to appeal the judgment to the UK Supreme Court. That appeal will be heard in December, with a ruling expected in January...

Brexit: Topics for Audit Committees & Management

This Grant Thornton memo gives some advice to audit committees about the topics that they should discuss with management as a result of Brexit. These include:

- Does management have a strategic plan to manage risks and lessen negative effects? Has the organization done a thorough Brexit risk assessment? What hedging strategies are in place for foreign exchange exposure and how does Brexit affect those strategies? To what extent is the company exposed to debt denominated in pounds sterling?

- How will Brexit affect the carrying value of assets or business units exposed to the UK or EU?

- Will the company see significant translation gains and losses in terms of functional currency? Are foreign subsidiaries using the right functional currency?

- How will Brexit affect historical guidance? How will Brexit affect customers and suppliers and the company's interactions with them? How will this affect existing guidance?

- What are the implications for communications? How and what does the company plan to communicate to stakeholders about the effect of Brexit - including investors, customers, vendors and employees?

- How will Brexit affect the company's financial statements? For entities that have significant exposure, what should they expect to see in the June 30 quarter, and what might they see going forward?

The audit committee & management should also discuss what kind of additional regulatory compliance and reporting burdens might result from Brexit, as well as whether there are potential benefits - such as lower borrowing costs resulting from a delay in Fed interest rate increases.

NYC Triple Threat on That's So Random

This is a fun one! In this 22-minute podcast, our NYC trio - Roshni Banker Cariello and Melissa Glass of Davis Polk, as well as Connor Kuratek of Marsh & McLennan - discuss the latest in random things about life, including:

1. Hometowns
2. Office sizes
3. Deal cubes
4. TV shows about NYC
5. Holiday parties
6. Pencils

Broc & John: Dodd-Frank Reform

Broc & John had a lot of fun taping our 3rd "news-like" podcast. This 6-minute podcast is about efforts in Congress to repeal Dodd-Frank & dinosaurs. We highly encourage you to listen to these podcasts when you take a walk, commute to work, etc. And as we tape more of these, it's inevitable we'll figure out how to be more entertaining...

Broc & John: Shareholder Proposal Reform

Broc & John had a lot of fun taping our 4th "news-like" podcast. This 8-minute podcast is about shareholder proposal reform & sports blogs. We highly encourage you to listen to these podcasts when you take a walk, commute to work, etc. And as we tape more of these, it's inevitable we'll figure out how to be more entertaining...

November-December Issue: Deal Lawyers Print Newsletter

This November-December issue of the Deal Lawyers print newsletter was just posted - & also sent to the printers - and includes articles on:

- Disclaimers & Limits on Claims Outside of the Contract
- Due Diligence: Patient Protection & Affordable Care Act Considerations
- FCC Licenses: The Forgotten Stepchildren of M&A
- Reverse Break-Up Fees: Move Along, Nothing to See Here
- The Takeaways: Two Chancery Decisions on Informed, Uncoerced Stockholder Approval

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. 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.

People: Who's Doing What & Where

SEC Chair White to Step Down In January

In mid-November, the SEC announced that Chair Mary Jo White will leave her position when President Obama leaves office on Inauguration Day. Last week, Broc blogged that Mike Piwowar will almost certainly become interim Chair since he's the sole sitting GOP Commissioner. Former Commissioner Paul Atkins is heading the financial regulatory transition team for the incoming Administration - and speculation about White's possible successor has already begun...

SEC's Budget Request: Not Going Anywhere? HQ May Move?

Given how the SEC may soon dramatically change - President-Elect Trump will be selecting three new Commissioners right off the bat! - Broc read SEC Chair White's testimony before the House in mid-November about the SEC's budget with curiosity. For the 2018 fiscal year, the SEC's request is $2.227 billion, a $445 million increase over the 2017 request - a 25% increase. Approval of this request isn't likely - as this Gibson Dunn memo notes, the new Administration may seek to reduce, or least stop the growth in, the SEC's annual budget.

Even more interesting was the fact that the SEC's HQ may relocate - here's an excerpt about that:

The current leases for the SEC's headquarters buildings (Station Place I, II, and III) will expire in FY 2019, 2020, and 2021. In accordance with the memorandum of understanding (MOU) between the GSA and the SEC, we have begun work with GSA to begin the procurement process for a new headquarters lease. The SEC is working collaboratively with GSA to develop a package of materials to submit through the prospectus lease process. We have been informed by GSA that the SEC must be prepared to obligate the funds necessary for the build out of a new headquarters, if relocation is required, before a new lease can be executed. GSA's current schedule calls for a new lease to be executed in FY 2018.

Thus, the SEC's FY 2018 authorization request reflected the GSA's estimate at that time for the build-out of which would cover expenses for construction, IT cabling and equipment, security-related equipment, and appropriate GSA fees were we required to re-locate. The estimate will continue to be refined as the prospectus lease process unfolds.

At the SEC, in addition to Chair White, the exodus that occurs when an Administration changes has begun: Trading & Markets Director Stephen Luparello and Enforcement's Chief Litigation Counsel Matt Solomon are the first. And Chief Accountant Jim Schnurr retired, with Wes Bricker taking Jim's spot - Wes has been serving as Interim Chief Accountant since July.

In Corp Fin, Justin Kisner recently left to join the DC office of Skadden.

Conference Calendar

What's New on Our Websites

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