E-Minders July 2015

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 "Half-Price for Rest of '15" No-Risk Trial to see what you are missing. Here are 10 Good Reasons to try us now.

You can subscribe below to receive a complimentary E-Minders subscription - even if you don't subscribe to TheCorporateCounsel.net. Our hope is that once you get to know us, you will understand the true value of a subscription to TheCorporateCounsel.net. Note that subscribers to TheCorporateCounsel.net should sign up below for E-Minders too, as we don't have the e-mail addresses for many people in our community.

Act Now! Our Pair of Popular Executive Pay Conferences: We expect nearly 2000 attendees as usual for our pair of popular conferences - "Tackling Your 2016 Compensation Disclosures" & "12th Annual Executive Compensation Conference: Say-on-Pay Workshop" - to be held October 27th-28th in San Diego and via Live Nationwide Video Webcast on TheCorporateCounsel.net. Act now for the phased-in pricing - which expires August 7th - to get as much as 10% off! Here are the agendas.

2015 Edition of Romanek's "In-House Essentials Treatise": Broc Romanek has wrapped up the 2015 Edition of the definitive guidance on securities law for the in-house lawyer and it's done — Romanek's "In-House Essentials Treatise." With over 1000 pages—spanning 18 chapters—you will need this practical guidance for the challenges ahead.

Upcoming Webcasts on TheCorporateCounsel.net: Join us on July 14th for the webcast - "Nasdaq Speaks '15: Latest Developments and Interpretations" - to hear senior members of the Nasdaq Staff - Arnold Golub, David Strandberg, Stanley Higgins and Cyndi Rodriguez - discuss all the latest.

And join us on July 16th for the webcast - "Cybersecurity: Governance Steps You Need to Take Now" - to hear Weil Gotshal's Paul Ferrillo & Randi Singer, as well as PhishMe's Jim Hansen, get into the nitty gritty of how cybersecurity is now a huge governance concern and what you should be doing (including how to best train employees).

And join us on September 17th for the webcast - "Whistleblowers: What Companies Are Doing Now" - to hear the Chief of the SEC's Office of the Whistleblower, Sean McKessy - as well as Goodwin Procter's Jennifer Chunias, DLA Piper's Deborah Meshulam and K&L Gates' Mike Missal, as they explore the latest developments at the SEC - and the issues that companies should consider when adopting changes to their whistleblower policies and procedures.

And join us on October 6th for the webcast - "Regulation A/A+: Developing Market Practices" - to hear Morrison & Foerster's Marty Dunn & Dave Lynn, as well as Greenberg Traurig's Jean Harris and Locke Lord's Stan Keller, as they look at Regulation A/A+'s developing market practices and discuss how these new offering alternatives stack up against traditional offering techniques.

And join us on November 10th for the webcast - "How to Draft Meaningful Sustainability Reports" - to hear Lou Coppola of the Governance & Accountability Institute, Kate Kelly of Bristol-Myers Squibb and Pam Styles of Next Level Investor Relations explain the keys to drafting sustainability reports that are meaningful to investors & other constituents and a "how to" list of things you should be aware of when drafting.

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 DealLawyers.com: Join us on July 21st for the webcast - "Selling the Public Company: Methods, Structures, Process, Negotiating, Terms & Director Duties" - to hear Greenberg Traurig's Cliff Neimeth, Richards Layton's Ray DiCamillo and Richards Layton's Mark Gentile analyze the legal and commercial parameters of what you can - and can't do (or should and shouldn't do) - when shopping and agreeing to sell control of a public company are evolving due to judicial decisions, legislative developments and market conditions.

And join us on September 16th for the webcast - "Evolution of M&A Executive Pay Arrangements" - to hear Morgan Lewis' Jeanie Cogill, Sullivan & Cromwell's Matt Friestedt, Cravath's Eric Hilfers and Wachtell Lipton's Andrea Wahlquist cover the latest in executive compensation arrangements in deals.

And join us on November 5th for the webcast - "An M&A Conversation with Myron Steele & Jack Jacobs" - to hear about the latest state law developments from former Delaware Supreme Court Chief Justice Myron Steele and former Delaware Supreme Court Justice Jack Jacobs.

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.

Pay Ratio Rumor: Will the SEC Adopt Rules By August 5th?

We've had false start rumors before about when the SEC will adopt pay ratio rules - but this time it feels different given the heightened political attacks against the SEC. The latest is this Bloomberg article indicating the rules will be adopted by August 5th, which the article notes was not confirmed by the SEC. It's according to "two people familiar with the matter who asked not to be named."

That's right before our August 7th deadline for our last discounted rate for our big "Executive Pay Conference" in San Diego and by video webcast. Act now!

Clawbacks: SEC to Propose Rules on July 1st!

In late June, the SEC posted the Sunshine Act notice to announce that it will propose the clawback rules required by Dodd-Frank on Wednesday, July 1st!

SEC Chair Speaks: Universal Proxy Ballots Coming?

As reported by this WSJ article, SEC Chair White delivered this speech in late June at the Society's National Conference. In her speech - which focused on proxy-related matters - Chair White advised that she "asked the staff to bring appropriate rulemaking recommendations before the Commission on universal proxy ballots." A universal proxy ballot provides security holders a means to vote for management & proponent nominees on a single ballot in an election contest. This allows a security holder to mix & match votes between nominees of the company & the proponent - without attending & voting in person at the meeting. Chair White also encouraged companies & proponents to voluntarily use "some form" of universal proxy ballot while the SEC Staff prepares its rulemaking recommendation. Here's an excerpt from her speech:

All of the participants [of a roundtable held on ways to improve the proxy voting process] agreed that if the Commission were to revise the proxy rules to implement a universal proxy ballot, the "devil would be in the details." Questions include when a universal ballot could be used, whether it would be optional or mandatory and under what circumstances, whether any eligibility requirements should be imposed on shareholders to use universal ballots, what the ballot would look like, and whether both sides must use identical universal ballots.

Chair White's speech also covered the topics of preliminary voting results, "unelected" directors & shareholder proposals - which included comments on Rule 14a-8(i)(9) relating to proxy access proposals.

Proxy Disclosure: Call for "1st Annual Awards" Nominations

With so many companies now improving their proxy disclosures, we've decided to hold an annual contest for proxy disclosures. The deadline for nominations is Wednesday, July 1st. The winners will be decided by you - via anonymous popular voting. In three weeks, I will post the nominees to be voted upon in the following 14 categories - in the meantime, please submit your nominations by emailing them to me.

Here are three things to note (see our full set of FAQs):

- Self-nominations permitted
- Max of 3 nominations per company
- No need to explain why you're nominating a proxy for a category(ies). Just let us know the company name and the category(ies) for which it is being submitted.

Here's the categories:

1. Best Overall Proxy (Combined Online & Print)
2. Best Print Proxy - Large Cap
3. Best Print Proxy - Mid-to-Small Cap
4. Best Online Proxy - Large Cap
5. Best Online Proxy - Mid-to-Small Cap
6. Most Improved Print Proxy
7. Most Improved Online Proxy
8. Most Persuasive Supplemental Letter/Additional Soliciting Materials
9. Best Executive Summary
10. Best CD&A
11. Best CD&A Summary
12. Best Shareholder Engagement Disclosure
13. Best Director Bios Disclosure
14. Best Shareholders Letter

Regulation A/A+: Corp Fin Issues 11 New CDIs

In late June, Corp Fin issued 11 new CDIs related to the recent effectiveness of new Regulation A/A+. Here's a rundown of the topics:

- Question 182.01: Filing of non-public draft offering statements as exhibits
- Question 182.02: Confidential treatment requests
- Question 182.03: Definition of "principal place of business"
- Question 182.04: Eligibility of companies with suspended Exchange Act reporting obligations
- Question 182.05: Eligibility of voluntary filers
- Question 182.06: Eligibility of wholly-owned subsidiaries of Exchange Act reporting companies
- Question 182.07: Business combination transactions
- Question 182.08: Balance sheet requirements of recently created entities
- Question 182.09: Test the waters
- Question 182.10: Federal preemption
- Question 182.11: Engagement of registered transfer agents

Corp Fin also deleted two Securities Act Form CDIs - 128.01 relating to paper filings & 128.03 relating to delaying notations - that are no longer applicable under the new Regulation A/A+ rules.

Regulation A: New/Revised Forms Available

Since the new Regulation A/A+ took effect on Friday, June 19th - and the SEC denied Montana's request to stay its implementation - the SEC has posted these 6 new/revised forms (& Form 2-A has been rescinded):

- Form 1-A: Regulation A Offering Statement
- Form 1-K: Annual Reports and Special Financial Reports
- Form 1-SA: Semiannual Report or Special Financial Report Pursuant to Regulation A
- Form 1-U: Current Report Pursuant to Regulation A
- Form 1-Z: Exit Report Under Regulation A
- Form 8-A: Registration of Certain Classes of Securities Pursuant to Section 12(b) or (g)

These new/revised forms are available on our "SEC Rules & Regulations" page. In a few months, we're holding a webcast - "Regulation A/A+: Developing Market Practices" - to show you how market practice has developed...

SEC Issues New Pay Ratio Analysis

The SEC is now moving fast on the last of its Dodd-Frank rulemakings! In early June - as noted in this press release - it released additional analysis from its "DERA" (former nickname of "RiskFin") Division related to its pay ratio proposal. Comments on this new analysis are due by July 6th (coincidentally, the same deadline as the P4P proposal). As we blogged in early June, the SEC has become more cautious during its rulemaking process since a 2011 court decision struck down part of the SEC's proxy access rule after finding the economic analysis was incomplete - so the practice of releasing additional economic analysis for public comment is becoming fairly common.

In addition to reading this review of the SEC's new analysis (& this MarketWatch piece), check out my example that helps illustrate the SEC's new findings:

- If the standard deviation of compensation (meaning the variability among positions) is 55%, and the exclusion of non-US, part time and seasonal jobs results in the elimination of 20% of the workforce from the calculation, the ratio would decrease by 15%

- Thus, a ratio of 300:1 would become 255:1

- If the standard deviation is only 25% - and the exclusion removes 20% of the workforce from the calculation - the impact is only 6.5%, thus the 300:1 ratio might drop to 281:1

Corp Fin: "No Review" Status of Registration Statements Now Publicly Available

Recently, Corp Fin announced a new policy that the Staff will publicly release "no review" letters for registration statements that are not selected for review. These "no review" letters will be posted on Edgar in a company's "correspondence" stream. A company and its advisors would already know about a registration statement not being selected for review - so this move really only benefits third parties who wanted to know.

Some folks want Corp Fin to issue "no review" letters for preliminary proxy statements since the existing practice is that companies can presume that no comments from Corp Fin are forthcoming if they don't hear from the Staff within 10 calendar days of filing, per Rule 14a(6)(a). Learn more about this process in our "Preliminary Proxy Statements Handbook."

On the other hand, most folks like the fact that the Staff is silent and doesn't issue a "no comments" letter if its '34 Act filings are reviewed and the Staff has no comments. In other words, it's possible that your 10-K was reviewed but the Staff had no comments - but you wouldn't know that since they never contacted you. Typically, the '34 Act review is only of the company's financials, conducted by Corp Fin's accounting staff. This review is necessitated by Section 408 of Sarbanes-Oxley, which mandates that every company's periodic disclosures must be reviewed at least once every 3 years.

The rationale for not wanting a "no comments" letter is that you don't want the CFO and Controller's office getting excited and thinking they are doing a great job because Corp Fin didn't issue any comments. Better to keep them on their toes...

Whistleblowers: What Should You Do Now With Your Agreements?

Parsing through the dozens of memos about the SEC's recent KBR action, law firms seem to vary about what you should be doing now with your agreements. The positions fall into one of these three camps: (a) KBR settlement language is sufficient; (b) KBR settlement language is overly broad; or (c) not sure at all what is sufficient. The SEC's Enforcement Division seems to still be looking at - and asking - for agreements to review - but I believe that will settle down soon enough. We've just calendared a September webcast that includes the SEC's Chief of the Whistleblower Office Sean McKessy to help us sort through these choices (and more).

Meanwhile, here's an excerpt from this WSJ article entitled "Whistleblowers Find SEC Rewards Slow and Scarce":

The SEC program pays out based on sanctions that have been collected, rather than the amounts imposed by a judge that are up to the agency to recover. That can leave whistleblowers with nothing to show for their efforts if the money has vanished in the fraud or if the perpetrator has fled beyond U.S. jurisdiction. So far, more than 10,000 tips have been submitted to the SEC whistleblower program, about 300 people have applied for awards and 17 payouts have been made, according to SEC data. An SEC spokeswoman declined to say how much money has been collected for any of the 658 enforcement actions the agency's website lists as being potentially eligible for awards. She also declined to say how many, if any, of the pending award claims relate to cases in which no bounty is available, even if the claim is approved.

Proxy Access: 5 Law Firm Comment Letter

In mid-June, five law firms - which handle the bulk of the Rule 14a-8 work out there - submitted this comment letter to the SEC regarding the agency's ongoing review of the shareholder proposal process for no-action requests made under Rule 14a-8(i)(9) (ie. conflicting proposals).

There are 5 comment letters posted so far - including this one that includes a blog that I posted from an anonymous member as an attachment. Finding these comment letters can be tricky since there is no proposed rule - they are housed under the Corp Fin page, then head to the "Current Topics" box on the right side and you will see a link to "Share Your Views" on the Staff review of conflicting shareholder proposals - which has a link to "submitted comments" at the bottom...

Here's the latest status check into how proxy access shareholder proposals fared during this proxy season.

Political Spending Disclosure: House Bill Would Bar SEC From Adopting Rules

In mid-June, the House Appropriations Committee approved the "2016 Financial Services and General Government Appropriations" bill, which includes some items that don't pertain to funding the SEC. [It's a shocker that Congress would do that!] In addition to not giving the SEC an increase in funding (as we've blogged before), Section 625 of the bill prohibits the SEC from adopting a rule that would require public companies to disclose their political spending. We'll see if that provision survives as this bill winds its way through the sausage machine.

Meanwhile, as noted in this article, over 20 advocates sent a letter to President Obama requesting that the upcoming SEC Commissioner be filled by folks who support corporate political spending disclosure rulemaking. And this article cites a new report - and petition - that supports the view that the next new Commissioner shouldn't have ties to entities that the SEC regulates...

"Bad Actor" Waivers: Now for Forward-Looking Statements

In early June, SEC Commissioner Piwowar gave a speech supporting waivers relating to a company's' ability to rely on the PLSRA statutory safe harbor for forward-looking statements. Here's a related blog by Steve Quinlivan:

The Securities Act (Section 27A(b)) and the Exchange Act (Section 21E(b)) exclude reliance on the safe harbor for forward-looking statements if, among other things, the statement is made with respect to an issuer that has, within the past three years, been convicted of any felony or misdemeanor described in paragraphs (i) through (iv) of Section 15(b)(4)(B) of the Securities Exchange Act of 1934. The Securities Act and the Exchange Act each provide the disqualifications may be waived "to the extent otherwise specifically provided by rule, regulation, or order of the Commission." The SEC granted this waiver to Barclays PLC to continue be able to continue to rely on the safe harbor for forward looking statements as a result of a guilty plea for a violation of the Sherman Antitrust Act.

Meanwhile, another day, another waiver dissent from a SEC Commissioner...

Clawbacks: SEC Planning to Propose Rules Soon!

The big news comes from this WSJ article, which says that the SEC will "soon" propose the clawback rules required by Section 954 of Dodd-Frank. If it happens as rumored, this surely is Exhibit A that the SEC's Reg Flex Agenda is meaningless - because the SEC's new Reg Flex Agenda had an April '16 date for this activity. Here's Broc's quote in the WSJ piece:

Broc Romanek, a former SEC attorney who edits the websites CompensationStandards.com and TheCorporateCounsel.net, said the SEC should make sure it implements the new clawback requirements in a way that makes practical sense for companies and allows them discretion in determining whether it is economically efficient for them claw back pay, given legal, administrative or other expenses that may be involved. "It would not be ideal if a company is forced to spend more resources clawing back than [what] they would get in return," he said.

The critical issue is whether the proposed clawback rules will be principles-based or prescriptive (remember how the recent P4P rule proposal was proscriptive, which was surprising to some). "Principles-based" means "just disclose what you have that you treat as a clawback." And there are lots of tough questions about how a financial misstatement impacts compensation that may be indirectly - but not directly - based on financial performance, such as stock options (ie. how much is the stock price influenced by a restatement, as compared to performance criteria that is tied to EPS which is much more directly influenced). Remember this blog from last year: "Clawbacks & The New Revenue Recognition Rules: On a Collision Course?"

Whether the proposal is prescriptive or principles-based will in turn impact how much the rules drive a certain type of conduct - the more prescriptive, the more the SEC is making a judgment call and companies will have to come in line with what the SEC determines to be encompassed. And remember as to timing, the SEC's rulemaking will just be the first step - because SEC will be proposing rules that the stock exchanges then have to adopt standards to implement...

With all this SEC rulemaking in the compensation arena, we've rejiggered the two-day agenda for our big pair of "Proxy Disclosure/Executive Pay Practices" conferences - 2000 attendees in-person and more online - for which a 10% discount expires on August 7th! Register now!

SEC Considers Updating "Accredited Investor" Definition

You might recall that Dodd-Frank requires that the SEC to review the "accredited investor" definition for natural persons beginning in 2014 and every four years thereafter. As part of its review process, the SEC has received a significant number of recommendations from comment letters and from two SEC advisory committees. While the vast majority of commenters recommended not changing the current definition, others recommended raising the financial thresholds cited in the definition or adjusting them for inflation. Still others offer alternate recommendations, including adding a new category for financial sophistication or allowing a percentage of income or net worth to be used in qualifying private placements. This memo does a great job of summarizing all this activity...

Also check out this Cooley summary of the latest meeting of SEC's Advisory Committee on Small & Emerging Companies, focusing on the SEC's disclosure effectiveness project.

Restatements: Frequency Steady & Severity Low (But Class Actions Increasing)

Here's some thoughts from Baker & McKenzie's Dan Goelzer: Recently, Audit Analytics released its annual report on financial restatement trends, "Financial Restatements 2014-A Fourteen Year Comparison." The study concludes that the absolute number of restatements is constant and the severity of restatements is relatively low, although there is a trend toward more restatements by large public companies. According to the report synopsis and AA's blog:

- During the last five years, the number of public company restatements has remained essentially flat. Restatements peaked at 1,842 in 2006. By 2009, restatements had fallen to 761. Restatements rose to 836 in 2010 and have remained near that number through 2014.
- While the overall number of restatements is relatively constant, the number of accelerated filers - the largest public companies - announcing restatements is rising. In 2009 and 2010, 171 accelerated filers restated. That number has increased each year since 2010. In 2014, 309 accelerated filers restated.
- The severity of restatements remained low in 2014, consistent with AA's findings during the past several years. In 2014, the average public company restatement resulted in an income adjustment of $1.9 million, the lowest adjustment amount in eight years. In addition, AA's blog states that "virtually all" of the severity indicators tracked by Audit Analytics remained low in 2014. The severity indicators are negative impact on net income; average cumulative impact on net income per restatement; percentage of restatements with no impact on income statement; average number of days restated; and average number of issues identified in restatement.

A somewhat different perspective emerges from a report released by Cornerstone Research. That report, entitled "Accounting Class Action Filings and Settlements—2014 Review and Analysis," finds that securities class actions with accounting-related allegations increased in 2014; 69 new accounting cases were filed, an increase of 47 percent over 2013. (Cases are considered "accounting cases" if they involve allegations related to Generally Accepted Accounting Principles (GAAP) violations, auditing violations, or weaknesses in internal control over financial reporting.) Other highlights of the Cornerstone report include:

- More than one in four of the accounting class action complaints referred to an SEC inquiry or action. This is the highest level of private accounting suits that parallel SEC enforcement cases since Cornerstone began tracking this variable in 2010.
- Accounting cases involving restatements increased to the highest level in seven years - both in terms of the number of cases filed (29) and as a percentage of total accounting cases (42 percent).
- Since 2010, the majority of accounting cases have included allegations of internal control weaknesses. In 2014, 60 percent of cases filed involved internal control weaknesses.
- The "Disclosure Dollar Loss Index" for accounting cases involving restatements increased to its highest level since 2005. The Disclosure Dollar Loss Index is a measure of the decline in market capitalization at the end of the class period.

In Cornerstone's press release, Dr. Elaine Harwood, a Cornerstone Research vice president and head of the firm's accounting practice, offered this explanation for the increase in class action litigation alleging accounting violations: "The increase appears to be, at least in part, a result of the SEC's heightened focus on accounting-related fraud as demonstrated by the substantial growth in accounting case filings that refer to inquiries or actions by the SEC." As to the reasons why more class actions relating to restatements were filed in 2014, Dr. Laura Simmons, a Cornerstone Research senior advisor, observed: "The increase in filings of cases involving restatements is consistent with our finding of a relative increase in negative stock price movements surrounding restatement announcements in 2014 as compared to recent years."

Comment: The Audit Analytics study is consistent with other research indicating that the reliability of financial reporting has increased post-Sarbanes-Oxley. However, as Cornerstone's research indicates, market-moving restatements, while rarer than in earlier years, still can have severe consequences, both in terms of SEC action and private litigation.

Court Finds SEC's Use of ALJ Likely Unconstitutional

The debate over whether the SEC's use of administrative law judges in enforcement proceedings has ratcheted up a few notches. In Hill v. SEC, the US District Court for the Northern District of Georgia preliminarily enjoined the SEC from conducting the administrative proceeding brought against an alleged insider trader, finding a substantial likelihood that he will succeed on the merits of his claim that the SEC has violated the Appointments Clause of Article II of the US Constitution.

As noted in this blog, the Appointments Clause requires that "inferior officers" be appointed by the President, department heads or courts of law. SEC administrative law judges are not appointed by the SEC - they are hired by the SEC's Office of Administrative Law Judges, with input from the Chief Administrative Law Judge, human resource functions and the Office of Personnel Management. The Court looked to the powers of the administrative law judge which are functionally comparable to that of a judge in making its decision.

As noted in this blog, this WSJ article indicated that the SEC will likely resolve this issue by having the Commissioners appoint its ALJs directly. But in the meantime the court's ruling could spur similar challenges to the validity of current and past SEC proceedings - but the US government is fighting this new decision.

Are Partisan Politics Destroying the SEC?

This is a challenging - and complex - question. A fair answer truly can't be given unless you happen to work right now at the SEC at the highest levels. But we still can give our 10 cents without the benefit of true inside baseball. Broc goes out on a limb with an answer of "not really 'destroying,' but things aren't good - and not necessarily for the reasons expressed by many today." Here's what Broc means by that:

1. The Commissioners Certainly Are More Rebellious - SEC Commissioner unity is a thing of the past. Over the past decade or so, each succeeding slate of Commissioners have publicly fought more and more. As Broc blogged before, back when he worked for a Commissioner in the late '90s, Chair Arthur Levitt rarely would take a matter to a vote unless he knew he had a 5-0 vote in his pocket. And he certainly wouldn't have tolerated public displays of contention. There occasionally were heated debates behind the scenes - but Broc doesn't recall any of that spilling out into the open. Chair White - just like Chair Schapiro before her - doesn't have that luxury. Oral & written dissents are a regular occurrence; not a rarity.

2. Rebellion Isn't Necessarily a Bad Thing - Broc's observations about Commissioner dissent above doesn't mean that it's a bad thing. We're just noting a trend. Since it only takes three Commissioner votes to approve something, the fact that there are two dissenting votes - or even that a Commissioner is vocal in expressing displeasure - shouldn't impact the agency's daily operations. Of course, divisive dissent does have an impact on Staff morale - and certainly on how the public views the agency. But in terms of rulemaking & pursuing Enforcement cases, etc., that alone should be a small speedbump given the limited power that Commissioners have by themselves (learn more about that from the transcript of our webcast: "How the SEC Really Works"). You certainly don't want Commissioners acting as rubber stamps.

3. Congress Is The Primary Partisan Problem - Partisan politics has seeped from Capitol Hill down into all the federal agencies - and the SEC is no exception. It used to be that a Congressional Committee Chair might only occasionally ask something of an agency head. Now it's all the members of a Congressional Committee seeking an audience, with a greater frequency. During Chair Schapiro's term, we blogged several times about the abuse - asking SEC officials to constantly testify in hearings. It's hard to get real work done when you are constantly preparing to testify - or to respond to lengthy written requests from Congress. These shenanigans continue. Very little of this is driven by a desire to protect investors or benefit our markets. Most of it is purely for "show" - or an attempt to disrupt how the agency functions.

4. Rulemaking Will Always Be Hard Going Forward - This WSJ article entitled "SEC Bickering Stalls Mary Jo White's Agenda" from early June provides us with some nice statistics for this point. It notes how Chair White has brought a record 755 enforcement actions in the latest fiscal year - but only finalized 7 rules in '14 (compared to an average of 17 per year over the past decade). The largest factor for this rulemaking dearth may be how hard it is to get a rule over the line since the DC Circuit's 2011 proxy access decision in the Business Roundtable/Chamber lawsuit. Rulemaking was hard before that - now the requisite enhanced economic analysis & other new mandated processes seems to increase the difficulty by an untold magnitude.

And things are bound to get worse before they get better. Congress continues to explore ways to meddle in affairs for which they have limited expertise. The latest is the "Regulation Sensibility Through Oversight Restoration Resolution of 2015," which establishes a joint select committee charged with reviewing how agencies adopt rules - including holding hearings on how to reduce regulatory overreach. The SEC could only get 7 rules adopted last year - is that overreach? The circus plays on...

Delaware House Approves Curb on Fee-Shifting Bylaws

Here's news from the Delaware Law Weekly (also see this memo):

The state House of Representatives on June 11, unanimously approved SB 75, the annual package of amendments to the Delaware General Corporation Law, which included a measure that would prevent stock corporations from enacting bylaws that impose attorney fees and costs on plaintiffs who lose after filing lawsuits alleging corporate waste or wrongdoing. The measure now goes to the desk of Gov. Jack Markell, who is expected to sign it into law.

"SB 75 helps preserve the balance between shareholders and management and ensures that shareholders in Delaware corporations have access to the Court of Chancery," said Kelly Bachman, Markell's press secretary. "The governor would like to thank the Corporation Law Council for its continued efforts to improve Delaware law and preserve Delaware's place as the leading state of incorporation."

Approval—which required a two-thirds vote—came on a 40-0 vote with one state representative absent.

Chief Deputy Secretary of State Richard J. Geisenberger came to the chamber before the vote to answer lawmakers' questions and said its drafters were confident that the bill would maintain the delicate balance of Delaware's franchise in corporate regulation, which he said is worth $1.1 billion annually to the First State. The state should aim, Geisenberger said, "to strike a balance between the attractiveness of our corporate statute to managers and [the needs of] raising capital from shareholders."

He added that he did not think banning stock corporations from adopting fee-shifting bylaws posed a risk to Delaware's attractiveness as a state of choice for incorporation. He stressed that another key provision of the act allows corporations to state in their bylaws that claims under the DGCL be brought only in the courts of Delaware.

More on "Brain-Teaser: '11:59pm or 12:01am' for Contracts?"

People love the brain-teasers. We received many emails in response to Broc's blog about a contract that tackles the "what day is it" query. Here are some of those responses:

- Ken Adams has a new blog on the topic entitled "A New Provision Specifying a Drafting Convention Relating to Time"

- Whitney Holmes of Dorsey & Whitney notes: Oh dear, the problem of the infinitesimal.... I don't advocate bringing back the stake, but after 400 years I wish this kind of question would go away.

Midnight doesn't really exist—it is only in the mind—because there is no indivisible unit of time. Midnight (in the sense of 12:00 o'clock at night) can be infinitely subdivided into seconds, tenths of seconds...nanoseconds, picoseconds and so on. What about 12:00:00.0000001 "midnight"? Still a.m. in my view and not heretical. See, Alexander Amir, Infinitesimal: How a Dangerous Mathematical Theory Shaped the Modern World, Scientific American / Farrar, Straus and Giroux (April 8, 2014). Because every unit can be subdivided into smaller units, any time that starts with a 12:00 has to be the beginning of the next cycle (the next day, in the case of midnight) or you would need an infinite string of zeros, which is impossible because infinity is also a concept that only exists in the mind. Therefore, nothing can happen "at midnight" unless midnight is understood to be 12:00 plus some minute increment of time. As a result, Midnight is 12:00 a.m. the next day. QED

Of course, that results in "12:00 noon" being "p.m.", or "afternoon," which is pleasantly paradoxical, not that anybody really cares. Id.

This is reminiscent of the argument that came up at the turn of the century regarding whether 2000 or 2001 was the first year of the new century. Ugh.

- Consecutive days simultaneously begin and end at midnight. It's similar to the singularity principle with regard to black holes where relativistic equations break down because at the singularity, you reach a theoretical infinitesimal point where an infinite mass exists. The whole "boundary" concept proposed by others makes it seem like time, or more correctly space-time, is not continuous or that you could even discern exactly where the boundary lies. You could never measure the precise moment of midnight, it's impossible because it's a singularity. It's not dissimilar from attempting to measure the length of an island's coastline - as the size of your ruler decreases and approaches 0, the island's coastline approaches infinity (there is an interesting book on fractals I read long ago that dives into this idea, which interestingly enough showed up on the LSAT exam I took - I guess that section did not truly test my reading comprehension because I know the answers to the questions based on prior substantive knowledge!).

The response that a day begins a "nanosecond" (10^-9 seconds) after midnight is not correct because that would mean that 1 picosecond (10^-12 seconds)after midnight would still be the prior day, which obviously doesn't make sense. If you want to get really nerdy, one could analyze the impact of different inertial frames of reference on people's perception of time under the special theory of relativity.

The practical solution is that if you want something to end at the end of a particular day, use 11:59:59, because it is unlikely that something could happen in the one second between this time and 12:00 that would cause a different result under a contract. For the same reason, I'd also use 12:00:01 for the same reason for something that must begin at the beginning of a certain date. If the one second is problematic for some reason, just carry the specified time out to more significant digits. At some point, we just need to accept an imperfect but practical solution to a problem that is impossible to solve perfectly.

- Pugh v. Duke of Leeds (1777) 2 Cowp. 714 per Lord Mansfield: "'Date' does not mean the hour or the minute, but the day of delivery and in law there is no fraction of a day." In Lester v. Garland (1808) 15 Ves. 248 Sir William Grant MR said "Our law rejects fractions of a day more generally than the civil law does. the effect is to render the day a sort of indivisible point."

Thus a day begins at the instant of midnight passing, and ends at the following midnight. The parties can of course agree to define a day differently, and for banking reasons a day is often defined as ending at 1pm or 2pm (as money transmitted later may not reach the other party until the next day).

In English law, this holds good still - although there are some variations according to custom and circumstance. However, the starting point under US law is, presumably, Lord Mansfield in 1777, with whatever variations were determined by US courts or statutes since 1790 (or thereabouts)."

- There is no such thing as 12 am or pm. It is either 12 noon or 12 midnight.

Survey Results: Hedging Policies

Thanks to those that participated in this survey - a hot topic! Below are the results from our recent survey on hedging policies:

1. Does your hedging policy cover?
- Only officers? - 3%
- Only officers & directors? - 43%
- Officers, directors & employees? - 54%

2. Does the hedging policy cover?
- Only company securities granted by the company as compensation? - 3%
- All company securities without regard to how acquired? - 97%

3. If your company doesn't currently cover all employees under a hedging policy, do you expect to expand it now to all employees?
- Yes - 27%
- No - 73%

4. Do you think there is a way to effectively enforce a broad hedging policy?
- Yes - 8%
- No - 61%
- Not sure - 31%

Take a moment to participate in our "Quick Survey on Board Portals" and our "Quick Survey on Annual Meeting Conduct."

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:

- Spencer Stuart Addresses Board "Refreshment"
- Avoiding & Managing Boardroom Disputes
- Using COSO to Assess & Manage Cyber Risks
- Form 10-K Preparation Tips
- How to Proactively Tackle the Director Tenure Issue
- Code of Ethics/Conduct Primer
- Audit Committee Role in Improving Disclosure
- CEO Succession Planning Guidance for CEOs & Boards
- Addressing Key Governance Challenges in International Markets

More on the "Proxy Season Blog"

- Sample: Proxy Statement Reg Summary Sheet
- Shareholder Proposals: Corp Fin Allows Exclusion of "Review of Company's Voting Policies" Proposal
- More Debate: Harvard's "Shareholder Rights Project"
- Trinity v. Wal-Mart: Serious Implications for the Ordinary Business Exclusion
- Shareholder Proposals: Playing Games With Submission Deadlines
- Shareholder Proposals: Review of Proxy Voting on ESG Issues
- Proxy Access: Whole Foods Responds to Shareholder Proposal With Own Alternative
- An Interview with Fidelity Worldwide Investments
- Group Presses on Political Spending Disclosures
- 10-K Wrap Design: Five Tips to Do More with Less

People: Who's Doing What and Where

Mary Shapiro - former Chair of the SEC - has joined the London Stock Exchange Group's Board of Directors.

Conference Calendar

What's New on Our Websites

Among other new additions, during the last month we have:

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