TheCorporateCounsel.net

May 25, 2018

An Anti-ESG Campaign Begins

Here’s something that I blogged yesterday on our “Proxy Season Blog”: The National Association of Manufacturers (NAM) and other conservative-leaning organizations have launched a new campaign, the “Main Street Investors Coalition” – with a multi-million dollar budget – to limit the influence of large asset managers that they feel wield too much power on ESG initiatives. As we’ve previously blogged, more support from Vanguard is one factor that has led to higher approval rates for ESG proposals – and, as noted in this blog, BlackRock has also urged companies to develop a long-term strategy that accounts for their societal impact.

This Axios article says that the group’s first focus will be writing studies & op-eds backing up their positions – which is interesting in light of recent DOL guidance that restricts ERISA fiduciaries from pursuing ESG initiatives in the absence of data showing that the initiatives will lead to higher returns. It’s not clear yet whether this group will also pursue the tactic of submitting its own shareholder proposals, in order to beat ESG activists to the punch.

The Axios article notes that this campaign comes at a time when “shareholder advocacy” has been producing more social change among companies than legislation. And here’s an excerpt from an op-ed by Bloomberg’s Matt Levine:

The interesting development will be if this (pro-corporate, anti-environmentalist, etc.) group makes common cause with the more left-ish critics of institutional investors who worry that they create antitrust problems. Having most of corporate America controlled by a handful of giant institutions: It makes a lot of people nervous.

Deloitte Fined $500k for Faulty Audit

Yesterday, as noted in this article, the PCAOB levied a hefty $500k upon Deloitte for missing material accounting errors in three consecutive audits of a client…

Happy Memorial Day!

In addition to thanking my friends & family in the armed forces, I’ll be watching this 30-second video from “Kida The Great” (past winner of “So You Think You Can Dance: The Next Generation”) and hoping for a visit from the ice cream truck…

Liz Dunshee

May 24, 2018

Annual Meetings: Ban the Press?

Some companies decide to ban reporters from their annual meetings. The risk in doing this is that it backfires and draws even more negative publicity. Here’s one example of negative press due to a ban – and this MarketWatch article looks at another recent uproar. Nell Minow is quoted:

It’s not unusual for companies to say that meetings are for shareholders only. But I think that it’s best practice for them to allow press in so that shareholders who can’t be there in person can learn about the sole opportunity shareholders have to see the board and executives in person – how they present themselves when they control the process, and how they respond to questions when they do not. If the answer is cutting off access to the press, the obvious question is, what are they trying to hide?

Our “Checklist: Annual Meetings – Dealing with the Press” outlines logistics to think about if you want media coverage at your meeting – or if you don’t. It also considers the possibility of using rules of conduct to limit the type of coverage – e.g. a ban on recording devices. But this article shows that those types of restrictions should also be handled carefully.

Poll: Dealing with Media at Annual Meetings?

Please take a moment for our anonymous poll:

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Annual Meetings: Be Consistent With Your Admission Policies

It’s always smart to be consistent when restricting shareholder attendance at your annual meeting. Some companies require beneficial holders to show proof of ownership in order to gain admittance. But if you’re going to use that as a means to prohibit people from being admitted, it can be risky to make exceptions in exchange for a vow of silence.

This article highlights that risk – here’s an excerpt:

After the attorneys summoned security guards to physically block Danhof from the meeting room – and threatened to call the police – Danhof gave up and opted to file a complaint with the SEC. He had begun to suspect that the situation involved more than a simple miscommunication when the company offered to let him attend if he didn’t make any comments or attempt to address the meeting.

“That leads me to believe that they did some quick research, they figured out I was there, that I was an activist investor, that I ask tough questions and put CEOs on the spot, and they wanted to do whatever they could to make sure their CEO didn’t have to answer the question,” he said.

Liz Dunshee

May 23, 2018

“Dual Class” Companies: CII Supports 7-Year Sunsetting

Recently, CII responded to MSCI’s proposal to weight companies in its indexes based on whether they have unequal voting structures – i.e. “dual class” companies. Since CII wants alignment between economic & voting rights, it’s not surprising that they support the proposal. But – consistent with these letters that CII recently sent to two IPO candidates – they suggest exemptive relief for companies that adopt a 7-year sunset provision.

CII also thinks that it would be reasonable for a sunset structure to be renewable for additional 7-year terms if approved by a majority of the shares with inferior voting rights – and that existing index constituents should have 3 years to adopt a sunset provision before getting dinged by MSCI’s weighting feature. CII’s response differs from BlackRock’s. As I recently described on “The Mentor Blog,” BlackRock wants indexes to reflect the entire investable marketplace.

Sustainability: More Talk Than Action?

This Ceres report finds that few companies are taking a “systemic approach” to sustainability. Sure, lots of proxy statements make reference to sustainability as a board responsibility, but just 13% of large companies have formalized that in committee charters and/or disclosed board-management engagement – and 83% of boards don’t have a director with sustainability expertise. Similarly, a third say they link executive pay to sustainability – but most don’t describe the specific goals that are incentivized.

Ceres found that companies that are more precise in these areas are at least twice as likely to have strong sustainability commitments. On each topic, the report highlights disclosure from companies with leading practices – a good starting point if you’re looking to bolster your own systems.

Ceres & “The B Team” also released this “Climate Smart Primer” to help directors understand the potential material impact of sustainability issues…

“Bipartisan Banking Act” Will Soon Become Law

Here’s a nice infographic from Davis Polk about the “Bipartisan Banking Act” – which the House passed yesterday – that makes big changes to the regulation of banking organizations. It’s expected to be signed by the President shortly. Also see this MoFo memo

Liz Dunshee

May 22, 2018

Pay Ratio: A Congressman Weighs In (With a Study)

Here’s something that I blogged yesterday on CompensationStandards.com: A member of Congress is now using pay ratio data to examine income inequality. This study from Rep. Keith Ellison’s staff (D-Minn) looked at pay ratios from 225 large companies that were responsible for employing more than 14 million workers. When it comes to “extreme gaps,” it “names names” – and it also seems to assume that companies that excluded portions of their workforce were doing so to keep their ratio down.

This article describes the findings – here are the main ones:

1. Pay ratios ranged from 2:1 to 5000:1. The average was 339:1 – compared to 20:1 in 1965

2. 188 companies had a ratio of more than 100:1 – so the CEO’s pay could be used to pay the yearly wage for more than 100 workers

3. Median employees in all but 6 companies would need to work at least one 45-year career to earn what their CEO makes in a single year

4. The consumer discretionary industry had the highest average pay ratio – 977:1

I think it’s easy to become numb to high CEO pay when you work with it all the time and you’re focused on the mechanics of programs and disclosures. This study is a reminder that no matter how useless pay ratio seems to companies, people outside of this field are paying attention – and they’re synthesizing the data not just to compare companies, but to show that outsized executive pay is a pervasive issue that interests many.

Pay Ratio: Customer Fallout?

As highlighted in Rep. Keith Ellison’s study, the consumer discretionary industry is shaping up to have the highest average pay ratios – 977:1 among the S&P 500. That compares to a supposedly ideal ratio among consumers of 7:1, according to this study. And while the high numbers aren’t surprising given the workforce for most of those companies, this WSJ article says it could impact their bottom line. Here’s the high points:

A recent study found that consumers are significantly less likely to buy from companies with high CEO pay ratios. First, it found that sales declined for Swiss companies when their high pay ratios were publicized.

In a follow-up experiment, people had the chance to win a gift card to one of two retailers. In the absence of pay-ratio information, 68% of people chose one retailer’s card and 32% chose the other. But when participants were informed that the first of those retailers had a 705:1 pay ratio and the second had a 3:1 ratio, just 44% of people chose gift cards from the first retailer while 56% chose the second.

It’ll be interesting to see whether this holds true in “real life,” where customers probably aren’t looking at pay ratios at the same time they’re making a purchase – and may not have the option to buy from a company with a 3:1 ratio. The lowest ratios I’ve seen for that industry are around 100:1.

By the way, here’s this CNBC piece entitled “Companies with Closer CEO Pay Ratios May Generate Higher Profit Per Worker.”

UK’s “Enron”: Parliament Committees Recommend Governance Reform

Last week, two Parliament committees issued their final report on the collapse of Carillion – which had been the UK’s second-largest construction group. The situation has been called the British “Enron” and could lead to sweeping reform. As described in this ”Financial Times” article, the report comes down hard on the Big Four auditors – and also blames the implosion on the board and lax regulations. It includes these findings:

– Carillion’s directors elected to increase its dividend every year, come what may. Even as the company very publicly began to unravel, the board was concerned with increasing and protecting generous executive bonuses.

– Government should refer the statutory audit market to the Competition and Markets Authority. Possible outcomes considered should include breaking up the audit arms of the Big Four, or splitting audit functions from non-audit services. The lack of competition in the audit market “creates conflicts of interest at every turn.”

– In its failure to question Carillion’s financial judgements and information, KMPG was “complicit” in the company’s “questionable” accounting practices, “complacently signing off its directors’ increasingly fantastical figures” over its 19 year tenure as Carilion’s auditor.

– The regulators are wholly ineffective – they only started investigating after the company collapsed and are more interested in apportioning blame than in proactively challenging companies and averting avoidable failures.

– The regulators’ mandate should be changed to ensure that all directors who exert influence over financial statements can be investigated and punished.

Also, the British have a way with words. Here are comments from one MP:

“Same old story. Same old greed. A board of directors too busy stuffing their mouths with gold to show any concern for the welfare of their workforce or their pensioners. This is a disgraceful example of how much of our capitalism is allowed to operate, waved through by a cozy club of auditors, conflicted at every turn. Government urgently needs to come to Parliament with radical reforms to our creaking system of corporate accountability. British industry is too important to be left in the hands of the likes of the shysters at the top of Carillion.”

Liz Dunshee

May 21, 2018

Drafting Integrated Reports: How Hard Is It?

Some advocates have been pushing companies to put together “integrated reports.” To illustrate how easy they think it is to do so, a couple of researchers recently prepared this 40-page mock “Integrated Report” for ExxonMobil (starts at page 18). As they describe in this Forbes article, they used publicly-available info – the 10-K, proxy statement, citizenship report, annual report, etc. – and said it took them about 40 hours to edit & organize it into the framework.

Some might say that the 40-hour estimate to draft an integrated report isn’t realistic. Perhaps their effort overlooks the amount of time associated with ensuring the various components of an integrated report work together appropriately – and all the layers of review that a company (who has real potential liability for the end product) must go through.

By the way, according to this announcement, the next step for these researchers is to create an “Integrated Report Generator Tool” – which will “provide stakeholders with a way to create integrated reports.”

Poll: Challenges of Drafting Integrated Reports

Please take a moment to participate in our anonymous poll:

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Bank Examiners Can’t Override Privilege: 7-Firm Memo

This “7-Firm Memo” asserts that bank examiners aren’t entitled to privileged material from financial institutions – and shouldn’t condition favorable examination results & relationships upon “voluntary” waivers. The analysis relies heavily on recognition of the attorney-client privilege by the SEC & DOJ. Both agencies have said they don’t require privilege waivers in order to deem a company “cooperative.”

Liz Dunshee

May 18, 2018

“Going Concerns”: Going. . . Going. . . But Not Gone

This “Audit Analytics” blog reviews its recent survey of 17 years of auditor opinions containing “going concern” qualifications.  Not surprisingly, going concern opinions peaked in 2009 – a total of 3,551 were issued for financial statements covering that year.  But since then, they’ve been on a steady decline, with only 1,970 issued for 2016 financials.

That seems like good news, but it’s complicated by the fact that attrition played a large role in the decline between 2015 and 2016.  However, the number of first time going concerns is estimated to be 467, which would be the 6th consecutive year in which that number was under 600.

The survey’s most troubling conclusion is that once a company finds itself slapped with a going concern opinion,it’s becoming increasingly difficult for them to dig out from under it:

The number of companies that improved well enough to shed their going concern status is tied for the second lowest population of companies that recovered during the 16 years analyzed. This very low number of improving companies indicates that many companies with going concerns are still experiencing difficulties and are unable to improve enough to rid the going concern status.

Crowdfunding: More Bang for Your Buck

One of the problems with crowdfunding under Regulation CF is that you don’t get a lot of bang for your buck – issuers can only raise $1 million per year. But this recent blog from Andrew Abramowitz highlights a potential workaround for companies looking to raise more money – a simultaneous Regulation CF & Rule 506(c) offering. Here’s an excerpt:

One might think that a way to do this would be to conduct a traditional private placement under Rule 506(b), which has no dollar limit, alongside the Regulation CF offering. However, this is a poor fit because of so-called “integration” issues. Regulation CF permits general solicitation, subject to limits, while Rule 506(b) by definition prohibits the “blast-it-out” approach, so efforts to spread the word on the Regulation CF offering could be deemed to be improper promotion of the Rule 506(b) offering.

A better fit would be another exemption arising out of the JOBS Act: a Rule 506(c) offering to all accredited investors, with no dollar limitation, which can be offered through the same portals that are required for Regulation CF offerings. Because general solicitation is permitted under both exemptions, there is not the same integration issue as with Rule 506(b).

By combining Regulation CF and Rule 506(c) in an offering via a web portal, companies can raise essentially any amount needed. The portal would steer non-accredited investors to the Regulation CF bucket, and accredited investors would invest under Rule 506(c). This allows companies to allow for small increment investments in situations where it doesn’t want to limit its shareholder base to accredited investors, while not being constrained meaningfully by the offering dollar limit.

Companies opting for this approach need to pay close attention to the respective rules for each exemption – particularly those imposing restrictions on communications outside the portal during a Regulation CF offering.

Yahoo! & Loss Contingencies: The Shoe That Didn’t Drop

As a follow-up to last month’s blog about the Yahoo! enforcement proceeding, here’s a recent memo from Locke Lord’s Stan Keller discussing an issue that the SEC didn’t raise in the Yahoo! case:

The SEC’s Yahoo enforcement action did not address the failure of Yahoo’s financial statements to include disclosure (and possibly an accrual) under Accounting Standards Codification 450-20 for the potential loss contingencies resulting from the 2014 data breach. Not much imagination typically is required to foresee the potential for significant liabilities arising from a massive cyberbreach and therefore the importance of considering the financial statement implications of that breach among other required disclosures.

Stan contrasts the Yahoo! proceeding with the SEC’s 2017 enforcement action against General Motors – where ASC 450 was specifically referenced. In both cases, the loss contingencies involved unasserted claims that, under ASC 450-20, required an assessment concerning whether claims were “probable” and, if so, whether a material loss was “reasonably possible.” If this test is met, disclosure is required, and the estimated range of loss must be quantified if an estimate can be made. Any loss that is probable and can be estimated must also be accrued as a charge to the income statement.

The SEC may not have brought ASC 450 up in the Yahoo! case, but let’s face it – that seems to have been a pretty target rich environment, so we probably shouldn’t read too much into that. Companies considering disclosure issues around data breaches would be smart to keep ASC 450’s requirements in mind.

John Jenkins

May 17, 2018

The SEC’s “HoweyCoins.com”: Investor Protection As Performance Art!

I’ve been impressed by the FTC’s use of its “Competition Matters” blog to provide antitrust guidance – and I’ve wondered why the SEC was so. . . well. . . “stodgy” in its approach to this kind of thing.  Then this press release with the headline “The SEC Has an Opportunity You Won’t Want to Miss: Act Now!” hit my inbox with the following news (also see this WSJ article):

Check out the SEC’s Office of Investor Education and Advocacy’s mock initial coin offering (ICO) website that touts an all too good to be true investment opportunity. But please don’t expect the SEC to fly you anywhere exotic—because the offer isn’t real.

The SEC set up a website, HoweyCoins.com, that mimics a bogus coin offering to educate investors about what to look for before they invest in a scam. Anyone who clicks on “Buy Coins Now” will be led instead to investor education tools and tips from the SEC and other financial regulators.

So I clicked on the link, and I’ve got to say it’s about the most out-of-character thing I’ve ever seen the SEC do – right down to having the Chief Counsel of the SEC’s “Office of Investor Education & Advocacy” portray HoweyCoins.com’s fraudster-in-chief.

I don’t know that I’d put this on the same level with Andy Kaufman’s stuff when it comes to performance art, but it’s pretty good for government work!

“The Crypto Deals. . . Have Lots of Fraud. . . Deep in the Heart of Texas”

The SEC’s fraud warnings about coin deals seem pretty timely. For instance, this Jones Day memo says that Texas blue sky regulators went hunting for fraud in crypto deals – and found a whole bunch of it. Here’s the intro:

As the price of bitcoin rose to unprecedented levels in 2017, regulators began focusing more enforcement resources on cryptocurrency offerings, both at the federal and state levels. At the state level, the Texas State Securities Board (“TSSB”) has led the way. In late 2017, the TSSB quietly launched an investigation into cryptocurrency offerings being made to Texas investors.

The TSSB announced the results of that investigation last month, indicating that it had found widespread fraud in cryptocurrency offerings. As a result of that investigation, the TSSB has brought nine enforcement actions over a span of less than six months. Given the growing investment in cryptocurrencies, we expect to see continued use of enforcement actions by the TSSB and other state regulators as one of the principal tools to regulate this growing market.

We’ve previously blogged about how the blue sky cops are on the crypto beat – and The Lone Star State’s experience suggests that bad guys are not in short supply.

ICOs: Are They or Aren’t They?

The SEC didn’t come up with the name “HoweyCoins.com” out of thin air. Ever since it issued its 21(a) Report on ICOs last summer, the SEC has made it clear that it thinks tokens are “securities” under the Howey test.” Now, John Reed Stark reports that the first court test of this position is underway in a federal district court in Brooklyn. The issue is being contested in the context of a criminal proceeding in which the defendant has filed a motion to dismiss based on, among other things, an argument that the tokens he sold were not securities. The SEC has also brought civil charges in the case.

Oral arguments on the motion to dismiss were held last week – and the blog provides a link to the transcript. As for the outcome, John says it’s a slam dunk: “The SEC and DOJ will win. Easily. Quickly. Handily.”

John Jenkins

May 16, 2018

Litigation Financing: Senate Bill Would Mandate Disclosure

We’ve previously blogged on “The Mentor Blog” about the growth in 3rd party litigation finance.  Now, Kevin LaCroix blogs that legislation introduced by Senate Republicans would mandate disclosure of these financing arrangements.  Here’s an excerpt summarizing the bill:

On May 10, 2018, U.S. Senator Chuck Grassley, the Chairman of the Senate Judiciary Committee introduced The Litigation Funding Transparency Act of 2018, which would require the disclosure of litigation funding in class and multidistrict litigation in federal courts. The draft bill is co-sponsored by Senators Thom Tillis and John Cornyn.

The bill has two operative provisions, one applicable to class action litigation and the other applicable to multidistrict litigation. The gist of the bill is that it would require class counsel and counsel for a party asserting a claim in a multidistrict lawsuit to disclose to the court and all other parties “the identity of any commercial enterprise … that has a right to receive payment that is contingent on the receipt of monetary relief … by settlement, judgment, or otherwise.”

The legislation also would require counsel to “produce for inspection or copying … any agreement creating the contingent right.” The mandated disclosure must take place not later than the later of ten days after execution of the agreement or the time of service of the action.

The Senate Judiciary Committee’s press release announcing the bill’s introduction notes that “third party litigation funding is estimated to be a multi-billion dollar industry but is largely unregulated and subject to little oversight, fueling concerns that such agreements create conflicts of interest and distort the civil justice system.” The proposed legislation is intended to promote transparency & improve oversight by establishing a uniform disclosure rule that would apply to all class actions and MDL proceedings in federal courts.

GDPR Enforcement: How Will It Work for US Companies?

A lot of companies with European operations have been gearing up to comply with the EU’s new “General Data Protection Regulation” or “GDPR.” Some U.S. companies are undoubtedly asking, “so if we don’t comply, what’s the EU going to do?”

This Womble Bond Dickinson memo says that the answer depends on the particular circumstances of each company. Here’s an excerpt:

– For US companies with a physical establishment in the EU – the GDPR can be enforced directly against them by EU regulators.

– For US companies subject to the GDPR that lack a physical presence in the EU – a local EU representative must be appointed unless an exemption in Article 27 applies. This EU representative may be held liable for non-compliance of overseas entities, although the contract with the representative may shift liability back to the US company.

– For US companies with no EU physical location or local representative – EU regulators will have to rely on US cooperation or international law to punish GDPR noncompliance.

Transcript: “The Latest on ICOs/Token Deals”

We have posted the transcript for our recent webcast: “The Latest on ICOs/Token Deals.”

John Jenkins

May 15, 2018

Parallel Investigations: DOJ Throws Flag for “Piling On”

Companies on the receiving end of enforcement proceedings involving multiple agencies or jurisdictions have long complained about “piling on” – the government’s assessment of penalties without considering those that have already been imposed by other authorities for the same conduct. This Paul Weiss memo says that Deputy AG Rod Rosenstein announced last week that the DOJ has adopted a new policy designed to address these concerns. Here’s an excerpt with some of the details:

In a speech announcing the new policy, DAG Rosenstein referred to the “piling on” of fines and penalties by multiple regulators and law enforcement agencies “in relation to investigations of the same misconduct.” DAG Rosenstein noted that the “aim” of the new policy “is to enhance relationships with our law enforcement partners in the United States and abroad, while avoiding unfair duplicative penalties.”

Specifically, the new policy requires DOJ attorneys to “coordinate with one another to avoid the unnecessary imposition of duplicative fines, penalties and/or forfeiture against [a] company,” and further instructs DOJ personnel to “endeavor, as appropriate, to . . . consider the amount of fines, penalties and/or forfeiture paid to federal, state, local or foreign law enforcement authorities that are seeking to resolve a case with a company for the same misconduct.”

The memo points out that the DOJ has left itself a lot of “wiggle room” under the policy. Among other things, the policy does not describe the extent to which parties will be given “credit” for fines paid to other regulators, and allows for consideration of subjective criteria, such as the “egregiousness of a company’s misconduct,” which could have an impact on its practical application. We’re posting memos in our “White Collar Crime” Practice Area.

IPOs: CII Asks Companies to Stop “Dual Class” Tempting Investors

We’ve previously blogged about investor – and CII – disdain for dual class capital structures. Last month, the CII sent letters to two prospective IPO candidates – Vrio and Pivotal Software – requesting them to reconsider going public with a dual class structure, or to at least adopt a “sunset” provision for that structure.

The circumstances of the two companies are a little different, but this excerpt from the CII’s letter to Pivotal Software gets to the gist of its concerns:

As long-term investors, we believe a decision by Pivotal Software to go public with the dual-class structure will undermine confidence of public shareholders in the company. Independent boards accountable to owners should be empowered to actively oversee management and make course corrections when appropriate.

Disenfranchised public shareholders have no ability to influence management or the board when the company encounters performance challenges, as most companies do at some point, and especially where management is accountable only to itself and the board that it appoints. For these reasons, we are particularly concerned about the process of electing directors, the unequal voting structure, and the lack of a reasonable time-based sunset provision.

Fair enough – the CII is doing its job and raising legitimate points. But in the current environment, if I were a controlling shareholder of either company, my response would likely be along the lines of “if you don’t like our capital structure, then don’t buy our stock.”

Frankly, if this is an issue that really matters to the institutions that are sitting on the biggest pile of money in the world, a strategy that relies on appeals to the “better angels of our nature” & pleas for regulatory intervention seems a little pathetic. Money talks, and this is an issue that institutions need to vote on with their wallets. Unless, of course, it really doesn’t matter that much to them.

A member points out that the CII has been sending letters like these to prospective IPO companies with dual class structures for quite some time – and copies are available on its website.

Tomorrow’s Webcast: “M&A Stories – Practical Guidance (Enjoyably Digested)”

Tune in tomorrow for the DealLawyers.com webcast – “M&A Stories: Practical Guidance (Enjoyably Digested)” – to hear Cleary Gottlieb’s Glenn McGrory, Sullivan & Cromwell’s Melissa Sawyer and Haynes and Boone’s Kristina Trauger share M&A “war stories” designed to both educate and entertain. The stories include:

1. Let It Go – how sometimes when you can’t seem to repair a deal after a lot of effort, maybe helping the client be disciplined and walk away actually is the right outcome

2. Déjà Vu, All Over Again – the central truth about the high-yield debt market: companies often plan to merely dip their toes in the debt market only to find, over time, that they have plunged deeper than expected

3. Knowing What the Other Side Doesn’t Know – how a seller figured out what an inexperienced buyer didn’t understand about financing and how it almost killed but ultimately saved the deal.

4. Just the Facts – how sometimes issues that seem like major obstacles in a deal can be resolved dispassionately just by taking a deeper dive into the facts and narrowing the field of the unknown

5. End Goal in Mind – for any type of deal, keep in mind the client’s ultimate objective

6. When Timing Matters, So Does Trust – how last minute issues can scupper deal announcements – and how trust between deal teams can facilitate quick solutions to allow the deals to proceed

7. Dealmakers are Architects in Four Dimensions – how solutions to complex issues in deals require non-linear, creative thinking under pressure

8. Expect the Unexpected – it’s common for clients to imagine a transaction playing out in a certain manner, only to have market conditions steer them in a new direction. So it’s vital for deal lawyers to stay nimble and be ready to quickly pivot, as needed

9. They’ll Never Be the Winner – the hazards of trying to figure out (and plan for) who you think will win an auction, only to have an unexpected contender (and its own particular issues) prevail

10. The Secret’s Not Out – the extreme measures parties take to protect the confidentiality of secret formulae in consumer product transactions

John Jenkins

May 14, 2018

45 New Proxy CDIs: Overhauling Last of Telephone Interps

It’s been over a decade since Corp Fin started issuing CDIs to replace its main source of “informal” interpretations – the “Telephone Interpretation Manual.” Oddly, after all these years, some of the “Phone Interps” still haven’t been replaced. That’s finally changing. On Friday, Corp Fin issued 45 new CDIs to replace the interps in the Telephone Interpretation Manual and the March 1999 Supplement that relate to the proxy rules & Schedules 14A/14C. The Staff says it’s in the process of updating other proxy interps – so we can expect more CDIs to come.

Thirty-five of the new CDIs simply reiterate the guidance provided in the Manual & March 1999 Supplement – four make technical changes – and these six CDIs reflect substantive changes (here’s a redline from Cleary):

Question 124.01: Rule 14a-4(b)(1) states that a proxy may confer discretionary authority with respect to matters as to which a choice has not been specified by the security holder, so long as the form of proxy states in bold-faced type how the proxy holder will vote where no choice is specified. If action is to be taken with respect to the election of directors and the persons solicited have cumulative voting rights, can a soliciting party cumulate votes among director nominees by simply indicating this in bold-faced type on the proxy card?

Answer: Yes, as long as state law grants the proxy holder the authority to exercise discretion to cumulate votes and does not require separate security holder approval with respect to cumulative voting. [May 11, 2018]

Question 124.07: The Division has permitted registrants to avoid filing proxy materials in preliminary form despite receipt of adequate advance notification of a non-Rule 14a-8 matter as long as the registrant disclosed in its proxy statement the nature of the matter and how the registrant intends to exercise discretionary authority if the matter was actually represented for a vote at the meeting. See Section IV.D of Release No. 34-40018 (May 21, 1998). Can a registrant rely on this position if it cannot properly exercise discretionary authority on the matter in accordance with Rule 14a-4(c)(2)?

Answer: No. [May 11, 2018]

Question 126.02: Is a registrant required to file a preliminary proxy statement in connection with a proposed corporate name change to be submitted for security holder approval at the annual meeting?

Answer: No. As set forth in Release No. 34-25217 (Dec. 21, 1987), the underlying purpose of the exclusions from the preliminary proxy filing requirement is “to relieve registrants and the Commission of unnecessary administrative burdens and preparation and processing costs associated with the filing and processing of proxy material that is currently subject to selective review procedures, but ordinarily is not selected for review in preliminary form.” Consistent with this purpose, a change in the registrant’s name, by itself, does not require the filing of a preliminary proxy statement. [May 11, 2018]

Question 151.01: A registrant solicits its security holders to approve the authorization of additional common stock for issuance in a public offering. While the registrant could use the cash proceeds from the public offering as consideration for a recently announced acquisition of another company, it has alternative means for fully financing the acquisition (such as available credit under an executed credit agreement in the full amount of the acquisition consideration) and may choose to use those alternative financing means instead. Would the proposal to authorize additional common stock “involve” the acquisition for purposes of Note A of Schedule 14A?

Answer: No. Raising proceeds through a sale of common stock is not an integral part of the acquisition transaction because at the time the acquisition consideration is payable, the registrant has other means of fully financing the acquisition. The proposal would therefore not involve the acquisition and Note A would not apply. By contrast, if the cash proceeds from the public offering are expected to be used to pay any material portion of the consideration for the acquisition, then Note A would apply. [May 11, 2018]

Question 161.03: If a registrant is required to disclose the New Plan Benefits Table called for under Item 10(a)(2) of Schedule 14A, should it list in the table all of the individuals and groups for which award and benefit information is required, even if the amount to be reported is “0”?

Answer: Yes. Alternatively, the registrant can choose to identify any individual or group for which the award and benefit information to be reported is “0” through narrative disclosure that accompanies the New Plan Benefits Table. [May 11, 2018]

Question 163.01: Does a proxy statement seeking security holder approval for the elimination of preemptive rights from a security involve a modification of that security for purposes of Item 12 of Schedule 14A?

Answer: Yes. Accordingly, financial and other information would be required in the proxy statement to the extent required by Item13 of Schedule 14A. [May 11, 2018]

Of course, I can remember – pre-Internet – when it was hard to get a copy of the telephone interps. It was originally drafted to be an internal resource for Corp Fin. Some law firms obtained a copy – when Corp Fin Staffers left the Division or perhaps through a FOIA request – but it wasn’t widely available (or even known) before the late ’90s when it was posted on the SEC’s site…

The Latest Reg Flex Agenda: A Few New Items

Here’s some news from this Ropes & Gray memo written by Keith Higgins:

The Spring 2018 unified regulatory agenda – the so-called “Reg Flex” agenda – came out on May 9th (current / long-term). Although most of the items on the Corporation Finance agenda remain the same, there were a few new items added to the list that bear mention.

Added to the “proposed rule stage” was a rulemaking on “Business, Financial and Management Disclosure Required by Regulation S-K,” which previously had been on the long-term actions agenda. Other than to say that the proposal would be to “modernize” the disclosure requirements, the agenda doesn’t provide any insight into the areas that might be covered. This topic is a continuation of the Division’s Disclosure Effectiveness initiative and suggests that change may be in the offing that goes beyond the modest proposals that were included in the proposed rulemaking to implement the FAST Act report.

Also at the proposed rule stage is a rulemaking on “Filing Fee Processing.” The description of this project suggests that the Division will propose a rule to make the fee-related information on various Commission filings structured data. Doing so should allow the Commission to better track filing fees, particularly when they are transferred in connection with unused fees in Securities Act registrations. It is unlikely that any substantive changes will come out of this project.

The third new item on the list is a topic that Director Bill Hinman hinted at in his recent appearance before a subcommittee of the House Financial Services Committee – “Extending the Testing the Waters Provisions to Non-Emerging Growth Companies.” Testing the waters, which allows emerging growth companies to have discussions about an offering with qualified institutional buyers and institutional accredited investors, has been an increasingly popular provision of the JOBS Act. It makes every bit of sense to extend this concept to all companies that might be interested in undertaking a registered securities offering. And given the sophisticated audience with whom these discussions may be had, there would be no adverse impact on investor protection.

Added to the “final rule stage” list is the proposal on “Disclosure of Hedging by Employees, Officers and Directors.” This rulemaking, which was initially proposed in February 2015 to implement Section 955 of the Dodd-Frank Act, had been on the long-term list last fall. It is interesting that the Chairman has chosen to add this rulemaking to the list. On the one hand, it is a relatively innocuous proposal that does not call for any burdensome level of disclosure. On the other hand, however, because the proxy advisory firms and institutional investors have taken an interest in hedging by insiders, many companies have already made voluntary disclosure of their hedging policies as a matter of good corporate governance. As a result, adoption of the rule is unlikely to have any meaningful impact, although it will allow the Commission to check this one off the Dodd-Frank mandate list.

Broc Romanek