October 13, 2015

Activists Seeking Partnerships With Institutional Investors

Institutional investors are playing an increasingly important role in shareholder activist campaigns according to new survey findings from FTI Consulting/Activist Insight. The 2015 survey of 24 engaged activist firms revealed that 70% expect an increase in cooperation or “future partnerships” with institutional investors and pension funds in pursuing their target companies – and all perceive greater acceptance by these institutional investors.

Additional noteworthy findings include:

  • 300 companies worldwide were subjected to public demands in the first half of 2015 – compared with 142 in all of 2010
  • 96% suggest that M&A activism will increase in general
  • Number of board seats sought by activists has almost doubled – from 23 between 2010 and 2012, to 43 from 2013 to present
  • Activists believe that assets allocated to shareholder activism will continue to increase; 86% of surveyed funds expect to engage in new capital-raising over the next 12 months
  • Activists increasingly believe that the US activism market (i.e., competition for targets) is getting crowded, and are turning their sights toward Canada and Europe

In this new post, Wachtell Lipton’s Marty Lipton aims to encourage major institutional investors to recognize the harmful effects on company behavior and their overall portfolio value associated with the antics of activist hedge funds. The memo identifies three new studies by economists and law professors that Marty claims undermine the reliability of what has been characterized by some as “empirical evidence” allegedly supporting “short-termism, attacks by activist hedge funds and shareholder-centric corporate governance.”

See also this recent St. Louis Post Dispatch article wherein NYC Comptroller Scott Stringer expresses his concern about companies being too eager to succumb to activist demands to avoid a proxy fight to the detriment of long-term shareholder value.

Canadian Shareholder Coalition Seeks Universal Proxy

The Canadian Coalition for Good Governance, Canada’s largest shareholder coalition, is calling on companies and dissidents to voluntarily adopt the use of universal proxies in contested director elections pending sought-after corporate and securities laws reforms that would mandate their use. As blogged previously, on the US front, SEC Chair White indicated in June that she had asked the Staff for rulemaking recommendations on universal proxy ballots.

Matt Orsagh on Bank of America CEO/Chair Split

In this podcast, Matt Orsagh, Director of Capital Markets Policy for the CFA Institute, discusses combined and split CEO/Chair roles in the context of Bank of America’s recent shareholder vote, including:

– What was this vote all about?
– Is Bank of America backsliding on corporate governance?
– Are there potential conflicts of interest in combining the roles?
– What checks & balances do companies implement when they combine the roles?
– What is the trend in combining/separating the roles in the US?


– by Randi Val Morrison

October 12, 2015

Conflict Minerals: Would the FBI Challenge You?

Here’s a note from Lawrence Heim of Elm Sustainability Partners:

Not ones to cry wolf, we had a bit of a shock at the ThomsonReuters Governance and Risk Seminar we participated in this morning. One of the sessions included a representative from the FBI’s International Corruption Unit. Just to be clear, this is the US Federal Bureau of Investigation. The topic was current enforcement of the Federal Corrupt Practices Act (“FCPA”). We asked if matters such as conflict minerals, human rights abuses and human trafficking were on their radar screen, expecting a blank stare or an overly-general “non-answer answer.” Instead, a direct – and rather unnerving answer – was given. To summarize:

– The FBI has already identified linkages between known instances of FCPA violations/concerns (corruption, doing business in ”low integrity countries”) and human trafficking/human rights abuses. Human rights matters are of current interest to them.
– FBI’s FCPA enforcement resources have grown dramatically in recent years.
– FBI has unlimited global reach for FCPA compliance enforcement.
– Conflict minerals experts would do well to have at least a basic understanding of FCPA.

We don’t know what that all means just yet, but we do think it adds another dimension of risk to the SEC filings, compliance status and supplier relationships.

Lawrence will be among the speakers of our upcoming webcast: “Conflict Minerals: Tackling Your Next Form SD“…

Pay Ratio: Another House Bill Seeks to Repeal

Here’s a blog by Cooley’s Cydney Posner:

On September 30, the House Financial Services Committee approved, by a vote of 32 to 25, H.R. 414, the Burdensome Data Collection Act, following committee consideration and a mark-up session. Given that the bill is only one paragraph long, there was not too much to mark up. The bill will now go to a full vote of the House. The bill would repeal Section 953(b) of Dodd-Frank, the pay-ratio provision, and make any regulations issued pursuant to it of no force or effect.

Any of this sound familiar? It should. The very same bill was introduced in 2011, but went nowhere. (See this news brief.) With President Obama still holding the veto pen and a substantial constituency supporting the pay-ratio provision, a different result seems unlikely this time.

Europe: Director Duties & Liabilities

This 31-page “Guide to Directors’ Duties & Liabilities” was released last week by the European Confederation of Directors’ Associations. See the heading entitled “Comply-or-explain needs more explanation.” I guess that caption is tongue-in-cheek…

– Broc Romanek

October 9, 2015

FASB Proposes “Materiality” Guidance

As noted in this blog, the FASB issued two exposure drafts last week that address the use of materiality to help companies eliminate unnecessary disclosures in their financials. In addition, the exposure drafts are an attempt to have the FASB’s conceptual framework become better aligned with the legal concept of “materiality” established by the US Supreme Court.

The exposure drafts are part of the FASB’s disclosure framework project – and address the use of materiality in two ways:

– Helping companies use discretion when determining which disclosures in notes to financial statements should be considered “material,” and
– Helping FASB understand the reporting environment in which it sets accounting and reporting standards.

The exposure drafts are “Qualitative Characteristics of Useful Financial Information” – and “Notes to Financials – Assessing Whether Disclosures Are Material.” We’re posting memos in our “Materiality” Practice Area.

The Business Roundtable has a new white paper that argues that the materiality standard for determining disclosure obligations best protects investors and facilitates the capital markets…

PCAOB Auditor Inspections Will Focus on Three Areas

Last week, as noted in this blog, the PCAOB issued this “Staff Inspection Brief” to highlight the three general areas that it will focus on going forward during inspections: auditing internal control over financial reporting; assessing and responding to risks of material misstatement; and auditing accounting estimates, including fair value measurements. These are among the most common areas where inspectors found significant deficiencies in the past several years. In addition, PCAOB inspectors consider the current economic environment and related developments in their reviews. For example, economic uncertainty stemming from the financial crisis and the sluggish global economy has in the past factored into the audits and the areas selected for inspection.

Hat tip to the Society of Corporate Secretaries for noting how the PCAOB recently posted an updated Standard-Setting Agenda – and that based on comments received on its reproposal, the Staff anticipates recommending that the audit engagement partner disclosure be required on the new PCAOB form that was proposed as an alternative to disclosure in the auditor’s report. By the way, I just calendared this new webcast: “Audit Committees in Action: The Latest Developments.”

Coming? Disclosure Simplification for Smaller Companies

As noted in this Cooley blog, at last month’s meeting of the SEC’s Advisory Committee on Small and Emerging Companies, the Committee approved a set of recommendations in an effort to harmonize the jumble of rules that apply to the various categories of small companies and expanding the application of the small-company disclosure accommodations generally. Funny because I was just reliving some old memories with Brian Lane yesterday about the “Disclosure Simplification Project” that came out in 1996…

See this interview for a perspective of the disclosure effectiveness project underway related to accounting & the financials…

– Broc Romanek

October 8, 2015

NYSE’s New “Material Information” Policy: What to Do Now

Last week, I posted a poll to see how folks were reacting to the NYSE’s new “release of material information” policy. The poll results show that 27% of companies plan to make earnings announcements before 7 am – while 35% will do so after 4 pm (25% said they’ll make them when they want). In addition, I got this note from a member:

We talked to the NYSE’s “Market Watch” team yesterday and confirmed that while the decision whether to halt prior to 9:30 in connection with the issuance of material news is made by the company, the determination as to whether the news is actually “material” will be made by the company and the Market Watch team together – and the NYSE won’t implement a pre-market halt unless the Exchange Staff agrees with the company’s own materiality assessment. As a result, the factors that are relevant to whether an earnings release is material would be jointly considered by the company and the NYSE. In determining whether to halt trading, the NYSE asks that companies consider whether earnings are coming “near expectations” or whether there is a big beat or miss. So the NYSE will halt between 7:00 and 9:30 if (1) the company and the NYSE agree that the news is material and (2) the company requests a halt. If those two conditions are met, the NYSE will halt trading.

There is no change to practice during trading hours. Remember that the NYSE doesn’t halt a stock after news has been issued, so trading volatility after 9:30 in response to a release issued before the NYSE opens would never give rise to a halt. The only situation that perhaps the NYSE would halt trading in those circumstances would be if it was clear that the original earnings release was inadequate and either misstated or omitted material information and an additional release was necessary.

The NYSE Proposes to Significantly Increase Its Annual Listing Fees

Recently, the NYSE filed a proposed rule change with the SEC to amend the NYSE Listed Company Manual effective January 1, 2016 to increase annual listing fees. As noted in this Fried Frank memo, the minimum annual fee for a company’s primary class of equity securities is currently the greater of $45,000 or $0.001 per share. The proposed hike would increase the minimum annual fee to the greater of $52,500 or $0.001025 per share – roughly a 17% increase. For example, a company with 100 million shares of its primary class of equity securities will pay an annual fee of $102,500 per year in 2016.

Transcript: “Evolution of M&A Executive Pay Arrangements”

We have posted the transcript for our webcast: “Evolution of M&A Executive Pay Arrangements.”

– Broc Romanek

October 7, 2015

More Fake SEC Filings: Kraft Heinz, Phillips 66 Targeted

Following up on my series of blogs about fake SEC filings, here’s an excerpt from this WSJ article:

Two more companies were targets of apparently fake securities filings, this time Kraft Heinz Co. and Phillips 66. Two separate filings that said they were submitted by Loreto M. Zamora on behalf of LMZ & Berkshire Hathaway Co. to the Securities and Exchange Commission on Thursday morning claimed to hold at least 10% stakes in both Kraft Heinz and Phillips 66.

Both companies told The Wall Street Journal that the filings are fraudulent and they have contacted the SEC. Warren Buffett, whose Berkshire Hathaway Inc. owns stakes in the food and energy companies, said in an email that he has never heard of Mr. Zamora.

Transcript: “Whistleblowers: What Companies Are Doing Now”

We have posted the transcript for our popular webcast: “Whistleblowers: What Companies Are Doing Now.”

Yesterday, in a far-reaching judgment, the EU’s Court of Justice declared the European Commission’s 2000 US safe harbor decision invalid. I’ve never seen so many law firm memos come out so fast. For once, I’m not gonna post 50 of them – just these ones in our “Privacy Rights” Practice Area

Smaller Company Capital Formation: House Passes Two Bills

As noted in this MoFo blog by Carlos Juarez, the House passed two bills yesterday relating to the promotion of capital formation by smaller companies, H.R. 1525 and H.R. 1839:

– H.R. 1525 is the “Disclosure Modernization and Simplification Act of 2015,” which directs the SEC to issue regulations permitting issuers to submit a summary page on annual and transition report form, 10-K, if each item on that page cross-references electronically or otherwise the material contained in form 10-K to which the item relates. It also requires the SEC to revise regulation S-K and to study ways to modernize and simplify the requirements.

– H.R. 1839 is the “Reforming Access for Investments in Startup Enterprises Act of 2015,” which would amend the Securities Act of 1933 to exempt certain transactions involving purchases by accredited investors, and for other purposes, codifying Section 4(a)(1)(½).

– Broc Romanek

October 6, 2015

D&O Questionnaires: Do You Need to Update for AS #18?

Each year about this time, I get questions from members about whether they need to update their D&O questionnaire (remember our “D&O Questionnaire Handbook“). That’s a tough question to answer so far this year as there hasn’t been a consensus yet about how to handle the PCAOB’s new Audit Standard #18 regarding related-party transactions (see our memos on AS #18).

From what I hear, the Big 4 auditors have not been forthcoming – or consistent if they are – about what they need from their clients in response to AS #18. In some cases, it appears that an independent auditor might ask a client to have D&O questionnaires elicit a list of all the members of an insider’s immediate family on the questionnaire so that the auditor can then search for transactions with those individuals. For info on how “related party” is defined for purposes of AS #18, see #8536 in our “Q&A Forum.” Give me your feedback – and stay tuned for more…

Nasdaq has released a bunch of “Top 10″ lists, such as the “Top 10 Frequently Asked Questions” and “10 Most Popular Staff Interpretations & Listing Council Decisions”…

SCOTUS & Insider Trading: Newman Stands!

As noted in this Paul Weiss memo, on the first day of the US Supreme Court’s 2015-16 term, SCOTUS declined take up the government’s petition for writ of certiorari in United States v. Newman, a landmark decision that dismissed indictments against two insider trading defendants. By declining to hear the petition, the Supreme Court ensures that the Second Circuit’s decision in Newman will remain binding in the Second Circuit and influential across the country as it has already had a significant impact on the law of insider trading.

Two of Newman’s holdings are particularly important: first, that the government must prove that a remote tippee knew or should have known of the personal benefit received by a tipper in exchange for disclosing nonpublic information; and second, that the benefits alleged by the government in Newman were not sufficient to support a conviction, as they were not sufficiently “consequential.”

Webcast: “Transaction Insurance as a M&A Strategic Tool”

Tune in tomorrow for the webcast – “Transaction Insurance as a M&A Strategic Tool” – to hear Dechert’s Markus Bolsinger, Aon Transaction Solutions’s Matt Heinz, Pepper Hamilton’s Jim Epstein, Norton Rose Fulbright’s Scarlet McNellie and Haynes and Boone’s George Wang discuss all the “in’s & out’s” as insurance in M&A transactions has gained in popularity.

– Broc Romanek

October 5, 2015

Conflict Minerals: SEC Files Petition to Overturn Court Decision

As noted in this Schulte Roth memo, the SEC & Amnesty International filed petitions (here’s the SEC’s petition – and here’s Amnesty International’s) on Friday seeking an en banc rehearing of the panel decision from August in which a divided three-judge panel of the US Court of Appeals for the DC Circuit reaffirmed its April 2014 majority decision that the requirement under the SEC’s rule to describe products as having “not been found to be DRC conflict free” is compelled speech that violates the First Amendment (see more in this Cooley blog). Here’s a key excerpt from the memo:

We think it is likely that the Conflict Minerals Rule litigation will continue for some time still, which is likely to preserve the status quo for at least the current compliance period (i.e., calendar year 2015 and the related filing due on May 31, 2016). Accordingly, registrants — and their direct and indirect suppliers — must continue with their conflict minerals compliance and traceability initiatives.

Resource Extraction: SEC Proposes to Adopt Rules Within 270 Days

As we blogged about a few weeks ago, the US District Court for the District of Massachusetts – in Oxfam America v. SEC – held that the delay in implementing the resource extraction rules violated the Administrative Procedures Act and ordered the SEC to file an expedited schedule for rule adoption within 30 days. On Friday, the SEC filed this notice with the court that it “proposes” to adopt a new rule within 270 days, June 27th 2016 (although the notice lays out how this will be difficult to accomplish for a variety of reasons).

Webcast: “Regulation A/A+ – Developing Market Practices”

Tune in tomorrow 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.

– Broc Romanek

October 2, 2015

8-K Trading Gap: Are Insiders Abusing Their Positions?

Here’s the intro to this Cooley blog:

A new study, reported in the WSJ, showed that corporate insiders consistently beat the market in their companies’ shares in the four days preceding 8-K filings, the period that the researchers called the “8-K trading gap.” The study also showed that, when insiders engage in open market purchases –relatively unusual transactions for insiders—during that trading gap, insiders “are correct about the directional impact of the 8-K filing more often than not — and that the probability that this finding is the product of random chance is virtually zero.”

EDGAR Filer Support’s New Publication: “The Filer Report”

I was excited to see how the SEC’s EDGAR Filer Support Teams have begun to put out a new periodic publication – entitled “The Filer Report.” You will receive it by email if you sign up for “Email Updates” in the bottom right side of the SEC’s home page – and then you can customize your preferences to receive only those types of updates that you want from the SEC. If you’re only interested in “The Filer Report,” select only that box – the last one – under the “Industry Guidance and Information” section.

The inaugural issue of “The Filer Support” is not online. But it included all sorts of nuggets for those that deal with EDGAR regularly. For example, there was a link to this list of peak volumes for Edgar filings. There were reminders about including your CIK on filing fee payments – and how to send a single FedWire for multiple CIKs.

There also was a note that the “Information for EDGAR Filers” page is in the process of being redesigned – I’m crossing my fingers that it will include a blog that would notify us when EDGAR is down – or hiccups are occurring for certain types of filings – as well as notify us when those problems have been resolved…

EDGAR Modernization: Some Near-Term Suggestions

Following up on the news about the SEC’s EDGAR modernization project that I previously blogged about, a 9-page letter was jointly submitted to the SEC by the Business Roundtable, CAQ, FEI and CCMC in response to the SEC’s disclosure effectiveness project. The letter focuses specifically on EDGAR modernization – and includes suggestions to improve EDGAR in the near-term. A detailed two-phase approach is suggested that could be achieved before other EDGAR enhancements and SEC rulemaking. Here’s an excerpt from the letter:

We developed a two-phase approach to our recommendations for near-term improvement to the filings area of the SEC website. The first phase focuses on consolidating and updating current search features by improving their visibility and organization. The second phase focuses on additional enhancements to EDGAR, which include improvements to the company search page, filings detail screen, output functionality, and interactive data functionality.

While the letter suggests a number of changes to EDGAR’s search function, my favorite suggestion relates to finding previously-filed exhibits. Here’s the suggestion:

Registrants usually include a list of previously filed exhibits in periodic reports. However, it is challenging to find the exhibit that is referenced. The enhanced functionality should allow users to access all exhibits from one screen rather than have to go into individual filings. Also, a greater ability to use a search engine across the exhibits would be helpful.

– Broc Romanek

October 1, 2015

The SEC’s New “Rules Database”

Last week, the SEC rolled out a new “Rules Database.” Here’s is Chair White’s official announcement. Thankfully, it appears this new database will run in conjunction with the long-standing “Proposed Rules“; “Final Rules“, etc. pages that the SEC has maintained for a while.

What do I think of the new database? I’m not sure anyone needed it. But it doesn’t hurt as now proposing releases are listed together with adopting releases – although it doesn’t include Commissioner statements like the PCAOB does (and of course, this combo is available on our site along with firm memos, etc. in our “Practice Areas“).

As a psuedo-web designer myself, I can’t help but notice some minor stuff that I would change (some of the text is in light colors – hard to read; font sizes are a wee bit small too). And the layout highlights how some of the SEC’s releases have really LONG names (eg. “Final Rule Purchase of Certain Debt Securities by Business and Industrial Development Companies Relying on an Investment Company Act Exemption”). I almost always shorten the names of the SEC’s releases when I post them on our site.

Broadridge Updates!

A key to better usability of the proxy framework is the voting machines. That’s why I was excited to see that Broadridge has updated its to make it easier for folks to vote. Here’s an excerpt from the press release:

Examples include a capability to vote additional ballots, with fewer steps, for other shares held in current meetings, and to easily view additional communications from issuers, including video and virtual shareholder meetings. As part of this initiative, Broadridge also redesigned the content and format of the email messages that initiate proxy communications with shareholders. Broker-dealers can also easily add their branding and custom messages.

Our October Eminders is Posted!

We have posted the October issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

– Broc Romanek

September 30, 2015

SEC Proposes Changes to ALJ Tribunals

Last week, the SEC proposed amendments to how it’s administrative tribunals work in an attempt to quell the firestorm over its use of ALJs (although, as this blog notes, the proposal does little to address constitutional challenges to the SEC’s use of ALJs). We’re posting memos about the proposal in our “SEC Enforcement” Practice Area. The proposals include three primary changes to the SEC’s Rules of Practice:

– Adjust the timing of administrative proceedings, including by extending the time before a hearing occurs in appropriate cases
– Permit parties to take depositions of witnesses as part of discovery
– Require parties in administrative proceedings to submit filings and serve each other electronically, and to redact certain sensitive personal information from those filings

Keith Bishop wrote this interesting blog about the proposal entitled “When Is Medical Information Considered Sensitive?” And this proposal comes a few days after, as noted in this blog, the Second Circuit handed the SEC another defeat – forcing the SEC to stay the administrative proceeding against well-known fund manager Lynn Tilton. It’s hard to tell why though, as the Second Circuit’s order is one sentence long.

Meanwhile, this Bloomberg article summarizes a study that claims that the SEC’s Enforcement Division is padding its “success” numbers…

SEC Enforcement & the Electronic Communications Privacy Act

In this blog, David Smyth lays out how the pending “Electronic Communications Privacy Act” could impede Enforcement’s ability to obtain emails not used through normal corporate channels…

The UK’s Modern Slavery Act Applies to Many Companies Doing Biz in the UK!

As noted in this Cooley memo, the UK has adopted the Modern Slavery Act 2015, which imposes specific transparency requirements on many companies doing business in the UK, regardless of where the company is incorporated! There is a threshold for doing business in the UK that triggers its applicability. I don’t know if the number is settled yet, but I’ve heard £36 million – so it will certainly apply to many larger companies. That is quite a broad sweep!

– Broc Romanek