First off, I am not changing the focus of this blog to meat and meat by-products, although that would be a pretty interesting blog come to think of it.
Earlier this week, the U.S. Court of Appeals for the District of Columbia Circuit issued an en banc opinion in the appeal of American Meat Institute v. U.S. Department of Agriculture, upholding a Department of Agriculture rule requiring “country of origin” labeling for meat products. The outcome of this case may give the SEC some hope that the Court will reverse the three-judge panel’s holding that the Dodd-Frank Act conflict minerals disclosure rules violate the First Amendment in National Association of Manufacturers, et al., v. Securities and Exchange Commission. This is because a central issue with regard to the standard for review in the National Association of Manufacturers case was also at issue in American Meat Institute.
In American Meat Institute, the en banc court reheard the case in order to interpret a 1985 Supreme Court case, Zauderer v. Office of Disciplinary Counsel, on the issue of compelled commercial speech. The Court considered whether the government can only require disclosures when its aim is to prevent deception, or whether it has broader authority that would cover other types of speech. In Zauderer, the Supreme Court held that rational basis review applies to certain disclosures of “purely factual and uncontroversial information,” but the DC Circuit had previously limited Zauderer to situations where disclosure requirements are “reasonably related to the State’s interest in preventing deception of consumers.” The opinion in American Meat Institute took a broader interpretation, indicating that Zauderer actually extends beyond situations involving deception, so as to encompass the meat labeling disclosures that were at issue in that case.
In National Association of Manufacturers, the three-judge panel found that the rule violates the prohibition against compelled speech. The panel held that “[b]y compelling an issuer to confess blood on its hands, the statute interferes with that exercise of freedom of speech under the First Amendment.” This sort of disclosure, the panel reasoned, was similar to requiring issuers to “disclose the labor conditions of their factories abroad or the political ideologies of their board members” which would be “obviously repugnant to the First Amendment” and should not face a relaxed standard for review just because Congress used the “securities” label. Given the revisiting of the DC Circuit’s interpretation of Zauderer in the American Meat Institute opinion, that outcome now could change, although there are certainly distinctions between the two cases. Now, it just remains to be seen what will happen to the SEC’s request for a rehearing of National Association of Manufacturers en banc by the DC Circuit.
More on Cybersecurity: PwC and IRRC Report on Opaque Disclosures
A report released this week by PwC and the Investor Responsibility Research Center Institute indicates that while companies must disclose significant cyber risks, “those disclosures rarely provide differentiated or actionable information.” The report goes on to examine key cybersecurity threats to corporations and provides information to investors for the purpose of evaluating investment risk, business mitigation strategies, and the quality of corporate board oversight.
Our August Eminders is Posted!
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There has certainly been no shortage of attention paid to cybersecurity issues over the past couple of years, and one thorny issue that has plagued lawmakers and others is how to you compel companies to improve their cybersecurity efforts when there is no direct regulatory authority to do so. As is often the case, the SEC comes to mind, because it is the one agency that has some regulatory authority over large companies across all industries. Unfortunately, the SEC largely only regulates the disclosure by these companies (and, indirectly, through oversight of the stock exchanges, corporate governance standards), making it difficult to use the SEC’s powers to compel business decisions with respect to information technology resources. As we all recall, the Staff’s cybersecurity disclosure guidance was one effort in this regard, and as Broc recently noted, enforcement cases may be another tool. One tried-and-true tool is, of course, the bully pulpit, and Commissioner Luis Aguilar delivered a speech back in June expressing his views on what boards should do to ensure that their companies are addressing cybersecurity risk. In Commissioner Aguilar’s view, cybersecurity risk must be considered as part of a board’s overall risk oversight responsibilities. Commissioner Aguilar strongly recommended that companies consider the Framework for Improving Critical Infrastructure Cybersecurity, released by the National Institute of Standards and Technology in February 2014, which is intended to provide companies with a set of industry standards and best practices for managing their cybersecurity risks. Given that some have suggested the Framework will become a baseline for best practices by companies, Commissioner Aguilar expressed his view that boards should work with management to assess their policies against the guidelines in the Framework. While the speech represented just the views of Commissioner Aguilar and not the Commission as a whole, it would certainly appear that the Framework is something that companies should review and carefully consider now, rather than after something bad happens to their information systems.
Tune in on September 16th for our webcast – Cybersecurity: Working the Calm Before the Storm – to find out what you should be doing now to address cybersecurity risks…
More on Implementing COSO 2013
Implementing the new COSO standard continues to be a hot topic, and Edith Orenstein recently recounted in FEI Daily’s Financial Reporting Column a program in which three financial executives described their implementation efforts to date. One of the executive described the process as “evolution, not revolution,” and they all provided some practical tips on implementing the new standard. For more background on the new COSO standard and the steps you need to take to implement the standard, take a look at the May-June 2014 issue of The Corporate Counsel.
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:
- SEC Warns On Incentivizing Employees to Only Whistleblow Internally
- JOBS Act Related Bills Move Forward
- Reg 506(b) Offerings Continue to Dominate Regulation D Practice
- “Does Your Board Have a Duty of Imagination?” Egads…
Yesterday, the U.S, Chamber of Commerce’s Center for Capital Markets Competitiveness released a set of recommendations for the SEC as the agency considers how to make disclosure more effective. The report contains both near-term and long-term recommendations for improvement, and among the near-term recommendations are suggestions to address identified reporting requirements that are obsolete or duplicative of other disclosures (e.g., Item 101 of S-K disclosure of acquisitions, financial disclosure by geographic region, disclosure of where an investor can get copies of filings). Longer-term improvements suggested by the Center include addressing the problem of duplication among SEC filings, modernizing the presentation and delivery of public company reports, and reforming disclosures for CD&A and MD&A. No doubt we will see other reports along these lines as various groups attempt to provide the SEC with input on where to take its ongoing disclosure effectiveness project.
Why is Disclosure Reform So Hard?
The report from the Center for Capital Markets Competitiveness cites a number of the Commission’s prior efforts toward reforming disclosure, many of which did not yield much in the way of tangible results (remember the 21st Century Disclosure Project?). In fact, during my time at the Commission, I can’t think of any time where disclosure reform wasn’t somewhere on the agenda. Unfortunately for those who have been interested in accomplishing change in this area, other agenda items tend to crowd out the disclosure reform topic (e.g., the Sarbanes-Oxley Act, the Dodd-Frank Act, the JOBS Act), and disclosure reform is usually easy to push to the back burner because no one will squawk when it ends up there. And that leads to yet another problem, which is that there is no one unified voice calling for less or more effective disclosure. Many in the corporate community certainly think that more effective disclosure would be nice to have, while investor groups will sometimes express the view that more disclosure is better. As a result, other than individuals within the Commission who have been interested in this topic, there is no one force pushing forward the efforts. Lastly, a disclosure effectiveness effort is swimming upstream against a current of ever-increasing disclosure about random things that have no relevance whatsoever to what investors want to know (e.g., conflict minerals, Iran sanctions, resource extraction issuer payments), which makes it difficult to focus on real change. Hopefully, this time is different.
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:
- Insider Trading: 2nd Circuit Forces Tipper’s Disgorgement Even When Tippee Had No Direct Economic Benefit
- SEC Grants More Rule 506 Bad Actor Waivers
- Financials: FASB Proposes Decision Process for Determining Notes
- Audit Committee Members’ Failure to Respond to Red Flags Establishes Scienter
As we rapidly approach the August doldrums for capital markets activity, the good news is that 2014 has been a very strong year for the IPO market. As noted in this Morrison & Foerster blog by Nilene Evans, we experienced the hottest IPO market in 14 years during the first half of 2014, with 133 IPOs priced, raising more than $30 billion in proceeds. Whether or not the JOBS Act’s IPO On-Ramp for emerging growth companies has had anything to do with the success of the IPO market this year is hard to say, but it certainly is the case that IPO issuers are whole-heartedly embracing the On-Ramp’s confidential draft registration statement review process, with more than 85% of IPOs this year utilizing the SEC’s confidential submission process. Further, of the IPOs that priced in the second quarter of 2014, nearly 60% priced within or above the stated price range, and some have suggested that test-the-waters meetings for emerging growth company IPOs are providing useful information regarding pricing, which contributes to the phenomenon of more deals pricing within the filing range than was the case before the JOBS Act came along. Let’s hope the second half of 2014 is as strong as the first.
FINRA Clarifies Filing Requirements under Rule 2210 for Certain Research Reports and FWPs
Earlier this month, FINRA issued Regulatory Notice 14-30, announcing that the SEC has approved amendments to FINRA Rule 2210 (Communications with the Public) that: (i) exclude from Rule 2210’s filing requirements research reports concerning only securities listed on a national securities exchange and (ii) clarify that free writing prospectuses that are exempt from filing with the SEC are not subject to Rule 2210’s filing or content standards, while the filing and content requirements of Rule 2210 do apply to free writing prospectuses required to be filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii). These amendments were effective immediately.
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:
- Earnings Calls as Intellectual Property
- PCAOB Board Members: Concerns of Issuers & Audit Committees
- U.S. Brings Criminal Charges for False Sarbanes-Oxley Certifications
- Everything Securities Law Related About Bitcoin (But You Were…)
The numerous comments after this short “Adams Drafting” blog about high-stakes redlining practices is a dialogue that only a lawyer could love. Check it out. You can tell I’ve been “banking” this particular blog for years…
I gotta mention that Max & Mark Webb are retiring after a fine career in Corp Fin. I wish them well. Great guys!
Sample Reps & Warranties: Conflict Minerals
As I’m scrambling to get out of here on an “email-less” vacation for two weeks, I thought I would cheat and blog this item that I used on the DealLawyers.com Blog on Friday: Recently, we got the question from a member who was marking up a definitive agreement for the purchase of target company – a manufacturer of metal products – whom they believed to be utilizing conflict minerals. The member asked “Has anyone seen and reps and warranties being given for the use/non-use of conflict minerals in stock purchase agreements and, if so, what is being represented/warranted?”
My response was: These reps are pretty boilerplate. In the first example below, note that Oracle/Micros has a covenant that the seller has undertaken commercially reasonable efforts to eliminate conflict minerals from its supply chain:
Yesterday, Corp Fin Director Keith Higgins delivered this testimony before the House Financial Services Committee’s Capital Markets Subcommittee – talking about the state of the Division, with an emphasis on the status of Dodd-Frank and JOBS Act rulemaking. No earth-shattering revelations – but here are notables:
1. Pay Ratio – “Division staff is carefully considering those comments and is preparing recommendations for the Commission for a final rule”
2. Three Other Horsemen – “Division continues to work to implement provisions of the Dodd-Frank Act relating to executive compensation matters”
3. Accredited Investor Definition – “Division and other Commission staff currently are conducting a review of the accredited investor definition”
4. Crowdfunding – “Commission has received over 300 comment letters and the Division is preparing recommendations for the Commission on final rules”
5. Regulation A+ – “Commission has received over 100 comment letters and the Division is preparing recommendations for the Commission on final rules”
There were other rulemakings addressed – but you get the idea: “We are working on it.” There were also questions asked about the Ackman/Allergan situation. As noted in this Reuters article, Keith also addressed questions about WKSI waivers, a hot topic among the SEC Commissioners lately.
Keith did talk about the disclosure effectiveness project, noting that the initial set of recommendations would hone in on the business and financial disclosures in the ’34 Act area (with coordination with FASB). And noting that subsequent phases “will include compensation and governance information included in proxy statements.”
As for operational stats, 4500 companies had their filings reviewed last year – with the Division on the same pace for ’14. Over 400 no-action letter requests are processed annually – of which over 300 relate to shareholder proposals.
Time to Benchmark? Our Horde of Corporate Governance Surveys
We are constantly adding new “Practice Areas” to this site – with now over 500 of them! One of the latest is this one about “Corporate Governance Surveys,” which contains over 70 recent surveys on governance topics…
Connecting Middle-Market Bankers
In this DealLawyers.com podcast, Andy Jones, President of PEI Services, discusses his company – an online information services company providing up-to-date & accurate information about financial buyers to the middle market investment banking community and associated M&A service providers, including:
- What is PEI Services generally & who are the intended users?
- Can you describe your research database?
- How do you source your data and ensure data quality?
- Do you license your data for use within internal CRM systems, or as a plug-in to other corporate data systems?
As the result of a collaborative effort between Ginsberg Jacobs’ Anthony Zeoli, Crowdcheck and Seyfarth Shaw’s Georgia Quinn, here is a comparative summary chart where you can go to compare all of the enacted instrastate crowdfunding exemptions side-by-side – and here’s a chart with the proposed intrastate crowdfunding exemptions…
More on “New Intrastate Offering Exemptions: Not Useful”
Back in April when Corp Fin issued 3 CDIs about the intrastate offerings exemption, I ran a blog noting that they weren’t useful. Now Joe Wallin explains more about why that’s the case in his blog – and also see this piece by Sam Guzik…
I’ve been posting a slew of new checklists recently. This checklist is about whether it’s worth the hassle of converting old board minutes from paper to digital – and if so, how to best do it…
I know the title of this particular blog sounds sensational – but the opening of this DealBook column by Andrew Ross Sorkin about shareholder engagement is “What if lawmakers never spoke to their constituents?” So let me deal with the top 10 points that I see in this column since it created a stir yesterday:
1. “Within the clubby world of directors, communicating with shareholders, big or small, is overtly frowned upon”
My take: I agree that it’s quite strange that the notion of shareholder engagement is something that only recently is in vogue. Then again, the term “corporate governance” was barely used – or understood – until about a dozen years ago. I make fun of this sudden fascination with engagement in this 90-second video entitled “10 Silly Ways Towards Better Shareholder Engagement.” I should note that The Conference Board issued a statement yesterday clarifying its position about directors engaging (i.e. they support directors speaking directly with investors, particularly in special circumstances such as when investors have lost confidence in a board or management)- Sorkin didn’t characterize their position quite right.
2. “At least 1,000 large United States public companies to receive a letter this month from a group of shareholders representing more than $10 trillion in assets with a demand: Talk to us.”
My take: Here’s the July 2nd letter if you haven’t seen it. The letter doesn’t demand direct shareholder-director engagement. Rather, it asks boards to “consider adopting and clearly articulating a policy for shareholder-director engagement, whether through adoption of the SDX Protocol or otherwise.” The letter notes that JPMorgan’s proxy statement explicitly endorsed the SDX protocol – and that its board met with shareholders representing 40% of its base. The letter notes that less than 25% of the S&P 500 disclosed their engagement efforts in their proxy (I note that even the ones that disclosed their engagement efforts likely didn’t mention shareholder-director engagement).
3. “Some directors avoid meetings, worried about speaking with one voice”
My take: This seems like a valid concern on its face – but smart shareholders know that each director has their own views. Those shareholders seeking to meet a particular director typically just want to ascertain whether they are truly independent and capable of doing their job. They are not looking to meet a politician.
4. “Most don’t consider it their responsibility”
My take: Directors are supposed to represent shareholders. Although I agree it’s not a primary responsibility – and most directors don’t have the time to do a bunch of meetings – they shouldn’t shun shareholders.
5. “Some are anxious about accidentally disclosing sensitive information”
My take: If a director isn’t capable of meeting with someone and not giving away material nonpublic information, they shouldn’t serve in that role. Note that Corp Fin has issued Reg FD CDI Question 101.11 which clarifies that directors are not prohibited from speaking privately with shareholders. This CDI should give directors comfort that private meetings are not intrinsically problematic so that they can participate in governance engagement efforts.
6. “Some chief executives are insecure and don’t want shareholders to get too close to their boards for fear they will have undue influence”
My take: This is an interesting one. On its face, the CEO shouldn’t be insecure as these typically are short and simple meetings (and normally a company officer accompanies the director). But look how lobbying has destroyed Congress. So long as the engagement process is kept in check, this concern isn’t a valid one.
7. “Many top executives seem to think that board members cannot be trusted with such interactions”
My take: It’s true that most boards will have some directors that are not “camera ready.” But smart shareholders will know that and not expect (nor want) a board full of politicians.
8. “If a board becomes too enamored with a particular view from a set of shareholders, it could lead to short-term thinking that undermines long-term performance”
My take: True dat.
9. “Large investors might have the opportunity to meet with directors while small retail investors almost certainly never will”
My take: This is reality. But as I blogged yesterday, companies can post video interviews with directors so that anyone can get a feel for a director.
10. “The shareholders despite saying they want a dialogue, actually aren’t interested”
My take: This is a real problem: boards going on governance roadshows with few attendees. At our executive pay conference, the comments made during my “investors speaks” panels illustrate that there are a variety of views towards whether directors need to meet with shareholders. Shareholders have limited time availability, just like directors. By the way, I just posted this sample Powerpoint that can be used for a governance roadshow…
Our “Shareholder Engagement Checklists”
For me, the upshot is that boards should consider adopting shareholder engagement policies – and this is a topic ripe for proxy disclosure (many of the proxies I highlighted in my video series this year included this disclosure). Remember that we have a lot of good practical stuff in our “Shareholder Engagement Checklists”:
It’s Done: 2015 Edition of Romanek’s “Proxy Season Disclosure Treatise”
Just ahead of my vacation, I have wrapped up the 2015 Edition of the definitive guidance on the proxy season – Romanek’s “Proxy Season Disclosure Treatise & Reporting Guide” – and it’s gone to the printer. You will want to order now so that you can get your copy as soon as it’s done being printed. With over 1450 pages – spanning 32 chapters – you will need this practical guidance for the challenges ahead…
In this podcast, John Seethoff of Microsoft explains how the company has showcased its directors through video interviews, including:
- Why did Microsoft decide to tape videos of the directors?
- How do I find the videos?
- What typically is discussed in these videos?
- How much production is involved? Is it costly?
- Was it difficult to convince the directors to do them?
- What has feedback been from investors? From employees?
As noted in this MoFo blog, SEC Chair White & Corp Fin Director Higgins will testify on Thursday before the House Financial Services Committee about the status of Dodd-Frank’s rulemakings, as well as the disclosure effectiveness project…
Unclaimed Property: Delaware’s Voluntary Program Extended
As noted in this memo, the deadline to enter Delaware’s SOS VDA Program has been extended until September 30, 2014 (bumped up from June 30th) – and the deadline to resolve all unclaimed property liability under that program has been extended until June 30, 2016.
July-August Issue: Deal Lawyers Print Newsletter
This July-August Issue of the Deal Lawyers print newsletter includes:
- Materiality Scrapes Trending Upward in Private Deals
- Hushmail: Are Activist Hedge Funds Breaking Bad?
- Recent Trends: Antitrust & Regulatory Risk-Shifting in M&A Agreements
- Respecting Boilerplate: Preamble
For many years, ISS has posted a host of resources to help investors conduct due diligence, including a set of “questions you should ask” and a “due diligence checklist” in this 11-page due diligence compliance package. In addition, here’s a letter from Sullivan & Cromwell about a conflict policy review it conducted in ’07. So these materials were not posted in response to the SEC’s recent Staff Legal Bulletin that deals with the responsibilities of investment advisers to vote and hire proxy advisors, but they are definitely helpful now…
ISS Seeks Input: Annual Policy Survey
As noted in this Gibson Dunn blog, ISS has opened its annual survey ahead of updating its policies. The survey closes on August 29th – and then the results are released a few weeks later. Then there’s an open 30-day comment period in October – with the final policy updates arriving sometime in November typically. The entire policy process is described on ISS’ website..
Webcast: “Career Advice: The In-House Perspective”
Tune in tomorrow for the webcast – “Career Advice: The In-House Perspective” – during which Oracle’s Chris Ing, Governance Solutions Group’s Denise Kuprionis, Northeast Utilities’ Rich Morrison, former Northrup Grumman Kathie Salmas and Tennant’s Heidi Wilson will impact career advice from decades of in-house experience. The panel will cover:
- Determining Whether Going In-House is Right for You
- How to Evaluate a Potential Employer
- How to Market Yourself – Internally & Externally
- Salary Negotiations
- How to Best Work With Your Law Firm Lawyer
- Challenges in Setting Yourself Up as a Consultant After You “Retire”
James Garner was one of my favorites. From the “Rockford Files,” Jimmy Joe Meeker was his best alter ego…