E-Minders November 2019
In This Issue:
E-Minders is our monthly e-mail newsletter containing the latest developments and practical guidance for corporate & securities law practitioners.
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In mid-October, Corp Fin issued Staff Legal Bulletin No. 14K - which makes an even dozen SLBs devoted to shareholder proposals. It follows up on some of the topics addressed over the past two years in Staff Legal Bulletin 14I & Staff Legal Bulletin 14J. Among other things, the new SLB provides guidance on:
In addition, the SLB sets forth the Staff's view that companies should refrain from an "overly technical" reading of proof of ownership letters in an effort to avoid including a proposal. In particular, the SLB points out that the Staff has not required proponents to adhere strictly to the suggested format for those letters contained in Staff Legal Bulletin 14F in order to avoid having their proposals excluded under Rule 14a-8(b).
During the last week of October, the SEC announced it would hold an open meeting on Tuesday, November 5th to propose rule changes for proxy advisors & shareholder proposal thresholds - here's the agenda.
Although these things are always very speculative - both the substance & timing could change, and nothing's certain till we see the proposal - the Financial Times is reporting that the proposal could include:
If the proposal is issued, you can bet we’ll be covering it in our upcoming webcast - "Shareholder Proposals: What Now" - on Thursday, November 21st. In that program, Davis Polk's Ning Chiu, Morrison & Foerster's Marty Dunn and Gibson Dunn's Beth Ising will also be discussing Corp Fin's new approach for processing shareholder proposal no-action requests and the expected impact of Staff Legal Bulletin No. 14K.
The gloves are off. At the end of October, ISS announced that it had filed this lawsuit against the SEC - which challenges the Commission-level guidance that was issued back in August. As Broc previously blogged, CII had already sent a couple of comment letters to the SEC to complain about that guidance. This lawsuit also comes on the heels of the SEC announcing that it will hold an open Commission meeting in early November to propose rule changes for proxy advisors. These are the ISS allegations:
EDGAR System Technical Difficulties
The EDGAR system is experiencing technical issues, which may impact filers' ability to make submissions to EDGAR. Our technical staff is working to resolve the issues. We apologize for any inconvenience caused. Please note that updates regarding the resolution of this issue will be posted on this site. Once the outage has been resolved, we will work with filers who are impacted to resolve any impact from the inability to file.
Update - For those Issuers who are unable to furnish or file an Item 2.02 Report on Form 8-K to meet the requirements of paragraph (b)(1) of Item 2.02, but are unable to do so because of these difficulties, the staff will adjust the receipt date of such report so that it will be deemed furnished or filed at the time the Issuer first attempted to submit such report.
And this morning, the SEC posted their first "Edgar is back up" notice as an update to the "Edgar is down" notice:
Update - The technical issue has been resolved. EDGAR is operating normally. Filers who attempted to file but were unable to do so as a result of the outage should submit their filing as soon as possible, and contact Filer Support at 202 551-8900, or email EDGARFilingCorrections@sec.gov. Please provide the CIK, accession number of the impacted filing.
In late October, the SEC issued this 168-page proposing release to modernize filing fee disclosure that companies provide - and their own payment method process. Among other changes, the SEC proposes:
We doubt many folks pay via paper check or money orders these days. But Broc remembers how most paid that way thirty years ago before Edgar was mandatory and registration statements were hand-delivered to the SEC's filing desk...
Here's something John recently blogged on DealLawyers.com: Don't look now, but the Delaware Chancery Court just upheld another Caremark claim in the face of a motion to dismiss. In his 50-page opinion in In re Clovis Oncology Derivative Litigation, (Del. Ch.; 10/19), Vice Chancellor Slights held that the plaintiffs had adequately pled that the board breached its fiduciary duties by failing to oversee a clinical trial for the company's experimental lung cancer drug and then allowing the company to mislead the market regarding the drug's efficacy.
In declining to dismiss the case, the Vice Chancellor observed that Delaware courts are more likely to find liability under Caremark for oversight failures involving compliance obligations under regulatory mandates than for those involving oversight of ordinary business risks:
Caremark rests on the presumption that corporate fiduciaries are afforded "great discretion to design context- and industry-specific approaches tailored to their companies' businesses and resources." Indeed, "[b]usiness decision-makers must operate in the real world, with imperfect information, limited resources, and uncertain future. To impose liability on directors for making a 'wrong' business decision would cripple their ability to earn returns for investors by taking business risks."
But, as fiduciaries, corporate managers must be informed of, and oversee compliance with, the regulatory environments in which their businesses operate. In this regard, as relates to Caremark liability, it is appropriate to distinguish the board's oversight of the company's management of business risk that is inherent in its business plan from the board's oversight of the company's compliance with positive law–including regulatory mandates.
As this Court recently noted, "[t]he legal academy has observed that Delaware courts are more inclined to find Caremark oversight liability at the board level when the company operates in the midst of obligations imposed upon it by positive law yet fails to implement compliance systems, or fails to monitor existing compliance systems, such that a violation of law, and resulting liability, occurs."
VC Slights cited the Delaware Supreme Court's recent decision in Marchand v. Barnhill, and noted that that case "underscores the importance of the board's oversight function when the company is operating in the midst of 'mission critical' regulatory compliance risk."
Caremark requires a plaintiff to establish that the board either "completely fail[ed] to implement any reporting or information system or controls" or failed to adequately monitor that system by ignoring "red flags" of non-compliance. While the board's governance committee was responsible for overseeing compliance with regulatory requirements applicable to the clinical trial, the Vice Chancellor held that the plaintiff adequately pled that it knowingly ignored red flags indicating that the company was not complying with those requirements. Accordingly, he declined to dismiss the case.
Ann Lipton has some interesting perspectives on VC Slights' distinction between business & legal compliance risks over on her Twitter feed. Check it out.
Caremark still may be, as former Chancellor Allen put it, "possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment." But after decades of routinely dismissing Caremark claims at the pleading stage, this marks the second time this year that the Delaware courts have declined to do so – and it's the third case in the last two years in which they've characterized a Caremark claim as "viable."
Is Caremark becoming a more viable theory of liability, or is board's conduct in these cases just more egregious than in prior cases? It's hard to say based on the limited evidence we have. For now, maybe the '60s band Buffalo Springfield put it best – "There's something happening here. What it is ain't exactly clear. . ."
In mid-October, NYC Comptroller Scott Stringer announced an initiative calling for companies to adopt a corporate version of the NFL's "Rooney Rule" in order to promote gender & ethnic diversity in the boardroom. Here's an excerpt from the Comptroller's press release:
At the annual Bureau of Asset Management (BAM) "Emerging and MWBE Manager" conference, New York City Comptroller Scott M. Stringer today launched the third stage of the groundbreaking Boardroom Accountability Project with a new first-in-the-nation initiative calling on companies to adopt a policy requiring the consideration of both women and people of color for every open board seat and for CEO appointments, a version of the "Rooney Rule" pioneered by the National Football League (NFL). The new initiative is the cornerstone of the Comptroller's Boardroom Accountability Project, a campaign launched in 2014 which seeks to make boards more diverse, independent, and climate competent.
The Comptroller launched this initiative by sending a letter to 56 S&P 500 companies that do not currently have a Rooney Rule policy requesting them to implement one. The press release indicates that the Comptroller will file shareholder proposals at companies "with lack of apparent racial diversity at the highest levels."
Since the Comptroller is pressing for a corporate Rooney Rule, we wondered if there was data on how the NFL's Rooney Rule has played out in terms of promoting diversity. John came across this recent article from "TheUndefeated.com" which says that the results are a mixed bag. Minority candidates are getting more shots at head coaching positions, but the results suggest that they're put in a position to succeed less frequently than white coaches, and that teams give them the axe more quickly. It's also worth noting that, despite the Rooney Rule, 7 of the 8 head coaching vacancies in the NFL during the past offseason were filled by white dudes.
John disagreed with the methodology that the article applies to its Rooney Rule analysis. The Cleveland Browns' hiring & firing of Romeo Crennel & Hue Jackson during the period were included in the sample, which he thought should've been limited to professional football teams. Besides, as we Cleveland fans are in the process of finding out once again this season, nobody can question the fact that the Browns are an equal opportunity pit of despair.
This blog by Jim McRitchie is mind-blowing! Here's a summary:
CalPERS, the largest U.S. pension fund which manages more than $380 billion in assets, has already started implementing its new compensation framework. In an effort to drive more accountability and improved pay for performance alignment, CalPERS reports voting against 53% of compensation plans at portfolio companies during the 2019 proxy season. That is up from 43% last year.
When we first saw this announcement from the SEC's Enforcement Division about an emergency action to halt an unregistered ICO, we have to admit brushing it off as a takedown of yet another fraudulent "crypto" company. But this column from Bloomberg's Matt Levine points out that this one is different.
In Matt's words, the company here was doing the "best-practices-y thing" that had been blessed by several law firms. Its offering was structured as a "Simple Agreement for Future Tokens" - as John blogged last year, that's an approach based on the popular "SAFE" template for startup financing that was starting to take off for Reg D token deals. Matt's explanation of how it works:
1. Sell something – call it a "pre-token" – to accredited investors (institutions, venture capitalists, etc.) to raise money to build your platform. Concede that the pre-token is a security.
2. When the platform is built, it will run on a token, a cryptocurrency that can be used for transactions on the platform and that is not a security.
3. At some point – at or after the launch of the platform – the pre-token (the security) flips into the token (the non-security), and all the people who bought pre-tokens to finance the platform now have tokens to use on it. (Or to sell to people who will use them.)
This seems to honor the intention of securities law – you're not selling speculative investments to retail investors to fund the development of a new business – while also honoring the intention of the ICO: Your platform is financed (indirectly, eventually) by the people who use it; the people putting up the money do so not in exchange for a share of the profits but for the ability to participate in the platform itself. In this model the pre-token will be called something like a "Token Purchase Agreement" or "Simple Agreement for Future Tokens": It's a security wrapper for the eventual utility token.
Unfortunately, the SEC's complaint took issue with the fact that when the "pre-tokens" here were scheduled to flip into tokens, there would be no established ecosystem for them to trade as currency. Which would seem to be an obvious side-effect of financing a new form of cryptocurrency?
We're not really sure what to make of this yet. Matt suggests that maybe the SEC would be more amenable if the pre-tokens didn't flip until the ecosystem is running robustly. But probably not. John blogged last week on "The Mentor Blog" about how to do a Reg A token offering. So perhaps anyone considering an ICO should take a look at that...
Ah, autumn. A time to relish the changing leaves, cooler temps and of course the deluge of press releases from the SEC's Enforcement Division that drop before the end of the Commission's September 30th fiscal year. Here's an announcement about charges against the pharma company Mylan, which was the subject of a two-year DOJ probe and didn't disclose any loss contingencies or accrue any estimated losses prior to announcing a $465 million settlement.
The SEC's complaint also took issue with the company's "hypothetical" risk factor disclosures about government authorities taking contrary positions to its Medicaid submissions, when CMS had already informed Mylan that a product was misclassified. Mylan agreed to settle the SEC matter for $30 million.
Things like this tend to seem pretty clear in hindsight – especially if you're reading about them in an SEC announcement. But it really requires a thorough understanding of the rules and a lot of judgment. Don't forget that we have handbooks to help you sort through it all. Here's the one on "Legal Proceedings Disclosures" – and here's the one on "Risk Factors."
Here's another recent settlement between the SEC's Enforcement Division and a company that disclosed allegedly misleading customer metrics (the CEO was also charged). This one's scary because it delves into the type of non-financial stuff that gets added to earnings releases (and occasionally periodic reports) without a lot of lawyerly checking. This Stinson blog explains the allegations:
In 2014 and 2015, Comscore disclosed its total number of customers and net new customers added in quarterly earnings calls. Comscore also disclosed its customer total in periodic filings with the Commission. According to the SEC the number of net new customers added per quarter was an important performance indicator for Comscore that analysts tracked and reported on. During this time, in an effort to conceal the fact that quarterly growth in Comscore's customer total had slowed or was declining, a Comcast employee allegedly approved and implemented multiple changes to the methodology by which the quarterly customer count was calculated. These changes were neither applied retroactively nor disclosed to the public per the SEC order.
Coincidentally, a recent Corp Fin comment letter raised similar issues for a different company. Comments might be down overall, but don't let anyone tell you that Corp Fin is "calling it in" for their reviews. They took issue with the number of customers disclosed by a gym in its annual report and – of all the things! – the viewership stats that the company cited for "Dick Clark's Rockin' Eve" (see this Bass Berry blog).
For those of us who want to save companies from fines & embarrassment, the question is how to vet non-financial metrics efficiently and without losing all your friends & clients. Some members have suggested putting a "stake in the ground" that describes how customer metrics are calculated – whether that's a widely-available internal thing or actually in the 10-K would be up for debate (both shareholders & competitors would prefer the latter). Shoot us an email if you have other ideas...
We really can't overstate how much we love "fake SEC filings" around here. So it's with mixed feelings that we report on changes to Edgar that might make these an even rarer occurrence. Specifically, filers now need a longer & more complex password – this Gibson Dunn blog has more detail:
Filers, including Section 16 filers, will now be requested to provide twelve-character passwords instead of eight-character passwords when logging into both the EDGAR Filing Website and the EDGAR Online Forms Management Website. Current filers who do not update their password to twelve characters will be prompted to update it each time they log in. We have confirmed with the staff of EDGAR Filer Support that current filers who do not update their password when prompted will not be prevented from logging in successfully. However, EDGAR passwords expire annually and should be changed before the expiration date. Any filers who have not already updated their password by the time they otherwise expire will be required to create a password that satisfies the new requirements before being permitted to log in to EDGAR.
Even more interesting from a security perspective is that a "Last Account Activity" tab is being added to the filing & forms websites - so you can see a 30-day history of login attempts and spot any aspiring fakers. And on a more vanilla note, the changes also allow companies to include 150 characters in cover page tags for classes of registered securities (up from 100 characters), since some companies were having trouble fitting it all in.
We continue to post new items on our blog – "Proxy Season 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:
- Firearms Responsibility: Will Shareholders Show Renewed Interest?
We recently mailed the September-October issue of "The Corporate Counsel" print newsletter (try a no-risk trial). The topics include:
- Beyond the Big 3: The Skinny on Other Standing Board Committees
This September-October issue of the Deal Lawyers print newsletter was just posted - & also mailed - and includes articles on:
- Five Observations on Recent Use of Universal Proxies
Right now, you can subscribe to the Deal Lawyers print newsletter with a "Free for Rest of '19" no-risk trial. And remember that – as a "thank you" to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called "Back Issues" near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
Among other new additions, during the last month we have posted:
Kathleen Hamm Departs PCAOB: The SEC announced that Kathleen Hamm would not be reappointed in November, upon completing her existing term as a Board member. The announcement followed this article by MarketWatch.com's Francine McKenna that said the decision was made against Hamm's wishes. CII then sent a letter to the SEC citing Francine's article & endorsing Hamm's reappointment.
Rebekah Goshorn Jurata Appointed to PCAOB; Commissioner Hester Peirce to Lead SEC's Coordination Efforts: In mid-October, the SEC announced that White House aide Rebekah Goshorn Jurata has joined the Board - assuming the seat vacated by Kathleen Hamm's departure. In addition, Commissioner Hester Peirce - who is, to say the least, not a fan of Section 404 of the Sarbanes-Oxley Act - would "lead the Commission's coordination efforts with the Board of the PCAOB."
Any hopes that releasing the news about the PCAOB shake-up late on the Friday before a holiday weekend would limit media attention on the PCAOB were likely dashed when the WSJ published an article detailing a whistleblower's allegations that the PCAOB's work has been slowed by "board infighting, multiple senior staff departures, and allegations that the chairman has created a "'sense of fear.'" The changes have continued to draw media attention, including a NYT op-ed from former SEC Chair Arthur Levitt.
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