E-Minders May 2021

In This Issue:

E-Minders is our monthly e-mail newsletter containing the latest developments and practical guidance for corporate & securities law practitioners.

We view TheCorporateCounsel.net as the gathering place for the community and encourage those who may not yet be members to subscribe now to see what you are missing. All of our memberships are backed by our "100-Day Promise" - during the first 100 days as a newly activated member, you may cancel for any reason and receive a full refund! Here are "12 Good Reasons" to try us now.

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Early Bird Registration! Our "Proxy Disclosure & Executive Compensation Conferences"

We've posted the registration information for our "Proxy Disclosure" & "Executive Compensation Conferences" - which will be held virtually October 13th - 15th. We're excited to offer a format that can be either "live & interactive" or "on-demand" (your choice! or do both!) - to deliver candid & practical guidance, direct from the experts.

These Conferences will help you tackle ESG & executive pay issues that will be essential to your proxy disclosures and engagements. Check out the agendas - 17 panels over three days.

Early Bird Rates - Act Now! As a special "thank you" for early registration, we're offering an "early bird" rate for a limited time to both members & non-members of our sites. In addition, anyone who subscribes to one of our sites will get a special "member discount" when they register for these Conferences (both of the Conferences are bundled together with a single price). Register online or by mail/e-mail today to get the best price and make sure that you'll have access to all of the latest guidance.

It's Here! 2021 Edition of "Practical Corporate Governance Treatise": The latest edition of our "Practical Corporate Governance Treatise" is here. With nearly 1700 pages of well-organized guidance - in the form of over 300 checklists - this is an essential resource for in-house and outside counsel alike. Order today on TheCorporateCounsel.net to get your copy now!

Our Enhanced "In-House Accelerator": If you're relatively new to being in-house - or you want to improve your client work by gaining that perspective - take advantage of our "In-House Accelerator." We're now offering an enhanced version as an add-on exclusively to members of TheCorporateCounsel.net, which makes practical guidance from across the site accessible - all in one place. This training consists of 221 FAQs from our "In-House Accelerator" paperback (here's the "Table of Contents") - which you can either read online or listen to via our podcast series. Then, test your knowledge with our quizzes!

It's Here! 2021 Edition of "Proxy Season Disclosure Treatise": Liz Dunshee & Lynn Jokela wrapped up the 2021 Edition of the definitive guidance on proxy season disclosure: "Proxy Season Disclosure Treatise." The entire treatise spans 1900 pages and 33 chapters - all carefully organized for easy navigation. Here's the "Detailed Table of Contents" listing the topics so you can get a sense of the Treatise's practical nature. Plus, we will be providing an e-book supplement this winter to incorporate the latest amendments to Regulation S-K and Rule 14a-8. Order on TheCorporateCounsel.net so that you can have your copy in time for the upcoming proxy season.

It's Here! 2021 Edition of "In-House Essentials Treatise": Liz Dunshee & Lynn Jokela wrapped up the 2021 Edition of the definitive guidance on securities law for the in-house lawyer: Dunshee & Jokela's "In-House Essentials Treatise." With over 2000 pages - spanning 22 chapters - you will need this practical guidance for the challenges ahead. Here's the "Detailed Table of Contents" listing the topics so you can get a sense of the Treatise's practical nature. Order on TheCorporateCounsel.net.

It's Here! Lynn & Borges' "Executive Compensation Disclosure Treatise": The highly anticipated 2021 edition of Lynn & Borges' "Executive Compensation Disclosure Treatise" is here. With heightened attention being paid to executive & director pay, and new proxy advisor rules, the latest edition is critical for the upcoming proxy season. Here's the "Detailed Table of Contents" listing the topics so you can get a sense of the Treatise's practical nature. Order a hard copy on CompensationStandards.com. As always, Dave Lynn and Mark Borges have ensured that the treatise is comprehensive and practical.

Deal Lawyer Training: Jenkins' "Practical M&A Treatise": Based on his 30+ years of deal work, members are saying that John Jenkins' "Practical M&A Treatise" should be required reading for all M&A associates. Spanning 659 pages, John writes in a practical style – using stories & examples to make even the most complex deal issues easy-to-understand. Here's the "Detailed Table of Contents" listing the topics so that you can see for yourself.

Don't miss out on this popular training tool – order it today. And for your convenience, we're offering it as either a hard-copy print book – or as just an online version. So there are two different ways to order the "Practical M&A Treatise":

  1. Order the hard-copy of the "Practical M&A Treatise"
  2. Order the online version of the "Practical M&A Treatise

"Deal Tales" - A Three Volume Set! Education by entertainment! This “Deal Tales” series of three paperback books teaches the kind of things that you won't learn at conferences, nor in treatises or firm memos. Here's the "Table of Contents" for each volume rolled into one. With the set containing over 600 pages, John Jenkins - a 30-year vet of the deal world - brings his humorous M&A stories to bear. Order "Deal Tales" today!

Upcoming Webcasts on TheCorporateCounsel.net: Join us on May 12th for the webcast - "Capital Markets 2021" - to hear Katherine Blair of Manatt, Phelps & Phillips, Sophia Hudson of Kirkland & Ellis and Jay Knight of Bass, Berry & Sims discuss what 2021 has in store for companies looking to access the capital markets, including discussion of financing alternatives.

And join us on June 17th for the webcast - "Cyber, Data & Social: Getting in Front of Governance" - to hear VLP Law Group's Melissa Krasnow, Lumen Worldwide Endeavors' Lisa Beth Lentini Walker, Serna Social's Sue Serna and Stroz Friedberg/Aon's Heidi Wachs discuss unique governance challenges presented by cybersecurity, data privacy and social media and how it's essential to proactively manage your risks, response plans and disclosure processes.

And join us on July 20th for the webcast - "Insider Trading Policies & Rule 10b5-1 Plans" - to hear Meredith Cross of WilmerHale, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net and Haima Marlier of Morrison & Foerster discuss the new enforcement environment and focus on Rule 10b5-1 plans, the intersection of insider trading policies and Rule 10b5-1 plans, blackout period trends and pre-clearance procedures and the latest developments with compliance training.

We will apply for CLE credit in all applicable states for these 1-hour webcasts. You must submit your state and license number prior to or during the program, which you can do by visiting the landing page for the program(s) you plan to attend. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.

There is no cost for these webcasts if you are a member of TheCorporateCounsel.net. If you are not a member, sign up online, send us an email at info@ccrcorp.com - or call us at 800.737.1271.

Upcoming Webcast on DealLawyers.com: Join us on May 4th for the webcast - "The Leveraged ESOP as an Exit Alternative" - to hear Shawn Ely of Lazear Capital Partners, Steve Goodman of Lynch, Cox, Gilman & Goodman and Steve Karzmer of Calfee, Halter & Griswold discuss benefits and structuring, financing and operational issues to take into account with leveraged ESOP transactions.

We will apply for CLE credit in all applicable states for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.

No registration is necessary - and there is no cost - for this webcast for DealLawyers.com members. If you are not a member, sign-up now to access the programs. You can sign up online, send us an email at info@ccrcorp.com - or call us at 800.737.1271.

Upcoming Webcast on CompensationStandards.com: Join us on June 23rd for the webcast - "Proxy Season Post-Mortem: The Latest Compensation Disclosures" - to hear Mark Borges of Compensia, Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss the 2021 proxy season - including say-on-pay results, key 2021 lessons and examples of what companies did with this year's proxy disclosures and status of SEC rulemaking.

We will apply for CLE credit in all applicable states for this 90-minute webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.

No registration is necessary - and there is no cost - for this webcast for CompensationStandards.com members. If you are not a member, sign-up now to access the programs. You can sign up online, send us an email at info@ccrcorp.com - or call us at 800.737.1271.

Senate Confirms Gary Gensler as SEC Chair

In mid-April, the Senate voted to confirm Gary Gensler's nomination as the next SEC Chair by a 53-45 vote. Gary has been sworn in - and many expect he will hit the ground running.

Although the Senate initially approved Gary to serve only for the remainder of former SEC Chair Jay Clayton's term, which ends on June 5th of this year, a subsequent vote extended his term for the succeeding 5-year period that ends June 5th, 2026.

COVID-19: Corp Fin Extends Leniency for Presentation of Shareholder Proposals

In April, Corp Fin updated its guidance for conducting shareholder meetings in light of COVID-19 concerns. Here's the new stuff:

Exchange Act Rule 14a-8(h) requires shareholder proponents, or their representatives, to appear and present their proposals at the annual meeting. In light of the possible difficulties for shareholder proponents to attend annual meetings in person to present their proposals, the staff encourages issuers, to the extent feasible under state law, to provide shareholder proponents or their representatives with the ability to present their proposals through alternative means, such as by phone, during the 2020 and 2021 proxy seasons.

Furthermore, to the extent a shareholder proponent or representative is not able to attend the annual meeting and present the proposal due to the inability to travel or other hardships related to COVID-19, the staff would consider this to be "good cause" under Rule 14a-8(h) should issuers assert Rule 14a-8(h)(3) as a basis to exclude a proposal submitted by the shareholder proponent for any meetings held in the following two calendar years.

Some have noted that encouragement falls short of a mandate - but companies are already reacting. Following the Staff's announcement, Reuters reported that Berkshire Hathaway is now permitting As You Sow to present a diversity-related proposal remotely for the company's upcoming annual meeting. As You Sow welcomed the accommodation and said Berkshire cited the updated Staff guidance when it contacted As You Sow.

SEC Reopens Comment Period for Universal Proxy!

In mid-April, the SEC announced that it voted to reopen the comment period for the 2016 "universal proxy" proposal - which would amend Schedule 14A and related rules to require the use of a single proxy card in all non-exempt solicitations for contested director elections.

Last summer, it looked like this rule was nearing the finish line – and Acting SEC Chair Allison Herren Lee noted just last month that it was still on the near-term agenda. But – and this might be the greatest understatement to ever appear in this blog – a lot has happened since these amendments were proposed in October 2016. The 15-page reopening release says that the Commission wants more input in light of corporate governance developments that could affect how universal proxy cards work, such as:

– There have been several contests where one or both parties have used a universal proxy card

– Increased adoption of proxy access bylaws

– Use of virtual shareholder meetings

– New forms of advance notice bylaws that require dissident nominees to consent to being named in the company's proxy statement and on its proxy card

The release identifies 25 topics on which the Commission would appreciate input - about half relate to fund-specific issues. The formal comment period will be open for 30 days after the release is published in the Federal Register, which often takes about a month. Here are all the comments submitted to-date. For even more background, see this Cooley blog.

SPACs: Less Risky Than IPOs? Corp Fin Chief Says "Don't Bet On It"

In early April, John Coates, Acting Director of Corp Fin issued a statement titled "SPACs, IPOs and Liability Risk under the Securities Laws." John blogged about it on DealLawyers.com – here's his post (and also make sure to check out footnote 7):

As I've previously blogged, some commentators have suggested a driving force behind the SPAC boom may be the availability of the PSLRA safe harbor for a de-SPAC merger. The availability of the safe harbor supposedly provides greater freedom for sponsors to share projections than would be the case in an IPO, to which the safe harbor doesn't apply. The presumed availability of the safe harbor is one reason why some have suggested that a de-SPAC transaction involves less risk than a traditional IPO.

In a statement, the Acting Director of Corp Fin, John Coates, called the assumption that de-SPAC deals involve less liability risk than traditional IPOs into question. Here's an excerpt:

It is not clear that claims about the application of securities law liability provisions to de-SPACs provide targets or anyone else with a reason to prefer SPACs over traditional IPOs. Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst. Indeed, in some ways, liability risks for those involved are higher, not lower, than in conventional IPOs, due in particular to the potential conflicts of interest in the SPAC structure.

More specifically, any material misstatement in or omission from an effective Securities Act registration statement as part of a de-SPAC business combination is subject to Securities Act Section 11. Equally clear is that any material misstatement or omission in connection with a proxy solicitation is subject to liability under Exchange Act Section 14(a) and Rule 14a-9, under which courts and the Commission have generally applied a "negligence" standard. Any material misstatement or omission in connection with a tender offer is subject to liability under Exchange Act Section 14(e).

De-SPAC transactions also may give rise to liability under state law. Delaware corporate law, in particular, conventionally applies both a duty of candor and fiduciary duties more strictly in conflict of interest settings, absent special procedural steps, which themselves may be a source of liability risk. Given this legal landscape, SPAC sponsors and targets should already be hearing from their legal, accounting, and financial advisors that a de-SPAC transaction gives no one a free pass for material misstatements or omissions.

Director Coates also highlighted the limitations of the PSLRA's safe harbor for forward-looking statements. Among other things, he noted that it only applies in private litigation, not SEC enforcement proceedings, applies only to forward-looking statements, and doesn't apply to statements that are made with actual knowledge of their falsity. He also suggested that a de-SPAC merger may well be regarded as an "initial public offering" not subject to the safe harbor, and raised the possibility of clarifying rulemaking from the SEC concerning the scope of the safe harbor and its application to SPAC transactions.

Corp Fin's "SPAC" Statement: All That Glitters Is Not Gold

At the start of April, Corp Fin issued this "Staff Statement" to highlight accounting, financial reporting & governance issues that they want people to carefully consider before taking private companies public via a SPAC. Acting Chief Accountant Paul Munter also issued this statement to further emphasize the complex financial reporting & audit considerations that come into play with these transactions. These statements are being made at the Staff level and aren't approved by the Commission, but they underscore that people at the SEC think the SPAC frenzy warrants caution.

Corp Fin's statement points out that private companies need to thoroughly lay the groundwork for going public – even if they're not doing it via a traditional IPO. Here are a few (paraphrased) reasons why:

– Financial statements for the acquired business must be filed within four business days of the completion of the business combination pursuant to Item 9.01(c) of Form 8-K. You aren't entitled to the 71-day extension of that Item.

– The SPAC - and the combined company - need adequate expertise, books & records and internal controls to be able to meet reporting deadlines, satisfy the form & content requirements of financial statements, adopt accounting standards that may not have applied when private, understand "predecessor" implications, and generally ensure that they're providing timely & reliable reporting

– The combined company will need to continue to satisfy quantitative & qualitative listing standards - e.g., the SPAC may lose round lot holders during the business combination; the private operating company may not have in place adequate independent director oversight, appropriate audit committee expertise, or a code of ethics

In addition, the Staff wants everyone to understand that going the SPAC route means that the combined company will be more restricted in future capital raising transactions. For example, for 3 years following the business combination, they'll be an "ineligible issuer" (no WKSI status, no FWPs, etc.) – and also during that 3-year period, they won't be able to incorporate by reference on Form S-1.

These limitations on capital raising aren't new rules – they're really just saying that the more recent "fast track" alternatives aren't available to former shells. But they bear emphasis with the business crowd who are excited about a fast deal now and will be decidedly less excited about a slow deal later. Do yourself a favor and put it in writing!

Corp Fin & OCA Staff Clarify How to Account for SPAC Warrants – Restatement Analysis Coming Your Way?

Warrants are a standard part of how SPACs raise money, and they're often classified on balance sheets as equity. But as part of the SEC's ongoing scrutiny of these deals - and as a follow-up to statements issued in early April – Acting Corp Fin Director John Coates and Acting Chief Accountant Paul Munter issued a Joint Statement saying that these instruments might instead need to be classified as liabilities, which means that they need to be revalued every period and cause fluctuations in net income that are complicated to explain.

That's a big issue, especially for SPACs that have been filing financials for many reporting periods that could now be considered erroneous, and also for SPACs that are trying to go effective with registration statements.

When it comes to accounting for warrants, the statement discusses fact patterns and specific warrant terms that can impact whether the warrants can be classified as equity or as an asset or liability that requires a fair value assessment each period. Equity classification requires that the instrument (or embedded feature) be indexed to the company's own stock (e.g., the payoff can't depend on who the holder is). Another common situation that GAAP treats as a liability is if an event not within the company's control could require net cash settlement. There's a big emphasis on this being a "facts & circumstances" analysis – for each entity and each contract. Here are a couple of examples from the statement:

We recently evaluated a fact pattern relating to the terms of warrants that were issued by a SPAC. In this fact pattern, the warrants included provisions that provided for potential changes to the settlement amounts dependent upon the characteristics of the holder of the warrant. Because the holder of the instrument is not an input into the pricing of a fixed-for-fixed option on equity shares, OCA staff concluded that, in this fact pattern, such a provision would preclude the warrants from being indexed to the entity's stock, and thus the warrants should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings.

We recently evaluated a fact pattern involving warrants issued by a SPAC. The terms of those warrants included a provision that in the event of a tender or exchange offer made to and accepted by holders of more than 50% of the outstanding shares of a single class of common stock, all holders of the warrants would be entitled to receive cash for their warrants. In other words, in the event of a qualifying cash tender offer (which could be outside the control of the entity), all warrant holders would be entitled to cash, while only certain of the holders of the underlying shares of common stock would be entitled to cash. OCA staff concluded that, in this fact pattern, the tender offer provision would require the warrants to be classified as a liability measured at fair value, with changes in fair value reported each period in earnings.

Even though it may be painful, if you haven't already talked with your auditors about this, it's probably time to give them a call. If you determine there's a material error in previously filed financial statements – such as a reclassification of warrants from equity to a liability that also experienced a material fluctuation in value – the statement includes a reminder about information to include in an amended Form 10-K and any subsequent Form 10-Qs. It also reminds companies of their need to maintain internal controls over financial reporting and disclosure controls and procedures to determine whether those controls are adequate.

This latest statement could have the effect of slowing the deluge of SPAC transactions, as companies will need to wrangle with their accountants and others over terms of any warrants. If you have questions about technical accounting matters involving SPAC warrants, you should contact the Office of the Chief Accountant – and for questions about restating financial statements, contact Corp Fin's Chief Accountant's Office.

SEC Approves NYSE Amendments Easing Shareholder Approval Requirements

Earlier this month, following a comment period during which it received no comments, the SEC approved amendments to the NYSE Listed Company Manual relating to shareholder approval requirements for related-party equity issuances and private placements exceeding 20% of a company's outstanding stock or voting power. The amended requirements bring the NYSE's shareholder approval rules into closer alignment with Nasdaq rules and provide listed companies with greater flexibility to raise capital.

The NYSE initially issued a waiver to its shareholder approval requirements back in April 2020 as companies were trying to raise capital during the Covid-19 pandemic - the waiver was extended a couple of times and the rule amendments are substantially the same as the waivers. Steve Quinlivan's blog details the amendments relating to Sections 312.03, 312.04 and 314.00 of the NYSE Listed Company Manual. This excerpt summarizes changes to Section 312.03(b):

– Shareholder approval would not be required for issuances to a Related Parties' subsidiaries, affiliates or other closely related persons or to any companies or entities in which a Related Party has a substantial interest (except where a Related Party has a five percent or greater interest in the counterparty, as described below).

– Shareholder approval would be required for cash sales to Related Parties only if the price is less than the Minimum Price.

– Issuances to a Related Party that meet the Minimum Price would be subject to shareholder approval for any transaction or series of related transactions in which any Related Party has a five percent or greater interest (or such persons collectively have a 10 percent or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction and the present or potential issuance of common stock, or securities convertible into common stock, could result in an increase in either the number of shares of common stock or voting power outstanding of five percent or more before the issuance.

New Russia Sanctions May Prompt "Iran Notice" Disclosure

On March 2, 2021, the Secretary of State designated various entities affiliated with Russia's government,including the FSB, as parties subject to Executive Order 13382 for "having engaged, or attempted to engage, in activities or transactions that have materially contributed to, or pose a risk of materially contributing to, the proliferation of weapons of mass destruction."  This designation was prompted by the poisoning of dissident Alexander Navalny, and may result in some public companies that do business in Russia being required to provide the disclosure and accompanying "Iran Notice" filing contemplated by Section 13(r) of the Exchange Act.

This Bryan Cave blog reviews the scope & implications of the new sanctions designations, including the potential disclosure obligations for public companies with business in Russia:

Importantly, the additional sanctions designations pursuant to EO 13382 may trigger reporting to the SEC pursuant to Section 13(r)(1)(D) of the '34 Act. Although Section 13(r)(1) of the '34 Act is typically associated with the sanctions against Iran, some of the reporting triggers are broader than just transactions involving Iran. Among the broader triggers are any transactions or dealings knowingly conducted with "any person the property and interests in property of which are blocked pursuant to Executive Order No. 13382."

Based on this, parties that engage in transactions with any of the parties now blocked pursuant to EO 13382 in connection with the Navalny poisoning must be cognizant of these reporting requirements if the party is an issuer or the affiliate of an issuer required to report on a periodic basis to the SEC.

There are a number of Russian entities subject to the sanctions, but the big kahuna is the FSB. As this Hogan Lovells memo notes, the FSB plays a prominent role in licensing the importation of IT and other encryption products into Russia. Notification to or approval by the FSB may be necessary for a variety of technology products, including "laptops and smartphones, connected cars, medical devices, software, or any other items that make use of ordinary commercial encryption."

OFAC updated General License No. 1B to confirm United States persons may continue to interact with the FSB for purposes of qualifying their products for importation and distribution in Russia, but that license doesn't include an exemption from providing the disclosure required by Section 13(r) of the Exchange Act or from filing the accompanying Iran Notice with any annual or quarterly report.

SEC Enforcement: Public Companies in the Cross-Hairs?

This Baker Donelson memo discusses expectations that the SEC will engage in intensified enforcement efforts on a number of fronts, and says that public companies are among other entities that should should expect greater scrutiny from the Division of Enforcement than they've received in recent years. Here's an excerpt:

Chairman-designate Gensler testified at his March 2, 2021 confirmation hearing on several new areas of focus. Principal is the emphasis on new disclosure rules, which might require companies to report more about political contributions, workforce diversity, corporate governance, and the risks of climate change. Then, on March 4, 2021, the SEC created a Climate and ESG Task Force in the Division of Enforcement.

Another new focus would be on trading apps, like Robinhood, regarding whether investors get the best deals when such apps sell their trades for execution by market-making firms. Whereas former Chairman Jay Clayton emphasized cybersecurity issues and protecting retail investors under his Main Street investor initiative, more emphasis may now be placed on public companies (and possibly private equity and hedge funds, e.g., conflicts of interest) and issues such as inadequate disclosures, revenue recognition, and improper accounting.

The memo says that following the SEC's COVID-19-specific pronouncements in March 2020 and thereafter about disclosure requirements and safe harbors for appropriate forward-looking statements, both SEC enforcement and private class actions can be anticipated. In addition, the memo suggests that companies in industries such as travel, health care, software, energy, and financial services, among others, may face enforcement actions similar to the proceeding that the SEC brought against The Cheesecake Factory late last year.

Division of Examinations Observes Instances of ESG Proxy Voting Inconsistencies

The SEC's Division of Examinations issued a risk alert with observations from its review of investment advisers, investment companies and funds that offer ESG investment products and services. The Division examined firms to evaluate whether they accurately disclose their ESG investment approach, and whether they implement policies, procedures and practices that synch with their ESG-related disclosures. The risk alert describes some of the Division's observations relating to deficiencies and internal control weaknesses, including this excerpt about inconsistencies in proxy voting with advisers' stated approaches:

The staff observed inconsistencies between public ESG-related proxy voting claims and internal proxy voting policies and practices. For example, the staff observed public statements that ESG-related proxy proposals would be independently evaluated internally on a case-by-case basis to maximize value, while internal guidelines generally did not provide for such case-by-case analysis. The staff also noted public claims regarding clients' ability to vote separately on ESG-related proxy proposals, but clients were never provided such opportunities, and no policies concerning these practices existed.

The takeaway here is that companies, who think they may be doing and disclosing what certain investment companies and funds will value and evaluate, might not be able to count on these firms following their proxy voting guideline of a case-by-case analysis for a particular proposal. Whether this means the vote would be with management or not isn't clear but when voting determinations are "case-by-case," companies doing the right thing might think there's a chance votes would be cast with management's recommendation. This discrepancy highlights the need for companies, particularly those with ESG-related ballot items, to actively engage with shareholders to help stay on top of how different investment firms intend to cast their votes.

Commissioner Hester Peirce released a Public Statement about the ESG risk alert providing some added context. With respect to the risk alert discussion about inconsistencies in proxy voting, Commissioner Peirce reminds readers to keep the Commission's previously issued proxy voting interpretive releases in mind. Commissioner Peirce notes that 'While not applicable only to advisers using ESG strategies, these Commission statements remind advisers that proxy voting, when such authority is undertaken on behalf of the client, is subject to advisers' fiduciary duty and must be undertaken in the client's best interest.'

Quarterly Guidance: Should Companies Get Back In The Game?

Shortly after the onset of the pandemic, many companies opted to discontinue providing quarterly EPS guidance for the remainder of 2020. This McKinsey article says that companies thinking about providing that guidance in 2021 may want to think again:

McKinsey compared the market performance of companies that offer quarterly earnings guidance with the performance of those that don't. It found that the companies that did not provide EPS guidance did not generate lower total returns to shareholders (TRS). That same body of research revealed no difference in TRS between companies that regularly met the earnings consensus and those that occasionally missed it.

Lower TRS occurred only if companies missed consensus consistently over several quarters because of systematically lower performance. Further, McKinsey research showed that only 13 percent of investors surveyed thought that consistently beating EPS estimates was important for assessing a potential investment.

What's the harm, then, in providing quarterly earnings guidance if investors don't weigh such information heavily? One potential problem is the overemphasis of quarterly earnings to evaluate management teams' performance, which can create unnecessary noise in corporate boardrooms. More important, EPS-focused companies are known to implement actions to "meet the number" –deferring investments or cutting costs excessively, for instance.

McKinsey's views on quarterly guidance echo those of many business and investor groups. Instead of returning to the practice of providing quarterly EPS guidance, McKinsey says that the better approach is to provide long-term guidance, and that "For most companies, this would mean providing three-year targets (at a minimum) for revenue growth, margins, and return on capital."

"Robust" Disclosure about Virtual Shareholder Meetings: Glass Lewis Expectations

Earlier this year, Lynn blogged about some refinements Glass Lewis made to its disclosure expectations for virtual shareholder meetings. Virtual shareholder meetings were new for many last year and this year, expectations relating to information about the meetings are likely higher. For companies short on resources, some may have relied on an if-it-ain't broke, don't-fix-it-model, which we've heard may have caught some companies off-guard when receiving a Glass Lewis recommendation "against" members of their nominating committee. As a reminder, here's an excerpt from a Glass Lewis blog entry describing their expectations:

From 2021, our expectations of companies holding virtual meetings globally are as follows:

Glass Lewis believes that virtual-only meetings have the potential to curb the ability of a company's shareholders to meaningfully communicate with company management and directors. However, we also believe that the risks of a reduction in shareholder rights can be largely mitigated by transparently addressing the following points:

  • When, where, and how shareholders will have an opportunity to ask questions related to the subjects normally discussed at the annual meeting, including a timeline for submitting questions, types of appropriate questions, and rules for how questions and comments will be recognised and disclosed to shareholders.
  • In particular where there are restrictions on the ability of shareholders to question the board during the meeting – the manner in which appropriate questions received prior to or during the meeting will be addressed by the board; this should include a commitment that questions which meet the board's guidelines are answered in a format that is accessible by all shareholders, such as on the company's AGM or investor relations website.
  • The procedure and requirements to participate in the meeting and/or access the meeting platform.
  • Technical support that is available to shareholders prior to and during the meeting.

We believe that shareholders can reasonably expect clear disclosure on these topics to be included in the meeting invitation and/or on the company's website at the time of convocation.

In the most egregious cases where inadequate disclosure of the aforementioned has been provided to shareholders at the time of convocation, we will generally recommend that shareholders hold the board or relevant directors accountable. Depending on a company's governance structure, country of incorporation, and the agenda of the meeting, this may lead to recommendations that shareholders vote against:

  • Members of the governance committee, or equivalent (if up for re-election);
  • The chair of the board (if up for re-election); and/or
  • Other agenda items concerning board composition and performance as applicable (e.g. ratification of board acts).

For resources to help when preparing for virtual shareholder meetings, check out our "Virtual Shareholder Meetings" Practice Area. We have memos about "best practices" and a virtual shareholder meeting checklist to help you through some of the logistical issues.

The Returning Influence of Retail Investors: This Year's "Sleeper Issue"?

The retail segment of shareholders had been holding steady around 30% the last couple of years, well below the 85% levels of the 1960s, before the dawn of huge asset managers. But now we're in the age of stonks – and no-fee trading platforms. Although some are noticing hat retail trading is slowing, there's no denying that the number of retail accounts has swelled in the last year. Kris Veaco wrote to us to say that it's the fastest growing group of investors – some proxy intermediaries have noticed an uptick of 50% in email accounts compared to last year!

As Liz has noted a couple of times on our Proxy Season Blog, companies need to anticipate higher proxy distribution costs if they've seen a jump in retail holders. You may also need to brace yourselves for less predictable voting outcomes – especially with TD Ameritrade's elimination of broker discretionary voting.

But there's also an opportunity here – retail investors can be long-term, loyal supporters of management, and may also be enthusiastic participants in capital raises. This NYT article reports that some companies are rolling out the red carpet to welcome them – even changing the earnings release process to allow for more interaction with individuals. Here's an excerpt (also see this Axios article):

After CarParts.com reported its quarterly results last month, executives at the company, which sells replacement auto parts, did what many of their ilk do: They held a conference call with Wall Street analysts, fielding questions about inventory levels, profit margins and corporate strategy.

Roughly 30 minutes later, the same executives were on Clubhouse, hosting an entirely different kind of audience. Their 2,000 or so guests had gathered at the buzzy online meeting spot to learn about the company. Their questions were far more straightforward. How did the business work? Why was CarParts.com able to offer lower prices than brick-and-mortar rivals? Were CarParts.com shares worth buying?

CarParts.com isn't the only company to do this – Restaurant Brands International also invited "customers & guests" to discuss Q4 earnings with its leaders on Clubhouse, and other companies are using podcasts and YouTube to reach the retail audience. Tesla has also been using the interactive "Say" platform for earnings calls for a while now – Liz blogged a couple of years ago about the impact that was having on the Q&A portion of the call.

The thought of extra conversations with different groups of investors makes us a little skittish – but as long as execs comply with Reg FD, it seems like it's probably fine to do. Please correct us if you disagree!

Board Diversity: Women Make Gains On Silicon Valley Boards

Fenwick & West recently published this report on board gender diversity among large public companies & the Silicon Valley 150. Here are some of the key findings:

– The representation of women on boards continued to increase between 2018 (the last year Fenwick published the gender diversity survey) and 2020 in the United States and at rates higher than in years past. The average percentage of women directors increased 8 percentage points in the SV 150 to 25.7% in 2020 and in the S&P 100 rose 4 percentage points to 28.7% (with the SV Top 15 increasing 4.5 percentage points to 30.3%).

– In the last few years in both the S&P 100 and the SV Top 15, 100% of companies have had at least one woman director. In the SV 150 overall, the percentage of companies with at least one woman director increased 16.4 percentage points to 98%.

– In the S&P 100, gender diversity has grown slowly but steadily at a cumulative rate of 61%, or a compound annual growth rate (CAGR) of 2.37%. The SV 150 has lower scores overall, but a greater cumulative growth rate of 216%, and more than double the CAGR, 5.42% (with more rapid growth over the past decade).

The report says that most SV 150 companies met the initial 2019 standard for board gender diversity mandated under California's SB 826, but that 57% of those companies will need to add women to meet the law's 2021 standard. Only 14% of S&P 100 companies would need to add women to their boards in order to satisfy the 2021 standard.

It's Here: "practicalESG.com" - Sign Up Today!

PracticalESg.com is here! To celebrate our Earth Day launch, we're planting a tree in the name of the first 422 people who sign up to receive the free practicalESG.com blog in their inbox. Sign up now and get your honorary tree!

As Liz blogged a few weeks ago, we're thrilled that Lawrence Heim has joined our team to lead this new ESG platform. With Lawrence being a longtime ESG professional, you'll be able to use his daily updates and more than 30 years of experience to get practice pointers and real talk on developments that affect your sustainability programs – including how to manage ESG data tracking and reporting.

Eventually, practicalESG.com will be home to membership-based portals that take a deeper dive into environmental, social & governance issues. We'll be unveiling those features in the coming months, and of course we'll also continue to cover corporate governance, proxy season issues and SEC rulemaking here on TheCorporateCounsel.net

Remember, help us celebrate by signing up for Lawrence's free daily blog and getting a tree planted in your name!

March-April Issue: "The Corporate Counsel" Newsletter

The March-April Issue of The Corporate Counsel newsletter was posted – & also mailed (try a no-risk trial). The issue includes articles on:

– Climate Change Disclosures: Preparing for Staff Scrutiny

– The SEC's Rule 144 Proposals: Our Suggestions to Combine the Form 144/Form 4 Filing Process Sees the Light of Day!

– SEC Eases Auditor Independence Rules

Remember that you can also subscribe to our newsletters electronically – an option that many people are taking advantage of in the "remote work" environment.

Conference Calendar

What's New on Our Websites

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

  • "Deep Dive with Dave" podcasts in which Dave Lynn takes a deep dive with his special guests as they explore the latest developments in securities laws and corporate governance. Check out these episodes:
  • - An Electronic Signatures Workshop with Jim Brashear of McKesson Corporation – topics include:
            ο Background of Signature Requirements
            ο The SEC's Regulation S-T Rule Changes
            ο How to Authenticate an Individual's Identity
            ο Addressing Non-Repudiation
            ο Initial Electronic Signature Authentication Document
            ο Retention of Electronic Signatures

    - A Confidential Treatment Workshop with Dave Meyers of Troutman Pepper – topics include:
            ο Overview of the Confidential Treatment Process
            ο The 2019 SEC Rule Changes – The "Ask for Forgiveness" Approach
            ο The Filing Review Process
            ο Seeking Extensions of Confidential Treatment Requests
            ο Farewell to Competitive Harm

    - Our own John Jenkins of TheCorporateCounsel.net and Calfee, Halter & Griswold – Dave and John cover the latest issue of "The Corporate Counsel" newsletter, topics include:
            ο Virtual Reality: Investors Want More from 2021 Virtual Meetings
            ο Form 10-K Tidbit: Can You Drop Rule 3-09 Financial Statements?
            ο A Form 8-K Pitfall: Fallout from Changes to Section 162(m)
            ο Wither The Integration Doctrine? A New Approach Dawns this Spring

    - Mark Kronforst of EY and former Corp Fin Chief Accountant – topics include:
            ο How significant are the Regulation S-X amendments for acquisitions and dispositions to public companies?
            ο How do the new significance tests work?
            ο Will companies need to provide more pro forma financial information?
            ο Do the changes to the significance tests affect disclosures outside of Rule 3-05, such as Rule 3-09?
            ο What potential pitfalls should companies consider with this new approach?
            ο When do these changes go into effect and how does early compliance work?

  • An "Inside Track with Liz" podcast featuring podcast featuring Meaghan Nelson, Veeva Systems' Associate General Counsel and Assistant Corporate Secretary, about Veeva Systems recent conversion to public benefit corporation. Topics include:
    • How the possibility of a PBC conversion came to be on the board's agenda - and what advantages were identified
    • What type of shareholder outreach Veeva conducted before the special meeting - and what type of reaction it received from outside shareholders when it told them it was considering this as a possibility
    • What Veeva did under state corporate law to effect the conversion - and whether it's planning many changes to its board committees and SEC disclosures to reflect the broader "stakeholder" focus
    • Whether PBC conversions will become a trend
    • Meaghan's advice for in-house or outside counsel who might be advising clients on whether to convert to a PBC
  • An "Inside Track with Liz" podcast featuring Alex Smith, chair of Fenwick & West's corporate group, about the phenomenon of virtual board meetings. Topics include:
    • What special issues exist for boards of directors who are meeting in a virtual format
    • What should board advisors be doing to ensure that the board meetings are secure from a technology perspective and that all document retention policies are being followed for notes or recordings
    • What are some effective practices to encourage the type of dialogue and interaction that boards would have at an in-person meeting
    • Beneficial "virtual" practices that could continue after the pandemic
    • Recommended steps for companies who are bringing on one or more directors while we're in this environment - either because they're newly public or just because of regular refreshment practices
    • Traps for the unwary that board advisors should be watching for
  • A podcast series - "Women Governance Gurus" - that Liz has been hosting with Courtney Kamlet of Vontier. So far, these illustrious guests have joined Liz & Courtney to talk about their careers in the corporate governance field - and what they see on the horizon:
    • Karen Francis - Senior Advisor, TPG Capital and Vontier Corporation Board Chair
    • Jackie Cook - Director of Sustainable Stewardship Research, Morningstar
    • Lily Brown - Partner, WilmerHale
    • Kristina Fink - Vice President, Group Counsel, Deputy Corporate Secretary at American Express
    • Tanuja Dehne - President & CEO, Geraldine R. Dodge Foundation and public company board member

The following memos & insights:

- "Updated FAQs: US Voting Policies" - ISS (4/21)
- A Fresh Look at Rule 10b5-1 Trading Plans" - WilmerHale (4/21) (p.24)
- "5 Questions Prospective SPAC Directors Should Ask" - Skadden (4/21)
- "SEC Reaffirms Guidance on Shareholder Meetings During COVID-19" - Covington (4/21)
- "A Checklist for Companies Considering Whether to Speak on Political Issues" - Perkins Coie (4/21)
- "SEC Approves Amendments to NYSE Shareholder Approval Requirements" - Paul Weiss (4/21)
- "2d Cir. Holds NDA Establishes Duty of Trust to Uphold Insider Trading Conviction" - Simpson Thacher (4/21)
- "SEC's New Guidance on Liability Risks Likens SPACs to IPOs" - Fenwick (4/21)
- "Audit Committee Resource: 2021 Inspections Outlook" - PCAOB (4/21)
- "Audit Committee Guide" - Wachtell Lipton (4/21)
- "SEC Staff Cautions Private Companies Going Public Through deSPAC Transactions" - Covington & Burling (4/21)
- "Engagement Priorities for 2021" - BlackRock (3/21)
- "Changes to SSGA's 2021 Proxy Voting & Engagement Guidelines" - SSGA (3/21)

People: Who's Doing What & Where

Gary Gensler Names Initial Senior Staff Members: The SEC announced that Gary Gensler named four individuals as senior staff members with responsibility for advising Gary on matters before the Commission. Prashant Yerramalli, the SEC's Chief of Staff will continue to serve in that role and will serve as a senior advisor to Gary on all aspects of the agency's mission, including enforcement, rulemaking, examinations and agency operations. Heather Slavkin Corzo will serve as Policy Director leading a team of policy experts who will advise Gary on rulemakings. Kevin R. Burris will serve as Counselor to the Chair and Director of the Office of Legislative and Intergovernmental Affairs – being the primary liaison to Member of Congress, other federal agencies and state governments. Scott E. Schneider will serve as Counselor to the chair and Director of the Office of Public Affairs and be Gary's principal advisor on communications.

Marc Berger, Former Acting Director of SEC Enforcement Division to Join Simpson Thacher: Simpson Thacher & Bartlett LLP announced that Marc P. Berger, the former Acting Director of the SEC's Enforcement Division will join the firm in June as a Partner in the firm's Litigation Department. Prior to serving as the Enforcement Division's Acting Director, Marc served as the Division's Deputy Director in 2020 and was Director of the Division's New York Regional Office from 2017 to 2020. Marc also previously served in the U.S. Attorney's Office for the Southern District of New York, including within the Securities and Commodities Task Force where he was Chief from 2012 to 2014.

Jane Norberg, Chief of SEC Whistleblower Office Departs Agency: The SEC announced that Jane Norberg planned to leave the agency in April. Jane had been with the agency's Whistleblower Office since near its inception in 2012, serving first as Deputy Chief and then serving as Chief of the Whistleblower Office since 2016. The SEC's press release outlined many accomplishments during Jane's tenure with the Whistleblower Office including that the SEC's whistleblower program issued awards totaling nearly $650 million to more than 110 individual whistleblowers – this includes nine of the ten largest awards in the program's history. Emily Pasquinelli, the Whistleblower Office's Deputy Chief, will serve as Acting Chief following Jane's departure.

Your Input, Please

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Because we view TheCorporateCounsel.net as a "community" site, let us know if you would like to contribute content to our site. E-mail comments, suggestions and other input to liz@thecorporatecounsel.net.

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