E-Minders March 2021

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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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 Webcast on TheCorporateCounsel.net: Join us on March 9th for the webcast - "Conduct of the Annual Meeting" - to hear Crown Castle's Masha Blankenship, AIG's Rose Marie Glazer, Rocket Companies' Tina V. John, American Election Services' Christel Pauli and Oracle's Kimberly Woolley discuss expected “virtual meeting” trends for the 2021 proxy season, annual meeting logistics, rules of conduct, handling shareholder questions, and voting & tabulation issues.

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.

There is no cost for this webcast 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 CompensationStandards.com: Join us on March 16th for the webcast - " Top Compensation Consultants Speak" - to hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Marc Ullman of Meridian discuss what compensation committees should be learning about - and considering, evolving views of pay-for-performance, expanding roles for compensation committees, goal-setting & adjustments, and an early look & predictions for the 2021 proxy season.

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 CompensationStandards.com members. If you are not a member, sign up now to access the program. You can sign up online, send us an email at info@ccrcorp.com – or call us at 800.737.1271.

ESG: Corp Fin to Scrutinize Climate Change Disclosures

In news that may throw an 11th hour monkey wrench into the finalization of a number of 10-K filings, Acting SEC Chair Allison Herren Lee issued a statement in which she directed Corp Fin to take a hard look at companies' climate change disclosures. Here's an excerpt:

Today, I am directing the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. The Commission in 2010 provided guidance to public companies regarding existing disclosure requirements as they apply to climate change matters.

As part of its enhanced focus in this area, the staff will review the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks. The staff will use insights from this work to begin updating the 2010 guidance to take into account developments in the last decade.

You may recall that a few years ago, the GAO took a look at the SEC's actions since it issued climate change disclosure guidance. The GAO report expressed some concern with the Staff's level of training on climate related disclosures, so that may present some challenges for everyone involved in the review process. Those training shortcomings may well have been addressed in the years following the GAO report, but there's still the matter of the lack of uniformity in climate change disclosures that the GAO report also noted.

Finally, the SEC hasn't exactly been cracking the disclosure whip on climate change in recent years, so the Staff's likely to find a fairly target rich environment when it reviews existing climate disclosures. Add all of that up, and, well, in the words of Bette Davis, "fasten your seat belts, it's going to be a bumpy night."

Now is probably a good time to refresh yourself on the SEC's 2010 guidance, and to review the other resources in our "Climate Change" Practice Area. If you want to get a sense for where the SEC may be heading in this area and the broader ESG disclosure category, check out this blog from Cooley's Cydney Posner.

Disclosure: ESG Top Priority for Corp Fin's Acting Director

Acting Chair Lee & Corp Fin's Acting Director John Coates are clearly "singing from the same hymnal" when it comes to increasing the agency's emphasis on climate change and other ESG disclosures. In fact, according to this Bloomberg Law article, ESG is Coates' top disclosure priority. Here's an excerpt:

A Harvard Law School professor who has pushed the SEC to update its corporate disclosure requirements on climate change and other ESG issues is now planning to turn his words into action as an agency insider. John Coates, who joined the Securities and Exchange Commission on Feb. 1 as acting director of its Division of Corporation Finance, is poised to play a leading role in any agency action to boost companies' environmental, social, and governance disclosures, following his work on the issues at Harvard and on an SEC advisory panel.

Under his guidance, the SEC's Division of Corporation Finance could enhance its focus on climate disclosures when it reviews companies' filings. It also could start working on rules to mandate more corporate reporting on climate change and other ESG matters. He may even play a role in requiring disclosures on companies' political spending, if Congress allows the SEC to act.

"If I were to pick a single new thing that I'm hoping the SEC can help on, it would be this area," Coates said about ESG in an interview with Bloomberg Law.

A recent Reuters article also quotes Coates as saying that the SEC "agency 'should help lead' the creation of a disclosure system for environmental, social and governance (ESG) issues for corporations."

Market Mania: Corp Fin Issues Sample Comment Letter

Corp Fin issued a sample comment letter for companies conducting securities offerings during times of extreme price volatility. The Staff cautioned that the risks associated with price volatility are particularly acute when companies are seeking to raise capital during times of stock run-ups, high short interest or reported short squeezes, or atypical retail investor interest – i.e., the type of "market mania" that we saw a couple weeks ago with GameStop, and last summer with Hertz.

The letter highlights issues for companies to consider when preparing disclosure documents – including automatically effective registration statements and pro-supps that wouldn't typically be subject to Staff review. In particular, the Staff wants companies to consider disclosing on the prospectus cover page:

– A description of recent stock price volatility in the company's stock and any known risks of investing in the stock under the circumstances

– Comparative stock price information prior to recent volatility and any recent change (or lack thereof) in the company's financial condition or results of operation that are consistent with the recent stock price change

– Any recent change in the company's financial condition or results of operations, such as earnings, revenues or other measure of company value that is consistent with the recent change in your stock price – if no such change to financial condition or results of operations exists, disclose that fact

Corp Fin also suggests companies provide information about potential risk factors addressing the recent extreme volatility in a company's stock price, effects of a potential "short squeeze," the potential impact of the offering on a company's stock price and investors and the potential dilutive impact of future offerings on investors purchasing shares in the current offering. The sample letter includes information each of these potential risk factors should include.

For use of proceeds, the sample letter also suggests that companies disclose the possibility that they may not be successful in raising the maximum offering amount and the priorities for proceeds received.

Corp Fin cautions that the sample comment letter doesn't provide an exhaustive list of issues companies should consider. Companies experiencing extreme price volatility are encouraged to contact their Corp Fin industry office with questions about proposed disclosure. Kudos to Corp Fin for issuing this guidance so that advisors of companies that might get caught up in a fast-moving #stonk craze can prepare in advance.

SEC Enforcement: Powering Up

In mid-February, Acting SEC Chair Allison Herren Lee announced that she's restored to senior Enforcement Staff the power to approve the issuance of Formal Orders of Investigation, which designate who can issue subpoenas in an investigation. That means that Enforcement Staffers will be able to act more quickly to subpoena documents and take sworn testimony.

This is a reversal of the policy that then-Acting Chair Mike Piwowar implemented in the early days of the Trump administration – and departure from the traditional requirement for Enforcement Staff to obtain sign-off from the Commissioners on a Formal Order of Investigation before issuing subpoenas. Former Chair Mary Shapiro first expanded the subpoena power back in 2009, in the wake of the Bernie Madoff fiasco.

Decentralizing the power to pursue enforcement actions is a sign that the pendulum is currently swinging toward the "investor protection" aspect of the SEC's mission. This job posting suggests that the Enforcement Division also might be staffing up. We don't know for sure that these steps will lead to a higher number of investigations – see this Jenner & Block memo for key open questions that will determine how aggressive things could get. Nevertheless, companies are unlikely to view them as a positive development.

SEC Severs Enforcement Settlements & "Bad Actor" Waivers

Also in mid-February, Acting SEC Chair Allison Herren Lee issued this statement to reverse the Clayton-era policy of simultaneously considering enforcement settlements and requests for waivers from "bad actor" consequences – e.g., loss of WKSI status, Rule 506 eligibility and PSLRA safe harbors. Commissioners Hester Peirce and Elad Roisman followed with their own statement to object to the policy change.

The move means that waiver requests will revert to the domain of Corp Fin and the Division of Investment Management, rather than everything being negotiated by the Enforcement Division and companies being able to condition their settlement offers on the grant of a "bad actor" waiver. This Sullivan & Cromwell memo explains the three-fold impact of separating settlement & waiver conversations:

First, the change in policy signals greater skepticism on the part of the SEC with respect to granting waivers to settling entities. We expect that waivers will become more difficult to obtain and, when granted, may include additional, and potentially more burdensome, conditions.

Second, the change in policy creates increased uncertainty for entities settling with the SEC because they can no longer be guaranteed Commission review of the settlement of their enforcement matter simultaneously with their requested waivers. The impact of this change as a practical matter is unclear. If a settling party is denied a waiver and then seeks to withdraw its settlement offer, it remains to be seen whether the SEC will nevertheless proceed to seek judicial approval of the settlement in the face of such attempted withdrawal.

Third, the change in policy indicates the SEC's intent to keep waiver discussions substantially separate from enforcement recommendations. Our understanding is that these discussions generally happen separately in any case, so we do not view this as a substantive change.

Corp Fin's "No-Action" Page Gets a Makeover!

The SEC has redesigned Corp Fin's Rule 14-8 no-action page – and the layout is very user-friendly for those of us who spend proxy season monitoring incoming requests & responses. The old page was more spread out in narrative form, whereas this new version organizes into easy-to-read boxes the no-action response chart, incoming requests and final materials for responses – as well as reference materials and info from prior seasons. Bravo!

10b5-1 Plans: Senators Urge SEC Review

As this recent Cooley blog recounts, since the Rule 10b5-1 safe harbor was adopted 21 years ago, it's been a magnet for controversy. In the wake of trading gains realized by pharma execs when positive vaccine news came to light last fall, which were followed by remarks from outgoing SEC Chair Jay Clayton about "good corporate hygiene" for trading plans (also see this Cohen & Gresser memo), the safe harbor has been back in the spotlight.

Earlier in February, John blogged about "best practices" suggested by Glass Lewis that would promote transparency around these arrangements. People are now also talking about the "red flags" identified by this Stanford researchas signs of potentially opportunistic trades. The paper caught the attention of three Democratic US Senators – who used the research as a basis for this letter to Acting SEC Chair Allison Herren Lee. In it, the lawmakers urge the SEC to reexamine its policies on Rule 10b5-1 plans to improve "transparency, enforcement and incentives."

Specifically, the Senators note these possible remedies for "abusive" Rule 10b5-1 practices:

1. Requiring a four-to-six month "cooling off period" between adoption or amendment of a plan before trading under the plan may begin or recommence

2. Requiring public disclosure of the content of 10b5-1 plans, as well as trades that are made pursuant to such plans

3. Enforcement of existing filing deadlines – and requiring that forms disclosing 10b5-1 adoption dates are posted on Edgar

4. Enforcement of penalties when executives "benefit from short-term windfalls that don't translate into long-term gains" – by way of modifying Exchange Act Section 16(b) to apply to 10b5-1 profits that follow disclosure of material information, if the share price falls immediately after that disclosure

The letter asks the SEC to respond without much delay to a series of questions about its actions on this topic. One recommendation that the Senators didn't pull in from the Stanford research – for now – was a disqualification of single-trade plans. The professors contend that these plans are no different than traditional limit orders – and that Rule 10b5-1 should only apply to multiple transactions spread over a certain time period.

While that recommendation might seem reasonable to people who aren't dealing with administration of these plans, people in the trenches view it as further evidence of the "great divide" on this topic. A member wrote in with this feedback:

One recommendation that caught my eye is to disqualify single-trade plans. They say that single-trade plans aren't different from traditional limit orders (which wouldn't qualify for the safe harbor). I disagree. A trading plan can just set a tranche of shares to sell at a future date without specifying a price – they can be sold at whatever the market price is, which of course differs from a limit order.

My understanding of why an insider might have a single-trade plan is to diversify holdings following vesting of a large award. They know the vesting is coming up, they already hold a bunch of shares, and they want to diversify. So, they set up a trade sometime down the road, which allows the sale to happen even if there's an unscheduled blackout and also allows them to avoid dealing with executing the trade when they're busy with other things six months from now.

Also, we have a process with our captive broker where any limit order is automatically terminated when the trading window closes, as we don't want it to execute during a blackout period. So for our execs, a limit order wouldn't solve the issue of being able to trade during a blackout period – but a trading plan would.

Section 13(d) Reform: On the SEC's Agenda?

A recent Olshan blog discussing what activists might expect from a Gary Gensler led SEC raised the possibility that Section 13(d) reform just might find its way on to the SEC's agenda. This excerpt explains these efforts might garner bipartisan support:

At the CFTC, Mr. Gensler demonstrated an ability to balance progressive political pressures with competing industry interests. Should he take a similarly pragmatic approach if confirmed to lead the SEC, one of the areas where a coalition can be brokered between different interest groups is reform of Section 13(d) of the Exchange Act. Adopted in 1968 as part of the Williams Act, Section 13(d) instituted a rigorous beneficial ownership disclosure regime that requires stockholders to promptly notify issuers if they accumulate significant stock positions.

Ever since, corporations and their advisors have agitated for increasingly stringent investor reporting obligations. Likewise, progressives skeptical of hedge funds and activism in general have also trained their sights on parts of Section 13(d). As a testament to the appeal of this sentiment to both the business community and progressives, legislation (the "Brokaw Act") was introduced in the Senate in 2017 to intensify oversight of activist hedge funds through Section 13(d) reform by Senator Tammy Baldwin (D-WI) and former Senator David Perdue (R-GA), each a member of the peripheral wing of their respective party.

The blog suggests that in addition to potentially shortening the reporting window, the SEC's efforts could include expanding the definition of "beneficial ownership" to include derivative instruments that are not subject to settlement in the underlying security.

Electronic Signatures: Can You Authenticate Through Affirmative Reply Emails?

This Bryan Cave blog provides some helpful input about the SEC's recently adopted electronic signature process - a topic that we've received a lot of questions about in our Q&A Forum. Here's an excerpt addressing a common area of uncertainty: will the authentication requirements be met if a company emails a document for signature and asks that the recipient reply by email affirmatively indicating approval of the filing?

Many take the more conservative view that affirmative reply emails, without added features, are not sufficiently secure to authenticate the signer's identity. For example, someone other than the signer may have access to his or her email account and the ability to send affirmative reply emails on his or her behalf. Similarly, someone could theoretically walk by an unoccupied computer and send a reply email.

Another view is that an affirmative reply email in and of itself should be a sufficient "logical or digital" authentication as long as the attestation form confirms the signatory's email address to be used for that purpose.

We recommend that unless and until the SEC provides guidance, companies proceed with caution in using “affirmative reply” emails to authenticate signatures, and that, to the extent practicable, they consider adding features such as those discussed in Item 3 below.

As the blog's response suggests, the details surrounding the authentication requirement are somewhat murky, and this is an area where experienced practitioners disagree on the right approach.  Some guidance from the Staff on this and other electronic signature-related topics would be helpful. Sure, this is pretty mundane stuff - but worrying about the mundane stuff probably accounts for the vast majority of sleepless nights among securities lawyers.

Form 10-K Considerations & Reminders

With calendar year Form 10-K filings coming along, a recent Gibson Dunn memo walks through substantive and technical considerations to keep in mind when preparing 2020 Form 10-Ks. The memo covers recent amendments to Reg S-K, disclosure considerations in light of Covid-19, amendments to MD&A & financial disclosure rules and other considerations in light of recent and upcoming changes at the SEC. The memo includes a fairly extensive discussion of the new human capital disclosures and among other things, reminds companies to be mindful of what they've said about composition of their workforce in their CEO pay ratio disclosures. Here are a few other considerations, check out the complete 25-page memo for more:

KPIs: The SEC's Interpretive Release issued in January 2020 was a reminder that companies must disclose key variables and other qualitative and quantitative factors that management uses to manage the business and that would be peculiar and necessary for investors to understand and evaluate the company's performance, including non-financial and financial metrics. The memo reminds companies that if changes are made to the method by which they calculate or present the metric from one period to another or otherwise, the company should disclose, to the extent material, the differences between periods, the reasons for the changes and the effect of the changes. Changes may necessitate recasting the prior period's presentation to help ensure the comparison is not misleading.

Covid-19 Impact on Risk Factors: It is important that the COVID-19 risk factor disclosure be appropriately tailored to the facts and circumstances of the particular company, whether due to (i) risks that directly impact the company's business, (ii) risks impacting the company's suppliers or customers, or (iii) ancillary risks, including a decline in the capital markets, a recession, a decline in employee relations or performance, governmental regulations, an inability to complete transactions, and litigation. The SEC has reiterated that risk factors should not use hypotheticals to address events that are actually impacting the company's operations and brought enforcement actions against certain companies for portraying realized risks as hypothetical.[11] Accordingly, companies should be specific in providing examples of risks that have already manifested themselves.

Disclosure Controls and Procedures: In light of the substantial number of changes to the Form 10-K requirements and disclosure guidance, it is important for personnel and counsel to consider the manner in which the company's disclosure controls and procedures are addressing the changes. It is also important that the disclosure committee and audit committee are briefed on the changes and the company's approach to addressing them.

Form 10-K Selected Financial Data: Leave It In or Take It Out?

Compliance with the changes to Reg S-K's financial disclosure rules doesn't become mandatory until August 9th, but companies are permitted to early adopt the changes on a line item-by-line item basis as of the February 10th effective date. One of those changes eliminates Item 301 of S-K and its requirement to include selected financial data in a company's 10-K filing. If you're still trying to decide what to do about selected financial data in your 10-K, Jenner & Block has some help for you.

The firm surveyed 100 Form10-K filings made after the February 10th effective date of the rules by large accelerated filers & accelerated filers to see what companies were doing about selected financial data disclosure. This excerpt summarizes the survey's findings:

Approximately 40% of the Sample Eliminated Item 301 Disclosure: On the balance, we found that companies were slightly more likely to include the selected financial data than to omit such information based on the sample we reviewed.

– 61 companies within the sample included the selected financial data in the Form 10-K
– 39 companies within the sample omitted the selected financial data in the Form 10-K

No Distinct Patterns within the Sample: We did not detect any concrete patterns with respect to industry or company size. Companies of all industries and sizes elected to include and omit the selected financial data.

For Companies that Early Adopted, Use of Disclosure Varied: Some companies elected to explain why the information was omitted, some omitted the item entirely from the Form 10-K, and some used "Reserved" or similar disclosure.

On this last point, we think that if you're going to eliminate Item 301 disclosure, the better approach from a technical standpoint is to continue to include the caption "Item 6 – Selected Financial Data" in the 10-K. Here's why – Item 6 is still included in Form 10-K, and Rule 12b-13 says that an Exchange Act report "report shall contain the numbers and captions of all items of the appropriate form. . ." It also says that unless the form provides otherwise, "if any item is inapplicable or the answer thereto is in the negative, an appropriate statement to that effect shall be made."

So, while we doubt very much anybody will end up in SEC prison for just omitting Item 6 in its entirety, Rule 12b-13 indicates that you should continue to include it in your 10-K along with an appropriate statement about why you're not disclosing the selected financial data that it calls for. Looking for an example? Check out Zillow Group's 10-K.

2021 Risks: "Business Interruption" Tops the List

Allianz has issued its annual "risk barometer" – which identifies the top 10 risks for the upcoming year based on a survey of nearly 2800 brokers, underwriters, senior managers and claims experts in the corporate insurance sector. It's always a helpful read for identifying macro trends and issue spotting for your risk factors, although of course you need to tailor those to explain how the macro factors specifically affect your business.

"Business interruption" has been the top risk for 5 of the last 6 years – last year was the exception, with people worrying that cybersecurity would be the thing that kept us up at night in 2020. For 2021, "business interruption" is back at the top – which seems prescient in light of this week's power grid failure in Texas and the SEC's informal reminders to companies that they should have contingency plans to be able to carry on operations during emergencies. The risk of a pandemic outbreak is #2. Cyber incidents are hanging in there at #3 and are considered a potential "Black Swan."

Here's an excerpt:

When asked which change caused by the pandemic will most impact businesses, Allianz Risk Barometer respondents cited the acceleration towards greater digitalization, followed by more remote working, growth in the number of insolvencies, restrictions on travel/less business travel and increasing cyber risk. All these consequences will influence business interruption risks in the coming months and years.

The knock-on effects of the pandemic can also be seen further down the rankings in this year's Risk Barometer. A number of the climbers in 2021 – such as market developments, macroeconomic developments and political risks and violence – are in large part a consequence of the coronavirus outbreak. For example, the pandemic was accompanied by civil unrest in the US related to the Black Lives Matter movement, while anti-government protest movements simmer in parts of Latin America, Middle East and Asia, driven by inequality and a lack of democracy. Rising insolvency rates could also affect supply chains.

All that said, only 3% of survey participants were worried about a pandemic at this time last year. So, one of the main takeaways we gleaned this year was that it's pretty difficult to predict the "next big thing."

Investor Tips for Enhancing ESG Reporting

EY recently issued a report outlining investor expectations for the 2021 proxy season based on conversations with more than 60 institutional investors representing $38 trillion in assets under management. One topic that's sure to be top of mind for many investors this proxy season is portfolio company ESG reporting and the report provides tips for how companies can enhance ESG reporting.

When assessing a company's ESG practices and performance, the report found investors place the most value on direct company engagement, which is reassuring since direct engagement can help ensure investors receive a fulsome picture of company ESG initiatives and progress. Third-party ratings aren't as high on the list in terms of perceived value but 40% of investors still ranked them as a medium or high-value information source. This excerpt describes how investors want companies to help ensure their disclosures are picked up by third-party data aggregators:

Some large asset managers rely on third-party data providers to aggregate and structure company disclosures in a way that is more scalable and efficient to their processes, allowing raw ESG data across thousands of companies to be uploaded into their internal platforms for assessment. While investors generally acknowledged limitations of third-party data (e.g., gaps, data quality issues) they stressed their need to have data at scale. To make these processes successful, investors encouraged companies to take a more proactive role in confirming that their data is being picked up correctly by leading third-party providers.

The report says other ESG reporting enhancements investors would like to see align with one or more of the following: focus on what is material and the connection to strategy, align disclosures with external frameworks, disclose metrics, performance and goals, consider integrating material ESG disclosures alongside traditional frameworks and enhance data credibility through assurance.

Prep Time for Potential ESG Ratings Questions

Lynn blogged about how investors want to see companies enhance ESG reporting. ESG ratings are just one information source but it's an area highlighted by investors for improvement. Some ratings firms release a "combined ESG" score at no charge and now, Refinitiv is one ratings firm taking things a step further. Recently, Refinitiv began making its ESG rating information available for free on its website and this includes sub-theme scores within each of "E", "S" and "G" beyond just the overall combined ESG rating. Refinitiv has an extensive database – this blog post says it provides access to ESG scores on 10,000 companies.

With Refinitiv's sub-theme scores freely available, investors and other stakeholders can find a company's Refinitiv score for human rights, product responsibility, innovation, etc. Even if a company's major investors don't typically cite Refinitiv scores, with thematic scores freely available, this information could become fodder for questions during shareholder engagement meetings and it's possible ESG ratings questions could start coming from directors, employees and other stakeholders. For example, if a company talks up its commitment to community, knowing Refinitiv's "community" sub-theme score can be helpful and if it doesn't seem to jive, check out whether Refinitiv has pulled accurate information to generate its score.

Dealing with ESG rating challenges can seem like climbing a never-ending hill and for companies without a chief sustainability officer, ESG ratings challenges might increase the odds that they start thinking about appointing one. Given the usual responsibilities of corporate secretaries and IR professionals, it's hard to imagine either would have time to dive into ESG ratings to the extent needed. If other rating firms follow Refinitiv's lead in sharing ESG thematic scores freely, anyone dealing with understanding and validating ESG rating provider data just got a whole lot more work.

A recent Paul Weiss memo discusses implications from ESG ratings and serves as a reminder of actions companies can take to protect themselves from ratings inaccuracies. As a first step, companies should actively monitor their current ESG ratings and develop an approach to engage with ESG rating agencies to ensure an accurate assessment of the company's ESG performance. This includes confirming that ESG rating agencies are using correct data for their analysis. In addition to Refinitiv, the memo identifies MSCI, ISS, RobecoSAM, Sustainalytics and RepRisk AG as common ESG ratings firms but also says there are at least 125 organizations providing ESG ratings and research.

ESG: Corporate Heavy Hitters Sign On to Stakeholder Metrics

In early February, the World Economic Forum announced that 61 companies signed-on the organization's "Stakeholder Capitalism Metrics," a set of ESG metrics and disclosures that measure long-term enterprise value creation for corporate stakeholders. The metrics are intended to serve as "a set of universal, comparable disclosures focused on people, planet, prosperity and governance that companies can report on, regardless of industry or region." This excerpt from the WEF's announcement provides more details:

The Stakeholder Capitalism Metrics, drawn from existing voluntary standards, offer a core set of 21 universal, comparable disclosures focused on people, planet, prosperity and principles of governance that are considered most critical for business, society and the planet, and that companies can report on regardless of industry or region. They strengthen the ability of companies and investors to benchmark progress on sustainability matters, thereby improving decision-making and enhancing transparency and accountability regarding the shared and sustainable value companies create.

The Stakeholder Capitalism Metrics document is 97 pages long, and contains plenty of the kind of pious, self-congratulatory corporate gobbledygook you'd expect to find in something like this. However, the core metrics are summarized in a three-page chart beginning on page 8 of the document – and a review of that chart should give you a pretty good handle on them.

Companies that have signed on to the core metrics include Dow, Unilever, Nestlé, Bank of America, Credit Suisse, Sony & all of the Big 4 accounting firms (which helped develop the metrics). The signatories have committed to reflect the core metrics in their corporate reporting and to publicly support the effort to develop uniform ESG metrics.

We've previously blogged about the growing demand among investors and other constituencies for standardized sustainability disclosures, and this announcement represents a milestone in that process. Now, we'll have to see what these disclosures look like and whether the WEF's metrics continue to gain traction.

Board Diversity: Carlyle Puts Its Money Where Its Mouth Is

In response to the events of last summer, many companies announced actions designed to showcase their commitment to racial & ethnic diversity. Global private equity colossus The Carlyle Group was one of them. Last August, Carlyle announced a new policy calling for at least one candidate who is Black, Latino, Pacific Islander or Native American to be interviewed for every new position. Carlyle also committed to ensuring that that 30% of its portfolio companies' boards were ethnically diverse.

Corporate commitments like these were a dime a dozen in the long, hot summer of 2020, but Carlyle looks like it just might mean business. This recent NYT article describes a new $4.1 billion credit facility that the firm established for its portfolio companies that ties pricing to the diversity of a company's board:

The credit facility is an extension of Carlyle's goal for the boards of the companies in its portfolio to have a diversity rate of at least 30 percent by next year. Nearly 90 percent of its companies now meet its 2016 goal of having at least one director who is a woman or ethnic minority for companies in the United States or, for companies outside the United States, one director who is a woman.

The firm says the effort is good for business: In a study of its portfolio companies, Carlyle found that firms with two or more diverse board members recorded annual earnings growth 12 percent higher than those with fewer diverse directors.

The Times article says that Carlyle's effort to use the tools of private equity to promote diversity initiatives is part of a broader trend in ESG investments. It points out that debt issuance in support of sustainability efforts hit a record $732 billion last year – a 26% increase from the prior year.

January-February Issue: "The Corporate Counsel" Newsletter

The January-February issue of the "The Corporate Counsel" newsletter is in the mail (try a no-risk trial). It's also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the "remote work" environment. The issue includes articles on:

– Virtual Reality: Investors Want More from 2021 Virtual Meetings
– Form 10-K Tidbit: Can You Drop rule 3-09 Financial Statements?
– A Form 8-K Pitfall: Fallout from Changes to Section 162(m)
– Wither The Integration Doctrine? A New Approach Dawns this Spring

January-February Issue of "The Corporate Executive"

The January-February issue of the "The Corporate Executive" newsletter has been sent to the printer (try a no-risk trial). It's also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the "remote work" environment. The issue includes articles on:

– The Impact of COVID-19: Our Model CD&A Disclosure
– Recent Case Tests Attorney-Client Privilege for Law Firm Assisted Internal Assessments
– Deferred Compensation Plan Funded by a Rabbi Trust but Participants are Shut Out by Company and 409A
– Officer and Director Indemnification Provisions May Need Review

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:
  • - 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?

    - Our own John Jenkins of TheCorporateCounsel.net and Calfee, Halter & Griswold - topics include:
            ο Tackling the amendments to Item 105 of Regulation S-K
            ο Hypothetical risk factor language - where are we now?
            ο What should I do with my COVID-19 risk factor in the next Form 10-K?
            ο What are some other risk areas for 2021?
            ο John's risk factor tips

    - Lillian Brown of WilmerHale and former Senior Special Counsel to the SEC's Director of the Division of Corporation Finance - topics include:
            ο Key takeaways relating to shareholder proposals from the 2020 proxy season
            ο Evaluating the SEC Staff's approach to no-action requests in 2020
            ο Should I include a board analysis in my shareholder proposal no-action letter?
            ο New and revised proposal topics for 2021

    - Karen Garnett of Proskauer and former Associate Director of the SEC's Division of Corporation Finance - topics include:
            ο The SEC's Disclosure Effectiveness initiative - why was it so successful?
            ο Considering changes to the description of business requirement
            ο Human capital disclosure - what should companies do now?
            ο Tackling the amended risk factor disclosure requirements
            ο Is the disclosure effectiveness initiative done?

    - Jay Knight of Bass, Berry & Sims and former Corp Fin Staffer - topics include:
            ο Has the SEC staff been commenting on disclosures about COVID-19 in public filings?
            ο What areas of comment has the Staff raised regarding COVID-19?
            ο What approach has the Staff taken with respect to non-GAAP financial measures in the COVID-19 era?
            ο Do you think the Staff will focus on COVID-19 disclosures when it reviews 10-Ks filed in 2021?
            ο Are there lessons to take away from the Staff's comments as we prepare disclosures for the upcoming reporting season?

  • 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:
    • 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
    • Darla Stuckey - President & CEO, Society of Corporate Governance
    • Jurgita Ashley - Partner, Thompson Hine
    • Susan Permut - Adjunct Professor, Boston University School of Law, and Founder & Principal Consultant at Royce Road Advisors

The following memos & insights:

- "Corp Fin Directed to Focus on Climate Disclosures & Update Climate Guidance" - Wachtell Lipton (2/21)
- "Survey Information on Removing Selected Financial Data From 10-K" - Jenner & Block (2/21)
- "2020 Technology & Life Sciences IPO Report" - Wilson Sonsini (2/21)
- "2020 Engagement Review" - Glass Lewis (2/21)
- "ISS Release Substantial Changes to 'QualityScore'" - Wachtell Lipton (2/21)
- "Raising Capital During Periods of Extreme Price Volatility" - Troutman Pepper (2/21)
- "BlackRock & State Street Update Voting Guidelines" - Sullivan & Cromwell (2/21)
- "Risk Factors for the Recovery Era" - Freshfields (2/21)

People: Who's Doing What & Where

Former SEC Chair Jay Clayton Returns to Private Practice: Sullivan & Cromwell announced that former SEC Chair Jay Clayton is returning to the firm's New York office as Senior Policy Advisor and of counsel. The firm's announcement also said Jay is returning to his role as an Adjunct Professor at the University of Pennsylvania Carey Law School and that he's been appointed as Lead Independent Director of Apollo Global Management. Prior to serving as Chair of the SEC, Jay had spent his private sector career at Sullivan & Cromwell.

Former Co-Director of Enforcement Division Stephanie Avakian Returns to Private Practice: WilmerHale announced that Stephanie Avakian, the former Co-Director of the SEC's Enforcement Division, is returning to the firm later in the year as Chair of its Securities and Financial Services Department and as a member of the firm's Management Committee.  Stephanie had been a partner at WilmerHale prior to joining the SEC back in 2014.

John Coates Appointed as Acting Director of Corp Fin: The SEC announced that John Coates will serve as Acting Director of the Division of Corporation Finance. Professor Coates has been the John F. Cogan Professor of Law and Economics at Harvard University, where he also served as Vice Dean for Finance and Strategic Initiatives. Prior to joining the faculty at HLS, Professor Coates was a partner at Wachtell, Lipton, Rosen & Katz and he's served on the SEC's Investor Advisory Committee and chairs the IAC's Investor-As-Owner Subcommittee.

Satyam Khanna Appointed as SEC Senior Policy Advisor for Climate and ESG: The SEC also announced the appointment of Satyam Khanna to serve as Senior Policy Advisor for Climate and ESG in the office of Acting Chair Allison Herren Lee. Satyam previously served as counsel to former commissioner Robert Jackson and previously was a member of the SEC's Investor Advisory Committee, where he served on the Investor-As-Owner Subcommittee. Most recently, Satyam was a resident fellow at NYU School of Law's Institute for Corporate Governance and Finance and he served on the Biden-Harris Presidential Transition's Federal Reserve, Banking, and Securities Regulators Review Team. In his new role, Satyam will advise the agency on environmental, social, and governance matters and advance related new initiatives across its offices and divisions.

Kelly Gibson Named Acting Deputy Director of Enforcement Division: The SEC also announced that Kelly Gibson has been named Acting Deputy Director of the SEC's Enforcement Division. Kelly has been serving as the Director of the Philadelphia Regional Office since February 2020 and has served in the Philadelphia Regional Office for the past 13 years.

SEC Acting Chair Lee Announces Executive Staff Roster: The SEC also released a roster of executive staff for Acting SEC Chair Allison Herren Lee. The roster is a fairly lengthy list of between 15-20 appointments, check it out to see who's all involved with SEC activities.

Your Input, Please

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