E-Minders March 2019
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In mid-February, the SEC issued this 76-page proposing release would expand the "test-the-waters" accommodation from EGCs to all companies, including investment companies. Here's the SEC's press release - we're posting memos in our "Securities Act Reform" Practice Area as they come in (and here's Steve Quinlivan's blog and this MarketWatch article).
With this proposal, the SEC seeks to allow all companies to benefit from all the changes that the JOBS Act gave EGCs. Some of the JOBS Act benefits had already been widely available, as Corp Fin opened up the confidential filing process to all companies two years ago. If this proposal is adopted, the "testing-the-waters" part of the JOBS Act will also be extended to a broader range of companies. There's a 60-day comment period.
In early February, Corp Fin issued two identical "Regulation S-K" CDIs - 116.11 and 133.13 - to clarify what disclosure of self-identified director diversity characteristics is required under Item 401 and, with respect to director nominees, under Item 407. Broc's blogged about whether - and how - to address diversity in D&O questionnaires - and we're posting memos in our "Board Diversity" Practice Area about how this new guidance impacts that analysis.
In the meantime, here's the new CDI (also see this Cooley blog):
Question: In connection with preparing Item 401 disclosure relating to director qualifications, certain board members or nominees have provided for inclusion in the company's disclosure certain self-identified specific diversity characteristics, such as their race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background. What disclosure of self-identified diversity characteristics is required under Item 401 or, with respect to nominees, under Item 407?
Answer: Item 401(e) requires a brief discussion of the specific experience, qualifications, attributes, or skills that led to the conclusion that a person should serve as a director. Item 407(c)(2)(vi) requires a description of how a board implements any policies it follows with regard to the consideration of diversity in identifying director nominees.
To the extent a board or nominating committee in determining the specific experience, qualifications, attributes, or skills of an individual for board membership has considered the self-identified diversity characteristics referred to above (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background) of an individual who has consented to the company's disclosure of those characteristics, we would expect that the company's discussion required by Item 401 would include, but not necessarily be limited to, identifying those characteristics and how they were considered. Similarly, in these circumstances, we would expect any description of diversity policies followed by the company under Item 407 would include a discussion of how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics. [February 6, 2019]
Here we go again. Elon Musk can't quit Twitter - which means the SEC can't quit Elon. It was only last October that the Tesla CEO settled with the SEC on allegations of securities fraud, after a series of surprising "going private" tweets. Part of the settlement required Musk to get internal pre-approval of tweets that could contain material info about the company. But, as Broc and others predicted, it was a pretty tall order to think a mere mortal could stand between Elon and his social media.
In mid- February, Elon tweeted some production stats without getting that internal pre-approval. The SEC responded the following week with this motion - asking the federal district court in Manhattan to hold Musk in contempt for violating the court-approved settlement. The motion is worth reading - it includes Tesla's "Senior Executives Communications Policy" as well as a look into how the policy was being applied, and an excerpt from Musk's December interview with "60 Minutes" Lesley Stahl in which Musk essentially thumbed his nose at the SEC.
If you don't have time for that (or you don't read Elon's Twitter feed), this WaPo article also provides a good overview & analysis (also see this WSJ article and this NYT article). Here's an excerpt:
It is not surprising that the SEC felt compelled to ask for Musk to be found in contempt, said Charles Elson of the University of Delaware. "They have to react. From an agency standpoint, if you show outright contempt towards the agency and they do nothing, how are they ever going to enforce the law?," he said.
The SEC could ask the judge to increase the $20 million fine Musk has already paid or move to punish the company's board if they don't rein him in, said Adam Epstein, a corporate-governance advisor. But SEC is not likely to ask that Musk be removed from the company altogether, as it initially did last year, he said. "He has a pattern and practice of tweeting in an inflammatory fashion for years," Epstein said. "He probably knows that the government is not going from Defcon 5 to Defcon 1 to remove him from the company, because that would be the worst possible outcome for investors. He's clearly created more value than he's hurt shareholders by his tweeting."
Recently, John blogged about high-profile companies starting to use the "direct listing" route to go public rather than the traditional IPO path. This type of offering was facilitated by the NYSE changing its rules last year to permit a direct listing.
As noted in this Steve Quinlivan blog, Nasdaq recently filed an immediately effective rule proposal with the SEC that clarifies how the process works for direct listings on that exchange without an IPO. Over the years, there have been a handful of direct listings on Nasdaq...
In January, John blogged about Johnson & Johnson's unusual request to exclude a shareholder proposal that would have required arbitration of all federal securities law claims brought against the company. In mid-February, Corp Fin granted the company's no-action request & permitted it to exclude the proposal from its proxy materials. The company is a New Jersey corporation, and sought to exclude the proposal on the grounds that its implementation would violate applicable state law.
New Jersey's AG submitted a letter supporting that position - and this excerpt from the Corp Fin's response letter indicates that it was dispositive:
When parties in a rule 14a-8(i)(2) matter have differing views about the application of state law, we consider authoritative views expressed by state officials. Here, the Attorney General of the State of New Jersey, the state's chief legal officer, wrote a letter to the Division stating that "the Proposal, if adopted, would cause Johnson & Johnson to violate New Jersey state law." We view this submission as a legally authoritative statement that we are not in a position to question.
Since the permissibility of mandatory arbitration bylaws is a "hot potato" political issue, the issuance of the no-action letter was accompanied by a lengthy statement from SEC Chair Jay Clayton clarifying exactly what the Staff was - and wasn't - saying. In particular, he noted that Corp Fin was not addressing the permissibility of the proposed bylaw under federal law:
The staff of the Division of Corporation Finance explicitly noted that it was not expressing a view as to whether the proposal, if implemented, would cause the company to violate federal law. Since 2012, when this issue was last presented to staff in the Division of Corporation Finance in the context of a shareholder proposal, federal case law regarding mandatory arbitration has continued to evolve. Further, I am not aware of any circumstances where the Commission has weighed in on the legality of mandatory shareholder arbitration in the context of federal securities law.
Jay Clayton went on to say that he agreed with the Staff's approach & would expect it to take a similar approach if the issue arose again. He also reiterated his prior statements to the effect that any policy decision should be made by the SEC in a measured and deliberative manner. The Staff earns some style points for the way it finessed the mandatory arbitration issue here - but credit New Jersey's AG with a big-time assist.
Over the years, Broc has blogged about periodic attempts by shareholder proponents of going to court to compel the inclusion of a proposal and/or seek declaratory relief to enjoin an annual meeting due to shareholder proposal issues. These types of lawsuits typically challenged a company's decision to exclude a proposal after Corp Fin granted no-action relief. But recently, the NYC Comptroller went one step further - by filing this complaint against TransDigm shortly after it sought no-action relief - and before Corp Fin weighed in.
The lawsuit sought to enjoin TransDigm - which manufactures aerospace components - from soliciting proxies for its meeting without including a climate change proposal submitted by a group of NYC pension funds. TransDigm had argued to Corp Fin that it could exclude the proposal under Rule 14a-8(i)(7) because it related to "ordinary business." But the funds - which announced a couple of years ago that they might pursue climate change proposals as an initiative and more recently said they'd pursue a "clean energy" investment & divestment strategy - insisted that this was an urgent matter. Cydney Posner's blog explains what happened next:
Instead of conforming to the usual practice of submitting its own response to the SEC, the NYC Comptroller's office wrote to the SEC on December 7th that it would not respond to the company's November request for no-action because the pension funds had separately commenced a lawsuit against the company seeking declaratory and injunctive relief "that would ensure the... shareholder proposal is included in the proxy solicitation materials." As a result, in light of the pending litigation, the Comptroller requested that the SEC leave the matter to the courts, requesting that, the "staff follow its prior practice and decline to issue any response to TransDigm's no-action request."
The company apparently decided that this was not a battle worth fighting. By letter dated December 28, 2018, in the midst of the government shutdown, the company advised Corp Fin that it was withdrawing its request for no-action relief and would be including the proposal in its 2019 proxy materials. The parties filed a stipulation of settlement on January 18 concluding the action.
In its press release announcing the settlement, the Comptroller said that the "need for climate leadership is more urgent than ever. Yet, just when we need to speed up the pace, federal roll-backs are making polluting easier and could cause generations of damage. That's why as investors, we're using our voice to pressure companies to step up and address their role in climate change....Reducing greenhouse gas emissions is a moral imperative—and it's better for business. We'll continue to fight for shareholders rights and to hold companies like TransDigm to the highest standards for business and our planet."
We don't know yet if the NYC funds will adopt - or inspire other proponents to adopt - a litigation strategy against other companies for climate change proposals and/or other topics. Although the complaint was filed before the government shutdown began, the company might've felt additional pressure to settle due to Corp Fin's inability to respond to no-action requests.
In January, Liz blogged about the introduction of bipartisan legislation that would require the SEC to study whether Rule 10b5-1 should be amended to add more procedural restrictions for trading plans. According to this article from the Center for Executive Compensation, the bill has flown through the House & may be on the fast track in the Senate as well:
In early February, the House of Representatives approved, on a 413-3 vote, a bipartisan bill which would require the SEC to conduct an in-depth study of 10b5-1 executive stock trading plans. (A Rule 10b5-1 stock trading plan allows an individual with access to material, nonpublic information to execute sales or purchases of company stock in accordance with a pre-determined schedule, creating an affirmative defense to potential violations of company rules or federal securities laws regarding insider trading.)
The bill now moves to the Senate, where it appears Democrats are eager to move the bill and are working to create the same bipartisan atmosphere as in the House. In the past, the Senate has staunchly refused to take up any bill that does not exhibit a strong path to bipartisan adoption - especially those addressing governance and compensation issues.
The article says that the House's overwhelming approval of the bill puts it on a path which could lead to Senate action. If the bill does pass, it won't mean any changes in 10b5-1 right away, but the results of the study it would mandate could provide a blueprint for potential changes.
In a NYT op-ed, Senators Chuck Schumer (D-NY) and Bernie Sanders (D-VT) said they're going to introduce a bill that would allow companies to buy back shares only if they pay their workers well. Here's a few articles about their proposal:
CNBC's "Chuck Schumer and Bernie Sanders Call for Restricting Corporate Share Buybacks"
A few weeks ago, Liz blogged about a Senate bill from two Democrats that would allow companies to repurchase shares only if they pay their workers well (see this MarketWatch article for the potential consequences). Now Republican Senator Marco Rubio has released a report that calls for ending the tax advantages that buybacks enjoy over dividends (see this article). So there is a bipartisan push to limit stock repurchases, although with far different approaches to doing so...
Here's a press release from CII about its views on buybacks - essentially warning Congress against regulation and urging better disclosure from companies about the rationale for their buybacks...
Here's the intro from this blog by Cooley's Cydney Posner:
A bipartisan group of senators has introduced a new bill, the 'Fostering Innovation Act of 2019' (S. 452), that would amend SOX to provide a temporary exemption from the auditor attestation requirements of Section 404(b) for low-revenue issuers, such as biotechs. The bill is designed to help those EGCs that will lose their exemptions from SOX 404(b) five years after their IPOs, but still do not report much revenue. For those companies, proponents contend, the auditor attestation requirement is time-consuming and expensive, diverting capital from other critical uses, such as R&D.
According to the press release, the bill would provide "a very narrow fix that temporarily extends the Sarbanes-Oxley Section 404(b) exemption for an additional five years for a small subset of EGCs with annual average revenue of less than $50 million and less than $700 million in public float."
In addition to Corp Fin's new CDIs addressing board diversity disclosure issues, Rep. Greg Meeks (D-NY) & Sen. Bob Menendez (D-NJ) have introduced legislation that would require companies to disclose self-identified demographic info about their board & executive officers. Here's an excerpt from a recent Weil blog summarizing the proposed legislation:
The bill, which garnered the support of the Council for Institutional Investors and the U.S. Chamber of Commerce, would require public companies to disclose annually in their proxy statements data on the racial, ethnic, and gender composition, as well as veteran status, of its board of directors, director nominees and executive officers based on voluntary self-identification. Moreover, disclosure regarding the adoption of any board policy, plan or strategy to promote racial, ethnic, and gender diversity would be required.
The bill would also require the SEC's Office of Minority and Women Inclusion to publish best practices for corporate reporting on diversity. Rep. Meeks introduced the same legislation during the last Congress, but it went nowhere. With Democrats controlling the House & support from the CII & the U.S. Chamber of Commerce, perhaps it will get more traction this time around.
In remarks to the SEC Investor Advisory Committee, SEC Chair Jay Clayton provided some of his views on human capital disclosure. He first noted that since the time the current disclosure requirements in Items 101 & 102 of Regulation S-K were adopted, human capital has evolved into a resource - rather than a cost - for businesses. And, he acknowledged, disclosure requirements should also evolve over time to reflect market changes...but should remain flexible, enforceable, efficient and grounded in materiality.
So the basic idea stands that companies should focus on providing material information that a reasonable investor needs to make informed investment & voting decisions, and he's wary of mandating rigid disclosure standards or metrics. But it doesn't sound like he's closed the door on nudging companies to provide more info. He continued:
Instead, I think investors would be better served by understanding the lens through which each company looks at their human capital. Does management focus on the rate of turnover, the percentage of their workforce with advanced degrees or relevant experience, the ease or difficulty of filling open positions, or some other factors? I have heard this and similar questions on earnings conference calls and in other investor settings. I am interested in hearing from those on the Committee who manage investment capital - what is it that you are looking for as an investor and what questions do you ask the issuers when it comes to human capital?
Here, a note on comparability. In some cases it is possible to identify metrics that provide for reasonable market-wide comparability (for example, U.S. GAAP). In other cases, this is not possible at a market-wide level, and comparability is reasonably possible at an industry level or only at a company level (this is demonstrated by the development of non-GAAP financial measures). For example, for human capital, I believe it is important that the metrics allow for period to period comparability for the company.
This Cooley blog reports that Jay also touched on proxy plumbing in his remarks - and said that new Commissioner Elad Roisman will be taking the lead on efforts to improve the proxy process, including proxy plumbing, for both the short- and long-term.
Here's something Liz recently blogged on CompensationStandards.com: After market close on a Friday, Goldman Sachs announced via an Item 8.01 8-K that in light of the ongoing 1MDB investigation, its compensation committee might reduce bonuses to current - and former - senior executives. The board is wise to leave themselves some room, since they'll likely face shareholder scrutiny for the alleged fraud and all of its fallout. For last year's annual equity awards, the board added a new forfeiture provision. The 8-K doesn't go into detail about what types of harm - e.g. strictly financial v. reputational - would result in forfeiture, but simply says:
This provision will provide the Committee with the flexibility to reduce the size of the award prior to payment and/or forfeit the underlying transfer-restricted shares (which transfer restrictions release approximately five years after the grant date) if it is later determined that the results of the 1MDB proceedings would have impacted the Committee's 2018 year-end compensation decisions for any of these individuals.
For former executives, Goldman's comp committee decided to defer determinations about LTIP awards that otherwise would've paid out in January, since the 1MDB investigation relates to events that occurred during the performance period. This WSJ article reports that the forfeiture wouldn't apply to former exec Gary Cohn, who was paid out in lump sum when he joined the Trump Administration.
So these aren't true "clawbacks" - they're potential forfeitures of unpaid amounts, which are much easier for a company to administer. Remember that a few years ago in a different kind of scandal, Wells Fargo started off with forfeitures - and eventually also clawed back pay.
Here's something Liz recently wrote on CompensationStandards.com: I recently blogged about the pros & cons of disclosing your "equal pay audit." There aren't many US companies doing this...yet. But Citigroup is one of the trailblazers. Last year, similar to the stats in Intuit's proxy (hat tip Lois Yurow), Citi announced on its website the results of a "pay inequality" analysis - the difference in pay of women & men and US minorities & non-minorities, as adjusted for job function, level and geography. And it's made some pay adjustments based on the findings.
More recently, Citi announced on its website its unadjusted "pay gap" for women and US minorities - i.e. the difference in median total compensation. Citi agreed to publish the stats in response to a "gender pay equity" proposal from Arjuna Capital - who then withdrew the proposal. Here's an excerpt from Arjuna's announcement about what comes next:
Citi's analysis shows that the median pay for women globally at Citibank is 71 percent of the median for men, and the median pay for US minorities is 93 percent of the median for non-minorities. Citi's goal is to increase representation at the Assistant Vice President through Managing Director levels to at least 40 percent for women globally and 8 percent for black employees in the US by the end of 2021.
Alongside the median pay disclosure, Citi updated last year's "equal pay for equal work" analysis to extend across its global operations, reporting that when adjusting for job function, level, and geography women globally are paid on average 99% of what men are paid, and no statistically significant difference between what US minorities and non-minorities are paid at Citi. Citi also made pay adjustments follow
We recently mailed the January-February issue of "The Corporate Counsel" print newsletter (try a no-risk trial). The topics include:
- Tone Deaf at the Top: Now It's Your Problem When an Executive Messes Up
Among other new additions, during the last month we have posted the following:
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