April 13, 2021

“Deep Dive with Dave” Podcast: Confidential Treatment Workshop

If you’re looking for an easy way to get up to speed on rules and guidance relating to the confidential treatment process, check out the latest “Deep Dive with Dave” podcast.

In this 28-minute episode, Dave Lynn and Dave Meyers of Troutman Pepper provide a confidential treatment workshop with tips about how to navigate the confidential treatment process. Topics include:

– Overview of the Confidential Treatment Process

– The 2019 SEC Rule Changes – The “Ask for Forgiveness” Approach

– The Filing Review Process

– Seeking Extensions of Confidential Treatment Requests

– Farewell to Competitive Harm

Last week, John blogged about the March-April Issue of “The Corporate Counsel,” and the companion 22-minute podcast is now also available.

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.

“Robust” Disclosure about Virtual Shareholder Meetings: Glass Lewis Expectations

Earlier this year, I 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.

– Lynn Jokela

April 12, 2021

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

On Friday, 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.

SPACs: Less Risky Than IPOs? Corp Fin Chief Says “Don’t Bet On It”

Last week, 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 – 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 issued yesterday, 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.

PCAOB Issues Audit Committee Resource About 2021 Inspections

The PCAOB recently issued an Audit Committee Resource aimed at helping audit committees engage with their auditors about the PCAOB’s planned focus areas for 2021 inspections of public company audits. The resource provides a list of questions for audit committees as suggestions to spur dialogue between the audit committee and the company’s auditor. The suggested questions relate to the auditor’s risk assessments, auditor quality control systems, how auditors comply with auditor independence requirements, fraud procedures, critical audit matters, implementation of new auditing standards and supervision of audits involving other auditors.

Also, the PCAOB will continue to seek feedback from audit committee chairs as part of its effort to support improvements in audit quality. Like it has done in previous years, the PCAOB will seek feedback from audit committee chairs of companies where the PCAOB conducted inspections of the audit.

– Lynn Jokela

April 9, 2021

Diving into Seaspiracy: ESG Labels and Assurance Systems

Netflix’s newest documentary Seaspiracy is all over social media and the news. You may have already watched it, or maybe it’s in your queue for this weekend. The movie looks at wide ranging environmental and social impacts of the seafood industry – it’s hard to watch and there’s a lot to unpack. Some are saying they went too far. But for now, let’s look at one topic with which I have direct experience: ESG claims and assurance systems.

The film’s producer interviews Mark Palmer, Associate Director USA for the Earth Island Institute’s International Marine Mammal Project (IMMP), which operates the “Dolphin Safe Tuna” label program. The “Dolphin Safe” mark is used on canned tuna to indicate dolphins were not killed as bi-catch during tuna fishing.  The interview as presented in the film can be summed up in this exchange:

Producer: You [Dolphin Safe] have observers, but they are rarely there [on the fishing vessels], and they can be bribed and so you can’t guarantee that dolphin safe tuna is dolphin safe.

Palmer: That’s certainly true in terms of how the system works.

Producer: But it’s not guaranteed to be dolphin safe.

Palmer: Nothing can guarantee it’s dolphin safe.

Producer: But if it’s not guaranteed to be dolphin safe, why is it called dolphin safe?

Palmer:  We can pretty well guarantee it’s dolphin safe… it’s not guaranteed in the same way that, uh.. the world is a difficult place sometimes.

To be fair, in the “they’ve gone too far” camp, the IMMP has issued a statement expressing concern about how the film presents the interview.

In the bigger picture, though, there’s some merit to examining these programs – and the “Dolphin Safe” folks certainly aren’t the first responsible sourcing assurance mechanism to be on the hot seat. Another high-profile example is the London Bullion Marketers Association (LBMA) – and their “Good Delivery List” that’s intended to incentivize responsible gold production. Recent developments include NGOs claiming systemic flaws and a major assurance provider acknowledging shortcomings in managing conflict of interest. Many other metals and the mining industry have their own – but very similar – responsible sourcing due diligence mechanisms (the proliferation of these systems is a topic for another day).  Responsible timber due diligence assurance uses the same basic construct, so these issues may not be limited to gold due diligence assurance programs.

Encouragingly, these mechanisms aren’t deaf to the feedback. They are aware of improvements needed and are working to implement changes – but it takes time to develop, field test and launch solutions.

One takeaway for companies who rely on some of these programs is that major investors and financial institutions will soon be looking over your shoulder too. Jamie Dimon, CEO of JPMorganChase, stated in his 66-page Letter to Shareholders (2020):

… we will measure our clients’ carbon performance against sector-based GHG reduction targets that we’re setting for 2030 – with the goal of helping the reduce emissions from their direct operations and, in the case of oil and gas and automotive companies, reduce GHG from the use of their products.

What does this all mean? Basically, it’s reinforcement of companies’ misgivings around ESG assurance and certifications. They don’t offer the impenetrable protection of Captain America’s shield, and you can embrace that and add checks & balances. You never know when the next “Seaspiracy” will attract stakeholder attention – and investors are already developing their own systems to track, verify and question fundamental ESG information.

More on ESG Assurance: Using a Belt & Suspenders

While it’s true that many of the myriad ESG certifications/assurance mechanisms have responded to criticism by making systemic improvements, some have not. And even with improvements, gaps still exist. Either way, they don’t provide blanket protection from liability or business losses. Let’s dive in to how you can use industry assurance and labeling mechanisms in a prudent way.

In my opinion, there are two major elements to the risk:

Becoming a movie star villain. Seaspiracy is only the most recent example of becoming a reluctant movie star. A few years ago, another Netflix documentary brought economic devastation to one of my old consulting clients, and they are still struggling to get back where they were. Before that happened, I brushed off the idea that the film would have such impact. Having now seen it firsthand, I strongly suggest not ignoring it. Who knows what ESG matters – or companies – will be targeted next, and these documentaries have a track record of going viral.

Following the crowd. There are certainly advantages to using industry ESG assurance mechanisms, including the “safety in numbers” philosophy. In my experience, this tends to lead to complacency by individual companies about assurance quality and execution. But as previously discussed, those mechanisms are not perfect and you can essentially become a hostage to their flaws. Continuing to participate in or rely on these programs without doing something more may create more problems than expected.

Once a company recognizes the exposures, it should implement mitigation strategies. As a friend of mine at OECD frequently says: “You can’t outsource due diligence responsibility.” Perhaps the most effective of ways of taking responsibility are actually easy to do:

– Invite your Internal Audit group to learn more about industry assurance programs your company uses. Ask them to do a deep dive into the program’s procedures, practices, standards and auditors/assurance providers.

– Take an active role in shaping the industry assurance program(s) to close gaps or address concerns you or your Internal Audit group identified.

– Do your own monitoring of the assurance program(s) by participating in their audits where possible. Compare your experience and results with the programs’ final results. Where differences are identified, explore those with the program(s).

Finally, while not necessarily easy, it is worth considering augmenting your company’s use of industry programs with your own activities, including further use of Internal Audit to evaluate ESG risks of business partnerships or hiring qualified and screened third party ESG assurance experts.

Will Climate Pledges Outlive the Companies that Make Them?

Forever is a long time, except in corporate timelines. I remember visiting the Hoover Dam in the early 1990s and marveling at a plaque listing the construction contractors. Although construction was completed in 1936, a handful of the companies listed were still operating at the time I was there. But the world has changed in the past century. Companies aren’t really built to last.

Credit Suisse noted in 2017 that “the average lifespan of a S&P500 company is now less than 20 years, from 60 years in the 1950s.” Management is not necessarily stable over the long term. A Harvard Law study showed that CEO tenure has been on a downward trend and, for large cap companies, “the plurality of large-cap CEOs have been in the corner office between one and five years.”

These trends matter for a few reasons, but nothing may be as obvious as corporate climate commitments, especially the oh-so-popular Net-Zero pledge. This article from Canary Media does a fine job of summarizing last month’s analysis by Climate Action 100+ that benchmarked current corporate climate commitments against company actions and schedules (spoiler alert: there are substantial gaps between commitments made public, what those commitments should address and plans for execution).

Yet what I found most compelling is this perspective related to the current trends on company and CEO lifespan:

This shifts the critical question from whether we believe today’s corporate giants genuinely want to make good on these commitments to whether we think they, or their leadership, will even be around at all. Rather than congratulating companies that promise to clean up their act for a tomorrow they may never see, we need to be holding them to account for what they’re doing today.

Given the unprecedented complexity of the climate issue, uncertainty is to be expected. I hope that companies making long term climate pledges will last longer than most celebrity marriages – and it’s heartening to see companies making commitments, while recognizing this is a long term play. But will investors – many of whom already have short-term horizons – see corporate climate action from this perspective and push for nearer term goals/solutions? For companies making climate pledges that face the risk of no longer being a going concern – how will they manage or disclose the risk of failing to meet climate commitments?

This is one reason why it’s probably inappropriate to “shame” companies for favoring annual incentive programs as the vehicle for ESG metrics – it may be an annual program, but if you incentivize the correct year-over-year building blocks, it can lead to lasting change. In the fervor of this push for big change, it is worth considering the risk that a corporate climate pledge may outlive the company itself. Short-term stepping stones are a valuable part of the bridge to the future.

Lawrence Heim

April 8, 2021

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.”

CARES Act Fraud: Whatcha Gonna Do When They Come for You?

I couldn’t resist using the lyrics of Inner Circle’s “Bad Boys” in the title of this blog. That’s because they ran through my head as I read this Womble Bond memo on the government’s investigations of CARES Act fraud.  Unfortunately, as this excerpt dealing with the conclusions of the House Select Subcommittee on the Coronavirus reveals, it’s a target rich environment:

– Reviews of applications, records, and other data tend to show that there was around $84 billion in potential fraud from the PPP (more than $4 billion) and Economic Injury Disaster Loans (more than $79 billion) government payments;

– Over 1.3 million EIDL fraud referrals (over 700,000 of which involved identify theft) have been made to the SBA’s Inspector General’s Office;

– Nearly 150,000 hotline complaints related to potential PPP or EIDL fraud have been made to the SBA Inspector General’s Office;

– Financial institutions filed nearly 40,000 Suspicious Activity Reports related to potential PPP or EIDL fraud during May-October 2020 alone.

That’s quite a bit of potential fraud – but then again, these programs involved quite a bit of money that was moved out the door as quickly as possible. But the message is that if you’re a fraudster, Sherriff John Brown is most definitely coming for you. The memo says that the FBI has initiated hundreds of investigations into potential PPP fraud, and that they’ve been joined by more than 30 federal & state agencies investigating fraud in these programs.

Disclosure: Cybersecurity Breaches

This Audit Analytics blog summarizes its recent report on discovery and disclosure of cybersecurity breaches. One noteworthy aspect of the report is that the number of disclosed cybersecurity incidents actually declined in 2020. That was the first decline since Audit Analytics began reporting on cybersecurity disclosures in 2011, but the blog suggests that it is uncertain whether that decline reflects an actual decline in attacks or greater challenges monitoring cybersecurity incidents in a remote work environment.  Here are some other key findings:

– The median number of days to discover a cyber breach was just 16 days in 2020, while the median number of days to disclose a breach was 37 days.

– The median number of days to discover a breach was the lowest since 2017. The decreasing number of days to discover a breach may be a sign that companies are implementing better controls to monitor for cyber incidents, which enables more timely discovery.

– The median number of days to disclose the breach was at its highest since at least 2016. The increase in the median time to disclose a breach could be a sign companies are prioritizing complete notification over quick notification. This can be seen in the percentage of companies that disclose a type of attack, which grew to 90% in 2020 from less than 60% between 2011 and 2019.

The blog also notes that nearly 30% of public companies with a cyber breach between 2011 and 2020 disclosed the breach in an SEC filing, and reviews the sections of SEC filings in which disclosures of cybersecurity breaches most commonly appear.

That’s it for me this week, folks. Our new colleague, Lawrence Heim, will take the helm of this blog tomorrow – and I think we can all agree that you’re getting an upgrade.

John Jenkins

April 7, 2021

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.

Board Diversity: Does Diversity Enhance Shareholder Value?

Most of the studies on board diversity that I’ve seen referenced have concluded that increasing the diversity of corporate boards enhances shareholder value. That conclusion is a cornerstone of Nasdaq’s justification for its board diversity listing proposal, which cites a number of these studies.  But UCLA’s Stephen Bainbridge points to a recent paper by Harvard Law School Prof. Jesse Fried, which claims that the studies Nasdaq cites provide little support for that conclusion.  Here’s the abstract:

In December 2020, Nasdaq asked the Securities and Exchange Commission to approve new diversity rules. The aim is for most Nasdaq-listed firms to have at least one director self-identifying as female and another self-identifying as an underrepresented minority or LGBTQ+. While Nasdaq claims these rules will benefit investors, the empirical evidence provides little support for the claim that gender or ethnic diversity in the boardroom increases shareholder value. In fact, rigorous scholarship—much of it by leading female economists—suggests that increasing board diversity can actually lead to lower share prices.

There are all sorts of good reasons to promote increased gender & ethnic diversity on public company boards, including (as the paper points out), data indicating that it results in improved oversight of executives & financial reporting. But if this study is correct, it appears that there isn’t much in the way of quality empirical research to support Nasdaq’s claims about the positive impact of board diversity on shareholder value.

Tomorrow’s Webcast: “ESG Considerations in M&A”

Tune in tomorrow for the webcast – “ESG Considerations in M&A” – to hear the Hunton Andrews Kurth’s Richard Massony, Seyfarth’s Andrew Sherman and K&L Gates’ Bella Zaslavsky discuss the ESG considerations that are increasingly “front and center” for both buyers and sellers in M&A transactions.

John Jenkins

April 6, 2021

April Fools’ Day? Materiality in the Age of “Stonks”

It wasn’t that long ago when discussions about the “materiality” concept focused on things like the efficient market hypothesis and the probability and financial magnitude of contingent events. Underlying all of these discussions was a core belief that the market prices of stocks generally moved for reasons that reflected investors’ rational assessments of the financial implications of new developments.  Yeah, well that was then & this is now.

Today, nothing seems to move the market for individual stocks quite like a rogue tweet, an internet meme, or – in the latest example of market mania – a dumb marketing department prank gone awry.  Of course, I’m talking about Volkswagen’s ill-conceived April Fools’ “Voltswagen” prank, which resulted in its stock popping by 10% before coming back to earth.  This CNN article says that the combination of the announcement & stock gyrations that followed may expose VW to liability under the federal securities laws:

Volkswagen of America says its “Voltswagen” name change was merely a joke “in the spirit of April Fools’ Day” to promote a new electric car. But even if it was meant as a lighthearted marketing gag, the move could land the carmaker in some serious trouble. The situation may have put the company at risk of running afoul of US securities law by wading into the murky waters of potentially misleading investors. “This is not the sort of thing that a responsible global company should be doing,” said Charles Whitehead, Myron C. Taylor Alumni Professor of Business Law at Cornell Law School.

Making a securities law issue out of this stunt seems kind of silly to me. Yes, I get the long-term importance to VW of moving to electric vehicles & how investors might be interested in a name change that signifies that importance – but c’mon, gimme a break! What I think this situation really does is illustrate the consequences of equating “materiality” under the securities laws with any information that might be “interesting” to an investor. That’s something courts have been concerned about for quite some time – for instance, here’s a quote from the 1st Circuit’s 1992 decision in Milton v. Van Dorn:

The mere fact that an investor might find information interesting or desirable is not sufficient to satisfy the materiality requirement. Rather, information is “material” only if its disclosure would alter the “total mix” of facts available to the investor and “if there is a substantial likelihood that a reasonable shareholder would consider it important” to the investment decision.

The reason for concerns about catering solely to investor desires when it comes to disclosure obligations is the risk that the Northway Court identified of setting materiality at such a low standard that companies will flood investors with “an avalanche of trivial information,” which obscures important data & doesn’t help a reasonable investor make an investment decision. In other words, courts are worried about creating what economists call “noise,” and I think those concerns are heightened during a period when the market seems to be a particularly noisy place.

Right now, we’re engaged in an important discussion about what non-financial information should be regarded as material under the securities laws.  If the SEC serves up new disclosure mandates intended to give investors “what they want”  without worrying about creating a lot of noise, its actions may end up lowering the overall quality & usefulness of corporate disclosures.

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.

March-April Issue of “The Corporate Counsel” – New Podcast Coming Soon!

The March-April issue of “The Corporate Counsel” newsletter is in the mail (try a no-risk trial). It’s also available now online to members of 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:

– Climate Change Disclosures: Preparing for Staff Scrutiny
– The SEC’s Rule 144 Proposals: Our Suggestion to Combine the Form 144/Form 4 Filing Process Sees the Light of Day!
– SEC Eases Auditor Independence Rules

Dave & I have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues (here’s the most recent one).  We’ll have a podcast for this issue up shortly, so be sure to check them all out!

John Jenkins

April 5, 2021

We’re Growing! New “E&S” Sites Coming Soon…Led By Lawrence Heim!

I’m thrilled to announce that Lawrence Heim has joined our team – and will be leading the charge on our upcoming launch of a new sustainability/E&S platform! With the plethora of ESG ratings models & reporting frameworks, and what feels like a rapid but uncertain move towards new regulations, one of the hardest things about this exploding practice area is being able to cut through the deluge of information & gobbledygook. You need to know which developments matter – and what you actually need to be doing to gather E&S data and report on progress & risks. Lawrence is here to break that down for all of us.

Lawrence is going to be sharing insights & tips based on over 35 years of experience in ESG management. He’s been in the trenches to evaluate supply chains & environmental risks, he sits on the board of ASSET (a non-profit anti-slavery organization), and he wrote the book “Killing Sustainability.” Back when the conflict minerals rules were under consideration, he was the only non-financial auditor selected to give testimony to the SEC. You might also recognize his name from our webcasts over the years.

Lawrence understands the players in this space and how multi-disciplinary ESG teams can work together to make real progress and avoid risks. One of Lawrence’s early professional highlights was saving a major petroleum refinery $150 million through a unique waste management regulatory strategy. He built on that experience to help create the Global Environmental Risk Consulting Practice at Marsh and to support clients in environmental, health & safety compliance and management for many years at Elm Sustainability Partners. Most recently, Lawrence led development of supply chain due diligence standards at the Responsible Business Alliance/Responsible Minerals Initiative.

When we launch our new sites, we’ll be able to give more in-depth & practical coverage to the wide range of E&S topics that you’re grappling with – tailored to the corporate counsel and sustainability officer perspectives. We’ll continue to cover the “G” here on We’ll also continue to act as a “hub” in our network of ESG experts, so always feel free to reach out with questions or topics that you want to see covered – or practice pointers that you want to share.

This has been in the works for a while and I’ve been dying to share the news with all of you. So, consider this the “preliminary announcement,” with more details coming soon about how you can sign up for Lawrence’s blogs and the new resources. In the meantime, Lawrence is going to be running a few blogs here on, starting today, so that you can get to know him! You can also contact him via email –

Liz Dunshee

Principle Responsibility

Last Thursday (April 1), Responsible Investor wrote about an initiative intended to stem proliferation of new ESG codes/principles, or at least encourage collaboration between existing frameworks. According to the article, the “Principles for Responsible Principles” were launched due to:

“… concern that the growing number of voluntary codes creates a reputational risk for the better known and more established sets of responsible principles if their numbers continue to proliferate unchecked.”

The program contains five main points that “reflect those of similar initiatives and aim to create self-regulation within a sector that lacks clear KPIs.” Details are here, but if you want to skip that I can quickly summarize it thusly: pay attention to the date of publication.

Yes, I fell for it. No, none of my colleagues did.

To many ESG practitioners, this prank brings an uncomfortable grin because we painfully recognize the truth therein. And with that, my new career I begin. Inauspiciously.

Want to Get Ahead on ESG Data Quality? Internal Audit Is Your Not-So-Secret Weapon

Last month, Doug Hileman published this white paper on Internal Audit’s role in corporate ESG programs. Among Doug’s rather stark findings:

– 44% of respondent companies indicated a “complete commitment” to ESG, yet 25% don’t know where the ESG function “lives”

– 44% of respondents had not performed any internal audits of ESG topics in the past 5 years

– Another 36% didn’t know if any internal audits performed in the past 5 years included ESG topics

– Diversity & inclusion was identified as the top material ESG topic (44%). Supply chain ESG risks garnered exactly zero votes.

The results are based on polling at the Institute of Internal Auditing (IIA) March 2021 Los Angeles conference, so it’s not too surprising that this cohort would think they should be more involved with anything that could border on a compliance issue. Nor is it surprising that there’s some reluctance to add this layer of review to voluntary disclosures. In fact, it’s consistent with my own experience.

But, my humble prediction is that the absence of internal audit from ESG data gathering, evaluation & disclosure is going to start raising alarm bells very soon. Now’s the time to get ahead by starting to involve your own team, if you haven’t done so already. Much rides on ESG information quality these days: investors make decisions/issue guidance on it, media outlets write about it and the Biden administration has made clear that regulatory actions and enforcement will be taken based on it. With so much at stake, it’s only a matter of time before companies will be expected to have more stringent internal controls over this non-financial information – or face reputational & litigation risks for inaccurate disclosure.

Some simple steps for bringing Internal Audit to the ESG party:

– Have IA include internal environmental and social responsibility experts in audits. Blended teams merge IA’s governance and controls expertise and the E&S technical subject matter knowledge.

– Ensure established audit procedures are understood and followed by the blended team – especially evidence sampling methodologies. IA may be concerned about the amount of in scope E&S data and E&S staff may not understand controls testing. E&S staff can filter E&S data/evidence for technical appropriateness and IA can ensure evidence sufficiency.

– Recognize that there are risks with industry collaborative supplier ESG audit programs and certifications. IA needs to understand how these programs produce audit results on which companies rely and disclose to customers, the public and increasingly – regulators.

Lawrence Heim

April 2, 2021

Why Is the Stock Market Closed on Good Friday?

The US stock market is closed for nine days every year. Today, Good Friday, is one of those days – and the only one that isn’t also a federal holiday (the bond market is open till noon Eastern today). According to this article, it’s a long-standing tradition – but nobody really knows its origin. The article offers a few ideas:

1. Religion – it could be to mark the occasion of Easter – and often, Passover occurs at the same time. Volume is also down anyway due to observance of these Christian & Jewish holidays, and many non-US markets are closed

2. Superstition – legend has it that there was a huge sell-off when the market opened on Good Friday, but the crashes that are typically blamed – Black Friday and the Panic of 1907 – actually occurred later in the year

3. Lease Clause – some think that the NYSE’s lease requires it to be closed on major Christian holidays, but there are some holes in the theory

When it comes to more recent shut-down decisions that have been considered due to weather emergencies, technical issues, and the pandemic, there’s more daylight about the decision-making process among exchange operators (and in extreme situations, the federal government). This interview last year about reopening the NYSE trading floor is pretty interesting too.

EDGAR’s “Company Filings” Page: Scheduled Outage Tonight

The SEC is conducting scheduled maintenance tonight on EDGAR’s public access system, according to this notice posted on the “company filings” search page:

Maintenance for the SEC EDGAR public access system is scheduled for Friday, April 2nd, 2021, at 11:30 pm Eastern Time. Estimated duration is 30-45 minutes. Filing documents will be available, but some EDGAR searches may not return results during this time period. We apologize for the inconvenience.

The outage is only scheduled for 30-45 minutes, but it’s not a bad idea to plan ahead in case it lasts longer. Hopefully there are very few people who will be needing to search company filings late on Friday night of a holiday/spring break weekend!

More on “California Board Diversity Statute: Less Than Half of Companies Report Compliance”

I blogged a few weeks ago that only 318 companies that are subject to California’s board diversity statute have filed a disclosure statement to report whether or not they have the required number of women on their board. I was surprised by that – but Allen Matkins’ Keith Bishop sent this point of clarification:

The statutes requiring publicly traded corporations to file the Corporate Disclosure Statement predate the statutes relating to board composition. There is no specific fine associated with failure to file the Corporate Disclosure Statement in those statutes.

The statutes governing board composition provide that the Secretary of State may impose a $100,000 fine for failure to file to timely file board member information with the Secretary of State pursuant to a regulation. However, the Secretary of State has not adopted a regulation and is not required to do so (the statutes say that the Secretary of State “may” adopt implementing regulations).

I am not aware of any enforcement activity by the Secretary of State for actual violations of the composition requirements. Any enforcement action is likely to be defended on constitutional grounds and that is already being litigated in state and federal court.

Keith also went on to say that his understanding is that the Secretary of State compiles the data for the report solely from the Form 10-K and Corporate Disclosure Statements. Through no fault of their own, but because of how the statute is worded, they do not look at proxies or other disclosures made by a company. That reinforces that the corporate disclosure statements – and the “Women on Boards” report – isn’t all that useful in analyzing whether companies headquartered in California are satisfying the underlying board diversity requirements in the statute. As Keith explained in a recent blog, companies are permitted to file updated disclosure statements – but it’s not required.

Cooley’s Cydney Posner did pull up a few proxy statements – this blog summarizes her findings:

Should we assume that companies that did not file are not in compliance? I looked at the proxy statements for a number of the companies identified as “impacted corporations” that nevertheless were not reported as having filed Disclosure Statements — selected at random, unscientifically and completely arbitrarily — all of them had at least one woman on the board and often two or more. So, I would guess that the number of women on boards is probably much greater than the report indicates.

Unfortunately, however, to compile the report, the Secretary can’t simply look at companies’ proxy statements as I did. That’s because the language in the statute defines “female” as “an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth.” As a result, the Secretary is not reviewing 10-Ks or proxy statements to determine whether a company is compliant with the new board composition requirement, but is instead determining compliance based only on the California Statement, which includes a specific inquiry regarding the number of “female” directors. And if half the companies subject to the law don’t file, well, so much for the accuracy of the report.

It’s also worth noting that there are timing issues in connection with these annual reports and statements, resulting in “some gaps in available data” in the 2021 Report, as the report points out. Forms 10-K are due, generally depending on the size of the company’s public float, 60, 75 or 90 days after the end of the company’s fiscal year, and the deadline for filing the California Statement is 150 days after the end of the company’s fiscal year.

Liz Dunshee

April 1, 2021

Corp Fin’s “SPAC” Statement: All That Glitters Is Not Gold

Yesterday afternoon, 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!

ESG: Pru Previews Progress Before Annual Meeting

Prudential has been one of the ongoing leaders in sustainability disclosure. In late 2019, the company adopted a “multi-stakeholder” focus – and in 2020, it used its sustainability report to share progress under that framework. This year, we’re getting an even earlier look at some of Pru’s most impactful metrics – via this first-of-its-kind “summary ESG report” that was posted to the company’s sustainability page last week. It’s 18 pages long – and gives details on:

– The status of the Company’s Global Environmental Commitment’s operational and investment targets.

– Employees’ race/ethnicity and gender by job category, including preliminary EEO-1 data for 2020.

– Actions taken to support the Company’s nine commitments to racial equity, including disclosure of our diversity talent goals, which will serve as a baseline to illustrate our progress going forward.

– Disclosure of the Company’s gender and pay equity results.

The report was posted the same day the company filed its proxy statement. As usual, the proxy statement is very fulsome – and on page 58, it gives details on the “diversity modifier” that’s mentioned in the ESG summary as a way the company is supporting its commitment to racial equity. Although the company typically doesn’t post its full sustainability report until May/June, the ESG summary report provides key info to investors and other stakeholders in advance of the annual meeting on May 11th.

Our April E-Minders is Posted

We have posted the April issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!

Liz Dunshee

March 31, 2021

ESG: SEC Rulemaking Could Draw “First Amendment” Challenge

That was fast. Only a couple of weeks ago, Acting SEC Chair Allison Herren Lee gave a speech and issued a corresponding request for public comment on 15 aspects of climate change disclosure. Hunton Andrews Kurth’s Scott Kimpel alerted us that West Virginia’s Attorney General promptly responded with this letter to threaten a First Amendment lawsuit if the SEC adopts rules that require ESG disclosure.

The letter says the “strict scrutiny” framework applies to speech “compelled” by the government – and concludes that the SEC disclosure rules wouldn’t pass muster. The AG rests that conclusion on the theory that ESG info isn’t financially material and is merely meeting investor “demand.” Here’s an excerpt:

Strict scrutiny is the highest First Amendment standard and imposes three requirements. First, the regulation must advance a compelling government interest; second, it must be directly and substantially related to advancing that end; third, it must use the least restrictive means. See United States v. Playboy Entertainment Group, Inc., 529 U.S. 803, 813 (2000). This is a high bar for the government, and it is the “rare case[]” in which a regulation “withstands strict scrutiny.” Williams-Yulee v. Florida Bar, 575 U.S. 433, 444 (2015).

In Reed v. Town of Gilbert, the Court held that strict scrutiny applies to the type of content ­based speech regulation at issue here. 576 U.S. 155, 159 (2015). According to Justice Breyer, the holding in Reed “inevitably involve[s]” the “governmental regulation of securities.” Id. at 177. In NIFLA v. Becerra, the Court again applied strict scrutiny in a case dealing directly with compelled speech. 138 S. Ct. 2361, 2365-66 (2018). And most recently in an opinion by Justice Kavanaugh, the Court reaffirmed the same standard. Barr v. Am. Ass ‘n of Political Consultants, Inc., 140 S. Ct. 2335, 2346 (2020) ( citing Reed for its holding that “content-based laws are subject to strict scrutiny”). Concurring in part and dissenting in part in that case, Justice Breyer again remarked that this affects “the regulation of securities sales” because, “the regulatory spheres in which the Securities and Exchange Commission … operate[s]” is “defined by content.” Barr at 2360.

First Amendment strict scrutiny is an unmistakable roadblock for your proposal because merely meeting a “demand” for company statements is not a compelling government interest. And while protecting investors from fraud and deceptive practices in the issuance and trading of public securities will likely be held to be a compelling government interest, it is highly unlikely courts will find requiring statements of the kind you propose to directly and substantially serve that end. Moreover, the Commission would be hard-pressed to demonstrate that mandating companies to issue statements regarding environmental, social, and governance matters which are not material to future financial performance constitutes the least-restrictive means for investors to obtain such information. Private competition for customers and investors already leads companies to issue statements on a wide variety of matters of public interest without government compulsion.

It would be preferable for you and the Commission to recognize now that the First Amendment stands in the way of the plans you outlined. If not, these issues will be raised during rulemakings that proceed down this path.

It’s not too surprising to see a threat like this, given the fact that everything these days has become so politically charged. And remember, a First Amendment challenge was successful against the conflict minerals rule.

However, it’s bold to make a preemptive threat on behalf of the citizens of West Virginia before we can even assess whether proposed rules are appropriately tailored. Especially when we hear from companies that they want more certainty for information demands – and investors (including retail investors) are saying they want protection & accuracy when investing in ESG funds & indexes.

What’s clear is that both supporters and detractors will be gearing up for legal battles if rules materialize, and the Constitutional interpretation will land with the courts. That means we’ll probably be dealing with ambiguities in the “ESG disclosure” realm for quite a while.

“Responsible” Investors: Better to Engage Than Divest?

We’ve blogged several times about investor divestment initiatives – and pressure on big asset managers to eliminate fossil fuel companies from their portfolios. That’s a pretty blunt tool to use to effect social change – and recent research says it might not be as effective as engagement. Here’s an excerpt:

This paper is an attempt to analyze the welfare implications of two traditional strategies aimed at shaping corporate outcomes: exit and voice. To make the problem tractable we have made a number of simplifying assumptions: identical firms with zero marginal cost up to a capacity constraint, a linear demand curve, constant absolute risk aversion, normal distribution, etc. We have also studied the three principal socially responsible strategies, divestment, boycotting and engagement, separately, without considering how they might interact with each other.

Subject to these limitations, we find that in a competitive world exit is less effective than voice in pushing firms to act in a socially responsible manner. Our conclusion is consistent with Kruger et al.’s (2020) survey of institutional investors, which finds that such investors consider engagement, rather than divestment, to be the better approach for addressing an externality such as climate risk. Furthermore, we show that individual incentives to join an exit strategy are not necessarily aligned with the social incentive, while they are when investors are allowed to express their voice.

We have derived these results under the best possible scenario for the exit strategies: investors and consumers who can announce their strategies to the world and commit to them. If we relax these assumptions, exit becomes even less effective.

The authors go on to note that company-by-company engagement is also a better alternative than regulatory efforts – because it’s more flexible, cost-effective and “less prone to capture than political voice.” The authors note, however, that the US proxy system tends to limit shareholders’ ability to influence corporate policy and makes engagement less effective – and of course, engagement isn’t very effective at controlled and privately held companies.

Transcript: “Conduct of the Annual Meeting”

If you’re preparing for your shareholder meeting right now, make sure to check out the transcript from our recent webcast: “Conduct of the Annual Meeting.” 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 gave practice pointers on meeting format & logistics, voting tabulations, “rules of conduct” and other helpful topics.

Liz Dunshee