August 11, 2020

Universal Proxy Rules: Consensus Views

Last month, John blogged that the universal proxy proposal was on the SEC’s Reg Flex Agenda for finalizing in the near-term. Now, this letter from an informal “Universal Proxy Working Group” – consisting of 15 heavy-hitters from Wachtell, CII, Broadridge, CalSTRS, DF King, Wilson Sonsini, Trian, and others – is urging Corp Fin to consider common observations on the proposal as the Commission potentially nears the finish line. While the letter mostly supports the 2016 proposal, it makes a few suggestions. Here’s an excerpt:

– We support requiring disclosure on the universal proxy cards or in their accompanying materials (as well as in the definitive proxy statements), of the effect of: voting on the universal proxy card for more candidates than available board seats; voting on the universal proxy card for fewer candidates than available board seats; and signing and returning an otherwise unmarked universal proxy card.

– We support the Proposing Release’s presentation and formatting requirements, which advance the above objectives without compelling opposing sides to produce identical cards or co-ordinate the creation of a single universal proxy card. We believe both of these alternative models could cause unnecessary disruption for market participants accustomed to the circulation of two competing cards. The core improvement we seek is the ability of shareholders to use any proxy card they choose to vote for any combination of board nominees they prefer.

– We acknowledge that the presentation and formatting requirements described in the Proposing Release are not necessarily exhaustive of all appropriate requirements to ensure clarity, ease of use and fairness in an orderly process, and that further requirements, e.g., uniform presentation and formatting of the vote boxes beside the nominees, as well as standardized general colors for respective registrant and dissident cards, could be appropriate and helpful.

– While the Proposing Release centers on the universal proxy card, we would favorably view the SEC Staff having authority where necessary and appropriate to also facilitate the fair presentation of all nominees on vote instruction forms (VIFs) and electronic proxy voting platforms in the context of proxy contests.

– While the Proposing Release requires the dissident to solicit holders of shares representing a simple majority of outstanding voting power, the majority of the UPWG participants believe that requiring the solicitation of holders of two-thirds of outstanding voting power could also be workable,while commanding broader comfort that the threshold strikes an appropriate balance between providing the utility of the universal proxy system and precluding dissidents from capitalizing on the inclusion of dissident nominees on the registrant’s card without undertaking meaningful solicitation efforts.4Arequirement to solicit the holders of all outstanding votes would ensure that no shareholder is disenfranchised, but would not strike an appropriate balance, in the view of the majority of UPWG participants, especially taking into account the fact that dissidents generally are not reimbursed for their proxy solicitations (regardlessof whether the solicitation fails or succeeds).

Other near-term SEC rulemaking initiatives appear to have less consensus support. As reported in this blog from Cooley’s Cydney Posner, an appropriations bill recently passed by the House says that SEC funding can’t be used to finalize, implement, administer or enforce rules that would:

– Change procedural requirements or raise resubmission thresholds for shareholder proposals

– Harmonize private offering exemptions without strengthening filing requirements for exempt offerings in the same or stronger manner as proposed in 2013

– Place additional regulations on proxy advisors, per the SEC’s recent amendments

Cydney notes the possibility that these provisions could be jettisoned in the Senate’s version of the bill.

More on “What Does ESG Mean to You and Me?”

Lynn ran a guest blog last week from Rhonda Brauer about the meaning of ESG. We received several responses, including this 39-minute interview that our friend Keir Gumbs gave to Berkeley Law’s “ESG Beat.” It’s an engaging recap of how Keir came to work at Uber, what the company is doing on ESG issues, and who is driving that progress.

SEC Personnel Changes: On a Roll

Not only did we see Senate confirmations last week for two SEC Commissioners, the Commission also announced that Enforcement Co-Director Steven Peikin is stepping down, after three years on the job. Stephanie Avakian will remain as the Enforcement Division Director.

In addition, Lindsay McCord was named Chief Accountant in Corp Fin. The SEC’s press release notes that Lindsay has served as Acting Chief Accountant since March, and prior to that was a Deputy Chief Accountant in the Division.

The SEC isn’t the only organization making changes. The CII bid farewell to its leader Ken Bertsh last week, with Amy Borrus taking over as planned as Executive Director. Congratulations to both Ken and Amy!

Liz Dunshee

August 10, 2020

Reg FD Gets a “Kodak Moment”

Last week, the WSJ reported that the SEC is investigating the circumstances around Eastman Kodak’s announcement of a $765 million government loan to make COVID-19 pharmaceuticals at its US factories (which is now apparently on hold due to the probe). As a case study in “what not to do,” this is a pretty good one. Don’t:

1. Grant options the day before a positive announcement – especially if the options can be immediately exercised, and even if the recipients say they won’t sell the shares

2. Allow insiders to buy or sell shares while in discussions about a material deal

3. Share unembargoed press releases with media outlets before the company’s official announcement

As we see time and time again with insider trading allegations around big corporate news events, even if trading activity is consistent with prior transactions, the optics are terrible. Several members of Congress sent this letter to SEC Chair Jay Clayton to request an investigation into the Kodak transactions – as did Senator Elizabeth Warren (D-Mass.) in her own letter.

Senator Warren’s letter also calls attention to the Reg FD implications of non-intentional disclosure of material nonpublic information. The alleged problem here was that Kodak sent a news advisory to media outlets a day before its official announcement. The WSJ confirmed that the company didn’t provide any embargo instructions to prevent the press from sharing the info.

I don’t think that you could call what happened a “leak,” given the info was intentionally released – but at any rate, shares spiked as the news trickled out, and arguably not everyone had access to the same information. For example, investment firm “bots” had a big advantage as they crawled the web. Instead of immediately making its own announcement, Kodak asked the reporters to remove their articles. However, that may have been an incomplete solution since some stories had already been captured by screen shots, social posts and search engines.

Don’t let this happen to you. Read our “Reg FD Handbook” for more guidance on how embargoes can protect you from a violation. And if you’re a “Reg FD junkie” – as many of us are – check out the podcast series that our very own Dave Lynn has been curating for the SEC Historical Society, to celebrate the 20th anniversary of its adoption.

Remote Work: Questions Audit Committee Chairs Are Asking

The risks of remote work are top of mind for audit committee chairs right now, according to this PCAOB memo. Here are some questions they’re discussing with their auditors (also see this Cooley blog – and my blog last month about disclosure controls):

1. Will additional time be needed to get the audit work done remotely?

2. What complexity does working remotely add to the audit?

3. Will working remotely affect productivity of audit engagement team members?

4. If so, does the audit plan need to be updated, and do fees need to be revisited?

5. Has remote work affected the company’s ICFR? If so:

– Is the auditor including new controls in their assessment, or evaluating changes to existing ones?

– Has the auditor identified any concerns with respect to segregation of duties?

6. If a review of the issuer’s interim financial information has been completed already, are there any lessons learned that can be applied to the year-end audit?

7. Are there any technology enhancements or collaborative tools that should be considered to support longer-term remote work?Has the auditor assessed potential risks of material misstatement related to cybersecurity, and how does the auditor plan to respond to those risks?

Transcript: “Coronavirus: Next Steps For Disclosure & Governance”

We have posted the transcript for our recent webcast: “Coronavirus: Next Steps For Disclosure & Governance.”

Liz Dunshee

August 7, 2020

Senate Confirms Caroline Crenshaw as New SEC Commissioner & Hester Peirce Reappointed

Late yesterday evening, the Senate confirmed the nominations of Hester Peirce and Caroline Crenshaw to serve as SEC Commissioners by a voice vote. SEC Chair Jay Clayton and Commissioners Elad Roisman and Allison Lee issued a statement of congratulations and news was first reported in ThinkAdvisor. Commissioner Peirce was first sworn in on January 11, 2018 and her new term will end on June 5, 2025, while Commissioner Crenshaw’s term will end on June 5, 2024.

CPRA: California 2020 Ballot Initiative Means Potential Changes to CCPA

Back in May, I blogged on the Mentor Blog about California’s ballot initiative – the California Privacy Rights Act (CPRA).  And, earlier this summer, I also blogged about the release of final CCPA regulations as California’s Attorney General began enforcement of the regulations July 1.  Now, as has been widely reported, the CPRA initiative has qualified to be on California ballots in November.  This Sidley blog says the initiative has a strong chance of passing and provides an overview of what this might mean:

In the short term, the CPRA will help businesses by preserving through 2022 the employee and business-to-business exemptions that are otherwise scheduled to sunset on December 31, 2020.  Some of the potential changes, among others, relate to new duties imposed on businesses that collect personal information and their service providers, new rights for sensitive personal information and expansion of data breach liability to include email addresses with passwords.

The blog notes that the CPRA would create a requirement for annual cybersecurity audits and regular risk assessments for high risk data processors – Businesses whose processing of consumers’ personal information “presents a significant risk to consumers’ privacy or security” would be required to perform annual cybersecurity audits and submit to the new California data protection agency, “on a regular basis,” risk assessments weighing the benefits of processing personal information to the business, the consumer, other stakeholders, and the public, against the potential risks to the consumer.

Presuming the initiative passes, Sidley’s blog suggests company compliance efforts begin soon thereafter – while most of the CPRA would not go into effect until January 2023, obligations of businesses with respect to the personal information covered by the amended CCPA would relate to personal information collected beginning in January 2022.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members.  Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply entering their email address on the left side of that blog. Here are some of the latest entries:

– IPOs: Company-Friendly Directed Share Programs

– Considerations for Mitigating ESG Disclosure Risk

– Main Street Lending Program: Updated Fed Guidance

– Storytelling for Compliance Pros

– Whistleblower Awards: Dodd-Frank Turns 10!

– Lynn Jokela

August 6, 2020

Dave & Marty: The “Fond Farewell” Episodes, Part 3

In this third 30-minute podcast tribute to his friend & “Radio Show” co-host Marty Dunn, who died on June 15, 2020, Dave Lynn welcomes Marty’s colleagues from Corp Fin, private practice and the conference circuit to share their memories of Marty. Highlights include:

– The art of being subtle

– Marty’s fondness for the ‘Original Ledos’

– Marty’s humble leadership

– Crazy, cool new projects Marty couldn’t resist

– Work on the 2007 Reg D Proposing Release as Marty prepared to leave the SEC for private practice

– Marty’s reaction when seeing himself on the “big screen” at conferences

– Marty’s personable, friendly nature

Secure FTP for Supplemental Materials & Rule 83 CTRs

Earlier this week, in response to continued health and safety concerns from Covid-19, Corp Fin issued a statement providing a temporary secure file transfer process for submission of supplemental materials pursuant to Securities Act Rule 418 and Exchange Act Rule 12b-4 and information subject to Rule 83 confidential treatment requests.

Supplemental Materials: Securities Act Rule 418 and Exchange Act Rule 12b-4 permit the Commission or its staff to request certain supplemental materials. The secure file transfer process allows for electronic submission to the Division of supplemental materials submitted pursuant to Rules 418 and 12b-4 during this temporary accommodation, including supplemental materials subject to a Rule 83 confidential treatment request.

Rule 83 Confidential Treatment Requests: The Commission’s Rule 83 provides a procedure by which persons submitting information may request confidential treatment for portions of that information where no other confidential treatment process applies. Information subject to a Rule 83 confidential treatment request must be, to the extent practicable, submitted separately from information for which confidential treatment is not requested, appropriately marked as confidential, and accompanied by a separate written request in paper format for confidential treatment. Although Rule 83 requires that confidential treatment requests be submitted in paper format, the rule also permits the designation of alternative procedures. The secure file transfer process allows for electronic submission to the Division of Rule 83 requests for confidential treatment together with the confidential information during this temporary accommodation. A copy of the request for confidential treatment (but not the confidential information itself) must also be submitted to the Commission’s Office of FOIA Services.

Anyone wishing to submit information using FTP should contact the staff member associated with the matter to request the initiation of FTP. The statement also advises not to send supplemental information or Rule 83 CTRs through email.  Supplemental information and information subject to Rule 83 CTR can still be sent to the SEC mailroom, however, the statement says there will be delays in processing the documents.

For more information to help navigate the rules relating to confidential treatment requests, check out our “Confidential Treatment Requests” Handbook and our checklists – “Confidential Treatment Requests – Basics” and “Confidential Treatments Requests – Drafting” – that are available to members on

Mid-Year 2020 SEC Enforcement Update

This Gibson Dunn memo reviews SEC enforcement activity during the first half of 2020.  The memo includes discussion of the SEC’s Enforcement Division priorities in light of the Covid-19 pandemic as well as several enforcement actions against parties that allegedly sought to take advantage of the pandemic.  In terms of public company cases, here’s an excerpt about financial reporting enforcement actions:

In February, the SEC instituted a settled action against a financial institution for allegedly misleading representations concerning the success of its cross-selling business strategy. According to the settled order, the cross-sell metric reflected accounts and services that were unused and unauthorized by customers, and that had been opened through sales practices inconsistent with the company’s disclosure of a needs-based selling model. Without admitting or denying the allegations, the firm agreed to cease and desist from future violations and to pay a civil penalty of $500 million for distribution to investors. The settlement was part of a broader resolution with the Department of Justice.

Also in February, the SEC filed an action against a parent company, two of its former executives, and its energy subsidiary for allegedly making misleading statements about the subsidiary’s nuclear power plant expansion. According to the complaint, which was filed in federal court in South Carolina, the defendants represented that the company was on track in its plan to build two plants and receive nearly $1 billion in tax credits, even though they knew the company was behind schedule and the plan was eventually abandoned.

– Lynn Jokela

August 5, 2020

What Does ESG Mean to You and Me?

Rhonda Brauer shares her thoughts about SEC Commissioner Elad Roisman’s recent Keynote Speech at the Society for Corporate Governance’s National Conference:

Commissioner Roisman recently shared his thoughts on ESG and asked what the term means to “You and Me”.  Such keynote speeches are often meant to be provocative, and reasonable minds can differ.  Given my experience advising both corporate and investor representatives, this is what ESG means to me:

(1) ESG is a three-syllable acronym that has come to be associated with significant issues that impact the long-term sustainability of companies, our capital markets, capital formation and society. You can find different articles about its origin, but that’s not really the point.  Environmental, Social and Governance issues vary in importance across companies and industries, and they appropriately evolve over time.  It is important that management teams and boards think about whether and how these issues are financially material to their companies over different time horizons, generally acknowledging that they need to get their “G” right in order to get their “E” and “S” issues right.

(2) It is well established that “financial materiality” under our federal securities laws is what a reasonable investor would consider important in making investment or voting decisions. Nevertheless, I still see some confusion as to which ESG disclosures belong in SEC-filed documents.  Many reasonable investors have decided that both filed and unfiled ESG information is material to their investment and voting decisions, which is supported by research (see note 10) linking positive financially material ESG indicators to superior financial results.  These investors want to find this information in the public domain, and want the information to be accurate, relevant and comparable, which I believe necessitates explicit disclosure requirements.

The SEC has considered mandated disclosures in the past (see notes 37-39) as a way to provide relevant and comparable data, as opposed to the inconsistent “private ordering” of ESG disclosures championed by Commissioner Roisman.  In the meantime, many investors are urging their portfolio companies to disclose information pursuant to the Sustainability Accounting Standards Board (SASB) standards and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).  Both of these frameworks use the SEC definition of financial materiality.  The SASB identifies financially material issues using their research, back-testing and feedback from shareholders, companies and other financial market participants.

(3) ESG is part of Enterprise Risk Management (ERM). ERM oversight is a core board responsibility.  Companies generally consider ESG as part of their long-term ERM, to understand, monitor and address risks to, and opportunities for, them and their businesses.  Contrary to Commissioner Roisman’s statements, this is not a feel-good company exercise about “doing its part” in the world.  Effective board understanding and oversight of ERM are relevant to investors and the long-term viability of their portfolio company investments.  The SEC has recognized the importance of this board role by requiring that companies explain the board’s risk oversight to their investors in their annual proxy statements.

(4) Investors want and use ESG data to analyze and protect their financial interests and those of their clients or beneficiaries, not – again in Commissioner Roisman’s words — because they are “thinly veiled political operatives pushing their own agendas”, nor are they “grandstanding” or “conflat[ing] greater societal debates” and “blur[ing] their personal views” with what should be required disclosures. The U.S. Government Accountability Office (GAO) recently published a report, confirming that investors want corporate ESG disclosures to better understand and compare their investment risks, as well as to inform their decisions on voting and buy/sell actions.

Investors and other stakeholders may share their ESG concerns with companies, but these concerns are not presumptively “demands” and “pressure”.  Hopefully companies are already monitoring ESG issues that they consider to represent financially material risks and opportunities, as well as making the related capital allocation decisions that benefit their businesses and our capital markets more broadly.  Risk management of ESG issues is not a simple corporate responsibility, especially as the issues become more complex and interrelated for companies and our financial markets, communities, and planet.

The G&A Institute has reported that 90% of S&P 500 companies are already publishing voluntary sustainability reports, using many of the sustainability disclosure frameworks as guides.  Yet, this voluntary reporting, accompanied by the principles-based approach currently used for disclosure in SEC filings, seems to fall short of providing comparable and reliable information to investors and does not provide a consistent framework to companies, making it difficult for them to discern which information and formats are relevant to investors.  Mandated ESG disclosures would more strongly and efficiently support the three-part SEC mission on which Commissioner Roisman is rightly focused.

Comment Letters Pouring in for DOL’s Proposal on ESG Investing

Earlier this summer, Liz blogged on our “Proxy Season Blog” about the Department of Labor’s proposed amendments to the “investment duties” regulations for ERISA plan fiduciaries.  The full impact of the proposed rule isn’t exactly known but as this Groom Law Group memo explains, it’s generally viewed as creating significant challenges for ERISA plan fiduciaries considering ESG investing.  The proposal had a relatively short comment period, but even so, it’s generated a flurry of comment letters – this DOL web page catalogs over 1000!  As the headline for this ThinkAdvisor blog notes, the proposal is drawing quite a bit of criticism – here’s an excerpt:

Opposition to DOL’s proposal to limit ESG-focused investments in 401(k) plans is growing, along with requests for a longer comment period.  Morningstar, Heartland Capital Strategies, Principles for Responsible Investment and ISS have written comment letters opposing the proposal along with 41 Democratic members of the House, 13 Democratic members of the Senate and others.  In addition, a coalition of trade groups representing financial institutions with business in the defined contribution space requested an extension to the 30-day comment period that ended on July 30.  Opposition to the proposal centers on these primary arguments:

– Negative impact on investors: limiting ESG investments could increase risks and costs of plans, threaten performance and discourage plan participation by those who want to match investments to their values

– Inconsistency with other DOL rules: the proposal singles out one type of investment focus when it doesn’t do the same for others

– Burden for plan sponsors: this could have the effect of discouraging their use of ESG-focused investments, causing ‘even worse outcomes for plan participants’ according to Morningstar

– An outdated understanding of the role that ESG factors play in the current investment environment

For more, these letters from American Benefits Council, CII, ISS, Investment Company Institute and Wagner Law Group criticize the rule proposal, with some offering suggestions for modifications.  Also, Cyrus Taraporevala, SSGA’s President & CEO, penned an opinion piece in the Financial Times saying the DOL’s proposed rule “misunderstands what matters to performance and should be withdrawn.” In addition to the proposed rule, the DOL Employee Benefits Security Administration is apparently looking into ESG investments – attached is a sample inquiry letter that it has sent to some plan sponsors.  It’s not clear if EBSA will treat this as a formal investigation – so stay tuned!

Tomorrow’s Webcast: “ESG Data: Investor Use-Cases and Corporate Adoption”

Tune in tomorrow for the webcast – “ESG Data: Investor Use-Cases and Corporate Adoption” – co-hosted by ISS Corporate Solutions and CCRcorp – to hear to hear Nicole Bouquet of ISS Corporate Solutions, Rhonda Brauer of RLB Governance and Mary Morris of CalSTRS discuss an overview of the ESG landscape and how investors are increasingly using ESG data to make investment decisions.

– Lynn Jokela

August 4, 2020

Scrutiny Intensifies on Political Spending

Following the killing of George Floyd, attention has increased on diversity and inclusion, among other matters. Earlier this summer, Liz blogged on our “Proxy Season” Blog that company “anti-racism” statements could lead to more scrutiny of corporate political spending. 

Now, with increased focus on “E&S” as a backdrop, this “Conflicted Consequences“ report from the Center for Political Accountability finds that corporate political spending through non-profit, tax-exempt “527” organizations often doesn’t align with company statements in support of environmental & social issues. The report examines corporate political spending over the last decade and how those funds were used to fund political efforts that have turned out to be contradictory to company public statements. CPA made a bit of a splash with this report, as it received coverage in the NYT and Financial Times the same day of the report’s release.  Here’s an excerpt from the Foreword, explaining the concern with “527” political spending:

The intermediate organizations that these companies finance often direct that money in ways that belie companies’ stated commitments to environmental sustainability, racial justice, and the dignity and safety of workers. To take just one of the many instances this report recounts, large donations channeled through these organizations helped North Carolina Republicans take control of the state legislature in 2010. They used that control to institute extreme gerrymanders of both the state legislature and the state’s delegation to Congress, and to pursue a range of divisive and anti-democratic policies, including restrictions on LGBTQ rights and new rules designed to impede the access of black voters to the polls.

Both the NYT and FT cite specific examples of apparent disconnects between company support for issues and ultimate beneficiaries of company “527” donations.  Cydney Posner’s blog discusses the report and cites a 2018 CPA report with guidance for companies to address heightened risk of potentially conflicting messages.  Among other suggestions, it suggests companies conduct due diligence of risks associated with any donation, including how the funds will be used and with whom the company is being associated by virtue of the donation. If this heightened scrutiny continues as we move into election season and beyond, it could be a big deal for companies, especially in light of the increased focus lately on corporate purpose.

What to do About “Social” Risk

Besides conducting due diligence on risks associated with donations, boards delegate various oversight responsibilities among its committees and social risk is a responsibility likely shared among all committees and the full board.  Social risk can be more difficult to get your arms around as it’s not entirely clear when or where an event might arise nor exactly how it will be triggered but it’s one risk that can invite scrutiny from customers, employees, regulators and the general public.  A recent article from researchers at Stanford’s Corporate Governance Research Initiative examined social risk, noting that the primary cause of damage is reputational, such as risk from unwanted scrutiny of corporate political spending.

The article provides the following recommendations to help boards prepare for, manage and mitigate social risk:

– Use knowledge of the past to inform future plans: examine social risk events that have impacted peer groups and related industries and evaluate patterns about how risk events have evolved over time

– Conduct scenario planning to identify the highest likelihood risk events: based this analysis on events most likely to manifest given the company’s industry, profile and vulnerabilities and quantify the potential impact by looking at brand, product, suppliers, employees and overall reputation

– Prepare responses and identify the resources necessary to prevent or mitigate the highest likelihood risks: consider both preventative and responsive measures over both short-term and long-term time horizons and develop resources, programs and policies to protect the company going forward

July-August Issue of “The Corporate Counsel”

The July-August issue of “The Corporate Counsel” print newsletter was just posted – and also sent to the printer (try a no-risk trial). The topics include:

– In Memoriam: Marty Dunn

– What’s in a Name? The SEC Amends “Accelerated Filer” and “Large Accelerated Filer” Definitions

– The Curious Case of Public Companies and the PPP

– COVID-19 Disclosure: What Does the SEC Want to See in Your MD&A?

– Covid-19: Chief Accountant’s Statement Emphasizes Financial Reporting Process

– “Going Concern” Rears Its Ugly Head

– SEC Amends Proxy Rules to Address Voting Advice by Proxy Advisors

– Lynn Jokela

August 3, 2020

Looking Back at Restatements: Trending Down in Number & Severity

Audit Analytics recently released its annual report on financial restatement trends – the report looks at trends over the last 19 years.  Since 2015, total restatements – reissuance (“Big R”) and revision (“Little R”) – have declined for five consecutive years bringing the total to a 19-year low of 484 restatements in 2019.  And, of those, almost 80% were Little R restatements, which is the highest percentage since 2005.  Here’s some of the other highlights:

In addition to a decrease in overall number of restatements, Audit Analytics found an indication of low severity in every criterion quantified: (1) the negative impact on net income, (2) the average cumulative impact on net income per restatement, (3) the percentage of restatements with no impact on income statements, (4) the average number of days restated, and (5) the average number of issues identified in the restatements

– Average number of issues implicated in a restatement was approximately 1.5

– Average number of days that were corrected by a financial adjustment decreased from 500 days in 2018, to 451 in 2019 – the lowest number during the 19 years analyzed

– The largest adjustment in 2019 was $276 million and was the lowest during the last 18 years and dramatically lower than the largest adjustments in 2004 ($6.3 billion) and 2005 ($5.2 billion)

– More severe reissuance restatements from U.S. accelerated filers totaled only 32 in 2019, which is the lowest amount since 2005 when the disclosure requirement came into effect

ISS Policy Survey:  Covid-19, Climate Change, Board Diversity & More

Summer seems to be flying by and like previous years, ISS opened it’s “Annual Policy Survey.” Similar to last year, ISS is using a single survey with a limited number of questions to help streamline the process.  Even though the process is streamlined, it still covers a broad range of topics, including:

COVID-19 related questions on ISS policy guidance in response to the pandemic, AGM formats, and expectations regarding compensation adjustments and adjustments to short-term incentives globally.  Additional topics include, among others, a number of global questions related to climate change risk, sustainable development goals, auditors and audit committees, and racial and ethnic diversity on corporate boards, independent board chairs in the U.S.; and executive and director remuneration in pan-European markets.

As always, the policy survey is just the first step as ISS formulates its 2021 voting policies. In addition to the survey, ISS will gather input via regionally-based, topic-specific roundtables and conference calls.  From there, interested market participants can comment on the final proposed changes to the policies.

Our August Eminders is Posted!

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

– Lynn Jokela

July 31, 2020

Securities Litigation: Federal & State Court Suits Down in 2020

According to Cornerstone Research’s 2020 Midyear Assessment, the number of securities lawsuits filed in federal & state courts dropped by 18% compared to the second half of 2019, and were at their lowest level since 2016.  Kevin LaCroix recently blogged the details over on “The D&O Diary.”  Here’s an excerpt:

According to the report, there were 182 securities class action lawsuits filed in state and federal court in the first half of 2020, which while below the 221 filed in the second half of 2019 and 207 filed in the first half of 2019, is still well above the semiannual average of 112 filings during the period 1997-2019. The 182 filings in the year’s first half is the lowest semiannual number of securities suit filings since the second half of 2016. The report states its view that a decline in Section 11 filings “was the primary reason for the overall reduction in filing activity in the first half of the year.”

The decline in the number of filings from the second half of 2019 to the first half of 2020 represented a drop in the number of filings of 18%. Core (or traditional) filings declined 13%, from 134 in the second half of 2019 to 117 in the first half of 2020. Due to the slowdown in merger deal activity, merger objection lawsuit filings also declined, from 87 in the second half of 2019 to 65 in the first six months of this year, representing a decline of 25%. The 65 first half merger-related suit filings in the first half of this year is the fewest number in federal courts since the second half of 2016.

In case you’re wondering, Cornerstone says that 11 Covid-19-related securities class actions have been filed through the end of June. Kevin’s also been monitoring those filings, and he pegs the number at 15. Lawsuits that Kevin includes in his list that Cornerstone doesn’t are those filed against  Zoom, Colony Capital, Wells Fargo, and iAnthus Capital Holdings.

Kevin’s blog has links to prior posts that explain why he included these cases in his tally, but as far as I’m concerned, he doesn’t have to explain anything – he’s a fellow Clevelander, so I’ve got his back.

Crypto Enforcement: Here Comes The Martin Act!

Those of you who are of my vintage likely remember the commercials for Ron Popeil’s Veg-O-Matic that touted its 1,001 household uses – “It slices! It dices! It makes julienne fries!” Well, New York’s Martin Act just keeps on proving that it’s the Empire State’s answer to the Veg-O-Matic. This DLA Piper memo says that the Appellate Division of New York’s 1st Dept. recently upheld a lower court ruling authorizing the statute’s use as the basis for the New York AG’s long-running investigation of the virtual currency “tether.” This excerpt lays out the key takeaway from the Court’s decision:

The decision is a timely reminder to companies and individuals in the FinTech sector that the New York AG has broad power to investigate suspected fraud in the realm of virtual currencies. Dealing with the New York AG’s Investor Protection Bureau may be a disorienting experience for white collar practitioners used to responding to inquiries by federal regulators.

The text of the Martin Act places few clear limits on the New York AG’s investigative authority, and the office is not constrained by the large body of guidance memorialized in the US Department of Justice’s manual for prosecutors and other published federal enforcement guidelines that help practitioners attempt to deal with regulators on a level playing field.

If you old folks don’t remember the Veg-O-Matic, I bet you remember the Bass-O-Matic.  (I feel sorry for you kids today, I really do).

EDGAR’s On the Fritz Again

One of my colleagues was in the unenviable position of trying to file a couple of S-8s & an S-3 yesterday, and he learned to his chagrin that the EDGAR system was once again experiencing technical difficulties.  According to the EDGAR News & Announcements page on the SEC’s website, they’re working on it:

The EDGAR system is currently experiencing technical difficulties. Our technical staff is working to resolve the issue. Please check this site for updates. We apologize for any inconvenience this may cause.

Fortunately, our registration statement filings were eventually accepted, and even though they didn’t show up on  EDGAR until after 5:30 pm, we still received yesterday’s filing date. Still, I think my friend is starting to think the SEC is out to get him – he got caught up in the last malfunction trying to file a couple of 11-Ks.

John Jenkins

July 30, 2020

Updating: What Do You Do With Your First Quarter Covid-19 Risk Factor?

In response to the onset of the Covid-19 pandemic, many companies opted to include a risk factor addressing the pandemic in their 10-Qs for the first quarter of 2020. So, assuming that disclosure is still accurate & comprehensive, should you include it in your second quarter 10-Q? That’s the question addressed in this recent Bass Berry blog. Here’s an excerpt:

With respect to assessing whether to include potential COVID-19 risk factor disclosure in upcoming Form 10-Qs, as a starting point, Part II, Item 1A of Form 10-Q requires that public companies “set forth any material changes from risk factors as previously disclosed in the registrant’s Form 10-K” (emphasis added).

This language from Form 10-Q, on its face, would appear to require public companies to continue to disclose risk factors included in a prior Form 10-Q in any subsequent Form 10-Qs filed before the next Form 10-K in light of the statement about including material changes from the prior Form 10-K (compare the 2005 adopting release of the SEC promulgating this Form 10-Q risk factor requirement, which stated that the Form 10-Q should disclose risk factors “to reflect material changes from risks factors as previously disclosed in Exchange Act reports” (emphasis added).

The blog goes on to acknowledge that although practice has not been uniform, there is a good argument based on the text of Form 10-Q that public companies should continue to repeat (with updated language, as applicable) risk factors included in a prior Form 10-Q in subsequent Form 10-Qs filed during the fiscal year.  This Bryan Cave blog takes a similar position, noting that “strict compliance” with the language of Item 1A has become “common practice.”

These views are consistent with the position we’ve taken in our “Risk Factors Disclosure Handbook.” However, one of our members pointed out that the Sept. 2010 issue of The Corporate Counsel reported that, despite the language of Item 1A, the Staff had advised that new risk factor disclosure included in a 10-Q does not need to be repeated in subsequent 10-Qs. After making some inquiries, I learned that this advice was likely provided informally in a private conversation. Unfortunately, the Staff never formalized that guidance, and we don’t know whether the Staff would take the same position (or any position) today, in the context of Covid-19.

2020 DGCL Amendments Signed into Law

On July 16, Delaware’s Gov. John Carney signed the 2020 amendments to the DGCL into law. This S&C memo has the details. As we blogged at the time the legislation was first introduced, it addresses some of the problems that Delaware corporations experienced this year in their efforts to transition to virtual annual meetings. Here’s an excerpt:

Under the emergency conditions described in DGCL §110(a), the Amendments provide a board of directors with discretion to postpone or change the place of a stockholder meeting. Amendments to Delaware’s General Corporation Law July 22, 2020 meeting (including to hold the meeting solely by means of remote communication). Public companies may notify stockholders of such a change solely by a document that is publicly filed with the Securities and Exchange Commission.

The amendments also update the definition of an “emergency” under Section 110 of the DGCL & expand it beyond the Cold War “Rocket Attack U.S.A.” scenario to include “an epidemic or pandemic, and a declaration of a national emergency by the United States government.”

CEO Turnover: Uneasy Lies the Head That Wears the Crown

There’s a grim joke among professional football players to the effect that the initials “NFL” stand for “Not for Long.” According to a recent Squarewell Partners study, the same can be said for those who serve as U.S. public company CEOs. Squarewell studied CEO departures at some of the world’s largest companies since the beginning of 2019, and reached some interesting conclusions. These include:

– US companies witnessed more CEO departures than the UK and Europe
– Official company disclosures suggest only 7% of CEOs were formally dismissed but we find that the actual figure of CEO dismissals should be 29%.
– 40% of dismissed Lead Executives recorded negative share price performance during their tenure.
– Only 20% of companies (that saw a CEO change) provided comprehensive disclosure surrounding their succession plans prior to their departure.
– 66% of newly appointed Lead Executives were promoted from within the organization.
– 10% of newly appointed Lead Executives were women.

John Jenkins

July 29, 2020

Dave & Marty: The “Fond Farewell” Episodes, Part 2

In this second 30-minute podcast tribute to his friend & “Radio Show” co-host Marty Dunn, who died on June 15, 2020, Dave Lynn welcomes Marty’s colleagues from Corp Fin, private practice and the conference circuit to share their memories of Marty. Highlights include:

– The story behind the Dave & Marty puppet show
– Marty’s game saving “play at the plate” for the Corp Fin softball team
– Making a newcomer feel welcome
– Spending time with Marty & his family
– What it was like to be one of “Marty’s people”
– Marty’s extraordinary ability as a teacher and mentor
– Marty’s rendition of “Midnight Train to Georgia”

The podcast is accompanied by two of Dave & Marty’s legendary puppet shows from our 2015 & 2018 Proxy Disclosure Conferences.

Diversity: You Too, Plaintiffs’ Bar!

Lynn recently blogged about shareholder derivative lawsuits against Facebook & Oracle arising out of alleged inaction on diversity issues. In light of the plaintiffs’ bar’s fondness for diversity-based fiduciary duty claims, I thought it was fitting that the federal district court judge presiding over the Robinhood class action case decided that the plaintiffs’ bar needed to pay a little attention to its own diversity practices.

According to Alison Frankel’s recent blog, Judge James Donato rejected the application of two major plaintiffs firms to serve as lead counsel for the Robinhood litigation. This excerpt from the blog explains why:

Judge Donato, in an order Tuesday night, consolidated the cases – but rejected the leadership proposal. There was no doubt, he said, that Kaplan Fox and Cotchett would provide “highly professional and sophisticated representation” to the prospective class, given their “impressive history.” But Judge Donato said he was concerned that the proposed team lacked diversity.

There were no women among the proposed leaders of the case, the judge pointed out. He also noted that the list includes a lot of lawyers and law firms that frequently head class actions and MDLs. That experience might benefit the prospective class, he said, but “highlights the ‘repeat player’ problem in class counsel appointments that has burdened class action litigation and MDL proceedings.”

The judge’s order permitted the law firms to reapply after they reshuffled their starting lineups, but the blog says that the order may raise constitutional concerns based on Justice Samuel Alito’s criticism of a similar order in an antitrust case.

Going Concern: Update on Covid-19’s Toll

Back in May, I blogged about an Audit Analytics survey that identified 30 public company audit opinionsthat cited the COVID-19 pandemic as a contributing factor to substantial doubt about a company’s ability to continue as a going concern for the next twelve months. A more recent Audit Analytics survey says that the toll continues to grow:

Since our last update in May 2020, there have been 12 additional audit opinions filed with a going concern modification citing COVID-19 – a 40% increase over 7 weeks. For 3 of those companies, it was their first going concern, bringing the total up to 17 companies that were issued their first going concern in the last 5 years specifically citing the pandemic as a reason.

The blog is accompanied by a chart identifying the companies in question and the reasons they cited as contributing to the going concern qualification in their audit opinions.

John Jenkins