TheCorporateCounsel.net

November 13, 2019

ISS Issues ’20 Policy Updates

Yesterday, ISS announced its new policy updates for next year. In addition to firming up its board diversity policy (which is effective for the upcoming proxy season), clarifying its policies on independent chair & share repurchase proposals and making a few other changes, the policy updates for the US create two distinct policies for newly public companies that address: (1) problematic governance provisions – e.g. supermajority voting for bylaw or charter amendments, classified boards and (2) multi-class capital structures with unequal voting rights.

The multi-class policy now includes a framework for addressing acceptable sunset requirements for problematic capital structures in newly public companies. ISS says that a number of considerations will be taken into account when assessing the reasonableness of a time-based sunset provision – but sunset periods beyond seven years from the date of the IPO will not be considered reasonable.

See this Steve Quinlivan blog for a better summary…

Lost: Corp Fin’s Logo!

The Corp Fin logo is lost! Have you seen it? Back in the ‘aughts,’ I remember Corp Fin introducing its own logo. It looked pretty similar to the well-known SEC logo. However, I can’t recall that logo ever being used – and after scouring the Web, there’s no trace of this logo. Where has it gone? At the time, it wasn’t so strange since Enforcement had its own logo (many thanks to Bruce Carton of the “Securities Docket” for digging that one up) which I believe is not available anywhere on the Web except for the below:

SEC’s Enforcement: Do Stats Matter?

Every year, the SEC’s Enforcement Division releases stats about the number of actions it has brought, etc. – here’s the latest stats that were released last week (and here’s what the Enforcement co-Directors said about them). It’s good fodder for the media. But why does Enforcement do it? They’ve made this annual announcement well before our current “Big Data” era – when analytics drives so many corporate decisions.

I would argue that some of the motivation is driven by the fact that Congress requires some proof that its money is going to good use. The SEC is not self-funded – and the Senate & House Committees that oversee the SEC need something to hang their hat on. Of course, the stats can’t improve every year – at some point, they have to fall to earth. That’s when the SEC argues that quality is better than quantity – such an argument was made just last year.

Anyway, here’s a Debevoise & Plimpton memo covering the latest stats. And here’s a speech by SEC Commissioner Hester Peirce about them – this excerpt from the beginning is pretty funny:

It is hard to believe that 2019 is almost over. When I think back on the year, one defining theme is broken windows. Why is 2019 the “Year of the Broken Window”? I live in an condominium building with a lobby that has three sides of floor to ceiling windows. Three times this year, I have come down into the lobby to find one of these large windows broken. The first time was the routine, upset resident taking a soul-satisfying, hand-crushing whack at a window. The second two incidents though were a bit less commonplace.

One morning, I came down around 7 a.m. to find a van nose-first in the lobby. Rather than rounding the semicircular driveway in front of the building, the van headed straight into the lobby. Texting while driving? Medical emergency? Brake failure? I am not sure which, but I did feel bad for the driver, who, although apparently uninjured, was obviously unhappy. Misery loves company, however, and this driver got company. A couple months later, I once again came down in the morning to find a shattered window. No vehicle this time. It had already been cleared out of the lobby. From the condo rumor mill, I gleaned that an early morning car chase had ended with one of the vehicles in my building’s lobby.

Broc Romanek

November 12, 2019

Who “Leaked” WeWork’s Comment Letter (& Response)?

A “whodunit”! We haven’t blogged about one of those in a while. You will recall that WeWork – the gift that keeps on giving to this blog – withdrew its IPO registration after facing much criticism when its S-1 became publicly available. One of the consequences of the failure of WeWork’s IPO to see daylight was that Corp Fin’s comment letters (& the company’s responses) would never be made public. Here’s the SEC filing history for WeWork – showing the progression from a draft confidential filing – to filing the S-1 – to filing a withdrawal request for the S-1 before it ever became effective. Note that the comment letters & responses are not posted there.

Apparently, the WSJ somehow got their hands on that file, which became the basis for this article that excerpts specific comments from Corp Fin’s comment letters to WeWork – and analyzes some of the company’s responses. Here’s the intro to that WSJ article:

Just weeks before WeWork expected its stock to begin trading publicly, the startup was still wrangling with the Securities and Exchange Commission over a controversial key financial metric and a litany of other concerns about its planned multibillion-dollar IPO.

On Sept. 11 — after the initial public offering prospectus had been public for nearly a month, and after the SEC had already made dozens of demands about the document—the regulator sent the shared-workspace company a list of 13 still-unresolved concerns, according to previously unpublished correspondence reviewed by The Wall Street Journal. The back-and-forth shows that WeWork was scrambling to clean up big problems as its IPO was crumbling. The timing was indicative of the chaotic management that gave investors pause and ultimately led the company to pull the offering and Chief Executive Adam Neumann to step down under pressure.

The WSJ article doesn’t note how they obtained this “previously unpublished correspondence.” So we have no idea how that happened. Here are some of the possibilities:

1. One of the investment banks? They also had a big loan deal going down & some commercial lenders are infamous for leaking. But still a long shot. Odds: 1000 to 1.

2. Some lawyer on the deal team? Not in a million years. That’s a career killer. Odds: 1 million to 1.

3. Someone at WeWork? It’s not in their best interest – but the place is dysfunctional. Odds: 4 to 1.

4. Someone at the SEC? The deal was such a turd burger & the prospectus so outrageous that perhaps the SEC wanted to have something in the public domain that could show it was doing its job. But I would fall off my chair if Corp Fin provided this file (given its policy of not posting comment letters until after a registration statement is declared effective) – unless it was told to do so by the SEC Chair, etc. But it is possible that someone high up wanted this stuff out there. Odds: 50 to 1.

5. Maybe the WSJ made a FOIA request to the SEC? This seems the most likely by far. Except FOIA requests typically take quite a while to process. Odds: 2 to 1.

At the end of the day, this isn’t an important development. Just something novel to note. Even if Corp Fin gave the comment letter file to the WSJ, I would argue that it has that discretion – it simply is making an exception to its own informal policy. And there really isn’t much of a policy reason to keep its comments hidden – even if the IPO never went off. The more transparency, the better…

Poll: Issuing 100 Comments on an IPO?

Back when I served in Corp Fin, I once issued a comment letter with over 100 comments in it on the legal side. It was a family majority-owned REIT IPO, a company that was rife of conflicts of interest – and the prospectus needed many more risk factors, etc. I felt a little guilty about issuing so many comments at the time – but not so much anymore.

In this anonymous poll, imagine you worked in Corp Fin – how would you feel if you issued 100 comments:

survey tool


Transcript: “M&A in Aerospace, Defense & Government Services”

We have posted the transcript for our recent DealLawyers.com webcast: “M&A in Aerospace, Defense & Government Services.”

Broc Romanek

November 11, 2019

Our 2nd Annual “Cute Dog” Contest…

A while back, I ran our 1st annual contest for the cutest dog. It was so popular that the Internet almost broke with all the voting (just under 1k votes cast) – Skadden flexed their muscles and Hagen Ganem’s “Teddy” crushed the competition. And some members responded by emailing me with pictures of their dogs. So let’s do it again – the poll is at the bottom of this blog:

1. Baker Botts’ Jude Dworaczyk – Penny the “Hair Bow Aficionado”

2. McKesson’s Laura Heiman – Monty the “Toothless Wonderdog”

3. Aon’s Karla Bos – Gizmo & Pippa the “Cuties”

4. Curley Global’s Sally Curley – Milo & Derby the “Semi-Twins”

5. Investor Communications Services’ Lois Yurow – Wrigley & Jarrett the “Kindred Spirits”

Vote Now: “Cutest Dog Contest”

Vote now in this poll – anonymously – for the dog that you think is the cutest:

polls



Broc Romanek

November 8, 2019

Dual-Class: Maybe the Market Worked in WeWork?

Rick Fleming, the SEC’s Investor Advocate, recently lambasted companies with dual-class capital structures, referring them to as a “festering wound” that, if left unchecked, could “metastasize” and threaten the “entire system of our public markets.” C’mon Rick, we won’t get anywhere if you keep pulling your punches – let people know how you really feel. . .

Notwithstanding his rhetorical flourishes, Mr. Fleming deserves credit for being willing to acknowledge that investors are a big part of the problem:

We need to acknowledge that investors themselves have engaged in their own race to the bottom when it comes to corporate accountability to shareholders. Investors, and particularly late-stage venture capital investors with deep pockets, have been willing to pay astronomical sums while ceding astonishing amounts of control to founders. This means that other investors, in order to deploy their own capital, must agree to terms that were once unthinkable, including low-vote or no-vote shares. The end result is a wave of companies with weak corporate governance.

But after making this acknowledgment, he immediately retreated to the customary fallback position – we need government intervention on dual-class stock because there’s an insurmountable collective action problem here: “Investors, acting in their own self-interest (or according to their investment mandates), may be inclined to invest in companies with weak corporate governance even though they know that these companies will ultimately harm the broader capital formation ecosystem.”

Are late round & IPO investors just too greedy & short-sighted to be trusted to get this right? Could be. I mean, they’re sure greedy. But on the other hand, it’s possible that their indifference reflects the fact that many institutional investors don’t think dual-class structures pose the kind of existential threat to the market that people like Mr. Fleming do. Who knows? Some may even believe that the jury’s still out on whether dual-class structures are a problem at all.

Oddly enough, the WeWork fiasco may undermine the argument for outside intervention in IPO capital structures. WeWork indicates that there is a point when governance problems are egregious enough to provoke IPO investors to collectively say “no thanks” – no matter how much sizzle the deal supposedly has.  The fallout from the busted deal also suggests that even VC enablers are capable of learning their lesson when it comes to ceding so much control to founders.

I don’t want to push this too far – WeWork turned out to be such a mess that nobody really deserves to be patted on the back for having the sense to walk away. But if the argument for intervention on dual class structures is based on the premise that investors won’t act collectively to draw the line on governance problems, WeWork suggests that isn’t the case, and that the reasons why they don’t normally take collective action on this issue may have to do with things other than greed & short-sightedness.

Testing the Waters: Managing & Disclosing Indications of Interest

The post-JOBS Act ability to “test the waters” prior to filing a registration statement has made soliciting non-binding indications of interest from institutional investors a fairly common practice for IPO issuers. But while companies may obtain those indications of interest, this Olshan blog points out that there are still many issues that companies need to consider when it comes to planning the solicitation process & disclosing indications of interest.

In particular, this excerpt points out that offering participants still need to navigate the statutory restrictions on “offers” & “sales” under the Securities Act:

In view of these restrictions on premature “offers” and “sales,” the SEC has periodically requested issuers, through staff comment letters, to explain how and when they received the indications of interest, especially from new unaffiliated investors, and disclose any written communications or agreements that accept the investments or indications of interest. The SEC has also asked issuers to disclose the number of potential indicated investors the issuer communicated with on the topic.

As a result, issuers should note that any pre-IPO meetings or oral communications with potential new investors—where an investor indicates an interest in purchasing shares—must be conducted in the context of “testing-the-waters” activities pursuant to Section 5(d) of the Securities Act. An underwriter should generally be able to seek non-binding indications of interest from prospective investors (including the number of shares they may seek to purchase at various price ranges) as long as the underwriters do not solicit actual orders and an investor is not otherwise asked to commit to purchase any particular securities.

Similarly, when the issuer or underwriter engages a potential investor in any written communications (as defined in Rule 405 under the Securities Act), they may also need to provide them to SEC staff, who will verify whether the issuer violated Section 5.

Oops! Canadian Fund Overlooks $2.5 Billion in Securities in 13F Filing

I’ve always thought that 13F filings were far and away the most useless documents required to be filed with the SEC. But they’re even more useless if the filer neglects to include 20% of its reportable holdings. This is from The Financial Post:

One of Canada’s largest pension funds “inadvertently omitted” all of its Canadian holdings from a recent disclosure it made to the U.S. Securities and Exchange Commission, failing to include about US$2.46 billion in investments.

British Columbia Investment Management Corporation made the omission in February, when it submitted its disclosures for the three months ending on Dec. 31, 2018. The pension fund, which has $145.6 billion in assets under management, failed to disclose holdings in 98 companies, primarily across Canada’s energy, banking and mining sectors. The Canadian holdings accounted for more than 20 per cent of its total disclosed investments.

Apparently, this isn’t the first time that BCI has messed up its 13F filings. The Post article says that in October 2015, it filed 16 amendments to 13F filings dating back to 2010.

John Jenkins

November 7, 2019

S-K Modernization Proposal: Big Yoga Weighs In!

The comment period on the SEC’s proposal to amend Items 101, 103 & 105 of Regulation S-K recently expired. In the proposing release, the SEC laid out some controversial changes to current rules, including a “principles based” approach to Item 101 & a “human capital resources” disclosure requirement. In light of the contentious nature of these proposals, I thought a stroll through the comment letters might be interesting – and I was right.

First off, there was the uncanny fact that 2,829 people submitted the exact same comment letter. Cynics may suggest that this is the result of an astroturf campaign, but I think that it’s likely just an example of Carl Jung’s theory of the collective unconscious in action. Of course, all of the usual suspects also weighed in with their comments. Big Business, Big Law, Big Investor & Big Labor were all well represented.

But so was a new entrant into the governance debate – I guess I’ll call this one “Big Yoga“. “Yoga Burn Challenge” CEO Zoe Bray-Cotton submitted a comment letter focusing on human capital issues. Her comments are thoughtful & serve as a reminder that these issues matter to a broader segment of society than just those of us who earn a living dealing with securities regulation. But what really made her letter stand out from the crowd was the fact that she cited us – well, actually, ME! – in it:

I also refer to the following articles published by TheCorporateCounsel.net website:

1. Board Gender Diversity: Good for Business
2. Gender Quotas on Boards?
3. “Just Vote No”: State Street’s Alternative to Quotas

Those were all in this blog that I wrote a couple of years ago. Anyway, she plugged me, so I will plug her. Go check out the Yoga Burn Challenge – and tell Ms. Bray-Cotton that I sent you.

Data Security: CalPERS Directors Keep Losing Their Devices

Here’s a goofy one for you – it seems that some members of the CalPERS board have a real problem hanging on to their devices. Here’s an excerpt from a recent Sacramento Bee article:

CalPERS board member Margaret Brown has reported losing two state-issued iPhones and an iPad since she was elected to her seat overseeing the $380 billion pension fund two years ago, according to device records. Brown’s losses of the devices, while representing relatively minor security risks for the California Public Employees’ Retirement System, stand out compared to other board members’ handling of their devices, according to records CalPERS provided under the Public Records Act.

In the last five years, three other board members among the 20 officials listed in the records reported losing one iPad each. Former Board President Priya Mathur reported losing an iPad Air 2 in 2018, and the device wasn’t found, according to the records. Board members Theresa Taylor and Ramón Rubalcava each lost one iPad, neither of which appear to have been returned, according to the records.

But there’s no need for CalPERS participants to worry about their personal data being compromised. That’s because experts quoted in the article said that “only an extremely sophisticated hacker could access information on the iPads with the protections CalPERS has in place.” Whew! Good thing there are so few extremely sophisticated hackers out there.

I guess I shouldn’t be too hard on these folks. After all, my youngest son lost 2 smart phones on consecutive college spring breaks (we were not amused).  On the other hand, it’s probably fair to expect directors of a public institution to be a little more responsible than a frat boy. I don’t know if there will ever be a Hall of Fame for institutional investors, but if there is, the slogan “for thee but not for me” should be carved in stone over the entrance to it.

EDGAR: Why Are iXBRL Filings Sometimes So Clunky to Download?

Several members have pointed out – in emails & in our ”Q&A Forum” (eg #10032) – that some iXBRL filings take forever to load. According to the SEC Office of Structured Disclosure’s Inline XBRL page, that shouldn’t be the case if you’ve got an up-to-date browser:

Viewing Inline XBRL filings is simple and does not require any specialized software because the Commission has incorporated an Inline XBRL Viewer into the Commission’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

Anyone using a recent standard internet browser can view an Inline XBRL filing on EDGAR. (Recent standard internet browsers are ones that fully support HTML 5 and JavaScript, such as Chrome 68 and later, Firefox 60 and later, Safari IOS 11 and later, Microsoft Edge Windows 10, and Internet Explorer 11.)

Personally, I found that when I used the old computer that I was issued when I first joined TheCorporateCounsel.net team, iXBRL filings took forever to load. However, they uploaded fairly quickly on the new computer that my law firm issued to me, so I chalked it up to outdated hardware/software. However, others seem to have had problems on new computers/browsers as well. Does anybody know if there’s a fix that people may be overlooking?

John Jenkins

November 6, 2019

“The Die is Cast”: SEC Proposes to Regulate Proxy Advisors

Yesterday, the SEC issued two controversial rule proposals that, if adopted, would significantly modify the proxy disclosure & solicitation process. There’s a lot to cover, so I’m going to do these one at a time. First, the SEC announced a rule proposal that would impose disclosure & other obligations on proxy advisors. The proposed rules would:

– Amend Exchange Act Rule 14a-1(l), which defines the terms “solicit” and “solicitation,” to specify the circumstances when a person who furnishes proxy voting advice will be deemed to be engaged in a solicitation subject to the proxy rules.

– Revise Rule 14a-2(b) to condition certain exemptions relied upon by proxy advisors on their compliance with three new requirements. In order to avoid complying with the full range of rules applicable to proxy solicitations, proxy advisors would have to disclose material conflicts of interest in their proxy voting advice, provide the company with an opportunity to review and comment on their advice before it is issued; and, if requested by the company, include in their voting advice a hyperlink directing the recipient of the advice to a written statement that sets forth the company’s position on the advice.

– Modify Rule 14a-9 to include examples of when failing to disclose certain information in the proxy voting advice could be considered misleading within the meaning of the rule.

The SEC was sharply divided on this proposal & its companion – both of which were approved by a 3-2 vote. Commissioner Jackson issued a statement on his decision to dissent from the proposal, which he characterized as limiting the ability of investors to “hold corporate insiders accountable.” Fellow Democratic Commissioner Allison Herren Lee issued a statement in which she said that both proposals would “suppress the exercise of shareholder rights.”

In contrast, Republican Commissioner Eliad Roisman issued his own statement in support of the proposal, which he said would help fiduciaries “receive more accurate, transparent, and complete information when they make their voting decisions.”

When Caesar crossed the Rubicon with his legions in 49 BC, he knew that he was taking a fateful step and reportedly exclaimed “Alea iacta est!” – “The die is cast!” Maybe I’m being a little dramatic, but it sure feels like there’s an element of that sentiment in the SEC’s action. While Commissioner Clayton issued a statement in which he stressed that the proposal is just that – a proposal – it seems inevitable that the regulatory ground is about to shift in a significant way.

But Wait! There’s More! SEC Proposes to Tighten Shareholder Proposal Thresholds

Because one highly controversial proposal wasn’t enough, the SEC also announced a rule proposal yesterday that would make it more difficult for shareholders to submit & resubmit proposals for inclusion in a company’s proxy statement. The rule proposal would, among other things:

– Amend Rule 14a-8(b) to replace the current $2,000/1% ownership for at least 1 year threshold with 3 alternative thresholds for submission: continuous ownership of at least $2,000 of the company’s securities for at least 3 years; at least $15,000 of the company’s securities for at least 2 years; or at least $25,000 of the company’s securities for at least 1 year.

– Amend Rule 14a-8(c) to apply the one-proposal rule to “each person” rather than “each shareholder,” which would effectively prohibit a shareholder-proponent from submitting one proposal in their own name and simultaneously submit another proposal in a representative capacity. Representatives would also be prohibited from submitting multiple proposals, even if the representative were to submit each proposal on behalf of different shareholders.

– Amend Rule 14a-8(i) to increase the current thresholds of 3%, 6% and 10% for resubmission of matters voted on once, twice or three or more times in the last five years to 5%, 15% and 25%, respectively. A new provision would also be added permitting exclusion of a proposal that’s received 25% approval on its most recent submission if it has been voted on 3 times in the last 5 years and both received less than 50% of the votes cast and experienced at least a 10% decline in support.

Other proposed changes to Rule 14a-8(b) would subject shareholders using representatives to enhanced documentation requirements with respect to the authority of those agents, and require shareholder-proponents to express a willingness to meet with the company and provide contact & availability information.

I’ve already noted the reaction of individual SEC commissioners to these two proposals, but outside commenters had plenty to say as well. For instance, the CII decried the proposals as apparently “intended to limit shareholders’ voice at public companies in which they invest,” while the U.S. Chamber of Commerce hailed them for ensuring that “investors will have access to transparent and unconflicted proxy advice as well as improv[ing] the proxy submission process.”

Audit Reports: New CAM Disclosure Req’t Shines Light on Material Weakness

Check out this recent “FEI Daily” commentary on the impact of the new CAM disclosure requirement on one company:

In a stark example of how the new “critical audit matters” (CAM) rule is training a spotlight on companies’ internal controls, Stitch Fix Inc. is expanding its internal information-technology controls after identifying weaknesses in how the online service reported financial performance. The issue, related to outsourced information-technology service providers, was flagged by the San Francisco company’s independent auditor in October. The Public Company Accounting Oversight Board began requiring independent auditors to disclose significant challenges in reviewing public companies’ financial statements under the CAM rule this year.

Here’s a recent WSJ article with more details on the situation.

John Jenkins

November 5, 2019

Glass Lewis Issues ’20 Voting Guidelines

Glass Lewis has posted its 2020 Voting Guidelines. A summary of the changes appears on page 1 of the guidelines & on Glass Lewis’s blog, and we’ll be posting memos in our “Proxy Advisors” Practice Area. Here are some of the highlights:

Excluded Shareholder Proposals. Some of the most notable policy changes respond to the SEC’s recent guidance on the shareholder proposal no-action process. Glass Lewis now says that if the SEC declines to state a view on whether a shareholder proposal should be excluded, then it will likely recommend that shareholders vote against the members of the governance committee unless that proposal appears in the proxy statement.

If the SEC verbally permits a company to exclude a proposal and doesn’t provide a written record, Glass Lewis says that the company will have to provide some disclosure about the no-action position. Companies that don’t provide this disclosure will also face a negative recommendation on the members of their governance committee.

Committee Performance & Disclosure.  Several revisions relate to the codification of circumstances under which Glass Lewis will recommend against chairs of the audit, governance, and comp committees. Audit committee chairs will earn a thumbs down if fees paid to the company’s external auditor aren’t disclosed.

Governance committee chairs will get dinged when either director attendance information isn’t disclosed or when a director attended less than 75% of board and committee meetings and the proxy doesn’t provide enough details as to why. Comp committee chairs will earn Glass Lewis’s wrath if they adopt a time period for holding a “say-on-pay” vote that differs from the one approved by shareholders.

Exclusive Forum Bylaws & Supermajority Provisions. Glass Lewis has tweaked its guidelines to clarify that it may not recommend against the governance committee chair in situations where it determines that an exclusive forum bylaw has been “narrowly crafted to suit the unique circumstances facing the company.” Glass Lewis has also codified its position that it will recommend voting against proposals to eliminate supermajority provisions at controlled companies, because these protect minority shareholders.

Gender Pay Equity. Glass Lewis clarified that it will review on a case-by-case basis proposals that request that companies disclose their median gender pay ratios. It will generally vote against those proposals if the company has provided sufficient information concerning its diversity initiatives & concerning how it is ensuring that women and men are paid equally for equal work.

Other changes include defining situations where Glass Lewis reports on post-fiscal year end compensation decisions & setting expectations for disclosure of mid-year adjustments to short-term incentive plans. Glass Lewis also says that it has “enhanced” its discussion of excessively broad “change in control” provisions in employment agreements.

Whistleblowers: SEC Enforcement Says Protections Aren’t Just for Employees

Typically, when we think about whistleblowers, most of us probably picture disgruntled current or former company employees.  Yesterday, the SEC’s Division of Enforcement provided a reminder that while that’s often the case, others can qualify as whistleblowers too.  As this excerpt from the SEC’s press release announcing enforcement proceedings against Collector’s Café & its CEO demonstrates, investors are also eligible for protection as whistleblowers:

The Securities and Exchange Commission today filed an amended complaint against online auction portal Collectors Café and its CEO Mykalai Kontilai to add allegations that they unlawfully sought to prohibit their investors from reporting misconduct to the SEC and other governmental agencies. The SEC previously charged Collectors Café and Kontilai with a fraudulent $23 million securities offering based on false statements to investors, and alleged that Kontilai misappropriated over $6 million of investor proceeds.

The SEC had previously brought securities fraud charges against the defendants, and its amended complaint alleges that the defendants tried to resolve investor allegations of wrongdoing by conditioning the return of their money on agreements barring investors from dropping a dime on them to law enforcement, including the SEC.

The SEC’s complaint alleges that this conduct violated the SEC’s whistleblower protection rules – and just to make absolutely certain that they waived a red flag in front of the SEC bull, the complaint alleges that these defendants sued two investors that it believed breached one of these agreements.

Non-GAAP:  Is It a Non-GAAP Number or Something Else?

Here’s a really helpful SEC Institute blog that reviews the sometimes murky distinction between non-GAAP financial measures subject to Reg G’s requirements & operating measures that are outside the scope of the rule.  It also provides some guidance as to how to go about determining what category a particular metric falls into.

John Jenkins

November 4, 2019

Kokesh Redux: SCOTUS to Hear Challenge to SEC Disgorgement Authority

The SCOTUS’s 2017 Kokesh decision limited the SEC’s ability to use one of its favorite enforcement remedies when the Court unanimously held that SEC disgorgement claims were subject to a 5-year statute of limitations. Now, this Reuters article says that the SCOTUS has agreed to hear a new case that could remove disgorgement entirely from the SEC’s arsenal. Here’s an excerpt:

The U.S. Supreme Court on Friday agreed to hear a challenge to the ability of the Securities and Exchange Commission to recover ill-gotten profits obtained through misconduct in a case from California that could weaken the agency’s enforcement power.

The nine justices agreed to hear an appeal by California couple Charles Liu and Xin Wang contesting a 2016 civil action brought against them by the SEC. The SEC won a court ruling in 2017 requiring Liu and Wang to disgorge almost $27 million, the same amount they raised from foreign investors to build a never-completed cancer treatment center.

Part of the SEC’s civil enforcement arsenal, disgorgement requires defendants to hand over to the U.S. government money obtained from a fraudulent scheme. The SEC has said it generally passes on disgorged funds to the original investors although it was not required to do so in this particular instance. In fiscal year 2018, the agency returned $794 million to harmed investors.

Whether the SEC actually has the ability to seek disgorgement is an issue that the Kokesh Court specifically raised in footnote 3 of Justice Sotomayor’s opinion:

Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context. The sole question presented in this case is whether disgorgement, as applied in SEC enforcement actions, is subject to § 2462’s limitations period.

It looks like the SCOTUS’s invitation to litigate this issue has been accepted. Here’s the cert petition & the Court’s order granting it.  A decision in the case is expected by June 2020.

Boardroom Diversity: Where Do African-Americans Stand?

Efforts to enhance board diversity in recent years have focused primarily on increasing the number of women who serve as directors. Those efforts have slowly paid off and women now are represented on every S&P 500 board. But this Black Enterprise article says that African-Americans still have a long way to go when it comes to boardroom representation:

There are 322 black corporate directors at 307 companies versus 308 at 316 corporations last year. Our editorial research team also discovered that 187 S&P 500 companies or 37%, did not have a single black board member in 2019—a 2 percentage point improvement from 2018.

The article is accompanied by Black Enterprise’s “2019 Registry of Corporate Directors,” which identifies each African-American who serves on the board of an S&P 500 company, the companies that have at least one African-American director, and the companies that don’t.

Boardroom Diversity: Progress on Racial Diversity Impeded by Slow Turnover

The news isn’t all bad when it comes to the inclusion of African-American & other minority board members. Spencer-Stuart’s 2019 Board Index says that progress on racial & ethnic diversity is being made – but that slow turnover is impeding that progress. Here’s an excerpt:

Boards are also focused on racial/ethnic diversity. Just under one in four new S&P 500 directors (23%) are minorities (defined as African-American/Black, Asian or Hispanic/Latino). Minority women represent 10% of the incoming class, up slightly from 9% last year. Minority men represent 13% of the new directors, an increase from 10% last year but still down from 14% two years ago.

While women and minority men constitute more than half of the new directors, continued low boardroom turnover remains a persistent impediment to meaningful year-over-year change in the overall composition of S&P 500 boards. As a result, in spite of the record number of female directors, representation of women increased incrementally to 26% of all directors, up from 24% in 2018 and 16% in 2009.

The report says that “slight” progress is being made in minority representation at the top 200 S&P 500 companies. Today, 19% of all directors of the top 200 companies are male or female minorities, up from 17% last year and 15% in 2009.

John Jenkins

November 1, 2019

ISS Sues SEC Over Proxy Advisor Guidance!

The gloves are off. Yesterday, ISS announced that it had filed this lawsuit against the SEC – which challenges the Commission-level guidance that was issued back in August. As Broc blogged earlier this week, CII had already sent a couple of comment letters to the SEC to complain about that guidance. This lawsuit also comes on the heels of the SEC announcing that it will hold an open Commission meeting next week to propose rule changes for proxy advisors.

These are the ISS allegations (also see this Cooley blog – and this Twitter thread from Wharton Prof David Zaring that speculates this case may be used as part of the bigger picture pushback on regulatory guidance that we’ve been seeing):

– The guidance exceeds the SEC’s statutory authority under Section 14(a) of The Securities Exchange Act of 1934 and is contrary to the plain language of the statute; the provision of proxy advice is not a proxy solicitation and cannot be regulated as such

– The guidance is procedurally improper because it is a substantive rule that the SEC failed to promulgate pursuant to the notice-and-comment procedures of the Administrative Procedure Act

– The guidance is arbitrary and capricious because, even though it marks a significant change in the regulatory regime applicable to proxy advice, the SEC has denied that it is changing its position at all. The agency has thus flouted the basic requirement of reasoned decision-making that it at least display awareness that it is changing its position

Director Survey: “Collegiality” & “ESG” Can Go Too Far

PWC is out with its annual survey of 700 directors. The main theme is that “collegiality” remains highly valued and important – but it can go too far if it keeps directors from speaking up or pursuing necessary refreshments. Here’s the key findings:

– 49% of directors (privately) say that one or more colleagues should be replaced (a record number)

– 43% of directors say it’s difficult to voice a dissenting view in the boardroom

– 72% of boards are conducting performance assessments (up from 49% in 2016) – but most focus on adding expertise or diversity, rather than counseling or not re-nominating underperforming incumbents

The survey also says that some directors are growing weary of diversity & ESG attention:

– After years of steadily climbing, the number of directors saying board diversity is “very important” fell by 10%

– 83% of directors say they don’t support state law diversity mandates – but around half say they support policies of including diverse candidates in recruitment slates

– 56% of directors say that investors devote to much attention to E&S issues (however, part of the frustration is that there’s still a lot of confusion among directors about what issues fall into this category)

– An increasing number of directors say that the board has a role in corporate culture (but still not as much as upper & middle management)

See this HBR article for a take on working with the “5 archetypes” of director approaches to ESG – the deniers, the hardheaded, the superficial, the complacent, and the true believers.

Our November Eminders is Posted!

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Liz Dunshee

October 31, 2019

Survey Results: Management Representation Letters

We’ve wrapped up our latest survey on management representation letters (here’s the last one, from 2016). Here’s the results:

1. Who signs your management representation letter:

– CEO – 91%
– CFO – 94%
– Controller – 64%
– General Counsel – 24%
– Corporate Counsel Who Heads Litigation – 0%
– Corporate Counsel Who Handles Corporate Governance & Securities – 0%

2. How many representations does your management representation letter have:

– Less than 10 – 6%
– 11-15 – 12%
– 16-20 – 18%
– More than 20 – 64%

Please take a moment to participate anonymously in these surveys:

Hedging Policy Disclosure
Board Evaluations

Comment Trends: Corp Fin’s “Top 10”

This 91-page report from EY – and the related 7-page summary – say that Corp Fin issued 34% fewer comment letters last year. While that was partially due to the long-lasting government shutdown, it follows a 25% drop in the prior year – so there appears to be a trend. Not surprisingly, revenue recognition & non-GAAP were the most frequent comment topics. Here’s the full top 10 (see the report for example comments in each category):

1. Revenue recognition

2. Non-GAAP financial measures

3. MD&A (in order of frequency: (1) results of operations (20%), (2) critical accounting policies and estimates (10%), (3) liquidity matters (8%), (4) business overview (6%) and (5) contractual obligations (2%) – many companies received MD&A comments in more than one category)

4. Fair value measurements (including comments on fair value measurements under Accounting Standards Codification 820 – as well as fair value estimates, such as those related to revenue recognition, stock compensation and goodwill impairment analyses)

5. Intangible assets and goodwill

6. Income taxes

7. State sponsors of terrorism

8. Segment reporting

9. Acquisitions and business combinations

10. Signatures/exhibits/agreements (new to this year’s “Top 10”)

Foreign Nations Might Be Delaware’s New Competition

While you may think of Nevada – or even federal law – as Delaware’s primary competitor in the “corporate law” space, a forthcoming law review article says that non-US jurisdictions are the real threat. Here’s an excerpt:

While Delaware continues to dominate the market with 48.1% of US-listed companies, foreign nations now account for 13.4% of incorporations – more than double the 5.5% of US-listed companies incorporated in Nevada, which has been identified as the only other state besides Delaware actively vying to draw corporations that physically operate outside of its borders.

As this Article will show, offshore incorporation havens in recent decades have built sophisticated legal infrastructures that enable them to compete with Delaware. For one, they have attracted a network of elite foreign lawyers who help lawmakers in these jurisdictions draft “cutting edge” corporate law statutes. These lawmakers also rely heavily on incorporation fees for government revenues, allowing them to credibly commit to retaining laws that are attractive to the private sector.

Because the population of offshore incorporation havens tends to be a fraction of even sparsely populated states in the United States (for instance, as of 2019, the population of the Cayman Islands is 59,613 compared to 961,939 in Delaware and 2,998,039 in Nevada), these jurisdictions can enact legislation swiftly in response to private sector demand. They also do not confront the type of democratic accountability facing large nation states (or large states like New York or California), in part because they specialize in producing laws for corporations that do not physically operate within their territories.

Delaware’s judicial system is often pointed to as a competitive advantage over other states. These jurisdictions compete not by carbon copying Delaware’s judiciary, but rather by offering dispute resolution for a functionally similar to modern commercial arbitration. Like arbitration, courts in offshore incorporation havens swiftly resolve disputes without juries. Judges serving in these courts, like arbitrators, are credentialed business law jurists including partners at major international law firms who fly in from overseas to preside over cases ad hoc. Many legal proceedings take place in secret, and full-length opinions are frequently unpublished or available only to insiders.

I’m admittedly biased due to interning in Wilmington for a Delaware Justice back in the day, but isn’t transparency & predictability still a pretty big advantage? I guess if you can opt out of derivative suits & fiduciary duties, which is the case with many of these incorporation havens, that may matter less.

Liz Dunshee