March 27, 2008

More on Confidentiality of “Material Contracts”

A few weeks ago, I blogged about Canada’s new material contract filing requirements and waxed about what might happen if the same standard applied in the US. A member responded as follows:

Unrelated to your pessimism regarding the lengths to which some pracitioners may go to further their clients efforts to avoid disclosure of terms of material contracts is the consideration that boilerplate used for many agreements includes a general confidentiality provision relating to the agreements’ terms. In many of those cases, there is a simple “as required by law” exception to the confidentiality provision.

The exception often is used by a party required to file reports with the SEC as authorization to file the contract with the SEC as a material contract, subject to a request for confidential treatment for those portions of the contract that, consistent with applicable regulations, are permitted to remain confidential. And, after its review and processing of the related confidential treatment request, whatever the SEC Staff allows to remain confidential, so remains; whatever the Staff objects to remaining confidential, gets disclosed to the public in one form or another, consistent with applicable regulations.

Of course, in many instances where one party REALLY does not want to have certain terms disclosed and it is unclear whether these terms are of a type for which the Staff will grant confidential treatment, the typical confidentiality provision can be much more elaborate – for instance, allowing the counterparty to intercede with the government seeking to require disclosure and, perhaps, more significant remedies, such as the right to terminate a commercial-type agreement.

All of this being said (and again leaving your pessimism aside), I have noticed agreements where concepts meant to remain confidential are relegated to schedules, and the report, which includes the agreement as an exhibit, simply omits the schedules. Presumably, the basis for omission of the schedules relates to the provisions of the second sentence of Item 601(b)(2) of Reg S-K which states: “Schedules (or similar attachments) to these exhibits shall not be filed unless such schedules contain information which is material to an investment decision and which is not otherwise disclosed in the agreement or the disclosure document.”

Notably, Item 601(b)(10) of Reg S-K doesn’t contain an analogous provision. However, most practitioners are aware of a variety of practices that have developed in relation to the filing of exhibits and schedules to contracts, whether the contracts are filed pursuant to Item 601(b)(2) or (b)(10). Specically, many practitioners are aware of registrants which have omitted schedules to (b)(10)-filed contracts.

Presumably, these registrants have concluded that the omission is immaterial in light of other disclosure. In addition, many practitioners are aware of registrants which have omitted exhibits that are forms of contracts executed contemporaneously with a filed material contract and simply file that executed versions of these contracts. While the immateriality of these forms is undeniable (unless the exhibits are not filed in executed form contemporaneously with the primary contract), it is unclear whether this practice is sanctioned by applicable regulations.

Nasdaq Acts on IFRS

Recently, Nasdaq made this proposal to amend its listing requirements to accept financials prepared in accordance with IFRS from foreign private issuers. It is anticipated that all stock exchanges will amend or interpret their listing standards to conform to the SEC’s acceptance of IFRS.

The Rise of “Social” Proposals

Over the past few years, shareholders have been supporting so-called “social” proposals more than ever before (also known as “ES&G” proposals). For a long time, the percentage of shareholders that supported these types of proposals remained in single digits. Given the growing support of them over the past few proxy seasons, it wouldn’t be surprising if they started to routinely receive majority support.

During our recent webcast with Pat McGurn of RiskMetrics (transcript here), Pat noted that “30% of the E&S proposals won at least 15% support last year. And more than 25 of their proposals won support in excess of 30%. And several, including one that was opposed by management, ended up winning.”

And as Pat noted, companies are more willing to settle on these types of these issues nowadays and have these proposals withdrawn. Some boards are concerned about reputational risk; some are worried about the long-term impact of issues like climate control. In fact, last Fall, Grant Thornton conducted a survey of more than 500 business executives and found that only a quarter of survey respondents agreed that profits needed to be sacrificed when dealing with these issues, while three quarters believed corporate responsibility could enhance profitability. As a result, 77% said they expected corporate responsibility initiatives to have a major impact on their business strategies over the next several years.

Other findings in the Grant Thornton survey include:

– 19% of the companies surveyed report having a single point person in charge of all their corporate responsibility programs.

– 68% say they expect environmental responsibility reporting to be mandatory within the next three to five years, yet 55 percent say they have no plans to do any kind of corporate responsibility reporting.

– The four greatest obstacles to successful execution of corporate responsibility programs are: focus on quarterly earnings or other short-term targets, cost of implementation, measuring and quantifying ROI, and a non-supportive corporate culture.

– The three greatest benefits of enacting corporate responsibility programs are: improves public opinion, improves customer relations and attracts/retains talent.

– 72% of respondents believe that government should regulate companies for their effect on the environment and 56 percent said companies should be regulated for their effect on human rights and labor practices.

– 70% of respondents foresee increased government regulation for environmental responsibility in five years or less.

– 62% believe that pressure to pursue corporate responsibility programs in the future will come chiefly from consumers (45%) and investors (21%).

– 64% believe that the human resources department should take on social programs, 50% say operations should be in charge of environmental initiatives and 57% say finance should be responsible for economic responsibility programs.

– Broc Romanek