Monthly Archives: December 2014

December 31, 2014

New Year’s Resolutions: Attend More Board Meetings?

Each year, I’m grateful for good health and all the generosity from our members. Thank you! I hope you have the strength during the coming year to enjoy more board meetings…

board meeting

December 30, 2014

New Revenue Recognition Standard: Many Slow to Implement – So Delay Possible?

Here’s news from Baker & McKenzie’s Dan Goelzer: As discussed in our June 2014 Update, earlier this year the FASB and IASB adopted a new standard on revenue recognition. For U.S. public companies, the new standard is scheduled to take effect for reporting periods beginning after December 15, 2016. Since the recording and recognition of revenue is fundamental to all businesses, most companies will be affected to some degree by the new standard and will need to consider, long before 2017, whether and how their systems, reporting processes, and controls need to be modified to accommodate the new standard. Companies that elect full retrospective implementation (i.e., presentation of three years of comparable financial information) will need to have procedures in place to that permit the standard to be applied to transactions entered in 2015.

A survey conducted during the summer of 2014 by the Financial Executives Research Foundation and PWC indicates that many companies are off to a slow start in preparing for the new standard. FERF and PWC surveyed 174 respondents, 63 percent of whom represented public companies. Company revenues ranged from less than $100 million to more than $10 billion. Key findings include –

– Slightly over half of respondents (54 percent) stated that they were “somewhat familiar” or “very familiar” with the new standard. Eight percent were not familiar with the new standard.

– Most audit committee respondents either had not yet considered the new standard or had considered it only “somewhat.”

– Only 10 percent of respondents stated that they had attempted to quantify the financial statement impact of the new standard. About a third of respondents (35 percent) indicated that their companies had not attempted to quantify the impact, while 13 percent were “not sure” and 42 percent declined to respond to this question.

– Excluding those who were unsure or declined to respond, 77 percent of respondents said they expect to make significant changes to IT or enterprise resource planning systems as part of implementation of the new standard.

– Twenty-nine percent of respondents thought that the FASB’s effective date afforded sufficient time to adopt the full retrospective implementation approach, while 25 percent thought the time was not sufficient. Nearly half of respondents were unsure or did not respond. As noted above, full retrospective application will require 2015 data applying the new standard.

The PWC/FERF survey notes that a delay in the effective date of the new revenue recognition standard is a possibility. The FASB has announced it will perform outreach to assess whether a delay is warranted and plans to reach a decision no later than the second quarter of 2015. On December 9, the Journal of Accountancy reported that FASB Chair Russ Golden said in remarks at the AICPA’s Annual SEC and PCAOB Developments conference that FASB members are conducting field visits to learn how implementation efforts are progressing. “If companies have started to consider it and need more time, we’d want to know why they need more time,” Chair Golden was quoted as saying. At the same conference, SEC Chief Accountant Jim Schnurr said that a delay “depends on a number of things, but certainly if the parties determine there are implementation issues that require additional standard setting, I would think that would be a reason why you’d have to delay the adoption.”

Comment: Revenue recognition accounting and disclosure is a significant issue for virtually all public companies. Audit committees that have not already done so should discuss with financial reporting management how the company will be affected by the new standard, what changes in systems and controls will be necessary, and the likely financial statement impact. While a delay in the effective date is possible, it appears that many companies – consciously or unconsciously – are assuming a delay. A better strategy would be to formulate an implementation timetable.

Behind the Scenes: Setting Up a “Dummy” Corporation

This article from Vice makes for some nice holiday reading as it delves behind the scenes into setting up a “bogus” shell corporation. This aren’t the type of shell companies as dealt with under the securities laws – the ones discussed in the article are more for tax shelters and that ilk…

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 inputting their email address on the left side of that blog. Here are some of the latest entries:

– Hemispherx Biopharma Passes As Guinea Pig for Fee-Shifting Bylaw
– Cybersecurity: Board Oversight Action Items
– New COSO Framework: One Effective Transition Approach
– In-House Litigation Counsel: Eligibility for Attorney Fees
– Director Survey: Reputation, Cybersecurity & Regulation as Top Risks
– CII Issues “Best-in-Class” Board Evaluation Disclosure

– Broc Romanek

December 29, 2014

ISS Issues 20 FAQs on “Equity Plan Scorecard”

Last week, ISS issued 20 FAQs on its new “Equity Plan Scorecard.” Here’s some analysis from this excerpt of Steve Quinlivan’s blog:

The FAQs go a long way in adding some transparency to a complex new policy. Absent overriding factors, a score of 53 or higher (out of a total 100 possible points) generally results in a positive recommendation for the proposal. EPSC factors are not equally weighted. Each factor is assigned a maximum number of potential points, which may vary by model. Some are binary, but others may generate partial points. For all models, the total maximum points that may be accrued is 100. The FAQs include a useful chart showing factors scored and definitions, but it does not include the number of points allocated to the factors.

Proposals that only seek approval to ensure tax deductibility of awards pursuant to Section 162(m), and that do not seek additional shares for grants, will generally receive a favorable recommendation regardless of EPSC factors, provided the Board’s Compensation Committee (or other administrating committee) is 100 percent independent according to ISS standards. In the case of proposals that include additional plan amendments, such amendments will be analyzed to determine whether they are, on balance, positive or negative with respect to shareholders’ interests, and ISS will determine the appropriate evaluative framework and recommendation accordingly.

ISS Issues 9 FAQs on Independent Chair Policy

Last week, ISS issued 9 FAQs on its new “Independent Chair Policy.” Here’s some analysis from this excerpt of Steve Quinlivan’s blog:

The FAQs reveal that board tenure can play a role in the analysis. According to ISS, board tenure may be a contributing factor in determining a vote recommendation for independent chair shareholder proposals, but will be considered in aggregate with other factors. Concurrence of director/CEO tenure, lenghty directorships, or high average director tenure, may be considered. These concerns will be considered in the context of the overall leadership structure in determining whether the proposal presents the best leadership structure at the company.

And if you get a proposal, what action can you take that would be sufficient for ISS? ISS states full implementation would consist of separating the chair and CEO positions, with an independent director filling the role of chair. A policy that the company will adopt this structure upon the resignation of the current CEO/Chair would also be considered responsive.

ISS says partial responses will be evaluated on a case-by-case basis, depending on the disclosure of shareholder input obtained through the company’s outreach, the board’s disclosed rationale, and the facts and circumstances of the case. There are many factors that can cause investors to support such proposals, without necessarily demanding an independent chair immediately. For example, through their outreach, a company may learn that shareholders are concerned about the lack of a lead director, weaknesses in the lead director’s responsibilities, or the choice of lead director. In such a case, creating or strengthening a robust lead director position may be considered a sufficient response, assuming no other factors are involved. If the company already has a robust lead director position, then the company’s outreach to shareholders to discover the causes of the majority vote and subsequent actions to address the issue will be reviewed accordingly.

Delaware Supreme Court: Curtails Use of Books & Records and Confirms Validity of Board-Adopted Forum Selection Bylaws

Here’s news from this Wachtell Lipton memo:

A unanimous Delaware Supreme Court yesterday reaffirmed the ability of Delaware companies to organize corporate litigation in the Delaware courts. United Technologies Corp. v. Treppel, No. 127, 2014 (Del. Dec. 23, 2014) (en banc). The case involved an action to produce corporate books and records under Section 220 of the Delaware General Corporation Law, an increasingly frequent preliminary battleground in derivative litigation. Following a familiar pattern, stockholder plaintiffs demanded access to certain books and records of United Technologies Corporation, allegedly to assist in their consideration of potential derivative litigation. UTC asked that all demanding stockholders agree to restrict use of the materials obtained in the inspection to cases filed only in Delaware, pointing out that litigation had already been filed relating to the same matters in the Delaware courts and that any derivative lawsuit would be governed by Delaware law. Then, further evincing its concern to organize corporate governance litigation in the courts of Delaware, UTC’s board adopted a forum selection bylaw during the pendency of the Section 220 lawsuit.

The stockholder plaintiff nevertheless refused to agree to the Delaware forum condition, insisting on his right to use UTC’s books and records to bring litigation in any court. The parties tried the case to the Court of Chancery, which concluded that it lacked the statutory power to enter the order and thus ruled for the plaintiff.

The Supreme Court reversed. Emphasizing that “the stockholder’s inspection right is a ‘qualified’ one,” Chief Justice Strine’s decision held that “the Court of Chancery has wide discretion to shape the breadth and use of inspections under § 220 to protect the legitimate interests of Delaware corporations,” including through use restrictions related to forum. In remanding to the Court of Chancery to exercise this discretion, the Supreme Court instructed that the Vice Chancellor should consider that a corporation has a “legitimate interest in having consistent rulings on related issues of Delaware law, and having those rulings made by the courts of this state,” and a similarly legitimate interest in avoiding undue expense in defending against duplicative derivative lawsuits. The Supreme Court also reaffirmed the power of boards to adopt forum selection bylaws, noting that such bylaws demonstrate a corporation’s interest in rationalizing stockholder litigation, and once more endorsed board-adopted bylaws as valid and enforceable against stockholders who purchased shares before adoption.

The Treppel decision demonstrates again the tools available to Delaware companies to manage litigation relating to the duties of directors. The multijurisdictional stockholder litigation problem extends to derivative as well as merger suits. Forum selection bylaws and the courts’ statutory powers, as invoked and clarified here, are complementary parts of the solution.

– Broc Romanek

December 23, 2014

EDGAR Not Available on December 26th

I thought I would highlight this statement from the SEC since folks outside the Beltway probably aren’t aware that the federal government is closed on Friday, December 26th:

Friday, December 26, 2014, has been declared a non-working day for the federal government. Consistent with Securities and Exchange Commission (SEC) operation on a federal holiday, the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system will not be operational that day. Filings will not be accepted and the Filing Web Sites will not be operational. We will resume normal operation on Monday morning, December 29, 2014. Because December 26, 2014, will be treated as a federal holiday for filing purposes, all filings due on December 26, 2014, will be due December 29, 2014.

Although the 26th is not officially a federal holiday, this Executive Order from the President closed the entire federal government for that day. So, as the SEC’s statement says, the 26th isn’t considered a “business day” for purposes of filing deadlines as if it were a “holiday”…

In 2008, we had the same situation and I explained more in this blog about the nuances of an executive order closing the government. For example, if you are counting your 20 business days for a tender offer, it is my understanding that the SEC staff takes the position that if the offer is ongoing, you can still count the unscheduled Friday holiday in the 20 days. But you shouldn’t end the offer – or start it – on Friday.

Crowdfunding: A Crowdfunder’s Insiders Tale

This article from Institutional Investor gives us the perspective of a small business owner and the challenges of crowdfunding in the current era. It discusses “StartUp” – a free podcast series that chronicles the efforts of someone to finance a start-up related to podcasts…

Lawyers? Not Highly Sought as Dates…

This article is pretty funny – noting how lawyers were found to be at the bottom of a survey about who is in demand as a New Year’s Eve date…

– Broc Romanek

December 22, 2014

The World’s Largest Holiday Disclaimer: 2014 Version

In what has become an annual tradition, Cary Klafter of Intel again shares what I imagine has to be the world’s largest holiday disclaimer, running for 21 pages. Please take part in this anonymous poll:

survey services

The Compensation Holiday Card

I’m proud that Cap’n Cashbags has been included in Aon Hewitt’s nifty “2014 Holiday Card” in a “Where’s Waldo” type of situation. The card also includes Monte Carla (aka Liz Stoudt), the co-winner of the “Survivor of the Top Consultants” panel from our conference! Click the image below to enlarge…

2014 Christmas Card

Happy Holidays: From Broc & His Dog

val xmas 14

– Broc Romanek

December 19, 2014

JOBS Act: SEC Proposes ’34 Act Registration Requirements

On Wednesday, the SEC proposed a number of JOBS Act changes to the thresholds for registration, termination of registration & suspension of ’34 Act reporting including (here’s an overview in this blog):

1. Amending Rules 12g-1 through 4 and 12h-3 which govern the procedures relating to registration, termination of registration under Section 12(g), and suspension of reporting obligations under Section 15(d) to reflect the new thresholds established by the JOBS Act
2. Revising the rules so that savings & loan holding companies are treated in a similar manner to banks and bank holding companies for the purposes of registration, termination of registration, or suspension of their Exchange Act reporting obligations
3. Applying the definition of “accredited investor” in Securities Act Rule 501(a) to determinations as to which record holders are accredited investors for purposes of Exchange Act Section 12(g)(1). The accredited investor determination would be made as of the last day of the fiscal year.
4. Amending the definition of “held of record” to provide that when determining whether an issuer is required to register a class of equity securities with the Commission under the Exchange Act Section 12(g)(1), an issuer may exclude securities:
– Held by persons who received them under an employee compensation plan in transactions exempt from the registration requirements of Section 5 of the Securities Act or that did not involve a sale within the meaning of Section 2(a)(3) of the Securities Act
– In certain circumstances, held by persons who received them in exchange for securities received under an employee compensation plan
5. Creating a non-exclusive safe harbor under which a person will be deemed to have received the securities under an employee compensation plan if the person received them under a compensatory benefit plan in transactions that met the conditions of Securities Act Rule 701(c).

The SEC’s press release from yesterday says that the Commission “voted yesterday” to approve this proposal. Since there wasn’t an open Commission meeting on Wednesday, these proposals were approved in seriatim. As noted in this blog, there’s nothing wrong with that as rules get approved or proposed in this manner on occasion, particularly in December. And the press releases issued by the SEC typically don’t state that action has been taken in seriatim – since it doesn’t really matter for our purposes…

Pay Ratio Proposal: 7,196 Hours in the Making

Here’s an article from the WSJ:

How long does it take the Securities and Exchange Commission to develop a controversial rule forcing most companies to disclose the pay gap between CEOs and rank-and-file employees?

About 7,196 hours.

That’s how long staff of the agency have spent since 2011 on a proposal requiring companies disclose median worker pay and compare it with CEO compensation, according to SEC Chairman Mary Jo White. The figure translates to about $1.1 million in labor costs, Ms. White told House Financial Services Committee Chairman Jeb Hensarling (R., Texas) in a December 11 letter released Wednesday morning. The letter stresses the figures are rough estimates and doesn’t say the number of staff involved.

A requirement of the 2010 Dodd-Frank financial law, the rule wasn’t formally floated until September of last year and the five-member agency must vote on it a second time before it can go into effect. The commission is currently reviewing the more than 128,000 comments it has received on the proposal – many of them form letters – and Ms. White has said her goal is to complete the rule by the end of 2014. With the agency almost certain to miss that target, Mr. Hensarling and two other lawmakers urged Ms. White to delay finishing the measure, arguing in a letter last month that they are concerned the agency is “misallocating limited resources to non-essential projects.” Ms. White denied that concern in her letter last week. “The time spent by the staff on the pay ratio rulemaking does not mean that we have diminished our focus on fulfilling our rulemaking or other obligations,” she wrote. “Completion of all the commission’s mandated rulemakings continues to be a priority for me.”

Congressional Democrats continue to press the agency to finish the rule soon. Fifteen U.S. Senate Democrats, led by New Jersey’s Robert Menendez, wrote to Ms. White Tuesday asking for her to call a final vote on the rule before the end of the first quarter of 2015. “While some opponents may prefer not to disclose this information, Congress already enacted and the President already signed the requirement into law more than four years ago,” the senators wrote. “All that remains is for the implementing rules to be finalized, as the statute requires.”

NASAA Unveils Online Filing System for State Form D Filings

Here’s an excerpt from this blog by David Jenson:

On December 15, 2014, the North American Securities Administrators Association, Inc. (NASAA) unveiled its Electronic Filing Depository (EFD) for use in connection with state Form D filings in Rule 506 offerings. The NASAA has been pursuing initiatives to streamline the state blue sky filing process for some time. In July of 2014, we reported on the NASAA’s proposed model rules that could be enacted by states to require electronic filings in connection with Rule 506 offerings. The EFD system dovetails with that initiative. While the availability of the EFD is an interesting and welcome development, there are a few important limitations to note.

– Broc Romanek

December 18, 2014

IFRS: The SEC’s Saga Continues

During the recent annual AICPA Conference, SEC Chief Accountant Jim Schnurr delivered this speech about the SEC possibly continuing to consider the use of IFRS by domestic companies. As noted in this blog by George Wilson: “While he did not say anything definite, it is clear the IFRS is no longer on the back burner!”

As it typically does, the SEC has posted these additional speeches and PowerPoint presentations used by its Staffers during the AICPA Conference (here’s summaries of these from this Morgan Lewis blog and this Deloitte memo):

Auditor Independence Matters – Deputy Chief Accountant Brian Croteau

Internal Controls – Senior Associate Chief Accountant Kevin Stout

Spinoffs, Goodwill Impairment & Pushdown Accounting – Associate Chief Accountant Carlton Tartar

Consolidation & JVs – Accounting Fellow Christopher Rogers

Revenue Recognition – Accounting Fellow Steve Mack

Segment Reporting; SEC Staff Speeches – Deputy Chief Accountant Dan Murdock

International Issues – Deputy Chief Accountant Julie Erhardt

Financial Instrument Issues – Accounting Fellow Hillary Salo

Here’s a presentation from the PCAOB’s Associate Chief Auditor that provides an overview of comments received on the Staff’s “Fair Value” Consultation Paper…

Vanguard’s CEO Speaks: Over 900 Letters Sent to Companies Over the Year

Here’s a recent speech by Vanguard’s CEO during which he noted that Vanguard sent 923 letters last year to companies and 358 of those letters requested specific governance structure changes – and that about 80 companies adopted substantive changes in response. He also urged boards to create a standing shareholder relations committee “for boards to gather those outside perspectives” discussed in the speech – and as noted in this FT article, Vanguard plans to send letters to companies about this idea next year…

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 inputting their email address on the left side of that blog. Here are some of the latest entries:

– Tips to Enhance Your Non-GAAP Disclosures
– Using Internal Audit to Assess & Improve Corporate Culture
– Considerations for Compliance Outsourcing
– Caremark Applies to Audit Committee Oversight of Internal Controls
– Corporate Political Spending Disclosure: Strategic Communications Plan

– Broc Romanek

December 17, 2014

Transcript: “Proxy Access: A New World of Private Ordering”

We have posted the transcript for our recent popular webcast: “Proxy Access: A New World of Private Ordering.”

I’m not a big SNL fan – but this recent bit about Hobbits in the style of “The Office” is hilarious. Gandolph is Michael Scott; Gollum is Dwight…

A Rare No-Action Letter on Reg S

This Bookbuilds no-action letter released by Corp Fin recently is nothing special as it just applies to very narrow circumstances. But it’s noteworthy because it is a rare no-action letter under Reg S. There are only a handful of Reg S letters since its adoption in 1990…

Thanks for the Gumball Mickey – Cooley, Palo Alto

In this 20-second video, the fine lawyers at Cooley in Palo Alto pay homage to the old Hasbro TV commercial. A real gumball machine in this one…

– Broc Romanek

December 16, 2014

Conflict Minerals: Briefs Filed in Appeals Case

As noted in this Cooley blog and Davis Polk blog, the SEC, intervenor Amnesty International and amici Global Witness and Free Speech for People have filed their briefs in support of upholding the conflict minerals disclosure requirement in the appeals case. In a joint statement, SEC Commissioners Gallagher and Piwowar said they oppose the position taken in the SEC’s brief. Briefs from appellants are due in about 10 days.

Also see this Keith Bishop blog entitled “SEC Seeks To “Overrule” Fifth Circuit Whistleblower Interpretation“…

The Wall Street Takeover of Charity

It’s that time of the year – the time to give. But this article notes how folks are giving to charity funds rather than actual charities – and that actual charities aren’t receiving enough of the money…

Cap’n Cashbags: Time to Grant Stock Options (Seriously)

Did you ever want to see Cap’n Cashbags cry? In this 20-second video, Cap’n Cashbags – a CEO – is still hoping to get his mega-grant of stock options soon (here’s the related video):

– Broc Romanek

December 15, 2014

SEC Filings: How “Readable” Are They?

As noted in this blog, the WSJ ran this follow-up article a few months ago to a previous piece about Corp Fin’s comment letters. The latest article focuses on the “readability” of SEC filings (what is also known as “usability”). Here’s what it says:

Examiners at the Securities and Exchange Commission, as we explained this weekend, spend some of their time catching typos, demanding better punctuation and asking companies to rephrase impenetrable parts of official filings. So is it working? Not really. SEC filings remain pretty impenetrable. We sent lengthy excerpts from a half-dozen documents filed by six big companies — Apple AAPL -1.21%, General Electric GE +1.26%, General Motors GM +0.70%, JPMorgan Chase JPM +0.34%, UnitedHealth Group UNH +1.42% and Wal-Mart Stores WMT +0.94% — to Educational Testing Service, the outfit that runs the SAT and other school-entrance exams.

All the excerpts came from the companies’ most recent annual reports, and we picked parts of the more accessible sections: descriptions of the companies’ businesses, the principle risks they face and discussions of their recent results. The verdict, according to ETS: The words used in the filings tended to be abstract, academic and generally difficult. Sentence structures were moderately difficult. Some of the excerpts were relatively disjointed, and none could be considered conversational. Using ETS’s yardstick, the language typically qualifies as grade 13 to 14 — a grade-level or two above what is considered “college and career ready,” with grade 12 “encompassing the complexity levels likely to be found in college textbooks.” (It’s also worth noting that ETS recently altered its grade-level standards, so today’s grade 12 is closer to grade 14 under older measures.)

The companies varied in their comprehensibility. General Motors fared best, at a grade level of 12.5, helped by language that was more concrete and built out of less-complex sentences. JPMorgan Chase fared worst, at a 13.7 overall grade level, hurt by syntactically complex sentences, less-familiar vocabulary and a fair amount of abstraction.

None of the English in the excerpts was particularly plain. All scored poorly when measures on how conversational the style was, with Apple, General Electric and General Motors all faring particularly poorly. (Wal-Mart and United Healthcare fared best by that measure.) JPMorgan spokesman Joe Evangelisti said the company has to balance clarity and thoroughness in a complex industry. “We’re trying to simplify, we’re trying to reduce redundancy,” he said. “The fact is, we have to be complete too.” GE said it has taken steps to make its filings more readable, in part by adding a summary to its discussion of quarterly results. GM declined to comment. It’s also worth noting that, with some noticeable exceptions, big companies tend to put more effort into making their filings readable. That suggests that the rest of the filings out there could well be worse.

It isn’t as if the SEC is having no effect. In Saturday’s piece, we looked at changes requested by the SEC to filings by Technology Applications International NUUU -0.68%, a small company that, among other things, uses NASA-patented technology to make cosmetics. An SEC attorney originally questioned the company’s reference to a device called a “rotatable perfused time varying electromagnetic force bioreactor.” Successive rounds of feedback from the SEC led the company first to rephrase and then to expand and simplify its original explanation of the device (and add a picture). The changes lowered the grade-level rating for the excerpt from 14.1 — among the highest of any of the samples we sent ETS — to about 12.9, closer to the relatively readable General Motors filings. The biggest improvements came with somewhat simpler vocabulary, more concrete language and a slight improvement in sentence complexity.

Still, by ETS’s reckoning, anyone who would struggle over a college textbook could expect to have trouble making sense of the filing — or any of the filings we sent them.

NYSE Proposes to Delist Companies for Late 10-Qs

Here’s an excerpt from this blog by Ethan Mark:

The NYSE proposes to amend its continued listing requirements in relation to the late filing of a company’s annual report with the SEC as set forth in Section 802.01E, or the Late Filer Rule, of the Listed Company Manual. As amended, the Late Filer Rule will:

– expand the rule to impose a maximum period within which a company must file a late quarterly report on Form 10-Q in order to maintain its listing; and

– clarify the NYSE’s treatment of companies whose annual or quarterly reports are defective at the time of filing or become defective at some subsequent date.

Crowdfunding: A Cool Infographic

In this blog, Anthony Zeoli bemoans the belated nature of final crowdfunding rules from the SEC. Meanwhile, I’m adding to my recent blog about states who have already opened its doors to crowdfunding by telling you about this nifty infographic from Orchard Platform…

– Broc Romanek