Monthly Archives: June 2015

June 30, 2015

Conflicting Shareholder Proposals: Are Companies Asking for a Trump Card?

Here’s a blog from Adam Kanzer of Domini Social Investments based on his recent comment letter sent to the SEC:

According to a series of letters submitted on behalf of the issuer community, including a joint letter submitted by five prominent law firms, the original intent of Rule 14a-8(i)(9) and its successor formulations was to prohibit a very specific abuse of process by shareholders – the use of 14a-8 to solicit votes in opposition to management proposals (“counter proposals”). This would amount to a circumvention of the SEC’s solicitation rules. It is therefore clear that the exemption was based on the sequencing of proposals, and was intended to be used infrequently. The rule, however, is now applied where such abuses have not even been alleged. The issuer community is seeking an extremely broad and unreasonable reading of the subsection.

The law firms’ assertion that the sequencing of the proposals “is not a consideration encompassed by the text of the rule” ignores their own assertions about the history of the rule. The rule is grounded in a prohibition on counter proposals offered by shareholders, and a counter proposal must come second.

In addition to sequencing, public notice is also critical. Unless management has publicly announced its intention to submit a particular proposal to a vote before the proposal filing deadline—including the terms of that proposal—a shareholder proposal cannot be considered a solicitation “opposing a proposal supported by management.” This is largely a hypothetical abuse of process that is generally not available to shareholders, except, perhaps, on rare occasions (Northern States Power Company (July 25, 1995)(Shareholder proposal requesting that the board of directors require management to negotiate a more equitable merger agreement excludable as ‘counter to a proposal to be submitted by management.’) This subsection was presumably crafted to deal with those rare occasions. So rare, in fact, that they were deemed to be an “abuse” of process.

In reality, the shareholder proposal either accidentally coincides with a management proposal on the same topic, or management responds to the shareholder proposal with a proposal of its own. Neither situation can be considered an “abuse” by shareholders, as suggested by the 1982 Release.

Issuers are asking Staff to interpret (i)(9), a rule designed to address counter proposals by shareholders, to permit the exclusion of shareholder proposals any time a counter proposal has been offered by management. Not only does this reverse the intent of the subsection, as explained by the law firm letter, it eliminates the concept of a ‘direct conflict’ from the rule and converts what was intended to be a narrow exemption to deal with a rare abuse of process into a trump card to be used at management’s discretion.

Establishing a clear, bright line approach to 14a-8(i)(9), consistent with the wording of the rule, would dramatically reduce the opportunity for gamesmanship and avoid the need for SEC Staff to delve into those perilous waters. Our recommended approach, first suggested by the Council of Institutional Investors and endorsed by CalPERS and CalSTRS – non-binding proposals cannot “conflict” with management proposals – would satisfy issuers’ and proponents’ need for clarity and would eliminate any meaningful legal conflicts that “conflicting” proposals may create. Our proposal to permit conflicting binding proposals to be re-characterized as non-binding proposals would eliminate the need for any investigation into issuer or shareholder motives, while preserving both shareholder democracy and management’s right to submit alternative proposals to a vote.

Proxy Access Proposals: The Latest Stats

This Skadden memo is the first memo – of what likely will be many – with comprehensive coverage of the voting results for proxy access shareholder proposals this proxy season. We’ll be posting all of them in our “Proxy Access” Practice Area. Check it out!

Delaware Bans “Loser Pays” Bylaws & Authorizes Exclusive Forum Bylaws

The Delaware Governor has signed the latest Delaware amendments into law, taking effect on August 1st. On, we’re posting memos in our “Exclusive Forum Bylaws” Practice Area (also see this blog about whether the new law impacts federal class actions). And here’s the intro from this Cooley blog:

On June 24, 2015, the Governor of Delaware signed into law amendments to the Delaware General Corporation Law proposed by the Delaware Bar’s Corporation Law Council and overwhelmingly passed by the Legislature regarding fee-shifting and forum selection provisions in Delaware governing documents. (See this post and this post.) More specifically, the amendments invalidate, in Delaware charters and bylaws, fee-shifting provisions in connection with internal corporate claims. “Internal corporate claims” are claims, including derivative claims, that are based on a violation of a duty by a current or former director or officer or stockholder or as to which the corporation law confers jurisdiction on the Court of Chancery. These claims include claims arising under the DGCL and claims of breach of fiduciary duty by current or former directors or officers or controlling stockholders of the corporation, or persons who aid and abet those breaches. However, as discussed in this post, federal securities class actions are not included. In addition, the new provision is not intended to prevent these types of provisions in a stockholders agreement or other writing signed by the stockholder against whom the provision is to be enforced.

The amendments also expressly authorize the adoption of exclusive forum provisions for internal corporate claims, as long as the exclusive forum is in Delaware. Although the amendment does not address the validity of a provision that selects, as an additional forum, a forum other than Delaware, the synopsis indicates that it “invalidates such a provision selecting the courts in a different State, or an arbitral forum, if it would preclude litigating such claims in the Delaware courts.” A different result is possible where there is a provision in a stockholders’ agreement or other writing signed by the stockholder against whom the provision is to be enforced. In addition, an exclusive forum may not be “enforceable if the Delaware courts lack jurisdiction over indispensable parties or core elements of the subject matter of the litigation,” and the amendment in not intended to preclude evaluation of whether the terms or manner of adoption of the exclusive forum provisions “comport with any relevant fiduciary obligation or operate reasonably in the circumstances presented.” Deputy Secretary of State Richard J. Geisenberger said 99.6% of companies that have a forum-selection bylaw choose Delaware as the preferred venue. And, no surprise, Delaware wants cases involving Delaware corporations to be tried in Delaware.

– Broc Romanek

June 29, 2015

Pay Ratio Rumor: Will the SEC Adopt Rules on August 5th?

We’ve had false start rumors before about when the SEC will adopt pay ratio rules – but this time it feels different given the heightened political attacks against the SEC. The latest is this Bloomberg article indicating the rules will be adopted by August 5th, which the article notes was not confirmed by the SEC. It’s according to “two people familiar with the matter who asked not to be named.”

That’s right before our August 7th deadline for our last discounted rate for our big “Executive Pay Conference” in San Diego and by video webcast. Act now!

Clawbacks: SEC to Propose Rules on Wednesday!

Last Thursday, the SEC posted this Sunshine Act notice to announce that it will propose the clawback rules required by Dodd-Frank on Wednesday, July 1st!

Delaware Changes Law to Allow Restricted Stock Grants By Non-Directors!

Last week, Delaware enacted amendments to its corporation law – effective August 1st – that will permit grants of restricted stock to be made by a corporate officer who has been delegated that authority by the board (within parameters). Prior to this change, the granting of options could be delegated to officers pursuant to DGCL Section 157(c), but not so for stock. Under the old law, some companies worked around this limitation by creating a board committee of one person (typically, the CEO-director). The law change presents the opportunity for delegation without using a “committee of one,” allowing the CEO (in a non-director capacity) or other delegated officers to make grants of stock. Of course, accurate and timely records must be kept and plans also would need to permit such administration.

Here’s the news from this Richards Layton memo:

The 2015 legislation amends Section 152 of the DGCL to clarify that the board of directors may authorize stock to be issued in one or more transactions in such numbers and at such times as is determined by a person or body other than the board of directors or a committee of the board, so long as the resolution of the board or committee, as applicable, authorizing the issuance fixes the maximum number of shares that may be issued as well as the time frame during which such shares may be issued and establishes a minimum amount of consideration for which such shares may be issued.

The minimum amount of consideration cannot be less than the consideration required pursuant to Section 153 of the DGCL, which, as a general matter, means that shares with par value may not be issued for consideration having a value less than the par value of the shares. The legislation clarifies that a formula by which the consideration for stock is determined may include reference to or be made dependent upon the operation of extrinsic facts, thereby confirming that the consideration may be based on, among other things, market prices on one or more dates or averages of market prices on one or more dates.

Among other things, the legislation clarifies that the board (or duly empowered committee) may authorize stock to be issued pursuant to “at the market” programs without separately authorizing each individual stock issuance pursuant to the program. In addition, the legislation allows the board to delegate to officers the ability to issue restricted stock on the same basis that the board may delegate to officers the ability to issue rights or options under Section 157(c) of the DGCL.

Transcript: “Proxy Season Post-Mortem: The Latest Compensation Disclosures”

We have posted the transcript for our recent webcast: “Proxy Season Post-Mortem: The Latest Compensation Disclosures.”

– Broc Romanek

June 26, 2015

SEC Chair Speaks: Universal Proxy Ballots Coming?

As reported by this WSJ article, SEC Chair White delivered this speech yesterday at the Society’s National Conference. In her speech – which focused on proxy-related matters – Chair White advised that she “asked the staff to bring appropriate rulemaking recommendations before the Commission on universal proxy ballots.” A universal proxy ballot provides security holders a means to vote for management & proponent nominees on a single ballot in an election contest. This allows a security holder to mix & match votes between nominees of the company & the proponent – without attending & voting in person at the meeting. Chair White also encouraged companies & proponents to voluntarily use “some form” of universal proxy ballot while the SEC Staff prepares its rulemaking recommendation. Here’s an excerpt from her speech:

All of the participants [of a roundtable held on ways to improve the proxy voting process] agreed that if the Commission were to revise the proxy rules to implement a universal proxy ballot, the “devil would be in the details.” Questions include when a universal ballot could be used, whether it would be optional or mandatory and under what circumstances, whether any eligibility requirements should be imposed on shareholders to use universal ballots, what the ballot would look like, and whether both sides must use identical universal ballots.

Chair White’s speech also covered the topics of preliminary voting results, “unelected” directors & shareholder proposals – which included comments on Rule 14a-8(i)(9) relating to proxy access proposals.

First to the Finish: CalSTRS Inaugural Sustainability Report Released

Check out the first Sustainability Report of CalSTRS, posted in our “Social Responsibility” Practice Area. As explained in this press release, the sustainability report meets the reporting guidelines of the Global Reporting Initiative and is the first sustainability report from a US public pension fund to do so. As noted in the press release, the report highlights:

– Retirement security: legislative approval of a CalSTRS full funding plan.

– Investment impact: 288-percent increase in green bond holdings over fiscal year 2012-13.

– Business transparency: public access to all of our proxy votes through the website.

– Environmental efforts: 22-percent decrease in water usage from the year 2013 at the LEED Platinum-certified CalSTRS Headquarters building.

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season 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:

– Shareholder Engagement: TIAA-CREF
– Delaware Weighs In: Plain Vanilla Advance Notice Bylaws
– Some Ways to Shorten 10-Ks & 10-Qs
– Shareholder Proposals: Doing Research Through Free Databases
– Chamber: Report on How to Deal With Proxy Advisor Conflicts

– Jeff Werbitt

June 25, 2015

SEC Calling: Charges Brought Over Fake Filing

On a subject near & dear to Broc’s heart and following up on his blog from last month, the SEC filed a lawsuit in the Southern District of New York relating to the fake Schedule TO involving Avon. According to the SEC’s press release, a Bulgarian trader & four related entities were charged with violating multiple antifraud provisions of the federal securities laws – including Section 17(a) of the ’33 Act and Sections 10(b) & 14(e) of the ’34 Act in connection with the manipulation of Avon’s stock – among other charges. The SEC also announced that the court issued an emergency order to freeze $2 million in assets held in two related brokerage accounts. According to the SEC, this isn’t a new scheme. The complaint also charges the defendants in two other false takeover attempts involving Rocky Mountain Chocolate Factory in 2012 and Tower Group International in 2014. Here’s an excerpt from the press release about the SEC’s sleuthing:

“We used parallel trading analysis to connect the dots and track down these defendants,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit. “Even when traders attempt to hide behind proxy servers, false filings, and phony foreign entities, we are able to quickly identify patterns and relationships to focus our investigation and identify who is behind the manipulative trading.”

However, in an odd turn to an already unusual set of facts – this wsj article reports that contrary to the SEC’s complaint – the 2014 offer for Tower Group International may have been real. A representative of Euroin’s Insurance Group – one of the entities identified in the complaint as issuing a “fraudulent press release” containing an offer to acquire Towers Group International – claims that the press release was part of a legitimate takeover attempt. Here’s an excerpt:

Kiril Boshov, the chairman of the board of Euroins’s parent, Eurohold Bulgaria, said it was a legitimate offer and denied any link with the trader accused of illegally profiting from the proposal. “The offer for the acquisition of Tower Group International by Euroins Insurance Group was submitted in compliance with all regulations,” Mr. Boshov said in an email exchange.

Prior to the SEC’s filing of the lawsuit, Senator Charles Grassley – the Judiciary Committee Chair – submitted a letter looking for answers relating to the ease in which a fake SEC filing can be made. While the letter recognizes that the SEC & FBI were investigating the incident, Sen. Grassley calls for a review of EDGAR filing standards. Here’s the questions he’s looking to get answered:

– What, if any, efforts are made to verify any of the filings on EDGAR? What are the time deadlines associated with these verifications?
– How many instances of false postings to the EDGAR system have there been in the last 3 years? Please provide a list with information such as date of filing, type of filing and an explanation of the information in the filing that was determined to be false.
– Has any attempt been made by the SEC to determine what the cost to investors and market participants was as a result of the false postings to EDGAR? If there has, please provide that information. If not, please explain why not?
– How many of the approximately 4,000 daily filings made on EDGAR are made by first time users of the system?
– Has any attempt been made by the SEC to determine what the costs would be to verify the information on its most common filings? If there has, please provide the results of that effort. If not, why not?
– What other steps has the SEC taken to address the systemic vulnerabilities exposed by this incident?

Also check out Broc’s blog from last year that asks a similar question about how fake filings sneak past the SEC . . .

Bonuses & Perks: The New “Normal”?

According to this NY Times article, there’s been a “drastic shift” in the type of compensation increases received by salaried employees. Since the 1980s, annual pay raises have markedly decreased – while one-off bonuses & non-monetary rewards have increased. According to the article, the big question is whether we will see another shift over time or is this the new “normal”? Here’s an excerpt:

According to Aon Hewitt’s annual survey on salaried employees’ compensation, the share of payroll budgets devoted to straight salary increases sank to a low of 1.8 percent in the depths of the recession. It dropped to 4.3 percent in 2001, from a high of 10 percent in 1981. It has rebounded modestly since the recession, but still only rose to 2.9 percent in 2014, the survey of 1,064 organizations found. (These figures are not adjusted for inflation.)

Aon Hewitt did not even start tracking short-term rewards and bonuses — known as variable compensation — until 1988, when they accounted for an average of 3.9 percent of payrolls. Ten years later, that share had more than doubled to 8 percent. Last year, it hit a record 12.7 percent.

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season 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:

– Sample: Proxy Statement Reg Summary Sheet
– Shareholder Proposals: Corp Fin Allows Exclusion of “Review of Company’s Voting Policies” Proposal
– More Debate: Harvard’s “Shareholder Rights Project”
– Trinity v. Wal-Mart: Serious Implications for the Ordinary Business Exclusion
– Shareholder Proposals: Playing Games With Submission Deadlines

– Jeff Werbitt

June 24, 2015

Regulation A/A+: Corp Fin Issues 11 New CDIs

Yesterday, Corp Fin issued 11 new CDIs related to last week’s effectiveness of new Regulation A/A+. Here’s a rundown of the topics:

– Question 182.01: Filing of non-public draft offering statements as exhibits
– Question 182.02: Confidential treatment requests
– Question 182.03: Definition of “principal place of business”
– Question 182.04: Eligibility of companies with suspended Exchange Act reporting obligations
– Question 182.05: Eligibility of voluntary filers
– Question 182.06: Eligibility of wholly-owned subsidiaries of Exchange Act reporting companies
– Question 182.07: Business combination transactions
– Question 182.08: Balance sheet requirements of recently created entities
– Question 182.09: Test the waters
– Question 182.10: Federal preemption
– Question 182.11: Engagement of registered transfer agents

Corp Fin also deleted two Securities Act Form CDIs – 128.01 relating to paper filings & 128.03 relating to delaying notations – that are no longer applicable under the new Regulation A/A+ rules.

As I blogged on Monday, the new/revised Regulation A/A+ Forms are available on our “SEC Rules & Regulations” page. In a few months, we’re holding a webcast – “Regulation A/A+: Developing Market Practices” – to show you how market practice has developed…

“Tenure Voting”: Cure for Activism?

Here’s an excerpt from a Cooley blog:

In “Seeking a Cure for Raging Corporate Activism,” published on March 17, 2015, in the WSJ, the author discusses a technique resurrected from the 1980’s that some believe could, on reexamination, be “a bulwark against short-termers who roam the markets, looking to force buybacks or an untimely company sale.” Known as “tenure voting,” the concept would give investors additional votes if they hold their shares for at least a specified period of time, thus rewarding long-term holders by giving them more say in the future of the company than say, short-term hedge fund activists that may favor short-term profits over long-term business strategies. Will companies begin to pursue this strategy?

The concept of different voting rights is certainly not unique. Preferred stock often carries different voting rights, and many companies that have gone public in the last decade or so allocate disparate voting rights between two classes of common stock, with 10 votes per share attributed to the class of common typically held by founders and management. Tenure voting is positioned in the article as a middle course. According to a law professor cited in the article, with tenure voting “[y]ou still have an opportunity for shareholders to deal with a management that needs to go, but it isn’t going to be decided by a simple majority vote….It gives you more protection…..”

Podcast: Corp Fin Cyber Risk Comments

In this podcast, Yafit Cohn of Simpson Thacher discusses Corp Fin cyber risk comments, including:

– What are the four main types of Corp Fin comments in the cybersecurity area?
– Can you drill down on each?
– What has Corp Fin said lately about updating its Corp Fin disclosure guidance?

Meanwhile, Congressmen Langevin & Himes have sent this letter to the SEC seeking more disclosure guidance on cybersecurity. Here’s the related press release

– Jeff Werbitt

June 23, 2015

Survey Results: Hedging Policies

Thanks to those that participated in this survey – a hot topic! Below are the results from our recent survey on hedging policies:

1. Does your hedging policy cover?
– Only officers? – 3%
– Only officers & directors? – 43%
– Officers, directors & employees? – 54%

2. Does the hedging policy cover?
– Only company securities granted by the company as compensation? – 3%
– All company securities without regard to how acquired? – 97%

3. If your company doesn’t currently cover all employees under a hedging policy, do you expect to expand it now to all employees?
– Yes – 27%
– No – 73%

4. Do you think there is a way to effectively enforce a broad hedging policy?
– Yes – 8%
– No – 61%
– Not sure – 31%

Take a moment to participate in our “Quick Survey on Board Portals” and our “Quick Survey on Annual Meeting Conduct.” And don’t forget to send your nominations for our “Annual Proxy Disclosure Awards.” Here’s how that works. Deadline for nominations is Wednesday, July 1st…

Escheatment: Delaware Proposes Changes Beneficial to Companies

As noted in this memo, Delaware Senate Bill 141 was introduced in the Delaware General Assembly last week proposing many significant changes to the existing Delaware unclaimed property audit and administration regime, many of which would be beneficial to companies if the law gets passed. Delaware likely is acting as it was just sued for the first time before an audit, according to this WSJ article. This is a hot topic – see this audio archive of our recent related webcast…

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season 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:

– Sample: Proxy Statement Reg Summary Sheet
– Shareholder Proposals: Corp Fin Allows Exclusion of “Review of Company’s Voting Policies” Proposal
– More Debate: Harvard’s “Shareholder Rights Project”
– Trinity v. Wal-Mart: Serious Implications for the Ordinary Business Exclusion
– Shareholder Proposals: Playing Games With Submission Deadlines

– Jeff Werbitt

June 22, 2015

Regulation A: New/Revised Forms Available

Since the new Regulation A/A+ took effect on Friday, June 19th – and the SEC denied Montana’s request to stay its implementation – the SEC has posted these 6 new/revised forms (& Form 2-A has been rescinded):

Form 1-A: Regulation A Offering Statement
Form 1-K: Annual Reports and Special Financial Reports
Form 1-SA: Semiannual Report or Special Financial Report Pursuant to Regulation A
Form 1-U: Current Report Pursuant to Regulation A
Form 1-Z: Exit Report Under Regulation A
Form 8-A: Registration of Certain Classes of Securities Pursuant to Section 12(b) or (g)

These new/revised forms will soon be available on our “SEC Rules & Regulations” page. In a few months, we’re holding a webcast – “Regulation A/A+: Developing Market Practices” – to show you how market practice has developed…

Conflict Minerals Rules: The Real World Impact?

As we recover from Year Two of the conflict minerals disclosure push, we’ll continue to see plenty of reports and studies that focus on disclosure trends and statistics in Form SDs (they will be posted in our “Conflict Minerals” Practice Area as they become available). But this Stinson Leonard Street blog covers an article about the question of whether the conflict minerals rules are having a real world impact in the DRC. Here’s an excerpt:

Politico has an interesting article about a trip to the DRC in an attempt to answer that question. The author was told “not a single mine was tagging its output so that buyers could identify the mine at which it had originated.” “Tagging is very expensive, . . . We don’t have the partners to pay for it.” Of course, it’s only one person’s perspective.

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season 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:

– Shareholder Proposals: Review of Proxy Voting on ESG Issues
– Proxy Access: Whole Foods Responds to Shareholder Proposal With Own Alternative
– An Interview with Fidelity Worldwide Investments
– Group Presses on Political Spending Disclosures
– 10-K Wrap Design: Five Tips to Do More with Less

– Jeff Werbitt

June 19, 2015

More on “Brain-Teaser: ’11:59pm or 12:01am’ for Contracts?”

People love the brain-teasers. I received many emails in response to my blog about a contract that tackles the “what day is it” query. Here are some of those responses:

– Ken Adams has a new blog on the topic entitled “A New Provision Specifying a Drafting Convention Relating to Time

– Whitney Holmes of Dorsey & Whitney notes: Oh dear, the problem of the infinitesimal…. I don’t advocate bringing back the stake, but after 400 years I wish this kind of question would go away.

Midnight doesn’t really exist—it is only in the mind—because there is no indivisible unit of time. Midnight (in the sense of 12:00 o’clock at night) can be infinitely subdivided into seconds, tenths of seconds…nanoseconds, picoseconds and so on. What about 12:00:00.0000001 “midnight”? Still a.m. in my view and not heretical. See, Alexander Amir, Infinitesimal: How a Dangerous Mathematical Theory Shaped the Modern World, Scientific American / Farrar, Straus and Giroux (April 8, 2014). Because every unit can be subdivided into smaller units, any time that starts with a 12:00 has to be the beginning of the next cycle (the next day, in the case of midnight) or you would need an infinite string of zeros, which is impossible because infinity is also a concept that only exists in the mind. Therefore, nothing can happen “at midnight” unless midnight is understood to be 12:00 plus some minute increment of time. As a result, Midnight is 12:00 a.m. the next day. QED

Of course, that results in “12:00 noon” being “p.m.”, or “afternoon,” which is pleasantly paradoxical, not that anybody really cares. Id.

This is reminiscent of the argument that came up at the turn of the century regarding whether 2000 or 2001 was the first year of the new century. Ugh.

– Consecutive days simultaneously begin and end at midnight. It’s similar to the singularity principle with regard to black holes where relativistic equations break down because at the singularity, you reach a theoretical infinitesimal point where an infinite mass exists. The whole “boundary” concept proposed by others makes it seem like time, or more correctly space-time, is not continuous or that you could even discern exactly where the boundary lies. You could never measure the precise moment of midnight, it’s impossible because it’s a singularity. It’s not dissimilar from attempting to measure the length of an island’s coastline – as the size of your ruler decreases and approaches 0, the island’s coastline approaches infinity (there is an interesting book on fractals I read long ago that dives into this idea, which interestingly enough showed up on the LSAT exam I took – I guess that section did not truly test my reading comprehension because I know the answers to the questions based on prior substantive knowledge!).

The response that a day begins a “nanosecond” (10^-9 seconds) after midnight is not correct because that would mean that 1 picosecond (10^-12 seconds)after midnight would still be the prior day, which obviously doesn’t make sense. If you want to get really nerdy, one could analyze the impact of different inertial frames of reference on people’s perception of time under the special theory of relativity.

The practical solution is that if you want something to end at the end of a particular day, use 11:59:59, because it is unlikely that something could happen in the one second between this time and 12:00 that would cause a different result under a contract. For the same reason, I’d also use 12:00:01 for the same reason for something that must begin at the beginning of a certain date. If the one second is problematic for some reason, just carry the specified time out to more significant digits. At some point, we just need to accept an imperfect but practical solution to a problem that is impossible to solve perfectly.

– Pugh v. Duke of Leeds (1777) 2 Cowp. 714 per Lord Mansfield: “’Date’ does not mean the hour or the minute, but the day of delivery and in law there is no fraction of a day.” In Lester v. Garland (1808) 15 Ves. 248 Sir William Grant MR said “Our law rejects fractions of a day more generally than the civil law does. the effect is to render the day a sort of indivisible point.”

Thus a day begins at the instant of midnight passing, and ends at the following midnight. The parties can of course agree to define a day differently, and for banking reasons a day is often defined as ending at 1pm or 2pm (as money transmitted later may not reach the other party until the next day).

In English law, this holds good still – although there are some variations according to custom and circumstance. However, the starting point under US law is, presumably, Lord Mansfield in 1777, with whatever variations were determined by US courts or statutes since 1790 (or thereabouts).”

– There is no such thing as 12 am or pm. It is either 12 noon or 12 midnight.

Boards: Succession Planning for Top Managers

Here’s an excerpt from this Harvard Business Review article entitled “How the Best Board Directors Stay Involved”:

Engaging on talent. Directors have long assumed responsibility for selecting and replacing CEOs, both in the normal course of business and in “hit by a bus” scenarios. Many also find it useful to track succession and promotion—for example, by holding annual reviews of a company’s top 30 to 50 key executives. But to raise the bar, some boards are moving from simply observing talent to actively cultivating it. Case in point: directors who tap their networks to source new hires. Donald Gogel, the chairman and CEO of Clayton, Dubilier & Rice, explains that “our board members can operate like a highly effective search firm. There’s nothing like recruiting an executive who worked for you for a long time, particularly in some functional areas where you know that he or she is both capable and a great fit.” Other boards actively mentor high-performing executives, which allows those executives to draw upon the directors’ experience and enables the board to evaluate in-house successors more fully.

3 Biggest XBRL Mistakes

For those responsible for XBRL filings, this article does a good job of explaining common errors (egs. DEI information; scale errors; auto-generated tags) – and tips on how to avoid them…

Don’t forget to send your nominations for our “Annual Proxy Disclosure Awards.” Here’s how that works. Deadline for nominations is Wednesday, July 1st…

– Broc Romanek

June 18, 2015

Analyst Research: Earnings-Predicting Quality Going Down?

Here’s an excerpt from this blog by Cooley’s Cydney Posner:

Here’s an interesting report from Bloomberg on a soon-to-be-published study that concludes that stock analysts are actually worse at predicting corporate earnings now, after a number of regulatory actions to increase transparency and prevent research analyst conflicts of interest, than they were prior to these actions. In the wake of the dot-com crash and the Enron scandal, Congress, regulators and SROs enacted laws and adopted rules designed to increase transparency, improve corporate disclosure and prevent analyst conflicts, e.g., SOX (2002) and various conflict-of-interest rules adopted by the exchanges. While the study found an improvement in forecasting in the early 2000s right after adoption of these rules, the improvement was short-lived. The study showed that forecast accuracy significantly declined over the longer term despite the reduction in analyst conflicts of interest.

Also see this article entitled “9 ways companies fool you with earnings.” And don’t forget that Regulation A+ takes effect tomorrow, June 19th. As noted in this blog, the SEC has denied Montana’s request to stay it’s implementation…

Are Non-GAAP Disclosures Coming Under Renewed Scrutiny?

Here’s an excerpt from this blog by Cooley’s Cydney Posner:

A new study from the Associated Press, discussed in this AP article, shows a strong resurgence in the use of non-GAAP financial measures, most often reflecting numbers that are more favorable than GAAP numbers. The AP analyzed results from 500 major companies, based on data provided by S&P Capital IQ, a research firm, showed that the spread between GAAP and non-GAAP earnings has grown substantially over the past five years. For 21% of companies, non-GAAP profits reported in the first quarter were higher than net income by 50% or more, compared with 13% five years before. Although 72% of the companies had non-GAAP profits that were higher than net income in both the first quarter of this year and five years earlier, adjusted earnings were 16% higher this year compared with 9% five years ago. In the study, 15 companies “with adjusted profits actually had bottom-line losses over the five years.“ Moreover, the article contends, “the financial analysts who are supposed to fight corporate spin are often playing along. Instead of challenging the companies, they’re largely passing along the rosy numbers in reports recommending stocks to investors.”

Typically, the non-GAAP adjustments eliminated charges for layoffs, failed business operations or other restructuring charges, declines in the value of patents or other intangible assets, or charges related to employee equity comp. Whether or not these exclusions are fair, properly presented or even help investors see the financial results “through the eyes of management,” they are once again drawing the attention of critics. Indeed, former SEC chief accountant Lynn Turner is quoted in the article as contending that “companies are still touting ‘made-up, phony numbers’ as much as they did 15 years ago, perhaps more….” And one investor was quoted as finding the data “more confusing than it’s been in a long time, and the reason is all the junk they put in the numbers” and complaining of the time wasted “sifting through the same ‘nonsense’ figures…. confronted back in the dot-com days.”

In 2013, the head of the SEC’s Financial Reporting and Audit Task Force indicated at an AICPA conference, as reported by the WSJ, that the SEC was looking at the use of these non-GAAP measures “with an eye toward possible enforcement cases.” In particular, they were reportedly concerned about “mislabeling,…when companies use common, well-defined terms to refer to their own performance measures” and “trends and patterns that could indicate a risk of fraud, such as cases in which a company shows high reported earnings but has lower earnings for tax purposes, or when a company has a high proportion of transactions that are kept off its balance sheet.” While no big splashy cases have yet materialized as a result, frothy markets tend to invite the attention of concerned regulators, especially regarding issues that have attracted press scrutiny.

Political Spending Disclosure: House Bill Would Bar SEC From Adopting Rules

Yesterday, the House Appropriations Committee approved the “2016 Financial Services and General Government Appropriations” bill, which includes some items that don’t pertain to funding the SEC. [It’s a shocker that Congress would do that!] In addition to not giving the SEC an increase in funding (as I’ve blogged before), Section 625 of the bill prohibits the SEC from adopting a rule that would require public companies to disclose their political spending. We’ll see if that provision survives as this bill winds its way through the sausage machine..

Meanwhile, as noted in this article, over 20 advocates sent a letter to President Obama requesting that the upcoming SEC Commissioner be filled by folks who support corporate political spending disclosure rulemaking. And this article cites a new report – and petition – that supports the view that the next new Commissioner shouldn’t have ties to entities that the SEC regulates…

– Broc Romanek

June 17, 2015

Proxy Disclosure: Call for “1st Annual Awards” Nominations

With so many companies now improving their proxy disclosures, I’ve decided to hold an annual contest for proxy disclosures. The deadline for nominations is Wednesday, July 1st. The winners will be decided by you – via anonymous popular voting. In three weeks, I will post the nominees to be voted upon in the following 14 categories – in the meantime, please submit your nominations by emailing them to me.

Here are three things to note (see our full set of FAQs):

– Self-nominations permitted
– Max of 3 nominations per company
– No need to explain why you’re nominating a proxy for a category(ies). Just let me know the company name and the category(ies) for which it is being submitted.

Here’s the categories:

1. Best Overall Proxy (Combined Online & Print)
2. Best Print Proxy – Large Cap
3. Best Print Proxy – Mid-to-Small Cap
4. Best Online Proxy – Large Cap
5. Best Online Proxy – Mid-to-Small Cap
6. Most Improved Print Proxy
7. Most Improved Online Proxy
8. Most Persuasive Supplemental Letter/Additional Soliciting Materials
9. Best Executive Summary
10. Best CD&A
11. Best CD&A Summary
12. Best Shareholder Engagement Disclosure
13. Best Director Bios Disclosure
14. Best Shareholders Letter

Sights & Sounds: “The Women’s 100 Conference ’15″

Just wrapped both of my “Women’s 100” Conferences over the past two weeks – DC and Palo Alto. Like last year, they were very interactive & loads of fun. Here’s a nice note from Mintz Levin’s Megan Gates about it. [By the way, Megan & her team are doing a great job with their new blog – check it out!] Also check out this emotional speech by Prudential’s Peggy Foran, who earned the “Linda Quinn Lifetime Achievement Award” in DC.

Here’s a 40-second video that gives a little bit of the DC event’s flavor (with a nice wave cheer) – and then below that is a 40-second video of the Palo Alto event (great “boom shakalaka boom” at the end):

– Broc Romanek