Yesterday, Corp Fin issued a CDI – CDI 103.11 of the Regulation 13D-G CDIs – to clarify that just because someone is disqualified (due to efforts to influence management) from relying on HSR’s “passive investment” exemption doesn’t necessarily preclude that shareholder from being eligible to file a short-form Schedule 13G rather than the longer Schedule 13D. In other words, the HSR test is applied differently than the similar one for 13G/13D. The CDI notes that control intent – as analyzed through the relevant fact & circumstances – is key.
Before providing three examples of this analysis in operation, the CDI notes that the determination might hinge on the subject matter of the shareholder’s discussions with management – with the context in which the discussions occur being “highly relevant.”
Interestingly, this CDI came out on the same day that the DOJ – as noted in these memos posted on DealLawyers.com – announced a record fine of $11 million that ValueAct paid to settle allegations that it had violated the HSR’s “passive investment exemption”…
Model Business Corporation Act: Exposure Draft
Six years in the making, the ABA Corporate Laws Committee has published for comment an “Exposure Draft” of the 2016 Revision of the Model Business Corporation Act. This Revision represents the first top to bottom revision of the Act since publication of the Revised Model Business Corporation Act in over 30 years! Since 1984!
The Revised Act has served as the basis for the organic corporation law in more than 30 jurisdictions, with portions embedded in the corporation law in several others. The 2016 Revision represents a compilation of all of the amendments to the Act since 1984, including several adopted within the last three years following publication for comment in The Business Lawyer, as well as a thorough review and revision of the Act and its Official Comment. The 2016 Revision also incorporates the basic terminology and concepts contained in the Uniform Business Organizations Code, adopted by the Uniform Law Commission in 2011.
Comments are encouraged & must be delivered to Corporate Laws Committee Chair Karl Ege before August 15th…
More Indictments In Proxy Solicitor/ISS Bribery Scandal
This Reuters article provides news about the latest in the bribery scandal between a former ISS staffer and current & former members of Georgeson, a proxy solicitor. The former ISS staffer – the seller of the information – was sentenced a while back. Also see this WSJ article…
Over the past six months, the SEC has issued two different concept releases relating to its disclosure effectiveness project – the first one dealing with Regulation S-X and the second one regarding Regulation S-K. As the Staff continues to analyze the comments submitted on those, the SEC decided yesterday to issue this 318-page proposing release in an effort to update & simplify certain disclosure requirements with the goal of eliminating redundant, overlapping, outdated & superseded requirements. The proposing release also seeks the same type of input for US GAAP. There is a 60-day comment period. Here’s the press release – and this is a “demonstration” version of the proposed redlined rule changes, which is another 193 pages by itself…
This is the piece of the SEC’s disclosure effectiveness project that has stirred up Senator Elizabeth Warren. Here’s an angry letter that Sen. Warren wrote to Chair White last week. I don’t believe that criticism is warranted as the SEC has said all along that the project is likely to elicit more disclosure than reduce it on balance – this just happens to be the part of the project that would reduce the volume of repetitive or useless disclosure. And based on the reactions of members that quickly perused this new proposing release last night, there probably ain’t gonna be as much reduction as one might hope for…
S-K Concept Release: The Comments So Far
Comments are due on the S-K concept release by next Thursday, July 21st – here’s the list of comment letters. Other than 7000 form letters and a few dozen other brief comment letters, there aren’t too many comprehensive comment letters submitted – at least so far. Most comment letters tend to come in at the deadline – or shortly thereafter. Here are a few of the more substantive ones:
The Future of Disclosure: Looking Beyond Disclosure Effectiveness
I found this recent speech by SEC Commissioner Kara Stein to be pretty interesting. Kara looks beyond the ongoing projects to upgrade Edgar & improve disclosure effectiveness in an attempt to further modernize how disclosure is delivered & consumed. Here are some of Kara’s main points – followed by my ten cents in brackets:
– Creation of a “Digital Disclosure Task Force” comprised of investors, analysts, academics, companies and technologists (I’m dubious about this. Sometimes a committee doesn’t create a better soup; it just creates red tape. I think it’s better to just find the right people that truly understand how information is consumed today)
– Conducting “investor testing” rather than the SEC simply relying on comments on its proposals (Hopefully, this is the concept of usability testing – something I have been hammering for two decades.)
– Presenting disclosure in different formats (There is mention of “company profiles” & structured data, as well as different formats to match the different platforms by which disclosure is consumed today – which is already permissible under Example 7 of this 1996 interpretive release. There is no mention of virtual reality.)
It’s great that Kara is pushing this important topic – something that has been bandied about as far back as when browsers first came into our life twenty years ago – because it’s a tough one and is easy for the SEC to push aside as they handle the immediate crises of the day…
Speaking of disclosure effectiveness, here’s a fuller description of the contentious Senate Banking Committee that I blogged about earlier…
In a near record for turnaround time, we have cleaned up & posted the transcript for last week’s popular webcast: “Non-GAAP Disclosures: The SEC Speaks!” The audio archive is available via a link at the top of the transcript…
Don’t forget that the Corp Fin Staff may listen to your earnings call & issue non-GAAP comments – this was happening even before the arrival of the new CDIs. For example, see #4 in this comment letter for a 10-K review last year. This may be worth considering as you prepare your earnings call scripts…
This month marks the 50th anniversary of when President Lyndon Johnson signed the “Freedom of Information Act” into law. Go FOIA! Here’s a piece on FOIA’s history…
Tesla’s Travails: Road Test for FASB’s Materiality Proposals
Here’s a blog by Jack Ciesielski of “The Analyst’s Accounting Observer”:
About a week ago, Fortune’s Carol Loomis wrote the first story about the Tesla autopilot incident that claimed the life of its driver. Tesla CEO Elon Musk famously responded that the incident was “not material to Tesla” and that the story was “BS.” Since then, the Wall Street Journal has reported that the SEC is in the early stages of investigating whether or not the incident was a material fact that should have been disclosed to investors before a $2 billion stock sale.
It’s hard to see how it wasn’t a material factor for investors: if they’re buying Tesla stock, it’s not because Tesla cars have rich Corinthian leather in their seats. They’re buying Tesla stock for its promise of futuristic technology, be it the electrical power or the possibility of being a fully driverless car someday. If there’s an event that surfaces questions about the viability of those technologies, it would only be fair for investors to know that BEFORE they fork over cash for some of that future.
That’s where it is now – and it will be interesting to see where the SEC comes out on this. I can’t help but wonder how this would be disclosed in the footnotes of the financial statements under a pair of exposure drafts issued by the FASB that would grant more discretion to issuers in what they considered to be material matters to report. (My response is here; I wasn’t a fan.)
Given that Tesla already considered it a non-event, it probably wouldn’t be reported even if greater discretion was allowed. That’s why it will be interesting to see where the SEC stands on this – it might point up a difference in views on materiality between the two regulators. The SEC would want the FASB’s materiality concepts to hold up so they could apply them for their own purposes. Again, it’s tough to see how this series of events wouldn’t affect the judgment of a reasonable investor. Maybe the outcome will affect the FASB’s views on what they might create with their materiality proposal.
Yesterday, Corp Fin issued these two new CDIs relating to Form S-4 & A/B exchanges (Exxon Capital deals) – the two new CDIs are duplicative of each other:
1. How does serving in the Air Force serve you well in serving as a professor?
2. What are your favorite aspects of being a professor?
3. Least favorite?
4. How do you decide what to study?
5. What is the process to get a study out the door?
6. How do you feel about the recent changes in the insider trading laws?
7. What presently drives you mad about executive pay?
8. How do you feel about the latest accounting reforms?
Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
– How to Deal With Stock Options Between Signing & Closing
– The Examples
– Preliminary Considerations
– Economics of Option Treatment in Various Transaction Settings
– Section 409A Considerations
– Plan & Award Agreement Considerations
– Compensation Committees: Strategic Role in a Successful M&A Process
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
Here’s the intro from this blog from Manifest about the “Financial Services and General Government Appropriations Bill” for fiscal year 2017:
The US House of Representatives last week voted on a series of proposals designed to dismantle key aspects of Dodd Frank reforms. After June’s vote to propose regulation of proxy advisors and rescind the conflict minerals rule, the latest intervention on watering down shareholder rights and ESG removes:
– the SEC’s authority to enforce the CEO median pay ratio disclosure rules;
– the ability for the SEC to mandate companies disclose material climate-change risks; and
– the ability for SEC to give shareholders voting by proxy the ability to vote for a mix of of management and opposition board candidates on the same “univeral ballot card”. At present, only shareholders physically present at a meeting are allowed to vote for a mix of candidates from different slates. Shareholders voting by proxy must choose one full slate or another.
The proposals were put forward as “poison pill riders” to a financial-services agencies appropriations bill for the federal budget year beginning October 1. Although the bill was passed and sent to the Senate, the future of the most controversial aspects is uncertain. It is understood that due to the timing of the presidential elections, Republican leaders do not want to pass a budget bill that could lead to a presidential veto that they could not override. A previous vote to reduce SEC funding by $50 million was opposed by Senator John Boozman.
I did a quick Google search & couldn’t find these poison pill riders – but I did find this version of the bill, which would also bar the SEC from rulemaking on political contribution disclosures (Section 625 on page 134)…
Sean McKessy: SEC’s Chief of Whistleblower Office to Leave
On Friday, the SEC announced that its first Chief of its Whisleblower Office – Sean McKessy – will be leaving the SEC. Sean doesn’t yet know his next adventure…
Inline XBRL: Mock Sample
On Friday, the SEC posted a mock filing to illustrate the functionality of its Inline XBRL viewer. Here are FAQs about Inline XBRL…
Paul Dudek is a nice guy. He’s the quintessential nice guy. I doubt anyone has ever come away from an encounter with Paul & thought otherwise.
But of course, he’s much more than that. When you think of Corp Fin’s Office of International Corporate Finance, you can’t help but think of Paul. He served as Chief of that Office for 23 years – and if you’ve been around long enough to see the evolution of “globalization,” you realize that Paul has been serving in that role since the prairie days. And now he has left as noted in this SEC press release.
And serving in that role isn’t easy. You are dealing with the laws of hundreds of other countries. You are dealing with different cultures & expectations about how to resolve differences. You are dealing with language barriers. It’s a fascinating office – but it deals with complex matters & requires a diplomatic touch. That’s Paul all the way.
I’m sure Corp Fin will find someone admirable to fill Paul’s job – but I doubt anyone will ever be able to fill his shoes. He’s brilliant & an excellent securities lawyer on top of all that niceness. Luckily, Paul isn’t retiring – he’s moving over to Latham & Watkins’ DC office as noted in their press release…
ESG Advocates: Not A Pack of Sheep, More Like A Sheep Dog Pack
In the wake of yesterday’s Exxon proxy access vote, I read a recent post (“About Activist Unicorns and Sheep Pack Activism” on LinkedIn) on the activities of the As You Sow Foundation, in pressing BlackRock on executive compensation votes, describing the ESG Advocates as magical unicorns and as a sheep pack (as opposed to the wolf packs of activist hedge funds/investors).
I can understand how, at first blush, one might consider environmental groups (as well as religious investors, Taft-Harley and public funds) as goody-goodies focused on what they view as immoral, unethical and/or harmful behavior that companies need to end, irrespective of the financial impact on performance or investment returns. That however is only half the story and can lead to misperception with respect to the full spectrum of concerns these investors hold.
More on our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net 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:
– The “Proxy Access Bible”
– Shareholder Proposals: 49 Pages of Trends in ’16
– How to Write Bad MD&A
– Proxy Access Proposals: Most Likely to Gain Majority Support
– Proxy Advisor Reform: The Debate
The SEC’s pay ratio rule continues to pierce the consciousness of the general public. It was an answer on the game show – “Jeopardy!” – back on November 11th (there’s a fan-created database of archived Q&As from the show):
RULE OF LAW for $800: A 2015 SEC rule says companies must disclose the pay gap between workers & this 3-letter boss
And here’s another executive pay one from 1997:
A “GOLDEN” TREASURY for $600: It’s a big payment made to a prematurely terminated executive…
And the SEC made it on June 17th of last year too!
GOVERNMENT AGENCIES for $800: Leaving Wall St. & heading to Washington D.C., a lawyer never has to go outside, as D.C.’s Union Station connects directly to this regulatory commission on F Street
Don’t forget that you need to be gearing up to begin implementing the pay ratio rules this Fall as you need to consider what your pay ratio disclosures will look like well before you actually make them. Pay ratio will be a hot topic during our “Proxy Disclosure Conference” that annually draws 2000 of your peers. Register now and obtain a 10% discount!
House’s Proxy Advisor Bill: A Critic
Here’s a note from Sarah Wilson, CEO of Manifest (a proxy advisor in the UK) about the proxy advisor reform bill pending in the House that I have blogged about several times (here’s the latest):
Remember that so few companies have failed to earn majority support for say-on-pay in the United Kingdom because the proxy advisors there drive the process in a way that companies know what likely will pass – and what won’t.
The issue is that “yes, the investor group guidelines are largely public – but not everyone thinks they are good and have their own views.” But more importantly in the UK, we don’t need to resort to voting ‘against’ because (even though we have a very pro-shareholder legal framework):
– Voting isn’t mandatory per ERISA
– Most votes are binding and so therefore very robust – we CAN get rid of a director with a single AGM vote rather than wonder why after four votes nobody is doing much about it
– Company law rights haven’t been watered down by the securities regulators because our “company law” is a separate branch and firmly embedded with common law
– Investors would rather solve problems through engagement
– In the UK, we have 2 vendors who are non-recommendations focused: Manifest and IVIS.
Then there is the concern about: “We should at least worry that their advice might fail, just like the advice of the credit ratings agencies failed.” Well, if the law passes, then you effectively get issuer control over research – which is exactly why credit rating agencies DID fail.
Oh, the irony. Citizens United gives corporations free speech – but not the critics of the corporations. But the biggest question mark that I have is just where do companies get off with interfering with asset owners & managers freedom to choose and contract. And, as we have with common law, the freedom of quiet enjoyment of property rights? (Voting is a property right under UK common law). This is an infringement of an investor’s human rights (yes, investors have human rights as well as humans).
The proxy advisor reform bill is a truly ill-considered SLAPP suit and deserves to be exposed for what it is – a cowardly piece of lobbying by the Chamber of Commerce which daren’t criticize asset owners and managers, the providers of their capital.
Also see this blog from the CFA Institute railing against this House bill…
Study: CEO Golfing Harms Corporate Performance
As reported in this CNBC article (also see this Business Insider article) – a study investigated the relationship between CEO leisure time & company performance. Using golf as a proxy for leisure time activity, this study examined the US Golf Association records of 363 S&P 1500 CEOs over a four-year period. The study claims that more time spent on the golf course leads to lower performance & market valuations. Here’s an excerpt from the “Business Insider” article:
– Companies with CEOs in the top quartile of golf play (22 rounds or more per year) have lower operating performance and firm values
– Some CEOs in the database played more than 100 rounds in a year! (There are 365 days in a year)
– “While some golf rounds may serve a valid business purpose, it is unlikely that the amount of golf played by the most frequent golfers is necessary for a CEO to support her firm”
– CEOs play more golf the longer they are the CEO
– The number of golf rounds a CEO plays is negatively correlated with changes in firm profitability
– Overall, higher golf play is associated with a higher probability of CEO turnover
As noted in this Steve Quinlivan blog and this Ning Chiu blog, the SEC approved Nasdaq’s golden leash disclosure rule last Friday – just before it’s July 4th extended deadline. Here’s the 14-page order from the SEC. Both of those blogs were written before Nasdaq released Amendment No. 2 yesterday. Amendment No. 2 contains the actual rule language (starting on page 30). The new rule will be effective in approximately 30 days.
Here’s an excerpt from Cydney Posner’s blog, which she tweaked after Amendment No. 2 was released:
Rule 5250(b)(3) will require each listed company to disclose, by the date the company files its definitive proxy statement for its next annual meeting, the parties to and material terms of all arrangements between any director or nominee and any person or entity other than the company relating to compensation or other payment in connection with that person’s candidacy or service as a director. A company must make the required disclosure at least annually until the earlier of the resignation of the director or one year following the termination of the agreement or arrangement.
The accompanying interpretive material indicates that the terms “compensation” and “other payment” as used in the rule are not limited to cash payments and are intended to be construed broadly. The disclosure requirement encompasses non-cash compensation and other forms of payment obligation, such as indemnification or health insurance premiums. Note that the rule does not separately require the initial disclosure of newly entered arrangements so long as disclosure is made under the rule for the next annual meeting. The information must be disclosed either on or through the company’s website (in which case it must be continuously accessible) or in its definitive proxy statement.
Nasdaq also explicitly states that, if a company provides disclosure in a definitive proxy or information statement, including to satisfy the SEC’s proxy disclosure requirements, sufficient to comply with the proposed rule, the company’s obligation to satisfy the rule is fulfilled regardless of the reason that the disclosure was made.
No disclosure will be required for arrangements that:
– relate only to reimbursement of expenses in connection with candidacy as a director;
– existed prior to the nominee’s candidacy (including as an employee of the other person or entity) and the nominee’s relationship with the third party has been publicly disclosed in a definitive proxy or annual report (such as in the director or nominee’s biography); or
– have been disclosed under Item 5(b) of the proxy rules (interests of certain persons in connection with a proxy contest) or Item 5.02(d)(2) of Form 8-K (description of arrangements in connection with election of a new director) in the current fiscal year. (However, this disclosure would not obviate the need for the company to comply with its annual disclosure obligations under the rule.)
Nasdaq cites as an example of an agreement or arrangement falling under the exception for arrangements that existed prior to the nominee’s candidacy is a director or a nominee employed by a private equity or venture capital firm or a related fund, “where employees are expected to and routinely serve on the boards of the fund’s portfolio companies and their remuneration is not materially affected by such service. If such a director or a nominee’s remuneration is materially increased in connection with such person’s candidacy or service as a director of the company, only the difference between the new and the previous level of compensation needs to be disclosed under the proposed rule.”
So long as a company has undertaken reasonable efforts to identify all arrangements — including asking each director or nominee in a manner designed to allow timely disclosure — if the company then discovers an agreement or arrangement that should have been disclosed but was not, then the company can remedy the inadvertent failure to disclose by prompt disclosure after discovery of the error by filing a Form 8-K, where required by SEC rules, or by issuing a press release; in that event, the company will not be considered deficient with respect to the rule. However, remedial disclosure, regardless of its timing, would not satisfy the annual disclosure requirements. In all other cases, the company must submit a plan showing that the company has adopted processes and procedures designed to identify and disclose relevant agreements or arrangements, subject to approval by Nasdaq.
Nasdaq is also amending Rule 5615 to provide that the required disclosure of third-party payments to directors will be among the provisions allowing a foreign private issuer, upon satisfying specified conditions, to follow home country practice.
Life as a Compensation Consultant
As part of my “Big Legal Minds” podcast series – check out this 25-minute podcast, during which Blair Jones of Semler Brossy describes her vast experience on being a compensation consultant, including:
1. How did you wind up getting into the compensation consultant industry?
2. Can you give us a sense of what the compensation consultant industry is like?
3. Can you give us a sense of what different types of roles folks play within a consulting firm?
4. What are the least understood things that you do?
5. What are the hardest parts of your job?
6. What are the best parts of your job?
7. What are consultants best at? Less effective at?
8. How has the job changed since you first got into the industry? How do you expect it might change over the next several years?
9. What advice would you give someone that is just joining a consulting firm?
Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
Transcript: “The Top Compensation Consultants Speak”
We have posted the transcript for our recent CompensationStandards.com webcast: “The Top Compensation Consultants Speak.”
Since we’ve still been getting so many questions about what the SEC Staff expects in the wake of Corp Fin’s recent issuance of new non-GAAP CDIs, we’ve calendared a new webcast – “Non-GAAP Disclosures: The SEC Speaks!” – that will be held tomorrow, Wednesday, July 6th with Mark Kronforst, the Chief Accountant of the SEC’s Division of Corporation Finance! Dave Lynn & Meredith Cross will join Mark as they parse the questions that Corp Fin has been receiving since the CDIs – as well as the type of comments that the Staff has been issuing (those comment letters aren’t public yet since the files aren’t “closed”).
If you can’t make the webcast live, the audio archive will be posted immediately after the program ends – and a transcript will be posted about 10 days after that. If you’re not a member of TheCorporateCounsel.net, try a “Half Price for Rest of ’16” no-risk trial now…
Non-GAAP Measures: 60% of Proxy Statements Include Them
As noted in this Audit Analytics blog, nearly 60% of proxy statements include non-GAAP financial measures this year – up from a 20% rate in ’09. Thus, the new Corp Fin CDIs aren’t merely directed at earnings releases, 10-Qs and 10-Ks. Learn more in our oodles of memos about the new CDIs posted in our “Non-GAAP Disclosures” Practice Area…
The Passing of Former SEC Commissioner Irving Pollack
I’m sad to note that Irving Pollack has passed away. As noted in this statement by SEC Chair White, Irving was a dynamo – he worked at the SEC for 34 years, in many high level jobs including SEC Commissioner, Director of Market Reg and Director of Enforcement. He was Enforcement’s first Director! Here’s an excerpt from the statement:
Once called “a father of modern securities regulation” by the New York Times, Irving was a man of incredible integrity who was truly passionate about securities law. Irving recognized the immense responsibility of the Enforcement Division to ensure honest business practices and pursued that goal vigorously. Each year, the SEC presents the Irving M. Pollack award to an enforcement staff member who demonstrates fairness and compassion as well as a dedication to public service and the SEC.
Here’s a note from Craig Sparks:
I was on the Staff at the SEC from August 1974 until November 1977. I have an absolutely indelible memory of Commissioner Pollack. I was fortunate to be in a car pool that had a parking pass for the underground parking facility at 500 North Capitol. One day as we were pulling into the facility, I noticed a middle-aged man in white shirt, dark suit, conservative tie bent over picking up trash and made some snarky comment to the others in our car about the dress code for janitors. Just then the man stood up and we all saw that he was Commissioner Pollack. He so loved the SEC that he could not tolerate trash on the floor of the parking garage.
I have told that story many times both in my law firm and in my entrepreneurial ventures to illustrate the point that we are all responsible for everything that goes on in our firm or business. No one should walk by trash on the floor without picking it up, no one should walk past an untended client or other visitor without offering assistance. We are all in this together. That Mr. Pollack was a Commissioner brings home the point better than anything else I could say.
Our July Eminders is Posted!
We have posted the July issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Cross another item off my bucket list: “Being forced to wear a borrowed jacket at a restaurant.” Thanks to Skadden’s Brian Breheny & Marc Gerber for that fine dinner out at the beautiful Broadmoor in Colorado! Taking my own advice about “how to maximize your conference experience,” here’s the ten new people I met during this year’s Society of Corporate Secretaries conference:
Johnson & Johnson’s Lacey Elberg
Whirlpool’s Bridget Quinn
Former SEC Commissioner Dan Gallagher & son
ConocoPhillip’s Shannon Kinney
Denny’s Scott Melton
Alston & Bird’s Julie Mediamolle
Eversource Energy’s Richard Morrison
Intelligize’s Dana Gerk
Davis Polk’s Laura Turano & Joele Frank’s Joele Frank
