September 6, 2016

Non-GAAP: Here Comes SEC’s Enforcement!

We recently learned that some companies have been contacted by the SEC’s Division of Enforcement concerning their non-GAAP disclosure practices.  Enforcement’s interest appears to focus on Item 10(e) of Regulation S-K’s requirement that companies disclosing a non-GAAP measure in SEC filings and earnings releases must also present the most directly comparable GAAP measure with equal or greater prominence.

The disclosures being called into question were made in earnings releases – and predate the issuance of Corp Fin’s updated CDIs in May. Enforcement’s interest does not appear to have been prompted by the comment letter process, but instead seems to be the result of its own initiative. Could we be looking at a new sweep?

Although the disclosures that have been questioned were made within the last year, the companies under scrutiny are being asked to provide relevant documents covering multiple years. They are also being asked to identify any other instances of Reg G violations beyond those cited by Enforcement.

Public Benefit Corps: Pros & Cons

This Gibson Dunn memo discusses the pros & cons of the “public benefit corporation,” an alternative entity that is now an option in 30 states, including Delaware:

Although state corporate law statutes and the tax code treat PBCs as for-profit enterprises, the legal focus of this new corporate model contrasts with that of traditional corporation, which focuses solely on maximizing shareholder wealth. The PBC laws are designed to empower the board of directors to consider additional stakeholders alongside shareholders, and leave it to the board to determine the relative weight to place on shareholders’ and other stakeholders’ interests.

The advantages of the PBC form include more leeway to consider non-shareholder constituencies, possible increased interest from socially conscious investors, and additional takeover protection due to statutory limits on mergers with non-PBC entities. Disadvantages include possible hesitancy among traditional investors, legal uncertainties, additional reporting obligations, and complexities involving governance of PBC subsidiaries owned by traditional entities.

A number of large companies are experimenting with PBCs -and although there are no publicly-traded PBCs, that will likely change soon. Here’s a snapshot of the current PBC landscape:

As of August 2016, over 4,000 companies have formed as or converted to PBCs, including well-known consumer companies like Patagonia, Kickstarter, and Method Products. In August 2013, just after Delaware’s PBC statute became effective, Campbell Soup Company caused its newly acquired subsidiary, Plum Organics, to reincorporate as a PBC. Other public companies are similarly considering acquiring PBCs or converting subsidiaries to PBCs.

There are no publicly traded PBCs, but Etsy, which is certified as a “B Corp” by the non-profit entity B Lab, has gone public. According to B Lab rules, Etsy must convert to a Delaware PBC by August 2017 to maintain its certification.

You Have to Blow a Whistle to be a Whistleblower

This recent blog from “Jim Hamilton’s World of Securities Regulation” flags an interesting new federal court decision addressing what is & isn’t “whistleblowing.” The case – Verfuerth v. Orion Energy Systems – involves a pretty odd situation. As the court explained:

This case presents the unusual scenario in which a CEO claims to have been a “whistleblower” about his company’s failure to disclose material facts to shareholders during the same period he himself was certifying that his company’s disclosures were complete.

This case addressed the former CEO’s claim that the board terminated him for blowing the whistle on alleged securities fraud involving the company. The court was skeptical of his fraud claims – but it also believed that the whistle was never blown. It determined that the CEO’s allegations were premised solely on advice that he gave the board during internal discussions. Absent evidence that he communicated these concerns to the SEC, that wasn’t enough:

In sum, Verfuerth seems to have voiced disagreements with various board members about the company’s disclosure obligations, but simply telling someone he thinks they should disclose information is not blowing the whistle on anything. Essential to the concept of whistleblowing is the reporting of another person’s conduct to an appropriate entity, and there is no evidence that such activity occurred here.

John Jenkins