Monthly Archives: February 2018

February 28, 2018

Section 162(m): Performance-Based Comp’s Afterlife

Whether there’s life after death is one of those great unanswerable questions. . .Well, I mean except for Section 162(m)’s performance-based comp provisions – which, despite their untimely demise last December, we can say with certainty are enjoying a robust afterlife in proxy disclosures.

Over on “The Advisors’ Blog,” Broc’s already noted that the plaintiffs’ bar is keeping a watchful eye on performance-based comp proxy disclosures in the wake of tax reform’s changes. But beyond that, some high-profile companies – like Disney & John Deere – have recently filed proxy statements asking shareholders to re-approve existing compensation plans in order to comply with Section 162(m)’s 5-year shareholder re-approval requirements for performance-based comp.

If performance-based comp’s deductibility is a goner, why do that?  This Debevoise memo suggests one possible reason for this portion of 162(m)’s afterlife:

Grandfathered arrangements that rely on the performance-based exception must continue to comply with the formal procedures previously applicable to performance-based compensation. For example, if an executive had a contractual right as of November 2, 2017 to receive a performance-based award in the future, the performance criteria applicable to such award may need to be re-approved by shareholders if, when the award is granted, five years have passed since the last shareholder approval.

Many tax lawyers expect that the IRS may ultimately decide not to require shareholder reapproval for grandfathered awards – but it hasn’t issued transition rules yet, and some companies may have decided that including these proposals in their proxy statements is the prudent thing to do.

Transcript: “Audit Committees in Action – The Latest Developments”

We have posted the transcript for the recent webcast: “Audit Committees in Action – The Latest Developments.”

Enforcement Penalties: Uncle Sam’s No Longer Picking Up Part of the Tab

The new tax legislation makes it tougher to deduct payments made in connection with the resolution of government enforcement actions. Under prior law, Section 162(f) of the Internal Revenue Code allowed deductions for a fairly broad category of payments. This excerpt from a recent Sidley memo provides an overview of the new regime:

Section 13306 of the Act completely repeals the prior language of Code Section 162(f) and replaces it with a general prohibition of business expense deductions for any payments made to or at the direction of a government, a governmental entity or certain nongovernmental self-regulatory entities in connection with a violation of law or an investigation involving a potential violation of law.

However, taxpayers continue to be allowed deductions for payments that they can establish “constitute restitution(including remediation of property) for damage or harm” related to the violation or potential violation of law or that were made “to come into compliance with any law which was violated or otherwise involved” in an investigation.

Nevertheless, amounts paid to reimburse the costs of investigation or litigation are not deductible as restitution or otherwise. Code Section 162(f)(2)(B). Furthermore, as a prerequisite to establishing the right to the remaining allowable deductions, the court order or settlement agreement involved must identify the amounts paid as restitution or payments made to come into compliance with applicable law. Otherwise, no deductions are allowed regardless of the
nature of the payments.

The governmental entity or SRO involved in the action also has to file an information return with the IRS specifying the amounts that are deductive. The new provisions apply to proceedings involving all federal, state & local enforcement agencies, as well as non-governmental enforcement agencies, such as SROs.

This Cleary blog has more on this topic, together some advice on negotiating settlement agreements with the government in order to preserve deductibility.  One interesting suggestion – companies should consider settling civil class actions early & voluntarily repaying victims for their loss and then arguing that the repayment also satisfies any separate disgorgement obligation to a government.

John Jenkins

February 27, 2018

“Testing the Waters”: Everybody into the Pool?

SEC Chair Jay Clayton has made invigorating the sluggish IPO market one of his top priorities.  So far, the SEC’s most high-profile action on this front during his tenure has been to permit all companies – not just emerging growth companies – to make confidential filings of draft IPO registration statements.

Now, this WSJ article says that the SEC may take another step, and allow all companies, regardless of size, to “test the waters” before filing an IPO registration statement.  The ability to “test the waters” was provided to EGCs as part of the JOBS Act – and this excerpt from Cydney Posner’s recent blog provides an overview of what it allows companies to do:

The testing the waters provisions in the JOBS Act significantly relaxed “gun-jumping” restrictions by permitting an EGC, and any person acting on its behalf, to engage in pre-filing communications with qualified institutional buyers and institutional accredited investors. This relaxation of the gun-jumping rules allows companies to reduce risk by gauging in advance investor interest in a potential offering.

Prior to the JOBS Act, only WKSIs could engage in similar testing-the-waters communications. “Test-the-waters” communications can be oral or written, made before or after filing a registration statement, in connection with an IPO or any other registered offering.However, the only permitted communications are those made to determine whether the specified investors might have an interest in a contemplated securities offering.

As Broc blogged at the time, allowing all companies to “test the waters” was one of a slew of recommendations aimed at improving the capital markets made by the Treasury Department last October – and you may want to check out that list for other potential “coming attractions.”

Here’s an article from MarketWatch’s Francine McKenna with more background on the SEC’s efforts to make life a little easier for IPO candidates.

Warren Buffett’s Annual Letter to Shareholders

A few days ago, Warren Buffett released his annual letter to shareholders. As usual, this went completely unnoticed by the financial press – barely 50,000 articles & blogs have been written on it to date – so I’m sure you’re hearing about this for the first time from me.  There’s no need to thank me, it’s just part of the job.

Anyway, here’s a selection of some of the media reports on the Oracle of Omaha’s latest epistle:

– CNBC’s “Highlights from Warren Buffett’s Annual Letter”
– Bloomberg’s “Lessons from the Oracle: Warren Buffett’s Shareholders Letter, Annotated”
– MarketWatch’s “7 Highlights from Warren Buffett’s Berkshire Hathaway Investor Letter”
– NYT’s “Buffett’s Annual Letter: Berkshire Records $29 Billion Gain from Tax Law”
– Fortune’s “Buffett Warns That Safe-Looking Bonds Can be Risky”

Stock Buybacks: Here Comes the Backlash?

Warren Buffett’s recent pronouncements aren’t limited to his annual letter.  Berkshire Hathaway’s sitting on a pile of cash – $116 billion to be specific.  Yesterday, Buffett told CNBC that Berkshire-Hathaway was more inclined to repurchase stock with its excess cash than to pay dividends.

He’s got a lot of company. Stock buybacks have long been corporate America’s favorite bit of financial engineering – and this ValueWalk article says that 2018 could be the biggest year for them ever. But despite their continuing popularity, criticism of buybacks appears to be on the rise. For instance, this Bloomberg article says that buybacks are a big contributor to the market’s recent volatility. Here’s an excerpt:

Some market watchers are adding corporate share repurchases to the list of reasons for last week’s turmoil, which already included rising interest rates, higher inflation, growing government debt, volatility-linked investment funds and Washington instability. More significantly, those pointing the finger at buybacks say continued corporate stock purchases — which, unlike some of those volatility funds, survived the brief market downturn — will make the next one far worse.

Regardless of their impact on the market, the optics of buybacks are increasingly bad – this Washington Post op-ed claims that when it comes to using the additional cash flowing in from tax reform, companies are planning to spend 30x as much on buybacks as on wage increases.

John Jenkins

February 26, 2018

SCOTUS: Whistleblowers Must Go to SEC Too

Last week, in Digital Realty Trust v. Somers (US Sup. Ct.; 2/18), the US Supreme Court resolved a split between the circuits & held that in order to qualify for “whistleblower” protection under Dodd-Frank, an employee must reach out to the SEC – just blowing the whistle to an employer isn’t enough.

This Holland & Hart memo says that the case is a “mixed bag” for employers. This excerpt explains:

On the one hand, the decision is good news for employers because the ruling narrows the scope of protections available under Dodd-Frank’s anti-retaliation provisions. Dodd-Frank contains multiple plaintiff-friendly provisions – including immediate access to federal court, a generous statute of limitations (at least six years), and the opportunity to recover double back pay. Yet these benefits are now only available to a, presumably, smaller number of potential plaintiffs who actually report to the SEC.

On other hand, there are many reasons for employers to be wary of the ruling. Rather than incentivize employees to report their suspected concerns internally, today’s decision heavily encourages potential whistleblowers to report their concerns directly to the SEC – before any adverse action occurs, but also before employers have had the chance to hear, investigate, and address their potential concerns. Indeed, when an internal report does arrive, it may be safest for employers to assume that the SEC already has that same report.

The Court’s decision applies only to whistleblower status under Dodd-Frank.  Internal whistleblowers may still assert retaliation claims under Sarbanes-Oxley, which also provides significant economic downsides for companies that retaliate. We’re posting the flood of memos in our “Whistleblowers” Practice Area.

Time for BlackRock to “Stand & Deliver?”

BlackRock made a big splash last month when CEO Larry Fink called on companies to serve the greater good in addition to serving their bottom lines. Nice words – but now, this “Breaking Views” column calls on the world’s largest asset manager to back them up with its actions:

A day after the latest American mass shooting involving a military-style assault rifle, it is worth reviewing Fink’s words. BlackRock is the largest owner of shares in publicly traded manufacturers of what is arguably the most lethal consumer product of any kind. The firm’s funds hold 16 percent of Sturm Ruger, 12 percent of Vista Outdoor and around 11 percent of American Outdoor Brands, the parent of Smith & Wesson, according to Eikon.

BlackRock’s holdings are driven by its big indexing business, but it is not alone. Vanguard, which oversees $4.5 trillion of other people’s money, is the second-biggest owner of Sturm Ruger and a close third in the registers of AOB and Vista. Fidelity Management tops the roster at Vista with 15 percent, but doesn’t figure in the other two.

These increasingly engaged broad-brush investment firms, as well as more focused Wall Street advisers, could start with a simple thesis. Something common to most of the shooting horrors in recent years is the AR-15 class of semi-automatic weapons. In a country with as many firearms as people, eradicating murders, suicides and accidental deaths may never be possible. But reducing the lethality of those who would do harm is achievable by making these weapons – which were adapted from versions designed for military use on battlefields – harder to purchase or banning them outright, as some states have already done.

Denying the purveyors of assault rifles the financial means to produce and distribute them is a power that financial firms do possess. Many banks and brokers already avoid the gun industry, which scores low on most so-called ESG screens – for environmental, social and governance – in part because of the regular controversies surrounding the lethal misuse of their products.

Being pressured to weigh-in on one of the most controversial issues in American society is probably not what BlackRock had in mind when it announced its new emphasis on the need to serve the greater good – but my guess is that it’s going to get lots of input about what “the greater good” entails from here on out.  Looks like the ball’s in your court, BlackRock.

Transcript: “How to Handle Post-Deal Activism”

We have posted the transcript for our recent webcast: “How to Handle Post-Deal Activism.”

John Jenkins

February 23, 2018

Proxy Access: Mother Theresa Placed on a Ballot?!?

Well, not quite. But we’re going to the “Wayback Machine” to remember this shareholder proposal from 1990 submitted by John Jennings “JJ” Crapo to the Bank of Boston. Corp Fin allowed the proposal to be excluded. And it was a humdinger. The proposal asked the company to allow any shareholder – who met the Rule 14a-8 ownership threshold – to place one or more director nominees on the ballot. So it was ahead of its time on the topic of proxy access. Albeit with a lower ownership threshold than anyone could imagine.

But the real joy with this thing is found in the “Supporting Statement.” It rambles quite a bit, with a little bit of everything in there for everyone. Annual medical and “emotional” fitness evaluations for each director. A question whether the board’s priest provides it with chaplaincy services. A push to have Desmond Tutu, Mother Theresa and Lech Walesa sit on boards.

Given the pervasiveness of mindfulness these days – for which I am a big proponent – my favorite is this excerpt from the “Supporting Statement”:

I do think of my relations, Godparents, former teachers, pastors, and friends and neighbors usually daily three to four hours. Friends, neighbors, and co-workers are more important than Family.

Thanks to Intelligize for making it easy to find this gem – and for their permission to post the no-action letter!

10-K Summaries: Not All the Rage

Tina Bacce & her colleagues at Troutman Sanders recently reviewed how many companies have taken advantage of Item 16 to the Form 10-K – the new item that “permits” inclusion of a summary in a Form 10-K. They looked at the Form 10-Ks containing Item 16 filed to date – all for Fortune 500 companies – and only two included a summary:

Pfizer’s summary – it really is “Pfizer at a Glance” and consisted of a table of data that you might see in an annual report.
3M’s summary – appears to just call the hyperlinked table of contents a “summary.”

Don’t expect this “trend” to accelerate…

Was This “Interim Final” Rule More Final Than Interim?

Speaking of Item 16 of Form 10-K, Keith Bishop covers an interesting topic in this blog – did the SEC go to “final” for it’s Item 16 rulemaking already…

Broc Romanek

February 22, 2018

SEC Approves Cybersecurity Guidance! Our Big Webcast Coming Soon!

Despite a dose of drama when the SEC cancelled its open Commission meeting, the SEC released its 24-page interpretive release on cybersecurity disclosures in the early afternoon yesterday by seritim.

Here’s a statement by SEC Chair Clayton that indicates that Corp Fin will be reviewing disclosures to help decide whether further guidance – or rulemaking! – is necessary. And these statements by Commissioner Jackson & Commissioner Stein are a bit critical of the new guidance.

We’ll be posting the inevitable flood of memos about the guidance in our “Cybersecurity” Practice Area. I’m sure many will analyze the “duty to update” discussion in the guidance…

Our Coming “Cybersecurity” Webcast: Meredith, Keith & Dave!

Join us on Wednesday, March 14th for the webcast – “The SEC’s New Cybersecurity Guidance” – to hear WilmerHale’s Meredith Cross, Ropes & Gray’s Keith Higgins and Jenner & Block’s Dave Lynn discuss the SEC’s brand new cybersecurity guidance.

When is the SEC Required to Hold an Open Commission Meeting?

So the SEC approved this interpretive guidance by seritim rather than in the open Commission meeting context. Which really doesn’t matter – except the sudden cancellation of the open meeting made it feel like the guidance wasn’t coming out. The cancellation was probably related to another matter on the open meeting agenda – some liquidity rules that most of us luckily don’t care about. Read more in this blog about why the SEC isn’t required to hold an open meeting to approve rules or guidance…

Poll: Did Release of Cybersecurity Guidance Have More Drama Than the Olympics?

Please participate in this anonymous poll:

web polls

Broc Romanek

February 21, 2018

Cancelled: Today’s “Cybersecurity Disclosure” Open Meeting

Just 90 minutes before the meeting was supposed to start, the SEC posted a simple note saying today’s open Commission meeting – which would have given us interpretive guidance on cybersecurity disclosure – has been cancelled. A few hours later, the SEC’s interpretive guidance was posted. I’ll be blogging about it manana…

February 21, 2018

Three Women on Every Board! That’s Progress?

I blogged a few weeks ago about BlackRock’s desire for a quota of two women on every board. I’m glad that BlackRock is advocating for two women on every board – but I’m sad that an investor has to advocate for such a thing as quotas at all. There should be more than two women on every board – but ideally it should happen naturally, just as gender diversity has happened in so many professions over the past 40 years or so. We’ll get there – but unfortunately it’s pretty clear that it won’t happen “naturally” as progress is moving at a glacial pace.

Anyway, Allen Matkins’ Keith Bishop told me about this bill recently introduced in California that would require at least three women on a board when the authorized number of directors is six or more. This bill would apply to public companies with their principal places of business in California, to the exclusion of the law of the state of incorporation…

The SEC’s Home Page Redesign: Mobile Friendly

As someone who studies site design (yes, I design all of our sites), I am always curious when the SEC redesigns its home page. It’s only been 2 years since the last redesign – and the prior redesign was four years before that.

The new design of the SEC’s home page is particularly suited for viewing by mobile devices. Since studies show that a majority of online traffic comes through mobile devices, it’s logical that the SEC would go this route. I changed the design of this site’s home page so it was optimal for mobile – and many folks weren’t happy so I reversed course & went back to the old design!

The SEC’s redesigned home page continues to cater to retail investors – as well as tout the new Chair’s objectives that he discussed in his first speech a few months ago. For those of us that rely on the SEC’s rules, regulations & guidance, the tabs at the top continue to be of the utmost importance…

Just Announced! The “Section 16 Forums”

In response to those doing Section 16 work who have told us that they want to network with those similarly-situated, we are holding two “Section 16 Forums.” Hosted by Alan, these are one-day events for all Section 16 practitioners – not just beginners.

This pair of “Section 16 Forums” are:

Washington DC on Tuesday, June 19, 2018
San Francisco on Tuesday, June 26, 2018

You can “register now.” The cost is only $295.

Broc Romanek

February 20, 2018

Edgar Problems: The Crisis Continues

I’m calling it a “crisis” because periodic problems continue to happen – and the SEC continues to provide very little (if any) transparency around what is going on with Edgar. The last time that I blogged about Edgar problems was October – when I heard that offerings were being delayed and there were fee problems. I heard about this from a number of members – but the SEC never said a word about it.

Now I’ve heard through the grapevine that the filing deadline for Schedule 13G amendments on Valentine’s Day caused some rough sledding for Edgar. Form 5s were due then too. Companies with 8-Ks, etc. couldn’t get their filings through on Edgar. Again, not a word from the SEC. Same story told in these old blogs: “Edgar is Down? (Crickets)” – or this one: “EDGAR is Down”: A Familiar Refrain?

I’ve blogged about a simple solution for years – that the SEC launch an Edgar blog in which they indicate when Edgar is experiencing issues. And they then post follow-up blogs when the issues are resolved. Without this transparency, we are left to assume the worst. And given the high-profile hacking problems that the SEC has faced over the past year, you would think they would want to improve how they are perceived when it comes to handling this type of crisis communication…

Why am I so invested in this issue? Trying to save the SEC’s reputation I guess. Edgar is the most important asset that the SEC has – the market depends on it. And it’s ironic that this lack of disclosure is from an agency tasked with eliciting disclosure – not to mention that the SEC will be issuing guidance to companies tomorrow about how they should disclose hacks. And as John blogged recently, the SEC’s proposed budget seeks to boost its own cybersecurity resources…

Corp Fin Departures: Karen Garnett

Associate Director Karen Garnett has announced that she will depart Corp Fin after 23 years in the Division. No word yet on her next destination…

By the way, former Corp Fin Chief Accountant Mark Kronforst has joined EY’s National office in DC…

Transcript: “Tax Reform – What’s the Final Word?”

We’ve posted the transcript for the recent webcast: “Tax Reform: What’s the Final Word?”

Broc Romanek

February 16, 2018

SEC to Issue Cybersecurity Guidance on Wednesday!

Perhaps a long time coming, as noted in this Sunshine Act notice, the SEC will hold an open Commission meeting on Wednesday to issue an interpretive release providing cybersecurity disclosure guidance. The last cybersecurity guidance came from Corp Fin – not the Commission itself – back in 2011. Just this week, Commissioner Stein delivered a speech noting that current cybersecurity disclosure from companies was insufficient.

Not sure of the source & accuracy of this article, but the “SD Times” seems to know what will be in the interpretive guidance. Here’s an excerpt:

The updates are expected to take effect in the first and second quarter of this year, and it will require that investors are notified of all data breaches, instead of only notifying them of major cyber attacks.

The new update will include rules about sending timely breach notifications to senior management. Secondly, the upcoming guidance is expected to address how firms should disclose cybersecurity events that represent a material risk to their investors. In addition, it will provide information on how firms can create a blackout to prevent insider trading following a cybersecurity event.

Kyle Moffatt Named Corp Fin’s Chief Accountant

Yesterday, Corp Fin announced that Kyle Moffatt would be the Division’s Chief Accountant. Not surprising given that Kyle has been serving in that capacity since Mark Kronforst left last month.

Transcript: “Alan Dye on the Latest Section 16 Developments”

We have posted the transcript for the recent webcast: “Alan Dye on the Latest Section 16 Developments.”

Broc Romanek

February 15, 2018

Should We Lose the 10-Qs?

In recent years, some prominent governance commentators have advocated that the SEC follow the lead of EU & UK regulators and eliminate mandated quarterly reporting.  A recent study published in the March issue of “The Accounting Review” says that there’s empirical data supporting the idea that the SEC should “lose the 10-Qs.”  Here’s an excerpt from a recent American Accounting Association press release on the article:

With regulatory reform a high priority for the Trump administration, a new study focuses on one possible target – and it’s a fat one – the half-century-old SEC rule mandating the filing of quarterly financial reports by public companies.

The EU and UK no longer require quarterly financials, and the question of whether the SEC should follow suit has evoked heated debate. While there has been plenty of theorizing about the subject, what has been absent until now is large-scale evidence of the advantages less frequent reporting offers to companies and their shareholders. The research challenge: How to compare the effect of reporting frequency when all U.S. companies have to file quarterly.

Now a study in “The Accounting Review,” published by the American Accounting Association, finds a way around this problem by analyzing evidence from periods when reporting-frequency mandates changed in the U.S., permitting before-and-after comparisons to be made.

While acknowledging that, yes, there may very well be advantages in increased reporting frequency – such as lower cost of capital and more information for investors – the study concludes, crucially, that shorter reporting intervals engender “managerial myopia” which finds expression in a “statistically and economically significant decline in investments” along with “a subsequent decline in operating efficiency and sales growth.”

Therefore, “our evidence…supports the recent decision by the EU and the UK to abandon requiring quarterly reporting for listed companies with an apparent intent to preventing short-termism and promoting long-term investments,” write the study’s authors, Rahul Vashishtha and Mohan Venkatachalam of Duke University’s Fuqua School of Business and Arthur G. Kraft of the Cass Business School of City University London.

The study says that prior to the reporting mandates, firms that reported results at longer intervals had greater annual sales, annual sales growth and return on assets than firms that reported more frequently. By contrast, in the period three to five years post-mandate, sales and sales growth were about the same for the two groups, while the difference in return on assets narrowed significantly.

Of course, one of the truisms of corporate governance research seems to be that for every study that says “white,” there’s another that says “black.” This MarketWatch article from last year suggests that the issue of reporting frequency is no exception.

DOJ’s New Policy Restricting Use of Agency Guidance

Late last year, Attorney General Sessions issued a memo announcing his intention to curb the practice of “rulemaking by guidance.” This King & Spalding memo says that the DOJ has acted to implement the AG’s directive. Here’s an excerpt summarizing the new policy:

On January 25, 2018, Associate Attorney General Rachel Brand issued a memorandum significantly restricting Department of Justice civil litigating units’ use of executive agency guidance documents in affirmative civil enforcement actions. The Brand Memo outlines new policies for cases in which an executive agency previously issued relevant non-binding guidance, including:

– Reinforcing the long-standing principle that guidance documents are just that—recommendations for regulated industries;

– Emphasizing that guidance does not bind regulated parties or create new legal obligations beyond the scope of existing statutes and regulations;

– Precluding the Department from “effectively convert[ing] agency guidance into binding rules”; and

– Preventing Department lawyers from using noncompliance with guidance to establish violations of law.

The Brand Memo’s potential impact is very broad, and it will influence any DOJ investigation that relies heavily on regulatory agencies’ non-binding interpretive guidance, but the King & Spalding memo suggests that it may have a particularly significant impact in the life sciences sector – where DOJ attorneys have long leveraged guidance from the DHS’s Office of the Inspector General and the FDA to support the government’s claims.

Nasdaq Proposes Changes to Shareholder Approval Rule

This Morrison & Foerster blog highlights a recent Nasdaq proposal that would tinker with the rules governing when listed companies would have to go to their shareholders for approval of new stock issuances. Here’s an excerpt summarizing the proposed changes:

The proposal would, among other things:

– Amend the measure of “market value” in connection with assessing whether a transaction is being completed at a discount from the closing bid price to the lower of: the closing price as reflected by Nasdaq, or the average closing price of the common stock for the five trading days preceding the definitive agreement date;
– Refer to the above price as the “Minimum Price,” and existing references to “book value” and “market value” used in Rule 5635(d) will be eliminated; and
– Eliminate the references to “book value” for purposes of the shareholder vote requirement.

For some Nasdaq companies, this is kind of a big deal. Currently, listed companies need shareholders to sign off on any financing transaction (other than a public offering) that would result in the issuance of 20% or more of their outstanding shares at a price less than the greater of book or market.

Changing the rules to eliminate the reference to book value and shake out some of the effects of market volatility will enhance companies’ ability to raise private money quickly – and doesn’t seem to do violence to shareholders’ interests either.

John Jenkins