Monthly Archives: May 2018

May 16, 2018

Litigation Financing: Senate Bill Would Mandate Disclosure

We’ve previously blogged on “The Mentor Blog” about the growth in 3rd party litigation finance.  Now, Kevin LaCroix blogs that legislation introduced by Senate Republicans would mandate disclosure of these financing arrangements.  Here’s an excerpt summarizing the bill:

On May 10, 2018, U.S. Senator Chuck Grassley, the Chairman of the Senate Judiciary Committee introduced The Litigation Funding Transparency Act of 2018, which would require the disclosure of litigation funding in class and multidistrict litigation in federal courts. The draft bill is co-sponsored by Senators Thom Tillis and John Cornyn.

The bill has two operative provisions, one applicable to class action litigation and the other applicable to multidistrict litigation. The gist of the bill is that it would require class counsel and counsel for a party asserting a claim in a multidistrict lawsuit to disclose to the court and all other parties “the identity of any commercial enterprise … that has a right to receive payment that is contingent on the receipt of monetary relief … by settlement, judgment, or otherwise.”

The legislation also would require counsel to “produce for inspection or copying … any agreement creating the contingent right.” The mandated disclosure must take place not later than the later of ten days after execution of the agreement or the time of service of the action.

The Senate Judiciary Committee’s press release announcing the bill’s introduction notes that “third party litigation funding is estimated to be a multi-billion dollar industry but is largely unregulated and subject to little oversight, fueling concerns that such agreements create conflicts of interest and distort the civil justice system.” The proposed legislation is intended to promote transparency & improve oversight by establishing a uniform disclosure rule that would apply to all class actions and MDL proceedings in federal courts.

GDPR Enforcement: How Will It Work for US Companies?

A lot of companies with European operations have been gearing up to comply with the EU’s new “General Data Protection Regulation” or “GDPR.” Some U.S. companies are undoubtedly asking, “so if we don’t comply, what’s the EU going to do?”

This Womble Bond Dickinson memo says that the answer depends on the particular circumstances of each company. Here’s an excerpt:

– For US companies with a physical establishment in the EU – the GDPR can be enforced directly against them by EU regulators.

– For US companies subject to the GDPR that lack a physical presence in the EU – a local EU representative must be appointed unless an exemption in Article 27 applies. This EU representative may be held liable for non-compliance of overseas entities, although the contract with the representative may shift liability back to the US company.

– For US companies with no EU physical location or local representative – EU regulators will have to rely on US cooperation or international law to punish GDPR noncompliance.

Transcript: “The Latest on ICOs/Token Deals”

We have posted the transcript for our recent webcast: “The Latest on ICOs/Token Deals.”

John Jenkins

May 15, 2018

Parallel Investigations: DOJ Throws Flag for “Piling On”

Companies on the receiving end of enforcement proceedings involving multiple agencies or jurisdictions have long complained about “piling on” – the government’s assessment of penalties without considering those that have already been imposed by other authorities for the same conduct. This Paul Weiss memo says that Deputy AG Rod Rosenstein announced last week that the DOJ has adopted a new policy designed to address these concerns. Here’s an excerpt with some of the details:

In a speech announcing the new policy, DAG Rosenstein referred to the “piling on” of fines and penalties by multiple regulators and law enforcement agencies “in relation to investigations of the same misconduct.” DAG Rosenstein noted that the “aim” of the new policy “is to enhance relationships with our law enforcement partners in the United States and abroad, while avoiding unfair duplicative penalties.”

Specifically, the new policy requires DOJ attorneys to “coordinate with one another to avoid the unnecessary imposition of duplicative fines, penalties and/or forfeiture against [a] company,” and further instructs DOJ personnel to “endeavor, as appropriate, to . . . consider the amount of fines, penalties and/or forfeiture paid to federal, state, local or foreign law enforcement authorities that are seeking to resolve a case with a company for the same misconduct.”

The memo points out that the DOJ has left itself a lot of “wiggle room” under the policy. Among other things, the policy does not describe the extent to which parties will be given “credit” for fines paid to other regulators, and allows for consideration of subjective criteria, such as the “egregiousness of a company’s misconduct,” which could have an impact on its practical application. We’re posting memos in our “White Collar Crime” Practice Area.

IPOs: CII Asks Companies to Stop “Dual Class” Tempting Investors

We’ve previously blogged about investor – and CII – disdain for dual class capital structures. Last month, the CII sent letters to two prospective IPO candidates – Vrio and Pivotal Software – requesting them to reconsider going public with a dual class structure, or to at least adopt a “sunset” provision for that structure.

The circumstances of the two companies are a little different, but this excerpt from the CII’s letter to Pivotal Software gets to the gist of its concerns:

As long-term investors, we believe a decision by Pivotal Software to go public with the dual-class structure will undermine confidence of public shareholders in the company. Independent boards accountable to owners should be empowered to actively oversee management and make course corrections when appropriate.

Disenfranchised public shareholders have no ability to influence management or the board when the company encounters performance challenges, as most companies do at some point, and especially where management is accountable only to itself and the board that it appoints. For these reasons, we are particularly concerned about the process of electing directors, the unequal voting structure, and the lack of a reasonable time-based sunset provision.

Fair enough – the CII is doing its job and raising legitimate points. But in the current environment, if I were a controlling shareholder of either company, my response would likely be along the lines of “if you don’t like our capital structure, then don’t buy our stock.”

Frankly, if this is an issue that really matters to the institutions that are sitting on the biggest pile of money in the world, a strategy that relies on appeals to the “better angels of our nature” & pleas for regulatory intervention seems a little pathetic. Money talks, and this is an issue that institutions need to vote on with their wallets. Unless, of course, it really doesn’t matter that much to them.

A member points out that the CII has been sending letters like these to prospective IPO companies with dual class structures for quite some time – and copies are available on its website.

Tomorrow’s Webcast: “M&A Stories – Practical Guidance (Enjoyably Digested)”

Tune in tomorrow for the webcast – “M&A Stories: Practical Guidance (Enjoyably Digested)” – to hear Cleary Gottlieb’s Glenn McGrory, Sullivan & Cromwell’s Melissa Sawyer and Haynes and Boone’s Kristina Trauger share M&A “war stories” designed to both educate and entertain. The stories include:

1. Let It Go – how sometimes when you can’t seem to repair a deal after a lot of effort, maybe helping the client be disciplined and walk away actually is the right outcome

2. Déjà Vu, All Over Again – the central truth about the high-yield debt market: companies often plan to merely dip their toes in the debt market only to find, over time, that they have plunged deeper than expected

3. Knowing What the Other Side Doesn’t Know – how a seller figured out what an inexperienced buyer didn’t understand about financing and how it almost killed but ultimately saved the deal.

4. Just the Facts – how sometimes issues that seem like major obstacles in a deal can be resolved dispassionately just by taking a deeper dive into the facts and narrowing the field of the unknown

5. End Goal in Mind – for any type of deal, keep in mind the client’s ultimate objective

6. When Timing Matters, So Does Trust – how last minute issues can scupper deal announcements – and how trust between deal teams can facilitate quick solutions to allow the deals to proceed

7. Dealmakers are Architects in Four Dimensions – how solutions to complex issues in deals require non-linear, creative thinking under pressure

8. Expect the Unexpected – it’s common for clients to imagine a transaction playing out in a certain manner, only to have market conditions steer them in a new direction. So it’s vital for deal lawyers to stay nimble and be ready to quickly pivot, as needed

9. They’ll Never Be the Winner – the hazards of trying to figure out (and plan for) who you think will win an auction, only to have an unexpected contender (and its own particular issues) prevail

10. The Secret’s Not Out – the extreme measures parties take to protect the confidentiality of secret formulae in consumer product transactions

John Jenkins

May 14, 2018

45 New Proxy CDIs: Overhauling Last of Telephone Interps

It’s been over a decade since Corp Fin started issuing CDIs to replace its main source of “informal” interpretations – the “Telephone Interpretation Manual.” Oddly, after all these years, some of the “Phone Interps” still haven’t been replaced. That’s finally changing. On Friday, Corp Fin issued 45 new CDIs to replace the interps in the Telephone Interpretation Manual and the March 1999 Supplement that relate to the proxy rules & Schedules 14A/14C. The Staff says it’s in the process of updating other proxy interps – so we can expect more CDIs to come.

Thirty-five of the new CDIs simply reiterate the guidance provided in the Manual & March 1999 Supplement – four make technical changes – and these six CDIs reflect substantive changes (here’s a redline from Cleary):

Question 124.01: Rule 14a-4(b)(1) states that a proxy may confer discretionary authority with respect to matters as to which a choice has not been specified by the security holder, so long as the form of proxy states in bold-faced type how the proxy holder will vote where no choice is specified. If action is to be taken with respect to the election of directors and the persons solicited have cumulative voting rights, can a soliciting party cumulate votes among director nominees by simply indicating this in bold-faced type on the proxy card?

Answer: Yes, as long as state law grants the proxy holder the authority to exercise discretion to cumulate votes and does not require separate security holder approval with respect to cumulative voting. [May 11, 2018]

Question 124.07: The Division has permitted registrants to avoid filing proxy materials in preliminary form despite receipt of adequate advance notification of a non-Rule 14a-8 matter as long as the registrant disclosed in its proxy statement the nature of the matter and how the registrant intends to exercise discretionary authority if the matter was actually represented for a vote at the meeting. See Section IV.D of Release No. 34-40018 (May 21, 1998). Can a registrant rely on this position if it cannot properly exercise discretionary authority on the matter in accordance with Rule 14a-4(c)(2)?

Answer: No. [May 11, 2018]

Question 126.02: Is a registrant required to file a preliminary proxy statement in connection with a proposed corporate name change to be submitted for security holder approval at the annual meeting?

Answer: No. As set forth in Release No. 34-25217 (Dec. 21, 1987), the underlying purpose of the exclusions from the preliminary proxy filing requirement is “to relieve registrants and the Commission of unnecessary administrative burdens and preparation and processing costs associated with the filing and processing of proxy material that is currently subject to selective review procedures, but ordinarily is not selected for review in preliminary form.” Consistent with this purpose, a change in the registrant’s name, by itself, does not require the filing of a preliminary proxy statement. [May 11, 2018]

Question 151.01: A registrant solicits its security holders to approve the authorization of additional common stock for issuance in a public offering. While the registrant could use the cash proceeds from the public offering as consideration for a recently announced acquisition of another company, it has alternative means for fully financing the acquisition (such as available credit under an executed credit agreement in the full amount of the acquisition consideration) and may choose to use those alternative financing means instead. Would the proposal to authorize additional common stock “involve” the acquisition for purposes of Note A of Schedule 14A?

Answer: No. Raising proceeds through a sale of common stock is not an integral part of the acquisition transaction because at the time the acquisition consideration is payable, the registrant has other means of fully financing the acquisition. The proposal would therefore not involve the acquisition and Note A would not apply. By contrast, if the cash proceeds from the public offering are expected to be used to pay any material portion of the consideration for the acquisition, then Note A would apply. [May 11, 2018]

Question 161.03: If a registrant is required to disclose the New Plan Benefits Table called for under Item 10(a)(2) of Schedule 14A, should it list in the table all of the individuals and groups for which award and benefit information is required, even if the amount to be reported is “0”?

Answer: Yes. Alternatively, the registrant can choose to identify any individual or group for which the award and benefit information to be reported is “0” through narrative disclosure that accompanies the New Plan Benefits Table. [May 11, 2018]

Question 163.01: Does a proxy statement seeking security holder approval for the elimination of preemptive rights from a security involve a modification of that security for purposes of Item 12 of Schedule 14A?

Answer: Yes. Accordingly, financial and other information would be required in the proxy statement to the extent required by Item13 of Schedule 14A. [May 11, 2018]

Of course, I can remember – pre-Internet – when it was hard to get a copy of the telephone interps. It was originally drafted to be an internal resource for Corp Fin. Some law firms obtained a copy – when Corp Fin Staffers left the Division or perhaps through a FOIA request – but it wasn’t widely available (or even known) before the late ’90s when it was posted on the SEC’s site…

The Latest Reg Flex Agenda: A Few New Items

Here’s some news from this Ropes & Gray memo written by Keith Higgins:

The Spring 2018 unified regulatory agenda – the so-called “Reg Flex” agenda – came out on May 9th (current / long-term). Although most of the items on the Corporation Finance agenda remain the same, there were a few new items added to the list that bear mention.

Added to the “proposed rule stage” was a rulemaking on “Business, Financial and Management Disclosure Required by Regulation S-K,” which previously had been on the long-term actions agenda. Other than to say that the proposal would be to “modernize” the disclosure requirements, the agenda doesn’t provide any insight into the areas that might be covered. This topic is a continuation of the Division’s Disclosure Effectiveness initiative and suggests that change may be in the offing that goes beyond the modest proposals that were included in the proposed rulemaking to implement the FAST Act report.

Also at the proposed rule stage is a rulemaking on “Filing Fee Processing.” The description of this project suggests that the Division will propose a rule to make the fee-related information on various Commission filings structured data. Doing so should allow the Commission to better track filing fees, particularly when they are transferred in connection with unused fees in Securities Act registrations. It is unlikely that any substantive changes will come out of this project.

The third new item on the list is a topic that Director Bill Hinman hinted at in his recent appearance before a subcommittee of the House Financial Services Committee – “Extending the Testing the Waters Provisions to Non-Emerging Growth Companies.” Testing the waters, which allows emerging growth companies to have discussions about an offering with qualified institutional buyers and institutional accredited investors, has been an increasingly popular provision of the JOBS Act. It makes every bit of sense to extend this concept to all companies that might be interested in undertaking a registered securities offering. And given the sophisticated audience with whom these discussions may be had, there would be no adverse impact on investor protection.

Added to the “final rule stage” list is the proposal on “Disclosure of Hedging by Employees, Officers and Directors.” This rulemaking, which was initially proposed in February 2015 to implement Section 955 of the Dodd-Frank Act, had been on the long-term list last fall. It is interesting that the Chairman has chosen to add this rulemaking to the list. On the one hand, it is a relatively innocuous proposal that does not call for any burdensome level of disclosure. On the other hand, however, because the proxy advisory firms and institutional investors have taken an interest in hedging by insiders, many companies have already made voluntary disclosure of their hedging policies as a matter of good corporate governance. As a result, adoption of the rule is unlikely to have any meaningful impact, although it will allow the Commission to check this one off the Dodd-Frank mandate list.

Broc Romanek

May 11, 2018

Survey Results: More on Annual Meeting Conduct

Every few years, we survey annual meeting practices (we’ve conducted about a dozen surveys on this & related topics). Here’s the results from our latest one:

1. To attend our annual meeting, our company:
– Requires pre-registration by shareholders – 16%
– Encourages pre-registration by shareholders but it’s not required – 8%
– Requires shareholders to bring an entry pass that was included in the proxy materials (along with ID) – 14%
– Encourages shareholders to bring an entry pass but it’s not required – 11%
– Will allow any shareholder to attend if they bring proof of ownership – 76%
– Will allow anyone to attend even if they don’t have proof of ownership – 11%

2. During our annual meeting, our company:
– We hand out rules of conduct that limit each shareholder’s time to no more than 2 minutes – 30%
– We hand out rules of conduct that limit each shareholder’s time to no more than 3 minutes – 35%
– We hand out rules of conduct that limit each shareholder’s time to no more than 5 minutes – 5%
– We announce a policy that limits each shareholder’s time to no more than 2 minutes (but rules are not handed out) – 3%
– We announce a policy that limit each shareholder’s time to no more than 3 minutes (but rules are not handed out) – 0%
– We announce a policy that limit each shareholder’s time to no more than 5 minutes (but rules are not handed out) – 3%
– There is no limit on how long a shareholder can talk (subject to the inherent authority of the Chair to cut off discussion at any time) – 24%

3. For our annual meeting, our company:
– Provides an audio webcast of the physical meeting, including posting an archive – 24%
– Provides an audio webcast of the physical meeting, but does not post an archive – 3%
– Has provided an audio webcast of the physical meeting in the past, but discontinued that practice – 3%
– Is considering providing an audio webcast of the physical meeting but haven’t decided yet – 0%
– Provides a video webcast of the physical meeting (or is considering doing so) – 8%
– Does not provide an audio nor a video webcast of the physical meeting – 62%

4. At our annual meeting, our company:
– Announces the preliminary results of the vote on each matter (unless special circumstances arise such as a very close vote) – 89%
– Doesn’t announce the preliminary results of the vote on each matter – 11%

5. For our annual meeting:
– Our CEO makes a presentation and takes Q&A from the audience – 90%
– Our CEO makes a presentation but no Q&A from the audience – 3%
– We are considering revising next year’s format to eliminate the CEO presentation – 3%
– We are considering revising next year’s format to eliminate the Q&A – 3%
– We are considering revising next year’s format other than the CEO presentation and Q&A but haven’t decided yet – 3%

Please take a moment to participate anonymously in our “Quick Survey on Whistleblower Policies & Procedures” and our “Quick Survey on Political Spending Oversight.”

Also see the transcript for our recent webcast: “Conduct of the “Annual Meeting.”

Board Diversity: Some Progress

This Bloomberg article highlights stories of boards who are achieving some diversity by appointing people who are first-time directors – and who aren’t sitting or retired CEOs. Here’s an excerpt:

Waste management company Republic Services Inc. has been looking for diverse directors since 2011, after a 2008 merger with Allied Waste Industries left it with an all-male board, including one black man. “Change meant bringing people into the waste business who had other experiences,” says CEO Don Slager. “Prior to the merger, frankly, they were just a bunch of garbage men.”

As part of this push, the company enacted some new policies, including a mandatory retirement age of 73 for directors. A variety of experience also was a priority, Slager says. Candidates ideally would bring expertise in areas not already represented, such as logistics and financial reporting. “When you drop a layer below the C-suite, it opens you up to a whole new group of people who are the future leaders of these organizations,” he says.

While the article notes that in 2017, 45% of appointees to S&P 500 boards were novice directors – and a majority of incoming directors were women or minorities – it also states that white men still hold more than 75% of these seats. Not to detract from the companies highlighted as gender diversity success stories in the article – because I do think they’re being thoughtful about this and making progress – but they’ve actually just achieved the “three women” benchmark that Broc’s blogged about…

Age Diversity: Stats on Boards’ “Next Generation”

According to this PwC article, 90% of directors say that age diversity is important – a higher number than gender, race & other forms of diversity. Yet “young directors” – defined as anyone 50 or under – held only 6% of S&P 500 board seats in 2017, and the average age of independent directors increased to 63.

Not surprisingly, the information technology, consumer discretionary & consumer staples industries are the most likely to have at least one director – and technology expertise and active industry knowledge are commonly-cited skills.

Also see this EY report on the traits of first-time directors in 2017.

Liz Dunshee

May 10, 2018

How Directors Should Oversee (& Leverage) Data Analytics

There’s nothing hotter right now than data analytics. “Big data” can yield some big opportunities – so it would seem that boards would seek this information out when strategizing the big picture. At a minimum, boards should be at least oversee how their companies are using data analytics. This KPMG memo throws out some key questions for boards to consider:

— How is the data being collected and organized within the company and who is involved? Ultimately, who is responsible?

— Can the data be trusted? How is the quality and integrity of the data assessed?

— Does the company have a data ethics policy to protect the brand reputation and reduce legal risk?

— Does the company have the right talent, skills, and resources required to implement/manage its D&A activities?

— Has the company scoped out the near-term and longer-term opportunities for its use of D&A, including financial reporting and predictive analytics?

Trends in Board Cybersecurity Oversight

This recent EY webcast about the board’s cybersecurity oversight role included a poll of director & executive attendees. It appears that most companies aren’t making big changes in response to the SEC’s cybersecurity guidance from earlier this year. Here’s what else they found:

1. Which emerging technology does your board expect to have the greatest impact on the company’s strategy?
– Artificial Intelligence (AI)/Machine Learning and Internet of Things (IoT) – tied at 23%
– Blockchain and Robotic Process automation – tied at 19%

2. As a board member, which of the following do you think is most important to enhance the company’s cyber maturity posture?
– Enhancing data protection and privacy policies – 32%
– Continuously educating and testing the workforce on cybersecurity related matters – 22%
– Improving cyber threat intelligence gathering – 18%

3. How often are your board and management team conducting tabletop exercises and crisis scenario exercises?
– Annually – 31%
– Ad hoc basis/rarely – 30%
– Twice a year or never – tied at 18%

4. Given the recent SEC cybersecurity guidance, do you expect a material change in your disclosure controls process and procedures during your next quarter-end?
– No – 60%
– Yes – 40%

Also see the CAQ’s “Cybersecurity Risk Management Oversight: A Board Tool” that gives a list of questions that can be asked…

New Delaware Website for Data Breach Compliance

Delaware has amended its data breach law for the first time since enacting it in 2005 (see this Pepper Hamilton memo). To help companies comply with the new requirements, it’s now launched this website with template forms. According to this Morgan Lewis blog, the forms can be used for the required data breach notices to the Delaware Attorney General as well as consumers – and the website also provides a link for consumers to file complaints.

Liz Dunshee

May 9, 2018

Nominating Committee Getting “Rusty”? Call in the Robots!

A few years ago, Broc blogged about a VC appointing a robot director. Turns out their announcement was a play on words. But when it comes to director recruitment – the future is now? This paper shows that directors selected using an algorithm would perform better – based on shareholder approval numbers & company profitability – than individuals selected by the company’s board. Here’s an excerpt of the findings from this “Harvard Law” blog:

The differences between the directors suggested by the algorithm and those actually selected by firms allow us to assess the features that are overrated in the director nomination process. Comparing predictably unpopular directors to promising candidates suggested by the algorithm, it appears that firms choose directors who are much more likely to be male, have a large network, have a lot of board experience, currently serve on more boards, and have a finance background.

In a sense, the algorithm is saying exactly what institutional shareholders have been saying for a long time: that directors who are not old friends of management and come from different backgrounds are more likely to monitor management. In addition, less connected directors potentially provide different and potentially more useful opinions about policy. For example, TIAA has had a corporate governance policy aimed in large part to diversify boards of directors since the 1990s for this reason.

An important benefit of algorithms is that they are not prone to the agency conflicts that occur when boards and CEOs together select new directors. Institutional investors are likely to find this attribute particularly appealing and are likely to use their influence to encourage boards to rely on an algorithm such as the one presented here for director selections in the future.

SIFMA’s Report to Help More Companies Go & Stay Public

In this recent report, SIFMA (“Securities Industry & Financial Markets Association”) – which represents brokers, banks & asset managers – gives its two cents about what’s behind the declining number of public companies, why this is bad, and how to fix it. Not surprisingly, they suggested reducing the compliance burden (as opposed to SEC Commissioner Rob Jackson’s recent suggestion that underwriters need to reduce their fees). This Gibson Dunn memo summarizes the many recommendations:

1. Expand & lengthen the EGC exemptions under the JOBS Act

2. Encourage more research coverage of EGCs and other small public companies by allowing investment banks & analysts to jointly attend pitch meetings and relaxing restrictions on communications during an offering

3. Reduce the “administrative burden” of public reporting and the influence of activist shareholders & proxy advisory firms

4. Allow all companies to use Form S-3 – and allow underwriters to communicate on behalf of WKSIs before filing a registration statement

5. Implement a revenue-only test for smaller reporting companies, and raise the cap so that more companies would qualify

6. Tailor the equity market structure for small public companies, by allowing smaller tick sizes and limiting their shares to fewer exchanges (however, smaller exchanges are arguing this would be anti-competitive)

And see this “Radical Compliance” blog for another hypothesis on declining IPOs: the real issue isn’t that companies are afraid of going public because of fees or compliance, the issue is that it’s easy to stay private because there’s loads of money in that space…

ISS Launches a New “Help Center”

ISS has migrated its communications to a new portal – the “ISS Help Center.” This Weil blog has more details:

The ISS Help Center may be used by companies, law firms, consultants, and other third-parties who register. It includes FAQs & allows you to connect with ISS about research reports, engagement, peer groups, and equity plan verification – among other matters.

ISS will no longer take questions via email to the Global Research Help Desk and is eliminating various other legacy global e-mail addresses that were previously used to submit inquiries to ISS.

Liz Dunshee

May 8, 2018

SEC Commissioner Piwowar to Leave

SEC Commissioner Mike Piwowar – whose term expires in early June & who served briefly as Acting SEC Chair last year – will leave the SEC by early July, after serving nearly five years. Here’s an excerpt from the WSJ article:

Mr. Piwowar’s departure would leave the agency with four commissioners, meaning some votes could be deadlocked if the SEC’s two Democrats oppose measures favored by Chair Jay Clayton, a Trump administration appointee. That could slow Mr. Clayton’s progress on his priorities, which include stricter rules for brokers advising retail investors and lightening the regulatory burdens on public companies.

In theory, the White House and Senate could move quickly and nominate replacements for both Mr. Piwowar and Democratic SEC Commissioner Kara Stein, whose term ended last year. The Senate usually considers candidates for commissioners in pairs – one Republican and one Democrat.

Supplemental Pay Ratios: Not So Many (So Far)

Here’s something that I blogged last week on One of the big unknowns for the first year of mandatory pay ratio was whether companies would include supplemental ratios using a different methodology from the required rules. What situations would justify that extra effort? This Pearl Meyer blog notes that of the first 1039 companies to file proxies this year, only 99 have included a supplemental ratio. That’s less than 10%. Here’s what else they found:

– Most of the supplemental ratios were significantly lower than the required pay ratio.

– The desire to smooth out the impact of one-time or multi-year grants to a CEO was the most commonly occurring reason to provide a supplemental ratio.

– The most profound decrease from the required ratio occurred when companies provided a supplemental ratio that excluded part-time and seasonal employees.

– 14 companies provided a supplemental ratio that was greater than the required ratio, mostly likely to avoid a drastic increased ratio in 2019.

It’s possible that supplemental ratios will become more common in the future, as companies try to explain year-over-year pay ratio changes…

SEC’s Information Security Program: Not “Effective”

Recently, the SEC’s Inspector General released its audit results for the SEC’s information security program – as required by the “Federal Information Security Modernization Act.” Although the SEC’s program has improved, it didn’t meet the criteria to be deemed “effective” as of September 30, 2017. The SEC is supposed to submit a corrective action plan by mid-May that covers the audit’s 20 recommendations.

And in recent testimony before the House Appropriations Financial Services Subcommittee, SEC Chair Jay Clayton discussed the SEC’s new Chief Risk Officer position, its incident response procedures, and its ongoing internal investigation of last fall’s high-profile Edgar hack.

Liz Dunshee

May 7, 2018

Pay Ratio: A Wave Arrives In the Local News

Although pay ratio didn’t seem to initially capture the imagination of journalists, there has been a wave of local reporting about the pay ratios at specific companies over the past week. Here’s some of the articles about how pay levels – particularly pay ratios – look this year, based on this season’s proxy statements (Mark Borges, Barbara Baksa & I are quoted in the first piece):

1. SF Chronicle’s “Yes, median pay at Facebook really is about $240,000 a year”
2.’s “This CEO Makes 900 Times More Than His Typical Employee”
3. Kansas City Star’s “How many years would you have to work to earn one year of your CEO’s pay? 63? 96?”
4. Chicago Tribune’s “The boss makes how much? Illinois companies reveal CEO-to-worker pay ratio”
5. Boston Business Journal’s “At TJ Maxx parent, the CEO’s pay was 1,500 times higher than the median employee’s”
6. Washington Post’s “Looking for a bigger salary? These are the companies with the highest median pay”
7. Milwaukee BizTimes’ “CEO pay ratio rule provides new view of executive compensation”
8. Bloomberg’s “CEO-to-Worker Pay Reports Show Wildly Divergent Ratios”
9. Financial Times’ “Pay Ratios: Apple, Pears & Bananas”
10. Bloomberg’s “First Data CEO Pay Ratio is 2,028 Times the Median Worker’s”
11. WSJ’s “Does Verizon Really Pay the Typical Worker 60% More Than AT&T?”
12. Vox’s “How does a company’s CEO pay compare to its workers’? Now you can find out
13. Bloomberg’s “Less Is More for Companies Reporting CEO-to-Worker Pay Gap”

Yes, Edgar Is Still Broken (& We’re Not Being Told About It)

Sorry, but until the problem is fixed, I’m going to keep blogging about how the SEC’s Edgar continues to have problems (here’s a recent one) – and how the SEC isn’t telling us about it when it does. My hope is that by continuing to highlight the problems, the SEC will at least set up some sort of communication vehicle (a blog perhaps?) where it can inform the general public when Edgar is down (and when it’s back up). Here’s a note that I received from a member a few days ago:

Due to the volume of filings being received by the EDGAR system, the SEC confirmed that they are experiencing delays with filings disseminating. Filings are being accepted and acceptance notifications are returning. Please be assured that this is an SEC issue and the delay in posting does not alter the date/time of a live acceptance.

By the way, Edgar was having problems again this morning. You could make filings but could not access them on…

A Tool to Propel Climate Change Disclosure

As this Davis Polk blog notes, the Financial Stability Board’s “Task Force on Climate-Related Financial Disclosure” has launched the “TCFD Knowledge Hub.” The Hub currently contains 300 different documents or other resources organized by the four thematically related areas for disclosure…

Speaking of databases, the SEC recently launched “SALI” (“SEC Action Lookup for Individuals”) so that anyone can research whether the person trying to sell them investments has a judgment or order entered against them in an enforcement action…

Broc Romanek

May 4, 2018

Executive Pay as “Corporate Waste”? Delaware Court Allows Lawsuit

Here’s something that Mike Melbinger blogged recently on

I don’t recall that any court has decided in favor of plaintiffs alleging that the payment of executive compensation was a breach of fiduciary duty for a waste of corporate assets – until now. The reason is that [in the face of the business judgment rule] corporate waste is very difficult to prove. But last week, the Delaware Chancery Court allowed plaintiffs to continue with their shareholder derivative claims against the board of CBS Corporation in Feuer v. Redstone.

This court has commented many times on the difficulty of pleading a viable claim for waste against a corporate director under our law. But the particularized allegations of the complaint here depict an extreme factual scenario—one sufficiently severe so as to excuse plaintiff from having to make a demand on the CBS board of directors to press claims concerning certain (but not all) of the challenged payments, and to permit plaintiff to take discovery so that an evidentiary record may be developed before the court adjudicates whether those payments were made in accordance with the directors’ fiduciary duties.

Two full pages of the opinion are devoted to listing facts and information “demonstrating that it should have been abundantly clear to the members of the Board—from their attendance at Board meetings, press publicity, and other interactions with the Company—that far from being “actively engaged” in the CBS’s affairs, Redstone was providing no meaningful services to the Company beginning at some point in the latter part of 2014 or in 2015.” During and after that period, CBS paid Mr. Redstone more than $13 million, most of it in performance bonuses.

Note that this is far from a complete victory for plaintiffs. The decision only allows the plaintiffs to continue to trial with their lawsuit. But no allegations of compensation being corporate waste have made it this far in more than 30 years.

Happy Anniversary Baby! 16 Years of Blogging & Counting

Today marks 16 years of my blither & bother on this blog (note the Blog is nearly 15 years old – not shabby!). It’s one time of the year that I feel entitled to toot my own horn – as it takes stamina & boldness to blog for so long. A hearty “thanks” to all those that read this blog for putting up with my personality. I’m sure I won’t get more refined with age. So glad to now have John & Liz blogging with me!

Did you know that this is one of the oldest law blogs out there? When I started, nearly all of the few other lawyers that were blogging covered the marketing aspects of blogging – not substantive law. And since those folks wrote the “lists” that covered which lawyers were blogging, they frequently overlooked this blog because they tended to focus on marketing, not law.

Plus, the list compilers tended to be solo or small firm practitioners – they were nowhere near the securities law space. Bob Ambrogi compiled this list in 2007 of the first law bloggers – if he had placed us on the list, we would be the 8th blog to be started. And now we are the third oldest – only two of the 7 blogs started before us are still regularly active.

This blog still is overlooked by those handing out law blogging accolades. Our blog has long dropped out of the ABA’s Blawg 100, even when this blog won the popularity contest the first year they allowed the public to vote (they discontinued public voting soon thereafter). The ABA’s Blawg 100 list rarely includes securities law blogs – and their “Hall of Fame” doesn’t contain a single blog devoted to securities law…

Sexual Misconduct Claims: D&O Policy Implications

This D&O Diary blog delves into how D&O insurance policies might be implicated if claims are made against a company’s directors or senior managers for sexual harassment…

Is it me? Or is “Regulation Best Interest” a dorky name for a SEC regulation? #nerdy. This is something I tweeted when the SEC proposed its new broker regulation about providing investment advice – and nice to see Matt Levine link to my tweet in his Bloomberg article

Broc Romanek

May 3, 2018

More on “Who Administers Political Spending Policies?”

On the “Mentor Blog,” I recently blogged about the top of “who administers political spending policies?” – and I posted five examples. Following up on that, we have now posted a “Quick Survey on Political Spending Oversight.” Thanks to Teco Energy’s David Schwartz for the idea!

In addition, a member posted this query in our “Q&A Forum” (#9416): “Enjoyed the “Mentor Blog” on this topic a few days ago. How does the board ensure it doesn’t find itself in an embarrassing situation, like some companies have—where contributions have been made to candidates who end up supporting positions that are in conflict with the company’s mission?” John provided this simple answer:

If you’re worried about that, don’t give. If you trust a politician not to betray you, you deserve what you get.

Don’t forget to participate in this “Quick Survey on Whistleblower Policies & Procedures“…

Accounting Class Actions Rise to Unprecedented Level

Here are the highlights from this recent “Accounting Class Action Settlements” study from Cornerstone Research:

– Industrial sector spiked: The Industrial sector saw 22 percent of traditional accounting case filings in 2017, double the historical average. The Disclosure Dollar Loss (DDL) for accounting case filings in this sector was the largest among all sectors for the first time in the last 10 years.
– Restatements declined: For the third consecutive year, the number of traditional accounting case filings involving restatements declined. The number of 2017 restatement cases was 35 percent lower than the historical average; restatement case DDL was 49 percent lower than the historical average. 
– No auditor defendants named: There were no auditor defendants named in traditional accounting case filings during 2017—the first year that has happened since enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA).
– Total settlement value declined: The total settlement value attributable to accounting cases was the lowest since 1999, with only two accounting-related settlements reaching $100 million or more.
– Larger defendant firms observed as settlement size shrinks: Despite smaller settlement sizes, issuer defendants involved in accounting settlements were the largest observed over the past five years.
– Restatement cases garnered higher settlements: Cases involving financial statement restatements settled for substantially higher amounts than non-accounting cases.

Auditor Independence: SEC Proposes “Debtor-Creditor” Changes

Yesterday, the SEC issued this 71-page proposing release to amend its auditor independence rules to refocus the analysis that must be conducted to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of its client at any time during an audit or professional engagement period.

The proposed amendments would focus the analysis solely on beneficial ownership rather than on both record & beneficial ownership; replace the existing 10% bright-line shareholder ownership test with a “significant influence” test; (3) add a “known through reasonable inquiry” standard with respect to identifying beneficial owners of the client’s equity securities; and (4) amend the definition of “audit client” for a fund under audit to exclude funds that otherwise would be considered affiliates of the client. See more in this Cooley blog

Broc Romanek