This Locke Lord memo highlights that all 50 states now have data breach notification laws, and several states have recently amended their laws (including Delaware). Most states require companies to notify the state attorney general or regulator of a breach, in addition to the affected individuals – and a growing number outline how companies should handle data security. Meanwhile, This D&O Diary blog & NYT article discuss California’s new “GDPR-like” privacy law, to take effect in 2020 – which also heightens liability exposure for companies.
And for public companies, there’s a really important corollary to these laws, which often gets lost in the shuffle – information from state notices can find its way to the market even if you don’t file a Form 8-K. SEC Commissioner Robert Jackson has noted that this presents an arbitrage opportunity – and may weigh in favor of proactive, voluntary disclosure.
See our “Cybersecurity” Practice Area for the latest info – including this handy chart from Perkins Coie and this Cleary Gottlieb memo for key US & EU notice requirements. And as I previously blogged on “The Mentor Blog,” Reed Smith also has an app to help parse state law notice requirements…
Cybersecurity Committees: On the Rise
This Kral Ussery memo summarizes the growing trend of standalone cybersecurity committees. Although most companies still assign cybersecurity oversight to the audit committee due to that committee’s involvement with SEC disclosure, audit committees have growing workloads and cybersecurity is an increasingly demanding topic. The memo identifies ten companies that have standing cybersecurity committees – five of which were created in the last year.
Tomorrow’s Webcast: “Retaining Key Employees in a Deal”
Tune in tomorrow for the DealLawyers.com webcast – “Retaining Key Employees in a Deal” to hear Morgan Lewis’ Jeanie Cogill, Andrews Kurth Kenyon’s Tony Eppert, & Proskauer’s Josh Miller discuss the latest developments on compensation strategies to retain key employees in M&A transactions.
Tune in tomorrow for the webcast – “Insider Trading Policies & Rule 10b5-1 Plans” – to hear Weil Gotshal’s Howard Dicker, Hogan Lovells’ Alan Dye, Dorsey & Whitney’s Cam Hoang and Cooley’s Nancy Wojtas talk about the nuts & bolts – and the latest developments – for insider trading policies and Rule 10b5-1 plans. We recently updated our “Insider Trading Policies Handbook” – which includes a model policy.
2. Issuing a concept release on Rule 701 & Form S-8
3. Proposing changes to Rule 3-10 & Rule 3-16 of Regulation S-X (there was a request for comment on this back in 2015).
Jobs Act 3.0: Coming Soon?
According to this statement, the House Financial Services Committee has approved eight bills as part of “Jobs Act 3.0.” This Steve Quinlivan blog calls out that six of the bills were sponsored by Democrats – and it doesn’t sound like legislation will happen any time soon…
Here’s the third “list” installment from Nina Flax of Mayer Brown (here’s the last one):
1. Email – With three subparts to this item on my list:
a. I enjoy being in a client service industry (and have been since high school, when I worked in a clothing store during my free time, and through college, when I worked at a shoe store in the Durham mall). Getting emails from my clients lets me provide that service – and I feel accomplished when I am able to respond promptly. Also, the emails are like never ending text chats with friends.
b. I can put voices and tones to the communications, understand the questions beneath the questions, anticipate issues based on the communications, update my task lists, etc. They allow me to hone and improve the service I am providing.
c. Email can be so efficient. Which is not a knock against calls or meetings at all, but if you can accomplish communicating a point/resolving an issue quickly through email, it feels like such a separate accomplishment (in addition to just the back & forth/accomplishment of responding from point “a”).
2. Travel – Despite my desire to not be away from my son, it is always exciting to be face-to-face, to present at seminars, to socialize with clients. I love interacting with people – particularly in person. In writing this post, I quickly took an online personality test. It scored me as having a slight preference for extraversion over introversion!
My husband knows that sometimes I come home at the end of long days of calls and want nothing more than to not talk, but I also frequently call him or my parents from the car on my drive to or from work too… Actually, I am always on a phone call when driving. I’m going to say it is also efficient in addition to satisfying my extraversion.
3. Practice Breadth – I get to do so many different things touching so many different industries and jurisdictions and interacting with so many different people. Despite being a partner, I am constantly learning on the job. I do not have any projects that are the same. I do not have two clients that are the same. I do not have any days that are the same. Everything is always different! I love the diversity in private practice.
4. There Is No Break; It Never Ends – Translation: I never get bored! I wholeheartedly disagree with Karl Lagerfeld – I don’t think that work is making a living out of being bored. I’m on “Team Voltaire”: All kinds of jobs are good except the kind that bores you. Or “Team Metallica”: Boredom comes from a boring mind. Or “Team Carlyle”: I’ve got a great ambition to die of exhaustion rather than boredom. Or “Team Chung”: I’m terrified of being bored and not learning. (Side note: I hate the word “bored,” particularly in children’s books.) There is always something to do, even right after a deal closes. There is always something to learn, because the law or the industry changes.
These are my Yangs to my Yins! I truly believe there are pros and cons to everything. But right now there are only pros to eating Oreos for me.
SEC’s OM&A: Walk Down Memory Lane
Mauri Osheroff – who until a few years ago was Corp Fin’s Associate Director who oversaw the Office of Mergers & Acquisitions – was reading the transcript of our DealLawyers.com webcast with the Chiefs of OM&A from the past three decades. Mauri noted that the original office was called “Tender Offers and Small Issues” – they processed tender offers and Reg A offerings. Go figure. We don’t know when Reg A offerings dropped out of the picture.
The Office Chief back then was the legendary Ruth Appleton. Here’s Ruth’s obit, which details her SEC career and the obstacles she faced as a professional woman…
Poll: CEOs Have Too Much Time on Their Hands?
I recently got this astute note from a member: “There never seems a month that goes by that I don’t a survey be published relating to ‘what directors think’ or ‘what CEOs think.’ Who is completing these surveys – do they have time on their hands, do they get cash for completing, etc?”
Recently, Brink Dickerson of Troutman Sanders informed us that companies with meaningful operations in Argentina need to take note of the recent designation of Argentina as a “highly inflationary economy.” Under ASC #830, this may trigger additional footnote disclosure in the financials (regarding the inflation and the company’s exposure, revenue, costs, and possible impairment triggers relating to Argentina) and could require MD&A and risk factor disclosure as well. See this memo…
The SEC’s release does provide some eye-popping data. As a result of the program, the SEC has received over 22,000 tips and ordered payouts over $266 million. That is a lot of tips and a great deal of money. For some perspective, the SEC’s budget authority for 2018 is $1.652 billion. Thus $266 million is equivalent to about 16% of the SEC’s 2018 budget authority. Here in California, this $266 million represents 8.5 times the amounts appropriated by the California legislature for support of the California Department of Business Oversight’s investment program.
Sights & Sounds: Section 16 Forums
Here’s a one-minute video recapping our recent “Section 16 Forums.” They were very successful – but a lot of work. So we have no plans to hold additional Forums at this time. As a result, our “Section 16 Bootcamp” now consists of the 14 videos we have posted on demand and a copy of the “Section 16 Tales” paperback (described at our recent Forums as the “Section 16 Bible”) at a price of $295. If you know of someone new to Section 16, send them to the “Section 16 Bootcamp” today.
At a recent conference, I wound up in a fascinating conversation with someone who spends a lot of time inside boardrooms. The topic was whether boards were talking about race. Talking about race at all – whether in the context of board diversity or business strategy in general. The upshot was not surprising. People are scared to talk about race – and that includes directors.
This doesn’t mean that those hesitant to talk about race are racists. It’s simply that people are uncomfortable talking about race. At least the people I know – which tends to be a whole lot of white people. Which is most of the people in our field. Our field is dominated by white people. That has changed little in the 30 years that I’ve been in it. And if we don’t talk about it, that won’t change.
If you have ideas – or have seen initiatives – to improve this situation, please email me. I’d like to see real change in my lifetime. I remember SEC Chair Levitt really pushing for diversity in the financial world in the ’90s. I’d like to help push for more diversity among corporate lawyers & governance professionals.
Why Women Rarely Serve on Dissident Slates
Our “Women’s 100” events are governed by the ‘Chatham House’ rule – but Aneliya Crawford of Schulte Roth gave me permission to share this nugget with you. During one of these events, Aneliya was interviewed on the topic of dealing with activists. She represents many of them – and she was asked about why so few women serve as director nominees for activists during a proxy fight.
Aneliya responded that she’s studied this question in depth – and has concluded that the answer isn’t that activists don’t want nor seek women. Rather, the qualified women that they approach only want to serve on the board if the proxy fight settles. In general, they otherwise don’t want to be on a dissident slate and have their name slung through the mud. I don’t blame them. I wouldn’t want that either…
Conflict Minerals: Disclosures Over Past Few Years Similar
Recently, the GAO conducted its annual conflict minerals review as required under Dodd-Frank – and here’s the report. Here’s an excerpt from this Cooley blog that summarizes the findings:
The GAO found that, generally, the disclosures filed in 2017 were similar to those filed in the prior two years. The GAO estimated that, out of 1,165 companies that filed conflict minerals disclosures, almost all companies reported in 2017 that they performed country-of-origin inquiries. As a result of those inquiries, an estimated 53% reported whether the conflict minerals in their products came from the DRC or one of the adjoining countries, up from estimated 49% in 2016 and 2015—which you could characterize as an increase that crosses a significant “majority“ threshold except that the estimates have a margin of error of plus or minus 10 percentage points at the 95-percent confidence level. The percentage is 2017 was, however, significantly higher than the estimate of 30% in 2014.
Here’s the second “list” installment from Nina Flax of Mayer Brown (here’s the first one):
1. Email – With three subparts to this item on my list:
a. The VOLUME is exhausting.
b. Because responses are expected near instantaneously, I can never find quiet time during the waking hours to get deep thinking tasks done.
c. Part of the VOLUME is the deleting/filing/etc. I have flushed away hours of my life organizing emails and trying to dwindle down my inbox (in my personal system, getting below 1000 is a serious accomplishment).
2. Travel – Now, part of this is my own doing, admittedly. But when I have to travel to the east coast, I prefer to take red eyes so that I can put my son to sleep the night I am leaving. I similarly plan all outbound flights to all other locations to maximize awake hours with my son. Depending on why I am traveling, and where I am traveling, I usually turn right back around which means that I am gone for 24-28 hrs. Yes, even on trips to the east coast. One time I landed, got in my car, got on the highway, was going the speed limit (or under) and saw police lights behind me. Apparently in my trudge I had forgotten to turn on my headlights. I know, they should be on automatic – my husband always tells me that.
3. Time Entry – Being in private practice I should revere time entry. I don’t. I have debated with friends and colleagues over the most efficient way to track time, and everyone certainly seems to have their own system. Mine is entering everything myself. Others make chicken scratch notes that their assistants enter, but then they have (in my mind) the extra step of reviewing the entries to make sure everything got it. I don’t think timers within entry systems are all that useful – you still have to enter the descriptions, etc.
4. There Is No Break; It Never Ends – But seriously, my favorite vacation from a true break perspective that I have taken since starting at the firm was to North Korea – because they confiscated all electronic items at the border. It was bliss. I read books, talked to my dad (my travel companion) and slept. By contrast, on my husband’s first trip to Europe (to Italy), we landed, went and dropped off our bags, walked to the Spanish Steps, and he promptly fell asleep as I sat there on a two hour call. I know I am not alone on never really having a vacation.
One of my good friends has a husband who is also still in Big Law. She has a series of pictures of him working from their various vacations at all times in all random places. There are so many, and it is so hilarious, friends on Facebook asked for a custom calendar. I made one for myself. I love it. To center at the end of this one, I know I am blessed to even be able to “take” a vacation to begin with, but this is still my life! How I wish I were still in school. But really, can I go back?
Note to self: Should likely stop mentioning North Korea. Suspect I am already on one or more government watch lists even though my life really isn’t that interesting.
Top Ten Human Capital Topics of Interest to Investors
Davis Polk’s Ning Chiu has taken a page from Nina’s book & created her own list in this blog – this one about what investors are looking for when it comes to “human capital”…
CTRs: Changes to the SEC’s FOIA Rules
Recently, the SEC finalized an overhaul of its FOIA rules that impacts confidential treatment requests. Here’s an excerpt from this Cooley blog:
Most of the rules describe the procedures and fees for requesting documents. For those seeking to protect the confidentiality of documents, Section 200.80(c) of the new rules provides that a “request for records may be denied to the extent the exemptions in 5 U.S.C. 552(b) apply to the requested records”—that would include Exemption 4 contained in 5 U.S.C. 552(b)(4) for “[t]rade secrets and commercial or financial information obtained from a person and privileged or confidential,” on which Confidential Treatment Requests commonly rely—and the “(A) Commission staff reasonably foresees that disclosure would harm an interest protected by the applicable exemption; or (B) The disclosure of the requested records is prohibited by law or is exempt from disclosure under 5 U.S.C. 552(b)(3)” As a technical matter, note that the revisions eliminate certain provisions in the SEC’s current FOIA regs that were considered unnecessary because they simply repeated information contained in the FOIA statute.
Among the provisions eliminated were the nine categories, previously set forth in Section 200.80(b) of the superseded regs, that are exempt from disclosure under 5 U.S.C. 552(b). One of these eliminated categories is the oft-cited 200.80(b)(4), which repeated the statutory Exemption 4. (The statute remains—it’s only the repetitive regs that are being eliminated, so no substantive change there.) Accordingly, those preparing CTR requests will need to update legends and other references in CTRs to delete citations to the soon-to-be-defunct 200.80(b)(4) (and review any other references to the FOIA rules) and consider instead whether another reference is appropriate, such as to the statute itself or to 200.80(c).
You’ll be hearing a lot about the SEC’s Enforcement action against Dow Chemical over poor perk disclosures. As you can learn from the SEC’s order (and memos posted in the “Perks” Practice Area on CompensationStandards.com) – the company was not only fined $1.75 million – but it was ordered to retain a consultant for a period of one year to review its perks policies, controls & training (note that no individuals were charged, just the company). Wow! There were $3 million of perk omissions over four years.
So what can you do? For starters, we have an 82-page chapter on perk disclosure as part of the Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise” posted on CompensationStandards.com. The entire Treatise is 1650 pages – and it’s just about pay disclosure! In addition to being posted on CompensationStandards.com, you can order a hard copy.
Then, we’ve had a panel about perk disclosures for 16 straight years as part of our annual “Proxy Disclosure” conference – which is coming up soon: September 25th & 26th in San Diego and also available by video webcast. This upcoming big disclosure conference has nearly 20 panels. Register by August 10th for a reduced rate.
Tomorrow’s Webcast: “The Evolving Compensation Committee”
Tune in tomorrow for the CompensationStandards.com webcast – “The Evolving Compensation Committee” – to hear FW Cook’s Bindu Culas, Semler Brossy’s Blair Jones and Davis Polk’s Kyoko Takahashi Lin discuss how to untangle the complex issues that compensation committees face in exercising their fiduciary duties against a backdrop of increased shareholder activism, potent proxy advisor policies, an active plaintiff’s bar and heightened media scrutiny.
Mandatory Arbitration: Six State Treasurers Say “No”
We’ve blogged a bit (here’s the latest) about whether the SEC would consider mandatory arbitration under SEC Chair Clayton’s reign. This article notes that six state treasurers recently wrote a letter to the SEC Chair requesting that a move to mandatory arbitration not be done…
I’m sure most of us have experienced situations where the Corp Fin review process seemed to drag on for what seemed to be forever. For most companies, even an extensive review process usually ends after 3 or 4 rounds of comments & responses – but for a select few, the comment letter process really does turn into “Purgatory.”
This “Audit Analytics” blog takes a look at those companies. Audit Analytics looked at 27 listed companies that had Corp Fin reviews involving at least 10(!) back & forth letters during the period from 2016 – April 2018, and tried to determine why they ended up in this predicament. The answers were interesting:
In many cases, long SEC reviews appear to be correlated with other significant failures including SEC enforcement actions. For example, in 2017, MDC Partners Inc appeared on our radar after the company was charged in an SEC Enforcement action. One of the legal charges was related to using misleading custom metrics – the same metrics that were questioned by the SEC in some of the MDC’s comment letters.
Zynga had a conversation that spanned eleven letters and 150 days. Some of the comments were centered on presentation of individually tailored non-GAAP metrics, a presentation that is explicitly prohibited by the SEC rules.
A major red flag for comment letters is noted when the SEC asserts that a company partially or completely failed to address the comments. Arguably, a company’s failure to respond should be taken in the context of the overall controls environment of the company. Since 2016, three companies failed to respond to SEC comments, including Axon Enterprise, Inc and Dana Inc. In such a case, the SEC will typically issue a separate letter warning that if the comments are not resolved the agency will terminate the review and release the comments to the public.
A slightly more common scenario is the failure to incorporate previously agreed upon disclosure text from SEC review into the subsequent filings. Audit Analytics identified six instances where the SEC noted inconsistencies between the disclosure and previous responses to SEC comments.
Under the circumstances, I don’t think it’s too surprising that any of the companies cited found the Corp Fin review process to be a very long & winding road.
By the way, if you’re wondering how long a company’s stay in SEC purgatory can be, the blog notes that Iconix Brands spent a total of 723 days in the review process. During that time, the company & the SEC exchanged a staggering 29 rounds of correspondence. Two other companies, MDC Partners (540 days/18 letters) & Acacia Research (427 days/26 letters) spent more than a year under review.
Revenue Recognition: Trends in Staff Comments
While we’re on the subject of Corp Fin comments, here’s a FEI memo that reviews comments issued on the new revenue recognition standard and identifies some trends. FEI says that Staff comments have focused on the following areas of ASC 606:
– Disaggregation of revenue
– Disclosure of performance obligations; consideration of significant payment terms
– Disclosure of performance obligations; determination of whether promised goods/ services are distinct
– Timing of satisfaction of performance obligations
– Principal versus agent considerations
– Transaction price determination and allocation to specific performance obligations
– Costs to obtain and fulfill a contract
The memo reviews & provides links to individual Staff comment letters and company responses.
“Hey, Why is the SEC Advertising ICOs in its Emails?”
Several members have mentioned to us that they’re confused as to why the SEC is including a link to an advertisement for an ICO in all of its email announcements. If you share this confusion, go ahead and click on the ad – it sends you to the SEC’s “HoweyCoins.com” mock ICO site.
I’m sure the SEC is usually quite concerned if a communication from the agency leaves members of the public scratching their heads – but if people are intrigued enough to click on the ad, I’ll bet they’re pleased that this one does.
In 2017, Delaware amended its corporate statute to permit corporate records to be maintained using distributed ledger technology – aka “blockchain.” While it’s not a Delaware corporation, Banco Santander recently became the first company to use blockchain as part of the voting process for its 2018 annual meeting. This “IR Magazine” article suggests that the results were impressive. Here’s an excerpt:
At this year’s Santander AGM, held on March 23, investors were asked to cast their vote twice: once in the traditional manner and once on the distributed ledger. Investors accessed the distributed ledger through Broadridge’s web application. One in five (21 percent) of the AGM participants made use of the new technology.
The results of the votes cast using blockchain were available within two days of the AGM, compared with the usual two or three-week wait with traditional proxy voting. In the near future, voters will be told real-time what the results are, according to Broadridge Financial Solutions.
The article notes that 60% of the company’s shareholders are institutions, and that its blockchain initiative is designed to increase turnout among those investors.
We’ve previously blogged about initiatives to use blockchain technology for voting at shareholder meetings – one of these initiatives involved Broadridge & several banks (including Santander), while another involved Nasdaq.
As we’ve blogged in the past, corporate America continues to look for ways to enhance the diversity of its boards of directors, with Amazon’s recent adoption of a “Rooney Rule” being the latest initiative in this area. Recently, however, investors in a company called “Destination Maternity” used a different route to increasing the number of women on its board directors – a good old fashioned proxy fight. This excerpt from a recent “Corporate Secretary” article has the details:
Shareholders have secured the rare replacement of an entire board – and the installation of a majority-female set of directors – following a proxy tussle at Destination Maternity.
The company late last month said that all four director nominees of investors Nathan Miller and Peter O’Malley had been elected to the board at Destination Maternity’s AGM. The company bills itself as the world’s largest designer and retailer of maternity apparel. The new board comprises Holly Alden, Christopher Morgan, Marla Ryan and Anne-Charlotte Windal.
The vote followed disagreements between Miller and O’Malley and the former board over the strategic direction and performance of the company. The investors have a turnaround plan they intend the new board to implement. The previous board – which comprised three men and one woman – insisted it had always acted in the best interests of company shareholders and criticized what it said were the investors’ ‘inexperienced and under-qualified candidates’ for directors.
Miller and O’Malley disputed this characterization and argued that the company needed to have a majority-female board. Despite the unusual demand, O’Malley, managing partner with Kenosis Capital, insists he and Miller are not activists but long-term investors. ‘We thought a maternity company should be run by women, who would be simpatico with customers,’ he tells Corporate Secretary.
Diversity initiatives are swell, but sometimes breaking a little furniture works wonders. . .
Securities Class Actions: Last Year’s “Bigliest” Winners
Kevin LaCroix recently blogged about an ISS report ranking 2017’s Top 50 plaintiffs’ law firms in terms of total cash settlements of North American securities class actions. Here’s an excerpt listing last year’s top 5 firms:
The report lists the Bernstein Litowitz law firm as having had the highest total of shareholder recoveries during the year, with $639 in total settlement funds recovered during 2017. $210 million of the law firm’s total is attributable to the largest 2017 settlement in the Salix Pharmaceuticals case. As I noted in a prior post discussing ISS Shareholder Class Action Services’ updated report on the Top 100 all-time securities settlements, the Bernstein Litowitz firm has the most Top 100 settlements, with the firm serving as lead or co-lead counsel in the 33 of the Top 100 securities class action lawsuit settlements.
The Robbins Geller law firm came in at second place on the 2017 Top 50 list, with $344 million in total settlement funds recovered. The report notes that Bernstein Litowitz and Robbins Geller have both finished in the top two positions on the list, in various orders for five straight years. As discussed in my prior post about the Top 100 all-time settlements, the Robbins Geller firm (inclusive of predecessor law firms) is second on the Top 100 list, with 17 of the largest settlements (including the largest ever settlement in the Enron case.)
Places three through five on the Top 50 list include the Cohen Milstein firm, in third place, with recoveries of $203 million; the Levi & Korinsky law firm in fourth place, with recoveries of $200 million; and the Block & Leviton law firm at $198 million. A total of eleven law firms had aggregate shareholder recoveries during the year in excess of $100 million.
Kevin speculates that Berstein Litowitz’s efforts may have netted it as much as $126 million last year. Nice work if you can get it.
On Friday, Liz blogged about the SEC’s changes to the definition of a “smaller reporting company” & its adoption of a new requirement for companies to use Inline XBRL in their filings. This Steve Quinlivan blog points out that changes have been made to many of the SEC forms due to this new regime. We’re posting memos about this development in our “Smaller Reporting Companies” Practice Area.
This excerpt from Steve’s blog notes the effect of the new Inline XBRL requirement – and points out that changes to the form may be applicable before compliance with the new requirement becomes mandatory:
The new Inline XBRL rules include conforming amendments to the cover pages for certain periodic reports, including Forms 10-K and 10-Q. The change to the cover pages eliminates reference to compliance with the website posting requirement. While there is a generous phase in period for required use of Inline XBRL, the rules are technically effective 30 days from publication in the Federal Register. Therefore, these changes to the cover page are potentially applicable to second quarter Form 10-Qs for calendar year issuers.
The changes to the “smaller reporting company” definition have resulted in conforming amendments to the cover pages for registration statements (Forms S-1, S-3, S-4, S-8, S-11, Form 10) & periodic reports (Forms 10-K and 10-Q). The change reflects the fact that while the new rules specify a larger threshold for SRC status, the definition of “accelerated filer” remains unchanged. The rules are effective 60 days from publication in the Federal Register.
Forget Fireworks – The Future Belongs to Flame-Throwing Drones!
If I had this awesome device, I’d win the 4th of July pyrotechnics contest in my neighborhood for sure. Enjoy the holiday – and don’t hurt yourself.