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Monthly Archives: August 2018

August 21, 2018

Disclosure Simplification: The SEC Cleans Out the Garage

My wife recently announced that we’re having a garage sale – which bums me out because now I have to help her clean the garage so the strangers who stop by to peruse our junk won’t think less of us. Anyway, last Friday, the SEC announced some garage cleaning of its own – in the form of this 314-page release adopting amendments to certain “redundant, duplicative, overlapping, outdated, or superseded” disclosure requirements.

There’s a lot to digest in the release, but this Steve Quinlivan blog provides a helpful guide to the changes. Here’s an excerpt summarizing the revisions to Item 101 of S-K:

The amendments revise Item 101 of Regulation S-K to eliminate required disclosures in the business description regarding:

– Financial information about segments
– Research and development spending
– Financial information about geographic areas, such as revenues from external customers in the issuers country of domicile and foreign countries, but where material must be covered in the MD&A
– Risks attendant to the foreign operations and any dependence on one or more of the registrant’s segments upon such foreign operations, but where material should be covered in risk factors

The SEC’s press release notes that the rule changes are part of Corp Fin’s initiative to review & improve disclosure requirements for the benefit of investors and issuers. We’re posting memos about this in our “Fast Act” Practice Area.

Beyond “Bedbugs”: More Corp Fin Actions to be Posted on Edgar

While this doesn’t appeal to the prurient interest nearly as much as the recent decision to post “bedbug” letters on Edgar, Corp Fin announced yesterday that it has decided to post more Staff actions on Edgar.  Here’s an excerpt from the announcement:

Starting October 1, 2018, the Division will begin to release through EDGAR orders we issue granting or denying regulatory relief on behalf of the Commission, as identified below. We intend to continue our efforts to enhance transparency in subsequent phases by releasing additional types of documents, including those memorializing actions or positions taken by the Division staff, such as interpretive guidance and no-action relief.

Orders that will soon become available include Reg A & 1934 Act orders of effectiveness, orders declaring 1933 Act registration statements abandoned, and orders granting exemptions under the tender offer rules. This is pretty prosaic stuff, but stay tuned – availability of interpretive guidance & no-action relief on Edgar could be more interesting.

PCAOB Seeks Comment on Draft Strategic Plan For 1st Time

The PCAOB recently issued a draft of its 5-year Strategic Plan – and the accompanying press release notes that for the first time, it’s soliciting comments from the public. Here’s an excerpt from the press release with an overview of the key goals of the plan:

After its own careful study and a survey of PCAOB staff and the public, the new Board intends to:

– Broaden its approach to driving improvement in the quality of audit services and more clearly communicate how it is driving that improvement.

– Ensure that its inspections and standard-setting activities are responsive to and do not impede technological innovations.

– Engage proactively more often and directly with investors, audit committees, and other stakeholders to encourage relevant and timely conversations about the quality of audit services.

– Optimize PCAOB operations to more efficiently and effectively use resources.

– Reinforce the PCAOB’s culture of integrity, excellence, effectiveness, collaboration, and accountability.

So what’s behind the PCAOB’s decision to seek public input on its strategic plan? Here’s some insight from a recent Gibson Dunn blog:

Coming on the heels of a complete turnover of the Board and the subsequent departure of numerous senior personnel, the process by which the Board is crafting its strategic plan provides further evidence—if any were necessary—that this Board intends to seek out new ways to operate and to fulfill the PCAOB’s mission.

John Jenkins

August 20, 2018

Trump Asks SEC to Study Semi-Annual Reporting (Big Deal or Big “So What?”)

On Friday, President Trump announced via Twitter (naturally) that he had asked the SEC to study the possibility of moving from quarterly to semi-annual reporting for public companies.  As we’ve previously blogged, this isn’t a new idea. Less frequent reporting also dovetails with recent calls from a “Who’s Who” of business groups & CEOs to eliminate the practice of providing quarterly earnings forecasts – but even many of these business leaders continue to endorse quarterly SEC reporting.

But if the SEC did move to a semi-annual reporting system, would that really help promote a longer-term focus?  Would it even change the practice of releasing quarterly results?  This MarketWatch editorial from last year by a group of B-school profs who studied the issue suggests that the answer to both questions may be “no.” Here’s an excerpt:

In 2014, the U.K. followed the E.U.’s directive and eliminated the requirement for quarterly reporting. Yet, less than 10% of all U.K. public companies have so far moved to semi-annual reporting. These were mainly companies involved in the energy and utility sectors, where investments of 20-30 years are typical. However, the investment level of companies moving back to semiannual reporting did not increase more than those companies continuing to report quarterly.

Accordingly, our research strongly suggests that moving from quarterly to semi-annual reporting is not an effective response to concerns about the undue corporate emphasis on short-termism. If quarterly reporting focuses company executives on profit maximization in the upcoming three months, then semi-annual reporting might logically focus these executives on attractive investments in the upcoming six months — not over the next three to five years.

In contrast, another recent study suggests that less frequent reporting may help reduce short-termism – but that study was based on a review of the effect of changes in reporting mandates that occurred long before the advent of the 24-hour news cycle, the Internet & social media.

In our current information-saturated environment, it might be a stretch to conclude that the behavior of public companies & investors would change much based solely on the SEC’s decision to reduce the frequency of mandatory reporting. I doubt companies would alter their internal accounting cycle or stop generating quarterly financials for internal use (and many probably would also voluntarily file 10-Qs).  My guess is that our experience would mimic the UK’s – although you never know…

Investor groups are likely to strenuously oppose any effort to move to semi-annual reporting – this press release from the CII in response to the President’s announcement is a case in point. Also see this Vox article – and Cooley blog.

”The Accountable Capitalism Act”: Attacking Short-Termism From the Left

Meanwhile, in a parallel universe, Sen. Elizabeth Warren introduced her own prescription for short-termism – ”The Accountable Capitalism Act”.  Under her proposal, all companies with $1 billion in annual revenues would be required to be chartered by the federal government.  As this New Republic article explains, those federally-charted companies would also have some pretty unusual governance provisions:

Under the federal charter, companies would be required to consider the interests of workers, customers, communities, and society before making major decisions. Employees would elect at least 40% of all company directors, giving them representation on corporate boards.

That would involve worker representatives in decisions like whether to engage in political spending, which would require sign-off from 75% of all directors and shareholders. Finally, executives who receive shares of stock as compensation would have to hold them for at least five years.

Sen. Warren explained the rationale for her legislation in this WSJ editorial. Here’s an excerpt:

As recently as 1981, the Business Roundtable—which represents large U.S. companies—stated that corporations “have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” This approach worked. American companies and workers thrived.

Late in the 20th century, the dynamic changed. Building on work by conservative economist Milton Friedman, a new theory emerged that corporate directors had only one obligation: to maximize shareholder returns. By 1997 the Business Roundtable declared that the “principal objective of a business enterprise is to generate economic returns to its owners.”

That shift has had a tremendous effect on the economy. In the early 1980s, large American companies sent less than half their earnings to shareholders, spending the rest on their employees and other priorities. But between 2007 and 2016, large American companies dedicated 93% of their earnings to shareholders. Because the wealthiest 10% of U.S. households own 84% of American-held shares, the obsession with maximizing shareholder returns effectively means America’s biggest companies have dedicated themselves to making the rich even richer.

I’m no pundit, but I’ll still go out on a limb and say that in the current political climate, my beloved Cleveland Browns have a better chance of winning the Super Bowl than this legislation does of getting enacted.

Poll: What’s The Longest Longshot?

Please take a moment to participate in our anonymous poll:

online polls

John Jenkins

August 17, 2018

The “Nina Flax” Files: 10 Things I Accomplish Before 8:30 am

A friendly competition is brewing between our two “list-makers.” In the first edition of “The ‘Karla Bos’ Files,” Karla said she keeps of list of the 10 things (or more) that she accomplishes before 8:30 am every weekday. Inspired, Nina Flax decided to share her own morning rituals – so eventually we’ll be able to compare how two powerhouse individuals start their day. From Nina:

Here is one for the “Flax-Bos Throwdown of 2018.” Or maybe dance off. Though I don’t know if I’m “Team Britney” or “Team Justin.” Here are 10 things (not more) I accomplish before 8:30 a.m. every workday:

1. Wake Up. This is a MAJOR accomplishment for me. I am not a morning person, never have been. Would much prefer to stay up until 4 a.m. and sleep until 11 a.m. (but who am I kidding, I never get 7 hours of sleep anymore). Now there is child in my life. So, when he wakes up shouting “Papa, the sun is awake!” I too am awake. Even when I’ve been up past 2 a.m. working – or making lists…

2. Scan Email for Urgent Messages. I have taken to putting my phone in airplane mode at night, and leaving it not on the bedside table but on the floor (I think maybe this is helping my sleep?) – but I still scan my emails first. Being in California, I wake up to so many emails every morning from people further east and need to have the peace of mind that I have responded to everything urgent.

3. Kiss Child. Every morning – though sometimes by FaceTime. Funny aside on this. I have a very close friend who works at Facebook. My parents are very close to said very close friend, and when they come to visit me, they like to visit her on campus. I can’t take the time to describe the awesomeness of campus – but a particular focus of my father’s is their meatza (meat pizza). On one of my parents’ first visits to campus, my father said (out loud, he is not quiet and the area we were in was completely open plan): “You know, [friend]. You tell that Mark Zuckerberg that he missed the boat letting Apple get the name FaceTime.” I’m not kidding. It was hilarious.

4. Get Ready for Work. Usually while trying to continue to monitor emails and/or scanning LinkedIn for any interesting news updates. This usually includes cajoling child to brush his teeth. It is a real struggle.

5. Make Sure Creatures are Fed. Well, not all creatures. My husband always feeds the dogs (and in this I will not be upset when he uses the word always – this is different from arguments). But I usually make sure that child and fishy (or, I should say fishy 2.0) will get food – even if this is asking someone else to make sure it happens. That counts, right?

6. Drive to Work; Call Dad. (a) I don’t like to be on the phone at home, (b) somehow even though I live in Silicon Valley there are many dead spots in my house, and (c) I can’t (or at least I’m not supposed to) monitor emails while driving. So I always try to get the most out of my time in the car by making calls. The vast majority of the time one of my calls is to father mentioned above. We kibbitz and I sometimes try to explain how to accomplish various tasks on his iMac or iPad. Which is actually really hard without being able to look at your own screen to explain the way different icons and menus look. The rest of my calls are to colleagues to connect quickly on outstanding tasks, catch up on matters, etc.

7. Park Between the Lines. If you lived around here, you would know that many people do not accomplish this. I really don’t understand it. (My husband if he were talking to you would point out that I too, once, parked outside the lines – and got a ticket.)

8. Shout Hello to My Group. Anyone who sits by me in the office knows when I arrive. I am a big believer in hello’s & goodbye’s (and other things to connect – which I will save for another list).

9. Run to the Kitchen to Get Coffee. I am addicted to caffeine. I am okay with this.

10. Really Start to Work. When I lived in Chicago, trust me, this was a rarity before 8:30 a.m. I never subscribed to the Midwest way of earlier to work (but also was in the office later than most on a regular basis – see accomplishment #1 above).

Limits on Director Information Rights

We’ve blogged a couple of times – see this blog and this blog on DealLawyers.com – about the ongoing dispute between CBS & its controlling shareholder. If you like to “nerd out” on corporate law issues, this litigation just keeps on giving. Here’s the intro from this Francis Pileggi blog:

In the latest iteration of the ongoing litigation, the Delaware Court of Chancery recently provided a textbook summary of the general rule that directors have the right to unfettered access to corporate data, with three general exceptions. In this case, one of those exceptions to the general rule applied to prevent directors who were adverse to a Special Committee from obtaining communications with counsel for the Special Committee.

Lease Accounting: FASB Proposes Changes

It seems that FASB has noticed the sad state of implementation efforts for the new lease accounting standard. Earlier this week, they proposed a few changes aimed at easing the burden. The Exposure Draft addresses these topics:

1. Sales taxes & other similar taxes collected from lessees

2. Certain lessor costs paid directly by lessees

3. Recognition of variable payments for contracts with lease & non-lease components

Comments are due September 12th.

Liz Dunshee

August 16, 2018

IPO Governance Trends: Not “Shareholder Friendly”

Lots of interesting stuff in this Davis Polk survey of IPO governance trends among the Top 50 companies by deal size. There hasn’t been much change in the prevalence of defensive measures:

– 90% of companies adopted a classified board
– 94% of companies adopted a plurality vote standard for uncontested director elections
– 84% of companies effectively prohibited shareholder action by written consent
– 84% of companies had provisions prohibiting shareholders from calling a special meeting
– 78% of companies required a supermajority shareholder vote for amending the bylaws
– 90% of companies adopted exclusive forum provisions (up from only 14% in 2011)

When it comes to governance topics that aren’t necessarily enshrined in the articles & bylaws (and, interestingly, that many people agree shouldn’t receive “one-size-fits-all” treatment), more companies have been adopting “shareholder-friendly” practices:

– Average level of director independence was 73% of the board
– Over 80% of companies had fully independent audit, compensation & governance committees
– 52% of companies separated the role of chair & CEO (up from 34% in 2011)
– 38% of companies had an independent chair, and 33% of the remainder had a lead director

Of the 50 companies, 19 listed on the NYSE and 31 listed on Nasdaq. The survey also takes a separate look at practices among the Top 50 controlled companies.

Responsible Investing: Institutional Investor Trends

Recently, Aon surveyed 223 institutional shareholders about their “responsible investing” initiatives (also see this Morgan Stanley survey). There’s been a dramatic upsurge of interest in this area – more than a quarter of the world’s professionally-managed assets now have a responsible investing mandate – and the 28-page report cites to a number of large studies that show a link between high ESG rankings & performance. Here’s some takeaways:

– Overwhelmingly, the most common type of responsible investing is incorporating ESG factors into investment decisions – as opposed to applying values-based screens to exclude or include investments (but note that when it comes to active investors, this Clermont Partners survey says that 47% apply a screen – and we’ve blogged about State Street and BlackRock initiatives).

– EU & UK investors are much more likely to have responsible investment policies in place, compared to US investors.

– Only about 35% of respondents (15% of US respondents) said that they use shareholder engagement/activism & proxy voting to express their responsible investment initiatives.

– Climate change is the top concern, followed by other environmental issues, bribery & corruption, weapons manufacturing and human rights.

– Lack of consensus on ESG factors, returns, materiality and definitions hinders progress.

The report also touches on retail investing – ESG assets have more than doubled since 2014. Strangely, this survey found that wealth advisors currently believe there’s low demand for “socially responsible investing” – but they expect growth over the next five years…

Impact Investing: Continued Growth

In this “Annual Impact Investing Survey,” the Global Impacting Investing Network looked at 229 “impact investors” – including fund managers, foundations, banks, family offices, and pension funds. Here’s a few interesting findings:

– 84% of respondents that make both impact and conventional investments noted that their organizations are making more impact investments and are demonstrating greater commitment to measuring and managing their impact. Just 6% of respondents indicated greater reluctance to making impact investments at their organizations.

– Over half of respondents target both social & environmental objectives. An additional 40% primarily target social objectives, and 6% primarily target environmental objectives.

– Most respondents reported using a mix of tools or systems to measure their social & environmental performance. Most commonly, respondents use proprietary metrics and/or frameworks that are not aligned to external methodologies (69%), qualitative information (66%), or metrics aligned with IRIS (59%). Further, two years after the ratification of the Sustainable Development Goals (SDGs) by the UN, three out of four investors report tracking their investment performance to the SDGs or plan to do so in the future.

Liz Dunshee

August 15, 2018

Transcript: “Insider Trading Policies & Rule 10b5-1 Plans”

We have posted the transcript for our recent popular webcast: “Insider Trading Policies & Rule 10b5-1 Plans.”

Getting a “Cyber-Savvy” Board

There was a time – not that long ago! – when data breaches were a rare event, nobody had heard of Cambridge Analytica and AI was mainly a sci-fi movie concept. There was also a time when having one director with “cyber” expertise was enough to signal a board’s commitment to understanding cyber threats & opportunities.

But somewhere along the way, people began to appreciate that boards can’t rely on one “digital director” to solve all of their cybersecurity and cyberstrategy needs – doing that is the corporate-governance equivalent of this overused meme. This Spencer Stuart blog explains how the scenario often plays out with “next-gen” directors who are recruited for their tech skills:

Just because someone has worked at Facebook doesn’t mean he or she knows how to guide a 100-year-old company through a transition to e-commerce. Likewise, someone with digital marketing experience may not know the first thing about cybersecurity.

Boards need to better assess their company’s needs and the candidate’s capabilities, and prospective directors need a better understanding of what board service entails. In addition, boards should know that “next-gen directors,” broadly speaking, are very disinterested in sitting on a board where they aren’t making an impact on real issues: strategy, technology roadmap, etc.

This EY memo elaborates on how directors can use their existing skill-sets to oversee cyber issues – with help from dashboards, crisis planning exercises, third-party experts and resources that identify regular questions for management. And check out this WSJ blog for a story about Avon’s new “digital board” – an advisory group consisting of internal & external members – which will report to the board and executive committee.

The Incredible Shrinking Stock Market?

It’s been a year since we’ve blogged about the dwindling number of public companies. The trend continues – and this study examines the consequences to the general public. It says that the problem isn’t just that there’s a shrinking pie and fewer choices for “Main Street” investors – it’s that society now has less visibility into the privately-held entities that generate jobs & profits.

But for a more positive view, this essay – “Rumours of the Death of the American Public Company are Greatly Exaggerated” – says that everything’s fine. As summarized in this Cooley blog, companies still either go public (eventually) or get acquired by public companies – and the aggregate market cap of the remaining behemoths is higher than ever. The author isn’t as concerned with retail investors “having less scope to capture the upside of fledgling companies.”

Liz Dunshee

August 14, 2018

Survey Results: More on Whistleblower Policies & Procedures

Every few years, we survey developments in whistleblower policies & procedures (we’ve conducted several surveys in this area). Here’s the results from our latest one:

1. Over the last year, when it comes to our whistleblower policy, our company:

    – Has changed existing policies to address the latest whistleblower developments – 6%
    – Hasn’t yet, but intends to change existing policies within the next year – 6%
    – Not sure yet if will change existing policies – 53%
    – Has decided not to change existing policies – 35%

2. The board committee charged with consideration of the SEC’s whistleblower rules is:

    – Audit Committee – 88%
    – Corporate Governance Committee – 12%
    – Risk Committee – 0%
    – Compliance Committee – 0%
    – Compensation Committee – 0%
    – Board as a whole – 0%

3. Our company:

    – Has provided incentives for whistleblowers to report internally first – 6%
    – Hasn’t yet, but intends to provide incentives for whistleblowers to report internally first – 6%
    – Has decided to not provide incentives for whistleblowers to report internally first – 88%

4. Our company:

    – Has created a system to alert employees of the benefits of reporting internally (eg. sign updated employee handbook, fill out compliance questionnaires) – 31%
    – Hasn’t yet, but intends to create a system to alert employees of the benefits of reporting internally – 6%
    – Has decided not to create a system to alert employees of the benefits of reporting internally – 63%

5. Since the SEC adopted its whistleblower rules, our company has had:

    – More whistleblower claims reported internally – 6%
    – Same number of whistleblower claims reported internally – 94%
    – Fewer whistleblower claims reported internally – 0%

Please take a moment to participate anonymously in these surveys:

– “Quick Survey on Political Spending Oversight
– “Quick Survey on Board Fees for CEO Search

Corp Fin Comment Letters: Now Few & Far Between?

This “Audit Analytics” blog takes a look at macro trends in 10-K, 10-Q and 8-K comment letters. The average number of days to resolve comments has dropped significantly over the last seven years – from 86 days in 2010 to only 44 days last year.

The total number of comment letters has also steadily declined during that time period. This decrease is due in part to the declining number of public companies – but it also results from Corp Fin’s more recent principles-based approach to comments and a big drop-off in Regulation G-related comments during the last year. Don’t get too carried away with non-GAAP, though – the number of 8-K comment letters on this subject is still well above the low-water mark.

A View on Professors as Expert Witnesses

In this podcast, Professor J.W. Verret discusses Veritas Financial Analytics – the only expert witness firm operated by professors – and more:

– What’s it like being a professor?
– What type of dealings do you have with Congress?
– Why should professors run an expert witness firm?
– How does Veritas Financial Analytics differ from other expert witness firms?

Liz Dunshee

August 13, 2018

Corp Fin’s New “Small Entity Compliance Guide”

On Friday, Corp Fin posted this “Small Entity Compliance Guide” – which summarizes the recent amendments to the smaller reporting company thresholds & clarifies when newly-eligible companies can transition to scaled disclosure. For a summary, see this blog from Cooley’s Cydney Posner. Here are a few key points:

– Companies determine SRC status annually as of the last business day of their second fiscal quarter. If a company doesn’t qualify under the “public float” test, it would then determine whether it qualified based on annual revenues in its most recent fiscal year completed before the last business day of the second fiscal quarter.

– A company that’s newly qualified as an SRC can elect to use scaled disclosure beginning with the second quarter Form 10-Q. A company must reflect its SRC status in its Form 10-Q for the first fiscal quarter of the next year.

– For purposes of the first determination of SRC status after the September 10th effective date of the new rules, companies will qualify if they meet the revised definition as of the last business day of their most recently-completed second fiscal quarter. Companies can use scaled disclosure in their next current or periodic report due after September 10th (or filed on or after September 10th, in the case of transactional filings without a due date). The guidance has a handy chart that shows when companies with various fiscal year ends can transition.

We’re posting memos about the new rules in our “Smaller Reporting Company” Practice Area.

More on “Who Administers Political Spending Policies?”

We’ve blogged a couple of times about political spending oversight – and the risk that candidates who have received company contributions might end up supporting positions that conflict with the company’s position. For an activist’s view on these risks – and recommended board policies & procedures – check out the Center for Political Accountability’s recently-issued 36-page report.

Mark your calendar for our webcast – “How Boards Should Handle Politics as a Governance Risk” – to be held on Wednesday, November 28th. And there’s still time to take our 3-question “Quick Survey on Political Spending Oversight.”

“Greenhouse Gas” Coalition Adds Target Companies

Recently, Climate Action 100+ – a coalition that includes 225 investors with $26 trillion in assets under management – announced that it’s adding 61 companies to its focus list, bringing the total to 161 companies worldwide. They’re selecting companies based on these criteria:

– Reported & modeled greenhouse emissions data (including emissions associated with the use of their products)

– Materiality to investor signatory portfolios

– Significance of their opportunities to drive the clean energy transition

Since December, 18% of focus companies officially support or have committed to implement recommendations from the ‘Task Force on Climate-related Financial Disclosures’ and 22% have set or committed to set a target for reducing their emissions beyond 2030.

Liz Dunshee

August 10, 2018

Form 8-K Filings: Goin’ Down, Down, Down. . .

This FEI blog reports that the number of Form 8-K filings peaked in 2005 & is now approaching pre-Sarbanes-Oxley levels. The SEC’s rules expanding the items triggering an 8-K reporting obligation went into effect in August 2004. Over 112,000 8-Ks were filed in 2005 – the first full year of the new regime – and the number’s been on the decline ever since. Last year, approximately 69,000 8-Ks were filed, compared with 65,000 during 2003.

Why the decline? The blog speculates that increased use of social media for communicating information to investors may have something to do with it. But I kind of think that ignores the elephant in the room – the number of public companies has fallen off a cliff.

Here are some thoughts from WilmerHale’s David Westenberg on what’s behind the decline in 8-K filings:

I think the most important reason for the decline in 8-K filings is the change in executive compensation disclosure requirements. This trend is evident when you look at the data on a per-issuer basis. Below is an extract from my IPO book, describing an analysis we did on this subject. I have not yet updated the data for 2017 but do not expect any significant change in this trend.

“Since 2003, many new categories of reportable events were added to the Form 8-K rules, moving Exchange Act reporting closer to a real-time basis. As a result, a typical public company now files many more Form 8-Ks per year than it did prior to the rule changes.

Based on an unscientific sampling of Form 8-K filings by 57 public companies of various sizes across sectors, the median number of Form 8-Ks filed by these companies annually between 2000 and 2002, the three-year period before the rule changes, was 2.67, and the median number of Form 8-Ks filed by the same companies annually between 2005 and 2007, the three-year period following the rule changes, was 13.33.

In the 2000 to 2002 period, the most Form 8-K filings by any of the surveyed companies in any one year was 28; two of the surveyed companies did not make a single Form 8-K filing during this period, and five companies filed only one Form 8-K each.

In the 2005 to 2007 period, the most Form 8-K filings by any of the surveyed companies in any one year was 53, and the fewest was five. Form 8-K filings have since declined in number due to further rule amendments in late 2006 and subsequent SEC staff interpretations regarding the reporting of executive compensation arrangements.

Between 2008 and 2016, among the 38 companies from the original sample that remained independent throughout this period, the median number of Form 8-Ks filed annually was 11.95; the highest number of Form 8-K filings in any one year was 41, and the lowest was four. All of the foregoing data includes Form 8-Ks that are “furnished” under Item 2.02 and Item 7.01 rather than “filed.””

Board Diversity:  An Activism Repellant?

If you need another reason to increase the number of women on your board, try this one on for size – there’s a study suggesting a correlation between the number of women directors a company has & the likelihood that it won’t be an activist target.  This excerpt from a recent “Corporate Secretary” article lays it out:

According to a study of 1,854 public groups by the Alvarez & Marsal (A&M) consultancy, European businesses that have more female directors are less likely to be targeted by activist investors. The analysis found that companies not targeted by hedge fund activists had, on average, 13.4 percent more women on their boards.

Paul Kinrade, managing director at A&M, said there are many factors that can result in a business coming under scrutiny from activists, including diversity. ‘We would not go so far as to say that gender mix is a primary driver of shareholder activism, but our research shows it is certainly a factor and it demonstrates the value of a greater diversity of thinking at board level,’ he said. ‘A board that contains a broader and more rounded view on the disruptive forces in their given markets will increase a company’s resilience and flexibility.’

The study only addressed European companies, but it would be interesting to see data on the US experience.

Lease Accounting: Things Are Looking Sort of Grim

When we last updated you about the status of implementation efforts for FASB’s new lease accounting standard, nobody was ready, Wall Street analysts didn’t care, but the SEC very much did. According to this recent Deloitte report, the clock is still ticking – but the mood among financial execs is darkening. Here’s an excerpt from the press release announcing the report:

Deloitte’s April 2018 poll of more than 2,170 C-suite and other executives shows confidence is declining as those feeling unprepared to comply (29.5%) nearly double those feeling prepared (15.6%). This represents a drop from January 2018 statistics: unprepared (22.4%) and prepared (19%). Moreover, nearly one-half of executives (49.3%) report they are either “very” or “somewhat” concerned about implementing on time—up from 47.1% in May 2017.

The new standard goes into effect on January 1, 2019, and while FASB continues to try to lift accountants’ spirits by providing additional relief from certain aspects of the new standard, it still looks like things might get ugly.

John Jenkins

August 9, 2018

Insider Trading: Congressman Allegedly “Tipped” Sellers

Yesterday, a federal grand jury indicted Congressman Chris Collins (R-NY) on a variety of fraud-related charges arising out of alleged insider trading in an Australian biotech company for which he served as a director. He was also charged with making false statements to the FBI. Parallel civil securities fraud charges were filed by the SEC (for the newbies out there, the SEC only has the authority to bring civil charges; not criminal).

According to the indictment, Rep. Collins disclosed to his son the negative results of a clinical trial for a drug being developed by his company.  In turn, Collins’s son, along with his future father-in-law, allegedly sold shares in the company on the basis of the non-public information about the trial results & tipped other persons who also traded. Both of those men were also indicted.

Rep. Collins’s involvement with this company has been the subject of an investigation by the House Ethics Committee. He has denied the charges made against him.

Members of Congress have long demonstrated uncanny abilities as stock pickers – particularly when it comes to industries for which they have oversight responsibilities. In 2012, Congress enacted the STOCK Act, which was intended to combat legislative insider trading.  But according to this “Washington Post” editorial, its results have been mixed.  The number of trades by legislators has declined sharply since the statute was enacted, but as this excerpt notes, problematic trading practices remain:

Of the senators who remain active in the stock market, they have a high propensity for trading stocks in businesses they directly oversee from their committees. From these perches, members of Congress often are privy to information that could directly affect the value of stocks, posing a serious conflict of interest when trading in those markets.

Politico found a similarly disturbing trend in both chambers of Congress. Politico identified about 30 percent of members of the House and Senate who are currently active in the stock market. Several of these members play in the markets over which they have some direct legislative responsibility — in some cases, even sponsoring legislation that could have a direct bearing on their stock investments.

Regardless of its outcome, the Collins case is a reminder that insider trading on Capitol Hill remains a live issue – and that there’s still a lot of work necessary to drain this part of the swamp.

More On “To Reg FD & Beyond!” – Mr. Musk, We’d Like a Word With You. . .

In what may be the least surprising development in the history of securities regulation, the WSJ is reporting that the SEC has come knocking on Tesla’s door to discuss Tuesday’s series of extraordinary events:

Securities regulators have inquired with Tesla about Chief Executive Elon Musk’s announcement that he may take the company private and whether his claim was factual, people familiar with the matter said.

The SEC has asked the company whether Mr. Musk’s unusual surprise announcement on Tuesday was factual, the people said. The regulator also asked about why the disclosure was made on Twitter rather than in a regulatory filing, and whether the firm believes the announcement complies with investor-protection rules, the people said.

Meanwhile, there continues to be media speculation about whether Musk’s announcement of a possible Tesla buyout via Twitter violated the securities laws.

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John Jenkins

August 8, 2018

“To Reg FD & Beyond!” Elon Musk’s Tesla Tweetstorm

So, Elon Musk arrived at work yesterday and decided to tweet this:

Utter chaos then ensued. More tweets followed, Tesla’s stock soared, shorts got squeezed, Nasdaq halted trading, Tesla blogged more details, and the stock began trading again & closed up 11% on the day. Meanwhile, people began to chatter about whether Musk violated Reg FD – or whether he might face bigger legal woes.

The Reg FD issue is an interesting one. Over on “Broc Tales,” Broc had a great blog a while back about the perils of CEO social media accounts & the potential need for a “Twitter baby-sitter.”  Mindful of the Netflix 21(a) report, I took a quick look at Tesla’s investor page & didn’t notice anything indicating that Elon’s twitter feed would be a channel of investor information – but that’s because it happened so long ago, in a 2013 Form 8-K (hat tip to this MarketWatch article). Tesla did this in November 2013, the tail end of when a slew of companies filed this type of 8-K in the wake of the SEC’s latest social media guidance (companies seem to have stopped filing those 8-Ks, but that’s for another blog). So, maybe there’s an issue – or maybe there’s not?

Elon Musk has 22 million followers & has been using his Twitter account to share info with investors for years, so it seems like a stretch to say that his tweets aren’t a “recognized channel” for Tesla information by now – particularly given that Tesla 8-K’ed about it five years ago.  He’s practically. . . umm – is “presidential” the right word? – in his use of social media to get information out, so while I doubt Elon cares much about Reg FD, my initial impression is that he’s got a decent argument that he hasn’t run afoul of it.

In any case, Reg FD just might turn out to be the least of Elon’s problems when it comes to his unconventional approach to disclosure. As Prof. John Coffee noted in this “Yahoo! Finance” article, Musk may face some exposure if he fudged about the financing:

If Musk’s aim was to temporarily boost Tesla’s stock in order to force losses on short sellers, it could be considered stock manipulation, which is illegal. “That’s too inviting to a plaintiff’s lawyer not to sue,” says Coffee. “This would be an attractive lawsuit. The people who think he’s manipulating the market would say they’ve suffered an injury, and you could pull all those losses together in a class action.”

If, on the other hand, Musk can demonstrate that he has actually arranged financing for a private buyout, or made serious efforts to do so, he might be off the hook.

It should be very entertaining to watch this whole thing unfold, but there’s one question that I’m just dying to get an answer to – what did Elon’s lawyers do to make him hate them this much?  Tesla lawyers, the Excedrin’s on me!

Sustainability: Beware The Golden State, Delaware Virtue Signalers!

A few weeks ago, I blogged about Delaware’s new voluntary sustainability certification regime.  The state’s new statute goes to considerable lengths to disclaim any liability for actions that boards & corporations take with respect to it – but this recent blog from Keith Bishop says “not so fast.”

It turns out that those companies that want to hang out Delaware’s gold star for sustainability may find themselves in the cross-hairs in California.  Here’s an excerpt:

California has enacted an extremely broad unfair competition law, Bus. & Prof. Code § 17200, that seeks to protect both consumers and competitors from any unlawful, unfair or fraudulent business act or practice. By proscribing unlawful competition, California’s UCL does not enforce the borrowed statute, but treats them as unlawful practices that the UCL makes independently actionable. Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163, 180 (1999).

When the inevitable UCL suit is filed in California against a Delaware corporation for allegedly false or misleading “virtue signaling” under the Delaware statute, the California courts will face interesting questions of conflict of laws and comity.

Looks like there’s still no such thing as a free lunch.

Succession Planning: Most CEOs Say They Weren’t Ready

CEO succession planning has become an increasingly important issue – and as Broc recently noted, one that’s even made an appearance in pop culture.  However, if you measure a company’s succession planning efforts by the readiness of a new CEO to grab the reins, this Harvard Business Review article says that there’s a lot more work to be done.

According to the article, 68% of CEOs say that they weren’t fully ready for their job – and as this excerpt suggests, that’s not the only shortcoming when it comes to succession planning:

This signals that something is missing in internal hiring and development processes, and in board management of CEOs. Indeed, among CEOs who’d risen in the ranks through their firms, only 28% told us they’d been adequately prepared for the top job, and among all respondents, only 38% said they turned to their board chairman for honest feedback, while only 28% sought counsel from non-chairmen directors.

Egads! That’s practically the definition of a dysfunctional process.

John Jenkins