November 8, 2018

Corp Fin Tweaks CDIs Due to New “Smaller Reporting Company” Def’n

Yesterday, Corp Fin updated 4 CDIs to address the implications of the SEC’s adoption of rule amendments increasing the number of “smaller reporting companies” (SRCs) eligible to provide scaled disclosure. The updated CDIs reflect the impact of changes in the size thresholds for SRC status on prior interpretive guidance.

Corp Fin also withdrew 4 CDIs addressing transition issues for SRCs, as well 2 obsolete CDIs relating to old Reg S-B and a misstatement in the original SRC adopting release concerning when SRCs would have to provide audit committee financial expert disclosure. Here’s the tally of CDIs that were updated or withdrawn:

1. Exchange Act Rules CDIs – Section 130. Rule 12b-2:
– CDI 130.04 (withdrawn)
– CDI 169.01 (withdrawn)
– CDI 169.02 (withdrawn)
– CDI 169.03 (withdrawn)

2. Regulation S-K CDIs – Sections 102 & 202. Item 10 — General:
CDI 102.01 (updated)
CDI 102.02 (updated)
CDI 202.01 (updated)

3. Section 110. Item 303 — Management’s Discussion and Analysis of Financial Condition and Results of Operations:
– CDI 110.01 (withdrawn)(obsolete guidance relating to inapplicability of old Reg S-B provision)

4. Section 133. Item 407 — Corporate Governance:
– CDI 133.09 (withdrawn) (correction of misstatement on financial expert disclosure in original SRC adopting release)

5. Exchange Act Forms CDIs – Section 104. Form 10-K:
CDI 104.13 (updated)

Check out this Cydney Posner blog for a more detailed analysis of the updated CDIs. And also see Cydney’s blog about how the NYSE has proposed changes to Section 303A.00 of the Listed Company Manual related to the exemption from the compensation committee requirements applicable to SRCs due to the SEC’s recent changes to the SRC definition.

ESG: Making Sense of the Current Landscape for Boards

This Skadden memo reviews the many facets of the environmental, social & governance (ESG) issues that boards are confronted with and offers insights into how boards can make sense of the current environment. ESG issues can manifest themselves in a variety of ways – including shareholder proposals, surveys from ESG rating services, investor proxy voting policies, ESG-based activism, and legislation. This excerpt provides some thoughts on how boards should approach those issues:

To borrow a phrase from then-Justice Andrew Moore of the Delaware Supreme Court, in his 1985 Revlon decision, directors would appear to have wide latitude — and responsibility — for dealing with ESG issues to the extent they represent matters “rationally related [to] benefits accruing to the stockholders.”

That said, it is incumbent on directors to do their homework and apply appropriate processes to establish informed decision-making regarding that key determination — which also will enable them to defend challenges to spending shareholder money on “causes” that not all shareholders may support and to demonstrate to the “new” shareholder constituency, ESG investors, the attention paid to the subject at the board level.

Beyond that, of course, are a myriad of other important and potentially difficult decisions that may be required. These may include: Whether, when, to whom and how to engage in outreach regarding ESG issues. Choosing among ESG matters. Deciding how, how much and when to spend company resources to support selected ESG matters. How and when to communicate choices made and actions taken.

While the stakes are higher than ever when it comes to decisions surrounding ESG issues, the memo notes that these ultimately are board decisions that – like any other – require the exercise of business judgment in the best interests of the company and its shareholders.

ESG: More Sustainability Disclosure Means Less Analyst Coverage?

I guess this falls under the heading of “no good deed ever goes unpunished” – but in any event, a new study from a group of B-School profs suggests that the price for providing additional sustainability disclosures may be a reduction in the number of analysts following your stock & lower quality coverage. This excerpt from a recent article on the study summarizes its findings:

As the number of environmental performance ratings for firms in their portfolio increases, analysts cover fewer firms and provide fewer and less timely revisions for earnings-per-share forecasts. The average number of firms in their portfolios dropped 14.2 percent or 1.1 firms. Revisions to earnings-per-share forecasts decreased 3.2 percent, and those issued within two days of quarterly earnings reports were down 1.4 percent.

The study concludes that the effects are greater for negative environmental concerns than for environmental strengths, and suggests that part of the problem may be in the lack of a standardized approach to this type of disclosure.

Speaking of standardization, this King & Spalding memo notes that a rulemaking petition has been filed on behalf of a group of institutional investors requesting the SEC to develop a “comprehensive framework for clearer, more consistent, more complete, and more easily comparable information relevant to companies’ long-term risks and frameworks” to provide clarity on ESG reporting for US companies.

John Jenkins