Monthly Archives: December 2018

December 28, 2018

Proxy Access: Second Use of Access Bylaw to Nominate Director!

Well, it’s been over two years since the first filing of a Schedule 14N at National Fuel Gas. You’ll recall that was Gamco’s failed attempt to utilize proxy access. But we finally have a second Schedule 14N filed yesterday for “The Joint Corp.” By looking at the name, I thought this company would have something to do with legalized marijuana. But it’s actually a chiropractic franchise

The Interesting Back Story for this Schedule 14N

From what I can glean, here’s the back story for this Schedule 14N at “The Joint Corp”:

1. A shareholder proposal to adopt proxy access was approved – with 96.05% support – at the company’s annual meeting on June 1st of this year (there were a lot of broker no-votes – nearly one third). A few months after, the board amended the bylaws to adopt proxy access. As you can see from the company’s proxy statement, the board had not made a recommendation for – or against – the proposal. According to this Form 8-K, the board implemented proxy access in August on standard terms (3% – 3/20% – 20).

2. The director nominee, Glenn Krevlin, is listed as a ‘greater than 10%’ stockholder (aggregated with funds he controlled at Glennhill Capital, an activist hedge fund) in the most recent proxy. Note the ‘proxy access’ shareholder proposal mentioned in #1 above was filed by a different shareholder. According to the Schedule 13Ds filed by Glennhill, it began selling its stock soon after the proxy was filed and was below 5% within a couple of weeks. (This might be due to Krevlin winding down some funds he was associated with.)

3. This Schedule 14N was filed by the brother of the corporate secretary for The Joint Corp! (The brother is the trustee of the actual filer.) Might have been an interesting holiday for that family.

4. One last intrigue: the brother/trustee who filed this Schedule 14N had served on the board of the company until March 2017. When he left the board, this is what that Form 8-K said: “On March 14, 2017, Steven P. Colmar resigned from the board of directors of The Joint Corp, effective as of March 17, 2017. While Mr. Colmar’s letter of resignation did not cite any specific disagreements with management, in prior communications with the Company and various members of its management and board of directors, Mr. Colmar expressed disagreements about the Company’s strategic direction and management’s ability to execute upon it.”

Broc Romanek

December 27, 2018

The First CAM

Hat tip to Steve Quinlivan for finding the first CAM in this SEC filing from “Church Capital Fund”:

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

As discussed in Note 3 to the financial statements, the financial statements include investments valued at $8,658,675 (49% of net assets) as of September 30, 2018, whose fair values have been estimated by management in accordance with policies approved by and under the general oversight of the Board of Trustees in the absence of readily determinable fair values.

The principal considerations for our determination of the investments whose fair values have been estimated by management in accordance with policies approved by and under the general oversight of the Board of Trustees in the absence of readily determinable fair values are that auditing these investments involved our complex and subjective judgment and the investments are material to the financial statements as a whole.

Our audit procedures related to these investments included the following procedures, among others to address the critical audit matter: We tested the effectiveness of the controls over the Fund’s valuation methodologies and evaluated the relevance of the qualitative components embedded in the methodology models. We also agreed underlying supporting documentation from outside specialists where applicable, agreed to actual empirical sales data as available and tested the computational accuracy of the models.

CAMs: Lessons Learned & Illustrative Example

This new publication from the “Center for Audit Quality” is useful. It presents early lessons learned from “dry runs” that auditors have conducted on critical audit matters. It also contains an illustrative example of a CAM, along with a set of new questions to foster dialogue and understanding of the impact that CAMs will have on the audit process. See this Cooley blog

PCAOB’s Post-Implementation Review: Engagement Quality Review

Last week, the PCAOB Staff posted a post-implementation review of AS 1220 about engagement quality. This is the PCAOB’s first post-implementation review for one of its standards. The review includes key findings, messages for auditors and audit committees and enhancements to achieve more effective reviews…

Last week, the PCAOB also adopted a new standard to enhance the requirements that apply when auditing accounting estimates, including fair value measurements…

Broc Romanek

December 26, 2018

The SEC’s Shutdown: Corp Fin’s 14 FAQs

With the government partially shut down, the SEC will now follow its “operations plan” that it first devised a few years ago. Corp Fin notes on this page:

We understand that the uncertainty regarding the SEC’s operating status in the event of a federal government shutdown raises concerns for registrants that plan to request acceleration of their registration statements or qualification of their offering statements in the near future. Given this uncertainty, you may consider submitting your request while the SEC is open and operating.

We will be closed December 24th and 25th in observance of the holiday. However, the SEC will remain fully operational for a limited number of days beyond the start of a government shutdown. During the time we remain open, we will conduct ordinary business. If a change in our operating status looks imminent, we will provide as much advance notice as possible. Regardless of our operating status, EDGAR will accept registration statements, offering statements and other filings; however, as discussed below, during a shutdown we will not be able to declare registration statements effective nor qualify Form 1-A offering statements.

Here’s an excerpt from this Gibson Dunn blog: “As currently envisaged, starting on December 27th, the SEC “will have only an extremely limited number of staff members available to respond to emergency situations involving market integrity and investor protection, including law enforcement.” Regardless of the SEC’s operating status, the EDGAR filing system will continue to accept reports, registration statements and other filings. Accordingly, public companies must continue to file periodic and current reports when due on Forms 10-K, 10-Q and 8-K; however, from December 27th the SEC will not be able to declare registration statements effective nor qualify Form 1-A offering statements. A prolonged shutdown could create difficulties for the IPO market and for many public companies without an effective shelf registration statement and, in particular, would create a complex calculus for any company thinking about going public in January.”

Unlike one of the prior times that the SEC shut down earlier this year – when a group of 18 law firms issued a memo about how to handle matters due to a dearth of guidance from Corp Fin – Corp Fin has issued a helpful set of 14 FAQs this time around (I wish the Division would number the FAQs; that would assist practitioners to more easily refer to a specific FAQ when in discussion). Here’s a Morrison & Foerster memo – and a Davis Polk memo about the SEC’s shutdown.

Whoa! You May Be Permitted to Remove the “Delaying Amendment”!

One of Corp Fin’s FAQs suggests that companies may want to think about removing the “delaying amendment” from their registration statement if the SEC isn’t open. The registration statement would then become effective automatically 20 days after its removal. That’s pretty wild stuff given the sacred nature of “delaying amendments” to this former Staffer. When you join Corp Fin, the first thing you’re taught is to ensure that a newly-filed registration statement has the delaying amendment on it…

A short history lesson: Back in the “way, way back” old days, the SEC Commissioners themselves would review a registration statement. This was when the SEC was first established and very few securities offerings were happening. The notion of a “delaying amendment” didn’t exist yet (not until Rule 473 of Regulation C was adopted) – so the Commissioners had to conduct their review & resolve any differences with the issuer before the 20-day period – under Section 8(a) of the ’33 Act – when the registration statement automatically became effective had passed…

Poll: When Will the Government Be Open Again…

Please participate in this anonymous poll about when the government will reopen:


Broc Romanek

December 21, 2018

Delaware Chancery Rules “Federal Forum” Provisions Ineffective

Here’s news from Richards Layton (we’re posting memos in our “Internal Affairs Doctrine/Exclusive Forum Bylaws” Practice Area):

The Delaware Court of Chancery, in Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018), has declared “ineffective and invalid” provisions in three corporations’ certificates of incorporation that purported “to require any claim under the Securities Act of 1933 to be brought in federal court.” Ruling on cross-motions for summary judgment, the Court, by Vice Chancellor Laster, ruled that “[t]he constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law. In this case, the federal forum provisions attempt to accomplish that feat. They are therefore ineffective and invalid.”

SEC Posts Hedging Adopting Release!

Yesterday, the SEC posted this 104-page adopting release for the new hedging disclosure rules. We’re posting memos in our “Hedging” Practice Area on Ho, ho, ho…

ISS Updates “Equity Compensation Plans FAQs”

Yesterday, ISS posted this updated set of FAQs for equity compensation plans, complete with 2019 burn rate benchmarks. There are 8 new or modified FAQs…

The World’s Largest Holiday Disclaimer

In what used to be an annual tradition, now-retired Cary Klafter shared this world’s largest holiday disclaimer – running for 21 pages – a few years back…

Broc Romanek

December 20, 2018

SEC Adopts Reg A for All ’34 Act Companies

Yesterday, the SEC adopted the rules allowing ’34 Act reporting companies to rely on the Reg A exemption from registration for their securities offerings. This rulemaking was required by the “Economic Growth, Regulatory Relief and Consumer Protection Act” enacted earlier this year. Here’s the SEC’s press release – and here’s the 34-page adopting release.

Meanwhile, the SEC approved the PCAOB’s budget for next year…

The SEC Closed on Xmas Eve

As noted in this executive order, all federal agencies are closed on Monday for Christmas Eve…

By the way, if the government had partially closed due to a lack of approved funding by Congress and/or the President, the SEC would have been one of those agencies that could have been impacted (but SEC Chair Clayton said a few days ago that the agency has funds available to continue to operate for a little while – like the SEC has done in recent years when the government closed). Last night, the Senate passed a short-term spending bill to avert a shutdown and hopefully the House will pass it today & the President signs it – but when this short-term funding runs out on February 8th, this threat will re-emerge.

E&S Disclosures: SEC Chair Clayton Speaks

In this blog, Cooley’s Cydney Posner summarizes commentary recently provided by SEC Chair Jay Clayton about E&S disclosures. Here’s an excerpt:

Clayton contended that the current materiality disclosure framework (“materiality, comparability, flexibility, efficiency and responsibility (i.e., liability) are the lynchpins”) is the right one, but that what goes into it needs to reassessed. That is, we need to recognize when things have changed, and, Clayton maintained, what is important now is forward-looking information. For example, Clayton observed that, because the market reflects anticipated future performance, stocks tend to move at the time of the earnings release and analyst call—when guidance tends to be issued—not at the time of filing of the 10-Q. (Is that a harbinger of his view on the need for quarterly filings, now that it’s back on the agenda? See this PubCo post.)

Although KPIs are valued because they can presage future performance, they’re not part of the regulatory framework because there is little comparability across companies or industries. As a result, adding KPIs and NGFMs to GAAP is really difficult. What Clayton would like to see with regard to KPIs and NGFMs is a clear tie-back to GAAP and period-to-period consistency for each company. In addition, he indicated, these types of measures should track how management looks at its business, not just how management wants to present its business.

Broc Romanek

December 19, 2018

SEC Requests Comment on Earnings Releases/Quarterly Reports (& Adopts Hedging Rules)

Yesterday, the SEC posted this 31-page “request for comment” about earnings releases & quarterly reports – and deleted consideration of this topic from the meeting agenda for today’s open Commission meeting. The SEC released its request for comments – and adopted the hedging rules – ahead of schedule to provide more time for the other rulemakings still on the agenda, which remains very full. We’re posting memos in our “Earnings Releases” Practice Area.

Here’s some analysis from John:

The number – and depth – of the questions the SEC raises about the relationship between Form 10-Q and earnings releases (29 out of 46) in comparison to those addressing reporting frequency suggests to me that the SEC may be more interested in tinkering with quarterly reporting requirements rather than seriously considering a move to semi-annual reporting.

Also, the SEC’s questions surrounding how a change to semi-annual reporting under the Exchange Act would impact Securities Act registration requirements suggest that even if they went to semi-annual reporting, the requirements for Securities Act filings are likely to remain unchanged. There are lots of good reasons why the SEC might do that – but if so, then changing the frequency of 10-Qs would be practically meaningless to any company that wants to preserve its ability to access the capital markets quickly.

SEC Adopts Hedging Rules

Yesterday, the SEC adopted the hedging rules required under Section 955 of Dodd-Frank. The SEC adopted the rules a day before they were supposed to be considered at today’s open Commission meeting – and deleted consideration of this topic from the meeting agenda. Except for “smaller reporting companies” and “EGCs” – which get a one-year pass to mid-2020 – the new hedging rules apply to proxies filed during fiscal years beginning after July 1, 2019.

Here’s the SEC’s press release (the adopting release isn’t available yet) – and we’ll be posting memos in our “Hedging” Practice Area on

ISS Issues “Final” Comp FAQs

Last week, ISS released its “final” compensation FAQs – the “preliminary” set was issued last month. Here’s a blog from FW Cook’s Samantha Nussbaum about the final FAQs…

Broc Romanek

December 18, 2018

Mandatory Arbitration: The Shareholder Proposals Cometh…

Here comes another salvo in the battle over mandatory arbitration. Recently, John blogged about possible problems with “compelling shareholders to arbitrate” bylaws under Delaware law (here’s an article on that topic). Now comes news about the use of shareholder proposals to have companies adopt mandatory arbitration. Here’s the intro from this WSJ article by Dave Michaels:

Johnson & Johnson is being drawn into a battle over how much freedom shareholders have to sue companies, in a bid by lawsuit opponents to force regulators to pick sides over investors’ access to the courts. Hal Scott, a Harvard University professor who represents a trust that owns J&J shares, filed a shareholder proposal with the company that would push shareholder disputes into private arbitration hearings, instead of federal court. J&J doesn’t want to bring the proposal up for a shareholder vote, and this week the health-care products company asked the Securities and Exchange Commission for permission to reject it.

Supporters of mandatory arbitration say it would save companies money and time, arguing arbitration would be faster and less expensive than grinding out federal lawsuits involving thousands of investors. Proponents argue that class-action access to the courts is vital for holding corporations and executives accountable to shareholders. “This is an important issue for the capital markets,” Mr. Scott said in an interview. “It affects whether private companies want to go public, and whether foreign companies want to list [here].”

About 8.5% of all U.S. exchange-listed companies are projected to be targets of class-action lawsuits in 2018, according to Cornerstone Research, a litigation and economic consulting firm. That is well above the 20-year average of 2.9%, Cornerstone said. Securities class-action lawsuits typically focus on claims that public companies either misled investors about important facts or events, or failed to disclose important information that would have altered shareholders’ investment decisions.

Much of the expense is born by existing shareholders, with other shareholders sometimes benefiting from a settlement or judgment. Research into whether such judgments deter future wrongdoing has been inconclusive, said Donald Langevoort, a securities-law expert at Georgetown University. Mr. Scott is seeking to list his proposal for a bylaw change that would require mandatory arbitration on J&J’s 2019 proxy statement. J&J shareholders would vote on the measure next year.

J&J wrote the SEC this week asking permission to exclude the proposal from its ballot. Forcing investors into arbitration would violate parts of federal law that forbid asking investors to waive their legal rights, J&J’s attorneys wrote. The SEC rules every year on whether companies can omit different shareholder proposals. While public companies could benefit from arbitration, some fear it would offend investors if they were to push too aggressively for it. A J&J spokesman declined comment beyond the company’s letter.

SEC Chairman Jay Clayton has said he wants to avoid a brawl over mandatory arbitration that would pit business groups against investors and likely splinter the five-member commission along party lines. Some Republican commissioners say arbitration should be given a shot if stockholders agree with it.

SEC & PCAOB Revive Chinese Auditor Scare

This MarketWatch article by Francine McKenna says it all about this recent joint SEC/PCAOB statement about the lack of regulator access to audits of Chinese companies that are listed in the US. As the MarketWatch article notes, the SEC & PCAOB haven’t told us why they released this joint statement. Was it in reaction to something they know (that we should know)? Francine ponders whether there is some big China auditor fraud brewing and the US regulators will point to this statement as “we have a “disclosure regime” style here and well, we warned you, our hands are tied here.”

Also see this podcast with Tom Fox & Matt Kelly…

How PCAOB Inspections Might Impact You…

As noted in this article, the PCAOB recently published this “outlook” about it’s intended areas of inspection for next year – some of which impact areas that audit committees are responsible for…

By the way, we’re posting memos that summarize the recent AICPA conference in our “Conference Notes” Practice Area

Broc Romanek

December 17, 2018

Transcript: “Shareholder Proposals – Corp Fin Speaks”

Due to popular demand, we have posted the transcript for last week’s webcast – “Shareholder Proposals: Corp Fin Speaks” – featuring Corp Fin’s Matt McNair in record time…

Pay Ratio: Letter from Investor Group to Fortune 500

Here’s news from this ’Willis Towers Watson’ blog:

Companies preparing for Year 2 CEO pay ratio disclosures now have more questions to consider. Recently, Fortune 500 company compensation committees began receiving a letter from a group of 48 institutional investors requesting them to disclose more information on workforce compensation practices.

The letter posits that since “disclosure of the median employee’s pay provides a reference point for understanding the company’s workforce,” companies should move “to help investors put this pay information into the context of your company’s overall approach to human capital management” with more expansive disclosure.

IRS Issues Section 83(i) Guidance

A few days ago, over on, I blogged about new Section 83(i) of the Internal Revenue Code – it allows private company employees to defer taxes for up to five years from the exercise of a stock option or settlement of a RSU. Recently, the Treasury Department & IRS issued this notice about this new provision. This memo from Davis Polk outlines the key takeaways (we’re posting memos in our “Restricted Stock” Practice Area on

– The measurement period to determine whether the employer satisfied the eligibility requirement that 80% of U.S. employees received grants is measured on a single calendar year basis and does not take into account grants made in prior years

– Employers must withhold taxes at the maximum individual rate in effect at the time the stock with respect to which a Section 83(i) election has been made (deferral stock) is treated as received in income and will be treated as a noncash fringe benefit, which will provide employers additional time to collect amounts required to be withheld from employees

– The employee and employer must agree to place deferral stock in escrow to ensure that applicable withholding taxes are deducted

– An employer may opt out of Section 83(i) by not establishing an escrow arrangement

Broc Romanek

December 14, 2018

Next Wednesday! SEC Reschedules “Quarterly Reports” Meeting (& Adds Hedging)

We blogged several weeks ago about a scheduled open Commission meeting to consider a “request for comment” on the nature & content of quarterly reports & earnings releases. That meeting was cancelled due to President George H.W. Bush’s funeral. Yesterday, the SEC posted this Sunshine Act notice for the rescheduled meeting, to be held next Wednesday – December 19th. And at this meeting, the SEC will also consider adopting the long-pending hedging rules – as required by Section 955 of Dodd-Frank…

“Human Rights” Due Diligence

A growing number of investors are starting to ask companies how they manage human rights risks – but it’s a difficult thing to get your arms around. A recent report from the “UN Working Group on Business & Human Rights” says that the best thing to do is to just get started with the four-step diligence process (as outlined in this “Executive Summary”).

This 27-page annex provides a deeper dive on tools & resources, based on “lessons learned” from early adopters. Here’s an excerpt:

Enterprises should begin to consider the risks of adverse human rights impacts associated with the sector (or sectors) in which the enterprise is operating. For instance, the extractive sector must consider the human rights in communities affected by their projects, the garment sector must consider supply chain labour practices, and the information technology sector must consider the human rights affected when privacy is not adequately protected.

These examples are only some of the risks that are obvious in these sectors. Sector risks will be associated by the nature of the products and production processes as well as with the way the sector is organized. Some risks are common to almost all sectors. As part of the identification process, the enterprise should go through the list of internationally-recognized human rights.

Trading Suspensions: The Shareholder Perspective

This MarketWatch article looks at the consequences that shareholders face when a company’s stock is suspended or delisted – and follows the journey of one company, along with its shareholders and plaintiffs’ lawyers. Here’s the intro (and find more guidance on this topic in our “Delistings/Trading Suspensions” Practice Area):

You’re a thrill seeker, trading in highflying cannabis and crypto stocks, but you think you can get out any time. Suddenly there’s news of an unexpected trading stop or suspension and delisting by an exchange or by the Securities and Exchange Commission. Is all lost?

Unfortunately, according to the SEC, that may be the case. If there’s no exchange to trade that hot stock, the shares may become worthless, the SEC warns in an Investor Bulletin about the consequences of trading suspensions.

Liz Dunshee

December 13, 2018

Retail Voting: Enormous Increase at BofA!

Earlier this year, Broc blogged about Bank of America’s campaign to increase retail voting – they were donating $1 to Habitat for Humanity for every shareholder account that votes and also featuring online director interviews. This issue of Carl Hagberg’s “Shareholder Service Optimizer” reports that the effort was a resounding success – a 41% increase in voters (on top of an 8% increase last year) and over $900k donated. And importantly, a 4% increase in pro-management votes – this can make a big difference, especially for say-on-pay. Here’s how BofA maximized its results:

– First and foremost is the marketing truism that to get results you need to “repeat, repeat and repeat” your message.

– Equally important, you need to position your messages prominently – so they will be noticed right off the bat. BofA did a masterful job of this last year with its inaugural “Special Olympics” campaign. And this year, the message was even more prominently and frequently displayed. It was the very first – and very attention-getting – thing that shareholders saw when they received & opened the proxy package.

– Of course, the message needs to be a compelling one. Here, BofA hit a bases-loaded home run by choosing excellent and non-controversial charities last year & this year.

– Most compelling, however, were the attention-getting numbers: BofA was able to report that $650,000 had been donated to the Special Olympics last year – and that, we think, was a major motivating factor behind the huge number of new people who got on the bandwagon this year. (Next year, a $1 million goal will keep voters on the ranch – and will generate a lot more new participation, we feel certain.)

Carl also notes that BofA worked to increase the always hard-to-get “Employee Plan” votes. Not only did they post an educational video and email voting reminders, but they created a single “landing platform” for all employee plan accounts. The platform allowed employees to vote all of their positions through a single set of voting actions.

Mobile-Friendly Director Interviews: Another Vote-Getter

Another article from Carl Hagberg’s “Shareholder Service Optimizer” also speculates that BofA’s online director interviews contributed to the company’s massive increase in retail voting. The link was appended to all of the e-deliveries & employee outreach materials – and was posted on the voting sites.

Carl’s hypothesis is borne out by the fact that the “Meet the Board” feature is the most-visited content page for mobile-friendly proxies at EZOnlineDocuments. We’ve blogged before about EZOnline’s work – and Carl notes that he was “absolutely bowled-over” by a recent product demo. Here’s more:

Particularly for retail investors, having an interactive, web- and mobile-friendly proxy statement makes it easier to read, search and actually digest the content – better than anything else we have seen. We urge you to visit and to zero-in on the “Clients” tab for a quick and easy-to-absorb look at how it works for clients like Coca-Cola, Mastercard, Xcel Energy and others.

Transcript: “This Is It! M&A Nuggets”

We have posted the transcript for the recent webcast: “This Is It! M&A Nuggets.”

Liz Dunshee