January 4, 2019

Non-GAAP: SEC Finds Violation of “Equal or Greater Prominence”

Here’s the intro from this blog by Davis Polk’s Ning Chiu:

The SEC instituted a cease-and-desist proceeding in a fairly straightforward enforcement action that nonetheless emphasizes the importance of the requirement that GAAP measures must be provided with “equal or greater prominence” when a company discloses non-GAAP measures.

The SEC found that a company provided non-GAAP financial measures, such as adjusted EBITDA, adjusted net income and free cash flow before special items, without giving equal or greater prominence to the comparable GAAP measures. In the headline for the FY 2017 earnings release, the company presented its adjusted EBITDA for the fiscal year and stated that it was up 8% year-over-year, without mentioning its net income or loss (the comparable GAAP financial measure) in the headline.

Similarly, in the headline for the Q1 2018 earnings release, the company presented its adjusted EBITA for the first quarter of 2018 and stated that it was up 7% year-over-year, without mentioning its net income or loss (the comparable GAAP financial measure) in the headline. On the top of the first page, in a section called “Highlights,” the company then listed nine bullet points about the first quarter, including bullet points that provided adjusted EBITDA, adjusted net income and adjusted net income per share. These three non-GAAP financial measures were not accompanied by comparable GAAP measures in the same section. The GAAP measures were instead reported in the second and sixth full paragraphs of the earnings release.

Also see this blog by Ning about how the SEC continues to target companies for financial reporting failures – like this recent SEC enforcement action

The New Hedging Rule’s Novel “Fair & Accurate Summary” Requirement

Here’s the intro from this blog by Allen Matkins’ Keith Bishop:

Earlier this month, the SEC added a new paragraph (i) to Item 407 requiring a company to describe any practices or policies regarding hedging transactions. The fact that the SEC took this action should have been no surprise because Section 955 of Dodd-Frank required the SEC to do so. I was surprised, however, to see that the final rule includes a novel disclosure standard. I was especially surprised because this standard was not included in the text of the rule as proposed. Thus, the public was denied any opportunity to comment on the standard.

As adopted, Item 407(i) requires a company to provide a “fair and accurate” summary of its practices or policies. That sounds innocuous until one considers that Regulation S-K nowhere else imposes a “fair and accurate” disclosure standard (the standard does make an appearance in Rule 403(c) under the Securities Act requiring a fair and accurate English translation). The concept of accuracy seems clear enough, but what does it mean for a summary to be “fair”? Originally, the word “fair” meant pleasing or attractive (e.g., “Show a fair presence and put off these frowns” Wm. Shakespeare, Romeo and Juliet, Act I, scene 5). Eventually, it acquired a sense of being equitable or in accordance with the rules. Shakespeare in fact also employs this meaning of “fair” as when Hector in Act 5, scene 3 of Troilus and Cressida states “O, ’tis fair play”. (See also, King John, Act 5, scene 2 and The Tempest, Act 5, scene 1). Neither sense of the word seems particularly apt when applied to a summary of a hedging policy.

And here’s an excerpt from this Locke Lord alert:

Further, a company will be required either to provide a fair and accurate summary of any practices or policies that apply, including the categories of persons covered and any categories of hedging transactions that are specifically permitted and any categories that are specifically prohibited, or to disclose the practices or policies in full. The “fair and accurate” standard is uncommon in SEC regulations and thus may raise concerns over its meaning, but it is a concept used elsewhere, including in typical opinions given to underwriters.

California Court Confirms Enforceability of Delaware Forum-Selection Bylaws

As noted in this Wachtell Lipton memo, the California Court of Appeal recently became the second appellate court outside of Delaware – in Drulias v. 1st Century Bancshares – to recognize the enforceability of forum-selection bylaws adopted by Delaware corporations designating the Delaware Court of Chancery as the exclusive forum for the litigation of intracorporate & fiduciary disputes.

Broc Romanek