Monthly Archives: February 2019

February 15, 2019

Diversity: Proposed Legislation Would Mandate D&O Disclosure

Last week, Corp Fin issued new CDIs addressing board diversity disclosure issues.  Now, Rep. Greg Meeks (D-NY) & Sen. Bob Menendez (D-NJ) have introduced legislation that would require companies to disclose self-identified demographic info about their board & executive officers.  Here’s an excerpt from a recent Weil blog summarizing the proposed legislation:

The bill, which garnered the support of the Council for Institutional Investors and the U.S. Chamber of Commerce, would require public companies to disclose annually in their proxy statements data on the racial, ethnic, and gender composition, as well as veteran status, of its board of directors, director nominees and executive officers based on voluntary self-identification. Moreover, disclosure regarding the adoption of any board policy, plan or strategy to promote racial, ethnic, and gender diversity would be required.

The bill would also require the SEC’s Office of Minority and Women Inclusion to publish best practices for corporate reporting on diversity.  Rep. Meeks introduced the same legislation during the last Congress, but it went nowhere. With Democrats controlling the House & support from the CII &  the  U.S. Chamber of Commerce, perhaps it will get more traction this time around.

Board Gender Diversity: Will Supply Meet Demand?

Recently, Liz wrote on “The Mentor Blog” that assuming current board composition, California’s board gender diversity statute will require Golden State companies to find over 1000 women directors by the end of 2021.

A recent study on the market’s reaction to the statute suggests that there is some concern among investors that there won’t be enough qualified female director candidates to meet that demand – and this concern has implications for companies located in & outside of California. Here’s an excerpt from the study’s abstract:

On September 30, 2018, California became the first U.S. state to introduce a mandatory board gender quota applicable to all firms headquartered in the state. Using a large sample of publicly-listed firms headquartered in the U.S., we find that the introduction of the quota is associated with significantly negative announcement returns to California-headquartered firms. Consistent with the quota imposing frictions, this effect is larger for firms requiring more female directors to comply with the quota.

According to the study, California headquartered companies had a 0.47% lower return on the first day after the quota announcement than a control group of matched on size and industry. It says that this effect is larger for companies needing to add more female directors to comply with the quota and for those with low corporate governance standards – results that are consistent with the theory that smaller companies and those with poor governance could have a hard time recruiting qualified women candidates.

The study also identified negative “spillover” effects on returns for companies headquartered outside California. These were concentrated among companies in industries where California-based companies need to recruit a lot of female directors to comply with the law. Companies headquartered in “blue” states were also negatively affected – perhaps due to perceptions that they were more likely to become subject to a board gender quota than those based in “red” states.

Europe’s experience with a female quota requirement for boards suggests that companies may want to expand their search to some less traditional sectors – such as women working in leadership positions in government, non-profits & academia.

January-February Issue of “The Corporate Counsel”

We recently mailed the January-February issue of “The Corporate Counsel” print newsletter (try a no-risk trial). The topics include:

– Tone Deaf at the Top: Now It’s Your Problem When an Executive Messes Up

1. Is There an Insider Trading Problem?
2. An Unusually-Timed Form 4 Attracts Attention
3. Beware of the Potential for Shareholder Derivative Suits
4. There Are Disclosure Issues Everywhere
5. Sanctions & Remedial Steps

– Reg A Gets an Upgrade: Opening the Exemption to Reporting Issuers
– Annual Season Items
– Non-GAAP: “Equal or Greater” Prominence Applies to Your Earnings Release
– Form S-3 is Sometimes a “Come as You Were” Party

John Jenkins

February 14, 2019

Insider Trading: “Who Watches the Watchers?”

The Roman poet Juvenal famously asked “quis custodiet ipsos custodies” – “Who watches the watchers?” When it comes to public company gatekeepers, SEC Enforcement’s answer is “we do.” That’s clearly the message sent by the insider trading complaint that the SEC filed yesterday against a former Apple lawyer who, among other things, was responsible for overseeing compliance with the company’s insider trading program! Yes, the person responsible for insider trading compliance is alleged to have engaged in illegal insider trading!

Here’s an excerpt from the SEC’s press release that lays out the agency’s allegations:

The SEC’s complaint alleges that Gene Daniel Levoff, an attorney who previously served as Apple’s global head of corporate law and corporate secretary, received confidential information about Apple’s quarterly earnings announcements in his role on a committee of senior executives who reviewed the company’s draft earnings materials prior to their public dissemination.

Using this confidential information, Levoff traded Apple securities ahead of three quarterly earnings announcements in 2015 and 2016 and made approximately $382,000 in combined profits and losses avoided. The SEC’s complaint alleges that Levoff was responsible for securities laws compliance at Apple, including compliance with insider trading laws. As part of his responsibilities, Levoff reviewed and approved the company’s insider trading policy and notified employees of their obligations under the insider trading policy around quarterly earnings announcements.

Parallel criminal charges were also filed. Obviously, it’s up to the SEC to prove the conduct it alleges here, but this seems as good a time as any to remind you of Broc’s recent advice to anyone thinking about dabbling in insider trading – don’t do it!

In the interest of full disclosure, I confess that I’m nowhere near as erudite as the first sentence of this blog would suggest. Truth be told, I remembered the English version of the “who watches the watchers” quote from the “Watchmen” movie – and then I just got all of that Juvenal stuff by Googling it.

SEC’s Peirce Says “Lighten Up” On Howey For The Crypto

The Howey test considers “investment contracts” to be securities if they involve an investment of money in a common enterprise with an expectation of profit to be derived “solely from the efforts of others.” The SEC’s position has been that many token deals fit squarely within the definition of an “investment contract.” But in a recent speech, SEC Commissioner Hester Peirce suggested that the agency should take more flexible approach when it comes to applying the Howey test to digital assets:

While the application of the Howey test seems generally to make sense in this space, we need to tread carefully. Token offerings do not always map perfectly onto traditional securities offerings. For example, as a recent report from Coin Center noted, the decentralized nature of token offerings can mean that the capital raised through token sales may not be truly owned or controlled by a company. Functions traditionally completed by people designated as “issuers” or “promoters” under securities laws—which, importantly, bestow those roles with certain responsibilities and potential liabilities—may be performed by a number of unaffiliated people, or by no one at all.

Commissioner Peirce pointed out that since some token environments aren’t centralized & contemplate important roles for individuals “through mining, providing development services, or other tasks,” the SEC must avoid casting “the Howey net so wide that it swallows the “efforts of others” prong entirely.”

She expressed concern that some apparently legitimate projects may be made untenable by the federal securities laws, and also observed that regulators “ought not to assume that absent the application of the securities laws to the world of tokens, there would never be any order.” Well folks, they don’t call her “Crypto Mom” for nothin’!

At-the-Market Offerings: Hot! Hot! Hot!

Given how volatile the stock market was last year, it probably shouldn’t come as a big surprise that “at-the-market” offerings had a gangbuster year. This Bloomberg Law blog has the details:

An impressive 202 ATM offerings announced in 2018 were projected to raise a total of $31.75 billion, the largest amount in the last ten years. The average deal size for an ATM offering announced in 2018 was $157 million. To put things in perspective, 274 IPOs were priced in 2018 and raised $64.74 billion. Looking at industry distribution for ATM offerings in 2018, 52 percent were announced by companies in the Consumer, Non-Cyclical sector and 27 percent came from the Financial sector.

The two largest ATM offerings announced in 2018 were by: MPLX LP (announced on March 13, in the Energy sector and projected to raise $1.74 billion) and Annaly Capital Management Inc. (announced on January 3, in the Financial sector and projected to raise $1.50 billion).

ATMs were pretty popular shortly after the financial crisis, but fell out of fashion. The blog says that over the last 5 years, use of this financing tool has rebounded – along with market jitters.

John Jenkins

February 13, 2019

Shutdown Fallout: Just How Backed Up is the SEC?

Everybody knows that with the SEC operating with a skeleton crew for over a month, Corp Fin has a pretty deep hole to dig itself out of. This ‘Audit Analytics’ blog gives you a sense of just how far behind the shutdown has put the Staff. For example, here’s what the blog has to say about comment letters:

According to their Plan of Operations during Lapse in Appropriations, the Commission had an extremely limited number of staff members available to respond to emergency situations. There were 4,436 employees on-board prior to the shutdown, with roughly 110 expected to be retained because they were engaged in law enforcement activities and about 175 employees to be retained to protect life or property.

Having such a limited staff meant an even more limited scope of operations. While most SEC filings – annual, quarterly, and 8-Ks – continued as usual, there were two places, in particular, that were affected by the shutdown; namely, comment letters and IPOs. During the shutdown, the SEC staff did not review corporate filings and did not issue any comment letters. To help gain a sense of how many letters are typically processed during this time, we looked at the same period of the shutdown last year (December 21, 2017 to January 25th, 2018); there were over 300 comment letters dated during this time.

What about IPOs? The blog cites a WSJ article for the proposition that there were no IPOs this January, compared with 17 during the first month of last year.  According to this report from NBC News, the SEC had 40 IPOs in process at the time of the shutdown.

“Faster Than a Speeding Bullet”: 10b5-1 Legislation Flies Through House!

Remember last month, when Liz blogged about the introduction of bipartisan legislation that would require the SEC to study whether Rule 10b5-1 should be amended to add more procedural restrictions for trading plans?  According to this article from the Center for Executive Compensation, the bill has flown through the House & may be on the fast track in the Senate as well:

At the end of last week, the House of Representatives approved, on a 413-3 vote, a bipartisan bill which would require the SEC to conduct an in-depth study of 10b5-1 executive stock trading plans. (A Rule 10b5-1 stock trading plan allows an individual with access to material, nonpublic information to execute sales or purchases of company stock in accordance with a pre-determined schedule, creating an affirmative defense to potential violations of company rules or federal securities laws regarding insider trading.)

The bill now moves to the Senate, where it appears Democrats are eager to move the bill and are working to create the same bipartisan atmosphere as in the House. In the past, the Senate has staunchly refused to take up any bill that does not exhibit a strong path to bipartisan adoption – especially those addressing governance and compensation issues.

The article says that the House’s overwhelming approval of the bill puts it on a path which could lead to Senate action.  If the bill does pass, it won’t mean any changes in 10b5-1 right away, but the results of the study it would mandate could provide a blueprint for potential changes.

Transcript: “12 Tricks to Help You During Proxy Season”

We have posted the transcript for our recent webcast: “12 Tricks to Help You During Proxy Season.”

John Jenkins

February 12, 2019

‘Arbitration Bylaws’ Shareholder Proposals: Corp Fin Permits Exclusion (& Chair Clayton Weighs In)!

Last month, I blogged about Johnson & Johnson’s unusual request to exclude a shareholder proposal that would have required arbitration of all federal securities law claims brought against the company.  Yesterday, Corp Fin granted the company’s no-action request & permitted it to exclude the proposal from its proxy materials. The company is a New Jersey corporation, and sought to exclude the proposal on the grounds that its implementation would violate applicable state law.

New Jersey’s AG submitted a letter supporting that position – and this excerpt from the Corp Fin’s response letter indicates that it was dispositive:

When parties in a rule 14a-8(i)(2) matter have differing views about the application of state law, we consider authoritative views expressed by state officials. Here, the Attorney General of the State of New Jersey, the state’s chief legal officer, wrote a letter to the Division stating that “the Proposal, if adopted, would cause Johnson & Johnson to violate New Jersey state law.” We view this submission as a legally authoritative statement that we are not in a position to question.

Since the permissibility of mandatory arbitration bylaws is a “hot potato” political issue, the issuance of the no-action letter was accompanied by a lengthy statement from SEC Chair Jay Clayton clarifying exactly what the Staff was – and wasn’t – saying.  In particular, he noted that Corp Fin was not addressing the permissibility of the proposed bylaw under federal law:

The staff of the Division of Corporation Finance explicitly noted that it was not expressing a view as to whether the proposal, if implemented, would cause the company to violate federal law. Since 2012, when this issue was last presented to staff in the Division of Corporation Finance in the context of a shareholder proposal, federal case law regarding mandatory arbitration has continued to evolve. Further, I am not aware of any circumstances where the Commission has weighed in on the legality of mandatory shareholder arbitration in the context of federal securities law.

Jay Clayton went on to say that he agreed with the Staff’s approach & would expect it to take a similar approach if the issue arose again.  He also reiterated his prior statements to the effect that any policy decision should be made by the SEC in a measured and deliberative manner. The Staff earns some style points for the way it finessed the mandatory arbitration issue here – but credit  New Jersey’s AG with a big-time assist.

The Weed Beat: Banking on Cannabis

As of the end of 2018, medical marijuana has been legalized in 33 states and its recreational use has been legalized in 10 states – but if you’re in the legal cannabis business, just try & take your money to the bank. Perhaps because Canada experienced a communist revolution shortly after it legalized marijuana, the drug remains illegal under U.S. federal law. That makes banks very skittish about getting anywhere near these businesses.

This Davis Polk memo reviews the current uncertainties that banks face when dealing with the cannabis industry and reviews 2 pieces of proposed legislation – the SAFE Act and the STATES Act – that would clarify the regulatory framework & make it easier for these businesses to establish banking relationships. This excerpt from the intro summarizes what the proposed statutes are intended to accomplish:

Neither bill would federally legalize cannabis or deschedule cannabis from Schedule 1 of the Controlled Substances Act (CSA). Instead, the bills would permit depository institutions, in the case of the SAFE Act, or financial institutions, in the case of the STATES Act, to provide financial services to cannabis-related businesses (CRBs) that comply with state laws regulating legalized cannabis-related activity. Both bills would benefit from changes that would take into account a broader range of financial services or the realities of possible diligence in the financial sector.

The feds aren’t the only ones trying to make cannabis companies more bankable – check out this recent blog from Keith Bishop about proposed California legislation that would permit the state to charter limited purpose “cannabis banks.”

Tomorrow’s Webcast: “Earnouts – Nuts & Bolts”

Tune in tomorrow for the webcast – “Earnouts: Nuts & Bolts” – to hear Pepper Hamilton’s Michael Friedman, Cravath’s Aaron Gruber, Fredrikson & Byron’s Sean Kearney and K&L Gates’ Jessica Pearlman – discuss the nuts & bolts of earnouts, and how to prevent this popular tool for bridging valuation gaps from becoming a post-closing albatross for your deal.

John Jenkins

February 11, 2019

Shareholder Engagement: Getting Director Participation Right

Effective shareholder engagement is becoming more essential every year. So, it’s helpful to find examples of companies that do it well & can provide insights into what investors regard as “best practices.”  This recent “Corporate Secretary” article spotlights Hewlett Packard Enterprise’s efforts – which earned the company the award for “best shareholder engagement” at the magazine’s 2018 Corporate Governance Awards.  Here’s an excerpt on the role directors play in HPE’s engagement efforts:

Directors have traditionally been averse to taking part in meetings with shareholders, but best practice now requires their involvement at some level. HPE’s engagement includes a three-month off-season board outreach program comprising one-on-one, on-site meetings between shareholders and directors.

During fiscal 2018, the company broadened these efforts to holders of more than 60 percent of HPE’s stock. Combined with the participation of investor advisory firms, the program engaged directly with holders or advisers of more than 55 percent of its common stock.

HPE is keen on providing direct shareholder access to the board so investors can hear directors’ thinking, and vice versa, without a management filter. The company’s engagement program includes the board chair, committee chairs and other directors that shareholders have a specific interest in meeting.

Engagement efforts extend to semi-annual customer meetings, in which directors often participate in panel discussions. Directors also frequently attend the company’s annual investor day presentation.

Conference Calls: Anatomy of a “Non-Answer”

One of the more interesting – and awkward – aspects of an earnings conference call occurs when an executive declines to answer an analyst’s question.  This recent study reviewed situations in which company officials expressly declined to answer a question, and reached some interesting conclusions about when corporate officials were more – and less – likely to be forthcoming. Here’s an excerpt from the abstract:

Using our measure, about 11% of questions elicit non-answers, a rate that is stable over time and similar across industries. Consistent with extant theory, we find firms are less willing to disclose when competition is more intense, but more willing to disclose prior to raising capital. An important feature of our measure is that it yields several observations for each firm-quarter, which allows us to examine disclosure choice within a call as a function of properties of the question.

We find product-related questions are associated with non-answers, and this association is stronger when competition is more intense, suggesting product-related information has higher proprietary cost. While firms are more forthcoming prior to raising capital, the within-call analyses for future-performance-related questions shows firms are less likely to answer future-performance-related questions shortly before equity or debt offerings when legal liability is higher.

These results probably don’t come as a big surprise – and may even provide some comfort to lawyers that their guidance about the hazards of hyping future results when raising capital have been taken to heart.

But the study’s results suggest that the Securities Act’s liability scheme is a double-edged sword when it comes to corporate communications. Companies thinking about a deal are more willing to share historical information with the market – but more reticent to comment about the future.

Tomorrow’s Webcast: “How to Use Cryptocurrency as Compensation”

Tune in tomorrow for the webcast — “How to Use Cryptocurrency as Compensation” — to hear Perkins Coie’s Wendy Moore and Morrison & Forester’s Ali Nardali and Fredo Silva discuss the groundswell in the use of cryptocurrency as compensation among private companies — and the legal framework that applies.

John Jenkins

February 8, 2019

Shareholder Proposals: NYC Comptroller Seeks to Compel Inclusion in Court!

Over the years, Broc has blogged about periodic attempts by shareholder proponents of going to court to compel the inclusion of a proposal and/or seek declaratory relief to enjoin an annual meeting due to shareholder proposal issues. These types of lawsuits typically challenged a company’s decision to exclude a proposal after Corp Fin granted no-action relief. But recently, the NYC Comptroller went one step further – by filing this complaint against TransDigm shortly after it sought no-action relief – and before Corp Fin weighed in.

The lawsuit sought to enjoin TransDigm – which manufactures aerospace components – from soliciting proxies for its meeting without including a climate change proposal submitted by a group of NYC pension funds. TransDigm had argued to Corp Fin that it could exclude the proposal under Rule 14a-8(i)(7) because it related to “ordinary business.” But the funds – which announced a couple of years ago that they might pursue climate change proposals as an initiative and more recently said they’d pursue a “clean energy” investment & divestment strategy – insisted that this was an urgent matter. Cydney Posner’s blog explains what happened next:

Instead of conforming to the usual practice of submitting its own response to the SEC, the NYC Comptroller’s office wrote to the SEC on December 7th that it would not respond to the company’s November request for no-action because the pension funds had separately commenced a lawsuit against the company seeking declaratory and injunctive relief “that would ensure the… shareholder proposal is included in the proxy solicitation materials.” As a result, in light of the pending litigation, the Comptroller requested that the SEC leave the matter to the courts, requesting that, the “staff follow its prior practice and decline to issue any response to TransDigm’s no-action request.”

The company apparently decided that this was not a battle worth fighting. By letter dated December 28, 2018, in the midst of the government shutdown, the company advised Corp Fin that it was withdrawing its request for no-action relief and would be including the proposal in its 2019 proxy materials. The parties filed a stipulation of settlement on January 18 concluding the action.

In its press release announcing the settlement, the Comptroller said that the “need for climate leadership is more urgent than ever. Yet, just when we need to speed up the pace, federal roll-backs are making polluting easier and could cause generations of damage. That’s why as investors, we’re using our voice to pressure companies to step up and address their role in climate change….Reducing greenhouse gas emissions is a moral imperative—and it’s better for business. We’ll continue to fight for shareholders rights and to hold companies like TransDigm to the highest standards for business and our planet.”

We don’t know yet if the NYC funds will adopt – or inspire other proponents to adopt – a litigation strategy against other companies for climate change proposals and/or other topics. Although the complaint was filed before the government shutdown began, the company might’ve felt additional pressure to settle due to Corp Fin’s inability to respond to no-action requests.

SEC Chair Talks About “Human Capital” Disclosure

In remarks a few days ago to the SEC Investor Advisory Committee, SEC Chair Jay Clayton provided some of his views on human capital disclosure. He first noted that since the time the current disclosure requirements in Items 101 & 102 of Regulation S-K were adopted, human capital has evolved into a resource – rather than a cost – for businesses. And, he acknowledged, disclosure requirements should also evolve over time to reflect market changes…but should remain flexible, enforceable, efficient and grounded in materiality.

So the basic idea stands that companies should focus on providing material information that a reasonable investor needs to make informed investment & voting decisions, and he’s wary of mandating rigid disclosure standards or metrics. But it doesn’t sound like he’s closed the door on nudging companies to provide more info. He continued:

Instead, I think investors would be better served by understanding the lens through which each company looks at their human capital. Does management focus on the rate of turnover, the percentage of their workforce with advanced degrees or relevant experience, the ease or difficulty of filling open positions, or some other factors? I have heard this and similar questions on earnings conference calls and in other investor settings. I am interested in hearing from those on the Committee who manage investment capital – what is it that you are looking for as an investor and what questions do you ask the issuers when it comes to human capital?

Here, a note on comparability. In some cases it is possible to identify metrics that provide for reasonable market-wide comparability (for example, U.S. GAAP). In other cases, this is not possible at a market-wide level, and comparability is reasonably possible at an industry level or only at a company level (this is demonstrated by the development of non-GAAP financial measures). For example, for human capital, I believe it is important that the metrics allow for period to period comparability for the company.

This Cooley blog reports that Jay also touched on proxy plumbing in his remarks – and said that new Commissioner Elad Roisman will be taking the lead on efforts to improve the proxy process, including proxy plumbing, for both the short- and long-term.

SEC Lifts Stay on Administrative Proceedings

Last week, the SEC announced that it was lifting the stay on pending administrative proceedings that it had ordered as a result of the lengthy government shutdown. Parties that had filings due last month should either submit the filings or request an extension – either way, by February 13th.

Liz Dunshee

February 7, 2019

Corp Fin’s New CDI: Board Diversity Disclosure

Yesterday, Corp Fin issued two identical “Regulation S-K” CDIs – 116.11 and 133.13 – to clarify what disclosure of self-identified director diversity characteristics is required under Item 401 and, with respect to director nominees, under Item 407. Broc’s blogged about whether – and how – to address diversity in D&O questionnaires – and we’ll post memos in our “Board Diversity” Practice Area about how this new guidance impacts that analysis.

In the meantime, here’s the new CDI (also see this Cooley blog):

Question: In connection with preparing Item 401 disclosure relating to director qualifications, certain board members or nominees have provided for inclusion in the company’s disclosure certain self-identified specific diversity characteristics, such as their race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background. What disclosure of self-identified diversity characteristics is required under Item 401 or, with respect to nominees, under Item 407?

Answer: Item 401(e) requires a brief discussion of the specific experience, qualifications, attributes, or skills that led to the conclusion that a person should serve as a director. Item 407(c)(2)(vi) requires a description of how a board implements any policies it follows with regard to the consideration of diversity in identifying director nominees.

To the extent a board or nominating committee in determining the specific experience, qualifications, attributes, or skills of an individual for board membership has considered the self-identified diversity characteristics referred to above (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background) of an individual who has consented to the company’s disclosure of those characteristics, we would expect that the company’s discussion required by Item 401 would include, but not necessarily be limited to, identifying those characteristics and how they were considered. Similarly, in these circumstances, we would expect any description of diversity policies followed by the company under Item 407 would include a discussion of how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics. [February 6, 2019]

“Shutdown Threat” Risk Factors & MACs

In light of the possibility that “government-by-shutdown” is our new normal, Intelligize has gathered a handful of risk factors that identify specific business threats caused by a non-functioning government – e.g. delayed FDA & CFIUS reviews. And Intelligize also reports that several companies are adding shutdown references to forward-looking statement disclaimers and MAC clauses. Here’s an excerpt:

For example, pest control provider Rollins Inc. noted in its 2018 earnings statement filed on Jan. 23 that “the impact of the U.S. government shutdown” was among the “various risks and uncertainties” that could cause the company’s actual results to diverge from its forward-looking statements. Other companies that have added similar language to their filings this year include Teledyne Technologies and financial services giant Bank of America Corp.

And back in September, the contract language in Fortive Corp’s acquisition of Johnson & Johnson subsidiary Ethicon nixed “any actual or potential sequester, stoppage, shutdown, default or similar event or occurrence by or involving any governmental entity affecting a national or federal government as a whole” as material adverse effects.

Securities Class Actions: Highest Levels Ever?

A pair of recent reports on securities class actions – from Cornerstone Research and NERA Economic Consulting – both say that a greater percentage of listed companies were hit with lawsuits last year (about 4.5% of all exchange-listed companies, and 9.4% of the S&P 500…even higher if you include merger-related litigation). This is due to the declining number of public companies as well as a higher number of class actions.

The Cornerstone report also highlights that state court filings – which have become more likely since the Supreme Court’s 2018 Cyan decision – are driving litigation to potentially record levels. Here’s an excerpt from Cornerstone’s press release:

Plaintiffs filed a total of 403 securities class actions in 2018 compared to 412 in 2017. The number of core filings increased from 214 to 221—the highest level since 2008, when securities class actions surged due to volatility in U.S. and global financial markets. Federal M&A filing volume was the second-highest on record, despite declining from 198 to 182.

Securities class action filings related to stock price drops reached levels not seen since the peak of the financial crisis, with the annual likelihood of such filings against exchange-listed companies at an all-time high.

Liz Dunshee

February 6, 2019

Coming Soon: Senate Bill for Buyback Restrictions

In a Sunday NYT op-ed, Senators Chuck Schumer (D-NY) and Bernie Sanders (D-VT) said they’re going to introduce a bill that would allow companies to buy back shares only if they pay their workers well. Here’s a few articles about their proposal:

CNBC’s “Chuck Schumer and Bernie Sanders Call for Restricting Corporate Share Buybacks”
Bloomberg’s “Top Senate Democrats Propose Limits to Corporate Buybacks”
Yahoo! Finance’s “Chuck Schumer and Bernie Sanders May Be Dead Right About Stock Buybacks”
Vox’s “Bernie Sanders & Chuck Schumer Are Going After Corporate Stock Buybacks”
CNBC’s “Wall Street Defends Buybacks From Sanders, Schumer Attack: ‘Good Companies Buy Back Their Shares'”

More on “Insider Trading: House Bill Targets 10b5-1 Plans”

The “Promoting Transparent Standards for Corporate Insiders Act” – which would require the SEC to study whether Rule 10b5-1 should be amended to add more procedural restrictions for trading plans – passed the House last week, by a vote of 413-3.

This Year’s “Top Risks”?

As you focus on this year’s risk management priorities and refine your “Risk Factor” disclosure, consider that this “WSJ Pro” article reports that over 50 companies (mostly in the tech, entertainment, media & financial services sectors) mentioned AI in their risk factors last year – more than double than in 2017. That number will likely go up again this year, considering that this recent Protiviti survey of 825 directors & executives identifies disruptive innovations – e.g. AI – and competition from “born digital” companies as a top risk.

Meanwhile, on the geopolitical front, the Eurasia Group’s forecast predicts that our current cycle of destruction will cause a global “innovation winter” – and lots of other mayhem that will impact businesses. When it comes to Brexit’s impact on business, this memo from The Conference Board identifies six potential risks and what industries they apply to.

Liz Dunshee

February 5, 2019

Quasi-Clawback: Goldman Discloses Rare Possible Forfeiture Due to Investigation

Here’s something I blogged yesterday on After market close on Friday, Goldman Sachs announced via an Item 8.01 8-K that in light of the ongoing 1MDB investigation, its compensation committee might reduce bonuses to current – and former – senior executives. The board is wise to leave themselves some room, since they’ll likely face shareholder scrutiny for the alleged fraud and all of its fallout. For last year’s annual equity awards, the board added a new forfeiture provision. The 8-K doesn’t go into detail about what types of harm – e.g. strictly financial v. reputational – would result in forfeiture, but simply says:

This provision will provide the Committee with the flexibility to reduce the size of the award prior to payment and/or forfeit the underlying transfer-restricted shares (which transfer restrictions release approximately five years after the grant date) if it is later determined that the results of the 1MDB proceedings would have impacted the Committee’s 2018 year-end compensation decisions for any of these individuals.

For former executives, Goldman’s comp committee decided to defer determinations about LTIP awards that otherwise would’ve paid out in January, since the 1MDB investigation relates to events that occurred during the performance period. This WSJ article reports that the forfeiture wouldn’t apply to former exec Gary Cohn, who was paid out in lump sum when he joined the Trump Administration.

So these aren’t true “clawbacks” – they’re potential forfeitures of unpaid amounts, which are much easier for a company to administer. Remember that a few years ago in a different kind of scandal, Wells Fargo started off with forfeitures – and eventually also clawed back pay.

More on “First IPO Without Delaying Amendment?”

During the final stretch of last month’s government shutdown, I blogged that Gossamer Bio was prepared to go public without final sign-off from the SEC. Now, that company has announced that it’s reverting to a traditional IPO. The company has restored the delaying amendment language on an amended Form S-1 and will ask the SEC to accelerate effectiveness. Since it’s already set the offering price, there’s not much upside to waiting to sell the shares.

Audit Fees: New Standards Cause Modest Increase

This “Audit Fee Survey” from ferf & Workiva reports that audit fees rose by about 2.5% last year – mostly due to implementing the new revenue recognition and lease standards, but also because of M&A activity and more stringent PCAOB inspections. However, auditors remained open to negotiation due to the competitive marketplace and automation. The median fee for accelerated filers was $415k – compared to nearly $7 million for large accelerated filers…and this Fenwick & West study notes that average fees were $22.2 million for S&P 100 companies.

Meanwhile, Audit Analytics reported that non-audit fees represented about 10% of total fees paid by accelerated filers to their external auditors in 2017 – way down from 38% of the pie in 2002, which caused concern that these services were impacting auditor independence.

Liz Dunshee

February 4, 2019

First US Disclosure of “Gender & Minority Pay Gap”

Here’s something I wrote last week on I recently blogged about the pros & cons of disclosing your “equal pay audit.” There aren’t many US companies doing this…yet. But Citigroup is one of the trailblazers. Last year, similar to the stats in Intuit’s proxy (hat tip Lois Yurow), Citi announced on its website the results of a “pay inequality” analysis – the difference in pay of women & men and US minorities & non-minorities, as adjusted for job function, level and geography. And it’s made some pay adjustments based on the findings.

More recently, Citi announced on its website its unadjusted “pay gap” for women and US minorities – i.e. the difference in median total compensation. Citi agreed to publish the stats in response to a “gender pay equity” proposal from Arjuna Capital – who then withdrew the proposal. Here’s an excerpt from Arjuna’s announcement about what comes next:

Citi’s analysis shows that the median pay for women globally at Citibank is 71 percent of the median for men, and the median pay for US minorities is 93 percent of the median for non-minorities. Citi’s goal is to increase representation at the Assistant Vice President through Managing Director levels to at least 40 percent for women globally and 8 percent for black employees in the US by the end of 2021.

Alongside the median pay disclosure, Citi updated last year’s “equal pay for equal work” analysis to extend across its global operations, reporting that when adusting for job function, level, and geography women globally are paid on average 99% of what men are paid, and no statistically significant difference between what US minorities and non-minorities are paid at Citi. Citi also made pay adjustments following this year’s compensation review.

Borrowing for Buybacks: Is the Heyday Over?

This Bloomberg article reports that, after peaking in 2017, debt-financed buybacks are now at the lowest level since 2009. And although that’s partly because cash is abundant, this ‘Think Advisor’ article says that bondholders and ratings agencies are also starting to take issue with using debt proceeds for that purpose. Here’s an excerpt:

Already, U.S. companies are curtailing the amount of bonds sold to buy back their own stock by a third in 2018, based on a Bloomberg data search of transactions detailing use of proceeds. In Europe, where it’s more unusual for companies to borrow to redeem stock and profitability has recovered more slowly, issuance is running at an eight-year low.

It all points to a reversal of the type of shareholder-friendly activity that propelled the S&P 500 to dizzying peaks this year. Companies need to shore up their leverage before an economic downturn hits, as well as court lenders they may need down the road. And as interest rates grind even higher, treasurers are likely to think even harder about borrowing to enrich shareholders.

…[T] the drop in borrowing volumes is illustrative of a growing trend: Corporate America is facing a wake-up call as once-acquiescent bondholders balk at funding rewards to equity owners. After CVS Health Corp. closed a $70 billion deal to buy health insurer Aetna Inc. on Nov. 28, Moody’s Investors Service downgraded its credit rating and laid out its prescriptions for balance-sheet repair: “We expect the company to cut all share repurchases and use free cash flow to reduce debt.”

Tomorrow’s Webcast: “Conflict Minerals – Tackling Your Next Form SD”

Tune in tomorrow for the webcast — “Conflict Minerals: Tackling Your Next Form SD” — to hear our own Dave Lynn of Morrison & Foerster, Ropes & Gray’s Michael Littenberg, Elm Sustainability Partners’ Lawrence Heim and Deloitte’s Christine Robinson discuss what you should now be considering as you prepare your Form SD for 2018.

Liz Dunshee