While the Staff hasn’t said much about MD&A requirements in recent years, I think most lawyers appreciate that it’s really one of the cornerstones of the entire disclosure system. This recent blog from Bass Berry’s Kevin Douglas offers up 12 things that you need to know when you’re preparing your company’s MD&A. Here’s an excerpt with some tips on Item 303 of S-K’s trend disclosure requirements:
A core disclosure component of Item 303 of Regulation S-K (which sets forth the SEC disclosure requirements applicable to MD&A) is the requirement to provide an analysis of known material trends, uncertainties and other events impacting a registrant’s results of operations, liquidity or capital resources. Practice varies widely among registrants regarding the extent to which the disclosure of forward-looking statements is included in the MD&A.
While there may be reticence among some registrants to include overly expansive forward-looking disclosure (for example, based on concerns about liability exposure if such forward-looking information is not ultimately accurate), countervailing considerations include the fact that such disclosure may result in more useful disclosure as well as the fact that the failure to disclose known trends can give rise to exposure from Rule 10b-5 allegations from private parties as well as SEC civil actions.
The blog also points out that when companies include trend disclosure in their MD&A, they need to keep in mind that this disclosure may need to continue to be included and updated in subsequent periodic reports. Other topics include presentation and readability of MD&A disclosure, the interaction between MD&A and risk factor disclosure, and the use of non-GAAP financial measures in the MD&A.
Del. Sup. Ct. Says Plaintiff Pled Viable “Caremark” Claim
Breach of fiduciary duty allegations premised on a board’s failure to fulfill its oversight obligations are notoriously difficult to establish. One reason that these Caremark claims are so tough to make is that a plaintiff needs to show “bad faith,” meaning that the directors knew that they were not discharging their fiduciary obligations. But last week, in Marchand v. Barnhill, (Del. Sup.; 6/19), the Delaware Supreme Court overruled the Chancery Court and held that – at least for purposes of a motion to dismiss – a shareholder plaintiff stated a viable Caremark claim.
The case arose from a 2015 listeria outbreak at Blue Bell Creameries. In addition to being implicated in the deaths of three people, the outbreak resulted in a recall of all of the company’s products, a complete production shutdown, and a lay-off involving 1/3rd of its workforce. Ultimately, the financial fallout from this incident prompted the company to seek additional financing through a dilutive stock offering.
As a result, the plaintiff brought a derivative action against the board & two of the company’s executives. The plaintiff alleged that the board failed in its oversight duties, but the Chancery Court rejected those allegations. The Supreme Court disagreed, holding that the plaintiff had alleged shortcomings in board level oversight sufficient to survive a motion to dismiss:
When a plaintiff can plead an inference that a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation, then that supports an inference that the board has not made the good faith effort that Caremark requires.
Since Marchand involved a motion to dismiss, it’s hard to tell whether the case suggests that Caremark may be a more viable path to imposing liability than it has been in the past – but it’s worth noting that this decision is the second case in the last two years in which a Delaware court has characterized a Caremark claim against directors as being “viable.”
Board Minutes: “Not Too Long, Not Too Short, But Just Right. . .”
Here’s a recent blog from Bob Lamm that has some terrific insights into preparing board minutes. This excerpt contains Bob’s take on the issue of whether to prepare “long-form” minutes or “short form” minutes:
I believe that the proper course is what I call “Goldilocks Minutes.” Not too long, not too short, but just right. Minutes can (and IMHO should) give an indication as to what was discussed. For example, if the board is considering an acquisition, it’s not only OK – it’s actually a good idea – to reflect that the board discussed the merits and risks of the transaction, along with some examples of the factors discussed.
If you’re looking for more of a deep dive into issues surrounding board minutes, check out the March issue of The Corporate Counsel.
– John Jenkins