Monthly Archives: July 2019

July 19, 2019

Shareholder Proposals: Corp Fin Considering Changing Approach to No-Action Requests

Every proxy season, Corp Fin responds to somewhere between 200-400 no-action requests about shareholder proposals. Earlier this year, we blogged several times about how the government shutdown upended the process. And even though the Staff got back to “business as usual” when the shutdown ended, they had to be even more efficient given the time constraints – and that experience might have contributed to Corp Fin considering whether to rethink their approach to Rule 14a-8 no-action requests.

As you can hear at the 29-minute mark of this taping of a Chamber event a few days ago, SEC Chair Clayton & Corp Fin Director Hinman commented that they’re considering changing some aspects of their “referee” role (my word, not theirs) – so that, like other types of no-action requests, Corp Fin wouldn’t respond to every Rule 14a-8 submission. Rather, they’d focus on requests that involve “novel” issues and encourage companies & proponents to work things out themselves. Bill says they’re seeking input from the community on how they might change their approach.

As I blogged during the shutdown, companies continue to be very cautious about excluding proposals without first obtaining Staff no-action relief. Some speculate that we’ll see more litigation if Corp Fin does change their role and isn’t as involved – especially on matters that involve tough judgment calls. Any changes in Corp Fin’s role is bound to have a variety of views as this area is always contentious when change is considered, particularly if the SEC’s role might change.

How Asset Managers Feel About “Activists”

John’s blogged on that activist hedge funds don’t actually do much to improve company performance. But according to this SquareWell Partners survey (download required), the perception – at least among “active” asset managers – is that these funds are a useful market force, even if they have a short-term, selfish interest.

For that reason, it’s becoming more common for asset managers to align with activists on proxy fights and proposals if they agree with the substance of the activist’s argument – especially on governance & strategic matters. Here’s some interesting takeaways that can help you form alliances when you need them (this was also a topic covered earlier this week in our webcast – “How to Handle Hostile Attacks” – stay tuned for the transcript):

– 81% of investors expect companies to engage after they’ve analyzed the analyst’s arguments & formed a strategic response – i.e. don’t rush into a “PR War” – but also know that investors will engage with an activist even before the campaign is public

– 64% of active managers expect to engage with independent directors

– Investors consider a number of factors when assessing a targeted company – the top ones are company performance versus peers, management & board quality, and engagement history – they also look to broker reports, proxy advisors, media outlets & social media

– Investors are mixed on whether poor TSR is a dealbreaker – they’ll also consider ratios that show profitability, efficiency, debt & liquidity

– In addition to capital allocation decisions, active managers are most attuned to governance issues such as collective board expertise, board independence, chair quality and executive pay

Convertible Debt: Still a Good Way to Raise a Buck (or a Million)

This Fenwick survey looks at the terms of 100 convertible debt deals last year – for first-money and early- and late-stage bridge deals. Here’s some key findings:

– Year over year, deal sizes have continued to increase. The median overall deal size this year is up 14%, from $1.4 million to $1.6 million

– Conversion discounts are increasingly common, even in later-stage debt issuances, as is the practice of pairing the discount with a valuation cap

– In change-of-control situations, such as the sale of a company, most deals provide for a premium payout that is a multiple on top of the repayment of the principal balance. The number of deals giving a premium, as well as the median premium amount has remained steady year over year; however, this year the low end of the premium spectrum dropped from 25% to 10%

– Only 11% of deals used a valuation cap as a standalone provision in the absence of a conversion discount

Liz Dunshee

July 18, 2019

Shareholder Proposals: “Micromanagement” Continues to be Hot

At the recent Society conference, shareholder proposals – in particular, exclusions based on “micromanagement” – were a hot topic. I’ve blogged that last year’s Staff Legal Bulletin No. 14J revived that prong of Rule 14a-8(i)(7)’s “ordinary business” test.

Corp Fin Staffers have explained that proposals may be excludable due to “micromanagement” if they unduly limit management’s discretion – e.g. by advocating for specific methods or policies rather than deferring to the company to determine how to address a topic. They’ve also said that the complexity of the underlying subject matter doesn’t impact the analysis. And this 46-page Sullivan & Cromwell memo about trends in shareholder proposals looks at how “micromanagement” has been applied in some recent no-action letters.

Not everyone agrees with how things are playing out. For example, the Council of Institutional Investors recently submitted a comment letter to Corp Fin that frames the Staff’s approach as an arbitrary “too complex for shareholders” test – and requests that the Staff again revisit its approach to the rule. Specifically, CII takes issue with the Staff’s no-action relief for proposals relating to the use of non-GAAP adjustments in incentive plans (the topic of a rulemaking petition that CII filed with the SEC in April) – as well as requests for companies to report on greenhouse gas emissions. Here’s an excerpt:

With regard to the each of the Devon and Exxon proposals, the Staff said that, “by imposing this requirement, the Proposal would micromanage the Company by seeking to impose specific methods for implementing complex policies in place of the ongoing judgments of management as overseen by its board of directors.” [6] The Staff used the word “impose” twice in this sentence, but that doubling-down does not obviate the fact that the precatory recommendation would not impose anything on the company, other than for management to place the item on its proxy card and include the proposal and supporting statement in the proxy statement. These are requests to the boards on a major public policy issue, not directives.

Nor, for that matter, do the proposals require “specific methods.” The proposals thread the needle between vagueness and recommending overly specific policies. They do not suggest specific goals or a timetable, but rather frame a general structure, well understood by investors, for disclosure of goals.

Mandatory ESG Disclosure: Coming to an SEC Filing Near You?

Last week, the House Financial Services Committee debated five draft bills that would require companies to disclose information about climate change risk, political contributions and other ESG topics (you can also watch this week’s committee markup). This Davis Polk blog summarizes the hearing:

The committee memorandum prepared by the majority staff prior to the hearing stated that “investors have increasingly been demanding more and better disclosure of ESG information from public companies.” The target for improving this disclosure has been the SEC, which received an October 2018 petition from a coalition of investment managers, public pension funds and non-profit organizations requesting that the agency develop a robust ESG disclosure framework. Representative Juan Vargas (D-CA) noted in his remarks that this petition was the impetus for his draft legislation, ESG Disclosure Simplification Act of 2019, one of the bills considered at the hearing.

Several committee members on both sides of the aisle noted that, as interest in ESG disclosure rises, some public companies have responded by voluntarily adding these types of issues to their reporting efforts. However, debate ensued when considering that the draft bills would mandate this type of disclosure for all public companies. Issues raised during the question and answer period included:

– Whether mandated disclosure is necessary given current voluntary disclosure practices;
– The potential increased regulatory burden of these disclosures, which could negatively impact U.S. IPO markets; and
– Whether ESG issues qualify as material information for investors.

This column from Bloomberg’s Matt Levine points out that advice to quantify & disclose climate change risks might be something that companies hear from management gurus – and certainly some of their investors. But that has a different ring than an SEC mandate – especially if the underlying goal is to “solve climate change through the mechanism of corporate disclosure.” If regulating through securities laws ends up being our best hope to solve big problems, yikes – but at least we have a lot of thoughtful people in the field. And some even think a uniform ESG disclosure framework would help companies.

More on “California Reports on Mandatory Women Directors”

Last week, Broc blogged about discrepancies in the first “board diversity” report that the California Secretary of State published under new Section 301.3(c) of the California Corporations Code. A Secretary staffer later spoke with Cooley’s Cydney Posner to explain why the report looks the way it does – here’s an excerpt from her blog:

First, in the methodology, the Secretary acknowledges that there are gaps in available data because of the various filing deadlines: Forms 10-K are due, generally depending on the size of the company’s public float, 60, 75 or 90 days after the end of the company’s fiscal year, and the deadline for filing the California Statement is 150 days after the end of the company’s fiscal year. Accordingly, in some cases, the representative indicated, companies that may have their principal executive offices in California may not have filed their 10-Ks or California Statements during the designated review period and, as a result, their data was not included. (But there still appeared to be some unexplained omissions from the lists.)

Second, according to the representative, because of the language in the statute defining “female” as “an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth,” the Secretary is not reviewing 10-Ks or proxy statements to determine whether a company is compliant with the new board composition requirement. Rather, the Secretary is determining compliance based only on the California Statement, which, since March, has included a specific inquiry regarding the number of “female” directors.

Third, the California Statement is required to be filed by both foreign and domestic corporations and, if a company replied to the question regarding the number of female directors, even if it indicated that its principal executive offices were not located in California, the Secretary included that company on the compliant list; i.e., foreign corporations were not screened out. For the March update, the Secretary plans to provide a separate list of companies that report compliance but do not have principal executive offices located in California.

We should expect that some timing issues will continue to affect the March 1, 2020 update report. Notably, given the process the Secretary is following, current information from the California Statement regarding compliance for 2019 may not be available for the 2020 update report for companies with calendar-year FYEs, among others. For example, companies with calendar-year FYEs will have filed their California Statements in the first half of 2019, but if they do not add a female director and become compliant until, say, the third quarter of 2019, they will not have reported that compliance on their California Statements in time for the March 1, 2020 update (unless they were to file early). As of now, the Secretary does not intend to develop a new separate filing for purposes of soliciting the relevant information on board gender diversity on a more timely basis, but it can’t be ruled out. However, the Secretary does contemplate some revisions to the California Statement, currently expected to be in place by the beginning of 2020. Keep in mind also, that, no fines should be imposed until the Secretary adopts appropriate regulations, and my understanding is that the process of developing regulations has not yet begun.

California won’t be the only state requiring reports on board diversity – the Illinois General Assembly recently passed its own “Diversity Disclosure Bill,” which will require companies headquartered in that state to include diversity info in annual reports filed with the Secretary of State. However, as this Vedder Price memo explains, the version of the statute that ultimately passed in the “Land of Lincoln” doesn’t mandate the inclusion of women or minorities on boards or fine companies that fail to achieve a statutory target, which had been part of the original bill. At the federal level, the House Financial Services Committee has also passed a couple bills on the topic…

Liz Dunshee

July 17, 2019

Overboarding: New Investor Policies Causing Huge Drops in Director Support

This isn’t news to those of you who experienced it – and unfortunately, plenty of people I’ve talked to have. But this PJT Camberview memo highlights the unusually low votes that some directors are getting this year (in the 70th percentile range) – as a result of new overboarding policies at some institutional investors (especially those that were announced once proxy season was already underway, since at that point it was really too late to do anything about it). Here’s an excerpt:

In a sign of growing investor assertiveness, significant opposition to directors of Russell 3000 companies this year increased to its highest level since 2011 despite a year-over-year decrease in negative proxy advisor recommendations, according to a June ISS Analytics report. A contributor to this decline was new or stricter overboarding policies put in place by leading institutional investors such as Vanguard, BlackRock and Boston Partners. Active public company executives sitting on more than two boards were particularly hard hit, and a number of directors saw their support drop 25 or more percentage points on a year-over-year basis.

Investors’ stated concern with ‘overboarded’ directors is that they may not have sufficient time to dedicate to their roles, particularly when an activism, M&A or crisis event hits one or more of the companies on which they serve. Tighter overboarding policies may become more prevalent in the coming years, with direct implications for board diversity, succession planning and the way that directors and companies manage and track their board commitments.

Auditor Ratification: This Year’s Biggest (Almost) Losers

Each year, auditors at a handful of companies manage to irritate shareholders enough to motivate a notable “against” vote on the auditor ratification proposal. This “Audit Analytics” blog says that last year, there were 21 companies with more than 20% of votes “against” ratification. And according to the blog, 2018’s biggest (almost) losers were:

– Dynasil – 44% against
– Amber Road – 40% against
– MusclePharm – 37% against

If you think today’s headline is catchy, that’s because I stole it from John’s blog last year. He observed that most companies go on to reappoint their auditor despite shareholder objections – and that remains true…

EGC Transitions: Interplay With Revenue Recognition

Earlier this year, the Center for Audit Quality published notes from a spring meeting between its “SEC Regulations Committee” and the Corp Fin Staff. The Staff is considering the impact of the new leasing standard on the contractual obligations table – and has “pointed views” about the leasing standard’s impact on EBITDA disclosures (see this “Compliance Week” article). It also clarifies that an Item 2.01 Form 8-K is required to report an acquisition, even if the Staff grants a Rule 3-13 waiver that allows a company not to file acquired entity financials. The Staff also covered EGC transition issues, including:

Question: If an EGC loses status after it submits a draft registration statement or publicly files a registration statement, then it will continue to be treated as an EGC until the earlier of the date on which the issuer consummates its initial public offering (IPO) or the end of the one-year period beginning on the date the company ceased to be an EGC. If the EGC had elected private company transition for new accounting standards in the IPO, how and when is it required to transition to the new accounting standards for filings subsequent to its consummation of the IPO assuming that was the earliest date?

Answer: FRM 10230.1 states if an EGC loses its status after it would have had to adopt a standard absent the extended transition; generally,the issuer should adopt the standard in its next filing after losing status. EGCs that take advantage of an extended transition period provision are encouraged to review their plans to adopt accounting standards upon losing EGC status and to discuss with the staff any issues they foresee in being able to timely comply with new accounting standards already effective for public business entities in the next filing.

Question: When is quarterly information under Item 302 of Regulation S-K required to be revised under ASC 606 for a registrant that loses its EGC status?

Answer: FRM 10230.1 states if an EGC loses its status after it would have had to adopt a standard absent the extended transition; generally, the issuer should adopt the standard in its next filing after losing status. For example, a registrant that has elected the private company transition and loses its EGC status on December 31, 2019 would be required to reflect the adoption of ASC 606 in its December 31, 2019 annual report on Form 10-K. Since the issuer is not an EGC as of December 31, 2019 it is not provided the accommodation for Item 302 quarterly information, in FRM 11110.2, in that Form 10-K. That is, for the example provided, the issuer would reflect the adoption of ASC 606 in its 2019 quarterly financial information in its December 31, 2019 annual report on Form 10-K.

Liz Dunshee

July 16, 2019

Corp Fin Issues “LIBOR Transition Risks” Statement

LIBOR is going away in 2021 – and the SEC Staff is reiterating that companies should prepare – and adequately disclose the associated risks. Last week, Corp Fin issued a joint statement with the Division of Investment Management, Division of Trading & Markets and Office of the Chief Accountant to say that companies should identify their exposure under contracts that extend past 2021 and consider whether future contracts should use an alternative rate. Corp Fin’s portion of the statement also says:

As companies consider the questions in the section above entitled “Managing the Transition from LIBOR” and address the risks presented by LIBOR’s expected discontinuation, it is important to keep investors informed about the progress toward risk identification and mitigation, and the anticipated impact on the company, if material. In deciding what disclosures are relevant and appropriate, CF encourages companies to consider the following guidance.

– The evaluation and mitigation of risks related to the expected discontinuation of LIBOR may span several reporting periods. Consider disclosing the status of company efforts to date and the significant matters yet to be addressed.

– When a company has identified a material exposure to LIBOR but does not yet know or cannot yet reasonably estimate the expected impact, consider disclosing that fact.

– Disclosures that allow investors to see this issue through the eyes of management are likely to be the most useful for investors. This may entail sharing information used by management and the board in assessing and monitoring how transitioning from LIBOR to an alternative reference rate may affect the company. This could include qualitative disclosures and, when material, quantitative disclosures, such as the notional value of contracts referencing LIBOR and extending past 2021.

At this stage in the transition away from LIBOR, we note that companies most frequently providing LIBOR transition disclosure are in the real estate, banking, and insurance industries. We also note that, based on our reviews to date, the larger the company, the more likely it is to disclose risks related to LIBOR’s expected discontinuation. However, for every contract held by one of these companies providing disclosure, there is a counterparty that may not yet be aware of the risks it faces or the actions needed to mitigate those risks. We therefore encourage every company, if it has not already done so, to begin planning for this important transition.

Buybacks: Rulemaking Petition Wants to “Repeal & Replace” Rule 10b-18

A few weeks ago, the AFL-CIO and 18 other organizations submitted this rulemaking petition to call for more comprehensive rules around stock buybacks. Here’s an excerpt from this Wachtell Lipton memo (also see this Cooley blog):

The petition contends that the current rule has “failed to prevent executives from using repurchases to boost a company’s stock price or meet other performance goals at the expense of investing in its workers,” and that the existing disclosure requirements are inadequate. The petitioners cite evidence that corporations devote substantial capital to buybacks, noting the recent uptick following the enactment of the Tax Cuts and Jobs Act, and argue that the funds would be better spent on “wages, training, hiring” and other capital investments. The petitioners request that the SEC develop a “more comprehensive framework” to deter manipulation and protect workers, and propose that the SEC consider certain suggestions made in prior rulemaking processes (including additional disclosure requirements and tighter trading limits) and consider adopting regulatory features imposed in certain other countries (such as shareholder approval requirements and prohibitions on executive trading).

The History of Stock Buybacks

This WSJ article posits that “Share buybacks are as American as mom, apple pie and hot dogs on the Fourth of July.” They’ve been around since the 1800s – and were often mandatory back then, in order to keep management from pocketing extra profits. Bloomberg’s Matt Levine suggests that maybe the changing sentiment about this practice has more to do with our modern expectations for “corporate purpose” than with the supposed unfairness of profits going to shareholders rather than workers:

In the olden days, you’d start a company and call it like Pennsylvania Tin Folding Ltd., and its purpose would be to fold tin in Pennsylvania, and it would never occur to you to fold tin in Ohio, or to fold nickel, or to twist tin, or to do anything else not in the name. You’d raise money from investors for a purpose, and do the purpose, and if it was profitable you’d give the money to the investors; you’d stay in your lane.

In modern times, you start a company and call it like Alphabet Inc., and its purpose is be to sell online advertisements against search results, and when that turns out to be an extraordinarily lucrative business it will get into other businesses like email and self-driving cars and human immortality. And no one thinks this is the least bit weird; everyone says “well of course who should end the tyranny of death if not the search-ad guys?” And this becomes the normal way of thinking, so that any profitable mobile-phone or social-networking or whatever company that doesn’t plow its profits back into grandiose moonshot projects is somehow failing in its duty to humanity. How are we going to fund our most ambitious collective goals, if not by social-media startup founders making whimsical decisions about what to do with their retained earnings?

Liz Dunshee

July 15, 2019

CAMs: PCAOB Answers FAQs from Audit Committees

Every 2-3 months this year, the PCAOB has been publishing resources to explain the “critical audit matters” disclosure that’ll appear in upcoming audit reports (here’s our blog about their May guidance). The latest two pieces came out last week – one is directed to investors and the other is directed to audit committees – in addition, the CAQ also published this primer on CAMs for investor relations teams.

Here’s a couple responses to “frequently asked questions” that the PCAOB has gotten from audit committees about CAMs (also see pg. 6 for a list of questions that audit committees should ask auditors):

1. Will the new requirement of the auditor to communicate CAMs change required audit committee communications?

Other than a new requirement for the auditor to provide and discuss with the audit committee a draft of the auditor’s report, the PCAOB’s requirements for audit committeecommunications remain the same. Any matter that will be communicated as a CAM should have already been discussed with the audit committee and, therefore, the information should not be new.

2. Does the audit committee have a role in determining and ap-proving CAM communications?

No. While the auditor is required to share the draft auditor’s report including any CAMs identified with the audit committee, CAMs are the sole responsibility of the auditor. The standard is designed to elicit more information about the audit directly from the auditor. As the auditor determines how best to comply with the communication requirements, the auditor could discuss with management and the audit committee the treatment of any sensitive information.

COSO’s “ERM” Framework Now Includes “ESG”

This DFin memo summarizes current trends in ESG reporting & oversight. On pages 11-14, it points out that COSO’s enterprise risk management framework was updated last fall to include risk-related ESG controls & analysis. Here’s an excerpt:

As boards are expected to provide oversight of ERM, the COSO framework supplies important considerations for boards in defining and addressing risk oversight responsibilities. The COSO ERM – ESG framework is built on the five pillars of existing ERM reporting.

1. Governance & Culture for ESG-Related Risks

2. Strategy & Objectives for ESG-Related Risks

3. Performance for ESG-Related Risk – identifies risk, assesses & prioritizes risks, implements risk responses

4. Review & Revision for ESG-Related Risks

5. Information, Communication & Reporting for ESG-Related Risks

Tomorrow’s Webcast: “How to Handle Hostile Attacks”

Tune in tomorrow for the webcast – “How to Handle Hostile Attacks” – to hear Goldman Sachs’ Ian Foster, Cleary Gottlieb’s Jim Langston & Innisfree’s Scott Winter provide insights into the art of responding to a hostile attack.

Liz Dunshee

July 12, 2019

Universal Proxies: Understanding the Difference Between EQT & SandRidge Energy

Yesterday, I blogged about how a dissident group won control of EQT’s board through a proxy fight that was waged using a universal proxy card. According to this Olshan memo, this marked the first time that such a card was successfully used in a control proxy contest in the US.

In the wake of the blog, a member asked this in our “Q&A Forum” (#9949):

In today’s blog, it says it’s the first time a dissident won control of a company’s board after a proxy fight using a universal proxy card. What about SandRidge Energy last year? SandRidge was considered the first company in the U.S. to let an activist board nominee onto its ballot. I didn’t follow that proxy fight very closely, but thought Carl Icahn ended up taking over SandRidge’s board.

After conferring with Andrew Freedman of Olshan, I provided this response:

Yes, there actually is a big distinction. SandRidge used a universal proxy, but Icahn could not. It relates back to the issue that Olshan covers in their alert about how company counsel is using advance notice bylaws and/or director nominee questionnaires to extract “consents” from dissident nominees, while not agreeing to provide reciprocal consents for the Company’s nominees to the dissident. Thereby creating a one-way advantage for the company to use a universal proxy card – while the dissident is left with a card that can only name the dissident’s nominees. The Rice Team & Olshan didn’t let EQT get away with that – they went to court.

The Challenges of Disclosing a CEO’s Illness

Over the years, I have blogged numerous times about the challenges of disclosing an illness for a senior executive (see this blog – and this blog). My good friend Bob Lamm delves into this sensitive topic in this blog about some recent CEO illnesses and the related disclosures…

Abigail Disney’s “Mini-Crusade” Against Disney’s Pay Ratio

Following up on this blog that I wrote on, here’s a note from Anders Melin’s “The Pay Letter”:

I was out hiking in Laguna Beach the day Abigail Disney began her mini-crusade against Disney’s CEO pay ratio of 1,424-to-1. She laid it all out in a bunch of tweets. “Jesus Christ himself isn’t worth 500 times median workers’ pay,” she had said just weeks earlier.

Supporters and critics quickly jumped into their respective trenches. The former decried capitalism. The latter brushed off her remarks as socialist propaganda. (I exaggerate, but you get the point.)

Among her critics was Jeff Sonnenfeld, the ever-present Yale management professor. He pointed to Disney’s 580% stock return under Iger and the 70,000 jobs it’s created, and that the CEO’s pay still pales in comparison to that of some hedge fund managers, who don’t really create anything. “When pay and performance is properly aligned as it is at Disney, we need to recognize it,” he wrote.

What most of Abigail’s critics, including Sonnenfeld himself, failed to grasp was her actual point: That the wealth Disney’s created hasn’t been shared equitably with most of its employees.

In her lengthy series of tweets, she took a swipe at the shareholder-centric model of running companies and the consequences that sometimes follow for workers, the environment and surrounding communities. “When does the growing pie feed the people at the bottom?” she rhetorically asked the universe.

This question about what’s a fair sharing ratio — how much of the monetary gains of a successful company should be reaped by the single person in charge — is something I will explore in a series of stories later this year. (A sneak peek would be my piece from April about the CEO of a tiny California bank who took home twice as much as Jamie Dimon last year.)

Broc Romanek

July 11, 2019

Universal Proxies: Dissidents Win Board Control for First Time!

As John blogged today on the Blog, here’s big news on the universal proxy front: yesterday, at EQT Corporation’s annual meeting, a dissident group won control of the company’s board through a proxy fight waged using a universal proxy card. According to this Olshan memo, this marks the first time that such a card was successfully used in a control proxy contest in the US. Here’s an excerpt:

The universal ballot adopted by both EQT and the Rice Team named both EQT’s and the Rice Team’s nominees on their respective proxy cards. The only difference related to the presentation of the two cards, in which each side highlighted how it desired shareholders to vote. Copies of the two cards can be found here (Rice Team) and here (EQT).

As shown, the Rice Team made clear on its proxy card a recommendation for all seven of its nominees and for five of the Company’s nominees that it did not oppose, to permit shareholders to vote for all 12 available spots. Similarly, the Company recommended a vote for all 12 of its nominees and against the Rice Team’s nominees, other than existing director, Daniel Rice IV, who was nominated by both EQT and the Rice Team.

The Rice Team obtained public support from many of EQT’s largest shareholders, including T. Rowe Price Group Inc., D.E. Shaw & Co., Kensico Capital Management Corp. and Elliott Management Corp., along with proxy advisory firms Institutional Shareholder Services (“ISS”) and Egan-Jones Ratings.

The use of a universal ballot for a majority slate of directors is unprecedented and, in our view, may become more common in future proxy contests given the Rice Team’s success here. In fact, ISS noted the following in its report recommending that shareholders vote for all of the Rice Team’s nominees on that team’s universal proxy card:

“The adoption of a universal card was an inherently positive development for EQT shareholders (as it would be in any proxy contest), in that it will allow shareholders to optimize board composition by selecting candidates from both the management and dissident slates.”

Despite pushing for the adoption of universal proxies, some activists had recently cooled on their potential use. For instance, as we blogged last fall, Starboard Value’s CEO Jeff Smith expressed concern that in its current form, the universal ballot might tip the playing field in management’s favor. It will be interesting to see if the outcome of yesterday’s EQT vote causes people to recalibrate that assessment.

Looking at Vote Requirements

Here’s an interesting piece from ISS Analytics’ Kosmas Papadopoulos about vote requirements. Here’s the intro:

At the general meeting of Tesla Inc. on June 11, 2019, two management proposals seeking to introduce shareholder-friendly changes to the company’s governance structure failed to pass, despite both items receiving support by more than 99.5 percent of votes cast at the meeting. To get official shareholder approval, the proposals needed support by at least two-thirds of the company’s outstanding shares. However, only 52 percent of the company’s share capital was represented at the general meeting; based on turnout alone, there was no possible way for the proposal to pass.

As strange as the voting outcome at Tesla may seem, it is not a very unusual result. Every year, dozens of proposals are not considered to be “passed,” even though they receive support by an overwhelming majority of votes cast at the meeting. Supermajority vote requirements may be responsible for a large portion of these failed votes with high support levels (62 percent of instances since 2008). However, using a base of all outstanding shares for the vote requirement is an even more common corresponding factor (92 percent of instances). The increase in failed majority-supported proposals in recent years can be directly attributed to the change in the rules pertaining to the treatment of broker non-votes.

The History of Proxy Solicitation

This piece by Alliance Advisors’ Michael Mackey – published in Carl Hagberg’s “Shareholder Service Optimizer” – coincides with two of my favorite topics: history and proxy solicitation. Here’s the bottom line of the piece:

The most important takeaway for readers, as we have often noted here; this is ultimately a “people business” – where all the talent leaves the business every night – but where “the people at the top of the house” – and the people who are assigned to you own account – are the most important factors, we say, in choosing a solicitor…as the record clearly indicates if one studies the many ups and downs with care.

Broc Romanek

July 10, 2019

Delaware Chief Justice Strine to Step Down (Ahem, “Retire”)

Two days ago, Delaware Chief Justice Leo Strine announced that he would retire from the bench. This isn’t a surprise. It’s been kind of an open secret in Delaware for the past several months – he didn’t hire clerks for the next term. Leo isn’t quite “retirement age,” so I imagine we will see grander things yet from this very grand lawyer. As noted in this article, there is speculation that Leo will run for governor in Delaware in 2024.

Over on the blog yesterday, John gave a nice summary of just how important Leo has been to the Delaware judiciary for the last few decades. And here’s a statement from SEC Chair Clayton…

SEC Approves Nasdaq’s “Liquidity” Proposal

Here’s the intro from this blog by Cooley’s Cydney Posner:

The SEC has approved, on an accelerated basis, the recent Nasdaq proposal (as amended by new amendment no. 3) to revise its initial listing standards to improve liquidity in the market. Prior to the amendments, under the initial listing rules, to list its equity on any Nasdaq tier, a company was required to have a minimum number of publicly held shares, calculated to include restricted securities. Nasdaq proposed, among other things, to revise the initial listing criteria to exclude “restricted securities” from the calculations of a company’s publicly held shares, market value of publicly held shares and round lot holders, given that restricted securities are not freely transferable and are generally illiquid.

To that end, the Nasdaq proposal added new definitions for “restricted securities,” “unrestricted publicly held shares” and “unrestricted securities.” As a result of these changes, only securities that are “freely transferable will be included in the calculation of publicly held shares to determine whether a company satisfies the Exchange’s initial listing criteria under these rules.” No changes were proposed to the continued listing requirements. To allow companies adequate time to complete in-process transactions based on the existing rules, the changes will become effective 30 days after approval (July 5) by the SEC (August 4).

California Reports on Mandatory Women Directors

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

As noted yesterday, the California Secretary of State published a report on its website concerning publicly domestic or foreign corporations with principal executive offices are located in California. This report was required to document the number of these corporations “who [sic] have at least one female director”. Cal. Corp. Code § 301.3(c). The report, which is in the form of Excel spreadsheets, includes two tables. The first, entitled “SB 826 Corporations By SEC Data”, lists some 537 corporations. The second, entitled “Reporting in Compliance”, lists 184 corporations.

It is hard to know what these tables actually represent. For example, the second table identifies Ball Corporation among the 184 corporations “reporting in compliance”. However, Ball Corporation doesn’t appear on the first list of “SB 826 Corporations By SEC Data”. That isn’t too surprising if one looks at the cover sheet of Ball Corporation’s most recently filed Form 10-K which identifies it as an Indiana corporation with its principal executive offices located in Colorado. As such, it would not be subject to SB 826. That of course begs the question of why it is listed among the compliant and the more philosophical question of whether a corporation that is not subject to the law can be considered compliant.

Broc Romanek

July 9, 2019

SEC Will Evaluate Settlement Offers & “Bad Actor” Waiver Requests Simultaneously

Last week, SEC Chair Clayton issued this statement indicating that Enforcement will process settlement offers at the same time that “bad actor” waiver requests are made if so requested by the settling party. Here’s an excerpt from the Chair’s statement (we’re posting memos in our “SEC Enforcement” Practice Area):

I have consulted with the Office of the General Counsel and the Division of Enforcement regarding the mechanics of the Commission’s consideration of a simultaneous offer of settlement and waiver request. Based on these discussions, I generally expect that, in a matter where a simultaneous settlement offer and waiver request are made and the settlement offer is accepted but the waiver request is not approved in whole or in part, the prospective defendant would need to promptly notify the staff (typically within a matter of five business days) of its agreement to move forward with that portion of the settlement offer that the Commission accepted.

In the event a prospective defendant does not promptly notify the staff that it agrees to move forward with that portion of the settlement offer that was accepted (or the defendant otherwise withdraws its offer of settlement), the negotiated settlement terms that would have resolved the underlying enforcement action may no longer be available and a litigated proceeding may follow.

Tomorrow’s Webcast: “Current Developments in Capital Raising”

Tune in tomorrow for the webcast – “Current Developments in Capital Raising” – to hear Skadden’s Ryan Dzierniejko, Locke Lord’s Rob Evans, Shearman & Sterling’s Lona Nallengara and Wilson Sonsini’s Allison Berry Spinner explore the latest developments in raising capital and all the various alternatives, including ICOs, PIPEs and registered direct offerings, “at-the market” offerings, equity line financings and rights offerings.

Financial Reporting Structures: The Charts

Here’s an odd page that a member spotted on the SEC’s website. It contains three charts related to financial reporting structures: a blue print; a flow chart; and a segment chart. They were authored in the Spring of 2018 by Wes Bricker and Ying Compton from the SEC’s Office of Chief Accountant. Even though most companies will have their own unique circumstances, these could be useful as a “gut check”…

Broc Romanek

July 8, 2019

Next Thursday: SEC Calendars “Short- vs. Long-Term” Roundtable

The SEC will hold a roundtable next Thursday – July 18th – to address short-term vs. long-term “isms.” There are two panels – one for each “ism.” This follows the SEC’s “request for comment” in December about the nature, content and timing of earnings releases & quarterly reports – see the comments submitted to the SEC on that so far. And here’s the related memos we have posted…

Meanwhile, Sagar Teotia has been named the SEC’s Chief Accountant – he had been serving as “Acting” in that capacity for a while…

Usable Disclosure: Plain English Helps

Here’s a nice short piece by Third Creek Advisors’ Adam Epstein about how smaller companies can become more effective storytellers. Here’s an excerpt:

If your company’s storytelling acumen is high, your test subjects will quickly and accurately grasp the zeitgeist of your company. If they struggle, it’s likely that lots of small-cap investors – many of whom are generalists – don’t sufficiently understand what your company does either.

One way to dramatically increase messaging effectiveness is through website videos. Notwithstanding the fact that in excess of five billion videos are watched daily on YouTube, a surprising number of small-cap companies don’t have an “about us” video easily accessible on the home page of their corporate websites. This is a big mistake; a two-minute, professionally-produced, easy-to-understand video can pay for itself almost immediately.

Corp Fin Updates “Financial Reporting Manual” (Again)

Last week, Corp Fin indicated that it has updated its “Financial Reporting Manual” to remove guidance related to presentation of selected financial data & acquired business financial statements in a Form 10 filed by a “Smaller Reporting Company”; clarify the application of Rule 3-13 and Note 5 to Rule 8-01 of Regulation S-X; and provide revisions for certain technical amendments (e.g., update EGC revenue threshold pursuant to SEC Release 33-10332 and replace FASB ASU references with the applicable ASC Topics).

Broc Romanek