August 9, 2019

SEC Proposes Reg S-K Modernization! (For Items 101, 103 & 105)

Although the SEC cancelled its open Commission meeting that had been scheduled for yesterday, the Commissioners voted to issue this 116-page proposing release to modernize parts of Regulation S-K – specifically, Item 101 (business description), Item 103 (legal proceedings) and Item 105 (risk factors).

I speculated on Monday that some parts of the proposal might be somewhat based on the SEC’s Reg S-K concept release from 2016 – and it appears that they are (though the proposal doesn’t cover everything that was in the concept release). Another part of the proposal relates to human capital – a topic that SEC Chair Jay Clayton has indicated in recent speeches may be growing in importance. The “Fact Sheet” in the SEC’s press release highlights these proposed changes (also see this Cooley blog):

Item 101(a) (Development of Business):

– Make the Item largely principles-based by providing a non-exclusive list of the types of information that a registrant may need to disclose, and by requiring disclosure of a topic only to the extent such information is material to an understanding of the general development of a registrant’s business;

– Include as a listed disclosure topic, to the extent material to an understanding of the registrant’s business, transactions and events that affect or may affect the company’s operations, including material changes to a registrant’s previously disclosed business strategy;

– Eliminate a prescribed timeframe for this disclosure; and

– Permit a registrant, in filings made after a registrant’s initial filing, to provide only an update of the general development of the business that focuses on material developments in the reporting period, and with an active hyperlink to the registrant’s most recent filing that, together with the update, would contain the full discussion of the general development of the registrant’s business.

Item 101(c) (Business Narrative):

– Clarify and expand its principles-based approach, by including disclosure topics drawn from a subset of the topics currently contained in Item 101(c);

– Include, as a disclosure topic, human capital resources – including any human capital measures or objectives that management focuses on in managing the business – to the extent such disclosures would be material to an understanding of the registrant’s business,such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel; and

– Refocus the regulatory compliance requirement by including material government regulations, not just environmental provisions, as a topic.

Item 103 (Legal Proceedings):

– Expressly state that the required information about material legal proceedings may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document in an effort to encourage registrants to avoid duplicative disclosure; and

– Revise the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000 to adjust for inflation.

Item 105 (Risk Factors):

– Require summary risk factor disclosure if the risk factor section exceeds 15 pages;

– Refine the principles-based approach of that rule by changing the disclosure standard from the “most significant” factors to the “material” factors required to be disclosed; and

– Require risk factors to be organized under relevant headings, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption.

There’s a 60-day comment period – and we’ll be posting memos in our “Business Disclosure,” “Litigation” and “Risk Factors” Practice Areas.

This proposal was based on seriatim action taken by the Commissioners. As to the issue of whether the SEC is required to propose (or adopt) rules at an open Commission meeting, see Broc’s blog entitled “When is the SEC Required to Hold an Open Commission Meeting?”

Shareholder Proposals: Big Year for “Political Spending”

In March, Broc blogged on our “Proxy Season Blog” that lobbying & political spending proposals were “coming up big” this year. And now that the height of proxy season is behind us, the Center for Political Accountability is elaborating on their recent successes in this blog. Here’s an excerpt:

The average vote was 36.4 percent at 33 companies that held annual meetings. That was up from 34 percent last year, when 18 resolutions went to a vote. In 2017, the resolution averaged 28 percent over the 22 resolutions that went to a vote. CPA and its shareholder partners reached disclosure agreements and withdrew resolutions at 13 companies this year. That compares with three in 2018 and seven in 2017.

The 2019 Proxy Season breakdown is as follows:

– Two majority votes in support of the resolution at Cognizant Technology Solutions Corp. (53.6%) and Macy’s Inc. (53.1%).

– Eleven votes in the 40% range, including Kohl’s Corp. (49.8%), NextEra Energy Inc. (48.7%), Allstate Corp. (46.9%), Chemed (46.2%), Western Union Co. (44.3%), Fiserv Inc. (43.8%), Alaska Air Group (43.5%), Roper Technologies Inc. (43.0%), Netflix Inc. (41.7%), Centene Corp. (41.6%) and Nucor Corp (40.6%).

– Twelve votes in the 30% range. The companies included Illumina Inc. (37.7%), Simon Property Group Inc. (37.1%), American Water Works Company Inc. (37.0%), Duke Energy Corp. (35.8%), Wyndham Destinations (35.6%), American Tower Corp. (35%), Royal Caribbean Cruises Ltd. (34.5%), Wynn Resorts Ltd. (34.4%) CMS Energy Corp. (34.3%), Equinix Inc. (34.2%), DTE Energy Co. (33.6%), and J.B. Hunt Transport Services Inc. (31.7%).

This Cooley blog explores why companies might be coming around to greater oversight of this type of spending, and discusses some of the CPA’s recommendations…

Just Mailed: July-August Issue of The Corporate Counsel

We recently mailed the July-August issue of The Corporate Counsel. This issue includes pieces on:

1. Early Returns From the Fast Act Rule Changes
– Changes to the Form 10-K Cover Page
– Item 102 of S-K—Description of Property
– Item 303 of S-K—MD&A- Item 601 of S-K—Exhibits: Description of Securities
– Some Takeaways

2. Unpacking Stock Splits
– Stock Split v. Stock Dividend: What’s the Difference?
– Companies Need “Surplus” To Pay Dividends
– Do You Have Enough Shares?
– Directors’ Fiduciary Duties
– Reverse Splits: Appraisal Rights & Fair Value of Fractional Shares
– Federal Income Tax Treatment of Splits & Reverse Splits
– Federal Securities Law Compliance
– Exchange Act Compliance
– Stock Exchange Rules
– 5 Key Takeaways

3. A Few Words About Delaware’s “Legal Capital” Requirements

Liz Dunshee