Monthly Archives: October 2019

October 17, 2019

Shareholder Proposals: Corp Fin Issues 12th Staff Legal Bulletin

Yesterday, Corp Fin issued Staff Legal Bulletin No. 14K – which makes an even dozen SLBs devoted to shareholder proposals. It follows up on some of the topics addressed over the past two years in Staff Legal Bulletin 14I & Staff Legal Bulletin 14J.  Among other things, the new SLB provides guidance on:

– Rule 14a-8(i)(7)’s “ordinary business” exclusion, the role that the board’s analyses of why the policy issues involved in a proposal are not significant plays in the Staff’s consideration of a no-action request, and the board analyses that the Staff has found – and not found – to be persuasive.

– The factors considered in determining whether a proposal may be excluded under Rule 14a-8(i)(7) on the basis that it would involve “micromanagement” of the company, including circumstances that may result in even precatory proposals being deemed to raise micromanagement issues.

In addition, the SLB sets forth the Staff’s view that companies should refrain from an “overly technical” reading of proof of ownership letters in a effort to avoid including a proposal. In particular, the SLB points out that the Staff has not required proponents to adhere strictly to the suggested format for those letters contained in Staff Legal Bulletin 14F in order to avoid having their proposals excluded under Rule 14a-8(b).

Hey, remember those whistleblower proposals I blogged about yesterday?  The SEC also announced that it has scheduled an open meeting on October 23rd to consider adopting the proposed amendments.  Based on the SEC’s recent track record when it comes to cancelling open meetings, I sure wouldn’t recommend buying non-refundable tickets if you’re planning to head in to DC to attend.

Naming Audit Partners: No Audit Quality Impact?

Several years ago, the PCAOB adopted a rule requiring the public identification of the audit firm’s engagement partner on each public company audit. This rule went into effect for audit reports issued after January 31, 2017. It was intended to promote improved audit quality by enhancing auditor accountability. But according to this article, so far, there’s no evidence that it’s moved the needle on that front, but there’s at least some evidence that investors are using the information as a screening tool. Here’s an excerpt:

One of those new studies found that despite slightly positive trends in audit quality, the improvement is not yet convincingly attributable to the adoption of the audit partner-naming rule. That research, entitled “What’s in a Name? Initial Evidence of U.S. Audit Partner Identification Using Difference-in-Differences Analyses,” by Lauren M. Cunningham of the University of Tennessee, Chan Li of the University of Kansas, Sarah E. Stein of Virginia Tech, and Nicole S. Wright of James Madison University, is in the current issue of The Accounting Review, a peer-reviewed journal of the American Accounting Association.

The study by Cunningham and her colleagues also cites another ongoing study that finds investors are less likely to invest in a company when the partner is linked to another client with a restatement. Another working paper finds no evidence of significant trading activity in the days surrounding PCAOB Form AP disclosure, even in cases of a change in audit partner in the second year of mandatory disclosure.

Director Onboarding: Board Governance Guidebook

Clients frequently ask for resources to help new directors get up to speed on governance during the onboarding process – and this 12-page “Guidebook to Boardroom Governance Issues” that Wilson Sonsini has put together seems to fit the bill nicely.  It covers a lot of ground in a concise & informative way. Check it out!

John Jenkins

October 16, 2019

Poison Pills: A Career Limiting Move for Directors?

If you’re a public company director looking to put a real crimp in your future career prospects, it looks like adopting a poison pill is a pretty good way to do it. In a recent Business Law Prof blog, Akron U’s Stefan Padfield flagged a new study that says directors who vote to adopt a poison pill pay a significant price. Here’s the abstract:

We examine the labor market consequences for directors who adopt poison pills. Directors who become associated with pill adoption experience significant decreases in vote margins and increases in termination rates across all their directorships. They also experience a decrease in the likelihood of new board appointments. Firms have positive abnormal stock price reactions when pill-associated directors die or depart their boards, compared to zero abnormal returns for other directors.

Further tests indicate that these adverse consequences accrue primarily to directors involved in the adoption of pills at seasoned firms and not at young firms. We conclude that directors who become associated with poison pill adoption suffer a decrease in the value of their services, and that the director labor market thus plays an important role in firms’ governance.

The study suggests that the absence of any adverse effect on directors who put pills in place at emerging companies may reflect the market’s perception that takeover defenses are positive for young firms and negative for more seasoned ones.

PCAOB: Board Seat Drama Culminates in SEC Shake-Up

Last month, Broc blogged about the controversy over Kathleen Hamm’s seat on the board of the PCAOB. To make a long story short, Hamm wanted to be reappointed to the Board, but according to this article by’s Francine McKenna, the SEC seemed to have other ideas. Last week, the CII sent a letter to the SEC citing Francine’s article & endorsing Hamm’s reappointment.

The plot thickened late Friday afternoon when the SEC issued a press release announcing that Hamm would leave the PCAOB board when her current term expires. That was followed by another release announcing that White House staffer Rebekah Goshorn Jurata would take Hamm’s place on the board.

If the replacement of the reportedly “Democrat-aligned” Hamm with a Trump Administration insider wasn’t enough to raise eyebrows, the SEC’s second press release went on to announce that Commissioner Hester Peirce – who is, to say the least, not a fan of Section 404 of the Sarbanes-Oxley Act – would “lead the Commission’s coordination efforts with the Board of the PCAOB.”

Any hopes that releasing the news about the shake-up late on the Friday before a holiday weekend would limit media attention on the PCAOB were likely dashed yesterday when the WSJ published an article detailing a whistleblower’s allegations that the PCAOB’s work has been slowed by “board infighting, multiple senior staff departures, and allegations that the chairman has created a “’sense of fear.'”

Whistleblowers: Big Changes in SEC’s Program On the Way?

According to this recent AP report, the SEC is quietly moving toward adopting some potentially significant changes in its whistleblower program. Here’s an excerpt:

The proposal would give the SEC discretion to set the smallest and largest cash awards to whistleblowers, among other changes. Critics say that change would likely discourage employees from reporting major frauds by lowering the chances of a huge payout. The payment for successful cases is now 10% to 30% of fines or restitution collected by the agency — which means the bigger the fraud, the larger the bounty.

The SEC also wants to impose new requirements for filing a whistleblower complaint. To receive legal protection from the SEC against retaliation — a core concern for people risking their careers and livelihoods — a whistleblower would have to report violations in writing, rather than the oral disclosures now permitted at the SEC and other federal agencies.

Liz blogged about the proposal to amend the whistleblower rules when the SEC initially made it in June 2018, but now that it appears to be close to adoption, it has prompted the usual reaction from the usual suspects. Whistleblower advocates contend the changes would have calamitous results, while the AP story quotes the U.S. Chamber of Commerce as saying that the proposal is a “small but nonetheless important step” toward improvement.

John Jenkins

October 15, 2019

Board Diversity: NYC Comptroller Launches “Rooney Rule” Initiative

Last week, NYC Comptroller Scott Stringer announced an initiative calling for companies to adopt a corporate version of the NFL’s “Rooney Rule” in order to promote gender & ethnic diversity in the boardroom. Here’s an excerpt from the Comptroller’s press release:

At the annual Bureau of Asset Management (BAM) “Emerging and MWBE Manager” conference, New York City Comptroller Scott M. Stringer today launched the third stage of the groundbreaking Boardroom Accountability Project with a new first-in-the-nation initiative calling on companies to adopt a policy requiring the consideration of both women and people of color for every open board seat and for CEO appointments, a version of the “Rooney Rule” pioneered by the National Football League (NFL). The new initiative is the cornerstone of the Comptroller’s Boardroom Accountability Project, a campaign launched in 2014 which seeks to make boards more diverse, independent, and climate competent.

The Comptroller launched this initiative by sending a letter to 56 S&P 500 companies that do not currently have a Rooney Rule policy requesting them to implement one. The press release indicates that the Comptroller will file shareholder proposals at companies “with lack of apparent racial diversity at the highest levels.”

Since the Comptroller is pressing for a corporate Rooney Rule, I wondered if there was data on how the NFL’s Rooney Rule has played out in terms of promoting diversity. I came across this recent article from “” which says that the results are a mixed bag. Minority candidates are getting more shots at head coaching positions, but the results suggest that they’re put in a position to succeed less frequently than white coaches, and that teams give them the axe more quickly. It’s also worth noting that, despite the Rooney Rule, 7 of the 8 head coaching vacancies in the NFL during the past offseason were filled by white dudes.

I have a problem with the methodology that the article applies to its Rooney Rule analysis. The Cleveland Browns’ hiring & firing of Romeo Crennel & Hue Jackson during the period were included in the sample, which I really think should’ve been limited to professional football teams. Besides, as we Cleveland fans are in the process of finding out once again this season, nobody can question the fact that the Browns are an equal opportunity pit of despair.

Conflict Minerals: GAO Says 2018 Reports Were More of the Same

The GAO recently completed its annual conflict minerals review as required by Dodd Frank. Here’s an excerpt from this GAO report highlighting its results:

Companies’ conflict minerals disclosures filed with the U.S. Securities and Exchange Commission (SEC) in 2018 were, in general, similar in number and content to disclosures filed in the prior 2 years. In 2018, 1,117 companies filed conflict minerals disclosures—about the same number as in 2017 and 2016. The percentage of companies that reported on their efforts to determine the source of minerals in their products through supply chain data collection (country-of-origin inquiries) was also similar to percentages in those 2 prior years.

As a result of the inquiries they conducted, an estimated 56 percent of the companies reported whether the conflict minerals in their products came from the Democratic Republic of the Congo (DRC) or any of the countries adjoining it—similar to the estimated 53 and 49 percent in the prior 2 years. The percentage of companies able to make such a determination significantly increased between 2014 and 2015, and has since leveled off.

Tomorrow’s Webcast: “Sustainability Reporting – Small & Mid-Cap Perspectives”

Tune in tomorrow for the webcast – “Sustainability Reporting: Small & Mid-Cap Perspectives” – to hear White & Case’s Maia Gez, Elm Sustainability Partners’ Lawrence Heim, Ballard Spahr’s Katayun Jaffari and Toro’s Angie Snavely discuss sustainability trends among small & mid-caps – and how companies with limited resources can get a sustainability initiative off the ground.

John Jenkins

October 11, 2019

The “Nina Flax” Files: Things That Make Me Cry

Here’s the latest “list” installment from Nina Flax of Mayer Brown (here’s the last one):

I believe none of us, regardless of the stage of our careers, should feel bad, shame or any other negative if we are unable to remain completely unemotional at work. We are human – and emotions make us human! There have been many times throughout my career, and of course in the past few years, that I have cried – including somewhere at work. How I know that I need that outlet as well as support from others in order to remain [more] composed in the inducing situation and after. I need it like the air I breathe.

This got me thinking about crying, how and when I cry, and how some people I work with (internally and externally) do not seem to think of me as being vulnerable for I am sure a plethora of reasons. So, here is a more vulnerable list… a list of Things That Make Me Cry.

1. My Son’s Love. It is a fact that I am a working mom. In fact, I do not think I would be a good mom if I did not work – I am just not cut from that cloth. However, I am in a service profession, which means I have to be available and can have intense hours. Which also means that I have to travel. When my son grabs on to my leg and starts crying hysterically, whether on a “normal” morning when I am going in to work or as I have a suitcase in hand waiting for a car to take me to the airport, I keep it together. Momentarily. The second I walk out of the house and he can no longer see me, remembering his dragon tears and “No, mommy, don’t go! Don’t go [to work] [to the airport]! Stay here! I want you to stay here with me!” – I cry.

2. My Son’s Rejection. See first three sentences above. Which also leads to my husband being the more stable figure who is always able to be there in the morning (no calls in the office from 6am), at night (no working until 3am) and on weekends (for all, no work travel). Which leads to my son at times (sometimes it feels like the vast majority of times) preferring my husband. Which leads to my son, sometimes, yelling “Go away!” or “I don’t want you” or “NO! Only Papa!”, etc. I know this is not atypical. And I know that in the next breath, I get an “I love you” or a hug or a kiss or a head leaning on my shoulder, or, as above, a “Mommy, no, don’t go to work!” These things don’t make the hurt go away. My son’s rejection cuts me to the core, including the guilt I feel that I have to prioritize work sometimes, and I always sneak away to cry by myself. I am saving for another day tag lines that really make me angry – like work-life balance, or lean in. Finally, before I move off of this point, I LOVE the relationship my son and husband have, and would not want their relationship to be any other way. Other than tempering the tone and words of my rejection. If my son said, “Mama, can you please have Papa come in?” or “Mama, I would prefer if Papa tucked me in.” in those moments, I swear I would not cry – I would not feel rejected. Thankfully, he has started heading in this direction.

3. Being Frustrated When I’m Tired. Not kidding. If I am tired and something occurs that I find particularly frustrating, I cry. It is truly a reflex for me. Any frustration.

4. Witnessing Artistic Accomplishments. When I see an amazing ballet, or even watch a moving piece on So They Think They Can Dance (when I watched this show before child), or someone sing beautifully a beautiful song, or someone receiving an award for a fantastic performance, I cry. When people perfect their craft, share it and exude peace and joy at the same time, I am moved. I must admit I am more emotional around the arts, but any deep recognition of achievement, scientific, professional or other non-arts focused, usually makes my eyes at least water.

5. Reading The News. I know I should not admit this in public, but I extremely dislike reading or staying up-to-date on the news. Because inevitably, there is a piece on conflict I seek out, a story about a crime or horrific accident involving a child, or a moving, random act of kindness. The majority of the time I read the news I read something that makes me cry.

6. Feeling Grateful. I have referenced this a bit in my other posts, but I try to remind myself of all that I have to be grateful for. And when I do I realize how much I am grateful for, how trivial some of the things that upset me are, and how there are so many with less. Including children who are hungry, without a roof over their heads, without feeling safe, without feeling loved and/or without books. And I cry.

This makes it seem like I always cry. Those who are closest to me are not at all surprised by my delicate flower status. Those that are not as close to me are probably floored by this post. But I felt compelled to be honest – I am not ashamed of crying, and have learned to temper my feeling of being “less” than anyone in a professional situation who comes across as perfectly composed. Because I love emotions, but maybe a little less than I love books.

Fake SEC Filings: Edgar Fights Back

I really can’t overstate how much we love “fake SEC filings” around here. So it’s with mixed feelings that I report on changes to Edgar that might make these an even rarer occurrence. Specifically, filers now need a longer & more complex password – this Gibson Dunn blog has more detail:

Filers, including Section 16 filers, will now be requested to provide twelve character passwords instead of eight character passwords when logging into both the EDGAR Filing Website and the EDGAR Online Forms Management Website. Current filers who do not update their password to twelve characters will be prompted to update it each time they log in. We have confirmed with the staff of EDGAR Filer Support that current filers who do not update their password when prompted will not be prevented from logging in successfully. However, EDGAR passwords expire annually and should be changed before the expiration date. Any filers who have not already updated their password by the time they otherwise expire will be required to create a password that satisfies the new requirements before being permitted to log in to EDGAR.

Even more interesting from a security perspective is that a “Last Account Activity” tab is being added to the filing & forms websites – so you can see a 30-day history of login attempts and spot any aspiring fakers. And on a more vanilla note, the changes also allow companies to include 150 characters in cover page tags for classes of registered securities (up from 100 characters), since some companies were having trouble fitting it all in.

New Podcast Series! “Women Governance Gurus” With Courtney Kamlet & Liz

Check out the new podcast series – “Women Governance Gurus” – that I’ve been co-hosting with Courtney Kamlet of Syneos Health. So far, these illustrious guests have joined us to talk about their careers in the corporate governance field – and what they see on the horizon:

Stacey Geer – EVP, Chief Governance Officer, Deputy GC and Corporate Secretary at Primerica
Kellie Huennekens – Head of Americas, Nasdaq Center for Corporate Governance
Anne Chapman – Managing Director, Joele Frank
Hope Mehlman – EVP, Chief Governance Officer at Regions Bank

Stacey’s President & GC even presented her with a new nameplate in honor of the occasion!

Liz Dunshee

October 10, 2019

Chief Justice Strine’s “New Deal”

When Delaware Chief Justice Leo Strine announced that he’d be leaving the bench this fall, Broc speculated that grander things were yet to come. Now, the influential judge is kicking off his “retirement” with a bang – by publishing this proposal that would recommit to “New Deal” concepts. In particular, the proposal focuses on workers’ rights and a reformed shareholder voting/proposal process (e.g. requiring a “say-on-pay” vote only once every 4 years and changing shareholder proposal thresholds).

This isn’t a big surprise given some of Chief Justice Strine’s prior comments. But it’s more comprehensive. And while he doesn’t go as far as Senator Warren’s “Accountable Capitalism Act,” he does comment that companies are “societally chartered institutions” – notable for a Delaware judge! – and proposes requiring “workforce committees” for boards of all large companies (whether public or private). Here’s an excerpt on that point (and also see this Cooley blog):

To make sure that companies give careful consideration to worker concerns at the board level, the Proposal requires the Securities and Exchange Commission, the Department of Labor, and the National Labor Relations Board to jointly develop rules that would require the boards of companies with more than $1 billion in annual sales to create and maintain a committee focused on workforce concerns. By requiring these committees at all large corporations, not just public corporations, more accountability would be imposed on large private companies, such as those owned by private equity firms, to treat their workforce fairly.

These workforce committees would be focused on addressing fair gain sharing between workers and investors, the workers’ interest in training that assures continued employment, and the workers’ interest in a safe and tolerant workplace. These workforce committees would also consider whether the company uses substitute forms of labor—such as contractors—to fulfill important corporate needs, and whether those contractors pay their workers fairly, provide safe working conditions, and are operating in an ethical way, and are not simply being used to inflate corporate profits at the expense of continuing employment and fair compensation for direct company employees.

Offering a middle-ground between the current system and “codetermination”-style worker representation, the committees would be required to develop and disclose a plan for consulting directly with the company’s workers about important worker matters such as compensation and benefits, opportunities for advancement, and training. Finally, the National Labor Relations Act would be amended to ensure that companies can use dedicated committees to consult with their workers without running afoul of the Act’s prohibition on “dominating” labor organizations, provided that the company doesn’t interfere with, restrain, or coerce employees in the exercise of their rights to collective bargaining and self-organization. In essence, this would allow for European-style “works councils” without impeding union formation and representation.

Should the SEC Get Out of the “Stakeholder Disclosure” Business?

I think most securities practitioners can agree that it’s exhausting to shoehorn certain Congressional mandates for broader ’33 & ’34 Act reporting into the SEC’s mission to protect investors – and when these types of mandates come around, they also seem to be at odds with the Commission’s mission to facilitate capital formation. At the same time, a variety of stakeholders are clamoring for information, and the SEC runs the main disclosure game in town.

This paper by Tulane law prof Ann Lipton plays some of the same notes as Chief Justice Strine’s proposal (and it was actually published before his). For example, that it’s outdated to make disclosure requirements dependent on a company’s capital raising strategy. Here’s part of the abstract:

This Article recommends that we explicitly acknowledge the importance of disclosure for noninvestor audiences, and discuss the feasibility of designing a disclosure system geared to their interests. In so doing, this Article excavates the historical pedigree of proposals for stakeholder-oriented disclosure. Both in the Progressive Era, and again during the 1970s, efforts to create generalized corporate disclosure obligations were commonplace. In each era, however, they were redirected towards investor audiences, in the expectation that investors would serve as a proxy for the broader society. As this Article establishes, that compromise is no longer tenable.

Who would regulate this brave new world? Personally, I think that if the SEC’s mission was expanded, it would be well-suited to take on the challenge – but I’m not sure they’d want the job. Here’s what Ann suggests:

There is currently no federal agency with the skills to manage the system contemplated here. The SEC is not equipped to manage disclosures intended for noninvestors (which is another reason the securities laws should not be used for that purpose). The Federal Trade Commission has broad experience studying business activity, but has fewer disclosure mandates. That said, the SEC and the FTC both have skills and experience that would be useful in developing a new system: both study a wide range of industries, and the SEC in particular has expertise in developing standardized reporting for public audiences, balanced against the costs to businesses of complying with disclosure demands.

Therefore, it might be appropriate to create a joint initiative that draws on the resources and knowledge of both agencies. The initiative could begin its work by studying how public information about corporations is used by noninvestor audiences, including surveying local regulators, as well as advocacy and trade groups, for their input as to how existing disclosures are used and the weaknesses in the current system. Based on the results of this survey, the initiative could develop a standardized framework that would permit meaningful comparisons across reporting companies.

New! Quick Survey on Hedging Policy Disclosure

At our conference a few weeks ago a few weeks ago (which you can still register & watch via video archive), there were a lot of questions about how companies will handle the newly required hedging policy disclosure. Take a moment to participate in our 3-question “Quick Survey on Hedging Policy Disclosure” and see what others are planning to do.

Liz Dunshee

October 9, 2019

Director Meeting Fees. . .Going, Going, Gone?

Here’s something I recently blogged on As you can see from the studies posted in our “Director Pay” Practice Area, it’s become a pretty rare thing for public companies to pay director meeting fees. In fact, this Pearl Meyer blog reports that fewer than 25% of companies are doing it (though it’s still a majority practice at private companies). The blog gives these recommendations if your directors insist on being paid for attendance:

1. If your number of board or committee meetings is consistently above your peer group meeting, revisit whether your retainers account for that workload

2. If there’s a non-recurring situation, consider an ad-hoc retainer for affected directors

3. If directors are uncertain about their workload, consider conditional meeting fees if the number of meetings exceeds a pre-established threshold

SEC Enforcement: Check Your “Loss Contingency” Disclosure!

Ah, autumn. A time to relish the changing leaves, cooler temps and of course the deluge of press releases from the SEC’s Enforcement Division that drop before the end of the Commission’s September 30th fiscal year. Here’s an announcement about charges against the pharma company Mylan, which was the subject of a two-year DOJ probe and didn’t disclose any loss contingencies or accrue any estimated losses prior to announcing a $465 million settlement.

The SEC’s complaint also took issue with the company’s “hypothetical” risk factor disclosures about government authorities taking contrary positions to its Medicaid submissions, when CMS had already informed Mylan that a product was misclassified. Mylan agreed to settle the SEC matter for $30 million.

Things like this tend to seem pretty clear in hindsight – especially if you’re reading about them in an SEC announcement. But it really requires a thorough understanding of the rules and a lot of judgment. Don’t forget that we have handbooks to help you sort through it all. Here’s the one on “Legal Proceedings Disclosures” – and here’s the one on “Risk Factors.”

SEC Enforcement: Actually, Just Check All Your Disclosures

Here’s another recent settlement between the SEC’s Enforcement Division and a company that disclosed allegedly misleading customer metrics (the CEO was also charged). This one’s scary because it delves into the type of non-financial stuff that gets added to earnings releases (and occasionally periodic reports) without a lot of lawyerly checking. This Stinson blog explains the allegations:

In 2014 and 2015, Comscore disclosed its total number of customers and net new customers added in quarterly earnings calls. Comscore also disclosed its customer total in periodic filings with the Commission. According to the SEC the number of net new customers added per quarter was an important performance indicator for Comscore that analysts tracked and reported on. During this time, in an effort to conceal the fact that quarterly growth in Comscore’s customer total had slowed or was declining, a Comcast employee allegedly approved and implemented multiple changes to the methodology by which the quarterly customer count was calculated. These changes were neither applied retroactively nor disclosed to the public per the SEC order.

Coincidentally, a recent Corp Fin comment letter raised similar issues for a different company. Comments might be down overall, but don’t let anyone tell you that Corp Fin is “calling it in” for their reviews. They took issue with the number of customers disclosed by a gym in its annual report and – of all the things! – the viewership stats that the company cited for “Dick Clark’s Rockin’ Eve” (see this Bass Berry blog).

For those of us who want to save companies from fines & embarrassment, the question is how to vet non-financial metrics efficiently and without losing all your friends & clients. Some members have suggested putting a “stake in the ground” that describes how customer metrics are calculated – whether that’s a widely-available internal thing or actually in the 10-K would be up for debate (both shareholders & competitors would prefer the latter). Shoot me an email if you have other ideas…

Liz Dunshee

October 8, 2019

Something’s Happening Here: Caremark Bites Another Board

Here’s something John blogged last week on Don’t look now, but the Delaware Chancery Court just upheld another Caremark claim in the face of a motion to dismiss. In his 50-page opinion in In re Clovis Oncology Derivative Litigation, (Del. Ch.; 10/19), Vice Chancellor Slights held that the plaintiffs had adequately pled that the board breached its fiduciary duties by failing to oversee a clinical trial for the company’s experimental lung cancer drug and then allowing the company to mislead the market regarding the drug’s efficacy.

In declining to dismiss the case, the Vice Chancellor observed that Delaware courts are more likely to find liability under Caremark for oversight failures involving compliance obligations under regulatory mandates than for those involving oversight of ordinary business risks:

Caremark rests on the presumption that corporate fiduciaries are afforded “great discretion to design context- and industry-specific approaches tailored to their companies’ businesses and resources.” Indeed, “[b]usiness decision-makers must operate in the real world, with imperfect information, limited resources, and uncertain future. To impose liability on directors for making a ‘wrong’ business decision would cripple their ability to earn returns for investors by taking business risks.”

But, as fiduciaries, corporate managers must be informed of, and oversee compliance with, the regulatory environments in which their businesses operate. In this regard, as relates to Caremark liability, it is appropriate to distinguish the board’s oversight of the company’s management of business risk that is inherent in its business plan from the board’s oversight of the company’s compliance with positive law—including regulatory mandates.

As this Court recently noted, “[t]he legal academy has observed that Delaware courts are more inclined to find Caremark oversight liability at the board level when the company operates in the midst of obligations imposed upon it by positive law yet fails to implement compliance systems, or fails to monitor existing compliance systems, such that a violation of law, and resulting liability, occurs.”

VC Slights cited the Delaware Supreme Court’s recent decision in Marchand v. Barnhill, and noted that that case “underscores the importance of the board’s oversight function when the company is operating in the midst of ‘mission critical’ regulatory compliance risk.”

Caremark requires a plaintiff to establish that the board either “completely fail[ed] to implement any reporting or information system or controls” or failed to adequately monitor that system by ignoring “red flags” of non-compliance. While the board’s governance committee was responsible for overseeing compliance with regulatory requirements applicable to the clinical trial, the Vice Chancellor held that the plaintiff adequately pled that it knowingly ignored red flags indicating that the company was not complying with those requirements. Accordingly, he declined to dismiss the case.

Ann Lipton has some interesting perspectives on VC Slights’ distinction between business & legal compliance risks over on her Twitter feed. Check it out.

Caremark still may be, as former Chancellor Allen put it, “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” But after decades of routinely dismissing Caremark claims at the pleading stage, this marks the second time this year that the Delaware courts have declined to do so – and it’s the third case in the last two years in which they’ve characterized a Caremark claim as “viable.”

Is Caremark becoming a more viable theory of liability, or is board’s conduct in these cases just more egregious than in prior cases? It’s hard to say based on the limited evidence we have. For now, maybe the ’60s band Buffalo Springfield put it best – “There’s something happening here. What it is ain’t exactly clear. . .”

ISS Proposes Policy Changes: Comment By October 18th!

Yesterday, ISS announced a public comment period for proposed policy changes that would apply to next year’s annual meetings. For the US, the proposed changes are:

1. Clarifying a maximum 7-year sunset and other parameters for multi-class capital structures at newly public companies

2. Codifying ISS’s existing approach to “independent chair” shareholder proposals by identifying factors that will weigh in favor of a “For” recommendation – e.g. a “weak or poorly defined lead director role” – and moving some info into the “Policy FAQs”

3. Adding safeguards against “abusive practices” to the policy to vote “For” management proposals for buyback programs – e.g. the use of buybacks to boost EPS-based pay metrics

Submit comments to by next Friday – October 18th. Unless otherwise specified in writing, all comments will be disclosed publicly upon release of final policies – which is expected during the first half of November.

Ransomware: Preparing for a Growing Threat

According to a recent NYT article, more than 40 municipalities have been victims of ransomware attacks this year, including the 23 towns in Texas that were hit recently. This Wachtell Lipton memo predicts that ransomware is a growing threat for companies too – and offers these preparation & response tips (also see the suggestions in this “Accounting Today” article):

Before an attack:

– Reduce ransomware exposure by implementing reliable backup processes for IT systems & critical data

– Get cyber insurance that covers costs associated with ransomware incidents

– Implement incident response plans – including elevation procedures

– Foster pre-attack relationships with law enforcement

Responding to an attack:

– Protect attorney-client privilege by assigning legal counsel a leadership response role & engaging other advisers through counsel

– Assess disclosure obligations – e.g. state & international data breach notifications, SEC and industry-specific disclosure requirements

– Determine notice requirements for insurers, vendors and customers

– Approach the decision whether to pay a ransom with great caution & careful deliberation

On that last point about whether to pay a ransom, this ProPublica article outlines the pros & cons for victims – and suggests insurers have an incentive to accommodate the attackers even if (or because?) doing so leads to more incidents. According to the article, cyber insurance is now a $7-8 billion/year market, and insurers know that could fall apart if nobody is worried about getting hacked.

Liz Dunshee

October 7, 2019

Your Spouse Wants to Help “Design” Your IPO Prospectus? (Discuss)

What a freak show the now-aborted WeWork IPO wound up being. For example, this falls into the “news of the weird” category – check out this excerpt from this article about the role the CEO’s spouse played in preparing the company’s Form S-1:

An S-1 is meant to be a bland financial document, but WeWork’s took a different direction. With Adam’s encouragement, Rebekah became unusually involved in the artistic presentation of the document. “The traditional approach to producing an S-1 is bankers and lawyers hashing this out, but the process was continually usurped by Rebekah’s involvement,” one executive said, echoing a sentiment expressed by multiple people who worked on the project. “She treated it like it was the September issue of Vogue.”

WeWork had hired a former director of photography at Vanity Fair, and Rebekah insisted on selecting the photographers chosen to take photos of WeWork offices and members, and approved every photo that appeared in the S-1, of which WeWork included many more than most companies that go public. (She wasn’t the only picky one: Adam Kimmel, the company’s chief creative officer, became unhappy with how the company’s offices looked in its official pictures, so new photographers were sent around the world to reshoot them.)

As the summer wore on, WeWork employees found themselves making so many trips to meet with Rebekah at the Neumanns’ home in Amagansett that “He’s ‘out east’ tomorrow” became a euphemism for describing a colleague spending their day driving to and from the Hamptons. “The thing that’s so damning about all that is that it’s just not the point of the document,” a person who worked on the project said. “That’s the thing about WeWork: You’re spending all this time working on the surface of it instead of the actual truth of the thing.”

CalPERS Votes Against 53% of Pay Plans!

This blog by Jim McRitchie is mindblowing! Here’s a summary:

CalPERS, the largest U.S. pension fund which manages more than $380 billion in assets, has already started implementing its new compensation framework. In an effort to drive more accountability and improved pay for performance alignment, CalPERS reports voting against 53% of compensation plans at portfolio companies during the 2019 proxy season. That is up from 43% last year.

September-October Issue: Deal Lawyers Print Newsletter

This September-October issue of the Deal Lawyers print newsletter was just posted – & also mailed – and includes articles on:

– Five Observations on Recent Use of Universal Proxies
– Delaware Chancery Upholds Waiver of Appraisal Rights
– Does Your Acquisition Agreement Trigger a Form 8-K?
– Disclosure of Projections: Will Delaware’s Approach Still Rule the Roost?

Right now, you can subscribe to the Deal Lawyers print newsletter with a “Free for Rest of ‘19” no-risk trial. And remember that – as a “thank you” to those that subscribe to both & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

Broc Romanek

October 4, 2019

Pay Ratio: Bernie Sander’s “Tied to Higher Corporate Taxes” Campaign

As it has for the past few election cycles, executive compensation is working itself into the 2020 Presidential campaign. Bernie Sanders announced a proposal this week that would increase the corporate tax rate if a large company’s pay ratio is 50x or more (it would apply to any public or private company with more than $100 million in revenue). Here’s some news articles about it:

VOX’s “Bernie Sanders wants to tax companies that pay their CEOs way more than their workers”
NY Times’s “Sanders Proposes Corporate Tax to Address Pay Gap at Big Companies”
Washington Post’s “American CEOs deserve a pay cut. Bernie Sanders has a plan to make that happen.”
Business Insider’s “Bernie Sanders unveils ‘inequality tax’ targeting companies where CEOs make far more than workers”

SEC Enforcement: You Didn’t Disclose Your Scam

If you follow the SEC’s Enforcement actions, you find quite a few that can be entertaining. As Cooley’s Cydney Posner blogs, this one involving Marvell Technology is interesting because the company ran a “revenue management scheme” and the SEC took action not because of the scheme itself, but rather because the company failed to publicly disclose the scheme in its MD&A (or to disclose its likely impact on future performance). The SEC’s order demonstrates that, even if a scheme involving unusual sales practices may not amount to chargeable accounting fraud, failure to disclose may be actionable..

More on “Proxy Season Blog”

We continue to post new items on our blog – “Proxy Season Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Firearms Responsibility: Will Shareholders Show Renewed Interest?
– Proxy Voting: Impact of Mutual Fund Board Connections
– Uncontested Director Elections: Impact of Negative ISS Recommendations
– Proxy Plumbing: Recommendations From SEC’s “Investor” Subcommittee
– Shareholder Engagement: A UK Study of Investor Trends

Broc Romanek

October 3, 2019

Shareholder Proposals: Should Corp Fin Referee the No-Action Process?

Here’s a blog that I drafted before Corp Fin made its recent announcement about how it will process Rule 14a-8 requests for shareholder proposals going forward – it’s still worth sharing: Last month, I had lunch with a friend who started foaming at the mouth about the need for Corp Fin to remove itself as the referee in the no-action process for shareholder proposals. After his foam had dried, I replied that Corp Fin would like nothing more. The problem historically has been that whenever Corp Fin suggests that it diminish its role, participants on all sides scream bloody murder.

Processing no-action requests under Rule 14a-8 is labor intensive in Corp Fin. Most requests come in during a short window and are time sensitive. The Staffers working on them still have their regular workload to deal with (at least when I served in Corp Fin). Being placed on the “Shareholder Proposal Task Force” feels like punishment. Long hours. Very long. Highly sensitive situations in some cases – the kind that can derail your career. And not exactly intellectually rewarding.

Here’s an excerpt from the SEC’s adopting release in 1998, the last time the SEC significantly changed Rule 14a-8:

Some of the proposals we are not adopting share a common theme: to reduce the Commission’s and its staff’s role in the process and to provide shareholders and companies with a greater opportunity to decide for themselves which proposals are sufficiently important and relevant to the company’s business to justify inclusion in its proxy materials. However, a number of commenters resisted the idea of significantly decreasing the role of the Commission and its staff as informal arbiters through the administration of the no-action letter process. Consistent with these views, commenters were equally unsupportive of fundamental alternatives to the existing rule and process that, in different degrees, would have decreased the Commission’s overall participation.

Processing Shareholder Proposals: Life Can Be Rough

A story to illustrate. When I first joined Corp Fin in ’88 for my first tour of duty at the SEC, I was right out of law school. That was typical back then. And each branch was required to contribute one person to the Shareholder Proposal Task Force. You were “it” if you were the newest person in the branch. So the Task Force was comprised of a dozen people who were right out of law school.

Nothing was electronic back then. We wrote out our analysis & recommendation for each no-action request by hand. There was only one computer for the entirety of Corp Fin. So you would have to wait until “after hours” to be able to access it and print out precedent to support your analysis (the Division had a Lexis account on this prized computer that sat over in the Office of Chief Counsel). To top off this charmed experience, I was chewed out by a crazed supervisor over one of my first recommendations. By the end of his diatribe, he realized he had gone over the top and invited me out to go drink whiskey (I declined).

I wouldn’t blame him except I was right out of law school. My training when I arrived consisted of my boss handing me a rulebook and saying “here, read this over the next week.” So I read S-K – and the ’33 Act &’34 Act rules – straight. Those things are not meant to be read straight. So I learned nothing, Other than that the SEC’s rules & regulations are not written in anything close to plain English. There was literally no training. If you got lucky, your office mate was experienced & willing to teach. Yes, life was tough in the old days…

Poll: Corp Fin’s Role for Shareholder Proposals?

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Broc Romanek