John blogged last week about stock buybacks in response to market turmoil and various news outlets reported that several large banks have suspended their stock buybacks due to the COVID-19 pandemic. For those looking for information about conducting a buyback through a Rule 10b5-1 plan, this Morrison Foerster memo discusses questions about adopting a plan and potential modification given current events. It walks through – and reiterates – best practices in spite of current market conditions.
The memo points out that Rule 10b5-1 plan best practices are not bright line rules and any company should weigh the pros and cons when deciding whether to adopt a plan, including how adoption of such a plan during the COVID-19 outbreak might be viewed in hindsight by the public, outside investors, or law enforcement agencies.
Frequency of COVID-19 Board Updates
How often to brief the board is a question many are asking as we deal with COVID-19 related issues. A recent blog from Financial Executives International provides information about how often some are providing updates based on information gathered from a survey of corporate risk professionals.
The survey said most survey respondents are briefing their boards “as needed only,” while 25% haven’t made a decision yet or don’t currently have executive-level briefings. Another 8% are updating their boards weekly.
As for topics, this Sidley memo discusses ten concerns for boards during the COVID-19 pandemic – it’s a thorough list and helpful if you are preparing for a board update meeting. One of the topics covered is business continuity and, among other things, it says the plan should be continually re-evaluated and that you should consider whether contingencies are in place if a board quorum isn’t available.
Undoubtedly, the decision about updating the board varies from company-to-company and company specific facts and circumstances will guide the decision. To not over-burden management by holding one-on-one director briefings, the blog cites the head of KPMG’s Board Leadership as suggesting independent chairs and lead directors interface with management and then brief directors.
Board-Level Oversight of Sustainability Disclosures
Board-level oversight of sustainability initiatives and disclosure is up for grabs at many companies. This PwC memo discusses reasons audit committees might be best positioned to take on oversight responsibilities for sustainability disclosures. Granted, some companies have established a board-level sustainability committee, here’s a committee charter from Ford and another from Bunge. Audit committees always seem to have a full plate and with more attention focused on sustainability reporting, PwC suggests they take on even more. Here’s an excerpt from PwC’s memo:
Public disclosure of ESG metrics requires appropriate policies, controls and governance, similar to other elective financial metrics, such as non-GAAP metrics. Companies should have processes and controls around the development of those disclosures to support the accuracy of the data.
The audit committee has deep skills in overseeing internal controls, policies and procedures, and reporting. Audit committees can play a role by understanding the methodologies and policies used to develop the metrics, as well as the internal controls in place to ensure accuracy, reliability, and consistency of the metrics period over period.
The memo references the SEC’s interpretive guidance issued in February regarding key performance indicators in the MD&A saying “we encourage audit committees to be actively engaged in the review and presentation of non-GAAP measures and metrics to understand how management uses them to evaluate performance, whether they are consistently prepared and presented from period to period and the company’s related policies and disclosure controls and procedures.”
Not long ago, John blogged about how the SEC’s MD&A guidance heightens the stakes for ESG disclosures.
Friday afternoon, to accommodate companies and shareholders who are changing their annual meeting plans in response to COVID-19, the SEC announced that Corp Fin was providing Staff guidance about compliance with federal proxy rules for upcoming annual shareholder meetings – this includes guidance about virtual shareholder meetings. Here’s an excerpt from the press release:
The staff guidance provides regulatory flexibility to companies seeking to change the date and location of the meetings and use new technologies, such as “virtual” shareholder meetings that avoid the need for in-person shareholder attendance, while at the same time ensuring that shareholders and other market participants are informed of any changes.
Under the guidance, the affected parties can announce in filings made with the SEC the changes in the meeting date or location or the use of “virtual” meetings without incurring the cost of additional physical mailing of proxy materials.
The guidance also encourages companies to provide shareholder proponents with alternative means, such as by telephone, to present their proposals at the annual meetings in light of the difficulties that shareholder proponents face due to COVID-19.
Many have been wrangling with all the considerations of holding virtual-only or hybrid shareholder meetings during this time of “social distancing.” This Perkins Coie memo provides considerations from the West coast and this blog from Bass, Berry Sims does a nice job discussing practical considerations, including considering views of institutional investors and proxy advisors. We reached out to Amy Borrus from the Council of Institutional Investors and she kindly provided this statement about CII’s position on virtual-only shareholder meetings:
“CII generally has opposed virtual-only shareholder meetings, in favor of a hybrid approach. Given coronavirus concerns, it is reasonable that some companies will go to virtual-only this spring. But we hope they will make it clear that this decision was one-off, and that they follow best practices for making any virtual meeting participatory.”
The funds he oversees ‘will not take action against boards holding virtual-only annual meetings due to the coronavirus that disclose their rationale and affirm their commitment to holding in-person meetings in the future.’
State laws and company organizational documents may prevent some companies from holding a virtual-only shareholder meeting. But legal issues aside, virtual meetings aren’t without criticism. Among other things, some investors say the meetings don’t allow shareholders to interact with management and directors and there are concerns that shareholders might not be able to get all questions answered, etc. This criticism has led some investors to vote against directors at companies that hold a virtual-only shareholder meeting.
Due to these concerns (and others), it’s understandable why companies might be hesitant to shift to a virtual-only meeting format – so the statements from CII and the NYC Comptroller may help some companies who’ve been wrestling with the decision about what to do.
What about ISS & Glass Lewis? At least for this year, they’re relaxing their policies. This Cleary memo covering virtual meeting considerations includes the updated guidance from ISS and Glass Lewis released by Kingsdale Advisors. Glass Lewis also has a memo on its website – here’s an excerpt from Cleary’s memo:
– Glass Lewis: Consistent with its current 2020 proxy voting guidelines, Glass Lewis has indicated that it will continue to review an issuer’s proxy materials regarding virtual shareholder meetings. Pursuant to its 2020 guidelines, Glass Lewis will generally recommend voting against governance committee members where the board is planning to hold a virtual-only shareholder meeting and the company does not provide robust disclosure in their proxy statement assuring shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting. The memo includes examples of what Glass Lewis considers “effective disclosure”.
Glass Lewis stated that, in context of coronavirus, companies that have already filed their proxy statements and provided information for an in-person meeting but are moving to a virtual-only meeting should provide public disclosure explaining the rationale. Such disclosure should specifically state that the change is due to the coronavirus outbreak, include complete information about accessing the meeting and confirm shareholders will have the same opportunities to participate – as they would have had at an in-person meeting.
– ISS: Though it has not previously adopted a formal policy on virtual shareholder meetings, ISS stated that in light of the coronavirus outbreak and the rapidly changing environment, ISS expects that institutional investors will likely be more accommodating of virtual meetings this year.
Like Glass Lewis, ISS stated that it will require companies to provide comprehensive disclosure affirming that a virtual meeting will provide full opportunities for shareholders to participate, ask questions, provide feedback to the company and present shareholder proposals. ISS also indicated that it anticipates the way in which companies manage virtual meetings this year will impact its future position on virtual shareholder meetings.
Virtual Annual Meetings: Sample Disclosures
John blogged last week about resources addressing the various legal considerations on “going virtual” for this year’s shareholder meetings. For those looking for sample disclosures, here are a few that might help.
BNY Mellon’s 2020 proxy statement provides a sample of a company planning to hold an in-person shareholder meeting but also contains the following precautionary statement:
As part of our precautions regarding the coronavirus or COVID-19, we are planning for the possibility that the annual meeting may be held solely by means of remote communication. If we take this step, we will announce the decision to do so in advance, and details on how to participate will be available at https://www.bnymellon.com/proxy.
Examples of companies that have held virtual-only or hybrid meetings that some investors might view as being run well include Intel, Ford and ConocoPhillips. I found the following information after taking a look at each of the companies’ 2019 proxy statements. Perhaps some investors would find similar meeting formats and information transparency somewhat more acceptable, especially this year.
Intel’s 2019 proxy statement included instructions with links that helped shareholders submit questions in advance and also during the meeting. The proxy statement also said the company would make a replay available on its Investor Relations website and Intel’s Investor Relations website also includes answers to investors’ questions from the 2019 meeting.
Ford’s 2019 proxy statement includes a full-page of instructions for last year’s virtual-only meeting. The instructions provided information for shareholders to submit questions in advance and during the meeting, and provided a toll-free telephone number for someone to call if they ran into technical difficulties.
ConocoPhillips held a hybrid meeting and its 2019 proxy statement included instructions for attending in person or for viewing a live video webcast of the meeting. The proxy statement also provided information allowing shareholders to submit questions in advance of the meeting. The company has a link on its Investor Presentations website to access a replay and a transcript from last year’s meeting.
And, for anyone interested in following Warren Buffet’s lead, he announced last Friday that Berkshire Hathaway’s annual meeting will be streamed online by Yahoo Finance without shareholders present – here’s the story from CNBC.
Yesterday, the SEC adopted amendments to the definitions of “Accelerated Filer” and “Large Accelerated Filer.” Here’s the 210-page adopting release. The most notable result of this action is that smaller reporting companies with less than $100 million in revenues will no longer have to provide auditor attestations of their Sarbanes-Oxley Section 404 reports. This excerpt from the SEC’s press release summarizing the changes says that the amendments will:
– Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller reporting company and had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. Business development companies will be excluded in analogous circumstances.
– Increase the transition thresholds for an accelerated and a large accelerated filer becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million;
– Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status; and
– Add a check box to the cover pages of annual reports on Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is included in the filing.
The need for relief from SOX 404 was a controversial topic, and as usual these days, the vote was along partisan lines. Republican Chair Jay Clayton and Commissioner Hester Peirce submitted statements in support of the rule, while Democratic Commissioner Allison Herren Lee filed a statement in dissent.
Two commissioners also provided some colorful social media commentary on the vote. Allison Lee tweeted: “There must be a limit to the number of times we can credibly assert to investors that we act in their best interests by making policy choices they directly oppose.” For some reason, Hester Peirce tweeted a photo of a cherry cobbler with “404” baked into it (your guess is as good as mine, folks).
Disclosure: What If Your CEO Is Diagnosed With the Coronavirus?
The COVID-19 outbreak creates plenty of disclosure issues about its potential impact on a company’s business and financial condition. But there’s another one lurking in the background – what if the CEO becomes ill? Unfortunately, based on what we know about the virus, that doesn’t seem to be an unlikely outcome for at least a few companies, so it probably makes sense to start thinking about that particular issue now.
If you’re inclined to do that, check out this recent blog from UCLA’s Stephen Bainbridge on this topic. The blog acknowledges that it may be prudent for the CEO to disclose this information to the board and shareholders, but says that the existence of a legal obligation to do is another matter. A lot may depend on what you’ve previously said – for example, have you singled out the potential loss of the CEO as a risk factor in prior disclosure? This excerpt says that in the absence of this or another disclosure trigger, there may not be a legal obligation to disclose the illness:
Even if the CEO’s health is material, a company could only be held liable for disclosing that information if there was a duty to disclose it. This is because, under the securities laws, “[s]ilence, absent a duty to disclose, is not misleading ….” Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988). Hence, for example, if the company put out a press release containing misleading information about the CEO’s health, it would have a duty to correct that statement. But simply remaining silent about the CEO’s health should not result in liability, because there is no SEC rule requiring disclosure or any caselaw imposing a duty to disclose such information.
Having said all that, there are some academics who think there should be such a duty, although they recognize that the law has not yet imposed such a duty.
Prof. Bainbridge cites the academic literature supporting the imposition of a duty to disclose a CEO’s significant health problem, but as someone who wasn’t on law review, I take great pleasure in omitting the citations from my blog. After all, it’s been a tough week, and – to quote Kevin Bacon’s character in the movie Diner – “it’s a smile.”
Thinking About a Buyback? Here’s Some Reassurance
If your board is thinking about stock buybacks in response to the ongoing market turmoil, this brief Davis Polk memo has some words of reassurance for your directors. The memo walks through a number of complex issues about buybacks that boards are currently dealing with.
While these issues aren’t amenable to short answers, the memo notes that in making decisions about them, “a Board that acts without any conflict, is well-informed, and goes through a proper process in deliberating to reach a decision, will be protected by the business judgment rule.” If your company is thinking about a buyback, be sure to check out our “Stock Buybacks Handbook” and the other resources in our “Stock Repurchases” Practice Area.
For many companies, annual meetings are just around the corner, and the COVID-19 pandemic has raised all sorts of questions about what they should do and whether a virtual meeting is a viable alternative.
Last week, Lynn blogged about Davis Polk’s memo on planning for coronavirus-related annual meeting developments. Since then, we’ve received memos addressing similar topics – including adding a virtual meeting component or going entirely to a virtual annual meeting – from Freshfields, DLA Piper, Hunton Andrews Kurth, Pepper Hamilton and Dechert. Also check out this Cleary Gottlieb blog. These resources address the relevant securities and corporate law issues, as well as investor relations and logistical considerations.
This Sidley memo says that one of the consequences of the coronavirus outbreak may be a decline in proxy contests during the current season. As this excerpt points out, the reason is that given current market volatility, activists may be unwilling to commit to the kind of long-term hold that a successful proxy fight would necessitate:
It is important to understand that if an activist launches a proxy contest to replace directors, an activist must be prepared to remain in the stock for the foreseeable future – at least until the annual shareholder meeting and, if successful in obtaining board seats, at least 6-12 months beyond that. While there are no legal restrictions to the contrary, as a practical matter, an activist cannot initiate a proxy contest and sell or reduce its position shortly afterward.
An activist who does this stands to lose credibility with long-term institutional investors and becomes more susceptible to being portrayed as a “short term” investor in future activism campaigns. It is even more difficult for an activist to exit a stock if an employee of the activist fund, rather than candidates that are at least nominally independent, takes a board seat. Material nonpublic information received by the activist employee in the board room is imputed to the activist fund, thereby restricting the fund’s ability to trade in the stock.
The memo cautions that once the crisis passes, companies should expect activists to return to proxy contests with a vengeance. It notes that 130 proxy contests were launched in 2009, after the financial crisis, and many companies that can hide during a bull market have their vulnerabilities laid bare during a downturn.
Antitakeover: Dual Class & Staggered Boards are Alive & Well in Silicon Valley
Fenwick & West just came out with its annual comparative survey of governance practices among Silicon Valley companies and the S&P 100. One of the things that jumps out at you is that while antitakeover charter provisions may be on the decline in most of corporate America, they’re thriving out west:
– Historically, dual-class capital structures were more prevalent among the S&P 100 companies than they were among the SV 150, but the number of tech companies that have them has risen from 10.9% of the SV 150 in 2017 to 12.7% in 2019), while the percentage of S&P 100 companies with dual class structures has remained steady at about 9% during that same period.
– Staggered boards are also much more common among the tech set than among S&P 100 companies. Classified boards increased from 50.7% of SV 150 companies in 2018 to 52.7% in the 2019 proxy season. That percentage reflects the large number of Silicon Valley IPOs in recent years, but the percentage of companies with staggered boards among the more mature top 15 SV 150 companies increased to 13.3% in the 2019 proxy season, after holding steady at 6.7% for the preceding 4 years. In contrast, only 5% of the S&P 100 had staggered boards in 2019.
Obviously, IPOs that are skewing the Silicon Valley numbers somewhat, but another factor in the greater extent of unfashionable antitakeover provisions in SV 150 charters may also have something to do with the amount of voting power sitting in their boardrooms. The survey reports that directors & officers of SV 150 companies own an average of 9.0% of the equity in their companies, while their counterparts at S&P 100 companies own an average of only 3.5%.
With apologies to “The Scarlet Pimpernel“, this blog’s title is a fair summary of the results of Morrow Sodali’s annual institutional investor survey. More than 40 global institutional investors with a combined $26 trillion in assets under management participated in the survey, which was conducted in January. Among its other highlights, the survey found that:
– All respondents state that ESG risks and opportunities played a greater role in their investment decisions during the last 12 months, with climate change being top of investors’ list (86%).
– Climate change (91%) and human capital management (64%) are cited as the top sustainability topics that investors will focus on when engaging with boards in 2020.
– Notably, investors now prioritize presence of ESG risks (32%) before a credible activist business strategy when deciding whether to support ESG activists.
– Overwhelmingly 91% of respondents expect companies to demonstrate a link between financial risks, opportunities and outcomes with climate-related disclosures. A total of 68% respondents believe that greater detail around the process to identify these risks and opportunities would significantly improve companies’ climate related disclosures.
– When it comes to the company’s ESG performance and approach, investors recommend SASB (81%) and TCFD (77%) as best standards to communicate their ESG information.
91% of the institutions surveyed said that that board level engagement is the most effective way for investors to influence board policies – and nearly half said they’d consider voting against a director to influence outcomes.
Conflict Minerals: Time for a Fresh Look at Disclosure & Compliance Programs
Remember when everybody thought the Conflict Minerals disclosure requirement was on the way out? Yeah, good times. . . Anyway, this Ropes & Gray memo says that changes in the global regulatory environment and increasing investor demands for information on conflict minerals mean that it’s time for companies to take a fresh look at the way they approach disclosure and compliance. Here’s the intro:
The seventh year of filings under the U.S. Conflict Minerals Rule will be due in slightly under three months. At most companies, conflict minerals reporting and compliance have been more or less static for the last few years. It is time for many companies to take a fresh look at their conflict minerals disclosure and compliance program. In some cases, disclosures have become outdated and compliance programs have not kept pace with market developments.
In addition, over the last few years, the global regulatory landscape has continued to evolve, both with respect to conflict minerals specifically and human rights more broadly, with more changes on the way. Furthermore, investor expectations concerning supply chains – as part of ESG integration by mainstream investors – continue to increase.
The biggest regulatory event on the horizon is EU Conflict Minerals Regulation, which takes effect on January 1, 2021. The EU Regulation generally will require importers of 3TG (tin, tantalum, tungsten and gold) minerals into the EU to establish management systems to support due diligence, conduct due diligence and make disclosures about the 3TG they import into the European Union.
The memo provides an in-depth overview of the EU Regulation, and notes that while only a small number of U.S. Form SD filers will also be subject to the EU Regulation, the conflict minerals compliance programs of a large number of U.S.-based companies will need to address the EU Regulation.
Board Governance: Should You Keep Your Ex-CEO on the Board?
Cooley’s Cydney Posner recently blogged about this Fortune article addressing whether your former CEO should remain on the board after their departure. This excerpt says that many governance experts think that’s a bad idea – particularly if your CEO will assume some sort of “Executive Chair” role:
Some governance gurus cited in the article consider making the transition to executive chair a “bad idea.” According to one governance expert, the position of executive chair really “means you’re CEO….The person with the CEO title is really the chief operating officer.” Another expert observed that a good CEO will see that it’s “not fair to the new person.” Another academic doesn’t hold back, calling it “a stupid idea.
All kinds of psychological factors get in the way. Maybe the new CEO owes his or her job to the predecessor. Or maybe the new CEO can’t stand the previous one. Maybe the old CEO brought all the other directors onto the board, and they feel loyal to him or her. It obstructs the new CEO from doing his or her job.” Another problem highlighted was the difficulty for the new CEO to change course or raise issues about the former CEO’s decisions when the former CEO is still in the room. Awkward, at a minimum.
On the other hand, Cydney says that the authors contend that retaining the CEO on the board or in a consulting capacity for a brief time may provide benefits in terms of continuity. Interestingly, the article also says that in situations where the former CEO isn’t a founder, keeping the CEO on the board “is negatively associated with the firm’s post-turnover financial performance.”
In what may be a sign of things to come for many of us, The Washington Post reports that last night, the SEC asked employees in its DC headquarters to work from home in response to concerns that an employee may have contracted the coronavirus:
The Securities and Exchange Commission on Monday asked employees at its D.C. headquarters to stay away from the office because of a potential coronavirus case, becoming the first major federal employer to turn to telework to avoid the spreading virus.
The announcement from the agency, which is charged with monitoring the financial markets, came after a day of turmoil on Wall Street, with the Dow Jones industrial average falling more than 2,000 points. The agency‘s notice, which was emailed shortly after 8 p.m., required employees working on the ninth floor of its office to stay home and encouraged all others to do the same.
While the SEC may be the first federal agency to ask employees to telecommute, a number of U.S. businesses have also implemented work from home policies for some employees in response to the outbreak. Many others are adopting contingency plans that contemplate doing the same. For instance, last night my law firm sent out an email directing everyone to take their laptop computers home each night, in case the decision was made to implement a work from home policy for personnel at one or more of our offices.
Coronavirus: Will Business Interruption Insurance Pick Up Some of the Tab?
Many companies are looking into whether forced closures resulting from the coronavirus outbreak are covered under their business interruption policies. This Stroock memo delves into that question, and it turns out – as usual when it comes to coverage issues – the answer is pretty complicated. But the bottom line is don’t bet on it. Here’s an excerpt from the intro:
With COVID-19 disrupting global supply chains and sales, businesses are losing income and incurring additional expenses as a result of the disruption. There likely will be an increase in insurance claims against insurance policies offering business interruption and/or contingent business interruption coverage. Whether the claims are covered will depend on the terms and conditions of the insurance policy and the circumstances of the loss.
One of the largest independent claim managers has cautioned that “successful claims under business interruption coverage for infection are not common.” Indeed, there are no reported cases in the United States regarding business interruption coverage in connection with human infectious disease epidemics or pandemics. However, commerce has never been as global as it is today.
The memo does a good job summarizing the various types of policies that provide business interruption insurance and the way in which they’ve been interpreted by the courts. After reading it, I think it’s fair to say that any company that seeks to recover under a business interruption policy should be prepared for a long and uncertain fight.
Auditor Refreshment: Every 87 Years Like Clockwork. . .
A recent Audit Analytics blog noted that Brown Forman recently changed its outside auditors for the first time in 87 years, and also pointed out that since 2018, there were only two other S&P 500 companies to change auditors after a longer tenured engagement. GM parted ways with Deloitte after 100 years, and DuPont de Nemours ended its relationship with that same firm after 113 years.
That raises the larger question of just how long have S&P 500 companies used the same auditors? The blog lays that out too, with a chart showing the frequency distribution of auditor tenure in 10-year increments. While only 38 companies have auditors with tenures exceeding 80 years, 94 companies – or nearly 20% of the S&P 500 – have had the same auditor firm for more than 50 years. More than half of the S&P 500 (265 companies) have had the same auditor for more than 20 years.
I guess we can add earnings calls to the ever-growing list of things that the coronavirus outbreak has thrown a giant monkeywrench into. This recent article from “CFO Dive” says that public company CFOs have been scrambling to explain the potential impact of the outbreak on their company’s bottom line during recent earnings calls. This excerpt provides some examples of what BigTech has been saying:
As of last week, references to coronavirus have been made over 8,000 times across over 1,000 companies on earnings call transcripts, natural language processing company Amenity Analytics found,
Apple led the pack as the first corporate giant to state that it wouldn’t meet its Q1 revenue projections due to the virus, which originated late last year in Wuhan, China. iPhones, which are manufactured in China, have experienced limited production and reduced domestic demand, Apple announced on February 17.
Microsoft soon after followed suit. “Although we see strong demand … the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call,” the company said last week. “As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated.”
The article also features commentary on the outbreak’s earnings impact from companies across a range of industries, including financial services, hospitality, retail, and consumer products. Spoiler alert: the news is not good.
Upcoming Webcast: “The Coronavirus – What Should Your Company Do Now?”
We’ve blogged so much & posted so many memos on the implications of the coronavirus outbreak that I’m starting to think that we should change our name to “TheCoronavirusCounsel.net.” But there’s no getting around the fact that this is a very big deal. In addition to its tragic & rising human cost, the COVID-19 outbreak has disrupted global supply chains, staggered financial markets, and created huge uncertainties for businesses and investors.
Those disruptions & uncertainties have important implications for public companies and those who advise them. That’s why we’ve just calendared a webcast – “The Coronavirus – What Should Your Company Do Now?” – for Thursday, March 19th. The webcast features Davis Polk’s Ning Chiu, WilmerHale’s Meredith Cross, Uber’s Keir Gumbs and our own Dave Lynn. The panelists will tackle some of the key issues confronting public companies & their lawyers as a result of this ongoing international public health emergency.
Tomorrow’s Webcast: Conduct of the Annual Meeting
Tune in tomorrow for the webcast – “Conduct of the Annual Meeting” – to hear McDonald’s Jennifer Card, Independent Inspector of Elections Carl Hagberg, and GE’s Brandon Smith talk about annual meeting logistics, dealing with the media, preparing officers & directors, rules of conduct, disruptive shareholders, tabulation issues and meeting post-mortems.
Last month I blogged about a shareholder proponent that sued a Montana energy company seeking to force the company to include the proponent’s proposal on the company’s proxy ballot. Well, last week, the court ruled in the company’s favor and said the proposal could be excluded. What implications might this case have for shareholder proposal litigation? A timely Jones Day memo helps walk through that analysis. Here’s an excerpt from the memo:
The Court determined that under the Auer doctrine it should defer to the SEC’s formal releases, but that informal SEC staff interpretations, such as Staff Legal Bulletins and no-action letters, were entitled to “consideration” but not “persuasive weight.” Drawing on the Third Circuit’s analysis in Trinity Wall Street, a decision that the SEC staff had disavowed in a prior Staff Legal Bulletin, the Court held that the proposal could be excluded under the “ordinary business” exclusion of SEC Rule 14a-8.
Looking Ahead: The ruling may impact shareholder proposal litigation in two ways. First, the decision’s approach to Auer deference may breathe renewed life into certain Rule 14a-8 exclusions that were previously interpreted narrowly by informal SEC staff pronouncements. Second, the Court’s reliance on Trinity Wall Street reinforces the Third Circuit’s issuer-friendly analysis of the “ordinary business” exclusion.
Future of the PCAOB
As reported in various news outlets (here’s one from Accounting Today), President Trump’s 2021 budget includes a proposal that would consolidate the PCAOB into the SEC. Consider me a skeptic as to the likelihood of this actually happening, but then again it’s up to Congress so we’ll see. This blog from Baker Botts discusses some of what this might mean for issuers and auditors if it really happens. Here’s some considerations:
– Would the monitoring of public accounting firms be carried out in the same manner as it has been under the PCAOB? Would the SEC replicate the scope, magnitude, and rigor of the PCAOB’s regulatory activities?
– The proposed budget raises the possibility that funding will be reduced, does this mean auditor oversight activities would be reduced under the SEC—or would consolidation truly save millions without a reduction in oversight activities?
– Would the SEC would assume the PCAOB’s standard-setting function?
– Would audit firms and auditors lose confidentiality protections, which were explicitly required when Congress created the PCAOB, that aren’t necessarily available for charges brought by the SEC?
As alluded to in the blog, perhaps even if the consolidation doesn’t happen, there may be other changes in store for the PCAOB.
Managing Data Privacy Compliance
With 2020 bringing the effectiveness of the California Consumer Privacy Act and the New York Stop Hacks and Improve Electronic Data Security Act (otherwise known as the “SHIELD Act”) – and other state legislatures preparing to advance their own data privacy laws – this Jackson Lewis blog provides a list of 10 steps to help manage data privacy compliance. The list is a helpful reminder for managing any program but especially helpful as many compliance departments may be feeling overwhelmed with the proliferation of data privacy laws. Here’s an excerpt:
– Set expectations – remember staying on top of privacy laws will be an on-going effort
– Build interdisciplinary teams – include not only IT, but also HR, legal, operations and other business area representatives
– Evaluate new technologies carefully – not all technologies may have been developed or designed with an eye toward data privacy or security
– Remember to manage data retention – retain data and information strategically and deliberately
As for the CCPA, California’s Attorney General proposed two rounds of amendments to the regulations in February. This Cleary memo provides a summary of the proposed changes and we’re posting additional memos in the “state law” section of our “Cybersecurity/Privacy/Data Governance” Practice Area.
Yesterday, the SEC issued this 341-page proposing release intended to “simplify, harmonize, and improve certain aspects of the exempt offering framework.” The SEC’s press release summarizes the changes. Among other changes, the SEC proposes:
– Revisions to current offering and investment limits for certain exemptions for Reg A, Regulation Crowdfunding and Rule 504 of Reg D
– Amendments relating to offering communications, including:
New rule permitting issuers to use generic solicitation of interest materials to “test-the-waters” for an exempt offer of securities prior to determining which exemption it will use
Rule amendment permitting Regulation Crowdfunding issuers to “test-the-waters” before filing an offering document with the Commission in a manner similar to Reg A
New rule providing that certain “demo day” communications would not be deemed a general solicitation or general advertising
– Amendments to eligibility restrictions in Regulation Crowdfunding and Reg A, which would permit use of certain special purpose vehicles to facilitate investing in Regulation Crowdfunding issuers, and would limit the types of securities that may be offered and sold in reliance on Regulation Crowdfunding
– Changes to the Securities Act integration framework by providing a general principle of integration that looks to the particular facts and circumstances of the offering, and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering
– Four non-exclusive safe harbors from integration
– A change in the financial information that must be provided to non-accredited investors in Rule 506(b) offerings to align with financial information issuers must provide to investors in Reg A offerings
– A new item in the non-exclusive list of verification methods in Rule 506(c)
– Simplification of certain requirements for Reg A offerings
– Harmonization of bad actor disqualification provisions of Reg D, Reg A and Regulation Crowdfunding
The comment period on the proposing release will remain open for 60 days following publication of the release in the Federal Register. It’s hard to say whether these amendments will make everyone happy but with all the confusion caused by the current rules, one would think the amendments will bring some improvement.
SEC Issues COVID-19 Coronavirus Exemptive Order
Yesterday, the SEC took steps to address COVID-19 concerns and issued an unprecedented COVID-19 exemptive order. The SEC’s order provides publicly traded companies, subject to certain conditions, an additional 45 days to file certain disclosure reports that would’ve otherwise been due between March 1 and April 30, 2020. Companies seeking to rely on the order, need to furnish a Form 8-K – or 6-K – by the later of March 16th or the original reporting deadline.
The SEC filing relief isn’t available for all companies though as companies seeking to avail themselves to the SEC’s filing relief need to satisfy certain conditions, which are listed in the order and include among other things, a company’s inability to meet its filing deadline due to circumstances relating to COVID-19. The order also lists the information requirements for the Form 8-K or 6-K.
The order also provides relief for furnishing of proxy and information statements to shareholders “when mail delivery isn’t possible” and the order lists conditions for that relief.
In addition to providing filing relief to certain companies, the SEC’s press release reminds companies of their disclosure obligations:
For example, where a company has become aware of a risk related to the coronavirus that would be material to its investors, it should refrain from engaging in securities transactions with the public and to take steps to prevent directors and officers (and other corporate insiders who are aware of these matters) from initiating such transactions until investors have been appropriately informed about the risk.
When companies do disclose material information related to the impacts of the coronavirus, they are reminded to take the necessary steps to avoid selective disclosures and to disseminate such information broadly. Depending on a company’s particular circumstances, it should consider whether it may need to revisit, refresh, or update previous disclosure to the extent that the information becomes materially inaccurate.
Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding the coronavirus, can take steps to avail themselves of the safe harbor in Section 21E of the Exchange Act for this information.
As stated in its press release: the “Commission may extend the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant. Companies and their representatives are encouraged to contact SEC staff with questions or matters of particular concern.”
The development of COVID-19 has certainly made this year’s annual meeting season more complicated and has everyone watching for the latest guidance addressing a host of issues. To help – we’re posting memos about COVID-19 implications in our “Risk Management” Practice Area.
More on “Annual Meetings: Planning for COVID-19 Developments”
Yesterday, I blogged about possible COVID-19 implications for annual shareholders’ meetings and said maybe interest in virtual annual meetings would pick up. Thanks to Brooke Goodlett of DLA Piper for pointing us to Starbucks. Just yesterday, Starbucks filed an amendment to its proxy statement changing its annual shareholders’ meeting to a virtual-only meeting. Last year, Starbucks held an in-person meeting along with a webcast and according to this year’s original proxy statement, the company had been planning for the same format again this year.
Starbucks annual meeting is coming up in just a couple of weeks, so this is a pretty late-breaking development. It’s worth noting that Starbucks is a Washington company, not Delaware. DLA Piper’s memo on coronavirus considerations suggests companies consider, to the extent permissible by the company’s charter documents and state law, virtual board and shareholder meetings.
Last month we included a guest blog from Rhonda Brauer, and we’re excited to bring another post from Rhonda to you:
Since my last guest blog on the sustainability reporting frameworks, UK-based Aviva Investors published a thoughtful inhouse article on “Climate data: Seeing through the fog”, as part of a larger climate-related series. Many of us interviewed for this article agreed that required, not voluntary, reporting would be the best solution to the problem of not having comparable, relevant and transparent corporate ESG disclosures. The article goes on to explore how “big data” — which is too complex to be analyzed using traditional processing applications — and artificial intelligence (AI) could help solve this problem in the interim, particularly when applied to climate change and similar issues.
Although the use of satellites, sensors and big data analytics to measure emissions and inform investment decisions is just beginning, much of the data and computer programmes that make it possible exist and are constantly improving.
Whether to measure direct emissions from factories, across a company’s supply chain, or at a country level, an increasing number of options are emerging including mobile data, big data analytics from online sources, satellite measures and data available from a plethora of sensors scattered around the world.
This type of approach allows analysts and researchers to find and assess relevant data that does not feature in companies’… disclosure reports… through scraping (compiling information from online and offline sources) and crawling (using programmes to search across online sources)… Using AI to sort and analyse the mass of information gathered could make sense of it without deploying armies of researchers.
One cited example of how big data and AI can help reduce carbon emissions: Deforestation can now be predicted and detected through digital solutions, which form the basis for proactive action through monitoring and improving agriculture, reforestation and peatland restoration.
The article also includes examples of data gleaned from government satellites that make their data public versus commercial satellites and drones, how such data can be used and influenced by both equity and debt investors to inform financial decisions and to better detect “greenwashing” or manipulation of data, gaps that remain when using such data, how investors can play a critical role, and how companies should be using similar analyses for their business models.
Annual Meetings: Planning for COVID-19 Developments
In case you missed it, here’s something I blogged yesterday on our Proxy Season blog: This memo from Davis Polk walks through some of the things you might want to think about if you’re worried about the COVID-19 coronavirus and how it might affect where or when you hold your annual shareholders’ meeting. The memo looks at these considerations in context of SEC proxy rules and Delaware law. With COVID-19 developments moving quickly, the memo is timely and helpful because someone is bound to ask what your plan is in case you need to move the meeting location, etc.
For those that have already mailed the proxy statement:
In the event you have a last minute change in your meeting location or date, the memo discusses whether you would need to re-mail the proxy statement – the answer is “no” except for special circumstances described in the memo. Even though you likely wouldn’t need to re-mail the proxy statement, the memo says you should disclose the change as soon as possible by issuing a press release and filing the press release with the SEC as supplemental proxy materials.
For those that are still working on your proxy statement:
If you’re still working on your proxy statement and haven’t mailed it yet and you’re considering the possibility of a last minute change in venue or date, the memo suggests disclosing the possibility of a change in your proxy statement but says a change to the proxy card itself is likely unnecessary.
I often worried about what we would do if our meeting venue was suddenly unavailable, not to mention worries about technical snafus and our team had back-up plans “just in case”. To help you prepare and hopefully avoid any annual meeting surprises, here’s a reminder to visit our “Checklists” Portal – especially this one on “Annual Meeting Surprises.”
A few weeks ago, I blogged about things to consider if you’re thinking of holding a virtual annual meeting. Maybe interest will pick up but again, it’s not for everyone. If you want to look into this further, here’s another comprehensive resource about virtual meeting considerations sent to us from the folks at Veaco Group.
Also, it has been reported that in advance of Apple’s shareholder meeting last week, Apple warned those planning to attend to take extra health and safety precautions due to the ongoing development of COVID-19.
Really? SEC Cancels Another Open Meeting
It happened again, the SEC has cancelled an open meeting scheduled for today about proposed changes to rules on private offerings. Broc blogged last fall about how the SEC was cancelling open meetings on what was turning out to be a regular basis. Unclear what led to the cancellation this time, maybe a Commissioner is unavailable at the last minute or perhaps the Commissioners will take action in seriatim and still get something done, we’ll see and stay tuned!