Monthly Archives: April 2020

April 30, 2020

Mining Company Property Disclosure Rules: Corp Fin Issues 3 New CDIs

Yesterday, Corp Fin issued 3 new CDIs arising out of the new mining company property disclosure rules – Broc blogged about the rules when they were adopted in 2018.  The CDIs address when companies need to comply with the new rules and also incorporation of such disclosure by reference to an annual report.  Here they are:

Question 155.01

Question: For purposes of filing an Exchange Act annual report, when must a registrant engaged in mining operations comply with the new mining property disclosure rules set forth in Subpart 1300 of Regulation S-K?

Answer: A registrant engaged in mining operations must comply with Subpart 1300’s disclosure rules beginning with its Exchange Act annual report for the first fiscal year beginning on or after January 1, 2021. Until then, staff will not object if the company relies on the guidance provided in Guide 7 and by the Division of Corporation Finance staff for the purpose of filing an Exchange Act annual report. [April 29, 2020]

Question 155.02

Question: For purposes of filing a Securities Act registration statement, may the registrant satisfy its obligation to include mining property disclosure pursuant to Subpart 1300 of Regulation S-K by incorporating such disclosure by reference to its Exchange Act annual report for the appropriate period, even if such annual report was not required to comply with the new mining property disclosure rules in Subpart 1300 of Regulation S-K?

Answer: Yes. Until annual financial statements for the first fiscal year beginning on or after January 1, 2021 are required to be included in the registration statement, the staff will not object if a Securities Act registration statement incorporates by reference disclosure prepared in accordance with Guide 7 from an Exchange Act annual report for the appropriate period filed by a registrant engaged in mining operations if otherwise permitted to do so by the Commission’s rules on incorporation by reference. See, e.g., Securities Act Rule 411 (17 CFR 230.411), which provides that information must not be incorporated by reference in any case where such incorporation would render the disclosure incomplete, unclear, or confusing. [April 29, 2020]

Question 155.03

Question: For purposes of filing an Exchange Act or Securities Act registration statement that does not incorporate by reference mining property disclosure from a registrant’s Exchange Act annual report, when must a registrant engaged in mining operations comply with the new mining property disclosure rules set forth in Subpart 1300 of Regulation S-K?

Answer: An Exchange Act or Securities Act registration statement that does not incorporate by reference mining property disclosure from an Exchange Act annual report filed by a registrant engaged in mining operations must comply with the new mining property disclosure rules set forth in Subpart 1300 of Regulation S-K on or after the first day of the first fiscal year beginning on or after January 1, 2021. For example, a calendar year-end company would be required to comply with the new mining property disclosure rules when filing an Exchange Act registration statement or a Securities Act registration statement that does not incorporate by reference disclosure from a registrant’s Exchange Act annual report on or after January 1, 2021, while a registrant with a June 30th fiscal year-end would be required to comply with the new mining property disclosure rules when filing an Exchange Act registration statement or a Securities Act registration statement that does not incorporate by reference disclosure from a registrant’s Exchange Act annual report on or after July 1, 2021. [April 29, 2020]

Covid-19: Going Concern Uncertainties

A recent Audit Analytics blog says that going concern uncertainties will likely see an uptick due to fallout from Covid-19 but so far anyway, it hasn’t been significant.  Here’s an excerpt of the most current information from Audit Analytics:

As of April 20, 2020, there have been 16 audit opinions on annual reports for SEC filers that have cited the COVID-19 pandemic as a contributing factor to substantial doubt about a company’s ability to continue as a going concern for the next twelve months.  Of those going concern opinions, 11 are repeat going concerns.

For the five companies with new going concerns for fiscal year 2019, the impacts of the COVID-19 pandemic are expected to have a material adverse effect on results of operations, cash flows, and liquidity. However, three of these companies had certain pre-existing uncertainties prior to the pandemic – such as debt covenant obligations, recurring operating losses and negative operating cash flows – so it’s not surprising that impacts from the coronavirus would contribute additional uncertainty, resulting in substantial doubt about their ability to continue as a going concern.

No doubt Covid-19 will likely impact going concern issues for companies already dealing with financial challenges.  And given the current economic environment, it seems the numbers are sure to change as the Covid-19 impact will be felt by companies in other industries that historically haven’t experienced going concern issues.

Former Chief Justice Strine Joins Wachtell, Lipton, Rosen & Katz

It was a just a couple of weeks ago that I blogged about Former Delaware Chief Justice Strine’s latest call for another “new deal.”  He’s on the move – earlier this week Wachtell Lipton announced that he’s joined the firm and the NYTimes DealBook column carried the news too.  Here’s an excerpt from the firm’s announcement:

Explaining his decision to join Wachtell Lipton, Mr. Strine said: “As a judge, I thought the importance of corporations in our society could not be measured by their stock price, and that it was critical to our nation’s well-being that powerful businesses treat their workers and consumers well, support the communities in which they operate, and focus on environmentally responsible, sustainable wealth creation.” Noting that “for more than two generations, Wachtell Lipton has been a consistent voice on behalf of that viewpoint and has embedded it in how it treats its people, and how it assists clients,” Mr. Strine concluded that the Firm would be “a great institution for me to help to put into practical application principles I believe are vital to our economy working for everyone.”

– Lynn Jokela

April 29, 2020

Data Breach Affects Disaster Loan Applicants

We’ve blogged before about data breaches…and if there wasn’t already enough negative press about the SBA relief program, last week various news outlets reported – and here’s a blog from Taft’s Privacy and Data Security team – that the SBA experienced a recent data breach affecting businesses that applied for the Disaster Loan Program (not the Paycheck Protection Program).

The SBA announced that nearly 8,000 business owners’ information may have been exposed to unauthorized users last month.  SBA has reportedly addressed the issue but business owners who applied for relief through the Disaster Loan Program are encouraged to check their accounts and review their credit reports.

For a reminder about the prevalence of cyberattacks exploiting the current Covid-19 crisis and the increased work-from-home arrangements, this Data Privacy Monitor blog discusses that and what can be done to help guard against cyberattacks – helpful reminders to hopefully prevent falling into a mess like the SBA and end up needing to send breach alerts to customers.

Beyond Force Majeure: Tips for Entering New Tech Agreements During Covid-19

Many companies have been dealing with what to do about existing contracts during Covid-19, while many are also continuing to enter into new agreements.  A new contract can present an opportunity to mitigate risks from the continued uncertainty everybody faces.  A recent Perkins Coie memo outlines tips for negotiating new contracts during Covid-19 relating to provisions typically found in technology agreements.  Here’s an excerpt:

Addendums: Consider including an addendum that contains terms and conditions that apply during the pandemic with an understanding that the pandemic-specific provisions preempt the terms and conditions in the main body of the agreement during the pandemic – the addendum can specify criteria that must be satisfied before the addendum can expire

Acceptance of Goods, Risk of Loss, Transfer of Title: Travel restrictions and stay-at-home orders may prevent inspection and acceptance of goods per the contract’s standard terms, which can then affect risk of loss, transfer of title and payment provisions so parties should consider alternatives such as relying on remote video or data measurements, permitting partial payment upon delivery or through use of buyer-funded escrows that could be released once inspection and acceptance occurs

Service Levels: Service providers may need to negotiate for more flexible service levels to accommodate bandwidth demands to regulate service usage – considerations could include temporary elimination of non-critical service features, throttle bandwidth, limitations on hours of operation, and service credits for service interruption

Other provisions addressed in the memo relate to ADR, limitations of liability, suspension, delivery terms, milestones, change orders, disclaimers, termination, health & safety, transition services, governing law, business continuity, confidentiality & reporting obligations, reps & warranties and insurance.

Podcasts: More “Women Governance Gurus” With Courtney Kamlet & Liz

Liz continues to team up with Courtney Kamlet of Vontier to interview leaders in the corporate governance field about their career paths – and what they see on the horizon. Check out the latest episodes:

– Liz Dunshee, Managing Editor,

– Dannette Smith, Secretary to the Board and Senior Deputy General Counsel at UnitedHealth Group

– Alane Barnes – VP, General Counsel and Corporate Secretary at BioCryst Pharmaceuticals

– Lynn Jokela

April 28, 2020

BlackRock’s Catching Flack From all Sides

When you’re the largest asset manager, any statements garner a lot of attention.  Take for example, Larry Fink’s January letter to CEOs.  A lot of media outlets reported on it, we blogged about it as did many others.  Now, BlackRock, in its role assisting the Federal Reserve in administering some of the CARES Act relief programs, has arrows coming at it from all directions.

First, as discussed in this NYT article, a group of conservative leaning senators sent a letter to Fed Chairman Powell voicing concerns that BlackRock might avoid funding energy and transportation companies due to BlackRock’s own climate-related investment policies.  This was followed by a letter from senators on the other side of the aisle requesting the underlying investment guidelines provided to BlackRock for use in managing the Fed’s programs and warning about use of federal funds “to help sustain industries that may drive a future climate crisis.”

But, there were more arrows sent BlackRock’s way.  Here’s a post from the Federalist about a letter sent to BlackRock’s CEO from representatives of several conservative-leaning organizations, asking BlackRock to reconsider its plan to operate under a stakeholder model rather than supporting a shareholder primacy model.  The letter goes on by urging BlackRock to stand against “unnecessary and harmful ESG shareholder proposals.”  Coming at it from the other side, as part of an Earth Day event held last week – organized by a group named “BlackRock’s Big Problem” – the event flyer asked participants to call BlackRock to request it follow through on its climate commitment that BlackRock’s CEO made in his letter earlier this year.

BlackRock recently issued its 2020 Engagement Priorities and I blogged about it on our “Proxy Season Blog”.  There was a fair amount of focus on environmental risks and opportunities in that report.  No doubt though, by the end of the 2020 proxy season, somebody will likely have gripes about whatever BlackRock does.  It seems when you’re the largest asset manager, you’re a big target and everybody wants the influence you carry on their side.

California Board Diversity Law Withstands Legal Challenge

You may remember back when California’s board gender diversity law (SB 826) went into effect, then California Governor Jerry Brown reportedly said his chief concern was possible legal challenges.

Well, a couple of suits were filed and one of them was recently dismissed.  The plaintiff was seeking a permanent injunction preventing enforcement of the California law by saying it was unconstitutional under the 14th Amendment.  Last week, a federal judge in California dismissed the case on the basis of lack of standing.  See Cydney Posner’s Cooley blog for more on this story.   And, stay tuned – it looks like this case will carry on as the plaintiff filed an appeal – see this blog post from Keith Bishop.

Earlier this year, California issued a report on the status of compliance with the new law through December 2019.  The report said that of the 330 companies that filed the required disclosure statement, 282 reported compliance with the state’s board gender diversity requirement.  Note that the 330 companies that filed the required disclosure statement represent slightly more than half of the impacted companies (meaning they are publicly held with principle executive offices in California).

Even with California companies seemingly increasing board diversity, the law isn’t out of the woods yet as the appeal in the case has been filed and there’s another suit challenging California’s law that’s ongoing in California State Court – Broc blogged about that back when it was first filed.

ESG Ratings: Morningstar & Sustainalytics Join Up

Liz blogged a little over a year ago about the crowded ESG ratings field.  In case you missed it, last week, two firms joined forces when Morningstar announced it would acquire Sustainalytics.  Morningstar already owned about 40% of Sustainalytics and now it’s buying the remaining 60% when the transaction closes later this year.

The combination should be a boost for Sustainalytics – Morningstar is a much larger organization and is spread across more markets.  Like other deals, time will tell exactly how it shakes out…it’s expected that Morningstar will complete the integration of Sustainalytics data across its various products but anecdotally, my understanding is that Morningstar has everything it needs from Sustainalytics through the firms’ longstanding relationship.

If anything, Morningstar will now compete more directly with MSCI so there may be some investors who switch to Morningstar/Sustainalytics – although, surprisingly, a lot of investors already switch between MSCI and Sustainalytics and apparently some do so fairly often.

– Lynn Jokela

April 27, 2020

Careful Opening the Window

As many companies are releasing first quarter earnings and dealing with challenges related to earnings guidance, the next question to tackle might be whether to reopen the trading window.  Most companies typically reopen the trading window within a day or two after issuing the earnings release.  But, as this Bryan Cave blog points out, this time around some companies might want to think twice about that.

It might be fine for a lot of companies to go ahead as usual and open the window but with continued uncertainty and rapid change, the blog says some companies may want to pause.  Here’s the crux of the blog’s message:

Insiders who have access to daily information about demand, the supply chain, pricing and other information may be better able to assess the trend of the business, and may therefore be better able to predict how well the company will be able to withstand and bounce back from the pandemic.  Although this daily information might not ordinarily be deemed material nonpublic information for insider trading purposes, in the current environment and with the benefit of hindsight, the SEC could take a different position.

SEC Covid-19 Market Monitoring Group

In a press release last Friday, the SEC announced that it formed an internal, cross-divisional Covid-19 Market Monitoring Group.  The announcement says the group is temporary and the purpose is to assist the Commission, including its various divisions and offices, in actions related to the effects of Covid-19 on markets, issuers and investors as well as responding to requests for information, analysis and assistance from other regulators and public sector partners.

The group will be chaired by S.P. Kothari, the SEC’s Chief Economist and Director of the Division of Economic and Risk Analysis and assisted by Jeffrey Dinwoodie, Chief Counsel and Senior Policy Advisor for Market and Activities-Based Risk in the Office of the Chairman.  The announcement also includes a list representatives from across the SEC that will participate in the efforts of the Market Monitoring Group.

SEC Goes Remote & Virtual Like the Rest of Us

If you’re wondering how the SEC is getting all of its work done these days, they’re working remote like a lot of people and seem to be adapting.  A while ago, the SEC set up a webpage that gives general information about its operations during Covid-19.

The SEC’s recent open meeting, during which it approved offering rules for business development companies, was held virtually, although it’s not clear when they might do this again.  For that meeting, the audio was played live through access on the SEC website (here’s the audio archive) and Bloomberg Law reported that apparently Chairman Clayton participated in the meeting from his office at SEC headquarters while Commissioner Allison Lee participated from her home kitchen.  The SEC reportedly held “several dry runs” to prepare – an all too familiar exercise for many of us.

Meanwhile, this Notice for an upcoming meeting of the Small Business Capital Formation Advisory Committee says that it will be conducted via videoconference following the same format used for an ad-hoc meeting held earlier this month.  The Committee has an archived webcast from the April ad-hoc meeting available on the SEC’s website.

– Lynn Jokela

April 24, 2020

PPP Loans: You Got Your Money – Should You Give It Back?

Well, you can’t say we didn’t warn you – a number of Paycheck Protection Program loan recipients are receiving  heavy duty blowback from the media & politicians about whether they’re entitled to the loans they received. If your client finds itself in this position, it may well be asking – “should we give the money back?”

That question may be even more pressing in light of new FAQ #31 that the SBA issued yesterday morning, which addresses the certification of need that’s required in order to access the funding. The FAQ says that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”

As this Stinson memo points out, that guidance is – like almost everything the SBA has said about this program – as clear as mud:

As has become typical of the PPP, every attempt at clarification also raises new uncertainties. What is the threshold for “substantial market value”? Does a public company that would currently be unable to raise equity capital on favorable terms really have “access to capital markets” in a meaningful way? Should any debt financing be considered “significantly detrimental” to a business as compared to equity capital in light of the additional cash load it places on the borrower? If a borrower has undrawn but committed capital under its current financing facilities, can it still make the good faith certification required by the PPP application?

The memo says that in light of the very specific certifications and representations required of the applicant in its loan application, these questions should be considered with great care – and companies that aren’t comfortable with their answers should withdraw loan applications or repay loans that have already been received.

PPP Loans: Beware False Claims Act Whistleblowers

Companies that are thinking about repaying their loans ought to make their decisions prior to May 7th, because as this Bryan Cave blog points out, FAQ #31 provides a safe harbor for companies that repay their loans by that date.  The blog also addresses the liabilities that companies may face if they received a PPP loan to which they weren’t entitled – and the risk that employees may blow the whistle:

In addition to the risk of governmental regulatory or enforcement action, impacted companies and lenders may face other litigation and reputation risk. Companies may wish to consider whether their employees may believe that other sources of funding were available and may raise those concerns internally and externally as purported whistleblowers, possibly resulting in assertion of False Claims Act claims.

Of course, one of the fun things about the False Claims Act is that it provides for treble damages. The blog says that companies may also face reputational scrutiny and adverse impact on business performance, particularly if Treasury & the SBA publish borrower information – which the Fed has already announced that it will do under its CARES Act lending programs.

Public Offerings: Doing a Deal in a Blackout Period

Speaking of public companies with access to the capital markets, stop me if you’ve heard this, but those markets are kind of turbulent right now.  That means its essential for companies that need capital to be able to quickly access the market when a financing window opens.  Unfortunately, some companies now find themselves in a “blackout period” pending the release of their first quarter results.  This Davis Polk memo says that while that may complicate things, there’s no prohibition on a company accessing the capital markets during a blackout period, and it may be possible for a company to complete an offering if:

– Management has enough information about the current (or recently ended) quarter to be able to predict with a fair degree of confidence what the company’s reported results are likely to be;

– Management has a good track record of being able to judge its anticipated results at similar points in the information-gathering and reporting cycle;

– Management’s expectations for the quarter, and future periods, are either (i) at least in line with “the market’s” expectations as well as with management’s own previously announced guidance (if any) – or (ii) if management’s expectations are not so in line, the company and its underwriters conclude that the deviation is not material or the company is willing to “pre-release” its current expectations prior to the earnings release; and

– Management’s analysis of the going-forward impact on the company’s business of COVID-19 is sufficiently developed that disclosure can be made at the time of the offering that will be in line with what is disclosed when the 10-K, 20-F, 10-Q, 6-K or other filing is made.

The memo notes that as a result of the Covid-19 crisis, it may be difficult for management to forecast the company’s results beyond the current quarter. In situations like this, companies sometimes decide to withdraw previously issued guidance and not issue new guidance. But the memo stresses that withdrawing guidance is not a substitute for disclosure of underlying trends and uncertainties that could affect financial and operational performance.

The memo also walks through an analysis of the various matters that should be considered in addressing each of the factors identified above, as well as other matters such as the need to update disclosures of risk factors & known trends, potential selective disclosure issues, and reputational and legal risks. By the way, if you’re representing a client that’s considering an offering during a blackout period, I highly recommend that you take a look at the transcript from our 2017 webcast, “Flash Numbers in Offerings.”

John Jenkins

April 23, 2020

Virtual Shareholder Meetings: Survey of Q&A Trends

With so many companies moving to virtual meetings, one of the issues that’s become front & center is how shareholder Q&A sessions should be handled. This Bass Berry blog provides some insight into how companies have addressed that issue. The authors surveyed Fortune 100 public companies that filed their proxy statements after March 1, including those that opted for a virtual meeting after filing definitive materials. Of the companies surveyed:

– 6% are permitting stockholders to submit questions only in advance.
– 58% are permitting stockholders to submit questions only at the meeting.
– 32% are permitting stockholders to submit questions both in advance and at the meeting.
– 4% do not clearly address their Q&A in the proxy materials the style of their Q&A sessions couldn’t be determined.

The survey found a few outliers. One company chose to limit in-person attendance to a handful of officers and employees who will deliver proxy votes. Shareholders were encouraged to present questions to financial journalists listed in the company’s annual report, who will choose questions that they consider the most interesting and important. The survey doesn’t identify the company, and I want to respect its privacy as well – so all I can tell you is that its initials are “Berkshire Hathaway.”

The survey identified two other companies that are not permitting live Q&A. One required shareholders to submit questions up to three days in advance, while the other is requiring stockholders to submit their questions in advance only through a portal on the company’s website.

I haven’t seen any survey data on how companies that are holding virtual meetings are dealing with shareholder proposals, but I can tell you that the folks at ValueEdge Advisors are not happy with the way AT&T has chosen to handle them at its virtual meeting.

Listing Standards: NYSE Joins Nasdaq in Providing Relief From Price-Based Standards

Earlier this week, I blogged about Nasdaq’s rule change providing extended compliance periods for companies that fail to meet its minimum bid price & global market cap continued listing standards. On Tuesday, the NYSE received the SEC’s sign-off on a rule change providing similar relief to its listed companies.  This excerpt from a recent Locke Lord blog provides the details:

NYSE-listed companies now have additional time to cure a deficiency if their stock has closed under $1.00 for 30 consecutive trading days. Now, days between April 21, 2020 and June 30, 2020 will not be counted toward the normal 6-month compliance period. Compliance periods will recommence on July 1, 2020 from the point at which they were suspended on April 21.

Listed companies will also have additional time if their average global market capitalization has fallen under $50 million for 30 consecutive trading days at a time when their stockholders’ equity is also under $50 million. These companies would normally have a maximum 18 months to cure the deficiency. These compliance periods are similarly suspended until July 1, 2020.

The exchanges have cut listed companies a lot of slack during the current market turmoil, but the news for troubled companies isn’t all good on the listing front. The blog also notes that Nasdaq adopted rules on the same day that actually shorten compliance periods for particularly distressed companies.

Jackpot! Whistleblower Hits for $27 Million

Well, in the midst of this colossal mess, I guess it’s nice to know that somebody had a good month. Last Thursday, the SEC announced that it had awarded a whistleblower who alerted it to misconduct a whopping $27 million. The SEC’s order lauded the whistleblower’s efforts to “repeatedly and strenuously” raise concerns about the misconduct internally.  The SEC followed this up with a $5 million whistleblower award earlier this week. When it rains, it pours.

John Jenkins

April 22, 2020

SEC & PCAOB Officials Issue Joint Statement on “Emerging Market” Risks

Yesterday, SEC Chair Jay Clayton and a group of senior SEC & PCAOB officials issued a joint statement warning about the risks posed by “emerging market” investments.  While the statement addresses all emerging markets, it focuses on the 500 lb. gorilla of those markets – China. Here’s an excerpt from the introduction:

Over the past several decades, the portfolios of U.S. investors have become increasingly exposed to companies that are based in emerging markets or that otherwise have significant operations in emerging markets. This exposure includes investments in both U.S. issuers and foreign private issuers (“FPIs”) that are based in emerging markets or have significant operations in emerging markets. During this time, China has grown to be the largest emerging market economy and the world’s second largest economy.

The SEC’s mission is threefold: protect our investors, preserve market integrity and facilitate capital formation. Ensuring that investors and other market participants have access to high-quality, reliable disclosure, including financial reporting, is at the core of our efforts to promote each of those objectives. This commitment to high-quality disclosure standards—including meaningful, principled oversight and enforcement—has long been a focus of the SEC and, since its inception, the PCAOB.

Our ability to promote and enforce these standards in emerging markets is limited and is significantly dependent on the actions of local authorities—which, in turn, are constrained by national policy considerations in those countries. As a result, in many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse, in comparison to U.S. domestic companies. This significant asymmetry holds true even though disclosures, price quotes and other investor-oriented information often are presented in substantially the same form as for U.S. domestic companies.

The statement details risks and related considerations specific to “issuers, auditors, index providers & financial professionals.” These include concerns about the quality of financial information, the PCAOB’s continuing inability to inspect workpapers in China, the limited ability of U.S. authorities to bring enforcement actions in emerging markets, the limited rights & remedies available to shareholders, and the failure of passive investment strategies to account for these risks.

The statement also addresses concerns about disclosure, and emphasizes the importance of robust risk factor disclosure for companies with operations in emerging markets:

In light of both the significance and company-specific nature of the risks discussed in this statement, we expect issuers to present these risks prominently, in plain English and discuss them with specificity. Issuers based in emerging markets should consider providing a U.S. domestic investor-oriented comparative discussion of matters such as (1) how the company has met the applicable financial reporting and disclosure obligations, including those related to DCP and ICFR and (2) regulatory enforcement and investor-oriented remedies, including as a practical matter, in the event of a material disclosure violation or fraud or other financial misconduct more generally.

The statement was issued jointly by Chair Clayton, PCAOB Chair Bill Dunkhe, SEC Chief Accountant Sagar Teotia, and the Directors of Corp Fin & IM. With that kind of firepower mustered behind the statement, I think it’s fair to say that they aren’t fooling around here. Public companies based in China or with significant operations there should take a hard look at their risk factor disclosures, because it seems likely that they will be scrutinized closely by the Staff the next time their filings are pulled for review.

Covid-19 Crisis: Companies Adopt Emergency Bylaws to Ensure Board Operations

With all of the disruptions resulting from the Covid-19 pandemic, many companies are looking at board and management continuity issues, and some companies have opted to adopt an emergency bylaw to help address these issues. This recent Simpson Thacher memo discusses Section 110 of the DGCL, which allows companies to adopt emergency bylaws and sets forth what may be included in them.  Among other things, these bylaws may permit companies to expand the class of persons who may call a board or committee meeting, and relax notice and quorum requirements for such a meeting.

Yesterday, Mastercard filed an Item 5.03 8-k announcing that its board had adopted an emergency bylaw, which provides that:

– a Board or committee meeting may be called by any director or officer by any feasible means, and notice of the meeting may be provided only to the directors that can be feasibly reached and by any feasible means; and

– the director(s) in attendance at the meeting shall constitute a quorum and may appoint one or more of the present directors to any standing or temporary committee as they deem necessary and appropriate

Mastercard isn’t the only company that has adopted an emergency bylaw in recent weeks. John Bean Technologies also adopted a similar provision, and other companies have long had emergency provisions in their own bylaws (see this Jack In The Box filing from 2005).  If your bylaws don’t contain an emergency provision, now may be a good time to consider adopting one.

Transcript: “Activist Profiles & Playbooks”

We have posted the transcript for the recent webcast: “Activist Profiles & Playbooks.”

John Jenkins

April 21, 2020

Covid-19 Crisis: What About ICFR?

The Covid-19 crisis has created a number of challenges for public companies, and one of the potentially most significant is maintaining appropriate internal control over financial reporting. Crisis-related ICFR issues include managing newly remote workforces, the novel and often unfamiliar financial reporting issues created by the crisis, and – for companies receiving government assistance – the need to implement restrictions on executive comp, share repurchases and dividends, among other things.

This Hunton Andrews Kurth memo reviews the legal framework applicable to these issues, and offers insights on how to address them. Here’s an excerpt:

We recommend that companies begin to assess their existing disclosure and internal controls by taking stock of what has changed in the current financial reporting environment. Unique or novel accounting issues should be carefully analyzed, and expert advice sought when internal resources are insufficient.

Potential and actual disruptions to a company’s supply chain, customer base, operations, processes and workforce should be weighed when evaluating the operating effectiveness of legacy controls. As part of this process, companies should also assess any potential deficiencies in review-type internal controls and the ability of individuals to perform control duties in light of shelter-in-place orders and other company specific remote-work protocols.

Based on this assessment, companies should determine whether existing controls are sufficient to prepare financial statements and disclosure documents at the reasonable assurance level. If a legacy control cannot be performed as previously designed, companies should determine what new controls may be necessary to reduce the risk of errors and fraud. In doing so, they should ensure that any changes in design address both the original risks of material misstatement as well as any new risks. We anticipate regular dialogue with counsel, the auditors and audit committees on these topics.

The memo also says that public companies, particularly those receiving government assistance, should expect heightened scrutiny from the “media, putative whistleblowers, agency inspectors general, consumer watchdog groups, members of Congress and other political figures.” In this environment, the best way for companies to protect themselves is by maintaining a robust control environment and responding nimbly to changes in business circumstances that may require adjustments to those controls.

Covid-19 Crisis: Chart of Governmental Actions

If you represent a client with operations in multiple states, Faegre Drinker’s interactive chart of the various federal, state and local government orders associated with the Covid-19 crisis is a really handy resource. If you click on an individual state, you’ll be taken to a page that contains links to that state’s legislative and executive orders relating to Covid-19, as well as to orders issued by major municipalities within that state. It appears to be updated on a daily basis, so you’ll probably want to bookmark it.

Transcript: “The Top Compensation Consultants Speak”

We have posted the transcript for the recent webcast: “The Top Compensation Consultants Speak.”

John Jenkins

April 20, 2020

First Quarter Reporting: Put On Your Game Face

Management teams and their advisors always have plenty to think about when preparing for any quarter’s financial reporting, but when it comes to this one, well. . . like they say on “Rick & Morty” – “Wubba lubba dub dub!” If you’re waist deep in this process, you should take a look at this Weil memo, which provides in-depth checklists addressing issues to think about when preparing this quarter’s earnings release & Form 10-Q. Here’s an excerpt:

At the risk of stating the painfully obvious, the just-completed quarter has not been “normal” for public companies by any stretch of the imagination. As they turn from addressing complex operational matters and mitigation efforts to disclosure decision-making, corporate management, audit committees and boards are grappling with such questions as: Should the earnings release and conference call be delayed to give the company more time to come to grips with any number of novel or complex accounting issues generated by the “perfect storm” of the COVID-19 pandemic, global economic turmoil, and the rapid-fire pace of federal and state legislative and regulatory responses?

If it has not already done so, should the company withdraw or otherwise modify earnings guidance made early in Q1? What is the impact on the company of the Coronavirus Aid Relief and Economic Security Act (CARES Act) and its regulatory progeny? Will the company need to recognize impairments? And finally, given the uncertainty about when and how the economy will reopen and whether certain industries will undergo lasting structural change, the ultimate question: what insight can be given into what the future may hold for the company?

The checklists addresses these and other disclosure issues and includes a discussion of the relevant SEC and/or staff-level disclosure guidance that has been provided during the Covid-19 crisis. The checklists identify key action items and conclude with suggestions about “what to do now” in navigating this quarter’s disclosure challenges.

Listing Standards: Nasdaq Provides Temporary Relief from Price-Based Standards

On Friday, the SEC approved an immediately effective Nasdaq rule change that would allow listed companies more time to return to compliance with price-based continued listing standards, which relate to the minimum bid price and market value of publicly held shares. Here’s an excerpt from this Steve Quinlivan blog with a summary of the rule:

Under the approved rule Nasdaq will permit companies that are out of compliance with the Price-based Requirements additional time to regain compliance by tolling the compliance periods through and including June 30, 2020. However, throughout the tolling period, Nasdaq will continue to monitor these requirements and companies will continue to be notified about new instances of non-compliance with the Price-based Requirements in accordance with existing Nasdaq rules. Companies that are notified about non-compliance are required by Nasdaq rules to make a public announcement disclosing receipt of the notification by filing a Form 8-K, where required by SEC rules, or by issuing a press release.

Starting on July 1, 2020, companies will receive the balance of any pending compliance period in effect at the start of the tolling period to come back into compliance with the applicable requirement. Similarly, companies that were in the delisting hearings process would return to that process at the same stage they were in when the tolling period began. Companies that are newly identified as non-compliant during the tolling period will have 180 days to regain compliance, beginning on July 1, 2020.

According to this Reuters article, the NYSE has proposed to provide similar relief from its own price-based continued listing standards, but its initial proposal was rejected. The Exchange was reportedly “in talks” with the SEC about the rule proposal, but that was two weeks ago – and I haven’t seen anything more on this since then.

Cheat Sheet: Covid-19 Quick Reference

I’m a sucker for “cheat sheets” that I can use to get up to speed quickly & fake my way through a conference call, and Simpson Thacher’s 37-page “Covid-19 Quick Reference Guide” fits the bill when it comes to the Covid-19 crisis. It provides a bullet-point overview of securities, corporate, M&A, commercial finance and other considerations associated with the crisis, and also provides an overview of the CARES Act and other governmental responses.

John Jenkins

April 17, 2020

Board Oversight of Covid-19 Response & the Business Judgment Rule

Last fall, John blogged about “stakeholder governance” and the business judgment rule and noted that in Delaware, the business judgment rule provides protection for directors who conclude in good faith that considering the interests of other stakeholders may be helpful in maximizing long-term shareholder value.  A recent memo from Wachtell Lipton says boards will need to understand Covid-19 related risks not only to the company but also to its various stakeholders.  The memo also serves as a good reminder that despite all of the challenges from Covid-19, boards should fulfill their oversight responsibility as best they can and know the business judgment rule will be applied to board decisions.

The memo discusses director oversight along with management’s role in handling the day-to-day operations, including concerns relating to external obligations, including debt and regulatory requirements, liquidity, compensation and strategic threats and opportunities.  Here’s an excerpt:

The decisions facing companies at this time are terribly difficult and painful. It will be crucial for the board and the management team to maintain an atmosphere of respect and shared concern in order to promote effective decision-making in this period of great stress. The board should be careful to resist any temptation to usurp the role of management in running the company’s day-to-day business and addressing the challenges resulting from the COVID-19 pandemic. Corporate America finds itself now in uncharted territory, and the ramifications of the crisis and the nationwide response are unknowable factors. While there may be substantial second-guessing once the COVID-19 crisis is past, directors should take comfort that the business judgment rule applies to board decisions regardless of how they appear in hindsight. The board is called to fulfill its oversight role to the best of its ability. Directors who act on an informed basis, in good faith, and in the honest belief that their decisions are in the company’s best interests will continue to have the protection of the business judgment rule.

Rulemaking Petition Seeks to Allow Electronic Signatures Under Reg S-T

In what could be a big step forward for the SEC, a rulemaking petition from Wilson Sonsini, Fenwick & West and Cooley asks the SEC to amend rules under Reg S-T that would permit companies to obtain electronic signatures for documents filed with the SEC.  The rulemaking petition acknowledges the Staff’s recent statement providing flexibility regarding manual signatures during the current crisis and then encourages the SEC to go further.

In this day and age, electronic signatures seem to be more the norm and routing manual signatures to hold in a dusty, over-crowded file cabinet somewhere seems somewhat archaic – this change would be a nice improvement for many.  Here’s an excerpt from the petition:

We acknowledge the Staff Statement: Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns (March 24, 2020) (the “Staff Statement”) and appreciate the added flexibility it provides regarding manual signatures in the current extraordinary environment.  We believe, however, and many of our clients have also informed us, that obtaining and retaining manual signatures in compliance with the Staff Statement remains a significant logistical burden.  We and many of our clients believe the Staff Statement could be of greater effectiveness to registrants, with no compromise to the integrity of the document signing process, if registrants were permitted to use existing, proven electronic signature processes with respect to filing documents with the Commission.

Improvements in electronic signature software technology make it possible to confirm (with at least equal confidence to the collection of manual signatures) who has signed a document and when it was signed (and, indeed, far better accuracy as to the timing of execution), and make recordkeeping and storage of such signatures seamless and secure.

More Women on Boards Helps Ensure Consumer Safety

It’s been well documented and we’ve blogged about studies showing how increased board gender diversity may lead to better ESG and business performance.  A recent abstract describes an academic study that looked at the influence female directors had on product recall decisions.  The study found that as boards add female directors, product recall decisions change.  The abstract says as boards add female directors, “firms make faster recall decisions for the most serious defects that are high in severity and dangerous for customers, highlighting the increased stakeholder responsiveness from adding female directors.”

This blog from Lehigh University provides further discussion of the study.  Some basic stats cited in the blog include:

Compared to firms with all-male boards, firms with female directors announced high-severity product recalls 28 days sooner

The number of women on boards also impacted high-severity recall outcomes – only boards that had at least 2 female directors improved timeliness of severe product recalls and when there were 3, recall decisions moved along even more quickly

For low severity recalls – where executives have greater discretion, boards with female directors announced 120% more recalls compared to firms with no women directors

Lynn Jokela