Monthly Archives: July 2020

July 31, 2020

Securities Litigation: Federal & State Court Suits Down in 2020

According to Cornerstone Research’s 2020 Midyear Assessment, the number of securities lawsuits filed in federal & state courts dropped by 18% compared to the second half of 2019, and were at their lowest level since 2016.  Kevin LaCroix recently blogged the details over on “The D&O Diary.”  Here’s an excerpt:

According to the report, there were 182 securities class action lawsuits filed in state and federal court in the first half of 2020, which while below the 221 filed in the second half of 2019 and 207 filed in the first half of 2019, is still well above the semiannual average of 112 filings during the period 1997-2019. The 182 filings in the year’s first half is the lowest semiannual number of securities suit filings since the second half of 2016. The report states its view that a decline in Section 11 filings “was the primary reason for the overall reduction in filing activity in the first half of the year.”

The decline in the number of filings from the second half of 2019 to the first half of 2020 represented a drop in the number of filings of 18%. Core (or traditional) filings declined 13%, from 134 in the second half of 2019 to 117 in the first half of 2020. Due to the slowdown in merger deal activity, merger objection lawsuit filings also declined, from 87 in the second half of 2019 to 65 in the first six months of this year, representing a decline of 25%. The 65 first half merger-related suit filings in the first half of this year is the fewest number in federal courts since the second half of 2016.

In case you’re wondering, Cornerstone says that 11 Covid-19-related securities class actions have been filed through the end of June. Kevin’s also been monitoring those filings, and he pegs the number at 15. Lawsuits that Kevin includes in his list that Cornerstone doesn’t are those filed against  Zoom, Colony Capital, Wells Fargo, and iAnthus Capital Holdings.

Kevin’s blog has links to prior posts that explain why he included these cases in his tally, but as far as I’m concerned, he doesn’t have to explain anything – he’s a fellow Clevelander, so I’ve got his back.

Crypto Enforcement: Here Comes The Martin Act!

Those of you who are of my vintage likely remember the commercials for Ron Popeil’s Veg-O-Matic that touted its 1,001 household uses – “It slices! It dices! It makes julienne fries!” Well, New York’s Martin Act just keeps on proving that it’s the Empire State’s answer to the Veg-O-Matic. This DLA Piper memo says that the Appellate Division of New York’s 1st Dept. recently upheld a lower court ruling authorizing the statute’s use as the basis for the New York AG’s long-running investigation of the virtual currency “tether.” This excerpt lays out the key takeaway from the Court’s decision:

The decision is a timely reminder to companies and individuals in the FinTech sector that the New York AG has broad power to investigate suspected fraud in the realm of virtual currencies. Dealing with the New York AG’s Investor Protection Bureau may be a disorienting experience for white collar practitioners used to responding to inquiries by federal regulators.

The text of the Martin Act places few clear limits on the New York AG’s investigative authority, and the office is not constrained by the large body of guidance memorialized in the US Department of Justice’s manual for prosecutors and other published federal enforcement guidelines that help practitioners attempt to deal with regulators on a level playing field.

If you old folks don’t remember the Veg-O-Matic, I bet you remember the Bass-O-Matic.  (I feel sorry for you kids today, I really do).

EDGAR’s On the Fritz Again

One of my colleagues was in the unenviable position of trying to file a couple of S-8s & an S-3 yesterday, and he learned to his chagrin that the EDGAR system was once again experiencing technical difficulties.  According to the EDGAR News & Announcements page on the SEC’s website, they’re working on it:

The EDGAR system is currently experiencing technical difficulties. Our technical staff is working to resolve the issue. Please check this site for updates. We apologize for any inconvenience this may cause.

Fortunately, our registration statement filings were eventually accepted, and even though they didn’t show up on  EDGAR until after 5:30 pm, we still received yesterday’s filing date. Still, I think my friend is starting to think the SEC is out to get him – he got caught up in the last malfunction trying to file a couple of 11-Ks.

John Jenkins

July 30, 2020

Updating: What Do You Do With Your First Quarter Covid-19 Risk Factor?

In response to the onset of the Covid-19 pandemic, many companies opted to include a risk factor addressing the pandemic in their 10-Qs for the first quarter of 2020. So, assuming that disclosure is still accurate & comprehensive, should you include it in your second quarter 10-Q? That’s the question addressed in this recent Bass Berry blog. Here’s an excerpt:

With respect to assessing whether to include potential COVID-19 risk factor disclosure in upcoming Form 10-Qs, as a starting point, Part II, Item 1A of Form 10-Q requires that public companies “set forth any material changes from risk factors as previously disclosed in the registrant’s Form 10-K” (emphasis added).

This language from Form 10-Q, on its face, would appear to require public companies to continue to disclose risk factors included in a prior Form 10-Q in any subsequent Form 10-Qs filed before the next Form 10-K in light of the statement about including material changes from the prior Form 10-K (compare the 2005 adopting release of the SEC promulgating this Form 10-Q risk factor requirement, which stated that the Form 10-Q should disclose risk factors “to reflect material changes from risks factors as previously disclosed in Exchange Act reports” (emphasis added).

The blog goes on to acknowledge that although practice has not been uniform, there is a good argument based on the text of Form 10-Q that public companies should continue to repeat (with updated language, as applicable) risk factors included in a prior Form 10-Q in subsequent Form 10-Qs filed during the fiscal year.  This Bryan Cave blog takes a similar position, noting that “strict compliance” with the language of Item 1A has become “common practice.”

These views are consistent with the position we’ve taken in our “Risk Factors Disclosure Handbook.” However, one of our members pointed out that the Sept. 2010 issue of The Corporate Counsel reported that, despite the language of Item 1A, the Staff had advised that new risk factor disclosure included in a 10-Q does not need to be repeated in subsequent 10-Qs. After making some inquiries, I learned that this advice was likely provided informally in a private conversation. Unfortunately, the Staff never formalized that guidance, and we don’t know whether the Staff would take the same position (or any position) today, in the context of Covid-19.

2020 DGCL Amendments Signed into Law

On July 16, Delaware’s Gov. John Carney signed the 2020 amendments to the DGCL into law. This S&C memo has the details. As we blogged at the time the legislation was first introduced, it addresses some of the problems that Delaware corporations experienced this year in their efforts to transition to virtual annual meetings. Here’s an excerpt:

Under the emergency conditions described in DGCL §110(a), the Amendments provide a board of directors with discretion to postpone or change the place of a stockholder meeting. Amendments to Delaware’s General Corporation Law July 22, 2020 meeting (including to hold the meeting solely by means of remote communication). Public companies may notify stockholders of such a change solely by a document that is publicly filed with the Securities and Exchange Commission.

The amendments also update the definition of an “emergency” under Section 110 of the DGCL & expand it beyond the Cold War “Rocket Attack U.S.A.” scenario to include “an epidemic or pandemic, and a declaration of a national emergency by the United States government.”

CEO Turnover: Uneasy Lies the Head That Wears the Crown

There’s a grim joke among professional football players to the effect that the initials “NFL” stand for “Not for Long.” According to a recent Squarewell Partners study, the same can be said for those who serve as U.S. public company CEOs. Squarewell studied CEO departures at some of the world’s largest companies since the beginning of 2019, and reached some interesting conclusions. These include:

– US companies witnessed more CEO departures than the UK and Europe
– Official company disclosures suggest only 7% of CEOs were formally dismissed but we find that the actual figure of CEO dismissals should be 29%.
– 40% of dismissed Lead Executives recorded negative share price performance during their tenure.
– Only 20% of companies (that saw a CEO change) provided comprehensive disclosure surrounding their succession plans prior to their departure.
– 66% of newly appointed Lead Executives were promoted from within the organization.
– 10% of newly appointed Lead Executives were women.

John Jenkins

July 29, 2020

Dave & Marty: The “Fond Farewell” Episodes, Part 2

In this second 30-minute podcast tribute to his friend & “Radio Show” co-host Marty Dunn, who died on June 15, 2020, Dave Lynn welcomes Marty’s colleagues from Corp Fin, private practice and the conference circuit to share their memories of Marty. Highlights include:

– The story behind the Dave & Marty puppet show
– Marty’s game saving “play at the plate” for the Corp Fin softball team
– Making a newcomer feel welcome
– Spending time with Marty & his family
– What it was like to be one of “Marty’s people”
– Marty’s extraordinary ability as a teacher and mentor
– Marty’s rendition of “Midnight Train to Georgia”

The podcast is accompanied by two of Dave & Marty’s legendary puppet shows from our 2015 & 2018 Proxy Disclosure Conferences.

Diversity: You Too, Plaintiffs’ Bar!

Lynn recently blogged about shareholder derivative lawsuits against Facebook & Oracle arising out of alleged inaction on diversity issues. In light of the plaintiffs’ bar’s fondness for diversity-based fiduciary duty claims, I thought it was fitting that the federal district court judge presiding over the Robinhood class action case decided that the plaintiffs’ bar needed to pay a little attention to its own diversity practices.

According to Alison Frankel’s recent blog, Judge James Donato rejected the application of two major plaintiffs firms to serve as lead counsel for the Robinhood litigation. This excerpt from the blog explains why:

Judge Donato, in an order Tuesday night, consolidated the cases – but rejected the leadership proposal. There was no doubt, he said, that Kaplan Fox and Cotchett would provide “highly professional and sophisticated representation” to the prospective class, given their “impressive history.” But Judge Donato said he was concerned that the proposed team lacked diversity.

There were no women among the proposed leaders of the case, the judge pointed out. He also noted that the list includes a lot of lawyers and law firms that frequently head class actions and MDLs. That experience might benefit the prospective class, he said, but “highlights the ‘repeat player’ problem in class counsel appointments that has burdened class action litigation and MDL proceedings.”

The judge’s order permitted the law firms to reapply after they reshuffled their starting lineups, but the blog says that the order may raise constitutional concerns based on Justice Samuel Alito’s criticism of a similar order in an antitrust case.

Going Concern: Update on Covid-19’s Toll

Back in May, I blogged about an Audit Analytics survey that identified 30 public company audit opinionsthat 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. A more recent Audit Analytics survey says that the toll continues to grow:

Since our last update in May 2020, there have been 12 additional audit opinions filed with a going concern modification citing COVID-19 – a 40% increase over 7 weeks. For 3 of those companies, it was their first going concern, bringing the total up to 17 companies that were issued their first going concern in the last 5 years specifically citing the pandemic as a reason.

The blog is accompanied by a chart identifying the companies in question and the reasons they cited as contributing to the going concern qualification in their audit opinions.

John Jenkins

July 28, 2020

Tales From the Swamp: Stimulus Money Fuels Insider Trading?

According to a recent study, there’s a pretty good chance that all of the stimulus money currently sloshing around may stimulate some good old fashioned insider trading among the politically well-connected – at least that’s what the experience of the last time Washington fired its cash bazooka suggests. This Stanford article says that the study looked at trading by politically-connected insiders at TARP fund recipients during the 2008 financial crisis.

That program bailed out a lot of financial institutions, but it wasn’t a model of transparency & key details of the program were never publicly disclosed. This excerpt from the article says that insiders used that lack of transparency to their advantage:

This gave corporate insiders advance knowledge of the likely scope of government intervention and its impact on their institution. Larcker’s study finds evidence that many seemed to trade on the basis of this private information to earn higher returns than public shareholders. Prior to massive government stimulus, political connections had far less influence on trading decisions, the study shows. But in the nine months after TARP’s inception, transactions by politically connected insiders were correctly predicting future stock performance.

Federal law requires executives to disclosure equity stakes in their own firm through regulatory filings that investors pore over for clues about potential share price swings. The researchers’ analysis shows that trades were ramped up 30 days prior to TARP announcements. During allocation of government funds, insiders made 3,058 trades averaging $105,987 and yielding $22,251 in average market-adjusted profits ($68 million overall), significantly outperforming their unconnected counterparts.

One of the authors of the study suggests that the key to preventing abuses with the current stimulus spending lies in increased transparency – which he suggests the bipartisan insider trading legislation that the House passed last year would provide – and a longer cooling off period longer between a job in government and an executive position in the private sector, and vice versa. If I were you, I wouldn’t hold my breath on either of those recommendations being adopted.

Regal, But Not Quite Princely: Leo Strine’s Titles are a Mouthful

Over on, Stephen Bainbridge notes that former Del. Chief Justice Leo Strine is currently sporting a mouthful of titles. Take a deep breath everybody, because Leo Strine is:

Michael L. Wachter Distinguished Fellow in Law and Policy at the University of Pennsylvania Carey Law School; Ira M. Millstein Distinguished Senior Fellow at the Millstein Center at Columbia Law School; Senior Fellow, Harvard Program on Corporate Governance; Henry Crown Fellow, Aspen Institute; Of Counsel, Wachtell Lipton Rosen & Katz; former Chief Justice and Chancellor of the State of Delaware.

Prof. Bainbridge points out that, with his 60 word moniker, Strine easily outpaces Queen Elizabeth II, whose full title comes in at a paltry 33 words (which at least gives her something in common with the Rolling Rock beer label). But I’ve got some bad news for the former Chief Justice & the Queen – her husband Prince Philip crushes them both. Ready? Here we go:

His Royal Highness The Prince Philip, Duke of Edinburgh, Earl of Merioneth, Baron Greenwich, Royal Knight of the Most Noble Order of the Garter, Extra Knight of the Most Ancient and Most Noble Order of the Thistle, Member of the Order of Merit, Grand Master and First and Principal Knight Grand Cross of the Most Excellent Order of the British Empire, Knight of the Order of Australia, Additional Member of the Order of New Zealand, Extra Companion of the Queen’s Service Order, Royal Chief of the Order of Logohu, Extraordinary Companion of the Order of Canada, Extraordinary Commander of the Order of Military Merit, Lord of Her Majesty’s Most Honourable Privy Council, Privy Councillor of the Queen’s Privy Council for Canada, Personal Aide-de-Camp to Her Majesty, Lord High Admiral of the United Kingdom.

That’s a grueling 133 words, for those of you playing along at home. Prince Philip’s heritage may be Greek, but those titles would guarantee him a warm welcome from the crew of The H.M.S. Pinafore. The former Chief Justice’s titles may fall short of those of His Royal Highness, but his penchant for Gilbert & Sullivan-inspired judicial robes likely would make him a welcome guest on the Pinafore as well.

Audit Committees: Meetings & Processes in a Pandemic

The most recent edition of Deloitte’s “Audit Committee Brief” discusses priorities for the current quarter & future periods. I thought the discussion of how audit committees have adjusted their meetings and other committee processes in light of the limitations imposed by the Covid-19 pandemic was particularly interesting. Here’s an excerpt on prioritization of agenda items and meeting materials:

Many audit committee chairs have been reassessing the way their time is spent in meetings. Regardless of how the meeting structure has changed, prioritizing the agenda has been key for the committee’s effectiveness. Audit committee chairs should consider taking a step back to reevaluate what’s top priority. Simply following a previously created annual calendar or last quarter’s agenda may not allow the committee to focus on the right topics. Some audit committee chairs have pushed topics that aren’t top priority to later in the year or to consent agendas to allow more time for some of these critical discussions.

Many committees have reviewed meeting materials when considering ways to enhance effectiveness. Some companies are sharing more memos or narratives with pre-read materials; these provide committee members a bigger picture view and allow the members to come better prepared with questions. It can also provide a way to stay informed in between meetings. Some committees are providing more written questions to management before meetings. This doesn’t mean that questions are limited to those provided in advance, but it may help management come more prepared to discuss what’s important to the audit committee and allow for more robust discussions.

The publication also addresses topics such as financial reporting, forecasting, risk oversight, compliance and other challenges facing audit committees in the current environment.

John Jenkins

July 27, 2020

“Goldman Sans”: Use Our Font, Disparage Us Not

Some of my most vivid memories of my days nights as a young lawyer involve watching bulge bracket investment bankers & their lawyers sit in a Bowne or R.R. Donelley conference room in the wee small hours & obsess over a prospectus’ compliance with the terms of the bank’s style guide.

These style guides were sometimes elaborate documents with detailed instructions about proper fonts, spacing, logos, front & back cover page & underwriting section language, together with a bunch of other formatting details for every kind of offering document imaginable. Sometimes, they even specified the color of ink to be used (“Morgan Stanley blue” anyone?).

And woe to you if your document departed from the style guide! Punishment was swift and merciless (or so it was said). I remember one poor soul literally sweating as he meticulously measured & remeasured the distance between lines on the back cover page of the prospectus, and then turned his attention to the front cover, to ensure that the red herring language aligned perfectly with the top and bottom lines of the page. You’d have thought the guy was about to cut a 20 karat diamond.

That kind of obsessiveness is why the news that Goldman Sachs has come up with a new font that’s free to use, but comes with an interesting catch, doesn’t surprise me in the least. What’s the catch? This Verge article explains:

Investment bank Goldman Sachs has released its very own typeface: an inoffensive set of sans-serif fonts dubbed Goldman Sans. But in the spirit of bankers everywhere, these fonts come with a catch in the contract. As their license states, you’re free to use Goldman Sans for just about anything you like so long as you don’t use it to criticize Goldman Sachs.

According to the article, the license prohibits the user from using the licensed font software to “disparage or suggest any affiliation with or endorsement by Goldman Sachs.” It looks like Goldman’s PR folks got wind of the negative media attention, however, because the license agreement no longer contains the anti-disparagement language.

I guess some people saw this as overreach by a firm that’s long been a magnet for criticism, but anyone who has worked with an investment banker totally gets why they originally included the language in the license. For a Goldman Sachs lifer, there could be no greater affront than to have an element of the firm’s sacred style guide weaponized against it!

Inline XBRL: Accelerated Filers, Ask Not for Whom the Bell Tolls. . .

This Bass Berry blog provides a reminder to accelerated filers preparing for their second quarter filings that they are going to have to comply with the inline XBRL requirements, including cover page tagging and the new Exhibit 104 requirement:

Public companies designated as accelerated filers who are preparing their periodic reports for fiscal periods ending on or after June 15, 2020 (i.e., upcoming second quarter 10-Qs for many companies) will be required to comply with the SEC’s previously adopted Inline eXtensible Business Reporting Language (iXBRL) digital reporting guidelines. Per the SEC’s phase-in guidelines, filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date.

Tomorrow’s Webcast: “Distressed M&A: Dealmaking in the New Normal”

Tune in tomorrow for the webcast – “Distressed M&A: Dealmaking in the New Normal” – to hear Woodruff Sawyer’s Yelena Dunaevsky, Fredrikson & Byron’s Mercedes Jackson, and Seyfarth’s Paul Pryant & James Sowka discuss the unique challenges and opportunities presented by acquisitions of distressed targets.

John Jenkins

July 24, 2020

Dave & Marty: The “Fond Farewell” Episodes, Part 1

In this 30-minute podcast, Dave Lynn welcomes a series of eminent guests to remember his great friend and “Radio Show” co-host Marty Dunn, who died on June 15, 2020 (here’s Dave’s written tribute). Topics include:

– Origin stories: E-Proxy & Securities Offering Reform

– How to find substitute pants

– Ideal meeting length (22 minutes)

– Memorable song performances

– “International Marty Day”

– How to be a good friend, colleague & mentor

Covid-19: Does “Force Majeure” Apply?

Although the social media sphere is quick to characterize this year’s parade of horribles as an “Act of God,” that characterization may be more difficult for companies that want to call off their contractual obligations. If you’re negotiating a contract right now and want to preserve an “out” for an inability to perform, check out this Vinson & Elkins memo for drafting tips (and for more resources, see the “Contractual Performance” memos that we’re posting in our “COVID-19” Practice Area):

Looking ahead, parties seeking to boost the chances that their inability to perform will be excused should specifically reference the COVID-19 pandemic on the list of events that would qualify as force majeure. In addition, the COVID-19 pandemic should be identified as unforeseeable and unpredictable. The reason: in many states, even if an event is specifically listed, courts require that a party claiming force majeure demonstrate that the event was not foreseeable.

The blog also recommends asking these four questions if you’re on the receiving end of a force majeure notice and want to continue to enforce performance:

1. Is the pandemic covered by the force majeure clause?

2. If so, is the activity that is not being performed as promised something that actually is being prevented by the covered event?

3. Is there a specific exclusion in the force majeure clause for that performance?

4. What are the notice requirements — was the notice sent within the specified deadline?

Cybersecurity Oversight: What Boards Are Doing

This article from Melissa Krasnow of VLP Law Group looks at recent NACD benchmarking in the cyber-risk oversight of public versus private company boards. Among other things:

– Public and private company boards engaged in the same top seven and the bottom cyber−risk oversight practices over the past year, with differences in terms of percentages

– Over 60% of public companies scheduled cyber risk at least once on the board agenda over the last year, versus over 40% of private companies

In addition, the “Private Company Governance Survey” – which was published in May 2020, about five months after the “Public Company Governance Survey” was published in December 2019 – alludes to the impact of the COVID-19 pandemic on cybersecurity: “The surge of remote workers in the first quarter of 2020 may expose companies to a new set of risks.” This impact continues beyond the first quarter of 2020 and affects both public and private companies.

Liz Dunshee

July 23, 2020

Proxy Advisors: SEC Amends Proxy Rules to Address Voting Advice!

At an open meeting yesterday, the SEC adopted amendments to its proxy solicitation rules, which are intended to give companies a more meaningful opportunity to review and respond to proxy advisors’ voting recommendations, ensure that proxy advisor clients have access to those responses prior to the meeting, and require the advisory firms to disclose potential conflicts of interest. The rules were adopted by a 3-1 vote, with Commissioner Allison Herren Lee issuing this dissenting statement. CII also issued a statement expressing disappointment with the rules.

Here are the high points, which are explained in more detail in the SEC’s Fact Sheet (also see Mike Melbinger’s blog and this blog from Cooley’s Cydney Posner – and we’re posting memos in our “Proxy Advisors” Practice Area).

“Solicitation” Includes Proxy Advice for a Fee: Consistent with the Commission’s longstanding view, the changes amend the definition of “solicitation” in Exchange Act Rule 14a-1(l) to specify that it includes proxy voting advice, with certain exceptions.

New Conditions for Exempt Solicitations: Under amendments to Rules 14a-2(b)(1) & 14a-2(b)(3), in order for proxy voting advice businesses to rely on the exemptions from information and filing requirements (which are essential for them to be able to carry out their business), they must satisfy the conditions of new Rule 14a-2(b)(9), including disclosure of conflicts of interest and adoption & disclosure of policies that allow for companies to review & respond to the voting recommendations. New Rule 14a-2(b)(9) also establishes non-exclusive safe harbors that will allow proxy advisors to meet the conditions.

Application of Antifraud Rule to Proxy Advice: The amendments modify Rule 14a-9 to include examples of when the failure to disclose certain material information in proxy voting advice could, depending upon the particular facts and circumstances, be considered misleading within the meaning of the rule. These examples include material information about the proxy voting advice business’s methodology, sources of information, or conflicts of interest.

It is worth noting that the “registrant review” provisions of the final rule are less demanding that those that were originally proposed. That original proposal would have obligated advisors to provide companies with a copy of their advice in order to permit them to identify errors or other problems with the analysis in advance of their release, and would have also required proxy advisors to provide the company with a final report no later than two business days prior to its dissemination to their clients.

The amendments will be effective 60 days after publication in the Federal Register, but affected proxy voting advice businesses subject to the final rules are not required to comply with the Rule 14a-2(b)(9) amendments until December 1, 2021. At least that’s the plan – ISS has a pending lawsuit against the SEC challenging the agency’s ability to regulate it. The parties agreed to stay the lawsuit until the SEC adopted final rules. Now that the rules are in place, the real fight may be just beginning.

Proxy Advisors: SEC Supplements Guidance for Investment Advisers

Also yesterday, the SEC supplemented its 2019 guidance to investment advisers about their proxy voting responsibilities, and the steps they could take to demonstrate that they’re making voting decisions in a client’s best interest. As noted in Cydney Posner’s blog, that guidance:
“recommended that investment advisers satisfy their own fiduciary duties of care and loyalty and obligations to act in their clients’ best interests, in part, through careful oversight of proxy advisory firms (i.e., investment adviser as ‘enforcer’), such as by monitoring and analyzing the methodology and processes of proxy advisory firms, including their processes for engagement with companies and procedures to address errors.”

The supplemental guidance addresses how investment advisers should consider company responses to proxy advisor voting recommendations. This includes circumstances in which the investment adviser utilizes a proxy advisory firm’s electronic vote management system that “pre-populates” the adviser’s ballots with suggested voting recommendations or for voting execution services (so-called “robo-voting”). It also addresses their disclosure obligations and client consent requirements when using automated voting services. Here’s an excerpt:

An investment adviser should consider, for example, whether its policies and procedures address circumstances where the investment adviser has become aware that an issuer intends to file or has filed additional soliciting materials with the Commission after the investment adviser has received the proxy advisory firm’s voting recommendation but before the submission deadline. In such cases, if an issuer files such additional information sufficiently in advance of the submission deadline and such information would reasonably be expected to affect the investment adviser’s voting determination, the investment adviser would likely need to consider such information prior to exercising voting authority in order to demonstrate that it is voting in its client’s best interest.

Proxy Advisors: “Best Practices” Get New Oversight

Last week, the “Best Practices Principles Group” for shareholder voting research announced the appointment of an oversight committee to monitor the Principles that govern proxy advisor signatures, including ISS, Glass Lewis and Minerva Analytics. I most recently blogged about the BPPG last year when they updated the best practices from their original 2014 iteration. The international board includes:

– Six institutional investor representatives – including Amy Borrus of CII

– Three public company representatives – including Hope Mehlman of Regions Financial

– Two independent academic representatives

Among other responsibilities, the oversight board will conduct an annual review of the public reporting of each BPPG Signatory and present that information publicly. Congrats to Amy, Hope and the other members for being involved in this initiative.

Liz Dunshee

July 22, 2020

Covid-19: Accelerating “ESG” Focus for Credit Ratings

A recent 12-page Moody’s report says that the Covid-19 pandemic has increased the likelihood that ESG will affect credit ratings over the long term – i.e., beyond 12-18 months from now. The report puts these trends into three buckets: risk preparedness for global risks, social considerations related to healthcare access & economic inequality, and a shift from shareholder primacy to stakeholder needs. Specifically, it predicts that in addition to the “usual suspects” of governments, companies in the healthcare industry and carbon-intensive companies, all sectors have the potential for greater scrutiny of these areas:

– Risk management practices
– Climate change & environmental risks
– Healthcare access & affordability
– Economic & social inequality
– Corporate sustainability & governance practices
– Investor focus on ESG

Covid-19: Impact on Disclosure Controls

After Corp Fin supplemented its Covid-19 disclosure guidance last month to suggest what information companies should be considering for pandemic-related disclosure, we have been hearing from members grappling with their quarterly disclosure controls processes for their upcoming reports. To capture reportable events throughout the business, some are relying on questionnaires – like this one that we’ve posted in Word.

In our webcast last week – “Coronavirus: Next Steps For Disclosure & Governance” – Keir Gumbs also emphasized that companies should be thinking about how the “work from home” environment is affecting internal controls and disclosure controls. In addition to the topics covered in Corp Fin’s guidance, this Deloitte blog suggests thinking about these potential issues (also see this Freshfields blog):

– Store or facility closures
– Loss of customers or customer traffic
– The impact on distributors
– Supply chain interruptions
– Production delays or limitations
– The impact on human capital
– Regulatory changes
– The risk of loss on significant contracts

Quick Poll: Are You Reviewing Your Disclosure Controls?

Please participate in this anonymous poll:

bike trails

Liz Dunshee

July 21, 2020

“Stakeholder” Governance: Ideals vs. Data

When the BRT made the shift last year from “shareholder primacy,” many wondered what type of action the signatories would take to demonstrate a commitment to stakeholders. Earlier this year, Lynn blogged that 85% of those signatories published a sustainability report – and over half had adopted one or more sustainable development goals.

But this 67-page analysis, from two profs at the London School of Economics & Columbia Business School, suggests the “stakeholder” cynics might be right. Not only did the BRT statement have little impact on signatories’ stock prices at the time it was announced, the data that the professors reviewed showed that relative to industry peers, signatories to last year’s BRT statement:

– Commit environmental and labor-related compliance violations more often (and pay more in compliance penalties)

– Have higher market shares (and thus may face more scrutiny in future M&A transactions)

– Spend more on lobbying policymakers

– Report lower stock returns alphas and worse operating margins

– Have higher paid CEOs

The professors also looked at stocks in the largest ESG ETF and ESG mutual fund and found found “barely any correlation” between the included companies and federal environmental & labor compliance violations. That’s despite large asset managers emphasizing that ESG and sustainability issues are used by them in screening or otherwise evaluating investments, or affect their voting. The professors also question whether ESG scores from third-party vendors accurately reflect ESG behavior.

The professors do acknowledge that their data is not very demonstrative of “governance” factors and is more focused on “E&S” – and one might wonder whether the size of the signatories had an outsized impact on some of these findings. But the results are sobering and suggest that investors who are focused on these issues likely need to do more of their own verification. As if you didn’t have enough surveys already…

Podcast: The Minority Corporate Counsel Association

A few weeks ago, I blogged on “The Mentor Blog” about specific things we all can do to help retain Black lawyers, as the stats are showing that “diversity” efforts to-date aren’t moving the needle and probably need to focus more on equity & inclusion. I continued that conversation in this 30-minute podcast with Jean Lee, who is the CEO & President of the Minority Corporate Counsel Association.

In this podcast, Jean discusses the work that the MCCA has been doing – and why it’s important to have diverse corporate lawyers. Conversation topics include:

– How MCCA assists its members in recruiting, retaining & promoting women and diverse attorneys
– How approaches to improving diversity & inclusion may vary by group
– The business case for diversity
– What types of corporations & law firms are involved with MCCA
– Ways that individuals can advance diversity, equity & inclusion in their day-to-day professional lives

July-August Issue: Deal Lawyers Print Newsletter

This July-August Issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:

– M&A Transactions & PPP Eligibility and Forgiveness Considerations
– Strategic Acquisitions of Distressed Companies in the COVID-19 Environment
– Due Diligence: “That Deal Sounds Too Good to Be True”

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Liz Dunshee

July 20, 2020

What a “Stakeholder” Board Could Look Like

This blog from Doug Chia is getting a lot of traction. In it, he argues that calls for a focus on long-term “corporate purpose” – along with this year’s pandemic, market volatility and social unrest – are signs that it’s time to realign board committees in a stakeholder-driven way. Here’s an excerpt:

For the past 18 years, the committee structure for public company boards has been dictated by the Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated thereunder. Those rules and regulations essentially mandated all public company boards to have the “big three” committees: audit, compensation, and nominating. Some boards also created (or already had) other specific committees for oversight of finance, risk, public affairs, technology, and sustainability, just to name a few.

However, the big three committees largely address matters that directly relate to the interests of the company’s shareholders with the other three stakeholders being indirect beneficiaries. This required structure was appropriately coming out of the corporate failures of the early 2000s and fitting when maximizing shareholder value was still seen as the end-all, be-all. However, it may not be well-suited to a new era when boards are committing to place firm value in the context of a broader set of constituencies.

In an ideal world (where the current big three committees are not required), rethinking a board’s committees would start with a blank slate. The board would write down each of its annual agenda items, both those discussed by the full board and those covered in committee. It would then map each item to one or more of the four key stakeholders. Based on that exercise, the board would assign each item to one or more of four new stakeholder-focused committees and/or the full board, and it would adopt charters for each reflecting the end result. One of the many outcomes of creating committees this way would look like this:

Customers Committee: Focus on sales of products and services, go-to-market strategy, customer satisfaction, product safety, R&D, and innovation.

Employees Committee: Focus on the company’s overall workforce, health and benefits, compensation, labor relations, diversity and inclusion, talent development, recruitment and retention, training, employee engagement, and corporate culture.

Communities Committee: Focus on regulation, legal, compliance, tax, government affairs, public policy, sustainability, corporate social responsibility, philanthropy, community relations, and corporate reputation.

Shareholders Committee: Focus on financial and non-financial reporting, ESG disclosure, corporate finance, M&A, capital allocation, enterprise risk management, corporate governance, board composition, investor relations, and shareholder engagement.

Doug points out that this isn’t a completely new concept, as companies often establish and dissolve committees based on their current circumstances. As I’ve blogged on, there also have been growing calls to broaden the mandate of compensation committees to cover employee issues. Re-examining the board’s structure would require close attention to board composition and committee charters – which some view as an additional benefit and an opportunity to more closely align the board with strategy & culture.

ESG: GAO Sums Up Disclosure Dilemmas

The Government Accountability Office has issued a 62-page report on ESG disclosures – why investors want them, what public companies are doing, and the advantages & disadvantage of voluntary vs. mandatory disclosure regimes. The report itself doesn’t give much info that people in this space don’t already know – investors want ESG info, companies are working hard to provide it, there are gaps & inconsistencies in company disclosures due to the lack of standardized and prescriptive disclosure rules, and competing disclosure regimes pose important trade-offs.

One interesting tidbit – which may become relevant as investors & companies increase their focus on equity and resiliency going forward – is that companies seem to have come around to at least providing narrative cybersecurity information after the SEC’s emphasis on that issue for many years, but data about human rights and health & safety is harder to come by:

As shown in figure 2, we identified disclosures on six or more of the eight ESG factors for 30 of the 32 companies in our sample and identified 19 companies that disclosed information on all eight factors. All selected companies disclosed at least some information on factors related to board accountability and resource management. In contrast, we identified the fewest companies disclosing on human rights and occupational health and safety factors.

With regard to the 33 more-specific ESG topic disclosures we examined, 23 of 32 companies disclosed on more than half of them. The topics companies disclosed most frequently were related to governance of the board of directors and addressing data security risks. Conversely, based on disclosures we identified, we found that companies less frequently reported information on topics related to the number of self-identified human rights violations and the number of data security incidents.

In addition, we found that companies most frequently disclosed information on narrative topics and less frequently disclosed information on quantitative topics. There are several reasons why a company may not have disclosed information on a specific ESG topic, including that the topic is not relevant to its business operations or material.

Senator Mark Warner (D-VA), who had requested this report back in 2018, is now calling on the SEC to establish an ESG task force to consider requiring disclosure of “quantifiable and comparable” metrics. He seized on the GAO’s finding that even quantifiable metrics like carbon dioxide emissions are reported differently from company to company. As Lynn blogged last week – and as noted in this Wachtell Lipton memo – some standard-setters are starting to collaborate, which may help clarify reporting frameworks for companies & investors alike.

Quick Poll: Are “Stakeholder Committees” the Next Big Thing?

Please participate in this anonymous poll:


Liz Dunshee