Monthly Archives: September 2020

September 30, 2020

SEC Enforcement: Fiat-Chrysler Tagged for Misleading Emissions Disclosure

Earlier this week, the SEC announced settled enforcement proceedings against Fiat-Chrysler arising out of allegedly misleading disclosures about its compliance with emissions standards.  Here’s an excerpt from the SEC’s press release:

The SEC’s order found that in February 2016, FCA represented in both a press release and an annual report that it conducted an internal audit which confirmed that FCA’s vehicles complied with environmental regulations concerning emissions. As found in the order, FCA’s statements did not sufficiently disclose the limited scope of its internal audit, which focused only on finding a specific type of defeat device, or that the audit was not a comprehensive review of FCA’s compliance with U.S. emissions regulations. In addition, at the time FCA made these statements, engineers at the U.S. Environmental Protection Agency (EPA) and California Air Resource Board (CARB) had raised concerns to FCA about the emissions systems in certain of its diesel vehicles.

Under the terms of the SEC’s order, Fiat-Chrysler consented to a cease & desist order enjoining it from committing or causing future violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-16 thereunder. The company also agreed to a $9.5 million civil monetary penalty.

The announcement of this proceeding follows on the heels of a significant setback in the SEC’s enforcement action against Volkswagen arising out of that company’s use of a “defeat device” to thwart emissions tests. As discussed in this Mintz memo, a California federal court recently dismissed a significant portion of the SEC’s securities claims against Volkswagen on the grounds that they were previously released by the DOJ.

I’m inclined to be a little more forgiving toward Fiat-Chrysler than I am toward Volkswagen. Sure, this conduct seems to be less egregious, but the real reason is that I have a sentimental attachment to the company. My first car was a 1972 Dodge Polara, and my current dream car is an Alpha-Romeo Stelvio Quadrifoglio – both of which are currently under the Fiat-Chrysler corporate umbrella. Of course, in the real world I still drive a 2012 Equinox that eats oil and has a broken tail light that I busted when I accidentally hit it with a garbage can I was dragging in from the curb a few months ago.

By the way, if it seems like there are more high-profile enforcement actions this week than usual, don’t forget that the SEC’s fiscal year ends today, so Enforcement needs to put cases to bed now if they’re going to count in this year’s stats.

Board  Diversity: The Impact of Geography

Improved oversight and risk management are some of the advantages often associated with board gender diversity. However, a recent study suggests that the advantage that boards with female directors have when it comes to improved oversight doesn’t derive from the gender of those directors, but from their location.

The study says that what makes the difference is that fact that female directors are generally more geographically distant from the companies that they serve than their male counterparts. According to the study, this makes them more reliant on hard data and less reliant on things like CEO schmoozing when it comes to making tough decisions. Here’s the abstract:

Using data on residential addresses for over 4,000 directors of S&P 1500 firms, we document that female directors cluster in large metropolitan areas and tend to live much farther away from headquarters compared to their male counterparts. We also reexamine prior findings in the literature on how boardroom gender diversity affects key board decisions.

We use data on direct airline flights between U.S. locations to carry out an instrumental variables approach that exploits plausibly exogenous variation in both gender diversity and geographic distance. The results show that the effects of boardroom gender diversity on CEO compensation and CEO dismissal decisions found in the prior literature largely disappear when we account for geographic distance.

Overall, our results support the view that gender-diverse boards are “tougher monitors” not because of gender differences per se, but rather because they are more geographically remote from headquarters and hence more reliant on hard information such as stock prices.

Check out this episode of the @DenselySpeaking podcast, in which Greg Shill leads a discussion with one of the study’s authors about its implications and some of the other ways geography influences governance. I’ve never really considered the impact of geography on corporate governance, but the discussion makes an interesting case for the idea that geographic considerations can play a big role in a wide range of governance concerns.  

ICFR: Newly Public Companies & Material Weaknesses

This Audit Analytics blog takes a look at how newly public companies have fared when it comes to internal control over financial reporting. This excerpt summarizes the results of its analysis:

To get a sense of how prepared new IPOs are in terms of ICFR, this analysis looks at the effectiveness of controls as disclosed by SEC registrants in the first management report on ICFR after the IPO year. The amount of reports disclosing ineffective ICFR after an IPO has increased from 12% in 2010 to 21% in 2018, with a high point of 24% in 2016.

As an important note, 2019 is excluded from the above longitudinal analysis on ineffective ICFR after an IPO due to incomplete data; less than 20% of IPOs conducted in 2019 have subsequently filed a management’s report on ICFR. However, based on the reports currently available, 39% have disclosed a weakness in internal controls.

For comparative purposes, a 2019 study referenced in this FEI blog found that 23% of all SEC filers reported a material weakness in 2018. However you slice it though, the trend line for new public companies is not good – and remember, most IPO companies aren’t required to have their auditors vouch for management’s assessment of ICFR.

John Jenkins

September 29, 2020

Staff Comment Trends: Corp Fin’s Top 10

Ernst & Young recently issued its annual review of Staff comment letters. The number of comment letters issued during the year ended June 30, 2020 declined by 15% over the prior year. That represents the continuation of a four-year trend that has seen the number of comment letters decline by nearly 2/3rds since 2016.

EY attributes the decline to the Staff’s continued use of a “risk-based” approach to the review process, which involves concentrating on larger filers and reviewing their filings more frequently. Here’s a list of the 10 topics that were most frequently the subject of SEC comments:

1. Non-GAAP financial measures
2. Management’s discussion and analysis
3. Revenue recognition
4. Segment reporting
5. Fair value measurements
6. Intangible assets and goodwill
7. Contingencies
8. Inventory and cost of sales
9. Income taxes
10. Signatures/exhibits/agreements

The list is pretty similar to last year’s, although revenue recognition comments led the way in 2019. Contingencies and inventory & cost of sales were the only additions to this year’s top 10 list, while comments on state sponsors of terrorism and acquisitions and business combinations failed to make the cut this year.

SEC Enforcement: “EPS Initiative” Snares First Two Companies

Corp Fin isn’t the only SEC division that takes a risk-based approach to its work. Yesterday, the Division of Enforcement announced settled enforcement proceedings against two companies for allegedly manipulating their reported earnings per share.  Here’s an excerpt from the SEC’s press release announcing the proceedings:

The Securities and Exchange Commission today filed settled actions against two public  companies for violations that resulted in the improper reporting of quarterly earnings per share (EPS) that met or exceeded analyst consensus estimates. The actions are the first arising from investigations generated by the Division of Enforcement’s EPS Initiative, which utilizes risk-based data analytics to uncover potential accounting and disclosure violations caused by, among other things, earnings management practices.

The proceedings, which were settled on a “neither admit nor deny” basis, involved allegedly inappropriate accounting adjustments that enabled the companies to present misleading earnings performance. Both companies consented to cease and desist orders and civil monetary penalties. Two accounting executives at one of the companies also consented to cease & desist orders, civil monetary penalties and temporary bars to practicing before the SEC.

This is the first I’ve heard about an “EPS Initiative,” but the Enforcement Division’s increasing emphasis on data analytics is something that the agency has publicized for some time. For example, this BakerHostetler memo discusses comments made by the Enforcement Division’s Chief Accountant, Matthew Jacques, at a conference last fall:

Mr. Jacques disclosed that the Division of Enforcement has also invested time and energy in technology to better detect fraud, such as the increased use of data analytics, to allow the SEC to detect complex fraud faster and catch bad actors more quickly. Mr. Jacques stated that the SEC will evaluate potential accounting cases brought to its attention based on considerations such as the egregiousness of the conduct, the size of the company and the SEC’s priorities.

My guess is that we’ll be hearing more from Enforcement’s EPS Initiative in the coming months. Cases targeting earnings shenanigans seem like a nice fit with the SEC’s current focus on violations that impact “Main Street investors,” and they also highlight the agency’s ability to leverage its resources through the application of technology.

Sustainability: CII Calls for Companies to Use Standard Reporting Metrics

Last week, the CII adopted a statement a statement urging companies to report on their sustainability performance using standardized metrics established by independent private sector standard-setters. In its press release announcing the adoption of the new statement, the CII provided some insight about why it decided to adopt the statement now:

The CII statement comes at a pivotal time for the future of sustainability reporting, with five leading sustainability standard setters recently releasing a document declaring intent to work together toward comprehensive reporting, and the International Federation of Accountants recently proposing the creation of a sustainability standards board that would exist alongside the International Accounting Standards Board. While CII does not endorse any particular framework or independent standard setter, these developments clearly indicate momentum toward the broad objectives described in the statement.

The CII’s statement says that “standards that focus on materiality, and take into account appropriate sector and industry considerations, are more likely to meet investors’ needs for useful and comparable information about sustainability performance.” The statement also endorses the idea that, over time, companies should obtain external assurance of the sustainability performance disclosures.

John Jenkins

September 28, 2020

ISS Releases Policy Benchmark Survey

Last week, ISS released the results of its 2020 policy benchmark survey.  Here are some of the highlights:

Pandemic-Related Issues

1. ISS policy guidance in response to COVID-19 pandemic: With respect to ISS’s policy guidance issued in response to the pandemic, a significant majority of both investor (62%) and non-investor respondents (87%) indicated that ISS should carry this or similar guidance into 2021 and continue to apply flexible approaches where warranted through at least the 2021 main proxy seasons.

2Annual Meetings: Regarding the question on the preferred shareholder meeting format, absent continuing COVID-19 health and social restrictions, almost 80% of investor respondents chose “Hybrid” meetings, with the possibility for shareholders to attend and participate in the meeting either in-person or via effective remote communications. On the other hand, a plurality of non-investor respondents (42%) indicated a preference for in-person meetings, with virtual meetings used only when there is a compelling reason (such as pandemic restrictions).

3. Expectations regarding compensation adjustments: When asked about executive compensation in the wake of the pandemic, 70% of investor respondents indicated that the pandemic’s impact on the economy, employees, customers and communities and the role of government-sponsored loans and other benefits must be considered by boards, incorporated thoughtfully into decisions to adjust pay and performance expectations, and be clearly disclosed to shareholders. Among non-investor respondents, 53% indicated that many boards and compensation committees will need flexibility to make reasonable adjustments to performance expectations and related changes to executive compensation.

4. Adjustments to short-term/annual incentive programs: Regarding short-term/annual incentive programs and the respondents’ views on what is a reasonable company response under most circumstances, 51% of investors and 54% of non-investors indicated that both (1) making mid-year changes to annual incentive metrics, performance targets and/or measurement periods to reflect the changed economic realities and (2) suspending the annual incentive program and instead making one-time awards based on committee discretion could be reasonable, depending on circumstances and the justification provided.

Non-Pandemic-Related Issues

5. Director accountability to assess and mitigate climate risk: Investors ranked the top three actions that appropriate for shareholders to take at a company that isn’t effectively not effectively reporting on or addressing its climate change risk as follows: (1) engage with the board and company management (92%); (2) consider support for climate-related shareholder proposals (87%); and (3) consider support for shareholder proposals seeking greenhouse gas reduction targets (84%).

Notably, three-quarters of investors responded that they would consider a vote against directors who are deemed to be responsible for poor climate change risk management.  Non-investors overwhelmingly favored engagement with the board and company management as the most appropriate action (93%) while other possible actions were far less popular.

6. Sustainable development goals: When asked whether the UN’s SDG framework to be an effective way for companies to measure environmental and social risks and to commit to improving environmental and social disclosures and actions, 44% of non-investors said “yes,” while 51% said “no.”  Investor responses were “yes” (44%) and “no” (56%).

7.  Auditors and audit committees: ISS often considers the relative level of non-audit services and fees compared to audit-related services and fees when assessing auditor independence of the external auditor. When asked what other factors (when disclosed) they considered relevant to the evaluation of auditor independence & performance, 88% of investors said significant audit controversies. That edged out significance/frequency of material restatements, which was cited by 83% of investors. Significance/frequency of material restatements (67%) topped the list for non-investors.

When asked what information should be considered by shareholders in evaluating a company’s audit committee, the most popular response among investors was significant controversies relating to financial reporting, financial controls or audit (93%). Skills and experience of audit committee members (97%) topped the list for non-investors.

8. Racial and ethnic diversity: When asked should all corporate boards provide disclosure of the demographics of their board members including directors’ self-identified race and/or ethnicity, 73% of investors indicated all boards should disclose this information to the full extent permitted under relevant laws. Only 36% of non-investors gave the same response, while 32% said boards should only disclose this information where it is mandated in jurisdictions where they operate.

9. Independent board chairs: 85% of investors said that an independent chair is their preferred model, but 47% said that company-specific circumstances may justify other models. On the other hand, 38% said that non-independent chairs should only be allowed in emergency or temporary situations. Nearly half of non-investor respondents indicated that there was no single preferred model for board leadership.

PPP Loans: The SBA is MIA On Loan Forgiveness

According to this recent “American Banker” article, the SBA isn’t off to a great start when it comes to acting on PPP loan forgiveness applications.  In fact, this excerpt suggests that it hasn’t gotten off to any start at all:

More banks, weary of waiting on legislative fixes, are moving ahead with processing Paycheck Protection Program forgiveness applications. Many of those lenders have become more frustrated by a lack of communication from the Small Business Administration.

The $1.6 billion-asset NexTier Bank in Kittanning, Pa., submitted the first of 95 applications on Sept. 15, while the $2.2 billion-asset First Choice Bancorp in Cerritos, Calif., has processed about 200 applications in recent weeks. The $1.4 billion-asset IncredibleBank in Wausau, Wis., has submitted 50 loans since the forgiveness portal opened on Aug. 10. Each is still waiting for a response from the SBA.

“We have not yet had a single one validated,” said Robert Franko, First Choice’s president and CEO. “To our knowledge, no one has yet received forgiveness,” Franko added. “There’s no question borrowers are tired of waiting. We have an automated system and everything can be done online.”

Lenders and borrowers aren’t the only ones dissatisfied with the SBA’s performance. According to this recent GAO report, the SBA’s guidance on the loan forgiveness process leaves some remaining uncertainty about some aspects of the lenders’ role in the process, and its plans for overseeing the loan forgiveness process are still incomplete.

The GAO report said that the SBA had received approximately 56,000 forgiveness applications as of Sept. 8. According to the American Banker article, “The GAO report did not mention any approvals, and other lenders said they know of no applications that have made their way through the review process.”

Fantasy “Stockball”?  Score a TD & Get Stock for Free!

A member tipped us off to a new twist on “fantasy football.”  Apparently, the online financial services & investment platform SoFi is offering a promotion where you can win up to $100 in stock for every touchdown your NFL team scores in one game.  When I first saw this, I immediately thought about all of those enforcement actions that the SEC brought against companies that gave away securities for “free” during the late 90s. The SEC has also had occasion to crack down on this practice more recently, in the context of ICO “airdrops.”

This free stock promotion is different from the ones that have given the SEC heartburn. Instead of using its own stock, SoFi is giving away shares (or fractional shares) of other companies that it holds in its inventory. It turns out that SoFi isn’t the only online investment platform that gives away stock as a promotion – apparently Robinhood does something similar.

I like fantasy football, but I’m not into online trading. I’m also a Cleveland Browns fan, which means that it’s far from a sure thing that my team is going to score a touchdown on any given Sunday. So, I think I’ll take a pass on “fantasy stockball” and stick to my fantasy football league, where my team – “Myles Garrett’s Helmet Helpers” – is off to a 3-0 start. And yes, this entire blog was just an excuse to tell you that.

John Jenkins

September 25, 2020

BRT Says It Wants to Put a Price on Carbon…Over the Next 3 Decades

Last week, the Business Roundtable released these “Principles & Policies Addressing Climate Change” – a 16-page statement that declares the US should adopt a “market-based approach” to reduce emissions in line with the Paris Agreement. The BRT is careful to note that carbon should be priced only where it is environmentally and economically effective and administratively feasible, and in a way that continues to foster innovation & competitiveness. This Politico article summarizes the BRT’s positions. Here’s an excerpt:

A “market-based mechanism” is a broad term, and the Business Roundtable did not recommend any one particular design. It called for putting a price on carbon as a means to reduce emissions since “a clear price signal is the most important consideration for encouraging innovation, driving efficiency, and ensuring sustained environmental and economic effectiveness.”

Examples include direct taxation of carbon dioxide emissions as well as cap-and-trade schemes, such as legislation that passed the House in 2009 but fizzled in the Senate.

Any revenues that come from any market-based system should be used to support economic growth, reduce societal impact, and aid people and companies that are the most negatively affected, the goups said. And it should be linked with “at least a doubling of federal funding for research, development and demonstration of (greenhouse gas) reduction technologies.”

As this WaPo article notes, it’s looking like corporate interests may be more likely to claim a seat at the table the next time climate change legislation is considered, versus trying to kill those efforts outright, and that might help us all. However, the BRT’s principles envision reducing emissions by at least 80% from 2005 levels by 2050 and come at a time when the BRT is still drawing scrutiny of last year’s “stakeholder capitalism” pledge – the latest shot being this letter last week from Senator Elizabeth Warran (D-Mass.).

I suspect that a 30-year goal for reducing emissions is not what investors have in mind when they refer to “long-termism” – so if companies are hanging their hats on the BRT timeline, they probably also need to have some convincing talking points for engagements. As illustrated by this “open letter” issued last week by PRI, investors also continue to want companies to reflect climate-related risks in financial reporting.

Director Information Rights: The Latest “WeWork” Gift

We don’t get to blog much about The We Company since its IPO imploded, but their ongoing litigation recently brought us a nugget of corporate governance case law out of the Delaware Court of Chancery. In this opinion, Chancellor Bouchard decided as a matter of first impression that management cannot unilaterally preclude a director from obtaining the company’s privileged information.

The directors who were being kept in the dark here were members of a special committee formed last fall who were opposing the company’s motion to dismiss a complaint that the company filed in April against SoftBank, and they wanted privileged info that had been shared among company management, in-house counsel and outside counsel. The motion to dismiss was brought by a new committee consisting of two temporary directors, which was formed in May.

The info at issue isn’t the info that was shared between the new committee and its counsel, but between the company and its counsel – info about how the new committee was established, etc. Here’s the holding:

This decision holds, under basic principles of Delaware law, that directors of a Delaware corporation are presumptively entitled to obtain the corporation’s privileged information as a joint client of the corporation and any curtailment of that right cannot be imposed unilaterally by corporate management untethered from the oversight and ultimate authority of the corporation’s board of directors. Accordingly,the Special Committee is entitled to receive the privileged information of the Company it is has requested, which, to repeat, does not concern privileged communications between the New Committee and its own counsel.

This opinion is of interest because isolating director factions or underperforming directors through the use of special committees is one avenue that companies use to minimize those directors’ activities when they can’t otherwise be removed and won’t resign – but as this case emphasizes, director information rights must be honored. This blog from Frank Reynolds explains that there is a situation in which a board or committee can withhold privileged information – which exists when there’s sufficient adversity that the director could no longer have an expectation that they were a client of the board’s counsel. Here, the court found that management acted unilaterally – so the exception didn’t apply.

Venture Capital: New NVCA Forms Include Market Term Analysis

Here’s the intro from this Troutman Pepper memo (visit our “Venture Capital” Practice Area for more resources):

The National Venture Capital Association (NVCA) published on July 28, 2020 an updated suite of model venture capital financing documents that reflect the current events shaping the investment climate, and for the first time, embedded analysis of market terms directly in the NVCA’s model term sheet. Venture capital funds, professional investors, emerging companies and their respective advisors will benefit from the summary analysis contained in this article which highlights the most significant changes to the primary model financing documents.

The NVCA’s updates are timely because venture capital investing remains strong despite the challenges of 2020. Pitchbook reports 2,893 U.S. venture capital deals with an aggregate of $45.20B of capital raised as of the second quarter of 2020, representing approximately a 17% reduction in deal count and a 2% increase in aggregate dollars raised over the same period in 2019. Economic uncertainty looms in the market, as does the specter of increased governmental interest in foreign investments in certain emerging businesses.

Liz Dunshee

September 24, 2020

Shareholder Proposals: SEC Modernizes Rule 14a-8!

As we covered in real-time yesterday at our “Executive Compensation Conference,” (archives will be available soon – and you can still register for on-demand viewing of those), after a high-drama “pause” last week, the Rule 14a-8 amendments are finally here. The Commissioners voted 3-2 to adopt the amendments – which include the first revisions to the submission threshold in over 20 years, and the first revisions to the resubmission threshold since 1954. For companies that focus on keeping proposals out of the proxy statement (not all companies, but many!), this is a big deal. Here are the highlights from the SEC’s Fact Sheet:

Submission Thresholds – amend Rule 14a-8(b) by:

– Replacing the current ownership threshold, which requires holding at least $2,000 or 1% of a company’s securities for at least one year, with three alternative thresholds that will require a shareholder to demonstrate continuous ownership of at least:

– $2,000 of the company’s securities for at least three years;

– $15,000 of the company’s securities for at least two years; or

– $25,000 of the company’s securities for at least one year.

– Prohibiting the aggregation of holdings for purposes of satisfying the amended ownership thresholds;

– Requiring that a shareholder who elects to use a representative for the purpose of submitting a shareholder proposal provide documentation to make clear that the representative is authorized to act on the shareholder’s behalf and to provide a meaningful degree of assurance as to the shareholder’s identity, role and interest in a proposal that is submitted for inclusion in a company’s proxy statement; and

– Requiring that each shareholder state that he or she is able to meet with the company, either in person or via teleconference, no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal, and provide contact information as well as specific business days and times that the shareholder is available to discuss the proposal with the company.

Shareholder Representatives – amend Rule 14a-8(c) by:

– Applying the one-proposal rule to “each person” rather than “each shareholder” who submits a proposal, such that a shareholder-proponent will not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. Likewise, a representative will not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative were to submit each proposal on behalf of different shareholders.

Resubmission Thresholds – amend Rule 14a-8(i)(12) by:

– Revising the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings from 3%, 6% and 10% for matters previously voted on once, twice or three or more times in the last five years, respectively, with thresholds of 5%, 15% and 25%, respectively. For example, a proposal would need to achieve support by at least 5% of the voting shareholders in its first submission in order to be eligible for resubmission in the following three years. Proposals submitted two and three times in the prior five years would need to achieve 15% and 25% support, respectively, in order to be eligible for resubmission in the following three years.

The amendments will be effective 60 days after publication in the Federal Register – but there’s an important transition period in that the final amendments will first apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022. The final rules also provide for a transition period with respect to the ownership thresholds that will allow shareholders meeting specified conditions to rely on the $2,000/one-year ownership threshold for proposals submitted for an annual or special meeting to be held prior to January 1, 2023.

We’ll be posting the inevitable flood of memos in our “Shareholder Proposals” Practice Area, and will continue to provide guidance on how practice evolves. One thing is already clear – investor groups aren’t happy. CII’s press release says that the amendments will “muzzle the voice of small investors” and lists several benefits of the current proposal process – asserting that it is a cost-effective way for shareholders to communicate with companies. ICCR’s press release takes it a step further, with this quote from Andy Behar of As You Sow:

“The SEC has intervened to disrupt a system that has worked with fairness and integrity for over 50 years,” said Andy Behar, CEO of As You Sow. “Companies have gained deep insight into potential material risks to their businesses, courtesy of their shareholder engagements. Investors have had a forum to raise their concerns, assisting companies to outperform. This is an ecosystem based on mutual respect and a common goal; helping companies be as good as they can be. The new SEC rules will not stop this relationship, they will simply force shareholders to escalate to litigation and other means. This will ultimately cost companies valuable time and resources.”

But Wait, There’s More! SEC Updates Whistleblower Awards Program

Yesterday, the SEC also tackled amendments to the rules governing its whistleblower program – another controversial proposal that was initially scheduled for a few weeks ago but postponed. The final amendments were adopted 3-2 and were accompanied by guidance from the SEC’s Office of the Whistleblower about the process for determining award amounts for eligible whistleblowers. This blog from Matt Kelly of Radical Compliance gives a good overview. Here’s an excerpt:

Among the changes: a presumption toward more generous awards at the lower end of the pay scale, restrictions on people who abuse the tipster process too often, and faster disposal of would-be tips that don’t meet the awards program criteria.

And the controversial idea to cap large awards at $30 million — technically killed, although the SEC’s two Democratic commissioners still objected that the agency could use other measures to achieve that same end of whittling down large awards.

See Matt’s blog and the SEC’s press release & fact sheet for more details. We’ll also be posting memos in our “Whistleblowers” Practice Area.

Industry Guide 3: Relocated & Amended!

A few years ago, Broc blogged about a “request for comment” on Guide 3 – the industry guide for banks and bank holding companies. That effort has now come to fruition as the SEC (unanimously!) adopted amendments on September 11th, which update & expand statistical disclosure requirements and move “Guide 3” requirements into Reg S-K. We’re posting memos in our “Financial Institutions” Practice Area.

Liz Dunshee

September 23, 2020

Today: “17th Annual Executive Compensation Conference”

Today is our “17th Annual Executive Compensation Conference” – Monday & Tuesday were our “Proxy Disclosure Conference.” For those who haven’t been attending the conferences – or for those who have and want to watch again – we ran a special tribute video yesterday to honor Marty Dunn. Marty was a legend in our community and is deeply missed.

You can still register online to get immediate access to these virtual events. Both conferences are paired together and they’ll also be archived for attendees until next August. That’s a huge value. Here’s more info:

How to Attend: Once you register, you’ll receive a Registration Confirmation email from Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at

How to Watch Archives: Members of or who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on or

How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.

OTC: SEC Amends Information Requirements

Last week, the SEC closed the loop on a proposal from last year and adopted amendments to Rule 15c2-11 to modernize the type of information that needs to be available for broker-dealers to quote securities on the OTC markets. In keeping with the SEC’s current focus on outdated rules, this one was last amended about thirty years ago. Here’s an excerpt from the SEC’s fact sheet about the amendments (and here are statements from SEC Chair Jay Clayton & Commissioner Hester Peirce):

The amendments facilitate transparency of OTC issuer information by:

– Requiring to be current and publicly available certain specified documents and information regarding OTC issuers that a broker-dealer or qualified IDQS must obtain and review for the broker-dealer to commence a quoted market in an OTC issuer’s security (“information review requirement”);

The amendments provide greater investor protections when broker-dealers rely on the piggyback exception by:

– Providing a time-limited window of 18 months during which broker-dealers may quote the securities of “shell companies.”

The amendments reduce unnecessary burdens on broker-dealers by:

– Allowing broker-dealers to initiate a quoted market for a security if a qualified IDQS complies with the information review requirement and makes a publicly available determination of such compliance; and

– Providing new exceptions, without undermining the Rule’s important investor protections, for broker-dealers to:

– Quote actively traded securities of well-capitalized issuers;

– Quote securities issued in an underwritten offering if the broker-dealer is named as an underwriter in the registration statement or offering statement for the underwritten offering, and the broker-dealer that is the named underwriter quotes the security; and

– Rely on certain third-party publicly available determinations that the requirements of certain exceptions are met.

The rule will have a general compliance date that is 9 months after the effective date – and a compliance date that is 2 years after the effective date for the provisions that require a company’s financial info for the last 2 fiscal years to be current and publicly available.

How to Successfully Uplist

This blog from the Small Cap Institute points out that uplisting is a transformative event that is more than just a single transaction – it requires months of planning, and nearly perfect post-closing execution to assure investors that the company will be profitable investment. Here’s one tip for success:

Sell Stock to the Right Audience: Most companies that uplist have predominantly retail shareholder bases (i.e., their investors are mostly nonprofessional investors). Most companies that uplist also have stocks that trade less than $250,000 of stock per day. For reasons we cover in this piece about trading volume, most institutional investors are mathematically foreclosed from buying stocks that trade less than $250,000 per day, whether they like your company or not.

Unfortunately, due to either ignorance or disingenuous advice, myriad uplisted companies with daily trading volume less than $250,000 waste enormous amounts of time and money endlessly meeting around the country with institutional investors, who simply can’t buy their stock – and won’t.

Liz Dunshee

September 22, 2020

SPACs: New CDI Clarifies Form S-3 Eligibility

As John blogged last week on DealLawyers, SPACs have been having a “moment” due to this year’s market volatility. Yesterday afternoon, Corp Fin issued a new “Securities Act Forms” CDI #115.18 to address the Form S-3 eligibility of companies that go public via merger into a SPAC.

Question 115.18

Question: Following the merger of a private operating company or companies with or into a reporting shell company (for example, a special purpose acquisition company), may the resulting combined entity rely on the reporting shell company’s pre-combination reporting history to satisfy the eligibility requirements of Form S-3 during the 12 calendar months following the business combination?

Answer: If the registrant is a new entity following the business combination transaction with a shell company, the registrant would need 12 calendar months of Exchange Act reporting history following the business combination transaction in order to satisfy General Instruction I.A.3 before Form S-3 would become available. If the registrant is a “successor registrant,” General Instruction I.A.6(a) would not be available because the succession was not primarily for the purpose of changing the state of incorporation of the predecessor or forming a holding company. General Instruction I.A.6(b) also would not be available because the private operating company or companies would not have met the registrant requirements to use Form S-3 prior to the succession.

Where the registrant is not a new entity or a “successor registrant,” the combined entity would have less than 12 calendar months of post-combination Exchange Act reporting history. Form S-3 is premised on the widespread dissemination to the marketplace of an issuer’s Exchange Act reports over at least a 12-month period. Accordingly, in situations where the combined entity lacks a 12-month history of Exchange Act reporting, the staff is unlikely to be able to accelerate effectiveness under Section 8(a) of the Securities Act, which requires the staff, among other things, to give “due regard to the adequacy of the information respecting the issuer theretofore available to the public,…and to the public interest and the protection of investors.” [September 21, 2020]

Perks: New CDI Addresses COVID-19 “Benefits”

Yesterday, mere hours after Alan Dye & Mark Borges covered the complexities of evaluating “perks” in a COVID-19 environment at the first day of our “Proxy Disclosure Conference,” Corp Fin issued new “Regulation S-K” CDI #219.05:

219.05 In reporting compensation for periods affected by COVID-19, questions may arise whether benefits provided to executive officers because of the COVID-19 pandemic constitute perquisites or personal benefits for purposes of the disclosure required by Item 402(c)(2)(ix)(A) and determining which executive officers are “named executive officers” under Item 402(a)(3)(iii) and (iv). The two-step analysis articulated by the Commission in Release 33-8732A continues to apply when determining whether an item provided because of the COVID-19 pandemic constitutes a perquisite or personal benefit.

– An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.

– Otherwise, an item that confers a direct or indirect benefit and that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, is a perquisite or personal benefit unless it is generally available on a non-discriminatory basis to all employees.

Whether an item is “integrally and directly related to the performance of the executive’s duties” depends on the particular facts. In some cases, an item considered a perquisite or personal benefit when provided in the past may not be considered as such when provided as a result of COVID-19. For example, enhanced technology needed to make the NEO’s home his or her primary workplace upon imposition of local stay-at-home orders would generally not be a perquisite or personal benefit because of the integral and direct relationship to the performance of the executive’s duties. On the other hand, items such as new health-related or personal transportation benefits provided to address new risks arising because of COVID-19, if they are not integrally and directly related to the performance of the executive’s duties, may be perquisites or personal benefits even if the company would not have provided the benefit but for the COVID-19 pandemic, unless they are generally available to all employees.

Today: “Proxy Disclosure Conference – Part 2”

Today is the second day of our “Proxy Disclosure Conference” – tomorrow is our “17th Annual Executive Compensation Conference.” You can still register online to get immediate access to these virtual events! Both conferences are paired together and they’ll also be archived for attendees until next August. That’s a huge value.

How to Attend: Once you register, you’ll receive a Registration Confirmation email from Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at

How to Watch Archives: Members of or who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on or

How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.

Liz Dunshee

September 21, 2020

Today: “Proxy Disclosure Conference – Part 1”

Today and tomorrow is our “Proxy Disclosure Conference” – Wednesday is our “17th Annual Executive Compensation Conference.” Here are the agendas: 15 substantive panels over 3 days – plus 6 breakout roundtables today that you can choose from. Check out my promo video to see what’s in store! You can still register online to get immediate access to these virtual events! Both conferences are paired together and they’ll also be archived for attendees until next August. That’s a huge value.

How to Attend: Once you register, you’ll receive a Registration Confirmation email from Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at

How to Participate in a Roundtable: New this year, we have added interactive roundtables to discuss pressing topics! We hope you’ll join us for one of these half-hour breakout sessions. Space is limited for those, but you can save yourself a seat ahead of time by navigating to the agenda tab in the mvp platform and clicking on the seat icon next to the roundtable you want to attend.

How to Watch Archives: Members of or who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on or

How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.

EU Considering Options for “Sustainable Corporate Governance”

The European Commission is studying the root causes of “short-termism” and wants to enact an EU-level solution that would make directors more accountable for companies meeting the UN Sustainable Development Goals and the goals of the Paris Agreement on climate change. The findings are summarized in this 185-page report – and it looks like one option that’s on the table is changing the formulation of director duties in EU nations. It characterizes these 7 areas as “key problem drivers” (also see this Wachtell memo):

1.Directors’ duties and company’s interest are interpreted narrowly and tend to favour the short-term maximisation of shareholder value

2.Growing pressures from investors with a short-term horizon contribute to increasing the boards’ focus on short-term financial returns to shareholders at the expense of long-term value creation

3.Companieslack a strategic perspective over sustainability and current practices fail to effectively identify and manage relevant sustainability risks and impacts

4.Board remuneration structures incentivize the focus on short-term shareholder value rather than long-term value creation for the company

5.The current board composition does not fully support a shift towards sustainability

6.Current corporate governance frameworks and practices do not sufficiently voice the long-term interests of stakeholders

7.Enforcement of the directors’ duty to act in the long-term interest of company is limited

B-Corps: Getting More Useful?

Last week, Veeva Systems – an NYSE-traded company with a $40B market cap – announced that it had formed a board committee to explore becoming a public benefit corporation – along with shedding its main anti-takeover provisions. That’s a pretty unique move for a company that’s not even consumer-facing, and if Veeva proceeds, they would join only three publicly traded companies incorporated under Delaware’s “public benefit corporation” statute – Laureate Education, Lemonade and Vital Farms.

Some are predicting that more might convert – or that we will see more public company subs going that route, as Danone North America and Proctor & Gamble’s “New Chapter” have done. This MoFo memo analyzes the three current public company PBCs, extracts some lessons, and explains the possible benefit:

An obligation to report on ESG considerations and risks is not the same as an obligation to pursue a public benefit potentially to the detriment of short-term stockholder value. Adopting a PBC form allows boards of directors and management to balance these considerations and make the choices they think are right, while having a defense from activist stockholders that may be off-put by a quarter or year of lower-than-hoped results. Because of this, PBCs have been touted as a potential solution both to the problem of short-termism in issuer and investor behaviors and to companies seeking to maximize profits for stockholders and passing associated negative externalities to the public at large.

Meanwhile, this Seyfarth memo notes some of the hurdles for public company PBCs – compared to the over 3,000 privately held companies have now gone through the B-Lab process to become Certified B-Corps. Here’s an excerpt:

Because of the need for, and cost associated with, a shareholder vote to reincorporate an entity, among other reasons, this can be a practical barrier to B Corp certification for public companies. Notwithstanding, B Corps are slowly making their way into the public company space – with Danone North America leading as the world’s largest B Corp. At this juncture, the few other public B Corps were certified before becoming public.

Demand for B-corps – although limited – may be helped along by Delaware’s recent amendments to its “public benefit corporation” statute – which make it easier to convert to that structure and afford more protections to PBC directors. As John recently blogged on The Mentor Blog, this Ropes & Gray memo takes a deep dive into the amendments. Here’s a summary:

Voting Thresholds for Opting In and Opting Out Lowered. The 2020 PBC amendments eliminated Section 363(a) and (c) – which had originally required 90% approval to convert in or out of PBC status. The result is that the voting thresholds for conversions, mergers and consolidations involving PBCs are now governed by Sections 242(b) and 251 of the DGCL, which provide for majority voting unless the certificate of incorporation provides otherwise.

Elimination of Statutory Appraisal Rights in Connection with PBC Conversions. The 2020 PBC amendments eliminated Section 363(b) – which had provided appraisal rights to stockholders who didn’t approve of a conversion to the PBC entity form. As a result, there no longer is a specific statutory appraisal right if a conventional corporation converts to a PBC. Appraisal rights in connection with PBC mergers and consolidations are now governed by Section 262 of the DGCL, which addresses appraisal rights in connection with mergers and consolidations more generally.

Director Protections Strengthened. As discussed above, under Section 365(a) of the DGCL, directors of a PBC must balance the pecuniary interest of stockholders, the interests of other stakeholders and the specific public benefit identified in the certificate of incorporation. Section 365(c) has been amended to clarify that a director’s ownership of stock or other interests in the PBC does not inherently create a conflict of interest, unless the ownership of the interests would create a conflict of interest in a conventional corporation.

In addition, the 2020 PBC amendments revised Section 365(c) to provide that any failure on a director’s part to satisfy Section 365(a)’s balancing requirement does not constitute an act or omission not in good faith or a breach of the duty of loyalty for purposes of Section 102(b)(7) (exculpation of directors) or Section 145 (indemnification) of the DGCL, unless the certificate of incorporation provides otherwise. Previously, this was framed as an opt-in in Section 365(c), rather than as an opt-out.

Ability to Bring Derivative Suit Brought into Alignment with Conventional Corporations. Amendments to Section 367 align the thresholds for PBC derivative actions with those applicable to conventional corporations.

Farewell to Justice Ruth Bader Ginsburg

Late Friday, the SEC Commissioners issued a joint statement on the passing of Justice Ruth Bader Ginsburg (here is her NYT obituary):

We join the nation in mourning the passing of Justice Ruth Bader Ginsburg. Justice Ginsburg’s powerful intellect and determination shaped decisions that had meaningful impacts for all Americans, including our nation’s investors. She inspired many, and her trailblazing career will serve as a model of public service and dedication to our country for generations to come.

Liz Dunshee

September 18, 2020

More on “Reg FD Gets a ‘Kodak Moment'”

It wasn’t too long ago when Liz blogged about the SEC investigating the circumstances around Eastman Kodak’s announcement of a $765 million government loan. Earlier this week, the company issued a press release with an 88-page report to the special committee of Kodak’s board that was formed to internally investigate those events.

The report was prepared by Akin Gump over the course of what sounds like around-the-clock work spanning 6 weeks, in which it reviewed over 60,000 documents that included data searches of mobile devices, emails and text messages. It concludes that the company, and its officers, directors and senior management didn’t violate securities regulations or other relevant laws, breach their fiduciary duties or violate any of the internal policies or procedures. Even so, the report contains several corporate governance and procedural recommendations.

The report’s Reg FD analysis begins at page 70 and concludes there was no violation – among other reasons, because the early disclosure to the media was inadvertent and followed by the company’s posting of a DFC press release within 24 hours. But when it comes to the process that Kodak followed with respect to the release of information related to the LOI before the official release of the DFC Announcement, the report acknowledges there was room for improvement – and identifies several deficiencies that other companies may want to consider for their own policies & processes. In particular, counsel to the special committee found that there was:

(1) a lack of training for Kodak personnel who were dealing with the media,

(2) a lack of clear policies and procedures regarding processes that must be followed before a press release or media advisory can be revised or circulated to parties outside of Kodak,

(3) a general lack of sensitivity among certain Kodak employees regarding the need to carefully control the release of potentially MNPI regarding Kodak due to its status as a publicly traded company, and

(4) a lack of robust coordination with the legal department regarding outreach to the media leading up to and after the DFC Announcement.

Among other recommendations, the report urges the company to review and update its policies and procedures regarding the release of potentially MNPI and ensure that its public relations department is properly staffed and trained with respect to the appropriate protocols and best practices for handling interactions with the media on behalf of a public company. It also recommends that management ensure that the legal department has sufficient and appropriate resources.

Several media outlets issued stories about the report’s findings – here are a few – FT, CNBC, TheStreet.

Compliance Program Survey: Prioritizing People Issues Can Improve Effectiveness

Back in June, I blogged about NAVEX Global’s benchmarking data for compliance hotlines.  For a more general look at compliance program benchmarking information, Navex issued a 72-page 2020 Definitive Risk & Compliance Benchmark Report based on a survey of over 1,400 risk and compliance professionals.  One of the survey’s takeaways is that many compliance programs could take measures to improve effectiveness by prioritizing people issues.  Here’s some of the survey’s high-level data points:

– How an organization’s senior leaders view its compliance function greatly impacts overall program performance as does the frequency with which compliance officers interact with the board

– Regulatory requirements primarily drive compliance program decisions but for programs looking to get better, emphasis should be on workplace culture, tone from the top and program automation as much or more than meeting legal requirements

– More than half of respondents said that their risk and compliance program periodically reports to the board and 9 out of 10 rated their board engagement as good or excellent

– With respect to training, 74% of organizations are investing in data privacy training and nearly one-half of respondents are planning on providing training on bribery, corruption, fraud and financial integrity in the next 2-3 years

In terms of disappointments, one finding was that although workplace culture is valued – 74% of respondents described ‘improving organizational culture’ as important, the issue ranked last when respondents prioritized their concerns. Along with culture, preventing and detecting retaliation ranked low among compliance program concerns even though it’s a top concern for both regulators and employees and the extent to which employees fear retaliation has consistently been a strong indicator of the health of an organization’s culture. The survey found only 39% of respondents labeled speaking up and fear of retaliation as top concerns and the number of respondents who intend on making retaliation prevention a priority in the coming year fell to 17%.

Questions for Boards to Keep Culture “Front & Center”

With actual time in the office still limited for many, a Deloitte/NACDonline memo reminds us of the importance of company culture as it can help ensure a company is able to respond to disruption while also supporting employees.  Now that it appears not everyone has company culture high on their priority list – and because of its importance generally – the memo says it’s equally important that the board stay on top of culture risk.  The memo suggests boards ask the following questions to help keep company culture “front and center:”

– Do we understand what culture is and why it’s important?  When culture is aligned to business strategy, employees will work to support business goals, which can lead to competitive advantage

– Do we agree that the cultural tone is set from the top?  HR is often charged with employing techniques to gauge culture while the executive team sets the ethical tenor for the company – boards should evaluate their executive team on culture, perhaps linking compensation or making it part of the succession process for executive leadership

– How do we know if our organization has a culture problem?  Directors can perform due diligence on management’s assertions about culture by asking questions and seeking validation through data – they can also ask whether their organization is using emerging techniques to help assess culture, such as risk-sensing technology and behavior analytic tools

– Have we made culture a regular item on our board and committee agendas?  Culture should be part of the board’s general risk oversight process – boards should move away from thinking of culture as a once-and-done exercise

– Lynn Jokela

September 17, 2020

Quest for Director Diversity Information

Given the sensitivity of the issue, some may be grappling with how to approach gathering director diversity information.  Investors are increasingly asking for board diversity disclosures, and earlier this week, ISS ESG announced that it’s including some director and NEO racial and ethnic diversity information in the proxy advisor’s data service offerings. A frequent suggestion heard at conferences is to add a question or two to the D&O questionnaire, which most know, isn’t as straightforward as it sounds.  A recent Bryan Cave blog discusses this conundrum.

For those that aren’t keen on including another question in the D&O questionnaire, the blog says boards could consider addressing self-identification disclosures during a board meeting or in private conversations, and documenting the results in an appropriate manner, although individual director consent would still be needed for disclosures.  For those that might update the D&O questionnaire, companies could socialize the topic before circulating an updated questionnaire so they can understand whether directors wish to proceed.  The blog includes this example of a possible D&O question:

‘If you are willing to provide this information, please self-identify up to three classifications of racial/ethnic/gender/other diversity characteristics. Please note that if you choose to provide this information, you consent to possible public disclosure of the information, including in the company’s proxy statement, on our website or in response to inquiries from analysts, shareholders or the media.’

Alternatively, a separate consent checkbox could be added to the D&O questionnaire if a company wants to include only the first sentence of the sample question in order to gather diversity data and instead give directors a separate option to self-identify without consenting to public disclosure.

Quick Poll: Gathering Board Diversity Information

Please participate in this anonymous poll:

survey services

September-October Issue: Deal Lawyers Print Newsletter

This September-October Issue of the Deal Lawyers print newsletter was just posted – & also mailed (try a no-risk trial). It includes articles on:

– The Road to Global Closing: Drafting Local Transfer Agreements in Cross-Border Carve-Outs

– Third Circuit Clarifies Requirements for Risk Factor Disclosures in Merger Proxies

– M&A Purchase Price Considerations in the Context of COVID-19

Remember that – as a “thank you” to those that subscribe to both & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

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