Monthly Archives: September 2020

September 16, 2020

Course Materials Now Available: Detailed Agendas & Talking Points!

As a “sneak peek” for our members who are attending our “Proxy Disclosure & Executive Pay Conferences” that are starting next Monday, September 21st, we have posted the “Course Materials” – 167 pages of practical nuggets.  For conference attendees who are not members, the materials will be posted later this week on our conference platform – so those folks can use the registration email to access the platform and navigate to the “View Course Materials” link on the homepage.

With so many pandemic and rule-related developments this year, the Course Materials are better than ever before! We don’t serve typical conference fare (i.e. regurgitated memos and rule releases); our conference materials consist of originally crafted practical bullets & examples. Our expert speakers go the extra mile!

Here’s some other info:

– How to Attend: There’s still time to register for our pair of upcoming conferences, and once you do, 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 and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here are the agendas for all three days!  If you have any questions about accessing the conference, please contact Victoria Newton at

Register for 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 – you can sign up here.

– 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.

Shareholder Proposal Rulemaking: SEC Open Meeting Postponed!

After blogging earlier this week about the SEC’s open meeting that had been scheduled for today when it would consider amendments to the shareholder proposal rules, late yesterday afternoon, the SEC issued a notice postponing the meeting.  Postponement is perhaps a small consolation for those hoping the meeting wouldn’t be cancelled.

The Commission will now consider amendments to the shareholder proposal rules at an open meeting calendared for September 23.  The notice says at the September 23 open meeting, the Commission will also consider whether to adopt amendments to the rules implementing its whistleblower program. It was just two weeks ago when the SEC cancelled its open meeting to consider amendments to the whistleblower program, which was the second time that rulemaking has been called off.  So, presuming the Commission holds the open meeting next Wednesday – and both items stay on the agenda – it could be a pretty significant rulemaking day for the SEC.

Financial Reporting: Looking Again at Effects of Covid-19

Financial reporting in 2020 has turned out to be more of a laborious exercise than most companies envisioned at this time last year. And, this Deloitte memo says that Covid-19’s ongoing impact isn’t making things any easier. The memo discusses some “top of mind” financial reporting and accounting issues that companies are dealing with as challenges resulting from the pandemic continue to evolve. Here’s an excerpt addressing accounting considerations for companies that may be thinking about optimizing their real estate footprint:

In connection with optimizing their real estate footprint on a go-forward basis, a number of companies are reevaluating their leases or lease portfolios. From an accounting standpoint, companies should consider whether a decision to no longer use a leased asset constitutes an abandonment of the asset. Accounting guidance generally requires a company to accelerate expense recognition for assets deemed “abandoned.” However, to be deemed abandoned, a company needs to assess whether it has the ability and would be willing to sublease the leased asset at any point during the remaining lease term. This may include considering the economic environment and the expected demand in the sublease market and will likely require a company to use more judgment when assessing longer remaining lease terms. The potential that a company would be willing to sublease an asset at any point in the future may preclude the company from considering an asset to be abandoned and thus preclude the acceleration of expense recognition.

Some of the other topics addressed in the memo include forecasting, non-GAAP disclosures, internal controls, stock compensation plans and awards, default risk on modified loans, goodwill impairment and modification of other contractual agreements.

– Lynn Jokela

September 15, 2020

Vanguard’s Expectations for Board Diversity

Following the killing of George Floyd, investors are increasingly calling for change and looking for company and board diversity data.  A few weeks ago, I blogged about State Street’s request for companies to disclose board and workforce racial diversity data and last week, Liz blogged on our “Proxy Season Blog” about Neuberger Berman’s willingness to use its proxy votes to push for diversity disclosure.  With all this recent news, some may have missed that last year, Vanguard spoke up on board diversity by detailing expectations about board diversity as part of its 2019 Investment Stewardship Report.

In that report, Vanguard explained that in addition to promoting board gender diversity, the asset manager is asking boards to seek greater diversity.  Here’s an excerpt and Vanguard’s list of expectations for public companies:

We have long believed in the importance of diversity in the boardroom, and we have increasingly advocated for greater representation of women on corporate boards. We are expanding our focus to more explicitly urge boards to seek greater diversity across a wide range of personal characteristics, such as gender, race, ethnicity, national origin, and age. Our board diversity expectations of public companies includes:

(1) Publish your perspectives on board diversity. Here’s what we ask companies: Does your board share its policies or perspectives on diversity? How do you approach board evolution? What steps do you take to get the widest range of perspectives and avoid groupthink? Vanguard and other investors want to know.

(2) Disclose your board diversity measures. We want companies to disclose the diversity makeup of their boards on dimensions such as gender, age, race, ethnicity, and national origin, at least on an aggregate basis.

(3) Broaden your search for director candidates. We encourage boards to look beyond traditional candidate pools—those with CEO-level experience— and purposely consider candidates who bring diverse perspectives into the boardroom.

(4) Make progress on this front. Vanguard expects companies to make significant progress on boardroom diversity across multiple dimensions and to prioritize adding diverse voices to their boards in the next few years.

Board Composition: Snapshot of Ethnic & Gender Diversity Data

With increased attention on board composition, just last week Russell Reynolds issued an updated report on ethnic & gender diversity for U.S. public company boards and it says that Black representation on S&P 500 boards was surprisingly low in 2019 – only 6% of S&P 500 directors were Black.  The report provides a snapshot of board ethnic and gender diversity data, including trends – helpful data to take a look at and have on hand, especially when directors ask about trends and benchmarks. Here’s a few high-level data points:

– Compared to data for S&P 500 directors, Fortune 100 and 500 boards had slightly higher percentages of Black directors – 11.1% and 8.6% respectively

– When looking at trend data, the report shows board gender diversity has improved significantly from 2010 to 2018 but over that same time span, there has been minimal movement in board ethnic diversity – for Fortune 500 companies, the percentage of women directors increased steadily from 16 to 23%, while the percentage of Black directors has hovered between 7 and 9%

– At the time of the report, there were 161 companies in the S&P 500 without any black directors and although that’s a high number, Russell Reynolds reports that compared to a mid-July 2020 study, that number has actually declined from 172 – a 6% improvement in just a couple of months

– Data from KPMG, Ascend and Pinnacle included in the report shows Asian director representation in the Fortune 100, 500 and 1000, the majority of which fail to include at least one Asian director – see this KPMG study about the prevalence of Asian directors on Fortune 1000 boards

$10 million Whistleblower Award!
Earlier this summer, John blogged about someone hitting the whistleblower jackpot and since then there have been several sizable awards. Now there’s another with the SEC issuing this press release announcing an award of more than $10 million, not quite as high as the earlier jackpot but it’s no small change – and it likely brightened the whistleblower’s day. Persistence has a way of paying off, here’s an excerpt from the SEC’s Order:

Claimant provided Enforcement staff with extensive and ongoing assistance during the course of the investigation, including identifying witnesses and helping staff understand complex fact patterns and issues related to the matters under investigation; the Commission used information Claimant provided to devise an investigative plan and to craft its initial document requests; and Claimant made persistent efforts to remedy the issues, while suffering hardships.

– Lynn Jokela

September 14, 2020

Shareholder Engagement: Effect of Proposed Amendments to Form 13F

Ever since the SEC proposed amendments to increase the Form 13F reporting thresholds, there has been ongoing commentary voicing concerns – here’s John’s blog about some of the ‘hot’ comment letters.  A recent MarketWatch opinion piece from Ethan Klingsberg and Elizabeth Bieber of Freshfields does a nice job explaining why, if adopted, the rules could ultimately make things more difficult for company directors – and we could add to that most everyone involved in shareholder engagement efforts.

The authors note how off-season shareholder engagement has evolved to become “de rigueur for public companies.”  During proxy season, asset managers and governance specialists are swamped and pressed for time, which as many corporate secretaries have learned, has made off-season shareholder engagement a priority.  As investors look to engage with companies and sometimes request executives and directors be part of those conversations, the authors acknowledge the development has been good for business.  Even though there are still periodic activist campaigns, the authors note that a spectrum of shareholders are engaging in constructive dialogue with companies and then explain what could happen if the proposed amendments are adopted:

But all of these positive developments hinge on one factor: knowing who your shareholders are. Right now, mega-shareholders (those owning more than 5% of the outstanding stock) make mandatory filings, but for many companies, there are large numbers of institutional shareholders under this threshold that boards want to take into account and to which they want to organize outreach.

The way that these shareholders are identified is by the quarterly filings on Form 13F.  The SEC has proposed to cut back the 13F filing requirement dramatically, with boards ceasing to have visibility on holdings by 4,500 institutional investment managers representing approximately $2.3 trillion in assets, according to one SEC commissioner.  Only the most proactively vocal shareholders and the largest shareholders will be visible to boards.

Today in response to 13F filings, companies are able to proactively reach out to shareholders to help educate shareholders and understand their views.  We should keep the board-shareholder dynamic healthy and constructive rather than impeding it by tearing down the 13F regime.

Comment Period on Shareholder Proposal Rules – Request to Re-Open It

With the SEC slated to consider amendments to the shareholder proposal rules on Wednesday and despite a deluge of comment letters, a coalition of shareholder rights advocates have requested the Commission re-open the comment period for the proposed rule amendments.  The crux of the request to re-open the comment period relates to previously undisclosed data used to estimate the impact of the proposed amendments, here’s an excerpt from the group’s letter:

We are troubled by the 11th-hour submission by the Chief Economist of the Commission’s Division of Economic and Risk Analysis (“DERA”), on August 14, long after the February 3, 2020, public comment deadline, of the staff’s analysis of previously undisclosed data that is material to the public’s understanding of their predicted impact. The August 14 DERA Memo indicates that the Commission has been in possession of the data since at least August 2019 and that DERA staff had used the data to estimate the impact of the proposed amendments before the Commission voted to propose them. Yet the data and the staff’s analysis were held back from the Release accompanying the proposed amendments and not released until the Commission announced that it is prepared to vote on final changes to Rule 14a-8, without an opportunity for public comment.

The letter elaborates and asserts that the fact that the data was withheld is a significant breach of the Commission’s Current Staff Guidance on Economic Analysis in SEC Rulemaking, which among other things requires that the economic analysis that accompanies a proposed rule provide a fair assessment of the predicted impact of a proposed rule, including costs and benefits, as well as that it ‘clearly address contrary data or predictions.’

The SEC recently cancelled an open meeting when it was scheduled to consider adopting amendments to its whistleblower program.  Even with periodic last-minute cancellation notices, with so much anticipation around the proposed amendments to the shareholder proposal rules, it would come as a bit of a surprise if Wednesday’s meeting was cancelled – we’ll see where this goes, stay tuned!

Tomorrow’s Webcast: “Non-GAAP Measures & Metrics: Where Are We Now?”

Tune in tomorrow for our webcast – “Non-GAAP Measures & Metrics: Where Are We Now?” – to hear Mark Kronforst of Ernst & Young, Dave Lynn of Morrison & Foerster and and Lona Nallengara of Shearman & Sterling discuss non-GAAP disclosures that are back in the spotlight as companies grapple with how to quantify the effect of COVID-19 on their results of operations and the Corp Fin Staff continues its focus on individually tailored accounting principles and disclosure of key performance metrics.

– Lynn Jokela

September 11, 2020

Public Company PPP Loans: How Many Gave the Money Back?

Public companies took a lot of heat for taking PPP funds, but despite some well-publicized decisions to return the funds, this Bryan Cave blog says that the vast majority of public company borrowers decided to keep the money:

Based on a review of SEC filings, Bryan Cave Leighton Paisner identified over 850 borrowers who indicated that they had received PPP loan approvals. 107 of these borrowers, or roughly 12 percent, subsequently indicated that they either ultimately did not accept the loan, or returned the loan proceeds. About 25% of public companies who returned their loans had PPP borrowings that were less than the $2 million threshold for review indicated above.

Of the 759 public companies that elected not to return their PPP funds, approximately 73% received $2 million or less, while the remaining 27% had PPP loans of more than $2 million. About 8% of the public company recipients received less than $100,000, while over 55% received less than $1 million.

By our calculations, about 200 public companies with PPP loans in excess of $2 million elected to retain their PPP loans. About 60% of these loans were for between $2 and $5 million, 36% were for between $5 and $10 million, and 4% were for in excess of $10 million.

While public companies taking out PPP loans were sometimes unfairly criticized, other large borrowers took some heat as well. Stlll, the blog says that despite all the sound & fury, over 75% of PPP borrowers approved for a PPP loan in excess of $5 million decided to keep the money.

Supply Chain Finance: The Accounting Backstory

When I first saw the references to “supply chain financing” in Corp Fin’s Covid-19 guidance, I wasn’t really sure what the big deal was. I’m guessing that some others were also a little surprised to see how prominently supply chain financing featured in that guidance – and in recent Staff comment letters.

If you’re wondering where this all came from, check out this Jim Hamilton blog, which discusses the history of Staff concerns about accounting and disclosure issues surrounding supply chain financing, and says they can be traced all the way back to 2003. The basic issue is the appropriate classification of the obligation that arises when a purchaser gets financing from a lender to pay its vendors. The trouble is, as the Big 4 pointed out in a 2019 letter to FASB, U.S. GAAP currently offers little guidance on the question of how to account for these arrangements.

The blog reviews the accounting issues involved and the comment letters that the SEC has issued addressing supply chain financing disclosure. This excerpt summarizes the results of that comment letter review:

SEC staff have engaged in some comment letter dialogs with companies regarding supply chain financing. The theme of these dialogs is that SEC staff saw something unusual in the company’s filings, the company replies that the supply chain issue is nonmaterial, and the SEC accepts the companies’ promises of additional disclosure in future filings.

As Liz noted in her recent blog on this topic, the Staff’s interest pre-dates the pandemic, because it began issuing comments on supply chain financing in mid-2019. Perhaps it’s not a coincidence that the Big 4 reached out to FASB looking for guidance on the topic at around the same time.

Restatements: Common Reasons for “Big Rs” & “Little Rs”

Everybody makes mistakes, but when the accountants do, it’s terrifying. This Audit Analytics blog takes a look at how companies opted to correct errors in financial statements during 2019, and identifies the leading causes of “Big R” restatements and “Little R” out-of-period adjustments.

The five most common issues cited in Big R restatements in 2019 were revenue recognition (16.7%), cash flow statement classification errors (16.1%), securities – debt, quasi-debt, warrants & equity (15.3%), taxes (13.0%) and liabilities (12.2%). By way of comparison, the five most common issues cited in Little R restatements in 2019 were taxes (22.3%), revenue recognition (16.3%), expense recording (9.9%), inventory (9.9%), and value/diminution of PPE intangibles or fixed assets (7.4%)

Everyone involved in the SEC reporting process breathes a sigh of relief when it is determined that a particular error can be corrected through an out-of-period adjustment, because that means the prior period financial statements don’t have to be restated. (Okay, the fact that the CFO’s probably not going to prison either also may help explain the sighs of relief.)

But the blog points out that irrespective of their scale, restatements and out-of-period adjustments negatively impact the financial reporting of a company – and that even immaterial errors may predict future material weaknesses and errors in financial statements.

John Jenkins

September 10, 2020

Corp Fin Disclosure Guidance: Expiring Confidential Treatment Requests

Last December, Corp Fin issued CF Disclosure Guidance Topic No. 7, which addresses the procedures for submitting a “traditional” confidential treatment request (i.e., one that doesn’t take advantage of the streamlined procedures for redacting confidential information in exhibits that were put into place last year). Yesterday, Corp Fin updated that guidance to address alternatives for handling expiring confidential treatment requests.

In essence, the updated guidance gives a company with an expiring CTR three alternatives: it may refile the unredacted exhibit, extend the confidential period pursuant to Rules 406 or 24b-2, or transition to the rules governing the filing of redacted exhibits under Regulation S-K Item 601.  The guidance walks companies through the procedural steps involved with each of these alternatives.

Enforcement: SEC Brings Action for Failing to Deliver Final Prospectus

Here’s something you don’t see every day – last week, the SEC brought settled enforcement actions against an issuer and an underwriter for failing to deliver final prospectuses in connection with various shelf takedowns. Here’s an excerpt from the SEC’s press release announcing the proceedings:

The SEC’s orders find that NFS and FuelCell violated the prospectus delivery provisions of Section 5(b) of the Securities Act of 1933. The order charging NFS finds that it violated the underwriter prospectus delivery provisions of Securities Act Rule 173, and failed reasonably to supervise the traders that sold the FuelCell securities within the meaning of Section 15(b)(4)(E) of the Securities Exchange Act of 1934 and Section 203(e)(6) of the Investment Advisers Act of 1940.

Without admitting or denying the SEC’s findings, NFS and FuelCell have agreed to cease and desist from committing or causing any future violations of the charged provisions. In addition, NFS has agreed to be censured and has agreed to disgorge $797,905 in commissions, pay prejudgment interest of $163,288, and pay a penalty of $1,500,000. The SEC’s order against FuelCell recognized the company’s cooperation and self-report, both of which the SEC considered in determining not to impose a penalty against the company.

The genesis of the problem appears to have been the company’s failure to file 424(b) prospectuses in connection with its ATM offerings. That in turn led to violations of Section 5 by both the company and its underwriter. Their misfortune is our gain, however, because the SEC’s orders are a primer on the prospectus delivery requirement and the interplay between the statute and the rules governing the filing and delivery of the final prospectus.

I know from my own experience and from our Q&A Forum that there’s not a lot out there that ties all of these requirements together – and these orders do. Here’s the NFS order and here’s the FuelCell order.

By the way, I missed this enforcement action when it was first announced, but fortunately Ann Lipton flagged a Bloomberg Law article on it on her Twitter feed. If you practice corporate or securities law and you don’t follow Ann on social media, you’re making a big mistake. As my cousins from Maine would say, she’s “wicked smaht” & she posts all the time. You’ll learn a lot from her.

Wu-Tang Clan: Shkreli Shaolin Saga Coming to Netflix

We haven’t checked in on America’s most entrepreneurial hip-hop artists in some time, but the Wu-Tang Clan is back in the Business section of the paper again. It seems that Netflix is making a movie about the saga of fraudster Martin Shkreli, his $2 million purchase of the group’s “Once Upon a Time in Shaolin” album & his subsequent bizarre & convoluted beef with the Wu-Tang Clan. Here’s an excerpt from this article:

There were seemingly endless twists and turns in the Shkreli/Wu-Tang saga, many of them diligently chronicled at this very website. Now, as Collider reports, the narrative will become the basis for a movie to be released via Netflix, also titled Once Upon A Time In Shaolin. Paul Downs Colaizzo (Brittany Runs A Marathon) will direct the film based on a script by Ian Edelman (How To Make It In America). Wu-Tang ringleader and longtime filmmaker RZA is producing the movie in cooperation with Brad Pitt’s production company Plan B. The story reportedly follows the auction for the album and its messy aftermath.

Speaking of RZA, here’s an interview with him in which he discusses the concept behind the Shaolin album, as well as his regrets about how it ended up in the hands of an “evil villain.” Check out our “Wu-Tang Clan” Practice Area for more Wu-Tang news.

John Jenkins

September 9, 2020

Short-Term Investors: Maybe They Aren’t So Bad After All?

In the corporate governance debate, there’s perhaps no more pejorative term than “short-termism.”  But this “Institutional Investor” article cites a recent study that says short-term investors may not be so bad after all:

Short-term investors are widely seen as bad for the companies they invest in, because they are likely to focus on immediate changes in stock value — potentially at the expense of the company’s long-term profitability. But new research suggests that there may be times when a short-term focus can actually help companies perform better over the long run. The study, expected to be published in the scholarly journal Management Science, found that companies with more short-horizon investors — who trade stocks regularly — adapted more quickly when their competitive environments changed “radically.”

“Under these circumstances, firms and economies with disproportionately more short-term investors may appear more dynamic and avoid stagnation, indicating that short-horizon investors perform an important function in the economy,” wrote authors Mariassunta Giannetti (Stockholm School of Economics) and Xiaoyun Yu (Indiana University).

To put this a little more bluntly than the authors do, the study suggests that those who believe that short-term investors light a fire under corporate management may well have a point.

Public Offerings: ATMs Thrive in Pandemic

“At-the-market” offerings provide companies with flexibility to access the capital markets quickly, and that can be a very attractive option during times of volatility. Bloomberg Law recently published an analysis of second quarter ATM offerings, and the results indicate that this particular alternative to a traditional public offering has been very popular during the Covid-19 pandemic:

At-the-market (ATM) offerings surged in the second quarter of 2020, driven by a need for cheap capital and encouraged by continued investor buying during the pandemic downturn. The value of ATM deals far outpaced any other quarter since Q2 2009. Already through Aug. 10, ATM offerings have raised nearly $33 billion on 251 deals valued at least $1 million, exceeding 2019’s entire haul by $5.5 billion on 15 fewer deals.

According to Bloomberg Law, 108 at-the-market deals raising $14.2 billion were completed during the second quarter alone. That outpaced the first quarter of 2020, which saw 80 deals come to market and raise $9.1 billion. But you don’t have the full picture about just how hot ATM deals are until you realize that the number of deals and the amount raised during the first quarter of 2020 outstripped those metrics for every previous quarter during the past decade – and that the current quarter is on pace to surpass the second quarter.

Shelf Registrations & Takedowns: A Quick Reference

If you’ve read my blogs for any amount of time, you already know I’m a sucker for quick reference materials that I can pull out of a real or virtual desk drawer, glance at for 5 minutes, and then successfully fake my way through a conference call on the topic. This Mayer Brown memo on shelf registration statements & takedowns is the latest addition to my desk drawer.

The memo is only 10 pages long, but it provides a readable & comprehensive overview of topics that include eligibility issues, the types of transactions for which a shelf registration statement may be used, the benefits of WKSI status and liability considerations. Check it out!

John Jenkins

September 8, 2020

Covid-19 Risk Factors: 2nd Quarter Edition

We’ve been keeping an eye on pandemic risk factors since the “Before Time” (seriously, we first mentioned them in January). Most recently, we blogged about how to handle 1st quarter Covid-19 risk factor disclosure in 2nd quarter filings.  Now, this Bass Berry blog takes a look at what kind of pandemic risk factor disclosures companies actually made in their second quarter filings. The blog says that 97% of the 75 Nasdaq & NYSE company filings surveyed included Covid-19 related risk factors. This excerpt provides some insight into the content of those disclosures:

During our review, we noted that updates to the COVID-19 risk factor disclosure included in second quarter Form 10-Qs generally coalesced around certain topics such as uncertainty regarding the duration of the COVID-19 pandemic, impact of the economic downturn, and changes in consumer behaviors both during and potentially after the pandemic.

In addition, some common themes arose in certain industries such as healthcare, with updated disclosures regarding the uncertainty around vaccine efficacy and deployment, and travel and energy, with updated disclosure highlighting potential risks resulting from prolonged social distancing and stay-at-home orders. Such emerging themes reveal that COVID-19 may be having a similar impact on peer companies and, as a result, an ongoing review of peer company risk factor disclosures should be undertaken.

These disclosures don’t appear to be static – according to the blog, approximately 2/3rds of the companies surveyed updated Covid-19 risk factor disclosure from their 1st quarter Form 10-Q disclosure. As for the 3% of companies that didn’t include a specific risk factor, all included language to the effect that the pandemic could exacerbate or heighten the risk factors that were previously disclosed in their Form 10-K.

Non-GAAP: EBITDAC Revisited

During the 1st quarter reporting cycle, some companies that were hit hard by the initial phase of the pandemic attempted to quantify its effect on their operations and present non-GAAP financial data that backed out Covid-19’s impact.  As Liz blogged a couple of months ago, early returns from the 2nd quarter suggested that this practice was growing in popularity.  According to this Brian Cave blog, more recent information on 2nd quarter reporting suggests that companies are shying away from “EBITDAC” disclosure, but that some are getting to the same place in a more stealthy fashion:

While few companies used the EBITDAC label as noted above, some appeared to be using the concept without the label. For example, some adjusted their adjusted EBITDA for COVID-19 expenses or presented gross margin without COVID-19 impacts. Such COVID-19 adjustments may be more likely to draw SEC scrutiny during ordinary periodic filing reviews, especially when viewed in hindsight. The staff has taken the position that “presenting a performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business could be misleading.”

The blog reminds companies of the Staff’s position in CF Disclosure Guidance: Topic 9 that it is inappropriate to present non-GAAP financial information “for the sole purpose of presenting a more favorable view of the company” & that management should highlight why it finds the measure useful and how it helps investors assess the pandemic’s impact on the company’s financial position and results of operations.

IPOs: Surfing Legend Joins the Lineup

A company called Laird Superfood recently filed an S-1 for an initial public offering.  The company focuses on “highly differentiated plant-based and functional foods,” and currently offers “Superfood Creamer coffee creamers, Hydrate hydration products and beverage enhancing supplements, and roasted and instant coffees, teas and hot chocolate.”

As someone who once ate McDonald’s at The Louvre, you probably wouldn’t tag me as a guy who’d be real interested in “highly differentiated plant-based and functional foods,” and you’d be right. But it turns out that one of the co-founders of the company is Laird Hamilton, who is a surfing legend & somebody I’ve been a huge fan of ever since I saw him in the 2004 big wave surfing film, “Riding Giants.”

Am I a surfer? Gimme a break – I’m a fat old man who lives in Ohio. But I loved this movie for some reason, and Laird Hamilton is clearly its star. Check out this sequence about his spectacular ride on the “heaviest wave ever” at Teahupo’o (“Chopu”) in Tahiti.

John Jenkins

September 4, 2020

“Accredited Investor” Amendments: New Sample Subscription Agreement

Lynn blogged last week about the SEC’s amended “accredited investor” definition. We’re posting the avalanche of memos in our “Private Placements” Practice Area. Courtesy of the Stinson firm, we’ve also now posted a sample subscription agreement – in Word format and in a redlined PDF that shows updates for the new definition.

Eight Steps to Better Board Succession

This Heidrick & Struggles memo describes the increasingly complicated and important issue of board composition – and notes that too few boards rigorously evaluate their composition to ensure they’re meeting demands for digital & sustainability expertise and diverse experiences. If director recruitment is an ongoing process, boards are better able to plan ahead and “future-proof” the organization. They recommend these eight steps to better board succession:

1. At least annually, evaluate board composition, individual director performance, and full board effectiveness in the context of the organization’s strategic objectives and purpose.

2. Make sure a single person is accountable for that process (likely the chair of the nominating and governance committee) but that it is broadly embraced by the full board.

3. Establish benchmarks for key areas of board composition, considering peer boards or other high-performing organizations.

4. Map out the skills and experiences the board will need to meet its objectives for the next 5 to 10 years holistically, taking into consideration multiple directors moving on and off the board. Refresh and discuss these needs annually.

5. As the company’s needs change, so should the board. Board refreshment through term limits, age limits, and regular evaluations against the strategic skills matrix is key.

6. Develop new recruitment strategies that challenge long-held norms about the most useful networks for recruiting and the most important types of career experience. Search broadly. Be open minded. (Note – this is especially important given investors’ focus on diversity)

7. Build relationships now with potential future directors. Get to know them today for tomorrow’s needs.

8. Ensure the board is both inclusive and attractive to potential directors. Test your assumptions about what inclusivity means for your board.

Transcript: “CEO Succession Planning in the Crisis Era”

We’ve posted the transcript for our recent webcast: “CEO Succession Planning in the Crisis Era,” which covered these topics:

– Why succession planning should be high priority
– How to maintain a dynamic & adaptable succession plan
– Keeping track of contract & procedural requirements
– Disclosure implications
– Transition mechanics
– Steps for boards & advisors to take right now

Liz Dunshee

September 3, 2020

Whistleblower Rulemaking: Cancelled…For Now

Earlier this week, the SEC announced two pretty substantial whistleblower awards – a joint $2.5 million award and a $1.25 million award – which looked like a lead-up to yesterday’s highly anticipated open meeting, at which the Commission would consider adopting amendments to its whistleblower program. Late Tuesday, however, the SEC posted a cancellation notice for the open meeting, and while sometimes the Commission still moves forward with rule adoption in that scenario, it’s not the case this time around (at least so far).

While the rulemaking delay might be a function of holiday schedules, given the controversial nature of the proposed amendments, this WSJ article notes that it’s the second time rulemaking has been called off and speculates that the Commissioners may not have reached consensus quite yet. The article summarizes the history behind the proposed changes – here’s an excerpt:

The regulator unveiled the proposed changes in 2018. Under the whistleblower program, tipsters who provide information that leads to a successful enforcement action against a company can be eligible for an award of between 10% and 30% of the overall monetary sanction.

Whistleblower advocates have supported changes that the SEC says would make it more efficient in processing claims, including one that would allow it to ban tipsters who provide false information or make repeated, frivolous claims.

But they have mounted a vocal opposition to several other amendments, including one that would allow the SEC to downsize awards for information that leads to fines of $100 million or more, simply because of their size. The amendment would disincentivize the highest-paid Wall Street insiders from providing information, whistleblower lawyers have said.

Whistleblower advocates have also criticized new guidance that could restrict the type of information whistleblowers can be rewarded for providing, and a new rule that disqualifies tipsters who don’t submit a special form before contacting the SEC.

DOL Takes Another Crack at ESG

Earlier this week, the US Department of Labor issued this proposal – to clarify how ERISA fiduciaries should exercise their proxy voting and other shareholder rights under the statute’s “investment duties” section. In a defensive move against “ESG” voting, the proposal says that fiduciaries can’t vote any proxy unless they determine that the matter has an economic impact on the plan. And as a follow-up to the SEC’s proxy advisor rules, the proposal also outlines “permitted practices” that fiduciaries are able to follow when voting, such as applying proxy voting policies. This Stinson blog gives more background – here’s an excerpt:

The DOL is concerned that some fiduciaries and proxy advisory firms may be acting in ways that unwittingly allow plan assets to be used to support or pursue proxy proposals for environmental, social, or public policy agendas that have no connection to increasing the value of investments used for the payment of benefits or plan administrative expenses, and in fact may have unnecessarily increased plan expenses

The Department has issued sub-regulatory guidance and individual letters over the years affirming that, in voting proxies and in exercising other shareholder rights, plan fiduciaries must consider factors that may affect the value of the plan’s investment and not subordinate the interest of participants and beneficiaries in their retirement income to unrelated objectives. The Department believes, however, that aspects of the guidance and letters may have led to some confusion or misunderstandings. The proposal is designed to address those issues through a notice and comment rulemaking process that will build a public record to help the Department develop an improved investment duties regulation with the goal of ensuring plan fiduciaries execute their ERISA duties in an appropriate and cost-efficient manner when exercising shareholder rights.

According to a DOL official, the proposal would clarify Employee Retirement Income Security Act fiduciary duties for proxy voting and monitoring proxy advisory firms. In addition, the proposed rule would reduce plan expenses by giving fiduciaries clear directions to refrain from spending workers’ retirement savings to research and vote on matters that are not expected to have an economic impact on the plan.

This proposal is different than the proposed rule on “Financial Factors in Selecting Plan Investments” that the DOL issued in late June and has drawn over 1,000 comment letters – many in opposition. Both this proposal and the one from June are proposed amendments to 29 CFR 2550.404a-1. This week’s proposal states:

Both proposals include a proposed paragraph (g), but the Financial Factors in Selecting Plan Investments proposal proposes an effective date of 60 days after publication of a final rule. Depending on the publication date of the respective final rules, the Department may need to revise paragraph (g) to separately effectuate the final rules.

Reg S-K Modernization: Interplay with Form 10-K “Description of Business”

We’ve been posting a ton of memos about last week’s Reg S-K amendments – including this one from Gibson Dunn that includes perspectives on what the changes mean from a practical perspective and potential problems (as well as a summary table and blackline of the Reg S-K items). In addition, we’ve been fielding quite a few questions about the mechanics of last week’s Reg S-K amendments in our Q&A Forum – like this question about the interplay between the new rules and Item 1 of Form 10-K (#10,433):

The new rule amendments adopted by the SEC last week require disclosure of information material to an understanding of the general development of a company’s business and replace the 5-year (or 3-year for SRCs) time period specified in S-K 101(a) with a materiality standard. How is this rule change intended to apply to Form 10-Ks? There is no discussion in the proposing or the adopting release, but Form 10-K, Item 1. Business is very clear that “the discussion of the development of the registrant’s business need only include developments since the beginning of the fiscal year for which this report is filed.”

Does anyone have views on whether this was an oversight in the new rulemaking? The discussion in both the proposing and adopting releases appears to suggest that the new Item 101(a) amendments apply to all reports/registration statements subject to Item 101(a). But, there was no attempt in the rulemaking to amend the Form 10-K instruction quoted above. Therefore, based on a very plain and clear reading, the Form 10-K discussion is only required to include a discussion of the general development of the business since the beginning of the last fiscal year.

Do others agree / have other thoughts?

John responded:

That’s an interesting observation. I agree that there appears to be a disconnect between the new language of Item 101(a) and the current requirements of Item 1 of Form 10-K. In reading the adopting release, the intent of revised Item 101(a) appears to be that companies must either provide a full blown, principles based description of the development of the business that addresses the matters identified in Item 101(a)(1), to the extent material, or simply provide an update & incorporate the more complete disclosure by reference along with the link required by Item 101(a)(2). But the Form 10-K line item continues to require updating disclosure addressing only the fiscal year covered by the report, so some sort of clarification (or a revision to the 10-K line item) would be helpful.

For a fair number of companies, this issue probably isn’t going to matter very much. That’s because many companies have a practice of continuing to provide a discussion of the general development of their business over the previously required five year period in their 10-K filings, rather than just providing updating disclosure covering the most recent fiscal year. For example, check out GM’s comment letter on the rule proposal in which it objected to the proposal to permit only updating disclosure. GM’s letter noted that “this rule change would have a minimal impact on GM’s current disclosure,” and stated the company’s belief that “the entirety of this disclosure should be included in each filing.”

Liz Dunshee

September 2, 2020

Caremark: 10-K Disclosure Can Show Directors Ignored “Red Flags”

Last week, the Delaware Court of Chancery rejected a motion to dismiss in Teamsters Local 443 Health Services & Insurance Plan v. Chou – making it the latest in a string of Caremark claims that have made it past the pleadings stage. This blog from Ann Lipton explains the case – and notes that unlike other recent Caremark claims, VC Glasscock appeared to be much more cautious in finding a “failure to monitor.”

What tripped up the defendants in this case was the finding that the board had ignored red flags of illegal activity. The illegal activity involved a subsidiary that was pooling excess “overfill” medication from cancer vials into additional syringes, which led to contamination. This Troutman Pepper memo summarizes the three red flags that the plaintiffs adequately pled the board had ignored:

1. An outside law firm report had previously identified that Specialty, and by extension, Pharmacy, was not integrated into ABC’s compliance and reporting function, which according to the court, constituted a red flag that Specialty’s compliance mechanisms had substantial gaps that the audit committee had failed to follow-up on and rectify.

2. A former executive of Specialty had filed a complaint under seal in federal district court,alleging that Pharmacy’s business was essentially an illegal operation and, although ABC’s 2010 and 2011 Form 10-K disclosed the suit and was signed by ABC’s board of directors, the ABC board failed to take any remedial steps.

3. Specialty had received a subpoena from federal prosecutors which ABC believed, according to plaintiffs, related to the former Specialty executive’s action, which was subsequently disclosed in ABC’s 2012 Form 10-K, which was also signed by the ABC directors, and which was not referenced in the minutes of board or committee meetings.

The court found that it was conceivable that the board didn’t take any action to respond to the compliance report or either of the Form 10-K disclosures – therefore, the litigation is moving forward. This case highlights that directors who sign securities filings not only need to ensure that disclosure of legal proceedings & contingencies is accurate, they need to actually follow up on any concerning substance. As Troutman Pepper’s memo explains, those discussions should also be referenced in minutes:

Corporate fiduciaries and practitioners alike should be aware that corporate fiduciaries will be deemed to have knowledge of disclosures contained in filings and documents that they have executed (such as a Form 10-K). In this regard, it is especially important that directors are aware of, understand, and ask questions about what they are signing as a matter of compliance with their fiduciary duties.

In addition, Teamsters is evidence that minutes of board of directors and audit committee meetings will be heavily scrutinized in litigation. As applied in Teamsters, the absence of references to a red flag in minutes is equivalent to the board of directors or committee never having discussed the matter. Thus, counsel engaged in the representation of boards of directors and audit committees, as well as corporate officers, should be especially vigilant when drafting minutes in connection with the investigation and resolution of red flags.

Minutes should reflect that the risk or red flag was disclosed to the board or audit committee, that the board or audit committee followed-up on that risk and sought additional information, and ultimately, that the board either took at least some action to rectify that risk or red flag or determined that the risk or red flag was not necessary to further address.

NYSE’s “Direct Listings” Rule: Stayed!

Lynn blogged last week about the SEC order granting approval of the NYSE’s “direct listing” proposal for primary offerings. Yesterday, the SEC posted this letter to John Carey, Senior Director of the NYSE, to say that it had received a notice of intention to petition for review of its action under Rule 430 of the Administrative Procedure Act – which, according to this WSJ article, came from CII. Therefore, the direct listings order is stayed until the Commission orders otherwise.

This is just the latest in the ongoing back & forth on this rule change – last year, the SEC rejected the NYSE’s first attempt at a proposal only one week after it was filed.

Transcript: “Distressed M&A – Dealmaking in the New Normal”

We’ve posted the transcript for our recent webcast: “Distressed M&A – Dealmaking in the New Normal.”

Liz Dunshee