October 20, 2020

Forum Selection: ISS Policy Proposal Backs Exclusive Forum Bylaws

Last week, Liz blogged about ISS’s benchmark policy document.  In addition to the ESG & diversity policy changes that she mentioned, page 34 of the document sets forth a proposed policy under which ISS would generally endorse Delaware exclusive forum bylaws for Delaware corporations. Here’s an excerpt from Wachtell Lipton’s memo on the proposed policy:

Institutional Shareholder Services (ISS) has released its proposed 2021 voting policy updates and, for the first time, proposes expressly recognizing the benefits of Delaware choice of forum provisions for Delaware corporations and generally recommending in favor of management-sponsored proposals seeking shareholder approval of such charter or bylaw provisions. Under the new ISS policy, ISS would:

(1) generally vote for charter or bylaw provisions that specify Delaware, or the Delaware Court of Chancery, as the exclusive forum for corporate law matters for Delaware corporations, “in the absence of serious concerns about corporate governance or board responsiveness to shareholders” (and continue to decline to vote against the directors of Delaware companies who adopt such bylaw provisions “unilaterally”);

(2) continue to take a case-by-case approach with respect to votes regarding exclusive forum provisions specifying states other than Delaware; and

(3) generally vote against provisions that specify a state other than the state of incorporation as the exclusive forum for corporate law matters or a specific local court within the state (and apply withhold vote recommendations to a board’s “unilateral” adoption of such a provision).

When it comes to federal forum bylaws, ISS’s proposed policy would would generally support charter or bylaw provisions that specify “the district courts of the United States” as the exclusive forum for federal securities law matters. However, the memo notes that ISS would recommend against against provisions that limit the forum to a particular federal district court. As with ISS’s other proposed policy changes, the time period to submit comments on this proposal ends on October 26th.

Financial Reporting: About Those Covid-19 One-Time Charges. . . 

We’ve blogged quite a bit about the financial reporting issues created by the pandemic (here’s a recent one), but this WSJ article raises another one – how long can companies characterize Covid-19 related costs as “one time charges”? Here’s an excerpt:

More than six months into the pandemic, company executives say they expect to be dealing with the effects of Covid-19 for much longer than they initially anticipated. Still, some companies continue to treat virus-related costs as special, one-time items, which can give the impression that a business’s costs are lower than they actually are. This in turn can boost its non-GAAP financial results. Companies often highlight these metrics when also reporting earnings figures that comply with generally accepted accounting principles as required.

Some investors and accounting professionals suggest that after two quarters of reporting Covid-19-related costs, companies should consider treating these items as regular costs of doing business as they close the books for the third quarter and not adjust their non-GAAP earnings.

The article says that many prognosticators suggest that current conditions – and the heightened expenditures for PPE and other Covid-19 related costs – are going to continue at least until a vaccine becomes widely available. In that kind of environment, the appropriateness of continuing to back out these costs from non-GAAP numbers on the basis that they’re “one-time charges” is questionable.

Non-GAAP & KPIs: A Primer From the CAQ

The Center for Audit Quality recently published a report that supposedly deals with the role of auditors in non-GAAP financial measures and key performance indicators. Sure, there’s a section in there that addresses this topic, but most of the document is really a primer on the use of non-GAAP financial measures and KPIs. It’s pretty good too – particularly for someone who doesn’t deal with disclosure & other issues relating to these metrics on a regular basis.

John Jenkins