Monthly Archives: October 2020

October 16, 2020

Skeletons in the Closet: Companies Unprepared to Confront Their Pasts?

Now that the threat of “cancel culture” is omnipresent, many of us spend a lot of time thinking about how to prevent or respond to current missteps. But today’s blunders are only part of the risk. According to this recent survey of 50 C-suite execs, only 8% felt comfortable that their company hasn’t previously engaged in practices that would be deemed unseemly under today’s ethics or standards – that broke down into 76% knowing of problematic practices or events, and 16% being unsure. Here’s an excerpt:

Executives might know what’s included in documented corporate histories, but not about matters that were not publicized or documented. Instances that, at the time were both legal and standard practices, but are now threats both in the courts of law and public opinion may be especially difficult for executives to get their arms around. Two acute examples of such practices are companies (or predecessor companies they acquired) that: 1) once owned, insured, or used slaves as assets for collateral and 2) participated in manufacturing or other industrial practices that contributed to the climate crisis.

Forty-two percent of respondents said they thought the broader public was aware of past actions by their company that conflict with today’s ethics or standards, but just as many were unsure. That more than four in 10 respondents don’t have a good grasp of the public’s awareness of their company history means too many companies haven’t done enough work to understand their own pasts or how their pasts are perceived by the public.

You can’t change the past – and ethics standards will likely keep evolving. But you can – and should – have a plan for addressing your history. According to the survey, only 26% of execs said they were “very prepared” to respond if problematic actions came to light, so there is room for improvement. In addition, there are differences in how executives and investors are viewing these threats. Here’s more detail on that:

• C-suite executives are far more concerned about the impact of unknown past racial injustices and somewhat more concerned about sex or gender discrimination than investors, who are significantly more concerned about past support for divisive social or political causes.

• Executives are more concerned about the damage that unseemly revelations may do to their brand equity. But investors are more concerned with the potential for media and customer backlash and lower valuations.

• More than half of investors surveyed would put specific contingencies on a deal after a problematic discovery was made and one in four would require the company to respond in writing to the claims. More significantly, 29 percent of investors said they would dismiss the investment opportunity outright.

• Among investors, 32 percent said they are very or somewhat unlikely to regain confidence in a company following the revelation of a past bad action – even if the company addressed the past action in ways the investors deemed appropriate.

IPO Governance Trends: Takeover Defenses Remain Common

According to the latest survey of IPO governance trends by Davis Polk, there’s been “widespread and generally increasing adoption” of takeover defenses at both controlled and non-controlled companies in advance of IPOs – even as seasoned public companies have been abandoning the same defenses due to shareholder pressure. The survey looked at the Top 46 “controlled company” IPOs and the Top 50 “non-controlled company” IPOs by deal size from April 1, 2018 through July 10, 2020. Here are some other findings:

Exclusive Forum Provisions: The number of both controlled and non-controlled companies that adopted exclusive forum provisions (another governance attribute disfavored by some shareholder advocates) during the current survey period continued to grow from past survey periods. In the current survey, 91% of controlled companies and 98% of non-controlled companies adopted exclusive-forum provisions. These included both exclusive forum provisions addressing claims under the Securities Act of 1933 (the “’33 Act”) and exclusive forum provisions addressing other claims against the company. This is a substantial increase from the 14% and 26% of controlled and non-controlled companies, respectively,that adopted such provisions in our 2014 survey.

Direct Listings: When we compared the one comparable direct listing during the current survey period (Slack Technologies, Inc.) to the non-controlled companies, we found similar governance provisions. Slack’s takeover defenses were identical to the vast majority of non-controlled companies, including a staggered board, prohibitions on shareholder action by written consent, shareholder ability to call a special meeting, the requirement of a super majority to amend the bylaws and plurality voting for uncontested director elections.

Dual-Class Shares: Over 25% of controlled companies, and 28% of non-controlled companies, had a class of shares with unequal voting rights.

Shareholder Written Consent: 9% of controlled companies and 12% of non-controlled companies permitted shareholder action by written consent. We’ve blogged on The Proxy Season Blog about how this is becoming a “hot topic.”

Check out the full 60-page survey for info on board & committee structure, advance notice bylaws, board & shareholder rights, equity awards, employment agreements, and more.

Direct Listings: CII Urges SEC to Deny Nasdaq Proposal

Last week, the CII sent this letter in response to the SEC’s request for comments on Nasdaq’s “primary direct listings” proposal. In line with the points raised in its September petition to stay the NYSE’s similar proposal, the Council urged the Commission to disapprove the proposal for two reasons:

1. It would compound problems shareholders face in tracing their share purchases to a registration statement (i.e., “proxy plumbing” issues)

2. It may lead to a decline in effective governance at public companies, by allowing companies to sidestep IPO governance checks (the letter looks at Palantir’s recent deal as an example)

Liz Dunshee

October 15, 2020

Virtual Shareholder Meetings: Broadridge Mid-Year Stats

These mid-year stats from Broadridge show what a watershed year it’s been for virtual shareholder meetings. Here’s some highlights:

– 1,494 VSMs hosted on Broadridge technology – 98% of those were virtual-only

– Average meeting attendance was 30 for small-caps, 37 for mid-caps and 122 for large-caps – higher if a shareholder proposal was being presented

– When it came to shareholder questions, 97% allowed live questions, 11% allowed pre-meeting questions, 5 questions were asked on average and one company somehow fielded 316

– Average duration was 34 minutes if a shareholder proposal was presented and 18 minutes if not

Check out this Skadden memo and other resources in our “Virtual Shareholder Meetings” Practice Area as you plan for the possibility of another virtual shareholder meeting in 2021. And don’t forget to tune into our October 29th webcast with CII’s Amy Borrus, Doug Chia of Soundboard Governance, Dorothy Flynn of Broadridge, Independent Inspector of Election Carl Hagberg and Bristol-Myers Squibb’s Kate Kelly to hear what you should be doing right now to prepare.

ISS Proposes Diversity and E&S Policy Changes: Comment By October 26th!

Yesterday, ISS announced a public comment period for proposed policy changes that would apply to annual meetings taking place on or after February 1, 2021. For the US, the proposed changes include:

Board Diversity, Race and Ethnicity: Beginning in 2022, at companies where there are no identified racial or ethnically-diverse board members, the proposed ISS U.S. policy will be to recommend voting against the chair of the nominating committee (or other relevant directors on a case-by-case basis). Mitigating factors will be considered and the proposed coverage universe is all companies in the Russell 3000 and S&P 1500 indexes.

Director Accountability: ISS policies globally will explicitly note that significant risk oversight failures related to environmental and social concerns may, on a case-by-case basis, trigger vote recommendations against board members.

Shareholder Litigation Rights: ISS proposes modifications in the U.S. policy regarding management proposals to establish exclusive forums.

Submit comments to by 5 pm Eastern Time on Monday, October 26th. Unless otherwise specified in writing, all comments will be disclosed publicly upon release of final policies – which is expected during the first half of November.

COVID-19: Audit Committee Questions for the “New Normal”

COVID-19 disclosures remain a top area of focus for audit committees, according to this KPMG survey. Specifically, the uncertainty caused by the pandemic – along with expectations for companies to deliver forward-looking information and analysis – are leading to substantial discussion on disclosures about the pandemic’s effect on business, the preparation of forward-looking cash flow estimates, impairments, use of non-GAAP financial metrics and other topics.

This Deloitte memo suggests questions that audit committees should ask to ensure that disclosure is accurate and transparent. Here are a few:

– Is data from the 2008 financial crisis being used to benchmark the timing and pattern of recovery from the current pandemic? Has management carefully considered the differences between the two economic periods?

– What “new normal” conditions or future trends are included in the forecast assumptions?

– In considering the use of non-GAAP measures, has the company considered what costs might be part of the “new normal” and how certain non-GAAP adjustments may impact comparability in the future?

– Has the company reassessed its volatility assumption when valuing new stock awards in light recent market volatility?

– Has the company modified any significant contracts, particularly contracts with customers and leases?

Both memos note that audit committees are also focusing on reassessing or changing internal controls due to return-to-work plans, virtual working and cybersecurity – and that internal auditors are adjusting audit plans and activities to identify emerging risks posed by the pandemic. The KPMG survey says that audit committee members also indicated that they expect employee safety and diversity issues, as well as supply chain resilience and corporate reputation, to get significantly more attention from the board as a result of COVID-19 and recent protests against systemic racism.

Liz Dunshee

October 14, 2020

D&O Questionnaires: Few Changes for 2021 Proxy Season

This Stinson blog highlights things to think about for the upcoming proxy season – meeting format, issuer status, recent SEC guidance, and other developments. Here’s an excerpt explaining that very few changes will be needed to D&O questionnaires:

As noted in previous years, the Tax Cuts and Jobs Act eliminated the exception to IRC §162(m) for performance-based compensation, subject to a transition rule. We continue to urge caution in eliminating questions in directors’ and officers’ questionnaires related to §162(m) for compensation committee members unless it is clear the compensation committee is not required to administer any compensation arrangements under the transition rule. The same can be said for eliminating references to §162(m) in compensation committee charters.

In February 2020, the SEC approved a Nasdaq proposal to amend the definition of “Family Member” used in its corporate governance rules, which is incorporated into the definition of “Independent Director.” The definition will no longer include step-children and will include a carve out for domestic employees who share a director’s home. The issuer’s board must still affirmatively determine that no relationship exists that would interfere with a director’s ability to exercise independent judgment.

As Lynn recently blogged, companies may want to consider adding a “demographics” question in order to gather diversity info – but undertaking that kind of addition is less straightforward than it might seem at first blush. This Dorsey blog offers a sample question.

Misleading Disclosures: SEC Enforcement is Watching…Everything

Enforcement Division Director Stephanie Avakian recently gave this speech to recap actions over the past 3 years (also see the speech from SEC Chair Jay Clayton) – the walk down memory lane touched on these headline-grabbing allegations:

– Fraudulent accounting practices intended to misrepresent a company’s underlying financial condition, as in the Commission’s actions against Theranos, Hertz, and Penn West and their former executives

– Intentionally distorted non-GAAP metrics and key performance indicators, as in the Commission’s actions against Wells Fargo, Fiat Chrysler, Valeant, and Walgreens

– Misrepresentations or omissions in connection with risk factors, as in the Commission’s actions against Facebook and Mylan

– Materially misleading and incomplete disclosures, as in the Commission’s actions against Nissan and Volkswagen and their former executives

Stephanie acknowledged that the Division’s focus on financial fraud isn’t new – but she emphasized the expansion of the types of info that Enforcement is tracking. If her remarks had a theme song, it would be Rockwell’s “Somebody’s Watching Me” – and it’s a reminder to companies to watch all forms of disclosure. Here’s an excerpt:

Our focus on financial fraud and issuer disclosure cases resulted in some significant changes in how we approach identifying and investigating potential misconduct. Our proactive efforts to identify cases has employed a variety of research, approaches, internal and external tools, and other information sets. We routinely look at all public information about an issuer – statements made by a company or its officers, in filings, during investor presentations, in tweets or blog posts; related commentary by others including analysts, shorts, competitors, shareholders – to develop a deep understanding of the company’s reporting environment and industry. This is not a low cost investment, but it has provided substantial value in identifying potential financial fraud.

Further, in appropriate cases, we are employing strategies to streamline these investigations in an effort to substantially accelerate the pace of our investigations. This has come through a purposeful effort by our investigative teams to efficiently triage issues, increase staffing, make more targeted requests at the outset, substantively engage early with relevant parties, and leverage cooperation. We have already seen some success in our acceleration efforts and expect to see those successes continue in the near and long term.

This recap actually occurred before the flurry of enforcement activity that we saw a couple of weeks ago – so you can add those settlements to the tally. Also see this Davis Polk memo – noting that the speech signaled that the SEC may seek increased penalties in future insider trading cases, rather than disgorgement.

Corporate Governance: The “Acronym” Challenge

I love a good quiz – and this acronym challenge from Soundboard Governance is a fun one. Can you decipher the 40 selections from the corporate governance field’s “alphabet soup”? I got over 30 and called it a win.

Liz Dunshee

October 13, 2020

More on “Reg S-K ‘Modernization’ Amendments Published in Federal Register!”

Lynn blogged last week that the SEC’s amendments to modernize Items 101, 103 and 105 of Regulation S-K have now been published in the Federal Register. The effective date of the rules is Monday, November 9th – and in practice, that probably means that you need to comply for any filings made after 5:30 pm ET on Friday, November 6th, since those filings will have a Monday filing date. If you haven’t done so already, take a look at last year’s filing dates for your clients/your company to get a handle on exactly when you’ll need to incorporate these new requirements.

There’s been more back & forth in our Q&A Forum about the new rules (see Topic #10,435) – thanks to Bass Berry’s Jay Knight and Goodwin’s John Newell for keeping the conversation going. Jay noted that the Staff has informally said that early compliance with the modernization rules is not permitted, and shared that for Form 10-Ks filed after the effective date that contain more than 15 pages of risk factors, it may be acceptable to have the “forward-looking statement” section also serve as a risk factor summary, if it otherwise satisfies the requirements of Item 105. Many companies will try to keep their risk factors below 15 pages, in order to avoid that requirement altogether. Remember that our Q&A Forum is a good place to exchange ideas and ask questions about topics like this.

The SEC’s amendments to the definitions of “accredited investor” and “QIB” were also published in the Federal Register last week – those rules will go effective on December 8th.

Insider Trading: Pre-Clearance Duration

We recently received the following question from a member on our Q&A Forum (Topic #10,422):

How long does your pre-clearance last for execs?

A couple of members responded:

– At our company, it’s 2-3 days usually, they can request longer and we’ll revisit and extend after the first one expires.

– Our company is pretty conservative on compliance issues like this – but our pre-clearance just lasts for 24 hours.

I noted that our model insider trading policy – which is included in our “Insider Trading Policies” Handbook – suggests 5 business days as the amount of time that pre-clearance lasts, but it varies based on the company’s compliance culture and how common it is for there to be material non-public information that would affect the company’s stock. Periods of 24 hours or 2-3 days are both reasonable as well.

Pre-Clearance Duration: What’s Your Policy?

Please participate in this anonymous poll:


Liz Dunshee

October 9, 2020

Next Friday: A Celebration of Marty Dunn’s Life

On June 15, 2020, we lost a valued friend, counselor, mentor, colleague, and legend of the securities bar when Marty Dunn was taken from us far too soon. Many people have expressed an interest in participating in a celebration of Marty’s life. Given the limitations on physical gatherings, a virtual celebration of Marty’s life will be held on Friday, October 16, 2020 at noon eastern time via Zoom. Speakers will share their memories of Marty, followed by an opportunity for the participants to pay their respects.

Please feel free to share this invitation, and we look forward to seeing you at the event. We ask that you not post information about how to access the meeting on social media or other public channels so that only those who wish to honor Marty will attend the event.

Please let Lillian Brown (, Keir Gumbs (, Scott Lesmes ( or David Lynn ( know if you are interested in attending and one of them will send you more information about the event.

If you would like to make a donation in honor of Marty’s memory, his family has asked that you support The Bail Project. More information about The Bail Project can be found at

Insider Trading Enforcement: Effect of Supreme Court’s Liu Decision

Last summer, the U.S. Supreme Court’s decision in Liu v. SEC reaffirmed the SEC’s authority to seek disgorgement as an equitable remedy in enforcement actions. But, the Court placed limits on that authority. The Court’s decision said that courts must deduct “legitimate expenses” from disgorgement awards and an award must be distributed to the victims. Several questions were left open by the decision and this Davis Polk memo discusses the possible effect of Liu on insider trading cases when victims aren’t easy to identify and such distribution is basically infeasible.

The memo says it will take time before we fully understand the consequences of Liu but there are indications that when distribution of disgorgement awards is infeasible, the SEC may choose to forgo disgorgement and instead seek greater penalties:

The memo notes a recent speech by Director of Enforcement Stephanie Avakian in which she suggested the SEC might compensate for potential limitations on its disgorgement authority by seeking increased penalties.

Also, in recent weeks, the SEC has settled several insider trading cases without obtaining any disgorgement and, instead, imposed a penalty equivalent to two-times the wrongful gains/losses avoided. The SEC has taken this approach in both district court actions and administrative proceedings, even though the holding in Liu concerned only district court actions. We note, however, that the SEC is still seeking disgorgement in some insider trading actions filed post-Liu, most notably in U.S. v. Bohra, a district court action in which the SEC is seeking disgorgement of ill-gotten gains and civil penalties in a case concerning alleged trading in advance of earnings releases.

Convertible Debt Deal Trends: Deal Size Ticks Up in Q2

This Fenwick survey reviews terms of 100 convertible debt deals last year – it covers first-money and early- and late-stage bridge deals. The report covers the 15-month period, January 2019 – March 2020, and it also includes a comparison to Q2 2020 as an addendum. Here’s some of the high-lights:

– Compared to the prior year, deal size is down overall from $1.62 million to $1.58 million, although late stage deals are an exception

– Conversion discounts continue to be used frequently, even in late-stage debt issuances. Pairing conversion discounts with valuation caps are common in first-money issuance and less so in later-stage deals

– Only 12% of deals used a valuation cap as a standalone provision in the absence of a conversion discount

– In change-of-control situations, such as the sale of the company, most deals provide for a premium payout that’s a multiple on top of the repayment of the principal balance. When compared to last year, despite a decline in the number of deals giving a premium, the low end of the premium spectrum increased from 10% to 20%

– Data from Q2 2020 stood out compared to the prior period with noticeable skewing toward larger, later-stage deals. For Q2 2020 deals, interest rates were slightly higher, more deals used conversion discounts and less used valuation caps. In change-of-control situations, fewer of the Q2 2020 deals provided for a premium but more deals had an option to convert on a change-in-control

– Lynn Jokela

October 8, 2020

SEC Proposes Conditional Exemption for “Finders” Involved in Capital Raising

More than three years after the SEC’s Advisory Committee on Small and Emerging Companies issued a recommendation, the SEC voted 3-2 to propose a conditional exemption from the broker registration requirements of Section 15(a) of the Exchange Act for “finders.” The proposed exemption would permit “finders” to engage in certain capital raising activities involving accredited investors and is intended to provide clarity to smaller businesses and their investors, and “finders” who assist them in raising capital. Under the proposed exemption, “finders” would be classified in two tiers with conditions tailored to the scope of their respective activities. Here’s the proposing release. This excerpt from the SEC’s press release summarizes the two classes of finders – see the complete press release for a summary of the applicable conditions:

Tier I Finders

A Tier I Finder would be limited to providing contact information of potential investors in connection with only a single capital raising transaction by a single issuer in a 12 month period. A Tier I Finder could not have any contact with a potential investor about the issuer.

Tier II Finders

A Tier II Finder could solicit investors on behalf of an issuer, but the solicitation-related activities would be limited to: (i) identifying, screening, and contacting potential investors; (ii) distributing issuer offering materials to investors; (iii) discussing issuer information included in any offering materials, provided that the Tier II Finder does not provide advice as to the valuation or advisability of the investment; and (iv) arranging or participating in meetings with the issuer and investor.

For additional information, the Office of the Advocate for Small Business Capital Formation posted a video and a chart showing a comparison of some of the permissible activities, requirements and limitations for Tier I Finders, Tier II Finders, and registered brokers. The proposal is subject to a 30-day comment period.

Over the years, many small companies needing capital have found it difficult to determine when it’s appropriate to engage “finders.” In her statement in support of the proposal, Commissioner Hester M. Peirce found a way to acknowledge Eddie Van Halen’s “ebullient guitar-playing” by thanking Chairman Jay Clayton, the Division of Trading and Markets and others “for recognizing that the make-up-your-own-path approach works better for rock ‘n’ roll than it does for finders” – describing the current approach for finders as being ad-hoc and based on gut-feeling and guideposts gleaned from no-action letters and enforcement actions. Commissioner Peirce said the proposal provides a framework for finders and questioned whether the scope of the proposal should be expanded to secondary offerings.

Commissioners Allison Herren Lee and Caroline A. Crenshaw each issued dissenting statements criticizing the proposal for a lack of empirical support and investor protection concerns. In her statement, Commissioner Lee said she could have supported a rulemaking process that proposed a scaled registration format that required some form of record keeping and examination authority. Commissioner Lee continued by saying the proposal relies too much on the continued applicability of antifraud provisions as comfort for investor protections.

California Board Diversity Mandate Faces Legal Challenge

A couple of months ago, I blogged about California Assembly Bill (AB) 979 that would require public companies headquartered in California to include directors from “underrepresented communities” on their boards. California’s Governor Gavin Newsom signed it into law last week and it’s quickly been challenged in court. This Judicial Watch press release says that the group filed a lawsuit challenging the enforceability of AB 979. Cydney Posner’s blog provides a good overview of the lawsuit and notes that it’s patterned after the lawsuit challenging California’s board gender diversity law, SB 826:

Framed as a “taxpayer suit” much like Crest v. Padilla I, the litigation seeks to enjoin Alex Padilla, the California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law’s mandate is an unconstitutional quota and violates the California constitution.

The complaint requests entry of a judgment declaring any expenditures of taxpayer funds to implement or enforce AB 979 to be illegal and issuance of an injunction permanently prohibiting the Secretary from expending taxpayer funds to enforce or implement the provisions of the legislation. Presumably, California will file an answer contesting these claims; however, unless and until a court issues the requested injunction, the law will go into effect.

This Wilson Sonsini blog outlines the law and discusses potential reporting obligations. The blog suggests companies subject to the law start planning for compliance. For companies that don’t already have director diversity data, the blog says they may want to consider adding a question to their annual director and officer questionnaire to solicit the information. Not too long ago, I blogged about the quest for director diversity information and included one sample D&O question for consideration – and, this Dorsey blog includes another sample question.

Reg S-K “Modernization” Amendments Published in Federal Register Today!

Ever since the SEC adopted amendments to modernize Items 101, 103 and 105 of Regulation S-K in August, many have been watching – and waiting – for publication of the final amendments in the Federal Register. Thank you to John Newell of Goodwin Procter for posting this response in our Q&A Forum yesterday to questions about publication and the effective date of the amendments:

According to the Federal Register website, the amendments will be published on October 8, 2020. Thirty days results in an effective date of Saturday, November 7th.

That means that Form 10-Q reports and other filings submitted after 5:30 p.m. Eastern time on Friday, November 6th must comply with the amendments to Items 101, 103 and 105, to the extent applicable. Note that the EDGAR filing window for a same-day filing stamp closes at 5:30 p.m. Eastern time. The next filing day is Monday, November 9th, so filings made after the window closes but before 10 p.m. should comply with the amendments.

John followed up to say that already this morning, the rules have been posted. They provide for an effective date of Monday, November 9th, but that doesn’t change the fact that you’ll need to comply for anything filed after 5:30 p.m. Eastern Time on November 6th.

– Lynn Jokela

October 7, 2020

“Fishy” Comment Letters, Not So “Fishy” After All

Late last year, some may recall when reports started surfacing of allegedly “fishy” comment letters submitted to the SEC ahead of the agency’s proxy advisor rulemaking. The Office of Inspector General recently issued a statement summarizing its investigation and concludes there was no wrongdoing. Here’s an excerpt:

Each person interviewed stated they willingly submitted a letter to the SEC and did not receive any compensation or benefit from anyone for doing so. Further, the investigation determined that an advocacy association for seniors solicited its members, current and former employees, and friends of the association’s employees to submit comment letters in response to proxy rulemaking proposals. The investigation also determined that a public affairs company working on behalf of another advocacy group solicited individuals to submit letters to the SEC about the proposed rule change. The investigation did not identify any author who did not in fact submit a letter to the SEC or who disagreed with the content in the letter they submitted to the SEC.

The reports of the alleged fake-comment letters caught the attention of a lot of people. Back in July, Senator Chris Van Hollen (D-Md.) inquired about the letters but things were fairly quiet until the OIG issued its statement. The OIG’s statement says it has closed the investigation and that no evidence was found to indicate any criminal violation.

Circle the Wagons: Create Assurance Around ESG Data

We’ve blogged before about the importance of oversight and disclosure controls related to sustainability disclosures.  Just last week, John blogged about CII’s statement calling for use of standard reporting metrics, which also said over time, companies should obtain external assurance of sustainability disclosures. This follows a 2019 McKinsey survey that found 97% of investors surveyed said sustainability reports should be audited and 67% said those audits should be as rigorous as financial audits. A recent EY survey of nearly 300 institutional investors reiterates the importance of the disclosures coupled with the credibility of the information.  According to EY’s report, investors are stepping up their game in terms of assessing company performance using non-financial factors.  High-level data points from EY’s report include:

Overall, 98% of investors surveyed evaluate non-financial performance based on corporate disclosures, with 72% saying they conduct a structured, methodical evaluation. This is a major leap forward from the 32% who said they used a structured approach in 2018.

Investors are also building their understanding of the ESG reporting universe, factoring in disclosures made as part of the Task Force on Climate-related Financial Disclosures (TCFD) framework. In fact, this research found strong evidence that investors see the TCFD framework as a valuable approach for wider non-financial disclosures, beyond climate-related information.

The research found investors have a significant appetite for an independent lens on ESG performance. For example, 75% said they would find value in assurance of the robustness of an organization’s planning for climate risks.

The report offers three suggestions to help companies meet investor expectations:

(1) Build a stronger connection between non-financial and financial performance. Investors can focus on building more credible and nuanced approaches to understanding what influences long-term value for certain sectors and companies, while companies themselves can focus more on their materiality — reporting on what environmental, social and economic factors are most relevant to their stakeholders and could impact their ability to create value over the longer term.

(2) Build a more robust approach to analyzing the risks and opportunities from climate change and the transition to a decarbonized future, and communicate this more comprehensively through TCFD reporting. Critical actions range from understanding the resilience of business strategies and assets under a range of possible climate scenarios, to assessing avenues for capitalizing on the economic opportunities of a decarbonized future – including attracting and accessing capital.

(3) Instill discipline into non-financial reporting processes and controls to build confidence and trust. Establishing effective governance practices and seeking independent assurance of non-financial processes, controls and data outputs can help build trust and transparency with investors. This is an area where CFOs and their finance teams — which have extensive experience in establishing processes, controls and assurance of financial information — can bring their best practices and experience to bear. The input of CROs and risk teams can also be valuable, as can treasury function input when green finance is involved.

Tomorrow’s Webcast: “CFIUS After FIRRMA: Navigating the New Regime”

Tune in tomorrow for the webcast – “CFIUS After FIRRMA: Navigating the New Regime” – to hear Wilson Sonsini’s Stephen Heifetz and Hogan Lovells’ Anne Salladin discuss how to deal with the enhanced national security review environment resulting from implementation of 2019’s Foreign Investment Risk Review Modernization Act.

– Lynn Jokela

October 6, 2020

Director Survey: Room for Improvement with Board Refreshment

PwC issued its annual survey of nearly 700 U.S. directors. The survey covers a lot of ground and identifies several areas of opportunity for boards, including those relating to crisis management and board refreshment. Despite identifying problem areas, the survey’s introduction says the pandemic offers an opportunity for boards to leverage the crisis to create change in terms of board practices, diversity & inclusion efforts and company strategies and priorities. Here’s the key findings:

– Even though directors gave management high marks on Covid-19 response, including supply chain interruptions, only 37% of directors say their board fully understands the company’s crisis management plan – PwC suggests boards leverage their companies’ experiences to date in 2020 to look back and evaluate what worked, what didn’t and what needs to improve so they’re prepared for the next chapter

– 84% of directors agree that companies should be doing more to promote gender and racial diversity in the workplace but only 39% support including D&I goals in company pay plans

– 67% of directors say issues like climate change should be considered when developing company strategy – up from 54% last year – but only 38% say ESG issues have a financial impact on the company

In terms of board refreshment, directors support it but also say boards aren’t doing a good job with it:

– 49% of directors say at least one board member should be replaced

– Only 49% say a board succession plan is shared with the full board

– 10% say their board doesn’t have a succession plan at all

– Directors cited board leadership’s unwillingness to have difficult conversations with underperforming directors and an ineffective process for director assessments most frequently as potential barriers to board refreshment

As more investors signal increased focus on board composition this coming proxy season, check out our “Board & Director Evaluations” Practice Area for checklists and current sample disclosures. Board succession is a frequent blog topic – here’s an entry outlining steps for better board succession and Liz recently blogged on “The Mentor Blog” about emerging trends for board evaluations.

CCPA Data Breach Lawsuits Underway

Many have been warning of a potential coming wave of litigation resulting from California’s Consumer Privacy Act because the CCPA gives data breach victims a right to bring a lawsuit against a company as a result of the breach and the company’s failure to implement “reasonable security measures.” A Mintz blog from earlier this summer also warns companies of potential trouble spots ahead while reporting of a CCPA class action lawsuit brought against an online stationery and craft company for a data breach. The company disclosed the data breach in May and the lawsuit alleges that the company failed to implement “reasonable security measures” to protect certain personal information. The blog says that over 73 million records were apparently stolen in the breach, which included passwords, names and other information. Given the volume of records that were breached, the blog notes potential severe penalties for the company:

The CCPA applies to many companies doing business in California, if they meet certain thresholds. If the company subject to the CCPA fails to implement “reasonable security measures,” and a data breach subsequently results, the victims of the data breach that are California residents can file a class action and seek significant statutory penalties, ranging from $100 to $750 per every single violation. In a breach involving 73.2 million records, these penalties quickly escalate to “bet the company” damages, if a large percentage of the putative class plaintiffs reside in California and can claim CCPA penalties.

The blog says we should anticipate a steady increase in the number of CCPA data breach class actions in the coming year – this Compliance Week article reports of a similar case involving Walmart. For the latest memos to help understand the final CCPA regulations and compliance requirements, check out our “Cybersecurity” Practice Area.

September-October Issue of “The Corporate Counsel”

The September-October issue of “The Corporate Counsel” print newsletter was just posted – and also sent to the printer (try a no-risk trial). The topics include:

– SEC Engages in a Flurry of Rulemaking

– Regulation FD Turns 20: Our Take

– Something to Look Forward to in 2021: Less Non-Issuer Financial Information

– Lynn Jokela

October 5, 2020

Valentine’s Day Trip Flagged in SEC Enforcement Action

Last week, the SEC announced several enforcement actions as it wrapped up its fiscal year – here’s John’s blog about an alleged MD&A “Known Trends” violation. Earlier though, another SEC enforcement settlement slipped under the radar – in which the SEC alleged that a Nasdaq-traded company in the business of “live-adult entertainment clubs” and “military-themed Bombshells restaurants” failed to disclose a variety of perks and related party transactions and that a former director failed to disclose personal bankruptcies.

With the mix of allegations, the action provides a good case study on disclosure controls & procedures – and the SEC Enforcement folks took care to lay out in striking tables the value of perks allegedly received by execs versus what the company had disclosed in its proxy statements, including a Valentine’s Day trip by the CEO’s girlfriend to meet him when he was away on business. The press release summarizes the actions, and the 11-page order provides more color:

From FY 2014 through FY 2019, RCI failed to disclose a total of $615,000 in executive compensation in the form of perquisites. According to the order, these undisclosed perquisites included the cost of the personal use of the company’s aircraft and company provided vehicles, reimbursement for personal airline flights, charitable corporate contributions to the school two of the CEO’s children attended, and housing costs and a meals allowance for the CFO. In addition, the order finds that RCI failed to disclose related party transactions involving the CEO’s father and brother and a director’s brother. The order further finds that RCI failed to keep books and records that allowed it to report, and lacked sufficient internal controls concerning, these executive perquisites and related party transactions.

The former director served on the company’s audit committee and had filed two personal federal bankruptcy petitions that he failed to disclose to the company. The order involving the former director states that he also served as the audit committee financial expert and that he didn’t disclose the bankruptcy filings due to embarrassment and he didn’t want to embarrass the company. Once the company learned of the bankruptcy filings, the company asked him to step down from the board.

Without admitting or denying the SEC’s findings, RCI, the CEO and CFO consented to a cease & desist order and agreed to pay civil penalties in the amounts of $400,000, $200,000, and $35,000, respectively. With regard to the former director, he also consented to a cease-and-desist order and to pay a $30,000 civil penalty. The former director further agreed to be suspended from appearing or practicing before the SEC as an accountant, with the right to apply for reinstatement after three years.

These cases provide a good synopsis of how important it is to have internal controls and checks & balances in place. The SEC’s order sheds light on RCI’s internal control issues – for instance, the company identified personal use of company aircraft as a tax issue by reporting income on the executives’ W-2 forms but then didn’t disclose the value of personal aircraft use in the company’s SEC filings. In another instance, the company didn’t properly account for the full value of automobile perquisites because the value disclosed only included depreciation amounts as incremental costs and didn’t include other costs such as fuel, maintenance, registration and insurance. And as this excerpt shows, the company took the inadvisable approach of relying on personal judgment when it came to reimbursement requests:

The company did not have internal controls or policies and procedures concerning expense reimbursement requests approvals because management never got down to that specific detail. In the absence of expense reimbursement controls, persons approving reimbursement requests would use their “judgment,” resulting in undisclosed compensation to officers.

As employees move into new roles or assume new responsibilities, it’s a good idea to periodically revisit internal controls and policies to make sure everyone is on the same page and correctly following procedures. To help, check out the 2021 Edition of Lynn & Borges’ “Executive Compensation Disclosure Treatise,” our checklists about travel & expense policies, resources available on and our “Related Party Transactions Disclosure” handbook available on this site. And, questions about perks and related party transactions come up frequently on our Q&A forum and the Q&A forum – you can search previous posts or post a question anonymously!

Another Perks Enforcement Action!

Here’s an entry I blogged about last week on The SEC’s Division of Enforcement announced another perquisites enforcement action.  The latest action involves Hilton Worldwide Holdings and is the second third perks-related enforcement action in just the last few months.  We list perks cases in our “Perks” Practice Area and you can see they aren’t too frequent – so to see two three in just the last few months is surprising.

The SEC’s order provides some of the details and says the company failed to disclose $1.7 million worth of travel-related benefits to its CEO and NEOs.

Items that Hilton incorrectly viewed as business expenses and paid for on behalf of its Named Executive Officers, but did not disclose, include, in the case of the CEO, expenses associated with personal use of corporate aircraft, and in the case of Named Executive Officers, expenses associated with hotel stays, as well as taxes related to such items.  As a result, Hilton understated “All Other Compensation” portion of its Named Executive Officers’ compensation by an annual average of approximately $425,000 in the company’s 2016 – 2019 proxy statements.

According to the SEC’s order, Hilton’s system for identifying, tracking and calculating perquisites incorrectly applied a standard whereby a business purpose would be sufficient to determine that certain items were not perquisites or personal benefits that required disclosure.

The SEC’s order acknowledges that Hilton took prompt remedial acts and cooperated with the Commission:

Among other things, the order says after receipt of a written document and information request from the Commission staff, Hilton conducted an internal review of its perquisite disclosures and its system for identifying, tracking and calculating perquisites. On April 24, 2020, Hilton filed a definitive proxy statement, which, among other things, provided revised disclosures regarding perquisites and personal benefits provided to its CEO in 2017 and 2018 and to other Named Executive Officers for the same time period.

Without admitting or denying the SEC’s findings, Hilton consented to the SEC’s cease-and-desist order, which requires Hilton to pay a $600,000 civil penalty.

Perks can be tricky – to help guard against this type of action, we have a 102-page chapter on Perks & Other Personal Benefits as part of Lynn & Borges’ “Executive Compensation Disclosure Treatise” posted on Also, if you missed the perks session at our “2020 Proxy Disclosure” and “17th Annual Executive Compensation” conferences, you can access the video archives or if you didn’t register to attend, you can register now to watch any and all sessions.

Transcript: “Non-GAAP Measures & Metrics: Where Are We Now?”

We’ve posted the transcript for our recent webcast: “Non-GAAP Measures & Metrics: Where Are We Now?” – it covered these topics:

– Background to SEC’s 2020 MD&A Guidance

– Operating Metrics vs. Non-GAAP Financial Measures

– Presenting the Impact of COVID-19: Acceptable & Unacceptable Adjustments

– Issues of Frequent Staff Comment

– Fine-Tuning Disclosure Controls & Procedures

– What To Do Now

– Lynn Jokela

October 2, 2020

SEC Open Meeting: “Finders” On the Agenda for Next Wednesday

Yesterday, the SEC scheduled an open meeting for Wednesday, October 7th. The topic is one that’s likely to be of interest to anyone involved with small cap companies – a proposal to provide some relief from broker-dealer registration for “finders” involved in capital raising. Here’s an excerpt from the Sunshine Act notice:

The Commission will consider whether to issue a Notice, proposing to grant a conditional exemption, pursuant to Sections 15(a)(2) and 36(a)(1) of the Securities Exchange Act of 1934 (“Exchange Act”), from the broker registration requirements of Section 15(a) of the Exchange Act to permit natural persons to engage in certain limited activities on behalf of issuers, subject to conditions. The Commission would solicit comment on the proposed exemption, which seeks to assist small businesses in raising capital and provide regulatory clarity.

Specifically, observers have noted that small businesses frequently encounter challenges connecting with investors in the exempt market, particularly in regions that lack robust capital raising networks. So-called “finders,” who may identify and in certain circumstances solicit potential investors, often play an important and discrete role in bridging the gap between small businesses that need capital and investors who are interested in supporting emerging enterprises.

The securities laws don’t define the term “finder,” and the SEC’s guidance on distinguishing between a finder and a person who should be registered as a broker-dealer has been provided informally, through various no-action letters and other guidance. Action by the SEC in this area would finally address one of the key recommendations in the final report that the SEC’s Advisory Committee on Small and Emerging Companies issued more than three years ago. As noted in that report, the SEC’s current approach has resulted in “significant uncertainty” in the marketplace about what activities a finder may engage in without registering under the Exchange Act as a broker-dealer.

Some sort of formal relief for finders would also come as welcome news for many small companies that need capital, but whose financings aren’t large enough to attract interest from traditional investment banks.  Finders address this market need, but the ground rules under which they may lawfully assist a company in raising capital are both restrictive and opaque. As the Advisory Committee’s final report observed, this has put companies seeking to comply with the rules in a situation where they “find it hard to determine under what circumstances they can engage a “finder” or online platform that is not registered as a broker-dealer.”

Stock Exchanges: Long-Term Stock Exchange Debuts

We’ve previously blogged about efforts to get the LTSE off the ground – and earlier this month, they culminated with the official opening of the exchange. Here’s an excerpt from the LTSE’s press release announcing its debut:

The Long-Term Stock Exchange (LTSE), the only national securities exchange built to serve companies and investors who share a long-term vision, has opened for business. The exchange went live on Wednesday with the trading of all U.S. exchange-listed securities and a mission to offer companies in every industry a public-market option designed to sustain long-term growth. To list their shares on the exchange, companies are required to publish and maintain a series of policies that are designed to provide shareholders and other stakeholders with insight into their long-term strategies, practices, plans and measures.

The policies are based on five underlying principles, which hold that long term-focused companies consider a broad group of stakeholders, measure success in years and decades, align compensation of executives and directors with long-term performance, engage directors in long-term strategy (and grant them explicit oversight of this strategy), and engage long-term shareholders.

This Davis Polk blog has additional information on the LTSE, including the fact although no companies are yet listed on the exchange, it “allows shares of companies, regardless of whether they are listed on the LTSE or another exchange, to trade simultaneously and in real time across all U.S. exchanges, alternative trading systems and platforms operated by securities dealers.”

This market status information from the NYSE suggests that the LTSE has gotten off to a bit of a bumpy start when it comes to its trading activities, but this PitchBook article highlights the exchange’s big plans to develop an alternative market for IPO companies.

Peak SPAC? Playboy Enterprises to Go Public Through Reverse Merger

When I was in college, I won a raffle in which my prize was a “key” to the luxurious Buffalo Playboy Club. Quite a score, eh? I’m a big fan of Buffalo, but I must admit that this prize was even less impressive than it sounds to those of you who aren’t familiar with the city.

The original Playboy Club was located on the “Magnificent Mile” in Chicago, but this one was located across from the Buffalo airport in Cheektowaga, NY.  Still, the college kid version of me was pretty impressed with the idea of having a key to any Playboy Club, even if I was too chicken to ever pay the club a visit.

Anyway, that’s kind of a rambling introduction to the news I wanted to share with you today – according to this article from, Playboy Enterprises is re-entering the public market by way of a reverse merger with a SPAC:

Playboy is joining the super-hot special acquisition company club, with official plans to go public in a SPAC deal that values the storied brand at $415 million, the company said Thursday. The SPAC deal, which will make the iconic adult-entertainment brand public for the second time in its history, involves being acquired by a blank-check firm, in this case Mountain Crest Acquisition Corp. (MCAC) , which was set up earlier this year and trades on the Nasdaq exchange.

I’m not sure about this one. Putting aside the company’s extended decline prior to its 2011 take-private deal & the recent demise of the print version of its magazine (which I only ever read for the articles anyway), the Playboy brand & legacy just don’t seem in-tune with the current zeitgeist.

In the company’s defense, it has reinvented itself as a “lifestyle brand” and has apparently built a $3 billion business, so maybe its return to the public market will have a happy ending. Still, there are a lot of SPACs chasing deals right now, and I wouldn’t be shocked if we looked back on this one as signifying the moment when the SPAC craze jumped the shark.

John Jenkins