October 1, 2020

SEC Enforcement: HP Cited for Alleged MD&A “Known Trends” Violations

The last day of the SEC’s fiscal year included the announcement of a settled enforcement proceeding against HP, Inc. Among other things, the proceeding involved HP’s alleged failure to comply with Item 303’s “known trends” disclosure requirement regarding the implications of certain sales practices. This excerpt from the SEC’s press release summarizes the agency’s allegations:

According to the SEC’s order, from early 2015 through the middle of 2016, in an effort to meet quarterly sales targets, regional managers at HP used a variety of incentives to accelerate, or “pull-in” to the current quarter, sales of printing supplies that they otherwise expected to materialize in later quarters. The order further finds that, in an effort to meet revenue and earnings targets, managers in one HP region sold printing supplies at substantial discounts to resellers known to sell HP products outside of the resellers’ designated territories, in violation of HP policy and distributor agreements.

The order finds that HP failed to disclose known trends and uncertainties associated with these sales practices. The order further finds that HP failed to disclose that its internal channel inventory ranges, which it described in quarterly earnings calls, included only channel inventory held by channel partners to which HP sold directly and not by channel partners further down the distribution chain, thereby disclosing only a partial and incomplete picture of HP’s channel health.

The HP proceeding is the second enforcement action involving trend disclosure that the SEC has brought against a major public company this year. This excerpt from the SEC’s order summarizes the company’s alleged shortcomings:

In its 2015 Form 10-K, HP failed to disclose the known trend of increased quarter-end discounting leading to margin erosion and an increase in channel inventory, and the unfavorable impact that the trend would have on HP’s sales and income from continuing operations, causing HP’s reported results to not necessarily be indicative of its future operating results. The failure to disclose that material trend caused HP’s 2015 Form 10-K to be materially misleading.

The SEC’s order also focused on HP’s disclosure controls & procedures, and alleged that the company’s disclosure process “lacked sufficient interaction with operational personnel who reasonably would have been expected to recognize that the known trends” attributable to these discounting practices. Without admitting or denying the SEC’s findings, HP consented to a cease & desist order and agreed to pay a $6 million penalty.

NYSE Again Extends Temporary Shareholder Approval Relief

In April 2020, the NYSE adopted a temporary rule easing the shareholder approval requirements applicable to listed companies looking to raise private capital during the Covid-19 crisis. That temporary rule, which was originally set to expire at the end of June, was extended through the end of September. Earlier this week, the SEC approved the NYSE application to extend it again.

In case you’ve forgotten what the temporary rule is all about, here’s an excerpt from this Wilson Sonsini memo on the latest extension:

Generally, Section 312.03 of the NYSE Listed Company Manual requires listed companies to obtain shareholder approval prior to the issuance of common stock, or securities convertible into or exercisable for common stock, in certain circumstances. This temporary relief provides for a waiver, subject to the satisfaction of several conditions, from certain of the limitations and approval requirements set forth in Section 312.03 of the NYSE Limited Company Manual, including relating to (1) private placements involving 20 percent or more of a company’s outstanding shares of common stock or voting power at a price that is lower than the “minimum price” and (2) related party transactions.

The temporary rule is now scheduled to expire on December 31, 2020. However, since there’s a good chance that either a plague of locusts will descend upon us or the sea will turn to blood before then, my guess is another extension may be on the horizon.

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John Jenkins