With respect to Rule 701, the proposed amendments would:
• Revise the additional disclosure requirements for Rule 701 exempt transactions exceeding $10 million;
• Revise the time at which such disclosure is required to be delivered for derivative securities that do not involve a decision by the recipient to exercise or convert in specified circumstances where such derivative securities are granted to new hires;
• Raise two of the three alternative regulatory ceilings that cap the overall amount of securities that a non-reporting issuer may sell pursuant to the exemption during any consecutive 12-month period; and
• Make the exemption available for offers and sales of securities under a written compensatory benefit plan established by the issuer’s subsidiaries, whether or not majority-owned.
With respect to Form S-8, the proposed amendments would:
• Implement improvements and clarifications to simplify registration on the form, including:
o Clarifying the ability to add multiple plans to a single Form S-8;
o Clarifying the ability to allocate securities among multiple incentive plans on a single Form S-8; and
o Permitting the addition of securities or classes of securities by automatically effective post-effective amendment.
• Implement improvements to simplify share counting and fee payments on the form, including:
o Requiring the registration of an aggregate offering amount of securities for defined contribution plans;
o Implementing a new fee payment method for registration of offers and sales pursuant to defined contribution plans; and
o Conforming Form S-8 instructions with current IRS plan review practices.
• Revise Item 1(f) of Form S-8 to eliminate the requirement to describe the tax effects of plan participation on the issuer.
With respect to both Rule 701 and Form S-8, the proposals would:
• Extend consultant and advisor eligibility to entities meeting specified ownership criteria designed to link the securities to the performance of services; and
• Expand eligibility for former employees to specified post-termination grants and former employees of acquired entities.
There’s More! SEC Proposes Temporary Expansion of Compensatory Offerings to Gig Workers
The SEC saved the more interesting – and controversial – part of its “compensatory offering” modernization for an entirely separate proposal – which would, for a temporary five-year period and subject to a number of conditions, permit companies to provide equity compensation to gig workers who provide services (not goods) to the company (or as the SEC calls them, “platform workers”). Commissioners Hester Peirce & Elad Roisman issued a statement in support of the proposal. Commissioners Allison Herren Lee & Caroline Crenshaw dissented – and they were careful to point out that they did support the other proposal.
Under the amendments, an issuer would be able to use the Rule 701 exemption to offer and sell its securities on a compensatory basis to platform workers who, pursuant to a written contract or agreement, provide bona fide services by means of an internet-based platform or other widespread, technology-based marketplace platform or system provided by the issuer if:
• the issuer operates and controls the platform;
• the issuance of securities to participating platform workers is pursuant to a compensatory arrangement, as evidenced by a written compensation plan, contract, or agreement;
• no more than 15% of the value of compensation received by a participating worker from the issuer for services provided by means of the platform during a 12-month period, and no more than $75,000 of such compensation received from the issuer during a 36-month period, shall consist of securities, with such value determined at the time the securities are granted;
• the amount and terms of any securities issued to a platform worker may not be subject to individual bargaining or the worker’s ability to elect between payment in securities or cash; and
• the issuer must take reasonable steps to prohibit the transfer of the securities issued to a platform worker pursuant to this exemption, other than a transfer to the issuer or by operation of law.
The proposed amendments would also permit an Exchange Act reporting company to make registered securities offerings to its platform workers using Form S-8. The same conditions proposed for Rule 701 issuances would apply to issuances to platform workers on Form S-8, except for the proposed transferability restriction.
The proposed amendments would not permit the issuance of securities for platform worker activities relating to the sale or transfer of permanent ownership of discrete, tangible goods. Depending on the results of the initial expanded use of Rule 701 and Form S-8, if adopted, the Commission could consider expanding eligibility to other activities, such as selling goods or other non-service providing activities in the future.
The proposed amendments would require companies that sell securities to gig workers to furnish information to the SEC at 6-month intervals, to help the Commission decide whether the rule changes should expire, be extended or be made permanent.
Both proposals will be subject to a 60-day comment period following their publication in the Federal Register. Time will tell whether the next SEC Chair will carry either of these proposals across the finish line.
Glass Lewis ’21 Voting Guidelines: Diversity and E&S Phase-Ins
Also yesterday, Glass Lewis announced the publication of its 2021 Voting Guidelines. The biggest changes are that Glass Lewis is expanding its board gender diversity policy to vote against nominating chairs if there are fewer than two female directors, beginning in 2022 (they already recommend against the nominating chairs of all-male boards) – and they’re phasing in additional scrutiny of the descriptions of board-level E&S oversight.
As always, the first few pages of the Guidelines summarize the policy changes. Here’s a few highlights:
– Board Gender Diversity: Beginning in 2021, we will note as a concern boards consisting of fewer than two female directors. Our voting recommendations in 2021 will be based on our current requirement of at least one female board member; but, beginning with shareholder meetings held after January 1, 2022, we will generally recommend voting against the nominating committee chair of a board with fewer than two female directors. For boards with six or fewer total members, our existing voting policy requiring a minimum of one female director will remain in place.
– Disclosure of Director Diversity & Skills: Beginning with the 2021 proxy season, our reports for companies in the S&P 500 index will include an assessment of company disclosure in the proxy statement relating to board diversity, skills and the director nomination process.
– Board Refreshment: Beginning in 2021, we will note as a potential concern instances where the average tenure of non-executive directors is 10 years or more and no new independent directors have joined the board in the past five years. We will not be making voting recommendations solely on this basis in 2021; however, insufficient board refreshment may be a contributing factor in our recommendations when additional board-related concerns have been identified.
– E&S Oversight: Beginning in 2021, Glass Lewis will note as a concern when boards of companies in the S&P 500 index do not provide clear disclosure concerning the board-level oversight afforded to environmental and/or social issues. Beginning with shareholder meetings held after January 1, 2022, we will generally recommend voting against the governance chair of a company in the aforementioned index who fails to provide explicit disclosure concerning the board’s role in overseeing these issues. While we believe that it is important that these issues are overseen at the board level and that shareholders are afforded meaningful disclosure of these oversight responsibilities, we believe that companies should determine the best structure for this oversight for themselves.
– SPACs: We have added a new section detailing our approach to common issues associated with special purpose acquisition companies (“SPACs”), including our generally favorable view of proposals seeking to extend business combination deadlines, as well as our approach to determining the independence of board members at a post-combination entity who previously served as executives of the SPAC. Absent any evidence of an employment relationship or continuing material financial interest in the combined entity, we will generally consider such directors to be independent.
Glass Lewis also made several clarifying amendments – including that their standard policy on virtual shareholder meetings is now in effect, and they expect robust disclosure about the ability of shareholders to participate in the meeting.
We’ll be posting memos in our “Proxy Advisors” Practice Area – and you should also mark your calendar for our January 14th webcast, which is a dialogue with Courteney Keatinge, Senior Director of ESG Research at Glass Lewis. Members of TheCorporateCounsel.net can access that webcast for free – if you’re not a member, you can try a no-risk trial.
Yesterday, Corp Fin added to its “CF Disclosure Guidance Topic” series with “Topic No. 10: Disclosure Considerations for China-Based Issuers.” It summarizes risks and corporate law & reporting differences that the may be unique to companies that are based in or have the majority of their operations in China – and lists questions for these companies to consider when drafting disclosures.
Corp Fin’s disclosure guidance isn’t completely unexpected. In August, I blogged about recommendations from the “President’s Working Group on Financial Markets” – a regulatory council whose members include SEC Chair Jay Clayton and Treasury Secretary Steven Mnuchin. The recommendations included the adoption of more specific disclosure requirements – or interpretive guidance – about the risks of investing in companies from “non-cooperating jurisdictions” like China.
The working group also recommended enhanced listing standards to ensure PCAOB access to audit work papers for Chinese companies. This Bloomberg article says that the SEC is planning to move forward with that initiative and might issue a proposal before year-end that could result in many China-based companies being delisted. Adoption of any proposal would then be left in the hands of the new SEC Chair – whoever that ends up being.
“Human Capital” Disclosure: SASB Sums Up Its Resources
Yesterday, SASB published this 10-page “Human Capital Bulletin” – which summarizes elements of SASB standards that can help companies prepare human capital disclosure as required by the recent amendments to Reg S-K. Here’s what it includes:
• A list of SASB industry standards that contain topics and metrics related to human capital.
• An overview of selected human capital-related topics and metrics across all 77 SASB industry standards – specifically, standards on labor practices; employee health & safety; employee engagement, diversity & inclusion; and supply chain management
• A summary of SASB’s Human Capital Management Research Project, which has the objective of identifying opportunities for the SASB Standards to further account for human capital-related risks and opportunities
The new Human Capital Bulletin follows updates last week to this statement from the SASB Investor Advisory Group. The statement – which hadn’t been updated since the Investor Advisory Group was formed in 2016 – urges companies to include SASB-based disclosures in their ESG communications to investors and now emphasizes that other reporting standards and frameworks may complement SASB standards, but aren’t replacements for them. Also see this SASB press release.
For more tips on human capital disclosure, make sure to tune in to our upcoming webcast, “Modernizing Your Form 10-K: Incorporating Reg S-K Amendments,” on Tuesday, December 8th, 2020 at 11am Eastern (note, this is an earlier time of day than most of our webcasts). If you attend the the live version of this program, CLE credit is available in the following 10 states:
CA, FL, IL, NC, NJ, NY, PA, TX, VA, WA.
Members of this site are able to attend this critical webcast at no charge. If not yet a member, try a no-risk trial now. For this program, the webcast cost for non-members is discounted to $295 – which will count toward your 2021 membership rate should you decide to subscribe to TheCorporateCounsel.net before the end of this year. You can renew or sign up for a no-risk trial online – or by fax or mail via this order form. If you need assistance, send us an email at firstname.lastname@example.org – or call us at 800.737.1271.
Thanksgiving: Different Look, Fresh Gratitude
Thanksgiving is looking different this year for a lot of folks. As I count my blessings, this community looms large. I’m grateful to get to connect with you all from afar – nerding out on corporate governance, securities and ESG, and sharing the highs & lows of work and life in general. Hopefully what we do around here is also making your work lives a little easier in the midst of everything that’s been happening this year. Thank you to everyone who follows this blog, subscribes to our sites, speaks at or attends our events, and reaches out with interesting stories, tips and questions. We couldn’t do it without you!
Now, on to the recipes, since John is handling the blog tomorrow and we’ve got to keep up our streak of “foodieblogs.” I plan to be feasting on more leftovers this year than usual. This article from the Kitchn will help you turn one turkey into 9 freezer meals to enjoy in the weeks and months ahead.
On Friday, the Corp Fin Staff updated its statement on use of electronic signatures in light of Covid-19 concerns to say that it would not recommend enforcement action with respect to Reg S-T signature requirements for companies that comply with amended Rule 302(b) in advance of the effective date.
As I blogged back in June, the statement also extends for an indefinite time the temporary “Covid-19” signature relief that allows signatories to retain manually signed pages and deliver them to the company for retention as soon as reasonably practicable.
Dates for Electronic Signatures: Controlling for “Time Stamps”
If an officer decides to authenticate his/her signature electronically (once the new rule goes into effect) via DocuSign and does so a day or two in advance of an electronic filing with the SEC, should the signature page filed with the SEC bear the date that matches that date/time stamp or can it still bear the date of the filing?
I don’t think there’s ever been a hard and fast rule regarding the date of an individual’s signature on a 10-K or 10-Q filing. Rule 302 of S-T simply requires (as it always has) that the authentication document “shall be executed before or at the time the electronic filing is made.” That being said, I think the more common practice is to date the signature page the date of the filing, and I think that’s a better practice in this situation.
The reason I say that is that the filing speaks as of its date, and the officer’s responsibility for the accuracy of its contents does not end prior to the time that the document is filed. While obtaining signatures (electronically or otherwise) a few days in advance may be a matter of convenience, I think the company’s procedures should make it clear that a signatory’s responsibility for the filing do not end on the date that he or she has authenticated their signature, and that the signature in the filing will be dated as of the filing date.
I think the potential problem with not taking this approach can be illustrated by a situation in which the company obtains an officer’s signature a few days in advance of filing the 10-Q, but during the interim, there is a development that requires a subsequent event footnote. Now the company would find itself in a situation in which the officer has signed a document as of a date that precedes the date of a specific disclosure included in the document. I think a situation like that may well implicate the company’s disclosure controls and procedures unless it is clear from its policies that the signatories understand as of what date their signatures speak, and that their responsibility for the accuracy and completeness of the filing do not end with the date they sign it.
Auditor Independence: PCAOB Amends Standards to Align with SEC
Yesterday, the SEC continued this year’s rulemaking spree by adopting amendments to enhance and simplify the financial disclosure provisions of Regulation S-K. The amendments are significant – they eliminate the requirement for Selected Financial Data, streamline the requirement to disclose Supplementary Financial Information, and amend MD&A requirements. Here’s the 196-page adopting release – a tabular summary of the changes begins on page 8.
As noted in the SEC’s press release, the amendments reflect the Commission’s preference for a principles-based approach to disclosure. Here’s an excerpt:
The changes to Items 301, 302, and 303 of Regulation S-K sharpen the focus on material information by:
– Eliminating Item 301 (Selected Financial Data); and
– Modernizing, simplifying and streamlining Item 302(a) (Supplementary Financial Information) and Item 303 (MD&A). Specifically, these amendments:
Revise Item 302(a) to replace the current requirement for quarterly tabular disclosure with a principles-based requirement for material retrospective changes;
Add a new Item 303(a), Objective, to state the principal objectives of MD&A;
Amend current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources;
Amend current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline disclosure requirements for results of operations;
Add a new Item 303(b)(3), Critical accounting estimates, to clarify and codify Commission guidance on critical accounting estimates;
Replace current Item 303(a)(4), Off-balance sheet arrangements, with an instruction to discuss such obligations in the broader context of MD&A;
Eliminate current Item 303(a)(5), Tabular disclosure of contractual obligations, in light of the amended disclosure requirements for liquidity and capital resources and certain overlap with information required in the financial statements; and
Amend current Item 303(b), Interim periods (amended Item 303(c)) to modernize, clarify and streamline the item and allow for flexibility in the comparison of interim periods to help registrants provide a more tailored and meaningful analysis relevant to their business cycles.
In addition, the Commission adopted certain parallel amendments to the financial disclosure requirements applicable to foreign private issuers, including to Forms 20-F and 40-F, as well as other conforming amendments to the Commission’s rules and forms, as appropriate.
The amendments will be effective 30 days after publication in the Federal Register. Once effective, early application of the amended rules is permitted so long as companies provide disclosure responsive to an amended item in its entirety. Compliance with the amended rules won’t be required until a company’s first fiscal year ending on or after the date that is 210 days after publication in the Federal Register – for calendar-year companies, that will mean mandatory compliance will begin with their Form 10-K for the 2021 fiscal year that’s filed in 2022. For registration statements, companies will be required to apply the amended rules if the registration statement on its initial filing date is required to contain financial statements for a period on or after the mandatory compliance date.
With all the recent SEC rulemaking, you’d be forgiven if you forgot that the SEC just proposed these amendments back in January – and at the time, that Commissioner Allison Herren Lee issued a dissenting statement criticizing the proposal for not addressing climate risk disclosures. The final amendments also don’t address climate risk disclosures. Commissioner Lee issued a joint statement with Commissioner Caroline Crenshaw in which they voice two concerns: first, that the amendments eliminate the contractual obligations table and second, the principles-based disclosure requirements don’t address climate risk.
The last sentence of Commissioner Lee and Crenshaw’s statement says they’re ready to start working on standardized ESG disclosure: ‘There’s no time to waste in setting to ourselves to this task, and we look forward to rolling up our sleeves to establish requirements for standard, comparable, and reliable climate, human capital, and other ESG disclosures.’
Key Performance Metrics: SEC Enforcement Goes After Execs for Misleading Disclosure
Late last week, the SEC announced that it charged two former Wells Fargo executives for their roles in the allegedly misleading “cross-sell metric” that the bank had used to measure its financial success and that got it in so much hot water back in the mid-2000s. The SEC’s order for John Stumpf, the company’s former CEO, says that he agreed to pay $2.5 million to settle the charges without admitting or denying the allegations. The SEC’s complaint against Carrie Tolstedt, who headed up the company’s core Community Bank, alleges that she committed fraud. Among other things, the SEC’s complaint seeks to ban Tolstedt from serving as a public company officer or director and force her to pay fines.
The SEC says that the cross-sell metrics were inflated by unauthorized accounts and that the executives knew or were reckless in not knowing that the disclosures about those metrics were materially false and misleading. The SEC’s press release says that both former executives signed misleading certifications in 2015 and 2016, which is a violation under SOX, something not frequently enforced by the SEC. Here’s an excerpt from the SEC’s press release:
‘If executives speak about a key performance metric to promote their business, they must do so fully and accurately,’ said Stephanie Avakian, Director of the SEC’s Division of Enforcement. ‘The Commission will continue to hold responsible not only the senior executives who make false and misleading statements but also those who certify to the accuracy of misleading statements despite warnings to the contrary.’
– Duty of Loyalty Issues for Designated Directors and the Boards of Portfolio Companies
– Conflicted CEO Tilts Company Sale in PE Firm’s Favor
– SBA Announces New Guidance on Consent Requirements for PPP Borrower Changes of Ownership
– Court Rejects Challenge to M&A Transaction Despite Activist Pressure
– Do Reps and Warranties Policies Actually Pay Claims?
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
Yesterday, Corp Fin announced an update to the Division’s Financial Reporting Manual. The Manual is updated as of October 30, 2020 and sections with updates are marked with the date tag “Last updated: 10/30/2020.” Here’s a summary of some of the changes this update includes:
– Revised to reflect changes to smaller reporting company, accelerated filer and large accelerated filer definitions and amendments from Disclosure Update and Simplifications;
– Clarified the application of Rule 3-13 to Form 8-K and the income test for Rule 3-09 financial statements when there is more than one equity method investee;
– Clarified audit requirements for a special-purpose acquisition company target in Form S-4/F-4;
– Described the substantial deficiency situation impact on certain rule and eligibility standards;
– Included another example of a “To Be Issued” accountant’s report; and
– Removed outdated references and updated for changes to GAAP, guidance issued by the PCAOB, Division of Corporation Finance, and SEC’s Office of Chief Accountant in the last few years.
We’ll be on the lookout for more guidance coming from Corp Fin, given Director Bill Hinman’s upcoming departure. Back in 2016 when Keith Higgins prepared for his departure, Corp Fin issued 35 new CDIs in a single day.
Sold! ISS Changes Ownership (Again)
Earlier this week, ISS announced a change in its majority ownership – it seems like that just happened not too long ago, but looking back it’s been about 3 years since the firm last changed hands. Deutsche Börse AG is buying approximately 80% of ISS from current private-equity owner Genstar Capital. Genstar and ISS’ current management will continue to hold the remaining 20%. The ISS press release says the Deutsche Börse purchase is based on an ISS valuation of almost $2.3 billion. Here’s an excerpt with additional info:
The transaction is expected to close in the first half of 2021 subject to customary closing conditions and regulatory approvals. After the closing, ISS will continue to operate with the same editorial independence in its data and research organisation that is in place today. The current executive leadership team with CEO Gary Retelny will co-invest in the transaction and will also lead the business of ISS after the closing.
PCAOB Issues Audit Committee Resource on Auditing Estimates & Use of Specialists
It’s been almost two years since the PCAOB adopted a new requirements related to auditing accounting estimates, including fair value measurements, and using the work of specialists. With those requirements set to take effect for audits of financial statements for fiscal years ending on or after December 15, 2020, last week the PCAOB issued a resource aimed at helping audit committees understand the requirements. The PCAOB’s memo provides a list of questions for audit committees to consider asking their auditors, here’s the memo’s key takeaways:
– The effects of the new requirements will not be uniform across all audits
– The extent of effects of the new requirements will depend on the nature and extent of accounting estimates included in the company’s financial statements, and also on whether the company uses a specialist
– The new standard and amendments do not change the requirements for the auditor’s communications with audit committees, including those communications related to critical accounting estimates
– Auditors are applying these new requirements in extraordinary times and in situations that continue to evolve due to the Covid-19 pandemic
Yesterday, the SEC announced that it adopted rules to facilitate electronic submission of documents. Welcome news to many, the Commission adopted rule amendments to permit the use of electronic signatures used in connection with many documents filed with the Commission. The Commission also adopted rule amendments to require electronic filing and service of documents in administrative proceedings. Here’s an excerpt from the Commission’s press release about use of electronic signatures:
Today’s amendments permit a signatory to an electronic filing who follows certain procedures to sign an authentication document through an electronic signature that meets certain requirements specified in the EDGAR Filer Manual. In addition, the Commission amended certain rules and forms under the Securities Act, Exchange Act, and Investment Company Act to allow the use of electronic signatures in authentication documents in connection with certain other filings when these filings contain typed, rather than manual, signatures.
Back in April, I blogged about the rulemaking petition requesting the Commission amend rules under Reg S-T to permit use of electronic signatures when filing documents with the SEC – the SEC’s press release says that nearly 100 public companies joined in support of the petition. With electronic signatures being more the norm these days, these amendments will make things simpler, especially as many continue working remotely. See this Fenwick memo for more. The electronic signature rule amendments will be effective upon publication in the Federal Register.
UK Leads Way with Impact of Climate Risk Reporting, Will U.S. Follow?
As reported in the WSJ, last week the UK announced that it will require large companies and financial institutions to report the financial impact of climate risk in alignment with the Taskforce on Climate-Related Financial Disclosures (TCFD) framework by 2025. The TCFD recommendations are widely recognized as authoritative guidance for reporting climate-related information. Many have called for increased reporting of the impact of climate risk and Larry Fink, BlackRock’s CEO, is among those that say the U.S. should take action too. Reuter’s reported that Fink welcomed the UK’s announcement for mandatory climate reporting and said ‘the U.S. should move faster so we can achieve greater coordination.’ He also said the DOL could make it ‘easier, not harder’ for asset managers to integrate sustainability issues into their investment strategies.
Some may recall that earlier this year, a subcommittee of the SEC’s Investor Advisory Committee approved a recommendation encouraging the SEC to begin addressing ESG disclosure. With the incoming Biden administration, climate change has been identified as among the top priorities and some are predicting the SEC may be more receptive to ESG-related disclosure requirements. When it comes to climate risk disclosure, SEC Commissioner Allison Lee has advocated for mandatory disclosure, most recently she stressed the need to address it in a keynote address at PLI’s securities law conference – Cydney Posner’s blog provides a good overview of the address. For now, it remains to be seen if the U.S. moves forward on climate risk reporting and if so, how quickly that might happen.
Tomorrow’s Webcast: “Pay Equity – What Compensation Committees Need to Know”
Tune in tomorrow for the CompensationStandards.com webcast – “Pay Equity: What Compensation Committees Need to Know” – to hear Anne Bruno of Mintz, Tanya Levy-Odom of BlackRock, Josh Schaeffer of Equity Methods and Heather Smith of Impax Asset Management | Pax World Funds discuss pay equity – including why it’s in the spotlight, the difference between “pay equity” & “pay gap”, shareholder expectations, disclosure trends on pay gaps & pay equity, pay ratio interplay, mechanics of board & committee oversight and preparing for shareholder engagements & proposals.
Yesterday, the SEC announced that Chairman Jay Clayton intends to conclude his tenure at the end of the year, slightly ahead of his June 2021 term expiration date. As noted in the SEC’s press release, Chairman Clayton led the agency through a period of historically productive rulemaking – during his tenure, the agency advanced more than 65 final rules, many of which modernized rules that hadn’t been updated in decades.
Last summer, things got interesting when news spread of President Trump’s intention to nominate Chairman Clayton as the United States Attorney for the Southern District of New York, which hasn’t come to pass. Even with the commotion from that announcement, Chairman Clayton continued to move forward with notable rulemaking — including rules enhancing the Commission’s whistleblower program, modernizing Regulation S-K and the shareholder proposal process. In addition to all the rulemaking, the SEC’s press release highlights impacts from enforcement actions, which since 2017 have resulted in the SEC obtaining more than $14 billion in financial remedies.
With the incoming administration, there’s been a fair amount of speculation about who will lead the Commission. In the past, the most senior Commissioner of the current President’s party has served as interim Chair until a new Chair is confirmed. If that tradition is followed this time around, Commissioner Hester Peirce would be interim Chair following Jay’s departure and continue in that role for a while after President-elect Biden’s inauguration. This Bloomberg piece names several contenders for a Biden appointment, including former head of the CFTC, Gary Gensler, former U.S. Attorney for the Southern District of New York, Preet Bharara, and Michael Barr, who is a former aide to ex-Treasury Secretary Timothy Geithner.
Comment Letter Trends: Top 10 Topics in Reviews
Deloitte recently issued a 218-page roadmap on comment letter trends that includes developments on financial reporting topics through November 6, 2020. In terms of insights about comments related to the Covid-19 pandemic, the report says that early trends indicate that MD&A and risk factor trends have been main focus areas. Good news included in the report is that over the last five years, there’s been a notable decline in the number of reviews with comment letters and the number of comment letters issued. For those beginning to prepare for year-end reporting, it’s helpful to be aware of the leading areas for comment and the report lists these as the “top 10”:
1. MD&A – comments increased on results of operations, highlighting the Staff’s continuing focus on greater transparency and specificity in disclosures about operating results. Comments on Covid-19 have focused on the pandemic’s impact on future operating results and future financial condition, known trends or uncertainties related to COVID-19 that will have a material favorable or unfavorable impact on income from continuing operations, and discussions of current liquidity and availability of financial resources
2. Non-GAAP measures – the report lists several areas of continued focus, including whether there is undue prominence of non-GAAP measures, enhancing disclosure related to the purpose and use of the measures, identification and clear labeling and reconciliation requirements
3. Revenue recognition – largest volume of comments focused on disclosure of significant judgments used in applying the standard
4. Segment reporting – identification and aggregation of operating segments, changes in reporting segments, considerations for entities with a single reportable segment and entity-wide disclosures about products or services
5. Signatures, exhibits and agreements – form and content of certifications, and material contracts, including requests for them to be filed as exhibits
6. ICFR – among others, evaluation of severity of control deficiencies, including those related to immaterial misstatements and disclosures of material changes in ICFR, including the impact and remediation of material weaknesses
7. Fair value – valuation techniques and inputs used, use of third-party pricing services and fair value estimates related to revenue recognition, goodwill impairment and share-based payments
8. Contingencies – focus on specificity of disclosures and amounts accrued, estimates for reasonably possible losses and disclosures related to loss contingencies and whether they have been updated over time as circumstances change
9. Intangible assets and goodwill – goodwill impairment disclosures, including early-warning disclosures and the specific circumstances that led to the charge in the period of impairment rather than general market factors, asset groupings for impairment testing and whether or why an interim impairment test was performed and the results of the test
10. Inventory and cost of sales – accounting policy disclosures regarding inventory valuation, including adjustments related to excess and obsolete inventories
Transcript: “Virtual Annual Meetings: What To Do Now”
We’ve posted the transcript for our recent webcast: “Virtual Annual Meetings: What To Do Now” – it covered these topics:
– Baseline Best Practices for Virtual Shareholder Meetings
– Getting Remote Technology in Order
– How to Ensure Your Platform Allows for Shareholder Entry & Participation
– Virtual “Rules of Conduct”
– Voting & Tabulation Issues
– Contingency Planning
Broadridge is gearing up for next year’s annual meeting season and just yesterday announced the first phase of its enhanced virtual shareholder meeting platform – a press release says the enhanced platform will enable Broadridge to validate beneficial shareholders who log on to other virtual meeting platforms. For more information to help with planning for upcoming virtual annual meetings, check out our “Virtual Annual Meetings” Practice Area – there you’ll find the latest memos and sample transcripts, rules of conduct and video replays from several 2020 meetings.
Also, take advantage of this special offer available to our members from Carl Hagberg who doles out lots of practical advice in his quarterly newsletters: If you sign up now for a 2021 subscription to The Shareholder Service Optimizer, you’ll get two 2020 quarterly issues added to your subscription for free. You can use this link and mention that you’re a member of TheCorporateCounsel.net in the “order notes” box on the subscription page.
With a subscription, you get access to www.optimizeronline.com, which has the complete text of 13 years of back issues, a searchable index of important articles, and a list of “Pre-Vetted Service Suppliers to Publicly-Traded Companies” – with introductory articles to describe the kinds or services rendered, the current competitive environment and the most important things to consider in selecting a service provider. The subscription also comes with “Some free consulting on any shareholder relations or shareholder servicing matter to ever cross your desk.”
On Friday, Corp Fin updated one and withdrew several Securities Act CDIs. These CDIs relate to equity line financing arrangements and PIPEs that can raise issues under Securities Act Section 5 – CDI 139.13 has been updated and CDIs 139.15, 139.16, 139.17, 139.18, 139.19 and 139.20 have been withdrawn. Here’s updated CDI 139.13, which clarifies when a company may file a resale registration statement:
Question: In many equity line financings, the company will rely on the private placement exemption from registration to sell the securities under the equity line and will then seek to register the “resale” of the securities sold in the equity line financing. When may a company file a registration statement for the resale by the investors of securities sold in a private equity line financing?
Answer: In these types of equity line financings, the company’s right to put shares to the investor in the future and the lack of market risk resulting from the formula price differentiate private equity line financings from financing PIPEs (private investment, public equity). We, therefore, analyze private equity line financings as indirect primary offerings, even though the “resale” form of registration is sought in these financings.
The at-the-market limitations contained in Rule 415(a)(4) would otherwise prohibit market-based formula pricing for issuers that are not eligible to conduct primary offerings on Form S-3 or Form F-3. Nevertheless, we will not object to such companies registering the “resale” of the securities prior to the exercise of the equity line put if the transactions meet the following conditions:
the company and the investor have entered into a binding agreement with respect to the private equity line financing at the time the registration statement is filed;
the “resale” registration statement is on a form that the company is eligible to use for a primary offering;
there is an existing market for the securities, as evidenced by trading on a national securities exchange or alternative trading system, which is a registered broker-dealer and has an active Form ATS on file with the Commission; and
the equity line investor is identified in the prospectus as an underwriter, as well as a selling shareholder.
We will not object to the filing of a registration statement for a private equity line financing prior to the issuance of securities by the company under the equity line even when there are contingencies attached to the investor’s obligation to accept a put of shares from the company, as long as the above conditions are satisfied and the following terms of the investment have been agreed upon by both parties and disclosed by the company at the time that the resale registration statement is filed:
the number of shares registered for resale;
the maximum principal amount available under the equity line agreement;
the term of the agreement; and
the full discounted price (or formula for determining it) at which the investor will receive the shares.
[November 13, 2020]
SEC’s Private Offering Rules: Updated Chart of Registration Alternatives
Last spring, John blogged about the chart Stan Keller, Jean Harris and Rich Leisner kindly sent along reflecting the proposed changes to the private offering framework. Now that the amendments have been adopted, Stan, Jean and Rich sent along an updated Chart of Alternatives to Registration reflecting the final amendments to those alternatives – and included very helpful printing instructions to ensure the chart is printable in its most useful form as a handy reference booklet. Check it out!
Tomorrow’s Webcast: “Doing Deals Remotely”
Tune in tomorrow for the DealLawyers.com webcast – “Doing Deals Remotely” – to hear Joseph Bailey of Perkins Coie, Murad Beg of Provariant Equity Partners and Avner Bengara of Hughes Hubbard & Reed discuss adjusting to doing deals remotely, including lessons learned and emerging best practices for completing a successful transaction in this strange new environment.
Yesterday, ISS announced its policy updates for next year. Here’s the policy document. The big news this year is that ISS is ratcheting up the pressure on companies to improve board diversity, and taking a more accommodating approach to exclusive forum bylaws. Here are a couple of excerpts from ISS’s executive summary of the policy changes:
– For 2021, ISS benchmark research reports for companies in the Russell 3000 or S&P 1500 indexes will highlight boards that lack racial and ethnic diversity (or lack disclosure of such) to help investors identify companies with which they may wish to engage and foster dialogue between investors and companies on this topic.
– For 2022, for companies in the Russell 3000 or S&P 1500 indexes where the board has no apparent racially or ethnically diverse members, ISS will recommend voting against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis).
– Under the new policy, ISS will generally recommend a vote for federal forum selection provisions in the charter or bylaws that specify “the district courts of the United States” as the exclusive forum for federal securities law matters and recommend a vote against provisions that restrict the forum to a particular federal district court.
– Under the updated policy for exclusive forum provisions for state law matters, in the absence of concerns about abuse of the provision or about poor governance more generally, ISS will generally recommend in favor of charter or bylaw provisions designating courts in Delaware as the exclusive forum for state corporate law matters at companies incorporated in that state.
We’ll be posting memos in our “Proxy Advisors” Practice Area. With proxy season just around the corner, check out this Davis Polk blog for a list of key dates on ISS & Glass Lewis’s calendars for the upcoming months.
California Voters Adopt New Privacy Statute
Remember how much fun getting geared up to comply with the CCPA and its seemingly endless rulemaking process was? Well if you enjoyed that, you’ll be delighted to learn that on election day, California voters passed Proposition 24, the California Privacy Rights Act (CPRA). This intro to Thompson Hine’s memo on the new statute provides an overview of its provisions:
On November 3, California voters approved Proposition 24, also known as the California Privacy Rights and Enforcement Act of 2020 (CPRA), which amends and expands upon California’s other landmark privacy legislation, the California Consumer Privacy Act of 2018 (CCPA). In particular, the CPRA establishes new data privacy rights for California residents, imposes new obligations and liabilities on businesses and service providers, and creates a regulatory agency empowered to enforce California privacy law and prosecute noncompliance. The CPRA becomes operative on January 1, 2023, and, with some exceptions, will apply to California residents’ personal information collected by organizations after January 1, 2022.
The CPRA’s proponents put Proposition 24 on the ballot because of their objections to several legislative amendments to the CCPA & the California AG’s new regulatory framework that they believe “significantly weakened” its safeguards. The memo reviews the key provisions of the CPRA, and notes that approving the CPRA ballot initiative, California voters made several substantive amendments to the CCPA – and effectively prevented California’s state government from undermining them through future legislation.
Post-Election Suggestion: “Look at Mills! Look at Mills!”
There’s a zero percent chance that I’m going to use this blog to wade into the giant cauldron of rage into which our country has descended following last week’s election. I’m also not going to minimize the differences that separate us. We have a lot of work to do. But, like you, I have friends and family members whose political opinions differ significantly from mine, and I’d kind of like to continue to share the country with them and with all of you.
With that objective in mind, I want to close out the week with a suggestion as to how we might at least start to turn down the temperature. This is going to sound strange, but hear me out – I would like you to watch this video of NBC’s coverage of the final lap of the men’s 10,000 meters at the 1964 Tokyo Olympics. It’s only about a minute long.
I know the video quality is terrible, but I’m guessing that you still felt the same chills that I did watching the last 100 meters of that race. You know what? The people who voted for the other guy felt those chills too, and it’s fair to say that the letters “U.S.A” on the front of Bill Mills’ uniform probably had a lot to do with that. I believe that this kind of shared feeling is what Abraham Lincoln was getting at in his First Inaugural Address, and since there’s no blogger alive who can follow Honest Abe, I’ll let him have the last word:
We are not enemies, but friends. We must not be enemies. Though passion may have strained, it must not break our bonds of affection. The mystic chords of memory, stretching from every battle-field, and patriot grave, to every living heart and hearthstone, all over this broad land, will yet swell the chorus of the Union, when again touched, as surely they will be, by the better angels of our nature.
This SquareWell Partners report addresses investor approaches to ESG issues during 2020 and predicts how they will shape the dialogue between companies & shareholders during the upcoming year. This excerpt address investors’ increasing focus on capital allocation decisions:
As the impacts of COVID-19 will continue and the ‘V’-shaped recovery looking less likely, capital allocation decisions will require a delicate balancing act for companies in 2021 to manage the diverging expectations of its stakeholders (especially within its shareholder base regarding the payment of dividends).
Companies will be expected to justify their capital allocation decisions, whether it is to remunerate shareholders or not. Whilst investors like Schroders have communicated that they would be more flexible regarding capital raising requests, other investors (and proxy advisors) will scrutinize the management quality, urgency of the funds, and the long-term strategy before supporting any capital raise (as in the case at French mall operator, Unibail-Rodamco-Westfield).
The report cautions that while investors demonstrated restraint during the current year, 2021 will likely be a critical year during which investors will pass judgment on corporate actions or failures to act in response to the crisis.
Rule 10b5-1 Plans: No Affirmative Defense to Bad Publicity
Pfizer’s announcement earlier this week about the apparent efficacy of its Covid-19 vaccine is the best news the market – and the world – has heard this year. That announcement helped fuel a stock market surge, and according to media reports, Pfizer’s CEO & another executive sold a sizeable amount of the company’s shares during the rally.
The more thoughtful coverage of these sales pointed out that they were made under the terms of pre-existing Rule 10b5-1 plans, but the situation provides another example of the fact that whatever else a 10b5-1 plan does, it doesn’t provide an affirmative defense against bad publicity.