Monthly Archives: January 2021

January 29, 2021

Board Composition: Examining the “ESG” Skills Gap

With ESG gaining most of its momentum relatively recently, it’s not too surprising that the executive careers of many directors didn’t include a strong focus on sustainable operations metrics. Now, though, there’s a risk that investors could start to view that as a skill gap. Here’s an excerpt from a study published last week that’s making the rounds:

NYU Stern’s Center for Sustainable Business undertook a deeper dive and analyzed the individual credentials of the 1188 Fortune 100 board directors based on Bloomberg and company bios in 2019 (see box 1 on methodology),and found that 29% of (1188) directors had relevant ESG credentials. 29% seems like a decent showing, until we drill deeper and find that most of the experience is under the S; 21% of board members have relevant S experience, against 6% each for E and G (numbers are higher than 29% as some members had more than one credential).

The “S” credentials were clustered around workplace diversity (5%) and healthcare issues (generally through board memberships with medical facilities).

An issue of growing materiality, cyber/telecom security, had just eight board members with expertise. There were very few directors who had experience with ethics,transparency, corruption, and other material good governance issues. The third largest category across E, S & G and the largest in the G category was accounting oversight (G) at 2.6%. U.S. boards are required to have a least one board member with audit/finance background and most boards have at least two with that background. However, we only included board members with exhibited leadership in this area, such as being a trustee of the International Financial Reporting Standards Board or a member of the Federal Accounting Standards Advisory Board. The second largest area of expertise (1.0%) under the G was experience with regulatory bodies such the SEC or FCC.

Two areas of material importance to most companies and to investors, climate and water,had just five and two board members with relevant experience, respectively, across all1188 Fortune 100 board members. In general, there is very little director expertise for the “E,” with all nine categories at approximately 1%.

The study has shocking numbers but loses some credibility due to the way it’s measuring “relevant credentials” – as noted in this Cooley blog. But the fact that the data is out there – and investors’ growing interest in disclosure about the board’s role in ESG oversight – does suggest that there could be a benefit to examining and enhancing board sustainability credentials (through education and/or recruitment), and tying skills disclosure to “ESG” experience. For more thoughts on how expectations are evolving, see this Morrow Sodali memo on the future of the board.

NYSE: Annual Compliance Reminders

The NYSE has sent its “annual compliance letter” to remind listed companies of their obligations. The letter reminds listed companies that in response to market and economic effects of the pandemic, the NYSE has provided relief to listed companies from certain shareholder approval requirements. The NYSE is seeking to enact this relief as a permanent change to its shareholder approval rules – John blogged recently that the SEC is soliciting public comment on the proposed rule change.

The NYSE annual compliance letter is a good resource to have on hand – all the NYSE email and telephone number contact information is provided and the letter explains when and how listed companies should contact the exchange for various matters.

SEC Enforcement: Melissa Hodgman Named Acting Director

The SEC announced last week that Melissa Hodgman has been named as Acting Director of the agency’s Enforcement Division. Melissa was previously serving as Associate Director in the Enforcement Division and began working in the Division in 2008. Prior to joining the SEC, she was in private practice with Milbank, Tweed, Hadley and McCloy.

Liz Dunshee

January 28, 2021

Market Mania: All is Well!

I was hoping to punt coverage of the amateur trading insanity to John’s blog rotation next week, but it seems notable that the SEC’s Acting Chair Allison Herren Lee – along with Pete Driscoll, Director of the Division of Examinations, and Christian Sabella, Acting Director of the Division of Trading and Markets – issued this joint statement yesterday to say they’re on the case. Of course, the statement doesn’t name names, but it’s hard to think it’s referring to anything other than the out-of-this-world trading of GameStop and a few other companies, which has been the subject of at least 10 WSJ articles, an Elon Musk tweet and a Vox explainer in the past 24-48 hours.

GameStop’s stock triggered at least nine trading halts on Monday, according to Bloomberg News. It closed yesterday at $347.51, down slightly from its opening price but still more than a 1740% increase over the high-teens closing price of earlier this month. And while the company isn’t in passive index funds that track to the S&P 500, it is included in some retail exchange traded funds, so the trading is impacting more than just the company itself. Don’t worry, “All is well!

My favorite coverage so far has been from Matt Levine – here’s an excerpt from yesterday’s “Money Stuff” column:

You know who has a weird job right now? George Sherman. GameStop’s executives and board of directors don’t seem to have said much recently. What could they say? “Huh, nice that the stock’s up.” One important thing to remember is that while you and I and Reddit and Elon Musk can all treat GameStop’s stock as an absurd gambling token, a toy adrift on market sentiment far from any economic reality, it is still the stock of a company. The company’s executives still come to work each day and have to figure out what this all means. Does the price signal sent by the capital markets tell them something about how they should invest and what their hurdle rate for new projects should be? (Lol no.) Should they keep doing the stock buyback that they still have authorized? (Lol no.)

Should they sell a ton of stock to all these redditors who want it so badly? Yes, of course, absolutely, I said so on Monday, but it’s tricky. For one thing if they sell stock at the top they will surely get sued. For another thing, even at these prices, you want something sensible to do with the money; you can’t be like “we’re gonna sell a billion dollars of stock because we can, and use the money to pay ourselves bonuses and open some stores I guess?” Also, though, what is happening with their stock is a strange and for all anyone knows delicate piece of magic, and it’s very possible that filing to sell more stock would mess it up.[3] For technical reasons (more shares for short sellers to borrow), for fundamental reasons (dilution?), for anti-establishment resentment reasons (“ahh Wall Street is taking advantage of this rally for its own ends”) or for general emotional reasons (“man even GameStop is a seller at these prices”). I would not be especially surprised if GameStop announced a stock offering and the stock fell all the way back to, you know what I am not going to type a number here, but let’s just say a normal price.

GameStop actually does have a $100 million ATM offering going right now, under a Form S-3ASR that it filed in early December – or at least, it did have an ATM offering going at some point in the recent past, and it hasn’t reported whether all of that stock has been sold. If there’s still room under the program, theoretically it could hit the market at these wild valuations.

That could be a little more doable than, say, filing a pro supp right now and including disclosure that anyone who buys in the offering is nuts. Hertz tried that last summer when it was in bankruptcy and also trading at weirdly high values, and then quickly suspended the offering when the SEC Staff raised questions. Any other fast moves to capitalize on this could not only open the company up to potential shareholder litigation, but also leave it holding a big bag of cash that looks pretty attractive to activists if and when the stock falls back to Earth.

It’s hard to say which company will next catch the eye of the Reddit YOLO crowd – there are a few contenders already, which the SEC is probably watching. If these speculative frenzies continue, it can’t hurt to be prepared for the questions you’ll inevitably get as counsel. As a starting point, check out these MoFo FAQs on at-the-market offerings and Regulation M – and the other resources in our “Equity Offerings” Practice Area.

Avoid a “Semi-Hack”: Change Your URLs

Last week, as reported in the Financial Times, Intel released its earnings about 12 minutes earlier than planned due to some people getting early access to an infographic that described the quarterly results. Kudos to the company for acting quickly to address the issue – they were scheduled to put everything out right after market close, but instead reported at about 3:48 p.m.

As Byrne Hobart notes, what actually caused people to have early access to the infographic in this case was that they realized the URL for each quarter’s earnings followed a sequential pattern, and the infographic was posted live to that page before earnings were officially released:

Intel had an infographic for their Q3 earnings, in a file that ended with “Q3_2020_Infographic.pdf” and had a URL with a sequential numbering scheme. Q4’s earnings presentation had the same file naming scheme, so it was easy to guess.

This kind of thing happens from time to time, and it’s an interesting edge case in US securities law. Technically, the information wasn’t misappropriated; no one at Intel violated a duty to keep it confidential in exchange for some consideration from a trader. But in practice, the technicality matters less than appearances. Because it looks like insider trading, and fits the broad definition of hacking, trading based on the possession of this infographic is a poor risk-reward even if it turns out to be legal.

I personally love sequential URLs for their convenience. But I guess whatever technical securities law questions this type of scenario might raise, the practical takeaway is that the convenience isn’t worth it when it comes to posting material non-public information. Either keep your files gated until go-time, or change your URLs to gobbledygook.

January-February Issue: Deal Lawyers Newsletter

This January-February Issue of the Deal Lawyers newsletter was just posted – & also mailed (try a no-risk trial). It includes articles on:

– An Extraordinary Course: Important Lessons from the Delaware Court of Chancery Decision in AB Stable VIII v. MAPS Hotels

– Background of the Merger: Drafting Tips

– Investment Banker’s Valuation COVID-19 Initiatives

– Innovations in Transactional Law: Finding the Next Opportunities for Efficiency

Remember that you can also subscribe to our newsletters electronically – an option that many people are taking advantage of in the “remote work” environment. Also – as a “thank you” to those that subscribe to both & our Deal Lawyers print newsletter – we make all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of – 2nd 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 will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to – 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.

Liz Dunshee

January 27, 2021

Infodemic: We Only Trust Businesses Now

According to Edelman’s 2021 Trust Barometer, we are experiencing a “rampant infodemic” of misinformation and widespread mistrust of societal institutions around the world. Poor information hygiene has left us unable to agree on or accomplish much of anything – including fighting the pandemic. Business has emerged as the most ethical, competent and trusted institution – with 61% of people globally and 54% of US respondents trusting business, compared to lower numbers for governments, NGOs and the media.

Few people would’ve predicted that a majority of Americans would trust big business when we were emerging from the financial crisis a dozen years ago, but here we are. Maybe we can attribute some of these results to the increased focus on “stakeholders” during the last couple of years, or maybe people are just desperate for someone to step up. But with great power comes great responsibility. According to the survey (also see this WSJ article):

– 86% of people expect CEOs to publicly speak out on social challenges like the pandemic impact, job automation, societal issues and local community issues

– 68% think that CEOs should step in when the government doesn’t fix societal problems

– Only 31% of people think brands are living up to expectations of doing an excellent job in helping the country overcome challenges

I blogged a couple of weeks ago on our Mentor Blog about the CLO’s role in CEO “activism” – and it looks like that’s likely to grow in importance. We also have memos on corporate political activism in our “ESG” Practice Area to help you navigate these expectations.

An earlier report from Edelman also looked at the role that executive pay can play in building trust, especially among institutional investors. I blogged last month on that having a CEO pay ratio in line with those of peers and linking executive pay to ESG performance now impact trust “a great deal.”

Paul Munter Named SEC’s Acting Chief Accountant

Last Friday, the SEC announced that Paul Munter will become the agency’s Acting Chief Accountant, effective upon Sagar Teotia’s previously-announced departure from the Commission in February. Sagar had served as Chief Accountant since 2019 – and Paul has served as the SEC’s Deputy Chief Accountant since 2019.

Tomorrow’s Webcast – “Conflict Minerals & Resource Extraction: Latest Developments”

Tune in tomorrow for the webcast – Conflict Minerals & Resource Extraction: Latest Developments – to hear our own Dave Lynn of Morrison & Foerster, Lawrence Heim of Responsible Business Alliance/Responsible Minerals Initiatives, Michael Littenberg of Ropes & Gray and Christine Robinson of Deloitte discuss what you should be considering as you prepare this year’s Form SD, and if you’re a resource extraction issuer, hear how to plan for the payments disclosure required under the SEC’s new rules to implement Exchange Act Section 13(q).

Liz Dunshee

January 26, 2021

BlackRock Wants Climate Change Disclosure, ASAP

Larry Fink is sending his annual letter to CEOs this morning. It’s a little later than usual and I’ve been feeling like I was waiting for Moses to come down from the mountain. Based on the signals that BlackRock sent with the Stewardship Expectations it released in December (which, as I blogged on our Proxy Season Blog, said the asset manager would put more companies “on watch” for climate risks), it’s not too surprising that the letter urges companies to disclose their “net zero” business plan and to explain how their board oversees that strategy. But if anyone had any doubts that BlackRock wants that information, this letter should lay those to rest. Here are the high points (also see this NYT DealBook article):

– We are asking companies to disclose a plan for how their business model will be compatible with a net zero economy – that is, one where global warming is limited to well below 2ºC, consistent with a global aspiration of net zero greenhouse gas emissions by 2050.

– We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.

– We strongly support moving to a single global standard, which will enable investors to make more informed decisions about how to achieve durable long-term returns.

– Because better sustainability disclosures are in companies’ as well as investors’ own interests, I urge companies to move quickly to issue them rather than waiting for regulators to impose them. (While the world moves towards a single standard, BlackRock continues to endorse TCFD- and SASB-aligned reporting.)

– In addition, TCFD should be embraced by large private companies and public debt issuers

– As you issue sustainability reports, we ask that your disclosures on talent strategy fully reflect your long-term plans to improve diversity, equity, and inclusion, as appropriate by region.

The letter says the lines are blurring between “E” & “S” issues – for example, climate change has a disproportionate impact on low-income communities. So improved data and disclosure are all the more important to understand the interdependence between these topics.

Mr. Fink is also bullish on sustainability investments. In his letter to clients that was also released today, he explained that they’ll be publishing a temperature alignment metric for their funds, implementing a “heightened-scrutiny model” in active portfolios (including potential divestments), launching more sustainability investment products, and “using stewardship to ensure that the companies our clients are invested in are both mitigating climate risk and considering the opportunities presented by the net zero transition.”

NYC Pension Funds to Divest $4 Billion From Fossil Fuels

BlackRock isn’t the only investor focused on climate change. We’ve been blogging about divestments over on the Proxy Season Blog (including pressure on BlackRock). Yesterday, NYC Comptroller Scott Stringer announced that two of the City’s pension funds had voted to divest their portfolios of $4 billion from fossil fuel companies. Here’s an excerpt:

The New York City Employees’ Retirement System (NYCERS) and New York City Teachers’ Retirement System (TRS) voted to approve divestments today and the New York City Board of Education Retirement System (BERS) is expected to move forward on a divestment vote imminently. Securities were identified based on demonstrated risk from fossil fuel reserves and business activity, and the trustees will continue to evaluate risk in their portfolios to determine additional actions as warranted. The names of companies and the final scope of the divestment will be released following the sale of all targeted securities, which will be completed in a prudent manner to achieve best execution. The divestment is expected to be complete within the original five year timeline. The announcement by the Mayor, Comptroller, and Trustees follows an extensive and thorough fiduciary process to prudently assess the portfolio’s exposure to fossil fuel stranded asset risk and industry decline and other financial risks stemming from climate change.

In January 2018, the trustees announced a goal to divest from fossil fuel reserve owners within five years, consistent with fiduciary duty. The Systems retained independent investment consultants who conducted investment analyses showing the risks posed by fossil fuel companies and the prudent nature of the divestment actions adopted by the Boards.

In September 2018, the Mayor and Comptroller also jointly announced a goal of doubling the pension funds’ investments in climate solutions from 1% to 2%, or about $4 billion within 3 years. Climate solutions include renewable energy, climate infrastructure, green real estate, and other investments that will help achieve the goals of the Paris Climate Agreement. The City is on track to achieve this goal.

Tomorrow’s Webcast: “Alan Dye on the Latest Section 16 Developments”

Tune in tomorrow for the webcast – “Alan Dye on the Latest Section 16 Developments.” This is our annual co-hosted program with the NASPP, in which Barbara Baksa interviews Alan about practical tips for refining your Section 16 procedures and avoiding pitfalls. members can submit questions in advance to

Liz Dunshee

January 25, 2021

More on “SEC Rulemaking: Will 2020’s Efforts Be Undone?”

Last week, President Biden’s Chief of Staff, Ronald Klain, issued a memo to heads of executive departments & agencies to freeze new & pending rules (and guidance) until the incoming administration’s appointees have a chance to review them. This is a separate thing from the ability that Congress has to overturn recent laws under the Congressional Review Act – which, as I blogged earlier this month and this Cooley blog tracks through in great detail, could apply to SEC rules that have been adopted since last summer.

Here are three “regulatory freeze” points worth noting:

1. The regulatory freeze imposed by the new administration is a pretty routine thing – see this Davis Polk blog explaining the impact of a similar memo issued by the Trump administration in 2017 – but these notices still tend to generate a lot of questions each time around.

2. Because Klain’s memo expansively defines the term “rule,” this Gibson Dunn memo suggests the SEC could have an opening to delay rules that have not yet become effective.

3. However, like freezes issued under prior administrations, this one is addressed just to executive departments & agencies and doesn’t appear to apply to independent agencies like the SEC – nor does it request that independent agencies voluntarily comply with the freeze, as some prior iterations have done.

Given that last point, it appears right now that the SEC’s recently adopted and not-yet-effective rules on streamlined MD&A and financial disclosures, private placements, etc. will still go effective as planned. If there are any announcements one way or the other, we’ll make sure to blog about them here.

GDPR: First US Tech Company Gets Dinged – More To Come?

In mid December, the Irish Data Protection Commission announced that it was assessing a $546,000 fine against Twitter for late notification of a data breach that occurred in late 2018. Companies are supposed to notify the regulator 72 hours after a breach – but Twitter waited about two weeks, saying it didn’t appreciate the severity of the issue. It’s not the first GDPR fine against an American company – but this WSJ article explains that it’s an important bellwether because it’s the first in a long pipeline of privacy cases involving US tech companies, including Facebook, Apple and Google – and privacy advocates want those fines to be assessed more quickly than the two years it took for Twitter.

If you enjoy tracking this type of thing, check out this list of “major” GDPR fines to-date. This D&O Diary blog emphasizes that US companies should be paying attention to EU regulations and that privacy-related issues are a growing area of corporate risk:

The regulatory risk is an important exposure, and could also result not just in regulatory enforcement actions, but also follow-on actions as investors and others allege that companies either failed to take steps to protect the company against regulatory action or misrepresented the level of its regulatory compliance. No matter how you slice it, privacy-related issues and concerns represent a significant potential future source of corporate liability exposures.

Edgar: Goodbye “Fake” Filings, Hello Reliability!

In August, Lynn blogged about amendments the SEC had proposed making to Reg S-T in order to promote the reliability and integrity of Edgar submission. The SEC recently announced that it had adopted those amendments – by adding new Rule 15 of Reg S-T, which will become effective if & when the final rule is published in the Federal Register. Although this might be the nail in the coffin for “fake” SEC filings that we enjoy blogging about so much, we’re celebrating that these improvements could help resolve Edgar outages and other administrative problems.

Another big part of Rule 15 is that it establishes a process for the SEC to notify filers and other “relevant persons” – vendors or suppliers who make the submission on behalf of the company – about actions that it takes under the rule. That will hopefully make it even easier to resolve submission issues, although the Commission will typically just continue to work with filers in advance of taking action, as it already does. Here are the steps that new Rule 15 will allow the SEC to take:

• Redact, remove, or prevent dissemination of sensitive personally identifiable information that if released may result in financial or personal harm;

• Prevent submissions that pose a cybersecurity threat;

• Correct system or Commission staff errors;

• Remove or prevent dissemination of submissions made under an incorrect EDGAR identifier;

• Prevent the ability to make submissions when there are disputes over the authority to use EDGAR access codes;

• Prevent acceptance or dissemination of an attempted submission that it has reason to believe may be misleading or manipulative while evaluating the circumstances surrounding the submission, and allow acceptance or dissemination if its concerns are satisfactorily addressed;

• Prevent an unauthorized submission or otherwise remove a filer’s access; and

• Remedy similar administrative issues relating to submissions

And in related news, the SEC announced that it has named Jed Hickman as the Director of the SEC’s Edgar Business Office. Jed’s been serving as Acting Director of that office since April 2019. The person holding this office has authority to take the actions under new Rule 15 – as well as under existing rules about filing date adjustments and the continuing hardship exemption.

Liz Dunshee

January 22, 2021

Commissioner Lee Designated as Acting SEC Chair

Yesterday, the SEC announced that President Biden designated Commissioner Allison Herren Lee as Acting Chair of the agency. Right before the end of the year, President Trump designated Commissioner Elad Roisman as Acting Chair following former Chairman Jay Clayton’s departure.  Commissioners Hester Peirce, Elad Roisman and Caroline Crenshaw issued a statement congratulating Commissioner Lee on her designation as Acting Chair. Earlier this week, the President nominated Gary Gensler to serve as SEC Chair and until he goes through the confirmation process, Acting Chair Lee will preside over a four-person Commission.

Plan Ahead: 2021 Peak Edgar Filing Dates

Now that 2021 is here, it might be a good idea to check your calendar – the SEC published the list of 2021 peak filing days.  Identified peak filing dates are based on historical data and the SEC says that the filing volume on peak days tends to be highest in the last hour of the filing day.  The SEC also says that filers who contact Filer Support on peak filing dates may experience longer than usual wait times.

Difficult D&O Pricing Environment: Consider Doubling SPAC D&O Premium Estimates

I recently blogged about how, during what is a challenging D&O pricing environment, some insurers are starting to look at company diversity practices. As the SPAC craze continues, SPACs are running into more issues with D&O insurance pricing. A recent Mayer Brown Free Writing & Perspectives blog says D&O pricing for SPAC sponsors has increased dramatically in just a few weeks:

The contributing factors to the difficult D&O pricing environment include the fact that there are only a handful of insurers who are willing to write D&O coverage for SPACs and these same insurers have been inundated with requests for such coverage over the last few weeks and are running out of annual capacity.

These factors and others have driven SPAC D&O pricing to levels that are 100% to 200% higher than they were just a few weeks ago. As a result, the cost of a $20 million D&O policy has jumped from mid-$400,000s to between $900,000 and $1,100,000 just in the last month and in turn has led to hundreds of thousands of dollars in unplanned expenditures. SPACs looking at previous SPAC S-1 registration statements should be mindful that D&O insurance cost estimates in typical S-1s may have been actionable several years ago but are wishful thinking in today’s D&O market.

A recent Business Insurance article says D&O liability pricing isn’t getting any better.  The article says pricing is going up and underwriters are raising retentions. As to when we’ll start seeing pricing improvements, the article says some believe there won’t be a letup until sometime in the third quarter of this year.

– Lynn Jokela

January 21, 2021

M&A Financial Disclosure: New Rules Effective Now

The new rules governing financial information that public companies must provide for significant acquisitions & divestitures, which were adopted last May, became effective January 1st. The amendments made conforming changes to Items 2.01 and 9.01 of Form 8-K relating to, among other things, determining significance of an acquisition.

Those conforming changes to Form 8-K are outlined beginning on page 71 of the rules published in the Federal Register. However, as a heads up to anyone preparing this Form 8-K disclosure, it appears that the Form 8-K available on the SEC’s Forms List was last updated in May 2019 and does not yet reflect these updates.  For those looking for information about M&A financial disclosure – we have memos about the new rules posted in our “Accounting Overview” Practice Area.

It doesn’t appear these rules will be affected by the regulatory freeze President Biden imposed yesterday, which we’re still learning more about. As noted in this Cooley blog, these rules could be among several as possibly being negated under the Congressional Review Act, but at least historically, it’s been rare for that to happen.

“Say-on-Climate”: Future Routine Vote?

Back in December, Liz blogged on our “Proxy Season Blog” about Unilever’s plan to seek shareholder approval for its climate action plan. A recent Agenda Week article reports that at least seven North American companies received shareholder proposals requesting advisory votes on company climate change plans. The article says investors behind the proposals include hedge fund TCI Fund Management and As You Sow – they want regular votes on climate change so shareholders have a say on whether company progress on climate change is moving along fast enough. Although seven proposals aren’t a lot, the proposals are taking hold in Europe:

While this may be the first time many companies in the U.S. are dealing with say-on-climate proposals, the vote has been gaining traction in Europe. Aena, a Spanish airline operator, was the first company to adopt an annual shareholder advisory vote on its climate plan and progress after engaging with TCI late last year. And one European investor, Ethos Foundation, which serves as a proxy advisor to Swiss pension funds, adjusted its proxy-voting guidelines for the 2021 season to support say-on-climate proposals.

The article quotes the CEO of Ethos Foundation as saying ‘We don’t expect too many votes this year, but the pressure is increasing as some European companies already decided to adopt this advisory vote, and Unilever is one of them. We decided to put this in our guidelines early to set the tone and tell companies what we expect and to influence other investors to push for the right to vote on climate transition plans.’

For U.S. companies, a proposal at Moody’s has been withdrawn, presumably in response to Moody’s announcement that it would support the “say-on-climate” campaign – shareholders will vote on Moody’s climate transition plan at its 2021 shareholder meeting.  It’s possible more of the seven North American proposals will be withdrawn before this year’s shareholder meetings but in the meantime, it doesn’t seem like much of a stretch to think we may see more of these proposals coming down the pike. It’s probably a little early though to make a call saying whether these proposals might be on their way to becoming another “routine” annual meeting voting matter.

Financial Fraud Schemes: Familiar Common Themes

Throughout the last year, we’ve continued to read about SEC enforcement actions and the Enforcement Division’s continued focus on financial fraud. Many expect the Enforcement Division to be more active and aggressive in the coming years. To help companies protect against financial fraud, a recent study from the Anti-Fraud Collaboration analyzed SEC enforcement actions and provides insight into common financial fraud themes – it says the most common schemes and areas at higher risk for manipulation aren’t necessarily new.  Here are some of the study’s findings:

The kinds of business challenges that were frequently present in enforcement cases—pressure to meet analyst expectations, increased supplier costs, slowing demand for products, and more—are exacerbated during a crisis like COVID-19.  These kinds of challenges and issues suggest a need for the board and audit committee, management, and internal and external auditors to be attuned to both quantitative and qualitative metrics.

The most common type of fraud incident was improper revenue recognition (43%). Reserves manipulation (24%), inventory misstatement (11%), and loan impairment issues (11%) were other common financial statement fraud schemes. Improper revenue recognition was among the top two fraud schemes from 2014 through mid-2019.

Some industries were charged more frequently than others. Technology services companies (17%) were the most commonly charged industry. Finance (13%), energy (11%), and manufacturing (9%) were also charged in the enforcement actions.

The study cites case examples of common financial fraud schemes along with the result. In terms of what companies should do, the study reminds companies to continue exercising skepticism and attention to potential risks. It suggests companies should remain focused on the fundamentals—controls, processes, and environments that impact financial recordkeeping and decision-making—and company-specific risks by conducting regular risk assessments.

– Lynn Jokela

January 20, 2021

End of an Era: Corp Fin’s Shelley Parratt to Retire

Yesterday, the SEC announced Shelley Parratt is retiring after a remarkable 35 years of service with the agency.  For many, Shelley’s name is synonymous with Corp Fin – she’s currently the Division’s Acting Director and joined Corp Fin in 1986.  Over the years, Shelley served on three occasions as the Division’s Acting Director – here’s Broc’s blog from 2009 when she became Acting Director – and has served as Corp Fin’s Deputy Director since 2003. The press release includes several highlights of Shelley’s career and notes she led Corp Fin’s Disclosure Program for more than 25 years. In recognition of her service, Shelley has received numerous awards, including the Distinguished Service Award, the SEC’s highest honorary award.  She’s also been recognized for her role in promoting women in leadership roles, this excerpt from the SEC’s press release provides a highlight:

Throughout her tenure, Ms. Parratt served as a trusted mentor for countless current and former SEC staff members. As one of the longest serving female senior executives at the SEC, Ms. Parratt used her role to mentor and promote women into leadership roles. Always focused on the present and future needs of the Division, she helped lead the Division’s efforts to enhance diversity and inclusion, knowledge management and staff training with a primary focus on developing the Division’s future leaders. SEC Chair Mary Jo White recognized these efforts by presenting her with the Leading for the Future award in 2016.

Acting Chair Roisman recognized Shelley’s service and contributions, saying ‘Shelley epitomizes the dedication and expertise that are hallmarks of the SEC’s professionals, and we owe her a great debt of gratitude for her decades of public service.’

Shareholders Approve Public Company Conversion to PBC – In a Landslide!

Last fall, Liz blogged about some of the possible benefits of B-corps. At that time, Veeva Systems had formed a board committee to explore becoming a public benefit corporation. Of course one hurdle to a public company PBC conversion is the need for shareholder approval. Last week, Veeva announced that its shareholders gave the company two thumbs up as they overwhelmingly approved the company’s proposal to convert to a PBC – the company received support from 99% of its voting shareholders.  On February 1, Veeva will become a PBC, making it the first publicly traded company and largest-ever to convert to a PBC, here’s an excerpt from the company’s press release:

As a PBC, Veeva will remain a for-profit corporation but will be legally responsible to balance the interests of multiple stakeholders, including customers, employees, partners, and shareholders. It will also broaden its certificate of incorporation to include a public benefit purpose, ‘to help make the industries it serves more productive and create high-quality employment opportunities.’

A key technology partner to the life sciences industry, Veeva is dedicated to customers’ mission to advance human health and wellbeing. This move aligns Veeva’s legal charter with this broader mission and the company’s core values, including do the right thing, customer success, and employee success.

Tomorrow’s Webcast: “The Latest: Your Upcoming Proxy Disclosures”

Tune in tomorrow for the webcast – “The Latest: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and, Dave Lynn of and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance – including the latest SEC positions – about how to use your executive & director pay disclosure to improve voting outcomes and protect your board, as well as how to handle the most difficult issues on oversight, engagement and disclosure of executive & director pay.

– Lynn Jokela

January 19, 2021

Gary Gensler Tapped for Nomination as Next SEC Chair

Yesterday President-elect Biden announced several additional picks for his administration, including his intention to nominate Gary Gensler to serve as SEC Chair.  Gensler is currently a professor at MIT’s Sloan School of Management, previously served as Chairman of the Commodity Futures Trading Commission and is a former Goldman Sachs executive.  Speculation about who President-elect Biden would nominate for the SEC chair position has been swirling for a while now, although over the last week, several media outlets began reporting that Gensler would get the nomination – here’s a NYT story from last week.

With the incoming administration, the NYT reports that the SEC might focus on disclosures relating to climate change risk, political donations and boardroom diversity, while also potentially rethinking rules around stock buybacks. Some have noted that Gensler taught courses on cryptocurrencies at MIT and speculate that rules on digital currencies may also come into focus.  He’s also likely to step up enforcement efforts at the agency and some are saying he will favor aggressive regulation for financial institutions and companies.

It’s hard to say exactly when the agency’s new chair will be confirmed.  Back in 2017 when former Chairman Clayton was nominated, the timeline went like this: nomination announced in early January, Senate Banking Committee met to approve the nomination in early April and full Senate confirmation came along in early May.

Glass Lewis Refines Policy on Virtual Shareholder Meetings

In our webcast last week, one of the topics Courteney Keatinge, Glass Lewis’s Senior Director of ESG Research, talked about was the proxy advisor’s policy on virtual shareholder meetings. Glass Lewis supports virtual participation in shareholder meetings but has concerns when a company doesn’t provide “robust” disclosure about shareholder participation rights. There’s been a refinement to that policy, which Glass Lewis shared in a recent blog post.

One tweak in the proxy advisor’s expectations relates to when there are restrictions on the ability of shareholders to question the board during the meeting. In these situations, the proxy advisor expects a transparent disclosure about the company’s commitment to post questions and answers on the company’s shareholder meeting or IR website. The blog post also provides insight about the proxy advisor’s views relating to hybrid meetings, in-person meetings, amendments allowing virtual or hybrid meetings and allowing virtual participation by directors and executives. After last year, many, if not most, companies have experience holding a virtual shareholder meeting so shareholder expectations about information they need to participate and ask questions will likely be higher.  Here’s an excerpt about the proxy advisor’s VSM disclosure expectations:

Companies can mitigate risk of reduction in shareholder rights by transparently addressing:

– When, where, and how shareholders will have an opportunity to ask questions related to the subjects normally discussed at the annual meeting, including a timeline for submitting questions, types of appropriate questions, and rules for how questions and comments will be recognised and disclosed to shareholders.

– In particular where there are restrictions on the ability of shareholders to question the board during the meeting – the manner in which appropriate questions received prior to or during the meeting will be addressed by the board; this should include a commitment that questions which meet the board’s guidelines are answered in a format that is accessible by all shareholders, such as on the company’s AGM or investor relations website.

– The procedure and requirements to participate in the meeting and/or access the meeting platform.

– Technical support that is available to shareholders prior to and during the meeting.

In the most egregious cases where inadequate disclosure of the aforementioned has been provided to shareholders at the time of convocation, we will generally recommend that shareholders hold the board or relevant directors accountable and depending on a company’s governance structure, country of incorporation and meeting agenda Glass Lewis may recommend shareholders vote “against” members of the governance committee, board chair or other agenda items relating to board composition and performance.

Inauguration Day: Business as Usual for Edgar

With the inauguration tomorrow, some have SEC filings top of mind.  For those that do, the SEC issued an announcement that Edgar will operate normally that day.  The announcement is somewhat matter of course for the agency as it issued a similar announcement for the 2017 inauguration.

– Lynn Jokela

January 15, 2021

Financial Reporting: Mind Your XBRL Tags

There are few topics that make my eyes glaze over more quickly than anything related to XBRL. But in a recent FEI article, former SEC Chief Accountant Wes Bricker says that companies and audit committees need to pay closer attention to the quality of their efforts to comply with XBRL tagging requirements:

While more regulators have been requiring XBRL in recent years, its use hasn’t been without challenges: for instance, errors, inconsistent tagging of the same information across companies or mis-tagging tags are ongoing issues. And there are even technology companies that have emerged over the past few years that mine XBRL-public filings, remedy the problematic data and then sell the corrected data back to those that use XBRL data (including back to companies themselves).

While any errors in financial reporting or other processes is cause for concern across the market because of its corrosive impact on confidence over time, with XBRL errors there’s also a potential corrosive effect for individual companies, such as potential negative impacts to stock price, credit ratings, and even reputation.

The article notes that errors are difficult to scrub from the Internet, even following a corrective amendment – and the consequences can be significant. Reporting errors caused by XBRL issues could pose reputational risks, which can be compounded if tagging inaccuracies are overlooked and carried forward into future periods. Faulty XBRL data also could bring about errors in rating agencies’ models – which in a worst case scenario could result in a lower credit rating and higher borrowing costs.

Despite these stakes, the XBRL tagging error rate is high.  According to this Toppan Merrill blog discussing the article, 34% of September 10-K & 10-Q filings reportedly contained tagging errors. That blog also points filers to the US XBRL Data Quality Committee’s website, which provides a free service permitting companies to check their filings.

Wes Bricker’s article recommends actions that companies and audit committees should take to enhance the XBRL process, including enhanced education and training of staff in corporate accounting, finance, treasury, and investor relations. The article didn’t mention the need to loop in the legal department or outside counsel – which is good, because my eyes glazed over about three paragraphs ago. But as Liz blogged last month, if SEC commissioner Allison Herron Lee gets her way, we all may have to force ourselves to pay closer attention to XBRL tagging issues.

Insider Trading: Capitalizing On Cyber Breaches

In a recent Institutional Investor article, the authors of a new study suggest that there’s been quite a bit of insider trading during the period immediately following a breach. The study looked at options trading during the period between the time a cyber attack was experienced and when it was disclosed – and it reached some interesting conclusions:

We observed bearish call and hedging put strategies increasing prior to the official breach announcements. These effects were most significant for out-of-the-money, at-the-money, and in-the-money put options, which typically have the highest liquidity. Additionally, we found a spike in investors buying insurance against a stock crashing right before that company told the world it had been hacked.

An increase in deep out-of-the-money trades indicates that informed investors expect negative news in the future. We also saw that the options trading activity before a firm’s breach disclosure was related to the negative abnormal stock returns the firm experienced after the disclosure. Thus the pre-disclosure trading activity was consistent with informed investors profiting from or buying insurance against a stock crashing right before the company told the world it had been hacked.

The good news is that the authors found that the amount of potential insider trading around cyber breaches has declined over the past decade, which they attribute to increased scrutiny of breaches and greater awareness of trading around them before official announcements.

Private Offering Simplification Rules: We Have An Effective Date

The SEC’s recent amendments simplifying the regulation of private offerings were published in the Federal Register yesterday, and will become effective on March 15, 2021. We’ve just scheduled a webcast for February 17th to help you get up to speed on the new regime. Be sure to tune in!

– John Jenkins