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