Monthly Archives: June 2021

June 30, 2021

ESG: Enhancing Your Disclosure Controls & Procedures

Many companies are trying to satisfy investor demands for ESG disclosure, but it’s probably fair to say that their disclosure controls and procedures (DCPs) for these voluntary disclosures are likely not as robust as those required to be in place for mandatory disclosure topics. If you work with a company that meets this description, then be sure to take a look at this memo from Skadden & the Society for Corporate Governance, which provides some thoughts on both how to enhance disclosure controls for ESG and why companies should consider making such an effort now.

The memo highlights some of the risk mitigation benefits of enhancing DCPs in this area, and this excerpt addresses some of the other benefits that companies may derive:

The motivation for enhancing E&S DCP is not limited to risk mitigation. As companies factor E&S matters into their strategic decision-making and business operations, there may be business and operational benefits to ensuring robust DCP with respect to voluntary E&S disclosures that support the reliable collection and tracking of data. These benefits may include, for example:

– Enhancing the accuracy and reliability of the data used by management and the board of directors in their decision-making and oversight, respectively.
– Promoting, among employees across the enterprise, a greater understanding of, and engagement in, the company’s E&S efforts and objectives.
– Facilitating consistency of E&S disclosures across multiple mediums, such as the corporate website, sustainability report, and employee communications.
– Improving tracking and benchmarking of progress with respect to E&S initiatives and commitments over time.
– Uncovering risks and opportunities by better identifying areas that would otherwise be overlooked absent reliable data.
– Increasing access to capital or lowering the cost of capital.

The memo provides detailed guidance on enhancing ESG DCPs.  It also points out that another benefit of these efforts will be to help position the company with its obligations to establish DCPs addressing ESG disclosures in the highly likely event that the SEC adopts rules mandating some form of these disclosures.

John Jenkins

June 30, 2021

Public Offerings: Distressed Companies Eye Meme Stock Crowd

Several companies facing hard times have decided that the key takeaway from the meme stock phenomenon is that no business headwinds are strong enough to deter meme stock “apes” in search of their “tendies”.  Here’s an excerpt from a recent WSJ article:

The frenzied stock-buying activity that may have saved AMC Entertainment Holdings Inc. from bankruptcy is opening up a potential escape hatch for other troubled borrowers as well.

More companies with steep financial challenges are seeking a lifeline from equity markets, eager to capitalize on the surge of interest in stock buying from nonprofessional investors. Earlier this month, coal miner Peabody Energy Corp., offshore drilling contractor Transocean Ltd. and retailer Express Inc., all announced plans to sell stock, betting equity markets will support them despite heavy debt loads, recent losses and industry headwinds.

Selling stock isn’t the typical way for distressed companies to grab a lifeline. More often, they are forced to seek out rescue loans, sell off assets or pursue a merger, which can be difficult because of their existing debt. But equity markets now are more open to supporting troubled issuers, in large part because of risk-hungry individual investors eager to speculate, according to bankers and investors following the trend.

The companies identified in the article aren’t planning firm commitment underwritings. Instead, these companies – like AMC and other meme stocks – are planning to tap the market through ATM offerings. It will be interesting to see if this gambit works, but even after months of meme stock nuttiness, I have my doubts.  Most of the meme stocks seem to have gained that status because of buzz generated on social media, and that’s hard for companies to gin up on their own.

Hey, I’ve got an idea – maybe instead of road shows, their CEOs could start giving interviews to YouTube personalities without wearing pants? You know – sort of a “sans-culottes for the sans-culottes” marketing strategy. I mean, it’s worked before , . .

John Jenkins

June 30, 2021

New Director of Enforcement: New Jersey AG Gurbir Grewal

Yesterday, the SEC announced that New Jersey Attorney General Gurbir Grewal had been appointed to serve as the agency’s Director of Enforcement.  Grewal has served as The Garden State’s AG since January 2018, and prior to that time he spent much of his career as a federal prosecutor in New York and New Jersey.

John Jenkins

June 29, 2021

Hypothetical Risk Factors: Beware the 10-Q Updating Requirement!

The SEC’s 2019 enforcement action against Facebook highlighted the perils of hypothetical risk factors. Now, in In re Alphabet Securities Litig., (9th Cir.; 6/21) the 9th Circuit recently upheld disclosure claims against another tech titan premised on its alleged failure to update disclosure of a risk of a cyberbreach that was hypothetical when initially disclosed in a 10-K, but became very real by the time subsequent 10-Qs were filed.  This Morrison & Foerster memo reviews the Court’s decision. This excerpt provides an overview of the complaint’s factual allegations:

The complaint alleged that in February 2018, Alphabet, Inc. (“Alphabet”), the holding company of Google LLC (“Google”), filed its 10-K for FY 2017. In the “risk factors” section, it listed potential consequences in the event third parties were to breach Google’s cybersecurity measures and obtain access to its users’ private data.

The complaint further alleged that in April 2018, the Alphabet CEO discovered that a bug had exposed Google user data for a three-year period. The company did not disclose the breach at the time. Further, it alleged that on April 23, 2018, and July 23, 2018, Alphabet filed 10-Qs, stating affirmatively that there had been “no material changes” to the risk factors set out in its 2017 10-K and made no disclosure about the data breach.

The WSJ published an article in October 2018 that disclosed the cyberbreach, Alphabet’s stock price took a hit, and the lawsuits soon followed.  The District Court dismissed the plaintiffs’ complaint, but the 9th Circuit reversed. This excerpt from the memo lays out the Court’s reasoning:

The panel found it plausible that a reasonable investor reading the 10-Qs would have been misled by the company’s representation that there had been “no material changes” in the risk factors into believing that Google had not discovered a data breach. The panel relied on the Securities Exchange Commission’s guidance regarding the adequacy of cybersecurity-related disclosures as “judgments about the way the real world works” to inform its analysis of a
reasonable investor’s perspective.

Item 1A of Form 10-Q requires companies to update the risk factors disclosed in their 10-K filings to reflect any “material changes.” The Alphabet case makes it clear that when considering the perils of hypothetical risk factors, companies need to keep this updating requirement in mind if any of those risks have materialized since the 10-K was filed.

John Jenkins

June 29, 2021

Auditor Ratification: “No” Votes On The Rise

According to this Audit Analytics blog, “no” votes on auditor ratification proposals rose in 2020. Now, before we get carried away here, let’s start with the fact that support for these proposals is generally overwhelming – from January 1, 2018 to December 31, 2020, an average of 98% of votes were cast in favor of ratification.  Still, these excerpts from the blog indicate that’s not the whole story:

– The occurrence of shareholders voting in large numbers against auditor ratification has been increasing. Over the last three years, there have been four instances when more than 40% of a company’s shareholders voted against ratification; three of those votes occurred in 2020.

– In 2020, there were 13 entities with more than 20% of shareholder votes cast against ratification. SPAR Group [SGRP], LM Funding America [LMFA], and Barnwell Industries [BRN] top this list, with more than 42% of votes against auditor ratification.

– Both SPAR Group and Barnwell Industries had previous votes where shareholders voted in large quantities against the company’s auditor. In 2019, 30.85% of SPAR Group’s shareholders voted against ratification. For Barnwell Industries, over 5% of shareholders voted against the company’s longstanding auditor in six of the last seven years. Worth noting, Barnwell Industries opted to change auditors in 2020.

Among the S&P 500, the blog says that incidence of no votes on ratification proposals is much lower. The blog includes a list of the 10 highest votes against ratification among the S&P 500, and notes that UDR (14%) and GE (11%) topped the list this year. UDR and GE were the only members of the S&P 500 with greater than 10% negative votes, and the 10th company on the list, Masco Corporation, received only a 7% vote against ratification.

Those numbers may seem low, but given the traditional levels of support for auditor ratification proposals, the blog says they are enough to “trigger a red flag.” So what do companies do in response to this “red flag”? While it is still rare for companies to change auditors in response to a large negative vote, that doesn’t necessarily mean that companies and their auditors don’t take notice. For instance, in an earlier blog, Audit Analytics cites academic research indicating that a high level of shareholder dissatisfaction with auditors leads to better audit quality.

John Jenkins

June 29, 2021

Board Gender Diversity: 9th Cir. Okays Challenge to California Statute

Cooley’s Cydney Posner recently blogged this update on the status of litigation challenging California’s board gender diversity statute:

In Meland v. Padilla, a shareholder of a publicly traded company filed suit in federal district court seeking a declaratory judgment that SB 826, California’s board gender diversity statute, was unconstitutional under the equal protection provisions of the 14th Amendment. In April 2020, a federal judge dismissed that legal challenge on the basis of lack of standing.

On Monday, a three-judge panel of the 9th Circuit reversed that decision, allowing the case, now called Meland v. Weber, to go forward. The Court held that, because the plaintiff “plausibly alleged that SB 826 requires or encourages him to discriminate on the basis of sex, he has adequately alleged that he has standing to challenge SB 826’s constitutionality.”

Cydney’s blog also provides an overview of the potential constitutional issues raised by the California statute and the background of the litigation.

John Jenkins

June 28, 2021

SEC’s SolarWinds FAQs: “Zix Mail? Yeah, That Was Us. . . “

On Friday, the Staff issued 21 FAQs for recipients of its recent letter requesting certain companies to voluntarily provide information concerning the SolarWinds cyberattack.  The FAQs provide answers to questions concerning, among other things, the scope and limitations of the “amnesty” that the Division of Enforcement is prepared to provide and how to respond to certain inquiries contained in the original letter.

Companies that received the letter should read the FAQs carefully and should also be sure to check out this blog from Perkins Coie.  While the FAQs are all helpful, I think that for many companies, the Staff’s first FAQ raises the question they asked most often:

1.   I received a notification from Zix Mail, is it legitimate?

The SEC uses Zix Mail service for sending encrypted messages in connection with its confidential investigations, including this one. When we send an encrypted message via Zix Mail, the recipient receives a notification message from Zix Mail. An authentic notification of a message from Zix Mail will:

i.  Be sent only from
ii. Direct you to a link starting with “”

The backstory here is that many companies that received the original email from the Division of Enforcement weren’t sure that it was legit, and some of them reached out to the Staff to confirm that it came from the SEC. After reading FAQ #1, can you blame them?  Based on the SEC’s description of its email blast, this thing couldn’t have looked more like a phishing attempt if the Zix Mail email address had ended in “”.

John Jenkins

June 28, 2021

Section 13(d) Reform: Gary Gensler Makes His Pitch

A few months ago, I blogged about the possibility that 13(d) reform might be on the SEC’s agenda.  In a speech delivered last week, SEC Chair Gary Gensler confirmed that he has the beneficial ownership reporting rules in his sights. Here’s an excerpt:

In 1968, our Congress mandated that large shareholders of public companies disclose information that helps the public understand their ability to influence or control that company. Under current rules, beneficial owners of more than 5 percent of a public company’s equity securities who have control intent have 10 days to report their ownership.

We haven’t updated that deadline in over 50 years. Those rules might’ve been appropriate for the 1970s, but I have my doubts about whether they continue to make sense given the rapidity of current markets and technologies. I’ve asked staff how we might update these rules, including possibly shortening reporting deadlines.

Activists aren’t going to be thrilled with that development, but public companies and those who represent them are likely to continue their vocal support of a move to shorten filing deadlines. Chair Gensler went on to reference his desire for greater transparency concerning derivative swaps on individual companies that “provide exposure to the company without traditional equity ownership,” so perhaps an expansion of the definition of “beneficial ownership” under Section 13(d) to encompass these derivative positions might also be on the table.

John Jenkins

June 28, 2021

EDGAR: Juneteenth Filing Date Adjustments

The EDGAR system was closed on Friday, June 18th in observance of the new Juneteenth federal holiday. Since President Biden had signed the legislation only the day before, the decision to close EDGAR was made in a very short timeframe.  Apparently, that resulted in a little internal confusion, and some filers who made filings after 5:30 pm on June 17th receiving a June 18th filing date.  Since EDGAR was closed, that filing date doesn’t work, so on Friday, the SEC announced that those filers will have their filing dates automatically adjusted to June 21st.

John Jenkins

June 25, 2021

Strongly Worded CEO Letters: What If You Have To Disclose Your Follow-Through?

I blogged 3 years ago that it was getting difficult for CEOs to stay silent on hot social and political issues. Fast forward to today, and open letters have taken off as a mainstay of corporate political activism. Research suggests that they’re viewed as a somewhat “safe” way to respond to consumer & employee expectations without sacrificing shareholder value. But signs are emerging that investors and other stakeholders are starting to pay closer attention to follow-through.

Last year in particular, hundreds of companies vowed to combat systemic racism against Black Americans in the wake of George Floyd’s murder. It’s difficult to keep track of which companies made a commitment, what the commitment was, and whether they’ve followed through. Various “pledge trackers” sprung up in the fall, but they haven’t been maintained with real-time data.

One economist says that in the aggregate, companies pledged to put somewhere between $50 – 65 billion toward DEI efforts over a multi-year time frame. Now, he’s submitted an SEC rulemaking petition to urge that companies be required to disclose progress on their commitments. So far, he says, only $500 million has been spent. He argues it doesn’t matter whether investors care about this info, because compelling disclosure would be in the public interest and is within the Commission’s authority. That’s a bold position to take, in light of recent Commissioner statements about the SEC’s role and materiality.

Some investors do seem to care about racial equity commitments, though. We’ve been blogging throughout this proxy season about shareholder proposals requesting EEO-1 reports and racial equity audits. These proposals have become more common this year – and have been getting solid support. Shareholders seem to be moving from requesting simple demographics data to requesting data that allows them to understand & evaluate company efforts to promote equity. The level of support for these proposals, while typically below a majority at this point, implies that a sizable portion are starting to view the info as relevant.

The Commission hasn’t given any indication that it would take up this rulemaking petition, but the letter raises awareness of what could be an emerging disclosure risk. This DealBook column predicts that “strongly worded letters” are only going to become more common. With reputational risks & investor materiality assessments constantly evolving – and expectations that “ESG”-type commitments will be accurate – securities & corporate governance counsel should have a seat at the table when companies are crafting these high-minded statements. You want to ensure anything that’s released aligns with the company’s stated values and what it is actually doing & planning to do.

You may also want to start tracking your company’s follow-through, if you’re not doing that already – see this PracticalESG blog for ways to do that – and be prepared for inquiries like this one from Majority Action.

Liz Dunshee