Monthly Archives: November 2021

November 23, 2021

SEC Enforcement: New Perk Case Provides Primer on What Not to Do

If you’re looking for a primer on how not to implement disclosure controls & procedures surrounding the disclosure of executive perks and stock pledges, be sure to check out this settled enforcement proceeding that the SEC announced yesterday. This excerpt from the SEC’s press release summarizes the proceeding:

The Securities and Exchange Commission today announced that Texas-based oilfield services company ProPetro Holding Corp. and its founder and former CEO Dale Redman have agreed to settle charges that they failed to properly disclose some of Redman’s executive perks and two stock pledges.

The SEC’s order finds that Redman caused ProPetro to incur $380,594 worth of personal and travel expenses unrelated to the performance of his duties as CEO. He also failed to disclose to company personnel that he had pledged all of his ProPetro stock in two private real estate transactions. During the same period, ProPetro failed to properly disclose $47,591 in additional, authorized perks it paid to Redman. As a result of these failures, the company issued public filings that included material misstatements regarding executive perks and stock ownership, and failed to accurately record Redman’s perks in its books and records.

While the defendants neither admitted nor denied the allegations made by the SEC, they consented to a C&D and the former CEO agreed to pay a $195,046 penalty. But in order to understand the alleged shortcomings in the company’s disclosure controls & procedures surrounding perks and pledges, you need to check out what the SEC claimed in its Order Instituting Proceedings. Highlights include:

– The CEO had a 50% ownership interest in a company that owned an airplane that he used for business travel. It sent invoices to the company for his flights, which the CEO initialed for approval and passed on to the accounts payable supervisor in the same manner as all other vendor invoices.

– Despite a policy prohibiting personal use of company credit cards, the CEO and his family made over $125,000 of personal charges that were not reimbursed and were not disclosed in the company’s proxy statement.

– The CEO pledged stock without obtaining prior board authorization, and subsequently obtained board approval of a negative pledge arrangement with another bank that prohibited him from disposing of the stock. He did not inform the board of the earlier pledge, nor did the company disclose either pledge in its proxy statements for several years.

How did all of this (and more) get missed? Part of the answer appears to be a lax approach to handling D&O questionnaires. Here are paragraphs 24 & 25 from the SEC’s Order:

24. On January 27, 2017, approximately one week after the close on the loan for his first ranch with its associated stock pledge, Redman completed his “D&O Questionnaire” for the disclosures in the company’s Form S-1 Registration Statement. Redman completed and signed the 2017 D&O Questionnaire, but left the line item for pledged shares blank. In 2018, Redman did not complete a D&O Questionnaire at all. On January 21, 2019, Redman completed the D&O Questionnaire but did not submit Schedule B, “Security Ownership and Recent Transactions in Company Securities,” which should have described his ProPetro equity ownership including his stock pledges.

25. Redman also did not identify in his D&O Questionnaires any of his personal trips on the Aviation Co. Learjet, the personal charges he made on the corporate credit card, or the additional perquisites authorized by the company. In his 2017 D&O Questionnaire, Redman included some perquisites for his company car, but failed to include any of the additional perquisites detailed above. In 2018, Redman failed to complete a D&O Questionnaire. On January 21, 2019, although Redman included some perquisites in his D&O Questionnaire, he did not disclose the personal air travel, any of the personal credit card charges reimbursed by the company that year or the various previously authorized perquisites detailed above.

The good news for the company was that the SEC lauded its cooperation. The bad news for the company’s executives was that in order to get that pat on the back, the board replaced them with an entirely new management team.

John Jenkins

November 23, 2021

NYSE: SEC Approves Amendment Clarifying “Votes Cast”

Last week, the SEC approved an amendment clarifying the definition of “votes cast” in Section 312.07 of the NYSE’s Listed Company Manual (Liz blogged about the proposal last month).  The amendment eliminates a disparity that previously existed in the treatment of abstentions under the laws of many states and the NYSE’s treatment of them in determining whether a particular action has been authorized by a majority of the votes cast by shareholders.  This excerpt from Arnold & Porter’s memo on the amendment explains the NYSE’s action and its consequences:

The NYSE has historically advised companies that abstentions should be treated as votes cast for purposes of Section 312.07, such that a proposal would be deemed approved only if the votes in favor exceed the aggregate of the votes cast against plus abstentions (i.e., giving abstentions the effect of a vote against). The corporate laws of many states, however, including Delaware, allow companies to specify in their governing documents that votes cast for purposes of a shareholder vote include yes and no votes (but not abstentions), such that a proposal succeeds if the votes in favor exceed the votes against. Consistent with those state laws, many public companies have bylaws indicating that abstentions are not treated as votes cast.

The NYSE has amended Section 312.07 to provide that a company must determine whether a proposal has been approved by a majority of the votes cast for purposes of Section 312.07 in accordance with its own governing documents and any applicable state law, which would permit a company to disregard abstentions if its governing documents and any applicable state law so provide. In its proposal, the NYSE noted that this is consistent with Nasdaq’s approach. The NYSE also noted that the amendment will help ensure that shareholders properly understand the implications of choosing to abstain on a proposal subject to approval under NYSE rules.

John Jenkins

November 22, 2021

Human Capital: Assessing a Year’s Worth of Disclosure

The rules requiring principles-based disclosure of material information about human capital management practices have been in place for a little over a year now, and this Gibson Dunn memo takes a look at what companies have been saying in response to the requirement. The firm surveyed 10-K filings from 451 members of the S&P 500, and found that disclosure practices varied pretty widely, “with no uniformity in their depth and breadth.” That makes disclosures difficult to compare, which is one reason why more prescriptive disclosure requirements are likely on the way.

Despite the challenges, the firm was able to group common areas of disclosure within a handful of categories: workforce composition and demographics; recruiting, training & succession; employee compensation; health & safety; culture & engagement; COVID-19; and HCM governance & organizational practices. This excerpt discusses diversity and inclusion disclosure practices, which was the most common type of workforce composition disclosure:

This was the most common type of disclosure, with 82% of companies including a qualitative discussion regarding the company’s commitment to diversity, equity, and inclusion. The depth of these disclosures varied, ranging from generic statements expressing the company’s support of diversity in the workforce to detailed examples of actions taken to support underrepresented groups and increase the diversity of the company’s workforce. Many companies also included a quantitative breakdown of the gender or racial representation of the company’s workforce: 41% included statistics on gender and 35% included statistics on race.

Most companies provided these statistics in relation to their workforce as a whole, while a subset (21%) included separate statistics for different classes of employees (e.g., managerial, vice president and above, etc.) and/or for their boards of directors. Some companies also included numerical goals for gender or racial representation—either in terms of overall representation, promotions, or hiring—even if they did not provide current workforce diversity statistics.

In addition to discussing the types of disclosures that companies made, the memo also looks at disclosure practices within specific industries, including finance, tech, manufacturing, travel, retail and others. It also looks at how companies formatted their disclosures, the comments the Staff provided, and makes some recommendations for actions companies should take going forward.

John Jenkins

November 22, 2021

COVID-19: Disclosure of Vaccine Mandates

Many companies have been trying to come to grips with the business implications of complying with President Biden’s vaccine mandates. For public companies, those implications may well include disclosure of the potential material effects of those mandates in Exchange Act reports and Securities Act registration statements.

If you’re working on these issues, take a peek at this recent Bass Berry blog, which provides several examples of disclosures addressing issues surrounding vaccine mandates in the MD&A and Risk Factors sections and in forward-looking statements disclaimers. Here’s a sample pulled from one company’s MD&A discussion:

“Additionally, in September 2021 the President of the United States signed an executive order, and related guidance was published that, together, require certain COVID-19 precautions for federal contractors and their subcontractors, including mandatory COVID-19 vaccines for employees (subject to medical and religious exemptions). We are classified as a federal contractor due to a number of our agreements. In October 2021, we announced to our U.S. employees that the federal vaccine mandate would require all of our U.S. employees (subject to the exemptions described above) to be vaccinated by December 8, 2021. We continue to evaluate the potential impact of this executive order on our business. As a result of the federal vaccine mandate, we may experience constraints on our workforce and the workforce of our supply chain, which could require us to adapt our operations.”

By the way, if you’re looking for more info on all of the twists & turns surrounding employer testing and vaccination mandates, check out our “COVID-19 Issues” Practice Area.

John Jenkins

November 22, 2021

November-December Issue: Deal Lawyers Newsletter

The November-December issue of the Deal Lawyers newsletter was just posted and sent to the printer.  Articles include:

– Fraud Claims in M&A No-Recourse Transaction: The Enduring Legacy of Abry Partners
– Buyer Beware: Affordable Care Act Penalties May Affect Deal Economics
– Litigation Funding: What Transactional Lawyers Should Know
– 21 Practical Tips for In-House Deal Lawyers

Remember that, as a “thank you” to those that subscribe to both & our Deal Lawyers  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 – 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 newsletter, anyone who has access to will be able to gain access to the 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 newsletter including how to access the issues online.

– John Jenkins

November 19, 2021

Short Reports: Time Doesn’t Heal All Wounds

Out of all the types of drama and “client emergencies” that can arise in a securities & corporate governance practice, the release of a short report about your client is one of the most alarming. It can set off a chain reaction in the market and behind closed doors, with everyone wanting quick but thorough answers to legions of questions.

One of the first things the executives and board want to know is, “When is this ordeal going to be behind us?” Unfortunately, the answer for a lot of companies is that it can take a long time – and for some, a full recovery may never arrive. This “ESG Investor” article discusses recent research from a German asset manager about the impact of short seller campaigns. Here’s an excerpt:

The research shows that the gross excess returns of all target companies dropped by about 10% one month after the publication of a negative report. However, small companies’ (those with market capitalisation of less than EUR 5 billion), share prices did not recover within two years of a short campaign, while their larger counterparts staged a comeback.

However, it is worth mentioning that large companies are far from immune from the short selling campaigns. Only those with the shortest memories could forget the Wirecard collapse was a direct result of Viceroy Research’s investigation into widespread fraud at the German payment service provider.

Cyclical companies were also found to be more vulnerable to short seller activism. While targets from defensive sectors recovered after just one month, the downturn in cyclical stocks continued for up to 18 months after publication of the respective reports. The most frequently affected sectors were technology (27% of cases), consumer discretionary (17%) and financials (12%).

The report’s author says that cyclical sectors were targeted in 75% of the cases he looked at. He suggests that because those companies are under more pressure to meet expectations at a particular time, they’re more vulnerable to accusations of fraud. He also predicts that short seller targeting could come to the “E&S” space over time, as claims on those topics become more linked to stock price and regulatory compliance.

Liz Dunshee

November 19, 2021

EDGAR Updates Coming Next Week: Make Sure Your Filing Software is Up to Date

I blogged last month that the SEC has been considering a big EDGAR upgrade. On Monday, they’re making some changes to technology that is probably related to this upgrade and could affect some filing software. Alan Dye blogged this about it yesterday on

The SEC announced last week that it is implementing security-enhancing changes to its three EDGAR filing websites (including the “Ownership Forms” website for filing Forms 3, 4 and 5) which may require changes to third-party filing software. In a nutshell, the SEC is changing the way EDGAR communicates with filing software. Here’s an excerpt:

Specifically, EDGAR will create a unique parameter that some third-party software products may need to include with every request that enters/updates information. EDGAR will verify the parameter and terminate the user session if the parameter is missing or mismatched.

The SEC plans to implement the new measures on Monday, November 22. While most current software should be compatible with the new update, you should check with your filing agent if you have any questions. All filers, regardless of the software they use, should also be prepared for potential submission delays or rejections – there are usually glitches that need to be ironed out any time the SEC makes a software change.

For those who use the Romeo & Dye Filer, the desktop version of the Filer may not be compatible with the new system, which means filings can be created but then will need to be manually filed through EDGAR on the SEC website. Those still using the desktop version should consider migrating to the online version as soon as possible to avoid any last-minute transition difficulties. The web-based filing platform is up to date. CCRcorp’s member services team can help with migration if you email them at

Liz Dunshee

November 19, 2021

Transcript: “Investment Stewardship – Understanding the ‘New Era’ of Expectations and Engagement”

We’ve posted the transcript for our recent webcast for members, “Investment Stewardship: Understanding the ‘New Era’ of Expectations and Engagement.” Davis Polk’s Ning Chiu led a great discussion amongst Donna Anderson of T. Rowe Price, Michelle Edkins of BlackRock and Caitlin McSherry of Neuberger Berman about how investment stewardship teams operate, engagement do’s & don’ts, and more.

Liz Dunshee

November 18, 2021

Proxy Contests: SEC Mandates Universal Proxy Cards!

Yesterday, the SEC announced that it had adopted final rules that will require parties to proxy contests to use “universal” proxy cards that list all director nominees who are being presented for election. The rules also create new requirements for all director elections (including uncontested elections) – because they mandate that “against” and “abstain” voting options be provided on a proxy card where the options have legal effect under state law, and they require disclosure in the proxy statement about the effect of all voting options that are provided. All of this goes into effect for elections held after August 31, 2022.

The Commissioners adopted the rule at an open meeting by a rare 4-1 vote, with Commissioners Lee and Crenshaw issuing statements in full support of the rule, Commissioner Roisman supporting adoption but suggesting that the Commission consider in the future whether to impose additional eligibility criteria on dissidents launching campaigns and expressing reservations about the power that the rule could give to proxy advisors, and Commissioner Peirce dissenting. The Council of Institutional Investors issued a press release applauding the rule.

The SEC’s Fact Sheet summarizes the high points of the 197-page adopting release. To understand what this actually means for companies, though, you’ll want to read this Sidley memo – which predicts a “significant increase in proxy contest threats” once the rules go into effect. Here’s an excerpt:

While comparable to the vacated Rule 14a-11, which allowed shareholders holding at least 3% of the shares for three years to put dissident directors on the company’s proxy statement, the Universal Proxy Rules confer substantially more significant rights to shareholders without any minimum ownership requirements (i.e., owning only one share for one minute will be sufficient). While this was a concern voiced by several Commissioners, the SEC eventually went ahead with the adoption of the Universal Proxy Rules. The new rules will reshape the process by which hostile bidders, activist hedge funds, social and environmental activists, and other dissident shareholders may utilize director elections to influence control and policy at public companies.

As the rules will dramatically change the methods by which proxy contests at public companies have been conducted for decades, this Update summarizes the principal mechanics of the Universal Proxy Rules and the implications of the rules for public companies.

For more of this saga’s backstory, check out my blog from last spring when the SEC re-opened the comment period for these rules and my summary of themes from notable comment letters. We’ll be posting the avalanche of memos in our “Proxy Cards” Practice Area.

Liz Dunshee

November 18, 2021

Proxy Advisors: SEC Proposes Rescinding Parts of 2020 Rules

Yesterday, by a 3-2 vote of the Commissioners, the SEC approved a 71-page rule proposal on proxy voting advice that would unwind two parts of the “proxy advisor” rules adopted in mid-2020. Those rules were intended to give companies more of an opportunity to review & respond to proxy advisors’ voting recommendations & reports. They were a long time coming and were widely celebrated by many folks on the corporate side – although there were also some questions about how the new processes would affect proxy season timetables and voting behaviors. Yesterday’s action was criticized by the US Chamber of Commerce, as well as by Commissioner Peirce and Commissioner Roisman. Meanwhile, Commissioner Lee and Commissioner Crenshaw issued statements in support of the proposal.

The new proposal does not come as a huge surprise in light of SEC Chair Gary Gensler’s directive earlier this year to reconsider and refrain from enforcing the rules, which had been scheduled to go into effect December 1st. One of the reasons the SEC says that it has changed course is because of the industry’s effort to “self-regulate” through the “Best Practice Principles,” which I’ve written about a few times. Anyway, here’s an excerpt from the SEC’s Fact Sheet that explains the impact this new proposal will have if adopted:

Proxy Rule Exemptions for Proxy Voting Advice

The 2020 rules added conditions in Rule 14a-2(b)(9)(ii) to exemptions from the proxy rules’ information and filing requirements that proxy advisory firms often rely on. First, those conditions require proxy advisory firms to make their advice available to the companies that are the subject of their advice at or before the time that they make the advice available to their clients. Second, the conditions require proxy advisory firms to provide their clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding the proxy advisory firms’ proxy voting advice by registrants who are the subject of the advice.

Investors and others have expressed concerns that those conditions will impose increased compliance costs on proxy advisory firms and impair the independence of their proxy voting advice. The proposed amendments address those concerns by rescinding Rule 14a-2(b)(9)(ii) as well as the related safe harbors and exclusions from those conditions.

Liability Rule for Proxy Voting Advice

The 2020 rules also amended Rule 14a-9, which prohibits false or misleading statements, to add Note (e), which sets forth examples of material misstatements or omissions related to proxy voting advice. Specifically, Note (e) provides that the failure to disclose material information regarding proxy voting advice could be misleading.

Investors and others have expressed concerns that Note (e) may increase proxy advisory firms’ litigation risks, which could impair the independence and quality of their proxy voting advice. The proposed amendments would rescind Note (e) to Rule 14a-9 while affirming that the rule applies to material misstatements of facts contained in proxy voting advice. The proposing release also presents Commission guidance regarding the application of Rule 14a-9 to statements of opinion contained in proxy voting advice.

The comment period will be open for 30 days after the proposed amendments are published in the Federal Register. We’ll be posting memos in our “Proxy Advisors” Practice Area. Now, I just need to revisit the latest edits to our “Proxy Advisors” Handbook and plan to undo a bunch of them…

Liz Dunshee