This Audit Analytics blog reviews the tenure of public company auditors, and notes that for Russell 3000 companies, the average tenure of their outside auditors depends a lot on their size. As of 2021, large accelerated filers in the Russell 3000 retain an outside audit firm for an average of 22 years, with a median of 17 years. Accelerated filers and non-accelerated filers both average about 12 years, but the medians differ pretty dramatically. Accelerated filers retain their audit firms for a median of 8 years, while non-accelerated filers retain their for a median of 3 years.
The more interesting data in the blog addresses the number of companies that have retained the same outside auditor for over 100 years. A total of 18 companies are members of this particular century club. Procter & Gamble leads the way – it has retained Deloitte since 1890. Another Buckeye State company, Goodyear, is right behind P&G. The tire giant has retained PwC since 1898.
In fact, I just noticed this as I was drafting this blog, but Ohio companies really have a thing for long relationships with their auditors. Five of the top ten members of the century club are headquartered in Ohio. In addition to P&G and Goodyear, Cleveland-based Sherwin Williams, Canton-based Timken, & Toledo-based Dana all have had the same auditor for more than a century. I guess I shouldn’t be surprised that my home state is so well represented – Audit Analytics says that 78% of the companies that have retained their auditors for more than 100 years are in manufacturing.
The SEC has proposed significant changes to Rule 10b5-1 that may make complying with its requirements much more challenging. But despite a lot of commentary to the contrary from the chattering classes, the existing rule is far from a “get out of jail free” card. In that regard, the Fourth Circuit’s decision inKBC Asset Management NV v. DXC Technology Co., 19 F.4th 601 (4th Cir. 2021), highlights some potentially significant limitations on the protection provided under Rule 10b5-1. This excerpt from “The 10b-5 Daily’s” recent blog on the decision indicates that one of those limitations may arise from the rule’s status as an affirmative defense:
The defendants also argued that any inference of scienter should be negated by the fact that all of the trades were done pursuant to Rule 10b5-1 trading plans. The Fourth Circuit concluded that it could not consider the impact of the trading plans because the record was “silent as to when [the CEO and CFO] entered their plans.” If the plans had been entered into during the class period, they would not “mitigate a suggestion of motive for suspicious trading.” Interestingly, the court also noted in a footnote that it was not clear whether it could consider the trading plans “as an affirmative defense at the motion-to-dismiss stage.”
The first statement by the Court isn’t surprising, given the fact that Rule 10b5-1 requires plans to entered into at a time when the insider does not have MNPI. However, the suggestion that Rule10b5-1’s status as an affirmative defense might preclude a court from considering it at the motion to dismiss stage is likely to raise a few eyebrows. Here’s the language of the footnote to which the 10b-5 Daily referred:
Although we have previously considered trading plans as an affirmative defense when reviewing an appeal from a dismissal for failure to state a claim under Rule 12(b)(6), see Yates, 744 F.3d at 891, Plaintiffs contend it would be inappropriate for us to do so here. See Opening Br. at 49 (citing Lefkoe v. Jos. A. Bank Clothiers, No. WMN-06-1892, 2007 WL 6890353, at *6 n.11 (D. Md. Sept. 10, 2007) (noting that “[r]aising the affirmative defense of trading under a 10b5–1 trading [plan] . . . is typically premature . . . in a motion to dismiss” (internal quotation marks omitted))).
They may have a point. It is well established that we only consider affirmative defenses at this stage when facts sufficient to rule on the defense are apparent “on the face of the complaint.” Goodman v. Praxair, Inc., 494 F.3d 458, 464 (emphasis omitted) (quoting Richmond, Fredericksburg & Potomac R.R. v. Forst, 4 F.3d 244, 250 (4th Cir. 1993)).
As courts often do, the Fourth Circuit punted on the issue – but the precedent it cited suggests that it (and other courts) might be amenable to prohibiting the assertion of the affirmative defense in a motion to dismiss. For many users of Rule 10b5-1 plans, that kind of prohibition might be a very big deal. That’s because plaintiffs will have the opportunity to conduct potentially extensive and costly discovery before defendants will be able to raise a Rule 10b5-1 defense in their summary judgment motions.
Speaking of Rule 10b5-1, the SEC’s proposed amendments to that rule and its proposed amendments to rules governing stock buybacks were finally published in the Federal Register yesterday – almost two months to the day after they were initially issued. That means the 45-day comment period has officially commenced and that comments on both proposals will be due on April 1, 2022.
I still haven’t seen an explanation for the delay in publication – although given the initial objections about the short comment period established for these proposals, I don’t think anyone’s likely to complain about it. In any event, commenters haven’t waited to weigh in on the proposals, particularly the 10b5-1 proposal, which is far outpacing its stock buyback companion in terms of the number of comments received.
As Liz blogged last week, the SEC may be getting a little frustrated with having to wait for the Federal Register, because it has changed its approach to calculating the comment period in its most recent series of rule proposals.
Tune in tomorrow for the webcast – “Audit Committees in Action: The Latest Developments” – to hear Deloitte’s Consuelo Hitchcock, Maynard Cooper’s Bob Dow, Tapestry Networks’ Eric Shor, and E&Y’s Josh Jones discuss the ever-expanding responsibilities of audit committees in today’s environment and provide practical guidance on navigating the challenges they face.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of TheCorporateCounsel.net are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com – or call us at 800.737.1271.
I swear, I try to take crypto seriously – I really do. I mean, there are trillions of dollars being invested in it and lots of smart people think it’s the future. But it’s hard not to be dubious when so many of the crypto schemes I’ve seen people touting remind me of either the South Park underpants gnomes or episodes of the 1990s cartoon Pinky & the Brain. Last time we visited the world of crypto, we discussed a public offering of NFTs by a piece of conceptual art in corporate form. I didn’t think we could top that one – until I read this article about a DAO that’s pursuing a project that’s even more “out there”. Meet BitMouse DAO:
A new decentralized autonomous organization (DAO) wants to genetically engineer mice so that they carry Bitcoin inside them. BitMouseDAO launched on January 25. As of this writing, it has exactly two investors, almost no money, and no Discord. One investor, who put in .01 ETH, commented “Lmao,” while the other who put in the same amount said, “crazy.” The scheme, according to the DAO’s pitch, is to experiment with genetic technology to put Bitcoin inside a mouse.
The anonymous mind behind this project claims to be an artist who got the idea as they were going to sleep one night. They jotted the idea down and began to ponder its possibilities. “Over the next few weeks I started looking around to see if it was possible to carry out the experiment,” theys said in a blog post. “I was excited to imagine how this would affect us in the future.”
After namechecking artist Eduardo Kac’s genetically engineered phosphorescent rabbits, BitMouseDAO then rambles about how cool it will be to make a living thing into literal money. “We have tied the value of the mouse directly to Bitcoin, and it will fluctuate with the daily value of Bitcoin,” they said. “Maybe in ten years it will be worth $100 million, or maybe it will be worth nothing.”
I guess the way this is going to work is that the DAO will pay to have scientists figure out a way to edit the mouse’s genetic code to carry the private key that controls the bitcoins. Why would they do that? Look, don’t ask me. I’ve read the article and I still don’t know. Maybe you should check with the underpants gnomes or – since this is all about genetically engineered mice – the folks behind Pinky & the Brain.
In light of the increasingly sympathetic approach that Delaware courts have taken to Caremark claims in recent years, some commenters have observed that the risk of potential liability for directors’ breach of their oversight responsibility is much higher than it used to be. In that regard, this Proskauer blog says that one of the lessons of recent Delaware cases is that the growing demand for board oversight on ESG issues may increase the chances of viable Caremark claims:
Recent cases finding complaints to have sufficiently pled Caremark allegations may dovetail with the ever-increasing role of ESG in corporate policy and strategy. Corporate boards may be required to oversee corporate conduct with an eye towards how the company’s financial health intersects with and relies upon its commitment to sustainability, transparency and regulatory compliance. But with these added oversight obligations may come a higher risk of liability if the Caremark standards are not met.
In order to reduce this risk, the blog says that boards need identify “mission critical” aspects of the company’s business by focusing on its essential functions. Mechanisms for actively overseeing these functions should be evaluated and enhanced if necessary. In addition, the full board should regularly address mission critical aspects of the business and ensure that any complaints or significant issues concerning them find their way to the board.
For years, one of my “go to” resources for quickly referencing independence and other requirements applicable to public company directors has been Weil’s chart on those requirements. I was pleased to learn that the firm has just issued an updated version of that chart which we’ve posted in our “IPOs” Practice Area. Check it out – it covers NYSE & Nasdaq listing standards for boards and committees, as well as SEC disclosure requirements relating to directors.
While the universal proxy rules won’t go live for most companies until next year, this Goodwin blog recommends including some language in this year’s proxy about next year’s deadline for submitting the names of dissident nominees and other information required under new Rule 14a-19. This excerpt provides some sample language as well as a brief explanation of why the firm is making this recommendation:
Because universal proxy will apply to contested director elections at all 2023 annual meetings, we recommend including disclosure regarding the universal proxy deadline in this year’s proxy statement, including for companies that hold their annual meeting well in advance of the September 1, 2022 mandatory compliance date.
Sample disclosure for this purpose could be as follows: “to comply with the universal proxy rules (once effective), stockholders who intend to solicit proxies in support of director nominees other than the company’s nominees must provide notice that sets forth the information required by Rule 14a-19 under the Exchange Act no later than [INSERT DATE THAT IS 60 DAYS PRIOR TO ONE YEAR ANNIVERSARY OF 2022 ANNUAL MEETING].
This additional voluntary disclosure could be particularly useful for companies with no advance notice bylaws or with advance notice bylaws that provide a notice deadline of less than 60 days prior to the meeting, and could also be useful for companies that have longer advance notice deadlines, but move their meeting date and thereby create new accelerated deadlines.
While the blog recommends this disclosure – which is called for under new Rule 14a-5(e)(4) – for meetings held prior to September 1, 2022, it also acknowledges that the universal proxy rules don’t require that disclosure for meetings held prior to that date. If you’re interested, check out Topic #10934 in our Q&A Forum, which notes that some major companies (including Apple and Starbucks) have opted to include similar disclosure in their proxies. You’ll also find there my half-baked musings about some other reasons to consider this kind of disclosure.
When a company experiences a cybersecurity incident, a disciplined communication strategy is essential in order to protect attorney-client privilege and mitigate the legal and business risks associated with the unintended disclosure of internal communications about the incident. This Bryan Cave blog lays out some “dos” and “don’ts” when it comes to communicating internally about a breach. Here are some of the don’ts:
– DO NOT include subjective conclusions/assessments (e.g., “this was a big mistake,” “our systems were not adequately protected”) in email communications.
– DO NOT circulate forensics or other reports via email, particularly in draft form. Reports should be reviewed using a screen sharing application or similar means, and any dissemination via email or otherwise should be done only when the report has been finalized and at the direction of counsel.
– DO NOT communicate about the incident via other unofficial means (e.g., texts, instant messaging, other non-company communication applications), unless the nature of the incident mandates use of an approved secondary communication method.
– DO NOT destroy or delete any written communications related to the incident until receiving specific instructions to do so.
While the tips provided by the blog are intended to address communications surrounding a cybersecurity incident, many of the dos & don’ts laid out in the blog apply generally to internal communications arising out of other crisis situations.
The January-February issue of “The Corporate Counsel” newsletter is in the mail. It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment (subscribe here to be “in the know”). The issue includes articles on:
– SEC Looks to Amend Rules on Issuer and Insider Securities Transactions
– Is Your Insider Trading Policy Ready for Prime Time?
Dave & I also have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues. We’ll be posting one for this issue soon. Be sure to check it out on our “Podcasts” page!