In late September, John blogged about the latest Regulation FD enforcement action, which arose out of the use of a social media account of the CEO of DraftKings to disseminate material non-public information about the company. This Freshfields blog has some timely reminders on Regulation FD in light of this enforcement action.
First, social media channels do not automatically constitute “broad dissemination” but may — if the company takes certain steps.
In its guidance from 2013, the SEC made clear that dissemination of information through social media (without more) does not constitute broad dissemination of this information. Pursuant to that guidance, companies may disclose MNPI through social media channels only if sufficient steps were taken to alert investors and the market that such social medial channels will be used for the dissemination of MNPI. Methods of appropriate notice could be references to such social media channels in their periodic reports or press releases.
Second, prompt broad dissemination is appropriate when a company discovers an unintentional selective disclosure — although the initial disclosure may still be a Regulation FD violation.
Under Regulation FD, if a company unintentionally selectively discloses MNPI, it should remediate the violation by broadly disseminating the information “promptly.” For purposes of Regulation FD, promptly means “as soon as reasonably practicable (but in no event after the later of 24 hours or the commencement of the next day’s trading on the New York Stock Exchange) after a senior official of the issuer… learns that there has been a non-intentional disclosure by the issuer or person acting on behalf of the issuer of information that the senior official knows, or is reckless in not knowing, is both material and nonpublic.”
KPMG recently released the latest edition of its CEO Outlook analyzing insights shared by over 1,300 CEOs at large companies globally. The survey shows that, in today’s environment, CEOs are primarily focused on “anticipating and staying ahead of compound volatility…strategically allocating capital to address near-term risks such as cyber and geopolitics that can cause abrupt business disruption in the short term, while making long-term investments in generative artificial intelligence and mergers and acquisitions to spur future growth.” KPMG coined this term “compound volatility” which it describes as “the combination of near-term risks to growth and the structural changes to the US economy that raise the cost of doing business with little margin for error on strategy development and execution.”
– 78% of CEOs were confident in their company’s growth prospects over the next three years
– Top risks identified were cost of living, cybercrime, cybersecurity and talent
– 70% of CEOs identified GenAI as a top investment priority, particularly in IT, sales and marketing and finance and accounting
– 72% said GenAI won’t significantly impact the number of jobs but will require upskilling
One of the biggest changes in survey responses year-over-year relates to return-to-office plans. This year, almost 80% of CEOs envisioned a full return to office over the next three years (up from only 34% saying so a year ago).
Speaking of “compound volatility,” this summer KPMG also released an in-depth guide to accounting for economic disruption with guidance on how various balance sheet and income statement line items and other disclosures may be impacted. KPMG encourages management teams to be proactive when it comes to considering how volatility impacts their financial statements and financial reporting:
During periods of economic disruption, it is crucial for companies to promptly identify the potential financial statement impacts and consider the accounting and disclosure consequences. Regulators place a strong emphasis on high-quality financial reporting during these times and closely scrutinize the sufficiency and timeliness of related disclosures. Transparency becomes particularly important, especially when it comes to estimation uncertainties and the underlying basis for critical judgments used in financial reporting.
The guide has chapters on:
– Revenue
– Financial assets, derivatives & hedging
– Inventory
– Goodwill and indefinite-lived intangibles
– Long-lived assets, leases and equity method investments
– Liabilities
– Compensation and benefits
– Income taxes
– Financial statement presentation, disclosures & MD&A
Each chapter starts with a description of how the relevant topic may be impacted by economic disruption and lists example questions to consider, with cross-references to the sections that address each question. Here’s an excerpt on compensation and benefits:
In response to economic disruption, companies may take actions related to compensation and benefits that have an impact on financial reporting. Examples include:
– providing revised or new compensation arrangements;
– evaluating existing compensation arrangements to determine if any specific terms, conditions or estimates have been affected;
– making modifications to compensation and benefit arrangements; and
– taking workforce actions that could result in pension or postretirement curtailments or settlements, or the need to pay severance and other postretirement benefits.
The following are example questions to consider that are specific to economic disruption and the potential impact to compensation and benefits and associated accounts (not exhaustive).
– Have either of the following related to share-based payments been affected: the probability assessment for performance-based awards; and/or the volatility input used to value awards on the grant date?
– Have any share-based payment awards been modified (e.g. changes to vesting criteria or strike price) and/or are discretionary clauses or claw back provisions starting to be included in awards?
– Have termination benefits (voluntary or involuntary) been offered or implemented?
– Has a significant event occurred (e.g. plan amendment, curtailment or termination) that could cause an interim remeasurement of defined benefit pension or postretirement plan assets and obligations?
– Have new or revised sick leave or paid time off policies been implemented or have furlough arrangements been offered to employees?
In the latest “Understanding Activism with John & J.T.” podcast, John and Orrick’s J.T. Ho were joined by Jim McRitchie, one of the leading voices in retail investor activism. Topics covered during this 37-minute podcast include:
– Collaboration among investors to influence corporate governance
– Top retail investor priorities for next year’s proxy season
– Deciding which companies receive shareholder proposals
– Measuring a proposal’s success
– Important factors in deciding whether to settle a proposal
– How companies can respond constructively to shareholder proposals
– How investors can maximize their ability to influence corporate governance
– Impact of election and changes at the SEC
John and JT’s objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. They’re continuing to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!
I hope you were able to join us last week for our 2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences. I’d like to send a big shoutout to our colleagues at CCRcorp who made everything happen and worked tirelessly to give our in-person and virtual attendees great experiences! I also want to thank all our fantastic speakers and sponsors. We quite literally couldn’t do it without you!
I thought I would take the opportunity to share some key points I took away or interesting tidbits I enjoyed from the conference panels. Here are a few I happened to be able to jot down, in no particular order:
– Sidley’s Sonia Barros reminded attendees of the importance of involving internal audit in cyber disclosures. For NYSE companies, internal audit is required to make ongoing assessments of risk management and, with the criticality of cyber these days, it may be a significant risk management process that internal audit is looking into. You want to make sure your 10-K disclosures are consistent with findings from any internal audit review.
– Michele Anderson of Latham, Anne Chapman of Joele Frank and Sean Donahue of Paul Hastings discussed 12 things a public company should do to be prepared for activism. Tip #12 was a practical suggestion for your annual D&O questionnaires: There are eight or so questions you need to include in the D&O questionnaire if a contest ensues. There’s no reason not to have those in your D&O questionnaire all the time, so the questionnaire you send an activist under your advance notice bylaw is already ready to go.
– Bill Ridgway of Skadden noted that, while cyber incident response plans should be documented, they should be more akin to guidelines than rigid plans since cyber incidents are so varied. You need to maintain flexibility to respond appropriately to the situation. If you set forth specifics and don’t follow them exactly, the SEC staff will point to that. And they’ve been very focused on controls and process and whether the technical details are making their way to the right people.
– Davis Polk’s Ning Chiu kicked off the panel on Rule 14a-8 and shareholder proposals by acknowledging that shareholder proposals are something many mid- or small-cap companies don’t often deal with but noted that these companies are impacted by proposals nonetheless, as they expand what voluntary disclosures become “market.” When a large company gets a proposal and starts reporting additional information voluntarily, say as a result of a settlement, that practice of reporting becomes the norm and pressures other companies to follow suit, even those that don’t regularly get proposals.
– It can be fun to learn about perks! Mark Borges and Alan Dye of Hogan Lovells described some more novel perks they’ve encountered over the years — like Employer Subsidized Pet Health Assistance and home lawn mowing. For some of these, it might be appropriate to ask first whether they are company-wide benefits. Sometimes they turn out to be a company-wide benefit (as Employer Subsidized Pet Health Assistance was for the particular company) saving you from further analysis. Others may not be widely offered (as, it turned out, lawn mowing was not) and you’ll need to assess under the two-step test to determine whether something is a perquisite or other personal benefit.
There were so many other gems I’d love to include here! You can also check out these two LinkedIn posts from my former colleague and these conference highlights from the Cooley PubCo blog for more.
If you missed any parts of the Conferences, archives of the sessions are now available. Attendees should receive an email today with a link to our 2024 Conference Archives page. Members of TheCorporateCounsel.net who registered for the Conferences can use their existing logins to access the Proxy Disclosure Archives and the Executive Compensation Archives. You may be eligible to earn CLE credit for the replays if you follow the instructions outlined on our CLE FAQ page, but note that you may not earn CLE credit for any session or session combinations that you previously watched live.
If you didn’t register to attend the conferences, you can purchase access to the archives (which will be available until October 15, 2025) online or by emailing sales@ccrcorp.com or calling 1-800-737-1271.
Thank you to all our blog subscribers who responded to our anonymous quick polls for the “Game Show Lightning Round: All-Star Feud” at our 2024 Conferences. If you joined us in person or virtually and were able to watch the “Feud,” I hope you enjoyed it. I really appreciated how enthusiastically our SEC All-Stars agreed to some lighthearted competition and Dave’s commitment to the game show host role (complete with costume change). Here’s a photo, ICYMI.
I took a “behind the scenes” role on the game show, running the slides — complete with automatic scoring and sound effects. As Dave noted during the game, I was, at times, quite generous in doling out points for guesses that only roughly matched the most popular survey responses. In my defense, in the one run-through I did with someone actually guessing, the “contestants” were my two kids. For “What’s the hottest shareholder proposal topic going to be in 2025?” my 7-year-old guessed, “How new phones will change our lives.” That was “AI” in my book!
One of our favorite things about our Conferences is talking to members — both virtually and IRL. Almost our entire editorial team was there in San Francisco, and we loved meeting everyone and hearing about what you do and what we can do to make this event and our sites more valuable to you. It energizes us all to catch up with friends & fellow practitioners and “nerd out” over corporate governance and securities law — not to mention that hearing how you use our resources reminds us why we do what we do! For those we didn’t get to connect with, we especially want to hear from you — please feel free to reach out to any of us editors!
Also, be on the lookout for an email asking for your feedback. But don’t let that stop you from sharing suggestions with our editorial team directly at any time. Our contact information is always at the bottom of our daily blog emails and on the “About Us” page on TheCorporateCounsel.net.
The PCAOB recently added a “Fraud Risk Resources” page to its website. While the materials on this page are intended to assist auditors in complying with their obligations to consider fraud during the course of an audit, the information the PCAOB provides there is also likely to be of assistance to audit committees in understanding those obligations and their implications for the audit process. Here’s an excerpt from the discussion of the auditor’s obligations with respect to the risk assessment process:
PCAOB standards require auditors to perform risk assessment procedures that are sufficient to provide a reasonable basis for assessing the risks of material misstatement, whether due to error or fraud, and designing further audit procedures. The risk assessment procedures required by PCAOB standards are intended to direct the auditor to identify external and company-specific factors that affect risks due to error or fraud, such as, fraud risk factors, for example, factors that create pressures to manipulate the financial statements.
Some required risk assessment procedures and procedures performed when identifying and assessing risks are directed specifically at risks of material misstatement due to fraud (“fraud risks”), such as:
– Conducting a discussion among the engagement team members of the potential for material misstatement due to fraud;
– Inquiring of the audit committee, management, internal auditors, and others about fraud risks;
– Performing analytical procedures relating to revenue for the purpose of identifying unusual or unexpected relationships involving revenue accounts that might indicate a material misstatement, including material misstatement due to fraud;
– Considering factors relevant to identifying fraud risks, including in particular, fraud risks related to improper revenue recognition, management override of controls, and risk that fraud could be perpetrated or concealed through omission of disclosures or presentation of incomplete or inaccurate disclosures; and
– Evaluating the design of controls that address fraud risks.
A substantial number of the other required risk assessment procedures also can provide information that is relevant to the auditor’s consideration of fraud.
Other topics addressed by the PCAOB here include acceptance and retention of audit engagements, audit planning, responses to the risk of material misstatements, and fraud considerations in ICFR audits.
I’m still a little jet lagged after returning from our conferences in San Francisco, and it’s been a slow news week, so I was delighted to find a recent Florida federal district court decision addressing one of my favorite topics – celebrities who get themselves sideways with the federal securities laws. In Harper v. O’Neal, (SD Fla. 8/24), the plaintiffs alleged that NBA Hall of Famer Shaquille O’Neal was liable for losses suffered by investors in the Astrals Project, a business venture involving an investment in NFTs that could be used in a virtual world in which users could socialize, play, and interact with other users (sounds similar to Method Man’s NFT project).
Anyway, after FTX blew up, the Astrals Project apparently fell apart, and the plaintiffs sued Shaq, who they allege was the “driving force” behind the project and was actively involved in promoting it through various social media channels. Shaq and the other defendants argued that this wasn’t enough for him to be considered a “seller” for purposes of Section 12(a) of the Securities Act, but the Court disagreed:
Defendants argue that the Amended Complaint fails to allege that Defendant O’Neal “successfully solicited” Astrals and Galaxy tokens to Plaintiffs, 1et alone that he did so to further his or the Astrals Project’s financial interests. Further, Defendants argue that Defendant O’Neal did not directly sell or persuade Plaintiffs to buy Astrals products. However, as cited above, the Wildes panel specifically clarified that solicitation need not be “personal” or “targeted” to trigger liability. See Wildes, 25 F.4th at 1346.
The Complaint alleges that O’Neal, in a video, claimed that the Astrals team would not’ stop until the price of Astrals NFTS reached thirty $SOL and urged investors to “[h]op on the wave before it’s (sic) too late.” Defendant O’Neal acted like the Wildes promotors that urged people to people to buy BitConnect coins in online videos. Wildes, 25 F.4th at 1346.
O’Neal also personally invited fans to an Astrals Discord channel, where he interacted directly with them on a daily basis, reassuring investors that the project would grow. Lastly, Defendant O’Neal’s own financial interests were in mind. The Complaint states that Defendant O’Neal was one of the founders of the Astrals Project. Further, the Astrals Project was his brainchild that he personally developed, and his son was named head of “Investor Relations.” Therefore, Plaintiffs have met the definition of a seller and thus alleged enough to state a Section 12 claim against Defendant.
However, the news wasn’t all bad for Shaq. Despite his status as an alleged founder of the Astrals Project, the Court held that he should not be regarded as a control person under Section 15 of the Securities Act, because the plaintiffs failed to plead how or in what way he used that status to direct the management and policies of the Astrals Project.
Okay, I know this is supposed to be a blog devoted to securities law and corporate governance topics, but there’s a 0% chance that I’m not going to blog about last night’s ALCS game, also known as “The Greatest Baseball Game I’ve Ever Seen.” I can’t come up with adequate words to describe the Cleveland Guardians’ incredible extra innings victory over the New York Yankees, so I’ll just let the great Tom Hamilton do the talking for me:
Yes, Yankee fans (and your $300+ million payroll), I know they’re still down 2-1, and like every Cleveland fan, I know that Heywood Broun was right when he wrote that “the tragedy of life is not that man loses, but that he almost wins.” Still, whatever happens, we’ll always have Game 3.
