I don’t think there’s a more intimidating moment in a corporate lawyer’s career than the first time they’re asked to make a presentation to a board of directors. Heck, even experienced lawyers get a little nervous when they’re presenting to a board they haven’t worked with in the past or addressing a particularly complex topic. In this month’s issue ofThe Boardroom Insider, Ralph Ward offers some tips from personal development coach T.J. Walker on making more effective board presentations. I think this one is particularly relevant for lawyers:
You are the expert on the topic you’re addressing to directors, so the temptation is to stuff in every factoid and data bit you’ve accumulated. “The biggest problem I see is trying to cover too many facts. You don’t want them to think you’re stupid or unprepared, so you tell them everything you know.” This overwhelms the directors, and sets them to checking their cell phones. Write up your board talking points. Condense them. Then condense them some more.
Walker also cautions against being too formal in your approach – writing out and memorizing your comments will put the board to sleep. It’s okay to make a verbal slip every now and again, because trying to perfectly script yourself will cause any stumble to throw you off and will make you less flexible in responding to questions from directors.
In prior blogs, Liz and Dave touched on risk factor and MD&A disclosure issues arising out of President Trump’s tariff-related actions. However, I wanted to address those issues again, because if you’re preparing your first quarter Form 10-Q, the timing of the President’s actions and the potential for another shoe to drop in less than 90 days create almost perfect conditions for companies to stumble into traps for the unwary when addressing these line-item disclosure requirements.
“Liberation Day” occurred on April 2nd, shortly after calendar year companies completed their first fiscal quarter. As a result, the financial statements for the first quarter that will appear in Form 10-Q filings typically won’t reflect the impact of the current tariff regime or the one that may be in place in 90 days. However, it’s pretty clear that most companies are already experiencing the impact of the change in tariff policy on their business – and that’s where the potential traps for the unwary start to unfold.
Under Item 105 of Regulation S-K, the fact that tariffs only began to impact a company’s business after the end of the quarter means that drafters should be particularly conscious of the “hypothetical” risk factor issue when updating risk factor disclosure. With events unfolding so rapidly, today’s risk may be tomorrow’s reality, and those responsible for drafting the 10-Q need to pay even closer attention to developments in the business than they have for previous filings.
There’s reason to think that in its current configuration, the SEC may be less enthusiastic about hypothetical risk factors as a basis for enforcement actions, but the same probably can’t be said for the plaintiffs’ bar. Since that’s the case, in updating risk factor disclosure companies should remember the Fifth Circuit’s admonition that “[t]o warn that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavorable events to happen when they have already occurred is deceit.” Huddleston v. Herman & MacLean, 640 F. 2d 534, 544 (5th Cir. 1981). If you make disclosure in a risk factor, you need to be very clear about events that have occurred and those that may occur – otherwise you’re likely only digging a deeper hole.
Second, events that are currently impacting a company’s business but that are not reflected in the financial statements included in a periodic report are precisely what Item 303’s “known trends” disclosure requirement is intended to capture. What’s more, companies aren’t just dealing with the current tariff regime, but the more draconian one that may be in place a few months from now. That future tariff regime is a contingency, and when it comes to contingencies, the SEC’s position is that known trends disclosure under Item 303 is triggered by any contingent event that is “reasonably likely” to occur and would be material if it did. Here’s how the SEC characterized its standard in its 2020 MD&A Release:
[W]hen applying the “reasonably likely” threshold, registrants should consider whether a known trend, demand, commitment, event, or uncertainty is likely to come to fruition. If such known trend, demand, commitment, event or uncertainty would reasonably be likely to have a material effect on the registrant’s future results or financial condition, disclosure is required.
Known trends, demands, commitments, events, or uncertainties that are not remote or where management cannot make an assessment as to the likelihood that they will come to fruition, and that would be reasonably likely to have a material effect on the registrant’s future results or financial condition, were they to come to fruition, should be disclosed if a reasonable investor would consider omission of the information as significantly altering the mix of information made available in the registrant’s disclosures.
The TL;DR version of this standard is that if a contingent event likely would be material if it occurred and management can’t conclude that it isn’t reasonably likely to occur, then the MD&A discussion must address the consequences of that event assuming that it occurred. So, when assessing their MD&A disclosure obligations, companies should consider the implications of the current tariff regime and, unless they conclude that it’s not reasonably likely to be implemented, the more draconian one that may come into effect in a few months.
ISS-Corporate has a new report on the number of women serving as named executive officers in Russell 3000 companies. The report says that while there’s been some slow improvement in recent years, women are underrepresented among NEOs. Here are some of the key findings:
– Women occupy less than 17% of the NEO positions at Russell 3000 companies, and over the last five years that percentage has only grown by about 1% per year.
– The good news is that over the past 10 years, the percentage of women serving in NEO positions has doubled, going from 9.5% to 16.4%.
– The industries with the highest percentage of female NEOs are Household & Personal Products (25.2%), followed by Utilities (24.2%) and Consumer Discretionary Distribution & Retail (23%). The laggards are Semiconductors & Semiconductor Equipment (11%), Energy (12.2%), and Automobiles and Components (13.1%).
The report also found that women are least likely to hold the CEO position (7%), and most likely to hold a Human Resources position (68%).
The last few weeks have been a rollercoaster ride for investors, but a recent Financial Times article says that despite the wild gyrations that have followed “Liberation Day,” so far markets haven’t experienced a liquidity crisis. The article says that last year’s move to T+1 settlement is a big part of the reason they haven’t:
Shorter settlement time not only cuts the collateral that traders have to put up, but also reduces the risk that counterparties have disappeared by the time a trade settles. During periods of extended volatility, that fear can lead to a reduction in liquidity that, in turn, leads to even more volatility.
The article also notes that in addition to the direct benefit of a shorter settlement time, the investments made in preparation for T+1 improved communications among market participants and allowed them to better identify and address risks before they escalated out of control.
We (John) first addressed the topic of “remote-only” or “remote-first” public companies — that claim to have no physical address — (not surprisingly) in 2021. At the time, he shared that the SEC cleared an IPO S-1 even though the cover page did not identify the address of the company’s principal executive offices. John’s last blog about “remote-first” public companies was just over three years ago now, and, by that time, the SEC Staff would no longer declare a registration statement effective unless and until it included a physical address in response to the requirement to disclose principal executive offices. Consider not just the cover page requirement, but also the rules that require certain communications to be sent to the principal executive offices — like Rules 14a-8 and 14d-3(a)(2)(i).
Fast forward to 2025. Comment and response letters related to the same company’s 2022 and 2023 10-Ks were just made public, and the Staff is now saying it needs to disclose its principal executive offices. Here are the threerelevantcomments and responses on this issue:
Please revise your filing to provide the address of your principal executive offices.
The Company advises the Staff that since May 2020 the Company has been, and continues to be, a remote-first company with no headquarters or principal executive offices. Furthermore, the Company’s executive team and Board of Directors (the “Board”) are distributed. Since May 2020, all Board meetings have been held virtually with the exception of one meeting in 2023, which was held at a location that was not in the Company’s offices. Substantially all of the Company’s executive team meetings are also held virtually, with meetings occasionally held in-person at locations that are either not in the Company’s offices or in various of the Company’s offices distributed around the world. The Company holds all of its stockholder meetings virtually. The Company’s employees are distributed across over 40 states and ten countries.
Because it does not have a headquarters or principal executive offices, the Company currently includes a footnote on the cover page of its periodic and current reports filed with the Commission providing that stockholder communications be directed to an email address set forth in the Company’s proxy materials and/or identified on the Company’s investor relations website and, beginning with its Form 10-Q for the quarter ended September 30, 2023, the Company will update this footnote to further provide such email address, as well as the address of its agent for service of process in the state of Delaware, for purposes of receiving physical mailings from its stockholders and regulatory communications from the Commission.
We note your response to prior comment 2 and reissue. Please revise disclosure in future filings to provide the address of your principal executive offices. While we note that you are a remote-first company and you have provided the address of your agent for service of process, identification of a principal executive office is a requirement of Form 10-K.
The Company acknowledges the Staff’s comment and advises the Staff that as described in the Company’s response to prior comment 2, since May 2020 the Company has been, and continues to be, a remote-first company with no headquarters or principal executive offices. As previously noted, the Company’s employees are distributed across over 40 states and ten countries, the Company’s executive team and Board of Directors (the “Board”) are geographically distributed, and meetings of the executive team and the Board are generally held virtually. However, in response to the Staff’s comment, the Company advises the Staff that the Company has initiated a process to identify an address to satisfy the principal executive offices requirement for purposes of its filings with the Commission and will disclose such address in the Company’s future filings with the Commission no later than the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 (the “2024 Form 10-K”).
We note your response to prior comment 1 that you have “initiated a process to identify an address to satisfy the principal executive offices requirement for purposes of [your] filings with the Commission and will disclose such address in the Company’s future filings with the Commission no later than the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.” Please disclose the address of your principal executive offices in your next Exchange Act report.
The Company advises the Staff that beginning with the Company’s Current Report on Form 8-K filed in connection with the Company’s public release of earnings for the quarter ended September 30, 2024 the Company has included, and will include in future filings with the Commission, an address as requested by the Staff.
John’s prior blog noted that the Staff sometimes accepted a P.O. Box and one company that had its related registration statement declared effective even said that any stockholder communication required to be sent to its principal executive offices may be directed to its agent for service of process. It’s unclear to me whether these options are still accepted. For similarly situated companies, the company did include an address on the cover of its 8-K and 10-Q, but it continues to omit a phone number and includes a footnote that reads: “We are a remote-first company. Accordingly, we do not maintain a headquarters. We are including this address solely for the purpose of compliance with the Securities and Exchange Commission’s rules. Stockholder communications may also be sent to the email address: secretary@coinbase.com.”
Apparently, CFOs are not immune to the trends that are causing record CEO turnover. Russell Reynolds reports that CFO tenure reached a 5-year low of 5.6 years in 2024. KPMG’s April 2025 Directors Quarterly discusses the need for robust CFO succession planning to avoid disruption from unexpected turnover. Key to effective succession planning is ensuring that the process evolves to reflect the skills and experiences that CFOs need in today’s business environment. And the role is expanding. The article points to the fact that CFOs now:
– Take on more responsibility as strategic leaders
– Lead (versus support) technology & innovation projects
– Have responsibility for cybersecurity, AI, digital transformations and sustainability
Accordingly, it says, CFOs often come to the role without traditional accounting and financial reporting backgrounds. That means talent management is also an increasingly important skill for CFOs since having a strong controller and accounting team is as important as ever. Given the increased dependence on CFO reports, KPMG suggests that effective CFO succession planning should also address those roles.
The article also discusses signs of a healthy (or not so healthy) relationship between the CFO and the audit committee. The KPMG team spoke to audit committee members & CFOs who cited these potential red flags that the relationship between the CFO and the audit committee isn’t what it should be:
– An audit committee member asks a question and the controller or CAE hesitates before answering
– The audit committee chair learns bad news from someone other than the CFO
Audit committees need to be vigilant. Lack of accounting resources/expertise was still one of the top 5 reasons for material weaknesses in internal controls in 2024, and the talent shortage in accounting isn’t going away anytime soon.
The transcript for our recent “Conduct of the Annual Meeting” webcast is now available. Chevron’s Mary Francis, The Shareholder Service Optimizer’s Carl Hagberg and Peder Hagberg, Lucky Strike Entertainment’s Matthew Kane and Alliance Advisors’ Jason Vinick discussed the latest developments and timely considerations for before, during and after your annual meeting.
During the program, Carl shared this helpful reminder of the importance of someone on the team sounding alarm bells if something in the voting or tabulation process doesn’t look right:
My number one suggestion, make sure you have a good inspector of election who, (A) has written presumptions as to the validity of proxies, and (B) knows what they mean, knows how to enforce them and rule on them, and (C) who can stand up if challenged and explain. At least five times a year, our inspectors get questions like, “How do you really know these votes are right?” We have a little mini script in our heads, where we tell them what we did to assure that the numbers are right.
Make sure that your inspector and your proxy solicitor has what I call a “good sniffer.” They smell trouble when the numbers don’t look right. We’ve had many cases where they discovered, “Oh, they forgot to mail to the employee plan,” or some big giant pile of proxies got left in a corner and didn’t get counted, or there’s something wrong, and you need to swing into action, or it’s just a mistake. Somebody made a big mistake and voted the wrong way.
We always look at the big voters. If you don’t see JP Morgan Chase voting only 70% of their position, you know there’s something wrong there. That would be number one – to make sure that you see potential problems coming and you’re prepared to respond to it.
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This Paul Weiss client alert highlights a recent decision by a federal district court in Colorado, Cupat v. Palantir Technologies, Inc. (D. Colo.; 4/25), that dismisses a Section 11 claim arising out of a direct listing after applying the strict tracing requirement from SCOTUS’s Slack decision. The Slack decision required that a plaintiff plead and prove that it purchased shares traceable to the registration statement it claims was materially misleading when making a Section 11 claim.
[The court] noted that the Supreme Court “did not assess whether any specific allegations were sufficient to plead traceability, nor what evidence is sufficient to prove it.”
Plaintiffs sought to satisfy the tracing requirement by alleging that (i) the probability that plaintiffs “purchased at least one registered share is so high as to constitute a legal certainty”; (ii) they would be able to prove traceability with appropriate discovery; and (iii) “any unregistered shares they purchased should be deemed registered on an integrated offering theory.”
[But] the district court held that plaintiffs could not plausibly allege that the shares they purchased were issued pursuant to the allegedly deficient registration statement because both registered and unregistered shares of the issuer’s stock were available at the time of the direct listing.
The alert continues with these implications, which are similar to those Liz had highlighted when Slack was released:
– The decision confirms that Slack’s strict tracing requirement may effectively insulate companies that go public through a direct listing from Section 11 liability.
– The decision further suggests that nothing short of chain-of-title allegations will suffice to plead traceability, posing a significant challenge to plaintiffs seeking to plead a Section 11 claim arising out of a direct listing.
– The decision may also have implications in other circumstances where tracing shares to a particular registration statement is difficult, such as where unregistered shares enter the market after an IPO lockup period expires, or where there have been multiple offerings pursuant to multiple registration statements. Ultimately, this decision and others interpreting Slack may make direct listings a more attractive avenue for companies that are looking to go public, as a direct listing may reduce associated litigation exposure.
KPMG recently released its 2024 study on material weaknesses and reported on trends over the last five years. Here are some of the data points highlighted in the report:
– Of the 3,502 annual reports filed in the 2023/2024 year, 279 companies (8%) disclosed material weaknesses in their filings.
– The percentage of companies disclosing material weaknesses in 2024 increased slightly as compared to the prior year.
– The top five issues driving material weaknesses were: lack of documentation, policies and procedures; lack of accounting resources or expertise; IT, software, security and access issues; lack of segregation of duties/design controls; and inadequate disclosure controls. (These are consistent with prior years.)
– Material weaknesses related to restatement of company filings decreased by 7% in FY24, and this is also within the typical range that’s been shown over the last several years.
– Perhaps not surprisingly, material weaknesses related to lack of accounting resources/expertise and IT, software, security and access issues have steadily increased from 2021 to 2024.
– Process areas with the highest concentration of material weaknesses include: financial close/reporting; control environment; systems; nonroutine/complex transactions; and revenue.
– Of the 757 companies that filed a report with a material weaknesse between 2020 and 2024, 236 companies (31%) disclosed material weaknesses in multiple years.
I’ve been listening to and loving Dave & Liz’s Mentorship Matters Podcasts. I mostly recently listened to their podcast with Keir Gumbs, and on that and many of their podcasts, they’ve discussed how folks new to securities law can develop foundational skills and knowledge. One of the things it got me thinking about is how I can make blogs more accessible to securities lawyers who are earlier in their careers. So, if that’s you and you’re looking for a commute read (a practice of Keir’s!) to understand internal controls over financial reporting, material weaknesses, significant deficiencies, the related disclosure requirements and other implications, navigate over to our “Internal Controls Disclosure” Handbook when you have a moment.
The US Attorney General has announced a major change in how federal regulators approach cryptocurrency markets. A recent memorandum directed the U.S. Department of Justice (DOJ) to scale back litigation and enforcement actions against digital asset platforms. Instead, the DOJ will focus on individuals and organizations using digital assets in unlawful ways. A recent memo from Sidley summarizes the changes:
“Continuing the Trump Administration’s shift away from targeting digital asset platforms, software, and other facilitating spaces, DOJ leadership has directed its prosecutors to deprioritize cases against virtual currency exchanges, mixing and tumbling services, and offline wallets for the acts of their end users or for ‘unwitting’ violations of regulations. Instead, DOJ prosecutors are instructed to focus on cases against individual actors that victimize investors, including: (1) embezzlement of funds on exchanges; (2) digital asset scams; (3) rug pulls; (4) hacking; and (5) exploitation of smart contract vulnerabilities”
The DOJ’s National Cryptocurrency Enforcement Team is now disbanded, as part of the DOJ’s new approach. Additionally, the memorandum reaches beyond the DOJ and is being implemented by other federal agencies. The Commodity Futures Trading Commission (CFTC) has announced its intentions to adhere to the memorandum. The spotlight is shifting from digital asset platforms, but the DOJ will still litigate against platforms directly engaging in unlawful activity. This comes as the administration makes efforts to expand the use and adoption of cryptocurrencies into traditional banking systems. It is unclear how this might affect the broader cryptocurrency ecosystem, but it does bring several pending enforcement actions against crypto platforms to an end.
Check out our “Crypto” Practice Area where we’re posting related resources on crypto developments. And, if you haven’t already, subscribe now to get free notifications from our new “AI Counsel” blog in your inbox!