Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
Hat tip to Bjorn Hall of Fundrise for letting me know that the Fundrise Real Estate Investment Trust, LLC (which they lovingly call the “Income eREIT”) filed the first-ever “Annual Report on Form 1-K” back in late April. Under Rule 257(b)(1) of Regulation A, Form 1-K is the annual report now required to be filed by Tier 2 companies that conducted their offerings under Regulation A+. The form is due within 120 calendar days of fiscal year covered by the report. Only Tier 2 companies are required to file a Form 1-K, one of trade-offs for not having to register with the states. Since Fundrise made their filing back in late April, there have been four other Form 1-Ks filed.
And as noted in this blog, the OTC Markets has filed a rulemaking petition with the SEC to open Regulation A+ to reporting issuers..
When I served in Corp Fin in the mid-90s, I was tasked for a while with reviewing novel products created by investment banks. Back then, that was handled out of one of the normal Operations groups – now that is done under Amy Starr’s “Office of Capital Market Trends.” Anyway, I wound up looking at some weird stuff and found out that there is even something called a “Form 1” filed with the SEC. That is the form that stock exchanges file to be registered with the SEC as an exchange…
ISS Responds to Proposed Proxy Advisor Legislation
Last week, I blogged about a statement from Glass Lewis about the proposed House bill that would enhance proxy advisor oversight. Now Ning Chiu has blogged about a statement from ISS on the proposed bill…
Dodd-Frank Repeal: Details of the “Financial CHOICE Act”
On Monday, I blogged about the efforts by the GOP in Congress to repeal Dodd-Frank. As laid out in this blog, the details of the “Financial CHOICE Act” have been unveiled by House Financial Services Committee Chair Jeb Hensarling.
See this report about the revolving door between the staff of the House Financial Services committee and the financial industry…
– It is extremely rare for any company to use GAAP earnings for bonus calculation purposes (word searching “non-GAAP” probably missed the other 42% of companies that refer to adjusted EPS, adjusted revenue, etc.).
– Most incentive plan targets are based on operating results, which is why it is common to exclude non-operating items – like FX or asset impairments – from the bonus calculation. It is also common for some industries to exclude non-cash expenses, like equity compensation expense.
– Agree that some items should not be excluded from GAAP results when calculating incentive payouts – and there is typically a very rigorous process that management and the compensation committee use to evaluate what to exclude.
– Lay-off expenses are mentioned as an example of a bad adjustment to GAAP results for incentive plan purposes. If you are the board, would you want to provide management with a financial incentive to delay a lay-off or plant closure until next year to avoid a reduction in the current year’s bonus? I can think of many examples where the entire industry faced excess capacity and closing facilities was not anticipated at the beginning of the year. Most boards would want the management team to get out in front on an issue like that – and would be happy to reward them for doing so, rather than create a financial penalty. I recognize that paying big bonuses to management during large layoffs is not a good practice and should be avoided.
– Agree that if management wants relief from FX headwinds one year, they need to exclude FX tailwinds in future years.
FINRA Proposes Changes to Communications Rules
As noted in this memo, FINRA recently filed proposed revisions to its communications rules with the SEC that include a few substantive revisions to existing rules, eases some burdensome filing requirements and leaves the door open for future changes…
Sights & Sounds: “Women’s 100 Conference ’16”
This 1-minute video captures the sights & sounds of the “Women’s 100” events that just wrapped up in DC and Palo Alto:
Tune in tomorrow for the webcast – “Non-GAAP Disclosures: What Is Permissible?” – to hear Meredith Cross of WilmerHale; Brink Dickerson of Troutman Sanders; Steven Jacobs of E&Y; and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster provide practical guidance about what to do now with your non-GAAP disclosures given Corp Fin’s new & revised CDIs and the attention being paid to them by the SEC, media and investors. It’s at a special time – 11 am eastern. The audio archive will be posted directly after the live program is over – and a transcript will be posted about 10 days later. The agenda includes:
A. Analysis of CDIs
1. Problematic misleading measures – adjustments, period-over-period inconsistency, offsets
2. Revenue
3. Prominence – when presenting a non-GAAP measure, present most directly comparable GAAP measure with equal or greater prominence
4. Reconciliation of forward-looking measures if available without “unreasonable efforts”
5. Free cash flow
6. Per share measures including FFO
7. Income tax effects related to adjustments
B. What to Do Now
1. What might be expected from Corp Fin during the comment process going forward
2. How hard should you push back on Corp Fin comments
3. What should be considered when rethinking whether to continue disclosing certain non-GAAP financial measures
4. How to monitor what other companies are doing – and not doing
5. What is the real SEC enforcement risk
This Cooley blog summarizes a WSJ article that lays out the increasing prevalence of non-GAAP measures in proxy statements…
But these adjusted metrics aren’t just showing up in earnings releases. Pro forma figures have been proliferating in annual proxy statements, too. There, when used with compensation metrics, they can help executives draw bigger pay packets. Research firm Audit Analytics finds that the term “non-GAAP” appeared in 58% of proxies for companies in the S&P 500 that have released them so far this year. Five years ago, that term showed up in 27% of proxies for current S&P 500 constituents.
There is nothing improper about using non-GAAP measures as long as they are disclosed properly. And corporate boards decide on the measures they want to use for compensation purposes. Plus, there is an argument to be made for sometimes excluding items from results for compensation purposes. If, say, a natural disaster hits a company with expensive repairs, perhaps an adjustment is in order. But other items that often get excluded in pro forma results, such as layoff-related charges, do seem like a reflection of management’s performance. And boards have too often shown a willingness to set awfully low bars for executives to clear.
That, though, can disadvantage shareholders and wreck the idea of pay for performance. In that vein, the dramatic rise in the number of companies using pro forma measures to determine bonuses would indicate the balance between shareholders and executives is being skewed in executives’ favor. Indeed, an examination of the most recent proxy statements from companies in the Dow Jones Industrial Average shows about a dozen of the index’s 30 constituents had annual pro forma earnings well in excess of GAAP ones and used the pro forma ones in annual bonus calculations.
Poll: Non-GAAP Numbers In Headlines (Without the GAAP)
Corp Fin’s new CDIs touch on the prominence of non-GAAP numbers in the headlines of earnings releases – and some members tell me that’s what they were already advising their clients to do for quite some time. Yet, there are many examples of contrary conduct. Here’s an anonymous poll about what you’ve been advising:
Spanking brand new. By popular demand, this comprehensive “Stock Buybacks Handbook” covers the entire terrain, from Rule 10b-18 and Regulation M to Rule 10b5-1 and Item 703 of Regulation S-K. This one is a real gem – 83 pages of practical guidance – and its posted in our “Buybacks” Practice Area.
Transcript: “Company Buybacks: Best Practices”
We have posted the transcript for our recent webcast: “Company Buybacks – Best Practices.”
Buybacks: Do Investors Think Companies Execute Them At Optimal Price?
Recently, Dave Bobker shared some of the interesting 360 research they are doing at Rivel Research Group regarding buybacks. One question they asked buy-side investors is: “what percentage of the time do companies execute buybacks at an optimal price?” For the US, 52% of investors said that buybacks were executed optimally 20-49% of the time; 25% said less than 20% of the time; 15% said a majority or more of the time. And 7% said they were uncertain. Globally, it was believed that 31% of time was executed optimally. Not that great a perception.
Rivel also asked investors about what type of message it sends when a company announces a buyback. The findings can be summarized as:
– To the global buy-side, announcing a buyback is an unambiguous signal that a company believes its stock is undervalued.
– It is also a sign to many (about one in four) that management has few strategic options at its disposal for using the excess cash on the balance sheet.
– Only rarely is it seen as being implemented purely as a reward to shareholders or to enhance shareholder value.
By the way, this WSJ article talks about “return on invested capital” (aka ROIC) as a way to better measure how a company is doing with its strategic planning – and here’s a McKinsey piece about how buybacks boost earnings without improving returns…
Shareholder Proposals: Buybacks & Executive Pay
With criticism about the impact of buybacks on executive compensation in the news, it appears that the AFL-CIO & other investors are sending shareholder proposals to some companies on this topic. Here’s an excerpt from this Cooley blog:
Now, the AFL-CIO and others are beginning to take steps to eliminate what they view as one of the motivations for buybacks — or at least one of the side effects. For 2016, the AFL-CIO (and entities apparently acting on its behalf) has submitted a new shareholder proposal asking companies to adjust executive pay metrics to exclude the impact of stock buybacks. According to this AFL-CIO publication, the proposals were submitted this year at IBM, Illinois Tool Works, 3M and Xerox.
Generally, the shareholder proposal urges the target companies’ compensation committees to “adopt a policy that financial performance metrics shall be adjusted, to the extent practicable, to exclude the impact of share repurchases when determining the amount or vesting of any senior executive incentive compensation grant or award. The policy should be implemented in a way that does not violate existing contractual obligations or the terms of any plan.”
The proponent contends that buybacks directly affect many of the financial ratios used as performance metrics, but, while they may boost stock prices in the short term, the proponent is “concerned that they can deprive companies of capital necessary for creating long term growth.” The proponent believes that, because senior executives are responsible for improving operational performance, “senior executives should not receive larger pay packages simply for reducing the number of shares outstanding. Executive pay should be aligned with operational results, not financial engineering.”
The proponent also asserts that, for “the 12 months ended June 30, 2015, S&P 500 companies spent more money on stock buybacks and dividends than they earned in profits.” In addition, the proponent looks to the chair and CEO of BlackRock, who urged that “[l]arge stock buybacks send ‘a discouraging message about a company’s ability to use its resources wisely and develop a coherent plan to create value over the long term.’” In each case, the proponent compares the amount spent on stock buybacks with the amounts spent on R&D and capital expenditures. For example, for Illinois Toolworks, according to the proponent, the company “spent $2.9 billion on share buybacks in 2014, but only $227 million on research and development, and $361 million on capital expenditures.” The proponent also identifies the CEO’s comp and the amount received in awards that are dependent on financial metrics that are susceptible to being goosed by stock buybacks.
Among the arguments made in the companies’ various statements in opposition are that the companies are committed to organic growth through capital expenditures and research and development and that they have capital allocation strategies designed to create growth opportunities through investment and to return excess capital to shareholders, that their boards assess their capital requirements to ensure that there is sufficient capital for investment for future growth, that performance metrics are designed by compensation committees (which, they contend, are in the best position to make these determinations) to align pay and performance, that among the metrics is typically an organic growth metric and that limiting the companies’ ability to use appropriate performance metrics is not in the best interests of the companies or their shareholders.
Buybacks aren’t just on the radar of hedge funds and governance activists – the SEC is paying attention too. The possibility of more frequent buyback disclosures was one of the more surprising topics raised by the SEC’s concept release on Regulation S-K, as I blogged about recently.
When I blogged about the “12 Most Surprising (or Scary) Things About the S-K Concept Release” a month ago, I ran a poll asking how many folks have read – or intended to read – the 341-page monster. The poll revealed that 12% had read it – and 27% intended to. Thus, it’s not surprising perhaps that not as many law firms have written memos about the thing than might be expected.
But good news! In addition to the March-April issue of The Corporate Counsel print newsletter that was completely devoted to the topic, you can read this nice 20-page memo that mainly consists of an appendix that really gets to the heart of the concept release and be fairly informed…
I had no idea that it was spelled “CliffsNotes” – I’ve always said “Cliff notes.” Did you know that ‘Cliff’ had an ‘s’ after it? Anyway, that proves that I never cut corners when I was a kid 😄…
Congress: The Latest Effort to Replace Dodd-Frank
Here’s the intro of this WSJ article by Donna Borak & Andrew Ackerman:
A top Republican financial policy maker in Congress has crafted a plan to repeal key provisions of postcrisis regulations enacted under President Barack Obama, according to a draft summary of the bill seen by The Wall Street Journal. The legislation will revoke the ability of regulators to designate firms as “systemically important,” a controversial power that has allowed officials to impose stringent new rules and oversight on big financial firms that fall outside the traditional authority of the government.
The bill crafted by the chairman of the House Financial Services Committee would also unwind other key provisions of the landmark 2010 Dodd-Frank financial-overhaul act. It would scrap the so-called Volcker Rule, which bans banks from making bets with taxpayer-insured deposits, and would impose new limits on the powers of the director of the five-year-old Consumer Financial Protection Bureau. The long-awaited legislation, called the Financial Choice Act, will outline seven broad initiatives proposed by Rep. Jeb Hensarling (R., Texas), chairman of the House Financial Services Committee, who plans to describe the plan Tuesday in a speech in New York. The full bill won’t be released until the following week.
The bill has no chance of becoming law this year, with Democrats in the Senate likely to block it, and Mr. Obama certain to veto it if it came to his desk. But the details are significant as they help define the Republican agenda for financial regulation, should the party win control of the White House in November. Donald Trump, the presumptive GOP nominee, has said he would try to repeal Dodd-Frank, but hasn’t given any details about what his plan would look like. Mr. Hensarling’s bill helps fill in some of the blanks of how a Republican-led government would likely proceed.
The ALJ Battle: Drawing to a Close?
Last week, the Second Circuit – in Tilton v. SEC – joined the recent Seventh and DC Circuit decisions (Bebo v. SEC and Jarkesy v. SEC) by finding that constitutional challenges to the SEC’s administrative law judge proceedings can’t go forward in court until those proceedings are done. In other words, a court review can only be sought as an appeal from a final decision by an ALJ.
The Eleventh Circuit now is the last court out there with a pending case (Hill v. SEC) that could possibly create a circuit split – so it looks unlikely that the Supreme Court would decide to weigh in. I’ve posted memos on the Tilton & other decisions in our “SEC Enforcement” Practice Area…
I’m excited to announce the launch of my new podcast series: “Big Legal Minds.” The series will consist of these two types of programs:
– 40-minute interviews with well-known folks from our community about their illustrious careers (four of these are posted so far)
– 20-minute talk shows with a pair of practitioners about news of the day (first one of these is coming soon)
The podcasts are available in 3 different ways:
– Posted on TheCorporateCounsel.net with our other podcasts
– Posted on BigLegalMinds.com
– Available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads)
So many people listen to podcasts these days that they subscribe to via their phones that I decided to make our podcasts available in this “easy-to-download & listen” format. Let me know if you have ideas!
Susan Wolf on “Being In-House”
As part of this “Big Legal Minds” series – check out this 35-minute podcast, during which Susan Wolf of Global Governance Consulting describes her vast experience on being an in-house lawyer & corporate secretary, including:
– How did you become a lawyer in this field?
– What was it like going in-house straight out of law school?
– What pointers do you have for working with directors?
– How has working with boards changed over the past two decades?
– What tips do you have for looking for a new in-house job?
– What tips do you have to ask for a raise when you’re in-house?
– How has it been working for yourself?
XBRL: Errors Going Down
According to this press release from XBRL USA, error rates in XBRL filings are down significantly – also see this graph comparison…
“No, you’re a stupid head!” Not to drift into a political discussion, but I hate when some folks in Congress complain about the government being too big & how federal agencies have adopted too many rules – but then Congress goes ahead & forces the SEC to adopt something like this interim final rule that was adopted yesterday. This is the stupid rule required by the FAST Act to allow Form 10-K filers to provide a summary of business & financial information. The fact that the adopting release is only 23 pages says it all. Given its foolishness, the SEC wisely made the rule principles-based – allowing companies to fashion their voluntary summary as they wish.
The new rule doesn’t require a summary – it merely allows it. News flash: it was already permissible to do so – as the SEC notes on page 4 of the adopting release. A complete waste of the Staff’s time. And I will ship a CorporateAffairs.tv t-shirt to anyone who writes a law firm memo solely dedicated to it. [Update: We have a winner of the shirt! Congrats to Kaye Scholer’s Sara Adler!]
This interim final rule will become effective as soon as it’s published in the Federal Register – so within the next week – and folks can comment for 30 days if they want to push the SEC to change it before it becomes “final final.” Don’t be shocked if this rulemaking doesn’t receive a single comment…
Glass Lewis Responds to Proposed Proxy Advisor Legislation
Here’s a blog by Davis Polk’s Ning Chiu about this statement from Glass Lewis KT Rabin about the proposed House bill that would enhance proxy advisor oversight…
SEC’s Budget: Going Down?
Here’s an excerpt from this WSJ article by Andrew Ackerman:
On Wednesday, a House Appropriations subcommittee approved a funding plan for the fiscal year beginning Oct. 1 that for the first time since before the crisis envisions cutting the market cop’s budget, to the tune of $50 million. That would represent a relatively modest decrease to a budget that has steadily grown to about $1.6 billion in the current year from about $900 million in 2007. Still, the House’s proposed decrease is an important inflection point. If adopted, it would mark the first time in a decade that Congress has voted to cut the agency’s budget.
In recent years, House appropriators have generally backed $50 million budget increases to the SEC in proposals widely seen as opening bids in yearlong negotiations between Congress and the administration. The SEC eventually gets a boost as part of end-of-year funding deals for the entire federal government. Such a deal in December granted the SEC a healthy increase of about $100 million—though it came with notable caveats, including a policy “rider” restricting the SEC from requiring public companies to disclose their political-spending activities.
House appropriators say they have sought to hold the SEC’s budget down because it has quadrupled since 2001. By now, funding should be sufficient for the agency to meet its postcrisis responsibilities under the 2010 Dodd-Frank Act and other recent legislation, they say. The move is significant as another sign of the political climate turning hostile to financial regulators, with critics trying to shift the terms of the political debate away from the crisis and onto the burdens of postcrisis rules.
Given the popularity of my recent blog – “Insider Trading: A Director, Golfer & Gambler Walk Into a Bar…” – I couldn’t resist a follow-up when I saw this press release from the SEC yesterday. It never ceases to amaze me how dumb some people on Wall Street are when it comes to insider trading. What did the I-banker think when the SEC Enforcement Staff saw that a plumber suddenly makes 10 bets on companies who miraculously were acquired shortly after the trades? Although I guess it feels like you got away with it the first few times, you figure you’re golden all the way. Anyways, this is a good teaser for tomorrow’s grand webcast…
Webcast: “Yes, It’s Time to Update Your Insider Trading Policy”
Tune in tomorrow for the webcast – “Yes, It’s Time to Update Your Insider Trading Policy” – to hear Chris Agbe-Davies of Spectra Energy, Ari Lanin of Gibson Dunn, Alan Dye of Hogan Lovells and Section16.net and Marty Dunn of Morrison & Foerster provide practical guidance on revisiting your insider trading policy, as well as your insider trading training program for officers, employees and directors. The panel will cover:
1. Insider Trading: The Current Enforcement Environment
2. Overview of Pre-Clearance Procedures
3. Things to Consider in Drafting/Applying the Policy (including gifts, transactions with issuer, changes of election under 401(k) plans and ESPPs)
4. Blackout Periods
5. Policy Provisions About Sharing Information With Third Parties
6. Extending Coverage Beyond Employees
7. Pledging, Hedging & Short-Selling Transactions
8. Intersection with Rule 10b5-1 Plans
9. Employee Education
Our June Eminders is Posted!
We have posted the June issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
2015 proved to be a tough year for venture-backed IPOs with the total number of IPOs completed decreasing by 37% from 2014. The outlook for IPOs in 2016 is still uncertain following a dramatic decrease in IPO activity in the first quarter of 2016 compared to IPO activity in the comparable periods over the last five years. Despite the decrease in activity, there is still optimism by the pipeline of outstanding pre-IPO companies ready to access the public markets. Here’s a venture-backed IPO survey for 2015 from Gunderson Dettmer, focusing on key governance and disclosure items.
Among others, the findings of the 60 venture-backed companies include:
– All but two are incorporated in Delaware
– 35% listed on the Nasdaq Global Select Market, 35% on the Nasdaq Global Market, 23% on the New York Stock Exchange, and 7% on the Nasdaq Capital Market
– Average time from incorporation to IPO was nearly nine years
– Average time from initial registration statement submission to the SEC to pricing the IPO was nearly five months
– 62% relied on insiders buying in the IPO, up from 51% in 2013
– Only three of the companies completed follow-on offerings in 2015
Last week, Corp Fin published this “Small Entity Compliance Guide” about the changes to the Exchange Act Section 12(g) threshold. Also check out this blog by Nasdaq Private Market’s Annemarie Tierney about “What is the RAISE Act and How Useful will it be to Sellers of Private Company Shares?”…
On May 17, 2016, Fortune Magazine published an article by Geoff Colvin, “Take This Market and Shove It,” examining the growing trend of companies staying private rather than opting for an IPO. The article notes that while the total number of U.S. companies continues to grow, the number that are traded on stock exchanges has plunged 45% since peaking 20 years ago, and that IPOs, once an indicator of U.S. business dynamism, dried up after the dot.com bust in 2000 and have never fully recovered, even though today’s economy is far larger. The article provides various explanations for why some public companies are returning to private ownership and many other companies are simply staying private, while public companies are increasingly becoming fewer and bigger. Although going or staying private allows companies to invest for the long-term and focus on their businesses rather than Wall Street expectations, the article notes that another important driving force has been the increasing fear of activist investors. Other significant factors noted by the article include the following:
– A decreasing reliance of companies on physical assets (e.g., factories and machinery), resulting in a decreasing reliance on IPOs for broad-based financing.
– All-time low interest rates, resulting from a savings glut and easy monetary policies across the globe, and the tax deductibility of interest payments.
– The high costs associated with going public. Underwriting and registration costs average 14% of the funds raised and offerings are usually underpriced by on average 15% in order to produce a first-day “pop.” Public companies also face additional rules, notably those imposed by the Sarbanes-Oxley of 2012 and the Dodd-Frank Act. In addition, public company disclosures are replete with information for competitors to study.
– The ability of PE firms to provide broad managerial advice to private companies. In addition, public companies suffer from the so-called agency problem (the misalignment of owners and managers), which does not arise in private companies because the majority owners are usually either the managers themselves or members of a powerful board of directors.
– Private ownership is also attractive to managers because executive compensation is not publicly reported.
The article also refers to an informal online survey indicating that 77% of CEOs think it would be easier to manage their company if they were private rather than public and that only 8% of CEOs thought that they did not have all of the cash they needed to fund investments.
SCOTUS: No Federal Jurisdiction Over State Law Claims That Don’t Raise ’34 Act Issues
