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."
It is with sadness that I report that Randi Morrison will be leaving us in a few days. She’s been toiling for the Society of Corporate Secretaries most of the week for the past year – but now she will be their full-time staffer. Randi has been working with me for well over five years – first as a volunteer and then as my right-hand woman.
Randi is a unique individual in our field – her enthusiasm for all things governance, securities and compliance-related is absolutely unparalleled. When you see Randi at a conference, she is sitting up straight – soaking in every nuance for hours on end. Her spark inspired me at a time when this job was becoming “old hat.” Her fingerprints are all over some of the best content on this site – the hundreds of Handbooks & Checklists for starters. She won’t be far away – but I will miss her dearly all the same! Good luck Randi!
Proxy Access: Corp Fin Provides Further Clarity on “Substantially Implemented”
Here’s some of the work that Randi is doing for the Society – she’s the lead author for its weekly alert, which included this gem a few days ago: As discussed in this new Goodwin Procter memo, another series of no-action letters issued by the SEC’s Division of Corporation Finance since our last report appear to make clear that companies may use Rule 14a-8(i)(10) to exclude proxy access shareholder proposals on “substantially implemented” grounds provided that the ownership threshold and holding period sought by the proposal and already implemented by the company are the same, despite differences in other proxy access terms. Each of the 15 no-action letters that were granted from February 26th – March 17th based on Rule 14a-8(i)(10) included a 3% ownership threshold and 3-year holding period, but the company’s proxy access right and the shareholder proposal differed as to the shareholder director nominee cap and aggregation (for purposes of attaining the ownership threshold).
The memo includes a table summarizing the principal terms of the company provisions and shareholder proposals, as well as a detailed summary in the Appendix.
House Committee Passes 10 Capital Access Bills
This MoFo blog by Carlos Juarez notes that the House Financial Services Committee passed ten bills yesterday relating to facilitating access to capital and the reduction of regulatory burden on smaller reporting companies…
Disclosure Effectiveness Project: Concept Release Coming on Wednesday, April 13th!
Yesterday, the SEC announced that they will hold an open meeting on Wednesday, April 13th to decide “whether to issue a concept release seeking comment on modernizing certain business and financial disclosure requirements in Regulation S-K.” This follows the “request for comment” that the SEC put out about Regulation S-X last September. This open meeting was originally scheduled for March 30th but then got pushed back two weeks…
Back in October, Corp Fin issued Staff Legal Bulletin No. 14H, which set forth a new “direct conflicts” standard for counterproposals. As noted in this blog, Corp Fin will only allow exclusion “if a reasonable shareholder could not logically vote in favor of both proposals.” In other words, proposals won’t be found conflicting unless they “directly conflict.”
On Monday, Corp Fin posted the first no-action letter issued under this new standard – this response to Illumina that allows the company to exclude a Jim McRitchie proposal that had requested that the board take the steps necessary so that each voting requirement in the company’s charter and bylaws that calls for a greater than simple majority vote be eliminated and replaced by a requirement for a majority of the votes cast for and against applicable proposals, or a simple majority in compliance with applicable laws. The Staff’s response allowed exclusion under Rule 14a-8(i)(9) because it “directly conflicts with management’s proposal because a reasonable shareholder could not logically vote in favor of both proposals.”
Does this letter foretell a new strategy by companies to bar shareholder proposals? Here’s an excerpt from this Cooley blog on that topic:
Does this letter outline an approach that may appeal to other companies seeking to exclude a shareholder proposal? Of course, in some – or perhaps many – cases, companies may be reluctant to submit to their shareholders management proposals to ratify a position that is the opposite of one that governance activists and institutional holders are ardently promoting as de rigueur. Nevertheless, this approach is apparently just what Mr. Chevedden fears. In one of his many letters to the staff regarding this no-action request, Mr. Chevedden recognized what may well represent a strategy for the future: “Implicit in the company argument is the concept that henceforth any rule 14a-8 governance proposal topic, that often obtains a majority vote, might be kept off the ballot by simply asking shareholders to ratify the opposite of the rule 14a-8 proposal.”
Ironically – from the perspective of proponents of shareholder proposals (some of whom prompted the staff’s reexamination of the conflicting proposals exclusion) – under the staff’s prior approach, companies seeking to exclude a shareholder proposal would have submitted as a management proposal a moderated version of the shareholder proposal that at least took some steps in the proponent’s direction but, under the new approach, companies seeking exclusion will now need to submit management proposals that completely reject the proponent’s position.
Proxy Cards: Corp Fin’s New CDI on “Clear & Impartial” Proposal Descriptions
Yesterday, Corp Fin issued this CDI 301.01 about how a proxy card should “clearly identify and describe the specific action on which shareholders will be asked to vote” for both management & shareholder proposals. The CDI provides six examples of what not to do. This is one of those examples that doesn’t satisfy Rule 14a-4(a)(3): “A shareholder proposal on executive compensation.” The CDI doesn’t clarify whether it applies to VIFs – but it likely does. Here’s an excerpt from this Gibson Dunn blog:
The CD&I does not indicate that a shareholder proponent’s title or description of its own proposal is necessarily determinative of how that proposal should be identified on the company’s proxy card. For example, if a shareholder captions her proposal as “Proposal on Special Meetings,” that description presumably still may not satisfy Rule 14a-4(a)(3). Thus, a company remains ultimately responsible for determining how a shareholder proposal is described on the company’s proxy card.
Because the Staff’s interpretation was based on Rule 14a-4, it applies only to how proposals are addressed on a company’s proxy card. Nevertheless, we would expect the Staff to hold similar views in interpreting the requirement under Rule 14a-16(d)(6) that a company’s Notice of Internet Availability contain a “clear and impartial identification of each separate matter intended to be acted on.” Similarly, to the extent that companies are involved in reviewing and commenting on the form of voting instruction card that is distributed to street name shareholders, best practice is to conform the descriptions of proposals on the voting instruction card to the descriptions on the company’s proxy card. Companies also are subject to the general standard of avoiding misleading statements when identifying or describing proposals within the body of the proxy statement.
Notably, the SEC does not have a rule on the form and content of the state law notice that appears at the front of companies’ proxy statements. Thus, if a company has determined that a generic description of shareholder proposals is sufficient for the notice page of the proxy statement under state law, such as stating that the shareholder meeting agenda includes a “shareholder proposal, if properly presented,” the C&DI does not prevent that practice. As a result, the description (if any) of those proposals on the notice page may differ from how each proposal is identified on the proxy card.
Corp Fin’s New Enforcement Liaison Chief: Tim Henseler
It’s been five months since Mary Kosterlitz retired as the long-time Chief of the Corp Fin’s Office of Enforcement Liaison – and now Corp Fin has a new Chief for that Office: Tim Henseler. Tim moved over from serving as the SEC’s Director of the Office of Legislative and Intergovernmental Affairs.
Recently, I blogged about the process of companies selecting a SIC code when they file their IPO registration statement with the SEC, including how to change that code if the company’s business changes over time. One member asked me a follow-up question – Why does the SEC still use SIC Codes?
The member pointed out that the SIC code system is almost 80 years old and it supposedly was superseded by NAICS in 1997. “NAICS” stands for the North American Industry Classification System – and it’s the standard used by federal agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the US economy. The answer to the question is “I don’t know” – anyone know?
Insider Trading: Mark Cuban Keeps The Heat On
As noted in this Dallas Morning News article, Mark Cuban has filed amicus briefs in three federal cases – including one before the US Supreme Court – regarding the SEC’s use of administrative law judges. As noted in the article, Cuban describes himself as qualified to weigh in on the issue because he was a “victim” of SEC overreach (see this blog about Cuban’s own insider trading case that he won in court a few years back – and this blog about his appearance at a “SEC Speaks” conference).
Misleading Statements: Sanofi Interprets Omnicare
After SCOTUS handed down its Omnicare opinion last year, many wondered what its impact would be – and how the case would be applied in the lower courts. A few weeks ago, the Second Circuit issued Tongue v. Sanofi that applies Omnicare. I’ve been posting memos on Sanofi in our “Securities Litigation” Practice Area…
Spanking brand new. By popular demand, this comprehensive “Auditor Engagement Handbook” covers how to engage an independent auditor, from the factors to be considered and engagement letter issues. This one is a real gem – 23 pages of practical guidance – and its posted in our “Auditor Engagement” Practice Area.
When I blogged last year about a Form 8-K license plate, a member reminded me that then-Corp Fin Associate Director Mickey Beach had a Virginia vanity plate with “12G3-2B” (this was a while back – before that Rule was modernized in ’08). Note that you can’t get lower case letters or parentheses on a license plate – so it’s impossible to get the true rule cite…
IR Web Page Leaks: How Bad Bots Are Destroying The Internet
I’ve blogged numerous times about keeping your earnings release information safe from premature leaking (here’s my latest). Here’s a good blog on the topic by Q4. Also check out Q4’s new finance app – Q4 Touch – that is designed for IROs and not just for investors. Go mobile!
My Final Four: UNC wins over Maryland. Purdue and Texas A&M also make the final weekend…
Unwaivable Statutes May Doom Forum Selection Provision
From this blog by Keith Bishop: Nearly four years ago, I wrote this post asking whether California’s anti-waiver statute voids choice of forum agreements. The statute in question was California Corporations Code Section 25701 which provides:
Any condition, stipulation or provision purporting to bind any person acquiring any security to waive compliance with any provision of this law or any rule or order hereunder is void.
Recently, the Franchise Law Committee of the Business Law Section of the California State Bar issued this e-Bulletin discussing the Court of Appeal’s recent opinion in Verdugo v. Alliantgroup, L.P., 2015 Cal. App. LEXIS 466 (May 28, 2015). In that case, the Court of Appeal reversed the trial court’s decision to enforce a forum selection clause in an employment agreement. The Court of Appeal summarized California’s approach as follows:
Although a party opposing enforcement of a forum selection clause ordinarily bears the burden to show enforcement would be unreasonable or unfair, the burden is reversed when the underlying claims are based on statutory rights the Legislature has declared to be unwaivable. In that instance, the party seeking to enforce the forum selection clause has the burden to show enforcement would not diminish unwaivable California statutory rights, otherwise a forum selection clause could be used to force a plaintiff to litigate in another forum that may not apply California law.
The Court of Appeal found that the employer’s speculation that the designated forum court would “most likely” apply California law was insufficient to meet this burden. It also suggested that it could have met this burden by stipulating to the application of California law.
As the Franchise Law Committee points out, “Although Verdugo is an employment law matter, the same rationale and analysis should apply to any dispute involving a non-waivable California statute . . .”.
Recently, Michelle Leder of footnoted wrote up some analysis of the latest disclosures from the bigger banks about their regulatory risks. Perhaps cynicism about regulators is more noticeable because it’s an election year – as there are plenty of examples of disclosures taking aim at the government. For example, here’s an excerpt from this Form 10-K:
For example, senior officials at the SEC have shown a willingness to pursue even violations that could be viewed as minor on the theory that publicly pursuing smaller matters will reduce the prevalence of larger matters. The Director of the SEC’s Division of Enforcement has described this approach as a ‘zero tolerance’ policy.
Two New SEC Commissioner Candidates Face Questions at Confirmation Hearings
Yesterday, the Senate Banking Committee held confirmation hearings over the nominations of Lisa Fairfax and Hester Peirce to be the newest SEC commissioners – five months after they were nominated. This WSJ article details the sharp questions they faced over their prior academic research – the article indicates that the Senate will vote on the confirmations on April 7th. As I blogged before, the Commission would be comprised of four women and one man if they are confirmed. Here’s a WSJ profile on Commissioner Peirce – and here’s a WSJ profile on Commissioner Fairfax…
As noted in this blog by Davis Polk’s Ning Chiu, this Bloomberg article notes that, since 2011, 5 of the biggest US activist funds have nominated women just 7 times in seeking 174 board seats.
More on “EDGAR is Down”: A Familiar Refrain?”
Recently, I blogged about how the SEC’s EDGAR seems to be experiencing more outages lately. In response, I received this from a member:
I filed a series of Form 4s on Friday night about 8 pm eastern. I immediately received filing acceptances from Edgar. So Edgar was receiving and accepting filings – there was no outage. But the filings weren’t posted for the public to see until early on Monday morning (and the third party alerts that the filings trigger also weren’t sent until that morning). In this case, the Forms were filed after the market closed on Friday and were publicly available before the market opened on Monday – but it was still troubling that filings were accepted during filing hours and not immediately made available to the public.
This is a good reminder to look on Edgar after you make a Section 16 filing to ensure it’s posted – even if you receive an acceptance from Edgar. Edgar shuts down at 10:00 pm eastern – and no filings will be accepted by Edgar after that time. But if a Form 4 is filed at 9:59 pm eastern, it should receive that day’s filing date – and should be disseminated that same day. So clearly something was wrong with Edgar here…
Here’s how the Edgar framework works – Filings submitted after 5:30 pm eastern receive the next business day’s filing date and are disseminated to the public at 6:00 am on the next business day – except the following submission types are exceptions and receive the same day’s filing date if filed by 10:00 pm eastern (the first three are disseminated the same day):
– Section 16 filings (3, 3/A, 4, 4/A, 5, 5/A)
– Filings pursuant to Rule 462B – “MEF” filings
– Form 13H filings
– CORRESP (correspondence) filings (not disseminated to the public)
– DRSLTR (correspondence Related to Draft Registration Statement) filings (not disseminated to the public)
Yesterday, General Electric released its first “integrated summary report,” which combines the most critical information from the company’s annual report, proxy statement and sustainability webpage in a single 68-page document – including a video. So this takes the concept of a “summary annual report” one step further by adding sustainability information. Also see this 1-page overview of the report.
Also check out my “Proxy Season Blog” from yesterday for analysis of Coca-Cola’s latest annual meeting materials, including a new event after their annual meeting called a “Shareowner Day”…
Transcript: “Hot Issues for Your Annual Meeting”
We have posted the transcript from the recent webcast: “Hot Issues for Your Annual Meeting.” This was a tremendous program and if you didn’t catch it live, check it out now…
SEC Enforcement: No Prize Too Small
Tied to the “zero tolerance” policy of the SEC’s Enforcement Division is this David Smyth blog about an enforcement action over a measly $1k of insider trading profits. The SEC brings these actions over small amounts as part of its deterrent campaign…
Yesterday, the SEC approved the PCAOB’s budget for 2016 in the amount of $257.7 million (of which $253.3 million is covered by annual accounting fees). This is a 3% budget hike compared to last year. Here’s PCAOB Chair Doty’s remarks…
Spanking brand new. By popular demand, this comprehensive “Managing Your Career Handbook” covers aspects of your career that you should be thinking about. This one is a real gem – 25 pages of guidance. All sorts of stuff on whether going in-house is right for you, how to work with recruiters, how to market yourself, how to evaluate potential employers, salary negotiations, how to work with law firms when you’re in-house – and more.
There isn’t much out there on this topic for folks in our community – yet it’s arguably the most important thing you should be worried about. Please take advantage…
How The IRS Uses Your Form 10-K
This CFO.com blog summarizes a study conducted by an accounting professor entitled “Reading the Roadmap: IRS Attention to Financial Statements.” The study notes the IRS’s increased usage of 10-K’s – and what that usage may mean. Gulp!
Director participation in investor meetings: Investor meetings with participation by board members more than doubled between 2013 and 2015, from 24% to 49%, respectively. This trend was led by companies in Developed Asia, with 81% of companies reporting such meetings, followed by Eastern Europe with 59% and Western Europe with 55%. North American companies had the lowest rate of board/investor interaction at 26%. Of the companies that reported meetings between directors and investors, 54% stated that such meetings were standard practice for the company and were generally the result of investor request. However, only 24% of companies reported having a written policy regarding interaction between directors and investors. 21% of companies stated that they believed directors should have no direct contact with investors.
Social media usage: The use of social media for IR purposes continues to increase, although at a slower pace in recent years. In 2010, only 9% of companies reported using social media for IR purposes, which increased to 28% in 2013 and 30% in 2015. Of the 70% of companies that reported not using social media for IR purposes, approximately half indicated that they may use social media in the future. The most common social media platforms used are Twitter/StockTwits (16%), Facebook (11%) and mobile phone/tablet IR apps (11%).
When analyzing the companies utilizing social media, the survey found that twice as many mega cap companies (54%) use social media in IR compared to microcap companies (26%). The four industry sectors reporting the highest usage of social media are Technology (39%), Financial (39%), Telecommunications (38%) and Healthcare (38%). Of the companies that reported not using social media for IR purposes, the majority cited a lack of investor demand (61%), as well as limited resources (35%), inability to control the message (29%) and lack of management support (28%).
Yesterday, I blogged about whether it’s worth calling the Corp Fin Staff to confirm that there isn’t a stop order for your offering that is about to go effective – or whether you can merely rely on looking at the SEC’s online list rather than bothering the Staff. I also ran a poll about what folks do – 46% said they call the Corp Fin Staff, 39% merely check the online list and 4% rely on the SEC calling them if there is a stop order.
A few members told me that if you call the Staff to ask about stop orders, you typically get a reasonably polite – but clear message – to check the SEC’s online list. So calling the Staff at closing to confirm may be a vestige of the past. In fact, I learned that this is the standard text that you now see in legal opinions to underwriters in connection with a registered offering:
The Registration Statement is effective under the Securities Act and, to our knowledge, based on a review of the Stop Orders page of the Commission’s website (http://www.sec.gov/litigation/stoporders.shtml), no stop order suspending the effectiveness of the Registration Statement has been issued under the Securities Act or proceedings therefor initiated or threatened by the Commission.
By the way, I’m excited about our upcoming webcast – “Legal Opinions: The Hot Issues” – featuring a trio of the foremost experts in that area…
Corporate Lawyers Warn of Impact of Empty Seat on US Supreme Court
A group of more than 100 corporate attorneys has signed a letter urging Senate Republicans to back down from their refusal to fill the U.S. Supreme Court vacancy while President Barack Obama is in office. The letter was spearheaded by the Lawyers’ Committee for Civil Rights Under Law in Washington, D.C., a legal aid organization founded during the civil rights era. The Wall Street Journal (10 March, Gershman) notes that among the signatories are Google Corporate Counsel Priya Sanger and Andrew Hendry, a retired executive of Colgate-Palmolive. “Having been the chief legal officer of two major American companies over more than a quarter-century, I can assure you that American business needs a complete nine-justice supreme court,” Hendry said. “The uncertainty created by an empty chair on the court for a prolonged period will damage American business,” he added, citing a recent US$835 million settlement by Dow Chemical, which the company attributed to the absence of a full bench.
Tune in on Monday for the DealLawyers.com webcast – “Rural/Metro: Aiding & Abetting Breach Claims Now” – to hear Potter Anderon’s Brad Davey, Alston & Bird’s Kevin Miller and Richard Layton’s Blake Rohrbacher discuss what you should now be considering as you prepare deals after the latest Rural/Metro decision from the Delaware Supreme Court. Please print these “Course Materials” in advance.
As Dave has blogged, a SEC stop order under 1933 Act Section 8(d) is a rare bird – yet every law firm associate working on public offerings knows the seemingly pointless exercise of confirming that there are no stop orders on a registration statement being used for an offering. It seems so pointless because so few stop orders are issued. However, there occasionally is a stop order. In fact, there were 11 stop orders during 2015 and 8 during 2014, according to the SEC’s list. I bet those numbers are higher than most people would have guessed.
Given the SEC’s online list of stop orders, you might ask yourself whether it’s worth calling the Corp Fin Staff to confirm there isn’t a stop order for your offering that is about to go effective? In other words, can’t you merely rely on looking at the SEC’s online list rather than bothering the Staff? I suppose that depends partly on how quickly the SEC updates that list, something that I don’t know…
The Senate Banking Committee has announced that it will hold a hearing on the nominations of Lisa Fairfax and Hester Peirce to be SEC commissioners next Tuesday, March 15…
Stop Orders for Withdrawal Requests? You See Something New Once in a Blue Moon
As part of this job, I review the new stuff that the SEC posts each day. Occasionally, I spot things that are kinda strange. For example, I know the SEC sometimes needs a stop order to prevent a registration statement from going effective because they automatically go effective under the ’33 Act unless the registrant includes a “delaying amendment” under Rule 473. In other words, Section 8(a) of the ’33 Act provides that registration statements will become effective twenty days after the filing date automatically – and this will happen without the magic language of a delaying amendment being included in the registration statement.
Everyone filing a registration statement includes a delaying amendment – unless someone tries to pull a fast one. Corp Fin is pretty vigilant in looking for delaying amendment – when a Staffer screens registration statements to decide which level of review it will receive, that is the first thing they look for (and if it’s missing, you get a call and you need to file a pre-effective amendment immediately to add it). [Back in ’33 when the statute was enacted, there were far fewer registration statements and the SEC was able to process them within 20 days. In fact, the Commissioners themselves reviewed them – there was no Corp Fin.]
Anyways, I didn’t think the SEC needed a stop order to deny a withdrawal request. I thought Corp Fin could decide to just not act on a withdrawal request and that would effectively deny it. But then I came across this stop order for a withdrawal request. I can’t recall ever seeing one of those before. Rule 477 says a request for withdrawal is deemed granted after 15 calendar days unless the SEC notifies the registrant that the request won’t be granted, so I guess this is the context in which this comes up…
Speaking of arcane stuff, I’m always shocked by the high volume of FOIA requests that the SEC has to process each year. Here’s the latest tallies in this report. If I’m reading it correctly, over 16k requests were processed last year…
Poll: Checking for Stop Orders
Here’s a poll on your beliefs on checking for a stop order:
The use of SIC codes – “Standard Industrial Classification” – provides a framework for classifying industries by a four-digit code. As noted on this Corp Fin page, the SEC uses the framework as a way to assign companies to one of the 11 AD groups that review filings within Corp Fin. When they register their IPO, a company will select its SIC code – mainly by assessing its primary source of revenue. Companies input their SIC codes when they set up their EDGAR account – and include it on the cover page of their initial registration statement. The SEC doesn’t assign them.Then over time, a company may decide to change its SIC code because the nature of its business has changed. Sometimes the SEC might challenge how a company wants to change that code.
Recently, we had a follow-up to a query in our “Q&A Forum.” The query (#5651) was answered in 2012, providing guidance about “how to ask the Corp Fin Staff to change the SIC code assigned to a company.” The follow-up noted how Corp Fin wouldn’t recently provide relief to a different company. The follow-up noted:
This mechanical application of a primary revenue test can lead to some surprising classifications. For example, Dominos Pizza (not my client) is assigned SIC Code 5140 (WHOLESALE-GROCERIES & RELATED PRODUCTS) rather than SIC Code 5812 (RETAIL-EATING PLACES). Therefore, searching EDGAR by SIC Codes will not necessarily generate issuers in the same business segment.
SEC Rulemaking Petitions: Political Contributions Lawsuit Revived
As noted in this blog by Steve Quinlivan, the lawsuit against the SEC for not acting on the political contributions disclosure petition has been revived…
SEC Rulemaking Petitions: Whipping One Up in Mere Minutes
The birth of the Internet eventually led to an explosion in the number of comment letters submitted on a SEC’s rulemaking proposal since submitting one nowadays is as easy as composing an email. Is that same trend finally extending to the art of submitting rulemaking petitions? I don’t closely track rulemaking petitions because it is quite rare that the SEC ever acts on them (despite what may be thought by those suing the SEC for not acting).
But I did notice that two petitions submitted a while back were shorter than what I have seen – this one that is 4 paragraphs long and this one that appears to have been transcribed by the SEC after receiving it in handwritten form (scroll down past the top page to see the handwriting)…
