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."
As noted in our “Annual Report & 10-K Wrap Handbook,” glossy annual reports are one of the few documents that companies furnish to the SEC in paper rather than being filed electronically in Edgar. Companies are permitted to furnish them electronically – but most choose to mail them in because it’s hard to format them so that Edgar accepts them.
For some time now, Corp Fin has been scanning in the paper copies of glossy annual reports and posting them on Edgar. However, as noted in Edgar Filer Support newsletter, Corp Fin recently decided to forego this practice “in an effort to reduce costs and simplify administrative processes, and in light of the availability of these annual reports on other web sites.”
The Edgar Filer Support newsletter notes that a Registration Fee Estimator – a tool designed to assist filers in estimating required fees for EDGAR filing submissions – should be available within the next 6 months…
Director Removal: Delaware Rules on ‘Without Cause’
Here’s a memo by Wachtell Lipton’s William Savitt:
The Delaware Court of Chancery recently held that a corporation without a classified board or cumulative voting may not restrict stockholders’ ability to remove directors without cause. In re Vaalco Energy S’holder Litig., C.A. No. 11775-VCL (Dec. 21, 2015). The ruling gives rise to questions for the many companies with similar charter or bylaw provisions.
In 2009, Vaalco’s stockholders approved an amendment to the company’s certificate of incorporation to declassify the board, but the amendment left intact clauses in the bylaws and charter providing that directors could be removed only for cause. When an activist investor launched a consent solicitation to remove four members of the board in late 2015, Vaalco responded that any such written consent would be “null and void” because its directors could “only be removed from office for cause.” Stockholder plaintiffs sued, arguing that under § 141(k) of the Delaware General Corporation Law, stockholders have the right to remove directors without cause unless the company has a staggered board or cumulative voting.
In a transcript ruling, the Court of Chancery agreed and invalidated the terms of Vaalco’s charter and bylaws providing that directors may be removed only for cause. Shortly thereafter, Vaalco reached a resolution with the activist investor.
The practical significance of the ruling for the scores of other companies with unclassified boards whose charters allow director removal only “for cause” remains to be determined. Even if the Delaware Supreme Court confirms the Vaalco rule — and the Supreme Court has not had the opportunity to pass on the issue — a without-cause removal right may be of limited importance, especially for companies whose charter and bylaws do not provide low thresholds for stockholder-called special meetings. More fundamentally, a board vulnerable to a without-cause removal campaign is likely equally vulnerable to a proxy fight at an ensuing annual meeting. In many cases, therefore, the Vaalco rule is unlikely to have real-world impact in a contested election scenario.
But stockholder plaintiffs may seek to capitalize on the ruling nonetheless, by bringing suit or demanding that boards comply with the Vaalco rule and then claiming a fee if a conforming change is made. Confronted with such a claim, companies will have the option to settle or litigate the matter in the Court of Chancery and the Supreme Court. Given the tactical complexity of these governance and litigation choices, companies affected by the Vaalco ruling should consider carefully whether a response is in order.
Director Exposure: Personal Liability for Whistleblower Actions?
It will not come as news to anyone that corporate directors face the possibility of direct personal liability for their actions or omissions in the capacities as directors. However, the scope of these individuals’ potential liability exposures can and does change. As a result of recent legal developments, at least two new areas of potential liability exposure for corporate directors have emerged. As discussed below, a recent federal district court decision suggests that directors can be held personally liable under both the Sarbanes-Oxley Act and the Dodd-Frank Act for whistleblower retaliation, and a recent California legislative enactment provides that corporate directors can be held personally liable for violations of the state’s wage and hour laws.
A lot of responses to my blog yesterday about the newly posted model annotated D&O questionnaire. Goodwin Procter’s John Newell gave me a nice add for the “D&O Questionnaire Handbook” and my section on page 24 about “Whether to Obtain Competition-Related Information.” In that section, I noted that it’s possible that some companies include a question about the Clayton Act depending on their questionnaire philosophy – but that we hadn’t seen one. John sent me one:
Do you, or have you at any time on or after the beginning of the company’s most recent completed fiscal year, served as either a director or an officer of any business other than the Company, including non-public businesses, that had (a) total liabilities and stockholders equity (i.e., net worth as shown on its balance sheet) in excess of $29,945,000 as of the end of that business’s most recently completed fiscal year and (b) revenues of $2,994,500 or more attributable to business operations that could be viewed as competing with the Company because of the nature of the other business’s business operations and the geographical markets in which the other business operates? If so, please provide the name of the business in the space below.
And John notes that the trick is that the FTC updates the dollar thresholds annually – but not until the second or third week of January, so anyone who uses this question before that date gets the prior year’s dollar amount.
And then another member sent me this example that doesn’t need to be updated every year:
Do any of the companies for which you serve as an officer or director (whether publicly-traded or privately-held) compete, directly or indirectly, with any of the company’s businesses?
YES NO
If YES, please identify below the company and provide an estimate of its total annual sales for its last completed fiscal year and an estimate of its annual sales which are competitive with the company.
As noted in this blog by Duane Morris’ David Feldman, the OTCQX has increased their listing and governance requirements effective January 1st. The QX is the highest tier of trading among the OTC options. There will now be a higher initial bid price of $0.25 to trade on the OTCQX U.S. tier. US companies on the QX will have to keep a price above $0.10. International companies will be required to meet new initial and ongoing minimum bid prices of $0.25 and $0.10 to trade on the OTCQX International tier. Both US and international companies will have higher initial and ongoing market capitalizations of $10 million and $5 million, respectively. All companies now will be required to have at least two market makers.
In addition, there are new minimum corporate governance requirements for American companies on the QX. These are: a minimum of two independent directors on the board of directors; an audit committee composed of a majority of independent directors; and they must conduct annual shareholders’ meetings and submit annual financial reports to shareholders at least 15 calendar days prior to such meetings. They also added even more stringent new requirements for the higher level “premier” tier on the QX.
Political Contributions: “Forcing the SEC to Adopt Rules” Case Dismissed
Here’s an excerpt from this blog by Steve Quinlivan:
The United States District Court for the District of Columbia has dismissed a two-count complaint asking the Court to mandate the SEC be required to adopt rules regarding disclosure of political contributions. The plaintiff had submitted a request for rulemaking to the SEC, and the SEC never took action on the request.
FASB Issues “Financial Instruments Recognition & Measurement” Standard
Here’s an excerpt from this blog by “Accounting Today”:
The Financial Accounting Standards Board issued Tuesday a long-awaited accounting standards update (2016-01) for the recognition and measurement of financial instruments that it has been developing for over a decade with the International Accounting Standards Board.
The standard affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities. FASB also plans to issue this year a separate standard on the impairment of financial instruments that will differ markedly from the IASB’s. The IASB issued its own financial instruments standard, IFRS 9, in 2014. The “recognition and measurement” standard was formerly referred to as “classification and measurement” but was changed to better reflect what FASB was trying to address.
Here’s something from the “DealLawyers.com Blog” that I recently posted: Occasionally, you hear that people have received advice to be especially careful about emails so “don’t put it in an email, give him/her a call.” Often the advice is couched in terms of “avoid putting anything in an email that you would be embarrassed to read about on the front page of the Wall Street Journal. Make a call instead.” That advice is insufficient given what often happens in litigation. According to a recent WSJ article regarding pending M&A litigation, it’s alleged that: “[employee of buyer] later testified that [employee of target’s financial advisor] called him and said “we should not email on this.”
And then consider this quote from a recent Delaware Chancery Court opinion:
“On the evening of March 24, [employee of buyer] summarized the situation in an email [to other employees of the buyer]: I have spoken to a number of bankers on our side (for advice) and theirs (for back-channel feedback). There are definitely two other offers as we suspected, both say they need another week of work but the company’s bankers think it is more like 2-3 weeks. Sounds like both are higher but again not a knock-out, I haven’t been able to get more specific info than that.”
Things to bear in mind include:
1. Any advice, if given by one transaction participant to another participant or their representatives, is discoverable. Even if you don’t disclose it, the other person may – and you should assume likely will.
2. While not necessarily wrongful, there can be lots of innocent and/or perfectly valid reasons for making the suggestion to talk rather than exchange email (e.g., to avoid ambiguity or misinterpretation or because time is of the essence) – plaintiffs will likely allege that the person making the suggestion was trying to hide something damaging.
3. Just because you speak with someone and don’t put it in an email doesn’t ensure that the substance of the conversation will not be memorialized in writing – and be discoverable. Even if you don’t put it in an email, the person you talk to may.
The bottom line is: while it is not always possible to avoid saying, doing or writing things that are potentially vague, ambiguous or subject to misinterpretation, and sometimes back-channel communications are authorized for purposes of seeking a bump in price from the buyer, you should not assume that it’s okay to say something so long as you don’t put it in an email. The better advice is to try to “avoid saying, doing or putting anything in an email that you would be embarrassed to read about on the front page of the Wall Street Journal.”
Related-Party Transactions: SEC Approves NYSE’s Exemptions from Shareholder Approval
Cooley’s Cydney Posner’s blog provides the long history behind the SEC’s approval of the NYSE proposal to exempt certain related-party transactions from shareholder approval requirements – despite concerns of the SEC’s Investor Advocate…
SEC Commissioner Aguilar Bids Farewell
On the heels of SEC Commissioner Gallagher issuing a brief farewell statement, Commissioner Aguilar has now issued a lengthy one too. I don’t recall Commissioners doing this in the past. In his statement, Aguilar summarizes the changes in the SEC & in the law during his tenure, lists his accomplishments and notes some “unfinished business.” And this is on top of his recent list of tips for incoming Commissioners.
Can you think back and wonder what you would write for every job you left…
I’m sad to note that former Rep. Mike Oxley passed away on New Year’s Day. As noted in this article, Congressman Oxley served 25 years in the House, representing Ohio, serving as Chair of the Financial Services Committee for the max term of six years and was co-author of the Sarbanes-Oxley of 2002. I had the fortune of interviewing Mike at our conference in 2012, the 10th anniversary of Sarbanes-Oxley. He was insightful, engaging and witty. And Mike was quite the athlete – particularly golf where he could boast that he had six “hole-in-ones” during his lifetime. Six! Condolences to his family & friends, including his colleagues at BakerHostetler.
Our January Eminders is Posted!
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Last week, the SEC issued a 208-page release that is part proposing, part concept release. Here’s an excerpt from this blog by Steve Quinlivan:
The release begins with the history of transfer agents and the development of regulations. For instance, it answers the mystical question of where DTC got the name for its nominee, “Cede & Co.” It’s short for “certificate depository.” See footnote 87 on page 31. It also explains the odd term “regular way” which sometimes works its way into documents. That apparently is just a reference to normal T+3 settlement. See footnote 262 on page 74.
Importantly, the release signals the SEC’s intent to impose enhanced obligations on transfer agents in the transfer of restricted securities. To combat microcap fraud, the SEC intends to propose rules:
– Prohibiting any registered transfer agent or any of its officers, directors, or employees from directly or indirectly taking any action to facilitate a transfer of securities if such person knows or has reason to know that an illegal distribution of securities would occur in connection with such transfer;
– Prohibiting any registered transfer agent or any of its officers, directors, or employees from making any materially false statements or omissions or engaging in any other fraudulent activity in connection with the transfer agent’s performance of its duties and obligations under the Exchange Act and the rules promulgated thereunder; and
– Requiring each registered transfer agent to adopt policies and procedures reasonably designed to achieve compliance with applicable securities laws and applicable rules and regulations thereunder, and to designate and specifically identify to the Commission on Form TA-1 one or more principals to serve as chief compliance officer.
With respect to Regulation Crowdfunding, the SEC solicits comments on the following topics:
– What services, if any, do commenters anticipate transfer agents providing for crowdfunding issuers?
– How do commenters anticipate transfer agents will comply with their recordkeeping, safeguarding, and other requirements in the context of crowdfunding securities?
– Does the entry of transfer agents into the crowdfunding space pose new or additional risks for the prompt and accurate settlement of securities transactions?
– Transfer agents have traditionally assessed fees on a per shareholder basis. Do commenters believe transfer agents are likely to impose a per shareholder fee in connection with crowdfunding issuances? If so, is a per-shareholder fee appropriate? If not, what other kinds of fees are likely to be charged, and would they be appropriate?
Is There an Accountant Revolving Door?
I’ve blogged numerous times in response to complaints about the revolving door at the SEC for lawyers. This Reuters article talks about a possible revolving door for accountants too (and throws some dirt about the PCAOB)…
As noted in this Cooley blog, there could be Congressional action in the area of cybersecurity disclosure soon enough. Here’s an excerpt from the blog:
Senators Jack Reed and Susan Collins have introduced the bipartisan “Cybersecurity Disclosure Act of 2015”, a bill to promote transparency in the oversight of cybersecurity risks at publicly traded companies. According to the press release, the bill is designed to ensure that public companies “provide a basic amount of information about the degree to which a firm is protecting the economic and financial interests of the firm from cyber attacks.” In addition, the bill “seeks to strengthen and prioritize cybersecurity at publicly traded companies by encouraging the disclosure of cybersecurity expertise, or lack thereof, on corporate boards at these companies.”
If ever enacted, this legislation would require companies to disclose – in their SEC filings – whether they have a director who is a “cybersecurity expert” – and if not, why having this expertise on the board isn’t necessary because of other cybersecurity steps taken by the company. The bill would require the SEC and the National Institute of Standards and Technology to provide guidance on the qualifications necessary to be a cybersecurity expert. This Jones Day piece by Mauricio Paez & Randi Lesnick criticize the bill…
It’s Here! “The Cybersecurity Act of 2015”
Congress & President Obama did enact a cybersecurity piece of legislation recently. One part of the omnibus appropriations bill is the “Cybersecurity Act of 2015.” As noted in the memos we are posting in our “Cybersecurity” Practice Area, the Act addresses the sharing of information between the public and private sectors about cyber threats (including privilege and confidentiality implications), liability protections for companies that monitor, how to share or receive cyber threat information and much more…
SEC Commissioner Aguilar Talks SEC’s Own Cybersecurity Risks
In this statement, SEC Commissioner Aguilar talks about the agency’s need to focus on its own cybersecurity profile. As I’ve blogged before, I think it’s just a matter of time before Edgar is hacked…if it hasn’t been already…
Recently, I blogged about the continued criticism of stock repurchase programs. In response, I received this note from Downey Brand’s Bruce Dravis:
Thanks for flagging new articles on the share buybacks. The main point of the Reuters piece tracks ground covered by a Harvard Business Review article last year on how the combined dividends and buybacks exceeded earnings over a given period. However, earnings, dividends and share buybacks are very different operational events for a company. While dividends and buybacks both involve expenditures of cash, they represent divergent strategies for providing returns to shareholders.
Conflating them in order to see if the combination exceeds company earnings generates an interesting number—but shouldn’t generate an automatic conclusion that shareholder payments are crowding out capital allocations for company development. It’s true that companies are under pressure from some activists to deliver short-term results. There is also a countervailing pressure from institutional investors to deliver sustainable results, which requires strategic investment.
Measured in absolute dollars, the amount spent on stock repurchases is a big number. A fairer picture, though, should include looking at how much the share repurchase expenditure is offset by the cash companies take in through equity compensation plans.
For example, I looked at Intel from 2006-13. Over those eight years, the company issued roughly 850m shares in equity compensation, taking in roughly $12.5b in cash and tax benefits. The issuances, by themselves, would have diluted shareholders by about 15% from the Jan. 1, 2006 starting point. In the same period, Intel repurchased 1.8b shares, for about $40b. Netting the equity plan issuances against the repurchases, you find about $27.5b in net cash expenditures to generate at net anti-dilutive impact of about 20% compared to the Jan. 1, 2006 starting point (in other words, the company bought back all the dilutive equity compensation shares, plus a lot more).
Since equity issuances and repurchases are both capital transactions, I think this comparison is more apt—or at least, adds to creating a more complete picture — than a comparison to earnings alone. If you also consider equity issued for acquisitions — arguably an investment in growing company revenues, albeit not made in R&D dollars — you get an even more complex picture than is suggested by the “Earnings=Dividends+Buybacks” formula.
Here’s a response that I got to Bruce’s note:
Perhaps Bruce should look at the whether the companies with buybacks are granting stock options instead of restricted stock! I gather that most stock based compensation is in the form of the latter. Besides, having buybacks that are tied to stock options means the company is buying shares when employees are selling, instead of making an independent capital allocation decision, and his comment has positive connotation – so just wanted to point this out.
In addition, here’s a Bloomberg piece with a countervailing view about the pace of buybacks…
Nasdaq’s Proposal: Regain Compliance Before Delisting for Failure to Hold Annual Meeting
As noted in this blog by Steve Quinlivan, Nasdaq has proposed to have the discretion to grant listed companies an extension to regain compliance before delisting a company that fails to hold an annual meeting. In determining whether to grant a company an extension to comply with the annual meeting requirement, Nasdaq will consider the likelihood that the company would be able to hold an annual meeting within the exception period, the company’s past compliance history, the reasons for the failure to timely hold an annual meeting, corporate events that may occur within the exception period, the company’s general financial status, and the company’s disclosures to the market.
What is “Private Ordering”?
Here’s an excerpt from this blog by “The Activist Investor” to explain a concept that wasn’t familiar to securities lawyers a decade ago:
It refers to a long-standing legal concept in which individual parties agree on how to police an activity, instead of relying on government regulation. It can apply to all sorts of activities – for example, development of information technology and the Internet, and the rules for standardizing structures and processes in online affairs.
To activist investors, it refers to how shareholders agree, with each other and with company management, on how corp gov will work at a given portfolio company. They do so instead of relying on states, Congress, and the SEC to prescribe corp gov principles as law and regulation.
This is different than self-regulation. When an industry self-regulates, it promulgates its own standard rules that apply to all parties (companies, consumers). Private ordering defines specific rules for each individual situation, in this case each individual company.
In the corp gov world, private ordering can apply to just about any part of company bylaws. Most recently, bylaw provisions for forum selection and litigation costs have stoked the debate about whether state corporate law and regulation or agreement among shareholders and management should prevail.
It also applies to the debate over proxy access, among other areas that fall within Federal jurisdiction. Recall how proxy access started as a strict SEC regulation requiring access on specific terms, pursuant to the Dodd-Frank Act. The SEC also allowed shareholders to propose different proxy access terms, in a bylaw amendment or non-binding resolution. A friendly judge vacated the regulations, but let stand the part that allowed shareholders to propose some form of proxy access for that company.
We note that regulation and private ordering sit at the two ends of a continuum of choices, rather than as the only two choices. We (the investing public) can decide to regulate something that won’t work for private ordering. We can leave to private ordering something else that is too expensive or complicated to regulate. We can regulate lightly, and leave some elements of a subject to private ordering. The possibilities are endless.
On Monday, Corp Fin issued 4 more CDIs (#3-6) on the FAST Act, tripling the number issued so far…
SEC Rulemaking Petitions: Political Spending Rulemaking Not Happening (At Least Not Soon)
The recent omnibus spending bill from Congress (page 1982) contains a provision prohibiting the SEC from conducting rulemaking in the area of political contributions disclosures as I blogged last week on “The Mentor Blog.”
As noted in this blog by Steve Quinlivan, 28 Senators and 66 House reps then sent a letter to the SEC explaining that the agency is free to propose a rule to require disclosure of corporate political spending – so long as the SEC doesn’t finalize, issue or implement it. The letter is supported by an opinion from Professor John Coates. The upshot is that this means that the petition from Harvard’s Lucian Bebchuk – which has received over 1 million comments in support – is not going to be both proposed and adopted this year…
The prohibition is just for this budget year as this is a budget bill for the 2016 fiscal year. Section 707 of the bill provides: “[n]one of the funds made available by any division of this Act shall be used by the Securities and Exchange Commission to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.” So it seems that Congress would have to renew the prohibition next year (or do it differently) to make it permanent – as I read it. I think that’s why the letter talks about why the SEC is allowed to propose rules now and get the ball rolling. But I believe it could be done in the next fiscal year, so long as it doesn’t use FY 16 funds…