Yesterday, Corp Fin issued CF Disclosure Guidance Topic No. 9, which addresses disclosure & other securities law obligations relating to the Covid-19 crisis. The guidance provides a helpful list of illustrative questions that companies should ask themselves when preparing disclosure documents. Here are some questions Corp Fin thinks companies should consider when thinking about the pandemic’s impact on their liquidity & capital resources:
How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources changed, or is it reasonably likely to change? Have your sources or uses of cash otherwise been materially impacted? Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency?
Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk. Do you expect to disclose or incur any material COVID-19-related contingencies?
The guidance also addresses insider trading concerns, as well as considerations for earnings releases. When it comes to earnings disclosure, Corp Fin touches on several issues, one of which is non-GAAP financial data. While reminding companies of their obligations under Reg G & Item 10 of Reg S-K, the guidance also indicates some flexibility to the Staff’s approach under current conditions:
We understand that there may be instances where a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments that may require additional information and analysis to complete. In these situations, the Division would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results.
As an example, the guidance references the case of a company that intends to disclose EBITDA information on an earnings call. The Staff’s position would permit the company to reconcile that measure to either its GAAP earnings, a reasonable estimate of its GAAP earnings that includes a provisional amount, or its reasonable estimate of a range of GAAP earnings. The guidance says that if a provisional amount or range is used, it should reflect a reasonable estimate of Covid-19 related charges not yet finalized, such as impairment charges.
SEC Modifies Covid-19 Exemptive Order
Yesterday, the SEC also issued a modified exemptive order extending the time period during which, subject to certain conditions, companies with operations affected by the Covid-19 crisis may delay their SEC filings by up to 45 days from the original due date. The SEC’s original order applied to certain disclosure filings that would’ve otherwise been due between March 1 and April 30, 2020. The modified order extends that period through July 1, 2020.
The SEC’s press release accompanying the modified order also indicates that, for purposes of determining Form S-3 eligibility & WKSI status, a company relying on the exemptive order will be considered current and timely in its Exchange Act filing requirements if it was current and timely as of the first day of the relief period and it files any report due during the relief period within 45 days of the filing deadline for the report. The same approach will apply to a company’s eligibility to file an S-8 & for purposes of determining whether it is current in its reports for purposes of Rule 144(c).
RIP Judge Stanley Sporkin
Judge Stanley Sporkin, who passed away on Monday, was one of the truly towering figures in securities regulation during the latter half of the 20th Century. Here is a statement on his passing from SEC Chair Jay Clayton, and another one from the current co-directors of the SEC’s Division of Enforcement, which Sporkin built almost from scratch into an enforcement powerhouse during his tenure there in the 1970s. We offer our condolences to Judge Sporkin’s friends and family.
I recently blogged about potential disclosure issues surrounding a corporate executive’s Covid-19 diagnosis. Regrettably, this is no longer a hypothetical issue. For example, Altria Group recently filed a Form 8-K announcing that its Chairman & CEO had contracted the virus and was taking a leave of absence, and Baxter International recently filed a Form 8-K disclosing that the company’s CFO & a member of its board of directors had tested positive for the virus.
We don’t know what prompted Altria and Baxter’s decisions to make public disclosure, but this recent Sullivan & Cromwell memo lays out a number of reasons why companies may opt to go public with this kind of information in the context of the Covid-19 crisis. As discussed in this excerpt, one reason to voluntarily make this disclosure is the high risk of a leak due to the public health response to the pandemic:
Due to the nature of COVID-19, including the recommended public health measures for containing its spread, there is a significant likelihood that a senior executive’s actual or presumed positive COVID-19 diagnosis will leak. Under the current public health recommendations, and pursuant to the COVID-19 related policies adopted by many companies, if an individual tests positive for the virus (or is presenting serious symptoms or has been in contact with someone who is diagnosed), the number of people both within and outside the company who will be aware of an executive’s actual or suspected illness is likely to be much higher than for another type of illness. Combined with the current public interest relating to COVID19 infections, the likelihood of public dissemination is meaningfully increased.
The memo points out that voluntary disclosure when a leak is likely will give the company an opportunity “to present its assessment of the impact of an executive’s illness and plans in place for mitigating such impact, including implementation of any interim officer roles or succession planning and the potential impact on the rest of the company’s executive team and its board of directors.”
Reg S-T: SEC Staff Cuts Signatories Some Slack
If you read the headline of this blog and were hoping to read that the SEC finally joined the rest of the world and permitted electronic signatures for filings, I’m afraid you’re going to be disappointed. No, the agency has just cut people some slack on the document retention requirement contained in Rule 302(b) of S-T. That rule requires every signatory to an electronic filing to manually sign the filing or an authenticating document, and requires the filer to retain it for five years and produce it upon request to the SEC.
In light of the Covid-19 crisis, the Staff of Corp Fin, IM and Trading & Markets issued a statement yesterday to the effect that, while they continue to expect everyone subject to Rule 302(b) to comply with it to the fullest extent practicable, they will not recommend enforcement action if:
– a signatory retains a manually signed signature page or other document authenticating, acknowledging, or otherwise adopting his or her signature that appears in typed form within the electronic filing and provides such document, as promptly as reasonably practicable, to the filer for retention in the ordinary course pursuant to Rule 302(b);
– such document indicates the date and time when the signature was executed; and
– the filer establishes and maintains policies and procedures governing this process.
The statement also says that a signatory may also provide to the filer an electronic record (such as a photograph or pdf) of such document when it is signed. I know it isn’t what you were hoping for, but take what you can get. Check out this Cydney Posner blog for more details.
The 3rd Annual “Cute Dog” Contest is Decadent & Depraved
Well, it’s pretty apparent that most of you are unlikely to be short-listed for any judging vacancies that may arise at the Westminster Kennel Club. Under what bizarre alignment of planets is my dog Shadow currently in last place in the cute dog contest? Obviously, she should be winning in a landslide – and for your information, Andrea Reed’s dog “Peaches” is actually a bunny rabbit. As my mother – and probably yours – would say, “I do and I do and I do for you – and THIS is how you thank me?”
Like many of you, I’ve spent the last week sequestering myself in my home office, trying to be a model social distancer & trying not to wonder how long this will all last and how much damage it will do. So has our faithful correspondent Nina Flax of Mayer Brown, and she weighs in with her thoughts on the way we live now:
The Bay Area was the first to institute a shelter-in-place, and even days before that, my family was in self-isolation (my son developed a cough, so we went on lock down). In watching American Idol recently (and I should mention that during each episode so far there have been multiple times I have had tears stream down my face – so inspiring and moving), there was great advice from Bobby Bones for Francisco Martin: “I’m going to give you a little advice about these nerves. You can’t will them away. So what I would suggest that you do is just embrace the fact that you’re just a nervous person.” Here is how I am embracing the fact that I can be a neurotic person at times and otherwise coping with the pandemic (for now):
1. Taking This Seriously. We are trying to do anything we can to not be any strain on the system in any way. We have some food already in the house, and as I write this on March 19th, for now have not gone to the supermarkets. I did place a Whole Foods order for toilet paper (since we do not have a hoard of it) and Matzo, Gefilte Fish and horseradish (to try to keep some semblance of normal around Passover). But we are also (i) rationing (to delay having to get food for as long as we can) and (ii) quarantining. For rationing, my husband and I have more fully embraced the parents-are-their-kids-garbage-cans mentality; anything that our son leaves, we eat before we decide what else we will eat. We also are setting aside at the beginning of the day what snacks our son wants that day in a designated box, so that he knows what he can have (and does not eat more). And, finally, trying to calorie restrict ourselves while not giving up on some things that make us happy – like a piece of chocolate. For quarantining, because current indications are that the virus can live on cardboard for 24 hrs and plastic and stainless steel for 2-3 days, we have had designated areas of our fridge and freezer for “older” food (meaning food from a store that has been in our fridge for more than 3 days) and “newer” food (that we place in one area, immediately wash our hands and leave untouched for at least 3 days). Clearly, as we got longer into this, the fridge and freezer areas became unnecessary. But we are also applying this old/new process to any mail that comes (including Amazon boxes). What goes along with taking things seriously is considering your actions that could result in a non-COVID-19 related visit to the doctor or hospital. For example, now is not the time that my son should be learning to ride a bike without training wheels. He likes training wheel riding just fine.
2. Being Considerate of our Friends in Essential Businesses. We need our friends in essential businesses to stay healthy, and part of staying healthy is staying happy. So please don’t complain to any of your friends who are still providing the services we need about cancelled yoga classes (not kidding, when speaking to our pediatrician for over-the-phone advice on our son’s cough (since we could not bring him in just in case), she mentioned how down she was when friends of hers would say things like this). Which is not at all to say you shouldn’t complain. I am a firm believer in needing the complaint-related release some of us get before keeping things in perspective. One thing that seemed to mean a lot to some of our friends is (i) telling them how seriously we are taking things (and letting them know about other friends and family who are being similarly neurotic), and (ii) saying thank you for all that they have always done and are now doing (which is something our family already does whenever we speak to someone in the military – so an easy expansion).
3. Being Grateful. I have touched on this one before, but want to come back to it again. I am grateful (i) to have a roof over my head (many in the Bay Area do not), (ii) have food in my fridge (same comment) and (iii) be in a position to assist others as we can. This ranges from asking our elderly neighbor if there is anything they need that we might have (over text/email, not in person), continuing to pay all of our service providers who we have asked to not come to our house during these times and determining food pantries and animal shelters we can monetarily support.
4. Staying Positive – or #teamhumanity. This is my favorite hashtag so far. Things that we are doing within this category are trying to enjoy the extra time we have with our son, so taking my “lunch” break to get a hug and see the crayon bits he melted into multi-color shaped crayons this morning. Staying in touch with friends through text, calls and especially video calls. Reaching out to a colleague who is in the US from abroad, having just arrived for a secondment two weeks ago. Sending around emails with fun things, like the Shedd Aquarium penguin videos or free opera streams or live virtual concerts. Reminding those with dogs to hug them. All of us who are fortunate to have jobs are juggling how to work under these conditions, but it is not insignificant the amount of time we will spend with our loved ones, human or furry, in person or otherwise. I hope we all come out of this more connected. That is at least my personal objective!
5. Relieving the Stress and Staying Healthy. I am not the best sleeper – but now I am trying to make sure I get at least 8 hrs of sleep each night. I am not the best at prioritizing exercise – but not I am increasing my 2020 goal from exercising once per week to at least twice per week. I am not the best at drinking water – but now I am trying to remember to drink the recommended daily intake each day. And, I am doing the things I know relieve my stress – meditating (which for me is watching really mindless TV), taking a bath and asking my family for hugs.
6. Limiting the News. This relates to item 5 above, but is so important I wanted to call it out separately. I check the news in the morning for 15 minutes and at night for 15 minutes. That’s it. Please do not get sucked in; it is not good for your mental health.
Let’s remember Anne Frank, who lived in a secret annex from July 6, 1942 until August 4, 1944. This will be hard, harder for others, and entirely surmountable. We can be amazing – I am already inspired by how others are rising to the occasion – from our preschool teachers who have arranged zoom meetings for the kids to see each other, to our neighbors who are all observing the stay-6-ft-apart concept but still engaging in friendly banter as we cross each other on dog walks from across the street, to clients who were not yet under shelter-in-place orders and offered to send staples to us, to our office leader arranging for video lunches, to my friends who have been also been FaceTiming my parents and keeping their spirits up. I continue to strive to embrace the positive.
New Practice Area: “Covid-19 Issues”
Over the last couple of weeks, we’ve been inundated with law firm memos and other materials covering a wide variety of legal issues raised by the Covid-19 crisis. In an effort to bring some order to those resources, I decided to organize them into a new “Covid-19 Issues” Practice Area. I think the last new practice area that we added was for the Wu Tang Clan. This one’s a lot less fun, but we hope it will make it easier for you to find the resources you need.
Transcript: “Audit Committees in Action – The Latest Developments”
We have posted the transcript for our recent webcast: “Audit Committees in Action: The Latest Developments.”
As forecasts of the economic impact of the Covid-19 crisis become increasingly dire, it looks like many companies are taking a page from the financial crisis playbook and drawing down their credit lines to provide a liquidity buffer. Here’s an excerpt from this FEI newsletter:
Drawing down credit lines has become the cash-flow salvation for senior-level financial executives that have seen revenues come to an abrupt halt because of the coronavirus outbreak. Over the past week draw downs shot up with both public and private companies joined the line for liquidity. Public Fortune 500 companies like Boeing Co. and casino operator Wynn Resorts are reportedly tapping their credit lines to the tune of $13.8 billion and $850 million, respectively. Private companies are also joining the scrum, with PE firms Blackstone Group and Carlyle Group each urging their portfolio companies to draw down their credit lines to avoid a cash crunch.
The article notes that so far, banks have been accommodating these draw downs with help from the Federal Reserve, which has opened the liquidity spigots – and it says that so long as the Fed continues to provide funding, the banks are likely to continue to lend.
Annual Meetings: NY Temporarily Permits Virtual-Only Meetings
Some states, like Delaware, provide a lot of flexibility to companies that want to hold virtual annual meetings. But there are a number of states that either prohibit virtual meetings, impose impediments to them, or have provisions in their statutes that make the permissibility of such meetings unclear. New York falls into this latter category, as this excerpt from a recent Sullivan & Cromwell memo points out:
New York’s Business Corporation Law (“NYBCL”) does not expressly provide that a meeting of shareholders may take place solely by remote communication, although Section 602 of the NYBCL allows a board of directors, where authorized, to implement reasonable measures to allow participation and voting at shareholder meetings by electronic communication. (A bill seeking to amend Section 602 of the NYBCL to expressly permit virtual-only meetings is currently pending.) The NYBCL also specifies that a company holding a shareholder meeting by virtual means must provide between 10–60 days’ advance notice, and such notice must include logistical details of how shareholders can participate in the meeting.
Sullivan & Cromwell now reports that late last week, in response to the Covid-19 crisis, NY Gov. Andrew Cuomo signed an executive order temporarily permitting New York corporations to hold virtual annual meetings. This excerpt summarizes the order:
The executive order provides that the Governor temporarily suspends subsection (a) of Section 602 and subsections (a) and (b) of Section 605 of the New York Business Corporation Law (“NYBCL”) “to the extent they require meetings of shareholders to be noticed and held at a physical location.”
Although the executive order suspends certain aspects of the meeting notice requirements under Section 605(a) of the NYBCL relating to a physical meeting location, companies incorporated in New York remain subject to all applicable shareholder notification and disclosure requirements under their governance documents, federal securities laws and stock exchange listing rules.
While the governor’s action will help New York corporations (at least through April 19th), another major jurisdiction with some funky provisions in its statute relating to virtual meetings has yet to provide its corporations with any relief – I’m looking at you, California.
Covid-19 Cash Crunch: Rethinking Dividends
The suddenness of the Covid-19 crisis has left many companies rethinking their liquidity needs. Those that declared a cash dividend before the crisis hit but haven’t yet paid it may be reconsidering whether that dividend is still a good idea. The problem is that there are several Delaware cases holding that once a company declares a dividend, it creates a debtor-creditor relationship between the company & its shareholders.
This recent memo from Morris Nichols, Richards Layton, Potter Anderson & Young Conaway provides some guidance on alternatives that may be available for companies that find themselves in this position. Here’s a suggestion for companies with record dates that haven’t yet passed:
If the record date for determining stockholders entitled to receive the dividend has not yet occurred, the board may determine to defer the record date and payment date for the dividend. The DGCL does not prohibit changing a record date or payment date that has not occurred. Accordingly, subject to any requirements under the certificate of incorporation, such as those relating to required quarterly payments of dividends on preferred stock, where the record date has not occurred, a board could change the record date and payment date for a dividend that has already been declared to a future date, so long as the payment date occurs within 60 days after that new record date.
The memo also points out that, even if the record date for the dividend has passed, there may be constraints prohibiting its payment. If the board is unable to determine that, at the payment date, the corporation has sufficient “surplus” (as defined in the DGCL) available to pay the dividend, or if the board believes payment of the dividend would leave the corporation insolvent, then Delaware law would prohibit the payment of the dividend.
Tomorrow’s Webcast: “Activist Profiles and Playbooks”
Tune in tomorrow for the DealLawyers.com webcast – “Activist Profiles & Playbooks” – to hear Joele Frank’s Anne Chapman, Okapi Partners’ Bruce Goldfarb, Spotlight Advisors’ Damien Park and Abernathy MacGregor’s Patrick Tucker discuss lessons from the 2019 activist campaigns, expectations from activists in the 2020 proxy season and how activism differs for large and small cap companies.
Yesterday, the SEC adopted amendments to the definitions of “Accelerated Filer” and “Large Accelerated Filer.” Here’s the 210-page adopting release. The most notable result of this action is that smaller reporting companies with less than $100 million in revenues will no longer have to provide auditor attestations of their Sarbanes-Oxley Section 404 reports. This excerpt from the SEC’s press release summarizing the changes says that the amendments will:
– Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller reporting company and had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. Business development companies will be excluded in analogous circumstances.
– Increase the transition thresholds for an accelerated and a large accelerated filer becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million;
– Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status; and
– Add a check box to the cover pages of annual reports on Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is included in the filing.
The need for relief from SOX 404 was a controversial topic, and as usual these days, the vote was along partisan lines. Republican Chair Jay Clayton and Commissioner Hester Peirce submitted statements in support of the rule, while Democratic Commissioner Allison Herren Lee filed a statement in dissent.
Two commissioners also provided some colorful social media commentary on the vote. Allison Lee tweeted: “There must be a limit to the number of times we can credibly assert to investors that we act in their best interests by making policy choices they directly oppose.” For some reason, Hester Peirce tweeted a photo of a cherry cobbler with “404” baked into it (your guess is as good as mine, folks).
Disclosure: What If Your CEO Is Diagnosed With the Coronavirus?
The COVID-19 outbreak creates plenty of disclosure issues about its potential impact on a company’s business and financial condition. But there’s another one lurking in the background – what if the CEO becomes ill? Unfortunately, based on what we know about the virus, that doesn’t seem to be an unlikely outcome for at least a few companies, so it probably makes sense to start thinking about that particular issue now.
If you’re inclined to do that, check out this recent blog from UCLA’s Stephen Bainbridge on this topic. The blog acknowledges that it may be prudent for the CEO to disclose this information to the board and shareholders, but says that the existence of a legal obligation to do is another matter. A lot may depend on what you’ve previously said – for example, have you singled out the potential loss of the CEO as a risk factor in prior disclosure? This excerpt says that in the absence of this or another disclosure trigger, there may not be a legal obligation to disclose the illness:
Even if the CEO’s health is material, a company could only be held liable for disclosing that information if there was a duty to disclose it. This is because, under the securities laws, “[s]ilence, absent a duty to disclose, is not misleading ….” Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988). Hence, for example, if the company put out a press release containing misleading information about the CEO’s health, it would have a duty to correct that statement. But simply remaining silent about the CEO’s health should not result in liability, because there is no SEC rule requiring disclosure or any caselaw imposing a duty to disclose such information.
Having said all that, there are some academics who think there should be such a duty, although they recognize that the law has not yet imposed such a duty.
Prof. Bainbridge cites the academic literature supporting the imposition of a duty to disclose a CEO’s significant health problem, but as someone who wasn’t on law review, I take great pleasure in omitting the citations from my blog. After all, it’s been a tough week, and – to quote Kevin Bacon’s character in the movie Diner – “it’s a smile.”
Thinking About a Buyback? Here’s Some Reassurance
If your board is thinking about stock buybacks in response to the ongoing market turmoil, this brief Davis Polk memo has some words of reassurance for your directors. The memo walks through a number of complex issues about buybacks that boards are currently dealing with.
While these issues aren’t amenable to short answers, the memo notes that in making decisions about them, “a Board that acts without any conflict, is well-informed, and goes through a proper process in deliberating to reach a decision, will be protected by the business judgment rule.” If your company is thinking about a buyback, be sure to check out our “Stock Buybacks Handbook” and the other resources in our “Stock Repurchases” Practice Area.
For many companies, annual meetings are just around the corner, and the COVID-19 pandemic has raised all sorts of questions about what they should do and whether a virtual meeting is a viable alternative.
Last week, Lynn blogged about Davis Polk’s memo on planning for coronavirus-related annual meeting developments. Since then, we’ve received memos addressing similar topics – including adding a virtual meeting component or going entirely to a virtual annual meeting – from Freshfields, DLA Piper, Hunton Andrews Kurth, Pepper Hamilton and Dechert. Also check out this Cleary Gottlieb blog. These resources address the relevant securities and corporate law issues, as well as investor relations and logistical considerations.
This Sidley memo says that one of the consequences of the coronavirus outbreak may be a decline in proxy contests during the current season. As this excerpt points out, the reason is that given current market volatility, activists may be unwilling to commit to the kind of long-term hold that a successful proxy fight would necessitate:
It is important to understand that if an activist launches a proxy contest to replace directors, an activist must be prepared to remain in the stock for the foreseeable future – at least until the annual shareholder meeting and, if successful in obtaining board seats, at least 6-12 months beyond that. While there are no legal restrictions to the contrary, as a practical matter, an activist cannot initiate a proxy contest and sell or reduce its position shortly afterward.
An activist who does this stands to lose credibility with long-term institutional investors and becomes more susceptible to being portrayed as a “short term” investor in future activism campaigns. It is even more difficult for an activist to exit a stock if an employee of the activist fund, rather than candidates that are at least nominally independent, takes a board seat. Material nonpublic information received by the activist employee in the board room is imputed to the activist fund, thereby restricting the fund’s ability to trade in the stock.
The memo cautions that once the crisis passes, companies should expect activists to return to proxy contests with a vengeance. It notes that 130 proxy contests were launched in 2009, after the financial crisis, and many companies that can hide during a bull market have their vulnerabilities laid bare during a downturn.
Antitakeover: Dual Class & Staggered Boards are Alive & Well in Silicon Valley
Fenwick & West just came out with its annual comparative survey of governance practices among Silicon Valley companies and the S&P 100. One of the things that jumps out at you is that while antitakeover charter provisions may be on the decline in most of corporate America, they’re thriving out west:
– Historically, dual-class capital structures were more prevalent among the S&P 100 companies than they were among the SV 150, but the number of tech companies that have them has risen from 10.9% of the SV 150 in 2017 to 12.7% in 2019), while the percentage of S&P 100 companies with dual class structures has remained steady at about 9% during that same period.
– Staggered boards are also much more common among the tech set than among S&P 100 companies. Classified boards increased from 50.7% of SV 150 companies in 2018 to 52.7% in the 2019 proxy season. That percentage reflects the large number of Silicon Valley IPOs in recent years, but the percentage of companies with staggered boards among the more mature top 15 SV 150 companies increased to 13.3% in the 2019 proxy season, after holding steady at 6.7% for the preceding 4 years. In contrast, only 5% of the S&P 100 had staggered boards in 2019.
Obviously, IPOs that are skewing the Silicon Valley numbers somewhat, but another factor in the greater extent of unfashionable antitakeover provisions in SV 150 charters may also have something to do with the amount of voting power sitting in their boardrooms. The survey reports that directors & officers of SV 150 companies own an average of 9.0% of the equity in their companies, while their counterparts at S&P 100 companies own an average of only 3.5%.
With apologies to “The Scarlet Pimpernel“, this blog’s title is a fair summary of the results of Morrow Sodali’s annual institutional investor survey. More than 40 global institutional investors with a combined $26 trillion in assets under management participated in the survey, which was conducted in January. Among its other highlights, the survey found that:
– All respondents state that ESG risks and opportunities played a greater role in their investment decisions during the last 12 months, with climate change being top of investors’ list (86%).
– Climate change (91%) and human capital management (64%) are cited as the top sustainability topics that investors will focus on when engaging with boards in 2020.
– Notably, investors now prioritize presence of ESG risks (32%) before a credible activist business strategy when deciding whether to support ESG activists.
– Overwhelmingly 91% of respondents expect companies to demonstrate a link between financial risks, opportunities and outcomes with climate-related disclosures. A total of 68% respondents believe that greater detail around the process to identify these risks and opportunities would significantly improve companies’ climate related disclosures.
– When it comes to the company’s ESG performance and approach, investors recommend SASB (81%) and TCFD (77%) as best standards to communicate their ESG information.
91% of the institutions surveyed said that that board level engagement is the most effective way for investors to influence board policies – and nearly half said they’d consider voting against a director to influence outcomes.
Conflict Minerals: Time for a Fresh Look at Disclosure & Compliance Programs
Remember when everybody thought the Conflict Minerals disclosure requirement was on the way out? Yeah, good times. . . Anyway, this Ropes & Gray memo says that changes in the global regulatory environment and increasing investor demands for information on conflict minerals mean that it’s time for companies to take a fresh look at the way they approach disclosure and compliance. Here’s the intro:
The seventh year of filings under the U.S. Conflict Minerals Rule will be due in slightly under three months. At most companies, conflict minerals reporting and compliance have been more or less static for the last few years. It is time for many companies to take a fresh look at their conflict minerals disclosure and compliance program. In some cases, disclosures have become outdated and compliance programs have not kept pace with market developments.
In addition, over the last few years, the global regulatory landscape has continued to evolve, both with respect to conflict minerals specifically and human rights more broadly, with more changes on the way. Furthermore, investor expectations concerning supply chains – as part of ESG integration by mainstream investors – continue to increase.
The biggest regulatory event on the horizon is EU Conflict Minerals Regulation, which takes effect on January 1, 2021. The EU Regulation generally will require importers of 3TG (tin, tantalum, tungsten and gold) minerals into the EU to establish management systems to support due diligence, conduct due diligence and make disclosures about the 3TG they import into the European Union.
The memo provides an in-depth overview of the EU Regulation, and notes that while only a small number of U.S. Form SD filers will also be subject to the EU Regulation, the conflict minerals compliance programs of a large number of U.S.-based companies will need to address the EU Regulation.
Board Governance: Should You Keep Your Ex-CEO on the Board?
Cooley’s Cydney Posner recently blogged about this Fortune article addressing whether your former CEO should remain on the board after their departure. This excerpt says that many governance experts think that’s a bad idea – particularly if your CEO will assume some sort of “Executive Chair” role:
Some governance gurus cited in the article consider making the transition to executive chair a “bad idea.” According to one governance expert, the position of executive chair really “means you’re CEO….The person with the CEO title is really the chief operating officer.” Another expert observed that a good CEO will see that it’s “not fair to the new person.” Another academic doesn’t hold back, calling it “a stupid idea.
All kinds of psychological factors get in the way. Maybe the new CEO owes his or her job to the predecessor. Or maybe the new CEO can’t stand the previous one. Maybe the old CEO brought all the other directors onto the board, and they feel loyal to him or her. It obstructs the new CEO from doing his or her job.” Another problem highlighted was the difficulty for the new CEO to change course or raise issues about the former CEO’s decisions when the former CEO is still in the room. Awkward, at a minimum.
On the other hand, Cydney says that the authors contend that retaining the CEO on the board or in a consulting capacity for a brief time may provide benefits in terms of continuity. Interestingly, the article also says that in situations where the former CEO isn’t a founder, keeping the CEO on the board “is negatively associated with the firm’s post-turnover financial performance.”
In what may be a sign of things to come for many of us, The Washington Post reports that last night, the SEC asked employees in its DC headquarters to work from home in response to concerns that an employee may have contracted the coronavirus:
The Securities and Exchange Commission on Monday asked employees at its D.C. headquarters to stay away from the office because of a potential coronavirus case, becoming the first major federal employer to turn to telework to avoid the spreading virus.
The announcement from the agency, which is charged with monitoring the financial markets, came after a day of turmoil on Wall Street, with the Dow Jones industrial average falling more than 2,000 points. The agency‘s notice, which was emailed shortly after 8 p.m., required employees working on the ninth floor of its office to stay home and encouraged all others to do the same.
While the SEC may be the first federal agency to ask employees to telecommute, a number of U.S. businesses have also implemented work from home policies for some employees in response to the outbreak. Many others are adopting contingency plans that contemplate doing the same. For instance, last night my law firm sent out an email directing everyone to take their laptop computers home each night, in case the decision was made to implement a work from home policy for personnel at one or more of our offices.
Coronavirus: Will Business Interruption Insurance Pick Up Some of the Tab?
Many companies are looking into whether forced closures resulting from the coronavirus outbreak are covered under their business interruption policies. This Stroock memo delves into that question, and it turns out – as usual when it comes to coverage issues – the answer is pretty complicated. But the bottom line is don’t bet on it. Here’s an excerpt from the intro:
With COVID-19 disrupting global supply chains and sales, businesses are losing income and incurring additional expenses as a result of the disruption. There likely will be an increase in insurance claims against insurance policies offering business interruption and/or contingent business interruption coverage. Whether the claims are covered will depend on the terms and conditions of the insurance policy and the circumstances of the loss.
One of the largest independent claim managers has cautioned that “successful claims under business interruption coverage for infection are not common.” Indeed, there are no reported cases in the United States regarding business interruption coverage in connection with human infectious disease epidemics or pandemics. However, commerce has never been as global as it is today.
The memo does a good job summarizing the various types of policies that provide business interruption insurance and the way in which they’ve been interpreted by the courts. After reading it, I think it’s fair to say that any company that seeks to recover under a business interruption policy should be prepared for a long and uncertain fight.
Auditor Refreshment: Every 87 Years Like Clockwork. . .
A recent Audit Analytics blog noted that Brown Forman recently changed its outside auditors for the first time in 87 years, and also pointed out that since 2018, there were only two other S&P 500 companies to change auditors after a longer tenured engagement. GM parted ways with Deloitte after 100 years, and DuPont de Nemours ended its relationship with that same firm after 113 years.
That raises the larger question of just how long have S&P 500 companies used the same auditors? The blog lays that out too, with a chart showing the frequency distribution of auditor tenure in 10-year increments. While only 38 companies have auditors with tenures exceeding 80 years, 94 companies – or nearly 20% of the S&P 500 – have had the same auditor firm for more than 50 years. More than half of the S&P 500 (265 companies) have had the same auditor for more than 20 years.
I guess we can add earnings calls to the ever-growing list of things that the coronavirus outbreak has thrown a giant monkeywrench into. This recent article from “CFO Dive” says that public company CFOs have been scrambling to explain the potential impact of the outbreak on their company’s bottom line during recent earnings calls. This excerpt provides some examples of what BigTech has been saying:
As of last week, references to coronavirus have been made over 8,000 times across over 1,000 companies on earnings call transcripts, natural language processing company Amenity Analytics found,
Apple led the pack as the first corporate giant to state that it wouldn’t meet its Q1 revenue projections due to the virus, which originated late last year in Wuhan, China. iPhones, which are manufactured in China, have experienced limited production and reduced domestic demand, Apple announced on February 17.
Microsoft soon after followed suit. “Although we see strong demand … the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call,” the company said last week. “As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated.”
The article also features commentary on the outbreak’s earnings impact from companies across a range of industries, including financial services, hospitality, retail, and consumer products. Spoiler alert: the news is not good.
Upcoming Webcast: “The Coronavirus – What Should Your Company Do Now?”
We’ve blogged so much & posted so many memos on the implications of the coronavirus outbreak that I’m starting to think that we should change our name to “TheCoronavirusCounsel.net.” But there’s no getting around the fact that this is a very big deal. In addition to its tragic & rising human cost, the COVID-19 outbreak has disrupted global supply chains, staggered financial markets, and created huge uncertainties for businesses and investors.
Those disruptions & uncertainties have important implications for public companies and those who advise them. That’s why we’ve just calendared a webcast – “The Coronavirus – What Should Your Company Do Now?” – for Thursday, March 19th. The webcast features Davis Polk’s Ning Chiu, WilmerHale’s Meredith Cross, Uber’s Keir Gumbs and our own Dave Lynn. The panelists will tackle some of the key issues confronting public companies & their lawyers as a result of this ongoing international public health emergency.
Tomorrow’s Webcast: Conduct of the Annual Meeting
Tune in tomorrow for the webcast – “Conduct of the Annual Meeting” – to hear McDonald’s Jennifer Card, Independent Inspector of Elections Carl Hagberg, and GE’s Brandon Smith talk about annual meeting logistics, dealing with the media, preparing officers & directors, rules of conduct, disruptive shareholders, tabulation issues and meeting post-mortems.
Yesterday, the SEC announced that it had instituted a settled enforcement action against actor, musician, environmentalist, martial arts master & Russian special envoy Steven Seagal for allegedly violating the anti-touting provisions of the Securities Act in connection with a digital asset offering. Here’s an excerpt from the SEC’s press release:
The SEC’s order finds that Seagal failed to disclose he was promised $250,000 in cash and $750,000 worth of B2G tokens in exchange for his promotions, which included posts on his public social media accounts encouraging the public not to “miss out” on Bitcoiin2Gen’s ICO and a press release titled “Zen Master Steven Seagal Has Become the Brand Ambassador of Bitcoiin2Gen.” A Bitcoiin2Gen press release also included a quotation from Seagal stating that he endorsed the ICO “wholeheartedly.”
These promotions came six months after the SEC’s 2017 DAO Report warning that coins sold in ICOs may be securities. The SEC has also advised that, in accordance with the anti-touting provisions of the federal securities laws, any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion.
According to the SEC’s order, in addition to consenting to a C&D on a neither admit nor deny basis, Vladimir Putin’s BFF agreed to disgorge all of the $157,000 in promotional payments that he received (plus interest) and to pay a $157,000 penalty. He also agreed not to promote any securities for three years.
If it’s any consolation to Louisiana’s most Googled d-lister, he’s not the first celebrity to run afoul of Section 17(b) of the Securities Act for touting a digital deal. Back in 2018, boxer Floyd Mayweather & music impresario DJ Khaled were tagged by the SEC for the same conduct.
D&O Insurance: Dealing with a Tough Market
Lynn recently blogged about the tightening market for D&O insurance. This Goodwin memo reviews some of the things that companies can do to put themselves in the best position to deal with current market conditions. In addition to careful advance planning with the company’s insurance brokers & coverage counsel, this excerpt highlights some alternatives for managing increased premiums:
Given daunting premium increases, insureds are also increasingly considering alternative ways to structure their insurance programs. For example, insureds may consider increasing the amount of their deductibles in order to reduce insurer risk, and thereby reduce the amount of premium charged (or reduce the size of a premium increase). In certain situations, insureds have also considered “captive insurance” programs to replace or supplement traditional insurance programs. (Captive insurance programs are in essence self-insurance programs owned and controlled by insureds rather than insurance companies).
Insureds may also consider reallocating more of their insurance program to so-called “Side A Difference-in Conditions (DIC)” coverage, which is less expensive coverage that is for the dedicated benefit of directors and officers only, excess of all other insurance and indemnification available to those individuals. Care should be taken with respect to any of these changes, however, in order to avoid unduly reducing important insurance protections in the event of claims.
Note the reference to “daunting” premium increases – the memo says that some companies are seeing premiums double without any change in risk profile. Deductibles for securities claims are also doubling in some cases, with IPO companies facing as much as a $10 million deductible. Yikes!
D&O Insurance: The Importance of Indemnification Agreements
With deductibles rising significantly, the importance of supplemental arrangements like “Side A” policies are well understood. But this recent blog from Woodruff Sawyer’s Priya Cherian Huskins says that the importance of individual indemnification agreements shouldn’t be overlooked – particularly given the risk that companies may opt for coverage that proves to be inadequate as premiums escalate. Here’s an excerpt:
An indemnification agreement in this context is a contract between individual director or officer and the company the director or officer serves. These agreements promise to (1) advance legal fees, and (2) pay loss (indemnification) on behalf of an individual should he or she be named in a lawsuit in his or her capacity as a director or officer of the company.
When properly structured, these agreements provide broad protection so that individuals have the right to hire a lawyer at the company’s expense from the moment they need protection, be it because they’re being investigated (including informally) by a regulator, accused of wrongdoing in a suit, or called as a witness in a case.
Directors & officers may think that they’re appropriately protected by corporate bylaws, but those often provide the company with discretion when it comes to advancement of expenses – and people can’t always rely on that discretion being exercised in their favor after they’ve departed. Indemnification agreements provide the individual with contractual rights obligating the company to defend an indemnitee, and will ensure that there’s a source of funding for those expenses so long as the company remains solvent.
