Yesterday, Corp Fin issued a new CDI addressing the application of the SEC’s conditional exemptive order extending by up to 45 days the due date for SEC filings by companies affected by the Covid-19 crisis to Part III of Form 10-K. Companies often incorporate Part III information into Form 10-K by reference to their definitive proxy materials. In order to do that, companies have file those definitive proxy materials within 120 days of their fiscal year end. If they can’t make that deadline, they need to amend their Form 10-K to include the Part III information.
How do the rules surrounding the inclusion of Part III information work for companies that want to rely on the SEC’s exemptive order? That’s the issue that the new Exchange Act Forms CDI #104.18 addresses:
Question: Form 10-K allows Part III information to be incorporated by reference from a registrant’s definitive proxy or information statement, or, under certain circumstances, filed as an amendment to the Form 10-K, not later than 120 days after the end of the related fiscal year. May a registrant that is unable to file the Part III information by the 120-day deadline avail itself of the relief provided by the COVID-19 Order (Release No. 34-88465 (March 25, 2020)) for the filing of the Part III information?
Answer: Yes, as long as the 120-day deadline falls within the relief period specified in the Order and the registrant meets the conditions of the Order.
– A registrant that timely filed its annual report on Form 10-K without relying on the COVID-19 Order should furnish a Form 8-K with the disclosures required in the Order by the 120-day deadline. The registrant would then need to provide the Part III information within 45 days of the 120-day deadline by including it in a Form 10-K/A or definitive proxy or information statement.
– A registrant may invoke the COVID-19 Order with respect to both the Form 10-K and the Part III information by furnishing a single Form 8-K by the original deadline for the Form 10-K that provides the disclosures required by the Order, indicates that the registrant will incorporate the Part III information by reference and provides the estimated date by which the Part III information will be filed. The Part III information must then be filed no later than 45 days following the 120-day deadline.
– A registrant that properly invoked the COVID-19 Order with respect to its Form 10-K by furnishing a Form 8-K but was silent on its ability to timely file Part III information may (1) include the Part III information in its Form 10-K filed within 45 days of the original Form 10-K deadline, or (2) furnish a second Form 8-K with the disclosures required in the Order by the original 120-day deadline and then file the Part III information no later than 45 days following the 120-day deadline by including it in a Form 10-K/A or definitive proxy or information statement. [April 6, 2020]
The CDI’s bottom line appears to be that, while the hoops that particular companies have to jump through may vary, companies taking advantage of the extension will be able to apply it to the Part III deadline as well.
Virtual Meetings: Delaware Gov.’s Order Resolves Notice Issues
Due to ambiguities in statutory language, companies switching from physical to virtual annual meetings have been uncertain about whether merely following the SEC’s guidance on communicating the change would be sufficient under state corporate law, or whether a new mail or email notice was necessary. Yesterday, Delaware Gov. John Carney issued an order in effect providing that compliance by a public company with the SEC’s guidance would be regarded as sufficient notice under Delaware law:
If, as a result of the public health threat caused by the COVID-19 pandemic or the COVID-19 outbreak in the United States, the board of directors wishes to change a meeting currently noticed for a physical location to a meeting conducted solely by remote communication, it may notify stockholders of the change solely by a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to § 13, § 14 or § 15(d) of such Act and a press release, which shall be promptly posted on the corporation’s website after release;
The order provides a similar accommodation for adjournment of meetings originally scheduled for a physical location. Hat-tip to @DougChia for flagging the order yesterday evening.
Virtual Meetings: California’s Gov. Gives Temporary Sign-Off – But Is It Legal?
Late last month, Gov. Gavin Newsom signed an order providing similar relief for California companies. The order temporarily exempts California-charted companies from the need to obtain consent from all shareholders to a virtual meeting, and also eases notice requirements for companies that switch from physical to virtual meetings.
However, this recent blog from Keith Bishop suggests that there’s some uncertainty about whether the Gov. has the authority to issue such an order:
The fly in the ointment (see Ecclesiastes 10:1) is that the Governor may not have the statutory authority to suspend these requirements. As I pointed out in this post, the Emergency Services Act gives the Governor the authority to suspend only two types of statutes: “regulatory statutes” or “statutes prescribing the procedure for the conduct of state business”. “Regulatory statute” is not defined and no one can say with certitude that the statutes purportedly suspended by the Governor are regulatory statutes.
As a result, Keith says that corporations opt for virtual only meetings based on the Governor’s order will be assuming some risk that actions taken at those meetings may be later invalidated. He suggests that lawyers may need to take that into account if asked to render “due authorization” opinions for actions taken at those meetings,
On Friday, SEC Chief Accountant Sagar Teotia issued a statement stressing the importance of high-quality financial reporting during the Covid-19 crisis. Many companies are struggling with the reporting implications of Covid-19, and the statement acknowledges that the current environment requires a number of difficult judgment calls:
We recognize that the accounting and financial reporting implications of COVID-19 may require companies to make significant judgments and estimates. Certain judgments and estimates can be challenging in an environment of uncertainty. As we have stated for a number of years, OCA has consistently not objected to well-reasoned judgments that entities have made, and we will continue to apply this perspective.
Teotia’s statement highlights some of the areas that may involve significant judgments and estimates, including fair value and impairments; leases; debt modifications or restructurings; hedging; revenue recognition; income taxes; going concern; subsequent events; and adoption of new accounting standards (e.g., the new credit losses standard). It goes on to emphasize the importance of required disclosures about judgments & estimates involving these and other issues.
The statement also says that financial institutions availing themselves of certain provisions of the CARES Act that allow them to avoid compliance with FASB pronouncements on accounting for credit losses & troubled debt restructurings during the period of the Covid-19 emergency will be regarded by the SEC as being in compliance with GAAP.
Cydney Posner’s recent blog about the Chief Accountant’s statement has a sidebar pointing out that while the new credit losses standard applies to any business that extends credit to customers, only financial institutions are exempt from compliance under the CARES Act – and those other businesses are going to face some significant compliance challenges during the current crisis.
PCAOB: “The Audit Ain’t Over ‘Til It’s Over”
The PCAOB also chimed in last week with a reminder to auditors that, in the current environment, they need to make sure that they keep their eyes on the ball until their audit is completed:
As part of the evaluation of whether sufficient appropriate audit evidence has been obtained, auditors are required to evaluate the appropriateness of their initial risk assessments. In light of the economic effects of the COVID-19 crisis, new risks may emerge, or the assessments of previously identified risks may need to be revisited because the expected magnitude and likelihood of misstatement has changed.
Changing incentives or increased pressures on management, especially when taken together with changes in internal controls or increased ability for management override of controls, may result in new risks of material misstatement due to fraud or changes to the auditor’s previous assessment of risks of material misstatement due to fraud. Similarly, increased pressure on, and changes in, management processes, systems, and controls may give rise to increased risk of error. Initial responses to assessed risks may not be adequate given the revised risk assessments, or planned procedures may not be practical or possible to perform under current circumstances.
The PCAOB says that auditors may need to reassess previous risk assessments for some areas of the financial statements in light of COVID-19. It also includes a laundry list of areas of the financial statements where evaluating presentation & surrounding disclosures are going to be very difficult for auditors. It probably won’t surprise you to learn that the PCAOB’s list largely overlaps with Sagar Teotia’s list of aspects of the financial statements that involve significant judgment calls.
Transcript: “Tying ‘ESG’ to Executive Pay”
We have posted the transcript for the recent CompensationStandards.com webcast: “Tying ‘ESG’ to Executive Pay.”
Late Wednesday, the Senate unanimously passed the Coronavirus Aid, Relief and Economic Security (CARES) Act. This Tax Foundation blog provides a detailed summary of the Senate bill, which is scheduled to go to the House for a final vote this morning. It’s expected to pass overwhelmingly, but passage might be delayed because one member is apparently asking the question, “what would Ayn Rand do?”
Although I suppose it’s conceivable that the House might try to tinker with the bill at the last minute, it seems unlikely that, with a Democratic majority, it would mess with one of the key conditions that the Senate bill imposes on companies seeking federal aid. As this excerpt from the blog points out, if a company wants taxpayer money, it can forget about doing stock buybacks for a while:
The bill provides $454 billion in emergency lending to businesses, states, and cities through the U.S. Treasury’s Exchange Stabilization Fund. Additionally, this includes $25 billion in lending for airlines, $4 billion in lending for air cargo firms, and $17 billion in lending for firms deemed critical to U.S. national security. Firms taking loans must not engage in stock buybacks for the duration of the loan plus one year and must retain at least 90 percent of its employment level as of March 24, 2020.
In case you’re wondering, dividends are also off the table for these companies for that same period of time. The loans also impose not terribly onerous limits on compensation and severance pay, and will be subject to oversight by Congress & a special inspector general.
Buybacks: Are Airlines Supposed to be Treated Differently?
Nobody is likely to shed any crocodile tears over companies receiving yet another federal bailout being prohibited from this type of financial engineering, but as I read through the bill, I noticed something interesting. Airlines have been the poster children for the buyback ban, and whether or not that’s the rationale, the language of the buyback restriction that applies to airlines & related entities is different than the language of the restriction that applies to companies getting money under the Treasury-backed Fed program.
Here’s the language of Section 4003(c)(3)(A)(ii)(I) (page 518) that applies to recipients of the Fed’s largesse. It requires them to agree that:
Until the date 12 months after the date on which the direct loan is no longer outstanding, not to repurchase an equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of this Act;
Here’s the language of Section 4003(c)(2)(E) of the bill (page 516) that applies to the airlines. It requires them to agree that:
Until the date 12 months after the date the loan or loan guarantee is no longer outstanding, neither the eligible business nor any affiliate of the eligible business may purchase an equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business, except to the extent required under a contractual obligation in effect as of the date of enactment of this Act
Similar language appears in Section 4114 of the bill, which deals with payroll support for air carrier employees. I took a quick look, and it appears that while the term “affiliate” is defined for at least one part of the CARES Act, it’s undefined in this particular part. So, it seems that without further clarification, the highlighted language might well be construed to prohibit airline officers and directors from purchasing shares of their own company’s stock. As I mentioned, there are limits on comp that apply to recipients of the bailout (Section 4004), but is that what is intended?
Since it’s so sweeping & came together so fast, I’m sure that the CARES Act is full of little interpretive grenades like this one – which means that Congress hasn’t forgotten to take care of America’s lawyers as it prepares to fire its cash bazooka.
That reminds me of an old adage that I once saw on a coffee mug: “Every business has its own best season. That is why they say that June is the best month of the year for preachers. Lawyers have the other eleven.”
Undisclosed SEC Investigations & Company Performance
Francine McKenna recently posted an article on her website that discusses some SEC investigations that weren’t disclosed for quite some time after they were initiated. Although she acknowledges that companies aren’t generally obligated to disclose investigations, she cites some new research that says there’s a negative correlation between undisclosed investigations and company performance, and notes that the researchers suggest that could give insiders a trading advantage:
Undisclosed investigations, if investors knew about them, could help explain the subsequent economically meaningful declines in firm performance and increased share price volatility the researchers say occurs. Because the investigations are secret, the performance declines are slow and gradual, and are not quickly reflected in share prices. That suggests, the researchers write, that insiders who know the details of the investigation have a substantial information edge.
My own experience with SEC investigations has been that when companies are subject to them and opt not to make public disclosure, they usually close the trading window for those in the loop at some point fairly early in the process (usually when an informal investigation becomes formal, if not sooner). The research Francine cites suggests that it would prudent for any company that’s the subject of an SEC investigation that it hasn’t disclosed to take the same approach.
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.”
