Last year’s SLB 14I addressed, among other things, the scope & application of Rule14a-8(i)(5) (the “economic relevance” exception) & Rule 14a-8(i)(7) (the “ordinary business” exception). That SLB also invited companies to include in their no-action requests a discussion of the board’s analysis of the policy issue raised by the shareholder proposal and its significance in relation to the company.
The new SLB 14J reviews the Staff’s experience with these no-action requests during this year’s proxy season and highlights the discussions of the board’s analysis that were most helpful. From Corp Fin’s perspective, the best of these submissions focused on the board’s consideration of specific substantive factors in reaching its conclusions. This new SLB specifies several of these substantive factors:
– The extent to which the proposal relates to the company’s core business activities.
– Quantitative data, including financial statement impact, related to the matter that illustrate whether or not a matter is significant to the company.
– Whether the company has already addressed the issue in some manner, including the differences – or the delta – between the proposal’s specific request and the actions the company has already taken, and an analysis of whether the delta presents a significant policy issue for the company.
– The extent of shareholder engagement on the issue and the level of shareholder interest expressed through that engagement.
– Whether anyone other than the proponent has requested the type of action or information sought by the proposal.
– Whether the company’s shareholders have previously voted on the matter and the board’s views as to the related voting results.
SLB 14J also addresses the application of the ordinary business exclusion to proposals relating to executive and director compensation. In particular, it provides further guidance on the circumstances under which proposals implicating the following issues may be excludable:
– Senior executive and/or director compensation and ordinary business matters.
– Aspects of senior executive and/or director compensation that are also available or applicable to the general workforce.
– Micromanagement of senior executive and/or director compensation practices
Sustainability: A Low Priority for Institutional Investors?
According to a recent survey, most institutional investors still don’t prioritize sustainability in making their investment decisions. This article summarizes the study:
Sustainable investing is a low priority issue for most institutional investors, according to a survey by Schroders. The UK-listed asset manager polled 650 investors around the world running $24trn (€20.6trn) and found that, although they expected sustainable investing to become a bigger issue in the next few years, it was not currently a high priority for most.
Almost a third (32%) of those questioned by Schroders said that how sustainable an investment was had “little to no influence” on the decision to buy. Factors such as a manager’s track record, expected return and risk tolerance were all more important factors, investors said.
There is a silver lining in the survey’s results for sustainability advocates – nearly 75% of respondents said sustainable investment would become more important over the next five years, and half have increased their allocations to sustainable investments during the past five years.
Activism: Dealing with Shareholder-Nominated Directors
With activists increasingly winning representation on public company boards, many GCs are seeking guidance on how to deal with these new directors. This Ropes & Gray article provides insight into how to address some of the more difficult issues that arise with the election of a shareholder’s representative to the board. This excerpt discusses how to approach the director’s sharing of information with the activist:
When a shareholder-nominated director is clearly the representative of the shareholder, the shareholder is generally entitled to receive the information that the director receives. Since the shareholder-nominated director generally has access to all company information, this effectively means that the shareholder likewise has access to all company information.
In light of the reality and general acceptability of the shareholder-nominated director’s sharing of confidential and/or privileged company information with the shareholder, company counsel should seek, before the shareholder-nominated director takes office, to have the shareholder sign an NDA restricting the shareholder’s disclosure and use of such information.
While the general rule is that information sharing is permissible, the article goes on to address situations in which it might be a breach of the director’s fiduciary duty to provide confidential information to the activist.
The SEC continues to ratchet up its scrutiny of cybersecurity issues. It issued disclosure guidance earlier this year & recently turned its attention to internal control implications of cybersecurity lapses. But are companies getting the message?
This recent EY report provides some clues on the disclosure front. It analyzes cybersecurity-related disclosures of Fortune 100 companies in proxy statements and Form 10-K filings. Not surprisingly, disclosure practices vary widely. Here are some some key findings:
– 84% of companies disclosed that at least one board-level committee was designated oversight of cybersecurity matters. At the same time, around 25% identified one or more “point persons” among the management team on cyber – e.g., the CISO or CIO.
– All companies included cybersecurity as a risk factor. In comparison, less than 15% voluntarily highlighted cybersecurity as a strategic focus in the proxy statement.
– 71% of companies described efforts to mitigate cybersecurity risk and 30% specifically referenced response planning, disaster recovery or business continuity considerations.
The report notes that cybersecurity risk management and incidents and related disclosures are a critical issue for investors & other key stakeholders. The SEC’s guidance & its high-profile enforcement proceeding involving Yahoo’s data breach indicate that this topic remains high on regulators’ list as well.
Cybersecurity: Board Oversight of a Dynamic Threat Environment
There’s also evidence to suggest that boards are taking cybersecurity threats – and the board’s oversight role in corporate efforts to prevent breaches – more seriously. For example, this recent EY memo reports on a recent cybersecurity board summit, in which 30 directors & other panelists participated. Here are some of the key takeaways:
– The board’s role is not cybersecurity risk management; it is cybersecurity risk oversight.
– Boards may need to restructure their committees and develop new charters to adequately oversee cybersecurity risk management.
– Directors want and need more education on cybersecurity risk.
– Boards need to engage a third party to independently and objectively assess whether the company’s cybersecurity risk management program and controls are meeting its objectives.
– These third parties should have direct dialogue with the board to report on the effectiveness of the company’s cybersecurity risk management program.
– Boards and companies need to adequately plan for a cybersecurity crisis, including having an arrangement with all their third-party specialists in place before a crisis hits.
– The board and management need to routinely practice the cybersecurity response plan.
– Management should consider providing the board regular updates with key metrics on critical cybersecurity controls communicated in plain English.
The memo notes that while improved detection efforts may increase the rate of cyber-related incidents, the rate of noteworthy incidents should decline as organizations improve how they manage and contain these incidents.
I’ve noticed that I blog a lot about cybersecurity. Maybe that’s because I’m a “Mr. Robot” fan – and I think anybody who’s watched that show probably has a bit of a knot in their stomach when they consider just how plausible the whole scenario of a truly devastating cyber-attack seems to be.
Theranos: “Things Fall Apart”
Despite my best efforts, I actually learned a few things in my college English classes. For example, I learned that everything Emily Dickinson wrote can be sung to the tune of “The Yellow Rose of Texas.” I also learned that John Keats’ last name is pronounced “Keets” & W.B. Yeats’ last name is pronounced “Yates.”
I also picked up a few lines from Yeats’ “The Second Coming”, one of which is “Things fall apart; the centre cannot hold.” That line came to mind when I read this article from MarketWatch’s Francine McKenna detailing the last days of Theranos. Check it out.
Like the prior version, the updated principles are intended to provide a basic framework for sound, long-term-oriented corporate governance for public companies, their boards & their institutional shareholders. According to this press release announcing the updated governance principles, changes from the prior version include:
– Board members should be prepared to serve for a minimum of three years.
– If board elections are not annual, companies should explain why.
– Companies and shareholders are encouraged to engage early on important proxy proposals.
– Companies should allow some form of proxy access.
– Poison pills and other anti-takeover defenses should be put to a shareholder vote and re-evaluated by the board on a periodic basis.
– Asset managers should disclose if they rely on proxy advisors to inform their decision making.
– Asset managers should disclose their conflict of interest policies in their proxy voting and shareholder engagement activities.
– Portfolio managers should be compensated based on performance over an appropriate term, given the strategy and investment time horizon for the portfolio.
– Asset owners should promote sound, long-term oriented governance in their direct interactions with both companies and asset managers.
– Asset owners should use benchmarks and performance reports consistent with their investment time horizon to affect governance outcomes with asset managers and evaluate the asset managers’ performance on both investment returns and governance.
Early returns indicate that the new principles are likely to be well-received by investor groups. For instance, the CII issued a press release “applauding” the updated version, which it says represents a “significant improvement” over the original. More information, including an “open letter” from the signatories, is available at the group’s website.
ISS Policy Survey: Pay-for-Performance & Board Gender Diversity
As always, this is the next step for ISS as it formulates its 2019 voting policies. Comments are due by November 1st. Final policy changes are expected in mid-November…
Blockchain & Beyond: SEC Introduces “FinHub” for FinTech
Yesterday, the SEC announced the launch of “FinHub” – its new “strategic hub for innovation and financial technology.” According to the press release, FinHub will serve as a resource for public engagement on blockchain & other FinTech-related issues and initiatives.
In addition to blockchain and digital assets, issues & initiatives encompassed by FinHub include automated investment advice, digital marketplace financing, and artificial intelligence/machine learning. It’s intended to replace several existing SEC working groups that have focused on similar issues. According to the release, FinHub will:
– Provide a portal for industry and the public to engage directly with SEC staff on innovative ideas and technological developments;
– Publicize information regarding the SEC’s activities and initiatives involving FinTech on the FinHub page;
– Engage with the public through publications and events, including a FinTech Forum focusing on distributed ledger technology and digital assets planned for 2019;
– Act as a platform and clearinghouse for SEC staff to acquire and disseminate information and FinTech-related knowledge within the agency; and
– Serve as a liaison to other domestic and international regulators regarding emerging technologies in financial, regulatory, and supervisory systems.
FinHub also replaces the FinTech@secgov address established in connection with the SEC’s 21(a) Report on the status of digital assets under the Securities Act – and provides a form that may be used to contact the Staff to arrange a meeting or request assistance with FinTech issues.
Earlier this year, Broc blogged about the Staff’s efforts to complete its decade-long project of transitioning from its legacy “Telephone Interpretations” guidance to CDIs. Yesterday, Corp Fin reached another milestone when it issued 27 new CDIs to replace the interps contained in Section II of the July 2001 Supplement dealing with cross-border exemptions. Here’s the inventory:
– 5 CDIs (101.03, 103.01, 104.02, 104.03, & 104.05) reflect substantive changes to the Telephone Interps
– 2 CDIs (100.04 &101.01) reflect technical revisions to the Telephone Interps
– 4 CDIs (100.01, 101.09, 104.04, & 105.01) reflect only non-substantive changes to the Telephone Interps
– The remaining 16 CDIs are newly published interpretations
Tweet Fight! Nell Minow v. Main Street Investors Coalition
Governance guru Nell Minow is not shy about calling things as she sees them – and her cavalcade of Twitter blasts against the NAM-backed “Main Street Investors Coalition” is a good example of that.
Here’s how this has been playing out – every time @MainStInvestors tweets, @NMinow fires back a response. She usually starts by highlighting the organization’s ties to CEOs and raising questions about its funding sources – and sometimes goes on from there. Here’s a recent example. I called this a “tweet fight,” but it’s pretty one-sided at this point. Main Street appears to have decided not to engage with Nell.
Nell also has been using the term “corp-splaining.” One person defined the term as “companies trying to tell people outside of a corner office why they shouldn’t care.”
Tweet Tempest! “Say Shareholder Value Theory is Evil Again – I Dare Ya!”
I spend way too much time on Twitter – which FT Alphaville recently described as a “rage-as-a-service platform.” But since we’re there, this Business Law Prof blog recounts the tempest that pundit Matt Yglesias stirred up when he responded to reports about Google’s decision to build a censored search engine in China by tweeting that, “according to shareholder value theory, if being evil increases the discounted present value of future dividends then Google’s executives are required to be evil.”
The responses started with UCLA’s Stephen Bainbridge inquiring whether Matt was “really that stupid?” & didn’t get a whole lot warmer after that. Enjoy!
I previously blogged about how Hester Peirce’s dissent from the SEC’s refusal to permit the listing of a bitcoin ETF earned her the moniker “Crypto Mom” from crypto enthusiasts. Judging by a recent speech, Commissioner Peirce digs her new nickname – & wants to be regarded as a “free range” mom who “encourages her child to explore with limited supervision, which requires the acceptance of a certain level of risk.” This excerpt elaborates on what “free range parenting” means when it comes to the crypto:
Steering a speeding machine down the highway is an enormously complex and cognitively-challenging task, one that is dangerous for drivers, passengers, and innocent bystanders. Permitting people to drive means people will be injured and, in too many cases, die. Outlawing driving would save lives, but the costs in terms of lost quality of life of doing so would be enormous, albeit difficult to quantify.
Instead of banning it entirely, therefore, we place reasonable restrictions on driving. Some of us may decide to avoid risks the law allows us to take. A speed limit, after all, is not a mandate. Some of us may choose not to drive at night, in bad weather, or at all. But, barring bad behavior on our part, the choice is ours, not the government’s.
It puzzles me that it is so difficult for those of us who regulate the securities markets to understand this concept; after all, capital markets are all about taking risk, and queasiness around risk-taking is particularly inapt. A key purpose of financial markets is to permit investors to take risks, commensurate with their own risk appetites and circumstances, to earn returns on their investments. They commit their capital to projects with uncertain outcomes in the hope that there will be a return on their capital investment. The SEC, as regulator of the capital markets, therefore should appreciate the connection between risk and return and resist the urge to coddle the American investor.
I get the argument for a lighter regulatory touch, but the analogy between cars and crypto falls flat. I mean, even the most gruesome multi-car pileup never helped trigger a global depression – the same can’t be said for innovative financial instruments.
Ironically, Commissioner Peirce’s remarks came during the month marking the 10th anniversary of the financial crisis. Axios’ Felix Salmon commemorated that milestone by tweeting a copy of what may be the most chilling email ever sent – a message in which one NY Fed official told another that Morgan Stanley had informed Tim Geithner late on Friday, Sept. 20, 2008 that it would be unable to open on the following Monday, and indicating that if Morgan Stanley didn’t open, Goldman Sachs was “toast.”
“Crypto Mom” or “Stakeholder Slayer?”
Commissioner Peirce may like her “Crypto Mom” nickname, but I’d venture a guess she might actually prefer “Stakeholder Slayer.” That’s because in another recent speech, she made it clear that she’s not a fan of the idea of corporate “stakeholders.” Here’s an excerpt:
We have a deep and well-developed body of corporate law. It rests on the assumption that the board owes its principal duty to the shareholders collectively, not to an amorphous group of stakeholders. There is no compelling reason to overturn centuries of settled law, and there are many reasons not to.
Although she objects generally to efforts designed to compel directors to consider ESG issues as part of their fiduciary duties, Commissioner Peirce is particularly critical of California’s new law mandating inclusion of women directors on public company boards. She contends that California’s legislation “effectively forces corporations, including non-California corporations, to consider all women as stakeholders,” and argues that it opens a door to get other “favored groups” included in the stakeholder definition.
Cyber Insurance: GDPR Penalties? They May Not Cover It
One of the most intimidating aspects of the EU’s General Data Protection Regulation – GDPR – is the enormous potential penalties the companies can face for violating its provisions. Companies that run afoul of the GDPR could face fines of up to the greater of €20 million or 4% of their gross annual revenue.
For many companies, this regime means that the most significant potential cyber-related exposure they face is GDPR non-compliance. But this Womble Bond Dickinson memo says that if you expect your cyber insurance policy to protect you, you may be out of luck:
Companies with international exposure should check their cyber insurance policies to determine coverage of EU fines. According to an analysis conducted this summer by Aon, GDPR fines were found to be insurable in only two countries – Norway and Finland – out of the 30 European countries surveyed. In fact, in 20 of the 30 jurisdictions, including the UK, France, Spain and Italy, GDPR fines would specifically NOT be insurable. The other eight jurisdictions were less clear, and may depend on whether a GDPR fine is classified as civil or criminal.
The memo says the answer may be different for U.S. domiciled companies – but even here, the availability and scope of GDPR coverage varies from carrier to carrier.
Recently, Liz blogged about the California Assembly’s passage of Senate Bill 826, which requires exchange-listed companies headquartered in the Golden State to have women on their boards. On Sunday, California Gov. Jerry Brown signed that statute into law.
This excerpt from an article in Sunday’s LA Times summarizes the new law’s mandate:
The new law requires publicly traded corporations headquartered in California to include at least one woman on their boards of directors by the end of 2019 as part of an effort to close the gender gap in business. By the end of July 2021, a minimum of two women must sit on boards with five members, and there must be at least three women on boards with six or more members. Companies that fail to comply face fines of $100,000 for a first violation and $300,000 for a second or subsequent violation.
So how many companies are going to need to add women to their boards? Annalisa Barrett has crunched some of the numbers:
I examined Equilar data for the companies headquartered in California which were in the Russell 3000 Index as of June 2017 and found that, based on current board composition, 377 companies will have to add female director(s) their boards in order to be in compliance with SB 826 by December 31, 2021.
– 66 companies would have to add three women to their boards
– 175 companies would have to add two women to their boards
– 136 companies would have to add one woman to their boards
Annalisa notes that there are likely to be many more companies that will need to take action to comply the statute. Many public companies headquartered in California are too small to be in the Russell 3000 – and the majority of microcap companies (i.e., smaller than $300M in market capitalization) don’t have women on their boards. We’re posting memos in our “Board Diversity” Practice Area.
But Is It Legal? “California Über Alles”
In Gov. Brown’s signing statement, he acknowledged that “serious legal concerns” have been raised about the statute, and that its flaws “may prove fatal to its ultimate implementation.” This recent blog from Cooley’s Cydney Posner reviews some of the statute’s potential constitutional flaws. Here’s an excerpt addressing one of the most frequently cited concerns – the law’s “California Über Alles” provision, which purports to apply its mandate to companies that aren’t incorporated under California law:
You may recall that, generally, the “internal affairs doctrine” provides that the law of the state of incorporation governs those matters that pertain to the relationships among or between the corporation and its officers, directors and shareholders. In case you were wondering how California could profess to control the internal corporate affairs of a foreign corporation, you may not be familiar with the long arm of California’s Section 2115, which purports to apply to foreign corporations that satisfy certain tests related to presence in California (minimum contacts), referred to as “pseudo-foreign corporations.”
Cydney points out that the pseudo-foreign corporations statute used to cause severe problems for law firm opinion committees until the provision was amended to exclude from its application companies listed on the NYSE or Nasdaq. However, the new law expressly applies to these “pseudo-foreign” listed companies.
Cydney says that it is unclear whether courts will view the location of a company’s principal executive office as sufficient to overcome the internal affairs doctrine. Keith Bishop is skeptical that courts will sign-off on the statute – and this recent blog lays out his reasoning.
Transfer Agents: Market Share Leaders
This “Audit Analytics” blog discusses its annual review of 2018 market share leaders among transfer agents. Here’s an excerpt about the leaders for IPO market share:
AST has moved to the top transfer agent of IPO market share, putting Computershare/BNY Mellon into second. Two transfer agents that were in the top last year, Wells Fargo and Citibank, are not top competitors in the IPO market this year. Instead, Vstock Transfer, who was last in the top in 2016, has reappeared. Another notable change is from Deutsche Bank Trust Co Americas/TA, which has made an appearance in the top five for the very first time.
That was fast. Elon Musk apparently thought better of fighting the enforcement action that the SEC announced on Thursday over his tweets – because on Saturday evening, the SEC announced that it had reached a settlement with Musk & Tesla.
What, I’ve got to work weekends now? Broc never said anything about this. . . Anyway, this excerpt from the SEC’s press release lays out the deal’s basic terms:
Musk and Tesla have agreed to settle the charges against them without admitting or denying the SEC’s allegations. Among other relief, the settlements require that:
– Musk will step down as Tesla’s Chair and be replaced by an independent Chair. Musk will be ineligible to be re-elected Chair for three years;
– Tesla will appoint a total of two new independent directors to its board;
– Tesla will establish a new committee of independent directors and put in place additional controls & procedures to oversee Musk’s communications;
– Musk and Tesla will each pay a separate $20 million penalty. The $40 million in penalties will be distributed to harmed investors under a court-approved process.
According to this NYT article, Musk rejected a comparable deal before the the SEC filed its lawsuit. The sticking point was Musk’s unwillingness to accept the SEC’s standard “neither admit or deny” language (no, I’m not kidding).
Steve Quinlivan blogged his take on the settlement. This excerpt lays out the message to public companies with tweeters at the helm – and suggests that another prominent organization could learn a lesson here as well (also see our own new “Social Media Handbook” – and this blog by John Stark):
So the message to public companies is clear: If you have executives out there communicating material information on social media, you need to have disclosure controls and procedures in place to review the information before and after publication. Or at least one or the other. It would seem the White House would benefit from a similar rule.
Poll: Did the SEC Let Musk Off Too Easily?
On Friday, we ran a poll asking whether folks thought Musk should be subject to a D&O bar – 43% said ‘yes’ and 36% said ‘no’ (the rest punted). Now please take a moment to participate in a new anonymous poll:
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That was fast. Yesterday, the SEC announced the filing of an enforcement action against Tesla CEO Elon Musk arising out of his ill-considered tweetstorm & subsequent comments about a potential “going private” transaction during the first two weeks of August. The SEC’s complaint makes it clear that Enforcement isn’t messing around – this is a Rule 10b-5 securities fraud case, unaccompanied by any non-scienter based allegations. Here’s an excerpt from the SEC’s press release:
On August 7, 2018, Musk tweeted to his 22 million Twitter followers that he could take Tesla private at $420 per share (a substantial premium to its trading price at the time), that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote.
The SEC’s complaint alleges that, in truth, Musk had not discussed specific deal terms with any potential financing partners, and he allegedly knew that the potential transaction was uncertain and subject to numerous contingencies. According to the SEC’s complaint, Musk’s tweets caused Tesla’s stock price to jump by over six percent on August 7, and led to significant market disruption.
Co-Director of Enforcement Stephanie Avakian added that taking care to provide truthful & accurate information is one of a CEO’s “most critical obligations” – and one that applies equally when communications are made via social media instead of through traditional media. Speaking of issues surrounding the use of social media – be sure to check out our new “Social Media Handbook.”
Musk’s predicament calls to mind another automotive industry visionary with whom he’s been compared – Preston Tucker. Check out this article for an overview of Tucker’s innovative “Tucker Torpedo” & the fallout from the SEC’s 1948 investigation into his company. Of course, let’s not get carried away – Tucker’s story had elements of tragedy to it, but Musk’s is pure farce.
Upping the Ante: SEC Seeks a D&O Bar Against Musk!
Elon Musk is one of the world’s wealthiest people, so financial penalties that might prove ruinous to anyone else may not provide that much of a sting. However, the potential raised by this portion of the SEC’s prayer for relief would definitely leave a mark:
Ordering that Defendant be prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act.
That’s a D&O bar, and it’s not unusual for the SEC to seek one – in fact, this ’Compliance & Enforcement’ blog says that they are sought in more than 70% of cases involving individual defendants.
But let’s face it, Elon Musk isn’t Joe Bagadonuts – we’re talking about a guy who figured out how to land a rocket standing up. There are few CEOs more closely identified with their companies than Elon Musk, and some question whether Tesla could survive without him. That means the SEC’s decision to pursue a bar raises the stakes for Musk, Tesla, and Tesla’s investors.
Poll: Should the SEC Seek a D&O Bar?
Please take a moment to participate in our anonymous poll:
This WSJ article speculates that the work that companies have done in order to comply with new accounting standards & address the financial statement impact of tax reform may have opened Pandora’s box when it comes to restatements. Here’s an excerpt:
During the first six months of 2018, 65 companies detected accounting mistakes significant enough to require them to restate and refile entire financial filings to regulators, compared with 60 companies for the same period last year, according to Audit Analytics. The Massachusetts-based research firm analyzed disclosures from more than 9,000 U.S.-listed going back to 2005, identifying companies that had to reissue their financials because prior documents were deemed no longer reliable.
The uptick came during a period when finance teams were overhauling corporate accounting paperwork to comply with the new U.S. tax law and new revenue accounting rules. In many instances CFOs and their staffs had to go over past financial reports to recalculate the value of tax credits or liabilities, or to assess how past results would look under new rules.
The article highlights two companies – Seneca Foods & Camping World Holdings – that restated financials based upon issues discovered during efforts to address the new revenue recognition standard (Seneca) and tax reform (Camping World).
We’ve previously blogged about Audit Analytics’ warning that the new revenue recognition standard might result in more restatements – so if this turns out to be a trend, they’ll have every right to say “we told you so.”
SEC Enforcement: A Very Expensive “Fish Story”
The SEC recently announced an enforcement action against SeaWorld & its CEO for alleged disclosure shortcomings associated with the impact of the documentary “Blackfish” on the company’s business. This Ning Chiu blog summarizes the proceeding. Here’s an excerpt:
News articles begin to speculate as early as August 2013 that there may be a link between the film and the company’s declining attendance. That fall, the company’s annual reputation study conducted by its communications department found that its score had fallen by more than 12% from the prior year. This finding was presented to the strategy committee that included the CEO, but was excluded from materials for a later meeting that the chairman of the board attended.
Musical acts and promotional partners started to cancel performances or withdraw from their marketing arrangements, which the SEC believes “should have provided confirmation” that the company’s reputation had been materially damaged by the film. Instead, in articles around the same time, the CEO expressly stated that he could not “connect anything” between the film and any effect on the company’s business. The company also stated in other media that there was “no truth” to the suggestion that the company’s reputation had suffered.
SeaWorld and its CEO agreed to settle the SEC’s charges without admitting or denying the allegations. The company paid a $4 million penalty and the CEO paid $850,000 in disgorgement and prejudgment interest and a $150,000 civil penalty.
Bad News: Give It to ‘Em Straight!
I guess you could say that the theme of today’s blogs is “bad news” – so this recent blog from Adam Epstein about how to deliver that kind of news to investors is probably a good way to close things out. The short answer is “give it to ’em straight.” Adam reviews all the ways he’s seen companies try to spin bad news, and says they just don’t work. Here’s an excerpt:
It doesn’t work. Smart investors have seen this movie before, and it ends badly. Every public company has bad quarters. Great companies face bad news directly, and succinctly, because nothing they say is going to undo the bad results. Every other path destroys trust and erodes value.
The blog acknowledges that sometimes a company’s bad quarter may distract from many other positive developments in the business. If that’s the case, the blog advises that instead of using those developments to spin bad news, management is better off to let those future results speak for themselves when announced.
Earlier this year, we blogged about evidence from insider gifts that backdating was alive and well. Now a recent study says that there’s a new twist on option backdating – instead of manipulating the timing of equity awards, CEOs are supposedly manipulating the market price of the shares on the award dates.This Stanford article about the study says insiders are reaping the same windfalls that they received when awards were backdated in the old fashioned way.
Here’s an excerpt quoting one of the authors of the study, Stanford Prof. Robert Daines:
In Dating Game 2.0, however, many top executives appear to be reaping the same kinds of windfalls with a new variant on the original scam. Instead of manipulating the dates of option grants to match a dip in the stock price, companies appear to be manipulating the stock price itself so that it’s low on the predetermined option date and higher right afterward.
“I was surprised, because it sounded too cynical at first,” says Daines, who teamed up with Grant R. McQueen and Robert J. Schonlau at Brigham Young University. “But we tested for all kinds of benign explanations and none of them fit the data. The unusual stock patterns happen so often, and they exactly fit with the self-interest of the CEOs and senior executives. Either the CEOs are incredibly lucky or they are manipulating stock prices.”
So how are companies supposedly manipulating the market price? Would you believe “bullet-dodging” & “spring-loading”:
The researchers found concrete evidence for both bullet-dodging and spring-loading in corporate “8-K” disclosures, which companies are required to file when important new developments occur between regular quarterly reports. At companies that issued lots of stock options, the disclosures before an option grant were more likely than not to drive shares down and those that came after an option date were more likely to send prices up. The same pattern showed up with company-issued “guidance” about upcoming earnings and with accounting decisions that effectively shift profits from one quarter to the next.
The more things change, the more they stay the same.
How to Respond to ESG Research Providers
If you are involved with a public company and you haven’t yet heard from an ESG research provider – don’t worry, you will. With ESG becoming more important to institutional investors, many are turning to these providers for assessments of public companies’ ESG performance. The problem is that there are more than 150 of these outfits – and many of them want you to respond to detailed questionnaires. So the question becomes – should you respond to these guys, and if so, how?
This Westwicke Partners blog has some helpful advice on that front. Here’s an excerpt on the pros & cons of responding to these questionnaires:
If you receive a questionnaire from one (or a dozen) of these ESG research providers seeking information on your company’s ESG disclosure and practices, it’s important to consider a few pros and cons of responding:
– Pro: Responding allows your company to better ensure the accuracy of the data used to determine your rating.
– Pro: Responding may set your company apart from those that decline to participate. Many ESG providers give higher ratings to companies that provide more ESG-related disclosures, and some even denote which companies did not respond to their questionnaires.
– Con: Responding can be a significant drain on your organization’s time and resources. Some questionnaires are estimated to take 1,000 hours to complete and require input from as many as 30 employees across multiple departments.
The blog also has pointers on determining how best to participate in the data-gathering process & handling inbound questionnaires from ESG research providers.
FCPA: 2nd Cir. Rejects “Monty Python” Approach to Foreign National Liability
This Drinker Biddle blog notes that the 2nd Circuit recently shot down the DOJ’s attempt to extend the scope of FCPA jurisdiction over foreign nationals. Here’s an excerpt:
The Second Circuit ruled on August 24 in United States v. Hoskins that the Foreign Corrupt Practices Act (FCPA) does not apply to foreign nationals who do not have ties to United States entities for bribery crimes that take place outside of U.S. borders. In doing so, the court rejected the government’s broadened theory of prosecution against Lawrence Hoskins, a U.K. citizen and former executive of the U.K.-based subsidiary of Alstom S.A., a global company headquartered in France that provides power and transportation services.
I’m no FCPA expert, but it sure seems like the DOJ was pushing the envelope in this case. The government’s position reminded me of the old Monty Python “Tax on Thingy” sketch – where at one point Terry Jones says that “to boost the British economy I’d tax all foreigners living abroad.” We’re posting memos in our “Foreign Corrupt Practices Act” Practice Area.
