There’s less than a year to go until the new audit report’s required disclosure of “Critical Audit Matters” (or “CAMs”) goes into effect for large accelerated filers – so the Center for Audit Quality’s “Key Concepts & FAQs” on CAMs are pretty timely. Here’s an excerpt on the process of deciding whether a particular matter is a CAM:
The determination of whether a matter is a CAM is principles based, and the new standard does not specify that any matter(s) would always be a CAM. When determining whether a matter involved especially challenging, subjective, or complex auditor judgment, the auditor takes into account certain nonexclusive factors (as specified in the new standard), such as the auditor’s assessment of the risks of material misstatement, including significant risks.
For example, the new standard does not provide that a matter determined to be a significant risk would always constitute a CAM. Some significant risks may be CAMs, but not every significant risk will involve especially challenging, subjective, or complex auditor judgment.
Similarly, the new standard does not require that matters such as material related party transactions or those involving the application of significant judgment or estimation by management always be a CAM.
Audit Committees: Trend Toward More Proxy Disclosure Continues
We’ve previously blogged about the trend toward more disclosure about various aspects of the audit committee’s work. This Deloitte report on the latest proxy season says that trend is continuing – although at a slower pace. Here’s an excerpt:
Our analysis of the S&P 100 companies demonstrates that companies are indeed voluntarily increasing disclosures included in the proxy, albeit at a slower pace in some areas. 2018 results show that disclosures did not increase by more than 10% in any areas covered, except for one, though 80% of the areas analyzed saw an increase in disclosure over last year. The greatest year-over-year percentage increase occurred in disclosures on the audit committee’s role in the oversight of cybersecurity, which increased by 13% since last year.
Other key observations include increases in disclosures around audit committee practices, specifically discussion of management judgments and/or accounting estimates, which increased 6%, and the audit committee’s review of significant accounting policies, which rose 4 percent. However, the analysis demonstrated only a 2% increase in the discussion of issues encountered during the audit.
The report suggests that the requirement for auditors of large accelerated filers to begin disclosing CAM in their audit reports next year may well trigger an increase in company disclosures in related areas.
Annual Meetings: Big Tech Directors Can’t Be Bothered?
This Reuters article confirms every Big Tech company stereotype you’ve ever heard:
A large portion of Alphabet, Facebook, Netflix and Twitter directors have not attended annual shareholder meetings in recent years, company records and securities filings show, in some cases in growing numbers.
Recent high-profile no-shows at the meetings – which are often the only chance “mom-and-pop” retail investors get to ask directors questions – include Alphabet Chief Executive Larry Page and Facebook board member Peter Thiel. The companies declined to discuss the absences in detail.
While big asset managers can get access to directors, shareholder activists and corporate governance experts say the empty seats at annual meetings mean small investors and campaigners challenging directors to make corporate changes may not get to engage with boards.
The article says that only 4 of 8 Facebook directors showed up at this year’s annual meeting. And only 4 of 11 directors at Alphabet – aka “The Company Formerly Known as Google.” Incredibly, Alphabet’s CEO Larry Page didn’t even show up to his own meeting!
Attendance was even worse for some high-profile tech companies that went the virtual annual meeting route. For example, at Netflix’s meeting, only 2 of 11 directors attended – while the CEO was the only director to attend Twitter’s meeting.
Having your directors blow off your annual meeting is a very bad look for any company – much less companies in a sector that’s getting as much negative publicity as Big Tech is.
It seems that SEC Commissioner Hester Peirce could teach Dale Carnegie a thing or two about how to win friends & influence people – at least on the Internet, where she’s become “Twitter famous” & earned the moniker “Crypto Mom.” According to this “Quartz” article, Commissioner Peirce owes her new-found popularity to her dissent from the SEC’s recent decision to refuse to allow the Winklevoss brothers to list their bitcoin ETF:
Crypto Twitter is rallying behind a sympathetic watchdog at the US Securities and Exchange Commission. Not long after commissioner Hester Peirce dissented from the agency’s rejection of a bitcoin exchange-traded fund, her count of Twitter followers soared.
Peirce’s social media exposure got a boost from a Reddit user who goes by lamb0x, who called for readers on the site to “show her some love from the Crypto Community.” She’s not the first buttoned-down American official to win Twittersphere adoration — the Chair of the Commodity Futures Trading Commission, Chris Giancarlo, had his turn in February after he gave Senators an unexpected education on crypto slang during a hearing.
Giancarlo was dubbed “Crypto Dad” by the cryptorati; inevitably, Peirce earned the moniker “Crypto Mom” from some Redditors.
The article includes a chart showing that Commissioner Peirce’s following on Twitter skyrocketed from around 1000 followers to more than 10,000 after her dissent.
Speaking of Twitter, be sure to follow Broc (@BrocRomanek) and Liz (@LizDunshee) – they tweet interesting & relevant stuff. You can follow me too if you want (@JohnJenkins36), but I mostly just whine about the Cleveland Browns.
SEC’s Proposed Transaction Fee Pilot: “Come at Me, Bro!”
Last March, the SEC proposed to implement a “Transaction Fee Pilot,” which would analyze the effects that fees & rebates have on how brokers route their orders to competing markets. It sounds pretty boring, but the comment process for this one has gone off the rails – accusations of “fearmongering” and “misleading” statements have been hurled by one side, while the other has been accused of “making a mockery” of the comment process.
So what is it about the proposal that’s causing such a ruckus? Well, one reason may be that public company stocks are going to play the role of “guinea pigs.” The SEC wants to create three test groups, each composed of 1,000 listed stocks. Each of these groups would have different levels of permissible transaction fees & rebates. For the remaining 5000 or so stocks serving as a control group, it would be business as usual. As proposed, the Pilot would run for up to two years, and companies would not be permitted to opt out from participating in it.
This “IR Magazine” article says that most major institutional investors are all-in on the Pilot, but that the Nasdaq & NYSE are not happy. In addition to concerns about driving trading away from the exchanges, the NYSE in particular has flagged some potentially significant downside consequences for listed companies:
Consider two hypothetical companies which are similar in profile. Both are large listed financial institutions with similar size, business profile and market capitalization. Company A is included in one of the SEC’s Transaction Fee Pilot. Company B is not included and still benefits from an exchange rebate program. We would expect Company A’s average bid-ask spread to widen due to the reduced or eliminated exchange rebates.
All else equal, Company A will now be a less appealing investment than Company B, as a wider bid-ask spread means that investors’ transactions costs will be higher when trading Company A’s stock compared to Company B’s stock.
The NYSE goes on to point out that wider spreads could make securities offerings & buybacks more expensive, and encourages listed companies to weigh-in through the comment process. Some heavy hitters – including P&G, Home Depot & Mastercard – have done so. One of the points made in several comment letters is the Pilot’s potential impact on peer group metrics. Here’s an excerpt from Mastercard’s letter:
The SEC has stated that stocks would be grouped into the control group and test groups based on stratified sampling by market capitalization, share price, and liquidity. This makes it likely that MasterCard, if included in the Pilot, would be separated from a peer group of companies that market partipants and investors compare to assess MasterCard’s financial performance. This separation could distort peer group metrics and complicate the comparison of peers by investors.
A number of companies have also asked to be put in the study’s control group if the study moves forward. In response, the CII followed up with a letter of its own to the directors of the 37 companies that opposed the proposal expressing its concerns about their opposition and its own “enthusiastic support” for the proposal.
The back-and-forth between one pair of commenters has gotten quite heated. In June, the Investors Exchange submitted a letter characterizing the NYSE’s statements as “fearmongering” built on a set of “knowingly false premises.” That prompted a blistering reply from the NYSE, in which it accused the IEX of “making a mockery of the Commission’s comment process” & targeting the NYSE in an attempt “to blame the NYSE for its own business failures.”
ICOs: The First “Token Securities Exchange” on the Horizon?
While the NYSE & IEX were slinging mud over the SEC’s Pilot Program, crypto-platform Coinbase was taking the first steps toward becoming the first national securities exchange for tokens. This recent blog from Gunster’s Gus Schmidt has the details. Here’s an excerpt:
In order to operate an exchange for securities, an entity must register as a national securities exchange or operate under an exemption from registration, such as the exemption provided for alternative trading systems (ATS) under SEC Regulation ATS. An entity that wants to operate an ATS must first register with the SEC as a broker-dealer, become a member of a self-regulating organization, such as FINRA, and file an initial operation report with the SEC on Form ATS.
Because Coinbase is neither registered as a national securities exchange nor operates under an exemption, it cannot operate an exchange-based trading platform for blockchain-based securities. However, the recently announced acquisitions indicate that Coinbase may be headed in that direction. The three companies acquired by Coinbase were:
– Venovate Marketplace, Inc. (registered as a broker-dealer and licensed to operate an ATS)
– Keystone Capital Corp. (registered as a broker-dealer)
– Digital Wealth LLC (registered as an investment advisor)
The blog points out that by acquiring licensed entities, Coinbase may be able to speed up its plan to create an exchange-based trading platform for blockchain-based securities.
Last month, Delaware enacted legislation permitting businesses to signal their commitment to global sustainability by signing on to a voluntary certification regime. Here’s an excerpt from this Richards Layton memo summarizing the statute’s operation:
For an entity to seek certification as a “reporting entity” subject to the terms of the Act, the “governing body,” which is defined generally to mean the board of directors or equivalent governing body, must adopt resolutions creating “standards” (i.e., the principles, guidelines or standards adopted by the entity to assess and report the impact of its activities on society and the environment) and “assessment measures” (i.e., the means by which the entity measures its performance in meeting its standards).
The Act enables an entity to select its own standards, tailoring them to the specific needs of its industry or business. In designing its standards, the governing body may rely upon various sources, including third-party experts and advisors as well as input from investors, clients and customers. The Delaware Secretary of State does not evaluate or pass judgment on the substantive nature of an entity’s standards or assessment measures.
Entities that participate in the regime contemplated by the Act can obtain a certification of adoption of transparency and sustainability standards from the Delaware Secretary of State. Obtaining the certificate involves the creation of a standards statement (which includes the standards and assessment measures), the payment of relatively nominal fees to the Delaware Secretary of State, and the entity’s becoming and remaining a reporting entity. That an entity is a reporting entity allows it to disclose its participation in Delaware’s sustainability reporting regime.
Any entity that wishes to continue as a reporting entity must annually file a renewal statement. The renewal statement requires disclosure with respect to changes to the entity’s standards and assessment measures. The entity must also include in its renewal statement an acknowledgement that its most recent sustainability reports are publicly available on its website, and must provide a link to that site. If the entity fails to file a renewal statement (and thus becomes a non-reporting entity), it may have its status as a reporting entity restored through the filing of a restoration statement, which requires disclosure and acknowledgments similar to those in the renewal statement.
The statute does not give anyone a right to bring claims for an entity’s decision regarding whether or not to become a reporting entity – and there’s no penalty for a reporting entity’s failure to comply with its own standards.
Some people seem pretty excited about this new statute’s potential, but I’m skeptical. Maybe I’m too cynical, but since everything is voluntary & “do-it-yourself” and there’s no real liability exposure, the statute appears to be little more than a mechanism for virtue-signaling. You know what I mean – it’s sort of the corporate equivalent of buying a Subaru.
Universal Proxy: Rumors Say It’s “Face Down & Floating”
Earlier this month, Reuters reported that the SEC has shelved its proposal to implement a “universal proxy”. Despite Reuters’ report, there’s been no official word from the SEC indicating that the proposal has assumed room temperature. If it is gone, we’re kind of sad to see it go. It’s not that we’re pro or con – it’s just that universal proxy’s been such fertile “blog-fodder” for us here & on DealLawyers.com!
We’ve previously blogged about the potential impact on activism of an SEC decision to adopt – or not adopt – the proposal. We’ve also discussed Pershing Square’s unsuccessful efforts to persuade ADP to use a universal proxy card – and, more recently, SandRidge Energy’s decision to become the first company to use a universal proxy card in a proxy contest.
This recent blog from Cooley’s Cydney Posner provides some history on the universal proxy proposal. If the SEC’s proposal truly is on the shelf, it will be interesting to see if there’s a move toward more aggressive private ordering when it comes to the use of a universal ballot.
Cybersecurity: More Scrutiny from Boards than Regulators?
This Deloitte survey says that C-suite execs expect more scrutiny from their boards on cybersecurity programs this year than from regulators. Here’s an excerpt from a press release announcing the results:
As pressure to develop more effective corporate cybersecurity programs continues to mount, 63% of C-suite and other executives in a recent Deloitte poll expect board of director requests for reporting on cybersecurity program effectiveness to increase in the next 12 months. A slightly lower 57% percent of executives expect increased cybersecurity regulatory scrutiny during the same period.
One possible reason for executives’ expectations for increased board attention – the survey says that less than 17% of executives say they are highly confident in the effectiveness of their organization’s current cybersecurity program.
This recent “exechange” report notes that roughly 10% of CEO departures during 2018 at the 1000 largest companies were related to conduct issues – and says that corporate boards are increasingly unwilling to tolerate bad behavior from CEOs.
The report reviews a number of recent high profile departures. It points out that some departures were handled very differently than others – and suggests some reasons why. Here’s an excerpt:
The fact that companies deal in various ways with their fallen CEOs may be related to the specific characteristics of their alleged misconduct. However, it may also highlight differences in corporate governance and raise questions about the independence of the board.
After allegedly or actually violating codes of conduct, CEOs were terminated or resigned “voluntarily.” In some cases, they left with a golden parachute, in others not. In a spectacular case, the board “reluctantly announced” that it had “accepted” the resignation of the CEO, chairman and main shareholder.
On the other hand, boards often take advantage of the opportunity to take the incident as a cautionary tale.
The report notes that in the past, if misbehaving CEOs were ousted, they were “rarely publicly shown the red card.” Instead, those departures were typically characterized in a more neutral fashion. In contrast, one of the striking things about many of the disclosures described in the report is the degree of candor displayed concerning the executive’s alleged misconduct. The times, they are a changin’. . .
CEO Transitions: What Should You Say After You Say “You’re Fired”?
So when you kick your bad actor to the curb, what should you disclose? As this Washington Post article points out, the SEC leaves a lot of that up to you. Here’s an excerpt:
How much detail must companies share when a CEO is asked to leave?
The answer: Not as much as you might think. Within four business days of making the decision, companies must issue a securities filing called an 8-K if a material corporate event occurs, and the departure of a chief executive certainly qualifies. It must include that the fact that the CEO is leaving, what kind of related agreements result from that departure (such as severance pay) and if the CEO is also a director — which a CEO almost always is — whether the departure is the result of a disagreement on “operations, policies or procedures.”
So that’s it, huh? Not exactly – check out our “Checklist: Officer Departures- Procedures” for a more comprehensive breakdown of things you need to think about when you’re transitioning a senior exec.
Activism: When “Santa Claus” Attacks
Here’s something I recently blogged on DealLawyers.com: If shareholder activism ever had an “everybody into the pool” moment, it probably came last month when Berkshire-Hathaway announced that it would withhold support from USG’s slate of directors at its upcoming annual meeting. Berkshire wasn’t happy about the USG board’s decision to stiff-arm a potential bid from Germany’s Knauf. Last week, USG’s board apparently got the message, and agreed to talks with Knauf.
Many have expressed surprise about Warren Buffett’s willingness to openly oppose the board of a company in which he’s invested. But despite his carefully cultivated public image as the genial “Sage of Omaha,” nobody becomes a billionaire without an iron fist somewhere inside that velvet glove. These 2010 comments from Buffett’s biographer, Alice Schroeder, probably ring true with USG’s board right about now:
“When he sees something he doesn’t like in a company whose shares he owns, the famously passive investor can swing into action to protect his investment—jawboning behind the scenes, scolding, cutting opportunistic deals, even hiring and firing CEOs. For some of those on the receiving end of his activism, it can feel a bit like being attacked by Santa Claus.”
Buffett’s actions are a reminder that at a time when longstanding passive investors are more frequently collaborating with activists to “shake things up” at the companies in which they invest, boards & management can take nothing for granted when it comes to investor support. As USG found out, even Santa Claus sometimes puts coal in your stocking.
Yesterday, the SEC proposed amendments to Rule 3-10 & Rule 3-16 of Regulation S-X, which address the financial information about subsidiary issuers, guarantors & affiliate pledgors required in registered debt offerings. Here’s the 213-page proposing release.
According to the SEC’s press release, the proposed changes are intended to “simplify and streamline the financial disclosure requirements” applicable to registered debt offerings for guarantors and issuers of guaranteed securities, as well as for affiliates whose securities collateralize a registrant’s securities. Highlights of the proposed amendments to Rule 3-10 include:
– replacing the condition that a subsidiary issuer or guarantor be 100% owned by the parent company with a condition that it be consolidated in the parent company’s consolidated financial statements;
– replacing the requirement to provide condensed consolidating financial information, as specified in existing Rule 3-10, with certain financial and non-financial disclosures;
– permitting the proposed disclosures to be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in the registration statement prior to the first sale of securities;
– requiring the proposed disclosures to be included in the footnotes to the parent’s financial statements beginning with the annual report for the first fiscal year during which sales of the debt securities were made.
In addition, the obligation to provide the required disclosures would terminate when the issuers and guarantors no longer had an Exchange Act reporting obligation with respect to the securities – instead of terminating only when the securities were no longer outstanding, as provided under current rules.
– replacing the requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with financial and non-financial disclosures about the affiliates & the collateral arrangement as a supplement to the consolidated financials for the entity issuing the collateralized security;
– permitting the proposed disclosures to be located in filings in the same manner as the proposed guarantor disclosures under Rule 3-10; and
– replacing the existing requirement to provide disclosure only when pledged securities meet a numerical threshold relative to the securities registered with a requirement to provide the proposed disclosures in all cases, unless they are immaterial to holders of the collateralized security.
By reducing the compliance burdens associated with existing financial statement requirements for these entities, the SEC hopes to encourage issuers to register debt offerings, & thus provide investors with greater protections than they receive in unregistered offerings.
The Weed Beat: Doing Business with Cannabis Companies
With the DOJ’s reversal of the Obama Administration’s policy that provided federal tolerance of any cannabis business conducted in compliance with state law, the risks of doing business with these companies have become a greater concern. This Perkins Coie memo provides an overview of those risks & some tips on how companies can protect themselves. Here’s an excerpt with some questions companies considering such a business relationship should ask themselves:
– To what extent will the cannabis-related activities occur in a jurisdiction where cannabis is legal? So long as key federal concerns, such as violent crime, are not in question, federal prosecutors are unlikely to seek charges against companies that are only indirectly involved in the cannabis industry in states that have legalized the substance.
Indeed, cannabis-related activities that are otherwise legal in such jurisdictions do not involve “victims,” and are unlikely to be viewed as “serious” by USDOJ. An important corollary to this consideration is that the company directly involved in the cannabis industry should fully comply with the drug laws of the states in which it operates. The due diligence factors listed below become even more significant if the cannabis-related activities will occur outside of a jurisdiction where cannabis is legal.
– What is the level of support and involvement that your company is contemplating with the company undertaking cannabis-related activities? Will your company merely invest in or provide passive support to the company that is directly involved in the cannabis industry, or will your company take a predominant role in managing the other company (e.g., through seats on the corporate board)? The more significant your company’s role will be in managing the cannabis-related activities, the greater the perceived culpability of your company for those activities in the eyes of a federal prosecutor.
The memo also points out that companies should be particularly wary of involvement in the financial aspects of the company involved in the cannabis business – there’s a risk that the feds might characterize that activity as money laundering.
– Finders & Unregistered Broker-Dealers
– Governance Perils Involved in Financing Transactions by Emerging Companies
– Impact of the European GDPR on M&A
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
According to this “Compliance Week” article, the new audit report standard’s requirement to disclose auditor tenure in audit reports may result in audit committees devoting more attention to tenure-related issues. This excerpt explains why:
There are plenty of public companies that have engaged the same audit firm for decades, according to the latest study. The average tenure for the first 21 companies listed in the Dow 30 is 66 years, the study says. Analysis from Audit Analytics shows nearly 20 companies have had the same audit firm for 100 years or longer – and nearly 200 have had the same firm performing the audit for 50 years or longer. More than 850 companies have engaged the same firm for at least 20 years or longer.
That puts the onus on audit committees to determine whether the company is benefiting or not from a longstanding relationship with the firm. And the new disclosure puts it front and center before investors, which may serve to heighten pressure on audit committees, says Kevin Caulfield, managing director at Navigant Consulting. “Because it’s disclosed now, it’s a chance for audit committees to take that second look to think about are we still getting quality audits from this auditor,” he says.
The article goes on to note that while audit committees must be sensitive to the potential risks associated with long-tenured auditors, they should also consider the benefits associated with having an auditor that is well-acquainted with the company & its operations, systems & processes.
Risk Management: “It’s a Mad, Mad, Mad, Mad World”
Did you know there’s a theory that we’re all just living in a computer simulation – a video game – being played by some super-advanced alien intelligence? If so, then I think that some alien teenager grabbed the controller in 2016 & has been messing with us ever since.
I believe that I can even pinpoint the date that the kid grabbed the joystick: Sunday, June 19, 2016. That’s when Cleveland overcame a 3-1 Golden State lead to win the NBA Championship. That was followed by the Chicago Cubs winning the World Series (against the Indians, no less), and then the 2016 election. . .
It’s been a little more than 2 years, and it looks like the alien kid is still calling the shots (Nick Foles? The Washington Capitals?). Since that’s the case, corporate boards would be smart to take the advice in this EY memo and factor today’s volatile geopolitical environment into their risk management oversight efforts. Here’s an excerpt:
Rising geopolitical tensions and increasing electoral share for populist parties are a concern for businesses. With policy becoming harder to predict, many executives see policy uncertainty, geopolitical tensions, and changes in trade policy and protectionism as key risks to their business.
At the same time, business leaders are optimistic about the near-term US outlook – in part because of deregulation and the passage of US tax reform. In fact, the recent Borders vs. Barriers report from EY, Zurich Insurance and the Atlantic Council indicates that despite concerns about policies restricting their ability to transport goods and raise capital, global CFOs are overwhelmingly bullish on investing in the US – and 71% expect continued improvement in the US business environment in the next one to three years.
These dynamics underscore the need for companies to proactively address strategic opportunities and risks stemming from geopolitical and regulatory changes. For the board to provide effective oversight in this area, it is imperative that directors understand the geopolitical and regulatory landscape and how relevant developments are identified and evaluated within their strategy-setting process and Enterprise Risk Management (ERM) framework. Boards should also consider whether they have access to the right information and expertise to effectively oversee this space.
How to Deal With Leaks
This recent “Corporate Secretary” article by Iridium Partners’ CEO Oliver Schutzman reviews the leak of Saudi Aramco’s financial information to Bloomberg, and uses that as jumping off point for a general discussion on dealing with leaks. Here are some of the article’s “golden rules” for responding to a leak:
– Have a leak strategy in place. Regularly reviewed and updated, the strategy should sit alongside procedures for handling a crisis or operational disaster and should receive the same senior-level investment and attention.
– When a leak occurs, do not embark on a witch hunt to find the leaker. Instead, put all energy and efforts into executing the leak strategy.
– Don’t hide behind ‘no comment’ if there is truth to the leak. Acknowledge it and state the facts. This may be unpalatable and painful. It may involve criminality or unsavory behavior. If this is the case, confess errors and present the measures and consequences taken to ensure prevention going forward. Only by dealing with the substance of a leak can a company regain the initiative
Companies should act to address any shortcomings exposed, & then take back control of the narrative. All actions should be taken with complete transparency.
In a recent speech, the SEC’s Deputy Chief Accountant – Sagar Teotia – reminded companies that the clock is ticking on finalizing disclosures relating to the impact of tax reform. As you’ll recall, the OCA gave everyone a holiday gift last December by issuing Staff Accounting Bulletin No. 118.
At the risk of oversimplifying, SAB 118 permits companies to assess, record provisional amounts & ultimately finalize disclosure of the financial impact of tax reform over a “measurement period” of up to one year from the date of the legislation’s enactment. However, this excerpt from the Deputy Chief Accountant’s speech clarifies that SAB 118 does not allow companies to defer reporting of tax reform’s impact:
Let me clarify a point about the measurement period and the expectation to be acting in good faith. SAB 118 states that the measurement period ends when an entity has obtained, prepared, and analyzed the information that was needed in order to complete the accounting required under ASC 740 and in no cases should the measurement period extend beyond one year from the enactment date. This should not be interpreted as a window to put pencils down until we are close to one year from the enactment date to get started on the accounting. Instead, entities should continue to keep moving in good faith to complete the accounting.
The measurement period ends when an entity has completed the process necessary to finalize its assessment of tax reform’s impact – and for certain income tax effects, that could be well before the one year mark.
Diversity: CalPERS Board Diversity Update
CalPERS recently provided this update on its efforts to improve board diversity among its portfolio companies. Among its other actions, CalPERS:
– Engaged more than 500 U.S. companies in the Russell 3000 Index regarding the lack of diversity on their boards;
– Adopted a “Board Diversity & Inclusion” voting enhancement to hold directors accountable at engaged companies that fail to improve diversity on their boards or diversity & inclusion disclosures;
– Withheld votes against 271 directors at 85 companies & ran proxy solicitations at two targeted companies where diversity proposals were filed by other investors.
Future actions under consideration include development of enhanced key performance indicators (KPIs) for diversity & inclusion. The KPIs will enable CalPERS to move beyond assessing whether a company has a dimension of board diversity to a more granular assessment of whether it has a level of board diversity that reflects each company’s business, workforce, customer base, and society in general.
CalPERS also intends to use the data provided by these enhanced key performance indicators to identify US companies lacking in diversity and file majority vote proposals & vote against board chairs, Nominating & Governance Committee members, and long-tenured directors at those companies.
Our “Q&A Forum”: The Big 9500!
In our “Q&A Forum,” we have blown by query #9500 (although the “real” number is much higher since many of the queries have others piggy-backed on them). I know this is patting ourselves on the back – but it’s over 15 years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been well over 30,000 questions answered.
You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis & that any answers don’t contain legal advice.
I’m sure most of us have experienced situations where the Corp Fin review process seemed to drag on for what seemed to be forever. For most companies, even an extensive review process usually ends after 3 or 4 rounds of comments & responses – but for a select few, the comment letter process really does turn into “Purgatory.”
This “Audit Analytics” blog takes a look at those companies. Audit Analytics looked at 27 listed companies that had Corp Fin reviews involving at least 10(!) back & forth letters during the period from 2016 – April 2018, and tried to determine why they ended up in this predicament. The answers were interesting:
In many cases, long SEC reviews appear to be correlated with other significant failures including SEC enforcement actions. For example, in 2017, MDC Partners Inc appeared on our radar after the company was charged in an SEC Enforcement action. One of the legal charges was related to using misleading custom metrics – the same metrics that were questioned by the SEC in some of the MDC’s comment letters.
Zynga had a conversation that spanned eleven letters and 150 days. Some of the comments were centered on presentation of individually tailored non-GAAP metrics, a presentation that is explicitly prohibited by the SEC rules.
A major red flag for comment letters is noted when the SEC asserts that a company partially or completely failed to address the comments. Arguably, a company’s failure to respond should be taken in the context of the overall controls environment of the company. Since 2016, three companies failed to respond to SEC comments, including Axon Enterprise, Inc and Dana Inc. In such a case, the SEC will typically issue a separate letter warning that if the comments are not resolved the agency will terminate the review and release the comments to the public.
A slightly more common scenario is the failure to incorporate previously agreed upon disclosure text from SEC review into the subsequent filings. Audit Analytics identified six instances where the SEC noted inconsistencies between the disclosure and previous responses to SEC comments.
Under the circumstances, I don’t think it’s too surprising that any of the companies cited found the Corp Fin review process to be a very long & winding road.
By the way, if you’re wondering how long a company’s stay in SEC purgatory can be, the blog notes that Iconix Brands spent a total of 723 days in the review process. During that time, the company & the SEC exchanged a staggering 29 rounds of correspondence. Two other companies, MDC Partners (540 days/18 letters) & Acacia Research (427 days/26 letters) spent more than a year under review.
Revenue Recognition: Trends in Staff Comments
While we’re on the subject of Corp Fin comments, here’s a FEI memo that reviews comments issued on the new revenue recognition standard and identifies some trends. FEI says that Staff comments have focused on the following areas of ASC 606:
– Disaggregation of revenue
– Disclosure of performance obligations; consideration of significant payment terms
– Disclosure of performance obligations; determination of whether promised goods/ services are distinct
– Timing of satisfaction of performance obligations
– Principal versus agent considerations
– Transaction price determination and allocation to specific performance obligations
– Costs to obtain and fulfill a contract
The memo reviews & provides links to individual Staff comment letters and company responses.
“Hey, Why is the SEC Advertising ICOs in its Emails?”
Several members have mentioned to us that they’re confused as to why the SEC is including a link to an advertisement for an ICO in all of its email announcements. If you share this confusion, go ahead and click on the ad – it sends you to the SEC’s “HoweyCoins.com” mock ICO site.
I’m sure the SEC is usually quite concerned if a communication from the agency leaves members of the public scratching their heads – but if people are intrigued enough to click on the ad, I’ll bet they’re pleased that this one does.
In 2017, Delaware amended its corporate statute to permit corporate records to be maintained using distributed ledger technology – aka “blockchain.” While it’s not a Delaware corporation, Banco Santander recently became the first company to use blockchain as part of the voting process for its 2018 annual meeting. This “IR Magazine” article suggests that the results were impressive. Here’s an excerpt:
At this year’s Santander AGM, held on March 23, investors were asked to cast their vote twice: once in the traditional manner and once on the distributed ledger. Investors accessed the distributed ledger through Broadridge’s web application. One in five (21 percent) of the AGM participants made use of the new technology.
The results of the votes cast using blockchain were available within two days of the AGM, compared with the usual two or three-week wait with traditional proxy voting. In the near future, voters will be told real-time what the results are, according to Broadridge Financial Solutions.
The article notes that 60% of the company’s shareholders are institutions, and that its blockchain initiative is designed to increase turnout among those investors.
We’ve previously blogged about initiatives to use blockchain technology for voting at shareholder meetings – one of these initiatives involved Broadridge & several banks (including Santander), while another involved Nasdaq.
As we’ve blogged in the past, corporate America continues to look for ways to enhance the diversity of its boards of directors, with Amazon’s recent adoption of a “Rooney Rule” being the latest initiative in this area. Recently, however, investors in a company called “Destination Maternity” used a different route to increasing the number of women on its board directors – a good old fashioned proxy fight. This excerpt from a recent “Corporate Secretary” article has the details:
Shareholders have secured the rare replacement of an entire board – and the installation of a majority-female set of directors – following a proxy tussle at Destination Maternity.
The company late last month said that all four director nominees of investors Nathan Miller and Peter O’Malley had been elected to the board at Destination Maternity’s AGM. The company bills itself as the world’s largest designer and retailer of maternity apparel. The new board comprises Holly Alden, Christopher Morgan, Marla Ryan and Anne-Charlotte Windal.
The vote followed disagreements between Miller and O’Malley and the former board over the strategic direction and performance of the company. The investors have a turnaround plan they intend the new board to implement. The previous board – which comprised three men and one woman – insisted it had always acted in the best interests of company shareholders and criticized what it said were the investors’ ‘inexperienced and under-qualified candidates’ for directors.
Miller and O’Malley disputed this characterization and argued that the company needed to have a majority-female board. Despite the unusual demand, O’Malley, managing partner with Kenosis Capital, insists he and Miller are not activists but long-term investors. ‘We thought a maternity company should be run by women, who would be simpatico with customers,’ he tells Corporate Secretary.
Diversity initiatives are swell, but sometimes breaking a little furniture works wonders. . .
Securities Class Actions: Last Year’s “Bigliest” Winners
Kevin LaCroix recently blogged about an ISS report ranking 2017’s Top 50 plaintiffs’ law firms in terms of total cash settlements of North American securities class actions. Here’s an excerpt listing last year’s top 5 firms:
The report lists the Bernstein Litowitz law firm as having had the highest total of shareholder recoveries during the year, with $639 in total settlement funds recovered during 2017. $210 million of the law firm’s total is attributable to the largest 2017 settlement in the Salix Pharmaceuticals case. As I noted in a prior post discussing ISS Shareholder Class Action Services’ updated report on the Top 100 all-time securities settlements, the Bernstein Litowitz firm has the most Top 100 settlements, with the firm serving as lead or co-lead counsel in the 33 of the Top 100 securities class action lawsuit settlements.
The Robbins Geller law firm came in at second place on the 2017 Top 50 list, with $344 million in total settlement funds recovered. The report notes that Bernstein Litowitz and Robbins Geller have both finished in the top two positions on the list, in various orders for five straight years. As discussed in my prior post about the Top 100 all-time settlements, the Robbins Geller firm (inclusive of predecessor law firms) is second on the Top 100 list, with 17 of the largest settlements (including the largest ever settlement in the Enron case.)
Places three through five on the Top 50 list include the Cohen Milstein firm, in third place, with recoveries of $203 million; the Levi & Korinsky law firm in fourth place, with recoveries of $200 million; and the Block & Leviton law firm at $198 million. A total of eleven law firms had aggregate shareholder recoveries during the year in excess of $100 million.
Kevin speculates that Berstein Litowitz’s efforts may have netted it as much as $126 million last year. Nice work if you can get it.
On Friday, Liz blogged about the SEC’s changes to the definition of a “smaller reporting company” & its adoption of a new requirement for companies to use Inline XBRL in their filings. This Steve Quinlivan blog points out that changes have been made to many of the SEC forms due to this new regime. We’re posting memos about this development in our “Smaller Reporting Companies” Practice Area.
This excerpt from Steve’s blog notes the effect of the new Inline XBRL requirement – and points out that changes to the form may be applicable before compliance with the new requirement becomes mandatory:
The new Inline XBRL rules include conforming amendments to the cover pages for certain periodic reports, including Forms 10-K and 10-Q. The change to the cover pages eliminates reference to compliance with the website posting requirement. While there is a generous phase in period for required use of Inline XBRL, the rules are technically effective 30 days from publication in the Federal Register. Therefore, these changes to the cover page are potentially applicable to second quarter Form 10-Qs for calendar year issuers.
The changes to the “smaller reporting company” definition have resulted in conforming amendments to the cover pages for registration statements (Forms S-1, S-3, S-4, S-8, S-11, Form 10) & periodic reports (Forms 10-K and 10-Q). The change reflects the fact that while the new rules specify a larger threshold for SRC status, the definition of “accelerated filer” remains unchanged. The rules are effective 60 days from publication in the Federal Register.
Forget Fireworks – The Future Belongs to Flame-Throwing Drones!
If I had this awesome device, I’d win the 4th of July pyrotechnics contest in my neighborhood for sure. Enjoy the holiday – and don’t hurt yourself.
