SEC Chair Jay Clayton has made invigorating the sluggish IPO market one of his top priorities. So far, the SEC’s most high-profile action on this front during his tenure has been to permit all companies – not just emerging growth companies – to make confidential filings of draft IPO registration statements.
Now, this WSJ article says that the SEC may take another step, and allow all companies, regardless of size, to “test the waters” before filing an IPO registration statement. The ability to “test the waters” was provided to EGCs as part of the JOBS Act – and this excerpt from Cydney Posner’s recent blog provides an overview of what it allows companies to do:
The testing the waters provisions in the JOBS Act significantly relaxed “gun-jumping” restrictions by permitting an EGC, and any person acting on its behalf, to engage in pre-filing communications with qualified institutional buyers and institutional accredited investors. This relaxation of the gun-jumping rules allows companies to reduce risk by gauging in advance investor interest in a potential offering.
Prior to the JOBS Act, only WKSIs could engage in similar testing-the-waters communications. “Test-the-waters” communications can be oral or written, made before or after filing a registration statement, in connection with an IPO or any other registered offering.However, the only permitted communications are those made to determine whether the specified investors might have an interest in a contemplated securities offering.
As Broc blogged at the time, allowing all companies to “test the waters” was one of a slew of recommendations aimed at improving the capital markets made by the Treasury Department last October – and you may want to check out that list for other potential “coming attractions.”
Here’s an article from MarketWatch’s Francine McKenna with more background on the SEC’s efforts to make life a little easier for IPO candidates.
Warren Buffett’s Annual Letter to Shareholders
A few days ago, Warren Buffett released his annual letter to shareholders. As usual, this went completely unnoticed by the financial press – barely 50,000 articles & blogs have been written on it to date – so I’m sure you’re hearing about this for the first time from me. There’s no need to thank me, it’s just part of the job.
Anyway, here’s a selection of some of the media reports on the Oracle of Omaha’s latest epistle:
Warren Buffett’s recent pronouncements aren’t limited to his annual letter. Berkshire Hathaway’s sitting on a pile of cash – $116 billion to be specific. Yesterday, Buffett told CNBC that Berkshire-Hathaway was more inclined to repurchase stock with its excess cash than to pay dividends.
He’s got a lot of company. Stock buybacks have long been corporate America’s favorite bit of financial engineering – and this ValueWalk article says that 2018 could be the biggest year for them ever. But despite their continuing popularity, criticism of buybacks appears to be on the rise. For instance, this Bloomberg article says that buybacks are a big contributor to the market’s recent volatility. Here’s an excerpt:
Some market watchers are adding corporate share repurchases to the list of reasons for last week’s turmoil, which already included rising interest rates, higher inflation, growing government debt, volatility-linked investment funds and Washington instability. More significantly, those pointing the finger at buybacks say continued corporate stock purchases — which, unlike some of those volatility funds, survived the brief market downturn — will make the next one far worse.
Regardless of their impact on the market, the optics of buybacks are increasingly bad – this Washington Post op-ed claims that when it comes to using the additional cash flowing in from tax reform, companies are planning to spend 30x as much on buybacks as on wage increases.
Last week, in Digital Realty Trust v. Somers (US Sup. Ct.; 2/18), the US Supreme Court resolved a split between the circuits & held that in order to qualify for “whistleblower” protection under Dodd-Frank, an employee must reach out to the SEC – just blowing the whistle to an employer isn’t enough.
This Holland & Hart memo says that the case is a “mixed bag” for employers. This excerpt explains:
On the one hand, the decision is good news for employers because the ruling narrows the scope of protections available under Dodd-Frank’s anti-retaliation provisions. Dodd-Frank contains multiple plaintiff-friendly provisions – including immediate access to federal court, a generous statute of limitations (at least six years), and the opportunity to recover double back pay. Yet these benefits are now only available to a, presumably, smaller number of potential plaintiffs who actually report to the SEC.
On other hand, there are many reasons for employers to be wary of the ruling. Rather than incentivize employees to report their suspected concerns internally, today’s decision heavily encourages potential whistleblowers to report their concerns directly to the SEC – before any adverse action occurs, but also before employers have had the chance to hear, investigate, and address their potential concerns. Indeed, when an internal report does arrive, it may be safest for employers to assume that the SEC already has that same report.
The Court’s decision applies only to whistleblower status under Dodd-Frank. Internal whistleblowers may still assert retaliation claims under Sarbanes-Oxley, which also provides significant economic downsides for companies that retaliate. We’re posting the flood of memos in our “Whistleblowers” Practice Area.
Time for BlackRock to “Stand & Deliver?”
BlackRock made a big splash last month when CEO Larry Fink called on companies to serve the greater good in addition to serving their bottom lines. Nice words – but now, this “Breaking Views” column calls on the world’s largest asset manager to back them up with its actions:
A day after the latest American mass shooting involving a military-style assault rifle, it is worth reviewing Fink’s words. BlackRock is the largest owner of shares in publicly traded manufacturers of what is arguably the most lethal consumer product of any kind. The firm’s funds hold 16 percent of Sturm Ruger, 12 percent of Vista Outdoor and around 11 percent of American Outdoor Brands, the parent of Smith & Wesson, according to Eikon.
BlackRock’s holdings are driven by its big indexing business, but it is not alone. Vanguard, which oversees $4.5 trillion of other people’s money, is the second-biggest owner of Sturm Ruger and a close third in the registers of AOB and Vista. Fidelity Management tops the roster at Vista with 15 percent, but doesn’t figure in the other two.
These increasingly engaged broad-brush investment firms, as well as more focused Wall Street advisers, could start with a simple thesis. Something common to most of the shooting horrors in recent years is the AR-15 class of semi-automatic weapons. In a country with as many firearms as people, eradicating murders, suicides and accidental deaths may never be possible. But reducing the lethality of those who would do harm is achievable by making these weapons – which were adapted from versions designed for military use on battlefields – harder to purchase or banning them outright, as some states have already done.
Denying the purveyors of assault rifles the financial means to produce and distribute them is a power that financial firms do possess. Many banks and brokers already avoid the gun industry, which scores low on most so-called ESG screens – for environmental, social and governance – in part because of the regular controversies surrounding the lethal misuse of their products.
Being pressured to weigh-in on one of the most controversial issues in American society is probably not what BlackRock had in mind when it announced its new emphasis on the need to serve the greater good – but my guess is that it’s going to get lots of input about what “the greater good” entails from here on out. Looks like the ball’s in your court, BlackRock.
Transcript: “How to Handle Post-Deal Activism”
We have posted the transcript for our recent DealLawyers.com webcast: “How to Handle Post-Deal Activism.”
In recent years, some prominent governance commentators have advocated that the SEC follow the lead of EU & UK regulators and eliminate mandated quarterly reporting. A recent study published in the March issue of “The Accounting Review” says that there’s empirical data supporting the idea that the SEC should “lose the 10-Qs.” Here’s an excerpt from a recent American Accounting Association press release on the article:
With regulatory reform a high priority for the Trump administration, a new study focuses on one possible target – and it’s a fat one – the half-century-old SEC rule mandating the filing of quarterly financial reports by public companies.
The EU and UK no longer require quarterly financials, and the question of whether the SEC should follow suit has evoked heated debate. While there has been plenty of theorizing about the subject, what has been absent until now is large-scale evidence of the advantages less frequent reporting offers to companies and their shareholders. The research challenge: How to compare the effect of reporting frequency when all U.S. companies have to file quarterly.
Now a study in “The Accounting Review,” published by the American Accounting Association, finds a way around this problem by analyzing evidence from periods when reporting-frequency mandates changed in the U.S., permitting before-and-after comparisons to be made.
While acknowledging that, yes, there may very well be advantages in increased reporting frequency – such as lower cost of capital and more information for investors – the study concludes, crucially, that shorter reporting intervals engender “managerial myopia” which finds expression in a “statistically and economically significant decline in investments” along with “a subsequent decline in operating efficiency and sales growth.”
Therefore, “our evidence…supports the recent decision by the EU and the UK to abandon requiring quarterly reporting for listed companies with an apparent intent to preventing short-termism and promoting long-term investments,” write the study’s authors, Rahul Vashishtha and Mohan Venkatachalam of Duke University’s Fuqua School of Business and Arthur G. Kraft of the Cass Business School of City University London.
The study says that prior to the reporting mandates, firms that reported results at longer intervals had greater annual sales, annual sales growth and return on assets than firms that reported more frequently. By contrast, in the period three to five years post-mandate, sales and sales growth were about the same for the two groups, while the difference in return on assets narrowed significantly.
Of course, one of the truisms of corporate governance research seems to be that for every study that says “white,” there’s another that says “black.” This MarketWatch article from last year suggests that the issue of reporting frequency is no exception.
DOJ’s New Policy Restricting Use of Agency Guidance
Late last year, Attorney General Sessions issued a memo announcing his intention to curb the practice of “rulemaking by guidance.” This King & Spalding memo says that the DOJ has acted to implement the AG’s directive. Here’s an excerpt summarizing the new policy:
On January 25, 2018, Associate Attorney General Rachel Brand issued a memorandum significantly restricting Department of Justice civil litigating units’ use of executive agency guidance documents in affirmative civil enforcement actions. The Brand Memo outlines new policies for cases in which an executive agency previously issued relevant non-binding guidance, including:
– Reinforcing the long-standing principle that guidance documents are just that—recommendations for regulated industries;
– Emphasizing that guidance does not bind regulated parties or create new legal obligations beyond the scope of existing statutes and regulations;
– Precluding the Department from “effectively convert[ing] agency guidance into binding rules”; and
– Preventing Department lawyers from using noncompliance with guidance to establish violations of law.
The Brand Memo’s potential impact is very broad, and it will influence any DOJ investigation that relies heavily on regulatory agencies’ non-binding interpretive guidance, but the King & Spalding memo suggests that it may have a particularly significant impact in the life sciences sector – where DOJ attorneys have long leveraged guidance from the DHS’s Office of the Inspector General and the FDA to support the government’s claims.
Nasdaq Proposes Changes to Shareholder Approval Rule
This Morrison & Foerster blog highlights a recent Nasdaq proposal that would tinker with the rules governing when listed companies would have to go to their shareholders for approval of new stock issuances. Here’s an excerpt summarizing the proposed changes:
The proposal would, among other things:
– Amend the measure of “market value” in connection with assessing whether a transaction is being completed at a discount from the closing bid price to the lower of: the closing price as reflected by Nasdaq, or the average closing price of the common stock for the five trading days preceding the definitive agreement date;
– Refer to the above price as the “Minimum Price,” and existing references to “book value” and “market value” used in Rule 5635(d) will be eliminated; and
– Eliminate the references to “book value” for purposes of the shareholder vote requirement.
For some Nasdaq companies, this is kind of a big deal. Currently, listed companies need shareholders to sign off on any financing transaction (other than a public offering) that would result in the issuance of 20% or more of their outstanding shares at a price less than the greater of book or market.
Changing the rules to eliminate the reference to book value and shake out some of the effects of market volatility will enhance companies’ ability to raise private money quickly – and doesn’t seem to do violence to shareholders’ interests either.
Wasn’t it was only yesterday that proxy access was one of the most hotly contested corporate governance issues? Now this Sidley memo says the game’s pretty much over – and proxy access has become mainstream:
As of the end of January 2018, 65% of S&P 500 companies have adopted proxy access. Through the collective efforts of large institutional investors, including public and private pension funds and other shareholders, shareholders are increasingly gaining the power to nominate a number of director candidates without undertaking the expense of a proxy solicitation. By obtaining proxy access (the ability to include shareholder nominees in the company’s own proxy materials), shareholders have yet another tool to influence board decisions.
Some of the 2017 developments noted in the memo suggest that not only is the concept of shareholder proxy access well-established, but investors and management are generally in accord on what it should look like:
– The continuing pace of proxy access bylaw adoptions and ongoing convergence toward standard key parameters (83% of companies that adopted proxy access in 2017 did so on the following terms: 3% for 3 years for up to 20% of the board (at least 2 directors) with a nominating group size limit of 20);
– Slightly increased average support (54% versus 51%) for shareholder proposals to adopt proxy access in 2017, but fewer proposals being voted on as more companies adopted proxy access in exchange for withdrawal of the proposals;
– The failure to pass of all shareholder proposals seeking specified revisions to existing proxy access provisions (so-called “fix-it” proposals) in 2017, despite favorable recommendations from ISS, which voting results suggest that many shareholders are satisfied with proxy access on market standard terms.
The memo also points out that Fidelity’s shift from opposing to supporting proxy access shareholder proposals may seal the fate of many companies that receive such a proposal in the future.
It seems fair to say that given current trends, proxy access may soon become ubiquitous. Of course, one big question remains – is anybody ever going to actually use it?
Cybersecurity: “I, For One, Welcome Our New Cyber Insurance Overlords”
This Cleary blog says that a group of corporate titans are joining forces to roll out an innovative new cyber insurance product that’s designed to reward good cybersecurity practices:
In response to the growing threat of malware and ransomware attacks and other cybersecurity threats facing businesses today, Apple, Cisco, Allianz and Aon announced a new holistic cyber risk management solution on February 5, 2018. The new product is designed to provide a comprehensive framework for companies to reduce cyber risk by leveraging the expertise of each of the partners. As cyber incidents often impose significant costs on companies that can be difficult to bear directly, cyber insurance can help provide some protection.
Companies interested in purchasing the new insurance product must first undergo a cyber resilience evaluation from Aon to determine their “cybersecurity posture.” Aon will also recommend ways for the company to improve their cybersecurity defenses. Companies that employ Cisco’s Ransomware Defense product and/or Apple devices such as iPhones, iPads and Mac computers, may then be eligible for an “enhanced cyber insurance offering” underwritten by Allianz Global Corporate & Specialty that provides what Apple describes as “market-leading policy coverage terms and conditions,” including lower deductibles, or in certain cases, no deductibles. Companies that purchase this insurance package will also have access to Cisco’s and Aon’s incident response teams in the event that they do suffer a cybersecurity incident.
The blog notes that providing incentives for good cybersecurity practices benefits both insurer and insured – and it won’t hurt Apple & Cisco’s bottom lines either.
There’s one other thing that caught my eye in the blog – the rather alarming statistic that 68% of U.S. businesses haven’t purchased any cyber insurance. Really? Hey, you guys – doesn’t anybody watch “Mr. Robot?”
Cybersecurity: The Board’s Role
While we’re on the subject of cybersecurity, this recent Deloitte memo addresses the board’s role in overseeing the company’s cyber risk management efforts. The memo lays out a model for how boards can develop strong oversight of cyber risks, and notes that this oversight function involves the many of the same risk management skills that directors apply to other areas of the company’s business. Here’s an excerpt:
Board members needn’t become cyber security specialists. But by bringing to bear their deep experience in risk management, they can push management to answer tough questions and identify potential weaknesses in an organization’s cybersecurity strategy and capabilities.
Knowing that every company will have to accept some risk, the board can help management focus its efforts on the highest risk areas, while preserving the company’s ability to innovate. Again, the question returns to the organization’s risk appetite, and the board’s ability to make sure the organization’s cyber security efforts align with agreed upon risk parameters.
Yesterday, the SEC issued a press release announcing its proposed budget for fiscal 2019. Last fall, SEC Chair Jay Clayton told Congress that he’d seek more funding to boost cybersecurity and IT in the wake of disclosure that the Edgar system had been hacked – and he’s a man of his word.
The proposed budget represents a 3.5% increase over the agency’s 2018 request, and the bulk of the request for increased funding is directed at those areas. Here’s an excerpt:
In furtherance of the objectives of the SEC’s 2018–2020 Technology Strategic Plan, this request seeks an additional $45 million to restore funding for technology development, modernization, and enhancement projects. Together with the support of the SEC Reserve Fund, the FY 2019 request would allow the agency to continue implementing a number of multi-year technology initiatives.
Uplifting the agency’s cybersecurity program is a top priority. The FY 2019 request would support increased investment in tools, technologies, and services to protect the security of the agency’s network, systems, and sensitive data. Priorities for FY 2019 include maturation of controls through continuous diagnostics and monitoring, and further enhancements to firewall technologies. Another way the FY 2019 request helps reduce the agency’s cybersecurity risk profile is by enabling the funding of multi-year investments to transition legacy IT systems to modern platforms with improved embedded security features.
Additional funding is also being sought for the restoration of 100 positions (50 FTEs) across various SEC divisions. The SEC’s budget request assumes that it will continue to have access to its reserve fund – something that many Republican legislators & the Trump Administration have targeted for elimination.
Tax Reform: What’s It Mean for Loan Markets?
This Milbank memo takes a look at what tax reform might mean to the loan markets. Here’s an excerpt of some of the memo’s preliminary conclusions:
The combination of a much lower corporate tax rate and the new limitations on the deductibility of interest may make debt financing a less tax advantageous form of financing for some U.S. taxpayers, although debt financing still has certain tax advantages over equity financing. Multi-national groups may rethink their financing structures now that the incentive to borrow in the United States rather than abroad due to much higher U.S. corporate rates has been reduced or eliminated.
As has been reported in the press, the change to corporate rates, the taxable deemed repatriation of deferred offshore earnings, the limitations on post-2017 NOLs and other provisions may result in significant financial accounting charges that will be reflected on financial balance sheets and earnings statements.
The memo also points out a variety of other potential issues. These include increased complexity in negotiating tax distribution provisions in loan documents due to the disparity between corporate and individual rates, and the potential need for multinational entities to reorganize their corporate structures in ways that may require them to renegotiate existing loan covenants.
Tomorrow’s Webcast: “The Top Compensation Consultants Speak”
Tune in tomorrow for the CompensationStandards.com webcast – “The Top Compensation Consultants Speak” – to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance “tell it like it is. . . and like it should be.” The jam-packed agenda includes:
1. Pay ratio – last minute items
2. The tax reform bill eliminates the 162(m) exemption – what impact will that have on executive pay design, structure and governance (e.g., salaries and positive discretion on incentive payouts)?
3. Calculation of existing performance awards under tax reform
4. Director pay is continuing to get additional attention from the proxy advisors and the plaintiff’s bar. What will this attention mean for how director pay is structured & administered?
5. Clawbacks aren’t just for restatements anymore. What is the latest thinking on applying clawbacks to a broader range of activities and a broader population?
6. Goal-setting and performance adjustments remain major discussion points at the C-suite level: what are some best practices that can be helpful in this regard?
7. Investors, the SEC and proxy advisors are all still looking for the best way to assess pay & performance? What is the best thinking about how companies can kick the tires around their own pay & performance?
This article quotes SEC Chair Jay Clayton as saying that he’s “not anxious” to pursue a rule that would allow companies to adopt bylaws compelling their shareholders to arbitrate securities claims. As we’ve previously blogged, it’s been suggested that such a move is under consideration by the SEC – but as we’ve also blogged, the idea has attracted heat from investor groups.
So, these comments suggest that this idea is likely dead, right? Not so fast. With a hot potato issue like this, we all probably read too much into prior reports suggesting that the SEC was ready to act, and we’re probably reading too much into his remarks now.
After all, those comments were in response to the customary “beating about the head and shoulders” that Senator Elizabeth Warren administers to every financial regulator who testifies in front of the Senate banking committee. Sen. Warren demanded a “yes or no” answer on whether the Chair would support “eliminating class actions” – and his response beyond the “not anxious to see a change” sound-bite fell far short of that. Here’s an excerpt:
“”If this issue were to come up before the agency, it would take a long time for it to be decided, because it would be the subject of a great deal of debate. In terms of where we can do better, this is not an area that is on my list of where we could do better.”
This FedNet video captures Jay Clayton’s full testimony before the committee. The exchange with Sen. Warren begins at the 55:25 mark. The Senator didn’t get the yes or no answer she was looking for – instead, she got one that seemed to say “I’m not prepared to die on this hill, but I’m not going to let myself be pinned down either.”
Insider Trading: It’s Worse Than You Think?
Here’s a cheery item from “The Economist” – according to threerecentstudies, insider trading is running rampant on Wall Street. Here’s the intro:
Insider-trading prosecutions have netted plenty of small fry. But many grumble that the big fish swim off unharmed. That nagging fear has some new academic backing, from three studies. One argues that well-connected insiders profited even from the financial crisis. The others go further still, suggesting the entire share-trading system is rigged.
Nice. I sometimes think that John Calvin may have been on to something with that “total depravity” stuff.
Tax Reform: An Accounting Disclosure Primer
As Broc blogged last week, some investors are finding company disclosures about the effects of tax reform to be a jumbled mess. While the complaints so far have surrounded disclosure in earnings releases, it’s not likely to get any easier for companies or investors when it comes time to spell things out in SEC filings. That’s why this BDO memo detailing the accounting & financial statement disclosures associated with the new tax law is a handy resource.
This Bloomberg article says that the SEC may be open to revisiting the permissibility of bylaws requiring investors to arbitrate their claims against public companies. Here’s an excerpt:
The SEC in its long history has never allowed companies to sell shares in initial public offerings while also letting them ban investors from seeking big financial damages through class-action lawsuits. That’s because the agency has considered the right to sue a crucial shareholder protection against fraud and other securities violations.
But as President Donald Trump’s pro-business agenda sweeps through Washington, the SEC is laying the groundwork for a possible policy shift, said three people familiar with the matter. The agency, according to two of the people, has privately signaled that it’s open to at least considering whether companies should be able to force investors to settle disputes through arbitration, an often closed-door process that can limit the bad publicity and high legal costs triggered by litigation.
The SEC’s willingness to take up the issue is apparently based on its desire to encourage more companies to take the IPO plunge. As I blogged last year, at least one Commissioner is on record as being open to permitting mandatory arbitration bylaws.
The article suggests that any action by the SEC to allow mandatory arbitration would be a “big gift” to companies – but as Broc pointed out in this blog, others say that companies should be careful what they wish for…
Activism: Glass Lewis Says “Hey, Don’t Blame Us!”
Some companies have grumbled that proxy advisors – like ISS and Glass Lewis – are fueling activism by generally supporting insurgent nominees in activist campaigns. This Glass Lewis blog pleads “not guilty”:
This perception isn’t borne out by the overall numbers. We’d caution against reading too much into the data, since the yearly sample of contested meetings is both too small to be free of significant variance, and too big to reflect the particular combination of parties and moving parts that makes each contest unique. That said, Glass Lewis’ support for contests dropped from 40% in 2016 to 32% in 2017, and has historically stayed within that range. Nor has Glass Lewis’ approach to contested meetings changed in a way that would result in increased activist support; our methodologies, our case-by-case approach and our team have remained consistent.
Glass Lewis suggests that the perception that proxy advisors are all-in for activists is fueled by the changing nature of the activism. Larger activists have a lot of capital, sophisticated strategies & a long-term approach, and that’s allowed them to hunt larger game & win proxy advisor support in some cases:
This combination of long-term goals, sophisticated tactics and significant investment has allowed activists to pursue larger, more established companies that perhaps were not previously at risk of a shareholder campaign. As well known companies are targeted, the contests themselves are generating more headlines; and with campaign strategies getting more and more refined, Glass Lewis supported some, but not all, of the highest profile dissidents in 2017 — for example, at Arconic, Cypress Semiconductor and P&G.
There were also a number of large contests where we supported management (General Motors, Buffalo Wild Wings and Ardent Leisure), and as noted above Glass Lewis’ overall support for 2017 contests was at the lower end of the historical range; nonetheless, the combination of high profile contests, and sophisticated campaigns, may explain a perception of increased overall dissident support.
Securities Litigation: You Can Get Into Trouble Without Saying a Word…
Did you know that most securities litigation involves alleged material omissions, not misstatements? Me either. This recent Katten Muchin article reviews the legal landscape for omissions claims and offers tips to directors on how to reduce their company’s risk of being on the receiving end of such a claim.
I am still trying to wrap my head around last week’s allegations against KPMG’s former partners & employees involving the misappropriation of PCAOB inspection data. “Shocking” doesn’t seem to be too strong a word here.
This case doesn’t involve ambiguous conduct that might just raise some eyebrows about the “revolving door.” No, this time, the revolving door smacked us right in the mouth. As the SEC’s Co-Head of Enforcement Steve Peikin put it, what’s alleged to have gone down here was equivalent to “stealing the exam.”
The SEC’s press release and the DOJ’s indictment make for some tough reading. In a separate statement, SEC Chair Jay Clayton went to great lengths to reassure the market that the scandal didn’t implicate the reliability of KPMG’s audits. As this MarketWatch.com article points out, some prominent commenters aren’t so sure:
Former SEC Chief Accountant Lynn Turner is not convinced KPMG’s audits should still be relied upon. “This episode raises a serious question about the culture of the KPMG firm. Under the circumstances, how can the SEC expect investors to trust KPMG’s audits?” asked Turner.
The MarketWatch article says that the indictment suggests 5 other KPMG partners and an outside consultant “either knew – or chose to ignore – the illegal source of the information.” That isn’t very reassuring either.
How Did KPMG Dodge the Bullet?
Since a number of pretty senior people were implicated in this situation, some have asked why KPMG wasn’t indicted? The pains that SEC Chair Clayton took to reassure the market about the continued reliability of KPMG’s audits hints at one likely reason – the collateral damage that can result from charges against a major accounting firm.
Another reason KPMG may dodge the criminal bullet here is the way it handled the situation once it was brought to management’s attention by a whistleblower. As detailed in this NYT DealBook article from last April, KPMG promptly retained outside counsel to investigate the matter, fired the individuals involved, self-reported, and cooperated with regulators.
Given KPMG’s previous legal troubles, it probably didn’t take the firm’s lawyers long to conclude that it was dealing with a potentially existential threat – and had no alternative but aggressive efforts to cooperate with authorities.
Tomorrow’s Webcast: “Audit Committees in Action – The Latest Developments”
Tune in tomorrow for the webcast – “Audit Committees in Action: The Latest Developments” to hear E&Y’s Josh Jones, Deloitte’s Consuelo Hitchcock, and Gibson Dunn’s Mike Scanlon discuss how to cope with the ever-growing demands on audit committees – including those arising out of the new revenue recognition standards and a host of other SEC, FASB & PCAOB requirements.
Virtual-only annual meetings seem to be gaining traction – as Broc blogged last summer, despite opposition from a number of prominent investor groups, the number of companies going virtual-only increased significantly in 2017. However, this Bloomberg article says that some big companies are having second thoughts about the virtual-only approach:
Railroad operator Union Pacific Corp. will revert to an in-person annual meeting this year, after its 2017 virtual-only gathering drew a shareholder rebuke and a proposal to end the practice, a company lawyer told the Securities and Exchange Commission in a letter dated Monday. ConocoPhillips is also backpedaling after investors objected to the oil producer’s online meeting last year.
“A virtual-only meeting is a totally disembodied event online — there’s no exchange or opportunity for investors to look the board in the eye,” said Tim Smith, a director at Boston-based Walden Asset Management who worked with shareholders of ConocoPhillips and Comcast Corp. opposed to virtual-only meetings.
The article points out that some investors prefer the hybrid meeting approach – where shareholders can attend in-person or online. However, according to Broadridge, only 1-in-5 virtual meetings last year adopted the hybrid approach.
White Collar: Antitrust Cops Say “No Poach” Prosecutions On the Way
Last fall, I blogged about the DOJ’s reminder that it intended to prosecute “no poaching” & wage fixing agreements between companies. Now, this Ropes & Gray memo says that the DOJ plans to make good on that promise. Here’s the intro:
Speaking at an antitrust conference on January 19, 2018, Makan Delrahim, the Assistant Attorney General for the Antitrust Division, stated that over the next few months DOJ will be announcing indictments charging criminal antitrust violations relating to no-poach agreements. DOJ’s position is that these agreements, under which companies agree not to hire each other’s employees, restrain competition in the market for employees and may constitute per se violations of the antitrust laws.
Delrahim’s announcement follows joint DOJ/FTC guidance issued in October 2016, which alerted companies that parties to no-poach agreements would be subject, not just to civil antitrust liability, but also potentially to criminal investigation and sanction. Delrahim also highlighted the extent to which the prior guidance had put companies on notice of the federal antitrust agencies’ approach to no-poach agreements.
Transcript: “Pat McGurn’s Forecast for 2018 Proxy Season”
We have posted the transcript for our recent popular webcast: “Pat McGurn’s Forecast for 2018 Proxy Season.”
Since we nearly gave many of you a pre-Christmas coronary by raising the topic of tax reform’s impact on deferred tax assets, you’re probably not thrilled to see another blog from me on income statement hits resulting from the new tax legislation. Sorry about that, but it’s got to be done.
So, anyway, here it goes – it turns out that whatever benefits tax reform may ultimately have, this “Audit Analytics” blog says it’s resulting in pretty eye-popping charges to some companies’ bottom lines:
Under GAAP, tax assets and liabilities are required to be re-measured during the period in which the new tax legislation is enacted. In some cases, if the impact is expected to be material, companies are also required to disclose estimated impact through 8-K filings. So far, at least 36 companies made such a disclosure, reducing the net income by a total of at least $50 billion. Eight of these 36 companies disclosed write-downs that exceeded $1 billion. Interestingly, two out of 36 companies have large deferred tax liability positions, so the effect is expected to be positive.
Citigroup’s the leader in the clubhouse with a staggering $20 billion estimated charge – and 6 of the other 7 companies taking whacks exceeding $1 billion are also financial institutions. The charges won’t all result from valuation allowances for deferred tax assets – the one-time repatriation tax on foreign cash will also represent a big hit for some companies.
How big is this going to get? The blog points to this MarketWatch article, which estimates that the 15 companies with the largest deferred tax asset balances may have to write down nearly $75 billion.
Tax Reform: First Batch of Disclosures Is “In”!
In this blog, Steve Quinlivan notes the disclosures made by companies with fiscal quarters ended 12/31/17, but not fiscal-year ends that show the effects of the tax legislation in recently filed Form 10-Qs in accordance with SAB 118. Some may find these disclosures as a useful starting point for drafting Form 10-K disclosures…
