The need to consider updating earnings guidance through a pre-release usually arises because management expects that the company’s results may depart significantly from its previous guidance. Deciding whether to issue a pre-release is a high-stakes decision that requires management to weigh often significant liability and credibility risks. Despite that, this isn’t a topic that I’ve seen a lot written about, at least until now.
Fortunately, this recent Sidley memo provides helpful guidance to companies that find themselves thinking about issuing a pre-release. It addresses some of the key considerations surrounding an earnings pre-release, including the applicable legal requirements, management credibility issues, Reg FD compliance & litigation and risk management. This excerpt highlights the need to ensure that management has a high degree of confidence in the information it discloses in a pre-release:
If a company has determined to pre-release its results, it should do so only when management is highly confident in the accuracy of the numbers, or at least a relatively narrow range. Having to make more than one pre-release, or ultimately reporting final financial results that materially differ from those reported in the pre-release, may backfire and end up harming rather than helping the company’s credibility with investors and analysts. When preparing the pre-release, companies should ensure that no material information is omitted that might render the disclosure materially misleading or inaccurate.
The memo reminds companies that a decision to issue an earnings pre-release is one that requires input from several different constituencies, including the CEO, CFO, CLO, head of investor relations, key board members (including the audit committee) and, typically, outside legal counsel. It also points out that once a company decides to pre-release, its actions will likely be viewed as creating a precedent for the future by investors and analysts.
We’ve blogged previously about the beneficial ownership reporting obligations that will be imposed on a range of private companies under the Corporate Transparency Act. This Dechert memo provides a handy reference tool for companies concerning what they will be required to disclose once FinCEN implements the reporting system on January 1, 2024 (companies organized prior to that date will have until January 1, 2025 to come into full compliance).
The memo also addresses several FAQs on various aspects of the reporting system, including the type of information that will be collected, the definition of “beneficial owner,” the timing of filing disclosure reports, and the entities that are subject to – and exempt from – compliance with the Act. As this excerpt on applicable exemptions indicates, the good news is that many businesses will not be subject to a reporting requirement:
The CTA and Final Rules provide 23 categories of business entities that will not be considered reporting companies. For example, public companies, registered broker dealers, and certain investment companies, investment advisers, banks, bank holding companies, credit unions, money-transmitting businesses, commodity trading companies, pooled investment vehicles, 501(c) tax-exempt entities, inactive business entities and insurance companies will not be required to submit their beneficial ownership information. A more detailed analysis of some of these exemptions is available in our November 2022 OnPoint and in the Frequently Asked Questions published by FinCEN available here.
Perhaps most relevant to clients contemplating non-public M&A transactions, business entities in the two following groups will be exempted from disclosing beneficial ownership details:
– any business entity that (i) employs more than 20 employees on a full-time basis in the U.S.; (ii) filed in the previous year income tax returns in the U.S. demonstrating more than $5,000,000 in gross receipts or sales (including the receipts or sales of subsidiaries and other entities through which such entity operates), and (iii) has an operating presence at a physical office within the U.S.; or
– any business entity owned or controlled by a business entity that is itself exempt from the beneficial ownership disclosure, with some limited exceptions.
As a result of the large operating company exemption, many larger operating companies and their subsidiaries will be exempt from having to disclose beneficial ownership details. However, smaller operating companies and passive holding companies may need to submit disclosure reports if no relevant exemption applies.
The SBA recently released its Inspector General’s report estimating the amount of fraud in the agency’s pandemic assistance programs. The report’s conclusions are jaw-dropping. Check out this excerpt from the press release announcing the findings:
Over the course of the Coronavirus Disease 2019 (COVID-19) pandemic, SBA disbursed approximately $1.2 trillion of COVID-19 Economic Injury Disaster Loan (EIDL) and Paycheck Protection Program (PPP) funds.
In the rush to swiftly disburse COVID-19 EIDL and PPP funds, SBA calibrated its internal controls. The agency weakened or removed the controls necessary to prevent fraudsters from easily gaining access to these programs and provide assurance that only eligible entities received funds. However, the allure of “easy money” in this pay and chase environment attracted an overwhelming number of fraudsters to the programs.
We estimate that SBA disbursed over $200 billion in potentially fraudulent COVID-19 EIDLs, EIDL Targeted Advances, Supplemental Targeted Advances, and PPP loans. This means at least 17 percent of all COVID-19 EIDL and PPP funds were disbursed to potentially fraudulent actors.
The SBA issued a reply taking exception to the Inspector General’s report and portraying the SBA Staff & its IG as being joined at the hip in the pandemic response:
However, we are concerned that the white paper’s approach contains serious flaws that significantly overestimate fraud and unintentionally mislead the public to believe that the work we did together had no significant impact in protecting against fraud.
I love the reference to “the work we did together” – which the SBA’s response uses more than once, just in case anybody missed the point. In other words, “I don’t have a problem – but if I do, then we have a problem.” Besides, what’s $200 billion among friends?
Last year, a divided 5th Circuit panel ruled that the SEC’s administrative law judge system, as currently operated, was unconstitutional. That’s a big deal in and of itself, but as Liz blogged at the time, some suggest that the decision could undermine not just the ALJ system, but a big chunk of the SEC’s rulemaking authority. In light of the stakes involved, it shouldn’t come as a big surprise that the SCOTUS granted the SEC’s petition for cert last week. This excerpt from SCOTUSBlog’s post on the case sets forth the issues to be addressed by the Court:
(1) Whether statutory provisions that empower the Securities and Exchange Commission to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment; (2) whether statutory provisions that authorize the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine; and (3) whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.
The SEC has not fared well in the SCOTUS when it comes to challenges to its ALJ system – and unlike a lot of other issues, the Court’s skepticism toward the the agency’s use of ALJs has been bipartisan. In 2018, for example, Justice Kagan wrote the majority opinion in SEC v. Lucia, in which the Court by a 7-2 vote invalidated the SEC’s process for appointing ALJs. Earlier this year, she authored the Court’s unanimous opinion in SEC v. Cochran, which permitted defendants in ALJ proceedings to raise certain structural challenges to those proceedings in federal court, without having to first complete the administrative proceedings.
Stay tuned. Depending on how the SCOTUS rules on this case, there could be some pretty fundamental changes to how the SEC does business when it comes to enforcement – and perhaps rulemaking as well.
Earlier this week, a federal district court judge issued an unpublished opinion in a long-running clawbacks case. Even though the case doesn’t create formal precedent, it may affect decision-making as we all look to finalize Dodd-Frank clawback policies by December 1st of this year. Specifically, it emphasizes that it’s important to follow state law contract principles when you put a policy in place, if you want to be able to enforce the company’s rights under that policy down the road. Enforceability matters because under the new listing standards and SEC rule, companies aren’t required to merely adopt a clawback policy, they are also required to comply with the policy by recovering erroneously paid incentive compensation reasonably promptly – with delisting at stake.
In Monday’s case, the judge granted summary judgment in favor of Hertz’s former CEO, shutting down the company’s 2019 claim that he had breached the company’s clawback policy – as well as representations in his separation agreement – by creating a “tone at the top” that may have led to inappropriate accounting decisions. Although the former CEO settled with the SEC in 2020, he continued to fight reimbursing the company. Mike Melbinger blogged about this case at the “motion to dismiss” stage in 2021.
Hertz alleged that this was a case of misconduct that caused a restatement. It sought to claw back incentive-based compensation that was paid in prior years based on achievement of later-restated revenue, by way of the company clawback policy. It also sought to rescind golden parachute payments that it made to the former CEO under his separation agreement. Both the clawback policy and the separation agreement required a finding of gross negligence, fraud or willful misconduct.
The holding underscores that adopting a clawback policy is only one step in the process of recovering compensation – a point that Ron Mueller reiterated in yesterday’s webcast and has been preaching at our “Executive Compensation Conference” for many years. If there were doubts about whether to have executives agree in writing to be bound by company policies, this decision supports the notion that you do need a contractual basis for enforcement. And according to this opinion, simply incorporating a general policy into other agreements doesn’t work. Here’s an excerpt (citations omitted):
Hertz argues that the Clawback Policies were incorporated into “various other agreements” with Frissora and as such, are enforceable through this incorporation (“Incorporation Argument”). Specifically, Hertz argues that the following documents incorporate one or both Clawback Policies: (1) Frissora’s Employment Agreement, which Hertz argues incorporates both Clawback Policies because it states that the violation of a “material company policy” constitutes a defined cause to terminate Frissora’s employment; (2) the Separation Agreement, which Hertz argues incorporates the 2014 Clawback Policy by reference; and (3) Hertz’s “bylaws,” which Hertz argues incorporate both Clawback Policies because they “impose on [Frissora] and other senior executives the solemn duty of abiding by and enforcing company policies.” …
The Court agrees with Frissora that Hertz can only argue that the Clawback Policies are stand-alone contracts. Accordingly, if the Court finds that they are not enforceable contracts, then Hertz’s breach of contract claims under Counts I and II will fail.
The court went on to explain that the company’s clawback policies – which were set forth in board resolutions, incorporated into the company’s standards of business conduct, and described in public filings – were simply mechanisms by which Hertz would enter future contracts, and were not themselves enforceable contracts. The court also determined that the company’s general standards of business conduct weren’t enforceable contracts because (according to the court) they:
– Contained “only vague and aspirational language,”
– Had no yardstick by which to measure compliance with the standards,
– Stated that they were a “guide” not a “contract,” and
– Did not expressly have employees indicate that they would agree to be legally bound by the document.
There were some procedural & litigation strategy issues at play throughout all these findings, which also affected the court’s decision to reject the company’s attempt to rescind the payments under the separation agreement. And it’s possible Hertz will appeal. Nevertheless, this case shows that you need to keep basic contract principles in mind for company policies if you want to be able to enforce them. Also see question #1467 in our “Q&A Forum” on CompensationStandards.com, which discusses contractual interpretations of bylaws vs. policies.
We’ll be posting memos about this case in our “Clawbacks” Practice Area on CompensationStandards.com – and rest assured we’ll also be discussing the implications at our “20th Annual Executive Compensation Conference,” which is coming up virtually on September 22nd and, as always, follows our “Proxy Disclosure Conference” on September 20-21. Here are the agendas for that pair of conferences. If you haven’t already signed up, now is the time! You can register online (via the “virtual conferences” drop-down), call 800.737.1271, or email sales@ccrcorp.com.
It can be hard to keep track of what data in SEC filings needs to be tagged using inline XBRL. Fortunately, Vanderbilt Prof. Josh White recently flagged an Appendix to the SEC’s 2023 Semi-Annual Report to Congress on Machine Readable Data for Corporate Disclosures that provides an itemized list by filing type of which data must be tagged using inline XBRL. You may want to hang onto this one for your next form check.
In May, my wife and I traveled to Germany and Austria. It was our first trip abroad since the pandemic. The places and people were wonderful, and I really have to hand it to the Germans when it comes to a couple of things. First, they’re a lot better about confronting the dark parts of their history than we are, and second – on a much lighter note – if I ever became president, my first act would be to introduce legislation mandating Biergartens in every city.
Like I said, it was a great trip, but we were gone nearly three full weeks, so I eventually got very homesick. This Chuck Berry tune popped into my head as soon as we touched down on US soil and it captured how I felt at that moment better than anything I could say here.
We’ve been going through some challenging times as a nation, and it seems like we’re not real comfortable in our own skin just now. But a little time abroad does wonders for your perspective. My trip helped to remind me that, despite all our troubles, there’s a lot about this country that remains worth celebrating. Don’t take my word for it – just ask the Germans. So, let’s crank up our own volume & have a Glorious 4th! Our blogs will be back on Wednesday.
Earlier this week, Vanguard published a statement on its approach to board responsiveness to shareholders & other stakeholders. After a couple of pages devoted to the usual platitudes about the importance of engagement and the general need for directors to be responsive to shareholder input, Vanguard lowered the boom by laying out its policy on board responses to majority supported shareholder proposals:
When a board fails to respond to a proposal supported by a majority of its voting shareholders and the Vanguard-advised funds supported the proposal, the funds will generally vote against relevant members of the board. For example, concerns with compensation matters would likely impact votes on members of the compensation committee, while governance concerns would generally impact votes on members of the nominating/governance committee. A pattern of unresponsiveness to shareholder feedback (e.g., a failure to act, or slow action, on shareholder votes) may be an indicator of poor governance practices and may result in increasing levels of opposition to board members’ election.
Not surprisingly, Vanguard doesn’t specify what an appropriate “response” would be to a majority-supported shareholder proposal, which is probably impossible to do in the abstract. Nevertheless, companies need to know that their responsiveness to these proposals will be graded at the ballot box by one of their largest shareholders.
Vanguard’s policy may not have a significant impact on most companies, at least for now. That’s because, as SEC Commissioner Mark Uyeda pointed out in his speech at the Society for Corporate Governance’s conference earlier this week, the percentage of shareholder proposals receiving majority support has fallen precipitously in recent years. Only 5% of proposals received majority support this proxy season, compared to 19% just two years ago.
The May-June issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– Anatomy of a CVR: A Primer on the Key Components and Trends of CVRs in Life Sciences Public M&A Deals
– Chancery Ruling Highlights Important Role of Special Litigation Committees in Maintaining Board Control Over Derivative Litigation
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
Liz and Broc met up at the Society Conference in Salt Lake City this week and I just couldn’t resist sharing this picture of two of TheCorporateCounsel.net’s all-time greats with our readers. It feels like a Beatles reunion – minus Ringo, of course, but nobody misses him anyway!
