In a recent Soundboard Governance blog, Doug Chia notes the top investor complaint with VSMs is the possibility that companies may be gaming the Q&A session by “cherry picking” the questions they answer in order to avoid the hard ones. The blog compares the different ways that two companies – “Hatfleld” and “McCoy” – handled their virtual annual meetings, and says that Hatfield did a pretty good job when it came to the transparency of its Q&A session:
It’s essential for companies to show its investors during the VSM Q&A session that they are trying to be as transparent as possible. One way Hatfield did this was by having all questions come in live by phone and letting each caller speak once their line was opened by the operator, like they do on talk radio. Based on the questions I heard, it didn’t seem like the company was screening the calls. (One caller opined that the entire accounting profession is a fraud!)
The members of management answered the questions on the spot in a way that didn’t sound scripted. Some of those answers were less than satisfying, but that’s going to happen whether the meeting is in-person or virtual-only. Another way Hatfield tried to convey transparency was by stating in its proxy statement that they would post answers to any pertinent questions not addressed during the Q&A session on their website sometime after the meeting.
The blog acknowledges that the limitations of the VSM format make it difficult to fully address investor concerns about the Q&A session’s transparency, but says that Hatfield handled investor Q&A much better than “McCoy” – which dealt with two questions that Doug submitted so poorly that he no longer feels skeptical about investor concerns that some companies are gaming the Q&A session at VSMs.
Doug’s blog is worth reading by anyone involved in planning a VSM, but I do have one minor quibble that may reflect the fact that Doug’s a bit younger than I am. He chose to use Hatfield & McCoy as pseudonyms for the two companies that served as his examples of good and bad VSM practices – but I think any of my fellow boomers would’ve seen Goofus & Gallant as the more obvious choice!
On Friday, the SEC announced that Mellissa Campbell Duru had been named Deputy Director for Legal and Regulatory Policy in the Division of Corporation Finance. Mellissa is an SEC veteran, but most recently served as a senior counsel for Covington & Burling. This excerpt from the SEC’s press release provides more information on her background:
At Covington & Burling, Ms. Duru worked in the Securities & Capital Markets practice, advising clients on securities regulation, capital markets transactions, and strategic corporate governance planning. She also served as a Vice Chair of the firm’s Environmental, Social, and Governance practice. Ms. Duru served at the SEC from 2004 to 2021, including as a Counsel to then-Commissioner Kara Stein, Special Counsel in the Division of Corporation Finance’s Office of Mergers and Acquisitions, and Cybersecurity Legal and Policy Advisor in the Division of Examinations. During her tenure, she also served as an SEC Brookings Institute Legislative Congressional Fellow in the Office of U.S. Senator Jack Reed. She began her SEC career in the Division of Corporation Finance’s Disclosure Review Program.
Mellissa fills the position previously held by Erik Gerding prior to his appointment as Director of Corp Fin earlier this year.
A recent SEC Institute blog points out that there are three changes from the SEC’s 2020 overhaul of the MD&A disclosure requirements that have become frequent topics for Staff comments:
– Critical accounting estimate disclosures
– Quantitative and qualitative disclosures about material changes
– Meaningfully addressing liquidity and capital resources
The blog suggests that one reason for this may be simple fact that a lot of companies simply aren’t updating their disclosures to comply with the new requirements, noting that “old and obsolete beliefs that disclosure changes will attract negative attention from the SEC create resistance that is difficult to overcome,” even when it comes to complying with new disclosure requirements. The blog also offers up some links to its prior commentary on these topics to help companies understand what the Staff is looking for when it comes to MD&A disclosures.
The Delaware Chancery Court’s recent decision in Hyde Park Venture Partners Fund III, L.P. v. FairXchange, LLC, (Del. Ch.; 3/23), serves as a reminder that a corporation’s ability to assert the attorney-client privilege as the basis for withholding information sought by a former director is very limited.
The Hyde Park case involved a discovery dispute in an appraisal proceeding following a sale of the company that had been approved by the board in the face of opposition from an investor-designated director. To give you an idea of how contentious things were, the director was excluded by the board from participating in discussions about the surprise offer that the company received from the buyer after he called for a market check to be conducted and was removed from the board one day after making a books & records demand.
The company asserted the attorney-client privilege against the investor as to information generated during the designated director’s tenure. The Chancery Court disagreed, and this excerpt from a Troutman Pepper memo on the case explains Vice Chancellor Laster’s reasoning:
Delaware law treats the corporation and the members of its board of directors as joint clients for purposes of privileged material created during a director’s tenure. Joint clients have no expectation of confidentiality as to each other, and one joint client cannot assert privilege against another for purposes of communications made during the period of joint representation. In addition, a Delaware corporation cannot invoke privilege against the director to withhold information generated during the director’s tenure. Delaware law has also recognized that when a director represents an investor, there is an implicit expectation that the director can share information with the investor.
In this case, the board designee and other board members were joint clients, and therefore, inside the circle of confidentiality during the designee’s tenure as a director. During the board designee’s tenure as a director, he received numerous communications from the company and its counsel. The company, therefore, had no expectation of confidentiality from the board designee and cannot assert privilege against him or his affiliates.
The company also failed to implement any of the three exceptions to asserting privilege against directors. First, there was no contract governing confidentiality of discussions between the company, its counsel, and the board. Second, the board did not form a transaction committee. Third, the board designee did not become adverse to the company until after he sent his books-and-records request at which point the company was able to exclude the director and the investor that appointed the director from the privileged materials.
The memo says that the key takeaway from the decision is that companies seeking to assert the privilege against a former director (or the investor who designated that director) must be prepared to establish the three exceptions identified in Vice Chancellor Laster’s opinion.
Goodwin recently published an updated version of their Form 10-Q Checklist for the 2nd Quarter of 2023. The first several pages address the new 10b5-1 plan-related disclosure mandates and some other potential disclosures that you should consider as you prepare your 2nd quarter 10-Q. This excerpt discusses the disclosure implications of the disruptions in the banking sector:
Review MD&A (Part 1, Item 2) and Risk Factors (Part 2, Item 1A) for financial and business-related disclosure about direct or indirect effects of actual events or reasonably foreseeable future events related to disruptions in the banking industry or financial services sector such as events involving limited liquidity, defaults, non-performance or other adverse events or developments. These could include not only impacts on the company but also impacts on banks and other financial sector companies with which the company has direct or indirect relationships, the company’s customers, suppliers and other counterparties, or the financial services industry generally.
Examples of potential disclosure topics cited by the checklist include, among others delayed or lost access to amounts available under credit facilities, limitations on access to deposits and other cash management vehicles, potential covenant breaches and cross-defaults, and expenses associated in obtaining replacement LOCs and other credit support arrangements.
Yesterday on PracticalESG.com, Lawrence blogged about COSO’s recently issued framework for internal control over sustainability reporting. Here’s the intro:
Anyone who has kept up with our blogs here knows that I am huge proponent of establishing a system of internal controls for ESG data/disclosure similar to those for financial reporting. Internal controls help to ensure the validity, accuracy and – ultimately – the credibility of ESG information reported by companies. This is critical not only for the company but also for the entire “ecosystem” that has developed around ESG disclosures including investors, rating organizations and the media.
Last month COSO – the Committee of Sponsoring Organizations – published its framework for internal controls over sustainability reporting (ICSR). COSO dates back to the 1980s and created a framework for internal controls for financial reporting (ICFR) known as Internal Control – Integrated Framework (ICIF) that became popular when the Sarbanes-Oxley Act went into effect in 2002. That framework was revised in 2013 which formed the basis of the new ICSR.
In addition to Lawrence’s blog, members of PracticalESG.com have access to a bunch of resources on disclosing ESG performance in its “Disclosing ESG Performance” subject area. ESG-related disclosures are just one of many ESG issues that are on the front burner and aren’t like to go away anytime soon. In today’s environment, you need the kind of practical guidance and in-depth ESG-related resources that PracticalESG.com provides. If you don’t already subscribe, there’s no time like the present to fix that! Subscribe today online or by contacting sales@ccrcorp.com.
Be sure to check out PracticalESG.com’s new showcase page on LinkedIn!
I’m not a big fan of Taylor Swift’s music, but I’m a huge fan of her judgment. In contrast to all the celebs who were highly compensated shills for FTX & have ended up on the receiving end of lawsuits from investors stung by the company’s collapse, The Daily Beastreports that Swift had the brains to ask a few questions before accepting a staggering $100 million offer from FTC to do the same:
Swift was reportedly in talks for a contract worth more than $100 million for Sam Bankman-Fried’s business in the months leading up to FTX’s monumental collapse in November, but the partnership never came to fruition—unlike deals the exchange signed with the likes of Tom Brady, Shaquille O’Neal, Larry David, and others. Attorney Adam Moskowitz, who is now handling a class action lawsuit against FTX’s celebrity promoters, claimed the defendants failed to actually look into the legality of what the company was doing before signing up to big money partnerships. “The one person I found that did that was Taylor Swift,” Moskowitz said on The Scoop podcast. “In our discovery, Taylor Swift actually asked them, ‘Can you tell me that these are not unregistered securities?’”
Ultimately, Swift’s due diligence paid off, because she turned down the offer & isn’t on the receiving end of a class action lawsuit. So now, her brand’s intact, and she can look all the Swifties out there in the eye & say that she turned down a fortune from FTX because “I knew you were trouble.”
This has nothing to do with the securities laws, but since I’m blogging about Taylor Swift I thought I’d point you in the direction of this brand new Duke Law Journal article provocatively titled “Murder and Money: The Dark Side of Taylor Swift.” If that’s not clickbait, I don’t know what is.
In a recent blog, Cooley’s Cydney Posner discussed the implications for audit committees of the SEC’s latest enforcement proceeding involving non-GAAP financial measures. This excerpt addresses some of the challenges confronting audit committees in providing oversight to their company’s non-GAAP disclosures:
Just what is the role of the audit committee when it comes to non-GAAP financial measures? The CAQ has characterized the audit committee’s oversight role as an important one that positions the committee to “act as a bridge between management and investors,” assessing whether “the measures present a fair and balanced view of the company’s performance.” But non-GAAP financial measures present challenges for audit committees: why is management using this measure? Is it consistent with the measures used by the company’s peers? Is the disclosure adequate? In addition, to the extent that non-GAAP measures may be used in determining incentive compensation, audit committee oversight becomes even more critical.
Cydney pointed to a PwC memo as a source of guidance to boards on these and other issues implicated in providing appropriate oversight to non-GAAP disclosures.
Special litigation committees can play a helpful role in addressing derivative claims in situations where a plaintiff has established demand futility. That committee has to be comprised solely of independent and disinterested directors, but there doesn’t have to be a room full of them in order for a company to reap the benefits of such a committee.
That point was reinforced by the Delaware Chancery Court’s recent decision in In re Baker Hughes, a GE Company, Derivative Litigation, (Del. Ch. 4/23), where Vice Chancellor Will granted a motion to terminate a derivative action based on the recommendation of a one-person special litigation committee, even in a situation where that committee’s process wasn’t pristine:
To be sure, the committee was imperfect. Having a single member is not ideal. Nor is the fact that the member exchanged a handful of messages with an investigation subject. The committee’s report also omits any discussion of the potential transaction advisor conflicts it investigated. But despite these flaws, the committee’s independence, the thoroughness of its investigation, and the reasonableness of its conclusions are not in doubt.
SEC Chair Gary Gensler testified before the House Financial Services Committee yesterday (here is his prepared testimony). This was the first time he’s testified in front of a GOP controlled committee and, according to this article in The Hill, things went about as well as you might expect given the current political environment. In addition to hammering the SEC chair on everything from cypto enforcement to climate disclosure, they also called him out for an alleged lack of transparency. Here’s an excerpt from The Hill’s article:
Throughout the tense hearing, Republicans expressed frustration that Gensler wouldn’t give them straight answers. They added that Gensler has failed to adhere to congressional inquiries. Rep. Bill Huizenga (R-Mich.) said that when he asked for documents relating to the SEC’s rule to mandate disclosure of climate-related risks, the agency provided only publicly available information, including a letter from Huizenga and McHenry congratulating Gensler on his confirmation. “I have that one in my file already,” Huizenga told Gensler. “Frankly, it’s insufficient and unacceptable what has been going on.”
Huizenga and McHenry also sent a recent letter to Gensler requesting more information about the SEC’s charges against Bankman-Fried. Republicans have accused him of failing to prevent FTX’s collapse. Gensler said Tuesday that he is obliged to keep investigative matters confidential.
Unfortunately, while committee members also took him to task for the SEC’s aggressive regulatory agenda, Chair Gensler doesn’t seem to have tipped his hand in his testimony concerning when the SEC will act on any of the major rulemaking proposals that were targeted for final approval by the end of this month.
While some of the Democrats on the FSC tried to run some interference for him, all in all it doesn’t appear that the committee should expect a five-star Yelp review from the SEC chair any time soon. In fact, the closest thing to good news that Gary Gensler received on Capitol Hill yesterday was the news that Rep. Warren Davidson (R-OH) still hasn’t introduced his “Fire Gary Gensler Act of 2023.”
