Author Archives: John Jenkins

Liz posted this blog on CompensationStandards.com on Monday. I was supposed to post it here yesterday, but I forgot because I’m bad at my job. Fortunately, she reminded me, so here it is – although I changed the title because Liz’s had an exclamation point in it & it’s hard to expect you to be excited when the news is nearly a week old:

On Friday – after much anticipation & nail-biting – Corp Fin issued 15 “Regulation S-K” CDIs to address common questions under new Item 402(v), which is the “pay versus performance” disclosure rule that was adopted in late August and for which disclosure will be required in proxy statements filed this spring. Dave Lynn is going to be covering these interpretations in-depth in the next issue of The Corporate Executive – if you aren’t already subscribed to that essential newsletter, email sales@ccrcorp.com and arm yourself with expert analysis to tackle these disclosures.

To help you see which CDIs are relevant to you, I’ve paraphrased each of them below – and thanks to the direct links that Corp Fin provided, you can also use this list to easily read your favorites in full:

1. Question 128D.01 – Item 402(v) information is not required in Form 10-K, and will not be deemed incorporated by reference, except to the extent that the registrant specifically does so.

2. Question 128D.02 – When calculating Compensation Actually Paid, companies need to include the change in value of a first-time NEO’s awards during the executive’s tenure as a NEO – even if the NEO received those awards as an employee, before being an NEO.

3. Question 128D.03 – Footnote disclosure of each of the amounts deducted and added pursuant to Item 402(v)(2)(iii) – for years other than the most recent fiscal year included in the Pay Versus Performance table – would be required only if it is material to an investor’s understanding of the information reported in the Pay Versus Performance table for the most recent fiscal year, or of the relationship disclosure provided under Item 402(v)(5). However, in the registrant’s first Pay Versus Performance table under the new rules, the registrant should provide footnote disclosure for each of the periods presented in the table.

4. Question 128D.04 – Aggregation of pension value adjustments and equity award adjustments isn’t permitted in the required footnotes.

5. Question 128D.05 – For purposes of pay versus performance disclosure, companies can use a “peer group” disclosed in CD&A, even if it is not used for “benchmarking” in the CD&A.

6. Question 128D.06 – If the class of securities was registered under Section 12 of the Exchange Act during the earliest year included in the “Pay Versus Performance” table, the “measurement point” for purposes of calculating TSR and peer group TSR should begin on such registration date.

7. Question 128D.07 – Companies need to present the peer group total shareholder return for each year in the table using the peer group disclosed in the CD&A for such year, including if the CD&A peer group changed from 2021 to 2022.

8. Question 128D.08 – GAAP “net income” is required in the Item 402(v) table.

9. Question 128D.09 – The Company-Selected Measure can be any financial performance measure that differs from the financial performance measures otherwise required to be disclosed in the Item 402(v) table, including a measure that is derived from, a component of, or similar to those required measures.

10. Question 128D.10 – It’s appropriate to use stock price as Company-Selected Measure only if it directly links compensation actually paid to company performance – e.g., as a market condition applicable to an incentive plan award – not if it just has a significant impact through affecting the fair value of a time-based share award.

11. Question 128D.11 – The Company-Selected Measure cannot be a multi-year measure – it must relate to the most recently completed fiscal year.

12. Question 128D.12 – In a “bonus pool” where payouts depend on achievement of a financial performance measure along with discretion, companies must identify that financial measure in the Tabular List and provide the required disclosure about the Company-Selected Measure and the related relationship disclosure.

13. Question 128D.13 – Companies can aggregate the compensation of multiple PEOs for purposes of the narrative, graphical or combined comparison between CAP & TSR, net income, and the Company-Selected Measure – to the extent the presentation will not be misleading to investors. Remember that separate columns for each PEO are required in the table.

14. Question 228D.01 – If a company changes its fiscal year during the time period covered by the Item 402(v) Pay Versus Performance table, provide the disclosure required by Item 402(v) for the “stub period,” and do not annualize or restate compensation.

15. Question 228D.02 – For purposes of the requirement in Item 402(v)(2)(iv), a company that has emerged from bankruptcy and issued a new class of stock under the bankruptcy plan may provide its cumulative total shareholder return and peer group cumulative total shareholder return using a measurement period that begins when the post-bankruptcy class of stock began trading.

– John Jenkins

Check out the inaugural edition of our “Timely Takes” Podcast featuring my interview with Covington’s Matthew Franker on the Non-GAAP CDIs that the Staff issued last December. These podcasts are intended to provide a forum through which experts can share their views on recent developments or emerging trends that we think our members would be interested in learning more about. In this 7-minute podcast, Matt addressed the following topics:

– What issues did the SEC address in its most recent round of Non-GAAP CDIs?
– Do the CDIs add new guidance or reinforce what the Staff of Corp Fin has been saying in the comment letter process?
– Should we expect a renewed enforcement focus on Non-GAAP compliance issues following the CDIs?
– What are the key takeaways for public companies from this latest round of CDIs and the Staff’s overall approach to Reg G compliance?

If you have insights on a securities law, capital markets or corporate governance trend or development that you’d like to share, I’m all ears – just shoot me an email at john@thecorporatecounsel.net.

– John Jenkins

Since we’re in the midst of earnings season, I thought Woodruff Sawyer’s recent two-part series on earnings management issues on its “D&O Notebook” blog was worth highlighting. The first installment reviews what “earnings management” means from the SEC’s perspective, and highlights some of the agency’s more high-profile earnings management enforcement proceedings, including its 2021 action against Under Armour. The second installment highlights several red flags for potential earnings management that boards and management should be on the lookout for, including the following:

Discussions regarding “meeting analysts’ expectations” and “making our numbers.” These are a hallmark of SEC cases related to earnings management and should be viewed as red flags since they can create an environment where improper earnings management practices can sprout—or at least give that impression when actions are reviewed after the fact by the SEC. For example, a CFO may emphasize to her direct reports that the company is feeling pressure to meet its numbers. Without intending it, that message may be misinterpreted by some direct reports to mean that they and their team need to find creative ways to help in the effort to meet the company’s numbers. The concern, of course, is that those efforts may cross the line into improper earnings management.

Consecutive periods of closely meeting or exceeding analysts’ expectations. This will undoubtedly garner congratulations during earnings call Q&As, as well as investor interest, but may also be a red flag in the eyes of the SEC. This is especially the case if these periods end with a sudden drop in earnings per share (EPS). I liken this to a track athlete who is breaking world records. As congratulations come in, so do questions as to whether that athlete is getting any extra help in the form of performance-enhancing drugs (PEDs). For companies that are meeting or exceeding analysts’ expectations, the analogous PEDs question is whether the company may be engaged in improper earnings management.

In addition to listing several other red flags, the blog offers some tips on how to avoid earnings management.  The blog highlights the need for a fulsome review of the MD&A section of the company’s SEC filings as part of this effort, and suggests that boards require “pre-read” materials highlighting accounting policy changes or new business strategies implemented during the period, as well as the MD&A disclosures about those matters.

– John Jenkins

We’ve blogged several times about potential risk factors in recent weeks – but hey, it’s that time of year, isn’t it?  So, as you continue to work on your Form 10-K and proxy filings, you may want to check out this recent Bryan Cave blog.  The blog covers some “old reliables” – like developments in China & the implications of a fight over the U.S. debt limit or a government shutdown – but here’s an excerpt that raises a couple of risks that might not have been on your radar screen:

Declaration of end of pandemic. With the Administration announcing the COVID public health emergency will expire on May 11, 2023, companies should evaluate whether any changes to existing pandemic-related risk factors are needed. While health care providers and patients may experience the most immediate effects, with the loss of free tests, treatments and vaccines, companies should consider whether any collateral consequences could materially affect them.

Possible future water allocation quotas in Western states. As a result of the inability of seven Western States to reach a negotiated resolution on allocation of sharply lower water flows from the Colorado River, companies and residents in those states may face harsh cuts forced to be made by the Interior Department. The timing and outcome of any future DOI actions remain uncertain, although administrative procedures and potential litigation may take some time. Unless drought conditions improve, companies may need to consider the impact of any quotas on their operations, suppliers, customers and other aspects of their businesses, and recognize that individual states may experience disparate water reductions.

– John Jenkins

We have posted the transcript for our recent webcast – “The SEC’s Rule 10b5-1 Amendments: What Issuers & Insiders Need to Know” – in which Brian Breheny of Skadden, Meredith Cross of WilmerHale, Ning Chiu of Davis Polk, Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster, and Ron Mueller of Gibson Dunn addressed the SEC’s recent amendments to Rule 10b5-1 and the related new disclosure requirements. One of the “sleeper issues” that our panelists identified is the whole way the SEC approaches the issue of insider gifts. Here’s an excerpt from Meredith Cross’s comments on this topic:

What the release does, it first it makes clear the Commission’s view that gifts as securities give rise to 10b-5 liability. They talk specifically about breaches of fiduciary duty and making gifts in breach of your duty of trust and confidence when you have MNPI. While many of us had previously advised that you don’t necessarily have to cover gifts in your insider trading policy because they’re not purchases and sales, they seem to say they’re the same as purchases and sales for purposes of 10b5-1.

The other thing that they do in the release, much to people’s disappointment, is they declined to treat gifts to unaffiliated charities differently. Some had hoped that would be the case. They also specifically declined in the release language to take on the view that as long as the donee was restricted in their resale until the MNPI had been released, that would be OK. They said no, that’s not their position because that would not give investors enough confidence and was inconsistent with how they were thinking about this.

The long and short of it is that if you are wanting to be consistent with the Commission’s guidance in this release in your advice to clients, the gifts should be treated the same as sales. There are no protections you can put in place in terms of how the gift is structured that will keep you out of harm’s way. They do say that you can use 10b5-1 for gifts, which is good, except that you can’t have overlapping plans. It’s unclear how you would have a 10b5-1 plan for gifts and not essentially make any other 10b5-1 plans. It’s not very workable.

– John Jenkins

This morning, it’s my pleasure to welcome Meredith Ervine as the newest member of our editorial team! Meredith has had a distinguished career in private practice, and her securities and corporate transactional expertise make her a great addition to our crew. She also has the kind of friendly and down-to-earth personality and sense of humor that makes it a cinch that you’re going to really enjoy getting to know her.

Meredith also brings an important intangible to the table. As she points out in the next blog, her presence also will help us diversify the mix of bad dad jokes & boomer pop culture references that have been the stock-in-trade of the more geriatric members of the editorial team (yeah Dave, I’m talking about you & me) by adding a more millennial twist. This will undoubtedly appeal to our younger readers and will also reduce the number of times that Liz rolls her eyes when reading our blogs.

If you’re a frequent visitor to our Q&A Forum, you may have already noticed that Meredith has hit the ground running. Meredith will be blogging later this week on the Proxy Season Blog, and you’ll also see her work on the DealLawyers.com Blog next week.  Once she settles in, you can look forward to seeing her as part of the blogging rotation here as well. To give you a taste of what you have to look forward too, I’m turning the next blog over to Meredith so that she can introduce herself to everyone.

– John Jenkins

We’ve posted the transcript for our recent webcast – “The Latest: Your Upcoming Proxy Disclosures” – in which Mark Borges of Compensia and CompensationStandards.com, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Morrison Foerster and TheCorporateCounsel.net, and Ron Mueller of Gibson Dunn covered the waterfront of issues to consider as you prepare your upcoming proxy disclosures – with lots of attention to pay vs. performance. Check out the transcript for info on:

1. Pay vs. Performance Disclosures

2. Meeting Format

3. Clawbacks

4. Say-on-Pay Trends

5. Showing “Responsiveness” to Low Say-on-Pay Votes

6. CD&A Updates

7. CEO Pay Ratio Considerations

8. Perquisites Disclosure

9. Shareholder Proposals

10. ESG Metrics & Disclosures

11. Proxy Advisor & Investor Policy Updates

12. Status of Other Pay-Related & Human Capital Management Rulemaking

Speaking of proxy disclosure, Corp Fin issued a boatload of Pay v. Performance CDIs on Friday.  Be sure to check out Liz’s blog on CompensationStandards.com for the details.

– John Jenkins

On Wednesday, the Delaware Chancery Court declined to dismiss fiduciary duty claims against a corporate officer arising out alleged oversight failures that allowed “a corporate culture to develop that condoned sexual harassment and misconduct.” The decision marks the first time that a Delaware Court has applied Caremark’s oversight duties to a corporate officer. This Debevoise memo summarizes the basis for the court’s decision:

In a January 25, 2023 decision (In Re McDonald’s Corp. S’Holder Litig., C.A. No. 2021- 0324-JTL (Del. Ch. Jan. 25, 2023)), the Delaware Court of Chancery declined to dismiss claims that a corporate officer, who led the company’s human resources function, breached his fiduciary duties by “allowing a corporate culture to develop that condoned sexual harassment and misconduct.” The plaintiffs claimed that the officer breached a “Caremark” duty by consciously ignoring “red flags” signaling misconduct. Despite the fact that no prior Delaware case had applied Caremark duties to an officer, the court declined to dismiss the claims, finding as a general matter that corporate officers owe a duty of oversight to an equal, if not greater, extent than corporate directors.

In this case, the court held that the bad faith necessary to support a Caremark claim was supported by particularized factual allegations that the officer had himself engaged in acts of sexual harassment, making it reasonable to infer, in the context of a corporate culture that allegedly condoned sexual harassment, that he consciously ignored red flags about similar behavior by others at the company. Moreover, the court declined to dismiss the claim that the officer’s misconduct itself constituted a breach of the duty of loyalty.

While Delaware recently amended the DGCL to permit corporations to ask stockholders to approve amendments to their charter documents eliminating in some cases officers’ liability in damages for breaches of the duty of care, because Caremark claims involve alleged breaches of the duty of loyalty, those charter amendments aren’t much use when it comes to them.

Kevin LaCroix posted a detailed analysis of this case on the D&O Diary this morning in which he raises some concerns about its potential implications:

My concern here is that in light of this decision, it may be easier for plaintiffs to sustain claims that both officers and directors have breached their duty of oversight. In that regard, I note that academic commentators had already raised the alarm that oversight duty breach claims are not in fact the most difficult kind of claim to sustain, and in fact they increasingly are being sustained with alarming frequency.

But that is not my biggest concern about Vice Chancellor Laster’s opinion. My biggest concern is his brief but nonetheless explosive conclusion that allegations of sexual harassment against a corporate officer can state a claim for breach of fiduciary duty. The possibilities for this conclusion to do mischief are incalculable – they raise the possibility that every sexual misconduct claim will become a Delaware Chancery Court D&O claim brought by shareholders in addition to an employment practices liability claim brought by the victim of the alleged misconduct.

– John Jenkins

NERA Economic Consulting recently released its annual report on securities class actions. Class action filings declined for the 4th consecutive year. Kevin LaCroix recently summarized the NERA report over on the D&O Diary, and here’s an excerpt:

According to the NERA report, there were 205 federal court securities class action lawsuit filed in 2022, down slightly from 210 federal court securities suits filed in 2021. (The NERA report counts multiple suits filed in different circuits against the same defendant as separate lawsuits, as a result of which the NERA count may differ from other published tallies. The NERA report also only counts federal court securities suits, it does not count state court securities filings.)

The recent decline in the number of lawsuit filings relative to the years 2017-2019, when there were annual filings of over 400 new lawsuits, is largely due to “lower levels of merger-objection cases and cases with Rule 10b-5 claims.” The decline in the number of federal court securities suit filings in 2022 represents the fourth consecutive year in the decline in the number of filings.

Lawsuits against companies in the Electronic Technology/Technology & Health Technology and Services sector accounted for 54% of last year’s filings.  More than 1/3rd (36%) of federal class action filings involved unregistered crypto offerings, SPACs or COVID-19-related claims.

It’s important to keep in mind that while merger objection lawsuits aren’t being filed as class actions, they aren’t going away.  This Bloomberg Law article notes that in recent years, plaintiffs have preferred filing these claims in state court, where they can often avoid judicial scrutiny of their settlements as well as the PSLRA’s limitations on the number of times a person can serve as lead plaintiff.

– John Jenkins

Earlier this month, I blogged about how we’re going to be changing the way we send out our email distributions of this blog and our other ones. I said we’d give you a heads up in advance of the changeover, and that’s what I’m doing this morning.  On February 1st, our daily blog email for TheCorporateCounsel.net will no longer come from Liz’s account. Instead, our blog email will come from Editorial@TheCorporateCounsel.net.

In order to ensure that you continue to receive our blogs without interruption, please follow these whitelisting instructions and share them with your IT folks.  Sorry for the inconvenience and thanks again for reading!

– John Jenkins