With many companies filing their second quarter 10-Qs in the upcoming weeks, this Goodwin memo on updating risk factors in a 10-Q is particularly timely. The memo refers to what it characterizes as “better practices” when it comes to updating. This excerpt addresses whether companies that repeat their entire “Risk Factors” section should highlight changes to a particular risk factor:
If a company chooses to update its risk factor disclosure by restating the entire risk factor section from its Form 10-K report or a subsequent Form 10-Q report, we recommend that the company consider whether it would be better to highlight the changes in some manner that makes it more likely that the changes will come to the attention of readers. We believe that this is particularly relevant where the risk factor disclosure extends to several pages or more, which could have the unintended effect of making it difficult for readers to find and absorb the new disclosure about material changes.
Changes could be identified in various ways, such as in an introductory paragraph that refers readers to specific updated paragraphs, by use of footnotes, by use of bold text, or by use of symbols such as an asterisk at the beginning and end of each paragraph that contains changed or new text (which was the way the SEC’s EDGAR system marked changed text in the past).
Other topics addressed include whether to comply with Item 105 of S-K’s requirements (including a risk factors summary for Risk Factors sections exceeding 15 pages) in a 10-Q and issues associated with hypothetical risk factors. The memo also provides a bullet-point list of recent developments that might prompt companies to update risk factors disclosure in their upcoming 10-Q filings.
Cooley’s Cydney Posner recently blogged about on whether companies are making progress in efforts to improve the racial and ethnic diversity of their boards. She cites ISS data indicating that while progress has been made, companies still have a long way to go. Here’s an excerpt from Cydney’s blog on where things stand with the S&P 500:
ISS reports that, in 2022, all boards of companies in the S&P 500 had at least one director that identified as racially or ethnically diverse; in comparison, in 2020, 11% of boards in the S&P 500 had no racially or ethnically diverse directors. In addition, in 2022, 36% had three racially or ethnically diverse board members, compared to 22% in 2020. Similarly, in 2022, 31% had four racially or ethnically diverse board members, compared to only 7% in 2020—an increase of 24 percentage points. The percentage of board seats held by racially or ethnically diverse directors grew from 19% in 2020 to 23% in 2022.
There were, however, differences among different races and ethnicities. For example, persons identifying as Hispanic/Latin American constituted up 18.5% of the U.S. population (according to the April 1, 2020 census), but held only 4% of S&P 500 board seats in 2020 and only 5% in 2022. African-Americans held 9% in 2020 and 12% in 2022; Asians held 5% in 2020 and 6% in 2022.
Russell 3000 companies have also made some progress. The good news is that in 2020, 38% of Russell 3000 companies had no racial or ethnically diverse board members, but that only 10% lacked racial or ethnically diverse directors. The percentage of companies with two or more racially/ethnically diverse directors rose from 29% in 2020 to 55% in 2022 & the percentage of board seats held by racially or ethnically diverse directors grew from 11% in 2020 to 16% in 2022.
Despite this progress, ISS says that diversity efforts still have a long way to go if boards are to “reflect the diversity of their customer base or the demographics of the broader society in which they operate.” It also points out that the long-term trajectory of board diversity initiatives remains to be seen.
I’ve blogged several times about the Musk-Twitter goofiness over on DealLawyers.com. You folks have been spared so far – but your luck has just run out. That’s because the WSJ reported that a recently released comment letter indicates that the Staff questioned whether Musk’s post-signing tweet about his supposed concerns with the number of bot accounts that included the phrase ““[t]his deal cannot move forward” triggered a requirement to amend his 13D filing.
Personally, I think the headline – “SEC Broadens Inquiry Into Elon Musk’s Disclosures” is a little misleading. The Staff’s concerns here are pretty narrowly focused & I don’t think I’d say that the SEC is “broadening” its inquiry, but don’t take my word for it – here’s the response letter from Musk’s lawyers, so you can judge for yourself. In any event, this back & forth with the Staff is a reminder of the perils of negotiating on social media.
Last week, the SEC announced the filing of an insider trading enforcement proceeding with allegations that sounded very familiar:
The SEC’s complaint, filed in federal district court in the District of Columbia, alleges that in January 2020, NTRP invited Haywood to participate in a registered direct offering of shares. Before being told about the offering, Haywood expressly agreed not to trade on the material, nonpublic information he was about to receive. Notwithstanding this agreement, after receiving information about the offering, Haywood immediately sold more than 100,000 shares of NTRP stock. As alleged in the complaint, NTRP’s stock price dropped nearly 50 percent after the offering was announced. The complaint alleges that Haywood avoid losses of approximately $179,297.
Those allegations – trading after agreeing to keep information about a pending offering confidential – are exactly the same as those brought in the SEC’s complaint against Mark Cuban. That one didn’t go so well for the agency & it will be interesting to see if it fares better in this case.
Rule 14a-8(l) allows companies to decide whether or not to include information in its proxy statement about a proponent (name, address, and number of shares held), but should they? This Perkins Coie blog suggests a couple of reasons why companies should consider disclosing that information:
There is a growing trend of proposals that appear to try to drive votes through using buzzwords that are of interest to certain types of investors, such as greenwashing or diversity – but in fact may espouse views that are the opposite of what a casual reader might think the proposal says. Knowing the identity of the proponent may help investors to better understand the context of the proposal.
There can be other benefits to providing information about proponents as well. Investors might read a proposal from a proponent with 200 shares differently than one from a proponent with 20,000. They might also be interested to know when a proposal has been made by a representative that is in the business of submitting these proposals, and not by the shareholder themselves.
This Goodwin blog reminds everybody that it’s time to conduct the public float calculation that you’ll need to determine your filer status for next year:
For public companies with a calendar year-end, now is the time of year for a company to conduct its public float calculation that will determine its Exchange Act reporting status as an accelerated filer, large accelerated filer, non-accelerated filer, smaller reporting company (SRC), and/or emerging growth company (EGC). The following is a very brief summary of the complex rules that govern filer status and qualification as an SRC or EGC.
For calendar year-end companies, a company’s filing status for Exchange Act reporting purposes is determined based in part on the company’s public float as of the end of the second fiscal quarter. As such, public companies with a calendar-year end should perform their public float calculations as of June 30, 2022 to determine what their filing status will be as of December 31, 2022 so that they can plan their SEC filing calendar accordingly. The filing status will determine the due date for the Form 10-K for the fiscal year ended December 31, 2022, as well as the due dates for the three 10-Qs filed in 2023.
The blog also notes that while public float doesn’t affect eligibility for EGC status, it can indirectly affect termination of EGC status. That’s because if an EGC becomes a large accelerated filer, its EGC status will terminate as of the last day of the current fiscal year.
We wish everyone a safe and happy holiday weekend. We’re off on July 4th & our blogs will be back on Tuesday.
“Most of the big shore places were closed now and there were hardly any lights except the shadowy, moving glow of a ferryboat across the Sound. And as the moon rose higher the inessential houses began to melt away until gradually I became aware of the old island here that flowered once for Dutch sailors’ eyes—a fresh, green breast of the new world. Its vanished trees, the trees that had made way for Gatsby’s house, had once pandered in whispers to the last and greatest of all human dreams; for a transitory enchanted moment man must have held his breath in the presence of this continent, compelled into an aesthetic contemplation he neither understood nor desired, face to face for the last time in history with something commensurate to his capacity for wonder.
And as I sat there brooding on the old, unknown world, I thought of Gatsby’s wonder when he first picked out the green light at the end of Daisy’s dock. He had come a long way to this blue lawn, and his dream must have seemed so close that he could hardly fail to grasp it. He did not know that it was already behind him, somewhere back in that vast obscurity beyond the city, where the dark fields of the republic rolled on under the night.
Gatsby believed in the green light, the orgastic future that year by year recedes before us. It eluded us then, but that’s no matter—tomorrow we will run faster, stretch out our arms further… And one fine morning—
So we beat on, boats against the current, borne back ceaselessly into the past.” – F. Scott Fitzgerald, The Great Gatsby
The comment period for the SEC’s climate disclosure proposals expired on June 17th. Not surprisingly, the agency was the recipient of an avalanche of last-minute comments. I waded through a bunch of these late arrivals and grabbed a handful that I thought were particularly interesting or significant. These include:
– A 94-page letter from the Society for Corporate Governance offering a critique of most of the specific rule proposals and calling into question the SEC’s authority to adopt the rules. Of particular note are appendices criticizing the Public Citizen survey data on retail investors’ desire for climate change disclosure cited by the SEC in the adopting release & providing data on Society members’ estimates of compliance costs.
– A 35-page letter from the ABA’s Federal Regulation of Securities Committee addressing specific issues relating to proposed S-K line-item disclosures and calling into question the workability of the SEC’s proposed financial statement disclosure requirements.
– A 6-page letter opposing the proposed rules submitted by a group of former SEC Chairs & Commissioners led by Richard Breeden and Harvey Pitt. Liz previously blogged about another group of former SEC bigshots who wrote in support of the SEC’s authority to adopt the proposal. These worthies disagree, characterizing the proposed rules as “an unprecedented and unjustified effort beyond financial materiality” that exceed the SEC’s statutory authority.
– A 21-page letter arguing that the proposed rules don’t violate the First Amendment from a group of 6 law professors led by Harvard Law School’s Rebecca Tushnet.
– A 30-page letter arguing that the SEC lacks the statutory authority to adopt the proposed rules submitted by Bernard Sharfman & James Copland. This letter responds to those commenters who argue that the SEC has almost limitless statutory authority to issue disclosure rules “in the public interest.” The authors argue that the SEC’s authority is somewhat more limited and contends that courts have construed this “in the public interest” language more narrowly & by reference to the objective of protecting investors.
In addition to this list, I’d like to highlight this 51-page letter submitted by a group of six commenters including former Corp Fin Director Alan Beller and former Delaware Chief Justice Leo Strine. This letter is probably the most constructive critique of the proposal that I’ve seen. Among other things, that letter recommends that the SEC make Scope 3 disclosure voluntary, delay implementation of the attestation requirement and consolidate proposed Items 1501-1503 of Reg S-K into one more concise MD&A-like item that is less prescriptive, less redundant and more focused on materiality. They even attach their proposed rewrite of those line items.
The Staff will wade through all of the submitted comments as part of finalizing the climate disclosure rule and crafting an adopting release for the Commissioners to approve. SEC Chair Gary Gensler wants to take action before year-end. If you expect to be involved in drafting your company’s climate disclosure – or will be helping gather and prepare emissions data for it – join PracticalESG.com on July 13th for a “Climate Disclosure Event” that will provide practical steps that you need to take now to be ready, and “lessons learned” from drafting our model disclosures.
Register today for this FREE event, and please share it with anyone on your team or in your network who may be interested. That includes ESG, Sustainability & Impact Officers, Environmental Health & Safety Officers, Investor Relations & Public Relations professionals, in-house and outside counsel who are advising boards or preparing disclosures, and anyone involved with ESG strategies and disclosures.
Yesterday, the WSJ released an investigative report reviewing insider transactions under Rule 10b5-1 plans. This excerpt says that one the Journal’s findings was that those insiders who trade shortly after adopting a plan do much better than those who wait:
A Wall Street Journal analysis of 75,000 prearranged stock sales by corporate insiders, using a comprehensive compilation of the data, shows that about a fifth of them occurred within 60 trading days of a plan’s adoption. The timing in aggregate made the trades more profitable: On average, those trades preceded a downturn in share price more often than when insiders waited longer to trade, the analysis found.
Collectively, insiders who sold within 60 days reaped $500 million more in profits than they would have if they sold three months later, according to the analysis, which examined trades from 2016 through 2021 and adjusted returns to remove the effect of sector-wide moves in the market.
What’s more interesting to me are that some of the report’s findings suggest that many companies are straying pretty far from best practices when it comes to allowing insiders to adopt & begin trading under Rule 10b5-1 plans. For example, the WSJ says that it found “scores of examples” where company insiders adopted a 10b5-1 plan near the end of a quarter and sold stock under the plan before results were announced.
Many companies impose a 30-day cooling off period for new plans, so it didn’t surprise me to learn that the WSJ found a “huge spike” in trades 30 days after adoption. However, the Journal report says that roughly 5% of the total trades it reviewed took place less than 30 days from plan adoption. Just under 2% of those trades took place less than 14 days after the plan was adopted, and some insiders traded the same day they adopted a plan. Yikes!
Adopting a plan near the end of the quarter & trading before that quarter’s earnings are released is asking for trouble, and while cooling off periods aren’t currently mandatory (although that will likely change soon), sales shortly after adopting a plan are a very bad look – as a bunch of executives and companies named in the WSJ report just discovered.
This Wilson Sonsini memo provides a reminder that Nasdaq-listed companies that haven’t included a board diversity matrix in their proxy statement filed with the SEC prior to August 8, 2022, will need to include a board diversity matrix on their company’s website no later than that date and inform Nasdaq that they have done so. Here’s an excerpt with some of the specifics:
If a company decides to make the disclosure on its website, Nasdaq provides a fillable PDF for U.S. companies and a fillable PDF for foreign issuers that companies may (but are not required) to use. A company must clearly label the disclosure on its website as the Board Diversity Matrix. Although Nasdaq does not mandate a particular place on the website, it recommends putting it on the company’s investor relations webpage or other webpage where governance documents are stored.
Following the initial 2022 compliance date, the company will be required to publish the matrix on its website concurrently with the filing of its proxy or information statement (or Form 10-K or 20-F, where applicable) and submit a URL link through the Nasdaq Listing Center within one business day after posting by completing Section 10 (Board Diversity Disclosure) of the Company Event Form. Nasdaq also offers Website Disclosure of Board Diversity Matrix: What Companies Need to Know, which provides further information.
For more analysis and instruction on the “comply or disclose” rule, visit our “Nasdaq” Practice Area.
