The May-June issue of “The Corporate Counsel” newsletter is in the mail (email sales@ccrcorp.com to subscribe to this essential resource). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. This issue includes the following articles:
– Considering the Disclosure Implications of the War in Ukraine
– The Trouble with Hyperlinks
– Mandatory Electronic Filing of Form 144 is Here
– EGC Status and Transitions: 10 Frequently Unanswered Questions
Dave & I also have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues. We’ll be posting one for this issue soon. Be sure to check it out on our “Podcasts” page!
The board composition report from Heidrick & Struggles that I blogged about yesterday noted that companies are looking to add directors whose backgrounds combine a mix of traditional expertise with other skills, such as sustainability or cybersecurity expertise. That need for new expertise may increase the opportunities for non-CEO executives to join the board of another company and may prompt some companies to rethink policies on outside board service to accommodate key executives’ desire to serve on a board.
This Perkins Coie blog provides some thoughts on outside board service by non-CEOs and offers recommendations on best practices in evaluating those opportunities and policing the issues that may arise. This excerpt addresses two significant issues – potential conflicts and time commitments:
– Conflicts & Related Party Transactions: Before anything else, ask – does the company making the invitation somehow raise the prospect of a risk of a conflict of interest – or even the appearance of one? Or might there be material related party transactions involved? This requires some homework and careful thought: the invited officer will need to learn the strategic goals of the inviting company – and consider if these now (or may in the future) overlap with and conflict the current employer’s interests. Even if the two companies are not competitors, could they enter into a related party transaction down the road that may need to be disclosed in either company’s proxy? Even seemingly innocuous disclosure could be considered a negative from an ISS, Glass Lewis or investor point of view.
Also consider reputational issues of the company who is offering the board seat, and whether they could negatively impact the employer.
– Assess Committee Obligations & Expected Time Commitment: What will be the time commitment of a board seat? And is putting in that time practical from the standpoint of the amount of time the executive is expected to put in for her employer? Consider both the expected hours commitment – and the reality of periodic “crunch” times that pop up during the inevitable crises that arise. There may be some executive roles – a CFO for some companies – who would be hard-pressed to appropriately deal with an M&A transaction or serious investigation in their role as a director without interfering with that officer’s responsibilities during earnings season, for example.
Yet a Chief HR Officer, Chief Technology Officer, Chief Legal Officer or Chief Sustainability Officer, with the right staff support, may be able to juggle both.
Other recommendations include limiting on service to one outside board, establishing a formal pre-approval process, monitoring director compensation received by the executive, and including board service as part of the executive’s annual performance appraisal process.
According to a recent blog from Doug Greene, the SEC’s proposal to eliminate SPACs’ ability to rely on the safe harbor for forward looking statements in connection with deSPAC transactions may not turn out to have much impact in practice. Why? Because, as this excerpt explains, the PSLRA’s safe harbor for forward looking statements simply isn’t very protective to begin with:
Public companies understandably believe that the Reform Act’s safe harbor protects them from liability for their guidance and projections if they simply follow the statute’s requirements. But, as a practical matter, the safe harbor is not so safe; some judges think the Reform Act goes too far, so they go to great lengths to avoid the statute’s plain language. This is one significant reason why we always have advocated an approach to defending forward-looking statements that does not depend solely on the safe harbor, even when the statute’s plain language would indicate that it applies. Thus, while SPACs and de-SPACs are certainly better off with the safe harbor than without it, its loss should not be as consequential as some may think.
The blog reviews the erratic approach that courts have taken to the safe harbor, and argues that it may stem from judges’ disdain for the potential “license to lie” that the statutory language provides. It goes on to point out that in defending claims implicating forward looking statements, the parties should keep in mind that these also involve opinions, and therefore, regardless of the safe harbor, plaintiffs also must satisfy the Virginia Bankshares & Omnicare tests in order to bring securities fraud claims based on those statements.
With the stock market heading straight downhill, a major war in Europe & the SEC throwing a regulatory monkey wrench into SPAC offerings, it’s no surprise that the IPO market’s been in a bit of a funk lately. But the Jim Hamilton Blog reports that things reached a new low last week:
As the air continues to come out of the IPO market, it reached a level last week that has not been seen in more than two years—no completed offerings. April 2020 was the last time that a week passed without at least one company making its public market debut. The holiday may have played a role in the standstill, but with only one IPO in the prior week the market was already growing quieter as May progressed. The 14 new issues in May represented the lowest single-month IPO total since ten were completed in April 2020.
The calendar for next week looks pretty empty too, so don’t be surprised if you see a larger than usual number of investment bankers at your favorite beach this summer.
Heidrick & Struggles recently issued its report on 2021 board composition trends among Fortune 500 companies. The report says that boards have continued a trend that began in the second half of 2020 of reaching out to groups of people from increasingly more diverse backgrounds. It concludes that 2021 changes in board composition were mostly incremental but generally positive. Here are some of the highlights:
– A record share of seats (43%) was filled by first-time public company directors. On the whole, these directors bring more diversity of experience and background, and there was an increase in the share of seats that went to directors with sustainability and cybersecurity experience.
– A record share of seats (45%) went to women, but there was only mixed progress on racial and ethnic diversity. The share of seats filled by Black directors held relatively steady at 26%, after a sharp rise in 2020. However, both Asian or Asian American (9%) and and Hispanic or Latinx (6%) directors are still heavily underrepresented.
– There was little progress on age diversity. In 2021, as in recent years, two-thirds of seats were filled by people between ages 50 and 65. The average age of new appointees was 57.
The report provides more granular data concerning board composition and concludes with some thoughts on the actions being taken by “best in class” boards when it comes to board composition and succession. These include actively seeking new directors whose backgrounds combine a mix of traditional expertise with knowledge that is newer on boards’ skills matrix (such as sustainability or cybersecurity), bringing younger directors onto boards, staying tightly focused on racial, ethnic and gender diversity, and seeking new members who can assume a leadership role.
If you aren’t already a member with access to that guidance, sign up now and take advantage of our “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund! You can sign up online, by calling 800-737-1271, or by emailing sales@ccrcorp.com.
The SEC hasn’t acted on its recent cybersecurity rulemaking proposal, but it seems apparent that any rules the agency adopts will ratchet up the demands on companies to effectively manage cyber risks & promptly disclose material cybersecurity incidents. Since that’s the case, this Woodruff Sawyer blog offers up some suggestions on what issues boards should be thinking about now in order to position their companies to comply with these new demands.
The SEC’s proposal to require 8-K disclosure of material cybersecurity incidents within four business days “after the registrant determines that it has experienced a material cybersecurity incident” creates a couple of issues that will require board attention. This excerpt explains:
– Companies may need to bolster the efficiency of their disclosure committees. The proposed four-day rule may be unworkable; boards and management nevertheless have to make every effort to comply. Now is the time for companies to review who is on these committees, as well as what resources they have to be able to comply with the SEC’s proposed timeline for disclosure. Although the rule is four days from a materiality determination, the SEC has made it clear that it will have no patience for companies attempting to slow-walk a materiality determination.
– Companies will want to review how they think about the financial impact of a cyber breach. The four-day rule allows very little time for companies to assess the impact of a cyber incident after it has happened. As a result, the onus will be on companies to attempt to calibrate these costs ahead of time, or at least consider a methodology for doing so.
Other areas that the blog identifies as meriting board consideration include the advisability of adding a cybersecurity expert to the board and reassessing the limits of the company’s cyber insurance policy.
The SEC’s Office of Investor Education and Advocacy announced yesterday that it was launching a series of game show themed PSAs to help investors make informed decisions and avoid fraud. The SEC’s press release makes it crystal clear that this program is being launched with the best of intentions:
One of the goals of the Investomania campaign, which features a 30-second TV spot, 15-second informational videos on crypto assets, margin calls, and guaranteed returns, and interactive quizzes, is to reach existing, new, and future investors of all ages. The campaign encourages investors to research investments and get information from trustworthy sources to understand the risks before investing. The campaign also reminds investors to take advantage of the free financial planning tools and information on Investor.gov, the SEC’s resource for investor education.
That being said, I’m not sure how these PSAs are going to play with their target audience. I’m skeptical that the SEC is “reading the room” well when it comes to the tone of the ads. After all, this campaign comes on the heels of a massive two-year surge in the number of new stock market investors, many of whom have taken a pretty big hit to their wallets over the past several months.
Since that’s the case, I think there’s a risk that a fair number of those investors are going to feel belittled by some of the content – particularly the videos lampooning meme stock & crypto investors. The early returns from social media suggest that’s exactly what’s happening.
Liz has blogged a couple of times about some of the comments on the SEC’s Rule 10b5-1 proposal, and Dave recently hosted a podcast with Stan Keller, who helped draft the ABA comment letter on the proposal. Now, just to make sure you’re completely up to date, here’s a recent Bryan Cave blog that reviews representative comments from the business and investor communities. I’m sure that it will come as no surprise that most investor groups were in favor of the proposal, while most business groups didn’t think much of it.
Among other things, most business groups commenting on the proposal called for shortening or eliminating the proposed 120-day cooling off period, clarifying or narrowing the proposed restrictions on multiple overlapping plans, and eliminate the certification and insider trading plan disclosure requirements. As this excerpt indicates, commenters zeroed in on the SEC’s statements about the potential that gifts might be subject to insider trading liability:
As noted in our December 16 client alert, the SEC included in its proposals a cautionary warning about the timing of gifts of securities. Some commenters strongly objected to the SEC’s warning, noting the absence of any judicial or SEC precedent for its position, and its failure to explain the circumstances where a charitable gift would involve a fraudulent breach of trust and confidence. Instead, a donor should be able to avoid insider trading liability by obtaining the charitable donee’s commitment not to dispose of the securities until any MNPI known by the donor at the time of the donation has become public or stale.”
I’m not a big fan of a number of the proposed changes to Rule 10b5-1, and I’m glad to see that those who actually work with the rule on a regular basis appear to have weighed in during the comment period. We’ll see if they carry any weight with the commissioners.
Determining whether a company has a duty to disclose a governmental investigation is always a complicated process, and the outcome of cases alleging the existence of such a duty depends on the specific facts and circumstances. That being said, you can add the 2nd Circuit’s recent decision in Noto v. 22nd Century Group, Inc. (2d. Cir. 5/22) to the list of cases finding that the plaintiffs sufficiently alleged that a company had a duty to disclose the existence of an SEC investigation. This excerpt from a recent Proskauer blog summarizes the decision and its potential implications:
The Court of Appeals for the Second Circuit yesterday reversed the dismissal of a securities class action alleging fraud based on the defendants’ failure to disclose an SEC investigation into the company’s disclosed financial-control weaknesses. The May 24, 2022 ruling in Noto v. 22nd Century Group, Inc. (No. 21-0347) is fact-specific, requiring disclosure of the investigation because the defendants (i) had disclosed the accounting deficiencies that had led to the investigation, (ii) had said they were working on the problem, and (iii) eventually had said they had resolved it, even though the SEC investigation had been pending during that entire period.
The Noto decision could affect disclosure assessments where issuers disclose an underlying accounting problem or other deficiency but are debating whether they must also disclose a pending SEC or other governmental investigation related to that specific problem. Depending on the facts and circumstances of the particular situation, a court might hold that failure to disclose the governmental investigation makes the disclosure of the underlying problem materially misleading because nondisclosure of the investigation could cause reasonable investors to make “an overly optimistic assessment of the risk” posed by the underlying problem.
This Goodwin blog discusses the distinction between “non-GAAP financial measures” (NGFMs) subject to Reg G and Item 10(e) of S-K, and other disclosures that, while they aren’t GAAP numbers, aren’t subject to the requirements imposed by those rules. Here’s an excerpt:
In very general terms, a NGFM is a numerical financial measure that reflects adjustments not permitted or required by GAAP. Because the application of this definition may not always be clear, Regulation G specifically excludes operating and other financial measures and ratios and statistical measures calculated using financial measures calculated in accordance with GAAP and/or the somewhat circular and often less than helpful category of “operating measures or other measures that are not non-GAAP financial measures.” The Financial Reporting Manual, prepared by the Division of Corporation Finance, provides a series of examples, including among others the following:
– operating and statistical measures (such as unit sales, number of employees, number of subscribers), and
– ratios or statistical measures that are calculated using exclusively operating measures or other measures that are not non-GAAP measures (such as dollar revenues per square foot for hotels, same store sales, and revenues per slot machine for casinos, assuming that sales/revenues for each measure is based on GAAP numbers).
The blog provides a reminder that because metrics like these aren’t subject to the requirements that apply to NGFMs, adjustments to them that would be problematic if applied to a GAAP financial measure are not per se problematic in these cases. However, it also points out that Rule 10b-5 applies to these statements and the SEC’s guidance on disclosure of KPIs should also be kept in mind.
