There’s been a lot of buzz this year about voluntary exempt solicitations – increasingly, these notices are being used to publicize shareholder views on proposals and other topics. Broc blogged about John Chevedden’s first “Notice of Exempt Solicitation” in March – and earlier this week I noted on our “Proxy Season Blog” that it may become a year-round practice. Yesterday, Corp Fin issued two new Proxy Rules CDIs that confirm that voluntary exempt solicitations are okay – if it’s clear who is making the filing.
– Question 126.06 says that the Staff will not object to a voluntary submission of such a notice, provided that the written soliciting material is submitted under the cover of Notice of Exempt Solicitation as described in CDI 126.07 and such cover notice clearly states that the notice is being provided on a voluntary basis. Doing so will make it clear to investors the nature of the submission and that it is being made on behalf of a soliciting party who does not beneficially own more than $5 million of the class of subject securities.
– Question 126.07 says that the Rule 14a-103 information required by Rule 14a-6(g)(1) – e.g. the filer’s name & address – must be presented in an Edgar submission before the written soliciting materials, including any logo or other graphics used by the soliciting party. To the extent that the notice itself is being used as a means of solicitation, the failure to present the Rule 14a-103 information in this manner may, depending upon the particular facts and circumstances, be misleading within the meaning of Exchange Act Rule 14a-9. This requirement applies regardless of whether the filing is voluntary or to satisfy the requirements of Rule 14a-6(g)(1).
For more background & commentary, visit this Gibson Dunn blog. Here’s an excerpt:
While these new CDIs provide helpful guidance on the use of voluntary Notices of Exempt Solicitations, the CDIs may not go far enough to address potential abuses that increasingly are arising when the EDGAR system is used as a platform for disseminating a filer’s views. For example, C&DI Question 126.06 does not expressly require that the filer represent that it is in fact a shareholder.
Absent further guidance from or review and comment on such filings by the Staff, the process allows anyone with EDGAR codes to submit filings unrelated (or only tangentially related) to a proposal, or to set forth disparaging or inflammatory views, subject only to the Rule 14a-9 standard governing false and misleading statements. For example, John Chevedden, who as of July 31 has filed 21 of these filings in 2018, filed a Notice of Exempt Solicitation at Netflix a week after the company’s annual meeting, which contained only a vague and confusing voting recommendation at the very end, and instead was devoted largely to criticizing the company’s decision to hold a virtual annual meeting. However, the Staff has informally indicated that companies should contact them if they believe the PX14A6G process is being abused, and the new interpretations hopefully indicate that the Staff will be more proactive in reviewing and possibly commenting on such filings.
“Passive” Investors: Causing a Rise in Activism?
We’ve blogged a few times about the misnomer of “passive” investors. But whatever we call them, the capital flow to these firms continues to increase. And this “Rivel Research” study indicates that these firms are exercising more & more influence – particularly when it comes to engagement on corporate governance & executive pay. Some active managers aren’t happy about that, because they think their passive counterparts make uninformed decisions that adversely impact stocks that the active funds are mandated to hold.
So what’s an active manager to do? Maybe they write a 17-page client letter to say they’re still better at picking stocks, as described in this WSJ article. Maybe they call them communists. Or maybe, they move away from simply picking stocks and into the potentially more lucrative field of campaigning for stock-enhancing changes – which could also minimize the impact of the passive engagement that they find problematic. This WSJ article credits passive investing with the hot activist environment and increasing involvement of first-time activists.
For tips on communicating with “passive” investors (and active investors that bifurcate the engagement & voting teams), check out this article from Ron Schneider of Donnelley Financial Solutions. He points out that they’re more likely to rely on the proxy statement than IR blasts – so there’s an increasing benefit in providing voluntary proxy disclosure on things like strategy & ESG issues. And as Broc has blogged – it’s best to do this in a thoroughly-bookmarked online document.
Our August Eminders is Posted!
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Yesterday, the SEC announced that it will hold a “proxy process” roundtable this fall. The date & agenda are TBD – but Chair Clayton is asking Corp Fin to reconsider the voting process, retail shareholder participation, shareholder proposals, proxy advisors, technology & universal proxy cards.
This isn’t the first time the SEC has tackled “proxy plumbing.” It issued its first concept release on this topic back in 2010 (see our “Proxy Plumbing” Practice Area). That effort didn’t result in much rule-making – maybe the SEC’s initiatives will be less controversial this time.
ISS Policy Survey: Auditor & Director Track Records, Gender Diversity & More
Yesterday, ISS opened its “Annual Policy Survey” – like last year, it consists of two parts:
1. Governance Principles Survey – 10 questions on high-profile topics. This year’s questions relate to auditor independence & quality, audit committee evaluations, impact of past & present director track records at other companies, board gender diversity and the “one-share, one-vote” principle. This part of the survey will close on August 24th.
2. Policy Application Survey – More expansive portion that can be accessed at the end of the initial survey, allowing respondents to drill down on key issues by region. This part of the survey closes September 21st. According to this Weil blog, the key issues for the Americas region include excessive non-executive director compensation, independent chair proposals, share ownership requirements for binding bylaw amendments and pay-for-performance metrics.
As always, this is the first step for ISS as it formulates its 2019 voting policies. In addition to the two-part survey, ISS will gather input via regionally-based, topic-specific roundtables & calls and a comment period on the final proposed changes to the policies.
Company Prevails Over Disputed Advance Notice Bylaw
A recent advance notice bylaw dispute is a reminder that there’s usually room for interpretation. Check out the intro from Ning Chiu’s blog:
HomeStreet received a 133-page notice the day before the advance notice deadline in its bylaws, alerting the company that Blue Lion intended to nominate two directors and submit two proposals – seeking annual elections and a binding resolution for an independent chairman.
Less than a week later, the company announced that the notice was deficient – attaching a five-page letter to a Form 8-K that it sent to the shareholder. The letter stated that the notice provided by the shareholder failed to meet several of the bylaw’s disclosure requirements, including providing information related to the holder of shares that would be disclosed in a proxy statement governing a solicitation as well as deficiencies in the D&O questionnaires returned by the shareholders’ nominees. Since the deadline had passed, declared the company, the company intended to disregard the nominations and the proposals for the meeting.
As you might guess – Blue Lion didn’t just accept this and walk away. In their view, the notice materially complied with the bylaw. They responded in a 34-page letter – and they took it to court. In this instance, the company prevailed.
According to this Sidley blog, since HomeStreet’s bylaw had been in place since the company’s IPO & was previously-disclosed, the court found that the company hadn’t taken any defensive measures. So, it rejected the argument that Delaware’s “enhanced scrutiny” test should apply. Broc recently blogged about a New York case with a different outcome…
At its open meeting yesterday, the SEC voted to issue a 36-page concept release that seeks input on expanding and simplifying Form S-8 & Rule 701. Among other points, the release asks whether:
– Rule 701 & Form S-8 accommodations should extend to “gig economy” relationships – and what parameters should apply
– Form S-8 requirements should be revised to ease compliance issues that arise when plan sales exceed the number of shares registered
– The SEC should permit all of a company’s plans to be registered on a single registration statement
– Companies would benefit from a “pay-as-you-go” or periodic fee structure for Form S-8
– Rule 701 should be extended to reporting companies – eliminating the need for Form S-8
– The SEC should amend the disclosure content & timing requirements of Rule 701(e)
This blog from Cooley’s Cydney Posner notes that much of the discussion at the open meeting and in the concept release relates to whether or not liberalizing the equity compensation rules would create incentives for companies to “go public and stay public” (here’s Commissioner Stein’s statement and here’s Commissioner Peirce’s statement).
SEC Raises Rule 701 Disclosure Threshold
Yesterday, the SEC announced that it had unanimously approved an amendment to Rule 701(e). Non-reporting companies that issue equity compensation won’t have to provide financial statements, risk factors and other disclosures to participants until they’ve sold an aggregate of $10 million in securities during a 12-month period. Previously, that threshold was $5 million.
As John blogged a couple months ago, this amendment was a result of the “Economic Growth, Regulatory Relief & Consumer Protection Act.” The amendment will become effective immediately upon publication in the Federal Register – and companies that have already started an offering in the current 12-month period will be able to apply the new threshold.
House Passes “Jobs Act 3.0”
The “Jobs & Investor Confidence Act of 2018” has now passed the House – by a vote of 406-4 – according to this announcement from the House Financial Services Committee. Among other things, the 32 pieces of legislation that comprise the bill would:
– Require the SEC to analyze the costs & benefits of the use of Form 10-Q by emerging growth companies and consider the use of alternative formats for quarterly reporting for EGCs.
– Direct the SEC to consider amendments to Rule 10b5-1 that would, among other things: limit insiders’ ability to use overlapping plans, establish a mandatory delay between the adoption of the plan and execution of the first trade, limit the frequency of plan amendments, require companies and insiders to file plans and amendments with the SEC, and impose board oversight requirements.
– Require companies with multi-class share structures to make certain proxy statement disclosures about shareholders’ voting power.
– Allow emerging growth companies with less than $50 million average annual gross revenue to opt out of auditor attestation requirements beyond the typical 5-year period.
– Amend the definition of “accredited investor” to include people with education or job experience that would allow them to evaluate investments.
– Expand to all public companies the “testing the waters” and confidential submission process for registration statements in an IPO or a follow-on offering within one year of an IPO.
– Allow venture exchanges to register with the SEC, as a trading venue for small & emerging companies.
– Direct the SEC & FINRA to study the direct and indirect costs for small & medium-sized companies to undertake public offerings.
Here’s something I blogged yesterday on CompensationStandards.com: This Forbes op-ed notes that a few “pace-setting companies” now link executive bonuses to diversity objectives – and makes the case for more companies to follow suit. Here’s an excerpt:
If an objective is important, then the company should ensure (1) its employees know about it and (2) that their performance in meeting this goal will be measured along with the company’s other core values and targets. Fostering greater diversity and preventing harassment and discrimination is more than simply the right thing to do on a broader societal level. Indeed, a business case exists for these initiatives. According to research by McKinsey & Company, achieving these goals correlates with concrete financial improvement.
At Alphabet, a recent shareholder proposal to link executive pay to diversity received about 9% of the vote. The company’s statement in opposition (pg. 66) noted that the CEO receives a base salary of only $1 per year and isn’t paid based on performance – so it argued that a rule like this would have little impact. And at Nike, a similar proposal was withdrawn after the company agreed to meet quarterly to discuss diversity.
Restatements: 17-Year Low
Recently, Audit Analytics released its annual report on restatement trends: “2017 Financial Restatements: A Seventeen Year Comparison.” The aggregate number of restatements fell to 553 last year – the lowest in 17 years. The number of restatements was about 18% lower than in 2016 – and as we blogged at the time on “The Mentor Blog” – that was a previous low. Here’s an interesting detail from Cydney Posner’s blog (also see this Compliance Week article):
The review distinguishes between “reissuance restatements” (meaning that, as the title suggests, the financials are withdrawn and cannot be relied on—necessitating the filing of an 8-K — and new financials are issued) and “revision restatements” (where the errors are just corrected and explanatory notes included). It’s not hard to guess which type of restatement is preferred by most companies; not surprisingly, the report indicates that around 77% of restatements were of the “revision” persuasion. Reissuance restatements have declined each year for the past 10 years. The number of revision restatements has also declined. And 168 restatements had no impact on earnings.
FYI: Conference Hotel Nearly Sold Out
As always happens this time of year, our Conference Hotel – the San Diego Marriott Marquis – is nearly sold out. Reserve your room online or by calling 877.622.3056. Be sure to mention the NASPP conference or Executive Compensation Conference or Proxy Disclosure Conference. If you have any difficulty securing a room, please contact us at 925.685.9271.
This Locke Lord memo highlights that all 50 states now have data breach notification laws, and several states have recently amended their laws (including Delaware). Most states require companies to notify the state attorney general or regulator of a breach, in addition to the affected individuals – and a growing number outline how companies should handle data security. Meanwhile, This D&O Diary blog & NYT article discuss California’s new “GDPR-like” privacy law, to take effect in 2020 – which also heightens liability exposure for companies.
And for public companies, there’s a really important corollary to these laws, which often gets lost in the shuffle – information from state notices can find its way to the market even if you don’t file a Form 8-K. SEC Commissioner Robert Jackson has noted that this presents an arbitrage opportunity – and may weigh in favor of proactive, voluntary disclosure.
See our “Cybersecurity” Practice Area for the latest info – including this handy chart from Perkins Coie and this Cleary Gottlieb memo for key US & EU notice requirements. And as I previously blogged on “The Mentor Blog,” Reed Smith also has an app to help parse state law notice requirements…
Cybersecurity Committees: On the Rise
This Kral Ussery memo summarizes the growing trend of standalone cybersecurity committees. Although most companies still assign cybersecurity oversight to the audit committee due to that committee’s involvement with SEC disclosure, audit committees have growing workloads and cybersecurity is an increasingly demanding topic. The memo identifies ten companies that have standing cybersecurity committees – five of which were created in the last year.
Tomorrow’s Webcast: “Retaining Key Employees in a Deal”
Tune in tomorrow for the DealLawyers.com webcast – “Retaining Key Employees in a Deal” to hear Morgan Lewis’ Jeanie Cogill, Andrews Kurth Kenyon’s Tony Eppert, & Proskauer’s Josh Miller discuss the latest developments on compensation strategies to retain key employees in M&A transactions.
Tune in tomorrow for the webcast – “Insider Trading Policies & Rule 10b5-1 Plans” – to hear Weil Gotshal’s Howard Dicker, Hogan Lovells’ Alan Dye, Dorsey & Whitney’s Cam Hoang and Cooley’s Nancy Wojtas talk about the nuts & bolts – and the latest developments – for insider trading policies and Rule 10b5-1 plans. We recently updated our “Insider Trading Policies Handbook” – which includes a model policy.
2. Issuing a concept release on Rule 701 & Form S-8
3. Proposing changes to Rule 3-10 & Rule 3-16 of Regulation S-X (there was a request for comment on this back in 2015).
Jobs Act 3.0: Coming Soon?
According to this statement, the House Financial Services Committee has approved eight bills as part of “Jobs Act 3.0.” This Steve Quinlivan blog calls out that six of the bills were sponsored by Democrats – and it doesn’t sound like legislation will happen any time soon…
Yesterday, the SEC announced that it adopted amendments to expand the number of “smaller reporting companies” that qualify for scaled disclosure. Here’s the 105-page adopting release – and we’re posting memos in our “Smaller Reporting Companies” Practice Area (also see this blog from Cooley’s Cydney Posner & this blog from Dorsey’s Cam Hoang). These are the key points:
– Companies with a public float of less than $250 million will qualify as SRCs.
– A company with no public float or with a public float of less than $700 million will qualify as a SRC if it had annual revenues of less than $100 million during its most recently completed fiscal year.
– A company that determines that it does not qualify as a SRC under the above thresholds will remain unqualified until it determines that it meets one or more lower qualification thresholds. The subsequent qualification thresholds, set forth in the release, are set at 80% of the initial qualification thresholds.
– Rule 3-05(b)(2)(iv) of Regulation S-X is amended to increase the net revenue threshold in that rule from $50 million to $100 million, so that more companies may be able to omit dated financial statements of acquired businesses.
– The final amendments preserve the application of the current thresholds contained in the “accelerated filer” and “large accelerated filer” definitions in Exchange Act Rule 12b-2. As a result, companies with $75 million or more of public float that qualify as SRCs will remain subject to the requirements that apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.
That last point was emphasized during the SEC’s open meeting (here’s Commissioner Stein’s Statement – and here’s Commissioner Piwowar’s Statement). Corp Fin has begun to formulate recommendations to the Commission for possible additional changes to the “accelerated filer” definition that, if adopted, would have the effect of reducing the number of companies that qualify as accelerated filers (and are subject to auditor attestation requirements). Some – but not all – believe this would promote capital formation by reducing compliance costs for those companies.
SEC Adopts Inline XBRL
Yesterday, with Commissioner Peirce dissenting, the SEC announced amendments to require the use of Inline XBRL for financial statement information. This means that companies will embed XBRL data directly into Edgar filings instead of posting separate files – and the new data will be readable by both humans & machines. The amendments also eliminate the requirements for companies to post XBRL data on their websites.
There’s no change to the categories of filers or scope of disclosures subject to XBRL requirements. Here’s the 143-page adopting release – also see this Cooley blog.
There’s a phase-in period to comply:
– Large accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 2019.
– Accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 2020.
– All other filers will be required to comply beginning with fiscal periods ending on or after June 15, 2021.
– Filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date.
SEC Proposes Changes to Whistleblower Program
In March, John blogged about the largest whistleblower award to-date – and noted that the SEC has awarded more than $262 million to 53 whistleblowers since the program’s inception in 2012.
Yesterday, the SEC proposed amendments to its whistleblower program. The amendments will allow awards based on deferred prosecution & non-prosecution agreements and clarify the requirements for anti-retaliation protection, among other things. There’s also a controversial proposal to cap award amounts. Here’s the SEC’s announcement & fact sheet. The comment period will remain open for 60 days following publication of the proposing release in the Federal Register.
This review from ISS Analytics shows that there were 127 virtual-only meetings through mid-May, compared to just 99 last year. And for the full year, at least 300 companies are expected to hold some sort of virtual annual meeting (including hybrid) – compared to 236 in 2017 (this doesn’t include companies that webcast meetings on their own). A recent Broadridge summary also notes:
– 10% of virtual meetings were hybrid
– Of the 24 companies that held a hybrid meeting in 2016, 12 of them switched to virtual-only in 2017
– 97% of virtual-only meetings were conducted with live audio, rather than video
– 57% of the companies holding virtual meetings were small-cap, 26% were mid-cap & 17% were large-cap
– 98% of companies allow questions to be submitted online during the live meeting
P&G’s Close Contest: Registered & Plan Shares to Blame for Uncertainty?
Broadridge recently reported this finding from the voting review of Proctor & Gamble’s short-slate proxy contest – where the voting margin ended up being less than 1% of votes cast:
The uncertainty in the validity of the votes occurred entirely within the registered shares and plan shares, while the votes of all of the street name shares were accepted as accurate and not contested.
Proxy Cards & VIFs Will Be More Identical
According to this newsletter, Broadridge is redesigning its “Voting Instruction Form” to make more space for full proxy card language. Here’s an excerpt from the newsletter:
Mr. Norman referred to previous discussions held with the SEC staff on the nature and use of abbreviations when faced with proxy language that is too voluminous to fit within the standard voter instruction form (VIF). He stated that in his recent discussions with the staff, the staff had expressed the view that the VIF should be revised so that it could allow the same language that appears on the proxy card, rendering the need for abbreviations obsolete.
Members of Broadridge management stated in response they were working on a redesign of an expanded VIF designed to permit full use of proxy card language on the VIF. A prototype of the proposed VIF has been drafted and is being submitted for quality assurance testing, with the goal that the new VIF form will be ready for use in September, the beginning of the 2018 fall “mini” proxy season.
Recently, Broc blogged about the SEC allowing anyone to track who reads filings on Edgar. Now we have a different “big data” concern: banks are tracking readership of sell-side research. Here’s an excerpt from this WSJ article:
Banks, under pressure to find new ways to boost revenue in their giant research arms, are collecting loads of data on what their clients are reading and when. Beginning about two years ago, banks started moving from the old system of emailing PDFs to using new websites using HTML5 – a web coding language that allows for more tracking of user activity – for distribution of research notes. With the new technology, they can typically see in real-time exactly what pages are being read, for how long, and by which users.
There’s reason for large investors to feel uneasy about this – and they do:
Some bankers said that hedge funds have asked if they can see a stream of aggregated research data, such as what notes are the most read, or longest read, but also that their banks weren’t selling that information, people familiar with those requests said.
The amped up data-tracking has rankled some customers, who worry that even anonymized readership habits, if shared with other clients, could allow rivals to get ahead of their trades. Capital Group, a Los Angeles firm with about $1.7 trillion in assets under management, has asked banks and other research providers to archive readership data related to the firm and not use it in any way for a period of time, according to people familiar with the discussions.
Are the investors getting that promise in writing? For better or worse, it’s exceedingly common these days for companies to capture & share customer information. I blogged a few months ago on “The Mentor Blog” about how that practice is leading to new liability exposures for officers & directors…
Off-Cycle Engagement: Avoiding Blunders
This Cleary Gottlieb memo gives eight tips on how to handle off-cycle engagement – from shareholders themselves. The intro explains why you should care:
Notwithstanding the chorus of shareholder-engagement advisors & investors singing the praises of holding off-cycle meetings – the truth is that the upside of these meetings is somewhat limited and the downside risks are significant. When pressed, any investor will tell you that if there were an actual proxy contest, even a company with a record of excellent off-cycle engagement is far from immune from a decision by the investor to vote in favor of an activist’s short-slate – and it often happens at the 11th hour of the proxy contest.
More importantly, a poor off-cycle meeting can be more detrimental than no meeting. Indeed, investors report that they regularly leave these meetings with a worse impression of companies. And since many institutional investors will each hold portfolios consisting of hundreds or even thousands of companies, many of them won’t take a meeting each year due to limited bandwidth – which amplifies the adverse consequences of a poor meeting.
Tomorrow’s Webcast: “Proxy Season Post-Mortem – Latest Compensation Disclosures”
Tune in tomorrow for the CompensationStandards.com webcast — “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster, and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.
This research analyzes why companies continue to use long, generic risk factors despite negative capital market consequences, a decline in the ability of analysts to assess fundamental risks and Corp Fin’s criticism of boilerplate disclosure. Here’s an excerpt:
Our results suggest that longer and more boilerplate risk factor disclosures are less likely to be flagged as inadequate under judicial and regulatory review. Specifically, we find that longer and more generic risk factor language is positively associated with favorable assessments for purposes of the Private Securities Litigation Reform Act’s safe harbor, and that standardized risk factor language is less likely to be targeted by an SEC comment letter during the SEC’s filing review process.
This makes sense up to a point. Nobody wants to be an outlier when judges & regulators use precedent to determine whether disclosure is adequate – that’s why it’s important to benchmark against peers, especially for industry risks. But – as we saw with the recent $35 million cybersecurity enforcement action against Yahoo! – it doesn’t work to use generic hypotheticals to describe a specific thing that’s actually happened (or is likely to happen) to your company. Our “Risk Factors Handbook” is full of tips for striking this balance.
SEC Enforcement: 67% Decline in Actions Since Last Year
This report from Cornerstone/NYU highlights just how much the SEC has stepped back from enforcement actions against public companies in the first half of this year. It initiated only 15 new enforcement actions – compared to 45 in the first half of last year. This is the lowest semiannual total since 2013. Here are five other findings (also see this blog from Kevin LaCroix):
1. 87% of enforcement actions were resolved on the same day they were initiated
2. 67% of actions didn’t have an associated individual defendant
3. Of the 5 actions with individual defendants, 4 involved reporting & disclosure allegations
4. 67% of actions were against companies in the finance, insurance & real estate industry
5. Monetary settlements declined to $65 million – the lowest semiannual total since at least 2009
According to this Bloomberg article, SEC Commissioner Hester Peirce might be emerging as an opposition force to many proposed enforcement actions, settlements and penalties. She retorted by explaining that she wants to move away from the SEC’s “broken windows” approach to enforcement. Along those lines, this WSJ article notes that the Division of Enforcement also says it wants its activities to be measured not by penalty totals, but by its success in expelling bad actors from the financial industry.
More on “Enforcement: Assessing the Fallout from Kokesh”
It’s been about a year since the Supreme Court’s Kokesh decision – which said that SEC disgorgement claims were subject to a 5-year limitations period. Since our last blog on this, the Co-Directors of the SEC’s Enforcement Division testified before Congress that the SEC has likely missed out on over $800 million in disgorgement penalties since the ruling – and may be unable to compensate victims in the future due to the time it takes to discover and investigate fraud. Limits on the SEC’s ability to obtain disgorgement could also help explain the decline in the magnitude of its settlement penalties this year. It’s unclear at this point whether these consequences will lead to legislation…
