According to this Audit Analytics blog, 97% of the S&P 500 use at least one non-GAAP metric in their SEC filings. That’s up from 76% in 2016, and only 59% in 1996.
And not only are more companies using non-GAAP metrics, the number of metrics used in each filing has shot up. This CFO.com article says that the number has tripled in the last 20 years – from 2.35 to an eye-catching 7.45. It also says that when it comes to Reg G compliance, there’s room for improvement:
Under Regulation G, which sets forth the regulatory framework companies are required to follow in presenting non-GAAP metrics, any EBITDA metric that excludes from income any items other than interest, taxes, depreciation, and amortization must be labeled as “adjusted EBITDA.”
However, according to Audit Analytics, among 46 companies that labeled a non-GAAP metric as EBITDA in 2017, more than half (24) excluded an item other than those. For example, two companies excluded acquisition-related items and two others excluded impairment-related costs.
There’s nothing inherently wrong with using non-GAAP metrics – in many cases, shareholders think that information is useful. But proper labeling and reconciliation is key – Corp Fin is still commenting on this – and in a speech last week, SEC Commissioner Kara Stein even floated the idea that auditors could take on a greater role in public disclosure, including offering assurance about the fair presentation of non-GAAP measures. All that to say, just because you might see other companies intentionally or unintentionally hide the ball, that doesn’t mean you should do it too. Check out our “Non-GAAP Handbook” for all the latest guidance.
Non-GAAP Comments: No More “Low-Hanging Fruit”?
It’s not just your imagination – Corp Fin’s been issuing fewer non-GAAP comments this year. But as detailed in this Audit Analytics blog, the number & percentage of these comments are still above 2015 levels.
Although non-GAAP comments continue to focus on areas that were clarified in the May 2016 CDIs, this Cooley blog points out that the Staff has moved on from easy-to-fix issues like undue prominence (possibly because companies have self-corrected). Now, they seem to be more focused on whether there’s adequate disclosure for individually-tailored accounting adjustments and “free cash flow” presentations. Here’s more detail:
– 12.3% of the non-GAAP comments referenced individually-tailored accounting – and this WSJ article explains how complex the topic can be. The Staff typically requests that companies remove individually-tailored recognition & measurement adjustments from non-GAAP measures – or explain how they considered the guidance in Question 100.04 of the non-GAAP CDIs and concluded that the adjustments were appropriate.
– The percentage of companies receiving comments referencing presentation of free cash flow & CDI 102.07 has increased significantly since 2016. And an increasing percentage of companies received a comment on the required presentation of the three major categories of the statement of cash flows when a non-GAAP liquidity measure is used (Question 102.06). Since the presentation of free cash flow is a non-GAAP liquidity measure, an increase in comments related to the three major categories of the statement of cash flows may indicate that companies are receiving both comments related to one item of financial reporting.
In monitoring SEC comment letters, we came across this SEC comment letter recently made public. While we acknowledge the term “pro forma” is often used by companies when adjusting their GAAP results to provide additional meaningful information to investors, this comment by the Corp Fin Staff serves as a reminder that the Staff generally dislikes non-GAAP measures titled as “pro forma” when the information is not presented in compliance with the pro forma rules in Article 11 of Regulation S-X.
In this situation, the company agreed to delete the words “pro forma” and instead use the words “as adjusted.” The comment was issued in connection with the Staff’s review of an initial public offering Form S-1.
This Proxy Insight article compiles annual voting data from the 10 largest mutual funds and compares how they voted on high-profile proposals (also see this Willis Towers Watson summary of recent stewardship reports). Here’s a couple highlights:
– The four biggest asset managers voted to ratify GE’s auditor – even though a shocking 35% of GE’s shareholders voted “against”
– For executive pay, Vanguard and State Street are following through with more stringent policies – and Goldman Sachs supported 8% fewer say-on-pay proposals than last year (and they’re not alone – as I recently blogged on CompensationStandards.com, enhanced policies led CalPERS to vote against 43% of say-on-pay proposals this year)
Also, if your shareholder base includes pension funds, a recent study says you’ll have a harder time getting their support – even if ISS & Glass Lewis recommend in favor of the board’s recommendations. This article explains:
Pension funds were 36.2 percent more likely than mutual funds to vote in favor of shareholder proposals, and 7.1 percent less likely to vote for management proposals, according to finance and accounting professors Ying Duan, Yawen Jiao, and Kinsun Tam. “They are most supportive of shareholder proposals submitted by other public pension funds, followed by those submitted by labor unions,” the authors added.
Beyond being more prone to support other shareholders, pension funds were also likelier to vote against recommendations made by proxy advisors. According to the study, only two of the 48 funds — the Orange County Employees Retirement System an Oregon Public Employees Retirement System — always followed the guidance issued by their proxy firms.
Corp Fin’s “Financial Reporting Manual”: Now Mobile-Friendly!
Over a year ago, Edgar was hacked – and we speculated about applying insider trading law to “hack & trade” schemes. This blog from John Stark – President of John Reed Stark Consulting and former Chief of the SEC’s Office of Internet Enforcement – outlines successful enforcement efforts under this theory from 2005 – 2016, and criticizes the lack of any more recent action. Here’s an excerpt:
Since the EDGAR data breach, the SEC has not brought any outsider trading cases — zero, zilch, nada – and the topic of outsider trading seems markedly absent from the current laundry list of SEC enforcement priorities and concerns.
Indeed, a recent NYT op-ed by SEC Commissioner Robert J. Jackson, Jr. and former SDNY U.S. Attorney Preet Bharara entitled, “Insider Trading Laws Haven’t Kept Up With the Crooks,” hinted at a significant rift within the SEC Commissioners about outsider trading, raising questions whether the SEC will file any future outsider trading cases ever again.
But this threat must be stopped. No longer are social security numbers, credit card information and the like the primary focuses of hackers. Information is the target – and public companies and the SEC in its EDGAR database have a lot of it. Indeed, crooks from anywhere in the world can now use their cyber-wares to orchestrate corporate espionage and remotely trade stock based on stolen secrets.
The SEC should get with the virtual program and redouble its efforts at policing outsider trading, an alarming and futuristic category of wrongdoing. The SEC has experienced first-hand the humility and alarm of playing the dupe in some offshore outsider trading scheme, and is clearly the best equipped to fight back. For more than 80 years, the SEC’s dedicated and vigilant enforcement staff has stood as a proud sentinel for investors, and SEC Chairman Clayton should cut the SEC enforcement staff loose and refuse to allow a preposterously strict reading of the ’34 Act’s broadly vested anti-fraud provisions to stand in its way.
– Board Gender Diversity: The policy announced last year will take effect in 2019 – Glass Lewis will generally recommend voting against the nominating committee chair of a board that has no female members, but they’ll closely examine the company’s disclosure of its board diversity considerations and other relevant contextual factors.
– Conflicting & Excluded Proposals: The policy lays out how Glass Lewis will evaluate conflicting proposals on special meeting rights – for one thing, they’ll typically recommend against members of the nominating & governance committee when a company excludes a shareholder proposal in favor of a management proposal of an existing special meeting right. And in limited circumstances, Glass Lewis may recommend against members of the governance committee if a company excludes any conflicting proposal based on no-action relief, if Glass Lewis believes the exclusion is detrimental to shareholders. See this blog from Davis Polk’s Ning Chiu.
– Diversity Reporting: Glass Lewis will now generally recommend in favor of shareholder proposals requesting additional disclosure on employee diversity and those requesting additional disclosure on the steps that companies are taking to promote diversity within their workforces.
– Environmental & Social Risk Oversight: Glass Lewis has codified its approach to reviewing how boards are overseeing environmental and social issues – if mismanagement of these risks has threatened or diminished shareholder value, Glass Lewis may recommend against the directors responsible for E&S oversight.
– Officer & Director Compensation: In its say-on-pay recommendation, Glass Lewis will consider excise tax gross-ups, severance and sign-on arrangements, grants of front-loaded awards, clawback provisions, and CD&A disclosure for smaller reporting companies. And they’ve clarified their approach to peer groups, pay-for-performance, the use of discretion, director compensation and bonus plans.
– Auditor Ratification: Glass Lewis will consider additional factors for auditor ratification proposals, including the auditor’s tenure, a pattern of inaccurate audits, and any ongoing litigation
or significant controversies which call into question an auditor’s effectiveness. In limited cases, these factors may contribute to a recommendation against auditor ratification.
– Virtual Shareholder Meetings: The policy announced last year will take effect in 2019. For companies opting to hold their annual meeting by virtual means, and without the option of attending in person, Glass Lewis will examine the company’s disclosure of its virtual meeting procedures and may recommend voting against the members of the governance committee if the disclosure does not ensure that shareholders will be afforded the same rights and opportunities to participate as they would at an in-person meeting.
– Written Consent Shareholder Proposals: In instances where companies have adopted proxy access and a special meeting right of 15% or lower, Glass Lewis will generally recommend against shareholder proposals requesting that companies adopt a shareholder right to action by written consent.
– Clarifying Updates: No changes here, but Glass Lewis has codified its approach to director and officer indemnification, quorum requirements, director recommendations on the basis of company performance, and OTC-listed companies.
Dual-Class: CII Petitions Exchanges to Require Sunset
On Wednesday, CII announced that it had filed an NYSE petition and a Nasdaq petition to curb listings of dual-class companies. Specifically, the petitions ask the exchanges to amend their listing standards to require that – going forward – companies seeking to list that have multiple share classes with differential voting rights include in their governing documents provisions that convert the share structure within seven years of the IPO to “one, share-one, vote.”
The petitions have support from BlackRock, T. Rowe Price, CalSTRS and CalPERS. CII cites several factors that support the concept of time-based sunsets, and also observes:
The SEC believes it lacks the statutory authority to compel U.S. exchanges to amend their listing rules. Over the past year, providers of benchmark indexes — FTSE Russell, MSCI and S&P Dow Jones — have stepped into the breach, with varying curbs on multi-class companies in indexes that are used widely by institutional investors. A listing standard would put all dual-class companies on the same footing.
Director Survey: Lots of Underperforming Colleagues
– 45% of directors think that at least one person on their board should be replaced – and only 30% think their board is “very effective” at dealing with underperforming directors
– 94% agree that board diversity brings unique perspectives to the boardroom – and 84% think it enhances board performance. But 52% think board diversity efforts are driven by political correctness – and 48% think shareholders are too preoccupied with the topic
To me, these responses imply that directors do see the value in diversity – but are frustrated about being pushed to refresh their boards (even underperforming directors have staying power) and look for new directors outside of their typical network. Which means they’ll get to it when they’re good & ready, dagnabbit! Also, keep in mind that over 75% of the survey participants aren’t diverse and are likely accustomed to the status quo (the survey details some pretty wide gaps in perspective between female & male directors).
The survey also looks at other “hot topics,” like cybersecurity and the board’s evolving role in overseeing corporate culture. Here’s what directors think about those subjects:
– 87% of directors think that inappropriate tone at the top leads to problems – while 79% also blame middle management and 74% point to “short-termism”
– 71% think that employee engagement surveys are one of the best ways to scope out problems with corporate culture
– The percentage of directors that said company strategy should “very much” take social issues such as health care, resource scarcity and human rights into account increased between 7 to 10 percentage points from last year
– Boards continue to shift responsibility for oversight of cybersecurity – 36% of directors say the job falls to their full board, up from 30% last year – and 21% say their board has moved cybersecurity oversight from one committee to another
For the last four years, the US Chamber of Commerce & Nasdaq have partnered to survey corporate views of proxy advisors. The latest results – from 165 participating companies – come just in time for the SEC’s upcoming ‘proxy process’ roundtable. Here’s a sampling:
– 92% of companies surveyed had a proxy advisor make a recommendation on an issue featured in their proxy statements, nearly identical to 2017, but an 11% increase over 2016.
– 83% of companies carefully monitor proxy advisors’ recommendations for accuracy or reliance on outdated information.
– 21% of companies surveyed formally requested previews of advisor recommendations—a 9% decrease from 2017, but little changed from 2016. For companies that requested a preview, proxy advisory firms provided them only 44% of the time, a 4% drop from 2017.
– 38% of companies asked proxy advisors for opportunities to provide input both before & after the firms’ recommendations were finalized. However, as in previous years, the amount of time companies were given to respond to the recommendations varied. Companies again reported being given anywhere from 30 to 60 minutes to two weeks. In 2018, 1 to 2 days was a common response among companies.
– 39% of companies believed that the proxy advisors carefully researched and took into account all relevant aspects of the particular issue on which it provided advice, up from 35% in 2017.
– 29% of the companies pursued opportunities to meet with proxy advisors on issues subject to shareholder votes, a significant decrease from 52% in 2017. Of those companies that sought a meeting, their request was denied 57% of the time, significantly more often than in 2017. Companies reported mixed results from meetings they had.
– One perceived problem with the proxy advisory system has been a trend toward “robo-voting” where a company’s outstanding shares are voted in line with an ISS or Glass Lewis recommendation in the 24-hour period after the recommendation is issued. With ISS, several companies reported that 10%-15% of their shares would vote automatically in line, while others estimated that between 25%-30% fell into that category. The problem seemed to be less apparent with Glass Lewis, with many companies reporting that less than 10% of their shares would be voted in line within 24-hours.
Quarterly Reporting: SEC Chair Says Here To Stay (For Now)
Back in August, John predicted that the latest push for semi-annual reporting wouldn’t go too far. Yesterday, SEC Chair Jay Clayton seemed to confirm that view for the near-term – except, perhaps, for a remote chance for smaller companies. That’s based on these remarks – reported in this WSJ article and this blog from Cooley’s Cydney Posner:
“I don’t think quarterly reporting is going to change for our top names anytime soon,” Clayton said. “It was good of the president to raise it,” he said, adding that it could make sense to ease the requirements for smaller companies….
“The President did touch on a nerve—which is ‘Are people running their companies too much for the short term in response to pressures?'” Clayton said in a brief interview after the event. “We’ve been hearing that for a while.” …While Clayton lauded Trump and others for raising the issue, he said that other factors like activist investing are also behind companies becoming more focused on the short term.”‘I would not say the driving factor is quarterly reporting.”
Across the Pond: New Governance & Reporting Requirements
From the land of the “original” say-on-pay, the UK is now revamping its “Corporate Governance Code” to encourage the long-term success of its businesses – and improve public confidence following some high-profile scandals. This WSJ blog summarizes a few of the enhanced “comply or explain” requirements:
– Vesting & holding period of 5 years or more for shares awarded to executives under long-term incentive plans
– Disclose when board chair’s tenure exceeds 9 years
– Disclose how the company’s approach to corporate governance contributes to long-term success
– Address cases in which more than 20% of shareholders vote against a management proposal
– Enhance workforce engagement – e.g. by creating an advisory panel
– Describe the nominating committee’s process, the board’s diversity policy and the gender balance of senior management
The code applies to companies listed in the premium segment of the London Stock Exchange – they’ll need to start complying in January. And although the revisions don’t add specific diversity targets or require companies to disclose broader diversity stats, that’s under consideration. This article notes that the UK’s Financial Reporting Council isn’t happy with the status quo and has been contacting companies to encourage more disclosure – though some people worry that will lead to useless boilerplate.
This Stinson Leonard Street blog highlights rule changes that could affect the upcoming proxy season. It says that most companies won’t need to make any changes to their D&O questionnaires for 2019 – though some might add questions on board diversity if the company wants to voluntarily explore that hot topic. In addition, the steady trickle of this year’s SEC guidance & rule changes means that there are plenty of things to watch out for outside of the questionnaires. Among other items, the blog delves into these topics:
– 162(m) disclosures
– Impact of changes to smaller reporting company rules
– Inline XBRL
– Changes to Form 10-K cover page
– Impact of SEC’s disclosure simplification
– Perks disclosures
– Cybersecurity disclosures
As you’re preparing for proxy season, don’t forget to tune in Tuesday, October 16th for the webcast – “Proxy Solicitation: Nuts & Bolts” – to hear a panel of experts discuss the role of proxy solicitors and whether they can help predict activist campaigns. And we’ve already scheduled two January webcasts to help you conquer this crazy time of year:
Investor Meetings: They Aren’t Going As Well As You Think?
Here’s your chance to be a hero and offer practical client advice that doesn’t just reduce risk, but gets money in the door. This blog from Adam Epstein offers a buy-side perspective on why investor meetings chronically falter – even if companies think they’re going well. For example, everyone’s favorite PowerPoint deck might be doing more harm than good. Here are a few tips for improving it:
– Length: Smart investors know that the length of a PowerPoint presentation is often inversely proportional to the quality of the company. Aim for less than 20 slides. Precedent matters, and the number of great small-cap companies with ~ 25+ page decks is not high.
– Information Weighting: Executive bios, market data, service/product description, intellectual property, strategy, risks, competitors, financials, and use of proceeds slides should all be evenly distributed. When key information isn’t equally weighted (e.g., 35%+ of the slides are about the market opportunity), investors know there is a reason why…and it’s never good.
– Accessibility: Investors marvel at why so many companies make their investor presentations so challenging to find on their websites. Always follow the two-click rule for information investors most want: the information should never be more than two-clicks away from the company’s home page. When investors have to try hard to find basic information, it sends a bad message.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Chart: Rule 144
– Insider Trading Policies: Addressing “Cyber” Info
– Sustainability Progress: “The Devil’s In The Details”
– What Does an “Interested Directors Statute” Do for You?
– Insider Trading: “Big Data” – Big Problem?
As I blogged today in this “Proxy Season Blog,” shareholder support of corporate political spending proposals increased to 28% this year – which is an 8% increase since 2014. With that in mind, here are results from our recent survey on political spending oversight:
1. Oversight of our company’s political spending is conducted by:
– Full board – 13%
– Board committee – 58%
– Committee consisting only of management – 8%
– Individual officer – 17%
– Other – 4%
2. For those overseeing political spending, the type of information they get regarding actual contributions is organized by:
– Individual contributions – 38%
– Particular contributions (e.g. sensitive races or large amounts) – 0%
– Aggregate breakdown (e.g. total annual amount, amount by type of election, political party breakdowns, etc.) – 46%
– No information is provided about actual contributions – 17%
3. If the board or a board committee is involved, their role is primarily:
– Ensure the process is sound from a governance perspective – 55%
– Ensure there is a process & that it’s followed – 36%
– Provide input on the amount or type of contributions – 0%
– Maximize the likelihood that contributions will be consistent with the company’s mission – 9%
Please take a moment to participate anonymously in these surveys:
We haven’t heard as much about proxy access this year. But it’s covered on page 38 of this 110-page report from Shearman & Sterling – which has lots of interesting info about governance provisions & disclosure, executive pay and proxy season trends.
As many have discovered first-hand, it’s an uphill battle to resist shareholder requests to implement proxy access: 90% of companies that received “adopt” proposals in 2015-2018 ended up doing so. And although there’s been a big drop in the number of these proposals, that’s partly because 67% of the S&P 500 and 89 of the largest 100 companies now have a proxy access bylaw in place. Here are some other stats:
– 53 companies adopted proxy access during the 2018 proxy season – compared to 87 during 2017
– Only 22 “adopt” proposals were received this season compared to 100 last year – due to a greater number of companies choosing to voluntarily adopt proxy access and shareholders switching their focus from “adopt” to “fix-it” proposals
– Only 28 “fix-it” proposals were received this season compared to 64 last year – but shareholders continue to advocate for changes to details in proxy access bylaws, as well as restrictions on the shareholder aggregation cap, renominations and the percentage of directors electable via proxy access
– From 2016-2018, only 2 of 103 “fix-it” proposals passed – and those were at companies that used a 5% minimum percentage ownership threshold. However, 37 companies have amended their proxy access bylaws during that time period – which might suggest behind-the-scenes pressure.
– More than 900 meetings have been held by companies with a proxy access bylaw since 2011. Only 1 nomination has been attempted using proxy access – and zero proxy access candidates have ultimately appeared in a company proxy statement
Transcript: “Nasdaq Speaks”
We have posted the transcript for our recent webcast: “Nasdaq Speaks – Latest Developments & Interpretations.”
As a look-back on their first full year as Co-Directors of the SEC’s Division of Enforcement, Stephanie Avakian gave this speech – and Steve Peikin gave this speech – to recap their accomplishments. Stephanie’s speech expands on Enforcement’s “Guiding Principles” for investor protection – and emphasizes that statistics showing a decline in the number of enforcement actions don’t adequately reflect the quality of their efforts. Instead, the goal is to use limited resources to bring “meaningful cases that send clear & important messages.” Here’s the intro:
Last year Steve and I articulated five principles that would guide our decision-making. They are: (1) focus on the Main Street investor; (2) focus on individual accountability; (3) keep pace with technological change; (4) impose sanctions that most effectively further enforcement goals; and (5) constantly assess the allocation of our resources.
I’m going to talk about the Division’s approach to dealing with initial coin offerings (ICO) and digital assets, and second, I will address the Division’s Share Class Selection Disclosure Initiative. These two examples illustrate our approach of identifying challenges and risks facing investors and markets, and developing a response that addresses those challenges in a thoughtful and effective way, and that maximizes our use of resources.
In the context of ICOs, she goes on to discuss non-fraud enforcement actions for ICO registration cases – and says Enforcement isn’t going to shy away from recommending substantial remedies for Section 5 violations. And as I’ve previously blogged, it’s not just issuers who can be the target of an ICO enforcement action. Recent settlements included a hedge fund that violated investment company registration requirements and an unregistered broker dealer.
SEC Enforcement: “Money Isn’t Everything”
John’s blogged that the magnitude of monetary penalties might not be the right way to measure enforcement activity – and Steve Peikin seems to agree. In his recent speech, he elaborated on the full range of relief that the Division of Enforcement recommends to the SEC – and says Theranos is a good example of how customized non-monetary remedies are deployed:
Aspects of the Theranos matter have been covered extensively in other forums. But for today’s purposes, one of the most important elements of the Commission’s settlement with Holmes were undertakings that (1) required her to relinquish her voting control over Theranos by converting her supermajority shares to common shares, and (2) guaranteed that in a liquidation event, Holmes would not profit from her ownership stake in the company until $750 million had been returned to other Theranos investors.
In Theranos, the Commission confronted a situation where, because of the capital structure of the company, Holmes had nearly complete control of the company. And given what we alleged had occurred, it was appropriate to seek relief that protected investors from potential misuse of that controlling position going forward. The undertakings were designed to do exactly that.
Tomorrow’s Webcast: “This Is It! M&A Nuggets”
Tune in tomorrow for the DealLawyers.com webcast – “This Is It! M&A Nuggets” – to hear Weil Gotshal’s Rick Climan, Arnold & Porter’s Joel Greenberg, McDermott Will’s Wilson Chu and Sullivan & Cromwell’s Rita O’Neill impart a whole lot of practical guidance!
Our last “list” blog featured Nina Flax’s morning routine. Now we get to see how Karla Bos starts her day:
OK, here’s the “Bos” edition of the pre-8:30 am accomplishment list. Very different from Nina’s, aside from the requisite coffee and email consumption, but that’s no surprise—she’s a Commuting Supermom and I’m a Work-from-Home Empty Nester. My list looked more like hers when I had a commute and kids at home.
Even so, reflecting on my current list, I realized that 10 years ago I would have read it and totally rolled my eyes, wondering what working person could find the time for all this in the morning and get up so many hours before they really had to. All I can say is that I started to get up earlier and earlier over the years as it dawned on me that doing so allowed me to take control of my day and take care of myself in a meaningful way. So for me, where I am now, this program works:
1. Decide Whether Sleep Will Come Again After 4 a.m. I’ve learned that, as soon as one of my three dogs whimpers or my monkey mind starts jumping, going vertical bears more fruit than chasing a few extra and unlikely minutes of sleep. But if the dogs are quiet, I hold off so the husband can sleep.
2. Get Up by 4:45 a.m. I don’t say “wake up” because I am almost always awake by then. Sometime during the last 10 years I turned into a morning person.
3. Take Dogs Outside. Scan the yard and stand guard for predators (hence, no doggie door) while my little dogs sniff everything as if for the first time. “Oh tree, how I’ve missed you!” I take a moment to enjoy the early morning desert quiet—until the senior dog barks to announce we can go in NOW …
4. Feed the Dogs. For age and health reasons, everyone gets their own custom menu with varying levels of meds and supplements. Start my coffee. Encourage the puppy to eat instead of play.
5. Take Dogs Outside Again. And generally repeat a slightly faster version of step #3. If it’s light enough by now I putter in the yard and make a mental list of what needs attention.
6. Set Out Coffee for My Husband. He’s in the shower about now. He is much less of a morning person (and less of a talker) than I and has a healthy commute. We used to carpool when we worked at the same company, which I thought was great because I could talk and talk and check my email while he drove—but I think he enjoys the quiet time now.
7. Coffee/Digital Content Intake. This means distracting the dogs with dental chews while I drink coffee, check email, and read to get a little smarter about corporate governance and the world. Being in Arizona, I share Nina’s challenge of waking up to east coast days that are already in full swing. Fortunately, our geographically distributed and highly responsive team helps make the time zone balancing act manageable.
8. Throw on Workout Clothes. This is one of the times I listen to a favorite podcast. Once I’d worked from home for a while, I realized I’d stopped doing this, so now I catch up here and there in the morning and whenever I step out of my office for a break.
9. Exercise and Stretch. Some days this means a full-on workout (Empty Nester = spare room for a home gym), some days mostly stretching (which I don’t love because I am not flexible, so podcasts are a great distraction), but it’s a must. It’s key to managing stress, aging, and too much time sitting. Drink water.
10. Check Email.
11. Walk the Dogs. The desert gear required is a separate list but includes big floppy hat, tweezers to remove cactus spines, and a whistle and pepper spray to fend off any aggressive wildlife (which usually keep their distance, but we had a dicey encounter with a group of javelinas and we see coyotes most mornings). Also a headlamp when it’s still dark. Enjoy the stillness and quiet but watch for predators. (You get used to it, rather like walking the streets of NY.)
12. Check Email.
13. Brush Dogs’ Teeth. Owners of small dogs know they require dental vigilance or things get ugly and pricey. Another chance to listen to podcasts.
14. Shower—and Sing! Singing in the shower is another must. Really gets me energized, and I cannot think (worry) about anything when I am belting out a showtune.
15. Meditate for 10-15 Minutes. Mindfulness meditation, which I’m new at, but feels really valuable. One time in the day I don’t make mental lists (well, try not to; like I said, I am new at this).
16. Get Dressed. While I love that this takes far less time and effort now that I work from home, it’s still important to set and adhere to standards, e.g., anything you slept or worked out in is not suitable work attire, and you’re not trying hard enough if your husband comes home and looks startled when he sees you.
17. Eat a Healthy Breakfast. Admittedly this happens at my desk if the preceding 16 activities expanded.
18. Commute to Work. There are things I miss about working onsite with a team, but I adore that my commute simply means walking down the hallway to my home office, where the dogs settle in for a snooze. Power up and get to work!
Nasdaq Proposes Changes to Initial Listing Liquidity Requirements
On Friday, Nasdaq announced that it’s seeking public comment on potential changes to its liquidity requirements for new listings. While all input is welcome, the proposal identifies four topics of particular interest:
– Restricted Shares
– Minimum Investment Value for Holders
– Trading Volume
– Reg A+ Listings & SPACs
Any changes to the rules will apply only to initial listings – not continued listings. Comments are due by November 16th.
As I’ve blogged, studies that show many investors are now taking ESG seriously. For example, in this “Proxy Season Blog”, I noted that State Street’s Rakhi Kumar was encouraging boards to become more familiar with SASB and the growing importance of ESG scores in driving investment.
So it’s not a big surprise that proxy advisors have begun incorporating ESG ratings into their reports & recommendations. Broc blogged about how ISS is starting to do this through its “E&S QualityScore” (aided by its slew of recent acquisitions in the ESG space). Now, Glass Lewis has announced that it’s taking a step in that direction. It will soon start displaying SASB standards in its research reports and on its voting platform – which is a nice boost for SASB in light of all the competition in the “ESG disclosure framework” space. Here’s more detail (also see this blog from Davis Polk):
Guidance on material ESG topics from the Sustainability Accounting Standards Board (SASB) will be integrated into Glass Lewis Proxy Paper research reports and its vote management application, Viewpoint. As a SASB Alliance Organizational Member since mid-2017 Glass Lewis is familiar with the value provided by SASB’s industry-specific standards, and has now been granted the right to display this content directly within its standard proxy research as well as its vote management platform.
As such, users of Glass Lewis’ services will be able to easily identify whether items are aligned with the SASB standards, helping inform the clients’ proxy voting and engagement activities. SASB’s information will be incorporated into Glass Lewis’ products in advance of the 2019 season after the SASB standards are codified, and available for thousands of companies across Glass Lewis’ global coverage universe.
ICOs: Court Says Coins Might Be “Securities”
About a year ago, the SEC brought its first ICO enforcement action – against the promoters of RECoin, which was supposedly a cryptocurrency backed by real estate, but (spoiler alert) wasn’t actually backed by real estate, and didn’t actually provide investors with any form of token or currency.
Now, the same defendant is fighting litigation in the first-ever federal district court case on ICOs – where the issue is whether federal securities laws can be used to prosecute ICO fraud. And wouldn’t you know, he’s not faring so well. Last week, the judge denied his motion to dismiss, in which he’d argued that the ICO didn’t involve “securities.” This Proskauer blog describes the judge’s reasoning (also see these memos):
The definitions of “security” in the relevant securities laws includes “investment contracts,” and whether the investment schemes at issue in this case are investment contracts is a question reserved for the ultimate fact-finder, which will be required to conduct an independent Howey analysis based on the evidence presented at trial.
At the motion to dismiss stage, the court must decide whether the “elements of a profit-seeking business venture” are sufficiently alleged in the indictment such that, if proven at trial, a reasonable jury could conclude that investors provided the capital and shared in the earnings and profits, and that the promoters managed, controlled and operated the enterprise. Judge Dearie concluded that such elements were sufficiently alleged in the indictment, and that if such allegations were proven, they would permit a reasonable jury to conclude that Zaslavskiy promoted investment contracts.
We don’t know for sure what’ll happen at trial, but the defendant’s argument seems a little shaky. Particularly because RECoin wasn’t a “utility token” that could be used in transactions – it was supposedly an investment in tokens that represented interests in assets. And it probably doesn’t help that a Florida magistrate judge recently applied the Howey test to another sketchy ICO – and ruled against the promoters (as described in this DLA Piper memo). But the bigger question is what impact the holding and dicta in these cases will have on ICOs that don’t involve fake tokens and imaginary asset interests.
Are ICOs Insurable?
If you’re in the cryptocurrency service space – e.g. security, custody, transfers, investments – or even if you just accept cryptocurrency for payment, it might be time to have a chat with your insurance broker. This “D&O Diary” blog says that you might even be able to get coverage for ICOs and D&O exposure, in addition to business risks. It’s timely advice, since last week the SEC reminded everyone that the legal risks of ICOs aren’t limited to ICO promoters – e.g. unregistered broker-dealers are also fair game for an enforcement action.
Of course, you’ll have to jump through some hoops to get coverage, in the form of extensive underwriter diligence as well as negotiations on policy limits. This “D&O Diary” blog cautions that coverage will be different from what you’d get in a traditional IPO – and elaborates on the attributes of an “insurable ICO”:
– The company is institutionally/VC backed and has already undergone fundraising
– The company is already an established corporate with an experienced management team & a good track record
– The insurer has been able to fully evaluate all of the relevant exposures, including systemic exposures
– The company can justify that the project underpinning the ICO cannot be achieved or the issue solved without blockchain technology
– The company is able to provide a white paper, regulatory authorizations, evidence of compliance controls, legal opinions, audit reports, banking agreements and outsourced service agreements
The “Ceres Investor Water Hub” – a working group of more than 100 investors that represent $20 trillion in assets – has published an “Investor Toolkit” to foster engagement with companies on water issues. Among other topics, it covers:
– Types of water risks – physical, regulatory, social – and how to assess materiality
– Shareholder resolutions & trends linked to water
– Database of proxy voting guidelines that integrate water issues
– Engagement tips for investors
– Recommendations for incorporating water issues into investment decisions
This Forbes op-ed from Ceres’ CEO Mindy Lubber notes that 81% of major U.S. companies in water-dependent sectors have water stewardship programs – though only 37% have set qualitative targets to better manage water resources. It doesn’t take too much imagination to predict that there’ll be more requests for disclosure in this area.
Why Do Some Companies Go Public Through Debt IPOs?
I don’t see much written about private companies issuing public debt, so this study caught my eye. Here’s an excerpt:
As compared to companies in the same industry that conduct an equity IPO in the same year, companies that go public via debt are typically significantly larger and more easily able to disclose their important performance data through their financial statements (versus non-financial disclosure). When the debt-first companies eventually go public by issuing equity, they face lower underpricing than companies without public debt.
Ownership structure (backing by a financial sponsor such as a venture capital or private equity firm) and the relative cost of information production in debt versus equity markets appear to be significant in explaining why these firms choose debt before equity and their subsequent decision to issue equity. Future research on IPOs should take into account that firms do not just face a simple choice between going public and staying private, but also an intermediate choice of issuing public debt but staying private.
More on “Proxy Season Blog”
We continue to post new items daily on our blog – “Proxy Season Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– More on “Shareholder Meetings: What to Do With a Tied Vote?”
– Shareholder Meetings: What to Do With a Tied Vote?
– 6 Reasons Why Corp Fin Denies Exclusion Under SLB 14I
– Icahn, Elliott & Activist Peers Grab the Mic in Meeting Season
– Management Proposals: Factors for Those That Just Eke By?
