Last week, Palantir filed the Form S-1 for its anticipated “Spotify-style” IPO. Despite new NYSE rules on “primary” direct listings, the company isn’t selling any shares in this deal – rather, existing shareholders will resell shares of Class A common stock on the NYSE.
For a company that’s been cloaked in mystery and has bestowed the title “legal ninja” on its in-house lawyers, the registration statement – much like a direct listing – is anti-climactic. Which is a compliment to everyone involved! As John tweeted, “the S-1 looks like it was written for grownups.” And unlike some of the other direct listings that we’ve seen, this one does include a D&O lock-up that runs until after the company announces its year-end results.
A few other things that jump out are:
– Prospectus cover page – Underwriter logos are conspicuously absent (like other direct listing companies, Palantir has engaged several financial advisors on the deal – whose names first appear in a risk factor on page 65 – and of course their role is further described in the Plan of Distribution)
– Plan of Distribution – Although there’s no formal book-building, there’s still the impression of some “shadow book-building.” The disclosure is clear that the banks are conducting investors communications & presentations only in connection with “investor education” and not to coordinate price discovery or sales…but it also says that the designated market maker will consult with Morgan Stanley on the opening public price, who will provide input based on pre-listing selling & buying interest that it becomes aware of. I’m sure this section was pored over by legal counsel & banks in excruciating detail, so check out the full thing if you’re interested in how the mechanics are described.
– CEO Letter – Typical stuff we see from unicorns – soaring language about the company and its rejection of a typical business model – but also a critique of Silicon Valley’s “values & commitments” and a pitch that Palantir is forward-thinking, moral and justified in its approach to data collection.
– Privacy – Under the heading “Our Team” on page 168, Palantir describes its “Privacy & Civil Liberties Engineering” team and its “Council of Advisors on Privacy & Civil Liberties” – as well as privacy-enhancing technologies.
– Board Composition & Governance – Three of the six independent directors joined the board in July. The governance structure isn’t in place yet but is contemplated as part of the NYSE listing.
– Multi-Class Cap Structure – In addition to the Class A common shares being resold in the offering, the company describes its Class B common stock (10 votes per share) and Class F common stock (a variable number of votes, all shares held in a voting trust established by co-founders Alex Karp, Stephen Cohen and Peter Thiel, and controlling up to 49.99% of total voting power). A risk factor notes that the company’s cap structure could make it ineligible for inclusion in certain indices.
– Founder Voting Agreements – The company has yet to file the charter with the terms of the “Class F” shares – or the stockholders agreements – and that’s probably the most interesting part of the offering.
This registration statement will likely go effective before the new Reg S-K rules go into effect, so Palantir won’t have to worry about immediately revising its disclosure. While nobody seems too surprised about the net loss figures (this is a unicorn, after all), this Reuters article says that the offering will “test the appetite of capital market investors who have in recent years shown an increasing wariness of backing loss-making startups, most notably WeWork, which botched its IPO last year.” But as we’ve seen, 2020 is a whole new animal.
Shelf Registrations & Takedowns: 10-Page Guide
This 10-page Mayer Brown memo gives a nice overview of the shelf registration & takedown process – including permitted offerings, liability & diligence issues, benefits of the shelf registration process, filing requirements, and a timely section on how market volatility may affect WKSI status and shelf eligibility. The memo gives this checklist of key questions to ask if you’re contemplating a shelf registration or takedown (also see our 140-page “Form S-3 Handbook” for lots of detailed guidance):
1. Is the issuer planning to sell new securities or outstanding securities?
2. Are securities being immediately offered after the registration statement becomes effective?
3. Will the issuer choose to offer securities in a delayed primary offering?
4. Is the issuer considered a well-known seasoned issuer?
5. Is the issuer subject to the baby shelf limitation?
6. Is the issuer considering using a shelf registration for one or more acquisitions?
7. Will the issuer be required to file a post-effective amendment as opposed to a prospectus supplement?
You can still register for our popular conferences – the “Proxy Disclosure Conference” & “17th Annual Executive Compensation Conference” – to be held virtually Monday – Wednesday, September 21st – 23rd. We’ll be covering the latest issues that you need to know – including COVID-related pay adjustments and disclosures, human capital management, navigating proxy advisors, and shareholder proposal rules & trends. Here are the agendas – 15 panels over 3 days.
New this year, we have also added interactive roundtables to discuss pressing topics! We hope you’ll join us for one of these half-hour breakout sessions – you can sign up here. To make the most of your experience, check out this blog for tips for “virtual networking” for lawyers. Here’s an excerpt:
– Be On-Camera: Speaking of cameras, please do not participate in a zoom networking event without being able to have a camera available. That black square with your name will not allow others to see who you are. It would be the equivalent to going to an in-person event and wearing a paper bag over your head. People would like to see who you are. Also, make sure that you are well lit when you are on camera. Too many people are on camera with the light behind them and you cannot see their faces clearly. A light should be in front of you.
– Show up on time (or even early): This is something I advocate for IRL networking, but concerning virtual networking, it is even more important. It is distracting to have someone enter a conversation in the middle of a virtual event, as opposed to a live networking event, and should be avoided at all costs. And, if you have to leave early, you can just make mention that you have an appointment that you have to attend to and thank everyone who was there. You can send a note to the host using the chat feature. Or, you can just leave quietly.
As the blog notes, there are no marketing and business development tactics that cannot be done virtually. So take advantage of this opportunity to meet with your fellow practitioners in a low pressure way, have a good conversation, and make a connection or two.
Earlier this week, McDonald’s filed a Form 8-K to announce that it had filed this complaint in the Delaware Court of Chancery against its former CEO, Steve Easterbrook, who was terminated without cause last year following a board investigation of a consensual relationship with an employee in violation of the company’s Standards of Business Conduct. The complaint seeks to claw back severance payments – and to prevent the exercise of stock options and sale of stock issuable under outstanding equity awards. The collective value of that compensation is estimated at $57.3 million, according to this WSJ article.
The complaint alleges that Mr. Easterbrook acted fraudulently in negotiating his termination, in claiming that he did not have physical relationships with any company employees. In July, McDonald’s received an anonymous employee tip that caused the board to reopen its internal investigation. During the new investigation, the board uncovered photographic evidence of prohibited physical relationships with multiple employees in Easterbrook’s company emails. According to the complaint:
The Company was not aware of these photographs before July 2020, when it discovered them in the course of investigating the allegations regarding Easterbrook and Employee-2. Neither these photographs, nor the e-mails to which they were attached, were present on Easterbrook’s Company-issued phone when it was searched by independent outside counsel in late October 2019 because Easterbrook, with the intention of concealing their existence from the Company, had deleted them from his phone. Unbeknownst to Easterbrook, however, the deletion of the e-mails from the mail application on his Company-issued phone did not also trigger the deletion of those e-mails from his Company e-mail account stored on the Company’s servers.
The Board would not have agreed to the terms of the Separation Agreement had it then been aware of Easterbrook’s physical sexual relationships with three McDonald’s employees, his approval of a discretionary stock grant for Employee-2 while they were in a sexual relationship, and the falsity of his representation to outside counsel that he had never engaged in a physical sexual relationship with a Company employee. That conduct constituted a clear legal basis to terminate Easterbrook for cause.
The complaint references “cause” because Easterbrook’s separation agreement incorporates clawback provisions from the company’s standard severance plan, which require repayment if the plan administrator determines that the recipient committed an act that would constitute “cause” while employed. This case highlights that boards may want the “cause” definition to do more work in this day & age – and why revisiting narrowly-formulated versions on a clear day could afford the board with some additional room to maneuver if it comes to light that an executive has engaged in conduct causing reputational harm. This NYT article observes:
The lawsuit represents an extraordinary departure from the traditional disclose-it-and-move-on decorum that American corporations have often embraced when confronted with allegations of wrongdoing by senior executives. More than a few chief executives in recent years have lost their jobs after allegations of sexual or other misconduct, but for the most part they have departed quietly and the companies haven’t aired the ugly details.
In the #MeToo and Black Lives Matter eras, however, more companies are striving to position themselves as good corporate citizens, responsible not only to shareholders but also to customers, employees and society at large. Mr. Easterbrook’s successor at McDonald’s, Chris Kempczinski, has called for a new corporate emphasis on integrity, inclusion and supporting local communities.
The company launched its lawsuit just before a books & records action that Bloomberg reported was brought against the company by a group of Teamsters pension funds on Wednesday, alleging “a pervasive sexual harassment & gender discrimination problem.” This follows a class action suit filed last fall and other complaints.
The McDonald’s board is taking some heat for relying on Easterbrook’s representation that he had only one affair and not digging deeper in the initial investigation. The anonymous tip came to light last month after McDonald’s held a town hall meeting in which employees were encouraged to come forward with concerns, and the board immediately investigated the complaint. After the board & comp committee chair weathered a “vote no” campaign at this year’s meeting, they now have many months to engage with shareholders and resolve this issue. It’s probably good that the town hall wasn’t in April or May.
On a related note, this CFO.com article reports that the former COO of Pinterest is suing the company for gender discrimination and wrongful termination. Boards are busy right now – and they need to continue to pay attention to #MeToo risks as well as risks arising from the social movement for equity & inclusion. For guidance on navigating potential landmines, visit our checklist on board oversight of sexual harassment policies.
SEC Preparing Proposals to Regulate Chinese Audits
Late last week, the “President’s Working Group on Financial Markets” released a report to address the ongoing issue of the PCAOB being unable to review the work papers for audits of US-listed companies who use Chinese accounting firms – who say, according to this Bloomberg article, that “Chinese law bars them from sharing those documents on the grounds that the documents may contain state secrets.” Because of this stance, China is known as a “Non-Cooperating Jurisdiction.”
The report makes 5 recommendations – but the upshot, as explained in this WSJ article, would be to ban Chinese companies from listing on US exchanges unless they comply with US audit requirements. Here’s more detail from the report:
The PWG recommends enhanced listing standards to require,as a condition to initial and continued exchange listing in the United States, PCAOB access to audit work papers of the principal audit firm for the audit of the listed company.
Companies that are unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in NCJs may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm.
In addition:
The PWG recommends that,as a specific listing standard, a more specific disclosure requirement or both, requiring enhanced and prominent issuer disclosures of the risks of investing in issuers from NCJs. These actions could include rulemaking and/or issuing interpretive guidance to clarify the disclosure requirements to increase investor awareness, and more general awareness of the risks of investing in such companies.
John blogged a few months ago about a statement from SEC & PCAOB officials on this topic. The Senate has also passed legislation that would amend Sarbanes-Oxley to prohibit the trading of securities – on an exchange or over the counter – for companies that retain an auditor whose reports cannot be inspected completely (and similar legislation has passed the House).
Now, in light of the Administration’s report, SEC Chair Jay Clayton and five other senior SEC officials, including Corp Fin Director Bill Hinman, have issued a statement to say that the SEC will prepare proposals in response to the report’s recommendations. The statement also says that the SEC staff stands ready to assist Congress with technical assistance in connection with any potential legislation regarding these matters.
These tensions don’t appear to be deterring Chinese companies from pursuing US listings – this WSJ article notes that more than 20 companies from China have gone public so far this year on Nasdaq or the NYSE, raising $4 billion in total.
Podcasts: More “Women Governance Gurus” With Courtney Kamlet & Liz
I continue to team up with Courtney Kamlet of Vontier to interview leaders in the corporate governance field about their career paths – and what they see on the horizon. Check out our latest episodes:
– Darla Stuckey, President & CEO, Society for Corporate Governance
This 40-page memo – recently commissioned & released by COSO – explains how companies can use blockchain technology to create more robust internal controls – and also highlights new controls that will be necessary because of the risks that blockchain creates. According to the memo, business use of blockchain will implicate the 5 components of COSO’s 2013 Internal Control Framework as follows:
1. Control Environment: Blockchain may be a tool to help facilitate an effective control environment (e.g., by recording transactions with minimal human intervention). However, many of the principles within this component deal primarily with human behavior, such as management promoting integrity and ethics, which, even with other technologies, blockchain is not able to assess. The greater challenge relates to the intertwining of an entity with other entities or persons participating in a blockchain and how to manage the control environment as a result.
2. Risk Assessment: Blockchain creates new risks and simultaneously helps to mitigate extant risks, by promoting accountability, maintaining record integrity, and providing an irrefutable record (i.e., a person ororganization cannot deny or contest their role in authorizing/sending a message or record).
3. Control Activities: Blockchain can act as a tool to help facilitate control activities. Blockchain and smart contracts can be a powerful means of effectively and efficiently conducting global business (e.g., by minimizing human error and opportunities for fraud). The collaborative aspects of blockchain, however, can introduce additional complexity, particularly when the technology is decentralized and there is no single party accountable for the systems that fall under ICFR.
4. Information & Communication: The inherent attributes of blockchain promote enhanced visibility of transactions and availability of data, and can create new avenues for management to communicate financial information to key stakeholders faster and more effectively. One aspect, in particular, for management to consider in applying blockchain is the availability of information to support the financial books and records, and related auditability of information transacted on a blockchain.
5. Monitoring Activities: The promise of blockchain to facilitate monitoring more often, on more topics, in more detail, may change practice considerably. The use of smart contracts and standardized business rules, in conjunction with Internet of Things (IoT) devices, may alter how monitoring is performed.
Audit Adjustment Waivers: Red Flag for Restatements & Audit Costs
Using a sample of 3,144 audits, this recent study found that the decision to waive auditor-proposed adjustments to financials may have unforeseen consequences of increased restatement risks, incentives to manage earnings, and higher audit costs. Here’s an excerpt:
We estimate that at least 80% of pre-audited financial reports contain misstatements detected by auditors, and management frequently does not make the proposed adjustments. Perhaps surprisingly, management corrects all misstatements only about 12% of the time and waives all proposed adjustments about 50% of the time.
We find that waived adjustments are linked both to lower financial reporting quality measured by material misstatements and to incentives to meet/beat analyst forecasts; the latter finding suggests disposition decisions can be an earnings-management mechanism.
We find that auditors respond to the increased restatement risk associated with management’s decisions to waive audit adjustments by increasing audit effort this period and are able to pass along at least some of these costs to their clients. The auditor’s response is persistent: auditors are likely to propose more next-year audit adjustments when clients waive adjustments in the current year, leading to increased effort (audit hours) and costs (audit fees) next year. Finally, we identify one reason managers may waive adjustments – to meet or beat analyst consensus forecast estimates.
The professors conclude that many of these waivers result from focusing on quantitative thresholds – and overlooking qualitative facts that impact the materiality of missatements.
Call for Photos: Marty Dunn Tribute
Our “Proxy Disclosure & Executive Pay Conferences” are coming up next month – and while I’m very excited about our agendas & speakers, the conference won’t be the same without Marty Dunn on the roster. We’ll be running a tribute to Marty and would appreciate any photos from the community that could help make it special. Please email me with anything you’d like to share – liz@thecorporatecounsel.net.
Some felt the statement pushed the theory of “shareholder primacy” aside – and we’ve been going around & around since then on whether this was simply a return to the BRT’s original position, whether it affects directors’ fiduciary duties, whether investors care, and whether corporate practices align with the statement. Many have steadfastly emphasized that this is just a debate on semantics and that the BRT statement didn’t change anything about how management or boards actually function, since the promotion of other stakeholders can typically be justified as something that also benefits shareholders in the long run.
Consistent with that view, this forthcoming article from Harvard Law Profs Lucian Bebchuk and Roberto Tallarita, which was also the subject of a WSJ op-ed last week, found that very few signatories involved their boards in the decision to sign the statement. Here’s an excerpt:
To probe what corporate leaders have in mind, we sought to examine whether they treated joining the Business Roundtable statement as an important corporate decision. Major decisions are typically made by boards of directors. If the commitment expressed in the statement was supposed to produce major changes in how companies treat stakeholders, the boards of the companies should have been expected to approve or at least ratify it.
We contacted the companies whose CEOs signed the Business Roundtable statement and asked who was the highest-level decision maker to approve the decision. Of the 48 companies that responded, only one said the decision was approved by the board of directors. The other 47 indicated that the decision to sign the statement, supposedly adopting a major change in corporate purpose, was not approved by the board of directors.
Bebchuck & Tallarita also looked at the corporate governance guidelines of the companies whose CEOs signed the BRT statement – and found that most of them reflect a “shareholder primacy” approach – e.g., stating that the business judgment of the board must be exercised in the long-term interest of shareholders.
I haven’t been in any of these c-suites or boardrooms, but I’d venture a guess that many had already been discussing long-termism and stakeholder governance prior to the BRT’s statement (even if they weren’t using those specific catchphrases) – with a view towards maximizing long-term shareholder value. Were the BRT commitments illusory, or just within the scope of those prior discussions? Either way, the absence of board involvement seems to indicate that no change to director fiduciary duties was intended.
This article from UCLA Law Prof Stephen Bainbridge agrees that the evidence is that most BRT members remain committed to shareholder value maximization – and suggests two possible reasons why the BRT publicly shifted its position:
First, the members may be engaged in puffery intended to attract certain stakeholders for the long-term benefit of the shareholders. Specifically, they may be looking to lower the company’s cost of labor by responding to perceived shifts in labor, lower the cost of capital by attracting certain investors, and increase sales by responding to perceived shifts in consumer market sentiment. They may also be trying to fend off regulation by progressive politicians. Second, some BRT members may crave a return to the days of imperial CEOS.
Corporate Purpose: Take 2 for the “Takeover Titans”?
Last month, I blogged about some back & forth between Skadden and Wachtell on the ongoing “corporate purpose” debate. One member pointed out that this is a revival of the old 1980s Skadden v. Wachtel debates when Joe Flom (now deceased) and Marty Lipton (clearly alive) made themselves famous in the hot times of corporate raiding by touring with show about their rival forms of takeovers and defenses.
Here’s an old University of Michigan newsletter that recounts a panel discussion including these two giants. And here’s a recent interview of Marty Lipton in “Business Law Today,” in which he comments that those touring days might have been the point when he knew he was a leader in the field:
JP: Was getting attacked by the folks from the Chicago School the time that you felt like, “OK—I’ve made it on the national stage”? When did you realize that you’re a leader in this field?
ML: I don’t know whether that’s possible to answer. I would say mid-’80s with the poison pill more than anything else. I certainly wasn’t an intellectual leader. From 1976, when Steve Brill wrote an article (“Two Tough Lawyers in the Tender-Offer Game,” NY Mag., 1976) about Flom and myself being the two lawyers on opposite sides in tender offers, I was a known quantity, and people were calling who didn’t know me but just from reputation were seeking representation in takeover situations. So it’s hard to say.
Tomorrow’s Webcast: “CEO Succession Planning in the Crisis Era”
Tune in tomorrow for our webcast – “CEO Succession Planning in the Crisis Era” – to hear Kerry Burke of Covington, Rusty O’Kelley of Russell Reynolds and Amy Seidel of Faegre Drinker discuss the CEO succession planning alternatives that are available to boards, analyze how to maintain a succession plan that’s adaptable to a dynamic business environment and highlight legal, contractual and disclosure minefields to avoid.
Last month, John blogged that the universal proxy proposal was on the SEC’s Reg Flex Agenda for finalizing in the near-term. Now, this letter from an informal “Universal Proxy Working Group” – consisting of 15 heavy-hitters from Wachtell, CII, Broadridge, CalSTRS, DF King, Wilson Sonsini, Trian, and others – is urging Corp Fin to consider common observations on the proposal as the Commission potentially nears the finish line. While the letter mostly supports the 2016 proposal, it makes a few suggestions. Here’s an excerpt:
– We support requiring disclosure on the universal proxy cards or in their accompanying materials (as well as in the definitive proxy statements), of the effect of: voting on the universal proxy card for more candidates than available board seats; voting on the universal proxy card for fewer candidates than available board seats; and signing and returning an otherwise unmarked universal proxy card.
– We support the Proposing Release’s presentation and formatting requirements, which advance the above objectives without compelling opposing sides to produce identical cards or co-ordinate the creation of a single universal proxy card. We believe both of these alternative models could cause unnecessary disruption for market participants accustomed to the circulation of two competing cards. The core improvement we seek is the ability of shareholders to use any proxy card they choose to vote for any combination of board nominees they prefer.
– We acknowledge that the presentation and formatting requirements described in the Proposing Release are not necessarily exhaustive of all appropriate requirements to ensure clarity, ease of use and fairness in an orderly process, and that further requirements, e.g., uniform presentation and formatting of the vote boxes beside the nominees, as well as standardized general colors for respective registrant and dissident cards, could be appropriate and helpful.
– While the Proposing Release centers on the universal proxy card, we would favorably view the SEC Staff having authority where necessary and appropriate to also facilitate the fair presentation of all nominees on vote instruction forms (VIFs) and electronic proxy voting platforms in the context of proxy contests.
– While the Proposing Release requires the dissident to solicit holders of shares representing a simple majority of outstanding voting power, the majority of the UPWG participants believe that requiring the solicitation of holders of two-thirds of outstanding voting power could also be workable,while commanding broader comfort that the threshold strikes an appropriate balance between providing the utility of the universal proxy system and precluding dissidents from capitalizing on the inclusion of dissident nominees on the registrant’s card without undertaking meaningful solicitation efforts. A requirement to solicit the holders of all outstanding votes would ensure that no shareholder is disenfranchised, but would not strike an appropriate balance, in the view of the majority of UPWG participants, especially taking into account the fact that dissidents generally are not reimbursed for their proxy solicitations (regardless of whether the solicitation fails or succeeds).
Other near-term SEC rulemaking initiatives appear to have less consensus support. As reported in this blog from Cooley’s Cydney Posner, an appropriations bill recently passed by the House says that SEC funding can’t be used to finalize, implement, administer or enforce rules that would:
– Change procedural requirements or raise resubmission thresholds for shareholder proposals
– Harmonize private offering exemptions without strengthening filing requirements for exempt offerings in the same or stronger manner as proposed in 2013
Cydney notes the possibility that these provisions could be jettisoned in the Senate’s version of the bill.
More on “What Does ESG Mean to You and Me?”
Lynn ran a guest blog last week from Rhonda Brauer about the meaning of ESG. We received several responses, including this 39-minute interview that our friend Keir Gumbs gave to Berkeley Law’s “ESG Beat.” It’s an engaging recap of how Keir came to work at Uber, what the company is doing on ESG issues, and who is driving that progress.
SEC Personnel Changes: On a Roll
Not only did we see Senate confirmations last week for two SEC Commissioners, the Commission also announced that Enforcement Co-Director Steven Peikin is stepping down, after three years on the job. Stephanie Avakian will remain as the Enforcement Division Director.
In addition, Lindsay McCord was named Chief Accountant in Corp Fin. The SEC’s press release notes that Lindsay has served as Acting Chief Accountant since March, and prior to that was a Deputy Chief Accountant in the Division.
The SEC isn’t the only organization making changes. The CII bid farewell to its leader Ken Bertsh last week, with Amy Borrus taking over as planned as Executive Director. Congratulations to both Ken and Amy!
Last week, the WSJ reported that the SEC is investigating the circumstances around Eastman Kodak’s announcement of a $765 million government loan to make COVID-19 pharmaceuticals at its US factories (which is now apparently on hold due to the probe). As a case study in “what not to do,” this is a pretty good one. Don’t:
1. Grant options the day before a positive announcement – especially if the options can be immediately exercised, and even if the recipients say they won’t sell the shares
2. Allow insiders to buy or sell shares while in discussions about a material deal
3. Share unembargoed press releases with media outlets before the company’s official announcement
As we see time and time again with insider trading allegations around big corporate news events, even if trading activity is consistent with prior transactions, the optics are terrible. Several members of Congress sent this letter to SEC Chair Jay Clayton to request an investigation into the Kodak transactions – as did Senator Elizabeth Warren (D-Mass.) in her own letter.
Senator Warren’s letter also calls attention to the Reg FD implications of non-intentional disclosure of material nonpublic information. The alleged problem here was that Kodak sent a news advisory to media outlets a day before its official announcement. The WSJ confirmed that the company didn’t provide any embargo instructions to prevent the press from sharing the info.
I don’t think that you could call what happened a “leak,” given the info was intentionally released – but at any rate, shares spiked as the news trickled out, and arguably not everyone had access to the same information. For example, investment firm “bots” had a big advantage as they crawled the web. Instead of immediately making its own announcement, Kodak asked the reporters to remove their articles. However, that may have been an incomplete solution since some stories had already been captured by screen shots, social posts and search engines.
Don’t let this happen to you. Read our “Reg FD Handbook” for more guidance on how embargoes can protect you from a violation. And if you’re a “Reg FD junkie” – as many of us are – check out the podcast series that our very own Dave Lynn has been curating for the SEC Historical Society, to celebrate the 20th anniversary of its adoption.
Remote Work: Questions Audit Committee Chairs Are Asking
The risks of remote work are top of mind for audit committee chairs right now, according to this PCAOB memo. Here are some questions they’re discussing with their auditors (also see this Cooley blog – and my blog last month about disclosure controls):
1. Will additional time be needed to get the audit work done remotely?
2. What complexity does working remotely add to the audit?
3. Will working remotely affect productivity of audit engagement team members?
4. If so, does the audit plan need to be updated, and do fees need to be revisited?
5. Has remote work affected the company’s ICFR? If so:
– Is the auditor including new controls in their assessment, or evaluating changes to existing ones?
– Has the auditor identified any concerns with respect to segregation of duties?
6. If a review of the issuer’s interim financial information has been completed already, are there any lessons learned that can be applied to the year-end audit?
7. Are there any technology enhancements or collaborative tools that should be considered to support longer-term remote work?Has the auditor assessed potential risks of material misstatement related to cybersecurity, and how does the auditor plan to respond to those risks?
Transcript: “Coronavirus: Next Steps For Disclosure & Governance”
We have posted the transcript for our recent webcast: “Coronavirus: Next Steps For Disclosure & Governance.”
In this 30-minute podcast, Dave Lynn welcomes a series of eminent guests to remember his great friend and “Radio Show” co-host Marty Dunn, who died on June 15, 2020 (here’s Dave’s written tribute). Topics include:
Although the social media sphere is quick to characterize this year’s parade of horribles as an “Act of God,” that characterization may be more difficult for companies that want to call off their contractual obligations. If you’re negotiating a contract right now and want to preserve an “out” for an inability to perform, check out this Vinson & Elkins memo for drafting tips (and for more resources, see the “Contractual Performance” memos that we’re posting in our “COVID-19” Practice Area):
Looking ahead, parties seeking to boost the chances that their inability to perform will be excused should specifically reference the COVID-19 pandemic on the list of events that would qualify as force majeure. In addition, the COVID-19 pandemic should be identified as unforeseeable and unpredictable. The reason: in many states, even if an event is specifically listed, courts require that a party claiming force majeure demonstrate that the event was not foreseeable.
The blog also recommends asking these four questions if you’re on the receiving end of a force majeure notice and want to continue to enforce performance:
1. Is the pandemic covered by the force majeure clause?
2. If so, is the activity that is not being performed as promised something that actually is being prevented by the covered event?
3. Is there a specific exclusion in the force majeure clause for that performance?
4. What are the notice requirements — was the notice sent within the specified deadline?
Cybersecurity Oversight: What Boards Are Doing
This article from Melissa Krasnow of VLP Law Group looks at recent NACD benchmarking in the cyber-risk oversight of public versus private company boards. Among other things:
– Public and private company boards engaged in the same top seven and the bottom cyber−risk oversight practices over the past year, with differences in terms of percentages
– Over 60% of public companies scheduled cyber risk at least once on the board agenda over the last year, versus over 40% of private companies
In addition, the “Private Company Governance Survey” – which was published in May 2020, about five months after the “Public Company Governance Survey” was published in December 2019 – alludes to the impact of the COVID-19 pandemic on cybersecurity: “The surge of remote workers in the first quarter of 2020 may expose companies to a new set of risks.” This impact continues beyond the first quarter of 2020 and affects both public and private companies.
At an open meeting yesterday, the SEC adopted amendments to its proxy solicitation rules, which are intended to give companies a more meaningful opportunity to review and respond to proxy advisors’ voting recommendations, ensure that proxy advisor clients have access to those responses prior to the meeting, and require the advisory firms to disclose potential conflicts of interest. The rules were adopted by a 3-1 vote, with Commissioner Allison Herren Lee issuing this dissenting statement. CII also issued a statement expressing disappointment with the rules.
– “Solicitation” Includes Proxy Advice for a Fee: Consistent with the Commission’s longstanding view, the changes amend the definition of “solicitation” in Exchange Act Rule 14a-1(l) to specify that it includes proxy voting advice, with certain exceptions.
– New Conditions for Exempt Solicitations: Under amendments to Rules 14a-2(b)(1) & 14a-2(b)(3), in order for proxy voting advice businesses to rely on the exemptions from information and filing requirements (which are essential for them to be able to carry out their business), they must satisfy the conditions of new Rule 14a-2(b)(9), including disclosure of conflicts of interest and adoption & disclosure of policies that allow for companies to review & respond to the voting recommendations. New Rule 14a-2(b)(9) also establishes non-exclusive safe harbors that will allow proxy advisors to meet the conditions.
– Application of Antifraud Rule to Proxy Advice: The amendments modify Rule 14a-9 to include examples of when the failure to disclose certain material information in proxy voting advice could, depending upon the particular facts and circumstances, be considered misleading within the meaning of the rule. These examples include material information about the proxy voting advice business’s methodology, sources of information, or conflicts of interest.
It is worth noting that the “registrant review” provisions of the final rule are less demanding that those that were originally proposed. That original proposal would have obligated advisors to provide companies with a copy of their advice in order to permit them to identify errors or other problems with the analysis in advance of their release, and would have also required proxy advisors to provide the company with a final report no later than two business days prior to its dissemination to their clients.
The amendments will be effective 60 days after publication in the Federal Register, but affected proxy voting advice businesses subject to the final rules are not required to comply with the Rule 14a-2(b)(9) amendments until December 1, 2021. At least that’s the plan – ISS has a pending lawsuit against the SEC challenging the agency’s ability to regulate it. The parties agreed to stay the lawsuit until the SEC adopted final rules. Now that the rules are in place, the real fight may be just beginning.
Proxy Advisors: SEC Supplements Guidance for Investment Advisers
Also yesterday, the SEC supplemented its 2019 guidance to investment advisers about their proxy voting responsibilities, and the steps they could take to demonstrate that they’re making voting decisions in a client’s best interest. As noted in Cydney Posner’s blog, that guidance:
“recommended that investment advisers satisfy their own fiduciary duties of care and loyalty and obligations to act in their clients’ best interests, in part, through careful oversight of proxy advisory firms (i.e., investment adviser as ‘enforcer’), such as by monitoring and analyzing the methodology and processes of proxy advisory firms, including their processes for engagement with companies and procedures to address errors.”
The supplemental guidance addresses how investment advisers should consider company responses to proxy advisor voting recommendations. This includes circumstances in which the investment adviser utilizes a proxy advisory firm’s electronic vote management system that “pre-populates” the adviser’s ballots with suggested voting recommendations or for voting execution services (so-called “robo-voting”). It also addresses their disclosure obligations and client consent requirements when using automated voting services. Here’s an excerpt:
An investment adviser should consider, for example, whether its policies and procedures address circumstances where the investment adviser has become aware that an issuer intends to file or has filed additional soliciting materials with the Commission after the investment adviser has received the proxy advisory firm’s voting recommendation but before the submission deadline. In such cases, if an issuer files such additional information sufficiently in advance of the submission deadline and such information would reasonably be expected to affect the investment adviser’s voting determination, the investment adviser would likely need to consider such information prior to exercising voting authority in order to demonstrate that it is voting in its client’s best interest.
Proxy Advisors: “Best Practices” Get New Oversight
Last week, the “Best Practices Principles Group” for shareholder voting research announced the appointment of an oversight committee to monitor the Principles that govern proxy advisor signatures, including ISS, Glass Lewis and Minerva Analytics. I most recently blogged about the BPPG last year when they updated the best practices from their original 2014 iteration. The international board includes:
– Six institutional investor representatives – including Amy Borrus of CII
– Three public company representatives – including Hope Mehlman of Regions Financial
– Two independent academic representatives
Among other responsibilities, the oversight board will conduct an annual review of the public reporting of each BPPG Signatory and present that information publicly. Congrats to Amy, Hope and the other members for being involved in this initiative.
A recent 12-page Moody’s report says that the Covid-19 pandemic has increased the likelihood that ESG will affect credit ratings over the long term – i.e., beyond 12-18 months from now. The report puts these trends into three buckets: risk preparedness for global risks, social considerations related to healthcare access & economic inequality, and a shift from shareholder primacy to stakeholder needs. Specifically, it predicts that in addition to the “usual suspects” of governments, companies in the healthcare industry and carbon-intensive companies, all sectors have the potential for greater scrutiny of these areas:
After Corp Fin supplemented its Covid-19 disclosure guidance last month to suggest what information companies should be considering for pandemic-related disclosure, we have been hearing from members grappling with their quarterly disclosure controls processes for their upcoming reports. To capture reportable events throughout the business, some are relying on questionnaires – like this one that we’ve posted in Word.
In our webcast last week – “Coronavirus: Next Steps For Disclosure & Governance” – Keir Gumbs also emphasized that companies should be thinking about how the “work from home” environment is affecting internal controls and disclosure controls. In addition to the topics covered in Corp Fin’s guidance, this Deloitte blog suggests thinking about these potential issues (also see this Freshfields blog):
– Store or facility closures
– Loss of customers or customer traffic
– The impact on distributors
– Supply chain interruptions
– Production delays or limitations
– The impact on human capital
– Regulatory changes
– The risk of loss on significant contracts
Quick Poll: Are You Reviewing Your Disclosure Controls?
When the BRT made the shift last year from “shareholder primacy,” many wondered what type of action the signatories would take to demonstrate a commitment to stakeholders. Earlier this year, Lynn blogged that 85% of those signatories published a sustainability report – and over half had adopted one or more sustainable development goals.
But this 67-page analysis, from two profs at the London School of Economics & Columbia Business School, suggests the “stakeholder” cynics might be right. Not only did the BRT statement have little impact on signatories’ stock prices at the time it was announced, the data that the professors reviewed showed that relative to industry peers, signatories to last year’s BRT statement:
– Commit environmental and labor-related compliance violations more often (and pay more in compliance penalties)
– Have higher market shares (and thus may face more scrutiny in future M&A transactions)
– Spend more on lobbying policymakers
– Report lower stock returns alphas and worse operating margins
– Have higher paid CEOs
The professors also looked at stocks in the largest ESG ETF and ESG mutual fund and found found “barely any correlation” between the included companies and federal environmental & labor compliance violations. That’s despite large asset managers emphasizing that ESG and sustainability issues are used by them in screening or otherwise evaluating investments, or affect their voting. The professors also question whether ESG scores from third-party vendors accurately reflect ESG behavior.
The professors do acknowledge that their data is not very demonstrative of “governance” factors and is more focused on “E&S” – and one might wonder whether the size of the signatories had an outsized impact on some of these findings. But the results are sobering and suggest that investors who are focused on these issues likely need to do more of their own verification. As if you didn’t have enough surveys already…
Podcast: The Minority Corporate Counsel Association
A few weeks ago, I blogged on “The Mentor Blog” about specific things we all can do to help retain Black lawyers, as the stats are showing that “diversity” efforts to-date aren’t moving the needle and probably need to focus more on equity & inclusion. I continued that conversation in this 30-minute podcast with Jean Lee, who is the CEO & President of the Minority Corporate Counsel Association.
In this podcast, Jean discusses the work that the MCCA has been doing – and why it’s important to have diverse corporate lawyers. Conversation topics include:
– How MCCA assists its members in recruiting, retaining & promoting women and diverse attorneys
– How approaches to improving diversity & inclusion may vary by group
– The business case for diversity
– What types of corporations & law firms are involved with MCCA
– Ways that individuals can advance diversity, equity & inclusion in their day-to-day professional lives
July-August Issue: Deal Lawyers Print Newsletter
This July-August Issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:
– M&A Transactions & PPP Eligibility and Forgiveness Considerations
– Strategic Acquisitions of Distressed Companies in the COVID-19 Environment
– Due Diligence: “That Deal Sounds Too Good to Be True”
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
