This blog from Doug Chia is getting a lot of traction. In it, he argues that calls for a focus on long-term “corporate purpose” – along with this year’s pandemic, market volatility and social unrest – are signs that it’s time to realign board committees in a stakeholder-driven way. Here’s an excerpt:
For the past 18 years, the committee structure for public company boards has been dictated by the Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated thereunder. Those rules and regulations essentially mandated all public company boards to have the “big three” committees: audit, compensation, and nominating. Some boards also created (or already had) other specific committees for oversight of finance, risk, public affairs, technology, and sustainability, just to name a few.
However, the big three committees largely address matters that directly relate to the interests of the company’s shareholders with the other three stakeholders being indirect beneficiaries. This required structure was appropriately coming out of the corporate failures of the early 2000s and fitting when maximizing shareholder value was still seen as the end-all, be-all. However, it may not be well-suited to a new era when boards are committing to place firm value in the context of a broader set of constituencies.
In an ideal world (where the current big three committees are not required), rethinking a board’s committees would start with a blank slate. The board would write down each of its annual agenda items, both those discussed by the full board and those covered in committee. It would then map each item to one or more of the four key stakeholders. Based on that exercise, the board would assign each item to one or more of four new stakeholder-focused committees and/or the full board, and it would adopt charters for each reflecting the end result. One of the many outcomes of creating committees this way would look like this:
Customers Committee: Focus on sales of products and services, go-to-market strategy, customer satisfaction, product safety, R&D, and innovation.
Employees Committee: Focus on the company’s overall workforce, health and benefits, compensation, labor relations, diversity and inclusion, talent development, recruitment and retention, training, employee engagement, and corporate culture.
Communities Committee: Focus on regulation, legal, compliance, tax, government affairs, public policy, sustainability, corporate social responsibility, philanthropy, community relations, and corporate reputation.
Shareholders Committee: Focus on financial and non-financial reporting, ESG disclosure, corporate finance, M&A, capital allocation, enterprise risk management, corporate governance, board composition, investor relations, and shareholder engagement.
Doug points out that this isn’t a completely new concept, as companies often establish and dissolve committees based on their current circumstances. As I’ve blogged on CompensationStandards.com, there also have been growing calls to broaden the mandate of compensation committees to cover employee issues. Re-examining the board’s structure would require close attention to board composition and committee charters – which some view as an additional benefit and an opportunity to more closely align the board with strategy & culture.
ESG: GAO Sums Up Disclosure Dilemmas
The Government Accountability Office has issued a 62-page report on ESG disclosures – why investors want them, what public companies are doing, and the advantages & disadvantage of voluntary vs. mandatory disclosure regimes. The report itself doesn’t give much info that people in this space don’t already know – investors want ESG info, companies are working hard to provide it, there are gaps & inconsistencies in company disclosures due to the lack of standardized and prescriptive disclosure rules, and competing disclosure regimes pose important trade-offs.
One interesting tidbit – which may become relevant as investors & companies increase their focus on equity and resiliency going forward – is that companies seem to have come around to at least providing narrative cybersecurity information after the SEC’s emphasis on that issue for many years, but data about human rights and health & safety is harder to come by:
As shown in figure 2, we identified disclosures on six or more of the eight ESG factors for 30 of the 32 companies in our sample and identified 19 companies that disclosed information on all eight factors. All selected companies disclosed at least some information on factors related to board accountability and resource management. In contrast, we identified the fewest companies disclosing on human rights and occupational health and safety factors.
With regard to the 33 more-specific ESG topic disclosures we examined, 23 of 32 companies disclosed on more than half of them. The topics companies disclosed most frequently were related to governance of the board of directors and addressing data security risks. Conversely, based on disclosures we identified, we found that companies less frequently reported information on topics related to the number of self-identified human rights violations and the number of data security incidents.
In addition, we found that companies most frequently disclosed information on narrative topics and less frequently disclosed information on quantitative topics. There are several reasons why a company may not have disclosed information on a specific ESG topic, including that the topic is not relevant to its business operations or material.
Senator Mark Warner (D-VA), who had requested this report back in 2018, is now calling on the SEC to establish an ESG task force to consider requiring disclosure of “quantifiable and comparable” metrics. He seized on the GAO’s finding that even quantifiable metrics like carbon dioxide emissions are reported differently from company to company. As Lynn blogged last week – and as noted in this Wachtell Lipton memo – some standard-setters are starting to collaborate, which may help clarify reporting frameworks for companies & investors alike.
Quick Poll: Are “Stakeholder Committees” the Next Big Thing?
Did you know that Thomas Jefferson had only 17 days to write the Declaration of Independence? I admit feeling conflicted that we still celebrate someone who turned out to be so pro-slavery in his older years, but I also find it impressive that young TJ met that deadline.
Beware EDGAR Technical Issues
It’s not the news I want to be bringing as we head into a holiday weekend, but it’s time to end the silent suffering of those who’ve attempted filings this week. With end-of-period equity awards triggering Form 4s, that’s a lot of people!
After a day of headaches on Monday, the SEC’s EDGAR Filer Communications circulated an email late that evening reporting the issues experienced at 4:30pm – right as many were trying to make filings – had been resolved (there had been no notice earlier in the day that an issue was occurring, and there were a lot of frustrated people attempting filings and questioning whether their filing agent was to blame). The “EDGAR News & Announcements” page offers this relief:
The SEC will automatically date as June 29, 2020 all filings made between 5:30 p.m. ET and 10:30 p.m. ET on June 29, 2020. For other filing date adjustments, please contact Filer Support at 202-551-8900 option 3.
However, Monday’s email also warned that filers could continue to experience technical problems with their custom codes. That happened yesterday, with a notice in the morning that EDGAR was experiencing technical difficulties and a notice in the afternoon that EDGAR would be down for a short amount of time for technical repair.
Kudos to the SEC for making real-time announcements yesterday and for keeping the “EDGAR News & Announcements” page updated – you should visit that page and follow the posted instructions if you’re having problems. Fingers crossed that the issue is now fully resolved!
Late last year, we were tracking the saga of the NYSE’s “direct listing” proposal for primary offerings. A lot has happened since then, and you’d be forgiven if you assumed that going public without the benefit of a traditionally marketed & placed IPO was no longer a very attractive option. But the NYSE hasn’t given up hope that we’ll return to better times. Last week, they filed the third version of a proposed rule change that would permit companies to raise money in a “direct listing.”
As this Davis Polk memo explains, this version of the proposal gives more detail about the mechanics of a direct listing – but it would also make this path available to fewer companies:
The NYSE’s current proposal eliminates the 90-day grace period that was previously proposed for the minimum holder requirement. As a result, both primary and secondary direct listings would continue to be subject to the requirement to have 400 shareholders at the time of initial listing.This requirement will continue to preclude many private companies from pursuing a direct listing because they do not having the required number of round lot holders.
Unlike the prior proposals, this version also provides more granular detail around the auction process for a primary direct listing. Significantly, the auction process would require that the company disclose a price range and the number of shares to be sold in the SEC registration statement for a primary direct listing, and would require that the opening auction price be within the disclosed price range. For purposes of the opening auction, the company would be required to submit a limit order for the number of shares that it wishes to sell, with the limit set at the bottom end of the price range. The proposed rule changes would not allow the company’s limit order to be cancelled or modified, and the limit order would need to be executed in full in order to conduct the primary direct listing
Suspending Preferred Dividends? Your Form S-3 Might Be At Risk
As some companies look to suspend dividend payments due to economic fallout from the pandemic, here’s a reminder from a recent Mayer Brown blog:
In order to remain eligible to use a Form S-3 registration statement, among other requirements, neither the issuer nor any of its consolidated or unconsolidated subsidiaries shall have failed to pay any dividend on its preferred stock since the end of the last fiscal year for which audited financial statements are included in the registration statement (General Instruction I.A.4 of Form S-3). The reference to materiality in the instruction does not apply to the failure to declare dividends on preferred stock.
A declared but unpaid dividend on preferred stock would disqualify an issuer from using Form S-3, as would the existence of accrued and unpaid dividends on cumulative preferred stock. The issuer also would be disqualified from using Form S-3 even if it has a history of accumulating such dividends for three quarters before paying them at the end of each year.
The blog notes a few ins & outs of this analysis – including that eligibility remains intact if a board doesn’t declare a dividend on non-cumulative preferred stock, or if the terms of the debt permit deferred payments and the deferral isn’t a default, since no liability arises under the terms of the stock. Also, even if a dividend payment on cumulative preferred stock was missed, a company can continue to use an already effective Form S-3 registration statement so long as there is no need to update the registration statement.
Secured Notes Offerings: Covid-19 Trends
In these desperate times, more companies are turning to secured notes to keep them afloat – and it’s not a terrible option, given current pricing and the possibility that other loans will be unaffected. This 3-page Cleary Gottlieb memo discusses current trends to consider – including disclosure, timing, covenants, collateral & intercreditor issues, call protection and reporting. Here’s an excerpt:
A common trend for these new secured notes offerings has been a five-year maturity, with two years of call protection, resulting in a much shorter tenor than the usual seven- to eight-year maturity for secured notes. This trend for a shorter tenor offers more flexibility to the issuer for refinancing if circumstances improve but still provides noteholders with more call protection than would be typical for a credit facility.
One feature in pre-crisis secured notesofferings, a 10% per annum call right at 103% for the first years after the offering (or if shorter, during the non-call period), appears to have fallen away in these recent secured notes deals.
Amidst the pandemic, the “corporate purpose” debate continues – a few say it’s even intensified, given some companies’ need to prioritize long-term viability & employee well-being over dividend payments or other capital allocation decisions that would benefit shareholders. A recent Wachtell Lipton memo defines “purpose” as:
The purpose of a corporation is to conduct a lawful, ethical, profitable and sustainable business in order to create value over the long-term, which requires consideration of the stakeholders that are critical to its success (shareholders, employees, customers, suppliers, creditors and communities), as determined by the corporation and the board of directors using its business judgment and with regular engagement with shareholders, who are essential partners in supporting the corporation’s pursuit of this mission.
In response to Wachtell’s positions, Skadden published this memo – which argues that shareholder primacy is still the name of the game. And practically speaking, companies’ ability to accommodate non-shareholder stakeholders is likely to turn on shareholder preferences.
That’s why this recent SquareWell Partners survey – of investors who collectively manage over $22 trillion in assets – is a worthwhile read. It covers whether “corporate purpose” is relevant to investors, who they believe should be responsible for delivering it, how it should be measured and how investors intend to hold companies responsible for putting it into practice. Here are a few key takeaways (also see this Harvard Law School blog):
1. 93% of shareholders believe that purpose is a necessary grounding for a successful long-term strategy
2. Nearly half of the participating investors suggested that they expect the company’s purpose to be in line with the UN Sustainable Development Goals
3. 86% expect firms to report on the delivery of purpose – with 75% emphasizing the need for KPIs
4. Most investors suggest that the company’s purpose has a dedicated section within their annual report (or equivalent document) closely followed by a formal statement from the board addressing the company’s purpose
5. Investors will look to see if there is consistent disclosure regarding the implementation of the purpose, stakeholder concerns, employee turnover, etc. to evaluate whether the company’s purpose is effective
6. Only one-third of participating investors expect to have a vote on a company’s purpose but almost two-thirds are engaging with companies on the topic
7. Whilst a quarter of the participating investors suggested that they will not oppose any agenda items if they are not satisfied with a company’s purpose, investors will most likely target the election of board members (including the board chair), discharge (where possible), etc.
Proxy Advisors & Shareholder Proposals: SEC’s Investor Advocate Still Wants a Proposal “Do-Over”
Way back in January, Lynn blogged on our “Proxy Season Blog” that the SEC’s Investor Advisory Committee recommended to the Commission that it revise and re-propose its rules on proxy advisors & shareholder proposal submission thresholds. Earlier this week, the SEC’s “Office of the Investor Advocate” – which is a member of the Investor Advisory Committee – reiterated that recommendation in its “Report on Objectives for Fiscal Year 2021.”
The Investor Advocate’s report on objectives is due by June 30th each year and relates to the government fiscal year that begins October 1st. It goes directly to Congress without any review or comment by the Commission or Staff. The report has this to say about proxy plumbing:
Much of the concern expressed by investors has centered on the economic analysis in the rulemakings. For example, the SEC’s Investor Advisory Committee submitted a recommendation to the Commission that it revise and repropose the rules, citing a number of ways in which the proposing releases failed to meet the SEC’s published guidance for conducting economic analyses.
The recommendation also noted that there are well-known problems with respect to so-called “proxy plumbing,” or the processes by which shares are voted and counted, and suggested that the Commission should prioritize efforts to address those concerns. In other words, before addressing concerns of the business community about the advice investors seek, the Commission should ensure that investors’ votes are actually counted.
In addition, the Investor Advocate includes in its 2021 policy agenda “corporate disclosure and investor protection in registered & exempt offerings” – calling for:
– Improved “human capital management” disclosure, possibly going beyond the “principles-based” approach that the Commission proposed last August
– Attention to “machine readable” disclosures outside of financials – noting that prior “disclosure effectiveness” changes have catered to investors who are manually accessing & analyzing info, but more & more investors are now using digital processes
– Consideration of whether the expansion of registration exemptions undermines public markets and ignores the value of registered offerings & public disclosure
The report also includes a special 3-page overview of the impact of Covid-19 on investors – highlighting eroding confidence of individual investors in stocks & mutual funds as beneficial long-term investments.
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D&O insurance premiums jumped somewhere between 44% and 104% in the first quarter of this year, compared with last year. That’s according to survey data from Aon & Marsh cited in this WSJ article. The cause of the increase is the ever-expanding specter of securities litigation, including event-specific litigation and suits over emerging ESG issues, which Lynn blogged in January would be likely to influence rates.
The latest threat? Covid-19 reopening decisions. Lynn blogged last week on “The Mentor Blog” about what boards need to consider to manage reopening risks – if boards get it wrong, they’ll not only be facing remorse over upended lives and a struggling workforce, they’ll also become a litigation target. Some believe that rates will more than double in the wake of the pandemic, according to this “Business Insurance” article. The WSJ reports that on top of tough decisions about the business, companies are having to decide whether to change deductibles, policy limits or insurance budget. Here’s an excerpt:
According to Aon, no primary policies that renewed in the first quarter with the same limits and deductibles fetched a lower price. To contain the increases, nearly half of the clients changed their deductibles or policy limits, and sometimes both.
In a June 10 report, A.M. Best Co. said a spike in litigation caused by specific events, such as cyberattacks, the #MeToo movement and wildfires, was driving the increases. Companies also face potential litigation over “emerging exposures” such as Environmental, Social and Governance, or ESG, issues and climate change, it says.
Exchange Act reporting is a key factor in reigning in premiums and reducing risk. According to the Journal and insurance companies, some companies also are setting up captive insurance companies in places like Singapore or Bermuda – as wholly owned subsidiaries that provide insurance to the sponsoring company alone.
Earnings Guidance: Most Important for Smaller Companies?
In this recent 6-minute interview with Andrew Ross Sorkin, Barry Diller – Chair of Expedia and IAC – takes a pretty firm stance against giving earnings guidance, and says the companies he oversees will no longer be providing granular predictions of the near-term future. This CFO.com article argues that guidance isn’t a waste of management’s time and outlines ways in which the practice can benefit companies – especially smaller companies. Here are some high points:
1. Volatility: Stocks are valued on expectations of future performance. Companies that give guidance help narrow the standard deviation of those expectations, and their words and numbers carry weight because they have the most information about their future. Volatility is less of an issue for widely-followed mega-caps, which have a “crowdsourced consensus on future value that can make guidance unnecessary.”
2. Visibility: For smaller companies, guidance is an important tool to enhance visibility on the Street. It makes analysts’ and investors’ jobs easier and shows management can deliver, which builds their credibility — the most valuable non-monetary asset on Wall Street.
3. Vulnerability: Companies that give guidance take the lead in shaping investor perception about future potential. Those that don’t leave a “consensus” opinion to a handful of research analysts who don’t have full perspective on the issuer’s culture, plans, and opportunities. Worse yet, management is nonetheless still held accountable by the market for hitting that consensus.
“All-Purpose” Securities Law Disclosure: Are We Reaching the Breaking Point?
As demands mount for “stakeholder”-oriented disclosure – and as the SEC faces understandable backlash about whether that type of disclosure is useful to investors – there’s a growing contingent suggesting that shoehorning extra info into an investor-focused disclosure scheme is a lot like two-in-one shampoo & conditioner: it simply doesn’t work. This article from Tulane Law prof Ann Lipton discusses whether the SEC has been a victim of “mission creep” – and why now’s the time to look at other avenues for required “stakeholder” disclosure. Here’s an excerpt:
The assumption — stated or unstated — that all public disclosure must necessarily run through the securities laws has distorted the discourse for decades. Academics, regulators, and advocates have conflated the interests of investor and stakeholder audiences, to the detriment of both. There has been little, if any, discussion of the informational needs of the general public, or when and whether businesses should operate under a duty of public transparency. At the same time, advocates for myriad causes try to flood the securities disclosure system with information relevant to their own idiosyncratic interests, overburdening the SEC and making it more difficult for investor audiences to interpret the information they are given.
How would this type of system work? Ann looks at the EU system “both as a model and a point of contrast” – and suggests that stakeholder disclosure would apply to these categories:
– Financial information – including issues pertaining to tax payments, anticorruption measures, and antitrust compliance
– Corporate governance
– Environmental impact
– Labor relationships – including diversity, working conditions, and pay practices
To minimize burdens on business, the initial system could focus on information that has already been compiled internally, such as reports that companies are already required to file with government agencies, or financial and governance information likely to be on hand. Doing so would spare companies the additional burdens of data gathering, and would go a long way toward standardization.
To be clear, this isn’t a call to “abolish” the SEC. Rather, it would emphasize the SEC’s focus on investors and use other ways to provide complementary info. However, we could see some ripple effects in SEC rules if something like this came to fruition, and it could expand the scope of work for people in our community, since we’re already involved with disclosure.
Last year, I blogged about an SEC enforcement action to halt an unregistered ICO that was being conducted in the most “best practices” way possible – through a “Simple Agreement for Future Tokens.” Under this structure, the company sells “pre-token” securities to accredited investors, which flip into non-security tokens at or after launch of a platform on which to use them. In this particular case, the SEC took issue with the fact that there would be no established cryptocurrency ecosystem at the point when the pre-tokens flipped to tokens.
On Friday, the SEC announced that it had settled the enforcement action – and the results aren’t encouraging for the crypto crowd. Here’s the highlights:
– The company agreed to return more than $1.2 billion to the initial purchasers in the offering
– The company’s paying an $18.5 million civil penalty
– For the next 3 years, the company has to notify the SEC before participating in the issuance of any digital assets
Yikes. The announcement includes this quote from the Chair of the SEC Enforcement Division’s Cyber Unit: “New and innovative businesses are welcome to participate in our capital markets but they cannot do so in violation of the registration requirements of the federal securities laws.” But with this SAFT arrangement drawing ire, a lot of folks are wondering how exactly a token offering would do that.
Reg S-T: Corp Fin Extends Temporary Relief for Signatures
In March, John blogged about Corp Fin’s temporary relief for manual signature retention requirements under Rule 302(b) of Regulation S-T. Last week, the Staff updated that statement to say that it’ll remain in effect until a date specified in a public notice, which will be at least two weeks from the date of the notice. So while the Staff continues to expect compliance, it won’t recommend enforcement if:
– a signatory retains a manually signed signature page or other document authenticating, acknowledging, or otherwise adopting his or her signature that appears in typed form within the electronic filing and provides such document, as promptly as reasonably practicable, to the filer for retention in the ordinary course pursuant to Rule 302(b);
– such document indicates the date and time when the signature was executed; and
– the filer establishes and maintains policies and procedures governing this process.
The Staff also extended for an indefinite period its temporary relief for submission of paper forms under Rule 144 and other rules – which had been set to expire June 30th. For more detail, see this Cooley blog.
Last week, the SEC, Corp Fin, the Division of Investment Management and the Division of Trading & Markets also issued this joint statement, which summarizes all of the relief & assistance that the Commission provided during the pandemic to accommodate capital raising & reporting, and says the Commission won’t be extending the relief that gave companies additional time to file disclosure reports that were due on or before July 1st.
But not everyone is happy about “deregulatory” efforts by the SEC these last few months – here’s a letter to SEC Chair Jay Clayton from Chair of the House Financial Services Committee, Congresswoman Maxine Waters (D-CA), calling for the Commission to halt rulemakings unrelated to the pandemic.
Climate Change Litigation: The Next “Mass-Tort” Frontier?
BP is facing state court action for nuisance claims from the cities of Oakland & San Francisco, after the Ninth Circuit denied the company’s motion to remove the case to federal court and dismiss the claims. This Wachtell Lipton memo predicts that the decision will invite “countless actions by states, municipalities, and private litigants in state courts all over the country” – and that liabilities will extend far beyond the energy sector.
Meanwhile, as Reuters reported a couple weeks ago, PG&E is pleading guilty to 84 counts of involuntary manslaughter in connection with the 2018 Camp Fire. Although no individuals will be held criminally accountable, this plea is pretty unique because the company is admitting criminal guilt. The company is also paying up to $19 million in fines & costs accepting tighter oversight – and pledging billions of dollars to improve safety and help wildfire victims. The company cited more than $30 billion in potential wildfire damages when it filed for bankruptcy, and it’s reached various settlements and rate agreements as part of the Chapter 11 plan.
Last fall, John blogged about a Caremark claim surviving a motion to dismiss. This was a big deal because at the time it was the second case in a year that the Delaware courts declined to dismiss at the pleading stage following decades of routinely doing so. Now, earlier this week the Delaware Court of Chancery issued a 41-page opinion in Hughes v. Hu and declined to dismiss another Caremark claim.
In the most recent case, Vice Chancellor Laster held that the plaintiff adequately pled that the director defendants, who served on the company’s audit committee, breached their fiduciary duties by failing to oversee the company’s financial statements and related party transactions. The plaintiff alleged that the directors’ failures led to the company’s need to restate its financial statements, thereby causing the company harm.
The Court found the allegations in this case support inferences that the board members did not make a good faith effort to do their jobs. The Audit Committee only met when spurred by the requirements of the federal securities laws. Their abbreviated meetings suggest that they devoted patently inadequate time to their work. Their pattern of behavior indicates that they followed management blindly, even after management had demonstrated an inability to report accurately about related-party transactions.
For instance, documents that the Company produced indicated that the Audit Committee never met for longer than one hour and typically only once per year. Each time they purported to cover multiple agenda items that included a review of the Company’s financial performance in addition to reviewing its related-party transactions. On at least two occasions, they missed important issues that they then had to address through action by written consent. According to the Court, the plaintiff was entitled to the inference that the board was not fulfilling its oversight duties.
Last fall, John wondered whether Caremark was becoming a more viable theory of liability or the board’s conduct in recent cases was just more egregious. It’s still early…we’ll see if any other pleading-stage dismissals show up in 2020 to form more of a pattern.
The facts in Hughes seem pretty egregious and the Court’s opinion says the defendants face a substantial likelihood of liability under Caremark. But, as Steve Quinlivan notes at the end of his blog, the Court hasn’t found any of the defendants liable for the actions alleged in the complaint.
PCAOB Wants Comments on CAM Requirements
The PCAOB wants comments on experiences so far with the new CAM disclosure requirement. Comments are encouraged from all interested stakeholders and should be submitted by June 15, 2020. Information on the comment process can be found on this PCAOB Request for Comment. The Comment Request includes a list of questions for consideration and asks commenters to provide data, evidence or other specific examples to support comments.
The PCAOB says it’s conducting an interim analysis to understand how auditors responded to the CAM requirements, how investors are using CAM disclosures and audit committee and preparer experiences. From there, the PCAOB will consider whether additional guidance or other steps may be appropriate. The PCAOB plans to report its interim review findings toward the end of the year.
Speaking of CAMs, according to a recent Audit Analytics’ blog, so far disclosure of the audit committee’s role regarding CAMs isn’t too prevalent. The blog says the firm reviewed 770 S&P 1500 proxy statement disclosures filed between July 1, 2019 and March 31, 2020 to look for disclosures about the audit committee’s role with CAMs.
Of course, the new disclosure requirement relating to CAMs requires auditors to share any CAMs with the audit committee as part of the draft auditor report, but the audit committee doesn’t need to approve or determine CAMs. So, even though there’s been a trend of expanding audit committee disclosure, audit committees wouldn’t necessarily need to say much about how they’re engaging in the new disclosure requirement – although the blog does say we’ll probably see more of this disclosure as time goes on. Here’s some of their findings:
In the first quarter 2020, they found slightly over 6% of S&P 1500 proxy statements filed included CAMs in audit committee disclosure – the majority of which included mention in the audit committee report of the proxy
Of proxy statements that included audit committee disclosure of CAMs, 61% were from the S&P 500 – although, overall most companies haven’t included this disclosure in proxy statements
When disclosure is included in the proxy statement, it often identifies the audit committee’s role as either reviewing the CAMs, discussing CAMs with the independent auditor or both
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Yesterday, Corp Fin issued 2 new CDIs addressing the interplay of Form 12b-25 and Corp Fin’s modified Covid-19 exemptive order that it issued last week providing SEC filing relief for companies affected by the Covid-19 crisis. Here they are:
Question 135.12
Question: A registrant expects that due to COVID-19 it will be unable to file a report of the type covered by Rule 12b-5 on timely basis without incurring an unreasonable effort or expense. It is uncertain as to its ability to file the required report within the applicable 12b-25(b)(2)(ii) period. Should the registrant instead furnish a report on Form 8-K or 6-K, as applicable, relying on the COVID-19 Order (Release No. 34-88465 (March 25, 2020))?
Answer: As a condition to its use, the COVID-19 Order requires, among other things, that the registrant furnish certain specified statements by the later of March 16, 2020 or the original due date of the required report. If the registrant only files a Form 12b-25 by the original due date of the required report, it will have not met the condition of the COVID-19 Order to provide the statements called for by the original filing deadline on a furnished Form 8-K or Form 6-K. Unless this condition is met, the 45 day relief period provided in COVID-19 Order will not be available. Registrants unable to rely on the COVID-19 Order are encouraged to contact the staff to discuss collateral consequences of late filings. [March 31, 2020]
Question 135.13
Question: Can a registrant that filed a Form 12b-25 subsequently rely on the COVID-19 Order (Release No. 34-88465 (March 25, 2020)), to extend the filing deadline for the subject report?
Answer: The COVID-19 Order is conditioned on a registrant having furnished a Form 8-K or Form 6-K by the later of March 16, 2020 or the original due date of the report. A Form 12b-25 filing does not extend the original due date of a report. Therefore, unless a registrant that filed a Form 12b-25 also furnished a Form 8-K or Form 6-K by March 16, 2020 or the original due date of the report, it would not be able to rely on the COVID-19 Order.
On the other hand, a registrant that relies on the COVID Order for a report will be considered to have a due date 45 days after the original filing deadline for the report. As such, the registrant would be permitted to subsequently rely on Rule 12b-25 if it is unable to file the report on or before the extended due date. Registrants unable to rely on the COVID-19 Order are encouraged to contact the staff to discuss collateral consequences of late filings. [March 31, 2020]
Heightened Insider Trading Risk
With the ongoing Covid-19 pandemic, there is heightened risk for insider trading as more people might have access to material non-public information (MNPI). We’ve blogged before about the need to maintain confidentiality of MNPI and with nearly everyone working remotely, this seems especially important now. The SEC has made clear that it’s focused on securities fraud during the current crisis. Last week, the Co-Directors of the SEC’s Division of Enforcement issued a statement about the impact of Covid-19 on market integrity. Here’s an excerpt:
In these dynamic circumstances, corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances. This may particularly be the case if earnings reports or required SEC disclosure filings are delayed due to COVID-19. Given these unique circumstances, a greater number of people may have access to material nonpublic information than in less challenging times. Those with such access – including, for example, directors, officers, employees, and consultants and other outside professionals – should be mindful of their obligations to keep this information confidential and to comply with the prohibitions on illegal securities trading.
In this interview transcript on CNBC, SEC Chairman Clayton reiterated this message saying “anyone who is privy to private information about a company or about markets needs to be cautious about how they use that private information. That’s sort of fundamental to our securities laws and that applies to government employees, public officials, etc. And the STOCK Act codifies that.”
These recent statements come on the heels of reports about Congressional trades right before the market downturn, which are now reportedly being investigated by the DOJ and SEC. But if companies haven’t already done so, now would be a good time to review who has access to inside information and compliance procedures to see whether extra steps are necessary to minimize insider trading risk.
Transcript: “The Coronavirus: What Should Your Company Do Now?”
We have posted the transcript from our recent webcast: “The Coronavirus: What Should Your Company Do Now?”
Last fall, Broc ran the 2nd Annual “Cute Dog” Contest. Baker Botts earned bragging rights with Jude Dworaczyk’s “Penny the Hair Bow Aficionado” representing the firm. Some members responded asking that we run the contest again and some suggested a future “cute cat” contest, which we will try to get on deck for some time in 2020. So, with all the heavy news lately, let’s take a look at more “cute dog” photos – and one cute rabbit! The poll is at the bottom of the blog.
1. Gibson Dunn’s Lori Zyskowski – Snickers the “Snowdoodle”
2. Norfolk Southern’s Ginny Fog – Barnaby the “Chillin’ Lounger”
3. Covington & Burling’s Reid Hooper – Midnight and Hercules the “Dynamic Duo”
4. Travelers’ Wendy Skjerven – Mulligan the “Prince of Second Chances”
5. Our own John Jenkins – Shadow the “Backseat Driver”
6. Sidley Austin’s Andrea Reed – Peaches the “City Slicker”
Vote Now: “Cutest Dog Contest”
Vote now in this poll – anonymously – for the dog that you think is the cutest:
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Cyan Agonistes: Del. Supreme Ct. Upholds Federal Forum Provisions
Sharing a blog entry here that John posted yesterday on DealLawyers.com as it’s of interest to many: In its 2018 Cyan decision, the SCOTUS unanimously held that class actions alleging claims under the Securities Act of 1933 may be heard in state court. It also held that if those claims are brought in a state court, they can’t be removed to federal court. Some corporations responded to Cyan by adopting “federal forum” charter provisions compelling shareholders to bring 1933 Act claims only in federal court. Much to the chagrin of the defense bar, the Delaware Chancery Court struck those provisions down in Sciabacucchi v. Salzberg, (Del. Ch.; 12/18).
Yesterday, the Delaware Supreme Court unanimously reversed the Sciabacucchi decision. In Justice Valihura’s sweeping 53-page opinion, the Court rejected claims that federal forum provisions were contrary to any Delaware law or policy, and read Section 102(b) of the DGCL as a broad enabling statute that provides Delaware corporations with more than enough flexibility to include a federal forum provision in their certificates of incorporation.
Section 102(b)(1) authorizes the certificate to include “any provision for the management of the business and for the conduct of the affairs of the corporation” and “any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders.” While that authority can’t be used to adopt provisions that violate law or public policy, the Court concluded that a federal forum provision, or FFP, didn’t raise either of those concerns:
First, Section 102(b)(1)’s scope is broadly enabling. For example, in Sterling v. Mayflower Hotel Corp., this Court held that Section 102(b)(1) bars only charter provisions that would “achieve a result forbidden by settled rules of public policy.” Accordingly, “the stockholders of a Delaware corporation may by contract embody in the [certificate of incorporation] a provision departing from the rules of the common law, provided that it does not transgress a statutory enactment or a public policy settled by the common law or implicit in the General Corporation Law itself.”
Further, recognizing that corporate charters are contracts among a corporation’s stockholders, stockholder-approved charter amendments are given great respect under our law. In Williams v. Geier, in commenting on the “broad policies underlying the Delaware General Corporation Law,” this Court observed that, “all amendments to certificates of incorporation and mergers require stockholder action,” and that, “Delaware’s legislative policy is to look to the will of the stockholders in these areas.” Williams supports the view that FFPs in stockholder-approved charter amendments should be respected as a matter of policy. At a minimum, they should not be deemed violative of Delaware’s public policy.
The Court rejected claims that the language added to Section 115 of the DGCL in 2015 codifying the Boilermakers decision permitting exclusive forum bylaws represented an implicit recognition that FFP provisions were impermissible. It also rejected the Chancery’s effort to limit Section 102(b)’s reach to matters covered by the “internal affairs” doctrine, and said that the Chancery’s decision took a narrower approach to what constituted “internal affairs” than either applicable federal or Delaware precedent.
On a personal note, I’d like to express my thanks to the Delaware Supreme Court for giving me something to blog about that’s completely unrelated to the Covid-19 pandemic & for allowing me to fulfill my dream of using the word “agonistes” in a blog title. Now, when somebody googles John Milton or Gary Wills, they may stumble across me! That’s the closest thing to literary immortality that a fat guy in pajamas pounding on a keyboard can reasonably hope to achieve. . .
COVID-19: First Securities Lawsuits Filed
With all the market turmoil, one more unfortunate outcome from COVID-19 is possible securities lawsuits – and it didn’t take long. A memo from Jenner & Block says stock drop class actions have been filed against two companies. First, there’s a suit against a cruise line operator alleging the company misrepresented the impact of COVID-19 by minimizing the likely impact on its operations.
Another suit has been filed against a pharmaceutical company. In this case, the suit alleges the company misrepresented its progress on a COVID-19 vaccine. Hopefully these cases aren’t indicative of a coming trend. Bottom line as noted in the memo – it’s hard to say whether these cases will be successful but companies should take extra care when making any public statements about the potential impact of COVID-19 on their business.
According to this report, Chief Audit Executives (CAEs) don’t think that companies are doing a very good job evaluating corporate governance. The report was issued by the Institute of Internal Auditors and the Neel Center for Corporate Governance at the University of Tennessee. The report says that IIA and the Neel Center partnered to develop what they call the “American Corporate Governance Index” (ACGI) that’s based on eight guiding principles of corporate governance.
The report is based on survey responses from 128 Chief Audit Executives of publicly traded U.S. companies. Survey respondents answered questions anonymously, so scores aren’t assigned to individual companies, by indicating their level of agreement or disagreement with specific statements and scenarios.
Emphasizing the difficulty in overseeing corporate governance across all levels of an organization, the report’s survey questions were designed to capture the effectiveness of corporate governance enterprise wide. Key findings include:
– 10% of Index companies scored an F
– Many companies are willing to sacrifice long-term strategy in favor of short-term interests
– More than one-third of board members are not willing to offer contrary opinions or push back against the CEO
– Boards fail to verify the accuracy of information they receive
– Independent boards drive stronger governance
– Companies are vulnerable to corporate governance weaknesses or failures – the report says that the majority of respondents reported no formal mechanism for monitoring or evaluating the full system of corporate governance
– Regulation does not correlate with stronger governance
Aside from the report’s key findings, it also said that CAE’s reported when corporate governance is formally evaluated, internal audit completes the evaluation 75% of the time, and when not, it’s often done by the GC’s office or under the direction of the board governance committee, at which point “it is more likely to be a compliance ‘check-the-box’ exercise”. Reading that CAE’s say regulation doesn’t correlate with stronger governance, regulations aside, I suspect many wouldn’t support dropping ‘check-the-box’ governance evaluations.
Insider Trading: Ex-Legal Department Employee Gets Caught
Last year, John blogged about how lawyers seemed to be getting caught in the cross-hairs of insider trading cases. It can be a little unnerving to read of these cases, especially when lawyers know better and company legal departments have policies and safeguards in place to mitigate insider trading risks.
But, here we are again. I recently saw this story about a SEC settlement involving a now ex- in-house legal department employee. According to the story, the employee, who was a legal assistant, got his hands on an update to the company’s board about a pending acquisition – the update was marked “strictly confidential”. The ex-employee then purchased shares in the target company and tipped his 86-year old father who also purchased the target’s shares. The story says the ex-employee got cold feet and sold his shares in the target but his father hung on for the acquisition announcement and resulting gain. Both the son and father agreed to pay civil penalties of about $20,000 with the father also giving up the illicit profit.
Bottom line – just don’t do it! For anyone wanting to brush-up on insider trading considerations, check out the “Insider Trading” Handbook available on our website that includes a sample insider trading policy as well as discussion of the scope and content for insider trading policies.
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