Virtual board meetings offer basic benefits like no travel and potentially better attendance and a recent Harvard Business Review article says some fast-adapting companies have found virtual board meetings are better than the real thing. Other benefits mentioned in the article include improved governance and collaboration through shorter agendas, crisper presentations and broader exposure to key executives and outside experts.
The article quotes several board members providing positive feedback and cites Spencer Stuart’s North American CEO practice leader, Jim Citrin, as saying several CEOs have told him ‘they’re not going back to the way it was.’ Citrin also predicts most companies will move to a single physical meeting and a series of online sessions throughout the year. The article lists 8 tips to prepare for and get the most out of the next virtual board meeting, here’s a few:
– Shorten and energize the agenda – consider building the agenda in 15-minute increments to help avoid virtual meeting fatigue
– Spread sessions over a week or two – instead of holding a 3-day strategy session, one company held a 1 to 2-hour session a week for 4 weeks resulting in more engaged and productive meetings
– Use breakout rooms productively – if possible, keep the groups to no more than 3 participants and keep discussions to no more than 10 to 30 minutes then reconvene the board as a group to hear the report-outs
– Build in “candor breaks” – consider including short candor breaks on the agenda and ask what’s not being said
Investor Group Calls for Worker Protections During Covid-19
Not too long ago, I blogged about investors calling for mandated Covid-19 related disclosure requirements. Although Corp Fin appeared to address some of the requested disclosures in its most recent Covid-19 guidance, this recent blog entry cites activist investors as saying the latest guidance falls short:
Activist investors plan to continue pushing the SEC for stronger disclosure requirements from public companies about COVID-19-related business risks and worker protection programs.
One such investor said ‘the pandemic has exposed a wide range of risks faced by businesses that are financially material to investors, including, but not limited to, employee health and safety, access to paid leave, access to health care, supply chain management, worker engagement, political lobbying, and executive compensation. Unfortunately, the existing SEC guidance is not sufficient to ensure that investors have access to material information to properly assess whether companies are adequately confronting the risks.’
Separately, a blog post from a human rights advocacy organization says that 118 investors, representing $2.3 trillion in assets under management and led by the Interfaith Center on Corporate Responsibility, recently released a statement directed to meat processing companies calling for increased worker protections due to Covid-19. Here’s an excerpt:
While we are acutely aware that the COVID-19 pandemic creates unprecedented economic challenges for businesses around the globe, companies have a responsibility to implement enhanced protections to protect workers fulfilling corporate operations and those in their supply chains. The pandemic exposes meat processing companies to reputational, legal and financial risks that may significantly disrupt operations if COVID-19 outbreaks in plants continue.
The letter acknowledges that several companies have implemented some enhanced safety measures, health protocols and worker benefits but they want to ensure companies implement safeguards across all facilities and operations. The letter urges companies, for the long-term sustainability of their operations and the health and safety of their employees, to comply fully and in a manner that provides the greatest protection for workers.
The blog post says some of the targeted companies have responded and includes links to those responses.
Taking Cues from Pandemic Response to Prepare for Future Outlier Events
A recent study out of the Rock Center for Corporate Governance at Stanford University reviewed Covid-19 disclosure practices in SEC filings for the period between January 1 and May 29, 2020. The study shows how, over time, the focus of Covid-19 disclosures shifted from supply-chain impacts in the early months to disclaimers to forward-looking statements and disclosure on cash positions as fears about liquidity and solvency increased. Given the trajectory of the pandemic, the exponential growth in disclosures isn’t all that surprising. Understanding the pandemic is out of the ordinary, here’s what the study suggests we can take from analyzing the related disclosure practices:
The COVID-19 pandemic provides a unique opportunity to examine disclosure practices of companies relative to peers in real time about a somewhat unprecedented shock that impacted practically every publicly listed company in the U.S. We see that decisions varied considerably about whether to make disclosure and, if so, what and how much to say about the pandemic’s impact on operations, finances, and future.
The study examines competitor companies within the beverage, apparel, airline and big box sectors where it found vast differences in frequency of disclosures. Noting the differences in company disclosure practices, the study suggests boards might use insights from a company’s pandemic response to prepare for other possible outlier events such as climate events, terrorism, cyber-attacks and other emergencies while also considering whether to share these insights with shareholders.
We’ve wrapped up our latest survey relating to hedging policy disclosure. Here are the results:
1. We’re refining our hedging policies & practices in light of the new disclosure rule:
– Yes – 22%
– We considered it and decided not to – 22%
– We’ve seen no need to revisit our existing policy – 56%
2. In our proxy, we’ll include disclosure about our hedging policies & practices:
– Only as part of the CD&A – 56%
– Outside of the CD&A, and also incorporated into it – 19%
– In both the CD&A (for NEOs only) and another part of the proxy (for everyone covered) – 25%
3. To disclose our hedging policies & practices, we’ll provide:
– Our full policy – 7%
– A “fair & accurate summary” – 93%
Please take a moment to participate anonymously in these surveys:
Last year, Liz blogged about calls for standardized sustainability disclosure and the “alphabet soup” of reporting frameworks, which haven’t diminished with time. But now, in an effort to help companies and investors, the SASB and GRI announced a “collaborative work plan.” Each organization issued an announcement – here’s the SASB announcement and GRI’s. The collaboration sounds promising, an Accounting Today article helps explain what this means:
The collaboration aims to demonstrate how some companies have used both sets of standards together and the lessons that can be shared. SASB and the GRI also hope to help the consumers of sustainability data, such as investors and financial analysts, understand the similarities and differences in the information created from these standards.
The collaboration will initially focus on delivering communication materials to help stakeholders better understand how the standards can be used together. GRI and SASB also plan to develop examples based on real-world reports to demonstrate how the standards can be employed concurrently. These resources are expected to be delivered before the end of this year.
GRI and SASB both provide compatible standards for sustainability reporting, but the groups pointed out that they’re designed to fulfill different purposes and are based on different approaches to materiality. The two groups noted that independence is important to both the GRI and SASB standard-setting processes, and they plan to maintain their independence. This collaborative work plan may identify opportunities to consider how the SASB and GRI standards may be developed in the future. Decisions about standard setting, content of standards, and their interpretation are the sole responsibility of the independent standards-setting functions, which rest with the Global Sustainability Standards Board on behalf of GRI, and of the SASB Standards Board.
Transcript: “M&A Litigation in the Covid-19 Era”
We have posted the transcript for the recent DealLawyers.com webcast: “M&A Litigation in the Covid-19 Era.”
Board diversity has been an area of focus for investors for a while now but with recent social unrest, board diversity is being scrutinized even more. With attention on diversity, a pair of recent shareholder derivative suits have been launched against two tech companies over diversity concerns. First, this D&O Diary blog reports that an activist investor has launched a suit against Oracle’s directors alleging the directors breached their fiduciary duties by failing to diversify the company’s board and failing to address diversity and equality issues.
Separately, a Law360 blog describes a suit targeting Mark Zuckerberg and several other Facebook directors with claims of breach of fiduciary duty, abuse of control and unjust enrichment for allegedly deceiving “stockholders and the market by repeatedly making false assertions about the company’s commitment to diversity.”
As noted in the D&O Diary blog, these lawsuits show how concerns raised in the wake of current social unrest can indirectly lead to claims against corporate boards – saying activists are likely to bring further lawsuits against corporate boards as they seek to advance diversity objectives, introducing a potential new area of D&O litigation. Both complaints seek several forms of relief, including:
That at a certain number of directors resign prior to their next annual meeting, and the companies should include Black or minority nominees as replacements; that the defendants should return all of their 2020 compensation; that the companies should require their board receive annual diversity training. In Oracle’s case, the shareholder also requests that the company set specific goals on the number of Black individuals and minorities to hire over the next five years; and that the company publish an annual Diversity Report. In Facebook’s case, the shareholder also requests Zuckerberg be replaced as company chairman, the company create a $1 billion fund to hire Blacks and other minorities and maintain a mentorship program, tie executive pay to achievement of diversity goals and replace Facebook’s auditor.
California Assembly Introduces Another Bill with Potential Director Quota
We’ve blogged before about California’s board gender diversity quota. Recently, as reported in Keith Bishop’s blog, a bill similar to California’s board gender diversity law has been introduced in the California Assembly. The bill would impose a requirement on public companies headquartered in California to have a minimum number of directors from an “underrepresented community” no later than the end of 2021. The bill defines a “director from an underrepresented community” to mean an individual who is African-American, Hispanic, or Native American.
California was the first state to introduce legislation requiring publicly-held companies headquartered in the state to diversify all-male boards. California’s board gender quota law has been challenged in lawsuits and earlier this year, I blogged about a federal court dismissal of one lawsuit – although the dismissal was promptly appealed. Meanwhile, another case challenging California’s board gender diversity law is ongoing in California state court – here’s Keith Bishop’s blog discussing the status of that case.
Tomorrow’s Webcast: “Coronavirus: Next Steps For Disclosure & Governance”
Tune in tomorrow for the webcast – “Coronavirus: Next Steps For Disclosure & Governance” – to hear to hear Ning Chiu of Davis Polk, Meredith Cross of WilmerHale, Keir Gumbs of Uber and Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net discuss lessons learned about securities law compliance and corporate governance issues brought on by Covid-19 and considerations going forward.
On Friday, the SEC proposed amendments to Form 13F for institutional investment managers. If adopted, the primary proposed change would raise the Form 13F reporting threshold for investment managers – from the current $100 million to $3.5 billion – and as stated in the SEC’s press release, would thereby provide relief for smaller managers who are currently subject to Form 13F reporting. Other proposed changes include:
The proposed changes also would direct the staff to review the Form 13F reporting threshold every five years and recommend an appropriate adjustment, if any, to the Commission. Additionally, the proposal would eliminate the ability of managers to omit certain small positions, thereby increasing the overall holdings information required from larger managers. The proposal also would require managers to report additional numerical identifiers to enhance the usability of the information provided on the form, and amend the instructions relating to requests for confidential treatment of Form 13F information.
The proposed reporting threshold change from $100 million to $3.5 billion is a big increase but as the announcement points out, the threshold hasn’t been updated since the Commission adopted the form over 40 years ago! In the time since the form was adopted, the announcement says the overall value of U.S. public corporate equities has grown over 30 times (from $1.1 trillion to $35.6 trillion).
Even though the press release notes that the Commission has received recommendations to revisit the Form 13F reporting thresholds over the years, not all are in agreement with the proposed changes. Commissioner Allison Lee issued a dissenting statement saying the proposal decreases transparency and that it lacks sufficient analysis. The National Investor Relations Institute (NIRI) tweeted its disagreement and said it “shared Commissioner’s Lee’s concerns about the ill-advised proposal.” NIRI also referenced its position paper on 13F reforms, which is dated just last fall and among other things, advocates for shortening the 13F reporting deadline.
Market-Wide Crisis: Impact on Independent Chair Proposals?
A recent Georgeson blog assesses whether the Covid-19 pandemic had an impact on independent chair proposals voted on during the 2020 proxy season. In their analysis, Georgeson compared voting results during the five-year period leading up to, and including, the COVID-19 crisis with the five-year period surrounding the 2008 financial crisis. Georgeson found key similarities between the two crises’ impact on voting support for independent chair proposals – saying it appears preference for an independent chair gets stronger during the time of a market-wide crisis.
Independent chair proposals have been prolific since the mid-2000s and were the most common type of governance proposal voted last year. Despite their popularity, these proposals have experienced average support in the range of 29% to 32% since 2012, with only one proposal having received majority support in the last five calendar years. Accordingly, there has been a relative surge in shareholder support this proxy season, averaging approximately 35%, with two proposals receiving majority support and 15 receiving support in excess of 40%. The COVID-19 crisis seems likely to have fueled shareholders’ focus on improving board oversight effectiveness by requiring an independent chair.
In comparison, looking at the shareholder support trend for independent chair proposals during the most recent prior crisis, average support for independent chair proposals had similarly jumped from 29.6% to 34.2% in 2009, coinciding with the year when major stock market indices hit their lows in the wake of the 2008 financial crisis.
The blog also analyzes the impact of ISS’s voting recommendation on vote outcomes and says ISS’s favorable recommendation ‘did strongly influence voting outcomes in 2020.’ In 2020, although ISS recommended in favor of a significantly greater percentage of these proposals compared to 2019, ISS’s support was well below its level of support for such proposals during 2016 – 2018. The blog attributes increased average support during 2020 as being driven more by individual investors’ decision-making – demonstrating that investors made case-by-case decisions.
Although support for independent chair proposals rose this year, one key point mentioned in a ISS Governance Analytics report is that ‘momentum on this topic appears to be somewhat tepid as roughly half of the companies where independent chair resolutions appeared on ballots in both 2019 and 2020 witnessed year-over-year declines in voting support.’
Tomorrow’s Webcast: “Executive Compensation Planning in a Down Market”
Tune in tomorrow for the CompensationStandards.com webcast – “Executive Compensation Planning in a Down Market” – to hear Tony Eppert of Hunton Andrews Kurth, Richard Harris of Aon and Jamin Koslowe of Simpson Thacher discuss emerging disclosure practices and how companies and compensation committees should approach executive compensation planning in a turbulent environment.
Late last year, Liz blogged about Prudential’s “multi-stakeholder framework” and the company’s intent to report progress under that framework in future sustainability reports. Yesterday, the company issued its first report since making that commitment.
Our good friend Peggy Foran and her team organized the report by 5 “capitals of sustainability”:
– Corporate Governance: this pillar includes the “multi-stakeholder” framework that codified the board’s accountability to shareholders, employees, customers and society
– Business Model & Innovation: highlighting strategic acquisitions
– Human Capital: noting that Prudential created an “Inclusion Council” last year to ensure C-suite accountability for inclusion & diversity, explaining the director identification process and sharing that 80% of the company’s outside directors are diverse
– Social Capital: discussing the company’s sustainability commitment, support for stakeholders in the midst of Covid-19 and supply chain efforts
– Environment: describing Pru’s “Global Environmental Commitment” that includes operational and investment targets – the company was carbon neutral in its corporate travel and in early 2020, it was the first insurer to issue a green bond
Prudential has issued a sustainability report for several years so they might be further along than others, but for those starting down the path of pulling a similar report together, Prudential’s report is worth a look. The company also has a sustainability micro-site and there, you’ll find the report and a series of short videos with 6 senior leaders.
Covid-19: Investors Want Mandated Disclosures
As reported in a recent Davis Polk blog, Americans for Financial Reform sent a letter signed by over 90 investors, state treasurers, public interest groups and others calling on the SEC to create new Covid-19-related disclosure requirements. The letter says the disclosure requirements would help investors understand how companies are protecting workers, preventing the spread of the coronavirus and responsibly using any federal aid the companies receive. Depending on how companies respond to Covid-19, the letter says the potential impact of losses resulting from Covid-19 will be significant.
The requested disclosures are somewhat lengthy and it’s understandable that the information could be helpful to investors, although it would be more work for companies and securities lawyers. Requested disclosures dealing with cash flow and liquidity concerns and supply chain adjustments may have been addressed, in part, by Corp Fin’s Covid-19 supplemental guidance issued earlier this week. Some of the other requested disclosures relate to worker protections during Covid-19, compliance with public health recommendations about reopening, rationale supporting executive compensation modifications and all election spending and lobbying activity, including funds spent through trade associations.
With companies preparing Q2 disclosures, the SEC is holding a “Roundtable on Q2 Reporting: A Discussion of Covid-19 Related Disclosure Considerations” this coming Tuesday, June 30. SEC Chairman Jay Clayton is moderating the roundtable and it will include Gary Cohn, Former Director of the National Economic Council; Glenn Hutchins, Co-Founder of Silver Lake Partners; Tracy Maitland, President of Advent Capital Management; and Barbara Novick, Vice Chairman of BlackRock. The roundtable is being webcast and can be viewed on the SEC’s website.
Tesla Delays Its Meeting – And D&O Coverage Puts Glass Lewis “Against” Chair
Many have likely seen reports that Tesla postponed its annual shareholder meeting. The delay is due to social distancing concerns – it had been scheduled for July 7. Elon Musk tweeted news of the delay and a few days later tweeted that September 15 is the tentative reschedule date – Tesla filed additional soliciting materials with this information and as some would say, a screenshot is worth a thousand words.
With Tesla’s original meeting date just around the corner, proxy advisors issued their voting reports and the NYT reports that Glass Lewis has recommended investors vote “against” Tesla’s Chairwoman, Rhonda Denholm. Back in May, John blogged about Elon Musk’s cost-saving move by not renewing the D&O liability policy for directors and instead, that Musk intends to personally provide the coverage. According to the article, that cost saving move is behind Glass Lewis’s recommendation:
The recommendation was based on corporate governance concerns due to an insurance arrangement with Chief Executive Officer Elon Musk after Tesla’s decision to not renew its directors and officers’ liability policy due to high premiums quoted by insurers, Glass Lewis said. The article quotes Glass Lewis: ‘We are concerned that this D&O arrangement gives the company’s independent directors a direct, personal financial dependency upon the CEO they are tasked with overseeing.’ Since Denholm heads the audit committee that permitted the insurance arrangement, it recommends voting against her.
Rhonda Brauer shares her observations about our current crises and how SASB’s “financial materiality” disclosure framework could assist in bringing about societal change:
As news occurs literally outside my window, I see accelerated demands for societal change that are impacting company, investor and other stakeholder expectations. The following data points affect not only “human capital” and environmental issues, but also “social capital” issues encompassing community relations and human rights:
The killing of George Floyd and likely continuing protests calling for deeper structural changes to systemic racism in our country;
The Business Roundtable’s 2019 Statement on the Purpose of a Corporation, which committed to support the communities in which companies operate, as well as the World Economic Forum’s International Business Council’s recent statement;
SASB’s continuing work on possible revisions to its standards, including research on human capital management across its 77 industries. SASB notes that these themes are closely related to “social capital” themes, which focus on human rights and community relations in, g., the Oil & Gas – Exploration & Production (E&P) industry.
SASB’s “financial materiality” disclosure framework brings these issues together in a way that could result in profound societal changes, particularly given the supportive statements of large asset managers and re-energized public focus on structural racial health inequities. As noted in my earlier blog, large asset managers are among the investors from which SASB has gained increasing support.
Looking more closely at social capital issues, I note the 2020 shareholder resolution (#8) at Chevron — it requested a report on efforts to “prevent, mitigate and remedy the actual and potential human rights impacts of its operations.” The supporting statement and exempt solicitation went into more detail about the social capital aspects of the request, referencing SASB’s quantitative metrics and analysis, which incorporate related international conventions to which Chevron says it adheres. The proposal received 16.7% support, which is significant for a first-year company proposal. Nevertheless, the lack of support from larger asset managers, in particular, raises questions about why they were satisfied with the company’s current disclosure about its impact on communities that are home or adjacent to its operations.
Unlike As You Sow’s “materiality” proposals, the Chevron human rights proposal did not mention SASB in its RESOLVED clause. Proxy Insight has tracked – through mid-June — the 2020 E&S proposals that concern human rights and community relations. Of those requesting enhanced disclosures, As You Sow’s resolutions that referenced SASB passed in most cases, unlike most similar proposals. This suggests that larger asset managers – and their asset owner clients — are focusing on the SASB-referenced resolutions, which might not otherwise get their attention during the busy proxy season. When considered with As You Sow’s successful withdrawal settlements, this also suggests that companies are willing to act when faced with resolutions that request SASB-aligned reporting.
Chevron is one of the few E&P companies listed as a SASB reporter, although it does not provide the required social capital metrics and analysis to show its investors and other stakeholders how its policies are actually implemented. Until there is widespread required ESG disclosures, companies like Chevron will likely increase SASB-requested disclosures, as they navigate the competing concerns of different external and internal constituencies calling for more or less disclosure. More corporate case studies will likely be disclosed.
Stay tuned as companies, investors and other stakeholders re-prioritize their social capital plans, following stepped-up calls for combatting systemic racism and also updated, reliable and comparable reporting on ESG issues, as noted in my earlier blog. Companies who ignore these powerful trends risk scrambling to catch up with their peers’ disclosures and policies, as well as antagonizing a wide range of their stakeholders, which could result in, e.g., employee and customer retention issues, as well as being targeted with community protests and boycotts and also shareholder resolutions and vote-no director campaigns.
Final CCPA Regulations Released
Back in April, I blogged about how even though California was continuing to make changes to the California Consumer Privacy Act, California’s Attorney General planned to move ahead with enforcement beginning July 1. With that date fast approaching, this Thompson Hine memo reports that California has released final CCPA regulations. The memo says there are no material substantive changes from the modified regulations that were released March 11 but the rulemaking record provides clarification and insight about the AG’s interpretation and approach to the CCPA.
As a resource for our members, we’ve been posting memos about the CCPA and other data security topics in our “Cybersecurity” Practice Area.
Today’s Webcast: “M&A Litigation in the Covid-19 Era”
Tune in this afternoon for the DealLawyers.com webcast – “M&A Litigation in the Covid-19 Era” – to hear Hunton Andrews Kurth’s Steve Haas, Wilson Sonsini’s Katherine Henderson and Alston & Bird’s Kevin Miller review the high stakes battles currently being waged over deal terminations and other M&A litigation issues arising out of the Covid-19 crisis.
Yesterday, Corp Fin issued CF Disclosure Guidance: Topic 9A relating to operations, liquidity and capital resources disclosures companies should consider with respect to business and market disruptions from Covid-19. The guidance is intended to supplement Corp Fin’s earlier guidance, CF Disclosure Guidance: Topic 9, that John blogged about in March. Acknowledging that many companies have had to make operational adjustments in response to Covid-19, including for such things as telework arrangements, supply chain and distribution changes, new or modified customer payment terms, and other financing activities, the guidance reminds companies of their disclosure obligations:
It is important that companies provide robust and transparent disclosures about how they are dealing with short- and long-term liquidity and funding risks in the current economic environment, particularly to the extent efforts present new risks or uncertainties to their businesses. While we have observed companies making some of these disclosures in their earnings releases, we encourage companies to evaluate whether any of the information, in light of its potential materiality, should also be included in MD&A.
The latest guidance also discusses disclosure obligations for companies receiving federal assistance under the CARES Act and says such companies should consider the short- and long-term impact of that assistance on their financial condition, results of operations, liquidity, and capital resources, as well as the related disclosures and critical accounting estimates and assumptions.
Corp Fin’s guidance also reminds companies of their disclosure obligations where there is substantial doubt about a company’s ability to continue as a “going concern” or the substantial doubt is alleviated by management’s plans. Similar to Corp Fin’s earlier guidance, the latest guidance provides a helpful list of questions that companies should ask themselves when preparing disclosure documents.
Along with Corp Fin’s guidance, the SEC’s Chief Accountant, Sagar Teotia, issued a statement stressing the importance of high-quality financial reporting during Covid-19. The Office of Chief Accountant’s statement acknowledges many companies have had to make significant judgments addressing various accounting and financial reporting matters. Among other things, the statement reminds companies about disclosure obligations relating to such judgments as well as ICFR and “going concern” issues:
Companies should ensure that significant judgments and estimates are disclosed in a manner that is understandable and useful to investors, and that the resulting financial reporting reflects and is consistent with the company’s specific facts and circumstances.
With that, the statement says that many companies have had to adjust financial reporting processes in response to the crisis and reminds companies about disclosure requirements. These changes may include consideration on how controls operate or can be tested and if there is any change in the risk of the control operating effectively in a telework environment. In addition, changes to the business and additional uncertainties may result in additional risks of material misstatement to the financial statements in which new or enhanced controls may need to be implemented to mitigate such risks. We remind preparers that if any change materially affects, or is reasonably likely to materially affect, an entity’s ICFR, such change must be disclosed in quarterly filings in the fiscal quarter in which it occurred (or fiscal year in the case of a foreign private issuer).
Like Corp Fin’s guidance, Teotia’s statement reminds companies to assess whether there is substantial doubt about the company’s ability to continue as a “going concern” and related disclosures. In instances where substantial doubt about an entity’s ability to continue as a going concern exists, management should consider whether its plans alleviate such substantial doubt, and make appropriate disclosures to inform investors. Such disclosures should include information about the principal conditions giving rise to the substantial doubt, management’s evaluation of the significance of those conditions relative to the entity’s ability to meet its obligations, and management’s plans that alleviated substantial doubt. If after considering management’s plans substantial doubt about an entity’s ability to continue as a going concern is not alleviated, additional disclosure is required. We note that GAAP requires such disclosure in the notes of the financial statements and this may be incremental to other disclosure requirements in filings with the Commission.
Today’s Webcast: “Proxy Season Post-Mortem: The Latest Compensation Disclosures”
Tune in today for the CompensationStandards.com webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.
Yesterday, in an 8-1 decision, the US Supreme Court reaffirmed the SEC’s authority to seek disgorgement as a remedy in enforcement actions – but placed limits on the scope of the remedy. Justice Sotomayor’s opinion, in Liu v. SEC, held that a disgorgement award that doesn’t exceed a wrongdoer’s net profits and is returned to the “wronged investors” is equitable relief permissible under 15 USC §78u(d)(5). Justice Thomas issued a dissenting opinion. Briefly, here’s how the case arose:
Liu involved a case of a California couple that contested an SEC enforcement action brought against them in connection with their solicitation of nearly $27 million from foreign nationals to build a never-completed cancer treatment center. The district court ordered disgorgement of the full amount the couple raised from investors, less a small amount remaining in corporate accounts. The couple then objected, saying the disgorgement amount didn’t account for their business expenses. The Ninth Circuit affirmed and the couple brought the case before the U.S. Supreme Court.
The couple claimed that the Court’s Kokesh decision meant that disgorgement is a “penalty,” and thus not the kind of relief available at equity. Justice Sotomayor’s opinion in Liu said, ‘Not so.’ The Court remanded Liu to the lower courts to decide the issues about limiting the disgorgement order to the couple’s net profits from the cancer center investment scheme and awarding it to the victims. Justice Sotomayor’s opinion includes discussion of principles to help guide the lower courts’ assessment.
When the Supreme Court agreed to hear the Liu case last fall, it sparked speculation about whether disgorgement might be removed entirely from the SEC’s arsenal of remedies. If disgorgement was no longer available as a remedy in enforcement actions, it could’ve greatly reduced the SEC’s leverage in settlement negotiations. The questions started a couple of years ago when the Court decided Kokesh v. SEC, which held disgorgement in an SEC enforcement action constitutes a “penalty” for purposes of the applicable statute of limitations. Justice Sotomayor’s opinion in that case included a footnote saying the Court didn’t decide whether courts have authority to order disgorgement in SEC enforcement proceedings or whether courts have properly applied disgorgement principles in this context.
Now, we know that disgorgement will continue as a potential remedy in SEC enforcement proceedings – but that courts must deduct “legitimate expenses” and the award must benefit the victims. As this Goodwin memo notes, there are still some open questions. We’ll be posting more memos in our “SEC Enforcement” Practice Area.
Some PPP Borrower Names & Loan Amounts to be Released
Last week, John blogged about a lawsuit filed by several media companies seeking to compel disclosure of private borrowers and loan amounts under the Paycheck Protection Program. A recent Journal of Accountancy article says that the SBA and Treasury have now agreed to publish names and loan amounts for PPP loan recipients that received loans of $150,000 or more. For loans that are less than $150,000, the article says the amounts will be aggregated by zip code, industry, business type and other demographic data.
Although information on loan recipients is being released, the data isn’t as extensive as some might want – here’s a statement issued by the Chairs of the House Financial Services Committee, Ways and Means Committee and Small Business Committee reiterating their demand for full transparency.
Impairment Testing Disclosures
A recent Audit Analytics blog says the SEC is watching impairment testing disclosures. Audit Analytics reports that the SEC issued a comment letter to a company asking the company to expand on its disclosure regarding impairment testing conducted in the first quarter. As companies deal with the economic impact resulting from Covid-19, many have had to conduct non-routine impairment tests. The blog says that it’s likely the SEC will continue to concentrate on impairment testing disclosures as part of their review process.
The DOJ caused a stir late Friday with its announcement that the President intends to nominate SEC Chairman Jay Clayton to replace Geoffrey Berman as the United States Attorney for the Southern District of New York, which is arguably the most prominent prosecutorial position outside of DC. What will this mean for the SEC?
According to this NYT article, Jay notified Staffers on Saturday that he intends to stay at the Commission until he’s confirmed into the new position. It’s not yet clear whether Jay’s nomination will make it through the Senate, or how long it will take, especially since it’s been reported that even those on Capitol Hill were blindsided by the news – and Democrat New York Senator Chuck Schumer, who traditionally would have procedural blocking power over the nomination since it’s in his home state, released a statement calling for Jay to withdraw his name from consideration. Bloomberg also reported that it’s unlikely Jay expected his nomination to spark controversy and require removal of the current occupant from office.
If and when Jay does leave the SEC, many speculate that Hester Peirce, as the most senior remaining Republican Commissioner, would be appointed to the role of Chair for the time-being. She wouldn’t need Senate approval since they’ve already approved her appointment as a Commissioner. The digital token crowd is pretty excited about that prospect – but at this point, it remains speculation.
The effect on rulemaking could be murkier. First, the timing of the Congressional Review Act deadline was already up in the air due to the coronavirus. That’s the Act that marks the cut-off point after which agency rules are vulnerable to repeal by the next Congress, and it’s always especially relevant during a presidential election year. Often, this deadline falls sometime in May, but this article from the Brookings Institute notes that it could be as late as July or even August if Congress continues to meet regularly in the coming months. So, while many think the SEC is unlikely to adopt any more major rules at this point, the door may still be open.
Second, the SEC currently has four commissioners because former Commissioner Rob Jackson stepped down earlier this year – his post had ended last June. John blogged on Friday that the President nominated SEC Senior Counsel Caroline Crenshaw to fill the vacancy, but no timetable has been set for her confirmation. If Jay moves on before Caroline is confirmed, the SEC will be left with just three Commissioners. That’s enough for a quorum under the Commission’s procedural rules (17 CFR §200.41), but as Broc blogged back when Mary Jo White was Chair, it effectively gives each Commissioner “veto power” by not showing up.
If Jay departs after Caroline is confirmed, that would return the number of Commissioners to four – and they might split 2-2 in their decision-making, with Commissioners Roisman and Peirce taking one view and Commissioners Lee and Crenshaw taking another. So, if we’re going to see any further rulemaking, it would most likely have the best chance of getting through with Jay still in the seat as Chair.
“WFH” & Surging Whistleblower Reports
Working from home certainly saves on commuting time. And an unexpected effect of recent stay-at-home orders, which led many to work from home, might be an upsurge in whistleblower tips to the SEC. A recent WSJ article said that over 4,000 tips of potential wrongdoing were reported to the SEC from mid-March to mid-May – an increase of 35% over the same period last year. Among other things, the article cites lawyers as saying the tipsters have more time on their hands. It also says that recent publicity of whistleblower awards may have also led to the upsurge. What kind of tips are being reported? Here’s an excerpt:
In recent months, whistleblowers have raised red flags on possible foreign corruption in health care, pharmaceuticals and technology to the SEC, the Justice Department and the Federal Bureau of Investigation.
Another attorney said some of the whistleblower cases brought to him are connected to the pandemic, such as small, public companies promoting home-testing kits that were allegedly fictional. Others presented more typical infractions such as money-laundering, insider trading, accounting gambits and bankruptcy fraud, unrelated to the pandemic.
Transcript: “Middle Market M&A – The Latest Developments”
We have posted the transcript for our recent webcast: “Middle Market M&A – The Latest Developments.”
Rather than thinking about how to refresh the board when directors approach mandatory retirement ages or term limits, a recent opinion piece in Forbes suggests “offboarding” as an alternative method to change board composition. Some might think “offboarding” is a nice way of saying “removal” but here’s what the author says about it:
For many reasons, it is critical for the board’s governance committee to take a closer look at what “offboarding” might achieve as a governance tool. Director offboarding is a focused board process to achieve a structured separation from certain directors without prompting controversy or ill will. It’s intended to allow the board to achieve necessary turnover more quickly and expansively than through term limits or mandatory retirement age, and more gently than through removal.
As defined by NACD and others, “offboarding” processes are grounded in a shared understanding amongst all directors of why an individual was appointed, and of the board’s expectations of performance. From the beginning of board service, directors are ideally made aware of the potential that they may be asked to leave the board before their term has formally concluded. It also involves an ongoing evaluation by the governance committee of the skillsets needed by the board, and conversations on whether individual director backgrounds continue to meet those needs.
The author attributes several factors as leading to more interest in offboarding, the first being that board composition doesn’t change all that fast and governance matters relating to how companies have responded to the Covid-19 pandemic, economic disruption and social unrest are leading to increased focus on board composition.
One effect of the Covid-19 pandemic has been increased concern with director bandwidth. Earlier this year, State Street was the latest asset manager to update its director “overboarding” policy – here’s Sidley’s memo about that. Maybe some directors will scale back board commitments and focus their efforts elsewhere. That’s what Reddit’s co-founder Alexis Ohanian did when he announced he was stepping down from Reddit’s board – he took things a bit further by asking the company to replace him with a black board member – and this week the company did by appointing Michael Seibel, CEO of Silicon Valley startup accelerator Y Combinator.
Aside from concerns about overboarding, the author says many companies will emerge from the pandemic with different competitive footprints and economic models. Although Reddit’s Ohanian may not start a trend and traditional board refreshment methods will certainly persist, maybe increased focus on board composition as a result of current events will lead more boards to consider offboarding as an option for bringing new ideas and perspectives to the boardroom.
Tips for Moving Forward with ESG Reporting & Disclosures
A recent Covington memo provides 7 “what to do” and “what not to do” tips for companies starting down the path of voluntary ESG reporting and disclosures. As investor focus on ESG disclosures sharpens, if companies haven’t already done so, the memo suggests companies start charting a path forward for these disclosures. Covington’s memo notes that despite investor interest, there’s risk courts could find voluntary ESG disclosure materially false or misleading. The recommendations are a good source of helpful tips, here’s what it says about bringing a “securities lawyer eye” to the effort:
– Include forward-looking statement disclaimers and/or other hedging language to clarify that the standards or goals described in the ESG disclosures are not guarantees or promises, as well as the factors that could cause material deviations from these standards or goals
– Frame ESG goals in aspirational language, using words such as “seek,” “expect” or “strive” and avoid making unqualified commitments, using words such as “shall” or “will”
– Challenge comparative and qualitative statements regarding ESG performance such as “best,” “most,” “largest” or “first” and assure that the company has adequate back-up for such statements
– Define in plain English any jargon or terms that lack well-understood definitions that are associated with ESG disclosures
– Cross check the company’s SEC filings against ESG reports to avoid inconsistencies in facts or degrees of emphasis
Resource Explaining ESG Jargon
Keeping up with the latest ESG terminology is nearly impossible as a lot of jargon can be industry specific. That’s why it’s nice to see Latham & Watkins “ESG Book of Jargon” explaining many current ESG-related terms and acronyms. If you’re wondering what something might be referencing, check it out – it’s 151 pages and covers lots of terms and phrases.