Last week, John blogged about what companies are going to do about guidance when issuing first quarter earnings. As a follow-on to that, Bass Berry & Sims surveyed initial disclosures in earnings releases for off-calendar year-end companies furnished on or after March 16, 2020 to see how companies handled earnings guidance in light of Covid-19. The findings say a majority of companies withdrew or suspended guidance. Here’s an excerpt:
67% (22 companies) either withdrew their existing guidance (in full or in part) or suspended their practice of providing quarterly guidance
The companies that provided either updated guidance or new quarterly guidance generally did so with a significantly greater gap between the high and low range of their guidance compared to prior disclosures
The survey highlights what the firm has been hearing from its clients—the unfolding COVID-19 pandemic and the resulting economic turmoil make it difficult to predict what the future will look like. As reflected in the survey results above, there will be many public companies that elect to suspend or withdraw guidance as a result of the tremendous economic uncertainty arising from COVID-19, but approaches will differ, and there will continue to be some public companies (albeit, potentially, a minority) that elect to continue to provide guidance during these uncertain times. Ultimately, the determination of whether to continue to provide guidance will require judgment and be very fact-specific (depending on, among other things, the industry of the public company and how COVID-19 has impacted such industry).
The blog discussing survey findings also includes links to notable disclosures – one being a company that made projections based on three recovery scenarios along with qualitative and quantitative assumptions about what such recoveries would look like for three of the company’s four operating segments.
Social distancing and stay-at-home orders resulting from Covid-19 will make this quarter’s earnings calls different for many companies – for most it will be difficult, if not impossible, to gather executives in one place for the call. Companies will likely need to put more effort into earnings call prep sessions with additional time devoted to logistical considerations to help ensure the calls go smoothly. With earnings kicking off this week, one resource that might help is this ICR blog that offers practical considerations and tips. Some of the considerations include:
– Pre-record opening, prepared remarks – some companies likely already pre-record opening, prepared remarks, but if not, it’s suggested that companies do so
– Evaluate whether technology like video capabilities will be helpful for Q&A
– Evaluate whether to hold a live Q&A session, ICR suggests companies do so, but if not:
Consider posting anticipated Q&As on the company website next to webcast link or earnings release
Have management speak to questions and provide key messages related to those questions as part of the call
Let listeners know that the company won’t be holding an interactive Q&A session at the beginning of the prepared remarks and that topics the company believes will be of further interest will be posted to its website
– Most conference call providers will have limited operators available right now, which could cause long wait times likely frustrating investors dialing in to the call. ICR provides options to help reduce risk of delays, one being not to include dial-in information in the advisory release and including only the webcast link. With this option, companies would email the dial-in information separately to sell-side analysts that would allow them to ask questions during the call.
– In any event, ICR recommends avoiding “internet-based” phones due to increased internet activity that can reduce call quality. Most analysts will be working remotely, so consider sending the release or presentation in an email ahead of the call.
– Last, consider reporting later than usual to give the company more insight into critical areas that investors will focus on, the blog also outlines considerations for current quarter reporting, including the current state of operations, financial liquidity/balance sheet/capital allocation and guidance.
Covid-19: Anticipated Enforcement Trends
As the Covid-19 crisis continues, it’s still early to know how enforcement activity will really play out, but this Gibson Dunn memo reviews early enforcement activity, as well as previous post-disaster enforcement activity, as possible indicators for areas where regulator activity might pick up.
The SEC has reminded us more than once that it remains “laser-focused” on enforcement efforts – Chairman Clayton and Corp Fin Director Hinman, included mention of this in their joint statement last week and the recent statement from the Co-Directors of the Enforcement Division serves as another reminder. The SEC’s website for individual investors, Investor.gov, also recently sent an Alert warning investors to be aware of current investment frauds, including Covid-19 related scams. So what should companies be on the lookout for?
If past activity serves as an indicator, the memo says distributions from government assistance programs like the CARES Act will dominate much of the enforcement agenda for the next decade. The memo also covers enforcement actions in the U.K., EU and Asia.
Areas where the memo says increased enforcement activity is likely: insider-trading, state-level focus on consumer protection and price-gauging and expansion of state regulatory powers, and False Claims Act enforcement. With increased government spending, the memo says its important for companies to document communications with, and decisions by, government contractors to help reduce False Claims Act exposure after the crisis.
And, if a company receives an internal whistleblower report, the memo reminds companies to respond thoroughly. This Gibson Dunn memo addresses whistleblower claims in particular, and says companies should anticipate an onslaught of whistleblower claims. The memo reviews steps companies can take to prepare and reiterates the importance of making sure a whistleblower action plan reflects current operations and to then stick to the action plan by following it to a tee.
When Delaware Chief Justice Leo Strine retired last fall, Liz blogged about his proposal that would recommit to “New Deal” concepts focused on workers’ rights and a reformed shareholder voting/proposal process. Last Friday, Chief Justice Strine, along with Dorothy Lund of the University of Southern California Gould School of Law, published an essay in DealBook that again calls for a “21st-century New Deal.”
The essay echoes Chief Justice Strine’s earlier comments, but the current pandemic offers a new backdrop for delivering the pitch. Here’s an excerpt:
Recently, the Business Roundtable and leading institutional investors have responded to growing inequality and economic insecurity by calling for greater respect toward all corporate stakeholders, not just stockholders. But what does it say about whether rhetoric is enough that, in the national emergency we are facing, American workers and taxpayers, not institutional investors or top corporate managers, are bearing the brunt of the harm? We are again paying the price for a corporate governance system that lacks focus on financial soundness, sustainable wealth creation and the fair treatment of workers.
Instead of just rhetoric, consider regulatory action to encourage corporations and institutional investors to make the best interests of American workers, consumers, communities and the environment an end goal of corporate governance, as important as serving stockholders. Public and large private companies receiving bailouts or pandemic-related subsidies could be required to become public benefit corporations under state law, and others could be given positive incentives to do the same. Institutional investors and socially important companies could be required to disclose to the public how much weight they give to issues like worker pay and safety, environmental responsibility and maintaining a strong balance sheet.
The essay emphasizes the need to invest in infrastructure, innovation and worker training and says progressive approaches like a financial transaction tax, a graduated capital gains tax and an end to the carried interest loophole for hedge funds can pay for these essential investments fairly. These measures are integral to corporate governance reform because they encourage sustainable investing and put a damper on imprudent speculation.
Covid-19 & Stakeholder Interest Impact on the Future of Buybacks
As the economic fallout from the Covid-19 pandemic continues, many are wondering when or if buybacks will pick up again. This MarketsInsider article cites Sanford Bernstein analysts as saying buybacks may not return for several years.
Companies accepting help from CARES Act stimulus programs will be restricted from buying back their stock and others want or need to conserve cash. But, the article high-lights what might be the “most intriguing factor fueling buybacks’ demise is the social stigma against them.” As noted in the article, buybacks and dividends could “become ‘socially unacceptable’ as calls increase to shift focus from shareholders to stakeholders.” The article says we should anticipate a broad decline in buyback activity but it won’t all disappear.
Public pressure to keep stakeholder interests top of mind is also high-lighted in this NY Times article recognizing that companies are receiving criticism for cutting jobs rather than investor payouts. Chief Justice Strine and Professor Lund in their DealBook essay also recognize that families are encouraged to save for a rainy day but many companies didn’t do the same and instead used cash for dividends and stock buybacks. Given nearly all companies are dealing with this unprecedented crisis, time will tell whether the economic effects from the pandemic coupled with focus on stakeholder interests have struck a lasting damaging blow to buyback programs.
Corp Fin Provides Temporary Relief for Form 144 Paper Filings
Yes, Forms 144 are still required but you can email them, for a while. Friday afternoon, Corp Fin issued an announcement providing temporary relief for Form 144 paper filings in light of the ongoing health and safety concerns from Covid-19. The relief allows Forms 144 filed in paper under Rules 101(b)(4) or 101(c)(6) of Reg S-T to be submitted by email provided a PDF of the complete Form 144 is attached to the email. Filers choosing to do so should direct the email to PaperForms144@SEC.gov.
The relief is available for those who submit Forms 144 from April 10, 2020 through June 30, 2020.
For those worried about a manual signature on Forms 144 submitted via email, the Staff won’t recommend enforcement action if the filer includes a typed form of signature. If you can’t get a manual signature on the Forms 144, besides providing a typed form of signature, you’ll want to ensure:
– the 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 submission and provides such document, as promptly as practicable, upon request by Division or other Commission staff;
– such document indicates the date and time when the signature was executed; and
– the filer or submitter (with the exception of natural persons) establishes and maintains policies and procedures governing this process.
For those wanting to continue with regular mail, the announcement says you can still do so, there just may be processing delays.
Yesterday, SEC Chairman Jay Clayton issued a public statement emphasizing that the SEC is “focused on ensuring that issuers and other registrants continue to provide material information to investors, including information related to the current and expected effects of COVID-19, as promptly as practicable.” In another statement before a special meeting of the Investor Advisory Committee yesterday, Chairman Clayton again emphasized the need for issuers to provide disclosures about efforts to address the effects of COVID-19. Here’s an excerpt:
Our investors and our markets thirst for information as a general matter. This is particularly the case in times of economic shock and uncertainty. Couple this fundamental premise with the reality that for COVID-19-related reasons issuers may not be able to file required quarter-end reports on time, and we have a challenge. Importantly, an inability to file required reports does not prevent issuers from issuing earnings releases and filing current reports on Forms 8-K.
I believe the conditional, tailored relief crafted by the Division of Corporation Finance, coupled with their detailed guidance regarding COVID-19-related disclosure topics will allow issuers to provide prompt, period-end earnings information, and information regarding their past and expected future efforts to address the effects of COVID-19, regardless of whether they are able to comply with filing deadlines. We encourage issuers to provide as much information as is practicable and stand ready to engage with them.
Hat tip to Cooley’s Cydney Posner who blogged about yesterday’s statements and included notes from the Investor Advisory Committee meeting.
COVID-19 Financial Reporting Considerations Guide
Last week, John blogged about Corp Fin’s COVID-19 disclosure guidance and we’ve blogged about COVID-19 disclosures involving executive health, annual meeting implications, earnings calls, etc. This 64-page report from Deloitte outlines financial reporting considerations related to COVID-19 and an economic downturn…could be a helpful resource as companies prepare first quarter financial reports, which no doubt will require more effort as the quarter was far from a “normal” first quarter and nearly everyone is working remotely, including most service providers.
Beyond discussing key accounting & financial reporting considerations related to issues resulting from COVID-19, it also includes various industry-specific considerations. The report lists the following topics as likely being the most pervasive and challenging accounting & reporting issues:
– Preparation of forward-looking cash flow estimates
– Recoverability and impairment of assets
– Accounting for financial assets
– Contract modifications
– Subsequent events
– Going concern
More on “Will Business Interruption Insurance Pick Up Some of the Tab?”
Not too long ago, John blogged about the long fight ahead for companies thinking of recovering for COVID-19 related losses under business interruption coverage. Ultimately, a company’s policy language will be one factor that determines whether COVID-19 business interruption losses will be covered and many commercial property policies exclude coverage for losses resulting from a virus such as COVID-19.
This Seyfarth memo notes that business interruption coverage usually requires that losses be accompanied by direct physical loss to the property. During the COVID-19 pandemic, many businesses are closed due to state orders so it may be difficult to get coverage under a policy providing business interruption coverage. Some might try to argue the physical loss resulted from COVID-19 contamination but this sounds like part of the long fight John blogged about.
An interesting wrinkle is that several states are trying to expand business interruption coverage retroactively by introducing bills that would provide coverage for losses from COVID-19 under commercial property policies. The memo says that legislators in Ohio and Massachusetts have introduced these bills and this Hunton Andrews Kurth blog reports bills have been introduced in other states. New Jersey introduced similar legislation but another Hunton Andrews Kurth blog reports the bill has been pulled to allow time for insurers time to come forward with their own plan for how to address the issue. Some might also want to watch whether lawsuits filed by restaurant owners seeking coverage for coronavirus-related business losses move forward – here’s a story about a lawsuit brought by Thomas Keller, the famed chef of The French Laundry and Per Se.
With ongoing economic uncertainty, many companies are thinking about and taking steps to address liquidity and capital resources. John blogged last week about Corp Fin’s Covid-19 disclosure guidance and this Davis Polk memo takes a look at factors public companies and their underwriters should consider when thinking about a possible securities offering during a blackout period. Self-imposed blackout periods are in place at many companies due to the rapidly developing COVID-19 pandemic and insider knowledge of potential impacts to a company. Care must always be taken when thinking about disclosures with a securities offering but in light of current circumstances, disclosure considerations are heightened now.
As noted in the memo, there is no legal prohibition on the sale of securities during a blackout period, but it can be tricky. Even with a blackout period in place, for companies thinking about a securities offering, the memo says it’s possible to do so when:
– management has enough information about the current (or recently ended) quarter to predict with a fair degree of confidence what the company’s reported results are likely to be
– management has a good track record judging its anticipated results at similar points in the information-gathering and reporting cycle
– management’s expectations for the quarter, and future periods, are either (i) at least in line with “the market’s” expectations as well as with management’s own previously announced guidance (if any) – or (ii) if management’s expectations are not so in line, the company and its underwriters conclude that the deviation is not material or the company is willing to “pre-release” its current expectations prior to the earnings release. In certain circumstances, such as those relating to the impact of the COVID-19 crisis, management may not be able to predict the company’s results beyond the current quarter, with a high degree of confidence. In those scenarios, a company may decide to withdraw previously issued guidance and not issue new guidance. Nevertheless, withdrawing guidance is not a substitute for disclosure of underlying trends and uncertainties that could affect financial and operational performance
– management’s analysis of the going-forward impact on the company’s business of COVID-19 is sufficiently developed that disclosure can be made at the time of the offering that will be in line with what is disclosed when the 10-K, 20-F, 10-Q, 6-K or other filing is made
The memo provides tips on what to say if management’s expectations aren’t in line with market expectations and considerations for updating risks, trends and uncertainties, selective disclosure issues, reputational and legal risks.
Section 16: Temporary Relief from Form ID Notarization Requirement
The SEC adopted a temporary rule yesterday that should make it easier for compliance personnel to obtain EDGAR codes for new directors and Section 16 officers during the covid-19 pandemic. The rule allows filers to obtain codes by submitting a manually signed authenticating document, without the notarization required by Rule 10(b) of Regulation S-T, so long as the submitted document includes a notation that the filer was unable to obtain the required notarization due to circumstances relating to COVID-19. A filer who receives EDGAR codes under the temporary rule must obtain a notarized, manually signed copy of the Form ID and submit a PDF copy as correspondence, vie EDGAR, within 90 days of receiving the codes. The relief is available through July 1, 2020.
See yesterday’s blog regarding the “manual signature” requirement.
Our April Eminders is Posted!
We have posted the April issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!
As is often said – beauty is in the eye of the beholder – some might say the same about ESG ratings, then again maybe not – it wasn’t too long ago that Liz blogged about how ESG ratings and funds were causing so much confusion – and frustration. The idea of a rating sounds great – evaluate a bunch of company-specific factors and calculate a rating so investors can evaluate companies based on their particular ESG interests and areas of focus. But, it’s not that simple because, among other things, we don’t have standard disclosure and reporting frameworks in place, raters use varying methodologies, investors use them differently, etc.
A recent BNY Mellon report based on a survey of 335 investor relations professionals says that only a small percentage of survey respondents agree with ESG rating providers’ analyses of their company. In 2019, slightly over half of survey respondents had communicated with an ESG rating provider in the past 12 months, which was up from 34% in 2017.
BNY Mellon’s report says that IR departments are increasingly monitoring their company’s ESG ratings, even more so at companies with higher market caps as they presumably have more staff. One reason companies might want to monitor ESG ratings is that investors often raise ESG questions during engagement meetings so it’s helpful to know which ratings your investors track and understand those raters’ methodologies. The BNY Mellon report summarizes the increase in investor ESG questions by topic and industry sector so you can see the types of questions you might hear this year.
I’ve heard suggestions that one way ESG ratings might be more useful would be if the ratings assessed the evolution of a company over time and its trajectory toward sustainability rather than comparing firms, even in the same industry.
For now, the usefulness of ESG ratings as stand-alone information seems questionable as one rater might rate a company high and another might rate the same company low. If anything, companies can find usefulness in the ratings to prepare for investor engagement meetings by understanding which ratings investors are tracking and the related rating methodologies.
Glass Lewis Approach to Governance During Pandemic
Not long ago, I blogged over on our “Proxy Season Blog” about Glass Lewis’s updated policy on virtual-only shareholder meetings. Glass Lewis recently posted another blog – this one about its approach to governance during the coronavirus pandemic. In its governance blog, Glass Lewis touches on compensation and balance sheets – which is the area where it expects to see most near term concerns and issues, board composition and effectiveness, activism and M&A, oil & gas, shareholder proposals & ESG, how Glass Lewis uses discretion and how a company’s disclosure can impact Glass Lewis’s use of discretion. Here’s some of the proxy advisor’s commentary on board composition amid the pandemic:
For boards, we see particular risk in the lack of age and gender diversity among company directors.
Much like shareholder concerns with overcommitment this lack of diversity presents a systematic risk to portfolios, given directors typically sit on several boards and one sick or deceased director can have a compound effect on the capacity of other directors at those companies, which then spreads to the other companies those directors sit on, and so on.
Ultimately, the ability of boards and management to successfully navigate the crisis and outperform their competitors will highlight the stark differences in the effectiveness of boards, directors and their governance structures. In our experience during past crises, well governed companies who made the right decisions during the good times are well prepared and durable during a crisis, and far better positioned to deliver shareholder returns afterwards.
Transcript: “Conduct of the Annual Meeting”
We have posted the transcript for our recent webcast: “Conduct of the Annual Meeting.”
It came together quickly, some might say not fast enough but last Friday, the Coronavirus Aid, Relief and Economic Security (CARES) Act became law. It is believed to be the largest emergency stimulus package in U.S. history and it will have a significant impact on businesses and employees. There’s a lot in it – for those looking for a shorter version (the bill is 880 pages), here’s a section-by-section summary and this Skadden memo provides an overview. This Cleary memo summarizes 10 key aspects to the bill:
1. Assistance for affected industries – $500 billion in loans, loan guarantees and other investments for industries affected by COVID-19, $454 billion for eligible businesses, states and municipalities and $46 billion for aviation businesses and national security-critical businesses
For aviation businesses and national security-critical businesses, Treasury must receive warrants, equity or senior debt from the borrower. Restrictions on share repurchases, capital distributions on common stock, executive compensation and workforce reductions apply. Airlines can be required to continue service of existing routes to the extent reasonable and practicable.
– See John’s blog from Friday for a nuance of the stock buybacks provision relating to airline companies
For borrowers receiving relief from the $454 billion bucket, the Federal Reserve may make loans or purchase obligations or other interests directly from issuers or in the secondary market. Restrictions on share repurchases, capital distributions on common stock and executive compensation apply to direct loans to eligible businesses, unless waived by Treasury, and workforce reduction restrictions apply with respect to the mid-sized business program.
2. Airline grants to support aviation workers – $32 billion, Treasury may make direct grants to the aviation industry that must be exclusively used for wages, salaries and benefits
Again, Treasury has authority to require warrants, equity or debt. Restrictions on share repurchases, capital distributions on common stock, executive compensation and workforce reductions, and airline service requirements, apply.
3. SBA assistance for small businesses – $349 billion Paycheck Protection Program – SBA will provide guarantees for loans to small businesses generally less than 500 employees, aimed at covering payroll and necessities like rent and utilities and include loan forgiveness provisions that are available if certain conditions are met
4. Financial sector liability guarantees – among other things, this includes a guarantee program for the U.S. money market mutual fund industry and bank debt guarantee authority
5. Financial institution regulatory relief –among other things, this includes lending limit waivers, community bank relief, regulatory capital relief for SBA lending and accounting relief for financial institutions
6. Tax relief – among other things, this includes an employee retention tax credit, deferral of certain employer payroll taxes, increased ability to deduct net operating losses, an increase in the business interest allowable deduction from 30% of adjusted taxable income to up to 50%
– Also tucked in this section is a waiver of the federal excise tax on any distilled spirits used for making hand sanitizer – doubtful we’ll hear complaints about this business tax break
7. Mortgage & real estate related relief – among other things, this includes foreclosure moratorium and forbearance of multifamily residential mortgage loan payments on federally backed loans
8. Potential relief for the hotel & restaurant industry
9. Employee benefits & tax-qualified retirement savings plans – among other things, this includes ability for individual withdrawals on a tax favorable basis from eligible retirement plans and an increase in dollar cap on loans from qualified employer plans
10. Family & medical leave – revisions to the Families First Coronavirus Response Act
The CARES Act also includes targeted funding for the health care system and other important provisions like unemployment -this McDermott memo delves into provisions related to the health care sector.
With the COVID-19 crisis unfolding daily, the measures taken by Congress, albeit imperfect, will hopefully stem some of the economic effects. There will likely be several rounds of “fix-it” sessions as constituents representing both sides of the aisle have particular wish lists that can be taken up moving forward because as many have noted, if the crisis persists for even longer, there may be calls for additional economic relief.
To help you find resources addressing various CARES Act provisions, we’re posting memos specifically related to the CARES Act in our “COVID-19” Practice Area.
CECL Delayed Effectiveness
The FASB standard for current expected credit losses (CECL) took a double-blow on Friday and is delayed after all. The CECL standard was supposed to take effect in January 2020, but as this Compliance Week blog reports, it’s delayed.
The CARES Act wedged CECL in on page 543 and allows banks to delay compliance until the earlier of December 31, 2020 or the date the coronavirus national emergency ends.
At the same time, the FDIC and Office of the Comptroller of the Currency issued a joint statement allowing banking organizations to mitigate the effects of CECL in their regulatory capital for up to two years. The interim final rule, which takes immediate effect but is not mandatory for banks wishing to stay the course, applies to organizations required to adopt CECL by its Jan. 1 effective date this year and is an addition to a three-year transition period already in place.
Rationale for slipping this provision in the CARES Act seems to be that since the standard requires banks to look forward while taking into consideration past experience and current conditions to predict which loans will be losers, given the current economic climate, that might prove problematic. As noted in this Accounting Today blog, this is likely welcome news to some banks as it eliminates a difficult task and reduces additional volatility – although some banks will likely comply with CECL anyway since they’ve been preparing for it over the last year. Critics will likely make some noise about this CARES Act provision since the FASB drafted the standard in the aftermath of the 2008 financial crisis to help illuminate impending losses and given current economic conditions, this is something many likely want to see now.
Importance of Board Culture
An opinion piece in Bank Director discusses board culture and how it’s often an underappreciated factor in determining board effectiveness. Asserting that board culture is more enduring than personality, some of the values the author mentions that shape the board’s culture include:
– Independence: do board members feel empowered to ask questions, probe and examine?
– Transparency: is all relevant information being shared with the board? Boards and management need to be reviewing the same information to facilitate effective oversight
– Access to information: boards need access to any information that is essential for their oversight responsibilities
– Alignment around objectives: all directors need to be aligned in their understanding and support of a company’s objectives and be focused on achieving them
One way boards can help ensure effectiveness is by evaluating their own culture in addition to the company’s culture. This report from Anti-Fraud Collaboration includes questions boards can use to help assess culture. The report also suggests steps the board can take improve oversight of company culture and it includes an outline of suggested oversight responsibilities for the board and each committee. The report suggests creating a culture dashboard and it lists metrics from different corporate functional areas that can help companies monitor trends.
Brand new! By popular demand, this comprehensive “Social Media Handbook” covers the entire terrain – from Reg FD, to proxy solicitation rules, to communications during offerings and business combinations, to reputational risks & opportunities. This one is a real gem – 95 pages of practical guidance – and it’s posted in our “Social Media” Practice Area.
COVID-19: Should You Update Earnings Guidance?
A lot of internal discussions are underway about whether to update earnings guidance about the effect COVID-19 might have on a company’s business or financial outlook. A recent blog from communications firm Clermont Partners says so far, few companies have actually issued updated guidance about the expected financial impact from the health pandemic but they expect pre-announcements or guidance updates to accelerate.
For those debating about whether to update guidance, the blog provides considerations to think about before doing so, here are a few:
– Timing – when it’s time to communicate, tell investors what you know about near-term impacts and longer-term impacts
– Let investors know when they can expect to receive additional updates
– Severity – decide how much of an alarm bell you want to ring – once markets calm down it might be hard to reign expectations back
Another report from PwC looked at what finance leaders are focused on amidst the COVID-19 pandemic. The report was based on a survey of 50 finance leaders. It found most CFOs say their companies are impacted although the full extent remains unknown – the survey then takes a look at actions companies are taking. Here’s some of what it found:
– More than half of survey respondents said they are considering taking cost containment measures
– Approximately 44% are considering adjusting earnings guidance
– When asked about plans to change disclosures, 48% say they’re planning changes as a result of COVID-19 and 8% said the changes would be “significant”
– In terms of the extent of disclosure changes as a result of COVID-19 – 40% said somewhat and another 38% said it’s currently difficult to assess
A couple of weeks ago, I blogged about managing data privacy compliance and noted that California’s AG had proposed two rounds of amendments to the California Consumer Privacy Act in February. We’ll see if the third time’s a charm because last week, California’s AG issued another round of revisions – comments are due by March 27th.
California’s AG can enforce the CCPA as of July 1, 2020 whether final regulations are in place before then or not. A recent Gibson Dunn memo provides a summary of the primary changes included in the latest round, which cover:
– Deletion of guidance on definition of “personal information”
– Change in definition of “financial incentive”
– Removal of the optional “opt out” button
– Relaxation of notice requirement for companies not selling consumer data
– Additional requirements for privacy policies
– Responding to requests to know and requests to delete
This recent blog from BakerHostetler says a 6-month delay in the enforcement of the CCPA has been requested to allow time for companies to focus on COVID-19 related issues.
This year, another aspect to annual shareholder meetings to think about is whether your directors, officers and other employees should attend the annual meeting – presuming that it’s not a virtual-only meeting. A Hunton Andrews memo discusses that question and notes the following considerations:
– Proxy statement disclosure – SEC rules require proxy statement disclosure describing a company’s policy, if any, about director attendance at annual shareholder meetings – and next year, a company will need to disclose in their proxy statement the number of directors who attended the prior year’s annual meeting
– What does “attendance” mean? SEC rules don’t define what constitutes “attendance” for purposes of SEC rules; however, many state laws say its okay for a director to participate in meetings remotely – such as by telephone – provided the director can hear and speak with other directors
– Companies holding in-person or hybrid shareholder meetings should review any director attendance policies they might have to determine if the policy requires “in-person” or “physical” attendance
The memo also provides considerations for companies that are planning to hold an in-person meeting while potentially allowing directors or other senior officers to participate remotely – it says be aware of potential criticism from shareholders and notes that a hybrid meeting format might help alleviate potential criticism.
“Tomorrow’s Webcast: “The Coronavirus: What Should Your Company Do Now?”
Tune in tomorrow for the webcast – “The Coronavirus: What Should Your Company Do Now?” to hear Davis Polk’s Ning Chiu, Wilmer Hale’s Meredith Cross, Uber’s Keir Gumbs and our own Dave Lynn discuss securities law compliance and corporate governance issues arising from the coronavirus outbreak that are confronting public companies & their lawyers.
Tomorrow’s Webcast: “The Top Compensation Consultants Speak”
And, tune in tomorrow for the CompensationStandards.com webcast – “The Top Compensation Consultants Speak” – to hear Semler Brossy’s Blair Jones, Pay Governance’s Ira Kay and Deloitte’s Mike Kesner discuss what compensation committees should be learning about and considering today. Discussion will cover the impact of the COVID-19 pandemic on executive compensation and incentive practices, including goals, timing and incentive plan share usage amid this rapidly changing environment with continued uncertainty. Don’t miss it!
John blogged last week about stock buybacks in response to market turmoil and various news outlets reported that several large banks have suspended their stock buybacks due to the COVID-19 pandemic. For those looking for information about conducting a buyback through a Rule 10b5-1 plan, this Morrison Foerster memo discusses questions about adopting a plan and potential modification given current events. It walks through – and reiterates – best practices in spite of current market conditions.
The memo points out that Rule 10b5-1 plan best practices are not bright line rules and any company should weigh the pros and cons when deciding whether to adopt a plan, including how adoption of such a plan during the COVID-19 outbreak might be viewed in hindsight by the public, outside investors, or law enforcement agencies.
Frequency of COVID-19 Board Updates
How often to brief the board is a question many are asking as we deal with COVID-19 related issues. A recent blog from Financial Executives International provides information about how often some are providing updates based on information gathered from a survey of corporate risk professionals.
The survey said most survey respondents are briefing their boards “as needed only,” while 25% haven’t made a decision yet or don’t currently have executive-level briefings. Another 8% are updating their boards weekly.
As for topics, this Sidley memo discusses ten concerns for boards during the COVID-19 pandemic – it’s a thorough list and helpful if you are preparing for a board update meeting. One of the topics covered is business continuity and, among other things, it says the plan should be continually re-evaluated and that you should consider whether contingencies are in place if a board quorum isn’t available.
Undoubtedly, the decision about updating the board varies from company-to-company and company specific facts and circumstances will guide the decision. To not over-burden management by holding one-on-one director briefings, the blog cites the head of KPMG’s Board Leadership as suggesting independent chairs and lead directors interface with management and then brief directors.
Board-Level Oversight of Sustainability Disclosures
Board-level oversight of sustainability initiatives and disclosure is up for grabs at many companies. This PwC memo discusses reasons audit committees might be best positioned to take on oversight responsibilities for sustainability disclosures. Granted, some companies have established a board-level sustainability committee, here’s a committee charter from Ford and another from Bunge. Audit committees always seem to have a full plate and with more attention focused on sustainability reporting, PwC suggests they take on even more. Here’s an excerpt from PwC’s memo:
Public disclosure of ESG metrics requires appropriate policies, controls and governance, similar to other elective financial metrics, such as non-GAAP metrics. Companies should have processes and controls around the development of those disclosures to support the accuracy of the data.
The audit committee has deep skills in overseeing internal controls, policies and procedures, and reporting. Audit committees can play a role by understanding the methodologies and policies used to develop the metrics, as well as the internal controls in place to ensure accuracy, reliability, and consistency of the metrics period over period.
The memo references the SEC’s interpretive guidance issued in February regarding key performance indicators in the MD&A saying “we encourage audit committees to be actively engaged in the review and presentation of non-GAAP measures and metrics to understand how management uses them to evaluate performance, whether they are consistently prepared and presented from period to period and the company’s related policies and disclosure controls and procedures.”
Not long ago, John blogged about how the SEC’s MD&A guidance heightens the stakes for ESG disclosures.
Friday afternoon, to accommodate companies and shareholders who are changing their annual meeting plans in response to COVID-19, the SEC announced that Corp Fin was providing Staff guidance about compliance with federal proxy rules for upcoming annual shareholder meetings – this includes guidance about virtual shareholder meetings. Here’s an excerpt from the press release:
The staff guidance provides regulatory flexibility to companies seeking to change the date and location of the meetings and use new technologies, such as “virtual” shareholder meetings that avoid the need for in-person shareholder attendance, while at the same time ensuring that shareholders and other market participants are informed of any changes.
Under the guidance, the affected parties can announce in filings made with the SEC the changes in the meeting date or location or the use of “virtual” meetings without incurring the cost of additional physical mailing of proxy materials.
The guidance also encourages companies to provide shareholder proponents with alternative means, such as by telephone, to present their proposals at the annual meetings in light of the difficulties that shareholder proponents face due to COVID-19.
Many have been wrangling with all the considerations of holding virtual-only or hybrid shareholder meetings during this time of “social distancing.” This Perkins Coie memo provides considerations from the West coast and this blog from Bass, Berry Sims does a nice job discussing practical considerations, including considering views of institutional investors and proxy advisors. We reached out to Amy Borrus from the Council of Institutional Investors and she kindly provided this statement about CII’s position on virtual-only shareholder meetings:
“CII generally has opposed virtual-only shareholder meetings, in favor of a hybrid approach. Given coronavirus concerns, it is reasonable that some companies will go to virtual-only this spring. But we hope they will make it clear that this decision was one-off, and that they follow best practices for making any virtual meeting participatory.”
Meanwhile, this NYT DealBook article includes a statement from NYC Comptroller Scott Stringer:
The funds he oversees ‘will not take action against boards holding virtual-only annual meetings due to the coronavirus that disclose their rationale and affirm their commitment to holding in-person meetings in the future.’
State laws and company organizational documents may prevent some companies from holding a virtual-only shareholder meeting. But legal issues aside, virtual meetings aren’t without criticism. Among other things, some investors say the meetings don’t allow shareholders to interact with management and directors and there are concerns that shareholders might not be able to get all questions answered, etc. This criticism has led some investors to vote against directors at companies that hold a virtual-only shareholder meeting.
Due to these concerns (and others), it’s understandable why companies might be hesitant to shift to a virtual-only meeting format – so the statements from CII and the NYC Comptroller may help some companies who’ve been wrestling with the decision about what to do.
What about ISS & Glass Lewis? At least for this year, they’re relaxing their policies. This Cleary memo covering virtual meeting considerations includes the updated guidance from ISS and Glass Lewis released by Kingsdale Advisors. Glass Lewis also has a memo on its website – here’s an excerpt from Cleary’s memo:
– Glass Lewis: Consistent with its current 2020 proxy voting guidelines, Glass Lewis has indicated that it will continue to review an issuer’s proxy materials regarding virtual shareholder meetings. Pursuant to its 2020 guidelines, Glass Lewis will generally recommend voting against governance committee members where the board is planning to hold a virtual-only shareholder meeting and the company does not provide robust disclosure in their proxy statement assuring shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting. The memo includes examples of what Glass Lewis considers “effective disclosure”.
Glass Lewis stated that, in context of coronavirus, companies that have already filed their proxy statements and provided information for an in-person meeting but are moving to a virtual-only meeting should provide public disclosure explaining the rationale. Such disclosure should specifically state that the change is due to the coronavirus outbreak, include complete information about accessing the meeting and confirm shareholders will have the same opportunities to participate – as they would have had at an in-person meeting.
– ISS: Though it has not previously adopted a formal policy on virtual shareholder meetings, ISS stated that in light of the coronavirus outbreak and the rapidly changing environment, ISS expects that institutional investors will likely be more accommodating of virtual meetings this year.
Like Glass Lewis, ISS stated that it will require companies to provide comprehensive disclosure affirming that a virtual meeting will provide full opportunities for shareholders to participate, ask questions, provide feedback to the company and present shareholder proposals. ISS also indicated that it anticipates the way in which companies manage virtual meetings this year will impact its future position on virtual shareholder meetings.
Virtual Annual Meetings: Sample Disclosures
John blogged last week about resources addressing the various legal considerations on “going virtual” for this year’s shareholder meetings. For those looking for sample disclosures, here are a few that might help.
BNY Mellon’s 2020 proxy statement provides a sample of a company planning to hold an in-person shareholder meeting but also contains the following precautionary statement:
As part of our precautions regarding the coronavirus or COVID-19, we are planning for the possibility that the annual meeting may be held solely by means of remote communication. If we take this step, we will announce the decision to do so in advance, and details on how to participate will be available at https://www.bnymellon.com/proxy.
Examples of companies that have held virtual-only or hybrid meetings that some investors might view as being run well include Intel, Ford and ConocoPhillips. I found the following information after taking a look at each of the companies’ 2019 proxy statements. Perhaps some investors would find similar meeting formats and information transparency somewhat more acceptable, especially this year.
Intel’s 2019 proxy statement included instructions with links that helped shareholders submit questions in advance and also during the meeting. The proxy statement also said the company would make a replay available on its Investor Relations website and Intel’s Investor Relations website also includes answers to investors’ questions from the 2019 meeting.
Ford’s 2019 proxy statement includes a full-page of instructions for last year’s virtual-only meeting. The instructions provided information for shareholders to submit questions in advance and during the meeting, and provided a toll-free telephone number for someone to call if they ran into technical difficulties.
ConocoPhillips held a hybrid meeting and its 2019 proxy statement included instructions for attending in person or for viewing a live video webcast of the meeting. The proxy statement also provided information allowing shareholders to submit questions in advance of the meeting. The company has a link on its Investor Presentations website to access a replay and a transcript from last year’s meeting.
And, for anyone interested in following Warren Buffet’s lead, he announced last Friday that Berkshire Hathaway’s annual meeting will be streamed online by Yahoo Finance without shareholders present – here’s the story from CNBC.