Deloitte recently published the results of a survey of CFOs of North American entities with more than $1 billion in revenues. The survey focused on identifying issues that CFOs were concerned about, and – aside from the impact of the US presidential election – respondents reported that they were worried about how talent shortages, wage inflation, and recent regulatory changes and proposals could impact their ability to manage and retain a skilled workforce. Survey respondents also identified external and internal risks that were keeping them up at night. This excerpt summarizes those concerns:
When asked to select the three external risks that worry them the most, CFOs put geopolitics near the top (52%), trailing only inflation (57%) and the economy (54%). After the election, a shift in foreign policy—or trade policy—could impact organizations with extensive overseas operations. But beyond the impact on their organizations, all three of the top three risks can directly impact key elements of the CFO’s remit: risk management, budgeting, and forecasting.
So, too, can the arrival of breakthrough technologies. Nearly half (49%) of respondents named technology transformation as one of their top three internal risks. A nearly equal amount (48%) ranked efficiency and productivity as a top internal risk, likely related to the adoption of innovative technologies. Curiously, generative AI—the most cited internal risk in our 2024 second quarter survey—fell down the list (44%) and out of the top three. The drop may have to do with CFOs now seeing gen AI as a critical enabler or element of larger concepts like tech transformation and enhanced productivity.
Overall, the CFOs surveyed were pretty downbeat about the current business climate, with only 12% of CFOs saying that now is a good time to be taking greater risks, compared to 26% in the second quarter and 41% in the third quarter of 2023. That’s probably not surprising given election year uncertainties, but public company disclosure committees and others involved in drafting SEC filings ought to take a look at the results of this survey when considering risk factor updates and trend disclosures in their upcoming 10-Qs.
In addition to the results of Deloitte’s CFO survey, you might want to keep this recent Fenwick blog in mind when you think about what might need to be updated in your “Risk Factors” disclosure. This excerpt includes a few of the specific potential risks outlined in the blog:
Risk related to Chevron and related decisions – As previously noted, we have observed that life sciences companies are adding risk factor language in response to the U.S. Supreme Court overturning the Chevron Doctrine and related decisions. Companies in life sciences or other highly regulated industries should consider whether it is appropriate to include such disclosure. Please see our alert for an example of such risk factor language.
Ongoing risk related to CrowdStrike outage – Companies impacted by CrowdStrike’s defective software update should consider updating their risk factors and forward-looking statements about systems downtime and/or reliance on third parties to operate critical business systems. Remember to revise relevant hypothetical language about outages or systems downtime to indicate that such risks have already occurred. Finally, impacted companies should also consider discussing any material impacts (if any) in the management’s discussion and analysis section of their next Form 10-Q.
In addition, software and technology companies that similarly update systems, including automated updates, should ensure their risk factors cover risks associated with errant updates, and that their boards have oversight visibility on how those risks are mitigated where it may be deemed mission critical to the company. Please see our alert for more information.
Risk related to AI – As a reminder, the EU AI Act entered into force on August 1. Companies should review and update any relevant language in their AI risk factor to reflect this development. Note that the Securities and Exchange Commission (SEC) and the plaintiffs’ bar also continue to focus on AI washing. In a recent video about AI washing, SEC Chair Gary Gensler reminded companies that “any claims about prospects should have a reasonable basis and investors should be told that basis.”
Other potential risks noted in the blog include inflation and interest rates, trade tensions between the US and China, new export control rules and – inevitably – the US presidential election.
Labrador recently announced the winners of its 6th annual disclosure transparency awards. Here’s an excerpt from its press release:
Intel, Dow, and Mastercard have emerged as champions, securing top honors in the 2024 U.S. Transparency Awards unveiled today by Labrador, a leading global communications firm specializing in transparent corporate disclosure documents. The rankings are based on a rigorous evaluation of corporate disclosure documents among the top 250 companies in the S&P 5001 and recognize companies dedicated to building investor and stakeholder trust through clear, concise, and effective communication.
The Transparency Awards celebrate the 10 most transparent U.S. companies, the top three leaders in 11 industries, and the best performers in individual disclosure categories—from best overall transparency, proxy statement, and ESG reporting to Form 10-K, investor relations websites, codes of conduct, and plain language usage.
Be sure to check out the Transparency Awards website for more details about the awards and the companies that received them. University of Michigan alums in the audience – including our own Meredith Ervine – will no doubt recognize the reference to the Wolverines’ fight song in the title of this blog. That’s intentional, because as many of you know, our former colleague & Michigan alum Broc Romanek has been leading the charge on disclosure transparency for Labrador for the past couple of years. Here’s Broc’s 8-minute video announcing the winners of this year’s awards.
Those of you who know Broc probably won’t be surprised to learn that he remains the hardest working man in show business. In addition to his Labrador gig, he’s recently joined the folks at Cooley where he’ll provide corporate governance guidance on the firm’s new “The Governance Beat” blog.
I highly recommend this Venable alert for folks looking for some education (or a thorough refresher) on the available safe harbors for forward-looking statements. For junior securities lawyers, it may even help you understand why we do some of the weird things we do in legends & disclaimers! It starts with a detailed review of Securities Act Rule 175, Exchange Act Rule 3b-6, the PSLRA and the bespeaks caution doctrine, including when each safe harbor or defense is available and how to invoke it. For example, on the PSLRA, the alert has this table summarizing the issuers, transactions and circumstances where the PSLRA safe harbor won’t apply:
Excluded Issuers
Excluded Transactions and Circumstances
“Bad actor” issuers
IPOs
Penny stock issuers
Offerings of securities by blank check companies [for the PSLRA, this now includes SPACs]
Investment companies
Roll-up transactions
Partnerships
Going private transactions
Limited liability companies
Tender offers
Direct participation investment programs
Financial statements prepared in accordance with GAAP*
Section 13 filings
*Hidden in a footnote to this table is a reminder of something I frequently reiterated to clients: “Issuers should take care to locate forward-looking statements in MD&A rather than notes to financial statements, and when, as is common, similar disclosure is contained in both MD&A and financial statements notes, to remove any forward-looking statements from the notes.”
Here are some of the alert’s suggestions for crafting PSLRA safe harbor legends:
Avoiding misuse of the PSLRA safe harbor legend. While it might seem straightforward, it is crucial to avoid the inclusion of the PSLRA safe harbor language in documents or oral presentations that do not contain forward-looking statements. This practice, though it may not directly affect the specific document, can lead to allegations that the issuer is not meaningfully employing the PSLRA safe harbor, thus potentially exposing unrelated statements to vulnerability under “boilerplate” attacks.
Hyperlink the legend if the media does not permit its inclusion. When social media platforms or other media limit the number of symbols or otherwise render the inclusion of a PSLRA safe harbor legend impossible or impractical, the legend should be prominently provided through an active hyperlink. Although this practice has not been expressly blessed by the SEC, we do not see the reason why the SEC would oppose this, especially considering the analogous approach permitted with Rule 134 legends. While the legend can be included in a series of sequential posts (for instance, on X), a hyperlink will better ensure that the legend will be attached to the statement in case of reposting or other dissemination, which will not be the case with sequential messages. Issuers may choose to combine both methods—sequential messaging and hyperlinks—if they find it does not compromise the aesthetic qualities of the message.
Format and timing of the PSLRA legend may potentially render the legend meaningless. Logistical planning for announcing PSLRA legends is essential. For instance, if forward-looking statements are intended only for a Q&A session following a formal adjournment of an annual meeting, it may be inappropriate to announce the safe harbor legend before the meeting begins or state in such legend that oral forward-looking statements will take place during the annual meeting. Additionally, for unscripted speeches, clearly defining the topics to be discussed beforehand allows for the crafting of the safe harbor language in a meaningful way, ensuring the legend identifies relevant risks without being overly broad or generic.
The alert has many more tips related to PSLRA legends & forward-looking disclosures. We’ve posted this in our “Forward-Looking Information” Practice Area.
This Sullivan & Cromwell governance alert purports to provide a non-exclusive list of hot topics for board and committee agendas in the next 12 months. The alert organizes topics by the board and each committee, although it acknowledges that where a topic is addressed will vary from company to company based on how responsibilities are allocated. For a sneak preview, here’s the list of just the topic headings (the alert explains each in more detail):
Board
– Addressing the Use of Artificial Intelligence
– Overseeing Management Succession Planning – Monitoring the Company’s Compliance Culture – Improving Committee Coordination
– Monitoring the Business Impact of Emerging Trends (e.g., rulemaking, enforcement, political polarization, M&A, case law developments, etc.)
What does the alert mean by improving committee coordination? Here’s more:
Although the right balance will vary by company and issue, potential options for enhancing committee coordination on relevant issues may include: (a) establishing practices/procedures that promote a minimum amount of discussion or reporting between applicable committees; (b) maintaining overlapping committee memberships; (c) periodically conducting joint committee meetings on topics of significance to multiple committees; and/or (d) having committee chairs provide updates to each other between meetings.
At the same time, in light of stockholders’ increased use of DGCL §220 books and records demands and Caremark lawsuits to challenge corporate oversight processes over the last few years, any relevant communications or decisions between or by committees should continue to be made in compliance with applicable board/committee procedures and kept to formal channels.
Back in April, the Society for Corporate Governance, NIRI and NYSE jointly submitted a petition requesting the SEC to initiate rulemaking to shorten the 45-day filing period for Form 13F filings to no more than five business days. The petition calls the current filing period “outdated” and says it’s “the one prominent ownership transparency rule that has not yet been modernized.” It argues shortening the deadline would “improve the utility of 13F filings for market participants and increase investor confidence in the integrity of the U.S. securities markets.”
Wachtell supports the rulemaking petition in this article, which notes that the petitioners urge public company stakeholders to submit comment letters (available here) in support of the petition. Here’s more from Wachtell:
Under current rules, adopted in 1979, investment managers with at least $100 million in U.S. publicly traded assets under management are required to disclose their share ownership positions on Form 13F within 45 days after each calendar quarter. Given the speed of today’s equity markets, 13F disclosure is generally considered already stale when published, and moreover, does not include information on options, swaps and other derivatives that are commonly used by activist hedge fund investors.
The fact that 13F positions are reportable as of the last day of the calendar year or quarter also means that short-term trades that occur between the reportable dates are underreported, or as the petition notes, “an investment manager can still buy a 4.99 percent stake on Jan. 2 and not have to report that position until May 15.” The lack of transparency of 13F disclosures hinders issuers’ ability to make informed decisions on key matters including preparing for shareholder outreach and engagement and identifying and responding to activism and takeover threats. Many companies and boards continue to fly blind even as shareholder activism and hostile takeover activity continue at high levels.
As the SEC has continued to shorten filing deadlines for other disclosures, including amending Sections 13(d) and 13(g) of the Exchange Act last year to shorten reporting deadlines for Schedule 13D and 13G filings, the time has also come to move 13F reporting toward realtime disclosures that promote market transparency.
Form 13F filings are on the SEC’s radar! This week, the Commission announced charges against 11 institutional investment managers for failing to file required 13Fs, with nine firms agreeing to pay more than $3.4 million in civil penalties. A few firms had no civil penalties since they self-reported the violations and cooperated with the SEC’s investigation.
Yesterday, federal agencies were apparently big on cutting things by half a … something. I’m referring, of course, to the rate cuts, but also to the SEC announcing final amendments to the rules governing how exchanges quote individual stock prices, including by reducing the minimum pricing increment for ‘tick-constrained stocks’ (those with narrow bid-ask spreads) to half a penny.
On September 18, 2024, the Securities and Exchange Commission adopted amendments to [e]stablish a second minimum pricing increment, also known as tick size, of $0.005 under Rule 612 of Regulation NMS for the quoting of certain NMS stocks, which are stocks listed on a national securities exchange, regardless of trading venue….
Minimum Pricing Increments. For quotations and orders in NMS stocks priced at or greater than $1.00 per share, the amendments to Rule 612 set forth two minimum pricing increments:
Minimum Pricing Increment If the Time Weighted Average Quoted Spread of the NMS stock during the Evaluation Period was $0.015 or less: $0.005
Minimum Pricing Increment If the Time Weighted Average Quoted Spread of the NMS stock during the Evaluation Period was Greater than $0.015: $0.01 …
[T]he compliance date will be the first business day of November 2025.
Here’s the explanation under “Why This Matters”:
When market participants submit orders to buy and sell shares of an NMS stock, the difference between the best buy order and the best sell order is the “bid-ask spread.” Rule 612 sets forth a minimum pricing increment of $0.01 for quotes and orders in NMS stocks priced at or greater than $1.00. This prevents bid-ask spreads for these stocks from being less than $0.01.
Since the adoption of Rule 612, there has been a marked increase in the trading volume of NMS stocks that would likely be priced with tighter spreads if their pricing was not constrained by Rule 612’s minimum pricing increment. In other words, easing constraints on ticks for these NMS stocks would allow for narrower spreads, reduce transaction costs for market participants, including investors, and allow prices to be determined in a more competitive manner.
Check out the reporting from the Wall Street Journal. And take a look at the fact sheet if you’re interested in the other changes related to access fees and transparency of better-priced orders.
Starboard’s latest effort to push Murdoch-family-controlled News Corp to eliminate its dual-class share structure has been heavily covered in the news. The gist is that Starboard sent a letter to company shareholders and issued a related press release informing shareholders of Starboard’s shareholder proposal for the 2024 annual meeting. The proposal calls for the Board to collapse the company’s dual-class share structure. But that’s not the interesting part! Here are some things that make this situation unique:
– News Corp is widely described as “controlled” by the the Murdoch family. Really, the family’s stake is approximately 14% and it controls 41% of the vote. It may be an uphill battle, but Starboard says “there is a path to achieve majority support.” In fact, a similar 2015 proposal was supported by 90% of non-Murdoch shareholders, representing 49.5% of the vote.
– Starboard’s letter says it plans to file its own proxy statement. Why would Starboard decide to solicit proxies under Rule 14a-4 instead of seeking to include the proposal in the company’s proxy under Rule 14a-8 (especially when they’re not trying to submit multiple proposals)? This article from The Activist Investor speculates:
Starboard might have missed the 14a-8 proposal deadline, which was June 6. Perhaps it decided to submit a proposal only a few weeks ago. It could submit a 14a-4 proposal between July 18 and August 17.
Starboard avoids the hassles of 14a-8 proposals, including getting through the SEC no-action process.
If Starboard solicits proxies itself, then it alone knows how a possibly significant percentage of the shareholder base votes. It will have the proxies, and NWSA won’t. … Starboard may simply force the company to negotiate, somehow, over demands to eliminate dual-class shares, or perhaps other unknown demands.
Since the rule amendments for universal proxy cards, a proponent may include the company’s director slate on its own proxy card along with its proposal(s). That can make it more likely that shareholders return the proponent’s proxy card, and if enough do, the company may have less visibility in tracking and counting votes. The Activist Investor discussed this rule change and strategy in greater detail in a follow-up post.
This is one of the new activist approaches that our panelists will discuss at our 2024 Proxy Disclosure & Executive Compensation Conferences on October 14-15 in San Francisco during our “14a-8 & Shareholder Proposals: The Latest Developments” panel consisting of Davis Polk’s Ning Chiu, Weil’s Howard Dicker and Cooley’s Brad Goldberg. Peruse our agenda to see what else our expert practitioners will cover. You can register here for in-person or virtual attendance.
It’s not surprising that the FTX fiasco resulted in some charges against its auditor. But I noticed that the announcement also included the settlement of previous charges against Prager Metis for violating auditor independence rules.
The SEC’s complaint alleged that, between approximately December 2017 and October 2020, the Prager Entities improperly included indemnification provisions in engagement letters for more than 200 audits, reviews, and exams and, as a result, were not independent from their clients, as required under the federal securities laws.
The final judgments provide for permanent injunctions, combined civil penalties of $1 million, and combined disgorgement with prejudgment interest of $205,000. The Prager Entities also agreed to be censured. The settlement is subject to court approval.
This week, the PCAOB released a Spotlight on auditor independence — “an area of common deficiencies year after year” — highlighting recent staff observations. This follows May 2023 enhancements to audit inspection reports, which now include a section on auditor independence as part of the PCAOB’s transparency initiative. The data shows that independence-related comments increased to 14% (as a percentage of total comments) compared to 9% in 2022 and 7% in 2021. The most common issue in all three years was audit committee pre-approval requirements. These deficiencies consisted of:
– Lack of evidence that the necessary audit committee pre-approval had occurred prior to the audit firm commencing audit, non-audit and/or tax services
– Instances where the auditor did not describe in writing to the potential client’s audit committee the scope of any non-audit services provided that may bear on independence prior to its initial engagement
– Instances where the auditor did not describe in writing any non-audit services provided that may bear on independence annually to the client’s audit committee or where annual communications failed to describe share ownership (and subsequent sale) by a covered person or inaccurately presented professional standards
The end of the report lists audit committee considerations. Here are two related reminders:
– Independence is a shared responsibility between the entity under audit, its audit committee, and its auditor. It is important for the company to have policies and procedures to proactively alert auditors to proposed or pending merger and acquisition activity that could have an impact on auditor independence.
– If the audit committee pre-approves services using pre-approval policies and procedures, the audit committee should consider whether the pre-approval policies and procedures are sufficiently detailed as to the particular services to be provided so that the audit committee can make a well-reasoned assessment of the impact of the service on the auditor’s independence.
As Dave shared over the summer, Corp Fin Staff is reviewing and commenting on Item 1.05 disclosures in real-time. We’d already seen some letters pop up. But hat tip to Orrick’s Bobby Bee for pointing out this exchange regarding AT&T’s July 8-K, which is far more interesting than the first Item 1.05 comment letter. Here are some things to note:
First, the 8-K confirms some rumors about the delay provisions being used. It discloses that the DOJ determined a delay in public disclosure was warranted on May 9 and again on June 5. The SEC’s comment letter says nothing about this delay or the related disclosure.
Second, the 8-K says the incident “has not had a material impact on AT&T’s operations, and AT&T does not believe that this incident is reasonably likely to materially impact AT&T’s financial condition or results of operations.” As we know, the SEC has indicated that disclosures about immaterial incidents should be made under another item, such as 8.01, to avoid investor confusion. So, not surprisingly, the Corp Fin Staff’s only comment is to clarify whether the incident is material.
The response letter takes the following position: “[T]he question of whether an incident is ‘material’ for purposes of 1.05(a) of Form 8-K is distinct from the question of whether an incident is likely to have a ‘material impact’ on the registrant. … They are not the same concept: ‘material’ is broader than ‘material impact,’ and the definition’s focus is on investors and their viewpoints.”
The Staff stopped commenting after the response, but the “review complete” letter is longer than usual, saying “our decision not to issue additional comments should not be interpreted to mean that the Commission staff or the Commission either agree or disagree with, or are opining on the legality of, your disclosure or responses, conclusions, or positions you have taken.” The Staff points to the company’s conclusion that information about the incident would significantly alter the total mix of information made available due to “reputational and customer perception risks”:
Item 1.05’s inclusion of “financial condition and results of operations” is not exclusive; companies should consider qualitative factors alongside quantitative factors. … It appears inconsistent to conclude that an incident is material because of ‘reputational and customer perception risks associated with the incident’ but that the incident has not had, and is not reasonably likely to have, any material impacts on the company, including with respect to the company’s reputation and customer perception.
For anyone who joined Friday’s “Dialogue with the Director” at the ABA Business Law Section Fall Meeting, this sheds some light on a seemingly cryptic comment by Corp Fin Director Erik Gerding that “there seems to be a view” in the market that an incident could be material but there could be no material impacts, and reiterating that you have to consider qualitative impacts. Now I get it!
