We all make mistakes. In fact, I can specifically recall for you many of the significant mistakes that I have made in my career, because I frequently dredge them up in my memory banks and mentally flog myself with those mistakes in an act of relentless self-flagellation. I am pretty sure that this practice does not do much to prevent me from making the same mistakes again, but it has just become of part of what it means for me to be a lawyer.
One of the areas where mistakes are often made is in the preparation of the proxy statement for the annual meeting of shareholders. Proxy statements are long and complicated documents with quite a few inputs, so it is foreseeable that mistakes can be made along the way. As Liz recently noted in the Proxy Season Blog here on TheCorporateCounsel.net, the most recent issue of “The Shareholder Service Optimizer” outlines frequent mistakes that they encounter in proxy statements and related annual meeting materials, including the following:
– One of the first things we noticed – as still avid readers of Proxy Statements – and mostly-faithful voters – and eager attendees at VSMs where we own shares and can squeeze in the time – was how difficult it was to find the correct date and time of the VSM – and how hard it was to find the link to the meeting in so many cases.
– Worse yet, we encountered several instances where the times and dates were at best incomplete, and in several cases, FLATLY WRONG!
– Another major observation this season was the unusually large number of instances we encountered where there were differences – sometimes quite substantial ones – in the number of “Votable Shares” reported in Proxy Statements vs. the numbers shown as “Shares Outstanding on the Record Date” as shown in the once “certified” lists of shareholders produced by transfer agents. And often, we encountered different numbers entirely in the reports from proxy tabulators. Our Inspector Team has a policy that requires our Inspectors to investigate here and to satisfy ourselves as to the correct number to use in the Final Report on the Voting – which is filed with the SEC. Most often, the differences are due to option exercises that took place shortly before or shortly after the official record date, But, we ask, “Who is in charge of the SEC-required “Control Book” at the Transfer Agent? And who is responsible for monitoring the numbers at the Company – and for making sure that the required entries are actually made on their “Cap Tables”… AND for assuring that differences are properly reconciled?
– The most disturbing thing we saw this season was the fact that many Transfer Agents are not officially certifying and signing the legally required list of registered shareholders. (Maybe because they themselves are ‘not in proof’?) And at least one TA is not including CEDE on the list of registered shareholders!
– One last thing we noted – the surprising number of times that issuers got totally wrong advice from newbies at their outside counsel. To cite just one example, we had a case where we presented our draft documents in advance, as usual, and were told re: the draft Ballot of Appointed Proxies [sometimes known as the “Master Ballot” whereby the proxy holders legally CAST their votes] that “our outside counsel says we do not need this.” “Don’t try telling that to a judge,” we said, citing the landmark case where the judge ruled, as most experts already knew, that “proxies are not votes” until the Proxy Committee votes them by BALLOT. (Bad as this was it still doesn’t top the case, a few years ago, when an attorney for one of the most famous law firms in California insisted that the votes that had been recorded for a Director who dropped out at the last minute should be simply “transferred” to the replacement – then – even stupider – he advised them to write and mail a new proxy statement – when the company could have appointed a new director with no fuss and muss – and without spending an extra dime – right after the AGM, where he or she could have served without a shareholder vote until the next AGM.)
Do yourself a favor and avoid providing fodder for the self-flagellation machine. Avail yourself of all of the resources that we have here on TheCorporateCounsel.net and CompensationStandards.com, take the time to learn and understand the proxy process and be very careful when reviewing and preparing the proxy statement and related annual meeting materials.
Another thing that you can do to get your proxy statement right in 2025 is attend our “2024 Proxy Disclosure Conference and our 21st Annual Executive Compensation Conference,” coming up in San Francisco on October 14-15. There is also a virtual option if you are unable to attend the conference in person. The agenda for the Conferences covers a wide range of topics, but here are a few that will be particularly relevant when preparing your upcoming proxy statement disclosures:
– Erik Gerding: The Latest From Corp Fin
– The SEC All-Stars: Proxy Season Insights
– Pithy Proxies: Getting to the Point Instead of the Courthouse
– 14a-8 & Shareholder Proposals: The Latest Development
– The SEC All-Stars: Executive Pay Nuggets
– Living with Clawbacks: What Are We Learning
– Perks: The Latest Developments
– The Top Compensation Consultants Speak
– Navigating ISS & Glass Lewis
I encourage you to sign up today by using our online store or by calling us at 800-737-1271. I look forward to seeing you in San Francisco.
Last week, the SEC announced that, at an open meeting on September 9, the Commission will consider whether to approve a new quality control standard, QC 1000, A Firm’s System of Quality Control, and related amendments, as adopted by the PCAOB.
As I noted back in May, the new audit quality control standard replaces the existing AICPA standard that pre-dated the creation of the PCAOB. The new standard will require all PCAOB registered firms to identify their specific risks and design a quality control system that includes policies and procedures to address those risks. The PCAOB’s announcement noted the following key provisions of the audit quality standard:
– The new standard strikes a balance between a risk-based approach to QC (which should drive firms to proactively identify and manage the specific risks associated with their practice) and a set of mandates (which should assure that the QC system is designed, implemented, and operated with an appropriate level of rigor).
– All PCAOB-registered firms would be required to design a QC system that complies with the new standard. Firms that perform audits of public companies or SEC-registered brokers and dealers would be required to implement and operate the QC system they design, monitor the system, and take remedial actions where policies and procedures are not operating effectively – creating a continuous feedback loop for improvement.
– Those firms would be required to annually evaluate their QC system and report the results of their evaluation to the PCAOB on new Form QC, which would be certified by key firm personnel to reinforce individual accountability.
– Firms that audit more than 100 issuers annually would be required to establish an external oversight function for the QC system, referred to as an External QC Function (EQCF), composed of one or more persons who can exercise independent judgment related to the firm’s QC system. In response to comments, the new standard clarifies that the EQCF’s responsibilities should include, at a minimum, evaluating the significant judgments made and the related conclusions reached by the firm when evaluating and reporting on the effectiveness of its QC system.
If approved by the Commission, the PCAOB audit quality standard and related amendments will apply to all PCAOB-registered firms and will take effect on December 15, 2025.
With Labor Day now behind us marking the unofficial end of summer and the beginning of a sprint to election day, one may inevitably ask: “What are the prospects for SEC rulemaking activity as we approach the election and a new Administration?” As I have mentioned before, the conventional wisdom has always been that the SEC, like other government agencies, slows down its rulemaking activity as the Presidential election grows nearer, on the theory that agencies do not want to have controversial proposals interfere with election year politics, and agencies generally want to avoid the potential for a new rule to be invalidated under the Congressional Review Act, depending of course on the outcome of the election.
Certainly, the dynamics have changed a bit since I last addressed this topic in May, given that we now have two candidates for President that are not incumbents. When President Biden was still in the race, you had the possibility that the SEC Chair could continue in the role post-election if Biden was reelected, but now it is foreseeable that a Harris Administration would be more likely to make government-wide changes to cabinet and agency leadership (as would be the case with a Trump Administration, obviously). This dynamic undoubtedly puts more pressure on agencies such as the SEC to hold off on proceeding with their rulemaking agenda, given the significant degree of uncertainty as to the policy direction going forward.
While it is always possible that we could see a burst of SEC rulemaking in the coming months as we saw at the end of the Trump Administration, the quiet open meeting schedule over the summer seems to indicate that outcome is unlikely. This all may mean that public companies will not be scrambling to comply with new disclosure requirements during the upcoming proxy and annual reporting season as had been the case over the past few years.
The latest issue of The Corporate Executive has been sent to the printer. It is also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format. This issue tackles two timely topics, revisiting sell-to-cover transactions in light of the SEC’s amendments to Rule 10b5-1 and potential revisions to equity award policies in light of the SEC’s renewed focus on the timing of equity awards. On the topic of sell-to-cover transactions, the issue notes:
The amendments to Rule 10b5-1 have added a whole new set of complications when a company is seeking to implement sell-to-cover transactions with respect to full value awards. A Rule 10b5-1 plan for sell-to-cover transactions now must comply with the more extensive requirements of Rule 10b5-1(c), including the applicable cooling off periods and, subject to the rule’s exception for certain sell-to-cover transactions, the multiple overlapping plan and single-trade limitations. Companies also must consider the disclosure requirements now applicable to Rule 10b5-1 trading plans when setting up a sell-to-cover approach for full value awards.
On the topic of equity award policies, the July-August 2024 issue of The Corporate Executive notes:
These new disclosure requirements create an opportunity for a company to revisit its equity award policy, or adopt a new equity award policy if it does not have one. As indicated above, companies will be required to disclose certain policies and practices related to the grant of certain equity awards. When revisiting its equity award policy, or adopting a new equity award policy, companies should keep these disclosure requirements in mind. The policy should address how the company grants annual awards as well as off-cycle awards, and whether the awards will occur on an established schedule. A typical approach for annual awards and off-cycle grants is to have a preestablished schedule that permits award grants a specific number of days following the company’s earnings release. This approach ensures that the grants are occurring in an open trading window and at a time when the company is less likely to possess material nonpublic information. We take this approach in our sample award policy.
Another consideration for equity award policies in light of the SEC’s recent rulemaking is whether to prohibit granting equity awards in close proximity to periodic reports on Form 10-Q or Form 10-K, or any Current Report on Form 8-K that includes material nonpublic information. To prevent triggering the new tabular disclosure regarding options grants, companies should take steps to ensure that options are not granted to named executive officers in the period beginning four business days before the filing of a periodic report on Form 10-Q or Form 10-K, or the filing or furnishing of a Current Report on Form 8-K that discloses material nonpublic information, and ending one business day after the filing or furnishing of such report. Our sample equity award policy addresses the granting of equity awards during this time period.
Please email sales@ccrcorp.com to subscribe to this essential resource if you are not already receiving the practical information that we provide in The Corporate Executive newsletter.
Here’s an anecdote from the Wall Street Journal that you might find very exciting or very scary, depending on your perspective:
At a recent bank board meeting, directors were treated to a surprise. They listened to the chief executive talk strategy—except it wasn’t actually the CEO talking. It turned out to be a voice-cloning model that was trained, using the CEO’s prior earnings calls, to generate new content.
This was a staged exercise to “grasp the impact — and potential risks — of generative artificial intelligence,” but it still seems like one of those exercises in preparation that might make you (or any board member) feel worse and not better! Unsurprisingly, the article says the meteoric rise of AI in corporate America is keeping directors up at night. The article suggests that board members regularly ask the following questions, among others, to the management teams:
Who in senior leadership focuses on AI?
Where is AI being used within the company?
How are tools being identified and ranked for risk?
How are third-party providers using it, and how are boards monitoring evolving regulatory regimes and litigation?
Over at the D&O Diary, Kevin LaCroix gave his perspective on the article, saying, “while many directors recognize the importance of getting a handle on AI and how it might affect their companies, they are struggling to find the right approach even as AI-related questions become more pervasive.” And that could be a problem. Kevin points out that “questions concerning possible AI-related board liability exposures pervade all of these issues [and] companies that experience AI-related problems or disruption could well face the unwanted attention of plaintiffs’ lawyers, who, armed, with the benefit of hindsight, might well scrutinize prior company actions, particularly board activity.”
There’s no magic fix, but for a resource that can help boards and audit committees struggle through, take a look at the Center for Audit Quality’s recently released guide “Audit Committee Oversight in the Age of Generative AI” intended to “aid audit committee members looking to dedicate more time discussing AI governance by providing an overview of genAI and questions audit committees can ask to better understand company management’s approach to the use of genAI and oversee the related risks” — especially focused on use in financial reporting and ICFR.
The questions address risk considerations related to governance, data privacy and security, technology selection and design, technology deployment and monitoring, fraud and the regulatory environment. Some are intended to be addressed to management and others to the outside auditor. All of the questions are pulled out of the full resource and listed separately in Appendix A for easy reference.
Public company boards are far from the only group struggling with how to navigate the corporate and competitive landscape in an AI-powered world. This recent Bloomberg Law column says that law firms are starting to adjust their near-term expectations for genAI by “acknowledging that today’s AI tools are better at boosting back-office efficiency rather than redesigning how client work is handled.”
Redesigning the way lawyers produce work for clients—or figuring out how to build a business model that plugs the holes AI blasts in the billable hour—are largely problems for another day, said Charles Adams, Clifford Chance’s global managing partner.
He compared the coming change to early in his career when red-lining technology eliminated the need for lawyers to manually mark-up changes to documents, blowing up a large portion of associate work. Generative AI will lead to a similar moment, he said, but nobody yet knows what it will be or when it will happen.
[…] Law firm partners pushed firms to invest in the technology, excited by its potential, said Sente Advisors’ McClead. That was a change from typical tech adoption, which usually requires convincing lawyers to get on board, he said. [Now…] “We’re reaching a critical mass where they’re using it, finally, and saying: ‘But it doesn’t do what I thought it was going to do.’”
Some law firms have dedicated the time to understand where the current capabilities of gen AI can — and can’t — help their teams. The article notes that some M&A practitioners feel “today’s AI tools lack the accuracy and functionality that would make them useful in the dealmaking space.” On the other hand, the article says some early adopters of Microsoft CoPilot are finding it useful to improve the tone of an email or generate notes:
“For one of my emails, it said you’re conveying a lot of anxiety and stress. And I was like, you know what, I want that conveyed. Because I have anxiety and stress about this,” [Sharis Pozen, managing partner of the Americas for Clifford Chance] said, adding, “I absolutely love it.”
The tool has also generated notes for video meetings with recruiters, saving staff time on a previously manual task, she said. The firm wants its lawyers to experiment with the technology and use it in ways that saves them time.
David Cambria of Epiq says, “law firms are torn between FUD—fear, uncertainty and doubt—and FOMO, the fear of missing out.” Aren’t we all!
SCOTUS is poised to review a Ninth Circuit decision of great interest to us all — addressing whether Facebook could be held liable under antifraud rules for failing to disclose risks that had materialized but presented no known risk of ongoing or future harm. The Court granted cert in Facebook, Inc. v. Amalgamated Bank in June and is poised to hear oral arguments on November 6.
The case involves the same disclosures at issue in a 2019 SEC enforcement action but involves a securities class action lawsuit filed by Amalgamated Bank. Here’s the background from this Kramer Levin article:
Amalgamated Bank filed a securities class action alleging that defendant Facebook Inc. made materially false and misleading statements and omissions regarding the risk of improper access to or disclosure of Facebook user data. Facebook’s 2016 Form 10-K disclosures included risk factors such as “[a]ny failure to prevent or mitigate … improper access to or disclosure of our data or user data … could result in loss or misuse of such data, which could harm [Facebook’s] business and reputation and diminish our competitive position.” Plaintiffs alleged that at the time these risk factor statements were made, Facebook knew that on two prior occasions, Cambridge Analytica, a political consulting firm, had improperly collected and harvested Facebook users’ personal data. Accordingly, plaintiffs alleged that the risk factors identified in the Form 10-K were false and misleading because they framed the risk of data misuse as merely hypothetical, belying the fact that such data misuse had already occurred.
[The Ninth Circuit] found that the plaintiffs had adequately pleaded falsity as to the risk factors disclosed in Facebook’s Form 10-K regarding whether misuse of Facebook users’ data could harm Facebook’s business, reputation and competitive position. In so finding, the majority pointed to its reasoning in In re Alphabet, decided after the district court dismissed plaintiffs’ complaint. In In re Alphabet, the Ninth Circuit held that falsity allegations could survive a motion to dismiss when the complaint plausibly alleged that a company’s Securities and Exchange Commission (SEC) filings warned that risks “could” occur, when in fact those risks had already materialized. Relying on this holding, the majority found that the plaintiffs had sufficiently alleged the falsity of Facebook’s risk factor statements. […]
Facebook’s petition for certiorari presented two questions for the Court’s consideration, of which it granted review of one: whether risk disclosures are false or misleading when they do not disclose a risk that has materialized in the past, even if that past event presents no known risk of ongoing or future business harm. […] The petitioners contend that the Ninth Circuit’s holding creates a three-way split among eight circuits regarding what companies must include in “risk factors” disclosures.
The article notes that law professors, former SEC officials, legal policy institutes and industry groups had submitted amicus briefs in support of the petition for cert. Briefs on the merit have been submitted in August (and may continue to be submitted until September 24). The Society for Corporate Governance and the Chamber both argue that risk factor disclosures cannot support liability based on failure to disclose past events and urge SCOTUS to reaffirm “that Item 105 calls for prospective disclosures. Hypothetical phrasing about the future does not generally imply the absence of past incidents.” The Society’s brief suggests liability for hypothetical phrasing is only appropriate in very limited circumstances:
Insofar as forward-looking Risk Factors could be misleading as to past events or existing conditions, this Court should allow such a reading only where the risk disclosure implies a specific fact that is incorrect. For example, “a caution that ‘the price of our primary input may rise above $5 next quarter’ could certainly cause a reasonable investor to conclude that the price was, at present, $4.99 or less.” In re Mylan N.V. Sec. Litig., No. 16-cv-7926 (JPO), 2018 WL 1595985, at *9– 10 (S.D.N.Y. Mar. 28, 2018). But such specificity is not the norm, and the Court should not extend liability outside this narrow exception. Otherwise, litigants will continue to deliberately misread companies’ statements concerning hypothetical future risks to mean that such risks have never materialized in the past, subverting the plain, forward-looking focus of Item 105.
More to come on this one, which we’ll be following closely! For now, have a wonderful Labor Day Weekend! Our blogs will resume Tuesday.
Eye-popping SEC whistleblower awards continue. Last week, the SEC announced two awards totaling over $98 million and then, early this week, another two awards totaling over $24 million. (One individual whose tip prompted the opening of the investigations is receiving an award of $82 million! And this is still significantly below the record!) As a reminder, whistleblower awards can range from 10% to 30% of the monetary sanctions where they exceed $1 million.
While these few whistleblowers were getting multimillion-dollar awards, the U.S. Court of Appeals for the D.C. Circuit confirmed something Liz highlighted last year — the very limited circumstances under which lawyers may claim an award. As the opinion explains:
Under the Commission’s regulations implementing its whistleblower award program, an attorney may not receive a whistleblower award for disclosing information obtained during the representation of a client unless the attorney’s disclosure was permitted by the applicable state bar rules or the Commission’s attorney conduct regulations.
But the circumstances of this case were a bit unique. Here’s the background:
Defendants had offered and sold the securities of a corporate entity. In doing so, the Defendants had misrepresented to investors in the securities offering that their money would be used to fund a particular project (the “Project”). Instead of spending investors’ funds on the Project, however, Individual 1 and Individual 2 misappropriated a large portion of investors’ funds for their personal use. …
Doe was employed as in-house counsel at a company. The Company was owned and controlled by Individual 1 and provided assistance in connection with the Defendants’ securities offering. … During the course of his employment at the Company, Doe came across information that indicated that Individual 2 was misappropriating money invested in the securities offering. Individual 2 did not own, control, or play any formal role at the Company.
Doe filed a whistleblower tip with the Commission. In his tip, Doe explained that Individual 2 was misappropriating investors’ funds for his personal use and that, as a result, the Project that the securities offering was supposed to fund would never be completed. … Doe explained that he believed his disclosure would serve his client’s interest by “preventing further misappropriation by [Individual 2], possibly recovering funds that had been misappropriated, and helping lead to the successful completion of [the Project].” …
Although Doe’s whistleblower tip did not mention the Company or Individual 1, both were investigated by the Commission as a result of Doe’s tip and ultimately subject to enforcement actions.
The SEC determined that Doe’s disclosure was not permitted by the Florida Rules of Professional Conduct. Doe sought reconsideration based on the rule that permits a lawyer to reveal confidential information to the extent necessary to serve the client’s interest. The court did not find this persuasive:
The record demonstrates that at the time he filed the tip, Doe believed that the Company was implicated in the securities fraud scheme. In reporting on the suspected wrongdoing, then, Doe was reporting on his own client. Common sense therefore dictates that Doe could not have reasonably believed that he was acting in his client’s best interest. … Doe informed the Commission, for example, that his “goal” in submitting this tip was “to prevent [his] client . . . from committing a crime.” Doe elaborated that he intended for the Commission to investigate the entire securities offering, including his client; he explained, “I fully expected my tip to result in such a widely encompassing investigation” and “I intended for that to occur.”
But remember, whistleblower award or no, lawyers still need to report “up the ladder” under SEC rules!
With some signs showing that market conditions for IPOs may be improving, more companies may be asking two questions: Can I go public? And, if so, what do I need to do now? This HLS blog from Orrick attempts to answer the first question by assessing 79 non-SPAC IPOs that priced through June 30, 2024 and comparing those that traded up versus those that traded down. The data showed some trends in post-IPO performance depending on market cap and trailing twelve-month (TTM) revenue:
Of the 20 companies that listed with a market cap of $1 billion or more, only six have traded down so far. In contrast, of the 12 companies that listed with a market cap between $500 million and $1 billion, half have traded up, and half down. And of the 47 companies that listed with a market cap below $500 million, 39 have since traded down.
Of the 21 companies with around $300 million or more in TTM revenue, only seven experienced early stock price declines, with the results below that threshold much more mixed. Of the 12 companies with between $50 million and about $200 million of revenue, five have traded up and seven have traded down. And of the 46 companies with less than $50 million of revenue, only 8 have traded up.
For those looking to capitalize on an open IPO window, this Cooley blog walks through how to prepare. Steps 3 and 4 in the process address conducting a public company readiness assessment and establishing a timeline to address any issues. The blog lists these considerations (while acknowledging that this is not comprehensive):
Financial reporting and internal controls readiness
– Identify personnel needs.
– Assess Sarbanes-Oxley Act of 2002 (SOX) compliance readiness.
– Assess annual and quarterly financial statement closing timeline readiness.
– Review IT and cybersecurity readiness.
Audit and tax readiness
– Identify key accounting and tax issues.
– Flag “cheap stock” exposure and/or remediation measures required.
– Review past or planned significant acquisitions to determine financial statements required.
– Map Public Company Accounting Oversight Board (PCAOB) audit timelines.
Legal readiness
– Identify and analyze legal risks, such as:
Data privacy risks, including regulatory compliance (General Data Protection Regulation, California Consumer Privacy Act, and others)
Other regulatory risks
Intellectual property risks, including related to disputes, patent coverage, Proprietary Information and Inventions Assignment Agreements, and contractor agreements
Pending or threatened litigation exposure
– Audit the company’s capitalization table to identify what actions may be required to ensure all company equity is properly authorized and issued.
Governance readiness
– Determine what changes to the executive team may be necessary or desirable.
– Review board composition and identify changes needed to:
Meet stock exchange independence requirements
Meet applicable diversity requirements or desired standards
Enhance the collective expertise of the board to improve performance, anticipate investor demand or meet stock exchange requirements
Establish stock exchange-compliant committees
– Audit existing governance policies to identify gaps.
Human resources readiness
– Review compensation practices to see if they are competitive, appropriate, and ready to withstand public scrutiny.
