Join us tomorrow at 2 pm Eastern for the webcast “Related Party Transactions: Refresher & Lessons Learned from Enforcement Focus” to hear Deloitte’s William Calder, Maynard Nexsen’s Bob Dow, White & Case’s Maia Gez, and Vinson & Elkins’s Zach Swartz discuss why and how to enhance your controls and procedures surrounding related party transactions.
We have a packed agenda! This program will cover:
Overview of Disclosure Requirements
– Transactions & time periods covered by Item 404 of Regulation S-K – Definitional issues – Where disclosure may be required – Exhibit filing requirements – Special considerations for SRCs
Common Types of RPTs & Computing Transaction Amounts
– Family member employees – Participation in a public offering – Leases & aircraft – Loans – Charitable gifts
– Treatment under GAAP and Regulation S-X – Role of the auditor & communications to the Audit Committee
Related Party Transaction Due Diligence and Process
– D&O questionnaires, process & technology – AS 18 questionnaires – Company books & records – Audit Committee approval requirements & policies
Interplay with Other Considerations
– Director independence – Conflicts of interest
Wrap-Up & Recent Enforcement Focus
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE, which require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval, typically within 30 days of the webcast. All credits are pending state approval.
Just before Thanksgiving, the SEC announced an order officially staying the share repurchase disclosure rule and filed a motion with the 5th Circuit requesting more time to remedy deficiencies in the rule. Both the order and request followed the Court’s October ruling that the share repurchase rulemaking was “arbitrary & capricious” — requiring that the Commission fix it by November 30. As Liz shared last week, the Court denied that motion, which left the SEC only a few days to comply.
On December 1, following the expiration of the remand deadline, the SEC’s Office of General Counsel submitted a letter to the Court acknowledging the Commission was unable “to correct the defects in the rule” within the required 30-day period. Cooley’s Cydney Posner addressed the expected next steps in this blog:
Presumably, the Court will now vacate the rule and it will be up to the SEC to decide whether to appeal the decision or to try again with a new share repurchase proposal—this time one that addresses the defects identified by the Court.
John and Dave have blogged about FinCEN’s rules for reporting beneficial ownership information under the Corporate Transparency Act, which are effective January 1, 2024 and create new filing requirements applicable to a wide range of entities. As Dave shared when the final rules were issued, reporting companies created or registered before January 1, 2024 will have one year (until January 1, 2025) to file their initial reports, but under FinCEN’s original rule, reporting companies created or registered after January 1, 2024 would have had only 30 days after receiving notice of their creation or registration to file their initial reports. Last week, as reported by this McGuireWoods blog, FinCEN extended this original deadline:
On November 29, 2023, FinCEN extended the 30-day deadline to 90 calendar days for Reporting Companies created or registered on or after January 1, 2024 in order to give Reporting Companies more time to understand FinCEN’s reporting requirements and submit their BOI reports.
Reporting Companies created or registered prior to January 1, 2024, still have a calendar year from the Act’s effective date – until January 1, 2025 – to file their initial BOI reports.
For Reporting Companies created or registered on or after January 1, 2025, their initial BOI reports must be filed within 30 calendar days of receiving actual or public notice of their creation or registration becoming effective.
As a reminder, FinCEN will not accept BOI reports from Reporting Companies until January 1, 2024.
Proxy season is right around the corner! If you missed all or part of our “2023 Proxy Disclosure Conference” or “20th Annual Executive Compensation Conference” – or even if you didn’t — don’t forget that our conference sessions are archived for your continued reference as you navigate challenging proxy season issues! If you registered to attend, replays and transcripts are currently available on-demand and will be accessible until September 20, 2024. If you didn’t register, you can purchase access to the archives online or by emailing sales@ccrcorp.com or calling 1-800-737-1271.
And you may be able to earn CLE credit for watching replays! We are now offering on-demand credit for the session replays in states where that is available. There are some nuances to receiving that credit, so check out the on-demand CLE FAQs to take advantage of that.
Yesterday, the Center for Audit Quality announced the publication of its 10th annual “Audit Committee Transparency Barometer.” The report is compiled by the CAQ and Audit Analytics to measure disclosures about financial oversight and other audit committee responsibilities. This year’s report also takes a look back at big-picture changes to audit committee disclosures over the past decade. Here’s an excerpt:
After a decade of analyzing audit committee disclosures, we have seen disclosure rates increase across the majority of the questions and topics being tracked. In the current environment of economic uncertainty, geopolitical crises, and new ways of working, it remains as important as ever for audit committees to tell their story through tailored disclosures in the proxy statement. Investors and other stakeholders use these disclosures to understand how the audit committee is exercising oversight to navigate the challenges of this current environment.
This environment provides an opportunity for audit committees to revisit their disclosures to ensure that they are up to date and tailored to the specific events and circumstances that the audit committee currently faces. Providing detailed and relevant disclosures, instead of relying on boilerplate language, provides investors with useful information about the processes, considerations, and decisions made by the audit committee. Every year, each audit committee has a unique story to tell, and detailed disclosures in the proxy statement relay the extent of engagement of the audit committee, which contributes to audit quality.
However, while audit committees & disclosure teams have overall earned a “gold star,” the report notes that there is always room for improvement. To support that effort, the appendices to the report include disclosure examples and questions for consideration. Among other suggestions, the CAQ suggests that companies could consider discussing not just “what they do” but also “how they do it,” and enhancing disclosure about audit fees in the upcoming year:
Another area where we continue to see lower rates of disclosure is the discussion around audit fees, particularly disclosures about the connection between audit fees and audit quality (Q3) and explanation for a change in fees paid to the external auditor (Q6). For audit committees to enhance their disclosures, they should provide more robust disclosures about how the audit committee considers the appropriateness of the audit fee, including key factors affecting changes to the audit fee year over year. For example, it may be helpful for stakeholders to understand efficiencies achieved, such as the auditor’s use of new technologies, or changes in the scope, such as a major transaction during the year, that could lead to changes in the audit fee.
Audit fees can be an indicator of audit quality for stakeholders because abnormally low fees may indicate that not enough time or resources are spent on the audit engagement, which could contribute to low audit quality. On the other hand, abnormally high audit fees could indicate inefficiencies, which may also be a red flag for stakeholders. In selecting, retaining, and evaluating the independent auditor, the audit committee should always be focused, in the first instance, on audit quality. Describing the audit committee’s views on the audit fee’s appropriateness can help stakeholders understand what contributes to the audit fee and can provide stakeholders further insights into how the audit committee considers audit quality throughout its engagement with the external auditor.
The report concludes with this encouragement to keep moving onward & upward:
We applaud audit committees for their efforts to increase disclosures over the past 10 years and continue to encourage audit committees to consider how their disclosures can be enhanced to provide further transparency for investors regarding the critical oversight work that audit committees perform.
The “Audit Committee Transparency Barometer” released yesterday by the Center for Audit Quality and Audit Analytics says that 59% of S&P 500 companies are disclosing that the audit committee is responsible for oversight of cybersecurity risk – up from 54% last year. Here’s an excerpt describing how to communicate what that role involves and how the audit committee members are well-equipped to carry it out:
As the audit committee’s role continues to expand, it is increasingly important for boards to monitor the skill set and composition of committee members to ensure that audit committee members have appropriate expertise to exercise their oversight. Beyond disclosing the expertise of certain committee members, audit committees may also consider disclosing how all members of the committee stay abreast of emerging areas. In the 2022 Audit Committee: The Kitchen Sink of the Board report, researchers interviewed audit committee members and found that more than half of them consider their continuing education to be a critical part of their ability to manage evolving responsibilities, and they often strategically select continuing education that focuses on emerging risk areas, such as cybersecurity, ESG, and risk management. Telling this story to stakeholders demonstrates the audit committee’s commitment to the oversight role.
The same study also found that investors want to understand the roles and responsibilities assigned to the audit committee, why audit committee members are appropriate for the specific company, examples of continuing education for audit committee members, how audit committees address key risks, and details that reflect broader audit committee responsibilities.
As the SEC has recently adopted its Cybersecurity Disclosure rule and is continuing to work on its Climate Disclosure rule, we expect that these topics will continue to be relevant for audit committees, particularly as this information is included in SEC filings. Audit committees play an important role in the oversight of these areas given their expertise and experience in oversight of financial reporting and internal controls.
Even though a lot of companies are disclosing the audit committee’s role in some dimension of cyber risk oversight, the CAQ also notes that this broad responsibility is parceled out among existing committees at 85% of S&P 500 companies, according to the latest Spencer Stuart Board Index. Yesterday on CompensationStandards.com, Meredith highlighted why even the Compensation Committee can’t escape involvement.
Yesterday, the PCAOB announced three settled disciplinary orders relating to China-based audit firms & individuals involved with auditing US-listed companies. These are the PCAOB’s first enforcement settlements under the protocol established last year that finally granted the Board’s longstanding demand to inspect & investigate registered public accounting firms headquartered in mainland China and Hong Kong.
Three firms & four individuals were fined a total of $7.9 million for alleged training exam misconduct and violations of quality control and independence standards, among other things. As part of the settlements, the targets of the proceedings – who have not admitted or denied the findings – have also agreed to take steps to improve their policies & procedures (in the case of the firms) and remedial undertakings & restrictions (in the case of the individuals). PCAOB Chair Erica Williams said the settlements are a big deal:
These sanctions represent the highest civil money penalties the Board has ever imposed against firms in mainland China and Hong Kong, some of the highest penalties the Board has imposed against any firm around the globe, and the first time ever that the PCAOB has been able to bring enforcement action against a mainland Chinese firm based on its audit deficiencies.
The days of China-based firms evading accountability are over. The PCAOB is demonstrating that we will take action to protect investors in U.S. markets and impose tough sanctions against anyone who violates PCAOB rules and standards, no matter where they are located.
The PCAOB thanked the SEC for its assistance in this effort, and Chair Gensler issued a statement applauding the protection of American investors.
I warned last month that the SEC is going after companies for allegedly sub-par whistleblower carveouts in NDAs and various other agreements, which violates Exchange Act Rule 21F-17. The spate of enforcement actions has prompted companies to revisit their forms of agreement or even undertake an internal compliance audit. This Troutman Pepper memo gives the “Top 10” tips for getting your existing & future agreements and policies into compliance:
1. Carveout for Government Agency Contact
2. Allow Voluntary Disclosure
3. Broadly Construe the Information Disclosable
4. No Representation As to Prior Reporting
5. Do Not Limit Monetary Awards
6. No Reporting Penalties
7. Take a Holistic Approach
8. Ensure Internal Consistency
9. Ensure Organization-wide Consistency
10. Consider Third Party Agreements
Check out the memo for more color on each of these steps.
Nearly 2 million companies are incorporated in Delaware, and many of them employ “choice of law” and “exclusive forum” provisions to give themselves the benefit of the state’s specialized expertise in matters of corporate governance. Apparently, though, companies these days are liking Delaware a little too much. In response to a growing number of lawsuits that call on the Court of Chancery to rule on matters outside the scope of its mission – specifically, trying to shoehorn employment disputes into matters of internal affairs – Vice Chancellor Laster leads off this 68-page opinion with a plea to make it stop.
The dispute here related to whether incentive compensation awards were forfeited upon breach of a contractual restrictive covenant included in an LLC agreement. The various individuals and entities were scattered across 4 states (none of them being Delaware). VC Laster said it’s not the first time he’s seen this approach:
But Sunder filed suit here—in Delaware—because Sunder is a Delaware LLC and its lawyers deployed the now widespread legal technology of inserting restrictive covenants into an internal governance document. Businesses and their lawyers do that so they can invoke Delaware’s contractarian regime and argue that it should override how other jurisdictions regulate restrictive covenants.
That legal technology calls on the Delaware courts to adjudicate postemployment disputes for the country and potentially the world. In the past five years alone, the Court of Chancery has issued written decisions addressing disputes over restrictive covenants for businesses operating in Hong Kong, Italy, Alabama, Arizona,4 California, Colorado, Idaho, Illinois, Louisiana, Nebraska, New Jersey, New York, Oklahoma, and Texas. Only two businesses operated in Delaware, one of which filed two cases. That list excludes transcript rulings.
The Chancellor expresses several concerns with this trend, including: it will undermine the deference that other states accord to Delaware law, it’s unsustainable from a resource perspective, and it diverts the court’s attention from its core mission. VC Laster then notes that there are times when Delaware won’t enforce a choice of law provision:
This is an example of drafters attempting to use Delaware law to set the rules for what are effectively employment relationships. Other jurisdictions often have a more significant interest in regulating those relationships, which affect how their citizens living there can earn a living and how a business operating there can compensate its work force.
Delaware follows the Restatement (Second) of Conflict of Laws, and Delaware courts consequently will not enforce choice of law provisions when doing so would circumvent the public policy of another state that has a greater interest in the subject matter.
Consequently, when a different state’s law would govern in the absence of a choice of law provision, and if that state has established legal rules reflecting a different policy toward restrictive covenants than Delaware’s, then this court will defer to that state’s law notwithstanding the presence of a Delaware choice of law provision.
Applying that formula, VC Laster couldn’t toss this case. Here is his scream into the void:
A solution needs to be found, and the market is unlikely to provide it. This is an area where Delaware’s interests and the interests of its bar as a whole conflict with the individual interests of clients and their lawyers. For any single business, it makes sense for a lawyer to advise the client to embed restrictive covenants in an internal governance document. And for any single business faced with a dispute over those restrictions, it makes sense for a lawyer to advise the client to file a lawsuit in the Court of Chancery. In the aggregate, that is a recipe for a tragedy of the commons.
A judicial solution is also unlikely, because judges decide specific cases. Doubtless there are many combinations of fixes involving choice of law, personal jurisdiction, and subject matter jurisdiction that could address this burgeoning problem. But a cure requires the involvement of policymakers beyond the courts.
In an ideal world, this case would have been filed in Utah, Nevada, or Texas. But the case is here, and it must be decided.
He’s right that things are unlikely to change. Delaware is just too good.
The tributes are pouring in for Charlie Munger, who passed away earlier this week at age 99. Warren Buffett nicknamed Munger the “abominable no-man” due to his willingness to disagree with Buffett’s ideas. He was also notably committed to maintaining Berkshire Hathaway’s corporate culture. This MarketWatch column from Mayer Brown’s Larry Cunningham discusses Munger’s impact in that regard, and the succession planning that has gone into filling that gap:
People have long pondered the fate of Berkshire without Buffett, who is 93. Now we face an equally difficult question of what Berkshire will be like without Munger — or perhaps what Buffett will be like without his alter ego, the person uniquely able to identify his blind spots.
After all, these longtime business partners complemented each other in a nearly ideal way: Buffett tended to lean in while Munger tended to lean out. Munger was Buffett’s essential no-man because Buffett runs amiable and optimistic while Munger embodied a curmudgeonly cynicism.
Yet the two obviously have far more traits in common — such as being learned, loyal, patient, rational, trustworthy and long-term focused. The good news for Berkshire is that the two built a culture on these values that will sustain itself: the result is a deep managerial bench at Berkshire that offers reassuring answers about Berkshire’s future beyond Munger as well as beyond Buffett.
Multiple individuals will together assume various parts of the roles those two traditionally played. Buffett has been board chairman, chief executive officer, and chief investment officer, roles that Buffett has said will be filled by his son Howard as chairman, Greg Abel as CEO and both Todd Combs and Ted Weschler as co-chief investment officers.
Munger’s role as Berkshire’s No. 2, with the official title of vice chairman, has been partner to the CEO while saying no as needed. Just as Buffett’s role will be split among his successors, so will Munger’s. The duty of sustaining the culture — saying no to threats to its rational, acquisitive, decentralized, autonomous, trust-based strengths — will fall to all of their successors.
