I recognize that many folks involved in the “D&O questionnaire” process view this annual exercise as no more than a “necessary evil” that must be tolerated and made as painless as possible (that’s why we have a “D&O Questionnaire Handbook” with an annotated questionnaire for members). But this recent blog from Woodruff Sawyer’s Lenin Lopez points out that it could be a good opportunity for discussion & training on conflicts of interest:
It’s easy to ask directors to disclose any potential conflicts of interest. The challenge is how to do so in a way that translates into directors openly disclosing any potential conflicts of interest to the company. This is not to say that directors would intentionally look to avoid disclosure. Rather, it is more a matter of education about what types of director-level conflicts they should be on the lookout for. A brief walkthrough of a case like the one discussed in this article can be the basis for a fruitful discussion with the board well in advance of any actual potential conflict of interest arising. As a practice point, this type of discussion may be worthwhile holding in parallel with your company’s annual director and officer questionnaire process or review of the company’s code of conduct.
Why is it worth having these conversations when “fiduciary duties” can also put folks to sleep? Well, every corporate lawyer is bound to face thorny director conflicts of interest at one point or another – and courts continue to interpret the types of relationships that could be problematic. If a director’s loyalty is challenged, you don’t want to be the one who failed to tell them about the issue on the front end – or failed to create a supportive record. The blog summarizes a scenario that the Delaware Supreme Court recently addressed. Here’s an excerpt:
We have previously covered developments in Delaware courts’ view of director independence, including in the context of business and personal relationships. Delaware courts continue to look beyond traditional situations where independence was historically questioned, like financial relationships, and expand their view to include personal relationships, involvement with charities, overlapping business networks, and even shared ownership of aircraft. Two additional situations where Delaware courts have focused their independence assessment, and which may come as a surprise, are personal admiration and director income. In Re BGC Partners, Inc. Derivative Litigation addressed both situations.
On its way to upholding a ruling in favor of the company to dismiss the case (which John wrote about on DealLawyers.com), the court considered a creative argument from the plaintiff that a “teary-eyed” deposition cast doubt on a director’s willingness to consider a demand to sue the company’s Chair & CEO. In doing so, the court considered whether the record showed that the director’s respect for the Chair & CEO was so personal or of such a “bias producing” nature that it would have clouded his judgment.
The blog goes on to offer strategies to help ensure that board decisions get the benefit of the business judgment rule if they are challenged. In addition to encouraging transparency through training, Lenin notes that it’s important to maintain a contemporaneous written record that demonstrates directors were disinterested in their decision making. The court’s commentary shows that it will review this record.
Last month, the House Financial Services Committee’s Capital Markets Subcommittee held a hearing on “Examining the Agenda of Regulators, SROs, and Standards-Setters for Accounting, Auditing” – with testimony from PCAOB Chair Erica Williams, FASB Chair Richard Jones, and FINRA President & CEO Robert Cook. The livestream is here – and at approximately the 30-minute mark, Subcommittee Chair Ann Wagner (R-Missouri) recaps “deep concerns” with the costs & diversion of attention that are likely to occur if the PCAOB moves forward with its recently proposed standards on “Noncompliance with Laws & Regulations” and individual accountant liability.
In her testimony, PCAOB Chair Erica Williams defended the proposals and says that the PCAOB is considering feedback that has been provided. Here’s an excerpt:
We also proposed a new standard on noncompliance with laws and regulations, or NOCLAR. When auditors fail to identify noncompliance with laws and regulations that have a material impact on a company’s financial statements – or fail to take the proper steps to evaluate and communicate that noncompliance – investors pay the price.
Unfortunately, the current standard is 35 years old, and we have seen far too many examples of investors getting hurt due to noncompliance with laws and regulations since it was adopted.
Well-publicized issues relating to Wells Fargo offer just one example. Earlier this year, Wells Fargo agreed to pay $1 billion to settle a class-action lawsuit from investors alleging it made misleading statements about compliance with consent orders imposed by federal regulators. A lawyer for those investors underscored just who gets hurt when these incidents happen: “state employees, nurses, teachers, police, firefighters and others – whose critical retirement savings were impacted by Wells Fargo’s fraudulent business practices.”
When these kinds of incidents happen, the question almost inevitably follows, “where was the auditor?” In fact, our PCAOB advisory groups, made up of investors and other stakeholders, have cited to at least one study that shows auditors are currently only finding about 4% of fraud – which is certainly not consistent with what most investors expect.
In the fall, we issued a proposal on a rulemaking project that would hold associated persons accountable when they negligently, directly, and substantially contribute to firms’ violations. The proposal is designed to make sure PCAOB rules match what investors already expect: that when an associated person’s negligence directly and substantially contributes to firm violations that can put investors at risk, the PCAOB has the tools to hold them accountable.
The Q&A portion of the meeting suggests that the PCAOB will be holding a public roundtable for additional feedback on the NOCLAR proposal. Stay tuned!
Happy New Year! As Dave says, “For securities lawyers, every year is a roll-forward of the last one.” I take that to mean we get better every year – with incremental improvements & updates to our disclosures (and with any luck, ourselves). When it comes to your upcoming “risk factors” update, this White & Case memo identifies 6 key trends to consider:
– Cybersecurity
– Artificial Intelligence
– Macroeconomic Considerations: Uncertainty, Interest Rates and Inflation
– International Geopolitics
– Climate
– Internal Controls
In addition to considering whether the above developments have had – or are expected to have – a material impact on your company’s business, financial condition and operating results, now is also the time to make sure your existing risks are appropriately described. The memo shares these 5 drafting reminders:
– Avoid boilerplate disclosures
– Carefully Scrutinize Hypothetical Statements
– Review for Internal Consistency
– Update or Delete Risk Factors That Have Changed in Importance or Are No Longer Relevant
– Consider the order & organization of your risk factors, and don’t forget a “Risk Factor Summary” if your disclosure exceeds 15 pages
Check out the full memo for more color on each of these topics, as well as our “Risk Factors” Handbook and Practice Area for members.
In this 3-page memo released last month, the Vanguard Investment Stewardship team gives insight into how it analyzed shareholder proposals at 4 companies calling for third-party audits of workplace safety practices.
Vanguard emphasizes its case-by-case approach to these shareholder proposals, based on the relevant company’s facts & circumstances. The asset manager explains factors – e.g., disclosure about board oversight and quantitative improvements in safety metrics, etc. – that led to it voting against the proposals at each of the companies. The “against” votes occurred even though Vanguard determined that worker health & safety was a material risk for all 4 of the companies, so for other companies where this is a big issue, these examples are worth checking out. Here’s what Vanguard looks for from all portfolio companies on this topic:
On behalf of the investors in Vanguard-advised funds, we believe that companies should focus on issues that are material to their business. We look for boards to have the appropriate skills and expertise to identify and oversee material risks, to understand how risks could affect shareholder value creation at the companies they oversee, and to provide clear, decision-useful disclosure on oversight and management of the company’s material risks.
Portfolio companies should adhere to applicable labor laws and, where material, maintain oversight of workplace health and safety risks. We further look for boards to appropriately challenge management and regularly reevaluate risk-mitigation practices if the degree of financial materiality or the manifestation of a specific risk changes over time.
In engagements with portfolio companies, we seek to understand how boards oversee material risks, including those that relate to human capital management. Although the Vanguard-advised funds do not seek to dictate company strategy or day-to-day operations, we continue to engage boards on how they define materiality related to human capital risks, their oversight process for mitigating material risks, and how they disclose material risks to investors.
We’ve posted the transcript for our recent webcast – “More on Clawbacks: Action Items and Implementation Considerations” – during which Compensia’s Mark Borges, Ropes & Gray’s Renata Ferrari, Gibson Dunn’s Ron Mueller and Davis Polk’s Kyoko Takahashi Lin continued their excellent discussion from our 20th Annual Executive Compensation Conference on complex decisions and open interpretive issues that unlucky companies faced with a restatement will need to tackle. They covered:
– What to do if a restatement occurs
– Whether to amend other policies and agreements, or update other disclosures
– Maintaining your policy going forward (we are all going to get smarter about these policies over time!)
Members of this site or of CompensationStandards.com can access the transcript to this program and all of our other webcasts by visiting the “archives page“. If you’re not a member, sign up today to get access to this essential guidance!
Also, if you are a member, make sure to confirm with your knowledge management folks that your subscription has been renewed. Many of our subscriptions run on a calendar-year basis, and you don’t want any interruption in access as we head into proxy season.
Earlier this month, former securities analyst Ray Dirks passed away at the age of 89. Dirks was the petitioner in the famous case of Dirks v. SEC, in which the SCOTUS overturned a censure issued against him by the SEC for violating Rule 10b-5’s prohibition on insider trading. The SEC contended that Dirks, who uncovered & alerted the SEC and The Wall Street Journal to potential corporate wrongdoing, violated the prohibition on insider trading by “tipping” his firm’s clients to what he uncovered.
The SCOTUS rejected that argument, but in overturning Dirks’ censure, it established a standard for tipper/tippee liability that turned on whether or not the tipper violated a fiduciary duty by sharing the information in question. In a recent blog on the occasion of Dirks’ passing, Gunster’s Bob Lamm points out that this standard has created a lot of confusion and uncertainty about the boundaries of insider trading liability:
I don’t blame the Court for coming up with this rather convoluted route to Dirks’s exoneration; after all, one of my law school professors used to beat us over the head with the notion that courts will sometimes bend over backwards to fashion a remedy where the strict letter of the law leads to an unjust result. That seems to me to be a good thing. Also, I know that I’m in the minority – possibly a very small minority – that believes that the goal of insider trading law should be to create a level playing field rather than to punish breaches of fiduciary duty.
Still, the Dirks case has resulted in decades of confusion over what is – and what is not – insider trading, and I believe that we’d have all been better off if the SEC had not engaged in overzealousness where Dirks was concerned – particularly given the agency’s non-response to the allegations he’d brought to its attention.
The latest issue of The Corporate Counsel has been sent to the printer. It is also available now online to members of The CorporateCounsel.net who subscribe to the electronic format. The issue includes the following articles:
– SEC Amends Section 13(d) and Section 13(g) Beneficial Ownership Reporting Rules
– Related Person Transactions: Item 404’s Requirements
Please email sales@ccrcorp.com to subscribe to this essential resource if you are not already receiving the important updates we provide in The Corporate Counsel newsletter.
The Standard Industrial Classification Codes that appear in a company’s EDGAR filings indicate the type of business a company engages in and are used by Corp Fin to assign review responsibility for the company’s filings. Sometimes, a company’s business may change sufficiently over time to result in a change in its primary SIC code – which raises the question, “How does a company request the SEC to change in its SIC code?” One of our members recently did this for a client, and shared with us the following roadmap for requesting a change:
We had occasion to look into changing an SIC code for a client, and the info on the SEC’s website is outdated. Here is the updated information we received:
You need to send an e-mail requesting the SIC code change to: EDGARFilingCorrections@sec.gov. The email needs to include:
o Name of company
o CIK
o Current SIC
o Requested new SIC
o See sample e-mail below
The request will be reviewed by the committee that reviews these requests periodically. Note: There is dated information on the Internet indicating the SEC only reviews these requests in June of each year but that is no longer the case. These requests are reviewed on a rolling basis.
Once approved, the change in SIC code will not take effect until you make your next required filing with the SEC (e.g., 8-K, 10-Q, 10-K, etc.). Note: The new SIC code will not be approved unless it is representative of your primary source of revenue.
Sample e-mail:
Subject: SIC Code update for [INSERT COMPANY NAME] (CIK [INSERT CIK])
We are respectfully requesting an update to the following SIC code:
CIK [INSERT CIK]
Company Name [INSERT COMPANY NAME]
Current SIC [INSERT CURRENT SIC]
Requested SIC [INSERT NEW SIC]
Writing this blog brought to mind one of my favorite examples of a corporation completely changing its business – a company called Mary Carter Paint, which in the late 1960s opted to get out of the paint business and into something else. When it did that, it changed its name to one you’re probably much more familiar with – “Resorts International.”
Check out our latest “Timely Takes” Podcast featuring Orrick’s J.T. Ho & his monthly update on securities & governance developments. In this installment, J.T. reviews:
– The status of the SEC’s Share Repurchase Disclosure Rule
– Glass Lewis’s 2024 Voting Guidelines
– The SEC’s Solar Winds Enforcement Proceedings
– New CDIs from Corp Fin
– No-Action Letter Processes
As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email us at john@thecorporatecounsel.net or mervine@ccrcorp.com.
Earlier this week, ISS Governance announced its 2024 Benchmark Policy Updates, which will be effective for meetings on or after February 1, 2024. In a miracle of miracles, no updates are contemplated for the US Benchmark Proxy Voting Guidelines. Instead, ISS Governance announced changes to its Canadian and Japan policies and Asia-Pacific regional markets policies. Appendix B to this summary shows there is just one clarification to the U.S. policy that codifies ISS’s case-by-case approach on shareholder proposals to require shareholder ratification of executive severance arrangements or payments. I cannot remember if there was ever another time when ISS did not make any changes to its US benchmark proxy voting guidelines. Honestly, it feels kind of weird.
Of course, this outcome was foreshadowed last month when ISS Governance announced the launch of its open comment period on proposed changes to its benchmark voting policies. Notably, ISS Governance did not solicit comments for any policy changes in the US market.
