Join us tomorrow at 2 pm Eastern for our CompensationStandards.com webcast, “More on Clawbacks: Action Items and Implementation Considerations” – to hear Compensia’s Mark Borges, Ropes & Gray’s Renata Ferrari, Gibson Dunn’s Ron Mueller and Davis Polk’s Kyoko Takahashi Lin continue 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.
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.
We’re making this webcast available to members of TheCorporateCounsel.net as a bonus, but if you want to stay up to date on the latest developments on clawbacks, you need to become a CompensationStandards.com member if you aren’t already. We offer a no-risk trial for that site as well on the same terms that we provide for TheCorporateCounsel.net – and you can take advantage of that offer in exactly the same way!
Last week, Glass Lewis released the results of its inaugural Client Policy Survey, which reflects input on corporate governance, ESG and stewardship matters from more than 500 institutional investors, corporate issuers, corporate advisors, shareholder advocates and other stakeholders. This excerpt from the accompanying press release highlights some of the survey’s findings:
– Investors view financial results, excluding total shareholder return (TSR), and incentive payouts relative to TSR as the most important factors when reviewing executive pay-for-performance alignment.
– Overwhelmingly, respondents indicated that companies should set greenhouse gas (GHG) emissions targets. However, there was a split on exactly which companies should set targets — and exactly which types of targets they should set.
– More than 40% of investors would vote against boards that use plurality voting for uncontested director elections, and over two-thirds view the practice as problematic.
– Most investors believe all board-level roles should be considered when assessing whether directors’ commitments are overstretched.
The survey covers a lot of ground and includes responses addressing a variety of issues relating to board governance, director commitments, capital structure & voting rights, ESG & shareholder proposals, and executive compensation.
UCLA’s Stephen Bainbridge recently blogged about the major challenges and issues he sees facing public company boards over the next year or two. In his assessment, these include cybersecurity, risk management, shareholder activism and political risks. This excerpt addresses risk management:
Cybersecurity is a sufficiently important risk to deserve its own category. But the general problem of risk management remains an important part of what boards must do. Board-level systems designed to monitor and oversee mission-critical functions play a crucial role in showcasing the board’s fulfillment of its Caremark duties.
This was evident last year when the Delaware Court of Chancery allowed a Caremarkduty-of-oversight claim to advance against Boeing Company directors. The court’s decision was based on allegations of insufficient board involvement in safety matters and the absence of a dedicated committee with direct oversight responsibilities. Nevertheless, it’s worth noting that two subsequent cases, Hamrockand SolarWinds, have underscored the necessity of establishing bad faith rather than merely proving gross negligence for a Caremark claim to succeed.
By the way, Prof. Bainbridge is no fan of Caremark, and another one of his recent blogs summarizes his objections to it:
First, Caremark was wrong from the outset. Caremark’s unique procedural posture, which precluded any appeal, gave Chancellor Allen an opportunity to write “an opinion filled almost entirely with dicta” that “drastically expanded directors’ oversight liability.” In doing so, Allen misinterpreted binding Delaware Supreme Court precedent and ignored the important policy justifications underlying that precedent.
Second, Caremark was further mangled by subsequent decisions. The underlying fiduciary duty was changed from care to loyalty, with multiple adverse effects. In recent years, moreover, there has been a steady expansion of Caremark liability. Even though the risk of actual liability probably remains low, there is substantial risk that changing perceptions of that risk induces directors to take excessive precautions.
Join us tomorrow for the webcast – “SEC Enforcement: Priorites & Trends” – to hear Hunton Andrews Kurth’s Scott Kimpel, Locke Lord’s Allison O’Neil, and Quinn Emanuel’s Kurt Wolfe provide insights into the lessons learned from recent enforcement activities and insights into what the new year might hold.
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.
Some law firms have announced their own proprietary tools in the AI and software space recently — for example, Gunderson Dettmer announced a homegrown generative AI chat app for the firm’s attorneys, Cooley announced Cooley D+O, a software platform for D&O questionnaires, and Orrick recently announced The Observatory, an online platform meant to help you select technology that’s right for your organization.
These are certainly some interesting developments by firms working to lead here, but we still don’t have a great sense for what law firms and in-house legal departments are doing generally to leverage efficiencies from AI or other emerging technologies for legal tasks to stay up to date in this rapidly changing environment. To get some answers, we’ve put together a short, anonymous survey on how in-house teams and law firms are using technologies right now and what policies and oversight of AI they currently have in place. This is different from the many surveys on AI we’ve seen elsewhere focused on who it’s going to put out of a job or what industries it’s going to revolutionize. We hope this will give you current, practical & actionable insight. Please take a moment to participate!
If you are leading your team’s efforts to efficiently, safely & legally leverage AI, that would make a great podcast topic, and we’d love to hear about it.
LIBOR officially became an ex-parrot on June 30, 2023, and has been replaced by SOFR in most credit agreements. But this WilmerHale memo says that despite the fact that lenders and borrowers have known for some time that the transition away from LIBOR was coming, a surprising number of credit agreements still haven’t been amended to address the transition, and that this may prove to be a costly oversight:
Despite these preparations and legislative actions, there remains a contingent of corporate borrowers that have fallen (back) into the cracks. In many loan documents, LIBOR cessation results in a fallback to a rate based on the prime rate, also known as the base rate or reference rate, which, while based on the rate banks give to their best, most creditworthy corporate customers, has historically been more expensive than LIBOR.
Because the LIBOR Act is generally inapplicable for loan documents containing contractual fallback language that clearly specifies a replacement rate, the prime rate will become the controlling benchmark under these agreements. A recent estimate stated that approximately 8% of leveraged loans could fall back to the prime rate upon the cessation of LIBOR if action is not taken. Although public data on the topic is limited, the percentage of loans falling back to the prime rate in the venture debt and middle-market spaces is likely to be far higher.
The memo recommends that borrowers review the terms of their existing debt agreements to determine whether there are potential issues with the fallback pricing provisions of those agreements. Borrowers that identify potential issue should consult with counsel as to whether the LIBOR Act applies to their debt agreements and, if those agreements fallback pricing provisions are the prime or base rate, negotiate appropriate changes to a SOFR-based benchmark rate.
During the darkest days of the pandemic, convertible debt offerings were an attractive capital raising alternative, and as we blogged at the time, even large cap issuers that traditionally shied away from converts opted to take the plunge. While the convertible debt market remained pretty robust in 2020 & 2021, interest in converts petered out last year. However, a recent Institutional Investor article says that interest in convertible debt issuances has surged again in recent months:
The market for convertible bonds, the interest-paying securities that bondholders can choose to turn into common stock, is stirring again and attracting investors.
Convertible bonds typically mature in five years and are issued by less creditworthy companies — 76 percent of issuers don’t have a credit rating and most of the others have a BBB rating or lower from one of the major agencies, according to research by Calamos Investments. But higher interest rates are causing even the healthiest companies to use convertible bonds to raise capital. Through September of this year, companies across the globe sold $61 billion worth of convertible bonds and out of the $42 billion raised by U.S. companies, almost a third of them have investment grade ratings.
“That’s a bit of a change from the previous few years in that it was a much smaller percentage than before,” said David Hulme, managing director and portfolio manager at Advent Capital Management, which specializes in convertible bonds. “I think that’s been driven partially by a change in the way companies account for the issuance of convertibles.”
Back in 2020, companies were attracted to converts as an alternative to issuing equity during a period of downward pressure on stocks. This time, it looks like it’s the ability to mitigate the impact of the current interest rate environment along with depressed stock prices that’s making companies consider convertible debt issuances. Like Mark Twain supposedly said, history never repeats itself, but sometimes it rhymes.
John & Orrick’s J.T. Ho recently recorded their latest monthly “Timely Takes” Podcast, and in it, J.T. highlights California’s recently adopted Assembly Bill 1305. This climate-related bill has gotten less attention than SB 253 and SB 261 — California’s two other climate bills approved in October — since it’s generally focused on the voluntary carbon markets and entities operating in California that market or sell voluntary carbon offsets. But, as detailed by this Orrick alert, it also “imposes various disclosure requirements on companies that make net zero, carbon neutrality, or similar claims, including through the use of voluntary carbon offsets.” “Claims” includes goals, and as we all know, that covers many companies whose businesses have nothing to do with the carbon markets! And — get this — AB 1305 is effective on January 1, 2024. Yikes! That’s less than two short months from now.
The alert details what these covered companies need to disclose. Pay attention, since failures to comply can result in civil penalties, which accrue at a rate of up to $2,500 per day that information is not available or is inaccurate, for each violation, up to a maximum of $500,000.
If a company makes claims regarding the achievement of net zero emissions, carbon neutral claims or claims regarding reduction of greenhouse gas emissions: Must publicly provide all information documenting how such a claim was determined to be accurate or actually accomplished, and how interim progress toward that goal is being measured, including:
– disclosure of independent third-party verification;
– identification of science-based targets; and
– disclosure of the relevant sector methodology.
This requirement only applies to companies that operate within or make claims within California.
If a company makes the claims described above and purchases or uses voluntary carbon offsets: In addition to the information described above, companies must publicly provide information regarding the applicable project and offsets, including:
– the offset registry or program;
– the offset project type;
– the specific protocol used; and
– whether there is independent third-party verification.
This requirement only applies to companies that operate within or purchase or use voluntary carbon offsets sold within California.
The podcast & alert detail some action items that covered companies need to add to their priority year-end to-do list to prepare for and draft this disclosure. When reviewing your goals for achievability and to confirm appropriate plans are in place, in addition to general greenwashing considerations and securities-related risk, J.T. recommends that companies consider the FTC’s Green Guides (including potential amendments) and state-level consumer protection & marketing laws.
PwC’s latest publication on non-GAAP measures summarizes the topics covered in recent non-GAAP comment letters, particularly focused on comment letters since the staff’s 2022 updates to non-GAAP C&DIs. But what caught my eye the most was this blurb related to earlier guidance:
In March 2020, the SEC staff issued disclosure guidance related to COVID-19, including how non-GAAP measures could be impacted by the pandemic and what companies should consider in their non-GAAP disclosures. One topic discussed was when a non-GAAP measure is reconciled back to a comparable GAAP measure that is still provisional in nature because the measure may be impacted by adjustments that may require additional information and analysis. The SEC staff has recently stated that this guidance is not specific to COVID-19 and should be applied to other situations that could impact a company’s non-GAAP measures as well. Companies should continue to consider this guidance.
With the ever-increasing geopolitical uncertainty companies continue to face, it’s not surprising that COVID-related guidance may still be applicable in other contexts. In the 2020 guidance, while the Staff stated that “the Division would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results,” it described the limited circumstances when that may be acceptable and explained the Staff’s expectations for contextual disclosure:
In addition, if a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures in reliance on the above position, it should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to the Board of Directors. We remind companies that we do not believe it is appropriate for a company to present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company. Rather we believe companies should use non-GAAP financial measures and performance metrics for the purpose of sharing with investors how management and the Board are analyzing the current and potential impact of COVID-19 on the company’s financial condition and operating results.
If a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, it should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.
John & Orrick’s J.T. Ho took the Halloween theme to heart in their latest monthly “Timely Takes” Podcast on securities and governance hot topics recorded at the end of October. Some of J.T.’s updates are truly frightening, including his discussion of the recent climate legislation in California that I blogged about today with a compliance date that’s right around the corner. If you haven’t read that blog or listened to this podcast and you’re thinking “I’m not afraid”…you will be.
John and J.T. cover the following topics:
– New California Climate Legislation
– Amendments to Beneficial Ownership Reporting Rules
– IAC’s Recommendations on Human Capital Management Disclosure
– 5th Circuit Panel’s Decision Upholding Nasdaq’s Board Diversity Disclosure Rules
– NYSE Clawback Policy Affirmation Requirement
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 mervine@ccrcorp.com or john@thecorporatecounsel.net.
Programming note: In observance of Veterans Day, we will not be publishing a blog tomorrow. We will be back on Monday!
