August 6, 2018

“Crypto Mom?” Commissioner Peirce Makes Lots of New Friends

It seems that SEC Commissioner Hester Peirce could teach Dale Carnegie a thing or two about how to win friends & influence people – at least on the Internet, where she’s become “Twitter famous” & earned the moniker “Crypto Mom.” According to this “Quartz” article, Commissioner Peirce owes her new-found popularity to her dissent from the SEC’s recent decision to refuse to allow the Winklevoss brothers to list their bitcoin ETF:

Crypto Twitter is rallying behind a sympathetic watchdog at the US Securities and Exchange Commission. Not long after commissioner Hester Peirce dissented from the agency’s rejection of a bitcoin exchange-traded fund, her count of Twitter followers soared.

Peirce’s social media exposure got a boost from a Reddit user who goes by lamb0x, who called for readers on the site to “show her some love from the Crypto Community.” She’s not the first buttoned-down American official to win Twittersphere adoration — the Chair of the Commodity Futures Trading Commission, Chris Giancarlo, had his turn in February after he gave Senators an unexpected education on crypto slang during a hearing.

Giancarlo was dubbed “Crypto Dad” by the cryptorati; inevitably, Peirce earned the moniker “Crypto Mom” from some Redditors.

The article includes a chart showing that Commissioner Peirce’s following on Twitter skyrocketed from around 1000 followers to more than 10,000 after her dissent.

Speaking of Twitter, be sure to follow Broc (@BrocRomanek) and Liz (@LizDunshee) – they tweet interesting & relevant stuff. You can follow me too if you want (@JohnJenkins36), but I mostly just whine about the Cleveland Browns.

SEC’s Proposed Transaction Fee Pilot: “Come at Me, Bro!”

Last March, the SEC proposed to implement a “Transaction Fee Pilot,” which would analyze the effects that fees & rebates have on how brokers route their orders to competing markets. It sounds pretty boring, but the comment process for this one has gone off the rails – accusations of “fearmongering” and “misleading” statements have been hurled by one side, while the other has been accused of “making a mockery” of the comment process.

So what is it about the proposal that’s causing such a ruckus? Well, one reason may be that public company stocks are going to play the role of “guinea pigs.” The SEC wants to create three test groups, each composed of 1,000 listed stocks. Each of these groups would have different levels of permissible transaction fees & rebates. For the remaining 5000 or so stocks serving as a control group, it would be business as usual. As proposed, the Pilot would run for up to two years, and companies would not be permitted to opt out from participating in it.

This “IR Magazine” article says that most major institutional investors are all-in on the Pilot, but that the Nasdaq & NYSE are not happy. In addition to concerns about driving trading away from the exchanges, the NYSE in particular has flagged some potentially significant downside consequences for listed companies:

Consider two hypothetical companies which are similar in profile. Both are large listed financial institutions with similar size, business profile and market capitalization. Company A is included in one of the SEC’s Transaction Fee Pilot. Company B is not included and still benefits from an exchange rebate program. We would expect Company A’s average bid-ask spread to widen due to the reduced or eliminated exchange rebates.

All else equal, Company A will now be a less appealing investment than Company B, as a wider bid-ask spread means that investors’ transactions costs will be higher when trading Company A’s stock compared to Company B’s stock.

The NYSE goes on to point out that wider spreads could make securities offerings & buybacks more expensive, and encourages listed companies to weigh-in through the comment process. Some heavy hitters – including P&G, Home Depot & Mastercard – have done so. One of the points made in several comment letters is the Pilot’s potential impact on peer group metrics. Here’s an excerpt from Mastercard’s letter:

The SEC has stated that stocks would be grouped into the control group and test groups based on stratified sampling by market capitalization, share price, and liquidity. This makes it likely that MasterCard, if included in the Pilot, would be separated from a peer group of companies that market partipants and investors compare to assess MasterCard’s financial performance. This separation could distort peer group metrics and complicate the comparison of peers by investors.

A number of companies have also asked to be put in the study’s control group if the study moves forward. In response, the CII followed up with a letter of its own to the directors of the 37 companies that opposed the proposal expressing its concerns about their opposition and its own “enthusiastic support” for the proposal.

The back-and-forth between one pair of commenters has gotten quite heated. In June, the Investors Exchange submitted a letter characterizing the NYSE’s statements as “fearmongering” built on a set of “knowingly false premises.” That prompted a blistering reply from the NYSE, in which it accused the IEX of “making a mockery of the Commission’s comment process” & targeting the NYSE in an attempt “to blame the NYSE for its own business failures.”

ICOs: The First “Token Securities Exchange” on the Horizon?

While the NYSE & IEX were slinging mud over the SEC’s Pilot Program, crypto-platform Coinbase was taking the first steps toward becoming the first national securities exchange for tokens. This recent blog from Gunster’s Gus Schmidt has the details. Here’s an excerpt:

In order to operate an exchange for securities, an entity must register as a national securities exchange or operate under an exemption from registration, such as the exemption provided for alternative trading systems (ATS) under SEC Regulation ATS. An entity that wants to operate an ATS must first register with the SEC as a broker-dealer, become a member of a self-regulating organization, such as FINRA, and file an initial operation report with the SEC on Form ATS.

Because Coinbase is neither registered as a national securities exchange nor operates under an exemption, it cannot operate an exchange-based trading platform for blockchain-based securities. However, the recently announced acquisitions indicate that Coinbase may be headed in that direction. The three companies acquired by Coinbase were:

– Venovate Marketplace, Inc. (registered as a broker-dealer and licensed to operate an ATS)
– Keystone Capital Corp. (registered as a broker-dealer)
– Digital Wealth LLC (registered as an investment advisor)

The blog points out that by acquiring licensed entities, Coinbase may be able to speed up its plan to create an exchange-based trading platform for blockchain-based securities.

John Jenkins

August 3, 2018

The “Karla Bos” Files: A List of Lists – Part I

We’re feeling pretty lucky around here. Karla Bos reached out to us after reading “The ‘Nina Flax’ Files” – to let us know that she too is a list-maker. Here’s Part I of Karla’s “list of lists” (let Karla know what you think – my personal favorite is #2):

I’ve always been a list-maker, thanks to my parents – family to-do lists for the weekend (equal parts work & play, as I recall, something I’m striving to return to) and lists of summer chores by the day (including the much-despised yardwork, yet ironically I now enjoy it, go figure). But I didn’t fully appreciate until I read Nina’s lists how much I enjoy and rely on lists myself and what they must reveal about me. So I was inspired to make my own “list of lists” – sans my multiple shopping lists – and to make my own versions of many of Nina’s excellent lists:

1. Why Making Lists Keeps Me Sane

2. Why I Look Forward To The Women’s 100 Every Year

3. Multiple To-Do Lists (each with a strategic physical location in addition to electronic reminders): Multi-Week Personal To Do List, Today’s Personal To-Do List, Today’s Business Success (Aka Must-Do) List, Upcoming Personal/Family Appointments

4. Things I Didn’t Realize Were So Hard for Companies When I Was on the Investor Side

5. Things Companies Don’t Understand About the Investors That Vote Their Proxies

6. Ways My Acting School Training Helps Me In Business Every Day

7. What I Learned From Living In a Small Town, a Big City, the Woods & the Desert

8. Things I Do For My Job That Add Value (But Aren’t Billable)

9. What Working From Home Has Taught Me

10. Ways That Companies Inadvertently Offend Their Investors

11. 10 Things (Or More) I Accomplish Before 8:30 am Every Workday

12. Activities I Do/Should Be Doing Every Day To Counteract Too Much Sitting At a Desk

NASAA Proposes “Blue Sky” Updates

NASAA has proposed two rules that would make overdue updates to the ancient “manual exemption” – which is available for secondary resales when companies make certain information publicly available. The proposed rules would encourage states to:

1. Replace “S&P’s Corporation Records” with the OTC website as an information source for the manual exemption and

2. Provide an exemption for companies that have conducted a “Tier 2” Regulation A offering and are current in their ongoing reporting requirements

Is it just me, or do these changes seem overdue? The SEC adopted the Reg A+ changes over 3 years ago – and S&P discontinued their records service in 2016. You’d have thought something would have come along sooner. Comments are due by August 20th. Hat-tip to Latham’s Paul Dudek for bringing this to our attention.

Reduced Rates End Next Week: Our “Pay Ratio & Proxy Disclosure Conference”

Reduced Rates – Act by August 10th: Time to act on the registration information for our popular conferences – “Pay Ratio & Proxy Disclosure Conference” & “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference” – to be held September 25-26 in San Diego and via Live Nationwide Video Webcast. Here are the agendas – nearly 20 panels over two days. So register by August 10th to take advantage of the discount.

Liz Dunshee

August 2, 2018

Where Do Investors Get ESG Info?

This blog from “The Conference Board” discusses “reporting fatigue” on ESG matters. In the growing universe of ratings, rankings and initiatives, it’s hard to know where to focus your limited bandwidth. This Clermont Partners survey of 189 active investors – and related interview – say that annual reports are the #1 source of ESG info for investors, followed by direct questions to the company.

What about sustainability reports? For those of you working on them, I’m sorry to say there might be some leeriness there:

– While 28% of investors said that the reports were helpful, they also said they didn’t answer all of their questions; and

– 63% of the investors said they “don’t spend much time” with them.

But your work is not for nothing. According to this survey, almost everyone turns around and uses some combination of annual, integrated & sustainability reports to answer those direct questions from investors. And when investors look to third-party ratings agencies to fill information gaps, some of that information also comes from sustainability report.

Although depending on the ratings agency, that percentage might not be as high as you think: Broc has blogged on our “Proxy Season Blog” about how company disclosures contribute only about 35% of the data underlying MSCI ratings. Also see these MSCI resources in our “ESG” Practice Area.

This blog from Globoforce’s Derek Irvine discusses why it makes sense for employee engagement surveys to be one component of ratings – organizations that score in the top 25% on employee experience report nearly 3x the return on assets and more than 2x the return on sales as compared to organizations in the bottom quartile.

Human Capital: Investor Coalition Sends 45-Page Survey

The “ShareAction Workforce Disclosure Initiative” – a 100-member investor coalition – recently sent this 45-page survey to 500 companies. The coalition says the survey is a “streamlined solution” that helps companies avoid responding to multiple surveys & data requests. They’re also encouraging companies to make their responsive information public. Here’s a summary of results from their pilot project last year.

ESG Ratings: “Wildly Divergent”?

The American Council for Capital Formation is following up on its hard look at proxy advisors – which Broc blogged about on our “Proxy Season” Blog last month – with a new 17-page assessment of four major ESG ratings agencies. It concludes that output from MSCI, Sustainalytics, RepRisk and ISS Environmental & Social QualityScore is…less than ideal. Here’s an excerpt from the press release (also see this Financial Times article):

The major rating agencies have significant disparities in the accuracy, value, and importance of their individual ratings to investors,and arguably undermine the validity of ESG investment strategies. Findings reveal significant disparities in ratings due to a lack of standardization, inconsistencies, and subjective interpretation influenced by a number of biases – including company size, geography, and industry-specific criteria.

Though modern ESG investing has been practiced for over a decade now, there is still a lack of accurate data to support the evaluation process. To meet growing customer demand and attract ESG-orientated capital, companies have begun making selective and unaudited disclosures in regard to their performance. These disclosures are then utilized by ESG rating agencies, despite the fact that there are neither standardized rules, nor an auditing process to verify company data.

The report is careful to note that it’s not saying one particular method of ESG investment is right or wrong – only that the application of ESG-related metrics & ratings into complex investment decisions remains much more an art than a science. Among other recommendations, the ACCF advocates for standardized ESG disclosures in regulatory filings, in order to help ratings agencies make more consistent judgments. It also says that the agencies should be more transparent in their process – and better adjust for size, industry & jurisdiction.

Liz Dunshee

August 1, 2018

Exempt Solicitations: 2 New CDIs

There’s been a lot of buzz this year about voluntary exempt solicitations – increasingly, these notices are being used to publicize shareholder views on proposals and other topics. Broc blogged about John Chevedden’s first “Notice of Exempt Solicitation” in March – and earlier this week I noted on our “Proxy Season Blog” that it may become a year-round practice. Yesterday, Corp Fin issued two new Proxy Rules CDIs that confirm that voluntary exempt solicitations are okay – if it’s clear who is making the filing.

Question 126.06 says that the Staff will not object to a voluntary submission of such a notice, provided that the written soliciting material is submitted under the cover of Notice of Exempt Solicitation as described in CDI 126.07 and such cover notice clearly states that the notice is being provided on a voluntary basis. Doing so will make it clear to investors the nature of the submission and that it is being made on behalf of a soliciting party who does not beneficially own more than $5 million of the class of subject securities.

Question 126.07 says that the Rule 14a-103 information required by Rule 14a-6(g)(1) – e.g. the filer’s name & address – must be presented in an Edgar submission before the written soliciting materials, including any logo or other graphics used by the soliciting party. To the extent that the notice itself is being used as a means of solicitation, the failure to present the Rule 14a-103 information in this manner may, depending upon the particular facts and circumstances, be misleading within the meaning of Exchange Act Rule 14a-9. This requirement applies regardless of whether the filing is voluntary or to satisfy the requirements of Rule 14a-6(g)(1).

For more background & commentary, visit this Gibson Dunn blog. Here’s an excerpt:

While these new CDIs provide helpful guidance on the use of voluntary Notices of Exempt Solicitations, the CDIs may not go far enough to address potential abuses that increasingly are arising when the EDGAR system is used as a platform for disseminating a filer’s views. For example, C&DI Question 126.06 does not expressly require that the filer represent that it is in fact a shareholder.

Absent further guidance from or review and comment on such filings by the Staff, the process allows anyone with EDGAR codes to submit filings unrelated (or only tangentially related) to a proposal, or to set forth disparaging or inflammatory views, subject only to the Rule 14a-9 standard governing false and misleading statements. For example, John Chevedden, who as of July 31 has filed 21 of these filings in 2018, filed a Notice of Exempt Solicitation at Netflix a week after the company’s annual meeting, which contained only a vague and confusing voting recommendation at the very end, and instead was devoted largely to criticizing the company’s decision to hold a virtual annual meeting. However, the Staff has informally indicated that companies should contact them if they believe the PX14A6G process is being abused, and the new interpretations hopefully indicate that the Staff will be more proactive in reviewing and possibly commenting on such filings.

“Passive” Investors: Causing a Rise in Activism?

We’ve blogged a few times about the misnomer of “passive” investors. But whatever we call them, the capital flow to these firms continues to increase. And this “Rivel Research” study indicates that these firms are exercising more & more influence – particularly when it comes to engagement on corporate governance & executive pay. Some active managers aren’t happy about that, because they think their passive counterparts make uninformed decisions that adversely impact stocks that the active funds are mandated to hold.

So what’s an active manager to do? Maybe they write a 17-page client letter to say they’re still better at picking stocks, as described in this WSJ article. Maybe they call them communists. Or maybe, they move away from simply picking stocks and into the potentially more lucrative field of campaigning for stock-enhancing changes – which could also minimize the impact of the passive engagement that they find problematic. This WSJ article credits passive investing with the hot activist environment and increasing involvement of first-time activists.

For tips on communicating with “passive” investors (and active investors that bifurcate the engagement & voting teams), check out this article from Ron Schneider of Donnelley Financial Solutions. He points out that they’re more likely to rely on the proxy statement than IR blasts – so there’s an increasing benefit in providing voluntary proxy disclosure on things like strategy & ESG issues. And as Broc has blogged – it’s best to do this in a thoroughly-bookmarked online document.

Our August Eminders is Posted!

We’ve posted the August issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

Liz Dunshee

July 31, 2018

SEC Announces Proxy Roundtable (Here We Go Again)

Yesterday, the SEC announced that it will hold a “proxy process” roundtable this fall. The date & agenda are TBD – but Chair Clayton is asking Corp Fin to reconsider the voting process, retail shareholder participation, shareholder proposals, proxy advisors, technology & universal proxy cards.

This isn’t the first time the SEC has tackled “proxy plumbing.” It issued its first concept release on this topic back in 2010 (see our “Proxy Plumbing” Practice Area). That effort didn’t result in much rule-making – maybe the SEC’s initiatives will be less controversial this time.

ISS Policy Survey: Auditor & Director Track Records, Gender Diversity & More

Yesterday, ISS opened its “Annual Policy Survey” – like last year, it consists of two parts:

1. Governance Principles Survey – 10 questions on high-profile topics. This year’s questions relate to auditor independence & quality, audit committee evaluations, impact of past & present director track records at other companies, board gender diversity and the “one-share, one-vote” principle. This part of the survey will close on August 24th.

2. Policy Application Survey – More expansive portion that can be accessed at the end of the initial survey, allowing respondents to drill down on key issues by region. This part of the survey closes September 21st. According to this Weil blog, the key issues for the Americas region include excessive non-executive director compensation, independent chair proposals, share ownership requirements for binding bylaw amendments and pay-for-performance metrics.

As always, this is the first step for ISS as it formulates its 2019 voting policies. In addition to the two-part survey, ISS will gather input via regionally-based, topic-specific roundtables & calls and a comment period on the final proposed changes to the policies.

Company Prevails Over Disputed Advance Notice Bylaw

A recent advance notice bylaw dispute is a reminder that there’s usually room for interpretation. Check out the intro from Ning Chiu’s blog:

HomeStreet received a 133-page notice the day before the advance notice deadline in its bylaws, alerting the company that Blue Lion intended to nominate two directors and submit two proposals – seeking annual elections and a binding resolution for an independent chairman.

Less than a week later, the company announced that the notice was deficient – attaching a five-page letter to a Form 8-K that it sent to the shareholder. The letter stated that the notice provided by the shareholder failed to meet several of the bylaw’s disclosure requirements, including providing information related to the holder of shares that would be disclosed in a proxy statement governing a solicitation as well as deficiencies in the D&O questionnaires returned by the shareholders’ nominees. Since the deadline had passed, declared the company, the company intended to disregard the nominations and the proposals for the meeting.

As you might guess – Blue Lion didn’t just accept this and walk away. In their view, the notice materially complied with the bylaw. They responded in a 34-page letter – and they took it to court. In this instance, the company prevailed.

According to this Sidley blog, since HomeStreet’s bylaw had been in place since the company’s IPO & was previously-disclosed, the court found that the company hadn’t taken any defensive measures. So, it rejected the argument that Delaware’s “enhanced scrutiny” test should apply. Broc recently blogged about a New York case with a different outcome…

Liz Dunshee

July 30, 2018

Eight Revenue Recognition Disclosure Trends

This Deloitte memo looks at disclosure trends under the new revenue recognition standard. Here’s eight key takeaways:

1. Many revenue disclosures were at least three times as long as the prior-year disclosures.

2. Over 85% of surveyed companies elected to adopt the new revenue standard by using the modified retrospective approach.

3. The new requirement to provide more comprehensive disclosures significantly affects financial statements regardless of the standard’s effect on recognition patterns.

4. Not everybody is adding a lot of disclosure. While some companies provided robust and thorough explanations, particularly on the nature of performance obligations and on the significant judgments and estimates involved, others didn’t.

5. Many companies chose to add a separate and specific revenue footnote that contains the required disclosures.

6. When providing disaggregated revenue disclosures, a majority of surveyed companies used two or fewer categories. The most commonly selected categories presented in tabular disclosure were (1) product lines and (2) geographical regions.

7. Most surveyed companies elected multiple “practical expedients” related to their ASC 606 disclosures, most commonly those related to remaining performance obligations.

8. We expect companies to continue to refine the information they disclose as (1) they review peer companies’ disclosures, (2) accounting standard setters clarify guidance, and (3) regulators continue to issue comments (see this recent blog from John about comment letter trends – also see this blog from Steve Quinlivan).

Elad Roisman Tapped as Next SEC Commissioner

This one slipped by us. Elad Roisman has been nominated as the person to replace Mike Piwowar as SEC Commissioner. And last week, the Senate Banking Committee held a confirmation hearing. Elad would be yet another former Senate Banking Committee Staffer to serve as a Commissioner (as John blogged recently, the confirmation process tends to go smoothly for these staffers before their colleagues).

This article notes that much of the hearing focused on enforcement priorities, given the huge year-over-year decline in actions & penalties.

More on “An Anti-ESG Campaign Begins”

A few months ago, I blogged about the “Main Street Investors Coalition” & its initiative to limit the ESG influence of large asset managers. This tone seems to play to Chair Clayton’s focus on retail investors. In recent testimony, he noted: “One area in particular I believe we should analyze is whether the voices of long-term retail investors are being underrepresented, misrepresented or selectively represented in corporate governance.”

But for a rebuttal to this Coalition, see this NYT DealBook article – and this blog from Nell Minow of ValueEdge Advisors. Here’s an excerpt:

The “Main Street Investors Coalition” completely overlooks the fact that institutional investors are fiduciaries representing everyday working people like teachers, firefighters, and employees of publicly traded companies. What the folksy-sounding, corporate-front Main Street Investors want to do is divide and conquer. They know they can no longer rely on the support of investors smart and focused enough to tell when corporate management has gone off the track and big enough to make their views meaningful.

So, they pretend to be concerned about some mythic, stock-picking investors who will read through the proxy statements and decide to vote for management’s recommendation. If MSIC really cared about the power of individual shareholders, and if in fact they controlled the single largest pool of equity capital in the world, it would help them to vote their proxies more effectively. It would help them provide oversight to the institutions who manage their money, perhaps circulating reports on the annual disclosures of how the funds vote. After all, index funds have the same fees and returns, but there are differences in how they vote their proxies. Then the investors could decide whether, for example, Vanguard’s votes on CEO pay were more appealing than Fidelity’s.

MSIC’s faux populism about the “real” investor being mom and pop and their little basket of stocks ignores the reality that most working people invest through intermediaries like mutual funds because they perform better. The whole idea of institutional investors is based on the reality that they do better than individuals who do not have the time, resources, or expertise. And it makes sense that the same people who make the buy, hold, and sell decisions should make the decisions about how to vote on proxies as well.

MSIC is not a membership organization. Its board does not include representatives of the groups that actually do work with small investors, like, for example, the American Association of Individual Investors, which has excellent educational materials for its members, or Motley Fool and FolioInvesting, which provide services for individual investors. Instead, MSIC has “partners” like the powerful corporate lobbying group the National Association of Manufacturers and the anti-public pension fund American Council for Capital Formation, which says on its website that its purpose is “exposing the politicization of corporate governance.”

Liz Dunshee

July 27, 2018

Sustainability: Will Delaware’s Certification Statute Move the Needle?

Last month, Delaware enacted legislation permitting businesses to signal their commitment to global sustainability by signing on to a voluntary certification regime. Here’s an excerpt from this Richards Layton memo summarizing the statute’s operation:

For an entity to seek certification as a “reporting entity” subject to the terms of the Act, the “governing body,” which is defined generally to mean the board of directors or equivalent governing body, must adopt resolutions creating “standards” (i.e., the principles, guidelines or standards adopted by the entity to assess and report the impact of its activities on society and the environment) and “assessment measures” (i.e., the means by which the entity measures its performance in meeting its standards).

The Act enables an entity to select its own standards, tailoring them to the specific needs of its industry or business. In designing its standards, the governing body may rely upon various sources, including third-party experts and advisors as well as input from investors, clients and customers. The Delaware Secretary of State does not evaluate or pass judgment on the substantive nature of an entity’s standards or assessment measures.

Entities that participate in the regime contemplated by the Act can obtain a certification of adoption of transparency and sustainability standards from the Delaware Secretary of State. Obtaining the certificate involves the creation of a standards statement (which includes the standards and assessment measures), the payment of relatively nominal fees to the Delaware Secretary of State, and the entity’s becoming and remaining a reporting entity. That an entity is a reporting entity allows it to disclose its participation in Delaware’s sustainability reporting regime.

Any entity that wishes to continue as a reporting entity must annually file a renewal statement. The renewal statement requires disclosure with respect to changes to the entity’s standards and assessment measures. The entity must also include in its renewal statement an acknowledgement that its most recent sustainability reports are publicly available on its website, and must provide a link to that site. If the entity fails to file a renewal statement (and thus becomes a non-reporting entity), it may have its status as a reporting entity restored through the filing of a restoration statement, which requires disclosure and acknowledgments similar to those in the renewal statement.

The statute does not give anyone a right to bring claims for an entity’s decision regarding whether or not to become a reporting entity – and there’s no penalty for a reporting entity’s failure to comply with its own standards.

Some people seem pretty excited about this new statute’s potential, but I’m skeptical. Maybe I’m too cynical, but since everything is voluntary & “do-it-yourself” and there’s no real liability exposure, the statute appears to be little more than a mechanism for virtue-signaling. You know what I mean – it’s sort of the corporate equivalent of buying a Subaru.

Universal Proxy: Rumors Say It’s “Face Down & Floating”

Earlier this month, Reuters reported that the SEC has shelved its proposal to implement a “universal proxy”. Despite Reuters’ report, there’s been no official word from the SEC indicating that the proposal has assumed room temperature. If it is gone, we’re kind of sad to see it go. It’s not that we’re pro or con – it’s just that universal proxy’s been such fertile “blog-fodder” for us here & on!

We’ve previously blogged about the potential impact on activism of an SEC decision to adopt – or not adopt – the proposal. We’ve also discussed Pershing Square’s unsuccessful efforts to persuade ADP to use a universal proxy card – and, more recently, SandRidge Energy’s decision to become the first company to use a universal proxy card in a proxy contest.

This recent blog from Cooley’s Cydney Posner provides some history on the universal proxy proposal. If the SEC’s proposal truly is on the shelf, it will be interesting to see if there’s a move toward more aggressive private ordering when it comes to the use of a universal ballot.

Cybersecurity: More Scrutiny from Boards than Regulators?

This Deloitte survey says that C-suite execs expect more scrutiny from their boards on cybersecurity programs this year than from regulators. Here’s an excerpt from a press release announcing the results:

As pressure to develop more effective corporate cybersecurity programs continues to mount, 63% of C-suite and other executives in a recent Deloitte poll expect board of director requests for reporting on cybersecurity program effectiveness to increase in the next 12 months. A slightly lower 57% percent of executives expect increased cybersecurity regulatory scrutiny during the same period.

One possible reason for executives’ expectations for increased board attention – the survey says that less than 17% of executives say they are highly confident in the effectiveness of their organization’s current cybersecurity program.

John Jenkins

July 26, 2018

Bad Actors: Boards Show Misbehaving CEOs the “Red Card”

This recent “exechange” report notes that roughly 10% of CEO departures during 2018 at the 1000 largest companies were related to conduct issues – and says that corporate boards are increasingly unwilling to tolerate bad behavior from CEOs.

The report reviews a number of recent high profile departures.  It points out that some departures were handled very differently than others – and suggests some reasons why.  Here’s an excerpt:

The fact that companies deal in various ways with their fallen CEOs may be related to the specific characteristics of their alleged misconduct. However, it may also highlight differences in corporate governance and raise questions about the independence of the board.

After allegedly or actually violating codes of conduct, CEOs were terminated or resigned “voluntarily.” In some cases, they left with a golden parachute, in others not. In a spectacular case, the board “reluctantly announced” that it had “accepted” the resignation of the CEO, chairman and main shareholder.

On the other hand, boards often take advantage of the opportunity to take the incident as a cautionary tale.

The report notes that in the past, if misbehaving CEOs were ousted, they were “rarely publicly shown the red card.”  Instead, those departures were typically characterized in a more neutral fashion. In contrast, one of the striking things about many of the disclosures described in the report is the degree of candor displayed concerning the executive’s alleged misconduct. The times, they are a changin’. . .

CEO Transitions: What Should You Say After You Say “You’re Fired”?

So when you kick your bad actor to the curb, what should you disclose? As this Washington Post article points out, the SEC leaves a lot of that up to you.  Here’s an excerpt:

How much detail must companies share when a CEO is asked to leave?

The answer: Not as much as you might think. Within four business days of making the decision, companies must issue a securities filing called an 8-K if a material corporate event occurs, and the departure of a chief executive certainly qualifies. It must include that the fact that the CEO is leaving, what kind of related agreements result from that departure (such as severance pay) and if the CEO is also a director — which a CEO almost always is — whether the departure is the result of a disagreement on “operations, policies or procedures.”

So that’s it, huh?  Not exactly – check out our “Checklist: Officer Departures- Procedures” for a more comprehensive breakdown of things you need to think about when you’re transitioning a senior exec.

Activism: When “Santa Claus” Attacks

Here’s something I recently blogged on If shareholder activism ever had an “everybody into the pool” moment, it probably came last month when Berkshire-Hathaway announced that it would withhold support from USG’s slate of directors at its upcoming annual meeting. Berkshire wasn’t happy about the USG board’s decision to stiff-arm a potential bid from Germany’s Knauf. Last week, USG’s board apparently got the message, and agreed to talks with Knauf.

Many have expressed surprise about Warren Buffett’s willingness to openly oppose the board of a company in which he’s invested. But despite his carefully cultivated public image as the genial “Sage of Omaha,” nobody becomes a billionaire without an iron fist somewhere inside that velvet glove. These 2010 comments from Buffett’s biographer, Alice Schroeder, probably ring true with USG’s board right about now:

“When he sees something he doesn’t like in a company whose shares he owns, the famously passive investor can swing into action to protect his investment—jawboning behind the scenes, scolding, cutting opportunistic deals, even hiring and firing CEOs. For some of those on the receiving end of his activism, it can feel a bit like being attacked by Santa Claus.”

Buffett’s actions are a reminder that at a time when longstanding passive investors are more frequently collaborating with activists to “shake things up” at the companies in which they invest, boards & management can take nothing for granted when it comes to investor support. As USG found out, even Santa Claus sometimes puts coal in your stocking.

John Jenkins

July 25, 2018

Debt Offerings: SEC Proposes to Simplify Guarantor & Pledgor Disclosures

Yesterday, the SEC proposed amendments to Rule 3-10 & Rule 3-16 of Regulation S-X, which address the financial information about subsidiary issuers, guarantors & affiliate pledgors required in registered debt offerings. Here’s the 213-page proposing release.

According to the SEC’s press release, the proposed changes are intended to “simplify and streamline the financial disclosure requirements” applicable to registered debt offerings for guarantors and issuers of guaranteed securities, as well as for affiliates whose securities collateralize a registrant’s securities. Highlights of the proposed amendments to Rule 3-10 include:

– replacing the condition that a subsidiary issuer or guarantor be 100% owned by the parent company with a condition that it be consolidated in the parent company’s consolidated financial statements;

– replacing the requirement to provide condensed consolidating financial information, as specified in existing Rule 3-10, with certain financial and non-financial disclosures;

– permitting the proposed disclosures to be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in the registration statement prior to the first sale of securities;

– requiring the proposed disclosures to be included in the footnotes to the parent’s financial statements beginning with the annual report for the first fiscal year during which sales of the debt securities were made.

In addition, the obligation to provide the required disclosures would terminate when the issuers and guarantors no longer had an Exchange Act reporting obligation with respect to the securities – instead of terminating only when the securities were no longer outstanding, as provided under current rules.

Proposed changes to Rule 3-16 include:

– replacing the requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with financial and non-financial disclosures about the affiliates & the collateral arrangement as a supplement to the consolidated financials for the entity issuing the collateralized security;

– permitting the proposed disclosures to be located in filings in the same manner as the proposed guarantor disclosures under Rule 3-10; and

– replacing the existing requirement to provide disclosure only when pledged securities meet a numerical threshold relative to the securities registered with a requirement to provide the proposed disclosures in all cases, unless they are immaterial to holders of the collateralized security.

By reducing the compliance burdens associated with existing financial statement requirements for these entities, the SEC hopes to encourage issuers to register debt offerings, & thus provide investors with greater protections than they receive in unregistered offerings.

The Weed Beat: Doing Business with Cannabis Companies

With the DOJ’s reversal of the Obama Administration’s policy that provided federal tolerance of any cannabis business conducted in compliance with state law, the risks of doing business with these companies have become a greater concern. This Perkins Coie memo provides an overview of those risks & some tips on how companies can protect themselves. Here’s an excerpt with some questions companies considering such a business relationship should ask themselves:

– To what extent will the cannabis-related activities occur in a jurisdiction where cannabis is legal? So long as key federal concerns, such as violent crime, are not in question, federal prosecutors are unlikely to seek charges against companies that are only indirectly involved in the cannabis industry in states that have legalized the substance.

Indeed, cannabis-related activities that are otherwise legal in such jurisdictions do not involve “victims,” and are unlikely to be viewed as “serious” by USDOJ. An important corollary to this consideration is that the company directly involved in the cannabis industry should fully comply with the drug laws of the states in which it operates. The due diligence factors listed below become even more significant if the cannabis-related activities will occur outside of a jurisdiction where cannabis is legal.

– What is the level of support and involvement that your company is contemplating with the company undertaking cannabis-related activities? Will your company merely invest in or provide passive support to the company that is directly involved in the cannabis industry, or will your company take a predominant role in managing the other company (e.g., through seats on the corporate board)? The more significant your company’s role will be in managing the cannabis-related activities, the greater the perceived culpability of your company for those activities in the eyes of a federal prosecutor.

The memo also points out that companies should be particularly wary of involvement in the financial aspects of the company involved in the cannabis business – there’s a risk that the feds might characterize that activity as money laundering.

July-August Issue: Deal Lawyers Print Newsletter

This July-August issue of the Deal Lawyers print newsletter was just posted – & also mailed – and includes articles on (try a “Half-Price for Rest of ‘18” no-risk trial):

– Finders & Unregistered Broker-Dealers
– Governance Perils Involved in Financing Transactions by Emerging Companies
– Impact of the European GDPR on M&A

Remember that – as a “thank you” to those that subscribe to both & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

John Jenkins

July 24, 2018

Audit Reports: Tenure Disclosure to Heighten AC Scrutiny of Auditors?

According to this “Compliance Week” article, the new audit report standard’s requirement to disclose auditor tenure in audit reports may result in audit committees devoting more attention to tenure-related issues. This excerpt explains why:

There are plenty of public companies that have engaged the same audit firm for decades, according to the latest study. The average tenure for the first 21 companies listed in the Dow 30 is 66 years, the study says. Analysis from Audit Analytics shows nearly 20 companies have had the same audit firm for 100 years or longer – and nearly 200 have had the same firm performing the audit for 50 years or longer. More than 850 companies have engaged the same firm for at least 20 years or longer.

That puts the onus on audit committees to determine whether the company is benefiting or not from a longstanding relationship with the firm. And the new disclosure puts it front and center before investors, which may serve to heighten pressure on audit committees, says Kevin Caulfield, managing director at Navigant Consulting. “Because it’s disclosed now, it’s a chance for audit committees to take that second look to think about are we still getting quality audits from this auditor,” he says.

The article goes on to note that while audit committees must be sensitive to the potential risks associated with long-tenured auditors, they should also consider the benefits associated with having an auditor that is well-acquainted with the company & its operations, systems & processes.

Risk Management: “It’s a Mad, Mad, Mad, Mad World”

Did you know there’s a theory that we’re all just living in a computer simulation – a video game – being played by some super-advanced alien intelligence? If so, then I think that some alien teenager grabbed the controller in 2016 & has been messing with us ever since.

I believe that I can even pinpoint the date that the kid grabbed the joystick: Sunday, June 19, 2016. That’s when Cleveland overcame a 3-1 Golden State lead to win the NBA Championship. That was followed by the Chicago Cubs winning the World Series (against the Indians, no less), and then the 2016 election. . .

It’s been a little more than 2 years, and it looks like the alien kid is still calling the shots (Nick Foles? The Washington Capitals?). Since that’s the case, corporate boards would be smart to take the advice in this EY memo and factor today’s volatile geopolitical environment into their risk management oversight efforts. Here’s an excerpt:

Rising geopolitical tensions and increasing electoral share for populist parties are a concern for businesses. With policy becoming harder to predict, many executives see policy uncertainty, geopolitical tensions, and changes in trade policy and protectionism as key risks to their business.

At the same time, business leaders are optimistic about the near-term US outlook – in part because of deregulation and the passage of US tax reform. In fact, the recent Borders vs. Barriers report from EY, Zurich Insurance and the Atlantic Council indicates that despite concerns about policies restricting their ability to transport goods and raise capital, global CFOs are overwhelmingly bullish on investing in the US – and 71% expect continued improvement in the US business environment in the next one to three years.

These dynamics underscore the need for companies to proactively address strategic opportunities and risks stemming from geopolitical and regulatory changes. For the board to provide effective oversight in this area, it is imperative that directors understand the geopolitical and regulatory landscape and how relevant developments are identified and evaluated within their strategy-setting process and Enterprise Risk Management (ERM) framework. Boards should also consider whether they have access to the right information and expertise to effectively oversee this space.

How to Deal With Leaks

This recent “Corporate Secretary” article by Iridium Partners’ CEO Oliver Schutzman reviews the leak of Saudi Aramco’s financial information to Bloomberg, and uses that as jumping off point for a general discussion on dealing with leaks. Here are some of the article’s “golden rules” for responding to a leak:

– Have a leak strategy in place. Regularly reviewed and updated, the strategy should sit alongside procedures for handling a crisis or operational disaster and should receive the same senior-level investment and attention.

– When a leak occurs, do not embark on a witch hunt to find the leaker. Instead, put all energy and efforts into executing the leak strategy.

– Don’t hide behind ‘no comment’ if there is truth to the leak. Acknowledge it and state the facts. This may be unpalatable and painful. It may involve criminality or unsavory behavior. If this is the case, confess errors and present the measures and consequences taken to ensure prevention going forward. Only by dealing with the substance of a leak can a company regain the initiative

Companies should act to address any shortcomings exposed, & then take back control of the narrative. All actions should be taken with complete transparency.

John Jenkins