Well folks, we are less than a month away from our September conferences, and that means I am going to be spending my week on the blog reminding you of why you need to sign up for this big event. Today I am going to focus on the “2023 Practical ESG Conference,” which takes place virtually on Tuesday, September 19, 2023.
The 2023 Practical ESG Conference will deliver usable, practical guidance on current ESG developments in a candid and conversational format. We have assembled an extraordinary group of speakers and you will not want to miss any of these sessions:
• ESG Hot Topics – Forewarned is Forearmed
• What your DEI Leader Wants You to Know
• Your Evolving Climate Disclosure: Data Perils & Protections
• Anti-ESG: Practical Steps to Navigate the Crosshairs
• The Great Debate: Does DEI Belong in HR, ESG, or Somewhere Else?
• Greenwashing 2.0: New Ways to Tackle Your Company’s ESG Embellishments
• ESG Oversight: How to Protect Your Board & Audit Committee From a Litany of Risks
I am particularly looking forward to joining a great group of panelists – Doug Parker from Ecolumix, Mark Trexler from The Climate Web and Kristina Wyatt from Persefoni – for the panel “Your Evolving Climate Disclosure: Data Perils & Protections.” This panel will provide an overview of top concerns on GHG data collection, validation and management and how you can reduce your reporting risk.
The “2023 Practical ESG Conference” can be conveniently bundled with the “Proxy Disclosure & 20th Annual Executive Compensation” Conferences. With all that is going on, this is definitely the year to participate in our Conferences – you do not want to miss all of the insights that our incredible group of speakers bring to the table. Sign up today!
Bloomberg recently reported that inflation has been a hot topic in SEC comment letters — particularly the depth and detail of the discussion of inflation in MD&A. That shouldn’t come as a surprise — for one, it had been a long while since we’ve really had to flex our MD&A disclosure muscles when it comes to inflation. But also, just before inflation became a problem for the first time in a long time in the US, the SEC amended Item 303 of Regulation S-K to remove the express requirement to address the impact of inflation on the basis that other MD&A requirements would require a discussion of material inflationary impacts (for example, as a known trend or uncertainty or to explain material changes in line items from period to period). The 2020 Proposing Release for the MD&A amendments stated that a specific reference to inflation and changing prices “may give undue attention to the topic.” But here we are in an environment where attention is deserved.
Cooley’s Cydney Posner pulled recent comment letters on the topic and, in this post, shared additional color & sample comments:
In regular comments on SEC filings to a diverse mix of companies, Corp Fin has asked companies to discuss in more detail the impact of inflationary pressures, including at times, with quantification. From a quick EDGAR search, I found, for example, a comment from Corp Fin related to a risk factor that discussed inflation, asking the company to “update this risk factor in future filings if recent inflationary pressures have materially impacted your operations. In this regard, identify the types of inflationary pressures you are facing and how your business has been affected.”
In another case, where a company disclosed that its costs of necessary commodities, labor, energy and other inputs had significantly increased and were expected to continue to affect the business, the staff asked for more detail, requesting that the company revise its disclosure to quantify the impact of inflation, including providing year-over-year comparisons of the impact, and provide more detail regarding the company’s efforts to offset cost pressures through price increases, including the success of those efforts. In another instance, commenting on MD&A disclosure that inflation had negatively affected results of operations as a consequence of increased cost of sales and operating expenses, Corp Fin asked the company to “quantify and disclose the impact of the inflationary pressures you are experiencing on cost of sales, gross margins and operating expenses,” quantifying increases in transportation and fuel costs, materials, commodities and packaging costs, as well as production inefficiencies and geographical sales mix.
Another comment asked a different company to expand on how the impact of higher rates of regional inflation and raw material supply in certain regions affected the company’s operations, potentially affecting its operating segment analysis. In yet another example, the staff observed that when the financials reflect material changes from period-to-period in one or more line items, or where material changes within a line item offset one another, the company is still required to describe the underlying reasons in quantitative and qualitative terms. The staff then asked the company to “quantify the impact of each factor or component associated with material changes, including the impact of inflation associated with any material changes.”
Inflation was already a trending comment letter topic in 2022 when it was at its peak, but comments seemed to focus more on risk factors and, in particular, the ever-important-to-avoid hypothetical risk factor trap. Cydney notes that these comments — now MD&A focused — are still coming, even as inflation slows.
John recently blogged that emojis can create binding contracts and advised us to think long and hard before clicking “send” on that email or text with a cute little emoji. In fact, you may want to cut out emojis completely — at least in your professional life — especially if you’re a public figure. This Bryan Cave blog discusses a recent U.S. District Court decision rejecting a motion to dismiss a claim that a large investor in Bed Bath & Beyond, well-known to the meme-stock world, used a tweet with an emoji to orchestrate a pump and dump scheme.
On August 12, 2022, CNBC tweeted a negative story about the company, accompanied by a picture of a woman pushing a shopping cart at a Bed Bath store. In response, Cohen tweeted a reply: “At least her cart is full” with what was described as a “smiley moon emoji.” The court stated: “Some online communities understand the smiley moon emoji to mean ‘to the moon’ or ‘take it to the moon.’ . . . In other words, according to Plaintiff, Cohen was telling his hundreds of thousands of followers that Bed Bath’s stock was going up and that they should buy or hold.”
He then filed a close-in-time, but potentially unrelated, amendment to his Schedule 13D which indicated that it “was triggered solely due to a change in the number of outstanding Shares of the Issuer” and made no mention of any plans to sell. Two days later, he filed another amendment reporting the sale of all of his Bed Bath shares.
With respect to the emoji, the blog summarizes the court’s conclusions as follows:
– Although an emoji may be ambiguous, its meaning can be clarified “by the context in which [it] is used.”
– “Emojis may be actionable if they communicate an idea that would otherwise be actionable.”
– The plaintiff “plausibly alleged that the moon tweet relayed that Cohen was telling his hundreds of thousands of followers that Bed Bath’s stock was going up and that they should buy or hold. In the meme stock ‘subculture,’ moon emojis are associated with the phrase ‘to the moon,’ which investors use to indicate ‘that a stock will rise.’ So meme stock investors conceivably understood Cohen’s tweet to mean that Cohen was confident in Bed Bath and that he was encouraging them to act” [citations omitted].
– The tweet is actionable because “plausibly material,” rather than “mere puffery,” as evidenced by investors’ reliance in driving up the stock price. Further, “[i]nvestors may have reasonably seen Cohen as an insider sympathetic to the little guy’s cause,” by interacting with followers on Twitter, his large stake and public interactions with the company.
It’s worth noting that the plaintiffs claimed that the first 13D amendment and related Form 144 were also misleading. In response to the 13D claim, the defense pointed out that Section 13(d) has no private right of action for damages. To this the court replied, “No matter. Even if that is right, it does not follow that 10(b) claims may not be based on misleading 13D filings. Those are two separate questions.”
Here’s something that John blogged last week on DealLawyers.com:
The Activist Investor’s Michael Levin flagged a recent Institutional Investor article that claims that activist hedge funds look at the diversity of a board when identifying potential targets for their campaigns. Here’s an excerpt:
Activist hedge funds are paying attention to board diversity — and are using that information to decide on their next targets. New research shows that activist investors are more likely to succeed when boards are less united and slower to act — two characteristics that are common among diverse boards, where members come from different backgrounds and tend to bring different perspectives. The study found that hedge funds exploit differences of opinion among board members, as well as their more deliberate decision-making processes, to sway shareholder votes in their favor.
The article quotes one of the study’s authors as saying that although diversity provides many benefits, diverse boards take longer to come to a consensus than boards comprised of members of the “old boys network.” Boards and their advisors should keep this vulnerability in mind when evaluating their potential to be targeted by activist hedge funds and in their activism preparedness efforts.
On a related note, make sure to mark your calendar for our upcoming joint webcast with PracticalESG.com “Corporate DEI Programs After Students for Fair Admissions v. Harvard” on Thursday, August 31, 2023, at 2 pm Eastern. J.T. Ho, Co-head of Public Companies & ESG practice at Orrick, Ngozi Okeh, DEI Editor at PracticalESG.com, and Travis Sumter, Labor & Employment Attorney at NextRoll, will discuss the increasingly complex surroundings in which corporate DEI programs operate. If you’re not already a member with access to this webcast, sign up online for a no-risk trial or email sales@ccrcorp.com.
In mid-July, I blogged about the SDNY’s long-awaited order in SEC v. Ripple Labs, (SDNY 7/23), suggesting that the decision may not be the massive victory for crypto that some were calling it and lamenting that the Ripple decision was just one development in the crypto saga — certainly not bringing the regulatory clarity some had hoped. The latest crypto decision, also from the SDNY — SEC v. Terraform Labs, (SDNY 8/23) — supports these points. This Mayer Brown alert describes the decision:
Judge Jed Rakoff ruled this week in favor of the SEC on a motion to dismiss, finding the SEC’s amended complaint adequately pled that the crypto assets sold by Terraform Labs and its founder and Chief Executive Officer Do Keyong Kwon qualify as “investment contracts” under the Howey precedent. While this decision represents only a preliminary review of the issues and accepts the SEC’s allegations as true (for purposes of the motion), it provides useful commentary as well as some counterpoints to the Ripple analysis […]
Judge Rakoff appeared to agree with Judge Torres that digital assets do not constitute securities unless their offering, sale or use were tied to an economic benefit being conveyed upon the purchaser. However, Judge Rakoff also stated that a crypto asset that is not a security at one point in time may, as its circumstances and those of its related protocol(s) change, become an investment contract—i.e., a security—that is subject to SEC regulation.
The part of the decision certain to attract the most attention is Judge Rakoff’s explicit rejection of the approach used by Judge Torres in the recent Ripple ruling, which drew a distinction between digital assets based on the manner in which they were sold (primary issuance to institutional investors vs. secondary transactions involving retail investors). In doing so, Judge Rakoff stated that the Howey precedent does not differentiate among purchasers, because the manner in which digital assets are purchased would not change a purchaser’s reasonable belief in the promise of future profits. In the Terraform case, the SEC alleged that the defendants actively encouraged both retail and institutional investors to buy crypto assets while touting their ability to maximize returns on investors’ tokens.
Recent decisions appear to agree that:
– tokens, themselves, are not securities;
– some token sales are securities offerings, particularly those made directly from the issuer to a purchaser.
Recent decisions appear to disagree on whether or in what circumstances token sales are securities transactions in a secondary market;
The SEC sought leave to appeal the Ripple case, which may provide more substantial guidance next year.
Consider this for upcoming board and committee discussions — especially since cybersecurity disclosures are already bound to be on your agenda. Last week, the Department of Homeland Security announced the release of a report summarizing findings by the Cyber Safety Review Board regarding certain cyber incidents in 2021 and 2022 involving a particular threat actor group that impacted dozens of well-resourced organizations. The CSRB engaged nearly 40 organizations and individuals to discuss these incidents, including threat intelligence firms, incident response firms, targeted organizations, law enforcement, individual researchers and subject matter experts.
This post on the Jackson Lewis Workplace Privacy, Data Management & Security Report blog summarizes key highlights, specifically:
– The multi-factor authentication (MFA) widely used today is insufficient; one-time passcodes and push notifications sent via SMS can be intercepted, making application or token-based MFA methods preferred
– Employees can be compromised with monetary incentives and have handed over access credentials, approved upstream MFA requests, conducted SIM swaps, and otherwise assisted attackers in gaining access to an organization’s systems
– Threat actors also leverage third-party service providers to target downstream customers through secure file transfer services
Yikes! Some of these findings were surprising (to me) and — at least for some companies — may be worthy of board time and attention, including a discussion about how management is addressing these risks. To that end, here’s a further excerpt from the blog:
The Board outlines several recommendations, some are more likely to be within an organization’s power to mitigate risk than others. The recommendations fall into four main categories
– strengthening identity and access management (IAM); – mitigating telecommunications and reseller vulnerabilities; – building resiliency across multi-party systems with a focus on business process outsourcers (BPOs); and
– addressing law enforcement challenges and juvenile cybercrime.
As noted above, one of the strongest suggestions for enhancing IAM is moving away from passwords. The Board encourages increased use of Fast IDentity Online (FIDO)2-compliant, hardware backed solutions. In short, FIDO authentication would permit users to sign in with passkeys, usually a biometric or security key. Of course, biometrics raise other compliance risks, but the Board observes this technology avoids the vulnerability and suboptimal practices that have developed around passwords.
Another recommendation is to develop and test cyber incident response plans. As we have discussed on this blog several times (e.g., here and here), no system of safeguards is perfect. So, as an organization works to prevent an attack, it also must plan to respond should one be successful.
I also want to note that the title of this blog isn’t just clickbait. The opening message of the report references the 1983 movie WarGames and identifies parallels with modern-day real life, including that “teenagers are compromising well-defended organizations using a creative application of many techniques.”
Over on The Advisors’ Blog on CompensationStandards.com, I recently blogged about a settlement agreement in a compensation-related derivative suit that really is one for the books. The litigation challenged the reasonableness of Tesla’s director compensation, and the settlement includes the clawback & forfeiture of compensation valued at $735 million. The blog post describes the mechanics of the clawback terms and discusses what this means for the director defendants.
In a follow-up blog, Liz gave more detail on the “corporate governance reforms” also contemplated by the settlement, including a “director say-on-pay” vote, which — although not a widespread practice — Liz explains, isn’t necessarily a new thing.
We often compare the Staff’s approach to non-GAAP financial measures to a swinging pendulum — over the years there have been times when the Staff is more accommodating to companies when they present non-GAAP financial measures in their SEC filings and other communications, but then there are times when the Staff expresses significant concern with the presentation of non-GAAP financial measures through the comment process, enforcement actions and Staff guidance. Today, the pendulum has definitely swung toward the latter end of that spectrum, with a fresh round of more rigid interpretive updates and a new enforcement action being brought against a company for misleading non-GAAP financial measures and inadequate disclosure controls.
Our panelists also shared what the Staff hopes companies will do following new or updated guidance — that is, read it and take a fresh look at their disclosures to make any necessary tweaks. With that in mind, the Staff may provide a window for companies to self-correct following new guidance and then issue comment letters with clean-up comments. Since we’re over six months from the December 2022 CDI updates, this MyLogIQ survey of non-GAAP comment letters from January 2022 to May 2023 caught my eye. The survey focused on topics that were both frequently the subject of a comment letter and addressed in the CDI updates and found that:
– Equal or greater prominence was the top non-GAAP issue triggering a comment letter
– The top three comment letter issues were all addressed in the December 2022 CDI updates — the next two being recurring expenses and individually tailored measures
The survey also provides examples of comments on each topic addressed in the updated CDIs. In multiple sample questions on recurring expenses, the SEC took issue with “pre-opening costs.” Here’s one of the sample comments:
We note the following in regards to your presentation and reconciliation of your Non-GAAP measures adjusted EBITDA and adjusted net income:Your reconciliation excludes “Pre-opening costs” which appears to be a normal, recurring cash operating expense. Please tell us your consideration of Question 100.01 of the staff’s Compliance and Disclosure Interpretation on Non-GAAP Financial Measures, or revise accordingly.
Liz got me thinking about earnings calls with her blog last week on how the Corp Fin Staff uses earnings call transcripts in the disclosure review process. This recent Q4 blog recommends earnings call post-mortems and preparations for the subsequent quarter. With so much attention focused on earnings calls — not just from investors but from regulators — it may make sense to integrate some of these steps into your quarterly process, and they’re a “must” for executives who are new participants on earnings calls:
Following an earnings call, you must assess the performance of your senior leadership team. To do this, review the webcast or call recording, identifying any challenging questions or topics. Encourage each team member to share their thoughts on their performance and areas for improvement. Gathering their valuable insights. You can pinpoint where the team can grow and enhance its effectiveness.
To prepare your team for future earnings events, develop a plan focusing on their needs. This plan may include additional training sessions to address knowledge gaps, Q&A exercises to build confidence, or providing more detailed briefing materials. Additionally, consider seeking support from investor relations consultants or communications experts who can help fine-tune your team’s messaging and presentation skills.
You’ll cultivate a strong and confident group of leaders by consistently evaluating your senior leadership team’s preparedness and taking steps to improve their performance. With this foundation, your team will be well-equipped to tackle the demands and challenges of post earnings events, approaching them with poise and expertise that will impress shareholders and analysts alike.
Liz’s blog also mentioned showing your “value-add” in the earnings release process. If you’re outside counsel, you can still take the opportunity post-earnings to improve your value-add in future quarters by listening to the Q&A and brushing up on how the company, analysts and investors view the company’s business and financial results. And better yet, referring back to the transcript when reviewing the next quarter’s 10-Q, earnings release and call script can help you identify themes and the types of inconsistencies the SEC is looking out for.
The latest issue of The Corporate Executive has been sent to the printer. It’s also available online to members of TheCorporateCounsel.net who subscribe to the electronic format – a now very popular and convenient option. Email sales@ccrcorp.com to subscribe to this essential resource! This issue includes:
– NYSE and Nasdaq Finalize Clawback Listing Requirements
– Our Model Clawback Policy
– The DOJ Focuses on Clawbacks
Speaking of clawbacks, don’t forget that we will also have a panel devoted to this topic at our rapidly approaching “Proxy Disclosure & 20th Annual Executive Compensation Conferences” – which will be held virtually September 20th to 22nd. Here’s the full agenda. If you haven’t already registered, sign up today on our membership center or by emailing sales@ccrcorp.com – or by calling 1-800-737-1271.
The practical & insightful guidance that you’ll get at the Conferences will be key to helping you put the finishing touches on your policy, consider implementation mechanics, and prepare for all the issues that proxy season and SEC rulemaking are going to throw our way. What’s more, Conference attendees will have continued access to the video archives & transcripts for a year following the event – so you can continue to refer back to this essential guidance as you navigate year-end and proxy season. CLE credit is also available for the live event as well as the on-demand replays!
