For some reason, I’ve got a real weakness for articles about best practices for keeping board minutes – which is kind of strange because of all the routine tasks I did as a corporate lawyer, this was the one I disliked most. Anyway, whatever bizarre neurosis may be the cause, I’m always very interested in pieces like this recent Skadden memo, which has plenty of good advice about board minutes.
Writing minutes is drudgery, but it’s important to get them right – and doing that often requires a lot of judgment calls. One area that requires judgment is how to handle legal advice provided to the board at a meeting. You want the minutes to reflect that the board sought and received legal advice at the meeting, but you also don’t want to do anything to inadvertently waive privilege in the event that you have to produce the minutes through a books and records request or otherwise. This excerpt from Skadden’s memo highlights a potential pitfall that may arise by the way a lawyer’s advice to the board is characterized in the minutes:
It is important to ensure that the fact that legal advice was given to the board is reflected in the minutes at least at a high level, but boards need to guard against waiving the attorney-client privilege. Although privileged information is typically redacted when minutes are produced to plaintiff stockholders, legal advice may at some point become an issue in litigation if the board asserts that it relied on that advice.
To protect privileged information from disclosure, minutes reflecting legal advice should be characterized as an outside attorney or in-house counsel “providing legal advice” about a matter as opposed to “advising the board” to take a certain action, because advice from a lawyer that is not legal in substance — say, advice on business strategy — potentially may not be protected by the privilege.
The memo’s point about the possibility that legal advice may at some point become an issue in litigation is an important one to keep in mind. That means that when thinking about privilege, you need to think about not only how to protect privilege in board minutes, but also how best to use the minutes to help manage a decision to waive privilege as part of a litigation strategy.
Why might a company do that? Well, one reason is that Delaware courts have made it clear that the advice directors receive from lawyers and other professionals is often central to determining the reasonableness of the board’s actions, and an unwillingness to share the substance of that advice can have significant negative consequences, including a prohibition on asserting the content of the legal advice that the board was provided in the defense of the plaintiffs’ claims. See, e.g., Chesapeake v. Shore (Del. 2/00).
In light of this position, some practitioners suggest referencing the fact that legal advice was given in the minutes, but also providing a summary of the advice in separate privileged minutes. Writing that summary presents challenges of its own, but in appropriate circumstances, that approach may both help avoid inadvertent production and enable the board to provided contemporaneous evidence of the advice provided by counsel if the company determines to waive the privilege.
ESG ratings have become an indispensable element of investing and greatly influence how companies manage and market themselves. A myriad of issues exist when relying on and using ESG ratings from a corporate perspective. Tune in to today’s PracticalESG.com webcast, “Improving Your ESG Score” at 10:00 am eastern – to hear from:
Tamara Close, Founder and Managing Partner, Close Group Consulting
Jeremy Davis, Executive Director, ESG & Climate Client Coverage, MSCI
Marie-Josée Privyk, Chief ESG Innovation Officer, Novisto
Huub Savelkouls, Founder and Owner, Scope3Plus Consulting
We’ll be discussing the fundamentals of ESG scores & ratings, exploring ways to improve corporate ratings and considering why you may not want to emphasize ESG ratings improvement at a management level.
If you’re not already a PracticalESG.com member, sign up today to get access to the on-demand replay and transcript from this program, along with access to practical checklists and more, to help you with your corporate ESG program and related disclosures and communications. Sign up on our membership portal or email sales@ccrcorp.com.
I know that Liz was incredibly grateful for the outpouring of good wishes that she received when she blogged about her career transition. You folks were wonderful – and she deserved every bit of the praise you gave her. I told her that if she felt like Sally Field at the Oscars after reading your emails, that’s because she should. I’ve definitely got some very big shoes to fill.
As I read through the messages that Liz shared with us, I got the impression that a lot of people thought that Liz wasn’t going to be around much anymore. That’s decidedly NOT the case. Liz will continue in the blogging rotation, she’ll help organize and moderate some webcasts, and she’ll also be involved in helping me with our Proxy Disclosure and Executive Compensation Conference. So, from our members’ perspective, I don’t think a lot is going to change in terms of Liz’s role here – and we’re as happy about that as you are.
Liz did seem particularly anxious to ensure that she was involved in planning for next year’s Conference, although for the life of me, I don’t know why. You may not know this because I’m not one to brag, but I was the mastermind behind the1997 Cleveland Securities Law Institute. As I’m sure you know, that epic event has been described as “The Woodstock of flyover state bar association sponsored securities law conferences held in markets too small to get anybody from the SEC to speak.” People still talk about the set of coasters emblazoned with the Cleveland Bar Association’s logo that we gave away as speaker’s gifts. Ah, glory days. . .
I’m also more than a little relieved that Liz will continue to be a part of the team, because frankly, the transition has been a little rocky. First, management shot down what I viewed as an entirely reasonable request to change the title of my new position from “Managing Editor” to “Emperor of the Editors.” Then, I proposed a couple of much needed reforms to improve the discipline and esprit de corps of the editorial team. Nothing major – just a daily 6:00 am Zoom meeting for calisthenics and a mandatory dress code for working from home. Regrettably, these reform proposals have not been well received.
Liz did caution me about not making drastic changes, but gee whiz, I didn’t consider any of this stuff to be drastic, and I admit that I was kind of bummed out by the reaction to my administration’s reforms. But then this morning I thought of something that I can do to celebrate my newly elevated station in life without needing management’s approval or buy-in from my editorial colleagues. When I was in college, one of my history profs shared an anecdote about Bavaria’s legendary “Mad King Ludwig.” Apparently, in one of his less lucid moments, Ludwig forgot that he was the king. When his advisors informed him that he was, his response was something like “I am King? Very well, then I shall have noodles for lunch.”
So now, if you’ll excuse me, I’ve got a package of ramen to boil.
According to a recent PCAOB Staff Report, public company auditors didn’t have a great year in 2021. The report says that, according to preliminary inspection data, the number of audits with deficiencies is expected to increase. Here’s an excerpt with some details:
We observed an increase in the percentage of engagements reviewed with at least one “comment form” (the initial communication to audit firms of observed deficiencies from our inspections, which generally result in Part I.A or Part I.B inspection observations). We expect approximately 33% of the audits we reviewed will have one or more deficiencies that will be discussed in Part I.A of the individual audit firm’s inspection reports, up from 29% in 2020.
In addition, we expect that approximately 40% of the audits we reviewed will have one or more deficiencies discussed in Part I.B of the individual firm’s inspection reports, up from 26% in 2020. Some audits have both Part I.A and Part I.B deficiencies, such that we expect that approximately 55% of the engagements we reviewed will have one or more Part I.A and/or Part I.B deficiencies, compared to 44% in 2020.
A lot of these problems aren’t minor foot-faults. If an issue makes its way into Part I.A. of an inspection report, it means that the PCAOB’s Staff concluded that the deficiencies were significant enough that the auditor, at the time it issued its report, did not have sufficient appropriate evidence to support its opinion on the company’s financials or ICFR. Deficiencies identified in Part 1.B. of the report are less significant and include the Staff’s observations concerning instances of noncompliance with PCAOB standards or rules that don’t relate directly to the sufficiency of the evidence supporting the auditor’s opinion.
The report provides specific data on audit areas where deficiencies were found as well as trend data concerning recurring deficiencies for 2019 through 2021. It also discusses common areas where deficiencies were found in 2021 inspections and highlights “good practices” that the Staff observed relating to ICFR, accounting estimates related to business combinations, critical audit matters, auditor independence, supervision of audits and engagement quality review.
In our recent podcast, Hunton Andrews Kurth’s Steve Haas discussed bylaw changes that companies should consider in response to the implementation of the universal proxy rules. One possible change he suggested was including language in the bylaws reserving the use of the white proxy card to the board.
White is the color that’s traditionally been used by management in proxy contests, and with all parties jockeying for leverage in the new environment, it certainly seemed plausible that dissidents might try to grab the white card to increase the likelihood that investors would return their version of the universal proxy card. Over the past couple of months, many companies, including heavyweights like Exxon Mobil and Alphabet, have staked their claim via a bylaw amendment. Here’s the relevant language from Alphabet’s bylaws:
2.12 PROXIES.
Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A stockholder may authorize another person or persons to act for him, her or it as proxy in the manner(s) provided under Section 212(c) of the DGCL or as otherwise provided under Delaware law. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212 of the DGCL.
Any stockholder directly or indirectly soliciting proxies from other stockholders must use a proxy card color other than white, which shall be reserved for the exclusive use by the Board.
Anyway, it turns out that the concerns about dissidents beating companies to the punch and claiming the white card for their own that have prompted these amendments aren’t just hypothetical. On Twitter, Andrew Droste pointed out that activist hedge fund Blackwells Capital has launched a proxy contest at Global Net Lease – and grabbed the white card before the company did. So, if any of you have clients that considering the possibility of this kind of amendment, you might want to share Andrew’s tweet with them & suggest that there’s no time like the present.
Gibson Dunn’s Ron Mueller points out that Engine No. 1 snagged the white card in its battle with Exxon Mobil, and that’s what first put this issue on the radar screen for public companies (and likely prompted Exxon Mobil’s bylaw amendment).
The Corp Fin Staff posted a new sample comment letter addressing recent developments in the crypto markets. As is typical in these sample letters, the Staff describes why it is providing the guidance in the form of the sample letter, and then includes a series of sample comments, presumably drawn from experience with actual filing reviews. The sample comment letter notes:
Recent bankruptcies and financial distress among crypto asset market participants have caused widespread disruption in those markets. Companies may have disclosure obligations under the federal securities laws related to the direct or indirect impact that these events and collateral events have had or may have on their business. The Division of Corporation Finance believes that companies should evaluate their disclosures with a view towards providing investors with specific, tailored disclosure about market events and conditions, the company’s situation in relation to those events and conditions, and the potential impact on investors. Companies with ongoing reporting obligations should consider whether their existing disclosures should be updated.
The sample comments focus on a company’s business description, MD&A and risk factors and address a number of topics, including:
– The exposure companies have to crypto markets;
– The impact of recent bankruptcies in the crypto space;
– The steps companies have taken to safeguard crypto assets;
– The use of crypto assets as collateral;
– Recent experience with redemptions and withdrawals; and
– Material risks, including risks arising from excessive redemptions and withdrawals (or suspension of such activity), reputational risks, jurisdictional issues, regulatory developments, safeguarding of assets concerns, risk management issues, access to capital and liquidity issues, and market disruption risks.
– Tackling Your Pay Vs. Performance Disclosures: Navigating Interpretive Issues
– Tackling Your Pay vs. Performance Disclosures: Big Picture Impact
– Tackling Your Pay vs. Performance Disclosures: Key Learnings From Our Sample Disclosures (which includes as “course materials” model disclosures that I prepared for the program)
Note that we will continue to be covering the pay versus performance journey over the coming months, including ongoing coverage of Staff interpretations, disclosure trends and investor reactions. For example, on January 19, 2023 at 2:00 pm Eastern, I will be joined by Mark Borges, Ron Mueller and Alan Dye for a 90-minute webcast, “The Latest: Your Upcoming Proxy Disclosures.” We will share the very latest thinking on pay versus performance disclosures and other important items for the 2023 proxy season.
I have been discussing the new pay versus performance disclosure requirement with management teams and boards of directors over the past few months, and the most frequently asked question is: “What will investors do with this new information?” It is a logical question to ask, because whenever one is drafting new disclosure, it is always important to think about how investors will use that information and what consequences the disclosure might ultimately have for the company.
Unfortunately, when I am asked this question, there is really no good answer at this point. During our 3-part “Special Session: Tackling Your Pay Vs. Performance Disclosures” last month, I was joined by Jun Frank, Executive Director, ISS Corporate Solutions and Rob Main, Managing Partner and COO, Sustainable Governance Partners to talk about how the new pay versus performance disclosure will be perceived by investors and the proxy advisory firms and how they might ultimately use it in their analysis. On this point, Jun Frank noted:
In terms of what is most important, probably many investors will take a “wait and see” approach to see how this disclosure will play out and what companies say about this disclosure, and then start formulating opinions about how to utilize this information. I believe data is important, but in the first year, I expect there’s going to be more focus on the narrative portion of it — how does this tie into your pay versus performance, say-on-pay, CD&A? Does it tell a coherent story and narrative? That qualitative, storytelling aspect of it is going to get no more attention than the data aspect, at least at the outset.
From Rob Main’s perspective, given the uncertainty about how the disclosure will be utilized by investors, it is advisable to engage with investors now on the topic:
From what I’ve understood, very few investors, if any, and proxy advisers, not at all, are going to be incorporating this information into their 2023 analysis. That’s for a variety of reasons. Timing is a big piece of it. Yet, there is still an opportunity in fall engagements for companies to inquire with investors specifically on how they are thinking about this new disclosure.
As far as my views, I noted that consistency of your message is the key when approaching pay versus performance disclosure in the upcoming proxy season:
I’m not in a position to influence what investors or proxy advisers do by any means, but my initial guess is that, at least for the first year or first couple of years, it’s not something that’s going to supplant what people already are doing in the Compensation Discussion & Analysis and in their proxy statement for the benefit of the investors and proxy advisers. It’s something where you can just hurt yourself with this disclosure if it is inconsistent with that broader message and not aligned with the story you’re trying to tell in the other context, and then it just goes to your integrity and whether what you’ve been saying all along is true.
Be sure to check out the rest of the transcript for this session. If you registered for this Special Session, follow the “Access the Session Archives” link to find the videos and transcripts for each of the three panels.
The SEC announced that it will hold an open meeting next Wednesday to consider various matters, and one of the agenda items is to consider adoption of the amendments to Rule 10b5-1 and related disclosure changes proposed back in December 2021.
The SEC proposed to modify the conditions for the use of Rule 10b5-1 plans to include: (i) imposing a cooling-off period before trading could commence under a trading plan; (ii) prohibiting overlapping trading plans; and (iii) limiting single-trade plans to one trading plan per 12-month period. The SEC also proposed to require disclosure of policies and procedures related to insider trading and company practices around the timing of option grants and the release of material nonpublic information. Under the proposal, insiders would be required to disclose the use of Rule 10b5-1 plans in Forms 4 and 5. The SEC also proposed to require that bona fide gifts of securities, which are currently permitted to be reported by insiders on a delayed basis using Form 5, must be reported more quickly on Form 4.
Yesterday, the SEC announced that it is reopening the comment period (again) for its share repurchase disclosure rulemaking, which was proposed back in December 2021 at the same time that the Rule 10b5-1 changes were proposed. Under proposed amendments, the SEC would: (i) require daily repurchase disclosure on a new Form SR, which would be furnished to the SEC one business day after execution of a company’s share repurchase order; (ii) amend Item 703 of Regulation S-K to require additional detail regarding the structure of a company’s repurchase program and its share repurchases; and (iii) require information disclosed pursuant to Item 703 of Regulation S-K and pursuant to Form SR to be reported using Inline XBRL. The SEC’s announcement of the reopening notes:
The Commission is reopening the comment period because, after the proposed amendments were published for public comment, The Inflation Reduction Act of 2022 was enacted. The law imposes upon certain corporations a non-deductible excise tax equal to one percent of the fair market value of any stock of the corporation repurchased by such corporation during the taxable year. As a result, the Commission staff has prepared a memorandum that discusses potential economic effects of the new excise tax that may be helpful in evaluating the proposed amendments.
The DERA memorandum referenced in the reopening release is posted on the SEC’s website. The public comment period will remain open for 30 days after publication of the reopening release in the Federal Register. The reopening was met with criticism from Commissioner Uyeda, who issued a statement noting that the 30-day comment period “commences shortly before, and will overlap with, major holidays later this month” and recommending that a 45-day comment period would be preferable to receive more thoughtful responses.
