Last week, FASB announced that it issued a proposed Accounting Standards Update that would extend the period of time preparers can utilize the reference rate reform relief guidance and expand the Secured Overnight Financing Rate (SOFR)-based interest rates available as benchmark interest rates. Comments on the proposed ASU are requested by June 6, 2022.
The amendments in the proposed ASU would defer the sunset date from December 31, 2022, to December 31, 2024, reflecting the fact that in 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023. Further, based on the developments of a term-based version of the SOFR rate (SOFR term) in the marketplace, the proposed ASU would amend the definition of the SOFR Swap Rate to include other versions of SOFR, such as SOFR term, as a benchmark interest rate under ASU Topic 815, which deals with derivatives and hedging.
In the latest Deep Dive with Dave podcast, John and I talk about the topics we cover in the March-April 2022 issue of The Corporate Counsel. We discuss the SEC’s climate change, cybersecurity and beneficial ownership reporting rule proposals. Thanks for listening to the Deep Dive with Dave podcast!
I would be the first to admit that I usually say that it does not make much sense to begin preparing for compliance with new SEC rules when they are still in the proposal phase. Proposed rules are subject to change based on the comments that the SEC receives during the rulemaking process, and in many cases the SEC provides fairly generous compliance periods that give companies time to prepare for the new requirements.
With the SEC’s climate change disclosure proposals, I think it is a whole different ballgame. In an article that I recently published in Corporate Secretary, I describe the steps that companies should consider taking now to address the likely outcome of this rulemaking effort. The article notes:
It usually does not make sense to dedicate resources toward compliance when SEC rules are still at the proposal phase, but these proposed changes are quite different. Their scope and complexity may make them costly for companies if adopted. Even with generous transition provisions, companies may still not have time to develop the processes necessary to comply. For these reasons, public companies and their boards of directors should start working now to prepare for a whole new disclosure regime. They can do this by taking a series of steps.
The article sets forth five steps that companies can take now based on what the SEC has proposed. First, companies should take an inventory of the information they are already providing on climate change, determine how that information is gathered and how quantitative metrics are calculated, and assess their information-gathering and communication process. Second, companies should map their existing disclosures to the SEC’s proposed rules to identify potential gaps. Third, companies should revisit their approach to goals and targets in light of the SEC’s proposed requirements. Fourth, companies should look to the SEC’s proposed requirements to consider whether changes to their governance around climate change are necessary. Fifth, the proposed changes to financial statements should be previewed with management, the audit committee and auditors.
It is going to be a long and costly road to implementation of the SEC’s climate change disclosure rules when adopted, and I think this is a journey that companies should consider starting as soon as possible.
I must admit that, despite having read the SEC’s climate change disclosure proposing release discussion of the topic several times, I am still mystified about what the proposed financial statement requirements in the SEC’s climate change disclosure proposal would require companies to do if the rules were adopted as proposed.
That is why I was happy to come across Deloitte’s Comprehensive Analysis of the SEC’s Proposed Rule on Climate Disclosure Requirements, which goes into much more detail than other publications regarding these proposed requirements and provides helpful disclosure examples, as well as considerations for implementing processes going forward to track the information needed for the proposed financial statement requirements.
I struggle to admit to myself that I might be interested in what happens this week at the SEC’s Older Investor Roundtable, which takes place (virtually) this Thursday. But as much as I try to deny the relentless advance of time, the constant stream of AARP mailings to my household serves as a constant reminder that there is a reason why they call me a “Senior Editor” around here.
The Older Investor Roundtable is hosted by the SEC and NASAA and features AARP. The SEC describes the event as “a multi-topic listening session intended to encourage input and feedback from senior and older communities.” The roundtable will focus on the experiences of older investors, those with diminished capacity, their loved ones, and caregivers for the purpose of informing rulemaking and policy decisions.
As we begin the third year of the COVID-19 pandemic, the inevitable question arises with each reporting cycle: “Should we keep our COVID-19 pandemic risk factor and, if so, how should we update it?”
In response to the onset of the pandemic and the Staff’s guidance, many companies have included a separate, detailed risk factor about the pandemic in their periodic reports and registration statements. The risk factor recounts the various risks for companies arising from the pandemic and the measures that have been taken to prevent the spread of the COVID-19 virus. But as with many of the other complications arising from the pandemic, magical thinking pushes us to want to put COVID-19 into the rearview mirror, even in the disclosure realm.
While the outcome depends very much on the individual circumstances of the particular company, my general advice is that it is still too early to get rid of the COVID-19 risk factor in its entirety. Undoubtedly, there are elements of the disclosure that can be updated from period-to-period as public health measures evolve and the risk profile changes, but unfortunately we do not seem to be past a number of key risks arising from the pandemic, even though we may be experiencing more “normal” in our daily lives. For example, companies with operations in China or with elements of business dependent on goods and service from China are still at risk from the impact of lockdowns (as evidenced by reports that residents in Shanghai were being fenced into their apartment buildings over the weekend), while that risk now seems to be more remote in the United States. At the same time, risk factor disclosure about the risks associated with vaccine mandates may now be obsolete as the government’s priorities appear to have shifted on that front (at least for now).
One further consideration is the disclosure of risks arising from supply chain problems, which in the earlier days of the pandemic were very much intertwined with the impact of the pandemic and the resulting public health measures. Today, supply chain risks have taken on a life of their own apart from the pandemic, and as a result those risks in many cases warrant their own separate risk factor discussion. We now have a wide variety of factors contributing to the supply chain problems, including, for example, the impact of the pandemic and public health measures worldwide, economic disruption, rising prices, labor shortages, materials shortages and the war in Ukraine. For those companies with operations impacted by the supply chain issues, a frequently-updated dedicated risk factor is likely a good idea given the focus of investors on this area.
The bottom line? Even though you are not required to wear a mask on a plane or at the Starbucks, the pandemic is not over and certain risks remain a reality.
With the comment period now over for the SEC’s proposed amendments to require real-time disclosure about share repurchases, we can now get a sense of how much pushback that controversial proposal has received. A recent Law360 article notes that several business groups, including the U.S. Chamber of Commerce, Business Roundtable and National Association of Manufacturers, have submitted comments indicating that the SEC’s proposal for a one-day disclosure will burden companies and amount to information overload for investors. Many industry groups and law firms urged the SEC to consider mandating disclosure monthly rather than daily and require some minimal thresholds regarding the size of the company and size of the repurchase before it needs to be reported. On the other hand, the article notes:
Wall Street watchdog groups see it differently. The nonprofit organization Better Markets lauded the SEC for seeking quicker disclosure, which it considers an overdue fix from a “molasses-like quarterly timetable,” noting the volume of buybacks and speed at which information flows nowadays.
At this point, we do not have any indication of when final rules will be considered by the Commission, but it is possible that final rules could be adopted as early as this summer.
We’ve posted the transcript for our recent webcast for members, “Conduct of the Annual Meeting.”
Ben Backberg from General Mills, Dorothy Flynn from Broadridge, Carl Hagberg from The Shareholder Service Optimizer, Mary Catherine Malley from Juniper Networks and Vernicka Shaw from Capital One discussed the latest developments to consider for annual meetings. The panel shared many interesting insights during the webcast, including this point from Carl Hagberg about reaching Gen Z shareholders:
Hagberg: This is a good time to introduce another important change we’re facing: Gen Z. This generation is on the receiving end of the biggest transfer of wealth in history. The baby boomers and their children now are passing enormous amounts of wealth onto Gen Z, who seem to march to a different drummer than the old-time moms and pops, aunts and uncles, and good citizens and clients who were much more unpredictable. The surveys show that Gen-Z investors are much more engaged in voting issues than their elders.
They are technology wizards, and they mark you down if your technology is poor; they’ll name and shame you, saying, “What’s wrong with you?” They have no patience for things that don’t load well on the web or don’t enable them to operate or do all their business on the web.
We’re seeing a different generation of people, and they’re experts at social media. If they’re not happy, before you know it over a million people are tweeting about what went wrong. It’s a good reminder that we need to keep our technology as close to the cutting edge as we can, because we’re dealing with a new world in many ways.
If you are not a member of TheCorporateCounsel.net, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
Some significant changes will be on the table when Delaware’s General Assembly considers the 2022 proposed amendments to the DGCL. Among other things, the proposed amendments would permit exculpation for corporate officers, broaden the board’s authority to delegate the issuance of stock and options, and expand appraisal rights. Here’s an excerpt from this Troutman Pepper memo that discusses the proposal to permit officer exculpation:
Perhaps the most impactful change under consideration is an amendment to Section 102(b)(7) of the DGCL, which currently allows corporations to eliminate or limit directors’ personal liability for monetary damages for breach of the fiduciary duty of care. As proposed, the amendment to Section 102(b)(7) would allow corporations to extend similar protections to their officers as well.
An important exception, however, is that officers may not receive exculpation resulting from derivative claims (i.e., those brought by or on behalf of the corporation). Instead, under the proposed amendments, officers can only be exculpated for direct claims (i.e., those brought against them by stockholders alleging direct harm to the stockholders). Additionally, such protection will extend only to certain senior officers: the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, chief accounting officer, or any other person who has, by written agreement with the corporation, consented to be identified as an officer.
Stockholder plaintiffs in corporate litigation often cast a wide net when asserting claims against defendants. It has become increasingly common for senior-level officers to be accused of corporate wrongdoing alongside the board of directors. Often, directors and officers can serve in both capacities. Corporations will now have the option to protect certain officers from stockholder suits largely to the same extent that they can protect their directors.
If enacted, the proposed changes to Section 102(b)(7) are expected to become effective on August 1, 2022. Certain other changes would be effective for transactions entered into on or after that date.
Section 8 of the Clayton Act prohibits competitors from having overlapping directors or managers, regardless of whether any anticompetitive conduct actually occurs. That’s an issue that usually arises in proxy contests or M&A transactions, but in a recent speech, the DOJ’s antitrust chief Jonathan Kanter indicated that the agency will intensify its scrutiny of interlocking director issues outside of the merger review context. Here’s an excerpt from Faegre Drinker’s memo on his comments:
In his opening remarks at the Enforcers Summit, Assistant Attorney General Kanter stated, “[The DOJ] is committed to litigating cases using the whole legislative toolbox that Congress has given us to promote competition. One tool that I think we can use more is Section 8 of the Clayton Act . . . . For too long, our Section 8 enforcement has essentially been limited to our merger review process. We are ramping up efforts to identify violations across the broader economy, and we will not hesitate to bring Section 8 cases to break up interlocking directorates.”
Government challenges to interlocking directorates have been relatively rare, with only three such enforcement actions since 1994. Most recently in June 2021, the DOJ issued a press release stating that the two to executives of a talent and media agency resigned their positions on the board of directors for a competing business after the DOJ expressed concerns that the directors’ positions would make it difficult for the two businesses to continue competing independently.
The memo says that, taken together, Kanter’s comments and the DOJ’s June 2021 press release are a reminder to large companies of the need for an effective antitrust compliance program that considers the potential competitive implications of competitors having overlapping directors or officers. It goes on to say that smaller businesses not meeting Section 8’s jurisdictional thresholds must also remain vigilant for anticompetitive conduct that might result from board interlocks.
