A recent WSJ article notes that a growing number of shareholders are voting against the ratification of auditors at annual meetings. While the ratification of auditors is nonbinding, pushback against a company’s auditors can put companies in a difficult place when considering the engagement post-meeting. The article notes that “about 3.8% of investors voted against the ratification of S&P 500 companies’ auditors this year through May 19, almost triple the proportion of a decade earlier, according to research firm Audit Analytics, and up from 3.1% last year.”
While the numbers are pretty small and we have not seen any situations where there was majority support against the ratification of the auditors, any pushback above the 1% level could be seen as potentially problematic. The usual topics of audit quality and non-audit services seem to top the list of investor concerns.
Our Conferences always deliver expert guidance in a fast-moving, engaging format – plus invaluable course materials in the form of speaker “talking points” – so that you and your directors aren’t caught flat-footed by new expectations. You can also revisit all of the practical guidance with the on-demand archive that will be available until July 2023 at no extra cost.
I am pleased to announce that I will be interviewing Renee Jones, Director of the Division of Corporation Finance, who will discuss all of the initiatives that Corp Fin is working on that will affect your disclosures. As you will see from the agendas for the Conferences, we have an outstanding speaker lineup that also includes BlackRock’s Michelle Edkins, Wachtell’s Leo Strine and Sabastian Niles, WilmerHale’s Meredith Cross, Sidley’s Sonia Barros, Hogan Lovells’ Alan Dye and Martha Steinman, Gibson Dunn’s Beth Ising and Ron Mueller, and many more.
Early Bird Rate – Act by June 10th: Your directors are looking at you to stay ahead of the curve on new SEC disclosure rules, shifting stakeholder expectations, and heightened risks. To help you address these changes – and avoid costly pitfalls – we’re offering a special Early Bird Rate to attend these critical conferences (both of the Conferences are bundled together with a single price). Register by the end of this Friday, June 10th to save $320 on a single user registration, and over $500 on our single office location and firm-wide registrations.
On October 11, we will be launching our “1st Annual Practical ESG Conference.” I am really looking forward to this event, given how ESG is top of mind for boards of directors, management, in-house counsel and outside advisors. With ESG matters now integral to everything that we do today, you definitely do not want to miss this conference!
Our agenda covers employment law landmines, ESG litigation & investigations, DEI trends, carbon accounting risks, and other critical ESG topics. The registration fee for this Conference can be bundled together with the Proxy Disclosure & Executive Compensation Conferences for an additional discount – and is also subject to an Early Bird Rate that expires this Friday, June 10th.
Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271 to ensure you’re able to face these rapidly evolving issues with confidence.
The SEC’s Investor Advisory Committee is scheduled to meet virtually on Thursday, with an agenda that focuses on several hot topics for investors. The session will include a panel discussion regarding the accounting of non-traditional financial information, a panel discussion regarding climate disclosure, a discussion of a recommendation on protecting older investors and a discussion of a recommendation on funding investor advocacy clinics.
The SEC recently announced several new members of the Investor Advisory Committee:
One of the last vestiges of the paper filing world is (mostly) disappearing. On Friday, the SEC adopted several amendments to the rules governing electronic filing and the use of structured data that were proposed in December 2020 and November 2021. Among those changes is a requirement that Form 144 be filed electronically, eliminating the paper filing option, except in the case of non-reporting issuers.
Form 144 must be filed with the SEC by an affiliate of the issuer as a notice of the proposed sale of securities in reliance on Rule 144, when the amount to be sold under Rule 144 by the affiliate during any three-month period exceeds 5,000 shares or units or has an aggregate sales price in excess of $50,000. A person filing a Form 144 must have a bona fide intention to sell the securities referred to in the form within a reasonable time after the filing of the Form 144.
In practice, Form 144s are often filed by brokerage firms on behalf of their clients who are affiliates of a public company that are selling securities under Rule 144, so the shift to mandatory electronic filing will likely require some adjustments to their processes. As noted in Chair Gensler’s statement about the rule changes, there will be a relatively long lead time in implementing the changes:
Specifically, the requirement to file Form 144 electronically on EDGAR will commence six months from the date of publication in the Federal Register of the Commission release that adopts the version of the EDGAR Filer Manual addressing updates to Form 144. We currently expect that the Commission would consider adoption of the relevant version of the EDGAR Filer Manual addressing updates to Form 144 in September 2022, and publication in the Federal Register would occur thereafter. We believe this extended transition period will provide sufficient time for broker-dealers to transition clients for whom they prepare and submit Form 144 filings, including time for those clients who do not currently have access to EDGAR to apply for EDGAR access.
Based on past Form 144 filings, the SEC estimates that approximately 12,250 filers would be required to switch to electronic filings on EDGAR, so there are still those out there who opt to submit paper filings.
The SEC noted in the adopting release that it was not taking any action concerning the remaining proposals in the Rule 144 proposing release from December 2020, including the proposal to eliminate the Form 144 filing requirement for the sale of securities of non-reporting issuers and thus necessitating the paper filing carve-out for those situation where the non-reporting issuer does not have an EDGAR page. While the adopting release for the Form 144 amendments notes that the SEC will provide an online fillable form to facilitate filings, there is no discussion of whether this online fillable form will be integrated with the Form 4 online fillable form, as was discussed in the December 2020 proposing release and as we covered in detail in the March-April 2021 issue of The Corporate Counsel.
One interpretive issue that the mandated electronic filing of Form 144 raises is that the Staff has essentially applied a “mailbox rule” to Form 144 in determining whether the Form 144 has been filed “concurrently” with either the placing of a sale order with a broker or the execution of the sale directly with a market maker (see Securities Act Rules Compliance & Disclosure Interpretation Question 136.09). It is unclear how this concept would be applied in an EDGAR world, where most filings transmitted after 5:30 pm eastern time are deemed by the system to be “filed” on the next business day.
The same adopting release that brings us mandated electronic filing of Form 144 also will require the electronic filing of the “glossy” annual report required under Exchange Act Rules 14a-3 and 14c-3. The glossy annual report that is sent to shareholders is required “furnished” for the information of the SEC, which for many years required issuers to mail the glossy annual report to the Commission.
I can recall that when I started in Corp Fin in the mid-1990s, we were inundated with seven copies of each public company’s glossy annual report. There were stacks of the annual reports lining the halls and file rooms because nobody really knew what to do with them. Someone came up with the idea of turning the covers of some annual reports into art work, and I recall them being hung on the wall of the large Corp Fin conference room at 450 5th Street.
The glossy annual report always had a sort of “square peg, round hole” problem with EDGAR because, by its very nature, the report was full of graphic and image material that old-school EDGAR could not handle. The shift to mandatory HTML for EDGAR filings back in 2017 paved the way for EDGAR to now handle more complicated documents, like the glossy annual report.
Back in 2016, the Corp Fin Staff took the perfectly reasonable approach of indicating that it would not object if a company posts an electronic version of its glossy annual report to its corporate website by the due date in lieu of mailing paper copies or submitting it on EDGAR if the report remains accessible for at least one year after posting. This approach seemed to work perfectly fine from my perspective, because as we all know the Staff has computers and they can go to a company’s website and peruse the glossy annual report just as easily as they could access it using EDGAR.
Unfortunately, it seems that the Staff’s interpretive slight of hand was not good enough for the Commission, as it will now require submission of the glossy annual report via EDGAR, while rescinding the Staff’s 2016 guidance. The new requirement will be effective six months after the effective date of these amendments, so just in time for the 2023 proxy season.
Whether we like it or not, XBRL has become a part of our lives when dealing with SEC filings. Since 2009, the SEC has mandated XBRL for the financial statements of most SEC filings. Somehow, up until now, Form 11-K, which is the form used for annual reports of employee stock purchase, savings and similar plans that are filed with the Commission pursuant to Section 15(d) of the Exchange Act, was not subject to structured data reporting requirements. On Friday, the Commission adopted amendments ending that long run of flying under XBRL’s radar. The new requirements will be effective six months after the effective date of the amendments.
The board composition report from Heidrick & Struggles that I blogged about yesterday noted that companies are looking to add directors whose backgrounds combine a mix of traditional expertise with other skills, such as sustainability or cybersecurity expertise. That need for new expertise may increase the opportunities for non-CEO executives to join the board of another company and may prompt some companies to rethink policies on outside board service to accommodate key executives’ desire to serve on a board.
This Perkins Coie blog provides some thoughts on outside board service by non-CEOs and offers recommendations on best practices in evaluating those opportunities and policing the issues that may arise. This excerpt addresses two significant issues – potential conflicts and time commitments:
– Conflicts & Related Party Transactions: Before anything else, ask – does the company making the invitation somehow raise the prospect of a risk of a conflict of interest – or even the appearance of one? Or might there be material related party transactions involved? This requires some homework and careful thought: the invited officer will need to learn the strategic goals of the inviting company – and consider if these now (or may in the future) overlap with and conflict the current employer’s interests. Even if the two companies are not competitors, could they enter into a related party transaction down the road that may need to be disclosed in either company’s proxy? Even seemingly innocuous disclosure could be considered a negative from an ISS, Glass Lewis or investor point of view.
Also consider reputational issues of the company who is offering the board seat, and whether they could negatively impact the employer.
– Assess Committee Obligations & Expected Time Commitment: What will be the time commitment of a board seat? And is putting in that time practical from the standpoint of the amount of time the executive is expected to put in for her employer? Consider both the expected hours commitment – and the reality of periodic “crunch” times that pop up during the inevitable crises that arise. There may be some executive roles – a CFO for some companies – who would be hard-pressed to appropriately deal with an M&A transaction or serious investigation in their role as a director without interfering with that officer’s responsibilities during earnings season, for example.
Yet a Chief HR Officer, Chief Technology Officer, Chief Legal Officer or Chief Sustainability Officer, with the right staff support, may be able to juggle both.
Other recommendations include limiting on service to one outside board, establishing a formal pre-approval process, monitoring director compensation received by the executive, and including board service as part of the executive’s annual performance appraisal process.
According to a recent blog from Doug Greene, the SEC’s proposal to eliminate SPACs’ ability to rely on the safe harbor for forward looking statements in connection with deSPAC transactions may not turn out to have much impact in practice. Why? Because, as this excerpt explains, the PSLRA’s safe harbor for forward looking statements simply isn’t very protective to begin with:
Public companies understandably believe that the Reform Act’s safe harbor protects them from liability for their guidance and projections if they simply follow the statute’s requirements. But, as a practical matter, the safe harbor is not so safe; some judges think the Reform Act goes too far, so they go to great lengths to avoid the statute’s plain language. This is one significant reason why we always have advocated an approach to defending forward-looking statements that does not depend solely on the safe harbor, even when the statute’s plain language would indicate that it applies. Thus, while SPACs and de-SPACs are certainly better off with the safe harbor than without it, its loss should not be as consequential as some may think.
The blog reviews the erratic approach that courts have taken to the safe harbor, and argues that it may stem from judges’ disdain for the potential “license to lie” that the statutory language provides. It goes on to point out that in defending claims implicating forward looking statements, the parties should keep in mind that these also involve opinions, and therefore, regardless of the safe harbor, plaintiffs also must satisfy the Virginia Bankshares & Omnicare tests in order to bring securities fraud claims based on those statements.
With the stock market heading straight downhill, a major war in Europe & the SEC throwing a regulatory monkey wrench into SPAC offerings, it’s no surprise that the IPO market’s been in a bit of a funk lately. But the Jim Hamilton Blog reports that things reached a new low last week:
As the air continues to come out of the IPO market, it reached a level last week that has not been seen in more than two years—no completed offerings. April 2020 was the last time that a week passed without at least one company making its public market debut. The holiday may have played a role in the standstill, but with only one IPO in the prior week the market was already growing quieter as May progressed. The 14 new issues in May represented the lowest single-month IPO total since ten were completed in April 2020.
The calendar for next week looks pretty empty too, so don’t be surprised if you see a larger than usual number of investment bankers at your favorite beach this summer.
