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.
According to this Audit Analytics blog, the number of Staff comment letters declined sharply in 2021, but those that were issued generated a lot of back & forth between issuers and the Staff. Audit Analytics calls this back & forth a “conversation” and says that the number of letters per conversation rose to its highest level in the past five years, suggesting that the SEC is scrutinizing responses more closely than in recent years. Not surprisingly, Audit Analytics says this was particularly true with regard to climate change comments – each of those conversations involved more than one comment letter.
The top areas that generated Staff comment have remained relatively constant over the past five years. In 2021, MD&A led the way (31% of comment letters), followed closely by Non-GAAP (27%). 8-K disclosures (10%), segment reporting (9%) and revenue recognition (8%).
This Goodwin blog reminds 12/31 year-end filers that although they had to comply with the SEC’s 2020 MD&A amendments in their Form 10-K, this quarter’s 10-Q will be the first quarterly filing in which compliance with those rule changes will be required. This excerpt highlights some of the more important aspects of the new rules that companies will need to keep in mind:
Two of the newly required MD&A amendments are of particular significance: (1) the alternative interim period comparison and related disclosure requirements and (2) the new critical accounting estimates disclosure requirements. Very briefly, the critical points include the following.
– Interim period comparisons may be presented for sequential preceding periods rather than prior year periods, which was the only option prior to the 2020 financial disclosure amendments. If the company chooses to present a comparison of sequentially preceding periods, the amendments require additional disclosure, as set forth in Item 303(c) of Regulation S-K.
– Critical accounting estimates are now formally required by Item 303(b)(3) of Regulation S-K. An instruction explicitly states that this disclosure should not merely duplicate the accounting policies presented in the financial statement notes, which has been the practice of many companies under the guidance that applied prior to adoption of the amendments.
The blog also reminds filers to keep in mind the rising inflation and interest rate environment as they prepare the MD&A discussion for their first quarter 10-Qs. Goodwin has also put together this handy Form 10-Q Form Check Table that reflects the newly applicable line-item requirements as well as other topical matters that companies should consider addressing in their upcoming filings.
Earlier this week, the WSJ’s “Heard on the Street” column discussed the recent boom in stock splits. The column says that S&P 500 companies are implementing splits at the highest rate in the past 10 years. It also says that the traditional justification for a split – “democratizing access” to share ownership – doesn’t hold water in an age when retail investors can fractional shares through a variety of online trading platforms.
So what’s going on here? According to the WSJ, the stock split boom may well be the sequel to the “meme stock” craze of the last two years:
If the past few years brought the meme-stock craze, we may now be seeing a stock-split craze. Big money flooded freely into the tech sector in 2020 and early 2021 coincident with low Treasury yields. As tech stocks in particular have sold off in the past few months, companies are now having to work that much harder to make their shares stand out.
Indeed, the most important conclusion to the rise in stock splits this year, according to BofA’s investment and ETF strategist Jared Woodard, is the signal it is sending about the profound shift in management priorities “as the shareholders strike back.” Shopify has shed nearly 60% of its market value—worth some $100 billion—just this year, and even Amazon.com and Alphabet have lagged behind the S&P 500.
Within the S&P 500, BofA counted five stock-split announcements this year as of early last week—roughly the average annual number we have seen for companies in that index over the past five years. Assuming that pace continues, individual investors would be in a better position to take advantage of a total of about 18 stock splits from S&P 500 companies this year. And there could be far more than that: As of early February, 17% of the S&P 500 was trading above $500 a share, or 85 companies, BofA found.
After dutifully acknowledging that there’s no real financial impact from a stock split, the column goes on to discuss the pros and cons of a split, and it may make useful reading for a board that’s thinking about one. It also closes with a cautionary reminder that over the past four decades, the height of stock splits coincided with the dotcom boom, and that didn’t end very well.
Earlier this week, I blogged about Commissioner Peirce’s statement criticizing the SEC’s failure to act on a SPAC’s acceleration request for its Form S-4 registration statement. In that blog, I said that it was hard to assess the validity of her criticism, because the correspondence between the issuer and the Staff hadn’t been released yet. WilmerHale’s David Westenberg subsequently reached out to remind me that since the S-4 was not declared effective, the Staff will not publicly release the review correspondence, although it may be possible to obtain it with a FOIA request.
On her Twitter account, Olga Usvyatsky flagged a recent comment letter exchange between UPS & the Staff dealing with the potential impact of Russia’s invasion of Ukraine. The Staff’s comment focused on risk factor disclosure concerning the impact of changes in general economic conditions set forth on page 9 of the company’s Form 10-K. This excerpt from UPS’s response letter includes the Staff’s comment & the company’s response:
1.You refer to the adverse impact on your business due to geopolitical uncertainties and conflicts in the Russian Federation and Ukraine. Please describe the adverse impact of Russia’s invasion of the Ukraine on your business, including the impact on your operations and potential asset impairments.
Response to Comment 1:
The Company does not have any material business, operations or assets in Russia, Belarus or Ukraine, and has not been materially impacted by the actions of the Russian government. The Company’s total revenue from these three countries constitutes less than 1.0% of consolidated revenue.
As has been disclosed by the Company on its corporate website, www.ups.com, as a result of Russia’s invasion of Ukraine, the Company has temporarily suspended all shipping services to, from and within Ukraine, Belarus and Russia, until further notice. In addition, the Company has halted overflights of Russia, with no material impact on the Company’s costs.
If and when the actions of the Russian government are reasonably likely to materially impact the Company or its operations, the Company undertakes to include appropriate disclosures in its public filings.
The Staff had no further comments for UPS, but Olga’s tweet said that it was reasonable to assume other companies will be receiving similar comments. A quick search of the EDGAR database confirms that assumption was correct. A search for filing review correspondence containing the word “Ukraine” from 3/1 to 4/19 found two other issuers that had received publicly available comments relating to the Ukraine crisis. Here are links to response letters addressing Ukraine-related comments issued to ESAB Corp. and Teucrium Commodity Trust.
Yesterday’s NY Times contained an opinion piece from Adam Liptak discussing the First Amendment issues surrounding the SEC’s “neither admit nor deny” settlement policy. Liptak notes that a cert petition for review of a case challenging that policy has recently been filed with the SCOTUS. The case, Romeril v. SEC, involves a former Xerox executive’s efforts to obtain relief from a 2003 “neither admit nor deny” settlement with the SEC. In September 2021, the 2nd Circuit upheld the SDNY’s decision to deny the plaintiff’s motion for relief from judgment.
This excerpt from the cert petition’s “Questions Presented” section notes that the constitutional issues associated with the policy are front and center:
1. Does it violate the First Amendment for the Securities and Exchange Commission to impose a requirement that any party with whom it settles must agree to a lifelong prior restraint barring any statement, however truthful and whenever and however expressed, that even suggests that any allegation in a Securities and Exchange Commission Complaint is insupportable?
2. Does the Securities and Exchange Commission violate the Due Process Clause when it requires that any party with whom it settles must sign an SEC-drafted Consent Form waiving his due process rights and agree to a lifelong prior restraint barring any statement, however truthful and whenever and however expressed, that even suggests that any allegation in a Securities and Exchange Commission Complaint is insupportable?
Liptak notes that the Court grants very few petitions for cert, but that this one might have a shot because of the divergent approaches that lower courts have taken when it comes to gag orders imposed by the government. Okay, fair enough, but the cynic in me says there’s another reason the SCOTUS might take this case – given the present ideological makeup of the Court, there are likely several justices who wouldn’t mind the chance to bloody a federal agency’s nose when it comes to what they perceive as overreaching conduct.
Personally, I’ve come to really dislike the “neither admit nor deny” policy. I’ve seen situations where the agency has announced the filing of aggressive & career-damaging complaints on its website, only to settle for significantly less years later. To add insult to injury, the SEC routinely issues statements on its website trumpeting all of its settlements as victories, while the other parties can merely grit their teeth & hold their tongues.
