On June 30th, the SEC held a roundtable on 2nd quarter reporting & Covid-19 disclosure. The panelists included a bunch of big shots from private equity firms and asset managers. This Mayer Brown blog summarizes the panel’s recommendations on Q2 & Covid-19 disclosure. Many of these recommendations focused on liquidity & human capital-related issues. Here are some of them:
– Provide specific and forward-looking guidance on the company’s liquidity position, including its expected cash burn and upcoming capital expenditures. Companies should consider including a best, middle and worst case liquidity scenario.
– Separately disclose the company’s short-term and long-term liquidity plans. Identify the company’s primary use of cash during the second quarter as compared to prior quarters.
– Specify, in a standardized format, the amount of liquidity that is currently available under the company’s existing financing facilities and if financial covenants prevent the company from accessing or drawing down from a disclosed financing source. Identify the time period that the company can expect to continue to operate with limited or no cash revenue.
– Explain management’s rationale for implementing announced executive compensation or staff reductions. Disclose changes to the company’s work force and expected impact on the company’s operations.
– Disclose the impact of the pandemic on the company’s human capital. Explain if the company’s employees will be able to work remotely and disclose the company-specific challenges. Estimate costs if the company expects to spend significantly on personal protective equipment in order to safely reopen.
The panelists said that investors also want to see qualitative disclosures addressing a company’s operational challenges & resiliency, as well as forward-looking disclosures & trend guidance, particularly around capital raising activities. In addition, investors are looking for companies to address the effect of recent social unrest on their business & employees, along with standardized disclosure about their racial and gender diversity, including a description of applicable hiring practices.
Beyond EBITDAC: Quantifying Covid-19’s Impact in Public Company Disclosures
Earlier this year, I blogged about the practice of presenting “EBITDAC”- type disclosures that adjust for Covid-19’s impact. A more recent blog from Liz suggests that this practice is growing in popularity. Clearly, disclosures about the effects of Covid-19 are very important, but non-GAAP disclosures that include estimates of lost revenue from the pandemic aren’t likely to make you many friends at the SEC.
Unfortunately, the quantitative disclosures about Covid-19 that can raise compliance issues aren’t limited to EBITDAC, and guidance about where to draw the line has been hard to come by. That’s why this Cleary Gottlieb memo about disclosures quantifying Covid-19’s impact is a very helpful resource. This excerpt addresses potential concerns about the accuracy & verifiability of Covid-19 adjustments:
Not all adjustments are created equal. Adjustments stemming from fairly objective charges, such as COVID-related contract terminations or purchases of personal protective equipment, are easier to isolate, quantify and support than charges related to supply chain interruptions and operational inefficiencies, which may reflect drivers beyond COVID-19. The more judgment calls that are needed in a company’s assessment of an adjustment, the more the company should consider its assumptions.
The SEC may be more likely to question the accuracy of the disclosure during its normal-course review of the company’s periodic filings, and there is also litigation risk surrounding COVID-impact disclosure that contains a misstatement or is otherwise inaccurate or unsupportable. In addition, it may be difficult for auditors to comfort such an adjustment in an underwritten offering. such as COVID-related contract terminations or purchases of personal protective equipment, are easier to isolate.
Through a user-friendly format that incorporates Q&As and concrete examples, the memo also provides insight on determining whether or not a particular disclosure involves a non-GAAP financial measure, whether the disclosure is permissible or potentially misleading, and other matters.
Companies looking into using non-GAAP financial measures to address the impact of Covid-19 should also check out this Deloitte memo on the topic.
Covid-19 Disclosure: Choose Your Words with Care!
A recent post over on the Jim Hamilton Blog discussed a webcast hosted by Securities Docket in which representatives of Latham & FTI participated. The webcast addressed a variety of pandemic-related disclosure & litigation issues, but one that I wanted to highlight involved the importance of careful attention to the wording of disclosure – particularly the use of the term “material adverse effect” when discussing Covid-19. Here’s an excerpt from remarks by Latham’s Keith Halverstam:
Halverstam also advised against using the term “material adverse effect” when it comes to making COVID-related disclosures related to company operations. While it might look good to the SEC, other parties such as the company’s lenders might see it as a violation of a covenant, making it harder for the company to draw on their revolving credit. Instead of using “material adverse effect,” companies can say, for example, that the pandemic has had “significant effects on revenue,” he recommended.
For some situations, there may be no choice but to use the “material adverse effect” terminology, but the point is that the words you chose to use may have implications that go well beyond the confines of the disclosure document.
Did you know that Thomas Jefferson had only 17 days to write the Declaration of Independence? I admit feeling conflicted that we still celebrate someone who turned out to be so pro-slavery in his older years, but I also find it impressive that young TJ met that deadline.
Beware EDGAR Technical Issues
It’s not the news I want to be bringing as we head into a holiday weekend, but it’s time to end the silent suffering of those who’ve attempted filings this week. With end-of-period equity awards triggering Form 4s, that’s a lot of people!
After a day of headaches on Monday, the SEC’s EDGAR Filer Communications circulated an email late that evening reporting the issues experienced at 4:30pm – right as many were trying to make filings – had been resolved (there had been no notice earlier in the day that an issue was occurring, and there were a lot of frustrated people attempting filings and questioning whether their filing agent was to blame). The “EDGAR News & Announcements” page offers this relief:
The SEC will automatically date as June 29, 2020 all filings made between 5:30 p.m. ET and 10:30 p.m. ET on June 29, 2020. For other filing date adjustments, please contact Filer Support at 202-551-8900 option 3.
However, Monday’s email also warned that filers could continue to experience technical problems with their custom codes. That happened yesterday, with a notice in the morning that EDGAR was experiencing technical difficulties and a notice in the afternoon that EDGAR would be down for a short amount of time for technical repair.
Kudos to the SEC for making real-time announcements yesterday and for keeping the “EDGAR News & Announcements” page updated – you should visit that page and follow the posted instructions if you’re having problems. Fingers crossed that the issue is now fully resolved!
Late last year, we were tracking the saga of the NYSE’s “direct listing” proposal for primary offerings. A lot has happened since then, and you’d be forgiven if you assumed that going public without the benefit of a traditionally marketed & placed IPO was no longer a very attractive option. But the NYSE hasn’t given up hope that we’ll return to better times. Last week, they filed the third version of a proposed rule change that would permit companies to raise money in a “direct listing.”
As this Davis Polk memo explains, this version of the proposal gives more detail about the mechanics of a direct listing – but it would also make this path available to fewer companies:
The NYSE’s current proposal eliminates the 90-day grace period that was previously proposed for the minimum holder requirement. As a result, both primary and secondary direct listings would continue to be subject to the requirement to have 400 shareholders at the time of initial listing.This requirement will continue to preclude many private companies from pursuing a direct listing because they do not having the required number of round lot holders.
Unlike the prior proposals, this version also provides more granular detail around the auction process for a primary direct listing. Significantly, the auction process would require that the company disclose a price range and the number of shares to be sold in the SEC registration statement for a primary direct listing, and would require that the opening auction price be within the disclosed price range. For purposes of the opening auction, the company would be required to submit a limit order for the number of shares that it wishes to sell, with the limit set at the bottom end of the price range. The proposed rule changes would not allow the company’s limit order to be cancelled or modified, and the limit order would need to be executed in full in order to conduct the primary direct listing
Suspending Preferred Dividends? Your Form S-3 Might Be At Risk
As some companies look to suspend dividend payments due to economic fallout from the pandemic, here’s a reminder from a recent Mayer Brown blog:
In order to remain eligible to use a Form S-3 registration statement, among other requirements, neither the issuer nor any of its consolidated or unconsolidated subsidiaries shall have failed to pay any dividend on its preferred stock since the end of the last fiscal year for which audited financial statements are included in the registration statement (General Instruction I.A.4 of Form S-3). The reference to materiality in the instruction does not apply to the failure to declare dividends on preferred stock.
A declared but unpaid dividend on preferred stock would disqualify an issuer from using Form S-3, as would the existence of accrued and unpaid dividends on cumulative preferred stock. The issuer also would be disqualified from using Form S-3 even if it has a history of accumulating such dividends for three quarters before paying them at the end of each year.
The blog notes a few ins & outs of this analysis – including that eligibility remains intact if a board doesn’t declare a dividend on non-cumulative preferred stock, or if the terms of the debt permit deferred payments and the deferral isn’t a default, since no liability arises under the terms of the stock. Also, even if a dividend payment on cumulative preferred stock was missed, a company can continue to use an already effective Form S-3 registration statement so long as there is no need to update the registration statement.
Secured Notes Offerings: Covid-19 Trends
In these desperate times, more companies are turning to secured notes to keep them afloat – and it’s not a terrible option, given current pricing and the possibility that other loans will be unaffected. This 3-page Cleary Gottlieb memo discusses current trends to consider – including disclosure, timing, covenants, collateral & intercreditor issues, call protection and reporting. Here’s an excerpt:
A common trend for these new secured notes offerings has been a five-year maturity, with two years of call protection, resulting in a much shorter tenor than the usual seven- to eight-year maturity for secured notes. This trend for a shorter tenor offers more flexibility to the issuer for refinancing if circumstances improve but still provides noteholders with more call protection than would be typical for a credit facility.
One feature in pre-crisis secured notesofferings, a 10% per annum call right at 103% for the first years after the offering (or if shorter, during the non-call period), appears to have fallen away in these recent secured notes deals.
Amidst the pandemic, the “corporate purpose” debate continues – a few say it’s even intensified, given some companies’ need to prioritize long-term viability & employee well-being over dividend payments or other capital allocation decisions that would benefit shareholders. A recent Wachtell Lipton memo defines “purpose” as:
The purpose of a corporation is to conduct a lawful, ethical, profitable and sustainable business in order to create value over the long-term, which requires consideration of the stakeholders that are critical to its success (shareholders, employees, customers, suppliers, creditors and communities), as determined by the corporation and the board of directors using its business judgment and with regular engagement with shareholders, who are essential partners in supporting the corporation’s pursuit of this mission.
In response to Wachtell’s positions, Skadden published this memo – which argues that shareholder primacy is still the name of the game. And practically speaking, companies’ ability to accommodate non-shareholder stakeholders is likely to turn on shareholder preferences.
That’s why this recent SquareWell Partners survey – of investors who collectively manage over $22 trillion in assets – is a worthwhile read. It covers whether “corporate purpose” is relevant to investors, who they believe should be responsible for delivering it, how it should be measured and how investors intend to hold companies responsible for putting it into practice. Here are a few key takeaways (also see this Harvard Law School blog):
1. 93% of shareholders believe that purpose is a necessary grounding for a successful long-term strategy
2. Nearly half of the participating investors suggested that they expect the company’s purpose to be in line with the UN Sustainable Development Goals
3. 86% expect firms to report on the delivery of purpose – with 75% emphasizing the need for KPIs
4. Most investors suggest that the company’s purpose has a dedicated section within their annual report (or equivalent document) closely followed by a formal statement from the board addressing the company’s purpose
5. Investors will look to see if there is consistent disclosure regarding the implementation of the purpose, stakeholder concerns, employee turnover, etc. to evaluate whether the company’s purpose is effective
6. Only one-third of participating investors expect to have a vote on a company’s purpose but almost two-thirds are engaging with companies on the topic
7. Whilst a quarter of the participating investors suggested that they will not oppose any agenda items if they are not satisfied with a company’s purpose, investors will most likely target the election of board members (including the board chair), discharge (where possible), etc.
Proxy Advisors & Shareholder Proposals: SEC’s Investor Advocate Still Wants a Proposal “Do-Over”
Way back in January, Lynn blogged on our “Proxy Season Blog” that the SEC’s Investor Advisory Committee recommended to the Commission that it revise and re-propose its rules on proxy advisors & shareholder proposal submission thresholds. Earlier this week, the SEC’s “Office of the Investor Advocate” – which is a member of the Investor Advisory Committee – reiterated that recommendation in its “Report on Objectives for Fiscal Year 2021.”
The Investor Advocate’s report on objectives is due by June 30th each year and relates to the government fiscal year that begins October 1st. It goes directly to Congress without any review or comment by the Commission or Staff. The report has this to say about proxy plumbing:
Much of the concern expressed by investors has centered on the economic analysis in the rulemakings. For example, the SEC’s Investor Advisory Committee submitted a recommendation to the Commission that it revise and repropose the rules, citing a number of ways in which the proposing releases failed to meet the SEC’s published guidance for conducting economic analyses.
The recommendation also noted that there are well-known problems with respect to so-called “proxy plumbing,” or the processes by which shares are voted and counted, and suggested that the Commission should prioritize efforts to address those concerns. In other words, before addressing concerns of the business community about the advice investors seek, the Commission should ensure that investors’ votes are actually counted.
In addition, the Investor Advocate includes in its 2021 policy agenda “corporate disclosure and investor protection in registered & exempt offerings” – calling for:
– Improved “human capital management” disclosure, possibly going beyond the “principles-based” approach that the Commission proposed last August
– Attention to “machine readable” disclosures outside of financials – noting that prior “disclosure effectiveness” changes have catered to investors who are manually accessing & analyzing info, but more & more investors are now using digital processes
– Consideration of whether the expansion of registration exemptions undermines public markets and ignores the value of registered offerings & public disclosure
The report also includes a special 3-page overview of the impact of Covid-19 on investors – highlighting eroding confidence of individual investors in stocks & mutual funds as beneficial long-term investments.
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D&O insurance premiums jumped somewhere between 44% and 104% in the first quarter of this year, compared with last year. That’s according to survey data from Aon & Marsh cited in this WSJ article. The cause of the increase is the ever-expanding specter of securities litigation, including event-specific litigation and suits over emerging ESG issues, which Lynn blogged in January would be likely to influence rates.
The latest threat? Covid-19 reopening decisions. Lynn blogged last week on “The Mentor Blog” about what boards need to consider to manage reopening risks – if boards get it wrong, they’ll not only be facing remorse over upended lives and a struggling workforce, they’ll also become a litigation target. Some believe that rates will more than double in the wake of the pandemic, according to this “Business Insurance” article. The WSJ reports that on top of tough decisions about the business, companies are having to decide whether to change deductibles, policy limits or insurance budget. Here’s an excerpt:
According to Aon, no primary policies that renewed in the first quarter with the same limits and deductibles fetched a lower price. To contain the increases, nearly half of the clients changed their deductibles or policy limits, and sometimes both.
In a June 10 report, A.M. Best Co. said a spike in litigation caused by specific events, such as cyberattacks, the #MeToo movement and wildfires, was driving the increases. Companies also face potential litigation over “emerging exposures” such as Environmental, Social and Governance, or ESG, issues and climate change, it says.
Exchange Act reporting is a key factor in reigning in premiums and reducing risk. According to the Journal and insurance companies, some companies also are setting up captive insurance companies in places like Singapore or Bermuda – as wholly owned subsidiaries that provide insurance to the sponsoring company alone.
Earnings Guidance: Most Important for Smaller Companies?
In this recent 6-minute interview with Andrew Ross Sorkin, Barry Diller – Chair of Expedia and IAC – takes a pretty firm stance against giving earnings guidance, and says the companies he oversees will no longer be providing granular predictions of the near-term future. This CFO.com article argues that guidance isn’t a waste of management’s time and outlines ways in which the practice can benefit companies – especially smaller companies. Here are some high points:
1. Volatility: Stocks are valued on expectations of future performance. Companies that give guidance help narrow the standard deviation of those expectations, and their words and numbers carry weight because they have the most information about their future. Volatility is less of an issue for widely-followed mega-caps, which have a “crowdsourced consensus on future value that can make guidance unnecessary.”
2. Visibility: For smaller companies, guidance is an important tool to enhance visibility on the Street. It makes analysts’ and investors’ jobs easier and shows management can deliver, which builds their credibility — the most valuable non-monetary asset on Wall Street.
3. Vulnerability: Companies that give guidance take the lead in shaping investor perception about future potential. Those that don’t leave a “consensus” opinion to a handful of research analysts who don’t have full perspective on the issuer’s culture, plans, and opportunities. Worse yet, management is nonetheless still held accountable by the market for hitting that consensus.
“All-Purpose” Securities Law Disclosure: Are We Reaching the Breaking Point?
As demands mount for “stakeholder”-oriented disclosure – and as the SEC faces understandable backlash about whether that type of disclosure is useful to investors – there’s a growing contingent suggesting that shoehorning extra info into an investor-focused disclosure scheme is a lot like two-in-one shampoo & conditioner: it simply doesn’t work. This article from Tulane Law prof Ann Lipton discusses whether the SEC has been a victim of “mission creep” – and why now’s the time to look at other avenues for required “stakeholder” disclosure. Here’s an excerpt:
The assumption — stated or unstated — that all public disclosure must necessarily run through the securities laws has distorted the discourse for decades. Academics, regulators, and advocates have conflated the interests of investor and stakeholder audiences, to the detriment of both. There has been little, if any, discussion of the informational needs of the general public, or when and whether businesses should operate under a duty of public transparency. At the same time, advocates for myriad causes try to flood the securities disclosure system with information relevant to their own idiosyncratic interests, overburdening the SEC and making it more difficult for investor audiences to interpret the information they are given.
How would this type of system work? Ann looks at the EU system “both as a model and a point of contrast” – and suggests that stakeholder disclosure would apply to these categories:
– Financial information – including issues pertaining to tax payments, anticorruption measures, and antitrust compliance
– Corporate governance
– Environmental impact
– Labor relationships – including diversity, working conditions, and pay practices
To minimize burdens on business, the initial system could focus on information that has already been compiled internally, such as reports that companies are already required to file with government agencies, or financial and governance information likely to be on hand. Doing so would spare companies the additional burdens of data gathering, and would go a long way toward standardization.
To be clear, this isn’t a call to “abolish” the SEC. Rather, it would emphasize the SEC’s focus on investors and use other ways to provide complementary info. However, we could see some ripple effects in SEC rules if something like this came to fruition, and it could expand the scope of work for people in our community, since we’re already involved with disclosure.
Last year, I blogged about an SEC enforcement action to halt an unregistered ICO that was being conducted in the most “best practices” way possible – through a “Simple Agreement for Future Tokens.” Under this structure, the company sells “pre-token” securities to accredited investors, which flip into non-security tokens at or after launch of a platform on which to use them. In this particular case, the SEC took issue with the fact that there would be no established cryptocurrency ecosystem at the point when the pre-tokens flipped to tokens.
On Friday, the SEC announced that it had settled the enforcement action – and the results aren’t encouraging for the crypto crowd. Here’s the highlights:
– The company agreed to return more than $1.2 billion to the initial purchasers in the offering
– The company’s paying an $18.5 million civil penalty
– For the next 3 years, the company has to notify the SEC before participating in the issuance of any digital assets
Yikes. The announcement includes this quote from the Chair of the SEC Enforcement Division’s Cyber Unit: “New and innovative businesses are welcome to participate in our capital markets but they cannot do so in violation of the registration requirements of the federal securities laws.” But with this SAFT arrangement drawing ire, a lot of folks are wondering how exactly a token offering would do that.
Reg S-T: Corp Fin Extends Temporary Relief for Signatures
In March, John blogged about Corp Fin’s temporary relief for manual signature retention requirements under Rule 302(b) of Regulation S-T. Last week, the Staff updated that statement to say that it’ll remain in effect until a date specified in a public notice, which will be at least two weeks from the date of the notice. So while the Staff continues to expect compliance, it won’t recommend enforcement if:
– a signatory retains a manually signed signature page or other document authenticating, acknowledging, or otherwise adopting his or her signature that appears in typed form within the electronic filing and provides such document, as promptly as reasonably practicable, to the filer for retention in the ordinary course pursuant to Rule 302(b);
– such document indicates the date and time when the signature was executed; and
– the filer establishes and maintains policies and procedures governing this process.
The Staff also extended for an indefinite period its temporary relief for submission of paper forms under Rule 144 and other rules – which had been set to expire June 30th. For more detail, see this Cooley blog.
Last week, the SEC, Corp Fin, the Division of Investment Management and the Division of Trading & Markets also issued this joint statement, which summarizes all of the relief & assistance that the Commission provided during the pandemic to accommodate capital raising & reporting, and says the Commission won’t be extending the relief that gave companies additional time to file disclosure reports that were due on or before July 1st.
But not everyone is happy about “deregulatory” efforts by the SEC these last few months – here’s a letter to SEC Chair Jay Clayton from Chair of the House Financial Services Committee, Congresswoman Maxine Waters (D-CA), calling for the Commission to halt rulemakings unrelated to the pandemic.
Climate Change Litigation: The Next “Mass-Tort” Frontier?
BP is facing state court action for nuisance claims from the cities of Oakland & San Francisco, after the Ninth Circuit denied the company’s motion to remove the case to federal court and dismiss the claims. This Wachtell Lipton memo predicts that the decision will invite “countless actions by states, municipalities, and private litigants in state courts all over the country” – and that liabilities will extend far beyond the energy sector.
Meanwhile, as Reuters reported a couple weeks ago, PG&E is pleading guilty to 84 counts of involuntary manslaughter in connection with the 2018 Camp Fire. Although no individuals will be held criminally accountable, this plea is pretty unique because the company is admitting criminal guilt. The company is also paying up to $19 million in fines & costs accepting tighter oversight – and pledging billions of dollars to improve safety and help wildfire victims. The company cited more than $30 billion in potential wildfire damages when it filed for bankruptcy, and it’s reached various settlements and rate agreements as part of the Chapter 11 plan.
Late last year, Liz blogged about Prudential’s “multi-stakeholder framework” and the company’s intent to report progress under that framework in future sustainability reports. Yesterday, the company issued its first report since making that commitment.
Our good friend Peggy Foran and her team organized the report by 5 “capitals of sustainability”:
– Corporate Governance: this pillar includes the “multi-stakeholder” framework that codified the board’s accountability to shareholders, employees, customers and society
– Business Model & Innovation: highlighting strategic acquisitions
– Human Capital: noting that Prudential created an “Inclusion Council” last year to ensure C-suite accountability for inclusion & diversity, explaining the director identification process and sharing that 80% of the company’s outside directors are diverse
– Social Capital: discussing the company’s sustainability commitment, support for stakeholders in the midst of Covid-19 and supply chain efforts
– Environment: describing Pru’s “Global Environmental Commitment” that includes operational and investment targets – the company was carbon neutral in its corporate travel and in early 2020, it was the first insurer to issue a green bond
Prudential has issued a sustainability report for several years so they might be further along than others, but for those starting down the path of pulling a similar report together, Prudential’s report is worth a look. The company also has a sustainability micro-site and there, you’ll find the report and a series of short videos with 6 senior leaders.
Covid-19: Investors Want Mandated Disclosures
As reported in a recent Davis Polk blog, Americans for Financial Reform sent a letter signed by over 90 investors, state treasurers, public interest groups and others calling on the SEC to create new Covid-19-related disclosure requirements. The letter says the disclosure requirements would help investors understand how companies are protecting workers, preventing the spread of the coronavirus and responsibly using any federal aid the companies receive. Depending on how companies respond to Covid-19, the letter says the potential impact of losses resulting from Covid-19 will be significant.
The requested disclosures are somewhat lengthy and it’s understandable that the information could be helpful to investors, although it would be more work for companies and securities lawyers. Requested disclosures dealing with cash flow and liquidity concerns and supply chain adjustments may have been addressed, in part, by Corp Fin’s Covid-19 supplemental guidance issued earlier this week. Some of the other requested disclosures relate to worker protections during Covid-19, compliance with public health recommendations about reopening, rationale supporting executive compensation modifications and all election spending and lobbying activity, including funds spent through trade associations.
With companies preparing Q2 disclosures, the SEC is holding a “Roundtable on Q2 Reporting: A Discussion of Covid-19 Related Disclosure Considerations” this coming Tuesday, June 30. SEC Chairman Jay Clayton is moderating the roundtable and it will include Gary Cohn, Former Director of the National Economic Council; Glenn Hutchins, Co-Founder of Silver Lake Partners; Tracy Maitland, President of Advent Capital Management; and Barbara Novick, Vice Chairman of BlackRock. The roundtable is being webcast and can be viewed on the SEC’s website.
Tesla Delays Its Meeting – And D&O Coverage Puts Glass Lewis “Against” Chair
Many have likely seen reports that Tesla postponed its annual shareholder meeting. The delay is due to social distancing concerns – it had been scheduled for July 7. Elon Musk tweeted news of the delay and a few days later tweeted that September 15 is the tentative reschedule date – Tesla filed additional soliciting materials with this information and as some would say, a screenshot is worth a thousand words.
With Tesla’s original meeting date just around the corner, proxy advisors issued their voting reports and the NYT reports that Glass Lewis has recommended investors vote “against” Tesla’s Chairwoman, Rhonda Denholm. Back in May, John blogged about Elon Musk’s cost-saving move by not renewing the D&O liability policy for directors and instead, that Musk intends to personally provide the coverage. According to the article, that cost saving move is behind Glass Lewis’s recommendation:
The recommendation was based on corporate governance concerns due to an insurance arrangement with Chief Executive Officer Elon Musk after Tesla’s decision to not renew its directors and officers’ liability policy due to high premiums quoted by insurers, Glass Lewis said. The article quotes Glass Lewis: ‘We are concerned that this D&O arrangement gives the company’s independent directors a direct, personal financial dependency upon the CEO they are tasked with overseeing.’ Since Denholm heads the audit committee that permitted the insurance arrangement, it recommends voting against her.
Rhonda Brauer shares her observations about our current crises and how SASB’s “financial materiality” disclosure framework could assist in bringing about societal change:
As news occurs literally outside my window, I see accelerated demands for societal change that are impacting company, investor and other stakeholder expectations. The following data points affect not only “human capital” and environmental issues, but also “social capital” issues encompassing community relations and human rights:
The killing of George Floyd and likely continuing protests calling for deeper structural changes to systemic racism in our country;
The Business Roundtable’s 2019 Statement on the Purpose of a Corporation, which committed to support the communities in which companies operate, as well as the World Economic Forum’s International Business Council’s recent statement;
SASB’s continuing work on possible revisions to its standards, including research on human capital management across its 77 industries. SASB notes that these themes are closely related to “social capital” themes, which focus on human rights and community relations in, g., the Oil & Gas – Exploration & Production (E&P) industry.
SASB’s “financial materiality” disclosure framework brings these issues together in a way that could result in profound societal changes, particularly given the supportive statements of large asset managers and re-energized public focus on structural racial health inequities. As noted in my earlier blog, large asset managers are among the investors from which SASB has gained increasing support.
Looking more closely at social capital issues, I note the 2020 shareholder resolution (#8) at Chevron — it requested a report on efforts to “prevent, mitigate and remedy the actual and potential human rights impacts of its operations.” The supporting statement and exempt solicitation went into more detail about the social capital aspects of the request, referencing SASB’s quantitative metrics and analysis, which incorporate related international conventions to which Chevron says it adheres. The proposal received 16.7% support, which is significant for a first-year company proposal. Nevertheless, the lack of support from larger asset managers, in particular, raises questions about why they were satisfied with the company’s current disclosure about its impact on communities that are home or adjacent to its operations.
Unlike As You Sow’s “materiality” proposals, the Chevron human rights proposal did not mention SASB in its RESOLVED clause. Proxy Insight has tracked – through mid-June — the 2020 E&S proposals that concern human rights and community relations. Of those requesting enhanced disclosures, As You Sow’s resolutions that referenced SASB passed in most cases, unlike most similar proposals. This suggests that larger asset managers – and their asset owner clients — are focusing on the SASB-referenced resolutions, which might not otherwise get their attention during the busy proxy season. When considered with As You Sow’s successful withdrawal settlements, this also suggests that companies are willing to act when faced with resolutions that request SASB-aligned reporting.
Chevron is one of the few E&P companies listed as a SASB reporter, although it does not provide the required social capital metrics and analysis to show its investors and other stakeholders how its policies are actually implemented. Until there is widespread required ESG disclosures, companies like Chevron will likely increase SASB-requested disclosures, as they navigate the competing concerns of different external and internal constituencies calling for more or less disclosure. More corporate case studies will likely be disclosed.
Stay tuned as companies, investors and other stakeholders re-prioritize their social capital plans, following stepped-up calls for combatting systemic racism and also updated, reliable and comparable reporting on ESG issues, as noted in my earlier blog. Companies who ignore these powerful trends risk scrambling to catch up with their peers’ disclosures and policies, as well as antagonizing a wide range of their stakeholders, which could result in, e.g., employee and customer retention issues, as well as being targeted with community protests and boycotts and also shareholder resolutions and vote-no director campaigns.
Final CCPA Regulations Released
Back in April, I blogged about how even though California was continuing to make changes to the California Consumer Privacy Act, California’s Attorney General planned to move ahead with enforcement beginning July 1. With that date fast approaching, this Thompson Hine memo reports that California has released final CCPA regulations. The memo says there are no material substantive changes from the modified regulations that were released March 11 but the rulemaking record provides clarification and insight about the AG’s interpretation and approach to the CCPA.
As a resource for our members, we’ve been posting memos about the CCPA and other data security topics in our “Cybersecurity” Practice Area.
Today’s Webcast: “M&A Litigation in the Covid-19 Era”
Tune in this afternoon for the DealLawyers.com webcast – “M&A Litigation in the Covid-19 Era” – to hear Hunton Andrews Kurth’s Steve Haas, Wilson Sonsini’s Katherine Henderson and Alston & Bird’s Kevin Miller review the high stakes battles currently being waged over deal terminations and other M&A litigation issues arising out of the Covid-19 crisis.
Yesterday, Corp Fin issued CF Disclosure Guidance: Topic 9A relating to operations, liquidity and capital resources disclosures companies should consider with respect to business and market disruptions from Covid-19. The guidance is intended to supplement Corp Fin’s earlier guidance, CF Disclosure Guidance: Topic 9, that John blogged about in March. Acknowledging that many companies have had to make operational adjustments in response to Covid-19, including for such things as telework arrangements, supply chain and distribution changes, new or modified customer payment terms, and other financing activities, the guidance reminds companies of their disclosure obligations:
It is important that companies provide robust and transparent disclosures about how they are dealing with short- and long-term liquidity and funding risks in the current economic environment, particularly to the extent efforts present new risks or uncertainties to their businesses. While we have observed companies making some of these disclosures in their earnings releases, we encourage companies to evaluate whether any of the information, in light of its potential materiality, should also be included in MD&A.
The latest guidance also discusses disclosure obligations for companies receiving federal assistance under the CARES Act and says such companies should consider the short- and long-term impact of that assistance on their financial condition, results of operations, liquidity, and capital resources, as well as the related disclosures and critical accounting estimates and assumptions.
Corp Fin’s guidance also reminds companies of their disclosure obligations where there is substantial doubt about a company’s ability to continue as a “going concern” or the substantial doubt is alleviated by management’s plans. Similar to Corp Fin’s earlier guidance, the latest guidance provides a helpful list of questions that companies should ask themselves when preparing disclosure documents.
Along with Corp Fin’s guidance, the SEC’s Chief Accountant, Sagar Teotia, issued a statement stressing the importance of high-quality financial reporting during Covid-19. The Office of Chief Accountant’s statement acknowledges many companies have had to make significant judgments addressing various accounting and financial reporting matters. Among other things, the statement reminds companies about disclosure obligations relating to such judgments as well as ICFR and “going concern” issues:
Companies should ensure that significant judgments and estimates are disclosed in a manner that is understandable and useful to investors, and that the resulting financial reporting reflects and is consistent with the company’s specific facts and circumstances.
With that, the statement says that many companies have had to adjust financial reporting processes in response to the crisis and reminds companies about disclosure requirements. These changes may include consideration on how controls operate or can be tested and if there is any change in the risk of the control operating effectively in a telework environment. In addition, changes to the business and additional uncertainties may result in additional risks of material misstatement to the financial statements in which new or enhanced controls may need to be implemented to mitigate such risks. We remind preparers that if any change materially affects, or is reasonably likely to materially affect, an entity’s ICFR, such change must be disclosed in quarterly filings in the fiscal quarter in which it occurred (or fiscal year in the case of a foreign private issuer).
Like Corp Fin’s guidance, Teotia’s statement reminds companies to assess whether there is substantial doubt about the company’s ability to continue as a “going concern” and related disclosures. In instances where substantial doubt about an entity’s ability to continue as a going concern exists, management should consider whether its plans alleviate such substantial doubt, and make appropriate disclosures to inform investors. Such disclosures should include information about the principal conditions giving rise to the substantial doubt, management’s evaluation of the significance of those conditions relative to the entity’s ability to meet its obligations, and management’s plans that alleviated substantial doubt. If after considering management’s plans substantial doubt about an entity’s ability to continue as a going concern is not alleviated, additional disclosure is required. We note that GAAP requires such disclosure in the notes of the financial statements and this may be incremental to other disclosure requirements in filings with the Commission.
Today’s Webcast: “Proxy Season Post-Mortem: The Latest Compensation Disclosures”
Tune in today for the CompensationStandards.com webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.
Yesterday, in an 8-1 decision, the US Supreme Court reaffirmed the SEC’s authority to seek disgorgement as a remedy in enforcement actions – but placed limits on the scope of the remedy. Justice Sotomayor’s opinion, in Liu v. SEC, held that a disgorgement award that doesn’t exceed a wrongdoer’s net profits and is returned to the “wronged investors” is equitable relief permissible under 15 USC §78u(d)(5). Justice Thomas issued a dissenting opinion. Briefly, here’s how the case arose:
Liu involved a case of a California couple that contested an SEC enforcement action brought against them in connection with their solicitation of nearly $27 million from foreign nationals to build a never-completed cancer treatment center. The district court ordered disgorgement of the full amount the couple raised from investors, less a small amount remaining in corporate accounts. The couple then objected, saying the disgorgement amount didn’t account for their business expenses. The Ninth Circuit affirmed and the couple brought the case before the U.S. Supreme Court.
The couple claimed that the Court’s Kokesh decision meant that disgorgement is a “penalty,” and thus not the kind of relief available at equity. Justice Sotomayor’s opinion in Liu said, ‘Not so.’ The Court remanded Liu to the lower courts to decide the issues about limiting the disgorgement order to the couple’s net profits from the cancer center investment scheme and awarding it to the victims. Justice Sotomayor’s opinion includes discussion of principles to help guide the lower courts’ assessment.
When the Supreme Court agreed to hear the Liu case last fall, it sparked speculation about whether disgorgement might be removed entirely from the SEC’s arsenal of remedies. If disgorgement was no longer available as a remedy in enforcement actions, it could’ve greatly reduced the SEC’s leverage in settlement negotiations. The questions started a couple of years ago when the Court decided Kokesh v. SEC, which held disgorgement in an SEC enforcement action constitutes a “penalty” for purposes of the applicable statute of limitations. Justice Sotomayor’s opinion in that case included a footnote saying the Court didn’t decide whether courts have authority to order disgorgement in SEC enforcement proceedings or whether courts have properly applied disgorgement principles in this context.
Now, we know that disgorgement will continue as a potential remedy in SEC enforcement proceedings – but that courts must deduct “legitimate expenses” and the award must benefit the victims. As this Goodwin memo notes, there are still some open questions. We’ll be posting more memos in our “SEC Enforcement” Practice Area.
Some PPP Borrower Names & Loan Amounts to be Released
Last week, John blogged about a lawsuit filed by several media companies seeking to compel disclosure of private borrowers and loan amounts under the Paycheck Protection Program. A recent Journal of Accountancy article says that the SBA and Treasury have now agreed to publish names and loan amounts for PPP loan recipients that received loans of $150,000 or more. For loans that are less than $150,000, the article says the amounts will be aggregated by zip code, industry, business type and other demographic data.
Although information on loan recipients is being released, the data isn’t as extensive as some might want – here’s a statement issued by the Chairs of the House Financial Services Committee, Ways and Means Committee and Small Business Committee reiterating their demand for full transparency.
Impairment Testing Disclosures
A recent Audit Analytics blog says the SEC is watching impairment testing disclosures. Audit Analytics reports that the SEC issued a comment letter to a company asking the company to expand on its disclosure regarding impairment testing conducted in the first quarter. As companies deal with the economic impact resulting from Covid-19, many have had to conduct non-routine impairment tests. The blog says that it’s likely the SEC will continue to concentrate on impairment testing disclosures as part of their review process.
