I’m fresh off a high from attending Oprah’s “2020 Vision Tour” last month (yes, she visited Minnesota in January, maybe because as this video shows she’s a huge fan of Mary Tyler Moore). So I’m extra excited to share the latest “list” installment from Nina Flax of Mayer Brown (here’s the last one):
Another new year, another time many of us are setting goals and making resolutions. As a quick recap, the main goal I shared last year was reading more books for pleasure. Of the 12 books on my list, I read 3 – Bad Blood, The Girl Who Smiled Beads and The Queen’s Poisoner (and the rest of the Kingfountain series). I also read the Crazy Rich Asians series and one other book – bringing me to a grand total of 14. Which I think is a good first step to prioritizing reading for pleasure, but certainly improvable. So for this new year, I decided to double down on reading, formalize watching less TV (because since it was a “soft” goal last year, I of course let it slip) as well as numericize other things (because I clearly do better with specifics and measurements). For accountability’s sake (and thank you for giving me that feeling around reading last year!), here is what I’ve landed on:
1. Read More Books For Pleasure. My goal for this year is 28. I am hoping I exceed this number, but we will see… I decided to not choose my books in advance this year, because doing so last year actually discouraged me a bit. I tried to force myself to read ones from my list that just were not clicking. Where in previous years I would quickly move on if I wasn’t absorbed in the first chapter or two, this past year I wasted time trying to force myself to read words I clearly was not interested in. Several books started and not finished despite more time spent = lesson learned!
2. Work Out At Least Once a Week. Working out at all was a goal for last year. I did work out – some. But now that I am at an age where I definitely do not feel like I’m 20 anymore, I want to take the fact that I only have one body and want it to be healthier for longer more seriously. Plus, framing this as something I’m doing also for the sake of the child motivates me. Plus, I have a friend who said she wants to do this as well, and we agreed we would hold each other accountable.
3. Watch Less TV. I am going to try to limit TV, and want to try to watch only as I am working out. So if I want to finish watching the remainder of The Originals series (I have seen like every other vampire thing out there, and had not yet seen this, so I started over the holiday season, which = bad news for my 2019 soft goal), I better get on a bike or treadmill!
4. Track What Matters Most. One of my funniest, most driven friend’s father is Marshall Goldsmith, who is a leading business educator and coach. I heard many moons ago about his daily questions spreadsheet. I have wanted to implement something like this, but have not previously prioritized it. This year, it is a priority. I don’t think I’m going to have all of the questions he does (I really do not want to track my weight every day), nor will I have someone calling me every day to track for me (how cool would that be though?!), but I have come up with a few things I would like to watch more closely. Some on my list: Was I there at bed time for my son? Did I speak to my parents? Did I say or do something nice for my husband? Did I exercise? Did I watch TV when I was not exercising? Did I spend time reading for pleasure? As you can see, some redundancy built in to encourage meeting my other goals!
As in 2019, I will end this post with a quote from someone I knew as a child – Each year you should take a long walk, make a new friend and read a good book. Here’s to 2020 being great.
Nasdaq Clarifies “Closing Price” for Transactions Other than Public Offerings
Last week, this Notice of Filing and Effectiveness says that Nasdaq filed a proposed rule change clarifying the term “closing price” in Rule 5635(d)(1)(A) relating to shareholder approval for transactions other than public offerings. The rule change clarifies that closing price means the Nasdaq Official Closing Price (as reflected on Nasdaq.com). The Notice says there may have been some confusion and that Nasdaq believes this change will reflect Nasdaq’s original intent when adopting the amendment to Rule 5635(d) in September 2018.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply entering their email address on the left side of that blog. Here are some of the latest entries:
– D&O: Common Law & Statutory Claims Aren’t Covered “Securities Claims”
– Shareholder Engagement Trends
– Auditor Independence: What Audit Committees Should Watch For
– 5 Tips For Creating a “Tech-Savvy” Board
– Executive Successions: Include Process for “SOX” Certifications
Don’t miss the latest episode of the “Dave & Marty Radio Show” – in which Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics in this 24-minute episode include:
– Recommendations for tuning up your risk factors
– Early trends in the shareholder proposal season
– Evolving musical tastes in a world of technological innovation
Newer Sustainability Reporting Frameworks are Picking up Global Endorsements
This year has already seen significant endorsements of the newer sustainability reporting frameworks: the Sustainability Accounting Standards Board (SASB) and the Task Force for Climate-related Financial Disclosures (TCFD).
As Lynn blogged last month, Blackrock’s annual letters from CEO Larry Fink note that Blackrock is more strongly encouraging its portfolio companies to provide sustainability disclosure in accordance with SASB’s industry-specific standards and the TCFD’s recommendations, including a company plan for operating under a global warming scenario of 2 degrees Celsius or lower. To back up its “encouragement”, Blackrock will increasingly vote against management and boards whose companies aren’t “making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”
A related endorsement came out of Davos last month, where the World Economic Forum’s International Business Council (IBC) – which includes 140 large global companies — supported the development of an ESG reporting framework that also relies on existing disclosure frameworks, including SASB and TCFD. A draft framework has been proposed by the Big Four accounting firms, which have actively supported many of the sustainability reporting initiatives and are well placed to do third-party audits of the corporate ESG disclosures.
This growing support for SASB and TCFD is consistent with the report that Glenn Davis and I co-authored last September, “Sustainability Reporting Frameworks: A Guide for CIOs”, for the Council of Institutional Investors (CII). The text of this Guide is intended to be a quick read for pension fund CIOs and other readers, who want to learn:
The main differences between the primary reporting frameworks (summarized further in a brief Appendix)
Related considerations for fund CIOs and their staffs
Open issues for the future
For ESG reporting geeks who want more, the 50+ footnotes link to related research and articles, plus helpful disclosure examples.
Skipped Class the Day Insider Trading was Covered?
Insider trading stories really do make me shake my head in disbelief and I did that when reading a recent story. In this case, the SEC caught up with a recent college grad for insider trading – within the grad’s first year on the job as a junior investment banker. The action seems pretty cut and dry – within the first year out of college and while working as a junior investment banker, the grad learned of a pending deal, bought call options and sold them for a profit shortly after the deal was announced. Here’s an excerpt from the SEC’s press release:
The grad agreed to settle with the SEC and consented to the entry of a judgment permanently enjoining him from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and ordering him liable to pay disgorgement of his ill-gotten trading profits, with interest, which will be offset by the amount of any forfeiture ordered against the grad in a parallel criminal action. In a separate administrative proceeding instituted on December 23, 2019, the grad consented to be barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any penny stock offering.
On the same day the SEC filed its action, the U.S. Attorney’s Office for the Southern District of New York announced parallel charges against him. The grad pleaded guilty in the criminal action, and in January 2020 he was sentenced to five years of probation and ordered to forfeit approximately $126,000.
According to this story, the grad is reportedly the former study body president at NYU’s Stern School of Business and at one time gave advice to first-year students to “hold on to your values”. Not sure what values this person had in mind. It’s hard to imagine that someone wouldn’t understand the concept of insider trading even if the person missed class the day the prof covered it. But, it’s sad to think this could be another case where the person just thought they wouldn’t get caught…
A shareholder proponent has filed a lawsuit against a Montana energy company in an attempt to ensure the proponent’s proposal is included on the company’s proxy ballot. The proposal asks the company to end using coal-fired generation of electricity from a power plant it operates no later than the end of 2025 and to replace the electricity with non-carbon emitting renewable energy.
The lawsuit follows the company’s no-action request to the SEC on grounds that the proposal relates to the company’s ordinary business operations and that the proposal contains materially false or misleading information about the company’s carbon emission rate. As shown in the SEC’s chart detailing SEC responses to shareholder proposal no-action requests, the SEC has “no view” and indicates that litigation is pending.
Last year, Liz blogged about how the NYC Comptroller filed a lawsuit as it sought to ensure a proposal related to greenhouse gas emissions would be included on a company’s proxy ballot. In that case, SEC correspondence shows the company withdrew its no-action request and included the proposal on its ballot. Voting results for the company’s shareholder meeting show the proposal failed to receive majority support.
Time will tell how the proponent fares in federal court for the district of Montana and/or whether the company relents and includes the proposal on its ballot. The company’s no-action request says that the company intends to file its proxy materials on or about March 6, 2020 – stay tuned.
IFRS: Proposed Changes Strike a “Reg G” Note
At the end of December, the International Accounting Standards Board proposed new rules that would impact companies audited under International Financial Reporting Standards. This Davis Polk memo summarizes the proposal – here’s an excerpt:
In an interesting departure from U.S. generally accepted accounting principles, IASB is proposing to require companies to disclose information about non-GAAP measures in a note to their financial statements when such measures (i) are used in public communications outside financial statements; (ii)complement totals or subtotals specified by IFRS standards; and (iii) communicate to users of financial statements management’s view of an aspect of the company’s financial performance. Companies would have to explain why such measures provide useful information, how they are calculated, and how they relate to the most comparable profit subtotal specified by IFRS, and would also have to provide a reconciliation to the IFRS-mandated measure. This requirement would be similar to Item 10(e) of Regulation S-K, which currently governs such measures, but would be substantially less prescriptive.
The January-February Issue of the Deal Lawyers print newsletter is available now and focuses on Earnouts. Learn how to survive M&A’s “Siren Song.” This edition of the Deal Lawyers print newsletter covers:
– Overview of Earnouts
– Prevalence of Earnouts & Common Terms
– Tax & Financial Reporting Issues
– When Earnouts Are “Securities”
– The Risk of Post-Closing Disputes
– Earnout Litigation: Plenty to Fight About
– How Much Protection Does Good Documentation Provide?
– Key Issues in Structuring & Negotiating an Earnout
– Conclusion: The Sirens Still Sing
Here are FAQs about the Deal Lawyers print newsletter – including how members of DealLawyers.com who also subscribe to the print newsletter can access the issues online.
If you encounter a problem or if you would like help, please call us at 800.737.1271 or email info@ccrcorp.com.
This memo from the Journal of Accountancy gives me LSAT flashbacks. Based on remarks from an SEC Professional Accounting Fellow, it explains that while critical audit matters tend to be a subset of critical accounting estimates, some CAMs have not been reported as critical accounting estimates by management. Here’s an excerpt:
For example, one auditor reported that evaluation of the identification of related parties and related-party transactions was a critical audit matter, but there wasn’t a critical accounting estimate related to that topic.
Sometimes, Collins said, an auditor identifies a critical audit matter that is a component of a related critical accounting estimate. For example, one critical audit matter related to a goodwill impairment analysis for a specific reporting unit that was considered at risk for impairment. Management’s critical accounting estimate, meanwhile, related to goodwill impairment more broadly.
The memo also quotes SEC Deputy Chief Accountant Marc Panucci as urging auditors and companies to approach critical audit matters as a blank sheet of paper each year. Often, they might end up being the same from year to year, but auditors won’t know that until they’ve considered the facts & circumstances of each each individual audit.
Disclosure Reform: Are ESG Risks “Material”?
Over the past couple of years, the SEC has taken a few small steps toward “disclosure reform” – with its 2018 “Disclosure Update & Simplification” and 2019 “Fast Act Modernization” amendments – as well as with its more recent proposal to modernize Items 101, 103 and 105 of Reg S-K. Although the most recent proposal drew thousands of comments – including from Big Yoga! – none of the recent or anticipated rule changes would overhaul ESG risk disclosure in the way that some investors say they want.
One of the main objections to even considering rules on this topic is that the info wouldn’t be material. To get a sense of who shares that view, a recent study published in the Villanova Law Review takes a closer look at the comment letters submitted in response to the SEC’s 2016 Concept Release – apparently there were 25,000 comments but only 375 “unique” responses. Here’s an excerpt:
The findings here confirm that concerns about investors’ disclosure overload are overblown and indeed, outdated. While many investors support some streamlining of risk-related disclosure, most investor comments focus on the under-disclosure of material information, not the reverse.
The empirical results discussed in Part III below confirm that respondents’ support for, or opposition to, ESG disclosure reform has less to do with ESG and more to do with their underlying views on materiality, the value of prescriptive disclosure, and how satisfied they are with the current state of reporting.
At the same time, this study also finds a surprising level of agreement among respondents on a number of the SEC’s proposals to simplify risk-related disclosures, particularly with regard to market risk disclosures and MD&A.
What I found refreshing was that the study confirmed the SEC, investors and business community all agreed that risk disclosures are extensive but frequently generic and boilerplate – and there was general agreement for more principles-based disclosure. The study provides another entry point for conversations about ESG risk disclosure – e.g., consideration needs to be given to not only increased compliance costs that companies would incur with expanded disclosure but also costs to investors of under-disclosing material ESG information.
Tomorrow’s Webcast: “Conflict Minerals – Tackling Your Next Form SD”
Join us tomorrow for the webcast – “Conflict Minerals: Tackling Your Next Form SD” – to hear our own Dave Lynn of Morrison & Foerster, Ropes & Gray’s Michael Littenberg, Lawrence Heim of the Responsible Minerals Initiative and Deloitte’s Christine Robinson discuss what you should now be considering as you prepare this year’s Form SD.
With the comment period for the SEC’s proposed rules on regulating proxy advisors and the shareholder proposal process closing today – February 3rd – let’s take a peek at some of the comment letters submitted so far on these topics – available here and here, respectively.
First, among other things, T. Rowe Price has asked the SEC to refocus on proxy infrastructure – e.g. end-to-end vote confirmation – and to go back to the drawing board. That’s similar to recent recommendations from the SEC’s Investor Advisory Committee – I blogged last week on our “Proxy Season” Blog that the Committee wants the SEC to revisit its priorities and re-do the proposals.
Some letters focus primarily on the proposal dealing with regulation of proxy advisors (see this letter from Value Edge Advisors, Nell Minow), while others focus primarily on the proposal dealing with the Rule 14a-8 shareholder proposal process (like this one from First Affirmative) – and some address both (e.g., Neuberger Berman).
The Council of Institutional Investors issued a press release criticizing the proposals and then submitted two letters, one on the regulation of proxy advisors and another on the Rule 14a-8 shareholder proposal process, each is 65 pages long. Here’s an excerpt from CII’s press release:
The two proposals are the most significant attempt by the SEC to limit the voice of shareholders since the Commission was created in 1934. They would tighten regulation of proxy advisory firms and shareholder proposals in ways that CII believes are fundamentally flawed and unnecessary. If adopted, both proposals would introduce complexity and micromanagement in proxy voting and in shareholder-company engagement processes that have worked well for decades. CII urges the SEC to withdraw both proposals and focus instead on festering problems in the proxy voting system.
Here are a few other letters worth noting:
– Boston Trust Walden (signatories include, among others, As You Sow, Mercy Investment Services, NYC Comptroller, Trillium Asset Management)
– Principles for Responsible Investment (sign-on letter – signatories include, among others, BMO Global Asset Management, ClearBridge Investments, Legal & General Investment Management, MFS Investment Management, New York State Comptroller, Wellington Management Company)
Aside from traditional comments to the SEC, at least one asset manager has criticized the proposed rules in a letter to clients – here’s a client letter from Daniel Loeb’s Third Point (comments on rule proposal on pg 4).
As reported in the NY Times and Reuters, in a speech last week, SEC Commissioner Roisman defended the proposals and said that some of the comments are based on misinformation but he is “open to changing his mind” on the direction of the proposals.
And, even though the comment period closes today, comments will continue to roll in…
CalPERS and CalSTRS Report on Climate-Related Financial Risk
CalPERS has issued its first report on climate-related financial risk of its public market portfolio, including the fund’s alignment with the Paris Agreement and California climate policy goals and the exposure of the fund to long-term risks.
Among information included in the report is a summary of public market exposures and anticipated climate-related financial risks in sectors noted by the TCFD as most exposed to climate risks and opportunities. The report also provides an analysis of how CalPERs work on climate change is aligned with the Paris Agreement and California climate policy goals and it outlines some of CalPERS engagement activities. Engagement activities have included meeting in person with company management and in some cases board members about climate risk.
CalSTRS also filed its first report on climate-related financial risk under California Senate Bill 964. CalSTRS’ report, titled “Green Initiative Task Force“, includes additional content compared to prior reports in that it says the report analyzes CalSTRS climate risk exposure and describes how it supports California’s climate goals. The report also is structured to align with the TCFD framework of recommended climate-related financial disclosures – governance, strategy, risk management, and metrics and targets.
The reports also summarize CalPERS and CalSTRS proxy voting on environmental proposals during the 2019 proxy season – each fund typically supports proposals asking for improved environmental risk reporting unless it believes that the company already provides adequate disclosure about these risks. In 2019, CalPERS and CalSTRS each supported 54% of environmental proposals.
As noted in the reports, California Senate Bill 964 requires CalPERS and CalSTRS to publicly report this information every three years until January 31, 2035. Because this was CalPERS first report, in the report CalPERS states that it welcomes the California legislature’s feedback. So, let’s check back in three years and see how the report has evolved. In the interim, CalSTRS report says that it will provide an annual update highlighting its low-carbon transition activities.
Our February Eminders is Posted!
We have posted the February issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!
Yesterday, the SEC voted to propose significant changes to the financial disclosure provisions of Regulation S-K. The changes are intended to eliminate duplicative disclosures & modernize and enhance MD&A disclosures while simplifying compliance efforts. Here’s the 196-page proposing release. This excerpt from the SEC’s press release summarizes the proposed rule changes:
The proposed amendments would eliminate Item 301 (selected financial data) and Item 302 (supplementary financial data), and amend Item 303 (management’s discussion and analysis). The proposed amendments are intended to modernize, simplify, and enhance the financial disclosure requirements by reducing duplicative disclosure and focusing on material information in order to improve these disclosures for investors and simplify compliance efforts for registrants.
Among other things, the proposed amendments to Item 303 would:
– Add a new Item 303(a), Objective, to state the principal objectives of MD&A;
– Replace Item 303(a)(4), Off-balance sheet arrangements, with a principles-based instruction to prompt registrants to discuss off-balance sheet arrangements in the broader context of MD&A;
– Eliminate Item 303(a)(5), Tabular disclosure of contractual obligations given the overlap with information required in the financial statements and to promote the principles-based nature of MD&A;
– Add a new disclosure requirement to Item 303, Critical accounting estimates, to clarify and codify existing Commission guidance in this area; and
– Revise the interim MD&A requirement in Item 303(b) to provide flexibility by allowing companies to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter.
Yesterday’s vote was another divisive one. Commissioner Allison Herren Lee issued a dissenting statement criticizing the proposal for ignoring “the elephant in the room” – climate change disclosure. She observed that in all of the SEC’s efforts to modernize Reg S-K in recent years, it has not once mentioned climate change or its relevance to these disclosures.
SEC Chair Jay Clayton issued his own lengthy statement in which he addressed, among other things, the SEC’s ongoing efforts to get its arms around climate change & environmental disclosure issues. Meanwhile, the ever-quotable Commissioner Hester Peirce weighed-in with a statement in support of the proposal, in which she warned that due in part to the efforts of “an elite crowd pledging loudly to spend virtuously other people’s money, the concept of materiality is at risk of degradation” through its expansion to ESG & sustainability disclosures.
But Wait! There’s More! SEC Issues Guidance on MD&A Metrics
As if a revamp of S-K’s financial disclosures wasn’t enough, the SEC also issued this 7-page interpretive release providing guidance on disclosure of key performance metrics in MD&A. The guidance says that when companies disclose such metrics, they should also consider whether additional disclosures are necessary and gives examples of such disclosures. The guidance also cites the requirements in Exchange Act Rules 13a-15 and 15d-15 to maintain disclosure controls and procedures and advises companies to consider these requirements when disclosing metrics.
Risk Factors: Wuhan Coronavirus Outbreak
Jay Clayton also addressed the disclosure implications of the coronavirus outbreak in his statement on the S-K financial disclosure rule proposals. He noted the significant uncertainty surrounding the outbreak’s implications for businesses, but also observed that “how issuers plan for that uncertainty and how they choose to respond to events as they unfold can nevertheless be material to an investment decision.”
Speaking of that, Levi-Strauss filed its Form 10-K yesterday and it includes the first 10-K risk factor disclosure addressing the outbreak (see p. 19). Here’s an excerpt:
Disasters occurring at our or our vendors’ facilities also could impact our reputation and our consumers’ perception of our brands. Moreover, these types of events could negatively impact consumer spending in the impacted regions or depending upon the severity, globally, which could adversely impact our operating results. For example, in December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, resulting in store closures and a decrease in consumer traffic in China. At this point, the extent to which the coronavirus may impact our results is uncertain.
If there’s one thing we know about cryptocurrencies, it’s that celebs love them. We’ve blogged about rapper Ghostface Killah’s unsuccessful efforts to launch his own cryptocurrency, and we also mentioned how boxer Floyd Mayweather & music impresario DJ Khaleed managed to get themselves sideways with the SEC due to their involvement in touting some ICOs on social media.
Now Spencer Dinwiddie of the Brooklyn Nets has entered into the crypto game with his SD8 coin offering. This excerpt from a recent Forbes article explains what he’s up to:
After nearly three months of delays, including a threat from the NBA to ban him from the league during negotiations, Brooklyn Nets point guard Spencer Dinwiddie plans to launch his token-based investment vehicle on Monday in conjunction with a bid to get selected to his first career All-Star Game.
I reported in October that the 26-year-old planned to launch DREAM Fan Shares, a blockchain-based investment platform, where he’ll sell 90 SD8 coins that will enable Dinwiddie to collect up to $13.5 million of his guaranteed three-year, $34 million contract upfront, as a business loan. But Dinwiddie ran into some disagreements with the NBA about this first-of-its-kind initiative, which he outlined over the phone on Sunday as Brooklyn arrived in Orlando for a game the next night against the Magic.
The third year of Dinwiddie’s Nets contract is a player option for just over $12.3 million. And his original tokenization plan called for the possibility of significant dividends for investors if he elected to opt out of the final year of his deal in 2021 and come to terms on a more lucrative contract with Brooklyn or another team. And that is where the NBA had some real issues, according to Dinwiddie.
“Pretty much what they said was that the player option was gambling,” he said, “and that would’ve been cause for termination.”
Dinwiddie ultimately agreed to tweak his coin to eliminate the portion of it that related to his 3rd year player option, and the NBA backed down. While the NBA may not have liked his deal, it appears that Dinwiddie’s trying to stay on-side with the SEC. He’s doing his offering in reliance on Reg D, and will sell the coins to accredited investors only.
Venture Capital: Marky Mark Backed Co. to Toe the IPO Mark
You know what celebs love even more than the crypto? That’s right – cocaine! venture capital! We’ve blogged about Snoop Dogg’s venture investments, but there are lots of other celebrities in the venture capital game. This recent Coinspeaker article says that Mark “Marky Mark” Wahlberg’s investment in F45 Training Fitness may be ready for an IPO as soon as the first half of this year. And the article says that his investment has already paid off big-time:
The franchise has quickly gained traction. In March 2019, it attracted an American actor, producer, businessman, model, rapper, singer and songwriter Mark Wahlberg. Hollywood celebrity once tried the F45 Training program. After that, his Investment Group and FOD Capital bought a minority stake in F45 Training. The investment made as much as $450 million.
Wow – talk about Good Vibrations! Makes me want to buy a pair of parachute pants. Wahlberg appears to have really hit the jackpot here, and it looks like that in addition to his achievements in show biz, when it comes to venture investing, he can now echo the words of one of his most famous characters: “I’m a star. I’m a star, I’m a star, I’m a star. I’m a big, bright shining star.”
Blue Sky Cops & Robbers: “The Story You are About to Hear is True. . .”
I’ve been a huge fan of “Dragnet” since I was a little kid. I still can’t get enough of Joe Friday and his partners & their true crime tales from the files of the LAPD. Maybe that’s why I was excited to read Keith Bishop’s recent blog discussing a new series of podcasts from the North American Securities Administrators Association.
The series is called “Real Life Regulators”, which NASAA’s press release says recounts “true crime stories straight from the investigative files of the securities regulators closest to investors.” That sounds awesome. Here’s a link to the first episode.
You may have noticed that I referred to Joe Friday’s “partners” in the first sentence. That’s not a typo. Sgt. Friday actually had 4 partners on TV & radio before Officer Bill Gannon: Ben Romero, Ed Jacobs, Bill Lockwood and Frank Smith.
Last fall, Liz blogged that ISS was suing the SEC to overturn the Commission’s August 2019 interpretations saying that proxy voting advice is “proxy solicitation” under SEC rules. As reported in Bloomberg Law, that lawsuit is now on hold.
As part of the stay, the SEC has indicated that its guidance issued last August doesn’t have the effect of law and it won’t be invoked while the stay is in place. All of the underlying court filings are available on Pacer.
Insider Trading: Bharara Task Force Weighs In
A few years ago, I blogged over on The Mentor Blog about the establishment of a task force led by former SDNY chief Preet Bharara to make recommendations about reforming insider trading law. The task force recently issued its report, which recommends enactment of a new statute setting forth the elements of insider trading. Here’s an excerpt from the executive summary summarizing what the task force thinks that statute should include:
The language and structure of any statute should aim for clarity and simplicity.
– The law should focus on material nonpublic information that is “wrongfully” obtained or communicated, as opposed to focusing exclusively on concepts of “deception” or “fraud,” as the current case law does.
– The “personal benefit” requirement should be eliminated.
– The law should clearly and explicitly define the knowledge requirement for criminal and civil insider trading enforcement, as well as the knowledge requirement for downstream tippees who receive material nonpublic information and trade on it.
The task force’s report includes specific language that it would like to see included in any statute, including this definition of what it means to “wrongfully” obtain MNPI:
“Wrongfully shall mean obtained or communicated in a manner that involves (a) deception, fraud, or misrepresentation, (b) breaches of duties of trust or confidence or breach of an agreement to keep information confidential, express or implied, (c) theft, misappropriation, or embezzlement, or (d) unauthorized access to electronic devices, documents, or information.”
There’s a lot to unpack in this definition, but among other things, the inclusion of language covering the breach of an NDA would address one of the key weaknesses in the SEC’s failed enforcement action against Mark Cuban, while the language in clause (d) would shore up insider trading cases against data hackers, which also face some impediments under existing law.
Building Better Board Evaluations
Over the years, some boards have become pretty good at implementing effective & insightful self-evaluation schemes. But others struggle with a formulaic, “fill-in-the-blanks” process that leaves many directors wondering just exactly what this all was supposed to accomplish. If you advise any boards that fall into this latter category, this Weil memo laying out a framework for more effective board evaluations may be a helpful resource. Check it out!
Goldman Sachs’ CEO David Solomon made news at Davos last week by announcing that his firm would no longer help companies go public unless they had “at least one diverse board candidate, with a focus on women.” I knew women were underrepresented on IPO boards, but Solomon’s statement made me wonder exactly what the gender composition of IPO boards was like. So, I did a little digging, and now I’m kind of sorry that I asked.
Last May, this Quartz article looked at the gender diversity of the 10 biggest IPO filings of 2019. While it was early in the year, the list included Uber, Lyft, Pinterest, Slack, Chewy, WeWork & CrowdStrike – so the kind of unicorns that banks like Goldman court were all in the mix. The results were pretty dismal:
Of the 10 biggest companies that have gone public or filed to go public this year, none is led by a woman, and the average number of women on their boards is less than two. Excluding WeWork, which filed its registration confidentially, the average number of women on the list of the highest paid executives, disclosed in each company’s S-1 filing, is 0.56.
WeWork’s public filing disclosed one woman on the list of its highest paid executives, but it also didn’t have a single woman serving on its board. Uber and Lyft were the medalists in the group, with both companies having 3 women on their board. In terms of overall percentage of women board members, Pinterest topped the list with 2 women serving on its 6 member board.
This isn’t just a problem among tech unicorns. According to this Equilar report, in 2018, the 4 most popular IPO industry sectors all averaged fewer than 2 female board members. Tech & Consumer companies led the way with an average of approximately 1.3 women on their boards, while Financial companies averaged 1.0 women and Healthcare companies brought up the rear with an average of less than one woman per board. Healthcare’s not necessarily an outlier. A 2018 Equilar report said that only about 60% of recent IPOs had a woman on their boards.
It remains to be seen how scrupulously Goldman Sachs will stick to its pledge and whether any of its cohorts in the “bulge bracket” will follow its lead, but the numbers indicate that there’s a lot of work to be done. Check out this Cydney Posner blog for more on Goldman’s decision.
This Bloomberg Law analysis says that Goldman’s decision has the potential to cost it more than $100 million in underwriting fees – and that’s nearly 1/3rd of the fees that it earned from underwriting U.S. IPOs last year.
Brexit: FAQs
I guess I’ve been paying a lot more attention to Megxit than to Brexit lately. But while Harry & Meghan sip on free Tim Horton’s coffee & plot to seize the Canadian throne, Britain’s withdrawal from the EU becomes effective on Friday – and that means after the end of an 11 month transition period, the Continent will be cut off!
In case you haven’t been paying as much attention to Brexit as you should, then you’ll find this Hogan Lovells memo helpful. It’s a series of FAQs designed to help businesses sort out the legal consequences of the UK’s departure from the EU. Topics include the provisions of EU law that will continue to apply during the transition period, the consequences of a failure of the UK & EU to reach a trade agreement before the end of the transition period, and the impact of Brexit on the enforceability of UK judgments in EU states.
The NYSE’s Annual Compliance Letter
The NYSE has sent its “annual compliance letter” to remind listed companies of their obligations. There aren’t any new rules this year – but the letter highlights the enhanced functionality of the NYSE’s “listing manager” app, which replaced the egovdirect.com website last spring & is now the way that companies submit materials to the Exchange.
On Friday, Corp Fin issued three new Regulation S-K CDIs addressing interpretive issues arising out of last year’s Fast Act rule changes that, under some circumstances, permit companies to exclude the discussion of the earliest of the 3 years covered by the financial statements from their MD&A. Here they are:
Question 110.02
Question: A registrant providing financial statements covering three years in a filing relies on Instruction 1 to Item 303(a) to omit a discussion of the earliest of three years and includes the required statement that identifies the location of such discussion in a prior filing. Does the statement identifying the disclosure in a prior filing incorporate such disclosure by reference into the current filing?
Answer: No. A statement merely identifying the location in a prior filing where the omitted discussion can be found does not incorporate such disclosure into the filing unless the registrant expressly states that the information is incorporated by reference. See Securities Act Rule 411(e) and Exchange Act Rule 12b-23(e). [Jan. 24, 2020]
Question 110.03
Question: May a registrant rely on Instruction 1 to Item 303(a) to omit a discussion of the earliest of three years from its current MD&A if it believes a discussion of that year is necessary?
Answer: No. Item 303(a) requires that the registrant provide such information that it believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations. A registrant must assess its information about the earliest of three years and, if it is required by Item 303(a), include it in the current disclosure or expressly incorporate by reference its discussion from a previous filing. [Jan. 24, 2020]
Question 110.04
Question: A registrant has an effective registration statement that incorporates by reference its Form 10-K for the fiscal year ended December 31, 2018. In its Form 10-K for the fiscal year ended December 31, 2019, the registrant will omit the discussion of its results for the fiscal year ended December 31, 2017 pursuant to Instruction 1 to Item 303(a) and include a statement identifying the location of the discussion presented in its Form 10-K for the fiscal year ended December 31, 2018. The filing of the Form 10-K for the fiscal year ended December 31, 2019 will operate as the Section 10(a)(3) update to the registration statement. After the company files the Form 10-K for the fiscal year ended December 31, 2019, will the company’s discussion of its results for the fiscal year ended December 31, 2017 be incorporated by reference in the registration statement?
Answer: No. The filing of the Form 10-K for the fiscal year ended December 31, 2019 establishes a new effective date for the registration statement. As of the new effective date, the registration statement incorporates by reference only the Form 10-K for the fiscal year ended December 31, 2019, which does not contain the company’s discussion of results for the fiscal year ended December 31, 2017 unless, as indicated in Question 110.02, the information is expressly incorporated by reference. [Jan. 24, 2020]
We’ve gotten a few questions on our “Q&A Forum” about the mechanics of omitting the discussion of the earliest year from a company’s MD&A, and one of the things I’ve learned from them is that I’m not the only one who finds that process a little disorienting. Fortunately, this recent SEC Institute blog includes a bunch of MD&A examples from companies that opted to take advantage of the new rule, so now we all have plenty of precedent to look at.
Farewell to Bob Bostrom
All of us here at TheCorporateCounsel.net were saddened to learn of the passing of Bob Bostrom, and extend our sincere condolences to his family. Bob enjoyed a distinguished & award-winning legal career and generously shared his expertise with other practitioners. Here’s a remembrance from ACC President Veta Richardson.
Transcript: “Pat McGurn’s Forecast for 2020 Proxy Season”
We have posted the transcript for our recent webcast: “Pat McGurn’s Forecast for 2020 Proxy Season.”
