It’s been a couple of years since we’ve seen a SEC Enforcement action related to improper disclosure of perks but last week, the SEC settled a case. In this most recent case against Argo Group International Holdings, the SEC’s press release says the company failed to disclose over $5.3 million that it paid in connection to perks for the company’s then CEO. Here’s an excerpt:
The SEC’s order finds that in its proxy statements for 2014 through 2018, Argo disclosed that it had provided a total of approximately $1.2 million in perquisites and personal benefits, chiefly retirement and financial planning benefits, to its then CEO. According to the order, Argo failed to disclose over $5.3 million it had paid on the CEO’s behalf, including in filings for 2018 after a shareholder issued a press release alleging undisclosed perks to the CEO. The order finds that the perks Argo paid for, but did not disclose, included personal use of corporate aircraft, helicopter trips and other personal travel, housing costs, transportation for family members, personal services, club memberships, and tickets and transportation to entertainment events. The order finds that, as a result, Argo understated perks and personal benefits paid to the CEO over this period by more than $1 million per year, or 400%.
The SEC’s order provides more color about the company’s disclosure issues, which sound like in large part stemmed from failure to maintain internal accounting controls. The company settled the action without admitting or denying the SEC’s findings and it will pay a $900,000 civil penalty. Based on information in the SEC’s order, the company took quite a few remedial actions that likely didn’t come cheap while also leading to quite a bit of upheaval at the company.
We also have a panel about perk disclosures as part of our “Proxy Disclosure” conference – which is coming up in September via Nationwide Video Webcast. This is our big annual conference and it will cover all sorts of disclosure issues. Register now to receive the special Early Bird Rate!
First PPP-Related Securities Class Action
The Paycheck Protection Program has created plenty of blogging material and last week, Kevin LaCroix’s blog post reported on what is believed to be the first PPP-related securities class action lawsuit. What’s somewhat surprising about this case, as the blog notes, is that it involves a lender. Most would’ve thought these PPP D&O claims would involve PPP borrowers because as we’ve blogged, there has been concern about good faith need certifications PPP borrowers had to make.
The blog provides thoughts around why the lender may be targeted and says while a bank might not seem like the most obvious target to be hit with a coronavirus-related securities suit, there is this thing about banks: They always seem to be getting drawn into the latest securities litigation wave. They were certainly in the center of things in the litigation wave that followed in the wake of the global financial crisis. To be sure, that does not mean that other banks that participated on the PPP program necessarily are at greater risk of involvement in securities class action litigation. Rather, it is simply an observation that the plaintiffs’ lawyers seem ready to try to bring the banks into the litigation fray from the moment the starting gun sounds.
Technical Snafu Sends Double PPP Funds
By now, you’re probably thinking you’ve heard just about everything about the SBA’s Payment Protection Program. But, the PPP is a blogger’s dream as the stories keep coming. The latest is this Reuters story that says a technical snafu caused many small business owners to receive their loan amounts twice – potentially to the tune of over $100 million. Many of the duplicate loans have been identified and repaid, although not all.
Another story from NBC News explains more about how the double-payment snafu came about:
The issue stems from the hectic early weeks of the program, when funding ran out quickly and borrowers were not hearing back from their banks, industry sources told NBC News. Although businesses must certify they are only applying for one loan, some small-business owners applied at more than one bank to ensure they could secure a financial lifeline amid the economic shutdown. After funding ran out, some banks also suggested that customers who still had pending applications in their queue should apply with another bank in the meantime.
We’ll see how this all plays out, but the government will only guarantee one loan per borrower. The financial institutions obviously want to quickly address the problem and NBC News says borrowers expecting loan forgiveness are reaching out to repay the extra funds so they’re only responsible for one loan. For anyone not already returning any double PPP loan amounts, obviously it’d be good to do so – and maybe also take a gander at John’s “PPP Loan Enforcement: En Guarde!” blog.
Late Wednesday, the Senate unanimously passed the House version of the Paycheck Protection Flexibility Act, which President Trump is expected to sign into law. Among other things, the legislation extends the period during which PPP loans may be spent from eight to 24 weeks, and decreases the percentage of the loan that must be spent on payroll from 75% to 60%. This excerpt from a Journal of Accountancy article highlights some of the law’s key provisions:
– Current PPP borrowers can choose to extend the eight-week period to 24 weeks, or they can keep the original eight-week period. New PPP borrowers will have a 24-week covered period, but the covered period can’t extend beyond Dec. 31, 2020. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
– Under the language in the House bill, the payroll expenditure requirement drops to 60% from 75% but is now a cliff, meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven. Currently, a borrower is required to reduce the amount eligible for forgiveness if less than 75% of eligible funds are used for payroll costs, but forgiveness isn’t eliminated if the 75% threshold isn’t met. Rep. Chip Roy (Texas), who co-sponsored the bill in the House, said in a House speech that the bill intended the sliding scale to remain in effect at 60%. Senators Marco Rubio and Susan Collins indicated that technical tweaks could be made to the bill to restore the sliding scale.
– Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by Dec. 31, a change from the previous deadline of June 30.
– The legislation includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows borrowers to adjust because they could not find qualified employees or were unable to restore business operations to Feb. 15, 2020, levels due to COVID-19 related operating restrictions.
In addition, existing PPP loans – which originally had two year terms – may be extended to five years if the lender & borrower agree, and new PPP borrowers will have five years to repay their loans. The interest rate on PPP loans remains at 1%. PPP borrowers may also delay payment of their payroll taxes, which the CARES Act prohibited. The deadline to apply for PPP loans remains June 30th.
“Cha-Ching!” Whistleblower Hits for $50 Million
You know who isn’t going to need a PPP loan? The lucky individual who just hit the SEC’s whistleblower jackpot to the tune of nearly $50 million. This excerpt from the SEC’s press release announcing the award points out that it’s the largest in the whistleblower program’s history:
The Securities and Exchange Commission today announced a nearly $50 million whistleblower award to an individual who provided detailed, firsthand observations of misconduct by a company, which resulted in a successful enforcement action that returned a significant amount of money to harmed investors. This is the largest amount ever awarded to one individual under the SEC’s whistleblower program. The next largest is a $39 million award to an individual in 2018. Two individuals also shared a nearly $50 million whistleblower award that same year.
Here’s the SEC’s award order. As usual, all the good parts have been redacted, but this WSJ article has the details. The order indicates that another claimant sought a cut of the award, but the SEC shot that person’s claim down. Well, I guess we can’t all be winners. Personally, I think somebody like this should at least get some lovely parting gifts – you know, like Rice-a-Roni or a case of Turtle Wax – for playing the whistleblower game.
“What Then Must We Do?”
There’s a great scene in “The Year of Living Dangerously” in which photographer Billy Kwan takes journalist Guy Hamilton to witness the suffering of the poor in the slums of Jakarta. As they survey the scene, Kwan asks the question raised in St. Luke’s Gospel, “what then must we do?” Echoing John the Baptist’s response, Kwan’s answer is, “Don’t think about the major issues. You do what you can about the misery in front of you. You add your light to the sum of all light.”
As we end this week, I think many of us are asking Billy Kwan’s question. I thought about that when I read this article that a member passed along from the Yale School of Management about how white managers can respond to anti-black violence. It provides some suggestions about actions we can take in our own businesses to help make them places that aren’t just “non-racist,” but actively “anti-racist.” You may not agree with everything the author has to say, but engaging with these issues on our own turf is the first step in following Billy Kwan’s advice.
A recent Univ. of Georgia B-School study says that when it comes to maximizing the value of equity awards, corporate executives seem to never waste a crisis. Here’s an excerpt from a recent article discussing the study:
A recent study from management researchers at the University of Georgia Terry College of Business found a pattern of executives issuing negative press releases about their companies before their scheduled stock option grants. The practice, which is seen as unethical and sometimes illegal, allows the executives to increase their compensation by temporarily driving down the price of the stock when they are given the options.
“We can’t say with certainty that a given CEO is doing this,” said Tim Quigley, who studies CEO behavior and effectiveness at UGA’s Department of Management. “But we can look at the population and say, these trends would be very unlikely if a large number of CEOs were not purposely working to reduce the stock price before their option grants.”
If this sounds familiar, it might be because this is the second study in the last two years to suggest that CEOs may be manipulating the market price of the shares on the award dates in order to maximize the value of those awards. Of course, many companies time awards to occur shortly after the year-end numbers are announced, and if the numbers are bad, the stock price drops (and vice versa). Companies that have a practice of timing awards are required to disclose it in their CD&A discussion, but there isn’t anything illegal about it.
Nevertheless, these studies apparently suggest that there’s some intentionality on the part of senior executives when it comes to depressing stock prices around award dates. Since that’s the case, companies may want to take another look at the timing of their awards, and consider whether there is a pattern that might appear troubling. In that regard, the study suggests that spreading award dates throughout the year might provide a solution.
PPP Loan Certifications: D&O Issues for the Battles to Come
Most people expect the SBA & DOJ to engage in a robust enforcement effort when it comes to the PPP program. This recent D&O Diary guest blog by Pillsbury’s Peter Gillon addresses potential coverage issues under D&O policies that may be implicated by enforcement activities addressing loan certifications. This excerpt discusses the potential coverage for repayments of PPP loans:
A policyholder facing a PPP investigative or enforcement action might choose or be forced to repay the loan principal and would obviously like to claim this under its D&O policy. An insurer would likely argue that such amounts constituted disgorgement of “ill-gotten gains,” and deny coverage. Depending on applicable state law and the policy language, such an exclusion may or may not apply to preclude coverage for both the repayment of loan principal as well as defense costs.
For example, standard policy language defines covered “Loss” as “damages, judgments, settlements” and the cost of defense, but excludes amounts that are uninsurable as a matter of law. Carriers argue that, although they define the scope of what is covered Loss using broad undefined terms—“damages,” “judgments” and “settlements”—“public policy” prohibits them from indemnifying an insured for payment of restitution or disgorgement of ill-gotten gains. Insurers often assert this defense even when no case or statute declares such payments uninsurable.
However, Courts interpreting Delaware law (which for reasons beyond the scope of this piece generally applies to Delaware corporations) have rejected insurers’ attempts to deny coverage on this basis, holding that an insurer must meet its burden to prove that the personal conduct exclusion applies, including establishing by final adjudication that the gains were ill-gotten, before it can deny coverage on the basis that restitution is “uninsurable.”
Other issues addressed by the blog include those relating to coverage for governmental audits and internal investigations, criminal and civil penalties, entity and individual coverage, and the implications of the presence or absence of scienter on the availability of coverage.
PPP Loan Enforcement: En Garde!
This McGuire Woods memo says that regulatory agencies are already gearing up for enforcement activities surrounding the PPP loan program, and borrowers must prepare to respond quickly:
Regardless of borrower size or other qualifications, it is vital for companies to proactively document PPP compliance and prepare for effective defense of their eligibility and necessity certifications, as well as loan and forgiveness calculations. Waiting to receive an inquiry to gather supporting documentation may be too late.
Most inquiries provide 5-10 days for response. This is a very short timeframe for a company to research and gather supporting documentation. Applicants should consider seeking competent legal guidance related to collecting supporting materials and holding them in a central repository, contemporaneously as the events occur.
The memo offers tips to help companies prepare for the inevitable knock on the door, including the type of requests for production that they should anticipate receiving during the early stages of the government’s inquiry.
Last week, the Federal Reserve issued additional guidance on its “Main Street Lending Program” for small & mid-sized businesses. This Crowell & Moring memo provides an overview of the program, eligibility requirements, and the mechanics of how it will operate. Here’s an excerpt:
The Program, administered by the Boston Fed, is intended to facilitate lending to small and medium-sized businesses that were financially stable prior to the COVID-19 pandemic so that they may maintain operations and payroll during the COVID-19 pandemic emergency period. The Program operates through three types of loans (the New Loan Facility (“MSNLF ”), the Priority Loan Facility (“MSPLF ”), and the Expanded Loan Facility (“MSELF”)) each offering a 4-year term loan, with an adjustable interest rate based on LIBOR plus 300 basis points, and with principal and interest payments deferred during the first year of the loan. Loans range in size from $500,000 to $200 million, depending upon the loan facility selected.
The lending is conducted through lenders who meet the Program’s eligibility criteria (“Eligible Lenders”). Program loans are secured or unsecured new term loans originated after April 24, 2020 (in the case of MSNLF and MSPLF) or are based upon, and are an upsized tranche of an existing term loan to an ligible Borrower, originated on or before April 24, 2020 (in the case of MSELF).
The loans are full recourse loans, and unlike the SBA’s Paycheck Protection Programs (“PPP”) loans, the Program loans have no forgiveness of debt features. When the Boston Fed announces the opening of the Program, Eligible Lenders that wish to participate in the Program must first register with the Boston Fed. The Program will remain active until September 30, 2020, unless it is extended by the Federal Reserve and the Department of Treasury.
Eligible borrowers may use loan proceeds to maintain their U.S. operations & payroll until conditions normalize. While the new FAQs for the Program indicate that borrowers should undertake good-faith efforts to retain employees & payroll, businesses that have already laid-off or furloughed workers due to COVID-19 are eligible to apply for a loan. Copies of the FAQ and form documents for the Program are available on the Boston Fed’s website.
Reopening Risks: Covid-19 Waivers
For the first time in over three months, my pickup hockey group is going to be allowed to play this Sunday. Naturally, the rink is imposing all sorts of rules – we have to wear masks off the ice, we’re limited to 15 players, there is no locker room access, etc. Everyone also must sign a waiver that specifically addresses the risk of contracting the Covid-19 virus.
If your client is considering implementing a Covid-19 waiver policy, then you should take a look at this Cleary Gottlieb memo, which reviews the permissible scope of waivers & their enforceability. This excerpt addresses some of the unique issues raised by waivers purporting to address Covid-19 risks:
The primary question a court will likely consider is whether COVID-19 exposure is the kind of risk that can be waived. There is typically no requirement that the risks a customer waives be specifically related to the nature of the business drafting the waiver. Rather, waivers are limited by the common law requirements noted above, namely that the type of risk assumed be specifically enumerated and the presumption against the use of general waivers of all potential liability. It therefore seems that COVID19 waivers could be enforceable, provided that they are sufficiently concrete.
Whether these waivers would be seen as contrary to public policy, however, is a separate issue that courts will have to confront, and may well result in inconsistent outcomes as courts attempt to balance the public’s interests in preventing the spread of COVID-19, maintaining safe public spaces, and providing legal remedies for individuals exposed to COVID-19, against mitigating the chilling effect of legal risk on a reopening economy.
The memo also contains a helpful discussion of practical considerations for companies that are considering the implementation of waivers as part of their reopening strategies.
Transcript: “Capital Raising in Turbulent Times”
We have posted the transcript for our recent webcast: “Capital Raising in Turbulent Times.”
Companies and their auditors must periodically assess whether there is substantial doubt about the company’s ability to continue as a “going concern.” In normal times, this evaluation at major public companies usually results in the conclusion that the company doesn’t face going concern issues. But as this Gibson Dunn memo points out, these aren’t normal times, and going concern questions are on the front burner at many more companies than in years past.
The memo walks through the AICPA, FASB & PCAOB standards that apply to the going concern analysis, and the differences in the obligations imposed on issuers & outside auditors under them. It also addresses the implications that Covid-19 uncertainties may have for the analysis:
The list of adverse events set out in AS 2415 and Subtopic 205-40 that could potentially call a company’s viability into question includes items such as negative operating trends, work stoppages, and loan defaults. In some cases, the ultimate outcome of those events or circumstances will be uncertain at the time of management’s or the auditor’s assessment. The COVID-19 pandemic, however, raises a set of global uncertainties—concerning areas from public health to financial markets—whose complexity is an order of magnitude greater than that of the circumstances that may drive an entity’s going-concern analysis in normal times.
While Subtopic 205-40 requires only that an entity assess its ability to meet its obligations based on “relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued,” and AS 2415 similarly requires only that the auditor consider “his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor’s report,” both issuers and auditors should be aware that regulators and private plaintiffs will later assess their actions with twenty-twenty hindsight.
The memo says that in an environment like this, management & auditors should make, document & disclose their going concern evaluation process, the factors that could affect its ability to meet its obligations, and what is known and unknown about those factors and their implications. Finally, they need to make and document a good-faith assessment of how likely it will be that one or more of those factors will cause the company to be unable to meet its obligations during the relevant assessment period.
Going Concern: Covid-19’s Toll So Far
While Gibson Dunn’s memo focuses on issues companies and auditors must address when making a going concern assessment This recent Audit Analytics blog provides some input on the toll that Covid-19 has already taken when it comes to “going concern” conclusions:
As of May 20, 2020, there have been 30 audit opinions for SEC-registered public companies that have cited the COVID-19 pandemic as a contributing factor to substantial doubt about a company’s ability to continue as a going concern for the next twelve months. Of the 30 companies that received a going concern audit opinion citing COVID-19 as a contributing factor, 14 were issued their first going concern opinion within the last five years. This means that more than half of the companies receiving a going concern modification in their audit opinion citing COVID-19 were previously experiencing difficulties that could impact their ability to continue operating prior to the pandemic.
The blog reviews the disclosures made by companies that have cited Covid-19 as a contributing factor to a going concern qualification. Interestingly, for most of these companies, Covid-19 “unknowns” haven’t been the primary trigger for going concern issues. Instead, the blog says that going concern qualifications have been triggered primarily by the pandemic’s impact on other areas, such as a company’s inability to operate & subsequent liquidity concerns.
Cheat Sheet: Acquired Company Financials
If you’ve followed my blogs over the years, you know that aside from finding something that gives me an excuse to blog about celebrities, there’s nothing I like more than a good cheat sheet. This handy 2-pager from Latham & KPMG walks you through the process of determining whether you need to include acquired company financial statements in your registration statement – and yes, it’s been updated to reflect the SEC’s recent rule changes. Check it out!
I really don’t know how to lead things off today. It just doesn’t seem appropriate to jump into my usual spiel without acknowledging the events of the past several days. It’s been an awful weekend, at the end of terrible week, which wrapped up another dreadful month in an abominable year. I want to say something hopeful, and that’s hard right now, but I’m going to give it a shot.
I’m mindful that the epicenter of the latest crisis is Minneapolis, the beautiful city that my colleagues Liz and Lynn call home. But I’m from Cleveland, and when I saw a peaceful protest turn violent on the streets of my own city, I was struck by the fact that the unrest began just a couple of blocks from the old federal courthouse in downtown Cleveland. As I watched the news coverage, I thought about something that happened in that courthouse one day in 1918, and it reminded me that, no matter how bad things get, we seem to have been blessed throughout our history with more than our share of men and women who – to paraphrase Edward Kennedy’s eulogy for his brother Robert – “see things that never were, and say why not?”
It may surprise you to learn that a corporate tool like me thinks that the old lefty Eugene Debs was one of those people. Although I don’t agree with his politics, I still think he’s one of American history’s most interesting figures. He was a socialist, yet received over 6% of the popular vote in the 1912 presidential election. Debs also managed to get nearly 1 million votes in the 1920 presidential election – despite running from a prison cell. He was sent to that cell by a federal judge in that old federal courthouse in Cleveland.
To make a long story short, during the First World War, Debs gave an anti-war speech in Canton, Ohio and was convicted of violating the Espionage Act. He asked to address the court at his sentencing, and his speech that day has gone down in history. In the words of the journalist Heywood Broun, “he was for that one afternoon touched with inspiration. If anyone told me that tongues of fire danced upon his shoulders as he spoke, I would believe it.”
Debs stood up in the Cleveland courtroom, and began: “Your Honor, years ago I recognized my kinship with all living beings, and I made up my mind that I was not one bit better than the meanest on earth. I said then, and I say now, that while there is a lower class, I am in it, and while there is a criminal element I am of it, and while there is a soul in prison, I am not free.”
He went on to deliver a harsh critique of the American economic system, but also pledged his faith in the idea that the nation would change for the better, through non-violent means. He saved his best – and most poetic – rhetorical flourish for last:
“When the mariner, sailing over tropic seas, looks for relief from his weary watch, he turns his eyes toward the southern cross, burning luridly above the tempest-vexed ocean. As the midnight approaches, the southern cross begins to bend, the whirling worlds change their places, and with starry fingerpoints the Almighty marks the passage of time upon the dial of the universe, and though no bell may beat the glad tidings, the lookout knows that the midnight is passing and that relief and rest are close at hand. Let the people everywhere take heart of hope, for the cross is bending, the midnight is passing, and joy cometh with the morning.”
The judge was apparently unmoved by Debs’ eloquence, and sentenced him to 10 years in prison. President Harding commuted his sentence to time served in 1921. Please don’t misunderstand me – this isn’t meant to be a political statement. I don’t have a lot in common with Gene Debs when it comes to politics. But I don’t find that to be an impediment to admiring his fearlessness, idealism, and defiant belief that better days were ahead for the nation.
Those are qualities that Americans have always admired in our greatest leaders, regardless of their political affiliation. In trying times like these, I find hope in the knowledge that we can usually count on people with these qualities to step up, appeal to the better angels of our nature, and remind us of who we are supposed to be. If you take the time to look, you’ll see that lots of people like this are with us even now.
SPACs: Will More IPOs Mean More Lawsuits?
Last month, I blogged about the recent prominence of SPAC IPOs. While many traditional IPO candidates have put their deals on hold during the Covid-19 crisis, SPACs have prospered. But this recent Woodruff Sawyer blog cautions that the rise in SPAC IPOs may be followed by a rise in post-deal litigation. The blog says that it isn’t the IPO that SPACs have to worry about – it’s the M&A deals that come next that often trigger litigation. Here’s an excerpt addressing a recent SPAC-related M&A lawsuit:
Consider the 2019 case of Welch v. Meaux. The plaintiffs in this case brought both Section 11 and Section 10(b) claims against officers and directors of the publicly traded company in connection with a de-SPAC transaction. The case also included a claim concerning the subsequent follow-on offering. The SPAC in question, Landcadia, had raised $250 million in its 2016 IPO. Landcadia had 24 months to complete its business combination before being forced to return the proceeds to its investors. With two weeks to go before the deadline, Landcadia agreed to buy a mobile food ordering and delivery company.
Things did not go well with the target company after it became publicly traded. Plaintiffs ultimately brought suit, alleging material deficiencies in the proxy statement and subsequent registration statement. Their allegations included the charge that when the target company began publicly trading, investors were not told of all the risks being foisted onto them. Moreover, the plaintiffs alleged that they were deceived as to the company’s prospects for profitability. This case is still pending.
The blog also addresses securities class actions targeting SPAC-funded operating companies, and reviews some of the difficult issues that D&Os may face in bankruptcy proceedings due to the structure of SPAC transactions.
Our June Eminders is Posted!
We have posted the June issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!
During the Covid-19 pandemic, opportunities to join together for an in-person lunch-hour CLE while collecting the usual law firm swag are basically non-existent. So, what a nice surprise to receive law firm swag via email – Winston + Friends Cookbook! For someone who loves to eat and try new recipes, this made my day and hope some of you enjoy it too. Here’s the backstory to the 174-page cookbook from the firm’s email:
Soon after the COVID-19 pandemic left us no choice but to work remotely, Winston employees began a quarantine recipe exchange as a way to stay connected (and well-fed). What started as an internal email exchange among Winston personnel across the United States, has now led to a Winston + Friends Cookbook that contains over 100 recipes from Winston employees world-wide, as well as friends of the firm, including clients and professional chefs. The Winston + Friends Cookbook has delicious recipes for breakfast and brunch, condiments and sauces, appetizers, soups and salads, entrées, side dishes, desserts, and drinks.
Given the uncertain times, and the effects that this pandemic has had on access to food, the firm and our people have donated substantial sums to food-based organizations around the globe (and through our pro bono efforts have helped secure DACA renewals for front line food workers). Should you choose to help, we share at the end of the cookbook organizations founded or run by contributors to the cookbook as well as the contact information for Feeding America, the largest hunger-relief organization in the United States.
Board Gender Diversity: Another State Mandate
We’ve blogged before about board gender diversity and there are plenty of studies analyzing and reporting progress. These numbers will likely climb again as a recent Dorsey blog says the State of Washington will require gender diversity on public company boards or board diversity disclosure by January 1, 2022. The blog says to meet this gender diversity requirement, a public company will have a gender-diverse board of directors if, for at least 270 days of the fiscal year preceding the applicable annual meeting, individuals who self-identify as women comprise at least 25% of the directors serving on the board.
For companies that don’t meet the gender diversity requirement by 2022, the blog describes Washington’s disclosure requirements. One of the disclosure requirements includes discussion of any policy adopted by the board relating to identifying and nominating diverse director candidates for election and if there isn’t such a policy, the reasons why.
Washington will likely see an uptick in female directors much like California did. And, as this Shearman & Sterling blog notes, attention on board diversity will continue as several other states have considered similar legislation. In terms of progress, Equilar has been tracking board gender diversity at Russell 3000 companies and yesterday it issued its Q1 2020 report showing continued improvement. Equilar’s website commentary on the report says over the last quarter, the percentage of companies that previously had zero women on their board dropped from 7.7% to 7.1% and 129 companies have boards with between 40% and 50% women, up from 114 companies last quarter.
Importance of Updating Risk Management Programs
A recent Nixon Peabody memo reminds management teams to ensure risk management policies and procedures are updated, implemented and that any crises are resolved – ignoring a “red flag” may indicate a breach of management’s duty of care. The memo provides suggestions for updating company risk management programs, saying it’s now more important than ever, as many existing risk management programs may no longer be adequate during the Covid-19 pandemic. Here’s an excerpt:
Such procedures must be updated in accordance with state and federal recommendations and address not only the damage caused so far, but the arduous task of reopening, and the potential for similar or greater crises down the line. In particular, companies must have risk management policies and procedures updated for coronavirus in relation to:
– Possible industry-specific impacts
– Continuity of business issues
– Supply chain disruption
– Increased risk of litigation
– Decreased or impaired workforce
– Increased cybersecurity risks
Furthermore, under the current circumstances, company management cannot simply enact such risk management and step aside. Management is well-advised, for example, to set up COVID-19 subcommittees to report on a regular, if not daily, basis. Regular meetings, with minutes, must be held in response to the changing COVID-19 landscape to document the measures that are being taken, and the motivations for business decisions, to help stave off future regulator actions and derivative litigation.
Management should report about what it’s doing and what advice and guidance it’s relying on. The memo also says in certain circumstances it may be appropriate for management to bring in an inside or outside expert to present to the board – doing so can help bolster the board’s record of diligence. Management and the board should document the advice sought and how it was applied.
Last week when SEC Chairman Jay Clayton spoke before the SEC Investor Advisory Committee meeting, he concluded his remarks by noting his views on disclosure of ESG matters – saying that lumping “E”, “S” and “G” disclosure matters together reduces the usefulness of the disclosures. Yesterday, Chairman Clayton re-emphasized his view in remarks before a meeting of the SEC’s Asset Management Advisory Committee. Here’s an excerpt from Chairman Clayton’s remarks yesterday:
I believe I have made it clear that, while I believe that in many cases one or more “E” issues, “S” issues, or “G” issues are material to an investment decision, I have not seen circumstances where combining an analysis of E, S and G together, across a broad range of companies, for example with a “rating” or “score,” particularly a single rating or score, would facilitate meaningful investment analysis that was not significantly over-inclusive and imprecise.
Along with everyone else that has compiled data and responses for surveys used in ESG ratings, it seems safe to say that Chairman Clayton isn’t a fan of the proliferation of ESG ratings either.
The Commission has a tall order now that the SEC Investor Advisory Committee approved its recommendation suggesting the Commission get moving on ESG disclosure. Part of the Investor Advisory Committee’s recommendation is that the Commission conduct outreach about ESG reporting requirements to investors, companies and others. The Commission is clearly conducting outreach by gathering information from the Investor Advisory Committee and Asset Management Advisory Committee – although at this point, it’s hard to tell where the Commission’s effort on ESG disclosure goes from here – or for that matter, whether it will go any further.
Proxy Advisor Regulation – Is a Speed Bump the Answer?
Proxy advisors and others are voicing displeasure at the notion of a “speed bump” when it comes to proxy advisor reports. Even though the comment period for the SEC’s proposed proxy advisor regulations closed back in February, concerned voices haven’t quieted. The latest concern relates to the “speed bump” that Commissioner Elad Roisman spoke about back in March at CII’s spring conference.
During his remarks, Commissioner Roisman mentioned one idea that would allow contemporaneous review – companies would receive and review a proxy advisor’s report at the same time the proxy advisor sent the report to its clients. While a company reviewed a proxy advisor’s report, as a way to manage “automatic voting,” Commissioner Roisman suggested a “speed bump” – basically a time period during which the proxy advisor would disable any automatic voting submission features.
While some see contemporaneous review and a speed bump as an improvement compared to how things stand today, the constituents that don’t are jumping on the “voice of concern bandwagon.”
First, a CFA Institute blog says they want the SEC to propose new rules so details of contemporaneous review and the speed bump can be better understood. Without reopening a revised proposal for comments, the blog says the SEC risks shutting out stakeholders from providing comments.
A recent Pension & Investments article, titled “Truce sorely wanted on proxy proposal championed by SEC” (subscription required), quotes Glass Lewis’s SVP & GC, Nichol Garzon-Mitchell, as saying the proxy advisor still has concerns about some of the alternatives the SEC may be considering and that details of a new proposed approach should be vetted through public comment. The article also quotes representatives of the Investment Advisor Association and the Council of Institutional Investors as saying that the idea of contemporaneous review and a speed bump is promising but more information is needed and basically the SEC should re-propose the rule to sort out potential concerns and issues.
ISS declined to comment for that article, but separately a recent opinion piece from ISS’s head of Governance Research & Voting, Lorraine Kelly, also voices displeasure about the “speed bump” solution. The opinion piece echoes the IIA and CII concerns and suggests because the alternative proposal is so different from the original rule proposal it should require the rulemaking process to go back to start over. The opinion piece concludes by suggesting the SEC shelve the proposed rules.
Give the Commission credit, it’s no easy task to try to change or improve the process around proxy advisor reports and they’ve stepped up to try and address it. The proposed rules are controversial and no matter what is done, somebody’s probably not going to like it. At the same time, companies have been frustrated for years with the existing process for proxy advisor reports so some change would likely be welcome news.
Post-Mortem Assessment of Virtual Financial Close
Working remote continues for many and a recent Deloitte memo takes a look back at what, for most, was the first virtual financial close to help smooth the effort the next time around. Many companies had to adjust financial close processes on the fly and the memo says this may have raised questions about internal controls and it lists questions to help guide an assessment of potential weaknesses.
Knowing that the recent virtual financial close likely won’t be the last, if companies haven’t already done so, the memo serves as a reminder that now might be a good time to conduct a post-mortem of the most recent quarter-close experience. For a post-mortem assessment, the memo provides questions covering accounting and reporting impacts, impacts on the timeline, close and task management, governance and compliance, resourcing, technology, and remote working. Here’s an excerpt of questions about accounting and reporting impacts:
What were the technical accounting or disclosure impacts of the current pandemic—and how might they change in future periods?
Which elements of the financial statements needed increased focus?
Was there adequate time allowed for management reviews at all levels?
Where does management have limited transparency into the results and underlying drivers?
Were there any new focus areas for the external audit this period, or places where auditors spent additional time?
In the pre-COVID-19 world, I was monitoring independent chair proposals for the 2020 proxy season. I was particularly interested in those submitted by members of the Investors for Opioid & Pharmaceutical Accountability (IOPA), which was established in July 2017 to focus on opioid-related risks and which has since expanded to include drug-pricing risks. While I still believe in the momentum for these proposals, the pandemic appears to have temporarily changed things.
As these proposals became public and IOPA members filed exempt solicitations in support (see, e.g., Johnson & Johnson, Eli Lilly and Gilead Sciences), it seemed possible that the time had finally come for independent chairs in the pharmaceutical industry. Not only had opioid abuses and anti-competitive drug pricing become “kitchen table” topics, but more conventional corporate voices had also added support. According to the 2019 U.S. Spencer Stuart Board Index, the number of S&P 500 companies with independent board chairs more than doubled over the past decade, to now include one-third of the companies; and among the 18 Biotechnology/Pharmaceutical companies, seven have independent chairs, including Biogen Idec, Regeneron Pharmaceuticals, Perrigo Company and Nektar Therapeutics. PwC and the Harvard Business Review also weighed in to support independent chairs.
For a time, independent chair proposals seemed as if they could achieve majority votes, and CEO/chair separations could take place, in this industry, as they had for financial companies that shared responsibility for significant national crises, such as Bank of America and Wells Fargo. Then the pandemic hit, and priorities changed for companies, investors and regulators. Independent chair votes at pharmaceutical companies have received significant support (based on For/For + Against), including:
42% at J&J, where the vote had been increasing in recent years and where there was majority support for another IOPA proposal requesting a board report on governance of opioid-related risks;
34% at Eli Lilly, where it was a first-time proposal and where the vote would be 40% if the Lilly Endowment shares were backed out;
44.5% at Bristol-Myers Squibb, another first-time proposal; and
43.5% at Gilead Sciences, significantly higher than 29% in 2019 and the only over-40% vote that didn’t receive a FOR recommendation from ISS
Two non-IOPA independent chair proposals have passed this season: at Boeing (53%), where there have been significant legal, cultural and regulatory concerns; and medical products company Baxter International (55%), where a March 2020 restatementapparently raised sufficient investor concern. Some thoughts on what may be going on:
As I blogged earlier, the pandemic has sharpened investor focus on COVID-19-related issues. While investors are still raising non-COVID ESG issues, there is some sensitivity about piling on too much in their engagements with – and votes at – companies;
Pharmaceutical companies may be getting a slight pass, as the nation is looking to them to find COVID-19 cures, vaccines and tests;
Unlike Glass Lewis that supports most independent chair proposals, ISS appeared unconvinced of the need for structural leadership change at some of the IOPA-targeted companies, although their AGAINST recommendations left some room for evaluating what happens over the next year; and
Boeing hit a tipping point with investors, even with a currently independent chair.
Stay tuned for a few more 2020 voting results, as well as for how the off-season engagements and 2021 proposals evolve around this proposal. The time for independent chairs may yet arrive more broadly in the United States.
PPP: More Guidance About Loan Forgiveness
As we’ve blogged before, the Paycheck Protection Program has been fraught with issues and guidance about the program has been seemingly endless. Late last Friday, while some headed out for a weekend party, the SBA issued two PPP Interim Final Rules – the first IFR relates to requirements for loan forgiveness, the second IFR relates to the loan review process and borrower and lender responsibilities. Here’s a Venable memo highlighting notable aspects of the latest guidance, here’s another with key insights from Sidley.
Audit Committee Covid-19 Checklist
For those looking for another resource to help ensure the audit committee is covering all the bases when it comes to Covid-19, AICPA has answered the call. AICPA issued a checklist specifically related to audit committee Covid-19 oversight responsibilities – it’s in the form of questions and is intended to guide conversations to help identify weaknesses needing attention. AICPA says these questions should be discussed in an open forum with the audit committee, management and internal and external auditors – it could serve as a helpful oversight confirmation resource.
Late last week, the SEC’s Investor Advisory Committee approved a recommendation that encourages the SEC to begin addressing ESG disclosure. The recommendation might best be summed up as asking the SEC to “get moving” on ESG disclosure. Throughout the recommendation it reiterates familiar concerns raised by many including the “plethora” of ESG data provider questionnaires that create an exorbitant amount of work for companies – leaving many questioning whether the information that’s collected is material to investors and leaving others to set questionnaires aside due to resource constraints. The recommendation also says the SEC should take the lead or some other jurisdiction will. Here’s an excerpt:
The US capital markets are the largest and deepest in the world. Therefore, the SEC should take the lead on this issue by establishing a principles-based framework that will provide the Issuer-specific material, decision-useful, information that investors (both institutional and retail) require to make investment and voting decisions. This disclosure should be based upon the same information that companies use to make their own business decisions. If the SEC does not take the lead, it is highly likely that other jurisdictions will impose standards in the next few years that US Issuers will be bound to follow, either directly or indirectly, due to the global nature of the flow of investment into the US markets.
The recommendation itself doesn’t call for specific reporting standards or a specific framework and instead references existing standards – GRI, SASB and the TCFD framework, etc. – as examples to help shape the SEC’s thinking.
Although the committee approved the recommendation, this blog describes views of committee members that opposed it:
Those who were not in favor of the recommendation expressed concerns about the ambiguity of the term “materiality,” and that ESG ratings should be left to the private parties, rather than mandating a central group, such as the SEC. Creating such a framework would be both expensive and inconclusive since private parties have yet to come to consensus themselves due to the issue’s complexity. The naysayers also suggested protecting the Financial Accounting Standards Board from being “diluted” by the new ESG standards.
Another blog further summarizes committee member views and notes that, Commissioner Hester Peirce expressed her reservations about the recommendation – here’s her remarks in which she says today’s securities disclosure framework is “very good at handling all types of material information.”
For those wanting to get a sense of what the SEC might be looking at when reviewing Covid-19 related disclosures, a recent Intelligize blog reviewed some early SEC comment letters for insight. The blog provides links to the comment letters so they’re available to provide full context and it identifies five initial lessons:
– Understand the continuum between risk factors’ reasonably likely known effects and MD&A’s known trends
– Provide forward-looking insights about the impact of Covid-19
– Provide a complete picture with your metrics
– Clarify the impact of any facility closures or supply chain issues
– Ensure that material information included in press releases also appears in SEC filings
Post-Covid-19 Governance & Social Purpose
Will board governance change in a post-Covid-19 world? That’s a question considered in a recent Deloitte memo and it lists questions that should be on the radar for boards when thinking about their oversight role. The memo lists considerations involving overboarding, succession planning, oversight, investor concerns and social purpose and stakeholder governance. Questions for boards to consider about social purpose and stakeholder governance include:
– Will the pandemic cause a reordering of US business priorities?
– Will considerations regarding social purpose be impacted by continued market declines?
– Will the pandemic increase or decrease the focus on diversity, equity, and inclusion?
– Will shareholder value come back as being the primary priority?
