Given the times in which we live, I guess it’s not surprising that some companies have added “risk factor” disclosure about the potential implications of an active shooter to their SEC filings. Here’s an excerpt from this WSJ article:
A handful of public companies have begun quietly warning investors about how gun violence could affect their financial performance. Companies such as Dave & Buster’s Entertainment Inc., Del Taco Restaurants Inc. and Stratus Properties Inc., a Texas-based real-estate firm, added references to active-shooter scenarios in the “risk factor” section of their latest annual reports, according to an analysis of Securities and Exchange Commission filings. The Cheesecake Factory Inc. has included it in its past four annual reports.
So, what do these risk factors look like? Here’s what The Cheesecake Factory said in its 2019 10-K (pg. 25):
Any act of violence at or threatened against our restaurants or the centers in which they are located, including active shooter situations and terrorist activities, may result in restricted access to our restaurants and/or restaurant closures in the short-term and, in the long-term, may cause our customers and staff to avoid our restaurants. Any such situation could adversely impact customer traffic and make it more difficult to fully staff our restaurants, which could materially adversely affect our financial performance.
Dave & Buster’s 10-K included identical language (pg. 23). The language in Del Taco’s 10-K (pg. 21), and Stratus’s 10-K (pg. 17) was a little different. While I understand why companies are doing this, I’m not sure this kind of thing is what risk factor disclosure is intended to capture. Our tendency (mine too) to throw any item that’s been added to our national anxiety closet into a risk factor isn’t very helpful to investors. The problem is that not all disclosure adds value – some just creates “noise.”
In the U.S., we’ve learned that an active shooter is the kind of random event could happen to anyone, and the effect of such an event on any business would be terrible. So to me, it’s sort of like getting struck by a killer asteroid. I think this is the kind of thing that Judge Easterbrook was getting at in this excerpt from his 1988 opinion in Weilgos v. Commonwealth Edison:
Issuers need not “disclose” Murphy’s Law or the Peter Principle, even though these have substantial effects on business. . . Securities laws require issuers to disclose firm-specific information; investors and analysts combine that information with knowledge about the competition, regulatory conditions, and the economy as a whole to produce a value for stock.
But let’s face it – you’re not going to change your approach here and neither am I. That’s because while we can debate risk factor metaphysics, the reality is that the explosive growth in event-driven securities class actions is a big part of our personal anxiety closets too.
Venture Capital: Snoop’s Got His Mind on His Money & His Money on His Mind
My kids think I’m dorkier than Ari Melber when I reference hip-hop. But there’s no way I’m not going to use a “Gin & Juice” reference in the title when this Pitchbook article says that Snoop Dogg is an investor in Swedish payment services provider Klarna, which is now Europe’s second most valuable VC-backed company with a $5.5 billion valuation following its recent $460 million capital raise. Here’s an excerpt:
Founded in 2005, Klarna provides consumer financing for purchases at third-party merchants. Rather than requiring consumers to pay in full via credit card at the time of sale, Klarna acts as a middleman to front the payment for a purchase, with merchants receiving the full amount upfront while the consumer repays Klarna over time.
The Swedish company is perhaps most recognizable for its partnership and investment relationship with Calvin Broadus, better known as Snoop Dogg. Broadus is front-and-center in Klarna’s recent marketing campaign, known as “Smoooth Dogg.” Such marketing efforts could prove beneficial as Klarna plans to use its new windfall to significantly expand in the US, Broadus’ home country and where his career grew rapidly in the 1990s.
Regular readers of this blog know that Snoop has some impressive culinary skills, but you also should note that this isn’t his first rodeo when it comes to venture capital. He’s an investor in both Reddit & the trading app Robinhood, and a general partner in Casa Verde Capital, which recently completed a $45 million capital raise & focuses on investments in – here’s a shock – the cannabis industry.
Cryptocurrencies: Kik Claps Back at SEC Complaint
In June, I blogged about the SEC’s decision to bring an enforcement action against Kik Interactive for its $100 million unregistered token deal. As that blog noted, Kik’s founders are crypto-evangelists who have raised a $5 million war chest to fund its defense against the SEC’s allegation that its tokens are “securities.” It recently filed a 130-page answer to the SEC’s complaint, in which it accuses the agency of “twisting the facts” about its Kin token. Check out this TechCrunch article for more details.
Although the SEC cancelled its open Commission meeting that had been scheduled for yesterday, the Commissioners voted to issue this 116-page proposing release to modernize parts of Regulation S-K – specifically, Item 101 (business description), Item 103 (legal proceedings) and Item 105 (risk factors).
I speculated on Monday that some parts of the proposal might be somewhat based on the SEC’s Reg S-K concept release from 2016 – and it appears that they are (though the proposal doesn’t cover everything that was in the concept release). Another part of the proposal relates to human capital – a topic that SEC Chair Jay Clayton has indicated in recent speeches may be growing in importance. The “Fact Sheet” in the SEC’s press release highlights these proposed changes (also see this Cooley blog):
Item 101(a) (Development of Business):
– Make the Item largely principles-based by providing a non-exclusive list of the types of information that a registrant may need to disclose, and by requiring disclosure of a topic only to the extent such information is material to an understanding of the general development of a registrant’s business;
– Include as a listed disclosure topic, to the extent material to an understanding of the registrant’s business, transactions and events that affect or may affect the company’s operations, including material changes to a registrant’s previously disclosed business strategy;
– Eliminate a prescribed timeframe for this disclosure; and
– Permit a registrant, in filings made after a registrant’s initial filing, to provide only an update of the general development of the business that focuses on material developments in the reporting period, and with an active hyperlink to the registrant’s most recent filing that, together with the update, would contain the full discussion of the general development of the registrant’s business.
Item 101(c) (Business Narrative):
– Clarify and expand its principles-based approach, by including disclosure topics drawn from a subset of the topics currently contained in Item 101(c);
– Include, as a disclosure topic, human capital resources – including any human capital measures or objectives that management focuses on in managing the business – to the extent such disclosures would be material to an understanding of the registrant’s business,such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel; and
– Refocus the regulatory compliance requirement by including material government regulations, not just environmental provisions, as a topic.
Item 103 (Legal Proceedings):
– Expressly state that the required information about material legal proceedings may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document in an effort to encourage registrants to avoid duplicative disclosure; and
– Revise the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000 to adjust for inflation.
Item 105 (Risk Factors):
– Require summary risk factor disclosure if the risk factor section exceeds 15 pages;
– Refine the principles-based approach of that rule by changing the disclosure standard from the “most significant” factors to the “material” factors required to be disclosed; and
– Require risk factors to be organized under relevant headings, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption.
This proposal was based on seriatim action taken by the Commissioners. As to the issue of whether the SEC is required to propose (or adopt) rules at an open Commission meeting, see Broc’s blog entitled “When is the SEC Required to Hold an Open Commission Meeting?”
Shareholder Proposals: Big Year for “Political Spending”
In March, Broc blogged on our “Proxy Season Blog” that lobbying & political spending proposals were “coming up big” this year. And now that the height of proxy season is behind us, the Center for Political Accountability is elaborating on their recent successes in this blog. Here’s an excerpt:
The average vote was 36.4 percent at 33 companies that held annual meetings. That was up from 34 percent last year, when 18 resolutions went to a vote. In 2017, the resolution averaged 28 percent over the 22 resolutions that went to a vote. CPA and its shareholder partners reached disclosure agreements and withdrew resolutions at 13 companies this year. That compares with three in 2018 and seven in 2017.
The 2019 Proxy Season breakdown is as follows:
– Two majority votes in support of the resolution at Cognizant Technology Solutions Corp. (53.6%) and Macy’s Inc. (53.1%).
– Eleven votes in the 40% range, including Kohl’s Corp. (49.8%), NextEra Energy Inc. (48.7%), Allstate Corp. (46.9%), Chemed (46.2%), Western Union Co. (44.3%), Fiserv Inc. (43.8%), Alaska Air Group (43.5%), Roper Technologies Inc. (43.0%), Netflix Inc. (41.7%), Centene Corp. (41.6%) and Nucor Corp (40.6%).
– Twelve votes in the 30% range. The companies included Illumina Inc. (37.7%), Simon Property Group Inc. (37.1%), American Water Works Company Inc. (37.0%), Duke Energy Corp. (35.8%), Wyndham Destinations (35.6%), American Tower Corp. (35%), Royal Caribbean Cruises Ltd. (34.5%), Wynn Resorts Ltd. (34.4%) CMS Energy Corp. (34.3%), Equinix Inc. (34.2%), DTE Energy Co. (33.6%), and J.B. Hunt Transport Services Inc. (31.7%).
This Cooley blog explores why companies might be coming around to greater oversight of this type of spending, and discusses some of the CPA’s recommendations…
Just Mailed: July-August Issue of The Corporate Counsel
1. Early Returns From the Fast Act Rule Changes
– Changes to the Form 10-K Cover Page
– Item 102 of S-K—Description of Property
– Item 303 of S-K—MD&A- Item 601 of S-K—Exhibits: Description of Securities
– Some Takeaways
2. Unpacking Stock Splits
– Stock Split v. Stock Dividend: What’s the Difference?
– Companies Need “Surplus” To Pay Dividends
– Do You Have Enough Shares?
– Directors’ Fiduciary Duties
– Reverse Splits: Appraisal Rights & Fair Value of Fractional Shares
– Federal Income Tax Treatment of Splits & Reverse Splits
– Federal Securities Law Compliance
– Exchange Act Compliance
– Stock Exchange Rules
– 5 Key Takeaways
3. A Few Words About Delaware’s “Legal Capital” Requirements
A couple weeks ago, Broc blogged about some confusion around the Inline XBRL requirements that will be required for Form 10-Q filings by large accelerated filers this quarter. And with the 10-Q deadline looming for those with a June 30th quarter-end (tomorrow!), the dialogue has continued in our “Q&A Forum” (see #9960). Yesterday, Bass Berry also shared this blog about how to handle the iXBRL requirements. Here’s an excerpt about Form 10-Q – as well as Form 8-K (and see this Gibson Dunn blog for even more pointers):
Form 10-Q Question: As a large accelerated filer, should our 10-Q exhibit list include a separate reference to Exhibit 104?
Based on our discussions with SEC Staff within the SEC’s Division of Corporation Finance, we understand the position of the Staff in Corp Fin’s Office of Chief Counsel is that a registrant should explicitly reference an Exhibit 104 in the list of exhibits. And because the recent EDGAR Filer Manual makes clear that a registrant meets its obligation under Exhibit 104 by providing the cover page interactive data file using an Inline XBRL document set with Exhibit 101, the registrant should simply cross-reference to Exhibit 101.
For example, Exhibit 104 could include a cross-reference as follows: “104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).”
We also remind large accelerated filers that the recent instructions to Item 601(b)(101) of Regulation S-K were amended to require that for interactive data files, the Exhibit Index must include the word “Inline” within the title description for any XBRL-related exhibits. See Instruction 1 to Paragraphs (b)(101)(i) and (ii) of Regulation S-K.
Form 8-K Question: In a Form 8-K, are you required to explicitly reference Exhibit 104 in the Exhibit Index?
Answer: In discussions with SEC Staff within the SEC’s Division of Corporation Finance, we received the following guidance related to a registrant’s Exhibit 104 reference obligation in 8-Ks:
– If the 8-K does NOT otherwise have an exhibit being filed or furnished under Item 9.01(d), then the company does not need to include Item 9.01(d) in the 8-K solely for the Exhibit 104 reference. (The cover page tagging is still required in the background, but there is no standalone Exhibit 104 reference in an Item 9.01.)
– In contrast, if the 8-K does have another exhibit being filed or furnished under Item 9.01(d) (e.g., there is a material contract), then the company should include a reference to Exhibit 104 in the Item 9.01(d) disclosure because there is already disclosure being provided under this Item. For example, the reference could be as follows: “104 Cover Page Interactive Data File (embedded within the Inline XBRL document)”
– The principle behind this position is that Item 9.01 is intended to have an informational component to it, and if an Exhibit 104 reference is required in every 8-K then the informational benefit of item 9.01 is weakened.
Fast Act: SEC Issues “Technical Corrections”
A couple weeks ago, Broc noted in his Inline XBRL blog that an incorrect eCFR of the Item 601(a) table was causing some confusion about iXBRL requirements. The SEC has now issued this 18-page release, which corrects the exhibit table and a few other items from the original Fast Act amendments. The technical corrections to the final rules do the following:
– Reinstate certain item headings in registration statement forms under the Securities Act of 1933 that were inadvertently changed
– Relocate certain amendments to the correct item numbers in these forms and reinstates text that was inadvertently removed
– Correct a portion of the exhibit table in Item 601(a) of Regulation S-K to make it consistent with the regulatory text of the amendments
– Correct certain typographical errors and a cross-reference in the regulatory text of the amendments
Today’s Open Commission Meeting: Cancelled
The SEC has cancelled the open meeting that it had previously scheduled for today to consider whether to propose additional Regulation S-K disclosure reforms. No word on rescheduling yet.
Next Wednesday: SEC’s “Small Business Forum”
The SEC will hold its 38th annual “Small Business Forum” next Wednesday – August 14th – in Omaha, Nebraska (and if you’re like me, you now have this ‘Counting Crows’ song stuck in your head). The SEC’s announcement summarizes what topics will be covered and explains how to access the meeting (you need to register by tomorrow if you want to attend or listen in on any of the breakout sessions):
As in past years, the format of the Forum will include a live webcast informational morning session followed by an afternoon working session where participants will formulate specific policy recommendations in groups. The morning panels will cover capital formation (“success stories from the Silicon Prairie”) and efforts to harmonize the offering framework, based on the SEC’s June concept release.
The afternoon breakout group sessions will not be webcast but will be accessible by teleconference for those not attending in person. Anyone wishing to participate in a breakout group either in person or by teleconference must register online by August 9.
Also, about a month ago, the SEC posted its final report from last year’s Forum – which included recommendations about modernizing disclosure requirements and harmonizing private offering exemptions.
Here’s something from Dan Goelzer’s latest newsletter: A challenge faced by a company under non-public SEC investigation is whether to publicly disclose the investigation before the company knows whether it will result in any charges. There are no firm rules on whether investigations must be disclosed. The decision is inherently a judgment call and depends on an assessment of materiality after considering the costs and consequences of the investigation, the issues underlying the inquiry, the likelihood and potential impact of any eventual SEC enforcement proceeding, and other factors. It is frequently assumed that transparency is the more conservative approach and that, in the long run, the market rewards candor.
Dan goes on to say that a recent paper by David H. Solomon, of Boston College’s Carroll School of Management, and Eugene Soltes, of Harvard Business School, casts doubt on these assumptions. Professors Solomon and Soltes conclude:
– Even if no charges are ultimately filed, companies that voluntarily disclose an SEC financial fraud investigation have “significant negative returns, underperforming non-sanctioned firms that stayed silent by 12.7% for a year after the investigation begins.”
– Disclosing in a “more prominent manner” (e.g., in a press release as distinguished from an SEC filing) is associated with worse returns.
– A CEO whose company discloses an investigation is 14 percent more likely to “experience turnover” within two years than a CEO whose company opts to remain silent, regardless of the outcome of the SEC investigation.
These findings won’t come as a surprise to anyone who’s been involved in responding to fraud allegations. Even if the SEC ultimately drops their inquiry, a years-long investigation can tear apart the company and make it pretty hard for management to stay focused on their day jobs. But in his newsletter, Dan notes that:
The circumstances which lead to SEC financial fraud investigations vary widely, as do the pros and cons of voluntary disclosure. The Solomon and Soltes research, while intriguing, should not be a factor in deciding whether to disclose an investigation. The paper does, however, underscore how seriously the markets are likely to take news of a financial fraud investigation. The audit committee needs to treat such a matter equally seriously.
Securities Class Actions: M&A Filings Down, But Plaintiffs Still Loving Disclosure Fraud
Last week, Cornerstone Research published its midyear assessment of securities class action filings. Here’s a few takeaways from the press release:
– Plaintiffs filed 126 “core” class actions (excluding M&A claims) – that’s just one shy of the record set in the first half of 2017 – due to delayed market volatility in late 2018 and an uptick in filings against consumer-focused and tech companies
– Plaintiffs have filed more than 1,000 securities class actions in the last 2.5 years – accounting for more than 20% of the total number of filings since 1997
– M&A-related filings declined more than 20% since last year – to 72 – and dropped below 90 for the first time since the second half of 2016
– Six mega-dollar disclosure loss (DDL) filings (at least $5 billion) and 11 mega maximum dollar loss (MDL) filings (at least $10 billion) propelled aggregate market capitalization losses to the highest and fourth-highest levels on record, respectively
– Due to the Supreme Court’s 2018 Cyan decision, plaintiffs continue to shift securities fraud claims against IPOs from federal to state court – 61 new 1933 Act filings have appeared post-Cyan, which consists of 23 parallel filings, 12 filings in federal courts only, and 26 filings in state courts only
’33 Act Class Actions: NY State May Not Be So Plaintiff-Friendly After All
People have been predicting that SCOTUS’s 2018 Cyan decision – which held that class actions alleging claims under the Securities Act of 1933 may be heard in state court – would be a boon for the plaintiffs’ bar…and a big problem for IPO companies & their D&O carriers. Cornerstone’s midyear assessment of securities class action filings certainly suggests that plaintiffs have found the decision encouraging.
But this D&O Diary blog points to a glimmer of hope in New York – where many post-Cyan suits are being filed because the state’s pleading standards are less onerous than at the federal level. The blog explains that a New York State trial judge recently dismissed a case brought against an IPO company & its underwriters under Sections 11 and 12(a)(2) of the Securities Act. Here’s an excerpt (and here’s a call for reform):
To the extent that the plaintiffs’ lawyers were motivated to file in state court based on perceived advantages at the motion to dismiss stage, Judge Borrok’s decision represents something of a reality check. Judge Borrok’s opinion is thorough, sure-handed, and shows no discomfort in working with the federal securities laws and relevant case law. (In that regard, Judge Borrok’s reliance on the Omnicare decision underscores the importance of that ruling in opinion cases.) The state court pleading standard does not seem to have been a factor in the ruling. And no one would mistake Judge Borrok’s opinion as plaintiff friendly.
The decision in the Netshoes case is of course just one ruling by one trial court judge. It has no precedential value and may have only limited value as an indicator of how New York state courts generally may deal with the new influx of securities cases. Moreover, Judge Borrok’s dismissal of the Netshoes case was without prejudice; the plaintiffs will have an opportunity to try to cure the shortcomings Judge Borrok noted in his decision. For all we know, the plaintiffs might well succeed in amending their complaint and in surviving the next round of dismissal motions.
However, one can hope that Judge Borrok’s ruling may help send a message that the plaintiffs may need to reconsider whatever perceived advantages they may think they have in proceeding in state court rather than federal court.
Back in December, Stinson’s Steve Quinlivan spotted the first CAM. Now we owe him another hat tip for finding the first few CAMs in audits issued by the “Big 4” accounting firms – see page 93 of Microsoft’s Form 10-K and page 107 of Open Text’s Form 10-K. Both companies had a CAM relating to revenue recognition. Steve noted in his blog (also see his follow-up entry):
The CAM is straightforward and does not reflect negatively on the company or its audit committee or cast doubt on its financial reporting. If anything, it most likely reflects an attitude by the auditor that “we have to find something to protect us in the case of a PCAOB inspection.” I think revenue recognition CAMs are going to become somewhat boiler plate and not likely to attract a lot of attention absent special circumstances.
Auditor Attestations: No Shortage of Comments on SEC Proposal
The comment letters have been rolling in on the SEC’s proposed amendments to the “accelerated filer” definition – which would make fewer companies subject to the auditor attestation requirement. Predictably, accounting firms aren’t in favor of the change and say that it would weaken the quality of financial reporting (here’s EY’s letter as an example). CII has also joined that camp – its letter argues that the amendment may cause investors to lose confidence in the integrity of financial statements.
CII also takes issue with the SEC’s economic analysis of the proposal – by citing to another recent comment letter from four B-School profs. That letter adds data to the assertion that some companies can’t be trusted to report material weaknesses when left to their own devices (as does this blog about Canada’s experience with a similar rule). Here’s an excerpt from this WSJ article about the letter and its underlying study:
More than 100 companies that could get relief have reported restatements that altered combined net income by $295 million from 2014 through 2018, according to a comment letter from researchers at Stanford University, the University of Pennsylvania, the University of North Carolina and Indiana University. Eleven of the restatements occurred in 2018 and wiped out about $294 million in market value, the researchers wrote.
One company in the group is Insys Therapeutics Inc., said Prof. Taylor, who co-wrote the letter. Insys, an opioid manufacturer whose market value peaked at $3.2 billion in 2015, sought bankruptcy protection in June after pleading guilty to bribing doctors to boost use of its spray version of fentanyl, a synthetic opioid. It agreed to pay $225 million in fines and forfeiture.
Insys effectively failed the internal-controls audits in 2015 and 2016, according to securities filings. The company later restated results for several quarters in 2015 and 2016. The company said at the time that neither fraud nor misconduct caused the errors. Auditors in 2017 and 2018 reported its internal controls were free from material weaknesses.
The comment letter emphasizes that the analysis in the SEC proposal quantifies the cost of internal control audits – but not the potentialbenefits. Of course, there are two sides to this heated debate – and the WSJ article also emphasizes the high cost of compliance for smaller companies, and that investing that money in the core business rather than compliance could improve returns for shareholders…there are letters supporting the proposal from Nasdaq, the Chamber, Proskauer and a score of life science companies, among others.
Sarbanes-Oxley Compliance: Still a Lot of Work, But Automated Controls Might Help
There was a slight decrease in Sarbanes-Oxley compliance costs last year – according to Protiviti’s annual survey on the topic – but spending remains significant ($1.3 million on average among large accelerated filers – and that excludes external audit fees). In addition, hours & control counts continue to increase. Protiviti predicts that new technologies – along with a desire to strengthen controls and (finally) lower costs – will usher in “SOX Compliance 2.0.” Here’s an excerpt:
A growing number of SOX executives recognize that more dramatic improvements, fueled by a new mindset and advanced technologies, are required. To illustrate, our results reveal that the use of analytics has jumped significantly and that a broader range of compliance activities are being subjected to advanced technology — with even more plans to do so in the future. It also appears many organizations are huddling with their external auditors to figure out how the auditor’s use of advanced automation can deliver greater compliance effectiveness.
Protiviti also found that the use of automated controls testing is increasing, more companies are using outside providers for Sarbanes-Oxley compliance, and cybersecurity is substantially increasing compliance hours. Nearly half of companies said they were now required to issue a “cybersecurity disclosure” based on guidance from the SEC & Corp Fin.
The SEC announced that it’s holding an open Commission meeting this Thursday – August 8th – to consider whether to propose rule amendments to modernize these Regulation S-K disclosure requirements:
1. Business Description
2. Legal Proceedings
3. Risk Factors
I’ll admit that my first reaction to this news was, “Didn’t they already do this (twice) last year?” But then I remembered that the 341-page Reg S-K concept release from 2016 went well beyond the Fast Act and Disclosure Update & Simplification amendments. We don’t know yet whether a proposal coming out of this meeting – if any – will address any of those ideas (the agenda just says that any proposal would be intended to update these rules to account for developments since their adoption or last amendment, to improve these disclosures for investors, and to simplify compliance efforts for companies). We’ll keep you updated in any event.
By the way, we’ve overhauled about 4000 pages of our “Handbooks” to reflect the latest disclosure requirements, accommodations and best practices – including all of the Fast Act and Disclosure Update & Simplification amendments. They’re a great resource for making sure that your forms & disclosures are up to date.
Board Diversity: S&P 500 No Longer Has Any All-Male Boards
A couple weeks ago, the WSJ reported that all S&P 500 boards now include at least one female director – a pretty significant milestone, given that one in eight boards in that index were all male as recently as 2012. The “Thirty Percent Coalition” – which coincidentally was formed by investors in 2012 with the goal of improving female representation – also announced that 85 companies appointed a woman to their board for the first time during the last year and that more company boards include a woman now than at any other time since the campaign launched.
Of course, there are plenty of companies outside of the S&P 500 that haven’t diversified – and as this Korn Ferry blog points out, business benefits are best realized when 20-30% of the board is “diverse.” The Thirty Percent Coalition’s investors will be asking companies to undertake the following:
1. Disclosure in the Proxy of board composition inclusive of gender, race, and ethnicity
2. Language committing to diversity in Governance charter
3. Disclosure of future plans to make progress on board diversity
4. Adaptation of the “Rooney Rule” for board candidates and senior leadership (investors want each company to commit to include women & people of color in every pool from which Board nominees are chosen and to state this in their Board Refreshment Policies and/or Nominating & Corporate Governance Committee Charter)
5. Consideration of candidates outside of CEOs for board positions.
Tomorrow’s Webcast: “Joint Ventures – Practice Pointers (Part II)”
Tune in tomorrow for the DealLawyers.com webcast – “Joint Ventures: Practice Pointers (Part II)” – to hear Troutman Sanders’ Robert Friedman, Proskauer’s Ben Orlanski, Cooley’s Marya Postner and Aon’s Chuck Yen provide an encore to our popular June webcast with even more practical advice on navigating your next joint venture. The topics include:
1. Joint Ventures vs. Contractual Collaboration
2. IP Issues: JVs Based on An Owner’s Platform Technology
3. Negotiating “Divorce” Up Front
4. Consider Piloting a JV Before Full Commitment
5. Majority/Minority Dynamics
6. Acting By Written Consent
7. Clarifying JV’s Purpose
8. Pay Principles: Benchmarking & Long-Term Incentives
9. How Key Pay Decisions Are Made
Recently, a member asked this in our “Q&A Forum” on CompensationStandards.com (#1287):
Instruction 10 to Item 402(u) provides that, where there is a CEO transition, the registrant may use the “PEO serving in that position on the date it selects to identify the median employee and annualize that PEO’s compensation.” Since the new CEO would, of course, not have been the CEO when the Year 1 median employee was selected, would this mean that, whenever the registrant has a CEO transition and wishes to annualize the new CEO’s compensation for purposes of the pay ratio, it needs to identify a new median employee on a date when the new CEO was serving? Thanks.
In response, I noted:
This was a fairly common point of discussion this past year – and just this week – at the JCEB meeting and the consensus was that the change in CEO is not intended to override the ability to use the prior year’s median employee determination process. This is just one area where language in the rule is imprecise in a number of areas when applied in the ‘Year 2’ context.
What’s the “Latest Practicable Date” for S-4 Comp Tables?
Some of us have been internally debating what the “latest practicable date” means for purposes of S-4 compensation disclosures. There often are public-public deals with S-4 filings that are updated and amended four or five times before going effective six months after the S-4 is first filed with the SEC. In these S-4s, they start describing all the compensation arrangements as they are back at signing – but six months later, the company is still using some date that is quite a bit earlier (or, in some cases, a future date that is expected to be the closing) to show compensation “as of the latest practicable date.”
Here are various thoughts from folks that I reached out to:
– For a long time, I’ve trying to connect the dots of “latest practicable date” and compensation disclosures and S-4. I can’t find anywhere in S-4 itself that references “latest practicable date” and I only found a few references of it in Item 402 of Regulation S-K – (1) with respect to not being able to calculate salary or bonus and so you would provide it in a Form 8-K, and (2) with respect to golden parachute compensation. I don’t think item (1) would apply for an S-4 as an issuer would theoretically already have get this squared away for its 10-K. As such, I assume we are referring to calculating golden parachute payments where we pick a triggering date as of the latest practicable date and that the payment is based on a price that is not yet determined (such as a stock price).
– My personal approach to “latest practicable date” (a similar term is used in Item 403 for stock ownership tables – “most recent practicable date”) is to update the information so that by the time the registration statement is declared effective, it provides substantively materially accurate information within a reasonable period of time. In other words, as always said by the SEC, “it depends on the facts and circumstances” and don’t make any material misstatement or omissions. My goal would be to set up a calculation so that you can plug in the variable for the answer. This means your comp information could be within 1-3 weeks of going effective (based on filing and amendment and then getting SEC sign-off). If it makes sense, you could also use a variable approach showing payments at different levels based on different assumptions (e.g., high/medium/low).
Generally, executive comp tables must include the last completed fiscal year. Consider CDI Regulation S-K, Ques. 117.05 with regards to updating comp tables in an S-1 or an S-3. Also make sure you are comfortable that there are no material misstatements or omissions. I would also consider providing updates to the extent that there have been changes made in disclosures pursuant the acquisition agreement (e.g., in the disclosure schedules).
– Our view is that (leaving aside how material the volume of comp data really is), we would go with less is more so would leave it until there’s a specific rule or comment to change it. If there’s no SEC comment, we think a lot of S-4 issuers leave well enough alone, so they don’t have to take another cut at comp beyond once for S-4 purposes. Even if perhaps “latest practicable date” means that comp really should be updated to final, that’s easier said than done and sometimes impacts the type of prospectus that can be used and seems more trouble than it’s worth (not to mention the legal costs)).
– If the deal straddles two fiscal years, and forward incorporation by reference is not available, I would probably advise the registrant to roll forward when new annual numbers become available. Otherwise I’ve never thought of the executive compensation tables as ones that had to be updated more frequently than that.
– In most other contexts where “latest practicable date” or “recent practicable date” is used, I’ve had the Corp Fin Staff comment if it wasn’t in the last month or two. I would think the other issue, from a shareholder vote perspective (for deals where there is a vote) is making sure the s/h has all the material information they need to make an informed vote.
– I assume this is talking about the golden parachute comp disclosures, in which case it doesn’t seem like the Staff is too focused on those and my hunch is that companies get away with sticking with the initial date used in the first filing. The few deals I’ve been involved in that have included this disclosure haven’t been updated, but none of those were long registration processes. But I bet if you actually asked the Staff, they’d say it should be updated as time passes.
My blog earlier this week about Inline XBRL caused a stir. It appears that a majority of large accelerated filers forgot to make changes caused by Inline XBRL to the exhibit index for the 2nd quarter 10-Qs they recently filed. We’ve fielded a number of follow-up questions in our “Q&A Forum” (see #9960). If you’re wondering what you should do, check that out. If you already filed a 10-Q without expressly referencing exhibit 104, it’s not something to be too concerned about as I highly doubt this is a high priority for the SEC Staff…
SEC Chair Clayton on Short-Termism & ESG Disclosure
In this blog, Cooley’s Cydney Posner summarizes SEC Chair Clayton’s “E&S disclosure” thoughts captured recently in this “Directors & Boards” article. Cydney notes his commentary is nuanced – and it dovetails with a number of prior remarks on this topic by Chair Clayton and Corp Fin Director Hinman…
Our August Eminders is Posted!
We’ve posted the August issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Last week, Moody’s Investors Service published a scoring framework for assessing the governance characteristics of public companies not in the financial service area. Moody’s has scored governance for quite some time, but that was for their credit ratings business – this is a new “governance ratings” framework that stands alone. In other words, Moody’s has long incorporated governance issues into their credit ratings, but this is a new “Governance Assessment” which is separate from their credit ratings. But of course, the analysis for the two types of ratings will be somewhat related – you can think of it as a more comprehensive evaluation of the relevant governance factors that already contribute to a rating.
The new “GAs” provide stand-alone assessments of certain aspects of governance risk relative to defined benchmarks considered from the perspective of the potential impact on creditors. Five key components underpin Moody’s GA scores – ownership and control, compensation design and disclosure, board of director oversight and effectiveness, financial oversight and capital allocation, and compliance, controls and reporting. Each of the five components are scored by assessing several subcomponents.
GAs are expressed using a four-point scale between GA-1 and GA-4. Companies assessed at GA-1 have overall governance practices that generally score at the highest level based on our framework. Companies assessed at GA-4 have overall governance practices that generally score at a lower level.
Data used to conduct GA are sourced only from public disclosures like regulatory filings and investor presentations. Where disclosure is lacking, Moody’s GA will penalize the company and result in a less favorable score relative to the benchmark.
5 Takeways From the Proxy Season
In our “Proxy Season Developments” Practice Area,” we are posting the many reports recapping the recent proxy season as usual – including this note from EY’s Center for Board Matters that lists the top five takeaways…
Also see this blog by BlackRock’s Barbara Novick that has a host of stats for the proxy season…
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 inputting their email address on the left side of that blog. Here are some of the latest entries:
– What’s the “Long Term Stock Exchange”?
– Director Overboarding: The Latest Stats
– Board Recruitment: More Companies Looking for IR Expertise
– Attorney-Client: Preserving Privilege in a Crisis
– Expert Witnesses Aren’t Always Experts at Being Expert Witnesses
These Principles have also been updated to address SRD II with ‘avoidance’ added to ‘management’ of conflicts-of-interest with regard to the policy which should be disclosed. It also responds to feedback from the 2019 BPP Stakeholder Advisory Panel, acknowledging that conflicts of interest will always exist; therefore it is incumbent upon the BPP Signatories to have proper policies in place to try to avoid such conflicts wherever possible and when they do arise, to be transparent and manage them properly. The 2019 BPP Review Stakeholder Advisory Panel also reiterated the importance of the more stringent updated “Apply and Explain” approach for BPP Signatories to follow in light of SRD II Article 3j in relation to the Principles.
Another further area the updated Principles focused on was delineating the scope of proxy advisors’ responsibilities versus those of investors, in light of continued market misperceptions regarding the alleged overinfluence of proxy advisors and/or alleged “robo-voting” on the part of investors.
CEO Removals: Reputation Beats Financial Performance? Does Your Clawback Match?
During our upcoming “Proxy Disclosure Conference,” we have a panel devoted to the #MeToo era and how it might impact how your clawbacks (should) work. This PwC study shows how more CEOs were dismissed in the last calendar year for ethical lapses than for financial performance or conflicts with the board. So updating your clawback policies might be appropriate…
Reduced Rates Expire at End of This Friday: Our “Proxy Disclosure Conference”
– The SEC All-Stars: A Frank Conversation
– Hedging Disclosures & More
– Section 162(m) Deductibility (Is There Really Any Grandfathering?)
– Comp Issues: How to Handle PR & Employee Fallout
– The Top Compensation Consultants Speak
– Navigating ISS & Glass Lewis
– Clawbacks: #MeToo & More
– Director Pay Disclosures
– Proxy Disclosures: 20 Things You’ve Overlooked
– How to Handle Negative Proxy Advisor Recommendations
– Dealing with the Complexities of Perks
– The SEC All-Stars: The Bleeding Edge
– The Big Kahuna: Your Burning Questions Answered
– Hot Topics: 50 Practical Nuggets in 60 Minutes
Reduced Rates – Act by August 2nd: Proxy disclosures are in the cross-hairs like never before. With Congress, the SEC Staff, investors and the media scrutinizing disclosures, it is critical to have the best possible guidance. This pair of full-day Conferences will provide the latest essential—and practical—implementation guidance that you need. So register by August 2nd to take advantage of the discount.
