Last Friday, the SEC announced it settled an enforcement proceeding against The Cheesecake Factory for misleading Covid-19 disclosures. Among other things, early in the pandemic as the company began transitioning to a take-out and delivery service model, the proceeding alleges the company failed to adequately inform investors of the extent the pandemic had on the company’s operations and financial condition. This excerpt from the SEC’s press release summarizes the allegations:
As set forth in the SEC’s order, in its SEC filings on March 23 and April 3, 2020, The Cheesecake Factory stated that its restaurants were “operating sustainably” during the COVID-19 pandemic. According to the order, the filings were materially false and misleading because the company’s internal documents at the time showed that the company was losing approximately $6 million in cash per week and that it projected that it had only 16 weeks of cash remaining. The order finds that although the company did not disclose this internal information in its March 23 and April 3 filings, the company did share this information with potential private equity investors or lenders in connection with an effort to seek additional liquidity. The order also finds that, although the March 23 filing described actions the company had undertaken to preserve financial flexibility during the pandemic, it failed to disclose that The Cheesecake Factory had already informed its landlords that it would not pay rent in April due to the impacts that COVID-19 inflicted on its business.
The Cheesecake Factory proceeding is the SEC’s first enforcement action against a public company for misleading investors about the financial effects of the pandemic and shows the difficulties companies encountered early on in the pandemic. Without admitting or denying the SEC’s findings, The Cheesecake Factory consented to a cease-and-desist order and agreed to pay a $125,000 penalty. If you’re thinking the $125,000 penalty seems fairly light, the SEC’s press release does note the company’s cooperation in the proceeding. At minimum, the action serves as a cautionary reminder about the importance of accurate disclosures, even those made back at the outset of the pandemic, and that the SEC is continuing to scrutinize Covid-related disclosures.
Enforcement Proceedings: Earning Extra Credit for Cooperation
As mentioned in the SEC’s press release about The Cheesecake Factory, cooperation factored into the SEC’s determination to accept the settlement. When the SEC closed out its fiscal year, some may have read news reports of an SEC enforcement matter involving inaccurate disclosures concerning BMW’s U.S. retail sales volume while it conducted bond offerings. A Simpson Thacher memo outlines key takeaways from the case – one being that the SEC may give extra credit for cooperation during the pandemic. Here’s the memo’s takeaways:
First, the case serves as a reminder that the SEC continues to focus on bond offering disclosures, even in the absence of findings or allegations that proper disclosures would have impaired the company’s ability to make interest payments or repay the principal to bondholders. The memo reminds bond issuers to exercise caution in describing particular data points as important business barometers.
Second, the memo also notes that the case demonstrates that the SEC is prepared to give special credit for cooperation during the pandemic. The SEC’s order is also notable in its detailed description of BMW’s cooperation, and its express reference to challenges raised by the global COVID-19 pandemic. Specifically, the order commends the company for complying with the SEC’s requested schedule and its prompt collection and production of ‘a significant volume of electronic documents, including documents that would otherwise have been difficult and time-consuming for [the SEC] to obtain; documents from sources outside of the company’s corporate offices, such as BMW employees working from remote locations; and translations of key documents’ The order notes that the company additionally made several current and former employees available for interviews with the SEC, and provided the SEC with ‘presentations and narrative submissions that highlighted critical facts.’
Insofar as the items the SEC cites as evidence of BMW’s cooperation are part of the standard cooperation checklist, the case may be suggestive of the SEC’s willingness, during the COVID-19 pandemic, to accord extra credit for what some might view as ordinary course cooperation. At a minimum, the case may serve as useful precedent for other companies negotiating settlements with the SEC to argue that their cooperation during the pandemic warrants a reduced penalty (or even reduced charges).
This K&L Gates blog includes practical considerations about cooperation gleaned from remarks by Enforcement Division Associate Director Anita Bandy at the recent SEC Speaks conference:
Cooperation is largely still evaluated under the factors announced in the “Seaboard Report” issued by the SEC in 2001. The seminal consideration is whether the cooperation substantially enhanced the quality and efficiency of the investigation. In a recent case, for example, the respondent was forthcoming and proactive and, notwithstanding the complexity of the matter and the difficulties presented by collecting evidence internationally during the pandemic, worked to produce quickly documents and witnesses such that the investigation was resolved within ten months. As a result of this cooperation and other substantial remediation efforts, the Commission imposed a reduced penalty.
Tomorrow’s Webcast: “Modernizing Your Form 10-K: Incorporating Reg S-K Amendments”
Tune in tomorrow at 11 a.m. Eastern for our webcast – “Modernizing Your Form 10-K: Incorporating Reg S-K Amendments” – to hear Scott Kimpel of Hunton Andrews Kurth, John Newell of Goodwin Procter and Kenisha Nicholson of Wilson Sonsini discuss how the SEC’s recent amendments to modernize Regulation S-K will affect your next Form 10-K, including, among other things, how to tackle human capital disclosures, the impact on disclosure controls & procedures and other interpretive issues.
If you attend the live version of this program, CLE credit will be available in the following 10 states: CA, FL, IL, NC, NJ, NY, PA, TX, VA, WA. In order to receive CLE credit, you need to fully respond to the pop-up prompts throughout the live webcast. Please see these CLE FAQs for more information.
Members of this site are able to attend this critical webcast at no charge. If not yet a member, try a no-risk trial now. For this program, the webcast cost for non-members is discounted to $295 – which will count toward your 2021 membership rate should you decide to subscribe to TheCorporateCounsel.net before the end of this year. You can renew or sign up for a no-risk trial online – or by fax or mail via this order form. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
Prof. Sarah Haan of Washington & Lee Law School recently posted a draft article online that’s eye opening, to say the least. In short, her thesis is that a trend that scholars have overlooked – the explosive growth in the percentage of stock owned by women during the early decades of the 20th century – played a major role in the development of the modern paradigm for public company corporate governance. Here’s an excerpt from the article’s abstract:
Corporate law scholarship has never before acknowledged that the early decades of the twentieth century, a transformational era in corporate law and theory, coincided with a major change in the gender of the stockholder class. Scholars have not considered the possibility that the sex of common stockholders, which was being tracked internally at companies, disclosed in annual reports, and publicly reported in the financial press, might have influenced business leaders’ views about corporate organization and governance.
This Article considers the implications of this history for some of the most important ideas in corporate law theory, including the “separation of ownership and control,” shareholder “passivity,” stakeholderism, and board representation. It argues that early twentieth-century gender politics helped shape foundational ideas of corporate governance theory, especially ideas concerning the role of shareholders. Outlining a research agenda where history intersects with corporate law’s most vital present-day problems, the Article lays out the evidence and invites the corporate law discipline to begin a conversation about gender, power, and the evolution of corporate law.
Some of the language in the abstract may make the article sound a little wonky, but in reality, it’s accessible and engaging. It sounds cliché to call a work “groundbreaking,” but I can’t come up with a better word to describe this one. I’m sure they’ll be plenty of back & forth among governance scholars on the merits of Prof. Haan’s arguments, but my take is that she may have put her finger on something that’s been hiding in plain sight for a long time.
Revenue Recognition: E-Commerce Disclosures a Sleeper Issue?
Many companies have seen their e-commerce sales explode as a result of the pandemic and, not surprisingly, many have also called this growth out in earnings releases & other disclosures. This Bass Berry blog says that the new requirement to disclose “disaggregated revenues” under ASC 606 may be a “sleeper issue” for some of these companies. Here’s an excerpt:
Under ASC 606-10-50-5, a public company must “disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.” Additionally, per the implementation guidance in ASC 606-10-55-90, when selecting the type of category (or categories) to use to disaggregate revenue, an entity should consider how the information about the entity’s revenue has been presented for other purposes, including the following:
– Disclosures presented outside of the financial statements such as MD&A, earnings releases and investor presentations.
– Information regularly reviewed by our Chief Operating Decision Maker (CODM).
– Any other information similar to the information identified in (1) and (2) that is used by the company or users of the financial statements to evaluate the company’s financial performance or make resource allocation decisions. (emphasis added)
In determining the categories to include, ASC 606-10-55-91 says that an entity should consider the following examples:
– The type of good or service (e.g., major product lines).
– Geographical region (e.g., country or region).
– Market or type of customer (e.g., government or non-government customers).
– Type of contract (e.g., fixed-price or time-and-materials).
– Contract duration (e.g., short- or long-term).
– Timing of transfer of goods or services (e.g., point-in-time or over time).
– Sales channels (e.g., direct to customers or through intermediaries).
The blog acknowledges that the company’s accounting staff and its outside auditor will make the final analysis on this issue, but suggests that the continued focus on e-commerce in public company disclosures might prompt more companies to conclude that they should disaggregate revenues by sales channels, including e-commerce sales. It also cautions that disaggregate revenue disclosure continues to be an area of interest for the Staff, and cites a recent comment letter exchange as an example of some of the issues that might be raised.
Blockchain & Beyond: FinHub Gets an Upgrade
In 2018, the SEC announced the establishment of “FinHub” within Corp Fin. Since then, FinHub has served as a resource for public engagement on blockchain & other FinTech-related issues and initiatives. Yesterday, the SEC announced that FinHub was being upgraded to an independent office. This excerpt from the SEC’s press release explains the decision:
Designating FinHub as a stand-alone office strengthens the SEC’s ability to continue fostering innovation in emerging technologies in our markets consistent with investor protection. The office will continue to lead the agency’s work to identify and analyze emerging financial technologies affecting the future of the securities industry, and engage with market participants, as technologies develop.
FinHub’s existing Director, Valerie Szczepanik will continue to serve in that capacity, and will “coordinate the analysis of emerging financial innovations and technologies across the SEC’s divisions and offices and with global regulators and will advise the Commission and SEC staff as they develop and implement policies this area.”
The SEC’s pre-Thanksgiving rulemaking frenzy gave my colleagues Liz & Lynn plenty to blog about over the last couple of weeks. In contrast, the well has been a little dry this week in terms of breaking news. That’s left me scrambling a bit for blog topics. I knew I had a couple of SPAC-related blogs in the hopper, but SPACs aren’t a topic with broad appeal outside of the folks in the IPO and M&A crowd. So, I wanted to hold off on them until I found a lead blog that would make the topic more relatable & interesting.
Fortunately, I recently stumbled across just what I was looking for – a SPAC story featuring a bona fide A-List celebrity! That’s because no less than Jay-Z himself has decided to participate in the SPAC boom. According to this Bloomberg article, he has signed on to serve as an officer for a cannabis SPAC:
Subversive Capital Acquisition Corp., a special-purpose company that’s growing in the cannabis business, said it acquired two California companies and named Shawn “Jay-Z” Carter as its chief visionary officer. Subversive is buying Caliva, a cannabis brand with direct-to-consumer sales, and Left Coast Ventures Inc., a producer of cannabis and hemp products. The deals will create a new holding company and include $36.5 million of equity commitments from new and existing shareholders.
The holding company, which will be called TPCO Holding Corp., expects revenue from the combined entities to be $185 million in 2020 and $334 million next year. The deals’ aim is to “both consolidate the California cannabis market and create an impactful global company.” The new company aims to reach 75% of California consumers and Jay-Z will run its brand strategy and work on a related project to reform criminal justice.
Jay-Z may be the only A-lister to become an exec at a cannabis-related business, but he’s far from the only celeb backing one. We’ve already blogged about Snoop Dogg’s venture capital activities targeting “The Chronic”, and the cannabis beverage brand Cann recently announced a number of its own celebrity investors, including the likes of Gwyneth Paltrow & Rebel Wilson.
If you think I get unduly excited when I find an excuse to blog about celebs – well, you’re probably right. The truth is that I’m a frustrated gossip columnist who would dearly love a gig on TMZ or Page Six.
To SPAC or Not to SPAC? That is the Question. . .
This Cooley blog has a lot of information about how the SPAC market continues to grow & evolve, but there’s one aspect of it in particular that I thought readers of this blog might find interesting – a discussion of the differences and similarities between a SPAC transaction and a traditional IPO. This excerpt addresses timing considerations:
Despite common misconceptions, the timeline for completing a de-SPAC transaction and an IPO are comparable—often between four to six months, although that timeframe can vary depending on SEC review and comment. In a SPAC transaction, parties can expect to take approximately four to six weeks to negotiate a business combination agreement and line up a PIPE, and then another two to four months to prepare and file a joint Form S-4/proxy and deal with any SEC comments. Just as it would in a traditional IPO, the target must be prepared to provide the required financial information and other documentation necessary to operate as a public company, including PCAOB financials.
Other topics addressed include lockups, SEC review, Rule 144 limitations applicable to SPACs, & governance matters. The blog also addresses key trends in de-SPAC transactions, which represent the biggest difference between the SPAC & traditional IPO route to the public market.
SPACs: Auditor Market Share
One of the interesting things about SPAC deals is the relative absence of the involvement of Big 4 audit firms. In fact, as this Audit Analytics blog reviewing auditor market share for SPACs makes clear, the market is dominated by two non-Big 4 firms:
When it comes to blank check initial public offerings (IPOs), two firms dominate the market: Withum and Marcum. Together, these two firms account for 90.2% of all blank check IPOs from January 1, 2019 to September 30, 2020, with 156 companies raising over $47.7 billion. Only two Big Four firms audited a blank check company at the time of IPO during this period; KPMG, with three clients, and PwC, with one.
What accounts for the relative absence of Big 4 firms from the blank check/SPAC market? An earlier blog suggests some reasons:
While blank check IPOs and SPACs have raised billions and can offer a quick public offering, the type of transaction can pose unique challenges, especially for auditors tasked with preparing the necessary filings. There are special considerations and nuances for these transactions and based on these complexities; it is not surprising that some audit firms have specialized teams for SPACs, while others prefer to focus business elsewhere.
Non-Big 4 firms’ dominance of this part of the IPO market isn’t a new development. The blog says that while the Big 4 had over 70% of the market share for all IPOs from 2004-2019, they had only 6.5% of the market share for blank check IPOs.
Yesterday, Nasdaq filed a rule proposal with the SEC that would require all listed companies to disclose board diversity statistics, and would require most of them to either satisfy specified board diversity requirements or disclose why they don’t. This excerpt from Nasdaq’s press release summarizes the requirements of the proposed rule:
Under the proposal, all Nasdaq-listed companies will be required to publicly disclose board-level diversity statistics through Nasdaq’s proposed disclosure framework within one year of the SEC’s approval of the listing rule. The timeframe to meet the minimum board composition expectations set forth in the proposal will be based on a company’s listing tier. Specifically, all companies will be expected to have one diverse director within two years of the SEC’s approval of the listing rule.
Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market will be expected to have two diverse directors within four years of the SEC’s approval of the listing rule. Companies listed on the Nasdaq Capital Market will be expected to have two diverse directors within five years of the SEC’s approval. For companies that are not in a position to meet the board composition objectives within the required timeframes, they will not be subject to delisting if they provide a public explanation of their reasons for not meeting the objectives.
Nasdaq has posted FAQs and a summary of what listed companies need to know about the rule proposal on its website. One of the things about the proposal that surprises me is how few listed companies currently satisfy the proposed diversity standard. According to this NYT DealBook report, Nasdaq says that more than 75% of listed companies do not meet the proposed standard.
That means that a lot of companies are going to have a lot of work to do if the rule is adopted. In order to assist those companies, Nasdaq also announced a partnership with Equilar to assist listed companies in addressing board composition issues.
Big 3 Asset Managers: Paging Ida Tarbell. . .
If you’ve studied American economic history, you’ve likely heard of journalist Ida Tarbell, whose landmark series of articles in McClure’s magazine on The Standard Oil Company was credited with accelerating the government’s 1911 breakup of the company. According to this provocative new report from The American Economic Liberties Project, the growing dominance of the Big Three asset managers poses the same kind of threats that trusts like Standard Oil posed at the turn of the last century. Here’s an excerpt:
Today, scholars of finance are increasingly raising concerns that the rise of mutual fund ownership of U.S. corporations is “reminiscent of the early 20th century system of finance capital when business was under the control of tycoons such as J.P. Morgan and J.D. Rockefeller.” Antitrust experts argue that the “historic trusts that motivated the creation of antitrust law were horizontal shareholders[,]” where a common set of investors own significant shares in corporations that are competitors in a market. In this sense, asset management firms have become a part of a new “money trust”—a system of financial architecture dominated by a few large banks, private equity firms, and hedge funds.
Modern financial markets are distinct from the robber baron era by the fact that ultimate ownership of corporate shares is dispersed across many investors and asset owners, albeit controlled by a small concentrated group of institutions. In this sense, it is a modern version of an old problem.
For a sense of the scale of the problem, the “Big Three” asset management firms—BlackRock, Vanguard and State Street—manage over $15 trillion in combined global assets under management, an amount equivalent to more than three-quarters of U.S. gross domestic product.
The report details how the outsized footprint of the Big Three & a handful of other institutions raises concerns about corporate governance, American economic competitiveness, the concentration of political power, and the stability of financial markets. It also offers some dramatic solutions – including limits on asset managers’ ownership of individual companies & companies within similar industries, concentration restrictions limiting the “economic exposure” of individual asset managers, and legislation mandating a “structural separation” of asset managers’ systemically important infrastructure activities from their other lines of business.
These are the kind of sweeping changes that would require sustained, bipartisan Congressional action to implement, and right now, that looks like a pipe dream – absent a lot of public outcry. But in 1900, the idea of breaking up Standard Oil seemed pretty far-fetched too. . .
OTC: An Overview of Rule 15c2-11
Before brokerage firms can quote securities of unlisted companies, they have to satisfy the informational & other requirements of Exchange Act Rule 15c2-11. While the rule regulates the activities of brokers, ensuring that sufficient information is available to permit them to quote an issuer’s securities is often quite important to the issuers themselves. Liz blogged about the SEC’s recent amendments to the rule, and this BakerHostetler memo provides a comprehensive summary of the rule & the changes made by the amendments. Here’s the intro:
The SEC recently adopted amendments to Rule 15c2-11 of the Securities Exchange Act of 1934. Generally, in an effort to prevent fraudulent, deceptive or manipulative acts or practices related to the quote, the Rule imposes restrictions on a broker-dealer’s ability to publish or submit securities quotations for unlisted companies. Specifically, the Rule governs the requirements that broker-dealers must satisfy before they publish or submit securities quotations for unlisted companies in a quotation medium other than a national securities exchange – in other words, the over-the-counter (OTC) market.
The Amendment adds additional investor protections by mandating that investors have access to the current and publicly available information of issuers whose securities trade on the OTC markets, and it further requires broker-dealers to confirm that certain information about the issuer and its security is current and publicly available before quoting that security.
The memo walks through the mechanics of the rule, the alternative methods by which its information requirements may be satisfied, and summarizes the effect of the amendments.
A recent Corporate Secretary article reported that nearly 75% of respondents to an impromptu survey at a recent ESG investment conference said that the “social” component of the ESG equation was the most difficult for companies to analyze and integrate. This Dix & Eaton blog has some ideas for how companies can start the process of thinking about what to say – in upcoming ESG reports & elsewhere – about that aspect of their ESG efforts. Here’s an excerpt:
– Employee safety and health, training, protective equipment – what programs did you put in place in response to the pandemic, what does your 2020 data say about the effectiveness of those efforts, what did you learn, and what might you commit to for the longer term?
– Human capital management – what have you done to retain key people during the pandemic, handle unavoidable pay cuts, furloughs and layoffs in a thoughtful way, position the company and its people to recover from the upheaval, facilitate remote working arrangements and effectively manage and engage a remote workforce?
– Human rights – do you have a published human rights policy, is it relevant and applied across all regions in which you operate, how do you evaluate its effectiveness, how do you deal with non-compliance, and how well are you monitoring your supply chain?
– UN SDGs – if the UN Sustainable Development Goals have not been part of your reporting to date, might now be the time to lend your support to UN goals such as No Poverty, Zero Hunger, Good Health and Well-Being, Quality Education, Gender Equality, Reduced Inequalities, Peace, Justice and Strong Institutions?
– Diversity, equity and inclusion – do you have a policy, what are your goals and metrics, what are you going to do differently, how much change is needed, and how fast will you move?
– Board diversity – many companies have made progress on gender diversity on the Board (with at least two female Directors, for example), but how are you going to address racial and ethnic diversity (which is not nearly as well developed)?
– Environmental justice – with both environmental and social angles, are you ready for this to become a prominent ESG topic? (We rarely see it addressed in current reports, but we think it will receive more attention going forward.)
The social component may be the most difficult part of ESG for companies to address, but the blog says that it will feature prominently in 2020 ESG reports – which Dix & Eaton expects will look much different than in prior years. In any event, with the emergence of a new “human capital” disclosure requirement & growing investor interest in the “S” in ESG, the corporate response to social concerns is a topic that’s likely to grow in importance over the next several years.
PPP Loans: More On “Tax Deduction? If They’re Forgiven, Forget It!”
Last spring, I blogged about the IRS’s position that, assuming they qualified for forgiveness of their loans, PPP borrowers could not deduct business expenses that they paid with their loan proceeds. This CFO Dive article says that the IRS has recently updated its position. Unfortunately, the news didn’t get any better for borrowers. Here’s an excerpt:
If you took out a paycheck protection program (PPP) loan from the federal government and expect it to be forgiven, you can’t deduct business expenses you paid using the loan proceeds, the IRS said in guidance it released this week.
The IRS’s position isn’t new. It released guidance in May prohibiting the deductibility of expenses using forgiven loan proceeds. This week’s guidance updates the previous release by having the prohibition apply before you know whether your loan will be forgiven. As long as you believe you meet the criteria for forgiveness, you’re not to deduct your expenses in your tax filing.
“If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not,” the IRS said in releasing the guidance. If it turns out your loan isn’t forgiven, you can deduct your expenses paid using the proceeds, the IRS said.
The article points out that the AICPA has challenged the IRS’s position as being inconsistent with the language of the CARES Act, and that bipartisan legislation to undo that position has been introduced in Congress. Stay tuned.
Our December E-Minders is Posted
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There’s an old saying to the effect that “comedy equals tragedy plus time.” It’s in that spirit that we offer up the topic of “holiday lowlights” to kick off this year’s holiday season. Honestly, we can’t think of a better topic for 2020, since the entire year has been one continuous lowlight.
I think one thing that everyone who practices corporate or securities law for a living can agree on is that you aren’t really a full-fledged lawyer until you’ve had at least one holiday season ruined completely by a mad rush of transactions or other work. For some reason, it really does seem like somebody turns on a fire hose of work the moment they hang a wreath in the office lobby.
Liz, Lynn and I were emailing back and forth a few months ago when this topic came up, and we thought it might be interesting to start 2020’s holiday season by tossing out some of our worst holiday season experiences & inviting you to share your own. If you’re game, we’ll share your stories in a blog early next year – after we’ve shooed 2020 out the door and are hopefully starting to see people roll up their sleeves for a vaccine. To get things started, here are some of your faithful editors’ own ghosts of Christmases & Hanukkahs past:
Lynn Jokela: I remember being shipped off on an impromptu flight to Fargo, North Dakota on Christmas Eve in order to obtain a signed & sealed closing document. The client then took me to lunch at a Chinese buffet that included sushi!! Yes, sushi. Did I mention this was in Fargo?
Liz Dunshee: I was so caught up with a tender offer and options backdating investigation that I overworked myself into the ER one Christmas. It was so bad that my mom had to come up for 2+ weeks to take care of me, a grown adult, because I couldn’t get out of bed. To make matters worse, I’d organized a big holiday party for friends near & far, they had it without me, and I’m still hearing about what a fabulous night it was, nearly 15 years later.
John Jenkins: I’ve been involved in lots of M&A deals that closed over the holidays, and for many years, I also had a small cap client with a 9/30 year-end that was entirely dependent on me to prepare its 10-K, and crunch time was always around the holidays. To make matters worse, the company shut down over Christmas week every year. But my worst experience involved an IPO that I was working on in 1993. Our daughter was born early December of that year, and our oldest wasn’t even two yet. I was still an associate. The partner put me on a plane to Indianapolis two days after she was born, and I spent four days a week there for the next month getting an IPO filing together. Why my wife stayed married to me, I’ll never know.
I’m sure many of you reading this are saying to yourselves – “Oh, I can top that!” Well, please do. Shoot Lynn, Liz or me an email with your holiday season horror stories and we’ll blog them in the new year (anonymously, if you prefer).
ISS: No More “Sneak Peaks” for S&P 500
Kudos to Bob Lamm for picking up on news from ISS that not many folks caught when it was first announced, and non-members may not have seen when Liz blogged about it at the time on our Proxy Season Blog. It’s kind of big news too. Here’s an excerpt from Bob’s recent blog:
On November 2, the eve of what was arguably one of the most newsworthy if not significant elections in recent history, ISS snuck out an announcement that, effective January 2, 2021, it would no longer provide draft proxy voting reports to the S&P 500. Apparently, ISS – which has long been criticized for limiting the distribution of draft voting reports to the S&P 500 – has decided that the way to eliminate that criticism is not to send out draft reports at all.
Instead, ISS will send out proxy voting reports to its clients — i.e., investors — earlier and will send reports to all issuers at the same time at no cost. Thus (according to ISS), companies will have the time to provide feedback, and we’re assured that its “formal ‘Alert’ process” will enable companies to correct any errors and investors to change their votes.
The blog points out that ISS justified its decision to change its review process by noting that its purpose was originally to “help check the factual accuracy” of its reports. ISS says that it has invested heavily in enhancing the accuracy of its data, and that the review process isn’t being used as it intended. Instead, it has led to “lobbying” by companies against ISS’s recommendations. Wow, they must have been completely shocked that companies responded in that way, huh?
Attesting Electronic Signatures: There’s a Form for That!
Lynn recently blogged about the welcome news that the SEC amended Rule 302(b) of Reg S-T to permit electronic signatures. As amended, the rule provides that before initially using an electronic signature to sign a filing, a signatory must manually sign a document attesting that he or she agrees that the use of an electronic signature for an SEC filing constitutes the legal equivalent of such individual’s manual signature. So, what should that attestation look like? This Steve Quinlivan blog offers up a form that might fit the bill. Check it out!
Yesterday, the SEC continued its active year by announcing proposed changes to Form S-8 and Rule 701. The amendments suggested by the 156-page proposing release are responsive to comments that the Commission received on its 2018 concept release. Here are the highlights from the SEC’s Fact Sheet (we’ll be posting memos in our “Form S-8” and “Rule 701” Practice Areas):
With respect to Rule 701, the proposed amendments would:
• Revise the additional disclosure requirements for Rule 701 exempt transactions exceeding $10 million;
• Revise the time at which such disclosure is required to be delivered for derivative securities that do not involve a decision by the recipient to exercise or convert in specified circumstances where such derivative securities are granted to new hires;
• Raise two of the three alternative regulatory ceilings that cap the overall amount of securities that a non-reporting issuer may sell pursuant to the exemption during any consecutive 12-month period; and
• Make the exemption available for offers and sales of securities under a written compensatory benefit plan established by the issuer’s subsidiaries, whether or not majority-owned.
With respect to Form S-8, the proposed amendments would:
• Implement improvements and clarifications to simplify registration on the form, including:
o Clarifying the ability to add multiple plans to a single Form S-8;
o Clarifying the ability to allocate securities among multiple incentive plans on a single Form S-8; and
o Permitting the addition of securities or classes of securities by automatically effective post-effective amendment.
• Implement improvements to simplify share counting and fee payments on the form, including:
o Requiring the registration of an aggregate offering amount of securities for defined contribution plans;
o Implementing a new fee payment method for registration of offers and sales pursuant to defined contribution plans; and
o Conforming Form S-8 instructions with current IRS plan review practices.
• Revise Item 1(f) of Form S-8 to eliminate the requirement to describe the tax effects of plan participation on the issuer.
With respect to both Rule 701 and Form S-8, the proposals would:
• Extend consultant and advisor eligibility to entities meeting specified ownership criteria designed to link the securities to the performance of services; and
• Expand eligibility for former employees to specified post-termination grants and former employees of acquired entities.
There’s More! SEC Proposes Temporary Expansion of Compensatory Offerings to Gig Workers
The SEC saved the more interesting – and controversial – part of its “compensatory offering” modernization for an entirely separate proposal – which would, for a temporary five-year period and subject to a number of conditions, permit companies to provide equity compensation to gig workers who provide services (not goods) to the company (or as the SEC calls them, “platform workers”). Commissioners Hester Peirce & Elad Roisman issued a statement in support of the proposal. Commissioners Allison Herren Lee & Caroline Crenshaw dissented – and they were careful to point out that they did support the other proposal.
Under the amendments, an issuer would be able to use the Rule 701 exemption to offer and sell its securities on a compensatory basis to platform workers who, pursuant to a written contract or agreement, provide bona fide services by means of an internet-based platform or other widespread, technology-based marketplace platform or system provided by the issuer if:
• the issuer operates and controls the platform;
• the issuance of securities to participating platform workers is pursuant to a compensatory arrangement, as evidenced by a written compensation plan, contract, or agreement;
• no more than 15% of the value of compensation received by a participating worker from the issuer for services provided by means of the platform during a 12-month period, and no more than $75,000 of such compensation received from the issuer during a 36-month period, shall consist of securities, with such value determined at the time the securities are granted;
• the amount and terms of any securities issued to a platform worker may not be subject to individual bargaining or the worker’s ability to elect between payment in securities or cash; and
• the issuer must take reasonable steps to prohibit the transfer of the securities issued to a platform worker pursuant to this exemption, other than a transfer to the issuer or by operation of law.
The proposed amendments would also permit an Exchange Act reporting company to make registered securities offerings to its platform workers using Form S-8. The same conditions proposed for Rule 701 issuances would apply to issuances to platform workers on Form S-8, except for the proposed transferability restriction.
The proposed amendments would not permit the issuance of securities for platform worker activities relating to the sale or transfer of permanent ownership of discrete, tangible goods. Depending on the results of the initial expanded use of Rule 701 and Form S-8, if adopted, the Commission could consider expanding eligibility to other activities, such as selling goods or other non-service providing activities in the future.
The proposed amendments would require companies that sell securities to gig workers to furnish information to the SEC at 6-month intervals, to help the Commission decide whether the rule changes should expire, be extended or be made permanent.
Both proposals will be subject to a 60-day comment period following their publication in the Federal Register. Time will tell whether the next SEC Chair will carry either of these proposals across the finish line.
Glass Lewis ’21 Voting Guidelines: Diversity and E&S Phase-Ins
Also yesterday, Glass Lewis announced the publication of its 2021 Voting Guidelines. The biggest changes are that Glass Lewis is expanding its board gender diversity policy to vote against nominating chairs if there are fewer than two female directors, beginning in 2022 (they already recommend against the nominating chairs of all-male boards) – and they’re phasing in additional scrutiny of the descriptions of board-level E&S oversight.
As always, the first few pages of the Guidelines summarize the policy changes. Here’s a few highlights:
– Board Gender Diversity: Beginning in 2021, we will note as a concern boards consisting of fewer than two female directors. Our voting recommendations in 2021 will be based on our current requirement of at least one female board member; but, beginning with shareholder meetings held after January 1, 2022, we will generally recommend voting against the nominating committee chair of a board with fewer than two female directors. For boards with six or fewer total members, our existing voting policy requiring a minimum of one female director will remain in place.
– Disclosure of Director Diversity & Skills: Beginning with the 2021 proxy season, our reports for companies in the S&P 500 index will include an assessment of company disclosure in the proxy statement relating to board diversity, skills and the director nomination process.
– Board Refreshment: Beginning in 2021, we will note as a potential concern instances where the average tenure of non-executive directors is 10 years or more and no new independent directors have joined the board in the past five years. We will not be making voting recommendations solely on this basis in 2021; however, insufficient board refreshment may be a contributing factor in our recommendations when additional board-related concerns have been identified.
– E&S Oversight: Beginning in 2021, Glass Lewis will note as a concern when boards of companies in the S&P 500 index do not provide clear disclosure concerning the board-level oversight afforded to environmental and/or social issues. Beginning with shareholder meetings held after January 1, 2022, we will generally recommend voting against the governance chair of a company in the aforementioned index who fails to provide explicit disclosure concerning the board’s role in overseeing these issues. While we believe that it is important that these issues are overseen at the board level and that shareholders are afforded meaningful disclosure of these oversight responsibilities, we believe that companies should determine the best structure for this oversight for themselves.
– SPACs: We have added a new section detailing our approach to common issues associated with special purpose acquisition companies (“SPACs”), including our generally favorable view of proposals seeking to extend business combination deadlines, as well as our approach to determining the independence of board members at a post-combination entity who previously served as executives of the SPAC. Absent any evidence of an employment relationship or continuing material financial interest in the combined entity, we will generally consider such directors to be independent.
Glass Lewis also made several clarifying amendments – including that their standard policy on virtual shareholder meetings is now in effect, and they expect robust disclosure about the ability of shareholders to participate in the meeting.
We’ll be posting memos in our “Proxy Advisors” Practice Area – and you should also mark your calendar for our January 14th webcast, which is a dialogue with Courteney Keatinge, Senior Director of ESG Research at Glass Lewis. Members of TheCorporateCounsel.net can access that webcast for free – if you’re not a member, you can try a no-risk trial.
Yesterday, Corp Fin added to its “CF Disclosure Guidance Topic” series with “Topic No. 10: Disclosure Considerations for China-Based Issuers.” It summarizes risks and corporate law & reporting differences that the may be unique to companies that are based in or have the majority of their operations in China – and lists questions for these companies to consider when drafting disclosures.
Corp Fin’s disclosure guidance isn’t completely unexpected. In August, I blogged about recommendations from the “President’s Working Group on Financial Markets” – a regulatory council whose members include SEC Chair Jay Clayton and Treasury Secretary Steven Mnuchin. The recommendations included the adoption of more specific disclosure requirements – or interpretive guidance – about the risks of investing in companies from “non-cooperating jurisdictions” like China.
The working group also recommended enhanced listing standards to ensure PCAOB access to audit work papers for Chinese companies. This Bloomberg article says that the SEC is planning to move forward with that initiative and might issue a proposal before year-end that could result in many China-based companies being delisted. Adoption of any proposal would then be left in the hands of the new SEC Chair – whoever that ends up being.
“Human Capital” Disclosure: SASB Sums Up Its Resources
Yesterday, SASB published this 10-page “Human Capital Bulletin” – which summarizes elements of SASB standards that can help companies prepare human capital disclosure as required by the recent amendments to Reg S-K. Here’s what it includes:
• A list of SASB industry standards that contain topics and metrics related to human capital.
• An overview of selected human capital-related topics and metrics across all 77 SASB industry standards – specifically, standards on labor practices; employee health & safety; employee engagement, diversity & inclusion; and supply chain management
• A summary of SASB’s Human Capital Management Research Project, which has the objective of identifying opportunities for the SASB Standards to further account for human capital-related risks and opportunities
The new Human Capital Bulletin follows updates last week to this statement from the SASB Investor Advisory Group. The statement – which hadn’t been updated since the Investor Advisory Group was formed in 2016 – urges companies to include SASB-based disclosures in their ESG communications to investors and now emphasizes that other reporting standards and frameworks may complement SASB standards, but aren’t replacements for them. Also see this SASB press release.
For more tips on human capital disclosure, make sure to tune in to our upcoming webcast, “Modernizing Your Form 10-K: Incorporating Reg S-K Amendments,” on Tuesday, December 8th, 2020 at 11am Eastern (note, this is an earlier time of day than most of our webcasts). If you attend the the live version of this program, CLE credit is available in the following 10 states:
CA, FL, IL, NC, NJ, NY, PA, TX, VA, WA.
Members of this site are able to attend this critical webcast at no charge. If not yet a member, try a no-risk trial now. For this program, the webcast cost for non-members is discounted to $295 – which will count toward your 2021 membership rate should you decide to subscribe to TheCorporateCounsel.net before the end of this year. You can renew or sign up for a no-risk trial online – or by fax or mail via this order form. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
Thanksgiving: Different Look, Fresh Gratitude
Thanksgiving is looking different this year for a lot of folks. As I count my blessings, this community looms large. I’m grateful to get to connect with you all from afar – nerding out on corporate governance, securities and ESG, and sharing the highs & lows of work and life in general. Hopefully what we do around here is also making your work lives a little easier in the midst of everything that’s been happening this year. Thank you to everyone who follows this blog, subscribes to our sites, speaks at or attends our events, and reaches out with interesting stories, tips and questions. We couldn’t do it without you!
Now, on to the recipes, since John is handling the blog tomorrow and we’ve got to keep up our streak of “foodieblogs.” I plan to be feasting on more leftovers this year than usual. This article from the Kitchn will help you turn one turkey into 9 freezer meals to enjoy in the weeks and months ahead.
On Friday, the Corp Fin Staff updated its statement on use of electronic signatures in light of Covid-19 concerns to say that it would not recommend enforcement action with respect to Reg S-T signature requirements for companies that comply with amended Rule 302(b) in advance of the effective date.
As I blogged back in June, the statement also extends for an indefinite time the temporary “Covid-19” signature relief that allows signatories to retain manually signed pages and deliver them to the company for retention as soon as reasonably practicable.
Dates for Electronic Signatures: Controlling for “Time Stamps”
If an officer decides to authenticate his/her signature electronically (once the new rule goes into effect) via DocuSign and does so a day or two in advance of an electronic filing with the SEC, should the signature page filed with the SEC bear the date that matches that date/time stamp or can it still bear the date of the filing?
John responded:
I don’t think there’s ever been a hard and fast rule regarding the date of an individual’s signature on a 10-K or 10-Q filing. Rule 302 of S-T simply requires (as it always has) that the authentication document “shall be executed before or at the time the electronic filing is made.” That being said, I think the more common practice is to date the signature page the date of the filing, and I think that’s a better practice in this situation.
The reason I say that is that the filing speaks as of its date, and the officer’s responsibility for the accuracy of its contents does not end prior to the time that the document is filed. While obtaining signatures (electronically or otherwise) a few days in advance may be a matter of convenience, I think the company’s procedures should make it clear that a signatory’s responsibility for the filing do not end on the date that he or she has authenticated their signature, and that the signature in the filing will be dated as of the filing date.
I think the potential problem with not taking this approach can be illustrated by a situation in which the company obtains an officer’s signature a few days in advance of filing the 10-Q, but during the interim, there is a development that requires a subsequent event footnote. Now the company would find itself in a situation in which the officer has signed a document as of a date that precedes the date of a specific disclosure included in the document. I think a situation like that may well implicate the company’s disclosure controls and procedures unless it is clear from its policies that the signatories understand as of what date their signatures speak, and that their responsibility for the accuracy and completeness of the filing do not end with the date they sign it.
Auditor Independence: PCAOB Amends Standards to Align with SEC
Last week, the PCAOB announced it had adopted amendments to its independence standards to align the Board’s requirements with the SEC’s recent revisions to auditor independence rules. The PCAOB rules will be effective subject to SEC review.
Yesterday, the SEC continued this year’s rulemaking spree by adopting amendments to enhance and simplify the financial disclosure provisions of Regulation S-K. The amendments are significant – they eliminate the requirement for Selected Financial Data, streamline the requirement to disclose Supplementary Financial Information, and amend MD&A requirements. Here’s the 196-page adopting release – a tabular summary of the changes begins on page 8.
As noted in the SEC’s press release, the amendments reflect the Commission’s preference for a principles-based approach to disclosure. Here’s an excerpt:
The changes to Items 301, 302, and 303 of Regulation S-K sharpen the focus on material information by:
– Eliminating Item 301 (Selected Financial Data); and
– Modernizing, simplifying and streamlining Item 302(a) (Supplementary Financial Information) and Item 303 (MD&A). Specifically, these amendments:
Revise Item 302(a) to replace the current requirement for quarterly tabular disclosure with a principles-based requirement for material retrospective changes;
Add a new Item 303(a), Objective, to state the principal objectives of MD&A;
Amend current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources;
Amend current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline disclosure requirements for results of operations;
Add a new Item 303(b)(3), Critical accounting estimates, to clarify and codify Commission guidance on critical accounting estimates;
Replace current Item 303(a)(4), Off-balance sheet arrangements, with an instruction to discuss such obligations in the broader context of MD&A;
Eliminate current Item 303(a)(5), Tabular disclosure of contractual obligations, in light of the amended disclosure requirements for liquidity and capital resources and certain overlap with information required in the financial statements; and
Amend current Item 303(b), Interim periods (amended Item 303(c)) to modernize, clarify and streamline the item and allow for flexibility in the comparison of interim periods to help registrants provide a more tailored and meaningful analysis relevant to their business cycles.
In addition, the Commission adopted certain parallel amendments to the financial disclosure requirements applicable to foreign private issuers, including to Forms 20-F and 40-F, as well as other conforming amendments to the Commission’s rules and forms, as appropriate.
The amendments will be effective 30 days after publication in the Federal Register. Once effective, early application of the amended rules is permitted so long as companies provide disclosure responsive to an amended item in its entirety. Compliance with the amended rules won’t be required until a company’s first fiscal year ending on or after the date that is 210 days after publication in the Federal Register – for calendar-year companies, that will mean mandatory compliance will begin with their Form 10-K for the 2021 fiscal year that’s filed in 2022. For registration statements, companies will be required to apply the amended rules if the registration statement on its initial filing date is required to contain financial statements for a period on or after the mandatory compliance date.
With all the recent SEC rulemaking, you’d be forgiven if you forgot that the SEC just proposed these amendments back in January – and at the time, that Commissioner Allison Herren Lee issued a dissenting statement criticizing the proposal for not addressing climate risk disclosures. The final amendments also don’t address climate risk disclosures. Commissioner Lee issued a joint statement with Commissioner Caroline Crenshaw in which they voice two concerns: first, that the amendments eliminate the contractual obligations table and second, the principles-based disclosure requirements don’t address climate risk.
The last sentence of Commissioner Lee and Crenshaw’s statement says they’re ready to start working on standardized ESG disclosure: ‘There’s no time to waste in setting to ourselves to this task, and we look forward to rolling up our sleeves to establish requirements for standard, comparable, and reliable climate, human capital, and other ESG disclosures.’
Key Performance Metrics: SEC Enforcement Goes After Execs for Misleading Disclosure
Late last week, the SEC announced that it charged two former Wells Fargo executives for their roles in the allegedly misleading “cross-sell metric” that the bank had used to measure its financial success and that got it in so much hot water back in the mid-2000s. The SEC’s order for John Stumpf, the company’s former CEO, says that he agreed to pay $2.5 million to settle the charges without admitting or denying the allegations. The SEC’s complaint against Carrie Tolstedt, who headed up the company’s core Community Bank, alleges that she committed fraud. Among other things, the SEC’s complaint seeks to ban Tolstedt from serving as a public company officer or director and force her to pay fines.
The SEC says that the cross-sell metrics were inflated by unauthorized accounts and that the executives knew or were reckless in not knowing that the disclosures about those metrics were materially false and misleading. The SEC’s press release says that both former executives signed misleading certifications in 2015 and 2016, which is a violation under SOX, something not frequently enforced by the SEC. Here’s an excerpt from the SEC’s press release:
‘If executives speak about a key performance metric to promote their business, they must do so fully and accurately,’ said Stephanie Avakian, Director of the SEC’s Division of Enforcement. ‘The Commission will continue to hold responsible not only the senior executives who make false and misleading statements but also those who certify to the accuracy of misleading statements despite warnings to the contrary.’
The November-December Issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:
– Duty of Loyalty Issues for Designated Directors and the Boards of Portfolio Companies
– Conflicted CEO Tilts Company Sale in PE Firm’s Favor
– SBA Announces New Guidance on Consent Requirements for PPP Borrower Changes of Ownership
– Court Rejects Challenge to M&A Transaction Despite Activist Pressure
– Do Reps and Warranties Policies Actually Pay Claims?
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
