Yesterday, SEC Chair Jay Clayton and a group of senior SEC & PCAOB officials issued a joint statement warning about the risks posed by “emerging market” investments. While the statement addresses all emerging markets, it focuses on the 500 lb. gorilla of those markets – China. Here’s an excerpt from the introduction:
Over the past several decades, the portfolios of U.S. investors have become increasingly exposed to companies that are based in emerging markets or that otherwise have significant operations in emerging markets. This exposure includes investments in both U.S. issuers and foreign private issuers (“FPIs”) that are based in emerging markets or have significant operations in emerging markets. During this time, China has grown to be the largest emerging market economy and the world’s second largest economy.
The SEC’s mission is threefold: protect our investors, preserve market integrity and facilitate capital formation. Ensuring that investors and other market participants have access to high-quality, reliable disclosure, including financial reporting, is at the core of our efforts to promote each of those objectives. This commitment to high-quality disclosure standards—including meaningful, principled oversight and enforcement—has long been a focus of the SEC and, since its inception, the PCAOB.
Our ability to promote and enforce these standards in emerging markets is limited and is significantly dependent on the actions of local authorities—which, in turn, are constrained by national policy considerations in those countries. As a result, in many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse, in comparison to U.S. domestic companies. This significant asymmetry holds true even though disclosures, price quotes and other investor-oriented information often are presented in substantially the same form as for U.S. domestic companies.
The statement details risks and related considerations specific to “issuers, auditors, index providers & financial professionals.” These include concerns about the quality of financial information, the PCAOB’s continuing inability to inspect workpapers in China, the limited ability of U.S. authorities to bring enforcement actions in emerging markets, the limited rights & remedies available to shareholders, and the failure of passive investment strategies to account for these risks.
The statement also addresses concerns about disclosure, and emphasizes the importance of robust risk factor disclosure for companies with operations in emerging markets:
In light of both the significance and company-specific nature of the risks discussed in this statement, we expect issuers to present these risks prominently, in plain English and discuss them with specificity. Issuers based in emerging markets should consider providing a U.S. domestic investor-oriented comparative discussion of matters such as (1) how the company has met the applicable financial reporting and disclosure obligations, including those related to DCP and ICFR and (2) regulatory enforcement and investor-oriented remedies, including as a practical matter, in the event of a material disclosure violation or fraud or other financial misconduct more generally.
The statement was issued jointly by Chair Clayton, PCAOB Chair Bill Dunkhe, SEC Chief Accountant Sagar Teotia, and the Directors of Corp Fin & IM. With that kind of firepower mustered behind the statement, I think it’s fair to say that they aren’t fooling around here. Public companies based in China or with significant operations there should take a hard look at their risk factor disclosures, because it seems likely that they will be scrutinized closely by the Staff the next time their filings are pulled for review.
Covid-19 Crisis: Companies Adopt Emergency Bylaws to Ensure Board Operations
With all of the disruptions resulting from the Covid-19 pandemic, many companies are looking at board and management continuity issues, and some companies have opted to adopt an emergency bylaw to help address these issues. This recent Simpson Thacher memo discusses Section 110 of the DGCL, which allows companies to adopt emergency bylaws and sets forth what may be included in them. Among other things, these bylaws may permit companies to expand the class of persons who may call a board or committee meeting, and relax notice and quorum requirements for such a meeting.
Yesterday, Mastercard filed an Item 5.03 8-k announcing that its board had adopted an emergency bylaw, which provides that:
– a Board or committee meeting may be called by any director or officer by any feasible means, and notice of the meeting may be provided only to the directors that can be feasibly reached and by any feasible means; and
– the director(s) in attendance at the meeting shall constitute a quorum and may appoint one or more of the present directors to any standing or temporary committee as they deem necessary and appropriate
Mastercard isn’t the only company that has adopted an emergency bylaw in recent weeks. John Bean Technologies also adopted a similar provision, and other companies have long had emergency provisions in their own bylaws (see this Jack In The Box filing from 2005). If your bylaws don’t contain an emergency provision, now may be a good time to consider adopting one.
Transcript: “Activist Profiles & Playbooks”
We have posted the transcript for the recent DealLawyers.com webcast: “Activist Profiles & Playbooks.”
The Covid-19 crisis has created a number of challenges for public companies, and one of the potentially most significant is maintaining appropriate internal control over financial reporting. Crisis-related ICFR issues include managing newly remote workforces, the novel and often unfamiliar financial reporting issues created by the crisis, and – for companies receiving government assistance – the need to implement restrictions on executive comp, share repurchases and dividends, among other things.
This Hunton Andrews Kurth memo reviews the legal framework applicable to these issues, and offers insights on how to address them. Here’s an excerpt:
We recommend that companies begin to assess their existing disclosure and internal controls by taking stock of what has changed in the current financial reporting environment. Unique or novel accounting issues should be carefully analyzed, and expert advice sought when internal resources are insufficient.
Potential and actual disruptions to a company’s supply chain, customer base, operations, processes and workforce should be weighed when evaluating the operating effectiveness of legacy controls. As part of this process, companies should also assess any potential deficiencies in review-type internal controls and the ability of individuals to perform control duties in light of shelter-in-place orders and other company specific remote-work protocols.
Based on this assessment, companies should determine whether existing controls are sufficient to prepare financial statements and disclosure documents at the reasonable assurance level. If a legacy control cannot be performed as previously designed, companies should determine what new controls may be necessary to reduce the risk of errors and fraud. In doing so, they should ensure that any changes in design address both the original risks of material misstatement as well as any new risks. We anticipate regular dialogue with counsel, the auditors and audit committees on these topics.
The memo also says that public companies, particularly those receiving government assistance, should expect heightened scrutiny from the “media, putative whistleblowers, agency inspectors general, consumer watchdog groups, members of Congress and other political figures.” In this environment, the best way for companies to protect themselves is by maintaining a robust control environment and responding nimbly to changes in business circumstances that may require adjustments to those controls.
Covid-19 Crisis: Chart of Governmental Actions
If you represent a client with operations in multiple states, Faegre Drinker’s interactive chart of the various federal, state and local government orders associated with the Covid-19 crisis is a really handy resource. If you click on an individual state, you’ll be taken to a page that contains links to that state’s legislative and executive orders relating to Covid-19, as well as to orders issued by major municipalities within that state. It appears to be updated on a daily basis, so you’ll probably want to bookmark it.
Transcript: “The Top Compensation Consultants Speak”
We have posted the transcript for the recent CompensationStandards.com webcast: “The Top Compensation Consultants Speak.”
Management teams and their advisors always have plenty to think about when preparing for any quarter’s financial reporting, but when it comes to this one, well. . . like they say on “Rick & Morty” – “Wubba lubba dub dub!” If you’re waist deep in this process, you should take a look at this Weil memo, which provides in-depth checklists addressing issues to think about when preparing this quarter’s earnings release & Form 10-Q. Here’s an excerpt:
At the risk of stating the painfully obvious, the just-completed quarter has not been “normal” for public companies by any stretch of the imagination. As they turn from addressing complex operational matters and mitigation efforts to disclosure decision-making, corporate management, audit committees and boards are grappling with such questions as: Should the earnings release and conference call be delayed to give the company more time to come to grips with any number of novel or complex accounting issues generated by the “perfect storm” of the COVID-19 pandemic, global economic turmoil, and the rapid-fire pace of federal and state legislative and regulatory responses?
If it has not already done so, should the company withdraw or otherwise modify earnings guidance made early in Q1? What is the impact on the company of the Coronavirus Aid Relief and Economic Security Act (CARES Act) and its regulatory progeny? Will the company need to recognize impairments? And finally, given the uncertainty about when and how the economy will reopen and whether certain industries will undergo lasting structural change, the ultimate question: what insight can be given into what the future may hold for the company?
The checklists addresses these and other disclosure issues and includes a discussion of the relevant SEC and/or staff-level disclosure guidance that has been provided during the Covid-19 crisis. The checklists identify key action items and conclude with suggestions about “what to do now” in navigating this quarter’s disclosure challenges.
Listing Standards: Nasdaq Provides Temporary Relief from Price-Based Standards
On Friday, the SEC approved an immediately effective Nasdaq rule change that would allow listed companies more time to return to compliance with price-based continued listing standards, which relate to the minimum bid price and market value of publicly held shares. Here’s an excerpt from this Steve Quinlivan blog with a summary of the rule:
Under the approved rule Nasdaq will permit companies that are out of compliance with the Price-based Requirements additional time to regain compliance by tolling the compliance periods through and including June 30, 2020. However, throughout the tolling period, Nasdaq will continue to monitor these requirements and companies will continue to be notified about new instances of non-compliance with the Price-based Requirements in accordance with existing Nasdaq rules. Companies that are notified about non-compliance are required by Nasdaq rules to make a public announcement disclosing receipt of the notification by filing a Form 8-K, where required by SEC rules, or by issuing a press release.
Starting on July 1, 2020, companies will receive the balance of any pending compliance period in effect at the start of the tolling period to come back into compliance with the applicable requirement. Similarly, companies that were in the delisting hearings process would return to that process at the same stage they were in when the tolling period began. Companies that are newly identified as non-compliant during the tolling period will have 180 days to regain compliance, beginning on July 1, 2020.
According to this Reuters article, the NYSE has proposed to provide similar relief from its own price-based continued listing standards, but its initial proposal was rejected. The Exchange was reportedly “in talks” with the SEC about the rule proposal, but that was two weeks ago – and I haven’t seen anything more on this since then.
Cheat Sheet: Covid-19 Quick Reference
I’m a sucker for “cheat sheets” that I can use to get up to speed quickly & fake my way through a conference call, and Simpson Thacher’s 37-page “Covid-19 Quick Reference Guide” fits the bill when it comes to the Covid-19 crisis. It provides a bullet-point overview of securities, corporate, M&A, commercial finance and other considerations associated with the crisis, and also provides an overview of the CARES Act and other governmental responses.
Last fall, John blogged about “stakeholder governance” and the business judgment rule and noted that in Delaware, the business judgment rule provides protection for directors who conclude in good faith that considering the interests of other stakeholders may be helpful in maximizing long-term shareholder value. A recent memo from Wachtell Lipton says boards will need to understand Covid-19 related risks not only to the company but also to its various stakeholders. The memo also serves as a good reminder that despite all of the challenges from Covid-19, boards should fulfill their oversight responsibility as best they can and know the business judgment rule will be applied to board decisions.
The memo discusses director oversight along with management’s role in handling the day-to-day operations, including concerns relating to external obligations, including debt and regulatory requirements, liquidity, compensation and strategic threats and opportunities. Here’s an excerpt:
The decisions facing companies at this time are terribly difficult and painful. It will be crucial for the board and the management team to maintain an atmosphere of respect and shared concern in order to promote effective decision-making in this period of great stress. The board should be careful to resist any temptation to usurp the role of management in running the company’s day-to-day business and addressing the challenges resulting from the COVID-19 pandemic. Corporate America finds itself now in uncharted territory, and the ramifications of the crisis and the nationwide response are unknowable factors. While there may be substantial second-guessing once the COVID-19 crisis is past, directors should take comfort that the business judgment rule applies to board decisions regardless of how they appear in hindsight. The board is called to fulfill its oversight role to the best of its ability. Directors who act on an informed basis, in good faith, and in the honest belief that their decisions are in the company’s best interests will continue to have the protection of the business judgment rule.
Rulemaking Petition Seeks to Allow Electronic Signatures Under Reg S-T
In what could be a big step forward for the SEC, a rulemaking petition from Wilson Sonsini, Fenwick & West and Cooley asks the SEC to amend rules under Reg S-T that would permit companies to obtain electronic signatures for documents filed with the SEC. The rulemaking petition acknowledges the Staff’s recent statement providing flexibility regarding manual signatures during the current crisis and then encourages the SEC to go further.
In this day and age, electronic signatures seem to be more the norm and routing manual signatures to hold in a dusty, over-crowded file cabinet somewhere seems somewhat archaic – this change would be a nice improvement for many. Here’s an excerpt from the petition:
We acknowledge the Staff Statement: Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns (March 24, 2020) (the “Staff Statement”) and appreciate the added flexibility it provides regarding manual signatures in the current extraordinary environment. We believe, however, and many of our clients have also informed us, that obtaining and retaining manual signatures in compliance with the Staff Statement remains a significant logistical burden. We and many of our clients believe the Staff Statement could be of greater effectiveness to registrants, with no compromise to the integrity of the document signing process, if registrants were permitted to use existing, proven electronic signature processes with respect to filing documents with the Commission.
Improvements in electronic signature software technology make it possible to confirm (with at least equal confidence to the collection of manual signatures) who has signed a document and when it was signed (and, indeed, far better accuracy as to the timing of execution), and make recordkeeping and storage of such signatures seamless and secure.
More Women on Boards Helps Ensure Consumer Safety
It’s been well documented and we’ve blogged about studies showing how increased board gender diversity may lead to better ESG and business performance. A recent abstract describes an academic study that looked at the influence female directors had on product recall decisions. The study found that as boards add female directors, product recall decisions change. The abstract says as boards add female directors, “firms make faster recall decisions for the most serious defects that are high in severity and dangerous for customers, highlighting the increased stakeholder responsiveness from adding female directors.”
This blog from Lehigh University provides further discussion of the study. Some basic stats cited in the blog include:
Compared to firms with all-male boards, firms with female directors announced high-severity product recalls 28 days sooner
The number of women on boards also impacted high-severity recall outcomes – only boards that had at least 2 female directors improved timeliness of severe product recalls and when there were 3, recall decisions moved along even more quickly
For low severity recalls – where executives have greater discretion, boards with female directors announced 120% more recalls compared to firms with no women directors
Yesterday’s NYT DealBook high-lighted notable business leaders who are advising President Trump on reopening the economy. The column notes many of those business leaders are members of, or represent industry groups that are members of, the Business Roundtable and the BRT recently published its “principles for reopening the economy.”
Last summer, Broc blogged about the BRT statement on shareholder primacy and a commitment to all stakeholders and that statement still generates a lot of press and commentary today. I’m not sure the BRT will get as much press this time around as it did last summer but the BRT principles are encouraging as they provide a framework for planning and preparing a coordinated response to the current crisis.
The BRT principles’ bottom line is that reopening the economy requires careful planning, that should begin now and activity restrictions should be lifted gradually as guided by public health officials. As the effects of Covid-19 persist, without taking sides on to restrict or not to restrict, hopefully the BRT principles and framework help give some order to a recovery process that mitigates health, safety and economic problems as each seem at risk of escalating even further if not handled appropriately.
BRT endorsed the following principles:
Safety first – A recovery strategy must give Americans confidence that they can safely return to work and public spaces
Coordination – BRT encourages state and federal coordination for protecting public health and safety
The BRT says that it will be preparing a more detailed document outlining approaches to a safe recovery and revitalization and it will focus on the following issues:
– Federal guidelines helping to define public health criteria used to inform local decisions about lifting activity restrictions as well as guidelines that outline appropriate safety measures.
– Access to critical resources and supplies like testing and virus monitoring, supplies, therapeutics and vaccines.
– Vital worker and community needs including safe schools, childcare, transportation and restoration of comprehensive healthcare services.
BRT included 5 exhibits outlining its framework to address these issues. The exhibits show how federal guidelines and states can coordinate their approach to lifting restrictions, considerations that should be taken into account for determining when and where to lift restrictions, how federal guidelines should define risk levels that guide the level of activity restrictions, examples of measures state and local authorities can take to implement federal guidelines and how the measures vary by federally defined risk levels.
Covid-19 Oversight: Does the Board need a Special Committee?
No doubt most boards are dealing with unprecedented challenges related to the Covid-19 pandemic. Some boards might currently have a risk committee positioned to provide oversight of Covid-19 related issues while others might not. As directors are likely stretched for time just like everyone else – some boards are reportedly holding weekly or bi-weekly calls – a recent blog from Hunton Andrews Kurth takes a look at whether the board should create a special committee to oversee the company’s Covid-19 response.
A lot of factors will play into whether a company should designate a special committee to oversee the company’s pandemic response, including the structure of current board committees, director availability, director experience/expertise, existing committee oversight responsibilities, among other things. Here’s an excerpt from the blog:
Establishment of a Special Oversight Committee may give the board and the company a better opportunity to get the benefit of board members who collectively are best suited to exercise oversight in this unique set of circumstances. Such a committee could be composed of those board members who are in the best position to participate in conference calls frequently and on short notice.
Use of a Special Committee also would enable the board to select a group of committee members whose combined experience and expertise best qualify them to address the special challenges that the pandemic presents for the company.
In addition, the combination of more frequent board meetings and the establishment of such a committee would provide an excellent framework for providing high quality company oversight as well as a demonstrable record of such oversight, which record may be important in years to come as corporations deal with the fallout of the pandemic.
March-April Issue of “The Corporate Counsel”
We recently mailed the March-April issue of “The Corporate Counsel” print newsletter (try a no-risk trial). The topics include:
1. A Disclosure Framework for the Coronavirus
– The SEC Weighs In
2. Coronavirus Disclosure Considerations
3. Executives in Trouble: Is Disclosure of Uncharged Conduct Required?
– Other Potential Disclosure Considerations
4. “Test the Waters for All” Means WKSIs, Too!
– What WKSIs Can Do Under Rule 163
– The “Test the Waters” Rule 163B Alternative
– Mix & Match? Rule 163B is Non-Exclusive
– Conclusion: WKSIs Should Keep Rule 163B in Mind
Rhonda Brauer has provided a couple of guest blogs, here’s her most recent post. We’re grateful for her work this time that takes a look at where investors are turning their attention during the Covid-19 pandemic:
Recently, we have seen a number of investor-organized responses to the COVID-19 pandemic, which will likely refine investor agendas as we move forward.
As Lynn recently blogged, there will likely be increased calls for tying ESG metrics to executive pay and for more sensitivity to and limits on pay given the harsh impact on the larger workforce. Two notable additional examples of investor focus are:
First, a global coalition of institutional investors – public pensions, asset managers and faith-based funds – recently called on companies to step up to support their workers, communities, and businesses, as well as the markets, to help respond to the crisis. The coalition, organized by Domini Impact Investments, the Interfaith Center on Corporate Responsibility (ICCR) and the New York City Comptroller’s Office, has grown to over 250 investors representing over $6 trillion in assets under management, with more investors still signing on. Companies are asked, among other things, to:
Provide paid leave for all their workers,
Prioritize health & safety for their workers and communities,
Maintain employment for their workers, to enable an eventual resumption of operations more quickly,
Maintain supplier & customer relationships to help stabilize the economy, protect communities, and ensure stable supply chains, and
Exercise financial prudence & responsibility, particularly in such areas as share repurchases and executive compensation.
Companies should expect further calls from investors and investor-led organizations, such as PRI, to prioritize COVID-19-related issues in their ESG policies and engagements.
Second, as we begin to understand where the funds are flowing from the $2 trillion CARES Act rescue package, it seems inevitable that investors will increase focus on transparency in corporate political spending. Among others, Bruce Freed, president and co-founder of the Center for Political Accountability, has already asked, “Will we ever know whether undisclosed political contributions influenced which companies benefited most from the legislation?” He pointed to the relationship between One Nation, a 501(c)(4) group, and the Senate Leadership Fund (a so-called “527 Super-PAC”), closely associated with Senate Majority Leader Mitch McConnell, and evidence — through political spending reports and voluntary disclosures — of corporate money flowing through One Nation to this Fund. Such relationships, he said, feed fears that contributions could improperly influence who benefits from legislation. Freed believes that “it’s critically important that an increasing number of publicly owned companies … embrace… corporate political disclosure.”
Companies should be prepared for even more shareholder resolutions on political disclosures and more investor pressure to disclose all of their political spending, particularly those corporate funds channeled into so-called “dark money” vehicles: trade associations and 501(c)(4)s (organizations originally designed to promote social welfare and cause-related activities, to help educate the public), as well as the 527 Super-PACs that enable corporations to advocate indirectly for and against political candidates.
Additional Insight on Investor Stewardship & Covid-19
SquareWell Partners recently issued a report providing additional insight from asset managers about how they will fulfill their stewardship responsibilities given the continued uncertainty resulting from the Covid-19 pandemic. The report summarizes information based on feedback from 20 asset managers representing about $7.2 trillion in managed assets. They want to know more about what the board’s doing…here’s some of what they said:
– Most investors are prepared to deal with the current disruption and defer to regulatory guidance about the format for annual meetings – with a preference that companies revert back to a hybrid meeting format after the uncertainty subsides
– Investors expect communication from companies about the impact of recent events either through public disclosures or direct contact with management teams and would appreciate more information about how the board is overseeing the situation
– In terms of executive pay, investors expect boards to focus on more critical business issues and investors aren’t going to place additional importance on pay but note that there will be societal pressure to demonstrate restraint and manage reputational risk
California AG: No Delay in Enforcing CCPA
A few weeks ago, I blogged about the latest round of changes to the California Consumer Privacy Act. Some had requested a delay in enforcement of the CCPA due to ongoing need to focus on Covid-19 related concerns. This blog from Taft says that the California Attorney General provided an answer to the delayed enforcement request, and in short it’s “No”. As noted in the blog, there is some question about the exact start date for enforcing the CCPA – although it sounds like practitioners should plan on July 1.
Last week, John blogged about what companies are going to do about guidance when issuing first quarter earnings. As a follow-on to that, Bass Berry & Sims surveyed initial disclosures in earnings releases for off-calendar year-end companies furnished on or after March 16, 2020 to see how companies handled earnings guidance in light of Covid-19. The findings say a majority of companies withdrew or suspended guidance. Here’s an excerpt:
67% (22 companies) either withdrew their existing guidance (in full or in part) or suspended their practice of providing quarterly guidance
The companies that provided either updated guidance or new quarterly guidance generally did so with a significantly greater gap between the high and low range of their guidance compared to prior disclosures
The survey highlights what the firm has been hearing from its clients—the unfolding COVID-19 pandemic and the resulting economic turmoil make it difficult to predict what the future will look like. As reflected in the survey results above, there will be many public companies that elect to suspend or withdraw guidance as a result of the tremendous economic uncertainty arising from COVID-19, but approaches will differ, and there will continue to be some public companies (albeit, potentially, a minority) that elect to continue to provide guidance during these uncertain times. Ultimately, the determination of whether to continue to provide guidance will require judgment and be very fact-specific (depending on, among other things, the industry of the public company and how COVID-19 has impacted such industry).
The blog discussing survey findings also includes links to notable disclosures – one being a company that made projections based on three recovery scenarios along with qualitative and quantitative assumptions about what such recoveries would look like for three of the company’s four operating segments.
Social distancing and stay-at-home orders resulting from Covid-19 will make this quarter’s earnings calls different for many companies – for most it will be difficult, if not impossible, to gather executives in one place for the call. Companies will likely need to put more effort into earnings call prep sessions with additional time devoted to logistical considerations to help ensure the calls go smoothly. With earnings kicking off this week, one resource that might help is this ICR blog that offers practical considerations and tips. Some of the considerations include:
– Pre-record opening, prepared remarks – some companies likely already pre-record opening, prepared remarks, but if not, it’s suggested that companies do so
– Evaluate whether technology like video capabilities will be helpful for Q&A
– Evaluate whether to hold a live Q&A session, ICR suggests companies do so, but if not:
Consider posting anticipated Q&As on the company website next to webcast link or earnings release
Have management speak to questions and provide key messages related to those questions as part of the call
Let listeners know that the company won’t be holding an interactive Q&A session at the beginning of the prepared remarks and that topics the company believes will be of further interest will be posted to its website
– Most conference call providers will have limited operators available right now, which could cause long wait times likely frustrating investors dialing in to the call. ICR provides options to help reduce risk of delays, one being not to include dial-in information in the advisory release and including only the webcast link. With this option, companies would email the dial-in information separately to sell-side analysts that would allow them to ask questions during the call.
– In any event, ICR recommends avoiding “internet-based” phones due to increased internet activity that can reduce call quality. Most analysts will be working remotely, so consider sending the release or presentation in an email ahead of the call.
– Last, consider reporting later than usual to give the company more insight into critical areas that investors will focus on, the blog also outlines considerations for current quarter reporting, including the current state of operations, financial liquidity/balance sheet/capital allocation and guidance.
Covid-19: Anticipated Enforcement Trends
As the Covid-19 crisis continues, it’s still early to know how enforcement activity will really play out, but this Gibson Dunn memo reviews early enforcement activity, as well as previous post-disaster enforcement activity, as possible indicators for areas where regulator activity might pick up.
The SEC has reminded us more than once that it remains “laser-focused” on enforcement efforts – Chairman Clayton and Corp Fin Director Hinman, included mention of this in their joint statement last week and the recent statement from the Co-Directors of the Enforcement Division serves as another reminder. The SEC’s website for individual investors, Investor.gov, also recently sent an Alert warning investors to be aware of current investment frauds, including Covid-19 related scams. So what should companies be on the lookout for?
If past activity serves as an indicator, the memo says distributions from government assistance programs like the CARES Act will dominate much of the enforcement agenda for the next decade. The memo also covers enforcement actions in the U.K., EU and Asia.
Areas where the memo says increased enforcement activity is likely: insider-trading, state-level focus on consumer protection and price-gauging and expansion of state regulatory powers, and False Claims Act enforcement. With increased government spending, the memo says its important for companies to document communications with, and decisions by, government contractors to help reduce False Claims Act exposure after the crisis.
And, if a company receives an internal whistleblower report, the memo reminds companies to respond thoroughly. This Gibson Dunn memo addresses whistleblower claims in particular, and says companies should anticipate an onslaught of whistleblower claims. The memo reviews steps companies can take to prepare and reiterates the importance of making sure a whistleblower action plan reflects current operations and to then stick to the action plan by following it to a tee.
When Delaware Chief Justice Leo Strine retired last fall, Liz blogged about his proposal that would recommit to “New Deal” concepts focused on workers’ rights and a reformed shareholder voting/proposal process. Last Friday, Chief Justice Strine, along with Dorothy Lund of the University of Southern California Gould School of Law, published an essay in DealBook that again calls for a “21st-century New Deal.”
The essay echoes Chief Justice Strine’s earlier comments, but the current pandemic offers a new backdrop for delivering the pitch. Here’s an excerpt:
Recently, the Business Roundtable and leading institutional investors have responded to growing inequality and economic insecurity by calling for greater respect toward all corporate stakeholders, not just stockholders. But what does it say about whether rhetoric is enough that, in the national emergency we are facing, American workers and taxpayers, not institutional investors or top corporate managers, are bearing the brunt of the harm? We are again paying the price for a corporate governance system that lacks focus on financial soundness, sustainable wealth creation and the fair treatment of workers.
Instead of just rhetoric, consider regulatory action to encourage corporations and institutional investors to make the best interests of American workers, consumers, communities and the environment an end goal of corporate governance, as important as serving stockholders. Public and large private companies receiving bailouts or pandemic-related subsidies could be required to become public benefit corporations under state law, and others could be given positive incentives to do the same. Institutional investors and socially important companies could be required to disclose to the public how much weight they give to issues like worker pay and safety, environmental responsibility and maintaining a strong balance sheet.
The essay emphasizes the need to invest in infrastructure, innovation and worker training and says progressive approaches like a financial transaction tax, a graduated capital gains tax and an end to the carried interest loophole for hedge funds can pay for these essential investments fairly. These measures are integral to corporate governance reform because they encourage sustainable investing and put a damper on imprudent speculation.
Covid-19 & Stakeholder Interest Impact on the Future of Buybacks
As the economic fallout from the Covid-19 pandemic continues, many are wondering when or if buybacks will pick up again. This MarketsInsider article cites Sanford Bernstein analysts as saying buybacks may not return for several years.
Companies accepting help from CARES Act stimulus programs will be restricted from buying back their stock and others want or need to conserve cash. But, the article high-lights what might be the “most intriguing factor fueling buybacks’ demise is the social stigma against them.” As noted in the article, buybacks and dividends could “become ‘socially unacceptable’ as calls increase to shift focus from shareholders to stakeholders.” The article says we should anticipate a broad decline in buyback activity but it won’t all disappear.
Public pressure to keep stakeholder interests top of mind is also high-lighted in this NY Times article recognizing that companies are receiving criticism for cutting jobs rather than investor payouts. Chief Justice Strine and Professor Lund in their DealBook essay also recognize that families are encouraged to save for a rainy day but many companies didn’t do the same and instead used cash for dividends and stock buybacks. Given nearly all companies are dealing with this unprecedented crisis, time will tell whether the economic effects from the pandemic coupled with focus on stakeholder interests have struck a lasting damaging blow to buyback programs.
Corp Fin Provides Temporary Relief for Form 144 Paper Filings
Yes, Forms 144 are still required but you can email them, for a while. Friday afternoon, Corp Fin issued an announcement providing temporary relief for Form 144 paper filings in light of the ongoing health and safety concerns from Covid-19. The relief allows Forms 144 filed in paper under Rules 101(b)(4) or 101(c)(6) of Reg S-T to be submitted by email provided a PDF of the complete Form 144 is attached to the email. Filers choosing to do so should direct the email to PaperForms144@SEC.gov.
The relief is available for those who submit Forms 144 from April 10, 2020 through June 30, 2020.
For those worried about a manual signature on Forms 144 submitted via email, the Staff won’t recommend enforcement action if the filer includes a typed form of signature. If you can’t get a manual signature on the Forms 144, besides providing a typed form of signature, you’ll want to ensure:
– the signatory retains a manually signed signature page or other document authenticating, acknowledging, or otherwise adopting his or her signature that appears in typed form within the electronic submission and provides such document, as promptly as practicable, upon request by Division or other Commission staff;
– such document indicates the date and time when the signature was executed; and
– the filer or submitter (with the exception of natural persons) establishes and maintains policies and procedures governing this process.
For those wanting to continue with regular mail, the announcement says you can still do so, there just may be processing delays.
Have you ever watched a community access cable show? “Wayne’s World” will always be the definitive parody of these programs, but some of them are very creative. For instance, my local community access channel used to air something called “The Half Hour Show,” which involved two guys sitting in lawn chairs parked at a different local spot each week. The camera was placed behind them, so you never saw their faces. They just sat in their lawn chairs and watched the world go by for 30 minutes without saying a word. It was a post-modern masterpiece – and people loved it!
Another one of my community access favorites was a program in which some guy pointed a camera at his TV and showed a Madden video game simulation of the upcoming week’s Cleveland Browns game. I liked that show because unlike in real life, the Browns sometimes won.
Shows like these demonstrate that you don’t need a big budget or slick production values to provide quality programming – and it turns out that some of our fellow home-bound colleagues have taken that message to heart. In fact, we’ve heard from a couple of firms whose lawyers who are hosting educational video webcasts from their homes.
As you might expect, these webcasts focus on the corporate & securities law issues raised by the Covid-19 crisis, and offer a user-friendly alternative to the avalanche of client memos on these topics that everyone’s been receiving. Here’s a series of informative Covid-19 FAQ videos straight from the home offices of Perkins Coie’s Jason Day & his colleagues, and here’s the first in a series of Covid-19 videocasts from Fenwick & West’s corporate group. Technically, Fenwick’s videos originate from its “public tech company virtual situation room” – but it looks a lot like the living rooms of members of the corporate group.
Both sets of videos are well worth checking out, although I do think they could use some lawn chairs.
Covid-19 Crisis Disclosure: What About Earnings Guidance?
One of the many issues that companies are grappling with as a result of the Covid-19 crisis is what to do about earnings guidance. This Bass Berry blog addresses that issue, along with other high-level considerations for first quarter earnings releases. Here’s an excerpt:
For companies that previously issued 2020 guidance which remains in place, a gating issue is the extent to which the registrant believes that it can continue to project (with a reasonable basis) its 2020 forecasted results, taking into account the COVID-19 pandemic (which pandemic itself has a broad range of best-case and worse-case reasonable scenarios from a public health and economic perspective).
The issue of whether a registrant has a reasonable basis to potentially continue guidance will differ by industry, with companies in certain industries whose business (at least in the short term) has been so fundamentally harmed by the COVID-19 pandemic likely concluding that there is no practical ability to continue to provide guidance until there is greater macroeconomic certainty, while companies in other industries may have a closer judgment call.
Overall, we expect that a significant number of registrants, across a wide range of industries, will elect to withdraw guidance based on a determination that the uncertainties associated with COVID-19 are so significant that it is not practicable and/or advisable to continue to provide guidance.
The blog says that the negative market reaction typically associated with withdrawing guidance “may be more muted” in the current release cycle, if for no other reason than so many companies are likely to do it. The blog also suggests that companies opting to continue to provide guidance provide a broader range due to the uncertainties associated with the outcome of the crisis, and accompany that guidance with extensive caveats and detailed disclosure of assumptions about how the Covid-19 crisis will play out.
Risk Factors: Tips on Covid-19 Updating
If you’re preparing your first Covid-19 crisis SEC filing, I recommend that you take a peek at this WilmerHale memo on updating risk factor disclosure to address the pandemic. It’s short, specific and practical.
Yesterday, SEC Chair Jay Clayton and Corp Fin Director Bill Hinman issued a joint statement urging companies “to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning” in light of the impact of the Covid-19 pandemic. The statement covers a lot of ground, but this excerpt is probably the key takeaway for companies preparing for their upcoming Q1 earnings releases & analyst calls:
Speaking for ourselves, and recognizing the challenges inherent in our request, we urge our public companies, in their earnings releases and analyst calls, as well as in subsequent communications to the marketplace, to provide as much information as is practicable regarding their current operating status and their future operating plans under various COVID-19-related mitigation conditions. Detailed discussions of current liquidity positions and expected financial resource needs would be particularly helpful to our investors and markets.
Beyond the income statement and the balance sheet effects, we recognize that COVID-19 may significantly impact operations, including as a result of company efforts to protect worker health and well-being and customer safety. The impact of company actions and policies in this area may be of material interest to investors, and we encourage disclosures that address that interest.
In addition, companies and financial institutions may be receiving financial assistance under the CARES Act or other similar COVID-19 related federal and state programs. Such assistance may take various forms and is intended to mitigate COVID-19 effects for companies and their workers. If these or other types of financial assistance have materially affected, or are reasonably likely to have a material future effect upon, financial condition or results of operations, the affected companies should provide disclosure of the nature, amounts and effects of such assistance.
Throughout the statement, Clayton & Hinman repeatedly encourage companies to make forward-looking statements about a wide variety of topics related to their Covid-19 responses:
This quarter, earnings statements and calls will not be routine. In many cases, historical information may be substantially less relevant. Investors and analysts are thirsting to know where companies stand today and, importantly, how they have adjusted, and expect to adjust in the future, their operational and financial affairs to most effectively work through the COVID-19 health crisis.
For a lot of companies, the call for voluntary forward-looking disclosure about these and other matters is likely to be a big ask – even with assurances that “good faith attempts to provide appropriately framed forward-looking information” won’t be second guessed by the SEC. Their businesses have just been hit by the financial equivalent of a nuclear bomb. My guess is that most of them are going to have a tough enough time just trying to work through the forward-looking “known trends” disclosure they’re required to make in MD&A.
We’d all like some clarity about how companies “expect to adjust their operational and financial affairs to most effectively work through the Covid-19 health crisis.” In fact, I’d wager that nobody would like to know the answer to that question more than the boards and management teams who are trying to figure it out for their own companies. But, in the short term, I doubt that many companies will be able to provide a lot of meaningful disclosure in this area – and I’m not at all sure that it’s in their best interests to try.
Corp Fin Updates Annual Meeting Guidance (And I Get Scooped by Lynn)
I want to republish something that Lynn blogged yesterday over on the “Proxy Season Blog” – and there’s a backstory to this one. For some reason, the announcement of Corp Fin’s tweak to its annual meeting guidance didn’t arrive in our inboxes until after I published yesterday’s blog. Lynn was sharp-eyed enough to catch the story from other sources and break the news in her blog while I was busy eating a pop-tart or something. I’m sure she’ll lord this over me until my dying day, because that’s exactly what I’d do to her if the shoe was on the other foot. Anyway, here’s what she had to say:
Yesterday, Corp Fin issued an announcement providing updated guidance for conducting shareholder meetings in light of COVID-19 concerns. We blogged about Corp Fin’s original guidance back when it was issued in mid-March. Yesterday’s announcement addresses delays in printing and mailing of full-set proxy materials – allowing limited relief to companies that shift to furnishing proxy materials via the notice-only method of delivery. Corp Fin’s announcement also clarifies that its previous guidance regarding changes to the date, time and location of annual meetings also applies to special meetings.
The announcement says Corp Fin’s update about furnishing proxy materials stems from the impact of COVID-19 on some proxy service providers and transfer agents. The Staff understands some companies are concerned about being able to send notice of electronic availability of proxy materials at least 40 calendar days before the meeting so it’s allowing flexibility as long as shareholders receive proxy materials sufficiently in advance of the meeting and the company announces the change. Here’s an excerpt from the guidance:
The staff encourages issuers affected by printing and mailing delays caused by COVID-19 to use all reasonable efforts to achieve this goal without putting the health or safety of anyone involved at risk. In some cases, this may mean delaying a meeting in accordance with state law requirements and the procedures described above, if necessary, in order to provide materials on a timely basis. In circumstances where delays are unavoidable due to COVID-19 related difficulties, the staff would not object to an issuer using the “notice-only” delivery option in a manner that, while not meeting all aspects of the notice and timing requirements of Rule 14a-16, will nonetheless provide shareholders with proxy materials sufficiently in advance of the meeting to review these materials and exercise their voting rights under state law in an informed manner and so long as the issuer announces the change in the delivery method by following the steps described above for announcing a change in the meeting date, time, or location. Affected issuers and intermediaries also should continue to use their best efforts to send paper copies of proxy materials and annual reports to requesting shareholders, even if such deliveries would be delayed.
Issuers and other affected parties are encouraged to contact the staff to discuss any other concerns resulting from any late filings caused by delays in the printing and mailing of proxy materials.
Business Development Companies: SEC Adopts Rules Streamlining Registration Process
Yesterday, the SEC announced the adoption of rule amendments to streamline the offering process for business development companies and registered closed-end funds. In essence, the rules are intended to put these companies on the same footing as operating companies when it comes to the registration process. I know that this almost goes without saying at this point, but the vote was along partisan lines, with Commissioner Allison Herren Lee submitting a dissenting statement.
