At the Society of Corporate Governance’s conference last week, Skadden’s Hagen Ganem had an idea. Why not run a cute dog contest? Genius. So here is our first annual contest (vote for the cutest dog; not the cutest owner of a dog) – the poll is at the bottom of this blog:
1. Skadden’s Hagen Ganem – Teddy the “Snoozer”
2. Morrison & Foerster’s Dave Lynn – Jack the “Ripper”
3. PJT Camberview’s Shannon Johnson – Mia the “Mini Bernedoodle”
4. Gibson Dunn’s Ron Mueller – Jack & Morgan the “Love Bugs”
5. TheCorporateCounsel.net’s Broc Romanek – Willa the “Wonderful”
Vote Now: “Cutest Dog Contest”
Vote now in this poll – anonymously – for the dog that you think is the cutest:
A long, long while back, I blogged a story about an IPO prospectus that contained the term “certified pubic.” Here are a few more reactions from members about disclosure gaffes:
While I hadn’t heard of the “certified pubic accountant” goof previously, I can vouch for the IPO red herring that was circulated in the early 1970s with an “initial pubic offering” statement on the cover page. I never did see the SEC comment letter to know whether or not the Staff examiner commented on it.
I’m sitting here chuckling at my desk. I guess “certified pubic accountant” does beat “commom stock.” I admit I have caught the “pubic accountant” terminology a couple of times before the SEC filing was made. Given the number of times it is found on Edgar, I think we all need to include that global search in our checklists.
Sneaker Exchange & Other Online Marketplaces
Back when the Web was born in the mid-90s, I remember working on some no-action letters related to trading various things on this new thing called the “Internet.” Complex securities law issues – novel stuff. Flash forward twenty years and we have an amazing array of online marketplaces worth billions, as noted in this NY Times article…
Transcript: “Proxy Season Post-Mortem – The Latest Compensation Disclosures”
We’ve posted the transcript for the recent CompensationStandards.com webcast: “Proxy Season Post-Mortem – The Latest Compensation Disclosures.” Mark Borges, Dave Lynn & Ron Mueller shared their latest takes on these topics:
1. Say-on-Pay Results
2. Performance-Based Compensation Disclosure
3. Shareholder Responsiveness Disclosure
4. Perquisites Disclosure
5. Director Compensation Disclosure
6. CEO Pay Ratio Trends
7. Hedging Disclosure Rule
8. Status of Other Dodd-Frank Rulemaking
9. Shareholder Proposals
10. Proxy Advisors
11. Proxy Strike Suits
One of the stranger things in this field is hearing a SEC Staffer start off their public remarks by providing the “standard” disclaimer that their remarks are their own and not those of the Commission. It seems silly because I would argue that it’s implicit that a Staff member was not speaking for the Commission, but was simply expressing their own thoughts. And in a way, it’s embarrassing for them because it could be heard as “I’m not worthy of being here because what I say doesn’t really matter.”
Luckily, we are used to hearing the disclaimer – so we don’t hear it like that. We have come to expect it – and it even provides a bit of levity to the proceedings because everyone in the room recognizes how silly it is. Including the Staffer forced to utter it. I say “forced” because the Staff is forced to say it. That has been the case for as long as I can remember. It was the case when I spoke as a Corp Fin Staffer back in the ’90s.
But I have checked with some old-timers and they swear they didn’t provide a disclaimer when they spoke in the ’80s. So sometime between the ’80s & the ’90s, something must have happened that caused generations of Staffers to utter such nonsense…
From a member: “For some reason, this disclaimer blog reminded me of the honor pledge we had to write at law school. Whenever we took an exam, we had to write out the following pledge on the cover of the bluebook: “On my honor as a student, I have neither given nor received aid on this examination nor did I have prior knowledge of its contents.” Then you had to sign your name.
You could always tell the law students who’d gone to my school as undergrads, because while the rest of us were dutifully scribbling out all 25 words of the pledge, they were just scrawling “pledged” and signing their names to it. Anyway, maybe the Staffers who’ve been at the SEC for a long time should just say “disclaimed” and get on with their speeches.”
Poll: What Caused the SEC Staff to Start Providing a Disclaimer?
So what is your guess as to why the SEC Staff was forced to starting providing a “public speaking” disclaimer? Please provide your answer via this anonymous poll:
polls
Our July Eminders is Posted!
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FOIA Exemption 4 protects “trade secrets and commercial or financial information obtained from a person [that is] privileged or confidential.” However, most federal circuit courts have read in a “substantial competitive harm” test under which commercial information would be regarded as “confidential” only if its disclosure was likely to cause substantial harm to the competitive position of the person from whom it was obtained.
The substantial competitive harm requirement had its genesis in the D.C. Circuit’s 1974 decision in National Parks & Conservation Association v. Morton, and the standard had been widely adopted by other courts. But earlier this week, by a 6-3 vote, the SCOTUS invalidated the requirement in Food Marketing Institute v. Argus Leader Media. Here’s an excerpt from this Cleary Gottlieb memo that addresses the Court’s reasoning:
Notwithstanding that the lower courts have followed National Parks in one form or another for 45 years, the Supreme Court roundly rejected it. Writing for six members of the Court, Justice Gorsuch criticized the D.C. Circuit’s creation of the “substantial competitive harms test” based on its interpretation of legislative history as demonstrating a “casual disregard of the rules of statutory interpretation.”
Food Marketing Institute held that a court must begin its analysis of statutory terms by referencing the ordinary meaning and structure of the law itself, and when this leads to a clear answer, the court must not go further. The Court found that because there is “clear statutory language” in FOIA, legislative history should never have been allowed to “muddy the meaning” of this language.
The decision should substantially reduce the burden associated protecting confidential information submitted to the government, but the memo says that it also raises questions about how agencies and courts will apply existing regulations that incorporate the “substantial competitive harm” test, and whether they will need to revise such regulations or attempt to justify disclosure decisions on other grounds.
What Does the SCOTUS’s Decision Mean for CTRs?
The SEC is one of the agencies that will need to sort out how the SCOTUS’s decision to eliminate the “substantial competitive harm” standard impacts existing rules. In that regard, here are some insights that Bass Berry’s Jay Knight shared with us on how the Court’s decision complicates the SEC’s recently simplified CTR process:
As everyone may recall, in March the SEC adopted amendments to disclosure requirements for reporting companies, as mandated by the 2015 Fixing America’s Surface Transportation Act (the “FAST Act”). Among the amendments was a simpler CTR process, which now allows registrants to omit immaterial confidential information from acquisition agreements filed pursuant to Item 601(b)(2) of Regulation S-K and material contracts filed pursuant to Item 601(b)(10) of Regulation S-K without having to file a concurrent confidential treatment request. In short, registrants are permitted to redact provisions in such exhibit filings “if those provisions are both not material and would likely cause competitive harm to the registrant if publicly disclosed.” (emphasis added)
In the SEC’s adopting release, the SEC notes that it slightly revised the language of the amendment in the final rule to refer to information that “would likely cause competitive harm” to “more closely track the standard under FOIA.” (see page 25 of the adopting release) With the Supreme Court holding that FOIA exemption 4 does not have a competitive harm condition, it calls into question whether the “competitive harm” standard in Item 601 continues to be appropriate. (Other potential rules impacted are Exchange Act Rule 24b-2 and Securities Act Rule 406, which require that applicants for confidential treatment justify their nondisclosure on the basis of the applicable exemption(s) from disclosure under Rule 80, as well as Staff Legal Bulletin No. 1 and 1A, and Rule 83.)
Since that competitive harm standard is embedded in the SEC’s rules, at this point the prudent path for companies appears to be to continue to adhere the requirements of those rules until the SEC provides further guidance.
The Staff has informally advised us that they are evaluating the potential implications of the Food Marketing Institute decision on Rule 24b-2, Rule 406 & other rules that involve confidential treatment requests under FOIA. However, the Staff does not believe that Item 601(b) is implicated by the decision, since the new procedures relate to situations in which information need not to be filed with the SEC, rather than situations in which companies are seeking to use FOIA exemption 4 to protect information that has been filed.
Insider Trading: Lawyers Are Increasingly In the Cross-Hairs
Over the past year or so, we’ve blogged about a number of insider trading cases in which lawyers were involved directly or, sometimes, indirectly. If it seems like lawyers are being implicated more in insider trading cases, this Arnold & Porter memo says there’s a reason for that – they are:
A recent series of insider trading actions charging senior lawyers in legal departments of prominent public companies suggests that insider trading by lawyers may be on the rise. Over the past several months, the U.S. Securities and Exchange Commission has brought enforcement actions charging insider trading in advance of earnings announcements by senior lawyers at Apple and SeaWorld. In a third action, filed in early May 2019, the general counsel of Cintas Corporation was an unwitting victim of a house guest, a lifelong friend, who, the SEC alleges, surreptitiously pilfered merger related information from a folder in the lawyer’s home office.
These actions are noteworthy not only for the brazenness of the conduct involved, but because they suggest that insider trading by lawyers remains a “profound problem.” And, as the case of the Cintas general counsel demonstrates, innocent lawyers may also fall prey to others, such as close friends and family, looking to exploit their access to material nonpublic information, or MNPI.
Here at TheCorporateCounsel.net, we’re on record that if you’re a corporate officer who engages in insider trading, then – as one of my high school football coaches used to say – “you’re stuck on stupid.” But if you need more convincing, read the memo’s review of the recent proceedings involving lawyers, and the actions that companies & law departments can take to mitigate their insider trading risks.
Remember the classic scene in the movie “Network” in which Ned Beatty’s character, CEO Arthur Jensen, regales Howard Beale with his fire & brimstone “corporate cosmology” speech? It’s his vision of a “perfect world” led by “one vast and ecumenical holding company, for whom all men will work to serve a common profit, in which all men will hold a share of stock, all necessities provided, all anxieties tranquilized, all boredom, amused. . .”
If that’s your cup of tea, then I’ve got great news for you – a recent study says that fulfillment of Arthur Jensen’s vision may be right around the corner. Here’s an excerpt from an FT article on the study:
BlackRock, Vanguard and State Street Global Advisors are on course to control four votes out of every 10 cast at large US companies, as regulators and policymakers probe the wider consequences of their increasing dominance of the investment market. The influence of the Big Three, which have mopped up trillions of dollars of index investments in recent years, is being viewed by politicians as a possible antitrust issue. BlackRock, Vanguard and SSGA, which collectively manage more than $14tn, account for a quarter of votes cast at S&P 500 companies. This is set to grow to 34% over the next 10 years, and 41% in 20, according to academics at Harvard Law School.
The authors of this study are concerned that having the Big 3 control 40% of the S&P 500 will make them unduly deferential to management. I sure hope so – because it seems to me that a far more likely scenario is some variation of them telling us to “Kneel before Zod!”
I know I’ve mentioned this same scene from Network in at least one DealLawyers.com blog, but what can I say? My cultural frame of reference consists almost entirely of 1970s movies & TV shows. Throw in the “Superman II” reference in the last line & I have no choice but to admit that I’m a walking Dad Joke.
“Bad Actors”: Proposed Legislation Would Tighten SEC Waiver Process
Companies that run afoul of the antifraud provisions of the securities laws can find themselves barred from, among other things, using Reg D, Reg A, Form S-3, or qualifying for the forward looking statements safe harbor. In some instances, it isn’t necessarily equitable or in the best interests of investors or the market to impose these sanctions, and so the SEC has developed a waiver process.
Rep. Maxine Waters (D-Cal.), Chair of the House Financial Services Committee, recently introduced the “Bad Actor Disqualification Act of 2019,” which would significantly clamp down on the SEC’s ability to grant bad actor waivers. This excerpt from a recent Sidley memo summarizes the bill’s impact on the waiver process:
The Disqualification Act would eliminate the Commission staff’s ability to grant waivers and instead would impose a three-step process to obtain a permanent waiver. First, a company would need to petition the Commission for a temporary waiver, which the Commission could grant “if the Commission determines that such person has demonstrated immediate irreparable injury.” The temporary waiver would be for a period of 180 days, and all temporary waiver requests (whether granted or not) would be published with an explanation from the Commission as to the rationale for granting or not granting the waiver.
Second, the Commission would publish notice in the Federal Register “of the pendency of the waiver determination and … afford the public and interested persons an opportunity to present their views [on the waiver application], including at a public hearing.” Third, the Commission would hold a public hearing during which it would consider granting a permanent waiver. The Commission would not be able to consider the “direct costs to the ineligible person associated with a denial” and would need to find that the waiver “(i) is in the public interest; (ii) is necessary for the protection of investors; and (iii) promotes market integrity” in order to grant the waiver.
Rep. Waters issued a statement saying that the legislation is intended to protect investors by implementing a “rigorous, fair, and public process for waiving automatic disqualification provisions in the law.” But the Sidley memo contends that, among other things, it would further politicize the waiver process & make settlements with the Commission less attractive to companies.
Earnings Estimates: What If Your Analyst Estimates Are From “Fantasy Island?”
Few things cause more consternation in the C-suite than an analyst whose earnings estimates for your company are wildly out of line with management’s. If that happens to you, this Westwicke Partners blog offers some advice about how to respond.
A member followed up with a very good point – you need to keep Reg FD compliance in mind when you consider Westwick’s advice here!
Geez, I did it again – another 1970s pop culture reference in the title of this blog. I swear, at this point I’m not even conscious that I’m doing it.
While the Staff hasn’t said much about MD&A requirements in recent years, I think most lawyers appreciate that it’s really one of the cornerstones of the entire disclosure system. This recent blog from Bass Berry’s Kevin Douglas offers up 12 things that you need to know when you’re preparing your company’s MD&A. Here’s an excerpt with some tips on Item 303 of S-K’s trend disclosure requirements:
A core disclosure component of Item 303 of Regulation S-K (which sets forth the SEC disclosure requirements applicable to MD&A) is the requirement to provide an analysis of known material trends, uncertainties and other events impacting a registrant’s results of operations, liquidity or capital resources. Practice varies widely among registrants regarding the extent to which the disclosure of forward-looking statements is included in the MD&A.
While there may be reticence among some registrants to include overly expansive forward-looking disclosure (for example, based on concerns about liability exposure if such forward-looking information is not ultimately accurate), countervailing considerations include the fact that such disclosure may result in more useful disclosure as well as the fact that the failure to disclose known trends can give rise to exposure from Rule 10b-5 allegations from private parties as well as SEC civil actions.
The blog also points out that when companies include trend disclosure in their MD&A, they need to keep in mind that this disclosure may need to continue to be included and updated in subsequent periodic reports. Other topics include presentation and readability of MD&A disclosure, the interaction between MD&A and risk factor disclosure, and the use of non-GAAP financial measures in the MD&A.
Del. Sup. Ct. Says Plaintiff Pled Viable “Caremark” Claim
Breach of fiduciary duty allegations premised on a board’s failure to fulfill its oversight obligations are notoriously difficult to establish. One reason that these Caremark claims are so tough to make is that a plaintiff needs to show “bad faith,” meaning that the directors knew that they were not discharging their fiduciary obligations. But last week, in Marchand v. Barnhill, (Del. Sup.; 6/19), the Delaware Supreme Court overruled the Chancery Court and held that – at least for purposes of a motion to dismiss – a shareholder plaintiff stated a viable Caremark claim.
The case arose from a 2015 listeria outbreak at Blue Bell Creameries. In addition to being implicated in the deaths of three people, the outbreak resulted in a recall of all of the company’s products, a complete production shutdown, and a lay-off involving 1/3rd of its workforce. Ultimately, the financial fallout from this incident prompted the company to seek additional financing through a dilutive stock offering.
As a result, the plaintiff brought a derivative action against the board & two of the company’s executives. The plaintiff alleged that the board failed in its oversight duties, but the Chancery Court rejected those allegations. The Supreme Court disagreed, holding that the plaintiff had alleged shortcomings in board level oversight sufficient to survive a motion to dismiss:
When a plaintiff can plead an inference that a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation, then that supports an inference that the board has not made the good faith effort that Caremark requires.
Since Marchand involved a motion to dismiss, it’s hard to tell whether the case suggests that Caremark may be a more viable path to imposing liability than it has been in the past – but it’s worth noting that this decision is the second case in the last two years in which a Delaware court has characterized a Caremark claim against directors as being “viable.”
Board Minutes: “Not Too Long, Not Too Short, But Just Right. . .”
Here’s a recent blog from Bob Lamm that has some terrific insights into preparing board minutes. This excerpt contains Bob’s take on the issue of whether to prepare “long-form” minutes or “short form” minutes:
I believe that the proper course is what I call “Goldilocks Minutes.” Not too long, not too short, but just right. Minutes can (and IMHO should) give an indication as to what was discussed. For example, if the board is considering an acquisition, it’s not only OK – it’s actually a good idea – to reflect that the board discussed the merits and risks of the transaction, along with some examples of the factors discussed.
If you’re looking for more of a deep dive into issues surrounding board minutes, check out the March issue of The Corporate Counsel.
Zoom Video Communications is one of the year’s better performing tech IPOs, & now the video conferencing software provider is earning kudos for its effective use of technology to liven up the typically lackluster quarterly earnings call ritual. Here’s an excerpt from this recent Quartz article:
Earlier this month, Zoom disclosed its first quarterly results as a public company. After its press release went out, founder and CEO Eric Yuan and other senior executives hopped onto a Zoom video call to discuss the earnings with analysts, press, and investors. The interactive webinar showed off the company’s technology—and reinvented notions of what a quarterly earnings call should be.
The format introduced a greater degree of transparency between the company and analysts. It wasn’t just the executives whose faces appeared on the screen; when asking questions, the analysts on the call could also be seen—both by the executives and by everyone else on the call.
“You’re not just sort of talking into a box or a handheld—you’re actually looking at each other in the eye and you’re actually talking to feel like we’re connecting with a lot more people,” says Tom McCallum, Zoom’s head of investor relations.
The dynamics transformed the call from a presentation to more of a conversation, with executives and analysts essentially chatting face-to-face via video screens (journalists on the call were in view-only mode). The ability to see each speaker’s face brought a distinctly human touch to something that, with other companies, often feels like an anonymous, formulaic encounter steered by barely-human-sounding teleconference operators reading from scripts and frequently betraying their lack of familiarity with either the presenters or the callers on the line.
Here’s the presentation, which – while not exactly Avengers: Endgame – is more interesting to look at than the standard call. The Q&A is what you want to see, and that starts around the 20 minute mark. My one beef is that you have to rummage around the IR website a bit to find the presentation – while a link to the earnings release appears on the home page, the earnings presentation itself does not. You have to click on the “events” link to find it.
Board Recruitment: Assessing First Time Director Candidates
Many companies are finding themselves moving beyond the traditional pool of current & former CEOs to identify new directors – and many of these non-traditional candidates have never served on a public company board. So, how do you assess their qualifications? This SpencerStuart article has some suggestions. Here’s an excerpt about questions that nominating committees should ask covering areas that are key to the success of a new director:
– Interpersonal skills — Has the person demonstrated an ability to build relationships with all kinds of people? To influence and to gain trust and support from others? Can the candidate use diplomacy and tact? Listen and adjust appropriately to others’ input?
– Intellectual approach — Can the candidate handle complexity, or simplify issues to the essence to make sound, logical decisions? What is their comfort level with ambiguity? Does he or she have the
ability to look ahead? To transfer knowledge and experience to different environments?
– Integrity — Will the candidate adhere to an appropriate and effective set of core values and live by them? Is she or he honest and truthful? Is the person authentic, self-aware and confident enough to “be oneself”?
– Independent mindedness — Can the candidate set out and defend a position, even when this means going it alone? What about the ability to maintain positive relationships amid conflicts about ideas?
– Inclination to engage — Is the candidate motivated to invest time and effort in learning about the organization and staying up to date with it? Is she or he diligent enough to follow through with commitments?
A prospective director’s financial competence is also an important issue, and the article suggests that companies include the chair of the audit committee in interviews of a prospective candidate, in order to better assess the financial sophistication revealed by the questions the candidate asks.
D&O for Unicorns: Insurers Move to Public Company Model
High value private companies – i.e., “Unicorns” – are making insurers nervous. These are private companies, but their huge and volatile valuations, significant financing and resale transactions & other characteristics make them appear much riskier to insurers than the typical private company.
As a result, insurers are increasingly moving to public company-style policies for these companies. This Woodruff Sawyer blog reviews the implications of that trend. This excerpt says the biggest issue is the reduced scope of entity coverage found in the typical public company policy:
To be clear, both public and private company forms provide for entity coverage if the corporation is named in a securities claim. The definition of “securities claim” typically includes breach of fiduciary duty suits. As a practical matter, these are the types of claims for which D&O insurance is being purchased for high-value private companies (and public companies, too).
What you lose, however, when you move to the public company form is the expanded coverage for the corporation for other suits that name the corporate entity. For example, on the private company form, defense costs coverage may exist for the corporate entity if a regulator decides to take an enforcement interest in a corporation. Another example is corporate entity coverage for antitrust claims. These scenarios are almost entirely excluded from the public company form.
On the other hand, public company policies may provide greater coverage for D&Os, enhanced ability for the company to select its own counsel, broader coverage for regulatory investigations, and other more favorable policy terms.
According to this recent Audit Analytics blog, the trend toward fewer comment letters from the Staff not only continued last year, but accelerated:
The total amount of comment letters stemming from 10-K and 10-Q filings has once again decreased (as shown in the chart below). From 2017 to 2018, total comment letters decreased by roughly 26%, which is slightly steeper than the decline we’ve seen in the past (13% from 2016 to 2017 and 10% from 2015 to 2016). Similarly, the number of conversations largely followed the same declining pattern.
The blog says that the decline in 8-K comment letters was even sharper. Comment letters on 8-K filings plummeted 54.5% between 2017 and 2018, in comparison to 31.5% between 2016 and 2017 and an increase of 112.4% between 2015 and 2016. The 2016 spike in comment letters is attributable to the Staff’s focus on the use of non-GAAP financial data following Corp Fin’s issuance of updated guidance.
Audit Analytics suggests that the reasons for the decline in comments include a nearly 50% decline in the number of reporting companies since the early 2000s and the Staff’s principles-based approach to issuing comments. Last year’s government shutdown may also have contributed, since reviews weren’t performed during that time. But that probably didn’t move the needle much – since only the last 2 weeks of December were affected by the shutdown.
KPMG/PCAOB: Worse Than We Thought?
I consider myself pretty jaded, but if you read my blog when news broke about the scandal involving KPMG personnel’s misappropriation of PCAOB data, you know I was pretty shocked by the magnitude of what was alleged to have happened. The SEC thought this was pretty serious stuff too. Last week, the agency announced that it had reached a settlement with the firm under the terms of which KPMG admitted wrongdoing & agreed to a $50 million civil monetary penalty – which matches the largest fine ever imposed against an audit firm.
As bad as the KPMG situation appeared when it was first revealed, this recent article by MarketWatch.com’s Francine McKenna notes that the SEC’s announcement suggests that the scandal is even worse than originally reported:
The SEC revealed Monday a much larger scandal than was previously known: KPMG auditors, including some senior partners in charge of public company audits, cheated on internal tests related to mandatory ethics, integrity and compliance training, sharing answers with other partners and staff to help them also attain passing scores. In addition, for a period of time up to November 2015, some audit professionals, including one partner, manipulated the system for their exams to lower the scores required to pass.
Twenty-eight of these auditors did so on four or more occasions. Certain audit professionals lowered the required score to the point of passing exams while answering less than 25% of the questions correctly, the SEC says.
Egads. The SEC’s announcement of the settlement indicated that the agency’s investigation was ongoing. Yeah, I bet it is.
SEC Revises Procedure for Authenticating Form ID
Here’s something that Alan Dye recently posted on his “Section 16.net” Blog:
The SEC has announced enhancements to the EDGAR system, one of which affects the submission of Form ID. New filers will now complete an updated online version of Form ID, which is accessible via a hyperlink from sec.gov. Filers will print out the completed version, for manual signature and notarization, and then upload the signed version for submission with the Form ID. The old “courtesy pdf copy” of Form ID previously available for use as an authenticating document has been removed from the SEC’s website.
Earlier this year, Broc blogged about how Tesla was using the new “Say” platform to allow retail shareholders to submit questions during earnings calls. This memo from Say reports on how many shareholders are participating in this process – and says they’re more likely to ask about products & consumer experience than financial outlook (compare to these questions that one experienced buy-side advisor would ask). How’s that working out for analysts and Tesla’s IR folks? Here’s an excerpt:
Tesla led the Q&A portions of each call with questions from Say users, ahead of analysts. Like Russell’s questions on Tesla’s Q1 2018 call, Say users’ questions received follow up from traditional equity analysts. During Say’s Q1 2019 call with Tesla, Musk revealed the company would enter the auto insurance market while responding to a Say user question about insuring cars. A Morgan Stanley analyst later asked more about insurance, capturing the media’s attention and creating positive press for Tesla. The original retail shareholder question was submitted on our platform by an 18-year-old.
Our Q1 2019 call also included five questions from institutional Tesla investors, Ark Invest and Domini Impact Investments, who both issue ETFs holding Tesla in their portfolios. Together, they represented $185M in Tesla shares. Their questions, reflected in Figure 3, were largely ESG and product-focused and were not answered by the company. Having them filed on Say, however, captured institutional sentiment for Tesla’s IR department as well.
Allison Herren Lee Confirmed as SEC Commissioner
That was fast. Yesterday morning I blogged that the Senate Banking Committee had approved Allison Herren Lee’s nomination as SEC Commissioner. Yesterday afternoon, the SEC congratulated her on a successful Senate confirmation and welcomed her back to the SEC. Allison had previously served on the SEC staff from 2005 to 2018.
Director Compensation: Delaware Reiterates “Entire Fairness” Applies
Here’s something I blogged recently on CompensationStandards.com: This Bracewell memo notes that – in light of the Delaware Supreme Court’s 2017 Investors Bancorp decision – nearly 75% of surveyed LTIPs now include a director-specific limit on the size of annual grants, with many plans also capping total annual compensation for board members.
That trend isn’t likely to die out any time soon. Recently, the Delaware Court of Chancery reaffirmed that the entire fairness standard applies to most decisions that directors make about their own compensation. The opinion – Stein v. Blankfein – says that director pay decisions can be actionable even if the directors held a “good-faith, Stuart-Smalley-like belief” that they were “good enough, smart enough, and doggone it, they were worth twice—or twenty times—the salary of their peers” (bravo to the Vice Chancellor on the SNL reference – and in this case, it’s not much of a stretch to envision the Goldman Sachs directors holding that belief).
This Stinson blog has the details about the case & its implications – here’s an excerpt:
The following courses of action remain available to public company boards in approving director compensation:
– Have specific awards or self-executing guidelines approved by stockholders in advance; or
– Knowing that the entire fairness standard will apply, limit discretion with specific and meaningful limits on awards and approve director compensation with a fully developed record, including where appropriate, incorporating the advice of legal counsel and that of compensation consultants.
It may also be possible to obtain a waiver from stockholders of the right to challenge future self-interested awards made under a compensation plan using the entire fairness standard. To do so, stockholders would have to approve a plan that provides for a standard of review other than entire fairness, such as a good faith standard. In addition stockholders would have to be clearly informed in the proxy statement that director compensation is contemplated to be a self-interested transaction that is ordinarily subject to entire fairness, and that a vote in favor of the plan amounts to a waiver of the right to challenge such transactions, even if unfair, absent bad faith. Note that the Court did not conclude, because it was not required to do so, that such a waiver was even possible.
Culture & Human Capital Management: Buzz on the Board’s Role
In the past couple of months, my inbox has been even more inundated than usual with memos – and even media articles – about corporate culture and human capital management. Of course I’m dutifully posting in our “Corporate Culture” and “ESG” Practice Areas. But for your convenience, here’s a few that stood out:
The SEC celebrated its 85th birthday a couple weeks ago. You probably know that the Securities Act was one of FDR’s reform initiatives way back in 1933. But did you know that one of the first suggestions he received was for the US Post Office to regulate the securities law? The Post Office! Eventually the SEC was created under a different version of the bill, which passed either because it was “so [darned] good or so [darned] incomprehensible.” Some things never change…
Find more interesting historical details in this book excerpt – which Jeffrey Rubin of Ellenoff Grossman was kind enough to share.
More Exchanges Are Beating the “Sustainability” Drum
Ninety percent of exchanges now have ESG initiatives, according to this survey from the World Federation of Exchanges. No wonder it’s so hard to keep track of who’s doing what. Luckily, most of the initiatives are converging around the UN Sustainable Development Goals. From the WFE’s announcement, here’s a few other findings:
– Although two-thirds of responding exchanges encourage or require ESG disclosure, there is still no consistent global standard for ESG reporting.
– While there appears to be growing investor demand for ESG disclosure, the level of this demand is still considered to be limited in many markets.
– Sustainability indices remain the most commonly offered products, but there has been considerable growth in ESG-related bond offerings, with 73% of exchanges with sustainability products offering green bonds in their markets.
ESG Disclosure Guides: So Many to Choose From
As a follow up to last week’s blogs on sustainability reporting, there’s no shortage of guidelines for disclosure. In fact, that’s part of the problem…and why some predict that companies & investors will end up coalescing around frameworks that are more principles-based, like what’s offered by the UN Sustainable Development Goals or the TCFD – see this Troutman Sanders memo.
Here are three relatively recent disclosure guides (also see this blog about moving sustainability reporting into SEC filings – and this new Nasdaq survey of large company disclosure trends):
1. The 65-page “TCFD Implementation Guide” – brought to you by the Sustainability Accounting Standards Board (SASB) and the Climate Disclosure Standards Board (CDSB) – focuses on annotated mock disclosures that align with the principles of the Task Force on Climate-Related Financial Disclosures. According to this announcement, the guide is a direct response to requests from companies that want to see what effective climate-related disclosure looks like. Bonus points if you can keep all the acronyms straight – there’s a glossary on page 24 if you need help.
2. The “World Business Council for Sustainable Development” recently published this 34-page disclosure handbook that walks through the “who/what/why/how” of ESG disclosure (see pg. 28 for a handy checklist of key points)
3. Nasdaq’s 34-page “ESG Reporting Guide” summarizes reporting frameworks from the TCFD and the UN’s Sustainable Development Goals – as well as guidance & best practices gleaned from the World Federation of Exchanges & Nasdaq’s own pilot program for ESG reporting
SEC Commissioner Nominee: Allison Lee Advances to Senate
Back in April, John blogged that Allison Lee had been nominated to fill the Commissioner vacancy created by the departure of Kara Stein. Bloomberg reported that the Senate Banking Committee has approved her nomination – so it now goes to the Senate. This blog says that the nomination hearing a few weeks ago was pretty short…
