Over the years, Broc has blogged about periodic attempts by shareholder proponents of going to court to compel the inclusion of a proposal and/or seek declaratory relief to enjoin an annual meeting due to shareholder proposal issues. These types of lawsuits typically challenged a company’s decision to exclude a proposal after Corp Fin granted no-action relief. But recently, the NYC Comptroller went one step further – by filing this complaint against TransDigm shortly after it sought no-action relief – and before Corp Fin weighed in.
The lawsuit sought to enjoin TransDigm – which manufactures aerospace components – from soliciting proxies for its meeting without including a climate change proposal submitted by a group of NYC pension funds. TransDigm had argued to Corp Fin that it could exclude the proposal under Rule 14a-8(i)(7) because it related to “ordinary business.” But the funds – which announced a couple of years ago that they might pursue climate change proposals as an initiative and more recently said they’d pursue a “clean energy” investment & divestment strategy – insisted that this was an urgent matter. Cydney Posner’s blog explains what happened next:
Instead of conforming to the usual practice of submitting its own response to the SEC, the NYC Comptroller’s office wrote to the SEC on December 7th that it would not respond to the company’s November request for no-action because the pension funds had separately commenced a lawsuit against the company seeking declaratory and injunctive relief “that would ensure the… shareholder proposal is included in the proxy solicitation materials.” As a result, in light of the pending litigation, the Comptroller requested that the SEC leave the matter to the courts, requesting that, the “staff follow its prior practice and decline to issue any response to TransDigm’s no-action request.”
The company apparently decided that this was not a battle worth fighting. By letter dated December 28, 2018, in the midst of the government shutdown, the company advised Corp Fin that it was withdrawing its request for no-action relief and would be including the proposal in its 2019 proxy materials. The parties filed a stipulation of settlement on January 18 concluding the action.
In its press release announcing the settlement, the Comptroller said that the “need for climate leadership is more urgent than ever. Yet, just when we need to speed up the pace, federal roll-backs are making polluting easier and could cause generations of damage. That’s why as investors, we’re using our voice to pressure companies to step up and address their role in climate change….Reducing greenhouse gas emissions is a moral imperative—and it’s better for business. We’ll continue to fight for shareholders rights and to hold companies like TransDigm to the highest standards for business and our planet.”
We don’t know yet if the NYC funds will adopt – or inspire other proponents to adopt – a litigation strategy against other companies for climate change proposals and/or other topics. Although the complaint was filed before the government shutdown began, the company might’ve felt additional pressure to settle due to Corp Fin’s inability to respond to no-action requests.
SEC Chair Talks About “Human Capital” Disclosure
In remarks a few days ago to the SEC Investor Advisory Committee, SEC Chair Jay Clayton provided some of his views on human capital disclosure. He first noted that since the time the current disclosure requirements in Items 101 & 102 of Regulation S-K were adopted, human capital has evolved into a resource – rather than a cost – for businesses. And, he acknowledged, disclosure requirements should also evolve over time to reflect market changes…but should remain flexible, enforceable, efficient and grounded in materiality.
So the basic idea stands that companies should focus on providing material information that a reasonable investor needs to make informed investment & voting decisions, and he’s wary of mandating rigid disclosure standards or metrics. But it doesn’t sound like he’s closed the door on nudging companies to provide more info. He continued:
Instead, I think investors would be better served by understanding the lens through which each company looks at their human capital. Does management focus on the rate of turnover, the percentage of their workforce with advanced degrees or relevant experience, the ease or difficulty of filling open positions, or some other factors? I have heard this and similar questions on earnings conference calls and in other investor settings. I am interested in hearing from those on the Committee who manage investment capital – what is it that you are looking for as an investor and what questions do you ask the issuers when it comes to human capital?
Here, a note on comparability. In some cases it is possible to identify metrics that provide for reasonable market-wide comparability (for example, U.S. GAAP). In other cases, this is not possible at a market-wide level, and comparability is reasonably possible at an industry level or only at a company level (this is demonstrated by the development of non-GAAP financial measures). For example, for human capital, I believe it is important that the metrics allow for period to period comparability for the company.
This Cooley blog reports that Jay also touched on proxy plumbing in his remarks – and said that new Commissioner Elad Roisman will be taking the lead on efforts to improve the proxy process, including proxy plumbing, for both the short- and long-term.
SEC Lifts Stay on Administrative Proceedings
Last week, the SEC announced that it was lifting the stay on pending administrative proceedings that it had ordered as a result of the lengthy government shutdown. Parties that had filings due last month should either submit the filings or request an extension – either way, by February 13th.
Yesterday, Corp Fin issued two identical “Regulation S-K” CDIs – 116.11 and 133.13 – to clarify what disclosure of self-identified director diversity characteristics is required under Item 401 and, with respect to director nominees, under Item 407. Broc’s blogged about whether – and how – to address diversity in D&O questionnaires – and we’ll post memos in our “Board Diversity” Practice Area about how this new guidance impacts that analysis.
In the meantime, here’s the new CDI (also see this Cooley blog):
Question: In connection with preparing Item 401 disclosure relating to director qualifications, certain board members or nominees have provided for inclusion in the company’s disclosure certain self-identified specific diversity characteristics, such as their race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background. What disclosure of self-identified diversity characteristics is required under Item 401 or, with respect to nominees, under Item 407?
Answer: Item 401(e) requires a brief discussion of the specific experience, qualifications, attributes, or skills that led to the conclusion that a person should serve as a director. Item 407(c)(2)(vi) requires a description of how a board implements any policies it follows with regard to the consideration of diversity in identifying director nominees.
To the extent a board or nominating committee in determining the specific experience, qualifications, attributes, or skills of an individual for board membership has considered the self-identified diversity characteristics referred to above (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background) of an individual who has consented to the company’s disclosure of those characteristics, we would expect that the company’s discussion required by Item 401 would include, but not necessarily be limited to, identifying those characteristics and how they were considered. Similarly, in these circumstances, we would expect any description of diversity policies followed by the company under Item 407 would include a discussion of how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics. [February 6, 2019]
“Shutdown Threat” Risk Factors & MACs
In light of the possibility that “government-by-shutdown” is our new normal, Intelligize has gathered a handful of risk factors that identify specific business threats caused by a non-functioning government – e.g. delayed FDA & CFIUS reviews. And Intelligize also reports that several companies are adding shutdown references to forward-looking statement disclaimers and MAC clauses. Here’s an excerpt:
For example, pest control provider Rollins Inc. noted in its 2018 earnings statement filed on Jan. 23 that “the impact of the U.S. government shutdown” was among the “various risks and uncertainties” that could cause the company’s actual results to diverge from its forward-looking statements. Other companies that have added similar language to their filings this year include Teledyne Technologies and financial services giant Bank of America Corp.
And back in September, the contract language in Fortive Corp’s acquisition of Johnson & Johnson subsidiary Ethicon nixed “any actual or potential sequester, stoppage, shutdown, default or similar event or occurrence by or involving any governmental entity affecting a national or federal government as a whole” as material adverse effects.
Securities Class Actions: Highest Levels Ever?
A pair of recent reports on securities class actions – from Cornerstone Research and NERA Economic Consulting – both say that a greater percentage of listed companies were hit with lawsuits last year (about 4.5% of all exchange-listed companies, and 9.4% of the S&P 500…even higher if you include merger-related litigation). This is due to the declining number of public companies as well as a higher number of class actions.
The Cornerstone report also highlights that state court filings – which have become more likely since the Supreme Court’s 2018 Cyan decision – are driving litigation to potentially record levels. Here’s an excerpt from Cornerstone’s press release:
Plaintiffs filed a total of 403 securities class actions in 2018 compared to 412 in 2017. The number of core filings increased from 214 to 221—the highest level since 2008, when securities class actions surged due to volatility in U.S. and global financial markets. Federal M&A filing volume was the second-highest on record, despite declining from 198 to 182.
Securities class action filings related to stock price drops reached levels not seen since the peak of the financial crisis, with the annual likelihood of such filings against exchange-listed companies at an all-time high.
In a Sunday NYT op-ed, Senators Chuck Schumer (D-NY) and Bernie Sanders (D-VT) said they’re going to introduce a bill that would allow companies to buy back shares only if they pay their workers well. Here’s a few articles about their proposal:
As you focus on this year’s risk management priorities and refine your “Risk Factor” disclosure, consider that this “WSJ Pro” article reports that over 50 companies (mostly in the tech, entertainment, media & financial services sectors) mentioned AI in their risk factors last year – more than double than in 2017. That number will likely go up again this year, considering that this recent Protiviti survey of 825 directors & executives identifies disruptive innovations – e.g. AI – and competition from “born digital” companies as a top risk.
Meanwhile, on the geopolitical front, the Eurasia Group’s forecast predicts that our current cycle of destruction will cause a global “innovation winter” – and lots of other mayhem that will impact businesses. When it comes to Brexit’s impact on business, this memo from The Conference Board identifies six potential risks and what industries they apply to.
Here’s something I blogged yesterday on CompensationStandards.com: After market close on Friday, Goldman Sachs announced via an Item 8.01 8-K that in light of the ongoing 1MDB investigation, its compensation committee might reduce bonuses to current – and former – senior executives. The board is wise to leave themselves some room, since they’ll likely face shareholder scrutiny for the alleged fraud and all of its fallout. For last year’s annual equity awards, the board added a new forfeiture provision. The 8-K doesn’t go into detail about what types of harm – e.g. strictly financial v. reputational – would result in forfeiture, but simply says:
This provision will provide the Committee with the flexibility to reduce the size of the award prior to payment and/or forfeit the underlying transfer-restricted shares (which transfer restrictions release approximately five years after the grant date) if it is later determined that the results of the 1MDB proceedings would have impacted the Committee’s 2018 year-end compensation decisions for any of these individuals.
For former executives, Goldman’s comp committee decided to defer determinations about LTIP awards that otherwise would’ve paid out in January, since the 1MDB investigation relates to events that occurred during the performance period. This WSJ article reports that the forfeiture wouldn’t apply to former exec Gary Cohn, who was paid out in lump sum when he joined the Trump Administration.
So these aren’t true “clawbacks” – they’re potential forfeitures of unpaid amounts, which are much easier for a company to administer. Remember that a few years ago in a different kind of scandal, Wells Fargo started off with forfeitures – and eventually also clawed back pay.
More on “First IPO Without Delaying Amendment?”
During the final stretch of last month’s government shutdown, I blogged that Gossamer Bio was prepared to go public without final sign-off from the SEC. Now, that company has announced that it’s reverting to a traditional IPO. The company has restored the delaying amendment language on an amended Form S-1 and will ask the SEC to accelerate effectiveness. Since it’s already set the offering price, there’s not much upside to waiting to sell the shares.
Audit Fees: New Standards Cause Modest Increase
This “Audit Fee Survey” from ferf & Workiva reports that audit fees rose by about 2.5% last year – mostly due to implementing the new revenue recognition and lease standards, but also because of M&A activity and more stringent PCAOB inspections. However, auditors remained open to negotiation due to the competitive marketplace and automation. The median fee for accelerated filers was $415k – compared to nearly $7 million for large accelerated filers…and this Fenwick & West study notes that average fees were $22.2 million for S&P 100 companies.
Meanwhile, Audit Analytics reported that non-audit fees represented about 10% of total fees paid by accelerated filers to their external auditors in 2017 – way down from 38% of the pie in 2002, which caused concern that these services were impacting auditor independence.
Here’s something I wrote last week on CompensationStandards.com: I recently blogged about the pros & cons of disclosing your “equal pay audit.” There aren’t many US companies doing this…yet. But Citigroup is one of the trailblazers. Last year, similar to the stats in Intuit’s proxy (hat tip Lois Yurow), Citi announced on its website the results of a “pay inequality” analysis – the difference in pay of women & men and US minorities & non-minorities, as adjusted for job function, level and geography. And it’s made some pay adjustments based on the findings.
More recently, Citi announced on its website its unadjusted “pay gap” for women and US minorities – i.e. the difference in median total compensation. Citi agreed to publish the stats in response to a “gender pay equity” proposal from Arjuna Capital – who then withdrew the proposal. Here’s an excerpt from Arjuna’s announcement about what comes next:
Citi’s analysis shows that the median pay for women globally at Citibank is 71 percent of the median for men, and the median pay for US minorities is 93 percent of the median for non-minorities. Citi’s goal is to increase representation at the Assistant Vice President through Managing Director levels to at least 40 percent for women globally and 8 percent for black employees in the US by the end of 2021.
Alongside the median pay disclosure, Citi updated last year’s “equal pay for equal work” analysis to extend across its global operations, reporting that when adusting for job function, level, and geography women globally are paid on average 99% of what men are paid, and no statistically significant difference between what US minorities and non-minorities are paid at Citi. Citi also made pay adjustments following this year’s compensation review.
Borrowing for Buybacks: Is the Heyday Over?
This Bloomberg article reports that, after peaking in 2017, debt-financed buybacks are now at the lowest level since 2009. And although that’s partly because cash is abundant, this ‘Think Advisor’ article says that bondholders and ratings agencies are also starting to take issue with using debt proceeds for that purpose. Here’s an excerpt:
Already, U.S. companies are curtailing the amount of bonds sold to buy back their own stock by a third in 2018, based on a Bloomberg data search of transactions detailing use of proceeds. In Europe, where it’s more unusual for companies to borrow to redeem stock and profitability has recovered more slowly, issuance is running at an eight-year low.
It all points to a reversal of the type of shareholder-friendly activity that propelled the S&P 500 to dizzying peaks this year. Companies need to shore up their leverage before an economic downturn hits, as well as court lenders they may need down the road. And as interest rates grind even higher, treasurers are likely to think even harder about borrowing to enrich shareholders.
…[T] the drop in borrowing volumes is illustrative of a growing trend: Corporate America is facing a wake-up call as once-acquiescent bondholders balk at funding rewards to equity owners. After CVS Health Corp. closed a $70 billion deal to buy health insurer Aetna Inc. on Nov. 28, Moody’s Investors Service downgraded its credit rating and laid out its prescriptions for balance-sheet repair: “We expect the company to cut all share repurchases and use free cash flow to reduce debt.”
Tomorrow’s Webcast: “Conflict Minerals – Tackling Your Next Form SD”
Tune in tomorrow for the webcast — “Conflict Minerals: Tackling Your Next Form SD” — to hear our own Dave Lynn of Morrison & Foerster, Ropes & Gray’s Michael Littenberg, Elm Sustainability Partners’ Lawrence Heim and Deloitte’s Christine Robinson discuss what you should now be considering as you prepare your Form SD for 2018.
Whether he’s slamming financially engineered deals that leave employees holding the bag, calling out activist hedge funds, or skewering litigants with his caustic wit, Delaware’s Chief Justice Leo Strine never hesitates to “call ’em as he sees ’em” – and his recent essay bashing corporate political spending is no exception.
Strine’s essay calls into question the legitimacy of corporate political spending and says that the “Big 4” asset managers – BlackRock, Vanguard, State Street & Fidelity – have dropped the ball when it comes to their oversight responsibilities. He points out that the Big 4 are responsible for the investments of millions of American workers who have become “forced capitalists” in order to fund their retirement & their children’s education, and says that a docile approach when it comes to corporate political spending isn’t consistent with their obligations to these “Worker Investors.”
The Chief Justice doesn’t mince words when it comes to expressing his displeasure with this state of affairs:
The Big 4 continue to have a fiduciary blind spot: they let corporate management spend the Worker Investors’ entrusted capital for political purposes without constraint. The Big 4 abdicate in the area of political spending because they know that they do not have Worker Investors’ capital for political reasons and because the funds do not have legitimacy to speak for them politically. But mutual funds do not invest in public companies for political reasons, and public company management has no legitimacy to use corporate funds for political expression either. Thus, a “double legitimacy” problem infects corporate political spending.
The Chief Justice says that the Big 4 should push companies to implement a requirement that any corporate political spending to be authorized by a supermajority vote of the shareholders. He notes that this idea came from Vanguard founder Jack Bogle in the wake of Citizens United, and contends that this action is necessary if the Big 4 are to adequately represent the interests of Worker Investors:
It is not asking too much of the Big 4 to make sure that Worker Investors’ trapped capital is not used to tilt the playing field even more against ordinary, human Americans, to subject them to the huge costs that come when corporations influence regulatory policies to take shortcuts that hurt workers, consumers and the environment, and to shift the focus of corporate management away from legitimate, productive ways to generate sustainable wealth and toward
rent-seeking. By abdicating their duty to police political spending, the Big 4 has, in effect, enabled corporations to use Worker Investors’ capital for these purposes.
Investigations: Lookout, Here Comes Congress!
Speaking of politics, I think I read somewhere that Congress has broad investigative authority – and when it comes to investigations, this Paul Weiss memo says that companies shouldn’t ask for whom the bell tolls – because this year, it’s tolling for them:
Given the pent-up demand for House Democrats to make robust use of their oversight and investigative authorities, the current relative lull in congressional investigations of corporations is expected to end. Corporations across sectors should anticipate an uptick in investigative activity.
In addition to holding the majority for the first time in nearly a decade, this will be the first time that Democrats control the House since a 2015 rule change that empowered a number of committe chairs to subpoena witnesses or documents unilaterally. The chairs of the following committees, among others, have this authority: Energy and Commerce; Financial Services; Intelligence; Judiciary; Natural Resources; and Oversight and Government Reform.
The memo cautions that companies with ties to the Trump Administration or that have benefitted significantly from its initiatives may find themselves caught up in Congressional investigations, and offers tips for preparing to deal with Congressional scrutiny.
Our February Eminders is Posted!
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I blogged last year about Spotify’s decision to forego a traditional IPO in favor of a direct listing. Now, according to this recent WSJ report, it appears that fellow unicorn Slack Technologies will follow the same path. Bloomberg’s Matt Levine thinks that may be a big deal:
We talked a bunch about the Spotify direct listing when it happened, but it is hard to overstate the importance of the second big high-profile direct listing. There’s a reason that people still talk about Google’s Dutch auction IPO, 15 years later: because it didn’t inspire imitators. It didn’t become a standard tool of corporate finance, an option that is on the table for every company. It’s just a weird thing that Google did once.
But if Slack follows Spotify’s lead in going public by direct listing, then it is much more likely to become a thing. Other tech companies considering going public won’t think “should we do that weird thing that Spotify did” but rather “what are the pros and cons of direct listings compared to initial public offerings?” Investment banks will—reluctantly!—put together pitchbook pages explaining direct listings and touting their own credentials at leading them. (“Haven’t only three banks ever led a big direct listing in the U.S.,” you might ask, but that just means that you don’t understand how pitchbook credentials work. Every bank is the market leader in everything, in the safety of their own pitchbooks.)
Matt says that the viability of the direct listing alternative may lead to a much more customized process of going public than the traditional IPO:
It used to be that, if you wanted to go public, there was one way to do it. Now there are two. But the choice creates the possibility of more choice, of unlimited customization, of tweaking each feature to get exactly the tradeoffs you want.
Wow. And to think that I haven’t even tried avocado toast yet! Also check out this Cydney Posner blog on Matt’s article.
Crisis Management: Benchmarking Your Response Plan
This recent Morrison & Forester/Ethisphere survey is intended to assist companies in benchmarking their crisis management planning efforts by providing insight into current trends in crisis management & highlighting best practices. Here’s an excerpt discussing the frequency with which specific topics are addressed in crisis management plans:
One of the areas our survey explored in depth involved the types of events companies included in their crisis management plans. The most common response was “cyber breach,” with 67% of respondents answering that they had plans that addressed such an event.
The next most commonly included crisis events were “workplace violence or harassment” (reflecting additional steps being taken by companies to address these issues in the #MeToo era) (56.5%), followed by events relating to a government investigation (44.2%) and environmental damage (44.8%).
Beyond those, tied at 5th and 6th, were preparations for an anti-corruption violation (40.9%) and an IP (Intellectual Property) theft event (40.9%), followed by terrorism (36.4%), high stakes litigation (31.8%), and product recall (26%).
Other topics addressed include methods to boost organizational confidence in a crisis management plan & the role of outside counsel.
Privacy: France Smacks Google for Alleged GDPR Violations
Last week, Google earned the unwanted distinction of being the first U.S.-based company to be sanctioned for alleged violations of the EU’s GDPR. Here’s the intro from this Dinsmore & Shohl memo:
On January 21, 2019, Google was fined nearly $57 million (approximately 50 million euros) by France’s Data Protection Authority, CNIL, for an alleged violation of the General Data Protection Regulation (GDPR). CNIL found Google violated the GDPR based on a lack of transparency, inadequate information, and lack of valid consent regarding ad personalization. This fine is the largest imposed under the GDPR since it went into effect in May 2018 and the first to be imposed on a U.S.-based company.
The memo lays out the specific areas with which French regulators found fault, and notes that the proceeding was likely intended to send a message to all U.S.-based organizations that collect data on EU citizens.
Yesterday, the SEC announced enforcement proceedings against four companies that were unable to get their acts together when it came to internal control over financial reporting. Lots of companies encounter ICFR issues & disclose material weaknesses every year, so should they all be worried about the Division of Enforcement knocking at their door?
My guess is probably not – because the targets of these proceedings were a pretty unique group. As this excerpt from the SEC’s press release explains, to say that they all had longstanding ICFR issues is a huge understatement:
The Securities and Exchange Commission today announced settled charges against four public companies for failing to maintain internal control over financial reporting (ICFR) for seven to 10 consecutive annual reporting periods. Two of the charged companies also failed to complete the required evaluation of the effectiveness of ICFR for two consecutive annual reporting periods.
According to the SEC’s orders, year after year, the four companies disclosed material weaknesses in ICFR involving certain high-risk areas of their financial statement presentation. As discussed in the SEC orders, each of the four companies took months, or years, to remediate their material weaknesses after being contacted by the SEC staff. One of the companies is still in the process of remediating its material weaknesses.
One of the big lessons here is that it’s not enough to disclose your internal controls problems – you’ve got to fix them. The press release quotes Associate Director of Enforcement Melissa Hodgman as saying that companies “cannot hide behind disclosures as a way to meet their ICFR obligations. Disclosure of material weaknesses is not enough without meaningful remediation.”
Each of the four companies agreed to a cease and desist order & the payment of civil penalties. In addition, the group’s medalist – which disclosed a material weakness in ICFR each year for an entire decade(!) – was required to retain an independent consultant to ensure remediation of material weaknesses, including those involving related party transactions.
SOX 404: Maybe You Hate It, But Investors Don’t
Okay, the example of the “Gang of 4” in today’s lead blog notwithstanding, I confess that I’m still not a big fan of Sarbanes-Oxley’s Section 404. I guess I’m one of those people who think that it’s led to a lot of unproductive corporate navel gazing, and that this outweighs its merits.
Based on my experience, there seem to be a lot of other “404 haters” out there among my fellow lawyers. But I’m afraid a constituency a lot more important than us may have a different opinion about Section 404’s internal controls reporting mandate. According to this CFO.com article, a new study claims that investors like internal controls reporting quite a bit. The study cites investor reaction to decisions to opt-out of internal control audits for newly-acquired companies in support of its claim:
Looking at the impact of a rule that enables companies for one year to opt out of IC audits for newly acquired firms, the paper reveals a significant drop in the acquirer’s stock on the day the opt-out becomes public with the issuance of the acquiring company’s annual report.
Depending on how this decline is calculated, one-day abnormal stock returns compared with opt-in companies can be as much as 44 basis points, according to the study authors, Robert Carnes of the University of Florida, Dane Christensen of the University of Oregon, and Phillip Lamoreaux of Arizona State University.
…[T]hey found the stock-price dip occasioned by opting out of internal controls audits becomes more pronounced the greater the size of the acquired entity relative to the size of the acquirer, as would be expected if investors value an auditor’s internal control assurance. The professors also found a more negative effect for acquisitions in the first half of a buyer’s fiscal year, suggesting that opting out becomes more suspect to investors the more time acquirers have to integrate the two companies’ finances.
A big reason for investors’ negative reaction to an opt-out decision is that – as I’ve previously blogged – it frequently proves to be a red flag portending future restatements.
Transcript: “The Latest – Your Upcoming Proxy Disclosures”
We’ve posted the transcript for our recent CompensationStandards.com webcast: “The Latest – Your Upcoming Proxy Disclosures.”
When you find a mistake in the financials, one of the first questions that must be answered – after you stop hyperventilating – is “how do we correct the error?” This Audit Analytics blog reviews how companies have answered that question in recent years. The blog says that there’s been a trend away from restatements & toward the more benign “out-of-period adjustments” – and suggests that better internal controls may be part of the reason for it.
This excerpt reviews the issues that most frequently resulted in out-of-period adjustments and restatements during the period from 2009-2016:
When it comes to which types of issues are being corrected via out-of-period adjustments, taxes topped the list for the last 8 years. In 2016, companies recorded 85 tax related out-of-period adjustments – 26% of all the out of period adjustments recorded during the year. Second and third of the top issues were liabilities (14%) and revenue recognition (12%).
The most common issues being corrected differ when looking at restatements. Securities (debt, quasi-debt, warrants & equity) issues ranked at the top, comprising 17.6% of restatements in 2016, whereas they account for only 5.8% of out-of-period adjustments during the same year. Classification issues was the next most common restatement issue (14.2% of all 2016 restatements).
Ultimately though, the deciding factor between a restatement and an out-of-period adjustment is materiality, and the blog notes that when it comes to materiality, size matters. For most of the periods surveyed, the largest restatement was bigger than the largest out of period adjustment.
SEC’s Shutdown: “Keep On Rockin’ In The Free World. . .”
The government shutdown caused a lot of financial hardship, so we tip our hats to the band “G.O.A.T. Rodeo” – which played a concert in DC last week to provide some free entertainment and raise a little money for displaced federal workers. It turns out that the membership of the band isn’t what you might expect. As this Bloomberg Business Week article notes, the SEC Staff is well represented in the band:
The U.S. Securities and Exchange Commission lawyers who took the stage at Washington’s Rock & Roll Hotel Thursday night have won accolades for suing Goldman Sachs Group Inc. and writing rules for Wall Street traders. This time, their greatest hits were more of the heavy metal variety.
Prompted by the government shutdown, the SEC workers — who moonlight in a band called G.O.A.T. Rodeo — played a concert for fellow furlough victims. The plan was to raise some money for a charitable fund that helps federal employees and blow off some pressure that’s been building over the past month.
“We’ve been going a little crazy around my house, stir crazy, not working,’’ said Stacy Puente, an SEC attorney, before she launched into Ozzy Osbourne’s hit “Crazy Train.” The crowd, many of whom were also missing paychecks and unable to go to their jobs at the SEC and other agencies, nodded their heads and pumped fists in the air.
Vocalist Stacy Puente was joined by SEC enforcement lawyer Reid Muoio on drums, while other SEC staffers played lead guitar & keyboards. By the way, I love the band’s name – and there’s nothing more appropriate than having a band named “G.O.A.T. Rodeo” play a fundraiser for people feeling the pain of our national “goat rodeo.”
Transcript: “Pat McGurn’s Forecast for 2019 Proxy Season”
We have posted the transcript for our recent webcast: “Pat McGurn’s Forecast for the 2019 Proxy Season.”
Over the weekend, SEC Chair Jay Clayton posted a statement saying that the SEC has “resumed normal staffing levels and is returning to normal operations.” But this excerpt seems to acknowledge that getting back to full speed is going to take some real effort:
The leaders of our Divisions and Offices, in consultation with various members of our staff, are continuing to assess how to most effectively transition to normal operations. Certain of these Divisions and Offices, including our Divisions of Corporation Finance, Trading and Markets, Investment Management and our Office of Compliance Inspections and Examinations, will be publishing statements in the coming days regarding their transition plans.
As promised, Corp Fin subsequently posted its own statement – and said that when it comes to tackling its backlog, the general approach is going to be “first come, first served. Here’s an excerpt:
The Division of Corporation Finance is returning to normal operations. In general, we anticipate addressing filings, submissions and requests for staff action based on when an item was submitted. In other words, absent compelling circumstances, we expect to address matters in the order in which they were received.
Corp Fin’s statement also notes that although the Staff will be available to respond to questions, “their response time may be longer than ordinary.” That shouldn’t surprise anyone. The shutdown has led to a big logjam in IPOs, and has thrown a monkey wrench into the 14a-8 no-action process. While those issues have gotten most of the attention, I can only guess at the backlog of ’34 Act comment letters and other ordinary course business that the Staff will have to work through.
In short, the Staff has a big mess that it’s going to have to clean up over the coming weeks. At the same time, private sector lawyers are going to be under a lot of pressure to get their client’s projects moving again. Both sides of the table should cut each other some slack as we work through this. We didn’t make the mess – but when it comes to the cleanup, we’re all in this together.
Check out this Skadden memo, this Cooley blog and this Weil blog for more information about Corp Fin’s grand reopening – including a discussion of IPO & shareholder proposal-related issues.
Registration Statements: What If You Pulled The Delaying Amendment?
As Broc blogged last month, during the shutdown, the SEC invited companies with pending registration statements to pull their delaying amendments. For companies that opted to do that, the question becomes, “now what do we do?” Here’s what Corp Fin’s statement says:
Consistent with the Division’s Questions and Answers in connection with its statement regarding Actions During a Government Shutdown, some registrants omitted or removed delaying amendments from their registration statements. We will consider requests to accelerate the effective date of those registration statements if they are amended to include a delaying amendment prior to the end of the 20 day period and acceleration is appropriate.
In cases where we believe it would be appropriate for a registrant to amend to include a delaying amendment, we will notify that registrant. We remind registrants that Rule 430A is only available with respect to registration statements that we declare effective and is not available to registration statements that go effective as a result of the passage of time.
So, the bottom line appears to be that if you’ve pulled a delaying amendment & the Staff has an issue with that (such as unresolved comments), they’ll let you know. Otherwise, they’ll leave you to your fate – unless you add the amendment back yourself.
Tomorrow’s Webcast: “Controlling Shareholders – The Latest Developments”
Tune in tomorrow for the DealLawyers.com webcast – “Controlling Shareholders: The Latest Developments” – to hear Potter Anderson’s Brad Davey, Cravath’s Keith Hallam, Greenberg Traurig’s Cliff Neimeth and Sullivan & Cromwell’s Melissa Sawyer discuss the latest developments surrounding transactions involving controlling shareholders.
