Daddy, tell me a bedtime story. Do you want to hear the one about when the SEC was closed for the longest time ever? If so, you’re living it. While the government has been shut down before, the SEC nearly always has had “emergency” funds that allowed it to run at full strength while other agencies were closed. For the long government shutdown in ’95 – which this shutdown will soon pass for the “longest ever” – my recollection is that the SEC Staff was off only for a few days. The current SEC shutdown far exceeds that – two weeks today.
So we truly are in a “brave new world.” And the number of shutdown-related questions that members are posting in our “Q&A Forum” grows daily…
Removing the Delaying Amendment: More Examples
Following up on yesterday’s blog that included an example of someone removing the delaying amendment, Jeffrey Rubin of Ellenoff Grossman sent the additional examples below. Interesting to note that some companies include a reference to Section 8(a) (“This registration statement shall hereinafter become effective in accordance with the provisions of Section 8(a) of the Securities Act of 1933, as amended”), while others are silent. Some of these registration statements erroneously state that they shall become effective “As soon as practicable after this Registration Statement is declared effective.” If a registration statement is filed with no delaying amendment, companies should consider language such as “As soon as practicable after the effective date of this Registration Statement” or some variant thereof.
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Securities Litigation: The Rise of “Event Driven” Claims
– How Common are “Finance Board Committees”?
– Annual Meeting Minutes: Must They Be Signed?
– Audit Committees: What to Consider Now
– “Fake News”: Crisis Management’s New Horizon?
Now that we’re getting pretty deep into this government shutdown, you might be wondering whether all those no-action requests for Rule 14a-8 are just sitting in a pile in Corp Fin’s Office of Chief Counsel. Yep, they are (except everything is digital now – that really kills the imagination). Given that most no-action letter requests come in towards the end of December – beginning of January, that could really back things up this proxy season. And this webpage on the SEC’s site shows a bunch of requests pending from November & December. At some point, those companies may have to decide whether to exclude (or not) without the benefit of a Corp Fin no-action response…
Here’s a few random thoughts:
1. Any other former members of Corp Fin’s “Shareholder Proposal Task Force” fantasize about being called back into action for a short stint to help the Staff catch-up? An all-nighter with pizza & apple sodas? Akin to a “hackathon”…
2. When I get asked how I think I’m gonna go – yes, people do ask me that! – I typically reply “death by suffocation.” They then ask me to explain. And I describe being in a small room with someone pouring in reams of blank paper from a hole in the ceiling. Not stopping til I can’t breathe anymore…
3. Headline news when shutdown ends? “Staff Decides All No-Action Requests by Flip of a Coin.”
Removing the Delaying Amendment: An Example
Speaking of the SEC’s shutdown, Bass Berry’s Jay Knight blogged yesterday about an example of someone pulling their “delaying amendment.” Last month, I blogged about how Corp Fin’s 14 FAQs for the shutdown allow for this – and I noted how that’s pretty wild stuff given the sacred nature of “delaying amendments” to this former Staffer…
Tomorrow’s Webcast: “Pat McGurn’s Forecast for 2019 Proxy Season”
Tune in tomorrow for the webcast — “Pat McGurn’s Forecast for 2019 Proxy Season” — when Davis Polk’s Ning Chiu and Gunster’s Bob Lamm join Pat McGurn of ISS to recap what transpired during the 2018 proxy season — and predict what to expect for 2019. Please print these “Course Materials” in advance – it’s Pat’s deck that he will be working with…
A new bill in the New Jersey legislature would require many public companies based in the state to have at least three women on the board by 2021. The measure is the first to mimic a California law signed in September and signals the potential for more states to follow. Both the California law and New Jersey’s proposal call for public companies domiciled in the state to have at least one female director by 2019. Those with more than five directors are supposed to have three women by 2021. “Many times with legislation, timing is everything,” said Assemblywoman Nancy Pinkin, a Democrat from Edison. “I think this is a time that things are resonating.”
As of today, 42 percent of New Jersey companies would have to change the composition of their boards, allocating as many as 132 seats to women, according to estimates by advocacy organization 2020 Women on Boards. The law in California, which is home to four times as many companies as New Jersey, could open up as many as 711 director roles for women.
California’s Board Diversity Law: No Legal Challenges?
And this excerpt from the same Bloomberg article is deserving of your attention:
Now that California’s law is on the books, though, the California Chamber doesn’t have plans to sue to block it, a spokeswoman for the group said. Nor is the organization aware of any other constitutional challenges, which Governor Jerry Brown had said was his chief concern. “There’s definitely an equal protection question,” said Nicole Crum, a partner at Washington law firm Sullivan & Worcester. “But it’s hard to imagine a company coming out and litigating on this just from a public relations standpoint. For a lot of companies, it would be great for them to have the opportunity to buy into this if they are looking to add women anyway, which a lot of people are.”
Tomorrow’s Webcast: “The Latest – Your Upcoming Proxy Disclosures”
Tune in tomorrow for the CompensationStandards.com webcast – “The Latest: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance about your upcoming pay ratio & say-on-pay disclosures – including the new hedging rules and the latest SEC positions, as well as how to handle the most difficult ongoing issues that many of us face.
Recently, I blogged about how Fortune 500 compensation committees have received letters from a group of 48 institutional investors requesting them to disclose more information on workforce compensation practices relative to CEO pay. These letters note that since “disclosure of the median employee’s pay provides a reference point for understanding the company’s workforce,” companies should move “to help investors put this pay information into the context of your company’s overall approach to human capital management” with more expansive disclosure.
Now, the NY Comptroller – which was a signatory to those letters – has announced agreements with five companies to withdraw a shareholder proposal on a related topic. That shareholder proposal urges companies to adopt policies that take into account the compensation of their workforce when setting CEO pay – and the companies’ agreements range from adding “human capital” disclosure, to enhancing workforce benefits, to committing to consider the CEO pay ratio when determining executive pay. For those reading this blog for a while, you know that we have been advocating the use of internal pay ratios as an alternative tool for compensation committees to consider since peer group benchmarking is tainted due to the slippery slope of most companies deciding to pay CEOs in the top quartile for decades…
UK: Pay Ratio & LTIP Disclosures Coming Next Year
As noted in this press release, the UK kicked off mandatory pay ratio and LTIP disclosure obligations for companies yesterday. This Deloitte memo – and Baker McKenzie memo – provide the details. The pay ratio disclosures will be different than those for US-companies. The new requirements apply to companies reporting on financial years starting yesterday or later – so the first actual reporting will be in next year’s disclosures…
Can Footnotes Be “Sexy”?
Recently, I blogged about the value of footnotes. Given the interest in the topic – my poll revealed that 40% always read them; 35% do if they’re in the mood and 20% only if they’re in a SEC release or court opinion – I thought you may find this footnote by SEC Commissioner Rob Jackson in his statement in connection with the SEC’s adoption of the final rules regarding Regulation ATS (Alternative Trading Systems) a few months ago deserving of your attention:
But as millions of ordinary American investors approach retirement, they are increasingly seeking the safety and stability of fixed income. And those markets are still in the dark ages, costing retirees precious savings.[2] Stock markets are sexy, but fixed income will fund ordinary investors’ retirements.[3] It’s time for the Commission to bring common-sense reforms like those we’re finalizing today to the bond markets that millions of Americans will rely upon for the secure retirements they deserve.
[3] I’m using the word “sexy” loosely, but in financial regulation it’s important to remember that all things are relative. Compare Right Said Fred, I’m Too Sexy (Charisma Records, 1991) with John Stuart Mill, On Social Freedom: Or the Necessary Limits of Individual Freedom Arising Out of the Conditions of our Social Life, Oxford and Cambridge Rev. 57-83 (1907) (noting, in connection with the notion that measures of utility are appropriately characterized as marginal, that “[m]en do not desire to be rich, but richer than other men.”) and George Sylvester Viereck, What Life Means to Einstein: An Interview, The Saturday Evening Post (Oct. 26, 1929), at 17 (“Relativity . . . merely denotes that certain physical and mechanical facts, which have been regarded as positive and permanent, are relative with regard to certain other facts.”).
Here’s the intro from this blog by Davis Polk’s Ning Chiu:
The SEC instituted a cease-and-desist proceeding in a fairly straightforward enforcement action that nonetheless emphasizes the importance of the requirement that GAAP measures must be provided with “equal or greater prominence” when a company discloses non-GAAP measures.
The SEC found that a company provided non-GAAP financial measures, such as adjusted EBITDA, adjusted net income and free cash flow before special items, without giving equal or greater prominence to the comparable GAAP measures. In the headline for the FY 2017 earnings release, the company presented its adjusted EBITDA for the fiscal year and stated that it was up 8% year-over-year, without mentioning its net income or loss (the comparable GAAP financial measure) in the headline.
Similarly, in the headline for the Q1 2018 earnings release, the company presented its adjusted EBITA for the first quarter of 2018 and stated that it was up 7% year-over-year, without mentioning its net income or loss (the comparable GAAP financial measure) in the headline. On the top of the first page, in a section called “Highlights,” the company then listed nine bullet points about the first quarter, including bullet points that provided adjusted EBITDA, adjusted net income and adjusted net income per share. These three non-GAAP financial measures were not accompanied by comparable GAAP measures in the same section. The GAAP measures were instead reported in the second and sixth full paragraphs of the earnings release.
Also see this blog by Ning about how the SEC continues to target companies for financial reporting failures – like this recent SEC enforcement action…
The New Hedging Rule’s Novel “Fair & Accurate Summary” Requirement
Here’s the intro from this blog by Allen Matkins’ Keith Bishop:
Earlier this month, the SEC added a new paragraph (i) to Item 407 requiring a company to describe any practices or policies regarding hedging transactions. The fact that the SEC took this action should have been no surprise because Section 955 of Dodd-Frank required the SEC to do so. I was surprised, however, to see that the final rule includes a novel disclosure standard. I was especially surprised because this standard was not included in the text of the rule as proposed. Thus, the public was denied any opportunity to comment on the standard.
As adopted, Item 407(i) requires a company to provide a “fair and accurate” summary of its practices or policies. That sounds innocuous until one considers that Regulation S-K nowhere else imposes a “fair and accurate” disclosure standard (the standard does make an appearance in Rule 403(c) under the Securities Act requiring a fair and accurate English translation). The concept of accuracy seems clear enough, but what does it mean for a summary to be “fair”? Originally, the word “fair” meant pleasing or attractive (e.g., “Show a fair presence and put off these frowns” Wm. Shakespeare, Romeo and Juliet, Act I, scene 5). Eventually, it acquired a sense of being equitable or in accordance with the rules. Shakespeare in fact also employs this meaning of “fair” as when Hector in Act 5, scene 3 of Troilus and Cressida states “O, ’tis fair play”. (See also, King John, Act 5, scene 2 and The Tempest, Act 5, scene 1). Neither sense of the word seems particularly apt when applied to a summary of a hedging policy.
Further, a company will be required either to provide a fair and accurate summary of any practices or policies that apply, including the categories of persons covered and any categories of hedging transactions that are specifically permitted and any categories that are specifically prohibited, or to disclose the practices or policies in full. The “fair and accurate” standard is uncommon in SEC regulations and thus may raise concerns over its meaning, but it is a concept used elsewhere, including in typical opinions given to underwriters.
California Court Confirms Enforceability of Delaware Forum-Selection Bylaws
As noted in this Wachtell Lipton memo, the California Court of Appeal recently became the second appellate court outside of Delaware – in Drulias v. 1st Century Bancshares – to recognize the enforceability of forum-selection bylaws adopted by Delaware corporations designating the Delaware Court of Chancery as the exclusive forum for the litigation of intracorporate & fiduciary disputes.
Last week, I blogged about the SEC’s shutdown – along with Corp Fin’s 14 FAQs about “what now.” The SEC quickly ran out of “emergency funds” and has been down to a skeletal staff since last Thursday. If you’re working on a deal in registration, you may be freaking out. Corp Fin’s 14 FAQs are helpful here – and well as this Davis Polk memo and White & Case memo.
If you’re not working on a deal, you may not care. But if you live in Washington DC, the government shutdown is big news as many of your friends & neighbors are nervously sitting at home. Or maybe they have run out to one of Jose Andres’ restaurants, as the famous chef is handing out free food if you can flash a government ID. Some DC bars are offering speciality cocktails, such as as “Nothing Really Mattis” (Mad Dog 20/20 and Vodka) and “Mexico Will Pay for This” (Montezuma Blue tequila, orange juice and grenadine).
The SEC’s Staff’s “Out of Office” Reply
Did you know that when the government is shut down, the Staff is not permitted to check email even if they are willing to work for free? That is true (unless a Staffer is part of the skeletal crew that is forced to work for free). Anyway, this is the standard reply that you now get when you email a SEC Staffer:
Due to a lapse in appropriations for the federal government, the U.S. Securities and Exchange Commission is currently closed. I am currently out of the office and will return to the office once an appropriation has been enacted. During the closure, I will not be monitoring or responding to my emails. Thank you.
Our January Eminders is Posted!
We have posted the January issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
The start of a new year! When Liz, John & I finally got together in-person for the first time a few months ago, we enjoyed each other so much that we spontaneously began to sway to the beat (the “beat” being Montell Jordan’s “This Is How We Do It“) in this 8-second video:
Well, it’s been over two years since the first filing of a Schedule 14N at National Fuel Gas. You’ll recall that was Gamco’s failed attempt to utilize proxy access. But we finally have a second Schedule 14N filed yesterday for “The Joint Corp.” By looking at the name, I thought this company would have something to do with legalized marijuana. But it’s actually a chiropractic franchise…
The Interesting Back Story for this Schedule 14N
From what I can glean, here’s the back story for this Schedule 14N at “The Joint Corp”:
1. A shareholder proposal to adopt proxy access was approved – with 96.05% support – at the company’s annual meeting on June 1st of this year (there were a lot of broker no-votes – nearly one third). A few months after, the board amended the bylaws to adopt proxy access. As you can see from the company’s proxy statement, the board had not made a recommendation for – or against – the proposal. According to this Form 8-K, the board implemented proxy access in August on standard terms (3% – 3/20% – 20).
2. The director nominee, Glenn Krevlin, is listed as a ‘greater than 10%’ stockholder (aggregated with funds he controlled at Glennhill Capital, an activist hedge fund) in the most recent proxy. Note the ‘proxy access’ shareholder proposal mentioned in #1 above was filed by a different shareholder. According to the Schedule 13Ds filed by Glennhill, it began selling its stock soon after the proxy was filed and was below 5% within a couple of weeks. (This might be due to Krevlin winding down some funds he was associated with.)
3. This Schedule 14N was filed by the brother of the corporate secretary for The Joint Corp! (The brother is the trustee of the actual filer.) Might have been an interesting holiday for that family.
4. One last intrigue: the brother/trustee who filed this Schedule 14N had served on the board of the company until March 2017. When he left the board, this is what that Form 8-K said: “On March 14, 2017, Steven P. Colmar resigned from the board of directors of The Joint Corp, effective as of March 17, 2017. While Mr. Colmar’s letter of resignation did not cite any specific disagreements with management, in prior communications with the Company and various members of its management and board of directors, Mr. Colmar expressed disagreements about the Company’s strategic direction and management’s ability to execute upon it.”
Hat tip to Steve Quinlivan for finding the first CAM in this SEC filing from “Church Capital Fund”:
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
As discussed in Note 3 to the financial statements, the financial statements include investments valued at $8,658,675 (49% of net assets) as of September 30, 2018, whose fair values have been estimated by management in accordance with policies approved by and under the general oversight of the Board of Trustees in the absence of readily determinable fair values.
The principal considerations for our determination of the investments whose fair values have been estimated by management in accordance with policies approved by and under the general oversight of the Board of Trustees in the absence of readily determinable fair values are that auditing these investments involved our complex and subjective judgment and the investments are material to the financial statements as a whole.
Our audit procedures related to these investments included the following procedures, among others to address the critical audit matter: We tested the effectiveness of the controls over the Fund’s valuation methodologies and evaluated the relevance of the qualitative components embedded in the methodology models. We also agreed underlying supporting documentation from outside specialists where applicable, agreed to actual empirical sales data as available and tested the computational accuracy of the models.
CAMs: Lessons Learned & Illustrative Example
This new publication from the “Center for Audit Quality” is useful. It presents early lessons learned from “dry runs” that auditors have conducted on critical audit matters. It also contains an illustrative example of a CAM, along with a set of new questions to foster dialogue and understanding of the impact that CAMs will have on the audit process. See this Cooley blog…
Last week, the PCAOB Staff posted a post-implementation review of AS 1220 about engagement quality. This is the PCAOB’s first post-implementation review for one of its standards. The review includes key findings, messages for auditors and audit committees and enhancements to achieve more effective reviews…
Last week, the PCAOB also adopted a new standard to enhance the requirements that apply when auditing accounting estimates, including fair value measurements…
With the government partially shut down, the SEC will now follow its “operations plan” that it first devised a few years ago. Corp Fin notes on this page:
We understand that the uncertainty regarding the SEC’s operating status in the event of a federal government shutdown raises concerns for registrants that plan to request acceleration of their registration statements or qualification of their offering statements in the near future. Given this uncertainty, you may consider submitting your request while the SEC is open and operating.
We will be closed December 24th and 25th in observance of the holiday. However, the SEC will remain fully operational for a limited number of days beyond the start of a government shutdown. During the time we remain open, we will conduct ordinary business. If a change in our operating status looks imminent, we will provide as much advance notice as possible. Regardless of our operating status, EDGAR will accept registration statements, offering statements and other filings; however, as discussed below, during a shutdown we will not be able to declare registration statements effective nor qualify Form 1-A offering statements.
Here’s an excerpt from this Gibson Dunn blog: “As currently envisaged, starting on December 27th, the SEC “will have only an extremely limited number of staff members available to respond to emergency situations involving market integrity and investor protection, including law enforcement.” Regardless of the SEC’s operating status, the EDGAR filing system will continue to accept reports, registration statements and other filings. Accordingly, public companies must continue to file periodic and current reports when due on Forms 10-K, 10-Q and 8-K; however, from December 27th the SEC will not be able to declare registration statements effective nor qualify Form 1-A offering statements. A prolonged shutdown could create difficulties for the IPO market and for many public companies without an effective shelf registration statement and, in particular, would create a complex calculus for any company thinking about going public in January.”
Unlike one of the prior times that the SEC shut down earlier this year – when a group of 18 law firms issued a memo about how to handle matters due to a dearth of guidance from Corp Fin – Corp Fin has issued a helpful set of 14 FAQs this time around (I wish the Division would number the FAQs; that would assist practitioners to more easily refer to a specific FAQ when in discussion). Here’s a Morrison & Foerster memo – and a Davis Polk memo about the SEC’s shutdown.
Whoa! You May Be Permitted to Remove the “Delaying Amendment”!
One of Corp Fin’s FAQs suggests that companies may want to think about removing the “delaying amendment” from their registration statement if the SEC isn’t open. The registration statement would then become effective automatically 20 days after its removal. That’s pretty wild stuff given the sacred nature of “delaying amendments” to this former Staffer. When you join Corp Fin, the first thing you’re taught is to ensure that a newly-filed registration statement has the delaying amendment on it…
A short history lesson: Back in the “way, way back” old days, the SEC Commissioners themselves would review a registration statement. This was when the SEC was first established and very few securities offerings were happening. The notion of a “delaying amendment” didn’t exist yet (not until Rule 473 of Regulation C was adopted) – so the Commissioners had to conduct their review & resolve any differences with the issuer before the 20-day period – under Section 8(a) of the ’33 Act – when the registration statement automatically became effective had passed…
Poll: When Will the Government Be Open Again…
Please participate in this anonymous poll about when the government will reopen:
