It’s been over a decade since Corp Fin started issuing CDIs to replace its main source of “informal” interpretations – the “Telephone Interpretation Manual.” Oddly, after all these years, some of the “Phone Interps” still haven’t been replaced. That’s finally changing. On Friday, Corp Fin issued 45 new CDIs to replace the interps in the Telephone Interpretation Manual and the March 1999 Supplement that relate to the proxy rules & Schedules 14A/14C. The Staff says it’s in the process of updating other proxy interps – so we can expect more CDIs to come.
Thirty-five of the new CDIs simply reiterate the guidance provided in the Manual & March 1999 Supplement – four make technical changes – and these six CDIs reflect substantive changes (here’s a redline from Cleary):
Question 124.01: Rule 14a-4(b)(1) states that a proxy may confer discretionary authority with respect to matters as to which a choice has not been specified by the security holder, so long as the form of proxy states in bold-faced type how the proxy holder will vote where no choice is specified. If action is to be taken with respect to the election of directors and the persons solicited have cumulative voting rights, can a soliciting party cumulate votes among director nominees by simply indicating this in bold-faced type on the proxy card?
Answer: Yes, as long as state law grants the proxy holder the authority to exercise discretion to cumulate votes and does not require separate security holder approval with respect to cumulative voting. [May 11, 2018]
Question 124.07: The Division has permitted registrants to avoid filing proxy materials in preliminary form despite receipt of adequate advance notification of a non-Rule 14a-8 matter as long as the registrant disclosed in its proxy statement the nature of the matter and how the registrant intends to exercise discretionary authority if the matter was actually represented for a vote at the meeting. See Section IV.D of Release No. 34-40018 (May 21, 1998). Can a registrant rely on this position if it cannot properly exercise discretionary authority on the matter in accordance with Rule 14a-4(c)(2)?
Answer: No. [May 11, 2018]
Question 126.02: Is a registrant required to file a preliminary proxy statement in connection with a proposed corporate name change to be submitted for security holder approval at the annual meeting?
Answer: No. As set forth in Release No. 34-25217 (Dec. 21, 1987), the underlying purpose of the exclusions from the preliminary proxy filing requirement is “to relieve registrants and the Commission of unnecessary administrative burdens and preparation and processing costs associated with the filing and processing of proxy material that is currently subject to selective review procedures, but ordinarily is not selected for review in preliminary form.” Consistent with this purpose, a change in the registrant’s name, by itself, does not require the filing of a preliminary proxy statement. [May 11, 2018]
Question 151.01: A registrant solicits its security holders to approve the authorization of additional common stock for issuance in a public offering. While the registrant could use the cash proceeds from the public offering as consideration for a recently announced acquisition of another company, it has alternative means for fully financing the acquisition (such as available credit under an executed credit agreement in the full amount of the acquisition consideration) and may choose to use those alternative financing means instead. Would the proposal to authorize additional common stock “involve” the acquisition for purposes of Note A of Schedule 14A?
Answer: No. Raising proceeds through a sale of common stock is not an integral part of the acquisition transaction because at the time the acquisition consideration is payable, the registrant has other means of fully financing the acquisition. The proposal would therefore not involve the acquisition and Note A would not apply. By contrast, if the cash proceeds from the public offering are expected to be used to pay any material portion of the consideration for the acquisition, then Note A would apply. [May 11, 2018]
Question 161.03: If a registrant is required to disclose the New Plan Benefits Table called for under Item 10(a)(2) of Schedule 14A, should it list in the table all of the individuals and groups for which award and benefit information is required, even if the amount to be reported is “0”?
Answer: Yes. Alternatively, the registrant can choose to identify any individual or group for which the award and benefit information to be reported is “0” through narrative disclosure that accompanies the New Plan Benefits Table. [May 11, 2018]
Question 163.01: Does a proxy statement seeking security holder approval for the elimination of preemptive rights from a security involve a modification of that security for purposes of Item 12 of Schedule 14A?
Answer: Yes. Accordingly, financial and other information would be required in the proxy statement to the extent required by Item13 of Schedule 14A. [May 11, 2018]
Of course, I can remember – pre-Internet – when it was hard to get a copy of the telephone interps. It was originally drafted to be an internal resource for Corp Fin. Some law firms obtained a copy – when Corp Fin Staffers left the Division or perhaps through a FOIA request – but it wasn’t widely available (or even known) before the late ’90s when it was posted on the SEC’s site…
The Latest Reg Flex Agenda: A Few New Items
Here’s some news from this Ropes & Gray memo written by Keith Higgins:
The Spring 2018 unified regulatory agenda – the so-called “Reg Flex” agenda – came out on May 9th (current / long-term). Although most of the items on the Corporation Finance agenda remain the same, there were a few new items added to the list that bear mention.
Added to the “proposed rule stage” was a rulemaking on “Business, Financial and Management Disclosure Required by Regulation S-K,” which previously had been on the long-term actions agenda. Other than to say that the proposal would be to “modernize” the disclosure requirements, the agenda doesn’t provide any insight into the areas that might be covered. This topic is a continuation of the Division’s Disclosure Effectiveness initiative and suggests that change may be in the offing that goes beyond the modest proposals that were included in the proposed rulemaking to implement the FAST Act report.
Also at the proposed rule stage is a rulemaking on “Filing Fee Processing.” The description of this project suggests that the Division will propose a rule to make the fee-related information on various Commission filings structured data. Doing so should allow the Commission to better track filing fees, particularly when they are transferred in connection with unused fees in Securities Act registrations. It is unlikely that any substantive changes will come out of this project.
The third new item on the list is a topic that Director Bill Hinman hinted at in his recent appearance before a subcommittee of the House Financial Services Committee – “Extending the Testing the Waters Provisions to Non-Emerging Growth Companies.” Testing the waters, which allows emerging growth companies to have discussions about an offering with qualified institutional buyers and institutional accredited investors, has been an increasingly popular provision of the JOBS Act. It makes every bit of sense to extend this concept to all companies that might be interested in undertaking a registered securities offering. And given the sophisticated audience with whom these discussions may be had, there would be no adverse impact on investor protection.
Added to the “final rule stage” list is the proposal on “Disclosure of Hedging by Employees, Officers and Directors.” This rulemaking, which was initially proposed in February 2015 to implement Section 955 of the Dodd-Frank Act, had been on the long-term list last fall. It is interesting that the Chairman has chosen to add this rulemaking to the list. On the one hand, it is a relatively innocuous proposal that does not call for any burdensome level of disclosure. On the other hand, however, because the proxy advisory firms and institutional investors have taken an interest in hedging by insiders, many companies have already made voluntary disclosure of their hedging policies as a matter of good corporate governance. As a result, adoption of the rule is unlikely to have any meaningful impact, although it will allow the Commission to check this one off the Dodd-Frank mandate list.
Every few years, we survey annual meeting practices (we’ve conducted about a dozen surveys on this & related topics). Here’s the results from our latest one:
1. To attend our annual meeting, our company:
– Requires pre-registration by shareholders – 16%
– Encourages pre-registration by shareholders but it’s not required – 8%
– Requires shareholders to bring an entry pass that was included in the proxy materials (along with ID) – 14%
– Encourages shareholders to bring an entry pass but it’s not required – 11%
– Will allow any shareholder to attend if they bring proof of ownership – 76%
– Will allow anyone to attend even if they don’t have proof of ownership – 11%
2. During our annual meeting, our company:
– We hand out rules of conduct that limit each shareholder’s time to no more than 2 minutes – 30%
– We hand out rules of conduct that limit each shareholder’s time to no more than 3 minutes – 35%
– We hand out rules of conduct that limit each shareholder’s time to no more than 5 minutes – 5%
– We announce a policy that limits each shareholder’s time to no more than 2 minutes (but rules are not handed out) – 3%
– We announce a policy that limit each shareholder’s time to no more than 3 minutes (but rules are not handed out) – 0%
– We announce a policy that limit each shareholder’s time to no more than 5 minutes (but rules are not handed out) – 3%
– There is no limit on how long a shareholder can talk (subject to the inherent authority of the Chair to cut off discussion at any time) – 24%
3. For our annual meeting, our company:
– Provides an audio webcast of the physical meeting, including posting an archive – 24%
– Provides an audio webcast of the physical meeting, but does not post an archive – 3%
– Has provided an audio webcast of the physical meeting in the past, but discontinued that practice – 3%
– Is considering providing an audio webcast of the physical meeting but haven’t decided yet – 0%
– Provides a video webcast of the physical meeting (or is considering doing so) – 8%
– Does not provide an audio nor a video webcast of the physical meeting – 62%
4. At our annual meeting, our company:
– Announces the preliminary results of the vote on each matter (unless special circumstances arise such as a very close vote) – 89%
– Doesn’t announce the preliminary results of the vote on each matter – 11%
5. For our annual meeting:
– Our CEO makes a presentation and takes Q&A from the audience – 90%
– Our CEO makes a presentation but no Q&A from the audience – 3%
– We are considering revising next year’s format to eliminate the CEO presentation – 3%
– We are considering revising next year’s format to eliminate the Q&A – 3%
– We are considering revising next year’s format other than the CEO presentation and Q&A but haven’t decided yet – 3%
Also see the transcript for our recent webcast: “Conduct of the “Annual Meeting.”
Board Diversity: Some Progress
This Bloomberg article highlights stories of boards who are achieving some diversity by appointing people who are first-time directors – and who aren’t sitting or retired CEOs. Here’s an excerpt:
Waste management company Republic Services Inc. has been looking for diverse directors since 2011, after a 2008 merger with Allied Waste Industries left it with an all-male board, including one black man. “Change meant bringing people into the waste business who had other experiences,” says CEO Don Slager. “Prior to the merger, frankly, they were just a bunch of garbage men.”
As part of this push, the company enacted some new policies, including a mandatory retirement age of 73 for directors. A variety of experience also was a priority, Slager says. Candidates ideally would bring expertise in areas not already represented, such as logistics and financial reporting. “When you drop a layer below the C-suite, it opens you up to a whole new group of people who are the future leaders of these organizations,” he says.
While the article notes that in 2017, 45% of appointees to S&P 500 boards were novice directors – and a majority of incoming directors were women or minorities – it also states that white men still hold more than 75% of these seats. Not to detract from the companies highlighted as gender diversity success stories in the article – because I do think they’re being thoughtful about this and making progress – but they’ve actually just achieved the “three women” benchmark that Broc’s blogged about…
Age Diversity: Stats on Boards’ “Next Generation”
According to this PwC article, 90% of directors say that age diversity is important – a higher number than gender, race & other forms of diversity. Yet “young directors” – defined as anyone 50 or under – held only 6% of S&P 500 board seats in 2017, and the average age of independent directors increased to 63.
Not surprisingly, the information technology, consumer discretionary & consumer staples industries are the most likely to have at least one director – and technology expertise and active industry knowledge are commonly-cited skills.
Also see this EY report on the traits of first-time directors in 2017.
There’s nothing hotter right now than data analytics. “Big data” can yield some big opportunities – so it would seem that boards would seek this information out when strategizing the big picture. At a minimum, boards should be at least oversee how their companies are using data analytics. This KPMG memo throws out some key questions for boards to consider:
— How is the data being collected and organized within the company and who is involved? Ultimately, who is responsible?
— Can the data be trusted? How is the quality and integrity of the data assessed?
— Does the company have a data ethics policy to protect the brand reputation and reduce legal risk?
— Does the company have the right talent, skills, and resources required to implement/manage its D&A activities?
— Has the company scoped out the near-term and longer-term opportunities for its use of D&A, including financial reporting and predictive analytics?
Trends in Board Cybersecurity Oversight
This recent EY webcast about the board’s cybersecurity oversight role included a poll of director & executive attendees. It appears that most companies aren’t making big changes in response to the SEC’s cybersecurity guidance from earlier this year. Here’s what else they found:
1. Which emerging technology does your board expect to have the greatest impact on the company’s strategy?
– Artificial Intelligence (AI)/Machine Learning and Internet of Things (IoT) – tied at 23%
– Blockchain and Robotic Process automation – tied at 19%
2. As a board member, which of the following do you think is most important to enhance the company’s cyber maturity posture?
– Enhancing data protection and privacy policies – 32%
– Continuously educating and testing the workforce on cybersecurity related matters – 22%
– Improving cyber threat intelligence gathering – 18%
3. How often are your board and management team conducting tabletop exercises and crisis scenario exercises?
– Annually – 31%
– Ad hoc basis/rarely – 30%
– Twice a year or never – tied at 18%
4. Given the recent SEC cybersecurity guidance, do you expect a material change in your disclosure controls process and procedures during your next quarter-end?
– No – 60%
– Yes – 40%
Delaware has amended its data breach law for the first time since enacting it in 2005 (see this Pepper Hamilton memo). To help companies comply with the new requirements, it’s now launched this website with template forms. According to this Morgan Lewis blog, the forms can be used for the required data breach notices to the Delaware Attorney General as well as consumers – and the website also provides a link for consumers to file complaints.
A few years ago, Broc blogged about a VC appointing a robot director. Turns out their announcement was a play on words. But when it comes to director recruitment – the future is now? This paper shows that directors selected using an algorithm would perform better – based on shareholder approval numbers & company profitability – than individuals selected by the company’s board. Here’s an excerpt of the findings from this “Harvard Law” blog:
The differences between the directors suggested by the algorithm and those actually selected by firms allow us to assess the features that are overrated in the director nomination process. Comparing predictably unpopular directors to promising candidates suggested by the algorithm, it appears that firms choose directors who are much more likely to be male, have a large network, have a lot of board experience, currently serve on more boards, and have a finance background.
In a sense, the algorithm is saying exactly what institutional shareholders have been saying for a long time: that directors who are not old friends of management and come from different backgrounds are more likely to monitor management. In addition, less connected directors potentially provide different and potentially more useful opinions about policy. For example, TIAA has had a corporate governance policy aimed in large part to diversify boards of directors since the 1990s for this reason.
An important benefit of algorithms is that they are not prone to the agency conflicts that occur when boards and CEOs together select new directors. Institutional investors are likely to find this attribute particularly appealing and are likely to use their influence to encourage boards to rely on an algorithm such as the one presented here for director selections in the future.
SIFMA’s Report to Help More Companies Go & Stay Public
In this recent report, SIFMA (“Securities Industry & Financial Markets Association”) – which represents brokers, banks & asset managers – gives its two cents about what’s behind the declining number of public companies, why this is bad, and how to fix it. Not surprisingly, they suggested reducing the compliance burden (as opposed to SEC Commissioner Rob Jackson’s recent suggestion that underwriters need to reduce their fees). This Gibson Dunn memo summarizes the many recommendations:
1. Expand & lengthen the EGC exemptions under the JOBS Act
2. Encourage more research coverage of EGCs and other small public companies by allowing investment banks & analysts to jointly attend pitch meetings and relaxing restrictions on communications during an offering
3. Reduce the “administrative burden” of public reporting and the influence of activist shareholders & proxy advisory firms
4. Allow all companies to use Form S-3 – and allow underwriters to communicate on behalf of WKSIs before filing a registration statement
5. Implement a revenue-only test for smaller reporting companies, and raise the cap so that more companies would qualify
6. Tailor the equity market structure for small public companies, by allowing smaller tick sizes and limiting their shares to fewer exchanges (however, smaller exchanges are arguing this would be anti-competitive)
And see this “Radical Compliance” blog for another hypothesis on declining IPOs: the real issue isn’t that companies are afraid of going public because of fees or compliance, the issue is that it’s easy to stay private because there’s loads of money in that space…
ISS Launches a New “Help Center”
ISS has migrated its communications to a new portal – the “ISS Help Center.” This Weil blog has more details:
The ISS Help Center may be used by companies, law firms, consultants, and other third-parties who register. It includes FAQs & allows you to connect with ISS about research reports, engagement, peer groups, and equity plan verification – among other matters.
ISS will no longer take questions via email to the Global Research Help Desk and is eliminating various other legacy global e-mail addresses that were previously used to submit inquiries to ISS.
SEC Commissioner Mike Piwowar – whose term expires in early June & who served briefly as Acting SEC Chair last year – will leave the SEC by early July, after serving nearly five years. Here’s an excerpt from the WSJ article:
Mr. Piwowar’s departure would leave the agency with four commissioners, meaning some votes could be deadlocked if the SEC’s two Democrats oppose measures favored by Chair Jay Clayton, a Trump administration appointee. That could slow Mr. Clayton’s progress on his priorities, which include stricter rules for brokers advising retail investors and lightening the regulatory burdens on public companies.
In theory, the White House and Senate could move quickly and nominate replacements for both Mr. Piwowar and Democratic SEC Commissioner Kara Stein, whose term ended last year. The Senate usually considers candidates for commissioners in pairs – one Republican and one Democrat.
Supplemental Pay Ratios: Not So Many (So Far)
Here’s something that I blogged last week on CompensationStandards.com: One of the big unknowns for the first year of mandatory pay ratio was whether companies would include supplemental ratios using a different methodology from the required rules. What situations would justify that extra effort? This Pearl Meyer blog notes that of the first 1039 companies to file proxies this year, only 99 have included a supplemental ratio. That’s less than 10%. Here’s what else they found:
– Most of the supplemental ratios were significantly lower than the required pay ratio.
– The desire to smooth out the impact of one-time or multi-year grants to a CEO was the most commonly occurring reason to provide a supplemental ratio.
– The most profound decrease from the required ratio occurred when companies provided a supplemental ratio that excluded part-time and seasonal employees.
– 14 companies provided a supplemental ratio that was greater than the required ratio, mostly likely to avoid a drastic increased ratio in 2019.
It’s possible that supplemental ratios will become more common in the future, as companies try to explain year-over-year pay ratio changes…
SEC’s Information Security Program: Not “Effective”
Recently, the SEC’s Inspector General released its audit results for the SEC’s information security program – as required by the “Federal Information Security Modernization Act.” Although the SEC’s program has improved, it didn’t meet the criteria to be deemed “effective” as of September 30, 2017. The SEC is supposed to submit a corrective action plan by mid-May that covers the audit’s 20 recommendations.
And in recent testimony before the House Appropriations Financial Services Subcommittee, SEC Chair Jay Clayton discussed the SEC’s new Chief Risk Officer position, its incident response procedures, and its ongoing internal investigation of last fall’s high-profile Edgar hack.
Although pay ratio didn’t seem to initially capture the imagination of journalists, there has been a wave of local reporting about the pay ratios at specific companies over the past week. Here’s some of the articles about how pay levels – particularly pay ratios – look this year, based on this season’s proxy statements (Mark Borges, Barbara Baksa & I are quoted in the first piece):
Yes, Edgar Is Still Broken (& We’re Not Being Told About It)
Sorry, but until the problem is fixed, I’m going to keep blogging about how the SEC’s Edgar continues to have problems (here’s a recent one) – and how the SEC isn’t telling us about it when it does. My hope is that by continuing to highlight the problems, the SEC will at least set up some sort of communication vehicle (a blog perhaps?) where it can inform the general public when Edgar is down (and when it’s back up). Here’s a note that I received from a member a few days ago:
Due to the volume of filings being received by the EDGAR system, the SEC confirmed that they are experiencing delays with filings disseminating. Filings are being accepted and acceptance notifications are returning. Please be assured that this is an SEC issue and the delay in posting does not alter the date/time of a live acceptance.
By the way, Edgar was having problems again this morning. You could make filings but could not access them on sec.gov…
A Tool to Propel Climate Change Disclosure
As this Davis Polk blog notes, the Financial Stability Board’s “Task Force on Climate-Related Financial Disclosure” has launched the “TCFD Knowledge Hub.” The Hub currently contains 300 different documents or other resources organized by the four thematically related areas for disclosure…
Speaking of databases, the SEC recently launched “SALI” (“SEC Action Lookup for Individuals”) so that anyone can research whether the person trying to sell them investments has a judgment or order entered against them in an enforcement action…
Here’s something that Mike Melbinger blogged recently on CompensationStandards.com:
I don’t recall that any court has decided in favor of plaintiffs alleging that the payment of executive compensation was a breach of fiduciary duty for a waste of corporate assets – until now. The reason is that [in the face of the business judgment rule] corporate waste is very difficult to prove. But last week, the Delaware Chancery Court allowed plaintiffs to continue with their shareholder derivative claims against the board of CBS Corporation in Feuer v. Redstone.
This court has commented many times on the difficulty of pleading a viable claim for waste against a corporate director under our law. But the particularized allegations of the complaint here depict an extreme factual scenario—one sufficiently severe so as to excuse plaintiff from having to make a demand on the CBS board of directors to press claims concerning certain (but not all) of the challenged payments, and to permit plaintiff to take discovery so that an evidentiary record may be developed before the court adjudicates whether those payments were made in accordance with the directors’ fiduciary duties.
Two full pages of the opinion are devoted to listing facts and information “demonstrating that it should have been abundantly clear to the members of the Board—from their attendance at Board meetings, press publicity, and other interactions with the Company—that far from being “actively engaged” in the CBS’s affairs, Redstone was providing no meaningful services to the Company beginning at some point in the latter part of 2014 or in 2015.” During and after that period, CBS paid Mr. Redstone more than $13 million, most of it in performance bonuses.
Note that this is far from a complete victory for plaintiffs. The decision only allows the plaintiffs to continue to trial with their lawsuit. But no allegations of compensation being corporate waste have made it this far in more than 30 years.
Happy Anniversary Baby! 16 Years of Blogging & Counting
Today marks 16 years of my blither & bother on this blog (note the DealLawyers.com Blog is nearly 15 years old – not shabby!). It’s one time of the year that I feel entitled to toot my own horn – as it takes stamina & boldness to blog for so long. A hearty “thanks” to all those that read this blog for putting up with my personality. I’m sure I won’t get more refined with age. So glad to now have John & Liz blogging with me!
Did you know that this is one of the oldest law blogs out there? When I started, nearly all of the few other lawyers that were blogging covered the marketing aspects of blogging – not substantive law. And since those folks wrote the “lists” that covered which lawyers were blogging, they frequently overlooked this blog because they tended to focus on marketing, not law.
Plus, the list compilers tended to be solo or small firm practitioners – they were nowhere near the securities law space. Bob Ambrogi compiled this list in 2007 of the first law bloggers – if he had placed us on the list, we would be the 8th blog to be started. And now we are the third oldest – only two of the 7 blogs started before us are still regularly active.
This blog still is overlooked by those handing out law blogging accolades. Our blog has long dropped out of the ABA’s Blawg 100, even when this blog won the popularity contest the first year they allowed the public to vote (they discontinued public voting soon thereafter). The ABA’s Blawg 100 list rarely includes securities law blogs – and their “Hall of Fame” doesn’t contain a single blog devoted to securities law…
Sexual Misconduct Claims: D&O Policy Implications
This D&O Diary blog delves into how D&O insurance policies might be implicated if claims are made against a company’s directors or senior managers for sexual harassment…
Is it me? Or is “Regulation Best Interest” a dorky name for a SEC regulation? #nerdy. This is something I tweeted when the SEC proposed its new broker regulation about providing investment advice – and nice to see Matt Levine link to my tweet in his Bloomberg article…
On the “Mentor Blog,” I recently blogged about the top of “who administers political spending policies?” – and I posted five examples. Following up on that, we have now posted a “Quick Survey on Political Spending Oversight.” Thanks to Teco Energy’s David Schwartz for the idea!
In addition, a member posted this query in our “Q&A Forum” (#9416): “Enjoyed the “Mentor Blog” on this topic a few days ago. How does the board ensure it doesn’t find itself in an embarrassing situation, like some companies have—where contributions have been made to candidates who end up supporting positions that are in conflict with the company’s mission?” John provided this simple answer:
If you’re worried about that, don’t give. If you trust a politician not to betray you, you deserve what you get.
– Industrial sector spiked: The Industrial sector saw 22 percent of traditional accounting case filings in 2017, double the historical average. The Disclosure Dollar Loss (DDL) for accounting case filings in this sector was the largest among all sectors for the first time in the last 10 years.
– Restatements declined: For the third consecutive year, the number of traditional accounting case filings involving restatements declined. The number of 2017 restatement cases was 35 percent lower than the historical average; restatement case DDL was 49 percent lower than the historical average.
– No auditor defendants named: There were no auditor defendants named in traditional accounting case filings during 2017—the first year that has happened since enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA).
– Total settlement value declined: The total settlement value attributable to accounting cases was the lowest since 1999, with only two accounting-related settlements reaching $100 million or more.
– Larger defendant firms observed as settlement size shrinks: Despite smaller settlement sizes, issuer defendants involved in accounting settlements were the largest observed over the past five years.
– Restatement cases garnered higher settlements: Cases involving financial statement restatements settled for substantially higher amounts than non-accounting cases.
Yesterday, the SEC issued this 71-page proposing release to amend its auditor independence rules to refocus the analysis that must be conducted to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of its client at any time during an audit or professional engagement period.
The proposed amendments would focus the analysis solely on beneficial ownership rather than on both record & beneficial ownership; replace the existing 10% bright-line shareholder ownership test with a “significant influence” test; (3) add a “known through reasonable inquiry” standard with respect to identifying beneficial owners of the client’s equity securities; and (4) amend the definition of “audit client” for a fund under audit to exclude funds that otherwise would be considered affiliates of the client. See more in this Cooley blog…
As I recently blogged, the SEC Staff has long been able to modify – or – waive disclosure requirements in response to requests to modify what’s required for the financials in a SEC filing – but over the past few months, the Staff has announced that it’s now more amenable to grant Rule 3-13 requests than it was before. This is part of SEC Chair Clayton’s goal of removing unnecessary barriers to going public, etc.
Rumor has it that the Wall Street Journal has made a FOIA request for all 3-13 correspondence with the SEC Staff. That’s pretty wild if true! I hope this doesn’t lead to an article that distorts the purpose of these requests. It will be interesting to see how this plays out…
How Companies Grow Their In-House Teams
One of our more popular “sample documents” is our deck that in-house folks can use to argue for more resources in their department. Along these lines, a long while back, Splunk’s Scott Morgan sent me this note about how different industries might experience varying levels of growth in their in-house teams:
Over the past decade, I have seen a significant increase in the size and sophistication of in-house teams at technology companies. My experience is that companies are increasingly bringing specialty practices such as privacy/data security, M&A, securities/governance, benefits, technology transactions/products and IP/patents in-house. These experts are typically from big firms – so it’s the same expertise at a fraction of the cost. And there the work is closer to the business so the amount of firm-to-practice translation is significantly reduced in these areas. We still have a big need for firms (big and small) in certain subject matters, in larger projects and litigation, for benchmarking across companies and in foreign jurisdictions.
– A Small World After All: R&W Insurance in Cross-Border M&A
– Maximizing Value & Minimizing Risks in Carve-Outs: Seller’s Pre-Sale Preparation
– Director’s Abstention on Merger Vote Deemed Material to Shareholders
– LLCs: The Limits of the Implied Covenant of Good Faith
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
In recent years, as SEC rulemaking has stalled on topics like proxy access and political spending disclosure, “private ordering” has become the catalyst for ESG changes (see Broc’s earlier blog about how that’s faring). This may have been due partly to Department of Labor interpretive bulletins from 2015 and 2016 which assured ERISA fiduciaries – i.e. pension plans – that they could consider ESG factors in making investment decisions.
1. Fiduciaries must avoid too readily treating ESG issues as being economically relevant to any particular investment choice
2. Fiduciaries may not incur significant plan expenses to (i) pay for the costs of shareholder resolutions or special shareholder meetings, or (ii) initiate or actively sponsor proxy fights on environmental or social issues
As noted in a CII alert, the most significant impact of the guidance likely will be on shareholder engagement. Earlier guidance – the bulletin says – didn’t suggest that it’s always appropriate for plans to engage with the board or management of companies in their portfolios. The guidance “was not meant to imply that plan fiduciaries, including appointed investment managers, should routinely incur significant plan expenses” to fund advocacy or campaigns on shareholder resolutions or proxy fights on environmental or social issues at portfolio companies. It appears that this new field assistance bulletin shifts the burden to pension funds to prove there are tangible activism benefits in every case. This creates a negative presumption that most ESG factors are not economically significant.
The change in tone will undoubtedly elicit angst among governance & sustainability advocates. It’s the latest in a long history of back-and-forth: the DOL’s 2015 & 2016 bulletins were issued in response to a 2008 bulletin, which walked back 1994 guidance. Also see this Davis Polk blog entitled “Are the Reports that the DOL Guidance Will Lead to the Demise of ESG-Focused Plans Greatly Exaggerated?”…
Sustainalytics’ ESG Ratings Now on Yahoo! Finance
Here’s the intro from this blog by Davis Polk’s Ning Chiu:
Some companies may not be aware that since February, their Yahoo Finance web page includes a separate tab with the ESG scores from Sustainalytics. The Sustainalytics quote page shows a company’s numerical rating for three categories, environment, social and governance, along with the overall ESG score. Scores range from 1 to 100.
There is also a graphic representation of the score that, according to the Sustainalytics press release, will be tracked against the average in each category and plotted over time. The graph, currently reflecting data from 2014 to now, is intended to display trends of how a company ranks against industry peers.
Our May Eminders is Posted!
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