When I first heard that ISS was launching “Corporate Due Diligence Profiles,” my kneejerk reaction was that they were just rebranding the governance rating product that they have renamed a number of times over the years (eg. CGQ, GRId, QuickScore). But “Corporate Profile Products” is much more than a numerical rating applied to your governance profile. This blog by Davis Polk’s Ning Chiu explains – here’s an excerpt:
We understand from ISS that the product was designed to meet investor demands in reviewing companies for possible shareholder engagement and seeking more insight on individual directors. While the overall data is not new, as the report aggregates information primarily from prior ISS reports and QualityScore into new formats, companies will likely want to be aware of they are being perceived by investors.
Companies may be interested in particular in the 50+ page sample report (you need to fill in a form to receive the report), which shows:
– Historical vote recommendations by ISS on all annual meeting matters and vote results.
– A simple director skills matrix chart based on company disclosure, which interestingly highlights the director skills disclosed by another board where the director sits that is not disclosed in the company’s proxy statement. Companies may want to review how other companies’ describe the skills and qualifications of their directors.
– The QualityScore analysis measuring a company’s governance and compensation practices against the peer group selected by the company, and the industry peer group. Red flags note deviations from “best practices.” Companies may not always be aware of the QualityScore standards. Recent QualityScore updates reflect that for board diversity, as one example, a company must have three women directors serving on its board to qualify for meeting best practices. Two women on a ten-member board would earn a company a red flag. On tenure, a red flag would highlight a company with more than a third of board members who have served over nine years.
– A page devoted to each director, including that director’s election history at other companies where the director serves, as well as the TSR of those companies over the length of the director’s tenure.
Life as a Proxy Designer
In this 14-minute podcast, Labrador’s Molly Doran discusses her exciting career, including:
1. How did you wind up getting into the regulated communication industry?
2. What do you tell people that you do when you first meet them?
3. What are the hot topics that you’re grabbling with now?
4. What are the hardest parts of your job?
5. How is it working with the French?
6. What are the best parts of your job?
7. What advice would you give to someone new in your field?
8. What types of changes do you see coming in the near term for proxy design?
More on “The Mentor Blog”
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. Here’s some of the newer entries:
– Wanna Earn Big $$$? Change Your Company’s Name
– Q&A With Keith Higgins
– FCPA: Is a Follow-On Lawsuit an End-Run Around?
– Auditor Liability: Auditors May Now Be Forced to Look for Fraud
– Revenue Recognition: Lessons from “Early Adopter” Comments
– Disgorgement: Tax Reform’s Impact on Deductibility
As we blogged on several occasions last year, the issue of concurrent state jurisdiction over Securities Act claims is very much a live one, with the Supreme Court expected to weigh in on it later this term. However, it seems fair to say that state courts – particularly California state courts – have seen a booming business in Section 11 lawsuits in recent years.
In response, a number of IPO companies have adopted bylaws making federal courts the exclusive forum for Securities Act litigation – but this recent blog from Davis Polk’s Ning Chiu notes that this practice has recently been challenged in a declaratory judgment action filed in the Delaware Chancery Court. The lawsuit targets three companies – Snap, Roku & Stitch Fix – that have similar choice of forum bylaws. The plaintiff claims these bylaws don’t pass muster under Delaware law:
Plaintiff argues that the purpose of the forum provision is to regulate choice of venue in actions that do not assert internal corporate claims governed by Delaware law, or in the alternative, if claims under the Securities Act are internal corporate claims, then these forum provisions are inconsistent with the DGCL. The DGCL provides that, with respect to internal corporate claims, “no provision of the certificate of incorporation … may prohibit bringing such claims in the courts of this State.”
Ning points out that several California state courts have already invalidated this type of choice of forum bylaw. The D&O Diary has posted a copy of the declaratory judgment complaint in the Delaware action.
Enforcement: Assessing the Fallout from Kokesh
This Cleary blog looks at what’s transpired in the six months following the Supreme Court’s Kokesh decision – which said that SEC disgorgement claims were subject to a 5-year limitations period & may have raised questions about the agency’s authority to seek disgorgement in the first place.
So far, the SEC has been successful in fighting off claims directly challenging its authority to seek disgorgement, but the blog notes that the news hasn’t all been good for the SEC. A number of courts have been willing to at least acknowledge questions surrounding the SEC’s disgorgement authority, and other equitable remedies have come under fire because of Kokesh – including such enforcement mainstays as “obey-the-law” injunctions & industry bars.
And then, there’s the $15 billion question:
Most of the cases addressing Kokesh have involved SEC defendants arguing that the case limits the regulator’s use of disgorgement prospectively. However, this past fall private plaintiffs launched a much more aggressive salvo in the form of a class action arguing that certain historical awards are also at issue. Jalbert v. SEC, 17-cv-12103 (D. MA. Oct. 26, 2017), ECF. 1. The Jalbert plaintiffs argue that—because (1) the SEC can only collect penalties when specifically authorized by statute and (2) Kokesh held that disgorgement, which is not specifically authorized by statute, is a penalty—the SEC must return $14.9 billion in disgorgement that it has collected over the past six years.
Audit Committees: 3rd Party Risk Oversight
As part of their increasing emphasis on enterprise risk management, companies are paying closer attention to the risks posed to their business by vendors and other 3rd parties with whom they deal. This recent memo from the Audit Committee Leadership Network addresses the audit committee’s oversight role in addressing 3rd party risks.
Here’s an excerpt discussing some of the issues associated with outsourcing arrangements:
Outsourcing also opens the door to third‐party risk. Information technology, customer service, call centers, and human resources functions like benefits processing are not traditionally defined as part of the supply chain, but as these jobs and functions are outsourced, they become sources of third‐party risk, much like suppliers or distributors. In addition, shared technologies, such as cloud data storage, are necessitating new kinds of third‐party arrangements, with attendant risks.
Companies will frequently join forces to serve each other’s customers more effectively or to reach new customers. Examples of such arrangements include contracted ventures with marketing and cobranding partners and engagements with fee‐based service providers. When these arrangements require sharing sensitive data, they become a source of risk.
Specific risks associated with 3rd parties include cybersecurity risks, operational risks, & reputational risks. The memo discusses various approaches that companies take to managing 3rd party risks, as well as the methods used by boards to assess those risks.
Eighteen law firms put together this “white paper with 19 FAQs” about how a government shutdown would impact the capital markets. It came out just as it was announced that the government shutdown was short-lived. But it’s good stuff to know for the next shutdown.
If the SEC was to be shut down, here’s a poll about how much you would care:
Tomorrow’s Webcast: “Alan Dye on the Latest Section 16 Developments”
Tune in tomorrow for the Section16.net webcast – “Alan Dye on the Latest Section 16 Developments” – to hear Alan Dye of Section16.net and Hogan Lovells discuss the most recent updates on Section 16, including new SEC Staff interpretations and Section 16(b) litigation.
Tomorrow’s Webcast: “How to Handle Post-Deal Activism”
Tune in tomorrow for the DealLawyers.com webcast – “How to Handle Post Deal Activism” – to hear Paul Weiss’ Ross Fieldston, Vinson & Elkins’ Shaun Mathew, Morrow Sodali’s Mike Verrechia and Innisfree’s Scott Winter discuss the legal & other issues surrounding activism following a deal’s announcement. This post-deal activism happens frequently. But it’s poorly understood – and the failure to respond to it effectively can have a devastating effect on the chances to successfully complete the transaction.
Okay, so the United States of America is (mostly) closed for business – again. Here’s where the SEC stands, according to this announcement that it posted to its website on Friday:
Should there be a federal government shutdown after January 19, the SEC will remain open for a limited number of days, fully staffed and focused on the agency’s mission. Any changes to the SEC’s operational status will be announced here. In the event that the SEC does shut down, we will pursue the agency’s plan for operating during a shutdown. As that plan contemplates, we are currently making preparations for a potential shutdown with a focus on the market integrity and investor protection components of our mission.
So the SEC is open “as usual” for now. We don’t know how long is a “limited number of days” – but that doesn’t sound like a lot. As we blogged on Friday, once the SEC’s operations plan is implemented, there’s not much you’re going to be able to do other than make your Edgar filings. Check out this Cleary memo for more information on the shutdown’s implications for businesses dealing with the SEC & other federal agencies.
This is becoming Uncle Sam’s version of the movie “Groundhog Day” – only absent the laughs. . . Feel like a stroll down memory lane? Here is Broc’s very first shutdown blog from 2011.
Form 10-K: Technical Tips
For a lot of companies, it’s that time of year again – time to get to work on the Form 10-K. For those of you who find yourself in that position, this Gibson Dunn blog has some technical tips to keep in mind. Here’s an excerpt discussing the changes to the cover page, and noting that for some reason the revised form still isn’t on the SEC’s website:
As discussed in our blog post, in April 2017, the SEC adopted technical amendments to conform certain rules and forms to self-executing provisions of the Jumpstart Our Business Startups Act related to emerging growth companies (“EGCs”). The amendments modified the cover page of Form 10-K, along with the cover pages of various other forms including Form 10-Q, to include two additional checkboxes.
The first checkbox allows the company to indicate whether it is an EGC. The second checkbox allows the company to make an irrevocable election not to use the extended transition period for complying with new or revised accounting standards. The PDF of Form 10-K included in the SEC’s official forms list still does not reflect these revisions, so companies will need to look to the adopting release (or to their recently filed Forms 10-Q) to see how the 10-K cover page should be revised.
Corp Fin Reviewers: Tough Graders Lead to Better Reporting
This new study says that who you draw as the Corp Fin reviewer for your filings matters quite a bit – and that tough graders translate into better financial reporting. Here’s the abstract:
Using a sample of SEC comment letters, we show that SEC reviewers’ idiosyncratic style plays an economically and statistically significant role in explaining the cross-sectional variation in filing review outcomes, even after holding firm and disclosure attributes constant. We also show that the reviewer style is persistent across firms and time. Finally, we find that reviewers with a stricter style are associated with improved financial reporting quality. These findings suggest that individual SEC reviewers have significant influence on the SEC filing review process.
I’ll try to keep this in mind the next time I hit Amendment No. 5. . .
Congress is scrambling to avoid a government shutdown by the end of today – but the SEC’s contingency plans appear to be already in place. The SEC posted its “operations plan” for a government shutdown early last month.
As of right now, that plan is not featured on the SEC’s home page – nor is there word about how registration statements on the verge of being accelerated will be handled. The plan covers a total shutdown, not a partial shutdown if the SEC still has some funds available – which is what happened back in 2013 (also see this blog from back then).
There’s been no announcement as to potential timing – but if the SEC implements its plan, about 300 of the SEC’s 4600 staffers would keep on working. Edgar would remain operational, but it appears that most core Corp Fin operations would stop – including registration statement reviews. More to come…
Shareholder Proposals: “Lap Dog” Is In!
Here’s the intro from this blog by Cooley’s Cydney Posner: “From here on out, I guess you can count on seeing your directors described as “lap dogs” in some shareholder proposals or, more accurately, nascent or possible lap dogs. (That helps, doesn’t it?) That’s because, in three separate shareholder proposals submitted to The Boeing Company by three beneficial owners (all working through John Chevedden), the SEC refused to allow the company to exclude portions of the supporting statements that suggested that some of the company’s directors might be “lap dogs.”
Transcript: “The Latest – Your Upcoming Pay Ratio, Tax Reform & Proxy Disclosures”
We have posted the transcript for our recent CompensationStandards.com webcast: “The Latest: Your Upcoming Pay Ratio, Tax Reform & Proxy Disclosures.”
Earlier this week, BlackRock’s CEO Larry Fink sent his “annual letter to CEOs” of companies in BlackRock’s portfolio. This one’s pretty extraordinary – it makes it clear that as far as BlackRock’s concerned, from now on, doing well isn’t good enough:
Society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. Indeed, the public expectations of your company have never been greater. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.
Fink’s letter goes on to say that BlackRock intends to focus on whether companies are serving a social purpose in its engagement efforts. BlackRock expects each of the companies in which it invests to develop a strategic framework for long-term value creation – and that strategic framework must go beyond financial performance:
Your company’s strategy must articulate a path to achieve financial performance. To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends – from slow wage growth to rising automation to climate change – affect your potential for growth.
These comments are accompanied by a reminder that since BlackRock can’t dispose of shares in its index funds, “our responsibility to engage and vote is more important than ever.”
BlackRock’s new stance is sparking controversy – CNBC reports that investor Sam Zell called its action “extraordinarily hypocritical” and asked whether America was ready to have BlackRock “control the New York Stock Exchange.” Controversial or not, when the world’s biggest fund manager speaks, companies don’t have much choice but to listen.
Here’s a WSJ article, Davis Polk blog – and a Wachtell Lipton memo. Meanwhile, BlackRock hopes to increase the size of its “Investor Stewardship” team globally to over 60 by the end of 2020…
ICOs: “Mama Don’t Take My KodakCoin Awaaay . . .”
So, now Kodak is getting into the cryptocurrency business – because, well, why not? Unlike most of these coin deals, I can actually understand the concept behind this one. Here’s an excerpt from Kodak’s press release:
Utilizing blockchain technology, the KODAKOne platform will create an encrypted, digital ledger of rights ownership for photographers to register both new and archive work that they can then license within the platform. With KODAKCoin, participating photographers are invited to take part in a new economy for photography, receive payment for licensing their work immediately upon sale, and for both professional and amateur photographers, sell their work confidently on a secure blockchain platform.
Kodak is doing this deal on the up & up – it’s structured as a Rule 506(c) private placement, so there’s no attempt to make an end run around the federal securities laws.
Rochester’s my home town, and I’d dearly love to see our fallen giant hit this one out of the park. Unfortunately, while I was kind of intrigued by the concept, the reaction to Kodak’s announcement has been decidedly mixed. Naturally, the stock market loved it because Kodak used the magic word “blockchain” in its announcement – but other observers have been more skeptical. For instance, this article by Bloomberg’s Matt Levine says that there’s a lot less to KodakCoin than meets the eye. Here’s an excerpt:
Look: Kodak wants to run a web crawler and a central database of photographs. You don’t need to do that on the blockchain. It also wants to run a marketplace to match buyers and sellers of photographs. Again you don’t need to do that on the blockchain. You certainly don’t need your own currency to do that; lots of markets — the stock market, the supermarket, the existing market for photographic licensing — run on dollars, and what is convenient about dollars is that if you get dollars for licensing your photographs you can spend them at the supermarket.
The FT Alphaville blog was even more direct – and cutting – in its reaction to Kodak’s announcement:
Listen, a bunch of you out there have obviously programmed your algos to buy any stock that looks sideways at the words ‘blockchain’ or ‘cryptocurrency’. Please, stop it.
More on Our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season 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:
– More on “D&O Questionnaires: How to Address Board Diversity?”
– NYC Comptroller’s Office Counts on Active Shareholder Engagement
– A Checklist for Voluntary Filers
– The Acceleration of “Social Good” Campaigns?
– Shareholder Proposals: Companies Seek to Exclude Images
If you’re relatively new to being in-house – or you want to gain that perspective – take advantage of our new “In-House Accelerator“! This online – and offline – training program is free for members of TheCorporateCounsel.net. In addition to the “In-House Accelerator” paperback (paperback consists of 216 FAQs; here’s the “Table of Contents”), there is a series of podcasts & other comprehensive materials covering these four areas:
1. Corporate Governance
2. Proxy Season
3. ’34 Act Reporting
4. Other
Tomorrow’s Webcast: “Pat McGurn’s Forecast for 2018 Proxy Season”
Tune in tomorrow for the webcast – “Pat McGurn’s Forecast for 2018 Proxy Season” – when Davis Polk’s Ning Chiu and Gunster’s Bob Lamm join Pat McGurn of ISS to recap what transpired during the 2017 proxy season and what to expect for 2018. Please print out this “Course Materials” deck in advance.
Tomorrow’s Webcast: “Tax Reform – What’s the Final Word?”
Tune in tomorrow for the CompensationStandards.com webcast – “Tax Reform: What’s the Final Word?” – to hear Winston & Strawn’s Mike Melbinger, Choate Hall’s Art Meyers and PricewaterhouseCoopers’ Ken Stoler talk about how the new tax legislation will impact executive pay arrangements. Please print out this “Course Materials” deck (45 pages!) in advance.
On Friday, the Supreme Court announced that it would hear a challenge to the SEC’s appointment of its administrative law judges. Here’s the intro from this Bloomberg article:
The U.S. Supreme Court will decide whether the SEC’s in-house judges were appointed in violation of the Constitution, agreeing to hear a case that could upend administrative hearing systems across the federal government. The move came at the request of the Trump administration, which switched sides in November and told the justices it would no longer defend the SEC’s system.
The dispute could affect more than 100 cases currently at the SEC, along with a dozen that are on appeal in the federal courts. It also could have ramifications for other government agencies, including the Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau, which have similar systems for appointing their administrative law judges.
As we blogged at the time, the Trump Administration’s decision to change the government’s position in this case led to the SEC’s reappointment of all its ALJs in an effort to cure any constitutional defects in the appointment process. Left unanswered for now is the question of the effect that a Supreme Court decision invalidating those prior appointments would have on previously adjudicated cases.
This D&O Diary blog has more details on the case and the issues involved – and says that the case is likely to be resolved during the current term.
SEC Updates “Enforcement Manual”
Recently, the SEC updated its “Enforcement Manual” – a great resource for those dealing with SEC enforcement investigations. And second only to our “SEC Enforcement Handbook” in that area.
Also, check out this new Cleary Gottlieb blog – “Cleary Enforcement Watch” – which covers global enforcement, white collar, and regulatory trends & developments.
We haven’t blogged much about FASB’s new lease accounting standard, but now that the new revenue recognition standard’s in place, here’s a reminder – the new lease standard will go into effect for fiscal years beginning after December 15, 2018.
With the deadline approaching, FASB recently issued an exposure draft of a new auditing standard update intended to ease the implementation process. According to FASB’s press release, the proposed ASU would:
– Add an option for transition to ASU No. 2016-02, Leases (Topic 842), that would permit an organization to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements
– Add a practical expedient that would permit lessors to not separate nonlease components from the associated lease components if certain conditions are met. This practical expedient could be elected by class of underlying assets; if elected, certain disclosures would be required.
Yeah, I could pretend that I know what this means, but that wouldn’t be a smart play. Fortunately, there’s this Thompson Reuters article on FASB’s proposed action to help us all out. Comments on FASB’s exposure draft are due by February 5th.
The FASB lease accounting standard evolved over a period of years – but this recent blog from Steve Quinlivan says that another new standard designed to address “stranded tax effects” of the new tax reform legislation is being fast tracked. On second thought, since the proposed change has only a 15-day comment period, it might be more accurate to say that it’s being strapped to a rocket sled!
SEC’s Investor Bulletin: How to Comment on Rule Proposals
Recently, the SEC issued this investor bulletin explaining how to submit comments on proposed rules. Also see our own checklist on this topic…
More on “The Mentor Blog”
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. Here’s some of the newer entries:
– Why You Ain’t Getting a Board Seat
– Revenue Recognition: Pre-Clearing With Corp Fin Before IPOing
– SEC Investigations: “Are We Covered?”
– HSR: Watch Out for Those Comp Awards!
– Private Funds: ’40 Act Exemptions
– Reg A+ Offerings: Frequently Asked Questions
I was excited to see this Bloomberg article about how a company accidentally ignored a comment letter from Corp Fin because the emails from the Staff went into a spam folder at the company. The reason for my excitement is this: when I started in Corp Fin in the late ’80s – back before widespread use of computers – we had to call counsel to dictate our comments over the phone!
This “pre-computer days” process had these steps from the perspective of a front-line Corp Fin examiner:
1. Since Edgar wasn’t mandatory yet, paper copies of SEC filings were delivered – and if selected for review, they would be placed in a wooden box out in the hallway that was assigned to you.
2. You would review the filing and write out your draft comments by hand.
3. Your reviewer would read your draft comments and literally cross out – or add – comments. No points off for bad handwriting! Tough love for the reviewer.
4. You would call the person whose name was on the transmittal letter. Since there no voicemail back then, you might need to try calling a bunch of times. Or you would reach a secretary and they would try to call you back a bunch of times (but you weren’t around since you were taking a nap down in the SEC’s library). Serious phone tag.
5. Dictating the comments over the phone could take as long as an hour – depending on how many comments there were (remember that you were reading the bad handwriting of the accountants on the Staff too – their comments were combined with the legal comments, just like today) and how clear your diction was (if not clear, you would need to repeat yourself multiple times).
6. Rinse, wash, repeat for each round of comments. The good ole days…but at least companies couldn’t lose their comments in a spam folder!
So the question remains, how does “disclosure controls” fit into all of this…
