If you weren’t paid to read a proxy statement, would you ever think about looking at anything other than the summary comp table? I know I wouldn’t – it’s just human nature to have a prurient interest in this kind of stuff. Maybe the Wu-Tang Clan put it best:
Cash Rules Everything Around Me
C.R.E.A.M. get the money
dolla dolla bill y’all. . .
Anyway, because they know that we’re dying to know, Equilar just issued a new study on General Counsel pay at 1,100 public companies. As with previous Equilar GC pay studies, this one isn’t publicly available, but here’s Equilar’s press release summarizing it. Here are the key findings:
– How Much – The median total compensation for General Counsels, broken out by revenue range was:
o Under $1 Billion: $918k
o $1 Billion to $5 Billion: $1.5 million
o $5 Billion to $15 Billion: $2.4 million
o Over $15 Billion: $3.8 million
– Equity Awards are a Big Part of Comp – Equity awards represented about 1/2 of total compensation at the smallest companies in the study, and nearly 2/3rds at the largest. However, it’s good to be at the top of the pyramid – GCs at the largest companies were awarded more than 7x the amount in stock value as those who worked for companies with less than $1 billion in revenue.
– Pay Increases – Overall, GC pay rose 4% last year. The big winners were GCs of companies in the $1-5 billion range – they saw their comp increase by an average of 8.1%. Their counterparts at companies in the $5-15 billion range saw pay climb 3.3%, while those at the smallest companies surveyed received a 6.6% bump. GCs at the largest companies fared the worst – experiencing a decrease of 0.6% in compensation.
For data on broader in-house comp trends, check out this BarkerGilmore study. It covers both private & public companies and addresses comp trends for the GC, managing counsel and senior counsel.
Securities Fraud: Do Not Disrespect the Wu-Tang Clan
So, “Harper’s” magazine published the transcripts of the jury selection in Martin Shkreli’s securities fraud case. Among his other antics, Shkreli purchased the only copy of Wu-Tang Clan’s “Once Upon a Time in Shaolin” album for $2 million – and then contrived to manufacture a bizarre & convoluted beef with the Clan.
The transcripts reveal that these shenanigans didn’t sit too well with Juror #59:
Juror #59: Your Honor, totally he is guilty and in no way can I let him slide out of anything because…
The Court: Okay. Is that your attitude toward anyone charged with a crime who has not been proven guilty?
Juror #59: It’s my attitude toward his entire demeanor, what he has done to people.
The Court: All right. We are going to excuse you, sir.
Juror #59: And he disrespected the Wu-Tang Clan.
Future defendants are on notice – do not disrespect the Wu-Tang Clan.
Our New Practice Area: “Wu-Tang Clan”
As we’ve shown with our recent blogs on ICOs, blockchain & cryptocurrencies, we strive to keep up with the latest developments on the securities law and capital markets front. Along those lines, there’s an emerging player on the scene that we think merits its own practice area.
If you’ve been playing along with the home version of our game today, then by now you know that I’m talking about the Wu-Tang Clan.
Scoff if you want, but shortly after the Clan’s pivotal role in Martin Shkreli’s fraud trial, a “Wu-Tang Coin” ICO was launched with the stated purpose of purchasing the band’s “Once Upon a Time in Shaolin” album from Shkreli & releasing it to the public.
As if that weren’t enough, now “Rolling Stone” reports that band member Ghostface Killah has himself jumped in to the world of crypto-finance:
Ghostface Killah has cofounded a cryptocurrency company called Cream Capital, CNBC reports. The company is looking to raise $30 million during its initial coin offering (ICO).
Cream Capital takes its name from Wu-Tang Clan’s 1993 classic song “C.R.E.A.M.,” which stands for “Cash rules everything around me.” In the case of the company, Cream Capital Chief Executive Brett Westbrook told CNBC it has been granted the trademark for Crypto Rules Everything Around Me.
The ICO “Cream Dividend” tokens will be sold in November, which can then be exchanged for Ether. Ether is the value token of the Ethereum blockchain.
When it comes to acknowledging the Wu-Tang Clan’s prominence in finance & the capital markets, we concede that we’re a distant second to Dave Chappelle, whose classic “Wu-Tang Financial” sketch saw it all coming several years ago. No, I’m not going to link to it – the language is NSFW – but do yourself a favor and check it out on your own time.
If you put up a statue called “Fearless Girl” that’s intended to point a finger at Wall Street’s lack of gender diversity, you shouldn’t be surprised if people ask whether you’re “walking the walk.” That’s the position State Street finds itself in – and according to this recent Guardian article, it hasn’t lived up to its rhetoric:
As selfies with Fearless Girl shot across social media, State Street, one of America’s leading money managers, was quietly and consistently voting down gender equality proposals at some of the country’s largest corporations.
On a shareholder proposal calling for Alphabet, Google’s parent company, to disclose any pay disparities between men and women, State Street voted no. On the same proposal before Wells Fargo, State Street voted no.
According to SEC records seen by the Guardian, in 2017 alone State Street rejected shareholder proposals to tackle gender inequality at least a dozen times – including at Aetna, American Express, Bank of America, Express Scripts, JP Morgan Chase and MasterCard.
In State Street’s defense, when it announced its gender diversity initiative, it focused on diversity at the board level & said that it would give portfolio companies a year to get their acts together. So, State Street’s efforts are still a work in process – but the media’s decision to scrutinize its voting record on gender diversity shouldn’t come as a shock.
SEC Staff Comments: 2017 Trends
This EY memo surveys trends in Corp Fin comment letters during the year ended June 30, 2017. As this excerpt suggests, there aren’t a lot surprises when it comes to areas of the Staff’s focus:
– Non-GAAP financial measures topped our list of the most frequent topics in SEC staff comment letters for the year ended 30 June 2017.
– Emerging topics of SEC staff focus include how companies are applying the new revenue recognition standard as well as what they are disclosing about cyber risks and cyber incidents.
– The SEC staff also frequently comments on management’s discussion and analysis, segment reporting and income taxes.
The memo also shares some thoughts on best practices in responding to Staff comments:
– Responses to each comment should focus on the specific question(s) asked by the SEC staff, and those responses should cite authoritative literature wherever possible.
– Responses should address the registrant’s unique facts and circumstances. While it may be helpful to consider response letters from other registrants as a resource, registrants should not just repeat responses made by other registrants to similar comments.
– If revisions are being made to a filing as a result of a comment from the SEC staff, responses should indicate specifically where these revisions are being made. If additional disclosure will be included in a future filing, the registrant should consider providing the proposed language in its response letter to avoid an additional comment once the disclosure is filed.
– Companies should seek the input of all appropriate internal personnel and professional advisers (such as legal counsel and independent auditors) to determine whether they have responded to the comment letter in a complete and accurate manner. Waiting until a later round of comments to involve the necessary resources may delay or hinder a successful resolution.
Our November Eminders is Posted!
We have posted the November issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Here’s an interesting survey from Clermont Partners. Building on a recent book that contends GAAP reporting is no longer useful to investors, the survey asked 56 institutions with active (as opposed to passive) investment strategies 14 questions relating to the usefulness of GAAP information. Here are some of their responses:
– 74% of respondents said they rely on non-GAAP more than GAAP reporting
– 64% said they use non-GAAP 60% of the time or more when analyzing stocks as compared to GAAP
– 44% agreed that, over time, non-GAAP measures have become more important in evaluating a company’s financial performance, while 28% disagreed
– Only 36% agreed that GAAP paints a true picture of a company’s finances
The non-GAAP measures respondents most prefer are free cash flow, EBITDA or adjusted EBITDA, and adjusted net income or adjusted EPS. The survey asked for investor comments – and got an earful. Here’s a selection:
– “GAAP is rarely comparable and doesn’t show us the underlying trends in the business.”
– “GAAP means nothing to me.”
– “Cash flow is all that matters.”
Not all investors were this dismissive of GAAP. Here are some of their comments:
– “We look at GAAP. But for growth companies there are always adjustments that make sense.”
– “We look at both and blend together. We take GAAP and then back out truly non-recurring charges with adjustments to reflect reality.”
– “I start with GAAP and make small adjustments. I’ll ignore amortization of acquired intangibles if the company is good at R&D and buys long-lived assets. I’ll normalize the tax rate. I might look at maintenance capex instead of depreciation. I always leave SBC (stock-based compensbation) in as a real expense.”
I’m of two minds when it comes to GAAP v. non-GAAP. The capital markets lawyer in me thinks that GAAP numbers mean something important and are really indispensable to any financial analysis of a company. On the other hand, the M&A lawyer in me realizes that GAAP earnings mean nothing when it comes to how buyers and sellers approach valuation.
Maybe that’s why the investor comment that resonated most with me when it comes to GAAP v. non-GAAP was this one that essentially split the baby – “A large and persistent divergence between the two is a HUGE warning sign.”
ISS Updates “QualityScore” Ratings: Core Factors Increase to 21
Yesterday, as reflected in this press release, ISS announced methodology changes to QualityScore – with an increase from 6 to 21 of the core factors considered. There is a data verification period between November 13th-28th for the changes – and the new changes are effective December 4th. Among others, new factors include evaluation of independence of the audit, nomination & compensation committees; unequal voting rights; and vesting periods for option & restricted stock awards.
Audit Committees: Implementing New GAAP Standards
Here’s an excerpt from a recent speech by the SEC’s Deputy Chief Accountant, Sagar Teotia, about the role of audit committees in implementing new GAAP standards:
The process of implementing the new GAAP standards is a collaborative effort from different stakeholders, and the importance of the audit committee in promoting an environment for management’s successful implementation of the new GAAP standards cannot be overstated. Through its oversight function, audit committees play a key role in establishing the right “tone at the top” for a company. The tone at the top establishes the environment and culture within which financial reporting occurs, and is a key factor contributing to the integrity of the financial reporting process.
Audit committees should continue to set the tone for the adoption of the new GAAP standards. This should include actively monitoring the implementation efforts, including taking the time to understand, and assess the quality and status of implementation. Simply put, I believe the tone set by an audit committee can affect the quality of a company’s implementation, including judgments made by management, and, ultimately, the quality of information provided to investors.
The speech covers a lot of other ground when it comes to implementation of the new revenue recognition standards, as well as the new lease and credit losses standards that are just around the corner.
According to this WSJ article, a change in the SEC’s approach to enforcement may be on the way. Here’s an excerpt:
The Securities and Exchange Commission on Thursday signaled a pivot away from the prosecutorial approach to enforcement that the agency pursued after the financial crisis.
Steven Peikin, co-director of the SEC’s enforcement division, indicated the regulator would drop the “broken windows” strategy of pursuing many cases over even the smallest legal violations, and may also pull back from trying to make some companies admit to wrongdoing as a condition of settling with the SEC.
The SEC’s post-financial crisis “broken windows” approach to enforcement has been controversial – even among SEC Commissioners. As Broc blogged, Commissioner Piwowar sharply criticized the approach in a 2014 speech, where he contended that “if every rule is a priority, then no rule is a priority.”
On a related note, this Bloomberg article quotes Steve Peikin as saying that the SEC needs to better communicate the potential benefits of cooperation with the agency’s enforcement efforts:
The SEC should tell securities lawyers and their clients more about how to benefit from cooperating with the commission in an enforcement action, a top enforcement official said Oct. 26.
The Securities and Exchange Commission should be more specific about what a company or an individual did to merit cooperation credit or didn’t do if credit is denied, said Steven Peikin, a co-director of the SEC Enforcement Division. Enforcement targets that cooperate with investigators can receive perks such as reduced sanctions or even no action at all.
The framework for determining cooperation the SEC laid out in its 2001 report of investigation into Seaboard Corp., including self-reporting and remediation, is still in effect, Peikin said. The co-director, a former Sullivan & Cromwell LLP partner, appeared to sympathize with people who are still unsure about the exact benefits of cooperation, however. “I think we have room for improvement,” said Peikin at Securities Docket’s annual Securities Enforcement Forum in Washington.
On self-reporting, the SEC could do more to emphasize the “carrots” over the “sticks” in obtaining cooperation, former Enforcement directors said during the gathering.
At the risk of sounding like a cynic, I think I’ve seen this movie before – when Harvey Pitt replaced Arthur Levitt as SEC Chair in 2001, that era gave us the Seaboard 21(a) Report on cooperation that Steve referenced in his remarks – but it only lasted about 90 days; then Enron came along and ruined it for everybody.
Financials: New “FASB Credit Loss Standard” Handbook
If you’re one of the few companies that’s ahead of the curve on FASB’s new revenue recognition standard – you aren’t out of the woods yet. Two additional standards – dealing with leases and credit losses – are barreling down on companies like a locomotive. Fortunately, KPMG has provided some help in the form of this handbook on ASC Topic 326, Financial Instruments—Credit Losses.
While financial institutions will be most significantly impacted by the new standard, this excerpt says that it will affect virtually all businesses:
This is not just a standard for banks. All entities that engage in lending activities and invest in debt securities that are classified as available-for-sale or hold to maturity will be affected. Additionally, entities with trade receivables, reinsurance recoverables, and loans to equity method investees also will be affected by Topic 326. Topic 326 is expected to require management to make new judgments and calculations when measuring expected credit losses. This may require changes in policies, processes and internal controls.
Public companies are required to implement the new standard for interim and annual periods in fiscal years beginning after December 15, 2019.
Transcript: “Cybersecurity Due Diligence in M&A”
We have posted the transcript for our recent DealLawyers.com webcast: “Cybersecurity Due Diligence in M&A.”
There has been a lot of recent discussion about the merits of shareholder proposal reform. As this Davis Polk blog notes, the US Chamber of Commerce has submitted a proposal to tighten the eligibility criteria & other aspects of the shareholder proposal process – and SEC Chair Jay Clayton has expressed concern about “the cost[s] that the quiet shareholder, the ordinary shareholder, bear for idiosyncratic interests of others.”
In a recent meeting with Chair Clayton, the Council of Institutional Investors & other investor reps said that concerns about shareholder proposal “overload” are simply inaccurate. According to a series of FAQs provided by the CII, most companies don’t receive a single shareholder proposal:
On average, 13% of Russell 3000 companies received a shareholder proposal in a particular year between 2004 and 2017 according to the ISS database. In other words, the average Russell 3000 company can expect to receive a proposal once every 7.7 years. For companies that receive a proposal, the median number of proposals is one per year.
Large companies were far more likely to receive shareholder proposals. According to the FAQs, S&P 500 companies received 77% of the 852 proposals received by Russell 3000 companies. In contrast, only 3.7% of shareholder proposals were submitted at companies with a market cap under $1 billion.
Annual Meetings: Making Yours “Shareholder-Oriented”
In addition to the proposals submitted at your annual meeting, CII has some ideas about how you should conduct the meeting. Here’s a recent CII memo with some thoughts about how make your next meeting “shareholder-oriented.” Here’s an excerpt with some thoughts on conducting the meeting:
Rigid adherence to a brief and arbitrary meeting schedule (e.g. precisely one hour) may cut off responses to substantive questions, raising particular concern if the meeting begins with an extensive presentation from management, or if one general type of question appears to be favored and directors seem to sidestep other questions that are perhaps uncomfortable but pertinent.
Some shareholders attend meetings for the chance to interact on an informal basis with company leadership after the meeting’s formal conclusion. Company leaders, including directors in attendance, should welcome these opportunities for casual engagement by remaining for a limited period after the meeting has adjourned.
ISS Issues Draft Policies: Poison Pills, Director Compensation & Gender Pay
Yesterday, ISS released draft policy changes for comment in 13 areas spanning the globe (based on these survey results from constituents) – the deadline for comment is November 9th. It’s expected that ISS will release its final policies in late November (although burn rate thresholds & pay-for-performance quantitative concern thresholds are typically announced through updated FAQs in mid-December; here’s info about the ISS policy process).
These are the three main areas up for consideration in the US:
– For the director compensation draft policy, here’s how Wachtell Lipton describes it: “ISS states that median pay for non-employee directors has increased every year since 2012 and was approximately $211,000 in 2016. In response to alleged “extreme pay outliers,” ISS is proposing to recommend voting against or withholding votes from members of board committees responsible for setting non-employee director compensation when there is a “pattern” (over two or more consecutive years) of “excessive” non-employee director pay without a compelling rationale or other mitigating factors. Among other things, ISS is seeking feedback regarding the circumstances for which large non-employee director pay magnitude would merit support on an exceptional basis, e.g., one-time onboarding grants for new directors.”
– For the gender pay gap draft policy, here’s how Wachtell Lipton describes it: “ISS notes that there has been an increasing number of shareholder proposals requesting that companies report whether a gender pay gap exists, and if so, what measures will be taken to address the gap. ISS is proposing to vote case-by-case on requests for reports on a company’s pay data by gender, or a report on a company’s policies and goals to reduce any gender pay gap, taking into account the company’s current policies and disclosure related to its diversity and inclusion policies and practices, its compensation philosophy and its fair and equitable compensation practices. ISS will also take into account whether the company has been the subject of recent controversy or litigation related to gender pay gap issues and whether the company’s reporting regarding gender pay gap policies or initiatives is lagging its peers.”
– For the poison pills draft policy, here’s how Wachtell Lipton describes it: “ISS’s current policy provides that if a company maintains a long-term (>1 year) shareholder rights plan that has not been approved by shareholders, ISS will recommend voting against all nominees every year if the company’s board is classified. However, if the board is annually elected, ISS will recommend voting against the entire board once every three years.
ISS proposes changing its policy to recommend voting against all directors of such companies at every annual meeting. In addition, commitments to put a long-term rights plan to a vote the following year would no longer be considered a mitigating factor by ISS (but may still be relevant to individual shareholder voting decisions). ISS would also eliminate the exemption for 10-year rights plans adopted prior to November 2009, which would affect approximately 90 companies. ISS notes that short-term rights plans would continue to be assessed on a case-by-case basis, but states that the updated policy would focus more on the rationale for the rights plan’s adoption than on the company’s governance and track record.”
I’m not very good at coming up with code names for deals. When asked, I usually default to a color – Project Blue, Project Red, etc. I guess I’ve always thought that if colors were good enough for the “Reservoir Dogs” guys, then they were good enough for me.
This Intralinks blog listing 2016’s top deal code names shows that I’m not the only one who is bad at this stuff. The list is heavy on colors & birds (“Project Blue” is #1!), and transparently smarmy efforts to ingratiate the name-giver to the client (e.g., “Project Diamond”).
And then there’s “Project X”. . . Seriously? You had a choice and you picked Project X?
Creativity doesn’t seem to be a strong suit among the bankers (usually) & lawyers (sometimes) who come up with these names, but the blog points out that this shortcoming can cause real problems:
Overuse of the same, easily-guessed code names for M&A deals not only risks compromising the parties’ identities by hackers or eavesdroppers; it also increases the likelihood that confidential information will be sent to the wrong person. For junior bankers under pressure and working long hours on multiple deals, mistaking one Project Blue with another Project Blue could be a catastrophe. Sending confidential information, or mixing up buyer information across several data rooms, could result in the type of exposure no dealmaker wants.
Fortunately, there’s an alternative to this potentially hazardous lack of imagination. There are a whole bunch of random deal code name generators available online. I tried some & they churned out some good code names – I was particularly taken with the lyrical “Project Mountain Sky” – and not a single “Project Blue.”
IPOs: JOBS Act Leading to Underpricing?
This recent article from MarketWatch’s Francine McKenna flags a new study that contends that emerging growth companies’ ability to furnish less disclosure in IPOs is having an unintended consequence – underpricing of their offerings. Here’s an excerpt:
The Jumpstart Our Business Startups Act, or JOBS Act, is causing initial public offerings to leave cash on the table, according to new research, because fewer mandatory disclosures create wary investors that demand bigger post-IPO share price pops.
All three measures of underpricing—market-adjusted stock returns based on the offer price and the closing price on the day of the IPO, the closing price on the day after the IPO, and the closing price 30 trading days after the IPO—are larger for emerging growth companies, or EGCs, according to Mary E. Barth, professor of accounting at Stanford University, Wayne R. Landsman, professor of accounting at the University of North Carolina’s Kenan-Flagler Business School and Daniel J. Taylor, associate professor of accounting at the University of Pennsylvania’s Wharton School.
So why aren’t these companies complaining? The study says that’s because EGC executives are benefitting from lower levels of disclosure in other ways – including lower priced IPO equity awards & reduced comp disclosure.
D&O Insurance: Outlook for 2018
It’s getting to be renewal time for a lot of D&O policies, and this Woodruff Sawyer article reviews market conditions, claims trends and coverage issues. Here’s an excerpt on pricing expectations:
For most public companies, renewal pricing outcomes can be divided into two categories: the primary layer of the program; and, the excess and Side A layers of the program. Since fewer carriers have the appetite to write the primary layer of a D&O tower, pricing for the primary layer has held firmer. This is especially true for those companies that carriers regard as having particular markers for risk: larger market caps, challenging industries,existing or likely litigation, financial woes and other similar factors.
While the market for the primary layer has tightened, market for excess layers – including Side A – is highly competitive & often results in a year-over-year decrease in the total premium.
Last month, Congress passed the “Fair Access to Investment Research Act” – signed by the President into law a few weeks later – which requires the SEC to ease restrictions on broker-dealer research reports on ETFs and other investment company securities. The FAIR Act requires the SEC to expand an existing safe harbor for research reports that prevents them from being considered an “offer” under the Securities Act, and to limit SEC & FINRA filing requirements for those reports.
I know, I know – “yada, yada, yada” – but here’s the thing, the legislation has a unique provision designed to prod the SEC to act on the rulemaking required by the statute. This Davis Polk blog explains:
The bill includes a provision that one sponsor of the bill described as an effort to “hold[] the SEC accountable to follow Congress’ direction.” The bill directs the SEC to amend its rules, within 270 days of enactment, to implement the safe harbor in a manner consistent with specific parameters set forth in the bill. If the SEC fails to do so by the 270-day deadline, however, the bill provides for an “interim effectiveness” during which the expansions to the safe harbor would automatically be deemed to be in effect, “as if revised and implemented” in accordance with Congress’ directions.
Some members of Congress have not been happy about the SEC’s inability to adopt the roughly 12 trillion regs required under Dodd-Frank & the JOBS Act on a timely basis – and this is intended to prod the agency to act more quickly:
The interim effectiveness provision may spur the SEC to act more quickly to implement the FAIR Act in order to address the inevitable ambiguities contained in legislation—facilitating its implementation through their expertise in administering the securities laws. If this device is successful in forcing the SEC to accelerate its rulemaking efforts, look for Congress to employ it in future legislation.
Of course, while Congress is telling the SEC to speed up, the agency’s been getting a different message from the courts – the blog points out that the DC Circuit has invalidated recent SEC rulemaking “for failure to conduct sufficient analysis, including in terms of the cost-benefit analysis of new rules.”
SCOTUS: MD&A “Known Trends” Case Goes Away. . .
As Broc previously blogged, last March, the Supreme Court granted cert to a 2nd Circuit case involving whether MD&A’s “known trends” line-item disclosure requirements can give rise to 10b-5 liability. Now, it looks like resolution of that issue will have to wait for another day – this Hunton & Williams memo says that the parties to Leidos v. Indiana Public Retirement System have reached a settlement.
ICOs: Nasdaq-Listed Company to Take the Plunge
Steve Quinlivan recently blogged about a Nasdaq-listed issuer that’s considering an initial coin offering. Steve does his best to describe what the company’s proposing in plain English. See if you can figure it out – I’m admittedly not the sharpest knife in the drawer, but I have absolutely no idea.
Naturally, the company’s stock shot up 70% on the news. Resistance is futile.
Yesterday, bumping up against a deadline to act, the SEC unanimously approved the PCAOB’s new audit reporting standard, AS #3101 – the first major overhaul of the audit report in more than 50 years. Here’s the SEC’s order. We’ll be posting memos in our “Audit Reports” Practice Area.
As Liz blogged at the time of the PCAOB’s adoption of the standard, audit reports will look fundamentally different under the new regime. Among other items, they will need to describe the auditor’s take on “CAMs”(“critical audit matters”) – matters communicated to the audit committee that relate to material accounts or disclosures and involve complex auditor judgment. These changes become effective for annual periods ending on or after June 30, 2019 for large accelerated filers & on or after December 15, 2020 for all other filers.
The new standard also requires audit reports to include information about auditor tenure, and to clarify the language addressing the auditor’s responsibilities. It also completely revamps the report’s organization and formatting. These changes will become effective for audits of annual periods ending on – or after – December 15, 2017.
Critics of the proposal contend that the additional disclosures – and particularly the requirement to address CAMs – will lead to more litigation targeting auditors. Those concerns were addressed by SEC Chair Jay Clayton in his statement on the SEC’s approval of the proposed change:
I would be disappointed if the new audit reporting standard, which has the potential to provide investors with meaningful incremental information, instead resulted in frivolous litigation costs, defensive, lawyer-driven auditor communications, or antagonistic auditor-audit committee relationships — with Main Street investors ending up in a worse position than they were before.
I therefore urge all involved in the implementation of the revised auditing standards, including the Commission and the PCAOB, to pay close attention to these issues going forward, including carefully reading the guidance provided in the approval order and the PCAOB’s adopting release
The statement went on to note that the PCAOB will monitor the results of the new standard’s implementation – “including consideration of any unintended consequences.”
I’m old enough to remember the days of counting paragraphs in an auditor’s opinion – if there were more than 3, that meant the opinion was qualified. But counting paragraphs was all anybody did – the rest was useless boilerplate. That boilerplate was nibbled at around the edges over the years, but the report still didn’t convey much useful information.
Yesterday, the SEC didn’t just pare back the boilerplate – it blew up the boiler. Time will tell if anybody gets scalded. But CAMs have been disclosed in the UK for several years without much consequence…
Multi-Class Stock: Reports of Its Death Greatly Exaggerated?
To the extent institutional investors expected that promising companies, especially technology companies, would choose being listed in one of the indexes rather than implementing governance structures that these companies (and their boards and earliest investors) believed better suited their businesses in the long-term, the institutions have clearly been disappointed.
Indeed, in just the few weeks since the indexes announced their decision, there have been several prominent—and very successful—IPOs by tech companies with dual-class stock. Examples of such recent offerings include Roku and CarGurus, which have both benefited from substantial stock increases since the first day of trading; and data center operator Switch, which also continues to trade nicely above its IPO price.
The memo notes that several other companies with multi-class structures are planning to launch IPOs during the 4th quarter.
Multi-Class Stock: BlackRock Opposes Exclusion from Indexes
Here’s another sign that multi-class structures are … uh… “undead.” (Sorry, Halloween’s coming & I couldn’t resist.) BlackRock recently issued this statement saying that it opposes the exclusion of companies with multi-class stock from major indexes. This blog from Davis Polk’s Ning Chiu discusses BlackRock’s position. Here’s an excerpt:
BlackRock believes that these actions limit access to the universe of public companies for their index-based clients, depriving them of opportunities for returns. Policymakers should set corporate governance standards through regulation. Index providers should reflect the “investable marketplace” in diverse and expansive benchmark indices, in order to facilitate investors’ use of those indicies and align them with the objectives of public equity investors.
BlackRock’s statement goes on to say that it is a strong advocate of equal voting rights – and, among other things, wants companies with dual or multi-class structures to periodically submit those structures to shareholders for approval.
Here’s something that John blogged recently on the “DealLawyers.com Blog”: We recently blogged about the uncertainty surrounding the scope of Reg G’s exemption for disclosure of non-GAAP information contained in projections provided to financial advisors. A few days ago, Corp Fin issued a new CDI that helps address some of that uncertainty.
New Non-GAAP CDI 101.01 provides that financial measures included in forecasts provided to a financial advisor and used in connection with a business combination transaction won’t be regarded as non-GAAP financial measures if & to the extent that:
– The financial measures are included in forecasts provided to the financial advisor for the purpose of rendering an opinion that is materially related to the business combination transaction; and
– The forecasts are being disclosed in order to comply with Item 1015 of Regulation M-A or requirements under state or foreign law, including case law, regarding disclosure of the financial advisor’s analyses or substantive work.
Because the tender offer rules don’t specifically reference the relevant provisions of Item 1015 of Reg M-A, some have contended that the exemption from Reg G’s requirements shouldn’t extend to disclosures contained in tender offer materials. By referring to both the requirements of Item 1015 of Reg M-A and state law, the new CDI clarifies that the availability of the exemption does not depend on whether the disclosure appears in a tender offer document, a proxy statement or a registration statement.
Forecasts may be included in disclosure documents for a variety of reasons, and since the new CDI clarifies that the exemption only applies “if and to the extent” forecasts were provided for the purposes of rendering an opinion, it doesn’t necessarily cover the waterfront.
In connection with the adoption of the new CDI, the Staff renumbered the existing CDIs and deleted references to Item 1015 that previously appeared in what is now Non-GAAP CDI 101.02.
Transcript: “E&S Disclosures – The In-House Perspective”
We have posted the transcript for the webcast: “E&S Disclosures: The In-House Perspective.”
“Pay Ratio & Proxy Disclosure Conference”: Sights & Sounds
Here’s some pics from last week’s “Pay Ratio & Proxy Disclosure Conference”:
Me & Nell Minow
Corp Fin All-Stars: Dave, Meredith, Keith, Brian, Keir & Marty
Virtual reality offered @ BDO’s booth
My dad showing off @ Schwab’s fitness-oriented booth
The title of this blog includes multiple question marks because the SEC continues to keep us in the dark when Edgar has problems. I’m not talking about the cyber breach that was recently announced. I’ve been harping for some time that the SEC needs a blog – or some type of other vehicle – to inform the public when Edgar is experiencing problems (and when those problems are resolved). Go back to my March blog entitled “Edgar is Down? (Crickets)” – or this one from a year back from that: “EDGAR is Down”: A Familiar Refrain?”
This is not just my pet peeve. Here’s a note that I received yesterday from a member:
We’ve had problems over the last few days with a couple of Edgar filings that were hung up apparently due to fee processing problems. A quick search for S-1 filings today shows the first five S-1 filings all being time-stamped within a fifteen minute period starting around 3:12 pm today, which strongly suggests a systems problem. I’ve talked to several financial printers and gotten confirmation that other law firms were seeing the same filing problems with fee-required filings yesterday and today. I wonder if this is related to the hack – or just outdated systems. Can you blog about this so you can gather feedback from others.
As of this morning, Edgar is still having trouble accepting filings – the third day in a row. Apparently, this is affecting every deal that’s trying to price & launch. It’s a bit sad that I’m being asked to gather information from the community so that we can figure out what is happening with Edgar. It happens a lot. And the SEC could easily solve this problem by communicating with us as I’ve blogged about many times…
Pay Ratio: Glass Lewis’ Approach
In this note, Glass Lewis has joined the many who have written about the SEC’s new guidance on pay ratio (we’re posting memos about that in our “Pay Ratio” Practice Area). In addition to summarizing the SEC’s guidance, Glass Lewis indicates what approach it will take for pay ratio in this excerpt:
Glass Lewis intends to display the pay ratio as a data point in our Proxy Paper in 2018. At this time, however, we do not intend to incorporate the pay ratio into our assessment and analysis of Say-on-Pay proposals. We recognize that this data point might provide valuable additional information to shareholders on a company’s pay practices; however, we do not believe that this information is material for our analyses of the structures by which, and the disclosures of how, companies pay their NEOs.
By the way, for those registered for our “Pay Ratio & Proxy Disclosure Conference,” the video archives for Wednesday’s panels are now posted…
ISS Survey: Director Comp & Gender Pay Gap
Yesterday, ISS released this 23-page summary from its 2017-2018 policy survey. This year, survey topics were split into two parts, with an initial, high-level survey covering a small number of fundamental and high-profile topics. Here’s two of the pay-related findings for the US:
– Director Pay – Survey respondents were asked which factors should be considered in determining whether a director pay program presents a governance concern with respect to high pay magnitude. Tops for investors was measuring director pay relative to a four-digit GICS peer group, followed by stock market index peers, and, third, measuring a director pay program relative to all companies. Corporate respondents, meanwhile, deemed the measurement of pay relative to a stock market index most appropriate, followed next by pay measurements relative to a four-digit GICS industry peer group. When asked which factors should be considered in determining whether a pay program presents a governance concern with respect to problematic pay structure, both groups agreed that excessive perquisites was most problematic.
– Gender Pay Gap – Over the past two years, shareholders have filed proposals asking for a report on gender pay equity at numerous U.S. companies. ISS’ survey asked whether companies should be disclosing their gender pay gap information, with 60 percent of investor respondents answering affirmatively, compared with 17 percent for corporates. Of the just over one-quarter (27 percent) of investor respondents suggesting the need for such disclosures would “depend” on certain considerations, most indicated they would deem it favorable if the practice became an industry norm and/or the company was lagging its peers.
