Tune in today for the webcast – “E&S Disclosures: The In-House Perspective” – to hear National Vision’s Jared Brandman, Davis Polk’s Ning Chiu, Bristol-Myers Squibb’s Kate Kelly, Apple’s Jung-Kyu McCann and Clorox’s Stephanie Tang discuss environmental & social disclosure issues – in both SEC filings & other types of filings.
SASB Proposes ESG Disclosure Standards
As Ning notes in her blog, the Sustainability Accounting Standards Board (SASB) released draft standards for Environmental, Social and Governance (ESG) disclosure last week, launching a 90-day public comment period which ends on December 31st. Four years in the making, these standards set forth ESG topics covering 11 different sectors and 79 industries for public companies to disclose annually.
Ning has a link to where the exposure draft resides. I decided not to do so – because I’m dismayed that one can only receive a copy if you fill out a form. Studies show that downloads of documents dramatically go down if you force people into providing their personal information – even if the document is free. I dislike this practice – particularly for something like this that has a regulatory feel…
Heads Up! Legal Entity Identifier (LEI)/MiFID II Deadline
A member recently asked in our “Q&A Forum” (#9237): “It appears that several EU firms are reaching out to U.S. public companies to obtain a Legal Entity Identifier (LEI) in advance of the new EU financial markets regulation (MiFID II and MiFIR) becoming effective (or risk that company shares cannot be traded in Europe after January 3, 2018). Are public companies applying for LEI’s, and if so, how? It looks like Bloomberg is an accredited issuer of LEIs as a Local Operating Unit (LOU), but I’m just trying to get a handle on how other public companies are responding any why.”
I asked a few in-house friends about this – and they were unaware of this requirement. We posited some potential thoughts on this topic in response to the query in the “Q&A Forum” – and now the first law firm memo is out about it. Send more!
Some of you might know that I’m rolling into “Week 38” of my second pregnancy…the “home stretch.” For all the parents out there – especially moms – you know that balancing your pregnancy & profession can present some unique issues. Here are 4 things I’ve experienced:
1. To-Do Lists: At this point, these are growing faster than the baby. There’s the work list, the mom/baby healthcare & benefits lists, the nursery list, etc. It can be overwhelming, especially since all the tasks have the same imminent – but unknowable – deadline.
With our firstborn, I managed to wrap up my work projects (and report for jury duty!) just before the baby’s early arrival. But, we were “those people” who didn’t have a name picked out & installed the car seat in the hospital parking lot. This time, I’d love to have 10 minutes of downtime to mentally prepare for the new person who’s joining our family. I’m not there yet – but there’s still hope.
2. Transition Mechanics: I’ve benefitted from good parental leave policies, but there’s an art to making this work. Good colleagues & relationships are key, since it’s scary to entrust your work and clients to someone else. You want to know they’ll do a great job but also that your position is secure and your clients will still want to work with you when you return. You’re also well-aware that you’re asking big favors. Co-workers are taking on extra work – with limited background and without an obvious long-term incentive. Clients are dealing with someone they don’t know, who might not have the entire backstory for on-the-fly questions.
It’s best for everyone if you’re extremely organized going into leave (more to-do lists, plus contact lists). Discuss expectations with clients & colleagues – separately & during intro calls. I also continued to monitor e-mail and was available for questions during leave. People are pretty respectful, but they like knowing you won’t hang them out to dry. Small thank-you gifts also never hurt.
3. Awkward Networking: I don’t like being pregnant in a professional setting. Pretty much everyone stares at and/or comments on your body. This doesn’t bother me much if the other person is relating to me as a fellow parent – maybe it’s even a good icebreaker – but you still need a tactic for redirecting the conversation to any professional topics you wanted to cover. And always have a stock response ready for people who aren’t as smooth. Because the cruel irony is that you can’t just smile and take a big drink of wine…
4. Mixed Feelings: Don’t get me wrong, I love our two-year-old more than life and I’m grateful and excited for the opportunity to care for another little person. But parenthood isn’t always easy or fun, the world isn’t always kind, and experiencing all that love also requires a lot of vulnerability.
On top of that, there’s the postpartum identity crisis – during which you try to reconcile your ambitious, always-available, pre-baby self with the realities of limited time & sleep, as well as whatever you & society think a mother/parent should look like. There’s a tension between proving yourself all over again and setting boundaries that allow you to actually enjoy your family. Both are necessary and evolve over time. As a woman in an historically male-dominated profession, I’m also constantly thinking about how my attitude, day-to-day actions & career decisions might impact my kids’ ambitions and worldview.
But there’s upside: the transition is a chance to examine your goals – and decide how to maximize your potential. Plus, you might be more creative & efficient.
I know I’m not alone on this journey of balancing pregnancy, parenthood & lawyering – email me with any experiences & “lessons learned” that you want to share!
Corp Fin’s “Partial” Global Rule 13e-4 Relief
Here’s something that Broc blogged yesterday on the “DealLawyers.com Blog“: Whenever Corp Fin’s Office of Mergers & Acquisitions posts a new no-action response, I take a gander to see if it’s new or unusual. Typically, they aren’t – and this new response to CBS falls within that category. It’s basically one of the formula pricing variety (albeit in the Reverse Morris Trust exchange offer context).
The Staff’s relief allows for the bidder/issuer to offer a number of shares in exchange based on the dollar amount of securities tendered – and relies on “formula pricing” mechanisms going back to the old Lazard Frères no-action letter from the 1980’s while utilizing the “pricing goes hard at least two days prior to expiration.”
So nothing surprising here, except the last paragraph in the no-action letter which states the Staff will no longer be issuing no-action letters for parts of this area. The global relief is somewhat narrow – it covers only Day 18 VWAP pricing in a RMT. So issuers can go on their own if they fit within the letter’s facts. Be careful – the request doesn’t expressly give global relief for Day 20 VWAP pricing, which has a few more conditions under Staff precedents.
This is clearly a sign that Corp Fin is looking to get out of the business of issuing timing-consuming no-action letters in situations where there is a well-trodden path of letters…
Speaking of the Staff, don’t forget to tune in next Wednesday, October 11th for the DealLawyers.com webcast – “Evolution of the SEC’s OMA” – to hear current & former Chiefs of the SEC’s “Office of Mergers & Acquisitions” discuss what that job is all about. Join Corp Fin’s Michele Anderson and Ted Yu, as well as Skadden’s Brian Breheny, Weil Gotshal’s Cathy Dixon, Alston & Bird’s Dennis Garris and Morgan Lewis’ David Sirignano. This is a unique event!
Do EPS Incentives Discourage CapEx?
This Goldman Sachs video suggests we’re in a period of declining capex – for the first time since the early 90s. Some think that’s because shareholders prefer dividends and buybacks over long-term investments. This Dealbreaker article suggests there’s also a connection to incentive pay structures:
How executives are rewarded has a real impact on capital allocation. When a CEO’s bonus is tied to earnings per share – a metric that can be juiced by gobbling up shares – that company will likely to do more and bigger buybacks. And when companies appear to buy back shares in order to avoid a negative earnings surprise, capex spending tends to be diminished in the following year. Executives whose personal wealth moves in tandem with their company’s stock price show a particular preference for repurchases over capital expenditures. Larry Fink has a term for this.
If this criticism sounds familiar, it’s because the potential use of buybacks to support stock prices became a “hot topic” a couple years ago. Here’s one of Broc’s blogs discussing it.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take a few hours to post the video archives after the panels are shown live). A prominent link called “Enter the Conference Here” – which will be visible on the home pages of those sites – will take you directly to the Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player).
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here are the conference agendas; times are Eastern.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if it’s possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see our “CLE Credit By State” list.
– Register Now to Watch Online: There is still time to register for our upcoming pair of executive pay conferences – which starts on Tuesday, October 17th – to hear Keith Higgins, Meredith Cross, etc. If you can’t make it to Washington DC to catch the program in person, you can still watch it by video webcast – either live or by archive. Register now to watch it online.
– Register in Washington DC to Watch In-Person: Starting next Thursday, October 12th, you will no longer be able to register to attend in Washington DC through this site – but you can always register to attend when you arrive in DC! You just need to bring payment with you to the conference and register in-person. But until next Thursday, you can still register online to attend in DC…
Transcript: “Pay Ratio Workshop – What You (Truly Really) Need to Do Now”
We have posted the transcript for our recent pre-conference webcast: “Pay Ratio Workshop – What You (Truly Really) Need to Do Now.” Now get ready for the main event taking place in less than two weeks in Washington DC and by video webcast – 20 pay ratio panels over 2 days: “Pay Ratio & Proxy Disclosure Conference.” It’s time to register now…
SEC Seeks to Enhance Cybersecurity Expertise: Good Luck With That…
Yesterday, SEC Chair Clayton gave testimony before the House Financial Services Committee about the SEC’s budget for the agency’s next fiscal year. The Chair noted that he intended to ask for a $100 million increase over the $1.6 billion budget that the SEC currently has – and also planned to ask permission to lift the hiring freeze currently in place.
The main reason for the additional funds would be to enhance the SEC’s cybersecurity efforts. This article excerpts the key paragraph from the Chair’s testimony:
“The $234 million that the SEC plans to spend on information technology in fiscal year 2018 is quite modest, by way of comparison, to the amounts that the major Wall Street firms spend on their own information technology systems,” he said. “For example, in 2016 one large financial institution alone spent more than $9.5 billion on technology firm-wide, with $3 billion of that dedicated to new initiatives. Another large financial institution spent $6.6 billion in 2016 on technology initiatives.”
That paragraph says it all. When many are predicting a very serious shortage of cybersecurity expertise in the near future, how is a government agency able to compete in recruiting cybersecurity people worth their salt? The government is quite limited in the pay packages it can offer. It’s going to be a very uphill climb – even if Congress agrees to give the SEC this additional money…
Yesterday, I blogged about the seriousness of the SEC’s Edgar being hacked (and what we know – & don’t know – about that hack). Today, let’s delve into “what does it mean for those of you that are in-house?” For purposes of this blog, I’m assuming a different type of scenario than the Edgar hack that was just disclosed by the SEC. Something more sinister – such as a hacker going in and changing the numbers in a company’s financials, etc.
John has come up with your “11-step plan of action” if one of your company’s filings on Edgar is hacked:
1. Review your prior filings and press releases on your website and the EDGAR database to determine whether they have been altered from their original versions.
2. Keep a hard copy of your SEC filings “at the ready.” If Edgar is hacked – and it’s your filing being manipulated – you may need something that you know isn’t tainted. It’s hard to taint a hard copy.
3. Have a plan in place to react to your SEC filing being hacked. This includes a list of who you’re going to call first (think senior management, the board, your stock exchange, etc.). And what you’re going to say. After verifying the accuracy of prior filings & coming up with an action plan, contact your stock exchange rep to either confirm to them that any prior filings they’ve looked at are valid – or tell them what you’re working to correct.
4. This is instantly a board matter. Contact the head of the audit committee or other appropriate committee charged with risk oversight immediately. The SEC and the FBI should also be on the short list of people you contact (the SEC’s Enforcement Division has just formed a special unit in this area). Tell your Assistant Director in Corp Fin what has happened and what you are doing to address it early on in the process.
5. Don’t assume that your filing is the only thing that’s been hacked or that it’s the SEC’s fault. Proceed under the assumption that your most sensitive internal systems have been hacked and initiate an investigative and cybersecurity response on that basis. Also, proceed under the assumption that the hack has been going on for a long time. Just blaming the SEC right away might not be appropriate – maybe it was someone at your company (or your financial printer, etc.) that screwed up.
6. Your top public communications priority needs to be correcting the record or acting to disseminate material non-public information that may have been comprised. If the hack has resulted in inaccurate disclosure (e.g., if your filing was hacked), correct it immediately and succinctly. If you have reason to believe that it has resulted in a leak of MNPI, get the information out immediately.
7. Move! Time is of the essence. Don’t get bogged down in narrow legal issues about whether you have a duty to speak. Depending on the circumstances, you may or may not have a legal obligation to do this – but one of the big problems is that you likely won’t know right away where the responsibility for the breach lies. Remember, you will be judged by investors and regulators in part based on how prompt, thorough and transparent your response to the problem is.
8. Credibility is essential. Be as transparent as possible. Don’t spin. Don’t speculate. If you don’t know something, tell people that. If you can’t discuss something, say so and be upfront as to the reasons why.
9. As part of your investigation, review trading activity surrounding prior SEC filings and communications (including any comment letters and responses) to determine whether there has been any unusual activity.
10. Immediately impose a blackout on insiders under your insider trading policy & review recent insider transactions (first thing the media will look at, even though it may be completely irrelevant).
11. If your company sends “test” filings through Edgar, reconsider that practice – or perhaps shorten the window between when you submit a test filing and a “live” filing. And of course, avoid posting earnings releases, etc. online before they are supposed to – remember that series of “URL-sniffing bots” fiascos from a few years back…
John notes: “I don’t know if you’ve seen the show “Mr. Robot,” but it’s basically what “Fight Club” would look like if it was written by smart people. Anyway, the show’s about a group of hackers who bring down the social order by hacking into and destroying personal financial information held by a large corporation (sound familiar?). One of the points the show makes is that in an information-based economy, everything is based on trust. Whether you have any responsibility for the hack or not, people’s trust in YOU has been undermined by it. That fundamental point should underscore every move you make in response.”
Non-GAAP: Does Reg G Apply to M&A Projections?
Here’s something that John blogged on our “DealLawyers.com Blog“: Most public company M&A disclosure documents include a section addressing the forecasts provided to the board and the company’s financial advisors in connection with their evaluation of the transaction. These forecasts typically include non-GAAP financial information, but Rule 100(d) of Reg G provides an exemption from its requirements that applies to disclosures summarizing “the bases for and methods of arriving at” a fairness opinion.
While these forecasts appear to be well within the scope of the exemption, plaintiffs – and in some cases the Staff – have challenged this assumption in the case of non-GAAP information disclosed under a separate heading (typically captioned “Forecasts” or “Projections”) from the discussion of the banker’s fairness opinion. Some have also called into question the applicability of this exemption to tender offer filings.
This Cleary blog sets forth a detailed argument that these distinctions are inappropriate – and that the reconciliation requirements of Reg G do not apply to this information, regardless of what type of disclosure document it appears in or where it appears. Here’s an excerpt summarizing the argument:
It is true that the projections in the “Forecasts” section of M&A disclosure documents include projections that are not GAAP. Indeed, projected unlevered free cash flows are a central input into any discounted cash flow analysis. But in our view the contention that these projections are subject to Regulation G is incorrect.
The provision of a GAAP reconciliation for these forecasts would not serve the purpose for which Regulation G was adopted – namely, to prevent a company from misleading investors by providing NGFMs that obscure its GAAP results and guidance. No such concern applies to the “Forecasts” section of M&A disclosure documents, where the data are being provided solely to enable shareholders to understand the specific, projected financial metrics that the company’s financial advisor used in its financial analyses to support a fairness opinion.
The blog notes that the Staff has sometimes issued comments to the effect that Reg G applies to these disclosures, and recommends that the Staff issue interpretive guidance confirming that the exemption applies to forecasts included in M&A disclosure documents.
I’m concerned that some folks aren’t worried enough about the SEC’s Edgar being hacked. I’ve seen a number of blogs about SEC Chair Clayton’s cybersecurity statement that didn’t bother to even mention the most important item in that statement: Edgar was hacked! Perhaps that was a byproduct of the SEC “burying the lead” when it stuck that revelation in the middle of a 5-page statement about cybersecurity generally.
But make no mistake about it, this is a huge development. Don’t be numb because hacking news has become so routine. John’s blog about the Chair’s statement keyed in on this theme with his title of “Wow! Edgar Hacked!”
If such breaches continue, or if the SEC is too underfunded or outgunned to fix them, it could undermine company and investor confidence in the agency. That might threaten the regulator’s ability to provide a bedrock principle of the U.S. financial system: market transparency.
The SEC’s Hacking Incident: What We Know (& Don’t Know)
The SEC is certainly now taking the hacking seriously. Yesterday, SEC Chair Jay Clayton issued this update on the breach since the agency has now found that personal information for at least two individuals was hacked (see this Reuters article).
And culling through the written testimony from Chair Clayton before the Senate Banking Committee last week – and the media pieces about that (WSJ’s Andrew Ackerman has penned several pieces; this is the latest), here’s a few things we know – and don’t know:
1. Management Kept in the Dark – Although the breach was reported in 2016 to the Department of Homeland Security and the security gaps were patched, SEC Commissioners and the SEC’s then-COO were unaware of the 2016 hack. It’s not known when in 2016 the hacking took place.
2. SEC Has Enforcement Action Pending – An ongoing enforcement probe prevents the SEC from revealing many details about the cyber incident – so there’s a probe into possible illegal trading (or “outside trading” as John Stark describes it). Chair Clayton did disclose that the investigation, which he learned about last month, spurred a second look at the breach.
3. Sparse Facts Known So Far – The SEC hasn’t revealed the type of information accessed by hackers in 2016 nor which companies were affected. So we don’t know which filings were hacked – nor which companies might have been affected by the breach. Chair Clayton’s statement says the SEC’s Inspector General is probing the source of the hack, the type of information obtained and how the SEC responded internally to the breach – he decided to disclose the SEC’s own breach as soon as he had enough information to accurately inform market participants and investors.
4. “Customized” Part of Edgar Enabled the Hack – The hackers exploited a vulnerability in the “customized” part of Edgar that allows companies to test the accuracy of data transmitted in new forms. The SEC has hired outside consultants to test the vulnerability of its systems.
Survey: Boards Not Sharing Cyber Incident News
It apparently isn’t only the SEC that is slow to share the fact that a cyber incident occurred. This recent BDO survey found that just one-quarter of boards (25%) are sharing information gleaned from cyber-attacks with external entities! The survey also found that boards are more involved with cybersecurity than they were 12 months ago – and a similar percentage (78%) say they have increased company investments during the past year to defend against cyber-attacks, with an average budget expansion of 19%.
In a recent speech, SEC Chief Accountant Wes Bricker highlighted some of the financial reporting issues associated with initial coin offerings. His remarks addressed matters that should be considered by both issuers & investors in coin offerings.
For issuers, Wes cited the need to consider the application of GAAP guidance addressing questions such as:
– What are the necessary financial statement filing requirements?
– Are there liabilities requiring recognition or disclosure?
– Are there previously recognized assets that require de-recognition?
– Are there revenues or expenses requiring recognition or deferral?
– Is there a transaction with owners, resulting in debt or equity classification and possibly compensation expense?
– Are there implications for the provision for income taxes?
For coin investors, Wes noted the following topics for consideration:
– Does specialized accounting guidance (such as for investment companies) apply to the holder’s financial statement presentation?
– What are the characteristics of the coin or token in considering whether, how, and at what value the transaction should affect the holder’s financial statements?
– What is the nature of the holder’s involvement in considering whether the issuer’s activities should be consolidated or accounted for under the equity method?
Bricker’s remarks came at the end of a tough week for ICOs – China’s central bank announced an outright ban on them – and are another reminder that the SEC is watching, and expects companies involved in these deals to comply fully with applicable securities laws.
On a related note, the SEC issued an “Investor Alert” in late August about scams involving companies making claims about being involved in ICOs. And on Friday, the SEC busted a few of the scams.
ICOs: Get Ready for the Lawsuits
Money has been pouring in to ICOs – about $1.3 billion has reportedly been raised during 2017 alone – and a lot of that funding has been provided by unsophisticated investors, unaccompanied by regulatory scrutiny (until recently). This Bloomberg article says that’s a recipe for a wave of private litigation:
The soaring valuations of new tokens and the major blockchain technologies underlying them, such as Bitcoin and Ethereum, have drawn new investors that may not understand how the tokens work, could lose money, and may not know how to recognize whether the tokens should be valued as a security, cryptocurrency, or utility.
Those factors are attracting bad actors and artificially driving up valuations of some assets that, once deflated, are likely to spur private litigation against companies and individuals issuing and exchanging these tokens, attorneys and research groups said.
According to the article, 3 lawsuits involving ICOs have already been filed – although none involve claims against issuers or exchanges on which the tokens trade.
Blockchain: Sorry Delaware, Nevada & Arizona Got There First
Of course, we wouldn’t be talking about ICOs and cyptocurrencies without blockchain – the distributed ledger technology that makes them possible. Delaware’s recent legislation allowing blockchain to be used for corporate recordkeeping has been hailed as cutting edge – with one nitwit even going so far as to say that Delaware’s actions “opened the door” for the use of blockchain in this fashion.
This recent blog from Keith Bishop says “not so fast” – sorry Delaware, it’s Nevada & Arizona that opened the door:
Delaware, which prides itself as a leader in corporate law, was not the first state to enact legislation authorizing blockchain technology, however. Nevada beat the Blue Hen State to the punch by over a month when Governor Brian Sandoval signed SB398 into law on June 5, 2017. Nevada’s legislation, unlike Delaware’s, does not amend Chapter 78, Nevada’s Private Corporation Law. Nevada chose instead to amend Chapter 719, which is its version of the Uniform Electronic Transactions Act. In this respect, Nevada follows Arizona which enacted amendments to its “Electronic Transactions Act” in March of this year (HB 2517)
Our October Eminders is Posted!
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– John Jenkins
According to media reports, SEC Chair Jay Clayton faced some tough questioning from the Senate Banking & Finance Committee earlier this week on the Equifax fiasco & the SEC’s announcement that the Edgar system had been hacked.
In addition to concerns about the SEC’s delay in disclosing its own hack, lawmakers focused on the need for new SEC guidelines addressing the disclosure obligations of companies involving data breaches. This Bloomberg article also reports that Jay suggested that he was open to working with Congress on efforts to enact “legislation to ensure executives don’t profit by buying or selling company stock before the public is told about market-moving news.”
What sort of legislation the Chair might back remains to be seen. However, his openness to Congressional action seems to represent a bit of a departure from previous statements – earlier this month, the WSJ reported that Jay said that legislation defining insider trading wasn’t necessary.
Any way you slice it, insider trading law isn’t exactly a model of clarity. As a case in point, this Linked-In article says that if the SEC’s hackers traded on the information they obtained, they likely won’t be subject to liability under insider trading law as it currently exists – instead, the SEC would need to rely on a much less well established “outsider trading” legal theory.
Also this blog by Keith Bishop with some interesting questions about how insider trading laws would work with the hacker of the SEC’s Edgar. As noted in this MarketWatch piece, perhaps the hackers would be prosecuted in same way the SEC went after the Ukranian hackers of the wire services a few years ago…
Litigation Survey: South Dakota Dethrones Delaware
In a development that’s akin to the Alabama Crimson Tide not making the CFB playoff, the US Chamber of Commerce’s recent lawsuit climate survey says that South Dakota has knocked Delaware from its traditional top spot as the state with the most pro-business litigation climate.
There’s been a lot of commentary about the impact of Delaware’s rejection of disclosure-only settlements & changing approach to deal litigation, but according to the Chamber, that’s not what dethroned Delaware. Instead, it’s a pro-plaintiff legislative climate & absence of tort reform that’s soured business on the First State:
“Delaware no longer lives up to its nickname as the ‘First State,’” said ILR President Lisa A. Rickard. “As the competition between states to enact legal reforms gets tighter, Delaware is losing ground.”
Delaware is getting passed by. The state’s main business court has remained solid, repeatedly refusing to approve bogus settlements where lawyers get all the money. But while other states are busy passing tort reforms, Delaware’s legislature is siding more with the plaintiffs’ lawyers than businesses.
According to Bryan Quigley, senior vice president of communications for the ILR, the fee-shifting ban was of particular concern to companies, which complained that the General Assembly essentially overruled the state Supreme Court after the justices OK’d the so-called “loser pays” provisions for nonstock corporations.
Lawmakers, acting on the recommendation of the Delaware State Bar Association, passed the legislation amid fear that the same conditions would be imposed on stock corporations.
After occupying the top spot since 2002, Delaware tumbled to #11 in this year’s survey – that not only will keep it out of the playoff picture, but probably dashes any hope of a New Year’s Day bowl appearance.
SEC Provides Regulatory Relief for Hurricane Victims
Yesterday, the SEC issued an order granting conditional exemptions from filing deadlines and other requirements for companies & others by the series of hurricanes that recently struck the U.S. & Caribbean. It also adopted interim final temporary rules extending filing deadlines for specified reports and forms required under Regulation Crowdfunding & Regulation A. Here’s the SEC’s press release.
I was always one of those people who crammed a semester’s worth of studying into the night before the final exam. This Bloomberg accounting blog suggests that a lot of companies are going to find themselves in the same boat when it comes to implementation of FASB’s new revenue recognition standard:
The Financial Accounting Standards Board (FASB) issued ASU 2014-09 Revenue from Contracts with Customers declaring that the new standard would remove inconsistencies in revenue requirements, improve comparability of revenue, provide more useful information through improved disclosure requirements, and simplify the preparation of financial statements. You get the picture—all these wonderful benefits. It is only during implementation do the side effects become fully apparent. Most public companies are set to adopt the rules next year, however, many are only now realizing the numerous implementation issues.
“Most of the people today are struggling with readiness. A lot of people were not fast enough to get ready to adopt.” Jagan Reddy, senior vice president at Zuora Inc., told Bloomberg BNA staff correspondent Denise Lugo, when asked about the slow pace of implementation. “Another reason is companies want similar companies…to adopt first so they can use them as a guide.”
Despite the 2018 implementation date, the blog notes that Starbucks, Oracle & Apple have all recently announced that they won’t be implementing the new standard until 2019. MarketWatch’s Francine McKenna & her colleagues have been closely following the impact of the new standard. She notes that some companies can defer to 2019 because of the timing of their fiscal years. However, Francine points out that Apple’s an interesting example of the challenges that companies face – as this article notes, Apple originally planned to early adopt the new standard, but then delayed implementation one year to the latest possible date.
It turns out that there are some companies that stuck their necks out & early adopted the new revenue recognition standard. This recent blog from Steve Quinlivan reviews one recent early adopter’s fairly probing comment letter from the Staff, & has some tips for comments that companies that haven’t adopted should keep in mind for their 3rd quarter 10-Qs. Also see this Deloitte memo that analyzes revenue recognition disclosures in the 2nd quarter for a bunch of companies…
ESG: Building a “Sustainability Competent” Board
Boards are increasingly called upon to address a variety sustainability issues – including climate change, human rights & other environmental and social concerns that not long ago seemed pretty far afield from the business of running a public company. This Ceres report makes the business case for developing boards that are “sustainability competent,” and offers insight about how to accomplish this objective.
Here’s an excerpt from the executive summary addressing the business case for sustainability competence:
Where sustainability is material to a company, boards have a fiduciary responsibility to act. A key part of the fiduciary responsibility of boards is the duty of care, or the duty to adequately inform themselves of material issues prior to making business decisions. To discharge this responsibility, directors need to be able to understand and evaluate material risks facing the business. When a social or environmental force poses material risks, directors now need to consider those risks in decision-making in order to adequately discharge their fiduciary responsibility.
Investors are increasingly focusing on board sustainability competence. Investors are making connections between sustainability and materiality on one hand, and financial performance on the other. As a result, they are focusing on the critical role the board plays in ensuring the resilience of a company’s assets and its long-term business strategy. Consequently, investors are putting pressure on boards to show themselves as “competent” in environmental and social issues.
Your mileage may vary when it comes to legal arguments about what the fiduciary duty of care requires here, but there’s no doubt that sustainability is becoming a top priority for many investors.
The report calls for companies to take a variety of steps to build a sustainability competent board. These include integrating sustainability into the nominating process, educating directors on sustainability risks, & deepening engagement with experts and stakeholders on relevant sustainability topics.
When it comes to sustainability, most of the action among investors has come from institutions. This recent publication from the US SIF Foundation aims to change that – it provides a guide for retail investors to getting started in socially responsible investing.
IPOs: Are SPACs the Answer for Unicorns?
We’ve previously blogged about various aspects of the Unicorn phenomenon – $1 billion dollar tech companies that are reluctant to take the IPO plunge. How can these companies be coaxed into the public marketplace? This NYT DealBook article says somebody’s building an app – uh, I mean a SPAC – for that. Here’s an excerpt:
Last week, Chamath Palihapitiya, a brash entrepreneur who was an early Facebook employee, launched a public company known as a special purpose acquisition company, or a “blank check” company, with $600 million put up by investors. The intent is to merge with one of Silicon Valley’s unicorns, taking it public through a back door of sorts.
The idea is to remove “the process of going public that is true brain damage,” Mr. Palihapitiya said.
Unicorns may have the cash to defer going public, but it does create problems for them when it comes to retaining talent – at some point, employees realize that they can’t eat private company stock. By gobbling up Unicorns into a SPAC, the idea is that the entity will enable their management to avoid all of the headaches and distractions of the IPO process, and become public in a blink through a reverse merger.
Reverse mergers as a vehicle for going public don’t have the greatest track record – but most of the companies that have gone down that path weren’t in a position to attract the kind of attention from market participants that a hot tech property might. So, who knows? It might just be crazy enough to work.
We have posted the transcript for our popular webcast – “Non-GAAP Disclosures: Corp Fin Speaks” – featuring Mark Kronforst, the Chief Accountant of the SEC’s Division of Corporation Finance and Dave Lynn of TheCorporateCounsel.net and Jenner & Block…
Private Liquidity Programs: Key Considerations
We’ve previously blogged about the growth in liquidity programs for private companies electing to defer IPOs. PwC has pulled together this “White Paper” addressing key considerations for CEOs and CFOs of companies considering liquidity programs. Here’s an excerpt from the intro:
The rapidly growing nature of these secondary markets has led to many sellers and an increasing array of alternatives for those sellers to achieve liquidity. Despite being an established market, the information available to buyers and sellers is limited when compared to the market for publicly-traded stock and therefore the market is characterized by significant opacity as compared to public exchanges where US federal securities laws, disclosure requirements and investor rights are well understood.
Private companies understand the steps and potential impact of issuing equity to investors in a primary sale either privately or publicly as these transactions are customary and well-known (i.e., in a private preferred stock financing or an IPO). Sales of shares in a secondary market, on the other hand, introduce unique challenges that are not well understood. This publication outlines certain valuation, accounting, tax, regulatory, legal, and human resources related considerations that should be carefully considered by private companies whose shares are sold in a secondary market.
Human Capital Management Disclosure: The Next Big Thing?
In this 10-minute podcast, UAW Retiree Medical Benefits Trust’s Cambria Allen discusses the “Human Capital Management Coalition” – which is led by the UAW Retiree Medical Benefits Trust – and the Coalition’s recent petition for rulemaking to the SEC, including:
1. What is the “Human Capital Management Coalition”? And what is “human capital management disclosure”?
2. Why did those interested in this topic decide to submit a petition for rulemaking to the SEC (as opposed to other routes)?
3. What are the main goals of the petition?
4. Any surprises so far since submitting the petition?
5. What can folks do who want to support the petition?
For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in tomorrow – 2 pm eastern (audio archive goes up when the program ends; transcript available in a week or so) – for the third in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You (Truly Really) Need to Do Now.” There will be a heavy emphasis on “what now” given the SEC’s new guidance.
– Mark Borges, Principal, Compensia
– Ron Mueller, Partner, Gibson Dunn
– Dave Thomas, Partner, Wilson Sonsini
– Amy Wood, Partner, Cooley
Register Now: This is the only comprehensive conference devoted to pay ratio – and it’s only three weeks away! Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.
ISS Releases ’18 Policy Survey Results
Yesterday, ISS released the survey results for its upcoming policy changes – with findings including:
– Unequal Voting Rights – ISS solicited respondents’ views on multi-class capital structures that carry unequal voting rights. Among investors, a large minority (43 percent) indicated that unequal voting rights are never appropriate for a public company in any circumstances. An equal proportion of investors (43 percent) said unequal voting rights structures may be appropriate for newly public companies if they are subject to automatic sunset requirements or at firms more broadly if the capital structure is put up for periodic re-approval by the holders of the low-vote shares.
– Board Gender Diversity – ISS asked respondents if they would consider it problematic if there are zero female directors on a public company board. More than two-thirds (69 percent) of investor respondents said “yes.” The lion’s share of these respondents (43 percent) said that the absence of women directors could indicate problems in the board recruitment process, while 26 percent of investor respondents said that although a lack of female directors would be problematic, their concerns may be mitigated if there is a disclosed policy/approach that describes the considerations taken into account by the board or the nominating committee to increase gender diversity on the board.
– Virtual Meetings – Survey respondents were asked to provide their views on the use of online mechanisms to facilitate shareholder participation at general meetings, i.e., “hybrid” or “virtual-only” shareholder meetings. About one out of every five (19 percent) of the investors said that they would generally consider the practice of holding either “virtual-only” or “hybrid” shareholder meetings to be acceptable, without reservation. At the opposite extreme, 8 percent of the investors did not support either “hybrid” or “virtual-only” meetings.
More than one-third (36 percent) of the investor respondents indicated that they generally consider the practice of holding “hybrid” shareholder meetings to be acceptable, but not “virtual-only” shareholder meetings. Another 32 percent of the investor respondents indicated that the practice of holding “hybrid” shareholder meetings is acceptable, and that they would also be comfortable with “virtual-only” shareholder meetings if they provided the same shareholder rights as a physical meeting.
– Pay Ratio Disclosures – ISS asked respondents how they intend to analyze data on pay ratios. Somewhat surprisingly, only 16 percent indicated that they are not planning to make use of this new information. Nearly three-quarters of the investor respondents indicated that they intend to either compare the ratios across companies/industry sectors, or assess year-on-year changes in the ratio at an individual company or use both of these methodologies. Of the 12 percent of investors who selected “other” as their response, some of them indicated a wait-and-see approach while other comments indicated uncertainty or concerns regarding the usefulness of the pay ratio data. Among non-investor respondents, a plurality (44 percent) expressed doubt about the usefulness of such pay ratio data.
Say-on-Pay: Despite Few “Failures,” 12-14% Run Into Problems
Here’s the intro from this interesting blog by Davis Polk’s Ning Chiu:
Although the failure rate for 2017 say-on pay results achieved an all-time low of just 1.3%, the number belies the fact that more than 2,000 say-on pay proposals have either received negative recommendations from ISS or less than 70% support, or both, since say-on-pay resolutions started in 2011.
Approximately 12% to 14% of companies run into problems every year. As companies have become more proactive with shareholder engagement, the number of companies that received “against” recommendations from ISS and still achieved more than 70% support has increased in the last three years, while the number of companies with those negative recommendations that received less than 70% favorable votes have fallen. What may be most surprising to companies, however, is that about 10 to 15 companies each year received positive endorsement from ISS and still obtained less than 70% support.
