Cyberattacks are a “dime a dozen” these days. But the one that Equifax disclosed last week has an insider trading twist that all corporate lawyers should be aware of. Reportedly, as noted in this LA Times article, three of the credit agency’s senior executives sold company shares – worth nearly $2 million – after the breach was discovered. But before public disclosure of the breach was made! According to the LA Times article, these sales weren’t likely made pursuant to a Rule 10b5-1 plan.
At this point – as the LA Times article notes – we don’t know if these officers were aware of the breach before they made the sales and/or whether the company’s pre-clearance procedures were adequately followed. Keep tuned (and please participate in our new “Blackout Periods Quick Survey.”
In addition, some are questioning why the company – including the board – didn’t correct vulnerabilities after prior breaches. Read more in this blog by Patterson Belknap’s Craig Newman, which notes that the cyberattack disclosure resulted in the immediate filing of this class action complaint (and subsequently, many more – including a securities lawsuit). Also see this NY Times article.
Given that Equifax’s breach of 143 million records might have personally impacted you – and everyone else reading this – this blog notes steps you might take to help avoid identify theft. People are understandably upset that Equifax is offering folks to use their security monitoring service for free in case they were breached. But it’s not quite “free” – in order to do that, you must first waive any rights against Equifax that you might have due to a breach…
NYC Comptroller & Pension Funds Begin New Activist Campaign
As noted in this Reuters article & this Weil Gotshal blog, the NYC Comptroller & the NYC Pension Funds have sent a letter to 151 companies seeking more board diversity – and a board that is more independent & climate-competent.
They want companies to use this standardized board matrix when making board composition disclosure – and they want boards to work with them (and other large shareholders) to identify suitable director nominees. This 2.0 project follows the “Boardroom Accountability Project” launched in 2014. We’re posting memos about this new campaign in our “Investor Policies” Practice Area.
Tomorrow’s Webcast: “Secrets of the Corporate Secretary Department”
Tune in tomorrow for the webcast – “Secrets of the Corporate Secretary Department” – to hear former Pitney Bowes’ Amy Corn, Primerica’s Stacey Geer and Mondelez International’s Carol Ward as they debunk myths on how to run the corporate secretary department, as well as provide oodles of practice pointers – the agenda includes:
– Scheduling Meetings – Approach & Tips (a/k/a The Calendar Challenge)
– Considerations in Planning Board/Committee Meeting Schedule & Agendas
– Allocation of Duties to – & Among – Committees (Using Charters)
– Committee Calendars (a/k/a Still More Calendar Challenges)
– Develop Annual and Monthly Agenda for Board & Committee Meetings
– Presentations vs Discussions vs Information Items
– Logistical Support – Tips & Pitfalls
– Minutes & Meeting Follow-ups
– Technologies – Portals Are Your Friend
ISS announced yesterday that it’s changing hands – for the fifth time in the past 15 years or so. Genstar Capital, a San Francisco-based private equity firm, is buying the company from the previous PE owner – Vestar Capital Partners – for $720 million.
The ISS press release gives a few details on the expected timing & transition plans:
The transaction is expected to close by early fourth quarter, subject to customary closing conditions.
ISS will continue to operate independently once the transaction is completed and the current ISS executive leadership team will remain in place.
Based on the press release, Genstar has some experience in backing service providers in the financial services sector – and plans to continue ISS’s strategic infrastructure & ESG initiatives.
Blockchain: Here Come the Early Adopters
According to this Bloomberg article, Delaware’s enactment of amendments permitting companies to use blockchain technology for corporate records is already attracting potential early adopters among privately-held companies. Here’s an excerpt:
Medici Ventures Inc.—a venture capital arm of online retailer Overstock.com Inc. that invests in blockchain companies—plans to become one of the early adopters. “Medici Ventures is very excited about the possibilities this forward-thinking legislation from Delaware affords corporations, and plans to offer its shares and begin managing its shareholder records on the blockchain as soon as possible,” Medici Ventures President and Overstock.com board member Jonathan Johnson told Bloomberg BNA in an Aug. 10 statement.
Medici Ventures is an investor in Symbiont, a New York-based financial services firm that is working with Delaware on the infrastructure to support corporate record keeping on a blockchain throughout the company’s life. The Overstock.com subsidiary is one of about two dozen private companies that have expressed interest in using Delaware’s blockchain law.
The article says that – so far – it’s law firms that have expressed the most interest in blockchain technology.
Spanking brand new. By popular demand, this comprehensive “Management Proposals Handbook” covers the entire terrain – in a nifty chart format! – from SEC requirements for typical proposals to common questions about proxy statement distribution. This one is a real gem – 31 pages of practical guidance – and it’s posted in our “Annual Shareholders’ Meetings” Practice Area.
Whistleblower Hotlines: Still a Vital Tool?
Here’s the intro from this blog by Matt Kelly of Radical Compliance:
Recently the chief compliance officer of a global company asked me: does a company need a telephone-based whistleblower hotline anymore? In our all-technology, all-the-time world, could a company phase out telephone hotlines in favor of a web-only reporting system?
The answer to that question requires a bit of finesse. The short answer is yes: in the purest, technical interpretation of corporate governance law and SEC rules, a company isn’t required to provide a telephone hotline as one reporting option. But you would need bulletproof arguments demonstrating why your organization no longer needs a telephone hotline, and never will in the future.
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here’s a sampling of entries:
– Confidential Treatment Requests for IPOs: 40% Have Them
– Federal Court Holds Delaware’s Unclaimed Property Estimation Methods Violate the Constitution
According to this Bloomberg article, a lot more companies are disclosing shareholder activism as a risk factor in their SEC filings. Apparently, 65 companies cited “shareholder activism” as a risk factor in SEC filings during the first six months of 2017, more than five times the number that cited activism during the same period three years ago.
Why is risk factor disclosure on the rise? The article suggests that companies are becoming increasingly aware of the prevalence of activism and the potential downside of being a target. The market cap of the companies including activism risk factors ranges from $45 million to $27 billion – although most are small caps & only a few are at the upper end of the market cap range.
The article identifies a number of companies that had activism risk factors in their recent 10-K filings – including:
Another Bloomberg article says that corporate risk factor disclosure about cyber threats is also growing – or maybe “exploding” is a better word:
More public companies described “cybersecurity” as a risk in their financial disclosures in the first half of 2017 than in all of 2016, suggesting that board and C-suite fears over data breaches may be escalating. A Bloomberg BNA analysis found 436 companies cited “cybersecurity” as a risk factor in their Securities and Exchange Commission periodic filings in the first six months of 2017, compared to 403 companies in 2016 and 305 companies in 2015.
There are plenty of sample cybersecurity risk factors to look at – and they run the gamut from boilerplate to highly specific disclosure. Here are a few that I thought were fairly robust:
In addition to activism & cybersecurity, as we’ve blogged before, President Trump is turning up in a lot of “risk factors” sections of SEC filings. In fact, the President is named so frequently in filings that “there’s an app for that” – the “Trump Tracker.”
Here’s an excerpt from this Sentieo blog introducing its Trump Tracker tool:
Today, we are excited to introduce the Trump Tracker. It’s a bot that constantly scans new public financial documents for mentions of President Trump. These documents include all SEC filings, conference call transcripts, investor presentations, press releases, and more. The bot instantly surfaces new mentions of Trump as soon as they’re published, while intelligent queries automatically sort them into topics like Obamacare, Mexico, and NAFTA.
Anyone interested in following the administration’s impact on public companies can engage with the Trump Tracker by checking the dedicated website, following the @trumptrackerbot Twitter account, or signing up for a daily email alert on the site.
Last week, Vanguard released its 2017 proxy voting report – along with an open letter to public company boards from CEO Bill McNabb. The letter stresses Vanguard’s long-term perspective, and sets forth its governance priorities. Meanwhile, the proxy voting report makes it clear that when it comes to asserting those priorities, the world’s largest index fund complex is more willing to throw its weight around.
The message that Bill McNabb delivered in his letter is an increasingly familiar one – it’s time for companies to improve board gender diversity & climate change disclosure. The letter also stressed the importance of engagement:
Timely and substantive dialogue with companies is core to our investment stewardship approach. We see engagement as mutually beneficial: We convey Vanguard’s views and we hear companies’ perspectives, which adds context to our analysis.
Our funds’ votes on ballot measures – 171,000 discrete items in the past year alone — are an outcome of this process, not the starting point. As we analyze ballot items, particularly controversial ones, we often invite direct and open-ended dialogue with the company. We seek management’s and the board’s perspectives on the issues at hand, and we evaluate them against our principles and leading practices.
To understand the full picture, we often also engage with other investors, including activists and shareholder proponents. Our goal is that a fund’s ultimate voting decision does not come as a surprise. Our ability to make informed decisions depends on maintaining an ongoing exchange of ideas in a setting in which we can cover the intention and strategy behind the issues.
The proxy voting report demonstrates that Vanguard continues to ramp up its engagement efforts. In 2017, it engaged with 954 companies – a nearly 40% increase over the 685 companies that it engaged with in 2015.
Moreover, the report shows that Vanguard is willing to vote against management when companies aren’t responsive to its engagement efforts. For example, Vanguard voted for a shareholder resolution calling for a gender diversity policy at a Canadian company because it concluded that the company wasn’t responsive to its concerns about diversity. For the first time, it also supported several climate change proposals – including one at ExxonMobil.
But Vanguard isn’t just sending a message to public company boards – as this Wachtell memo notes, its actions send an equally strong one to activists calling for index funds to relinquish their vote in contested situations:
With respect to activist and academic-sponsored attacks on the major index funds’ ability to participate in contested situations, Vanguard’s commitment to prioritizing responsible and long-term oriented investment stewardship is clear, having refused to outsource voting decisions to proxy advisory firms, doubled their internal team’s size since 2015, developed an intensive sector-based approach to analysis, engagement and voting and accessed the investment talent across Vanguard’s Investment Management Group and the 30 other investment firms managing Vanguard’s active portfolios.
Vanguard has been criticized for not being as active when it comes to governance issues as its peers BlackRock & State Street, but after some prodding from its own investors, it appears that the once slumbering giant is now wide awake.
New SEC Commissioner Nominee: Robert Jackson
On Friday, President Trump nominated Columbia law prof. Robert Jackson to fill one of the two remaining vacancies on the SEC. Here’s the White House’s announcement of Jackson’s nomination. Jackson would fill a Democratic slot on the SEC & would definitely make the meetings more interesting – he’s a leading advocate of a rule mandating disclosure of corporate political spending. In the past, Jackson’s also crossed swords with the SEC over the agency’s FOIA compliance.
In addition to the nomination of a new Commissioner, the SEC recently announced a number of appointments to Chair Jay Clayton’s executive staff.
Our September Eminders is Posted!
We’ve posted the September issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
A few days ago, the United Kingdom proposed specific reforms as reflected in this 68-page response to its “Green Paper.” The reforms proposed relate to three specific areas: Executive pay, strengthening the employee, customer and supplier voice and corporate governance in large privately held businesses.
The proposal waters down some of the more controversial aspects of the Green Paper (eg. binding say-on-pay votes) – but the remaining proposals are quite astounding. Here’s the ones relating to executive pay:
1. Require listed companies to report pay-ratio information annually (the ratio of CEO pay to the average pay of the company’s UK workforce), including a narrative explaining changes to the ratio from year to year and “setting the ratio in the context of pay and conditions across the wider workforce.”
2. Provide a “clearer explanation in remuneration policies of a range of potential outcomes from complex, share-based incentive schemes.”
3. Provide specific steps listed companies should take when there is significant shareholder opposition to executive pay policies and awards (which might include, for example, provisions for companies to respond publicly to dissent within a certain time period, or to verify that dissent has been sufficiently addressed by putting the company’s existing or revised remuneration policy to a shareholder vote at the next annual meeting).
4. Increase the responsibility of comp committees for oversight of pay and incentives across the company and require these committees “to engage with the wider workforce to explain how executive remuneration aligns with wider company pay policy (using pay ratios to help explain the approach where appropriate).”
5. Extend the recommended vesting & post-vesting holding periods for executive equity awards from three to five years to encourage a longer term focus.
6. Invite the Investment Association to maintain a public register of listed companies that receive shareholder opposition of 20% or more on say on pay, along with “a record of what these companies say they are doing to address shareholder concerns.”
In 2015 the NYSE amended its policy with respect to material news releases. One of the amendments was to include advisory text in Section 202.06 of the Listed Companies Manual requesting that listed companies intending to release material news after the close of trading on the Exchange wait until the earlier of the publication of their security’s official closing price on the Exchange or fifteen minutes after the scheduled closing time on the Exchange. The reason for the change was that securities trade in other markets after the NYSE closes, and investor confusion arises if the trades in other markets are at prices different than NYSE trades being completed at the NYSE closing price.
Notwithstanding the addition of the advisory text, the NYSE has continued to experience situations where material news released shortly after 4:00 p.m. has caused significant investor confusion. Accordingly, the NYSE now proposes to amend Section 202.06 to prohibit listed companies from issuing material news after the official closing time for the NYSE’s trading session until the earlier of publication of such company’s official closing price on the Exchange or five minutes after the official closing time. The NYSE believes that designated market makers are able to complete the closing auctions for the securities assigned to the market maker in almost all cases within five minutes of the NYSE’s official closing time.
In the proposed rule, the NYSE continues to recommend that companies that intend to issue material news after the NYSE’s official closing time delay doing so until the earlier of publication of such company’s official closing price on the NYSE or fifteen minutes after the Exchange’s official closing time. The foregoing change is in addition to changes to NYSE rules related to dividend announcements, which the NYSE is currently seeking to delay to facilitate implementation of the new rules.
Happy Labor Day! “Office Space” Style
Enjoy the long weekend – assuming you have your TPS Reports done. If not, I think Lumberg wants to see you.
Here’s the results from our recent survey on board approval of the 10-K:
1. When it comes to approving the filing of the Form 10-K with the SEC, our company’s full board:
– Convenes telephonically to approve it – 48%
– Relies on the audit committee to convene telephonically to approve it – 48%
– Management already has the board’s power of attorney to sign the 10-K, so there’s no audit committee or board meeting to approve it – 5%
2. When our directors are given a chance to comment on a draft of the 10-K, we typically receive back:
– No substantive questions or comments – 21%
– 1-2 substantive questions or comments – 43%
– 3-5 substantive questions or comments – 21%
– More than 5 substantive questions or comments – 15%
Dual-Class Structures: Does the Market Already Have a Fix?
Liz recently blogged about the decision of major indices to exclude “dual-class” companies that offer minimal voting rights to public shareholders. The debate about dual-class companies continues to rage – but this recent study suggests that the market may already have a solution, in the form of investors’ demand for a “risk premium” for these stocks. Here’s the abstract:
Critics advocate eliminating dual class shares. We find that founding families control 89% of dual class firms, potentially confounding economic inferences regarding limited voting shares. To identify the impact of dual class structures on outside shareholders, we examine stock price returns; finding that dual-class family firms earn excess returns of 350 basis points more per year than the benchmark.
Institutional owners garner a disproportionate fraction of these returns by holding over 97% of their floated shares. Overall, we show that investors demand a risk premium for holding dual-class family firms, suggesting a market-driven resolution to concerns about limited voting shares.
If the study’s right, these above-market returns may go a long way to explaining why – despite their harrumphing – institutions continue to throw money into these stocks.
Meanwhile, this LA Times article notes that tech companies are not likely to bow to S&P’s new dual-class rules…
Nasdaq to Dual-Class Companies: “We’ve Got Your Back”
The major indices may have “unfriended” dual-class companies like Snap, but this “Institutional Investor” article says that Nasdaq remains happy to provide a home for them. Here’s an excerpt:
Nelson Griggs, head of global listings at the Nasdaq Stock Market, said Nasdaq supports companies that want to go public with a dual-class structure, as long as investors know what they’re getting into. Companies often use multiple share classes – each with different voting rights – to help founders and CEOs maintain control or as a tool to fend off activists. Technology and media companies have been among the biggest users of multiple share classes.
“In the U.S., if companies disclose that they have multiple share classes, then investors can make a decision on whether they want to be a financial owner,” said Griggs. “We think it’s in the best interests of companies to have that option.”
With fewer companies going public, new listings are hard to come by – and companies with dual-class structures represent 10% of Nasdaq’s listings. That’s up from 2% a decade ago. You do the math.
When it comes to changing auditors, it looks like the best advice comes from “Macbeth” – “’twere well it were done quickly.” This Fredrikson & Byron blog flags a new study that says timing matters when it comes to a decision to change auditors – and sooner is a lot better than later:
Companies thinking about changing their auditors should do so before the end of their second fiscal quarter, according to a recent study by researchers at the University of Notre Dame and Ohio University. Although there are legitimate reasons to change auditors having nothing to do with company malfeasance or auditor malpractice, turnover is rare so it can raise questions. In an interview with CFO Magazine, the study’s lead author says that a company announcing the dismissal of its auditor after the second fiscal quarter risks being “lumped in with the bad apples” that want to end the auditor’s engagement to cover up “nefarious” doings.
The study found that companies that dismiss auditors after the 2nd fiscal quarter have “markedly higher rates of future restatements, material weaknesses and delistings” compared to firms that make the change shortly after filing the prior year’s 10-K.
Pre-IPO Companies: Private Liquidity Programs
One reason that some promising companies are electing to defer IPOs may be the growth in private liquidity alternatives for their shareholders. This MoFo blog discusses the Nasdaq Private Market’s recent report on private liquidity programs conducted through its trading platform during the first half of 2017. Here’s an excerpt:
Nasdaq Private Market reports increased activity in private company liquidity programs. Companies that are choosing to stay private longer are using structured and controlled liquidity as a recruitment and retention tool, according to the Nasdaq report. In the first half of 2017, the Nasdaq Private Market Platform had 19 liquidity programs, with a total program volume of $733 million and 1,765 program participants.
62% of the programs were share buybacks and the remaining 38% of the programs were structured as third-party tender offers. These programs had an average size of $40 million. The report notes that most of the 19 programs were employee-focused, where 84% of eligible sellers were current and former employees.
While Nasdaq says that private liquidity programs are appealing to a broader range of companies, most of the companies that have implemented them this year are “unicorns” – with a median valuation of $1.4 billion.
Dividends: NYSE Delays New Timing Requirements
Following up on something we blogged about a few weeks ago, here’s news from Ning Chiu’s blog:
The NYSE has asked the SEC to delay the effectiveness of its recently approved rule requiring listed companies to provide notice to the Exchange at least 10 minutes before making a public announcement about a dividend or stock distribution.
On August 14, when the rule change was approved by the SEC that would require listed companies to provide the Exchange with advance notice, including outside of the hours in which the Exchange’s immediate release policy operates, many assumed that the rule was immediately effective since nothing in the rule filing indicated otherwise.
In its proposal to the SEC, NYSE states that it is asking for the delay to provide listed companies with additional time to prepare and for the Exchange’s new technology systems to provide the necessary support to Exchange staff in reviewing notifications. The Exchange indicates that it will provide reasonable advance notice of the new implementation date to listed companies by emailing a notice to them that will also be posted on nyse.com, and that the new implementation date will be no later than February 1, 2018.
Until then, the text of Rule 204.12 continues to state that notice should be given as soon as possible after declaration of the dividend or stock distribution and in any event, no later than simultaneously with the announcement to the news media.
We decided to release these course materials early since so many are grappling now with the type of issues addressed in this “How to” manual. Just like the upcoming “Pay Ratio & Proxy Disclosure Conference” in October will comprehensively address these – and many more – issues. This comprehensive pay ratio event is one that you can’t afford to miss. Also remember that our third pre-conference webcast is September 27th.
Register Now: This is the only comprehensive conference devoted to pay ratio. 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.
“Token Sales” & ICOs: A Primer
We’ve been blogging a bit about the emergence of initial coin offerings, also known as “token sales,” “app coins” and all sort of other terms (here’s our latest blog). Some members have asked how can a currency be a security. Rather than host a webcast on that topic, I think this 32-minute podcast from “a16z” does a great job of making something fairly challenging to understand seem simple. The brief discussion at the 18:29 mark about how governance works when a “protocol” is monetized sets the table for a fascinating debate…
Steven Clifford on “The CEO Pay Machine”
In this 26-minute podcast, former CEO Steven Clifford discusses the problems with CEO pay – and describes his plan about how to fix it (as noted in his new book “The CEO Pay Machine“), including:
1. Why did you write this book?
2. Can you explain the role of boards in setting pay – and how they might be “collectively” delusional?
3. Why might CEOs not be as important as many think they are?
4. Can you get into the topic of “peer groups” and how CEOs may not be portable?
5. How can excessive pay actually be a de-motivator?
6. I’ve always argued that any pay is “pay-for-performance” by definition. How are most P4P arrangements detrimental to a company’s long-term health?
7. How is “shareholder alignment” not the gold standard that many think it is?
8. What is your plan to fix the “CEO Pay Machine”?
This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play. Use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
This recent WSJ article pointed out a significant decline in penalties levied by the SEC during the first half of 2017:
The SEC levied some $318 million in penalties during the first half of 2017, a search of federal court documents and all publicly available records on the agency’s website and data provided by Andrew Vollmer, a professor at the University of Virginia School of Law, showed. Last year, agency actions yielded $750 million in penalties during the same period, an agency spokesman said.
The article notes that fines & penalties imposed by other financial regulators were also down sharply. It cited a more business favorable climate under the Trump Administration & the winding down of financial crisis cases as contributing factors to a decline in SEC enforcement activity.
. . .Wait, Maybe Penalties Aren’t the Right Thing to Look At?
This CFO.com article by Labaton Sucharow’s Jordan Thomas says “not so fast.” The article claims that enforcement activity shows no signs of easing. Here’s an excerpt:
If the first half of the year was any indication, the SEC is on track to have another record year for enforcement activity in 2017. Looking at data compiled in our SEC Sanctions Database, which tracks a subset of enforcement actions that resulted in monetary sanctions exceeding $1 million, the agency shows no sign of easing its efforts to sanction bad actors.
The largest case thus far in 2017 was brought against Barclays, which agreed to pay $97 million in disgorgement and penalties for overcharging clients for mutual fund sales and advisory fees. Perhaps unsurprisingly, given where major financial firms are headquartered, cases were clustered regionally in the Northeast and West, with nearly half of all actions coming out of the Northeast. But actions coming from the South nearly doubled from last year and the Midwest saw a fivefold increase in the number of cases.
Also for the first half of 2017, more than 40% of cases we studied involved offering fraud. That’s almost double the number of offering fraud cases observed in the first halves of the last three years combined.
The article says that in light of this level of activity, the WSJ’s criticism of the SEC’s enforcement activity during 2017 is misplaced – and that it’s inappropriate to draw conclusions about the agency’s enforcement agenda by looking at 6 months of penalties in a vacuum.
Corp Fin Updates “Financial Reporting Manual”
On Friday, Corp Fin updated its “Financial Reporting Manual” to provide contact information for the Office of the Chief Accountant and to clarify guidance on the omission of financial information from draft & filed registration statements. The latter change adds references to the new CDIs on the same topic issued earlier this month.
Enjoy the long weekend – assuming you have your TPS Reports done. If not, I think Lumberg wants to see you.