Here’s the results from our recent survey on Regulation FD policies & practices (here’s other Reg FD surveys conducted over the years):
1. Our company has a written policy addressing Regulation FD practices:
– Yes, and it is publicly available on our website – 5%
– Yes, but it is not publicly available on our website – 64%
– No, but we are in the process of drafting such a policy – 7%
– No, and we do not intend to adopt such a policy in the near future – 24%
2. For Regulation FD purposes, our company believes:
– Our website is a “recognized channel of distribution” – 29%
– We are still studying whether our website is a “recognized channel of distribution” – 17%
– Our website is not a “recognized channel of distribution” – 52%
– I don’t even know what this question means – 2%
3. Compared to our insider trading policy, our Regulation FD policy:
– Has the exact same parameters – 34%
– Our Regulation FD policy imposes a quiet period that starts earlier than our insider trading policy – 6%
– Our Regulation FD policy imposes a quiet period that starts later than our insider trading policy – 25%
– Our Regulation FD policy imposes a quiet period that lasts longer than our insider trading policy – 6%
– Our Regulation FD policy imposes a quiet period that lasts shorter than our insider trading policy – 28%
– We don’t have a Regulation FD policy – 26%
I found it interesting that Japan just introduced its own version of Reg FD. Better late than never…
Equifax: Special Committee Finds Insiders Properly Pre-Cleared Trades
Back when I blogged about the Equifax cybersecurity breach – and the question arose whether senior executives had pre-cleared trades in the company’s stock – I wrote: “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.”
Equifax now has released this special committee report dealing specifically with this pre-clearance of insider trades. And after reviewing 55,000 documents & 62 interviews with the parties involved, it found that the insiders involved did indeed properly pre-clear the trades according to the company’s policy. That certainly is good news.
In the wake of Corp Fin’s new Staff Legal Bulletin No. 14I, we have scheduled a webcast for next Tuesday, November 14th – “Shareholder Proposals: Corp Fin Speaks” – during which Davis Polk’s Ning Chiu will ask Corp Fin’s Matt McNair about how the new SLB should be applied in practice.
As reflected in the memos posted in our “Shareholder Proposals” Practice Area, there are a number of open issues to consider after the SLB – particularly logistical issues about how boards can timely act to qualify for the Staff’s new “ordinary business” position…
Rule 701 & E-Delivery: Corp Fin’s New CDI
Yesterday, Corp Fin issued this new CDI 271.25 under the ’33 Act rules:
Question: To protect against the unauthorized disclosure of Rule 701(e) information, may companies that are using electronic delivery to satisfy Rule 701(e) disclosure requirements implement safeguards with respect to electronic access to Rule 701(e) information?
Answer: We understand that some companies satisfying their Rule 701(e) delivery obligations electronically have concerns about the potential disclosure of sensitive company information. Standard electronic safeguards, such as user-specific login requirements and related measures, are permissible. The use of a particular electronic disclosure medium either alone or in combination with other safeguards, such as the use of dedicated physical disclosure rooms that house the medium used to convey the information required to be disclosed, should not be so burdensome that intended recipients cannot effectively access the required disclosures.
For example, we would expect that physical disclosure rooms would be accessible during ordinary business hours upon reasonable notice. Once access to the required information has been granted, however, the medium used to communicate the required disclosure should provide the opportunity to retain the information or have ongoing access substantially equivalent to personal retention. [November 6, 2017]
We just wrapped up Lynn, Borges & Romanek’s “2018 Executive Compensation Disclosure Treatise” — and it’s been printed. This edition has a major update to the key chapter on the new SEC’s pay ratio rules (now 120 pages long!) & more – this includes the latest pay ratio guidance from the SEC in September. All of the chapters have been posted in our “Treatise Portal” on CompensationStandards.com.
How to Order a Hard-Copy: Remember that a hard copy of the 2018 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately. Act now as this will ensure delivery of this 1650-page comprehensive Treatise soon. Here’s the “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.
Last week’s tax bill from House Republicans would have a tremendous impact on executive pay if enacted into law. We’re posting memos in the “Regulatory Reform” Practice Area on CompensationStandards.com – but here’s a teaser from Skadden that will blow you away:
If enacted, the newly proposed “Tax Cuts and Jobs Act” would effectively put an end to many of the most widely used forms of executive compensation:
– Deferred compensation and stock options would disappear
– Use of performance-based compensation would be severely limited
– Compensation over $1 million to senior executive officers would be nondeductible for public companies and subject to an excise tax for tax-exempt organizations.
Of course, the tax reform bill released by the House Republicans today (November 2) is likely to change, perhaps drastically, in the coming days.
House Passes Two Bipartisan Bills to Facilitate Offerings
On November 1, the House passed two bills designed to encourage capital formation by extending JOBS Act testing-the-waters provisions to all companies, codifying the SEC’s earlier expansion of confidential submission of draft registration statements by a non-emerging growth company for its IPO and during the one-year period after going public, and modifying the definition of an accredited investor to make more individuals eligible to participate in private placements.
The bills were passed on a bipartisan basis and echo proposals that were part of the Financial Choice Act passed by the House in June 2017 and the Treasury Department’s recent regulatory reform report on capital markets. We expect the bills would likely be passed and signed into law if they reach the Senate floor for a vote.
Farewell to Walter Schuetze
I note the sad news of the passing of Walter Schuetze. Walter served both the profession & public admirably. He was a courageous & staunch advocate for improving financial reporting through the use of fair value accounting.
As noted in this bio, Walter had an amazing career – one of the original founding members of the FASB. A leader of the KPMG’s National Accounting Technical Office, and the Chair of the AICPA’s Accounting Standards Committee. Served as both the SEC Chief Accountant and SEC Enforcement’s Chief Accountant. He will be missed by many.
Farewell to Dean Hunt
Sadly, former SEC Commissioner Dean Hunt passed away too. Here’s what the SEC’s statement says:
Appointed to the Commission in 1996 at the dawn of the digital age and a truly transformative era of our capital markets, Ike was a powerful voice for making sure our mission of protecting investors, fostering fair and efficient markets, and facilitating capital formation remained timeless in the face of dramatic change.
Always a thoughtful advocate for the rule of law and its fair and consistent application, Ike started his legal career as an SEC staff attorney in 1962. From then, whether in private practice, academia, or serving at the Commission, Ike set a shining example for generations of SEC staff to follow. We thank Ike for his passion and distinguished public service, and offer his family and friends our deepest condolences.
A few days ago, Corp Fin issued Staff Legal Bulletin No. 14I – it’s first SLB on shareholder proposals in two years. And it’s a big one. As CII notes, the SLB creates a path for companies to omit proposals by presenting a “well-developed” description to the Corp Fin Staff of the board’s analysis of the issue raised by the proposal & the issue’s significance to the company – and the SLB places a greater expectation on proponents to tie social or ethical issues to a significant effect on the company’s business.
– Deference to company analyses of significant policy issues under the Rule 14a-8(i)(7)’s “ordinary business” exclusion basis
– Expansion of the “economic relevance” exception under Rule 14a-8(i)(5)
– Additional eligibility requirements for proposals “by proxy” under Rule 14a-8(b)
– Application of Rule 14a-8(d) to the use of images in shareholder proposals & supporting statements and encouraged reliance on Rule 14a-8(i)(3)’s “false and misleading” standard for exclusion
In her Davis Polk blog, Ning Chiu does a good job of identifying the open issues relating to how companies might be able to create the board’s analysis over significant policy issues under (i)(7). More on this SLB soon…
“NASDAQ” v. “Nasdaq”? Branding 101
As Steve Quinlivan noted in this blog, Nasdaq has filed an immediately effective rule change with the SEC to reflect a corporate branding change to Nasdaq’s name. If you read through our stuff – including our fabulous “Nasdaq Listing Standards Handbook” – you’ll see that we have never used “all caps” for Nasdaq. It ain’t Plain English. I’ll use all caps for acronyms – like the “SEC” – but I won’t use all caps otherwise. It’s bad branding…
The irony is that Nasdaq didn’t use all caps long ago – but then changed it to “NASDAQ.” I think it was originally all caps, as it was an acronym for National Association of Securities Dealers Automated Quotations. So it went from upper case to lower case to upper case and now again lower case…
Our New “Deal U. Workshop” Is On!
Our new “Deal U. Workshop” is the perfect way to train those less-experienced in working with M&A. Each attendee receives these three critical – and practical – resources:
1. Deal U. Podcasts – Access to nearly 60 podcasts about M&A activities – tailored to those new to this area. Each podcast ranges between 5-10 minutes – for a total of 7 hours in content. Here’s a list of the podcast topics.
2. Deal U. Situational Scenarios – Our 30+ situational scenarios – with detailed analyses – will help you fully comprehend many different aspects of deal practice.
3. “Deal Tales” Paperbacks – A Three Volume Set – Education by entertainment! This series of three paperback books teaches the kind of things that you won’t learn at conferences, nor in treatises or firm memos. With the set containing over 600 pages, John Jenkins – a 30-year vet of the deal world – brings his humorous M&A stories to bear.
This is a great way to outsource your training – our resources are practical (and entertaining at the same time). Call Albert Chen at 512.960.4823 for a flat firmwide or sliding scale rate – or register now for a single user.
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.
