Here are stats about this year’s no-action letters for shareholder proposals, courtesy of this Bloomberg blog:
– An increase in number of no-action letter requests: Over 220 requests were submitted – almost a 10% increase over 2016.
– E&S requests were most common: Together, human rights & environmental proposals were the subject of 71 no-action requests. Companies were successful in excluding 62% of the human rights proposals – but only 17% of the environmental proposals.
– Ongoing attention to proxy access: 49 companies attempted to exclude proposals on proxy access – and the Corp Fin Staff granted relief more than 75% of the time. Most of these were probably “fix-it” proposals. As I blogged today on our “Proxy Season” blog, companies are starting to find a roadmap for excluding these proposals on the basis of “substantial implementation.”
– Requests vary by industry: Most of the no-action requests were submitted by companies in the financials, consumer discretionary & health care industries. In the financial sector, 9 out of 40 no-action requests dealt with shareholder proposals relating to executive compensation. In consumer discretionary, most of the requests related to human rights/social issues.
Also note that the Manhattan Institute recently released its shareholder proposal stats for the proxy season…
Director Communications: Convenience v. Security
How does your board balance convenience & security? Directors need to be able to access & interact with documents while traveling – but their accounts & devices are prime targets for hackers.
Recently, NYSE & Diligent surveyed 350 directors to understand current practices. Among other findings: 92% use unsecured personal email accounts for at least some board communications – yikes! Here’s another nugget:
It’s a bit perplexing that the auditing of board communications, accompanied by cybersecurity training for directors, has not yet become routine. At most companies, board members are on the front lines of a pitched battle; directors are targeted for cyberattack precisely because they have access to the most sensitive information with the least amount of oversight…
Experts agree, the company’s information security officers should provide a similar level of oversight, cyber risk auditing, and cybersecurity training for directors as for the rest of the company, and a director’s ability to adhere to proper procedure should be considered a basic standard for continued membership on the board.
Transcript: “Whistleblowers – What Companies Should Be Doing Now”
We have posted the transcript for our recent webcast: “Whistleblowers – What Companies Should Be Doing Now.”
Section 845 of the Act would prohibit the SEC from requiring the use of a universal proxy. It states “The Commission may not require that a solicitation of a proxy, consent, or authorization to vote a security of an issuer in an election of members of the board of directors of the issuer be made using a single ballot or card that lists both individuals nominated by (or on behalf of) the issuer and individuals nominated by (or on behalf of) other proponents.”
Section 844 of the Act would drastically alter the shareholder proposal rules. The Act would require the SEC to eliminate the option to satisfy the holding requirement by holding a certain dollar amount, require the shareholder proponent to hold one percent of the issuer’s voting securities and increase the holding period from one year to three years. It would also increase thresholds for resubmission of proposals. Interestingly, it would also prohibit the common practice of having a proxy submit a proposal on behalf of a shareholder.
The House Financial Services Committee will hold a hearing on the bill next Wednesday…
A Few New Cover Pages For You…
Recently, the SEC changed the cover pages for most ’33 Act & ’34 Act forms by adding a box relating to “emerging growth companies.” Hat tip to Bass Berry’s Jay Knight for providing these new cover pages in Word:
Director Viewpoints: Changing Domestic Strategies & More
The annual “What Directors Think” survey – by Corporate Board Member/Spencer Stuart – addresses a wide range of topics ranging from deregulation & tax policy to the board’s role in long-range strategic planning & cybersecurity. Key findings include:
– While a full third of board members agreed Dodd-Frank should be completely repealed, the majority (58%) argued in favor of tweaking only certain provisions.
– Half of the respondents believe a one-time deemed repatriation of 10% on offshore profits would support their company’s domestic growth.
– Two-thirds of directors said it is unlikely they’ll adjust their global strategy over the near term, though 46% speculated about the likeliness of doing so domestically.
– Thirty-nine percent of directors said they discuss cybersecurity at every meeting, a slight uptick from the 35% reported six months earlier.
– Four out of 10 respondents reported their board has at least one director with cyber expertise, with an additional 7% who are in the process of recruiting one.
– Only 8% of directors reported being in favor of federal regulations for overboarding.
Last week, Broc blogged that companies are lagging in preparing for the upcoming changes to the “revenue recognition” accounting standard that takes effect the start of next year. And it’s notable that companies may also be lagging in 10-Q transition disclosure. Over on our “Proxy Season Blog,” Broc recently identified this as “The Key MD&A Item in 2017 10-Qs” & highlighted a sample disclosure.
This blog excerpt from Dorsey’s Gary Tygesson provides more pointers:
Of more immediate concern, companies should be reviewing their Form 10-Q disclosures this quarter and for the balance of the year to make sure that they have addressed the SEC staff’s transitional disclosure requirements set forth in Staff Accounting Bulletin No. 74 regarding the expected impact of the new revenue recognition rules. If a company does not know, or cannot reasonably estimate, the expected financial statement impact of the new rules, that fact should be disclosed.
In that case, however, as noted in a recent speech by the SEC’s Chief Accountant, Wes Bricker, the SEC staff expects a qualitative description of the effect of the new accounting standard, and a comparison to the company’s current accounting, to aid investors in understanding the anticipated impact. Mr. Bricker said that companies “should also disclose the status of its implementation process and significant implementation matters yet to be addressed.” Based on a preliminary look at disclosures in SEC filings to date, Mr. Bricker reported that a number of companies have enhanced their transition disclosures, while for others “there is still more work to do.”
Mr. Bricker also advised caution for companies that conclude in their transitional disclosures that the impact of the new revenue recognition standard is not expected to be material. Because the new standard includes comprehensive new disclosures about contracts with customers and related judgments made by companies, he warned that “the basis of any statement that the impact of the new standard is immaterial should reflect consideration of the full scope of the new standard, which covers recognition, measurement, presentation and disclosure for revenue transactions.”
A New “Intrastate Integration” CDI: Rule 147
Yesterday, Corp Fin issued this new CDI 141.06 regarding how offerings under Rule 147 can transition to those relying on Rule 147A…
PCAOB’s “AuditorSearch” Database: Auditors & Engagement Partners Now Searchable
Recently, the PCAOB launched “AuditorSearch” – a public database of engagement partners & auditors. This search tool allows you to surf through the data filed as part of the new Form AP. The database can provide insight into the relative experience of various engagement partners – such as whether they’ve been associated with restatements or disciplinary proceedings. It also shows whether other auditors performed work underlying the audit report.
Poll: Another Editor??
It’s official – my first week of blogging is here. Readers everywhere are checking their bookmarks & emailing Broc. I can confirm he’s well (albeit in Japan on vaca) – and that all of our content remains subject to our quality-control procedures.
I’m joining TheCorporateCounsel.net after 10 years in private practice. Everyone – including me – thought I’d spend my life in the law firm trenches. Who doesn’t love the adrenaline rush of an FD slip or an unexpected shareholder proposal? But when opportunity knocks…
When we know each other better, I’ll share some reactions to my job change by former colleagues. Let’s just say they were all across the board. In the meantime, Broc & I thought it would be fun to get your reactions too – in this anonymous poll:
Dig this 170-page Form 10-K for the US Government! It was drafted at the behest of former Microsoft CEO Steve Ballmer (the guy who bought the LA Clippers a few years ago for a cool $2 billion) – and his “USAFacts Institute” project.
The “Top 5” things that tickled me (page numbers are those of the PDF – not the ones from the actual doc):
1. Includes the standard “forward-looking statements” disclaimer, but it is tailored! (pg 5)
2. Executive pay data for the US officers – where’s that equity comp? (pg 152)
3. Executive pay data for state governors – Maine gov is underpaid! (pg 153)
4. Related-party transactions – ie. political contributions (pg 154)
5. Cover page notes that all US governments have $15.1 trillion in aggregate debt (pg 1)
While I love that all the exhibits are numbered 99.xx, I think they missed a real opportunity to include the Constitution as “Exhibit 3.1,” the Bill of Rights as “Exhibit 3.2,” and so on. Hat tip to Bjorn Hall of Rise Companies for pointing this gem out!
IPO alternatives appear to be alive and well as we learn from press reports that unicorn music service Spotify may go public through a “self-filing,” also known as a “direct listing.” In my first book, over 10 years ago, I talked at length about the potential value of this very straightforward technique. Assuming you otherwise qualify for an exchange listing, you simply file to register some already outstanding shares for trading, without raising new money, and off you go. Recent self-filers include Coronado Biosciences.
T+2 in Practice: Three Implications Not to Be Missed
This Weil blog by Howard Dicker & Kaitlin Descovich provides some great practice pointers about the shortened settlement period. Also see these memos about the rule change in our “Settlement” Practice Area…
Grimes’ decision marks the failure of the SEC’s game plan to pursue Hill through an in-house administrative proceeding, a strategy approved by a federal appeals court in Atlanta last June after more than a year of litigation by Hill.
Critics of such proceedings, which were championed by former SEC enforcement chief Andrew Ceresney, say they are unfair to defendants because there are no juries and limited depositions, and because judges are on the SEC payroll. Federal appeals courts have divided on the proceedings’ constitutionality, raising the prospect that the U.S. Supreme Court may take up the issue.
I’m very excited to announce that Liz Dunshee has joined us as an Editor for our sites. Liz is an “all-star” in every sense of that word, as you’ll soon find out. She’s based in Minneapolis – her email address is included in her bio if you want to drop a line. She’ll be blogging soon enough.
Given her tender age, Liz is poised to take over this enterprise from me someday – when either my paws can’t hammer this keyboard anymore or I refuse to write “conflict minerals” one more time…
Did you know? The term “conflict minerals” has been mentioned in over 200 entries in this blog! #ThoughtThisWasaSecuritiesLawJob
White Collar Crime in a Post-Bharara World
Here’s some analysis of where the SDNY might be headed in the wake of Preet Bharara’s ouster:
Book Review: How to Make An Effective Corporate Video
Recently, I read the new book by Vern Oakley entitled “Leadership in Focus: Bringing Out Your Best on Camera.” For those that watched my “Usable Proxy Workshop” a few years back (the video archives from that excellent event are still available), you’ll remember Vern as the filmmaker that helps many companies with their corporate videos. This new book is easy to read, filled with interesting anecdotes & stories to bring home the points that Vern wants to make. My favorite type of book!
Here’s some of my favorite chapters, along with an explanation about why I feel that way:
1. “Speak from Your Heart: Connect with Millions“: A more humanizing presentation holds the viewer’s attention & helps connects them to your ideas. Too many videos – and blogs! – are bereft of any humanity. You want the video to feel “authentic” (but not sharing too much, of course – share what’s appropriate).
2. “Nobody Wants Perfect“: Building authenticity means bringing your guard down a little. Show some vulnerability. That shows courage. Your flaws can motivate people to listen to you more closely.
3. “The Leader Has No Clothes“: There is no failure, only feedback. And you want to provide feedback, not criticism. Empathy builds trust. If your trusted advisors aren’t offering the kind of objective feedback you want, share this book!
4. “Anatomy of an Effective Video“: Good practical stuff!
As noted in this WSJ article, the bartering to tweak the “Financial Choice Act” continues. Most of the Corp Fin-related notables in the bill remain untouched (eg. pay ratio would still get the axe) – but there are a few proposed changes that would impact you, such as changes to the ownership thresholds under Rule 14a-8, the shareholder proposal rule. This chart contains the changes – so far – from “Financial Choice Act 1.0.”
Of course, it’s still too soon to say what form the Choice Act will ultimately wind up taking – and even too soon to know if this legislation will eventually be “the one” put forward to replace Dodd-Frank…
By the way, the White House recently issued this memo, which affirms that its executive order with the “kill two rules-for-adopting one” mandate isn’t binding on independent agencies – like the SEC. But this new memo also reaffirms President Trump’s encouragement that independent agencies voluntarily abide by this mandate. The new memo dovetails with OMB’s Interim Guidance from a few months back on this topic…
Katherine Blair: Life as a Corporate Lawyer
In this 32-minute podcast, Katherine Blair of Manatt Phelps discusses her long & enjoyable career, including.
– Where did you grow up?
– How did you wind up becoming a lawyer?
– How did you wind up selecting securities laws?
– How has practicing in a law firm evolved over time?
– What is corporate practice in Los Angeles like?
– How active are the LA County & California bars?
– What types of tasks do you enjoy the most?
This podcast is also posted as part of my “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…
Resource Extraction: 12 Senate Democrats Want to Try Again
Recently, a group of a dozen Senate Democrats sent this letter to the SEC asking that they try again with a resource extraction rule. I wouldn’t bet on that happening. This counters the letter that 6 Senate Republicans sent down to the SEC a few months ago…
The big news from Wells Fargo a few days ago was that the company’s board exercised its discretion to clawback $75 million from its former CEO and former head of community banking. Here’s the 113-page Wells Fargo board report – and here’s the news:
Recently, Corp Fin denied a no-action request from Celgene to exclude a shareholder proposal submitted by John Chevedden. The proposal sought a bylaw that would prevent the board from seeing a running vote tally when say-on-pay or shareholder approval of plans were on the ballot. The company made unsuccessful arguments under Rule 14a-8(i)(2) (arguing it was a state law matter) – and (i)(7) ordinary business. Over the years, Corp Fin has allowed exclusion of shareholder proposals that sought confidentiality for preliminary vote tallies for uncontested matters under (i)(7) – a broader plate of topics than the narrower “pay topics only” proposal at issue in this case.
Conflict Minerals: NGOs Say “Ignore Corp Fin Guidance”
As noted in this Cooley blog, a number of non-governmental organizations have issued statements emphatically rejecting Corp Fin’s recently updated statement about the effect of the Court of Appeals Decision on the conflict minerals rule – and they’re asking companies to disregard the Corp Fin guidance…
Yesterday, the self-effectuating changes – under the JOBS Act – to many of the SEC’s ’33 Act & ’34 Act forms became effective – since the rule changes were published in the Code of Federal Regulations. I originally blogged about this a few weeks ago, several days before the SEC put out their press release about it – not sure why the SEC waited to do that, but it seems to have caused some confusion among loyal readers (that along with my unartful title of that blog).
Most of these changes impact cover pages, which will help the SEC identify whether a filer is an “emerging growth company” or not. In other words, your cover pages will now change for these forms regardless if your company is an EGC or not.
Six employees at KPMG LLP have resigned after the U.S. audit regulator began investigating the leak of a confidential plan to inspect work performed by the global accounting firm, the company said Tuesday. The departing KPMG employees include four partners and Scott Marcello, a partner and the head of the firm’s audit practice, according to KPMG. The firm confirmed the matter after being contacted by The Wall Street Journal. Mr. Marcello couldn’t immediately be reached for comment.
The Public Company Accounting Oversight Board, created by Congress after the accounting scandals that took down Enron Corp. and WorldCom Inc. to police audits of listed companies, has hired an outside law firm to probe the breach, according to people familiar with the matter. The accounting board discovered the leak more than a month ago, according to the people, and the incident has sparked renewed concern about the management of the regulator, which has been criticized as moving slowly to advance new audit standards.
Revenue Recognition: Are Most Companies Behind?
Here’s an excerpt in this blog from “The SEC Institute”:
The second recent development is the release by Deloitte in a “Heads Up” newsletter in April 2017 of their most recent updated survey “Adopting the New Revenue Standard — Where Do Companies Stand?” In the survey, Deloitte found that many companies that had originally contemplated using a full retrospective have moved more towards the modified retrospective method. And, along with the worries of the SEC Chief Accountant above, they also found: “Slightly more than half of respondents had started to implement the new standard, but most were in the very early phases of adoption.”
Broc recently blogged about Gretchen Morgenson’s NY Times column on the growth of virtual annual meetings. Frankly, I can see why the virtual-only approach might be attractive to many companies whose live meetings are attended – much like my traumatic 10th birthday party – only by a handful of people who are paid to be there.
Still, I confess that even after decades of watching executives read from turgid scripts written by junior lawyers (“I move that the reading of the minutes of the 2016 annual meeting of shareholders of the Company be dispensed with blah, blah, blah. . .”), I’m kind of a fan of in-person annual meetings.
Done well, an annual meeting can provide a great opportunity to connect with retail shareholders, and there’s also something to be said for requiring the CEO to stand in-person before shareholders once a year without a mute button and a team of advisors to help with a response to a tough question. But there’s more to recommend them than just that.
From microcap meetings held in a conference room to Berkshire-Hathaway’s annual epic, annual meetings frequently provide an endearing slice of Americana. Warren Buffett’s “Woodstock for Capitalists” is famous for its folksy charm – but you don’t have to go to Omaha for that. At a community bank meeting that I attended last year in a small Ohio town, a very nice retiree proudly showed me a copy of a passbook for a savings account that her father opened for her at the bank in the 1930s (she brought it to show the CEO, who knew her by name, asked about her family, and very much admired her memorabilia).
For larger companies, annual meetings can also provide entertainment that rivals anything on reality TV. Where else can you see Jesse Jackson spar with Meg Whitman or watch Bill Ackman get verklempt in front of a couple thousand people for free? If that’s not your style, how about the guy who became a folk hero in Minneapolis by showing up at the Green Bay Packers annual meeting wearing a Vikings jersey? Perhaps your taste runs to the “annual meeting as performance art.” If so, check out Google’s 2014 gala or Facebook’s fiesta from that same year.
Seriously, why would anyone want to get rid of an event that can offer everything from Norman Rockwell to the “Gathering of the Juggalos”? So, while the future of shareholder engagement may well be in cyberspace, I hope that the in-person annual meeting doesn’t completely go the way of the Dodo. We’ll sure lose a lot if it does.
By the way, if you think annual meeting wackiness is a recent phenomenon, here’s an article describing the shouting match between Mitch (“Sing Along with Mitch”) Miller and legendary gadfly Evelyn Davis at the 1964 Xerox shareholders meeting.
Virtual Annual Meetings: New York Comptroller’s Not a Fan
This O’Melveny memo says that I’m not the only one who prefers live annual meetings. New York’s Comptroller has a strong preference for them too – and it looks like New York’s pension funds intend to express that preference with their votes. Here’s an excerpt:
In addition to sending letters outlining his concerns to S&P 500 companies that have held virtual-only meetings, Comptroller Stringer has recommended that the trustees of the $170 billion New York City Pension Funds approve a new proxy guideline to discourage virtual-only meetings. If approved, the New York City Pension Funds would vote against all governance committee members of S&P 500 companies that hold virtual-only meetings in 2017, and would extend this voting policy to all US portfolio companies in 2018.
S&P 500 companies holding virtual-only meetings in 2017 could avoid an “against” vote from governance committee members only if they commit in advance of their 2017 annual meeting to hold their 2018 annual meeting in person or as a hybrid (virtual and in-person) meeting. The Pension Funds’ trustees are expected to vote on the voting-policy change in April 2017.
Class Actions: More, More, More
Remember how 2016 set all kinds of records for securities class actions? Well, Kevin LaCroix at The D&O Diary blogs that 2017 is on course to blow those records away:
The annualized pace of the 1st quarter’s litigation rate of 10.8% is more than four times the 1997-2015 litigation rate of 2.5%. In other words, at the current filing pace, if continued for the rest of the year, U.S. publicly traded companies would face a likelihood of getting hit with a securities suit four times greater than the average annual likelihood of a securities suit during the last two decades.
Kevin says that during the 1st quarter, U.S. publicly traded companies were being sued at an annualized rate of nearly 11%. That compares to a 5.8% rate for the record-breaking 2016 year, and an average litigation rate of just 2.5% from 1996 to 2015. Merger objection litigation is part of the story, but far from all of it. Check out Kevin’s blog for more details.
Yesterday, the SEC announced enforcement proceedings against 27 firms and individuals arising out of alleged violations of the “anti-touting” provisions of the federal securities laws . According to the SEC’s press release, the defendants left the impression with investors that their publications promoting various company stocks were independent & unbiased – when in fact the writers were compensated for touting them. Here’s an excerpt describing the allegations:
SEC investigations uncovered scenarios in which public companies hired promoters or communications firms to generate publicity for their stocks, and the firms subsequently hired writers to publish articles that did not publicly disclose the payments from the companies. The writers allegedly posted bullish articles about the companies on the internet under the guise of impartiality when in reality they were nothing more than paid advertisements. More than 250 articles specifically included false statements that the writers had not been compensated by the companies they were writing about, the SEC alleges.
“If a company pays someone to publish or publicize articles about its stock, it must be disclosed to the investing public. These companies, promoters, and writers allegedly misled investors by disguising paid promotions as objective and independent analyses,” said Stephanie Avakian, Acting Director of the SEC’s Division of Enforcement.
According to the SEC’s orders as well as a pair of complaints filed in federal district court, deceptive measures were often used to hide the true sources of the articles from investors. For example, one writer wrote under his own name as well as at least nine pseudonyms, including a persona he invented who claimed to be “an analyst and fund manager with almost 20 years of investment experience.” One of the stock promotion firms went so far as to have some writers it hired sign non-disclosure agreements specifically preventing them from disclosing compensation they received.
Fraud charges were filed against 7 stock promotion firms & 3 public companies – 2 company CEOs, 6 individuals at the firms, and 9 writers were also charged. The SEC announced that 17 of the defendants agreed to settlements ranging from approximately $2,200 to nearly $3 million based on the frequency & severity of their actions. Actions against 10 other defendants are pending in a New York federal court.
One other settled action is worth noting – the SEC brought separate charges against another company that was in registration at the time the publications were circulating. The agency alleged that these communications were therefore prospectuses that didn’t comply with Section 10 of the Securities Act.
My initial thought was that this was an unprecedented “sweep” – but it turns out that the SEC did something similar 19 years ago, when it brought anti-touting actions against 44 defendants in connection with Internet promotional scams.
SEC Enforcement: Harder Line on Private Equity?
This blog from Jenner & Block’s Andrew Lichtman and Howard Suskin says that the SEC may be taking a harder line in enforcement actions involving private equity fee allocations & conflicts of interest:
Over the last several years, the SEC has targeted private equity funds for various fee allocation arrangements and conflicts of interest. Rather than describing the fee practices as fraudulent, which would require a showing of scienter, the SEC has concluded that the private equity advisers committed disclosure violations. However, a recent proceeding in which the SEC secured a settlement based on both breach of fiduciary duty and fraud may foreshadow a more aggressive approach.
The SEC’s first private equity enforcement proceeding of 2017, In re SLRA Inc. (Feb. 7, 2017), involved allegations of breach of fiduciary duty & fraud against Scott Landress, the founder of a private equity fund, in connection with improper withdrawals of fees from the fund. While the SEC’s decision to pursue fraud charges may simply reflect its assessment of the egregiousness of the conduct at issue, the blog suggests that there’s reason to believe that fraud allegations may be on the table in a broader range of fee disclosure settings:
The SEC’s order stated that the failure to disclose the related-party transaction was a breach of fiduciary duty “[e]ven if” Landress had in fact hired the affiliate to perform the work. That finding suggests that the SEC may be more inclined to bring breach of fiduciary duty or fraud claims where private equity advisers fail to disclose improper fee arrangements.
Crystal Ball: Justice Gorsuch on Securities Law
The Supreme Court’s newest member doesn’t have a long record of securities law opinions as an appellate judge, but this recent post from “The Boardroom Blog” reviews Justice Neil Gorsuch’s more significant opinions & speculates that he’s likely to be skeptical of both securities plaintiffs’ claims and the idea of judicial deference to the SEC.
