On the heels of posting my blog yesterday that I had found the ’15 policy updates for Glass Lewis, ISS released their ’15 policy updates for 2015. Here’s a blog by Steve Quinlivan – I will be posting memos regarding both these developments in our “Proxy Advisors” Practice Area. And a “Proxy Advisors Handbook” is coming soon…
Dodd-Frank: Republican Senate Takeover Could Bring Changes
Many are asking what the GOP’s takeover of the Senate might mean for the SEC’s pay ratio proposal, among others. It’s too soon to tell – but it’s a good bet that Chair White’s “hope & expectation” to adopt the pay ratio rules by the end of this year might not happen. But you never know. Anyways, this memo from Greenberg Traurig lays out a bunch of possibilities about how Dodd-Frank could change, including an observation that 60 votes in the Senate is needed to pass changes to Dodd-Frank (meaning that some Democratic Senators must cross party lines) and musings about who is now likely to chair the Senate Banking Committee, which oversees the SEC (Sen. Richard Shelby (R-AL) – again!)…
This Boston Globe article notes other efforts to implement laws to enact pay ratios…
Transcript: “Private Company Trading Markets: The Latest”
We have posted the transcript for our recent webcast: “Private Company Trading Markets: The Latest.”
Without much fanfare – or maybe I accidentally found them? – Glass Lewis has posted its “Guidelines for the 2015 Proxy Season,” which includes a summary of the changes to its policies for the upcoming proxy season on pages 1-3. I haven’t seen anyone else mention this development – including silence on the Glass Lewis Blog – but when I get some commentary, I’ll let you know…
SEC Brings 10 Enforcement Actions for Failing to File “Stock Dilution” 8-Ks
Yesterday, the SEC announced enforcement actions against 10 companies for failing to file Form 8-Ks about financing deals and unregistered sales that diluted their stock. Companies are required to file a 8-K when stock is sold in transactions that are not registered and constitute at least 5% of their outstanding stock. Companies also must file a 8-K when they’ve entered into a financing agreement not made in the ordinary course of business. Each of the 10 companies failed to make the required 8-K disclosure – and 3 additionally failed to use accurate numbers when later reporting the dilution in 10-Qs/10-Ks. All of the companies settled the SEC’s charges, each paying $25-50k for a total of $350k in penalties among the group.
– Item 1.01 of Form 8-K, a registrant must disclose within four business days its entry into a material definitive agreement.
– Item 3.02 of Form 8-K, a smaller reporting company must disclose within four business days the unregistered sales of equity securities unless they constitute less than 5% of the number of last reported shares outstanding of the class of equity securities sold.
– Form 10-Q or 10-K, issuers must disclose the number of outstanding shares of their common stock as of the latest practicable date, and the information must be true, correct, and complete.
Here’s an excerpt from this blog by Steve Quinlivan: “The majority of the charged issuers appeared to be sitting ducks, with the increases reportedly being between 95% and 35,000%, with others at 7%, 15%, 25% and 50%. Seven percent may be a “broken window” but it seems hard to take that position with some of the others. It is also interesting no one was charged for disclosure controls and procedure violations and no individuals were charged.”
Proxy Access: Many Shareholder Proposals Coming!
Did you see this NY Times article that notes that 75 companies will be receiving shareholder proposals seeking proxy access from a group of institutions led by the New York City pension funds? Wow! Here’s the NY Comptroller’s press release, a list of the companies receiving the proposals – and a sample proposal. The initiative is called the “Boardroom Accountability Project.”
Also, as noted in this blog by Davis Polk’s Ning Chiu, the CFA Institute recently came out with a study that is being cited in shareholder proposals that proxy access has the potential to raise U.S. market capitalization by between $3-$140 billion. As Ning notes, by examining 16 companies that have adopted proxy access globally, including 4 US companies, the study concludes that slightly more than half of the companies experienced positive one-day returns following proxy access, 63% had positive returns in the year following the adoption, and around 71% outperformed their industries. Some of the other studies analyzed demonstrated negative outcomes – and a few were not included due to what the study deemed to be faulty methodology.
By the way, there’s a free lunch event on Monday, November 17th co-sponsored by the CFA Institute at the Ronald Reagan Building in Washington DC to go over the study. Here’s the agenda – and here’s the registration page.
On Monday, the Supreme Court heard oral arguments in Omnicare v. The Laborers District Council Construction Industry Pension Fund, No. 13-435, to decide the standard of liability for statements of opinion. Is it enough for a plaintiff to show that a statement of opinion was incorrect or lacked a reasonable basis? Or should a plaintiff also be required to show that the opinion was subjectively false? Liability under that standard would turn on whether the speaker sincerely believed the opinion or not. This MoFo memo covers what was argued in the briefs filed – as well as summarizes what transpired during oral argument. And here’s the analysis from the SCOTUS Blog that the court is likely to affirm – and analysis from Lane Powell’s Claire Loebs Davis…
Securities Class Actions: Gutting the Loss Causation Requirement
As noted in this Akin Gump blog by Michelle Reed, “securities class action plaintiffs generally consider the conservative 5th Circuit to be shark infested waters for pursuing federal securities claims, with very rigorous pleading and proof standards imposed with exactness. After a ruling in Public Employees’ Retirement System of Mississippi v. Amedisys, Inc. (5th Cir. Oct. 2, 2014), plaintiffs may consider the waters slightly less dangerous. In Amedisys, the Court held that a series of five partial disclosures spanning two years may be considered together to plead loss causation.” Read the blog for more…
Also see this Reuters article which notes that US District Judge Jed Rakoff has warned of the SEC’s growing use of administrative proceedings to handle securities fraud cases poses “dangers” to the impartial development of the law.
SEC Sanctions Auditor & Requires Lead Partner Rotation
As noted in this blog by Brooks Pierce’s David Smyth, the SEC’s recent administrative action against an independent auditor should give pause to smaller companies. The SEC required the auditor to rotate its lead partners on its engagements with clients…
This CFO.com blog entitled “The Split Over Convergence” covers how the FASB and IASB backed away from the goal of a single global accounting language…
With cyberattacks now prevalent, companies are seeking to institute whatever additional preventative measures and protections are reasonably available to mitigate their risks. In this podcast, Brian Finch of Pillsbury discusses how companies can use the Dept. of Homeland Security’s SAFETY Act to limit or eliminate claims after a cyberattack, including:
– What is the SAFETY Act generally?
– What kinds of entities are eligible for coverage?
– What are the protections afforded by the Act, and how does a company access them following a cyber breach?
– What kinds of cyber incidents are covered?
– What does it take to apply or get certified under the Act?
– How does the SAFETY Act differ from insurance?
– Is there anything else like the SAFETY Act available today?
See our heaps of additional resources including memos, surveys, webcasts and regulatory guidance in our “Cybersecurity” Practice Area.
Directors & Officers: Mitigating Impacts of Cyber Attacks
In this article, Pillsbury identifies five cyber security “truths” and related recommendations that will assist directors and officers in mitigating the risks and damage associated with a cyberattack, including:
Preparing now for inevitable litigation following a breach
Actively and regularly focusing on cybersecurity risk management
Cyberattack preparedness necessarily includes education and training at multiple levels. So it’s interesting to note that, in contrast to the predominantly high-level US approach, the UK has developed a comprehensive package of cyber security action steps and resources – including online training, education and guidance – aimed at businesses of all sizes to help bolster its reputation as one of the safest places world-wide to do business online. Among other things, it just launched a new free online training course for lawyers and accountants (for the benefit of themselves and their clients) on cyber security – and cyberattack preparedness and mitigation – as part of its national cyber security program.
See also this new Advisen white paper, which includes an easy-to-follow roadmap on how to optimally prepare for a data breach.
Webcast: “Reg D Offerings: What Is Happening Now”
Tune in tomorrow for the webcast – “Reg D Offerings: What Is Happening Now” – during which McCarter & English’s Joe Bartlett, Cohen Gresser’s Bonnie Roe and Davis Wright’s Joe Wallin will provide a “bring-down” of what’s happening now in the Reg D area, including what are the open issues and how are practitioners handling them – as well as provide practical guidance about what you should be doing in this area.
Did you know that filings on the SEC’s EDGAR database used to be available to the general public only after a 24-48 hour delay (unless they paid a premium service to get them sooner)? Old-timers will remember that piece of trivia (the poll below asks you to guess when filings became available to the general public in real-time).
As crazy as that is, it appears that some remnants of favoring those that pay for EDGAR access might still be alive and well. According to this study by three professors, paying subscribers gain access to filings on EDGAR by an average of 10 seconds. Hints of the flap over high frequency trading! Here’s a Bloomberg article – and here’s the study summary from the authors:
We use a large recent sample of Form 4 insider trading filings to provide evidence on the process through which SEC filings are disseminated via EDGAR. We find that while the delay from a filing’s acceptance by EDGAR to its initial public availability on the SEC website is relatively short, with a mean (median) posting time of 40 (36) seconds, in the majority of cases the filing is available to Tier 1 subscribers before its availability on the public SEC site. We further show that prices, volumes, and spreads respond to the filing news beginning around 30 seconds before public posting, consistent with some market participants taking advantage of the posting delay. These results raise questions about whether the SEC dissemination process is really a level playing field for all investors.
Poll: When Did EDGAR Filings Become Available in Real-Time?
This poll asks you to guess when EDGAR filings became available to the general public in real-time:
customer surveys
Disclosure Effectiveness: SEC Awards Contract to Modernize EDGAR
Recently, the SEC acted on this RFP to modernize Edgar, a massive undertaking which is an important component of the disclosure effectiveness project. Fulcrum IT was awarded this contract, although I’m not certain if that is for the entire reform (as I can’t find any press release/article written about it – and this contract is worth $5 million; entire modernization estimated to cost $16 mil). The SEC is looking to effectively replace EDGAR by reducing its complexity and reduce costs both to the agency and filers – including a reduction in the number of form types and acceptable data formats.
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!
About 20 comment letters have been submitted to the SEC so far in connection with Corp Fin’s Disclosure Effectiveness project. Common themes include strong investor interest in mandatory disclosure of sustainability/ESG information, and a desire among issuers to eliminate requirements and processes that elicit redundant and outdated disclosures.
The Society of Corporate Secretaries recommends elimination of obsolete and duplicative disclosures (citing specific examples in both categories), and provides other suggestions for enhanced disclosure including elimination of the “glossy” annual report and prior period results in the MD&A; institution of a formal post-adoption review process for significant new disclosure requirements to evaluate the continuing need for such disclosures in light of evolved economic, business and regulatory conditions; and allowing for sustainability disclosure to be effectively communicated outside of ‘34 Act reports.
The Center for Capital Markets Competitiveness also offers concrete suggestions – including what it characterizes as near-term improvements to Regulation S-K that the SEC can enact expeditiously with the widespread support of multiple stakeholders (e.g., eliminating specifically identified redundant and outdated disclosure requirements), and longer-term projects that reflect more fundamental change such as the CD&A and MD&A.
Near-Term Actions to Enhance Disclosures
In this recent memo, Deloitte summarizes Corp Fin’s views and recommendations about steps companies can take now to improve their disclosures pending formal reforms resulting from Corp Fin’s Disclosure Effectiveness project. The memo includes a table in the Appendix that identifies specific types of disclosures (e.g., critical accounting estimates in MD&A, risk factors) and suggestions for improvements.
See also this recent FEI article discussing FASB’s and the IASB’s disclosure initiatives, as well as the SEC’s.
More on “The Mentor Blog”
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 are some of the latest entries:
– Exclusive Forum Bylaws: California State Court Follows Delaware – Whistleblowers: SEC Receives Two Rulemaking Petitions – Are the Securities Laws a “First Amendment Free” Zone? – Why Ralph Whitworth May Be America’s Best Board Member – Compliance: SEC Expectations vs. Current Stats
Stephen Bainbridge recently shared his comments opposing ISS’s proposed revised policy on independent board chair shareholder proposals. The proposal (issued in connection with draft policy changes) adds new factors that ISS would consider in determining whether to support an independent chair proposal and – unlike the current policy – provides that ISS would consider all of the factors holistically, rather than require that each factor be satisfied for ISS to recommend against a proposal.
Although this holistic evaluation would afford companies greater flexibility in that a failure to satisfy any particular factor wouldn’t necessarily be determinative, the proposed new policy inherently contains additional judgments about what constitutes good or subpar governance. Additional factors ISS would consider include the absence/presence of an executive chair, recent board & executive leadership transitions, and director/CEO tenure – governance practices that vary widely among companies. Also, as noted in this Weil Gotshal article, it’s not clear how these new factors would play into ISS’s analysis. For example, what about director/CEO tenure – i.e., what precisely would ISS take into account, and how will that be weighted relative to the other criteria? And how does that factor relate to the effectiveness of any particular form of independent board leadership?
In support of his position, Bainbridge identifies studies and other information that demonstrate the absence of a link between an independent chair structure and company performance. In addition to those cited in his blog, this 2013 study is relevant and noteworthy. After evaluating all germane (almost 50) studies on “CEO duality” (i.e., combined CEO/chair vs. alternative structures) over the past 20 years and discussing relevant findings, the authors conclude as follows:
More than at any other time since Finkelstein and D’Aveni (1994) published their foundational study on CEO duality, board leadership is in flux. Large firms are increasingly opting for a separate and independent chairman of the board (Lublin, 2012). This shift has garnered praise from governance advisors and institutional investors (Monks & Minow, 2008), but has also introduced new problems, such as the very public disagreement between the CEO and the independent chairman at insurer AIG (Lublin & Ng, 2010). That conflict ultimately ended with the chairman resigning, raising questions about the integrity of CEO non-duality. At the same time, policy makers are weighing whether to mandate a separate chairman at all U.S. firms. We believe such action would be misguided, not because the issue of CEO duality is praise unimportant, but because it is too important and too idiosyncratic for all firms to adopt the same structure under the guise of “best practice.” The most consistent finding in the CEO duality literature is that separating the CEO and board chair positions does not, on its own, improve firm performance. Given that the performance implications of CEO duality are contingent on an array of factors (Boyd, 1995; Krause & Semadeni, 2013), only some of which are known, boards should be left free to adopt the structure they deem to be strategically beneficial for their firms.
I’m not advocating any particular form of board leadership; as GC, I experienced both independent chair and independent lead director structures, and each was suitable under the circumstances. Rather, particularly in view of the absence of a link between a particular structure and company performance, I’m advocating tolerance of multiple views and alternative structures based on what the board believes to be optimal under the circumstances.
See also my previous blog noting declining or flattening shareholder support for independent chair proposals over the past four years – as various forms of independent board leadership have trended up.
Survey: Investors Weigh In on Boards
Not surprisingly perhaps, most investors want boards to consider/discuss all of their governance policies that PwC identified in its new investor survey; However, policies on majority voting, board diversity, and overboarding clearly stand out – each garnishing 94% of investor support. In contrast, less than 65% of investors thought that the board should be revisiting their policies on separating the CEO/chair, director term limits and mandatory retirement.
On diversity, 85% of investors believe that the board will need to address these impediments to increased diversity in connection with revisiting their policy:
Q: What impedes increasing gender or other aspects of diversity on US corporate boards (gender %/other aspects %)?
Directors don’t want to change their current board composition – 55%/52%
Board leadership is not invested in recruiting diverse directors – 52%52%
Directors don’t know many qualified diverse candidates – 52%/55%
Directors don’t view adding diversity as important – 52%48%
No perceived impediments – 15%/15%
Insufficient numbers of qualified diverse candidates – 3%/3%
Note that only 3% of investors cite an insufficient number of qualified diverse candidates as an impediment to increasing board diversity; however, 55% of investors believe that directors’ lack of awareness of many qualified diverse candidates is an impediment. Consistently, of those directors responding to PwC’s recent director survey who believe there are impediments to increased diversity, the top factor cited was a lack of awareness of qualified diverse candidates.
“Board Risk Score” Gauges Risk of Activist Attack
In this podcast, Waheed Hassan discusses Alliance Advisors’ launch of its new “Board Risk Score” product, including:
– What is the purpose of the Board Risk Score?
– What factors does the score take into account, and why did Alliance Advisors select those factors?
– Which companies are scored? And how often or when are companies scored?
– What information does a company’s score reveal?
– What should a company do with the information?
– How does a company get its score?
Spanking brand new. By popular demand, this comprehensive “SEC Enforcement Handbook” covers a topic that many have requested – what to do if your company – or someone working there – is investigated by the SEC. This one is a real gem – 31 pages of guidance. For example, the first section is entitled “First Steps for Responding to an Enforcement Investigation.” There is also a section about disclosure obligations relating to SEC enforcement actions…
SEC Commissioners: “Bad Actor” Waiver Battle Grows With Deadlock
With Chair White recused, it appears that the SEC Commissioners are stuck in a 2-to-2 deadlock over the latest in the “bad actor” waiver drama, this one over the ability of BofA to continue certain activities. Here’s a WSJ article – and a Bloomberg article. Here’s an excerpt from the Bloomberg article:
At the SEC, there are three main penalties that banks seek waivers for when they settle cases, with the harshest a ban on managing mutual funds. Another prevents banks from raising money for private companies. The third, and most minor, takes away a privilege that allows a firm to issue its own shares or bonds without SEC approval.
For Bank of America, the biggest hold-up is over the waiver that will allow the bank to continue seeking investors for private firms, such as technology companies that haven’t yet gone public and hedge funds, the people said. “It seems to me it would be important for them to have that waiver,” said Richard A. Kline, a law partner at Goodwin Procter LLP in Menlo Park, California. When fast-growing companies are seeking to raise money from institutions, “there are often banks that will lead some of those private placements,” he said.
Cap’n Cashbags: Time to Grant Stock Options
In this 20-second video, Cap’n Cashbags – a CEO – is hoping to get his mega-grant of stock options soon:
For those practicing long enough, you will recall that the commencement of the SEC’s foray into modern corporate governance kicked off a few years before Sarbanes-Oxley – then-Chair Arthur Levitt focused on audit committees in the late ’90s. This focus culminated in a Blue Ribbon Commission on Audit Committee Effectiveness established in ’98 by the NYSE & NASD, whose report led to a reform pushed by the SEC. It now looks like the audit committee will again be the focus of the SEC, building on work that the PCAOB has been doing for a while (here’s a new speech by the PCAOB’s Jay Hanson about audit committees).
Chair Mary Jo White, speaking before the Investor Advisory Group of the PCAOB, said that the SEC plans to issue a concept release in early 2015 “exploring possible avenues for elevating the work of public company audit committees.” The release is expected to address many of the issues that the PCAOB is examining, particularly those relating to the relationship between the audit committee and the independent auditors. White emphasized that she “’can’t overstate the importance of the audit committee functioning at the highest possible level.’”
SEC Approves PCAOB’s Related Party Transaction Changes
As noted in this Gibson Dunn blog, the SEC issued this order last week approving the PCAOB’s new related-party transaction standards. Notably, the SEC retained the PCAOB’s proposed effective date – so the new standards will become effective for audits for fiscal years beginning on and after December 15, 2014. In our “Related Party Transactions” Practice Area, we have posted memos regarding these new standards.
CFO Sues Former Employer for Defamation Over Earnings Forecast Error
In this Chicago Tribune article, it’s reported that a former Walgreens CFO has sued the company for blaming him for an earnings forecast error – a $1 billion error for which he was terminated.
Last week, ISS announced that QuickScore 3.0 will be launched on November 24th for the 2015 proxy season (in other words, that’s the first date the new governance ratings will be included in research reports). Ning Chiu highlights some of the changes from last year in this blog – also see this Wachtell Lipton memo and Gibson Dunn blog. Here’s the home for QuickScore 3.0, where you can download the technical document – and here’s the new QuickScore factors by region.
Companies will have from November 3rd to November 14th to verify the underlying raw data and submit updates and corrections through ISS’s data review and verification site. As always, ratings are updated based on a company’s public disclosures during the calendar year.
Board Diversity Disclosures: Diversity Definition Often Hinges on Experience
As noted in this DealBook article and Fortune article, most of the S&P 100 are interpreting diversity as having a varied background or experiences, instead of gender, race or age. According to research by Professor Dhir for an upcoming book, in each of the past 4 years, about 50% described diversity as meaning gender, race or ethnicity – but more than 80% consistently cited a variety of experience or backgrounds. The article notes that Corp Fin has rarely issued comments in this topic area during the past two years.
Board Gender Diversity: CalSTRS & The Thirty Percent Coalition’s New Campaign
As noted in this press release, institutional investors representing more than $3 trillion in assets along with some of the nation’s leading women’s organizations – aka “The Thirty Percent Coalition” – recently sent letters to 100 companies that lack women on their boards. The letter also affirms the importance of racial diversity. Here’s a sample letter. Prior letter writing campaigns has led to appointment of women to 17 boards. The Coalition has set a goal of women holding 30% of board seats across public companies by the end of 2015, up from the 17% current ratio…
