back-to-school-954572_1280My last post was a re-posting of Adam Epstein’s great piece on the importance of the proxy statement.  I promised that I would follow up on Adam’s thoughts with some recommendations of my own.  Here goes.

General

  • Manage your proxy statement “real estate” to maximize user-friendliness and create an optimal flow: Think about where things go.  For example, if your company is owned largely by institutions (and perhaps even if it’s not), should you lead off with an endless Q&A about the annual meeting and voting, discussing such exciting topics as the difference between record and beneficial ownership and how to change your vote?  Some of it is required, but consider taking out what’s not required and moving what is required to the back of the book.
  • Use executive summaries: Investors like them, and even the SEC has more or less endorsed their use. Think of it this way – whatever you think of ISS, it does a great job of summarizing your key disclosures, albeit not with your company’s best interests in mind.  Why pass up an opportunity to convey your key disclosures with those interests in mind?

Continue Reading Required reading (Part 2)

board-1848717_1280Those of you who know me have probably heard me sing the praises of Adam Epstein.  Adam was trained as a lawyer, has been an investor, and now advises small-cap companies on matters like board composition and disclosure.  IMHO, Adam is brilliant, and his insights need to be read, absorbed and acted on.

Adam has given me permission to copy one of his recent writings here.  It was originally posted on NASDAQ MarketINSITE.  His writing addresses how important it is for small-caps to get their proxy disclosures right.  My only quibble with it is that it’s not only true for small-caps; it’s equally true for any company that seeks to get favorable votes from institutional investors.  On the subject of singing (see above), I’ve been singing this song for a long time to minimal effect, but I’m hopeful that great advocacy from people like Adam will once again prove that justice delayed isn’t always justice denied.  By the way – Adam has written a book on the importance to small companies of getting the right board members.  I don’t often read books of that type, but Adam’s is a gem.

Here’s the posting:

Considering that 78 percent of activist campaigns were waged in companies with market capitalizations below $2 billion in 2016 (according to Activist Insight), it’s incumbent upon small-cap companies to communicate clearly about issues investors care most about. Notwithstanding the fact that proxy statements address many of those issues (e.g., board composition, compensation, etc.), too many small-cap boards outsource responsibility for drafting and refining proxy statements. That’s a mistake.

Consider a few suggestions in this regard from a buy-side perspective.

Board composition. Proxies provide an invaluable opportunity for companies to clearly answer a top-of-mind concern for seasoned investors: does a company have fulsome, objective, value-added governance, or is its board primarily composed of the CEO’s friends (i.e., oversight “lite”)? The most effective proxies set forth how the backgrounds of each board member map to a company’s key strategic imperatives, key enterprise risks, and key stakeholders and customers. An inability to succinctly explain why a company has the right people in the boardroom should serve as a warning to the board that it might be time to refresh its directors.

Compensation. Most small-cap investors aren’t compensation consultants or human resource experts; it’s unwise to draft a Compensation Discussion and Analysis (CD&A) as if they were. Investors principally want to understand how officer and director compensation is aligned with strategic value drivers, particularly for companies that are performing poorly and/or compensating richly when compared to peers. Rather than just repeating last year’s CD&A, boards should spend time each year simplifying and clarifying key investor takeaways.

Storytelling. A proxy statement is a legal document, but great proxies tell a cohesive story about: (1) a company’s values, strategic imperatives and ownership; (2) who the company is run and governed by; and (3) how and why officers and directors are appropriately compensated (among other things). Why would a company expend material time and money perfecting its storytelling to customers, and then outsource a great chance to communicate directly with investors to service providers who can’t possibly know the story as well as those inside the company?

Plain English. When proxy statements are formulaic and lawyerly, savvy small-cap investors often think two things: (1) the company doesn’t value the opportunity to communicate transparently with shareholders; and/or (2) the company is trying to hide something. Most small-cap investors aren’t lawyers, and few captivating tales have ever been written in “legalese.” So if your proxy statement doesn’t tell a compelling story that virtually any investor can understand… consider starting over again.

In addition to selling goods and services, public companies also sell stock. And whether it’s to passive, active, current, or prospective investors, it’s hard to successfully sell stock when investors don’t sufficiently understand what they’re buying.

Thanks, Adam (and NASDAQ MarketINSITE).  I’ll be writing a bit more on this topic in the coming weeks.

 

U.S. National Archives
U.S. National Archives

If you have ever had to search for an exhibit originally filed with the SEC years ago, you know it can take forever, particularly when the exhibit consists of an original document that has been amended several times, each amendment having been separately filed.

You will soon have to search no more, because the SEC is about to make it easier for you.  On March 1, the SEC adopted a final rule requiring public companies to include a hyperlink to each exhibit listed in the exhibit index to all filings subject to Item 601 of SEC Regulation S-K.  The rule will take effect on September 1 for most companies.  (“Smaller reporting companies” and companies that are neither “large accelerated filers” nor “accelerated filers” and that submit filings in ASCII get a one-year reprieve.)

Continue Reading The missing (hyper) link

Internet Archive Book Images
Internet Archive Book Images

As noted in a recent post, the future of SEC regulation – and perhaps even of the SEC itself – is uncertain in the wake of Donald Trump’s election.  However, the SEC Staff, a smart, decent and hardworking group, continues to stick to its knitting despite the turmoil.

The most recent example of the Staff’s diligence is a “Report on Modernization and Simplification of Regulation S-K – As Required by Section 72003 of the Fixing America’s Surface Transportation Act”.  The Report was issued on Thanksgiving Eve, and it’s no turkey.  Don’t be put off by the incredibly long title or by the fact that SEC regulations have nothing to do with Surface Transportation.  The Report provides a good summary of some actions impacting Reg S-K that have been taken to date, and the Staff’s recommendations for actions down the road (assuming there is a road).

Here are some of the highlights of things that may be on the come: Continue Reading SEC Staff’s Thanksgiving Gift: No Turkey

6650058825_a23c5c0d35_qIn the midst of the chaos of the presidential election, vicious attacks from Senator Warren, and goodness knows what else, the SEC continues to crank out requests for comment, rules and interpretations.

It’s the latter category that has attracted our attention lately, as the Staff has focused on some technical matters that securities counsel have been pondering for a while.

401(k) plans with a self-directed “brokerage window”

First, in September, the SEC published updated Compliance and Disclosure Interpretations, including one on 401(k) plans that feature a so-called “brokerage window”.  It’s been generally assumed that if a plan does not include an employer stock fund in which employee funds can be invested, Securities Act registration is not required.  This CDI says “maybe not” – if the plan (a) permits employer and employee contributions to be invested through a self-directed “brokerage window”, and (b) the plan does not prohibit investments in employer stock through the window, registration may be required.

Continue Reading The SEC Keeps On Keeping On

3003307653_f29d6e3b0c_zIf you’ve been reading our posts (and probably even if you haven’t), you should know by now that the SEC has launched a “disclosure effectiveness” initiative and has already taken actions to make some disclosures more “effective”.  One such action was the publication of a 341-page “concept” release asking hundreds of questions about whether and how to address a wide range of disclosure issues.  More recently, the SEC has proposed rule changes that would eliminate some particularly pesky disclosure burdens.

Continue Reading Moving Rapidly into the 90s

Photo by Ryan Smith
Photo by Ryan Smith

On July 14, the SEC Staff published a new Compliance and Disclosure Interpretation clarifying when an investor who may not be entirely passive may nonetheless remain eligible to file a beneficial ownership report on Schedule 13G rather than Schedule 13D.  Anyone who has tried to dance on the head of that pin will be relieved, particularly given the far greater disclosure burdens associated with the latter filing.

All other things being equal, the rules specify that a shareholder may file on the less burdensome Schedule 13G only if it acquired or is holding the subject equity securities with neither the purpose nor effect of changing or influencing control of the issuer.  However, the rules are not clear as to whether some actions (or an intent to engage in those actions) may make the 13G unavailable.

Continue Reading To 13G or not to 13G

The United Kingdom has a new Prime Minister.  Her name is Theresa May, and she’s a member of the

Photo by Scott P
Photo by Scott P

Conservative Party.  Remember that, because what you are about to read will probably lead you to think otherwise.

In a speech made a couple of days before Ms. May became Prime Minister, she said that she would pursue the following actions if she were to become Prime Minister: Continue Reading What happens in England

Photo by brennahRO
Photo by brennahRO

In recent years, the SEC – frequently due to Congressional mandates – has reduced the amount of disclosure that smaller public companies must provide.  Most recently, on June 27, the SEC proposed yet another rule that would reduce disclosure burdens by enabling more companies to qualify as “smaller reporting companies,” or “SRCs.”

The proposal would expand the definition of SRCs to cover registrants with less than $250 million in public float and registrants with zero public float if their revenues were below $100 million in the previous year.

If your company is not currently an SRC and you are wondering what relief you might get if you were, the proposing release lays it out in an easy-to-read table: Continue Reading Smaller gets bigger

4532941987_9004c36616_mIn a June 27 speech to the International Corporate Governance Network, SEC Chair Mary Jo White engaged in a bit of full disclosure herself:

“I can report today that the staff is preparing a recommendation to the Commission to propose amending the rule to require companies to include in their proxy statements more meaningful board diversity disclosures on their board members and nominees where that information is voluntarily self-reported by directors.”

As noted in her remarks, the SEC adopted the current disclosure requirements on board diversity in 2009.  However, the requirements were added to other board-related disclosure requirements at the last minute, when it was reported that Commissioner Aguilar refused to support the other requirements unless diversity disclosure was also mandated.  As a result, the diversity requirements were never subjected to public comment, did not define “diversity,” and seemed to require disclosure only if the company had a diversity “policy”.   When companies failed to provide the disclosure because they had no policy, the SEC clarified that if diversity was a factor in director selection then, in fact, the company would be deemed to have a policy, thus requiring disclosure.

Continue Reading Coming soon to an SEC filing near you: board diversity (but not sustainability…for now)