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In 1729, the great satirist, Jonathan Swift, penned an essay called “A Modest Proposal.”  The essay suggested that rather than allowing poor, starving children to be a burden on society, they should be fattened up and eaten.

How does this relate to corporate governance, you ask?  Well, here goes.  Anyone who has ever had children or spent any time around children knows that at some point most rug rats become incessant and indefatigable interrogators, their favorite question being “why?”  “Why do I have to eat vegetables?” [Because they’re good for you.] “Why?” [Because if you don’t eat vegetables you won’t grow to be big and strong] “Why?” [Because vegetables have vitamins and minerals that you need] “Why?”  And so on.  These wee tads are never satisfied with any answers, regardless of their logic or compelling authority; thus, responses like “Because I’m your father and I make the rules” go unheeded.  The “whys” just keep on coming, ad nauseam (literally). Continue Reading A Modest Proposal II: Don’t eat children; put them on boards instead!

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First, Broc Romanek

I don’t often write about the people I’ve come across in the course of my absurdly long career, but there are some exceptions.  One exception was a December 2019 post in which I noted that Broc Romanek had retired from thecorporatecounsel.net.  At the time, I predicted (probably because I hoped it would be true) that we hadn’t heard the last of him.  I am thrilled to report that my prediction has come true, as Broc has recently launched ZippyPoint.com, his latest and no doubt greatest achievement.

Why “ZippyPoint”?  Well, why not?  It’s punchy and catchy.  The fact that the name has nothing whatsoever to do with securities law or corporate governance makes it all the more endearing (though the website is all about securities law and corporate governance).  It’s also typical of Broc’s great and weird sense of humor. Continue Reading Ups and Downs

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I never thought I’d find myself quoting Her Majesty, Elizabeth II (even though we do share the same birthday), but 2020 was truly an annus horribilis.  However, now that it is behind us, if only barely, it is once again time for my annual post on my 10 favorite books of the year gone by.  For those of you who have not read my past “top tens,” these are books that I read during the past year rather than books that were published during the year, although some of the latter are included.  For those of you who have read my past top tens, I’m adding a couple of special features – two honorable mentions and one book that is incontestably the worst book I read in 2020 (and for many previous years as well).

So here goes.

Non-Fiction

Even though I read quite a few more works of fiction than non-fiction in 2020, and even though it was the kind of year that could drive anyone away from reality, more of my favorite books of the year were non-fiction, so it was much harder to narrow down the choices.  They included:

A Promised Land, by Barack Obama: One of the finest memoirs I’ve ever read, President Obama’s memoir is fascinating, straightforward, and clearly written by him; it’s a printed version of his voice.  I got through its 700 pages in just a few days and can’t wait to read the second volume.  Outstanding.

When Time Stopped, by Arianna Neumann: I’ve probably read hundreds of both fiction and non-fiction books about the Holocaust, but this is among the finest; a beautifully written, engrossing, and sympathetic memoir of a woman’s quest to find out more about her father and his family in wartime Czechoslovakia and Germany and postwar Venezuela and the US. Continue Reading The Best of Books in the Worst of Times

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On November 2, 2020, the SEC announced the adoption of extensive amendments to the rules governing exempt offerings, more commonly known as “private placements.” The announcement stated that the amendments are intended to “harmonize, simplify, and improve” the exempt offering framework, allowing issuers to move from one exemption to another, and to (1) increase the offering limits for certain private placements and revise certain individual investment limits, (2) establish consistent rules governing offering communications and permit certain “test-the-waters” and “demo day” activities, and (3) harmonize disclosure and eligibility and bad actor disqualification provisions.

The amendments are designed to promote better access to private capital while maintaining investor protections and simplifying the complex patchwork of federal private placement exemptions that has existed for over 50 years. However, they contain their own complexities and some pitfalls that can make compliance challenging.

Below are highlights of the amendments adopted by the SEC. Continue Reading The SEC Harmonizes the Private Placement Exemption Rules

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In case you missed it, there was a rather provocative article in a recent issue of The Wall Street Journal entitled “How to Give Shareholders a Say in Corporate Social Responsibility” (subscription required).  It was written by a professor and an executive fellow at London Business School and suggests that “if companies are going to pursue goals beyond profits, investors should be allowed to weigh in.”  Specifically, it proposes “to give investors a ‘say on purpose’ vote, similar to the two-part ‘say on pay’ votes that investors have in Europe.”  The article goes on:

“Here is how it would work. A company issues a statement… stating its purpose beyond profits…. [I]t would clarify the… trade-offs the company might make between investors and stakeholders (say, it will sacrifice profits to reduce carbon emissions) or between different stakeholders (it will decarbonize even though doing so will lead to layoffs). Every three years, investors would have a ‘policy vote’ on this statement, to convey whether they buy into it and the trade-offs it implies. An investor would vote against it if he or she disagrees with the priorities, or if it is so vague it gives little guidance on what the company stands for.”

Now I grant you that say on pay votes have generally benefited both companies and investors by encouraging and facilitating engagement between the two.  I also grant you that among the topics investors and companies might discuss is how companies should address their “purpose.”  But voting on it?  I beg to differ. Continue Reading Say on What???

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It’s no secret that the smaller a company’s market cap, the less likely it is to be concerned with governance “nice-to-haves,” such as independent board leadership, annual elections of directors, and board diversity.  Over the years, I’ve heard time and time again, “next year is the year when all these things will begin to trickle down to the smaller-cap companies.”  After a while, these assurances began to sound like the old line about quitting smoking – “I can quit whenever I want – after all, I’ve done it many times.”

Perhaps the great governance trickle-down has begun.  On December 1, 2020, Nasdaq announced that it had filed with the SEC a proposed change in its listing standards that “would require all companies listed on Nasdaq’s U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors [and] to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.”  An “underrepresented minority” is “an individual who self-identifies in one or more of the following groups: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander or Two or More Races or Ethnicities.” If adopted, the proposal would be implemented based on a company’s listing tier and would eventually apply to the roughly 3,000 companies listed on Nasdaq. Continue Reading Has the great governance trickle-down begun? Nasdaq pushes for board diversity

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When a company issues bad or less-than-good news on a Friday or the eve of a major holiday, say just before July 4th, investors and the media generally squawk like the proverbial stuck pig.  And there is some justification for that squawking.  After all, good news and bad news should be treated in a similar manner, and IMHO it’s too cute by half when a company tries to sneak something past the public at an odd time in the hopes that it won’t be noticed.

However, it appears that Institutional Shareholder Services does not regard itself as subject to the same concerns.  Specifically, on November 2, the eve of what was arguably one of the most newsworthy if not significant elections in recent history, ISS snuck out an announcement that, effective January 2, 2021, it would no longer provide draft proxy voting reports to the S&P 500.  Apparently, ISS – which has long been criticized for limiting the distribution of draft voting reports to the S&P 500 – has decided that the way to eliminate that criticism is not to send out draft reports at all.

Instead, ISS will send out proxy voting reports to its clients — i.e., investors — earlier and will send reports to all issuers at the same time at no cost.  Thus (according to ISS), companies will have the time to provide feedback, and we’re assured that its “formal ‘Alert’ process” will enable companies to correct any errors and investors to change their votes.  Anyone who’s gone head-to-head with ISS knows how well that process works; corrective alerts can get lost in the shuffle, votes don’t get changed, etc.  And this new policy will almost surely lead to a big increase in the number of alerts. Continue Reading ISS Tries to Hide in Not-So-Plain Sight

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Apparently, I wasn’t the only one who thought it was odd to enforce what was essentially an insider trading matter as an internal accounting controls matter.  Commissioners Peirce and Roisman agreed in a November 13, 2020  “statement” that can be found here.

Let’s assume that you are an executive of a company; that you have material non-public information about the company that will, when announced, cause the company’s stock to increase in value; that the company has a policy that prohibits trading when in possession of MNPI; and that you make an open market purchase of the company’s stock before the information is made publicly available.  What are the odds that you will be charged with fraud or insider trading?

Let’s assume a similar but slightly different set of facts:  The company has material, non-public information that will, when announced, cause the company’s stock to increase in value; the company has a policy that prohibits trading when in possession of MNPI; before this information is made publicly available, the company enters into a so-called Rule 10b5-1 plan to facilitate a stock buyback program; and the company then proceeds to buy shares of its stock under the Rule 10b5-1 plan.  What are the odds that the company will be charged with fraud or insider trading?

If you answered both questions the same way, you may be wrong.  In a recent enforcement action involving the second fact pattern above, the SEC opted not to charge the company or its executives with fraud or insider trading.  Rather, the problem, according to the SEC, was that the company had “insufficient” internal accounting controls.  Without going into too many details, the SEC’s theory goes something like this: Continue Reading Alternate routes (updated)

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There was good news and bad news from the SEC this week.

First, the good news.

It’s unofficial, but Bloomberg reported this week that the SEC is “shelving” its proposed overhaul of Form 13F.  (Hopefully, “shelving” doesn’t mean being put on the shelf to be taken down later on, as in a shelf registration.  In a hopeful sign, the Bloomberg piece says that “some within the [SEC] have been notified it’s dead.”)  As readers of this blog know, I was not a fan of the overhaul;  from my perspective, it was a misstep in what has otherwise been a run of pretty good rulemaking by the SEC.

As if to prove that investors and companies sometimes have more in common than one might think, the proposal was criticized by a broad swath of groups.  Companies objected to the fact that it would make it even harder to identify and communicate with their investors (that was the major concern I expressed in my blog posting).  But investors weren’t happy with it either; some questioned whether the proposal would generate the cost savings the SEC cited as one of the principal benefits.  In fact, the Bloomberg article cites a Goldman Sachs study to the effect that of the 2,238 comment letters received on the proposal, only 24 supported it.

The article states that the SEC “still believes that the…trigger [for 13F filings]…hasn’t been altered in four decades [and] needs to be changed.”  True, perhaps, but the SEC’s approach was to throw out baby (i.e., the benefits of 13F filings) with the bathwater.  The SEC is also quoted to the effect that “[t]he comments received illustrate that the form is being used in ways that were not originally anticipated.”  Also true, but that speaks to many larger issues, including so-called proxy plumbing, that the SEC needs to address.  In the meantime, this quick fix was not a fix at all.

Now for the bad news. Continue Reading Good News, Bad News

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While we have been busy in 2020 learning how to social distance, wear masks and do Zoom meetings, the SEC has spent the year turning out a relentless tsunami of new rules and amendments of old ones. Among the latter are extensive amendments to the financial disclosure obligations of a public company when it acquires or disposes of a business. Adopted in May 2020, these long-awaited amendments go into effect on January 1, 2021, so a summary seems timely.

Given the extent and complexity of these amendments, we will summarize them in installments. This first installment considers the changes to the periods to be presented in the financial statements, the amendments to the Investment Test and the Income Test in the definition of a “significant subsidiary,” and the codification of the staff practice of permitting abbreviated financial statements for acquisitions of components of an entity. In reading this and future summaries, bear in mind that the new rules are complex and need to be reviewed carefully against the detailed terms of an acquisition or disposition. Continue Reading The SEC Fixes those Pesky M&A Financial Disclosure Requirements