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Robert B. Lamm

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Bob Lamm chairs Gunster’s Securities and Corporate Governance Practice Group.  He has held senior legal positions at several major companies – most recently Pfizer, where he was assistant general counsel and assistant secretary; has served as Chair of the Securities Law Committee and in other leadership positions with the Society for Corporate Governance; and is a Senior Fellow of The Conference Board Center for Corporate Governance.  Bob writes and speaks extensively on securities law and governance matters and has received several honors, including a Lifetime Achievement Award in Corporate Governance from Corporate Secretary magazine.

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As securities lawyers know, disclosure is generally regarded as the best disinfectant.  However, in a recent enforcement action, the SEC determined that disclosure is not always enough.  Specifically, when it comes to internal controls over financial reporting, or ICFR, companies need to actually fix the problems they disclose.

In the action, the SEC cited four companies for failing to maintain ICFR for periods ranging from seven to 10 consecutive annual reporting periods.  While each of the companies disclosed material weaknesses in ICFR, it took them months or years to remediate the weaknesses – even after being contacted by the SEC!  (I don’t usually use exclamation points in my postings, but this calls for an exception to my usual policy.)  As noted in the SEC’s press release on the action, “[c]ompanies cannot hide behind disclosures as a way to meet their ICFR obligations. Disclosure of material weaknesses is not enough without meaningful remediation.”

Others have noted that the cases in question are outliers.  That’s undoubtedly true — at least I hope so, because it’s hard to imagine hearing from the SEC and doing nothing about it, much less over a period of years).  However, the moral of the story remains unchanged: if you’re going to disclose an ICFR problem, you better fix it, too.

In case you think that corporate minutes and other corporate formalities are for sissies, think again.  And read the opinion in the case of KT4 Partners vs. Palantir, decided by the Delaware Supreme Court in January 2019.

KT4 had submitted a demand under Section 220 of the Delaware General Corporation Law, seeking to inspect Palantir’s books and records.  Because such an inspection must be for a “proper purpose,” KT4 noted that, among other things, Palantir had failed to hold stockholder meetings and to give proper notice under stockholder agreements.

The demand ended up in the Delaware Court of Chancery, which granted some of KT4’s demands but rejected demands for emails exchanged among directors and officers relating to an investor rights agreement.  KT4 appealed to the Delaware Supreme Court, which reversed that rejection.

Continue Reading Minutes count (as do other formalities)

Each January, I depart from my admittedly nerdy focus on SEC and governance matters to communicate with you on one of my other admittedly nerdy pursuits – reading – by providing a list of my 10 favorite books of the prior year, five works of fiction and five of non-fiction.  As always, the list is comprised of books I read during the year gone by, rather than books published during the year.

By way of an overview, much of the fiction I read last year was just so-so, and while I really liked the works of fiction listed below, it was an easier choice than has been the case for the last couple of years (e.g., The Underground Railroad or A Gentleman in Moscow).  In the non-fiction category, I seem to have focused on biographies and memoirs even more than last year, as four of my five non-fiction works were in this category.

Here goes: Continue Reading My 10 Best Books of 2018

Lest you think that the SEC’s focus on the use of non-GAAP financial metrics is so, well, 2018, think again.  On December 26, the SEC issued a cease-and-desist order against a company based entirely on the company’s use of non-GAAP metrics without giving “equal or greater prominence [to] the most directly comparable financial measure or measures calculated and presented in accordance with GAAP…”, as required by Item 10(e)(1)(i)(A) of Regulation S-K.

According to the SEC order, the company in question – ADT, the security company based in Boca Raton, Florida – issued earnings releases for fiscal 2017 and the first quarter of fiscal 2018 that prominently included such non-GAAP metrics as adjusted EBITDA, adjusted net income, and free cash flow before special items, without giving equal or greater prominence to the comparable GAAP data.  For example, the order states: Continue Reading Ho, Ho, Uh-Oh: The SEC continues to focus on non-GAAP disclosures

As we approach the end of 2018, it’s only natural to look back on some of the year’s events – and some non-events.  For my money, one of the most significant non-events was the inauguration of CEO pay ratio disclosure, one of the evil spawn of Dodd-Frank.

In the interest of brevity, I’ll skip the background of the disclosure requirement, except to say that it seemed intended to shame CEOs – or, more accurately, their boards – into at least slowing the rate of growth in CEO pay.  Some idealists may have actually thought that it would lead to reductions in CEO pay.  Poor things; they failed to realize not only that all legislative and regulatory attempts to reduce CEO pay have failed, but also that such attempts have in every single instance been followed by increases in CEO pay.

So the 2018 proxy season, and with it pay ratio disclosures, came and went.  Sure, there were media outcries about some of the ratios, but they failed to generate any traction.  Companies may have incurred significant monetary and other costs to develop the data needed to prepare the disclosures, but their concerns about peasants storming the corporate gates with torches and pitchforks proved needless.  Few, if any, investors – and certainly no mainstream investors – seemed to care about the pay ratios.  Employees making less than the “median” employee didn’t rise up in anger.  Even the proxy advisory firms seemed to yawn in unison.

So that’s that.  Or so you’d think.

Continue Reading To pay ratio advocates, nothing succeeds like excess

A while back – March 2017, to be exact – I posted a piece entitled “Beware when the legislature is in session”, citing a 19th Century New York Surrogate’s statement that “no man’s life, liberty or property are safe while the legislature is in session.”

It may be time to amend that statement, for Washington seems to be at it regardless of whether the legislature is in session.  A very rough count suggests that there are more than 20 pending bills dealing with securities laws, our capital markets, corporate governance and related matters.  And that does not include other initiatives, such as the President’s August 17 tweet that he had directed the SEC to study whether public companies should report their results on a semi-annual, rather than a quarterly, basis.

Problems with the Approach

I’m not saying that all of the ideas being floated are awful, or even bad.  (One good thing is that our legislators seem to have decided that trying to give every statute a name that can serve as a nifty acronym isn’t worth the effort.)  In fact, some of the ideas merit consideration.  However (you knew there would be a “however”), I have problems with the way in which these bills deal with the topics in question.  (I have problems with some of the ideas, as well, but more on that later.)

  • First, in my experience, far too many legislators do not understand what our securities laws are all about, and some do not want to understand or do not care. I will not cite particular instances of this, but I’ve been surprised several times with the level of ignorance or worse (i.e., cynicism) demonstrated by legislators and their staffs about the matters their proposals address.  At the risk of hearing you say “duh”, this does not lead to good legislation.
  • Second, these bills represent a slapdash approach when what is needed is a comprehensive, holistic one. Even the best of the pending bills and proposals is a band-aid that will create another complication in an already overcrowded field of increasingly counterintuitive and/or contradictory regulations, interpretations, and court decisions.

Problems with the Proposals

As promised (threatened), I also have concerns about a number of the proposals being bruited about, but for the moment I’ll focus on two of them – eliminating quarterly reporting and Senator Warren’s “Accountable Capitalism Act”. Continue Reading Dear Washington: How can we miss you if you don’t go away?

Since the beginning of this month (July 2018), the SEC has brought two enforcement cases involving perquisites disclosure – one involving Dow Chemical, and one involving Energy XXI.  As my estimable friend Broc Romanek noted in a recent posting, over the past dozen years, the SEC has brought an average of one such case per year.  It’s not clear why the SEC is doubling down on these actions, but regardless of the reasons, it makes sense to pay attention.

The SEC’s complaint in the Dow Chemical case is an important read, as it summarizes the requirements for perquisites disclosure.  Among other things, it’s worth noting the following:

  • While SEC rules require disclosure of “perquisites and other personal benefits”, they do not define or provide any clarification as to what constitutes a “perquisite or other personal benefit.” Instead, the SEC addressed the subject in the adopting release for the current executive compensation disclosure rules, and it has also been covered in numerous speeches and other statements over the years by members of the SEC staff.
  • For those of you who prefer a principles-based approach to rulemaking, you win. Specifically, the adopting release stated as follows:

“Among the factors to be considered in determining whether an item is a perquisite or other personal benefit are the following:

  1. An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.
  2. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.”

The SEC has also noted on several occasions that if an item is not integrally and directly related to the performance of the executive’s duties, it’s still a “perk”, even if it may be provided for some business reason or for the convenience of the company.

Continue Reading Doubling down (literally) on perquisites disclosure

No, this is not a riff on Hamlet’s soliloquy.  It’s about the current kerfuffle (one of my favorite words) about stock buybacks.  In case you’ve not heard, some (but not all) of the concerns about stock buybacks are as follows:

  • Plowing all that cash into buying back stock means that it’s not going into plant and equipment, R&D or other things that facilitate longer-term growth and job creation.
  • Companies are using the windfall from the 2017 tax act to buy shares back rather than to make investments that will create jobs and longer-term growth.
  • Stock buybacks artificially inflate stock prices and earnings per share, which contributes to or results in additional (i.e., excessive) executive compensation.
  • By reducing the number of shares outstanding, buybacks mask the dilutive effects of equity grants to senior management.

And now there’s another concern.  Specifically, in a recent speech, new SEC Commissioner Jackson announced that stock buybacks are being used by executives to dispose of the shares they receive in the equity grants referred to above.  And one of his proposed solutions is that compensation committees engage in more active oversight – or, rather, that compensation committees should be required to engage in more active oversight – of insider trades “linked” to buybacks.

Continue Reading To buy or not to buy

If you find the title of this posting confusing, let me explain:  On June 28, the SEC announced revisions to the definition of “smaller reporting company”that will significantly expand the number of companies that fit within that category (i.e., “smaller gets bigger”).  As a result, more public companies will be able to reduce the disclosure they are required to provide under SEC rules (i.e., “which means less”).  The new definition will go into effect 60 days after publication in the Federal Register.

Background

The SEC adopted the reduced disclosure requirements applicable to smaller reporting companies, or SRCs, in 2007. These reduced requirements were intended to ease the costs and other burdens of disclosure for small companies.  The reduced requirements enabled SRCs, among other things, to:

  • present only two (rather than three) years of financial statements and the related management’s discussion and analysis;
  • provide executive compensation for only three (rather than five) “named executive officers”;
  • omit the compensation discussion and analysis in its entirety;
  • present only two (vs. three) years of information in the summary compensation table; and
  • omit other compensation tables, pay ratio disclosure, and narrative descriptions of various compensation matters.

In addition, SRCs that are not “accelerated filers” (companies that must file their Exchange Act reports on an accelerated basis) need not provide an audit attestation of management’s assessment of internal controls, required by the Sarbanes-Oxley Act.  More on this below. Continue Reading Smaller gets bigger, which means less (the new definition of “smaller reporting company”)

Are corporations people? Are they entitled to the same “certain unalienable rights” as human beings – including free speech, as in the Supreme Court’s decision in Citizens United?  These and similar questions struck me as pretty important and presumably interesting. So when I heard about “We the Corporations – How American Businesses Won Their Civil Rights”, I picked it up.

The good news is that the history of corporate civil rights is interesting, and Adam Winkler (a professor at UCLA Law School) does a decent job of telling it.  The bad news is that his negative views regarding corporations infect the narrative and make me question the impartiality, if not the accuracy, of much of the book.

Early on, Professor Winkler discusses the monopolistic practices of Standard Oil and other late nineteenth- and early twentieth-century trusts.  So far, so good.  However, he then discusses the “migration” of Standard Oil from Ohio to New Jersey due to the increasingly pro-corporate laws of the Garden State.  He characterizes this development as a “race to the bottom” in corporate law.  Again, so far, so good – maybe.  But then he goes on to state that Delaware has become the jurisdiction of choice for so many corporations because it favors corporations, presumably to the detriment of their constituencies – possibly including society at large.  To be fair, that may have been an accurate characterization in the past.  However, to really be fair, Professor Winkler should have acknowledged that in recent decades Delaware has become far more judicious (all puns intended) as to the exercise of corporate rights than most states.  And he also should have acknowledged that a (the?) major reason so many corporations organize under Delaware law is the existence and wisdom of and predictability afforded by its corporate judicial system – i.e., its Court of Chancery and Supreme Court – rather than its lax laws.  (Ironically, the book ends with a lengthy discussion and citation of Delaware Supreme Court Chief Justice and former Chancellor Leo Strine, who strongly disagrees with the Citizens United decision.  One wonders if Chancellor Strine was aware of Professor Winkler’s views of his state’s laws.)

Continue Reading Interesting issue, weak execution: a review of “We the Corporations”, by Adam Winkler