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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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Remember when you were a kid and you didn’t clean up your room or do something else you were supposed to do, and a parent would say “How many times do I have to tell you…?”  Well, the same holds true for perquisites disclosure.

Not quite four months ago, I wrote about an SEC enforcement action involving perquisites and the importance of paying close attention to perks.  Well, the SEC has done it again.  Two enforcement actions in four months may not a trend make, but as we approach the end of the calendar year – and the onset of the 2021 proxy season – a reminder seems in order.

The recent enforcement action, concluded at the end of September, sounds similar to so many other sagas of nondisclosure of perks.  In this case, the company disclosed “All Other Compensation” just shy of $600,000 over a four-year period.  The compensation included “certain personal travel and lodging costs.”  However, according to the SEC, the company failed to disclose $1.7 million of “travel-related perquisites and personal benefits,” consisting of personal use of corporate aircraft, expenses associated with hotel stays, and taxes related to both items.  It seems hard to overlook $1.7 million, but it’s not the first time it’s happened, and it almost surely will not be the last.
Continue Reading Perquisites Disclosure: “How Many Times Do I Have to Tell You?”

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One of the principal duties of corporate directors and officers is the duty of confidentiality.  That’s not just my personal opinion; it’s supported by case law, corporate governance treatises, law review articles, and more.  Generally viewed as a subset of the duty of loyalty, the duty of confidentiality means that directors and officers are expected to keep their knowledge of the company to themselves or, at a minimum, to disseminate it on a strict “need to know” basis.

My conviction (all puns intended) was reinforced some years ago, when Rajat Gupta, the former CEO of McKinsey and a member of the board of Goldman Sachs, among others, was convicted of insider trading for spilling secrets he learned in Goldman’s board room to Raj Rajaratnam.  Following his conviction, there was a flurry of activity among corporate governance nerds (present company included) as to the appropriateness and reasonability of asking directors and officers to enter into confidentiality agreements with the companies they served.  It seemed to me at the time that asking a member of your board – a person charged with oversight of your company, and effectively your boss – to sign a confidentiality agreement might be viewed as insulting or worse.

Events, both recent and not-so-recent, are changing my mind.  To start with the not-so-recent, in my many years of in-house practice, I came across the occasional director or officer who, to put it bluntly, was a media whore.   They love seeing their names in the paper and being quoted as authorities.  I get that; I’ve been quoted in some publications, and it’s very nice.  However, in at least one case, a director’s leaks to a reporter resulted in my getting calls from that reporter, literally demanding that I provide information, some of which was clearly privileged, arguing that if it was good enough for a board member it was good enough for me.  (I declined.)
Continue Reading Shhh!

I’ve often said that lawyers representing corporations should never underestimate the creativity of the plaintiffs’ bar.  However, it seems that the white collar criminal defense bar may not be slouches in the creativity department either.

I’m referring to a recent report in The Wall Street Journal that the legal team representing Elizabeth Holmes, the “disgraced Theranos founder,” is considering using her mental health (presumably, the lack thereof) as a defense in her upcoming federal trial for engaging in a variety of frauds.

I’m prepared to admit that I am totally if morbidly fascinated by the Theranos case: I’ve read the phenomenal book, Bad Blood, by John Carreyrou – twice, in fact – and will surely be among the first to see the movie (which reportedly will star Jennifer Lawrence as Holmes in what strikes me as the best casting choice ever); I’ve attended programs featuring Tyler Shultz, the whistleblower who blew the top off the fraud (and whose grandfather, former Secretary of State George Shultz, was on the Theranos board at the time in a family saga worthy of Aeschylus); I’ve listened to the podcast; I’ve watched the HBO documentary; and much more.  Still, it seems just surreal.
Continue Reading Legal surrealism

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For both public and private companies, it’s important to determine the skills and other attributes needed to form a good or, hopefully, great board.  Of course, there are basics that always apply, such as integrity, intelligence, and a good mix of collegiality and candor.  However, once you get past those basics, it’s desirable to figure out what the organization really needs.  If the company has a consumer-facing business, you probably want to have a director or two with experience in that and related fields, such as marketing.  If it’s a defense contractor, you likely need someone with expertise in government relations.  And so on. However, in searching for and, hopefully, finding those board members, it’s also desirable to find individuals whose abilities extend beyond a single area of experience or expertise.

The notion of avoiding such “one-trick ponies” came to me while reading an article in a recent article in the Financial Times.  Since a subscription may be needed to access the article, the headline reads “US companies urged to appoint Covid-19 experts to boards.”  In fairness, the headline was a bit misleading; the article itself said that “the dean of Harvard’s school of public health has called on companies to put public health professionals [i.e., not Covid-19 experts] on their boards… to manage a pandemic threat that could hang over businesses for years.”
Continue Reading One-trick ponies and hordes of directors

Image by Gerd Altmann from Pixabay

From where I sit, the SEC under the chairmanship of Jay Clayton has generally done a good job for public companies.  It has adopted a number of rules and amendments that make disclosure more effective without appreciably adding to – and in some cases reducing – the burdens on public companies.  Examples include streamlining financial disclosure requirements, rationalizing the definitions of “smaller reporting company”, “accelerated filer”, and “large accelerated filer”, and revising the rules governing financial statements of acquired and disposed businesses (although the latter do not take effect until 2021). And let’s not forget the very recent rule changes affecting proxy advisory firms, including a critical requirement that those firms provide companies with their voting recommendations.

While I wish that the SEC had also focused on proxy plumbing, it’s still a pretty good record, and it’s only a partial listing.

However (you knew there would be a “however”), I’m profoundly disappointed in the SEC’s proposal to “fix” Form 13F – the form on which large investment managers report their equity holdings of public companies.  While it’s nice that the SEC has turned its attention to a form that has long been in need of updating, the proposal seems to me to be unacceptable in at least two major respects.
Continue Reading 13F proposal — the SEC can (and should) do better

In my last post, I expressed some thoughts about the need to address our history and continuing practice of racial discrimination and inequality.  I’m still thinking about specific actions that I can take to put my actions where my mouth is.  However, in the meantime, I want to share a communication I received today

Readers of this blog know that my posts tend to be on the light side – even when addressing subjects I regard as important, I find it hard to avoid at least a touch of sarcasm or irony.  Each posting also includes a picture intended to be humorous.

This is not a usual posting, however.  This time, I’m writing from my heart on a subject that can’t be treated with humor, irony, or sarcasm.  And no pictures this time.  It’s about our country’s heritage and our future, and I’m about as serious as I can be.

The subject in question is race, or race relations.  I know I am not alone in being profoundly upset about recent developments.  But what really upsets me is that where we are today is really not about recent developments.  Rather, our country is coping with what may be its original, 400 year-old sin, slavery, and the legacy of that original sin that even 150 years later we can’t seem to shake.

We can and must do more and do better.  One of the many posters I saw on TV during the protests was one saying “Silence is Violence.”  I agree.  If we stay silent in the face of discrimination, its manifestations, and its consequences, we will at best find ourselves exactly where we are today 150 years from now (assuming that we don’t destroy ourselves or our planet before that).  At worst, we will do just that – destroy ourselves.  We need to examine and change our institutions, our practices and, frankly, our minds and the minds of those around us.
Continue Reading I’m serious