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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

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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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On October 7, 2020, the SEC proposed the creation of “limited, conditional” exemptions from broker-dealer registration for certain “finders” in private company capital raising transactions. This has long been a problem area for private companies, as current regulations impose restrictions that may prevent them from using unregistered finders to raise capital, or impose draconian penalties on them if they do. Since these companies are often unable to raise capital on their own and normally do not have access to the efforts of established, registered broker dealers, the already difficult challenge of raising early stage capital is made even more difficult. The SEC’s October 7, 2020 Press Release and Fact Sheet lay out these proposed exemptions in detail, and the Fact Sheet contains links to a chart and a video that may be helpful.

It’s too early to tell if these proposed exemptions will be beneficial to small companies. Will they actually facilitate small companies’ ability to raise early stage capital? That remains to be seen, but it’s a positive sign that the SEC is expending at least some efforts to help small companies in their capital raising efforts.

Here are the high points of the proposed exemptions: Continue Reading Will Finders Find Relief from SEC Restrictions?

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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!

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How did we get here?

On September 11, 2020, the SEC adopted new rules to “update and expand the statistical disclosures” that bank holding companies, banks, savings and loan holding companies, and savings and loan associations are required to provide to investors. The old regime – Industry Guide 3, “Statistical Disclosure by Bank Holding Companies” – had not been meaningfully updated for more than 30 years.  There have been all sorts of developments since then, including new accounting standards, a financial crisis, and new disclosure requirements imposed by banking agencies. So it’s not surprising that the SEC began questioning the need to make changes to Industry Guide 3, requesting comments in 2017 and again with a proposed rule in September 2019.

So, what’s new?

The changes were implemented in part to eliminate overlaps with disclosures already required under SEC rules, U.S. GAAP, and International Financial Reporting Standards (“IFRS”), as well as to incorporate new accounting standards. Under the new rules, disclosures are required for each annual period presented (as well as any additional interim period should a material change in the information or trend occur), aligning these disclosures with the annual periods for financial statements. Continue Reading Out with the old, in with the new: Banks and S&Ls must now provide updated and expanded statistical disclosures