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Environmental, Social and Governance considerations (ESG) are expected to play an increasing role in equity pay determinations for executive officers. About 50 percent of S&P 500 companies used ESG metrics in cash-based, short-term incentive compensation plans during 2020. Conversely, only about 4 percent of S&P 500 companies used ESG metrics in long-term equity incentive plans. This should change beginning with 2021 awards due to anticipated SEC-required disclosure of ESG business risks. ISS, Glass Lewis and large investors (e.g., BlackRock, Vanguard) have made calls for more ESG disclosure. Banks increasingly view ESG risks as credit risks. In addition, national media outlets have made the case for executive pay to tie with ESG goals.

In recent years equity awards made to executive officers have been tied to achieving company performance goals. But these performance evaluations are usually linked to relative total shareholder return or financial metrics such as EPS or return on invested capital. As the tide shifts to include ESG metrics, the question now asked is, “how do we set equity awards for executives to help our company attain its ESG goals?”
Continue Reading ESG Considerations for Equity Incentive Plans

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My apologies to those of you who thought I would expound on the corporate governance implications of Madonna’s early oeuvre; but I want to write about materiality, and I’m a sucker for a catchy title.

Those of us who spend our waking (and many sleeping) hours thinking about disclosure know that materiality is the linchpin of disclosure; if something is material, you at least have to consider disclosing it – though of course, probability and other factors can impact that decision.  We also know that there are any number of judicial interpretations of what is and is not material.  However, it seems to me that we are approaching a tipping point in how materiality may impact disclosures.

Take, for example, the position of SEC Commissioner Elad Roisman, who has stated, in effect, that there is no need for SEC rules explicitly requiring disclosures concerning climate change and other ESG matters, because existing rules already require disclosure of anything that is material to a company.  (For example, see his keynote address to the 2020 National Conference of the Society for Corporate Governance.)  I have been a member of the Society for many years, and I have heard many of my fellow members express similar views.  However, if that is the case, taking that view to its logical extreme, why have any specific disclosure requirements at all?  Why not just say “tell us what’s material”?
Continue Reading Living in a material world

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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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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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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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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

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On August 26, 2020, the SEC continued to keep its foot on the gas with respect to its recent practice of modernizing disclosure rules by adopting amendments to the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K. As discussed in a previous post by my colleague, Bob Lamm, regarding the rule changes as originally proposed on August 8, 2019, the changes significantly update the provisions of Regulation S-K and signal a continuing shift to a principles-based approach to disclosure. The SEC gave the green light to the amendments substantially as proposed in 2019, with some minor modifications. Details of the final amendments are included below. The previous post provides commentary on some of the rule changes and some observations regarding the potential impacts of the shift to a principles-based approach to disclosure on registrants and their advisors.

In its press release announcing the amendments, the SEC acknowledged that these updates were due – actually, overdue – after decades of evolution in the capital markets and the domestic and global economy without any corresponding revisions in the disclosure rules. SEC Chairman Jay Clayton stated that  the improvements to these rules “are rooted in materiality and seek to elicit information that will allow today’s investors to make more informed investment decisions,” adding that the revisions “add[] efficiency and flexibility to our disclosure framework.”
Continue Reading Pedal to the metal on principles-based disclosure

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On August 26, 2020, the SEC adopted changes to its definition of “accredited investor.” The SEC Release can be found here. The new rules will become effective 60 days after their publication in the Federal Register (around the end of October 2020). These changes are definitely a move in the right direction, and they indicate that the SEC may be willing to further expand and modernize the accredited investor qualification requirements, but I don’t believe they will have a significant impact on the private securities offering process. .

The accredited investor requirements largely determine eligibility to participate in private securities offerings. The current requirements are primarily based on financial status. For most individual investors to qualify as accredited investors, they need an annual income of $200,000 (or $300,000 combined with their spouse) or a net worth (including their spouse’s net worth but excluding the value of their primary residence) of $1 million.

These quantitative requirements have been subject to criticism. They have been in effect since 1982, with the only change being the exclusion (in early 2012) of the value of the investor’s primary residence in the net worth test. Some commentators say that these requirements are too restrictive and exclude too many investors from participation in private offerings, thus stifling the capital available to smaller companies. That criticism may have become less valid over time; when the $200,000 annual income test was first implemented in 1982, less than 1%  of potential investors qualified. Due to inflation and the lack of an increase in the income requirement, approximately 9% of potential investors currently qualify. . Conversely, however, this standard has been criticized by other commentators on the basis that it allows more investors to participate in risky and dangerous private investments because the qualification standards have not changed over time. This has led to some calls for indexing the income standard to inflation. The SEC did review these quantitative standards but declined to make any changes at this time.
Continue Reading SEC changes “accredited investor” definition – good, but not enough

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I don’t know very much about the federal budget process, but I do know that any budget proposed by the White House – regardless of its occupant – isn’t worth spending time on, and that by the time the budget is passed, it often looks…