Kimberley R. Anderson

I live and work in the Seattle area. As a result of COVID-19, school districts are now closed for 6 weeks, Seattle public libraries are closed for a month, a number of restaurants have closed for the time being and my beloved Mariners’ baseball season has been postponed (along with most other sporting events). As we adjust to the current realities of dealing with COVID-19, the staff of the SEC has been providing timely, practical advice and assistance to issuers. On March 4th, they provided filing relief for companies affected by COVID-19, while simultaneously reminding them of their disclosure obligations relating to the rapidly evolving impact of COVID-19. Today, the staff provided guidance to companies who wish to hold virtual annual meetings, or change the date, time or location of an annual meeting. Changing the date, time or location of an annual meeting If an issuer has already mailed and filed its definitive proxy materials but wants to change the date, time or location of the meeting, it need not mail additional soliciting materials or amend its proxy materials if the issuer promptly: issues a press release announcing such change; files the announcement as definitive additional soliciting material on EDGAR; and takes all reasonable steps necessary to inform other intermediaries (such as any proxy service provider) and stock exchanges of such change. For issuers who have not yet mailed and filed their definitive proxy statement, it may be prudent to include disclosure regarding potential changes to the timing or location of the annual meeting. Holding Virtual or Hybrid Meetings For issuers who desire to hold a virtual meeting (no in-person meeting and participation solely through electronic means) or a hybrid meeting (consisting of both an in-person meeting and participation through electronic means), the staff expects issuers to provide clear and timely instructions regarding access, participation and voting at the meeting. Shareholder Proponents For shareholder proponents who are required to “appear and present” their proposal, the staff encourages issuers to provide shareholder proponents with the ability to present their proposal through alternative means, such as by phone. The inability of a proponent to present their proposal due to factors relating to COVID-19 will be considered by the staff to be “good reason” under Rule 14a-8 and so cannot form a basis to exclude future proposals by that proponent during the next two years. State Law Considerations Prior to changing the date, time or location of an annual meeting or changing to a virtual meeting, issuers should review state law and their articles and bylaws to ensure the issuer remains compliant with all notice and meeting requirements.

The SEC adopted new rules today that will require disclosure of a company’s hedging policies in proxy statements or information statements relating to the election of directors. The new rules are set forth in new Item 407(i) of Regulation S-K and require a company to describe any practices or policies it has adopted regarding the ability of its employees, officers or directors to engage in hedging transactions. The disclosure requirements can be satisfied by providing a “fair and accurate summary” of the hedging practices or policies, or by disclosing the practices or policies in full. If a summary is provided, it must include (i) the categories of persons covered by the policy or practice and (ii) the categories of hedging transactions that are specifically permitted or specifically disallowed. However, if a company has not established a hedging policy or practice it must disclosure that fact or state that hedging transactions are permitted. The rules do not require that companies prohibit or limit hedging transactions, or that companies adopt a policy relating to hedging. However, we expect that most companies will amend their current policies to address hedging if it is not already covered in existing policies. Implementation Dates: Except for “smaller reporting companies” and “emerging growth companies”, the new disclosure rules apply for proxy statements or information statements filed during fiscal years beginning on or after July 1, 2019. For “smaller reporting companies” and “emerging growth companies”, the rules apply for proxy statements or information statements filed during fiscal years beginning on or after July 1, 2020. Foreign private issuers will not be subject to the new disclosure requirements.

On August 17th, the SEC adopted amendments updating and simplifying disclosure rules.  See our prior summaries here and here.  The rules have finally been posted today in the Federal Register, which makes them effective November 5, 2018.    Among the amendments is the extension of a previously annual requirement to interim periods, to present a statement of changes in shareholders’ equity and to disclose the amount of dividends per share for each class of shares (vs common shares only) (either in a separate statement or a footnote)(see revised Rules 8-03(a)(5) and 10-01(a)(7) of Regulation S-X).  In guidance previously issued by the staff in CD&I 105.09, the staff indicated that it would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments, which is November 5, 2018. As a result, a December 31 fiscal year-end filer could omit this disclosure from its Form 10-Q for the period ended September 30, 2018, and a filer with a June 30 fiscal year-end could omit this disclosure from its Form 10-Q for the periods ended September 30, 2018 and December 31, 2018.  However, the new disclosure must be included in the first Form 10-Q covering the period that begins after November 5, 2018.  For example, for filers with a June 30 or December 31 fiscal year-end, the Form 10-Q filed for the quarter ended March 31, 2019 must include the new disclosure.    

Human nature being what it is, the law, in its wisdom, does not presume that directors will be competent judges of the fair treatment of their company where fairness must be at their own personal expense.[1] According to the Delaware Supreme Court in In re Investors Bancorp, Inc. Stockholder Litigation, when equity awards are granted to directors under a stockholder-approved equity incentive plan that gives directors discretion to determine the size of the awards, the awards are subject to the “entire fairness” standard of review. This decision may expand stockholder litigation in the area of director compensation. When reading the recent opinion issued by the Delaware Supreme Court in In re Investors Bancorp, Inc. Stockholder Litigation, it is tempting to regard the dispute as a perfect example of “pigs get fat, hogs get slaughtered” and minimize the issues raised by the case. After all, on the heels of stockholder approval of an equity compensation plan, the 12-person Bancorp Board awarded themselves over $51 million in equity grants from plan; the non-employee directors each received grants valued at approximately $2 million (as compared to average awards of approximately $176,000 for non-employee directors at peer companies). Your company’s board, you tell yourself confidently, would never act in such a manner. However, even the most prudent of Boards needs to consider the implications from the In re Investors Bancorp decision. But first, let’s step back and look at a bit of background in the case: In June 2015, stockholders approved Bancorp’s Equity Incentive Plan (the “EIP”), which reserved 30,881,296 common shares for various types of equity grants for the Company’s 1,800 officers, employees, non-employee directors, and service providers, of which up to 30% were available to be granted to non-employee directors. Two weeks following stockholder approval of the EIP, the Board approved the grants noted above. Disclosure of the equity grants resulted in three stockholder complaints being filed in the Court of Chancery alleging breach of fiduciary duties by the directors for awarding themselves excessive compensation. The Court of Chancery dismissed the complaint because the EIP contained “meaningful, specific limits on awards to all director beneficiaries.” In other words, because stockholders approved the EIP, which the Court of Chancery noted contained meaningful limits, the ratification defense came into play, which allowed the Board’s actions to be reviewed under the business judgement standard. In December, the Delaware Supreme Court reversed the Court of Chancery’s decision and determined that the “entire fairness” standard applied. The Delaware Supreme Court noted that because director compensation determinations are inherently self-interested, those decisions will be reviewed under the business judgment rule only where fully-informed stockholders approve (i) specific compensation decisions or (ii) self-executing plans (plans with fixed criteria). However, if a stockholder-approved equity incentive plan gives directors discretion within general parameters when compensating themselves, then the “entire fairness” standard is appropriate. As the Supreme Court noted: We think, however, when it comes to the discretion directors exercise following stockholder approval of an equity incentive plan, ratification cannot be used to foreclose the Court of Chancery from reviewing those further discretionary actions when a breach of fiduciary duty claim has been properly alleged. As the Court of Chancery emphasized in Sample, using an expression coined many years ago, director action is “twice-tested,” first for legal authorization, and second by equity. When stockholders approve the general parameters of an equity compensation plan and allow directors to exercise their “broad legal authority” under the plan, they do so “precisely because they know that that authority must be exercised consistently with equitable principles of fiduciary duty.” The stockholders have granted the directors the legal authority to make awards. But, the directors’ exercise of that authority must be done consistent with their fiduciary duties. Given that the actual awards are self-interested decisions not approved by the stockholders, if the directors acted inequitably when making the awards, their “inequitable action does not become permissible simply because it is legally possible” under the general authority granted by the stockholders. So, what does this mean for Boards and Compensation Committees? If designing a new equity incentive plan, or amending an existing plan, consider whether self-executing awards to non-employee directors are appropriate or desired. If self-executing awards are not desired, determine if the plan contains significant and meaningful limitations on awards, as this might assist with the defense against a claim that the Board violated its fiduciary duties. If equity awards to directors are unusual in size compared to prior awards, consider making the awards subject to stockholder ratification at the next stockholders’ meeting. Have the Board and Compensation Committee pay close attention to compensation at peer companies and its own historical pay practices. Significant deviations from either may be more likely to trigger stockholder litigation under the new standards.   [1] Footnote 2 to Investors Bancorp opinion, citing Gottlieb v. Heyden Chem. Corp., 90 A.2d 660, 663 (1952)

On Tuesday, December 12, Dorsey will present our annual review of developments and disclosure requirements for the upcoming proxy season, including practical advice on how to prepare your proxy statement and annual report in 2018. Click here for more information or to register to attend in-person or via webinar: https://sites-dorsey.vuture.net/76/665/november-2017/12-12-preparing-for-the-2018-proxy-season(2).asp.

Tax reform efforts by Congress are ongoing, and the substance of the tax bills remains fluid. However, for foreign corporations with U.S. operations, there are some specific potential risks to consider, such as additional limitations on the deductibility of interest, the migration from a “worldwide” system of taxation to a territorial system, and the use of certain border adjustments. Foreign corporations with U.S. operations may want to consider including a risk factor in their periodic reports or offering documents regarding the potential impact of U.S. tax reform. A sample risk factor (based on the current iteration of the tax bills) is below. As the tax bills are amended during the legislative process, the language of the risk factor may need to be edited prior to use. Possible U.S. federal income tax reform could adversely affect us. The new U.S. administration and certain members of the U.S. House of Representatives have stated that one of their top legislative priorities is significant reform of the Internal Revenue Code. Proposals by members of Congress have included, among other things, changes to U.S. federal tax rates, imposing significant additional limitations on the deductibility of interest, allowing for the expensing of capital expenditures, the migration from a “worldwide” system of taxation to a territorial system, and the use of certain border adjustments. There is substantial uncertainty regarding both the timing and the details of any such tax reform. The impact of any potential tax reform on our business and on holders of our common shares is uncertain and could be adverse. [Prospective investors should consult their own tax advisors regarding potential changes in U.S. tax laws.]

The House passed the Financial CHOICE Act on Thursday as part of the new administration’s bid to overhaul Dodd-Frank. It is not expected to get through the Senate in its current form, but it does provide an interesting read. While current disclosure requirements have become too lengthy and cumbersome in many respects, the proposed change to Say-on-Pay voting frequency requires a materiality determination that may prove difficult for companies to implement. Currently, public companies are required to provide their shareholders with an advisory vote on executive compensation no less than once every three years. Most companies hold the vote annually. The Financial CHOICE Act would modify this requirement so that the vote is held “[e]ach year in which there has been a material change to the compensation of executives of an issuer from the previous year.” So, each year the issuer would have to determine if there has been a material change to executive compensation when deciding what proposals are put before shareholders at the annual meeting. I expect many issuers would continue to hold an annual vote to seek feedback from their shareholders even if there was no material change in compensation. However, given the high profile nature of a negative say-on-pay result, would issuers shy away from the advisory vote in a year of poor company performance (absent an obviously material change to executive compensation)? Will an issuer’s determination not to include the advisory vote bring on another wave of proxy disclosure litigation? Could an issuer determine not to hold a say-on-pay vote for multiple years in a row? Fewer say-on-pay advisory votes may not be problematic for issuers with strong corporate governance and shareholder engagement. However, for other issuers, say-on-pay advisory votes provided shareholders with a powerful (albeit imprecise) means of communicating their displeasure to the Board of Directors.

As noted in the earlier post, the House passed the Financial CHOICE Act yesterday. While the headline-grabbing aspects of the Financial CHOICE Act relate to a repeal of the Volcker Rule and reducing the authority of the Consumer Financial Protection Bureau, there are some other interesting tidbits relating to public company disclosure, including two that would provide significant relief for smaller issuers. However, the Financial CHOICE Act is unlikely to be adopted by the Senate, which is expected to draft its own measure to modify the Dodd-Frank Act. Hopefully these provisions will be considered for the Senate's bill. Voluntary XBRL. Smaller issuers with total annual gross revenues of less than $250 million as well as emerging growth companies would be exempt from the requirement to use XBRL for their financial statements or other periodic reporting. They could, however, elect to use XBRL voluntarily. Expanded Exemption from Internal Control Attestation. Section 404(b) of Sarbanes-Oxley requires an issuer to file an attestation report from its independent registered public accounting firm on the issuer’s internal control over financial reporting. The current requirement only applies to accelerated filers or large accelerated filers. The Financial CHOICE Act amends and expands the exemption to include any issuer that has total market capitalization of less than $500 million and any issuer that qualifies for the new low-revenue issuer exemption. The low-revenue issuer exemption is a temporary exemption which applies to an issuer that: ceased to be an emerging growth company on the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933; had average annual gross revenues of less than $50 million as of its most recently completed fiscal year; and is not a large accelerated filer. These amendments are a dramatic expansion of the exemption and would provide significant relief to smaller issuers. They also stand in stark contrast to the position taken by the SEC back in 2011, when the SEC examined the impact of 404(b) on smaller issuers with a market capitalization between $75 and $250 million. Back in 2011, the SEC recommended against expanding the existing exemption.

On February 14, 2017, President Trump approved a joint resolution of Congress that disapproves the SEC’s rule requiring specific disclosures by resource extraction issuers, effectively repealing the rule. The rules required resource extraction issuers to disclose payments made to the U.S. federal government or foreign governments, including foreign subnational governments, for the commercial development of oil, natural gas or minerals. Compliance under the rules for resource extraction issuers would have begun for fiscal years ending on or after September 30, 2018. The quick death of these rules are somewhat ironic given the time and energy taken to adopt them in the first place. Consider the timeline: 2010 - Dodd-Frank Wall Street Reform and Consumer Protection Act enacted, which mandated the implementation of the resource extraction rules 2012 - First set of rules adopted 2013 - Rules vacated by the U.S. District Court for the District of Columbia 2015 - After Oxfam America Inc. brought suit in an effort to expedite the long-delayed rules, a federal judge held that the SEC had “unlawfully withheld” agency action by failing to promulgate final rules on this topic 2015 - SEC re-proposes rules 2016 - SEC adopts final rules 2017 - Rules disapproved under the Congressional Review Act While the mandate to implement these rules still exists under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Congressional Review Act bars the enactment of a new rule that is substantially in the same form as the repealed rule. These rules, like the conflict minerals rules, attempted to further social policy through public company disclosure requirements. The aim here was to promote and support “global efforts to improve transparency in the extractive industries . . . to help combat global corruption and empower citizens of resource-rich countries to hold their governments accountable for the wealth generated by those resources.” While the goal is a worthy one, it was unclear whether the disclosure required by these rules would effectively and efficiently advance that goal. Congress and the White House were concerned with the regulatory burden and competitive disadvantage that these rules imposed. The White House’s Statement of Administration Policy noted that the “rule would impose unreasonable compliance costs on American energy companies” and could put American resource extraction issuers at a “competitive disadvantage in cases where their foreign competitors are not subject to similar rules.” Reducing the regulatory burden on public companies is both useful and necessary. However, there is one unfortunate aspect of this repeal. The rules provided for alternative reporting, so that issuers could comply with SEC disclosure obligations with a report complying with the requirements of an alternative reporting regime, such as Canada’s Extractive Sector Transparency Measures Act and the EU Accounting Directive and the EU Transparency Directive. For companies with operations in multiple jurisdictions, the recognition of an alternative reporting regime was a welcome attempt to address concerns of duplicative reporting requirements and implement mandated rules in a more efficient and cost-effective way for many issuers. This allowance was similar in concept to the Canadian Multi-Jurisdictional Disclosure System (the MJDS), a widely used alternative reporting regime for certain types of Canadian issuers. Successful implementation and use under an alternative reporting regime under the repealed rules by a wide variety of resource extraction issuers might have nudged the SEC to consider broader use of alternative reporting systems. On the whole, the repeal of resource extraction issuers is a positive development. Now if we could just eliminate the conflict minerals disclosure rules and the CEO pay ratio rules...

On Thursday, December 8, Dorsey will present our annual review of developments and disclosure requirements for the upcoming proxy season. Click here for more information and to register for the event, which will be presented via webinar.

On November 17, 2016, Glass Lewis opened enrollment for its 2017 Issuer Data Report (IDR) program.  This program will cover companies in the United States, Canada, United Kingdom, Switzerland, Norway and all EU countries on a first-come, first-served basis.  Space is limited, so the enrollment will close on the earlier of January 6, 2017, or as soon as the annual limit for each of the the markets is reached. There is no charge for the IDR program, which enables public companies to see a data-only version of its Glass Lewis Proxy Paper report prior to Glass Lewis completing its analysis and recommendations relating to the company’s annual shareholder meeting.  The IDR allows companies to confirm the accuracy of the information used in Glass Lewis’ corporate governance analysis, including information relating to directors and board composition, governing documents, independent public auditor, compensation practices, summary compensation data and equity plans.  The IDR does not contain the Glass Lewis analysis or voting recommendations. Enrolled companies will receive their IDR approximately three to four weeks prior to their shareholder meeting.  While Glass Lewis generally provides companies 48 hours to review the IDR, in some circumstances, Glass Lewis will limit the review time to 24 hours.  Companies can provide corrections to Glass Lewis, with the public documentation supporting such corrections. For more information or to enroll, go to https://www.meetyl.com/issuer_data_report.

Glass Lewis released its updated policy guidelines for the 2017 proxy season for several countries, including the United States and Canada.  The most significant change in the United States guidelines relates to director overboarding and was expected.  The changes to the United States guidelines include: Director Overboarding Policy As indicated in last year’s guidelines, in 2017, Glass Lewis will generally recommend voting against a director who: Is an executive officer of any public company and serves on a total of more than two public company boards, or Serves on a total of more than five public company boards. Glass Lewis generally will not recommend that shareholders vote against overcommitted directors at the companies where they serve as an executive. Board Evaluation and Refreshment With respect to board evaluation, succession planning and refreshment, Glass Lewis clarified that it believes “the board should evaluate the need for changes to board composition based on an analysis of skills and experience necessary for the company, as well as the results of the director evaluations, as opposed to relying solely on age or tenure limits.” Governance Following an IPO or Spin-Off With respect to corporate governance at newly-public entities, Glass Lewis will review the terms of the company’s governing documents in order to determine whether shareholder rights are being severely restricted from the outset.  If Glass Lewis believes that the board has approved governing documents that significantly restrict the ability of shareholders to effect change, Glass Lewis will consider recommending shareholders vote against members of the corporate governance committee or directors that served at the time of adoption of the particular governing documents. For 2017, Glass Lewis has outlined the specific areas it reviews when determining if shareholder rights are being restricted, including: The adoption of anti-takeover provisions, such as a poison pill or classified board Supermajority vote requirements to amend governing documents The presence of exclusive forum or fee-shifting provisions Whether shareholders can call special meetings or act by written consent The voting standard provided for the election of directors The ability of shareholders to remove directors without cause The presence of evergreen provisions in the company’s equity compensation arrangements The updated proxy guidelines can be found here.

On October 26, 2016, in a split vote, the SEC proposed the mandated use of universal ballots in contested director elections at annual meetings. The proposed rules were controversial even before they were proposed – the House of Representatives approved a spending bill this summer that included a provision prohibiting the SEC from proposing or implementing the use of the universal ballots in contested elections. We expect the comments on the proposed rule to be voluminous and varied. The press release and fact sheet on the proposed rules can be found here, and the proposed rule release can be found here. The rules are described further in our complete summary here: https://www.dorsey.com/newsresources/publications/client-alerts/2016/10/sec-proposes-universal-ballots

Material amendments to equity compensation plans require shareholder approval under Nasdaq rules. Last week, Nasdaq posted a new FAQ #1269 regarding amendments to equity compensation plans to increase the tax withholding rate.  FAQ #1269 is set forth below. “Generally, an amendment to increase the withholding rate to satisfy tax obligations would not be considered a material amendment to an equity compensation plan. Allowing the holder of an award to surrender unissued shares to pay tax withholdings is similar to settling the award in cash at market price, and neither creates a material increase in benefits to participants nor increases the number of shares to be issued under the plan. This type of change also is not an expansion in the types of awards provided under the plan. This analysis is the same regardless of whether the plan allows the shares surrendered for tax withholdings to be added back to the pool of shares available for issuance as future awards. Accordingly, an amendment to an equity compensation plan to increase the withholding rate to satisfy tax obligations would not be considered a material amendment to the plan.” This interpretation is broader than the NYSE interpretation on the same issue.  In August, the NYSE published guidance regarding compensation plans, and in Question C-1, noted “an amendment to a plan to provide for the withholding of shares based on an award recipient’s maximum tax obligation rather than the statutory minimum tax rate is not a material revision if the withheld shares are never issued, even if the withheld shares are added back to the plan.” (emphasis added) For more information about the NYSE guidance published in August, please see our publication “NYSE Clarifies Answers to Certain FAQs on Equity Compensation Plans”

On June 16, 2016, the SEC proposed new rules to update disclosure requirements for mining properties.  The intent of the extensive and complex proposed rules is to align them more closely with current industry and global standards, specifically disclosure standards based on the Committee for Mineral Reserves International Reporting Standards.  The SEC’s current disclosure requirements for mining properties, Industry Guide 7 (Mining Operations), are woefully out of date, and their limitations (and limited exemptions for certain foreign issuers) create an uneven playing field regarding resource disclosure.  The SEC has extended the comment period for the proposed rules until September 26, 2016.