Audit Analytics studies long-term capital market consequences of restatements

Studies have shown that, following announcement of a restatement, stock prices are abnormally negative for the period 20 to 30 trading days after the announcement.  But what happens after the restatement is actually filed?  In a study from Audit Analytics, the authors found that, following the date of the restated financials, there were no significant abnormal returns in either the first 30-day window or after a 90-day window, but, in the second 30-day window, the authors found long-term abnormal positive returns “of up to 3.28% following the resolution of the restatement process and filing of the restated financial statements.”

New bill to exempt low-revenue companies from SOX 404(b)—have we reached an inflection point?

A bipartisan group of senators has introduced a new bill, the Fostering Innovation Act of 2019 (S. 452), that would amend SOX to provide a temporary exemption from the auditor attestation requirements of Section 404(b) for low-revenue issuers, such as biotechs.  The bill is designed to help those EGCs that will lose their exemptions from SOX 404(b) five years after their IPOs, but still do not report much revenue. For those companies, proponents contend, the auditor attestation requirement is time-consuming and expensive, diverting capital from other critical uses, such as R&D. According to the press release, the bill would provide “a very narrow fix that temporarily extends the Sarbanes-Oxley Section 404(b) exemption for an additional five years for a small subset of EGCs with annual average revenue of less than $50 million and less than $700 million in public float.” I know it’s Valentine’s Day, but does it also feel a bit like Groundhog Day?  That’s because, in 2016, the House passed the Fostering Innovation Act of 2015—the very same bill. That bill went nowhere, but the question is: have we now reached an inflection point for SOX 404(b)? 

On shareholder proposal for mandatory arbitration bylaw, Corp Fin passes the hot potato

The issue of mandatory arbitration bylaws is a hot potato—and a partisan one at that (with Rs tending to favor and Ds tending to oppose).  And in this no-action letter issued yesterday to Johnson & Johnson—granting relief to the company if it relied on Rule 14a-8(i)(2) (violation of law) to exclude a shareholder proposal requesting adoption of  mandatory arbitration bylaws—Corp Fin successfully passed the potato off to the State of New Jersey.  Crisis averted.  However, the issue was so fraught that SEC Chair Jay Clayton felt the need to issue a statement supporting the staff’s hands-off position: “The issue of mandatory arbitration provisions in the bylaws of U.S. publicly-listed companies has garnered a great deal of attention.  As I have previously stated, the ability of domestic, publicly-listed companies to require shareholders to arbitrate claims against them arising under the federal securities laws is a complex matter that requires careful consideration,” consideration that would be more appropriate at the Commissioner level than at the staff level. However, as Clayton has previously indicated, mandatory arbitration is not an issue that he is anxious to have the SEC wade into at this time. To be sure, if the parties really want a binding answer on the merits, he suggested, they might be well advised to seek a judicial determination.

SEC Chair Clayton discusses human capital disclosure

In remarks for a telephone call on February 6 with SEC Investor Advisory Committee members, SEC Chair Jay Clayton briefly discussed three topics: disclosure requirements in general, human capital disclosure and proxy plumbing, the latter two topics being subjects of the committee’s call.

New CDI addresses diversity disclosure

Corp Fin has posted a new Compliance & Disclosure Interpretation under Reg S-K that relates to diversity disclosure.  The new interpretation applies to both Item 401— Directors, Executive Officers, Promoters and Control Persons and Item 407—Corporate Governance.

NYC Comptroller goes straight to court to compel inclusion of shareholder proposal—is this the Comptroller’s new normal?

Post-shutdown, the SEC is starting to catch up on no-action requests to exclude shareholder proposals, posting several new entries at the end of last week. While most of the responses reflected withdrawals of requests in light of withdrawal of the subject proposal, one of the more interesting withdrawal letters relates to a decision to include a shareholder proposal.  The proposal, submitted by the New York City Employees’ Retirement System and other pension funds overseen by NYC Comptroller Scott Stringer, sought to have TransDigm Group Incorporated, a manufacturer of aerospace components, adopt a policy related to climate change. After the company sought no-action relief from the SEC staff—and notably well before the government shutdown and before the SEC had even responded to the company’s request—the proponent pension funds filed suit in the SDNY seeking to enjoin the company from soliciting proxies without including the shareholder proposal and declaratory relief that the exclusion of the proposal violated Section l4(a) and Rule l4a-8.  Will the Comptroller use the same tactic of circumventing the traditional SEC process and commencing litigation for any proposal the pension funds submit in the future?  Will going straight to court be the new normal?

Have we reached an inflection point on environmental and social shareholder proposals?

In this thoughtful article from the Managing Editor at ISS Analytics, The Long View: US Proxy Voting Trends on E&S Issues from 2000 to 2018, the author contends that, notwithstanding high-level data showing relatively static median vote support for shareholder proposals over the last 19 years, that data is deceptive:  “the reality is that investor voting behavior among owners of U.S. companies has changed significantly—perhaps almost revolutionarily—over the past two decades.” What’s more, “the most significant change in investors’ voting behavior pertains to environmental and social issues, as these proposals are earning record levels of support in recent years.”