Month: February 2019

Is it time for corporate political spending disclosure?

A new bill that has been introduced in the House, H.R. 1053, would direct the SEC to issue regs to require public companies to disclose political expenditures in their annual reports and on their websites.  While the bill’s chances for passage in the House are reasonably good, that is not the case in the Senate. In the absence of legislation, some proponents of political spending disclosure have turned instead to private ordering, often through shareholder proposals.  So far, those proposals have rarely won the day, perhaps in large part because of the absence of support from large institutional investors.  But that notable absence has recently come in for criticism from an influential jurist, Delaware Chief Justice Leo Strine.   Will it make a difference?

In no-action letters, staff looks at Rule 14a-8(i)(7) exception and executive comp

In October last year, Corp Fin issued a new staff legal bulletin on shareholder proposals, 14J, that examined the exception under Rule 14a-8(i)(7), the “ordinary business” exception, addressing, among other topics, the application of the rule to proposals related to executive or director comp.  Post-shutdown, Corp Fin has now posted several no-action responses that consider the exception in that context. Do they provide any color or insight?

Pretty soon, any company will be able to “test the waters”

The SEC has voted to propose a new rule, Rule 163B, that would expand the JOBS Act’s “test-the-waters” reform beyond emerging growth companies to apply to all issuers.   If expanded as proposed, the new rule would allow a company (and its authorized representatives, including underwriters) to engage in oral or written communications, either prior to or following the filing of a registration statement, with potential investors that are, or are reasonably believed to be, qualified institutional buyers (QIBs) or institutional accredited investors (IAIs) to determine whether they might be interested in the contemplated registered offering. The proposed new rule is designed to allow the company to gauge market interest in the deal before committing to the time-consuming prospectus drafting and SEC review process or incurring many of the costs associated with an offering. According to the press release, SEC Chair Jay Clayton views the extension of this reform as a way to enhance the ability of companies “to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies…. [Clayton has] seen first-hand how the modernization reforms of the JOBS Act have helped companies and investors. The proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.”

The proposal is so uncontroversial that the SEC did not even hold an open meeting to vote on it. I’d don’t think I’d be going out on too much of a limb if I predicted that, although there may be tweaks to it, the proposed new rule is just about a done deal. The proposal will have a 60-day public comment period following its publication in the Federal Register.

How should we engage with investors on sustainability?

In this report, Change the Conversation: Redefining How Companies Engage Investors on Sustainability, sustainability nonprofit Ceres provides some guidance on how companies should best engage with their investors on the issue of sustainability. While almost half of the 600 largest U.S. public companies communicate with investors about environmental, social and governance issues, according to Ceres, they could be doing a much better job of it. To that end, Ceres offers a set of nine recommendations “to guide companies toward more meaningful and effective investor engagement on ESG issues.” What is the key message?  Don’t “fall into the trap of positioning sustainability as the ‘right thing to do,’ without making the connection to the business case.” And make the business case for sustainability by tying it to financial performance and demonstrating that it can drive business value.  Whether or not you buy into the whole program, you may still find Ceres’ perspective and examples provided helpful in guiding your engagement efforts.

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.