Just in time for the commencement of proxy season we have this reminder from SEC Enforcement about disclosures of related-person transactions. Failure to properly report on a related-person transaction has been a subject of Enforcement in the past. (See, e.g., this PubCo post and this PubCo post. ) In this Order against Shift4 Payments, Inc., the SEC alleged that, over a period of three years, the company failed to disclose, in proxy statements and annual reports, significant payments that were made to immediate family members of executive officers and directors as compensation for services as non-executive employees and commissions as independent sales agents. In the settlement, the company paid a civil money penalty of $750,000. So don’t let related-person transactions with family members escape your notice.
Just to refresh your memories, Item 404(a) of Reg S-K requires companies to describe transactions since the beginning of the last fiscal year in excess of $120,000 in which the company was a participant and any “related person had or will have a direct or indirect material interest.” What is a “related person”? The definition includes any director (or nominee) or executive officer, and any immediate family members of the directors (or nominees) or executive officers of the company. The definition of “immediate family member” is quite broad and includes “any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of such director, executive officer or nominee for director, and any person (other than a tenant or employee) sharing the household of such director, executive officer or nominee for director.” Similar rules apply regarding 5% shareholders. As the Order states, “[d]isclosure of related person transactions ‘involving the employment of immediate family members’ is required ‘when the threshold for disclosure has been met and the immediate family member has or will have a direct or indirect material interest.’” Among other things, Item 404 requires disclosure of the name of the related person, the basis of the relationship, the related person’s interest in the transaction and the approximate dollar amount of the transaction, the related person’s interest in the transaction and any other information about the transaction or the related person that would be material to investors. The disclosure is required in most proxy statements, including proxy statements for the election of directors.
Background. As described in the Order, Shift4 provides software and payment processing solutions, and its common stock is traded on the NYSE. The Order indicates that the company filed Forms 10-K for 2020, 2021 and 2022 that incorporated by reference related-person transaction information from the immediately forthcoming proxy statements. However, each of those proxy statements failed to disclose that a “sibling of an executive officer and director (as well as a child of a different director),” had received, in each of 2020, 2021 and 2022, approximately $1.1 million in compensation while serving as a nonexecutive employee of the company. In addition, the proxy statement did not disclose that, in 2022, a sibling of another executive officer received $167,947 in compensation while serving as a non-executive employee of the company.
Similarly, those proxy statements also failed to disclose that, in 2020, 2021 and 2022, a “sibling of an executive officer and director (as well as a stepchild of a different director),” received payments from the company of “residual commissions while acting as an independent sales agent not employed by the company,” in the respective amounts of $281,609, $492,096 and $463,565.
The Order charges that, in each instance, these “immediate family members were related persons who had a direct or indirect material interest in the transactions,” and, as a result, the transactions and related information should have been disclosed in the Forms 10-K and proxy statements.
Violations. The SEC charged that the company violated Section 13(a) of the Exchange Act and related Rule 13a-1 (periodic reports) and Section 14(a) of the Exchange Act and related Rule 14a-3 (proxy statements). The SEC took into account the company’s cooperation and remedial acts, such as disclosures and improvements to related-person policies and procedures. In the settlement, the company agreed to pay a civil money penalty of $750,000.
