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Nasdaq Board Diversity Proposal Faces Backlash

Nasdaq’s recent proposal mandating board diversity faces backlash, as 12 Republican senators on the U.S. Senate Banking Committee last week urged the SEC not to approve the proposed rules, which would require all U.S. Nasdaq-listed companies to disclose board diversity statistics and to have, or explain why they do not have, at least two diverse directors: one woman and one who self-identifies as either an underrepresented minority or LGBTQ.

While many anticipated that the SEC’s approval of the proposed rules would be a “slam dunk” given the current social climate, certain recent events suggest that approval may not necessarily be guaranteed.  These events include the senators’ disapproval and the SEC’s extension of the end of the comment period from January 25, 2021 to March 11, 2021.  Nasdaq and others, however, continue to fervently support the proposed rules.  In a letter dated February 5, 2021 to the SEC, counsel for Nasdaq reported that, by its count, 86% of the comment letters then submitted had supported adoption of the rules.  As reported in our December 2, 2020 post, Nasdaq believes its proposal would benefit investors and the public interest and cites in its SEC filing numerous empirical studies as support for its finding that diverse boards “are positively associated with improved corporate governance and financial performance.”  Nasdaq also noted calls for diversity from institutional investors, corporate stakeholders and legislators.

In the letter urging the SEC not to approve the proposed rules, the senators noted that Nasdaq appears to them

Nuts and Bolts of Electronic Signatures

As discussed in our November 24, 2020 post, amended Rule 302 under Regulation S-T permits the use of electronic signatures on documents “authenticating” typewritten signatures that are included in a company’s filings with the SEC, provided certain requirements are met.  The signatory first has to manually (i.e., with “wet ink”) sign a company’s form of “attestation” in which the signer agrees that the use of his or her electronic signature on authentication documents constitutes the legal equivalent of his or her manual signature for purposes of authenticating his or her signature on any filing for which it is provided.  The company’s electronic signature process must, at a minimum, also meet the following requirements as set out in updated Volume II of the SEC’s EDGAR Filer Manual:

  • require presentation of a physical, logical or digital credential that authenticates the signer’s identity;
  • reasonably provide for non-repudiation of the signature;
  • provide that the signature be attached, affixed or otherwise logically associated with the signature page or document being signed; and
  • include a timestamp to record the date and time of the signature.

As companies have begun to rely on amended Rule 302 to obtain electronic signatures on documents such as Form 10-Ks, Form 10-Qs and Section 302 and 906 certifications, here are a few of the questions and logistical issues that have arisen:

1. Are the authentication requirements met if a company emails a document for signature and asks that the recipient reply by email affirmatively indicating approval of

Lessons from GameStop: Small Investors “100% Don’t Care” About Risk

Like KC Chiefs quarterback Patrick Mahomes eating green beans in a recent commercial, even though he “100% [doesn’t] like them,” it appeared the Reddit r/WallStreetBets group that banded together to buy GameStop shares “100% don’t care” about market risk and potential investment losses.  

Inspired by social media cheerleaders, thousands of small investors acted with irrational exuberance, driving the share price from less than $20 on January 15, 2021 to $483 on January 28, 2021 before it closed that day below $200, and plummeted more than 40% to $53 on February 4.  

Average investors watched in disbelief as trading markets were turned upside down by investors who appeared to ignore financial and other disclosures, disregarding the risks of possible complete loss of their investments.

Understandably, the executives of GameStop and some players on the social media investor radar screen have so far declined to comment.  The social media blitz was completely outside control of the issuer’s management and they likely don’t have sufficient information to attempt to explain it.  To wit, one of GameStop’s reactions to the inexplicable volatility was to restrict trading in its shares.

Regardless of how this saga ultimately ends for GameStop, it has raised important questions like whether a company should keep its trading window closed even after earnings are announced and the company has disclosed all material nonpublic information.  Normally, there “ought not” be any liability concerns for an issuer in such a situation, but that could be risky when judged in hindsight.  Large

Prospects Dim for In-Person Meetings in 2021: Glass Lewis Provides Updated Hybrid/Virtual Approach

As we approach our 11th month of COVID-19 restrictions, the pandemic continues to evolve with new variants, while vaccination efforts move forward at a snail’s pace because of limited supplies in many states.  Many hoped for a return to normalcy in 2021, yet the prospects for in-person meetings in the spring seem unclear, if not dim.

Companies and boards grapple with whether it is still feasible to plan for an in-person only meeting or whether they should instead plan in advance for a hybrid or virtual-only meeting.  For many, the prudent course may be to plan in the ordinary course for a hybrid or virtual stockholder meeting, rather than making a last-minute change based on outdated SEC guidance issued during the 2020 proxy season.

While the SEC has not yet provided new guidance for the 2021 proxy season, Glass Lewis on January 14, 2021, issued updated guidance for hybrid/virtual stockholder meetings.  Glass Lewis stated that it would provide reasonable deference to companies that are incorporated in jurisdictions with current restrictions on in-person gatherings and where no established legal framework exists for a virtual-only meeting at this time.  However, Glass Lewis firmly stated its belief that completely “closed-door” meetings without any form of virtual transmission or the formal ability for stockholders to ask questions and receive transparent answers before, during, and/or after the meeting should be avoided at all costs.

Expectations Regarding Meeting Format

Glass Lewis highlighted two benefits for holding hybrid/virtual meetings – namely cost savings to the company

Key Takeaways and Reminders for 2021 Form 10-K and Proxy Season

The new year is well underway, and calendar year filers are knee deep in Form 10-K and proxy planning and drafting.  Our client alert here discusses some of the key issues and recent changes that companies should consider as they continue working on Form 10-K and proxy statement matters. They include the following:

  • Changes to Form 10-K
  • Amendments to Regulation S-K Items 101 (description of business), 103 (legal proceedings) and 105 (risk factors)
  • COVID-19 related Form 10-K risk factor, MD&A and other disclosures
  • Proxy statement disclosure of 2020 COVID-19 related perquisites
  • ISS’ and Glass Lewis’ November 2020 policy updates for 2021
  • Virtual Annual Shareholder Meeting Trends

Apple adds ESG bonus component to executive compensation program

In its recently filed proxy statement, Apple Inc. announced that beginning in 2021, the Compensation Committee will incorporate an environmental, social and governance modifier into the annual cash incentive program.  The Compensation Committee will use the modifier to determine whether to increase or decrease bonus payouts by up to 10% based on the Compensation Committee’s evaluation of executives’ performance with respect to “Apple Values” and other key community initiatives during 2021.

“This change is intended to further motivate Apple’s executive team to meet exceptionally high standards of values-driven leadership in addition to delivering strong financial results,” according to the proxy statement disclosure.

The proxy statement did not include specific ESG targets or initiatives for the modifier, although the introduction to the proxy statement listed the Apple Values shown below, noting they “reflect our commitment to leave the world better than we found it and to create powerful tools for others to do the same.”

Education

apple.com/education

For more than 40 years, Apple has worked alongside educators to inspire the next generation of learners. From primary through post-secondary school, teachers and students are using Apple products to express their creativity and to teach and learn the skills needed to succeed in a rapidly changing world. Through our Community Education Initiatives, such as ConnectED, our products, services, and support have reached learners of all ages in underserved communities that need them the most.

   

Environment

apple.com/environment

Apple has dedicated our resources and best thinking to considering the environment in everything

Post-2020 Board Self-Evaluations – COVID and Beyond

As boards prepare for the post-2020 round of self-evaluations, they will need to make the usual decisions regarding timing, scope and construct (e.g., written questionnaires and/or interviews), among others. But this year, boards also should consider adding questions/discussion topics specifically addressing the board’s ability to govern effectively in the face of the COVID-19 pandemic, as well as emerging areas of investor focus, such as diversity and inclusion, disruption/innovation, crisis preparedness, geopolitics, cybersecurity and privacy, virtual board meetings and environmental, social and governance (ESG) initiatives.

A recent study by the EY Center for Board Matters found that 53% of 2020 Fortune 100 proxy filers disclosed the general topics covered in their board evaluation program, up from 49% in 2019 and 40% in 2018. The study also found that 32% of 2020 Fortune 100 filers disclosed, usually at a high level, changes that had been made in response to the results of those evaluations, which was up from 27% in 2019 and 22% in 2018.

Sample supplemental questions/discussion topics for 2020 board evaluations, as well as, where applicable, committee and individual director evaluations, may include:

  • All board members have sufficient technology capabilities, IT infrastructure and cybersecurity protections to effectively access board materials, prepare for and participate in board meetings in the virtual environment.
  • Board members pay sufficient attention to environmental and social consequences and potential risks resulting from the company’s activities.
  • Board members are able to clearly and effectively communicate with each other and with management in the virtual environment,

SEC Rule 144 Proposals Target “Toxic” Convertible Securities and Paper Filings

Last week the SEC proposed to amend Rule 144 in order to:

  • Eliminate tacking for shares underlying market-adjustable securities of unlisted companies
  • Update and simplify certain filing requirements, including mandating electronic filing of Form 144s

Elimination of tacking for shares underlying market-adjustable securities of unlisted companies

The proposals would amend Rule 144(d)(3)(ii) to eliminate “tacking” for securities acquired upon the conversion or exchange of the market-adjustable securities of an unlisted company – that is, a company without any securities listed, or approved for listing, on a national securities exchange. As a result, the holding period for the underlying securities — either six months for securities issued by a reporting company or one year for securities issued by a non-reporting company — would not begin until the conversion or exchange of the market-adjustable securities.

In the SEC’s view, the change is needed because applying Rule 144 “tacking” provisions to market-adjustable securities undermines one of the key premises of Rule 144, which is that holding securities at risk for an appropriate period of time prior to resale can demonstrate that the seller did not purchase the securities with a view to distribution and as a result is not an underwriter for the purpose of Securities Act Section 4(a)(1).

In transactions involving market-adjustable securities, the discounted conversion or exchange features in these securities typically provide holders with protection against investment losses that would occur due to declines in the market value of the underlying securities prior to conversion or exchange. Often,

New York streamlines and modernizes Regulation D filing procedures

New York recently adopted new rules to, among other things, eliminate its cumbersome and confusing Form 99 blue sky notification filing requirement for many Regulation D offerings and instead require electronic notice filings on Form D for those offerings.  New York’s Martin Act previously required companies to manually file an originally-signed Form 99 before offering or selling private placement securities to New York investors. 

Effective December 2, 2020, New York’s new Regulation D filing procedures are now generally consistent with the 1996 National Securities Market Improvement Act and with procedures in other states, which allow companies selling “covered securities” under Rule 506 of Regulation D to provide notice to the state through the North American Association of Securities Administrators (“NASAA”) Electronic Filing Depository (“EFD”).  The Form D now is required to be filed with New York on the same schedule as federal and other state filings—within 15 days of the first sale of any securities to an investor in New York.

In a press release announcing the change, New York Attorney General Letitia James stated, “By moving to standardized electronic filings and payments, our systems will be more resilient to disruption in the future and will be better equipped to protect investors from frauds, especially critical as we have seen an exponential rise in these types of scams as a result of COVID-19.”  The press release also provides that the new rules are the “latest step in Attorney General James’ ongoing efforts to streamline and enhance the oversight

Turning Up the Heat on Board Diversity and E & S Risk Oversight: Quick Guide to ISS and Glass Lewis 2021 Proxy Season Updates

Institutional Shareholder Services (“ISS”) and Glass Lewis recently released their respective policy updates for the 2021 proxy season.  Key updates are summarized below.

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