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US Securities and Corporate Governance

COVID-19

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Key themes emerge from SEC Investor Roundtable

On June 30, 2020, Jay Clayton, SEC chair, and Bill Hinman, Director of Corporation Finance, hosted an investor roundtable seeking input from investors on how to improve disclosures during this period of COVID-19.  The participants included Gary Cohn, Former Director of the National Economic Council; Glenn Hutchins, Chairman of North Island; Tracy Maitland, President and CIO of Advent Capital; and Barbara Novick, Vice Chairman and Co-Founder of BlackRock.

The discussion was wide-ranging, but several themes emerged:

  • While swift government action from the Federal Reserve and the CARES Act appears to have helped stabilize the economy and markets, investors expressed concern that the macro-economic picture remains very uncertain, particularly as certain government programs expire.
  • Investors want to see greater transparency as to how the company expects to perform in the near term, including with respect to such matters as cash flow, working capital and covenant compliance as well as key assumptions. For example, is the company’s ability to restore production dependent on schools reopening so that parents can return to work?  Or does the company’s supply chain depend on European travel being restored?
  • Glenn Hutchins noted that fewer than 10% of the S&P 500 have maintained earnings guidance. As a result, investors seek greater insight into the range of potential outcomes and the ability of companies to manage through different scenarios as well as a greater understanding if companies have “tools for adaptability” and an ability to adjust to changes in an uncertain environment. He cited the joint statement

SEC extends temporary COVID-19 relief for some submissions

June 30, 2020

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In light of health, transportation and logistical issues raised by COVID-19, the SEC staff recently extended previously announced relief for several types of submissions.

  • Form 144 paper filings and certain forms (other than 144s) that are permitted to be filed in paper (such as annual or other reports by foreign private issuers on Form 6-K, Form 11-K and certain other specified forms) may be submitted via email in lieu of mailing or physical delivery if the complete Form 144 or other document is attached as a PDF sent to PaperForms144@sec.gov or CorporationFinancePaperForms@SEC.gov, respectively.
    • If a manual signature cannot be provided with the email, the SEC staff has announced that it will not recommend enforcement action if a typed signature is included instead and: (i) a manually signed page or other document acknowledging or otherwise adopting his or her signature in the filing is retained by the signatory and is provided upon request by the SEC staff; (ii) the signature page indicates the date and time when signed; and (iii) appropriate policies and procedures are established relating to this process.
    • Filers may continue to submit these documents to the SEC mailroom but there may be delays in processing.
  • The signature requirement for Edgar filings may create challenges for public companies and other filers to have such filings executed before the time of the electronic filing due to circumstances arising from COVID-19. While the SEC staff expects filers to comply with requirements to

COVID-19 Business Risk Management: Addressing Supply Chain Risks

As public companies continue to manage vulnerabilities attendant to the global pandemic and its widespread economic consequences, counter-party risk assessments and careful management of those risks can be critical.  We previously blogged about a series of ongoing posts from our restructuring and special situations team relating to general and customer counter-party risk management during this time.  Most recently, the team provided its assessment of managing supply chain risks.

Our special situations team explores the need for vigilance with respect to the health and resilience of a company’s supply chain, especially for critical suppliers and those for which replacements are limited or nonexistent.  The team discusses some of the insolvency law issues attendant to suppliers and supply agreements; it also provides several risk mitigation strategies to help ensure continuity of supply and reasonableness of ongoing counter-party terms and conditions.  The team recommends companies engage in a fulsome assessment of all suppliers; consider supply chain diversification; and establish contingency plans for any suppliers who seem at risk.   The importance of knowing a company’s leverage and using it appropriately is discussed, as are practical issues pertaining to supplier possession of a company’s inventory or equipment.

While a company cannot control all of what is happening to its customers and suppliers, it can be fully cognizant of its counter-party risk assessments and implement strategies where appropriate to mitigate those risks.  When it comes time to report results for the quarter and the year, companies who have taken the time to take

SEC Issues More COVID-19 Disclosure Guidance as Quarter End Approaches

On June 23, 2019, both the Division of Corporation Finance and the Office of the Chief Accountant issued additional statements to public companies and their stakeholders about the importance of “high-quality” financial reporting and the need for focused analysis and disclosures in the context of the principles-based disclosure system.

The Division of Corporation Finance issued CF Disclosure Guidance Topic No. 9A, a supplement to Topic No. 9 issued near the close of the first quarter of this year (see our prior blog post on Topic No. 9 here).  The new guidance states that the Division is monitoring how companies are addressing COVID-19 related disclosures and encourages public companies to provide meaningful disclosures of the current and expected impact of COVID-19 through the eyes of management.  The key topics covered by the guidance are the effects of the pandemic on a company’s operations, liquidity and capital resources; the short and long-term impact of any federal relief received under the CARES Act; and the company’s ability to continue as a going concern.

The staff acknowledges that companies are making many operational changes as a result of the pandemic – from converting to telework to modifying supply chain and customer contracts, and now converting to the return to the workplace and business reopenings.  The guidance says that companies need to consider whether any or all of those changes “would be material to an investment or voting decision” and disclose accordingly.  The staff takes a similar tack with respect to the

U.S. Companies Assess Ripple Impact of COVID-19 on their Business and Incentive Plan Metrics

As we near the end of second quarter 2020, companies are evaluating the ripple effect COVID-19 has had and will likely continue to have on their businesses as a result of worker layoffs, shelter-in-place orders, employee health and safety matters, supply chain and counterparty risk issues and decreased product demand, among other things.

One key area of focus for many companies and compensation committees will be assessing the impact of COVID-19 on incentive plan performance award targets, many of which were set in February before the pandemic hit the United States and may now be unattainable. Most companies will want to keep their executive and management teams striving for potentially new and adjusted goals that the new environment requires. How to go about reflecting and rewarding key employees for performance around these changes becomes challenging when awards for the performance period have already been granted.

Some companies have viewed their performance awards as long-term in nature and have maintained existing performance targets in spite of changed circumstances. Others see a need for changes. The approaches will depend on each company’s particular compensation philosophy and structure, the amounts and types of awards that have been granted, the extent and manner in which the business and existing targets have been affected, and other motivating criteria at issue.

On approach that companies have considered in connection with their annual awards is to adjust the performance targets based on currently available information so as to reflect changing expectations. This approach is relatively straightforward. A

Emergency Bylaws – Considerations in Light of the COVID-19 Pandemic and Beyond

June 15, 2020

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Among the many previously hypothetical concerns for companies that became actualized, or threatened to become actualized, during the height of the COVID-19 pandemic was the prospect of multiple members of the board or senior management becoming incapacitated due to serious illness.

With an average age of S&P 500 directors hovering around 63 according to recent surveys, many public company directors fall within the higher risk age ranges for more severe COVID-19 complications. This heightens the concern that the board and/or its committees may not be able to comply with, among other things, the quorum requirements in the company’s bylaws or pursue action by unanimous written consent due to sustained periods where multiple directors are incapacitated.

Emergency Bylaws as Potential Remedy:

One potential way to address this concern is through the adoption of so-called “emergency bylaw” provisions.  State law will, of course, govern whether and what types of emergency bylaw provisions may be available.  Based on a recent review of S&P 500 company filings, approximately 22% of such companies have adopted emergency bylaw provisions in some form, and approximately 1% have adopted specific emergency bylaw provisions in the last 120 days, presumably in the context of the COVID-19 pandemic.

Delaware law, specifically Section 110 of the Delaware General Corporation Law (the “DGCL”), allows for such emergency-related bylaw provisions. Section 110(a) of the DGCL has a distinct Cold War flavor, appropriate to the time it was adopted.  It provides that the board may adopt emergency bylaws, subject to repeal or change by

COVID-19 Business Risk Management: Addressing Counter-Party Risk

June 11, 2020

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As public companies continue to manage vulnerabilities attendant to the global pandemic and its widespread economic consequences, counter-party risk assessments and careful management of those risks can be critical.  In a series of ongoing posts to our Retail Law blog, our restructuring and special situations team provides a useful paradigm for analysis and action.  The points made in this series are equally applicable to companies in many other industries.

Our special situations team discusses the importance of getting the finance and legal functions of the business on the same page as the sourcing and sales functions.  As they point out, to be effective with mitigation, all parts of the business need to quickly align in terms of identifying the level of risk each counterparty poses to the business (and how that counterparty’s inability to pay or deliver goods/services will impact the overall business).  In doing so, companies will be better able to allocate scarce resources to counterparties that pose the greatest degree of near-term risk while carefully watching future performance through the same filtered lens.  To help think about the analysis, the team has created a Heat Grid for Triaging Counter-Party Risk that can serve as a one-page resource.

Companies should look both at their customers and their suppliers in assessing risk and addressing mitigation measures.  The point is to be intentional about better assessing particular customer or supplier risk, putting processes in place

U.S. – Significant Increase in Complaints Brings Potential for Increased SEC Whistleblowing Activity

Among the myriad quarantine pursuits undertaken by the work-from-home crowd, whistleblowing appears to be proving popular. Recent reports indicate that the SEC received more than 4,000 Tips, Complaints, and Referrals (“TCRs”) regarding possible corporate malfeasance between mid-March and mid-May.  As noted by Division of Enforcement Co-Director Steve Peikin in a recent speech, that represents an approximate 35% increase over the same period last year.  This surge in TCRs has resulted in the SEC initiating hundreds of new investigations of alleged misconduct in the contexts both of COVID-19 and many other traditional areas.  After already facing challenges from the coronavirus pandemic, many employers may be surprised by this new COVID-19 side-effect.

Under the SEC’s Whistleblower Program, individuals who report TCRs containing high-quality original information that results in financial relief exceeding $1 million may be eligible for monetary awards ranging from 10% to 30% of that relief.  Since the Program’s inception, tips have resulted in more than $2 billion in financial relief, and more than $500 million in related whistleblower awards.  These figures include the recent record award of nearly $50 million to a single whistleblower on June 4, 2020.  Some have attributed the surge in TCRs to a combination of increasingly rich award sums, potential TCR filers’ being emboldened by their remote work environments and/or harboring increasing frustration over their job or financial situations, and enmity by furloughed or terminated employees.

Regardless of its cause, the increase in TCRs means that issuers and regulated entities should evaluate their

U.S. SEC Enforcement Division Pursues Coronavirus-Related Fraud Claims

June 5, 2020

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Federal, state and local law enforcement and consumer protection agencies have been issuing alerts and investigating cases regarding efforts by fraudsters to exploit the coronavirus crisis for profit.  The SEC is taking similar action, focused on the use of public securities markets to carry out fraud.

Since the onset of coronavirus, or COVID-19, the SEC has suspended  trading in the stock of more than 30 companies in connection with coronavirus-related fraud, pursuant to its authority to suspend trading temporarily where it believes that information about a company is unreliable or inaccurate.

And the SEC’s Enforcement Division in recent weeks has brought enforcement  actions in several cases alleging fraudulent statements regarding coronavirus products designed to boost a company’s share price.  The actions were brought against smaller companies issuing releases with false claims about products and services likely to be in high demand because of the pandemic, such as virus tests, hand sanitizer and masks.  The statements are alleged to cause rapid increases in stock price and volume, and are alleged to violate section 10(b) of the Securities Exchange Act of 1934 and rule 10b-5.

The SEC’s latest coronavirus-related complaint, filed this week in the Southern District of Florida, involved a different fact pattern. It charged an investment adviser, E*Hedge Securities, Inc., and its CEO with violations of the Investment Advisers Act of 1940 for failure to produce books and records in the course of an SEC investment-adviser examination, and for failure to properly register under the Act.  E*Hedge on March 22,

Frustrations Emerge Over Lack of Clear ESG Disclosure Standards Among Patchwork of Providers

Fallout from the COVID-19 pandemic appears to be sharpening some investors’ focus on ESG (Environmental, Social or Governance) matters, as evidenced by the SEC Investor Advisory Committee’s recent recommendation that the SEC mandate disclosure of “material, decision-useful, ESG factors” as relevant to each company.

The desire for more clarity around ESG disclosure is understandable.  More than a dozen non-profit and for-profit ESG data providers have emerged in this complex, booming market, according to a May 28, 2020 webinar of the Sustainability Accounting Standards Board and the Society for Corporate Governance.  The data providers generally fall into four distinct groups:  (1) providers who publish guidance for voluntary ESG disclosure, often with company feedback; (2) providers who request data from companies using questionnaires and then based on the answers issue reports or ESG ratings; (3) providers who compile publicly available ESG data about companies and issue ESG ratings based only on that publicly available information; and (4) providers who create assessments of companies based on public and/or private information to sell to investors.

Under the current patchwork, a public company can be the subject of an ESG assessment without knowledge that it occurred or an opportunity to give input or correct misperceptions, particularly in situations where the company has very limited ESG disclosures because ESG issues were not deemed material and not required to be disclosed under SEC rules.  For public companies trying to navigate the maze of ESG issues and disclosures, frustration can easily emerge.  The different ESG assessment

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