As companies prepare upcoming periodic reports, they should focus on carefully reviewing and updating their risk factors. Some of the considerations may include:

• COVID Risks. As a number of business sectors improve, it may be advisable to revise COVID-related risk factors to reflect the changing economic climate.  In some cases, the focus may need to shift to address challenges in increasing production, managing supply chains, hiring workers or otherwise responding to increasing customer demand.  In other cases, companies that benefited from dramatic changes in the economy during the pandemic peak may need to address potential risks associated with a return to normalcy.  For example, consider whether recent growth trends are viewed as sustainable in light of the MD&A requirement to discuss “known trends or uncertainties” that the company “reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income.”  At the same time, it may be appropriate to continue to caution investors as to uncertainties as to the future course of the pandemic – particularly as concern with the impact of variants evolves.
• Labor Markets. Many sectors and regions are experiencing labor shortages. To the extent material, companies should consider disclosing in MD&A the effect of labor market conditions on their results of operations, and discussing possible future impacts in risk factors. 
• Hypothetical Risks. Risk factors typically include a wide range of topics intended to warn investors of potential adverse events, most of which may not have not ever materialized. These are included
  

For companies knee deep in proxy statement drafting and 2021 executive compensation decisions, we recommend a quick refresher on Glass Lewis’ December 2020 Approach to Executive Compensation in the Context of the COVID-19 Pandemic and ISS’ October 2020 COVID-19-related compensation FAQs, as well as ISS’ more general December 2020 compensation-related FAQs and equity plan-related FAQs.  Highlights include:

Glass Lewis Approach to Executive Compensation in the Context of the COVID-19 Pandemic

Glass Lewis released this December 2020 guidance to illustrate how it will apply its executive compensation policies in 2021 in the wake of COVID-19.  Glass Lewis noted that the pandemic has not changed its approach to executive pay, which is a “pragmatic, contextual approach that applies in good times and bad.”  Some of the key topics covered are:

Pay-for-Performance Analysis.  Glass Lewis does not expect the macroeconomic climate to have a drastic impact on its pay-for-performance model and will continue to take a holistic approach when evaluating the alignment between executive pay and company performance within the context of the pay-for-performance model and the pandemic.

Say-on-Pay Proposals.  Glass Lewis notes that how companies respond to changing macroeconomic conditions resulting from the pandemic will dominate say-on-pay votes.  Given that an executive’s base salary represents a relatively low portion of his or her total compensation, Glass Lewis will view temporary base salary reductions in the face of the pandemic to be token gestures.  Glass Lewis will instead look closely at overall pay levels, including scrutinizing mid-cycle pay

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

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

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,
  

In its first enforcement action against a public company for misleading disclosures regarding COVID-19’s business impact, the SEC released a December 4 Order Instituting Proceedings against The Cheesecake Factory Inc. and accepted its offer of settlement for a civil penalty of $125,000.  The charges arose from conduct in the period as the COVID-19 pandemic was first spreading across the United States.

As recounted in the SEC’s Order, Cheesecake Factory repeatedly made 8-K current report filings in March and April 2020.  Those disclosures presented a misleading optimistic assessment that its restaurants were “operating sustainably at present” under an off-premises (takeout and delivery) dining model.  The Order further detailed that the restaurant chain’s “operating sustainably” assessment failed to account for corporate expenses, and its misleadingly positive portrayal was contrary to the reality that Cheesecake Factory was losing $6 million cash per week and its cash on hand could support only a few more months of operations.  Finally, in the latest iteration of “you cannot characterize as a possibility that which has already occurred,” Cheesecake Factory was penalized for the March disclosure that it was “evaluating additional measures to further preserve financial flexibility.”  This omitted that the company had already determined to take some measures, as exemplified by its late March notification to landlords that it would not be making April rent payments.

While just the first of its kind, this action is consistent with the Division of Corporation Finance’s March 25, 2020 Disclosure Guidance that cautioned reporting companies regarding disclosure

The SEC recently approved amendments to Rule 302(b) of Regulation S-T, which governs the signing of “authentication documents” relating to typewritten signatures included in documents that are filed with the SEC electronically via EDGAR.  Current Rule 302(b) requires that, prior to or at the time of such a filing, each signatory manually sign a signature page (or other document) “authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing.”  Rule 302(b), as amended, will for the first time allow a signatory to use an electronic signature (as an alternative to a manual signature) on any such authentication document, provided certain requirements are met, as described below.

Effective Date.  The amendments will become effective upon publication in the Federal Register.  Following approval of the amendments, however, the SEC staff issued a statement indicating that, in light of COVID-19 concerns, early reliance on and compliance with amended Rule 302(b) is permitted.

Attestation Document (New).  Before using an electronic signature in an authentication document for the first time, a signatory will be required to manually sign a document attesting that he or she agrees that the use of an electronic signature in any authentication document will be the legal equivalent of such individual’s manual signature.

Electronic Signature Procedures.  In connection with the amendments, the SEC updated the EDGAR Filer Manual to set out the procedures that are required to be followed before an electronic signature may be used in an authentication document.  The electronic signing

As COVID-19 rages on, companies are again flocking to virtual annual meetings for the 2021 proxy season, but with one important difference:  the luxury of time.  Many companies are already exploring retention of virtual annual meeting providers and alternatives for video and real-time Q&A, as well as drafting fulsome disclosure about meeting logistics in their proxy materials to address concerns raised by investors, the SEC and others with respect to some pitfalls during the 2020 proxy season.

Service Providers and Technology.  For 2021, an issuer will have additional time to select an appropriate provider of a virtual meeting platform.  The most widely used vendor for hosting virtual meetings is Broadridge Financial Solutions, Inc., which reported that it hosted 1,494 virtual shareholder meetings during the first six months of 2020.  Other service providers, such as stock transfer agents, also provide such services.  A few companies have even arranged to facilitate the virtual component of an annual meeting via Zoom.

In 2020, some companies were caught off-guard by technology glitches.  For 2021, issuers should be in a position to anticipate technology issues and to put contingency plans in place to address them.  Issuers can follow best practices for virtual meetings by, for example, putting in place technical support lines for the duration of their meetings.

Format and Rules of Conduct (including Q&A).  Companies need to decide whether a meeting will be virtual-only, physical-only or a hybrid.  For any virtual component, they need to decide whether the access will be audio-only or

ISS recently published FAQ guidance addressing how it will approach COVID-related pay decisions under its pay-for-performance qualitative evaluation.  The guidance reflects feedback from discussions with investors and its annual policy survey.

• Temporary salary reductions have limited impact on ISS scoring unless incentive payout opportunities are also reduced, as base salaries typically represent a small portion of total pay.
• Changes to bonus/annual incentive metrics, targets or measurement periods will be evaluated for reasonableness on a case-by-case basis in light of the justifications and rationale disclosed.  The guidance sets forth a non-exclusive list of factors to consider for disclosure.
  • Specified disclosure of board consideration of payout opportunities would also be needed where the reduced target falls below the prior year’s performance levels without commensurate reductions of payout opportunities.
• Changes to in-progress long-term incentive awards will generally be viewed negatively, as they are intended to cover multiple years – particularly in the case of companies with poor quantitative pay-for-performance alignment.
• Changes to 2020 long-term incentive awards may be viewed as reasonable, where clearly disclosed and modest. For example, switching to relative or qualitative metrics due to uncertainty in forecasts could be viewed as reasonable – but not shifts to predominantly time-vesting equity or short-term measurement periods.
• Retention or one-time awards may be viewed as reasonable if (i) the rationale is clearly disclosed and furthers investor interests, (ii) reasonable in magnitude and represent an isolated practice, (iii) vesting conditions are strongly performance-based and properly linked to the underlying rationale,
  

As previously discussed, on October 2, 2020, the SBA published Procedural Notice 5000-20057 addressing Paycheck Protection Program Loans and Changes of Ownership. Based on a review of memos on the subject by other law firms and accounting firms, four items stood out as not being regularly addressed (in addition to some expressing the mistaken belief that buyers have to assume the PPP loan in any asset transaction).

1. Any Merger Triggers the Procedural Notice.

The definition of a change of ownership includes any merger of the PPP borrower with or into another entity.  Even if the PPP borrower is the surviving entity and there is no change in shareholder ownership, it would appear to be pulled into the SBA Procedural Notice. Accordingly, either internal reorganizations or acquisitions could trigger the obligations of the Procedural Notice if structured as a merger.

2. Stock Transfers Between Existing Shareholders Can Trigger Procedural Notice.

Stock transfers to affiliates and existing owners are covered, not just sales to new owners. Any change in shareholder composition that results in a greater than 50% change since the receipt of the PPP loan triggers a change of ownership of ownership under the Procedural Notice.

3. Silence as to Already Completed Changes of Ownership.

The SBA Procedural Notice does not provide any guidance for what should be done about changes in ownership that closed prior to the publication of the Notice. The significance of this silence is then either amplified or minimized, depending on one’s