Institutional Shareholder Services Inc. (ISS) opened its 2021 Annual Policy Survey on July 29, 2020, to seek input from institutional investors, public companies, directors and others to begin development of ISS’ annual benchmark policies and assess potential policy changes for 2021 and beyond.  The survey will close on August 21, 2020, at 5 p.m. ET.

This year’s survey includes questions related to recently released ISS policy guidance on issues related to the COVID-19 pandemic, including annual general meeting formats and stakeholder expectations regarding compensation and adjustments to incentives.  The survey also requests feedback on a global level related to climate change risk, sustainable development goals, auditors and audit committees, and racial and ethnic diversity on corporate boards. As in prior years, after analysis and consideration of the survey responses, among other inputs, ISS will open a public comment period in October for all interested market participants on the proposed changes to 2021 benchmark voting policies.

Earlier this month, ISS sent letters to multiple public companies asking them to voluntarily disclose “information on the self-identified race/ethnicity of each of the company’s directors and named executive officers (NEOs), to the extent that the company and the individual directors or NEOs are willing to provide this.”  The letter allows each director or officer to disclose up to three classifications from multiple categories, largely drawn from the OMB Standards for the Classification of Race and Ethnicity. Individuals may also provide supplemental information in free-text fields.

The letter states the request is driven by the

As we previously posted, the SEC recently adopted a number of amendments to the financial disclosure requirements for business acquisitions and dispositions by U.S. public companies including to (i) revise the requirements for financial statements and pro forma financial information for acquired businesses, (ii) revise the tests used to determine significance of acquisitions and dispositions giving rise to required financials, and (iii) permit certain expense omissions in those financial statements.

We have now prepared a client alert providing a more detailed analysis of the amendments, including descriptions of a number of changes incorporated in the final rule that differ from the SEC’s initial rule proposal.

The SEC stated in its adopting release that the amendments are intended to reduce the complexity of financial disclosure requirements for business acquisitions and dispositions, facilitate more timely access to capital, and reduce the complexity and costs to registrants to prepare the required disclosure.  As we note in our client alert, the result is that, as a practical matter, there will likely be fewer “significance” determinations and thus fewer historical and pro forma financial statement disclosures about acquired businesses.  And although the amendments are intended to streamline and simplify various aspects of the rules and filing requirements, these provisions of Regulation S-X remain highly complex. Registrants are advised to take great care in analyzing them in connection with the consummation of corporate transactions.

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

As the end of the quarter approaches for most public companies, it is important to keep in mind that the SEC’s Enforcement Division has brought numerous cases alleging financial and disclosure fraud in the past year.  Many of the cases stem from efforts to meet analysts’ earnings expectations by recognizing revenue prematurely or underreporting expenses and reserves.  Some of the notable matters include:

• a case against a technology company alleging that it accelerated sales originally scheduled for future quarters, thereby masking declining market conditions,
• a case against a large insurance company alleging that it underreported reserves, and
• a case against a publicly traded REIT, alleging that it improperly adjusted “same property net operating income,” a non-GAAP metric.

Allegations in some of the other cases involved:

• recognizing revenue when there were undisclosed side agreements enabling distributors to return product, or when getting paid was conditioned on the distributor’s sale to an end user,
• inflating the value of a portfolio of complex reverse mortgage bonds, and
• failing to correct an error in accounting for FX losses.

The cases are usually accompanied by allegations of books and records violations and significant deficiencies in internal controls.  The SEC almost always imposes multi-million dollar penalties on the companies and brings charges against the individuals the SEC deems responsible for the misstatements, which usually includes CEOs, CFOs and Controllers.

Financial reporting involves judgment calls that can be difficult to make.  It is important that the company’s motivation is accuracy and transparency in

On April 27, 2020, the Delaware Court of Chancery for the third time in a year denied a motion to dismiss a Caremark claim. The case, Hughes v. Hu, involves a derivative claim against the audit committee and officers of a Delaware corporation, Kandi Technologies Group, Inc., a Nasdaq-traded company based in China that manufactures electric car parts. In denying the motion, Vice Chancellor Laster found that there was a substantial likelihood that the defendants breached their fiduciary duty of loyalty by failing to act in good faith to maintain an adequate board-level oversight.

Two recent Delaware court decisions raised concern that Caremark duties may have expanded: Marchand v. Barnhill (declining to dismiss a Caremark claim against the board of Blue Bell Creamery for failing to make a good-faith effort to implement a system of board-level compliance monitoring and reporting to oversee the food safety of its ice cream production) and In re Clovis Oncology, Inc. Derivative Litigation  (where the board “did nothing” when the company released unsubstantiated reports about cancer treatments in clinical trials).  However, it appears that the Caremark duties remain unchanged, with Delaware courts underscoring the requirement that directors implement board-level oversight of mission-critical areas in good faith to ensure that the systems are working effectively and heed warnings or “red flags” that are discovered. This view of the line of recent Caremark decisions is further reinforced by Hughes, where serious alleged failures in internal processes regarding related-party transactions resulted in the plaintiff’s claim surviving a motion to dismiss.

The Hughes decision chronicles a long history of problematic internal control and monitoring within

On May 21, 2020 the Securities and Exchange Commission adopted a number of amendments intended to reduce the complexity of financial disclosures required for business acquisitions and dispositions by U.S. public companies. These amendments will, among other things, (i) revise the requirements for financial statements and pro forma financial information for acquired businesses, (ii) revise the tests used to determine significance of acquisitions and dispositions, and (iii) for certain acquisitions of a component of a business, allow financial statements to omit certain expenses. The amendments are effective January 1, 2021, but registrants may voluntarily comply with the rules as amended prior to the effective date.

When a registrant acquires a business that is “significant,” other than a real estate operation, Rule 3-05 of Regulation S-X generally requires a registrant to provide separate audited financial statements of that business and pro forma financial information under Article 11 of Regulation S-X. The number of years of financial information that must be provided depends on the relative significance of the acquisition to the registrant. Similarly, Rule 3-14 of Regulation S-X addresses the unique nature of real estate operations and requires a registrant that has acquired a significant real estate operation to file financial statements with respect to such acquired operation.

The significance of an acquisition or disposition is based on an Investment Test, an Asset Test, and an Income Test. The amendments revise the Investment Test to compare a registrant’s investments in and advances to the acquired or disposed business to the

Companies filed a flurry of Form 8-K filings last week announcing voluntary executive officer compensation reductions driven by the COVID-19 pandemic.  While some companies disclosed the compensation changes under Item 7.01 or 8.01 on Form 8-K and others simply issued a press release, we saw an uptick in the number of companies making the disclosure under Item 5.02(e) of Form 8-K, which is triggered when a company enters into, adopts or materially amends a material compensatory plan or arrangement with the principal executive officer, principal financial officer or named executive officer.

Among companies making the disclosure under Item 5.02(e) of Form 8-K (Ford , Nordstrom , Lands’ End and Briggs & Stratton, among others), the executives generally reduced their compensation by at least 20% (and in some cases, 50% or 100%), seemingly taking the position that salary decreases of 20% or more were generally viewed as material amendments to the executives’ compensation arrangement (in parallel to the view that salary increases of 20% or more would generally would be viewed as material), although it is difficult to predict how long the reductions will continue and the true impact on the executives’ overall compensation.

Companies relying on Item 7.01 or 8.01 or a stand-alone press release likely were comfortable that based on their specific facts and circumstances, either that the decrease was not material to the executives’ compensation arrangements or, in the case where employment agreements were in place, perhaps by analogy to SEC CDI 117.13, that