On August 23, the Securities and Exchange Commission (SEC) announced that effective October 1, 2021, the fees that public companies and other issuers pay to register their securities with the SEC will be set at $92.70 per million dollars of the proposed maximum aggregate offering price of the securities to be registered, a 15% reduction
It is probably safe to say that most public companies have experienced the difficult situation of needing to issue preliminary financial results after the quarter ends but before the customary date that financial results would otherwise be publicly released. A number of factors could cause this situation to arise, such as any of the following:
- A securities offering will be launched during this time period.
- The most recent quarter is materially different than market expectations (either unusually weak or unusually strong).
- Management will be participating in a conference and desires to speak about recent results, among other reasons.
In securities offerings, preliminary financial results are often called “flash” numbers or “capsule financial information,” and, outside of offerings, the market may refer to an earnings release containing preliminary financial results as a “pre-release” (i.e., a preliminary earnings release before the actual, final earnings release).
On August 6, 2021, the Securities and Exchange Commission (SEC) approved Nasdaq’s proposed rule that would require a listed company to comply with certain board diversity requirements, or explain why it does not (the Board Diversity Rules). Nasdaq proposed this rule late last year (see our blog post about Nasdaq’s proposed board diversity rules) to help make more transparent diversity in the boardroom.
Overview of Board Diversity Rules
In its approved form, the Board Diversity Rules set a “recommended objective” for most Nasdaq-listed companies with more than five directors to include at least one woman on their board of directors, along with one person who is an underrepresented minority or self-identifies as LGBTQ+. Smaller companies with five or fewer total directors may satisfy the recommended objective with one director from a diverse background rather than two. An “underrepresented minority” is defined as “an individual who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities.” “LGBTQ+” is defined as “an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community.”
Late last year, the Securities and Exchange Commission (SEC) adopted amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make according to Regulation S-K. An important component of these updates was the new requirement in Item 101 (Description of Business) of Regulation S-K to require registrants to make certain human capital disclosures to the extent material to an understanding of its business as a whole.
The new rule amended Item 101(c) to require registrants to provide “a description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business.” The disclosure is only required to the extent such information is material to the registrant’s business as a whole, and the SEC in the adopting release stated that each registrant’s disclosure “must be tailored to its unique business, workforce, and facts and circumstances.”
As a result of these amendments, along with disclosing the number of employees, companies must also consider how to comply with the new principle-based rule. The SEC intentionally did not define “human capital,” reasoning that the term “may evolve over time and may be defined by different companies in ways that are industry specific.” The adopted rule states that the required disclosures may include “measures or objectives that address the development, attraction and retention of personnel.” But the SEC made clear that these are just “examples of potentially relevant subjects, not mandates.” Thus, companies have broad discretion in deciding which human capital measures to disclose.
On July 28, Securities and Exchange Commission (SEC) Chair Gary Gensler delivered remarks at the Principles for Responsible Investment’s Climate and Global Financial Markets Webinar. In his remarks, he offered a glimpse of responses received by SEC Commissioner Allison Herren Lee to her March 2021 call for input on climate change disclosures. (See our recent blog post summarizing recent efforts by the Biden administration.) Chairman Gensler also covered some of the items he has asked the Staff to consider as part of its proposal for mandatory climate risk disclosure to be developed by the end of this year.
Chairman Gensler noted that more than 550 unique comment letters were submitted in response to Commissioner Lee’s statement on climate disclosures in March. He pointed out that three out of every four of these responses supported mandatory climate disclosure rules.
The demand for climate risk disclosure is strong and supports Chairman Gensler’s simple rationale for the SEC’s recent focus on climate risk disclosure – “So why am I talking about climate risk? Simple: because investors are . . . Investors are looking for consistent, comparable, and decision-useful disclosures so they can put their money in companies that fit their needs.” Required climate risk disclosure might help bring the clarity and consistency that investors have been seeking in this regard.
On June 28, Commissioner Allison Herren Lee delivered the Keynote Address at the 2021 Society for Corporate Governance National Conference. In it, she spoke on the ever-increasing role a company’s board of directors has within the environmental, social and governance (ESG) space. Notably, she provided some “key steps” for boards seeking to embrace their growing role in ESG matters and capitalize on the opportunities they present. Some of these key steps are highlighted below:
Enhance Board Diversity for New Perspectives
Despite the plentiful evidence that makes clear the important role that ESG plays in a company’s long-term growth and capital raising opportunities, Commissioner Lee referred to some evidence that suggests directors have been relatively slow to appreciate the need to integrate ESG into governance practices. In her view, board refreshment introduces opportunities to put new directors on boards, and prioritizing diversity helps increase the chance that new directors will bring new perspectives. This, in turn, may facilitate more up-to-date and proactive approaches to ESG governance by a company’s board.
We’ve seen the many efforts by the Securities and Exchange Commission (SEC) to regulate environmental, social and governance (ESG) disclosure on the domestic front (see here for our blog post that summarizes recent activity). Alongside these efforts, the SEC has not overlooked support for global ESG standards to address this global matter.
Earlier this year, then-acting SEC Corporation Finance Director John Coates (and as of June 21, 2021, SEC General Counsel) expressed interest in developing global ESG disclosure standards, stating that the SEC “should help lead the creation of an effective ESG disclosure system.”
The rationale for a global standard was simple – in his words:
ESG issues are global issues. ESG problems are global problems that need global solutions for our global markets. It would be unhelpful for multiple standards to apply to the same risks faced by the same companies that happen to raise capital or operate in multiple markets.
In particular, Coates showed support for the work of the International Financial Reporting Standards (IFRS) Foundation to establish a sustainability standards board. The IFRS Foundation is an international nonprofit organization that has been steadily working on creating global sustainability reporting standards.
It should come as no surprise to readers of our blog that public companies often expend significant resources each year on managing litigation matters. As a result, perhaps it is natural that some companies might want to convey financial results that exclude (or adjust out) these litigation expenses from their GAAP results as they arguably do not relate to the core performance of the company’s business.
When considering whether to include an adjustment for litigation expenses in non-GAAP measures, companies should be mindful of how they identify and disclose such expenses (e.g., outside of the ordinary course of business (non-recurring)). In monitoring recent Securities and Exchange Commission (SEC) comment letters, we found a letter exchange that we believe demonstrates the principal disclosure considerations at issue.
As background, Item 10(e) of Regulation S-K provides that a registrant must not “adjust a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years.” (Emphasis added.)
The market has seen a boom in the last two years for emerging companies going public through the use of special-purpose acquisition companies (SPACs). SPACs are attractive vehicles for allowing a private company to gain quicker access to public capital and avoid the traditional initial public offering (IPO) process. A SPAC starts as a public company through a traditional IPO but has no operations. The SPAC raises public funds under the premise that it will use those funds to find a target private company in which to invest. Once the target is identified, the SPAC goes through a business combination transaction (called a de-SPAC transaction) whereby the SPAC and private target engage in a merger transaction, with the result being the target survives as a public company.
The recent dramatic increase in using SPACs, however, has faced increased scrutiny. More recently, this trend has raised the attention of the U.S. Securities and Exchange Commission (SEC) along with plaintiff stockholder class action law firms. Directors and officers (D&O) insurance carriers are also adjusting their premiums and policy terms to account for these increased risks in using SPACs. Such rising concerns are only heightened by recent news reports of gaps in certain deals between returns for insiders versus later investors who suffer losses after a company becomes public via a SPAC.
This post highlights recent SPAC-related issues raised by the SEC and litigation filings, including potential conflicts with SPAC sponsors, accounting controls for targets, and the financial projections companies use when attracting support for a SPAC transaction. SPAC sponsors and potential SPAC target companies should be aware of these developments as they consider the booming SPAC market. Notwithstanding these headwinds, it is likely the SPAC market (particularly the de-SPAC market) will continue to be strong in 2021 as valuations continue to be attractive and given the reality that so many SPACs are in the market competing for targets.
I, along with Delta Air Lines Assistant General Counsel Stephanie Bignon, recently authored an article for Corporate Compliance Insights addressing the latest developments impacting SEC periodic reporting disclosure practices.
“Public companies have been monitoring and rapidly adapting to a wide array of developments impacting periodic reporting disclosure practices over the last year,” we wrote in the article.
In addition to various SEC rules changes that have been adopted over the last year, we provided an extensive overview of four key areas which are anticipated to impact periodic reporting for the remainder of 2021: