On November 3, Chairman Gary Gensler announced that the Staff (Staff) of the Securities and Exchange Commission’s (SEC) Division of Corporation Finance released SLB 14L (“new guidance”) regarding shareholder proposals.

The new guidance significantly changes the Staff’s approach when determining whether a shareholder proposal may be properly excluded from a company’s proxy statement. The new guidance rescinds SLBs 14I, 14J, and 14K (Rescinded SLBs), as well as any provisions of other prior Staff guidance that could be considered as inconsistent with the new guidance.  A few of these changes are highlighted below.

Significant Social Policy Exception

The new guidance significantly impacts Rule 14a-8(i)(7), commonly referred to as the “ordinary business exception.”  This substantive basis for exclusion permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.”  Under the new guidance, the Staff will realign its approach for determining whether a proposal relates to “ordinary business” with the standard the SEC initially set forth in 1976, which provided an exception for certain proposals that raise significant social policy issues.

According to the new guidance, the Staff believes that an “undue emphasis was placed on evaluating the significance of a policy issue to a particular company at the expense of whether the proposal focuses on a significant social policy.”


Continue Reading SEC Staff Significantly Changes Guidance on Shareholder Proposals and Rescinds Prior Guidance

As we’ve previously blogged, in November 2020, the Securities Exchange Commission (SEC) adopted amendments to the Regulation S-K items related to Management’s Discussion and Analysis (MD&A) as well as certain selected financial disclosures.  The amendments became effective on February 10, 2021 (effective date) but registrants were not required to apply the amended rules until their first filing related to their fiscal year ending on or after August 9, 2021 (mandatory compliance date).

As a result, compliance with these amendments will be required for most calendar-year companies beginning with the Annual Report on Form 10-K for the fiscal year ending December 31, 2021.  However, companies with fiscal years that ended September 30, 2021, will be required to comply with the new rules in their upcoming 10-K.  Registrants will also be required to apply the amended rules in a registration statement and prospectus that on its initial filing date is required to contain financial statements for a period on or after the mandatory compliance date.

While many issuers voluntarily early adopted the amendments covering Items 301 and 302 during this last 10-K reporting cycle, based on our experience a large number of registrants chose not to early adopt the amendments to Item 303 of Regulation S-K, relating to the MD&A section, because of the short time period after their adoption before the first 10-K.  As a result, this fall will be an ideal time for many companies to analyze what impacts the new rules will have on their upcoming MD&A.


Continue Reading New MD&A Rules Are Here – A Slide Deck to Help with Internal Discussions

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).


Continue Reading “Actual Results May Differ Materially From These Estimates;” SEC Staff Objects to Disclaimer Language When Giving Preliminary Financial Results

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.”


Continue Reading It’s a Rule! SEC Approves Nasdaq’s Board Diversity Proposal

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.


Continue Reading A Survey of Recent SEC Comment Letters on Human Capital Disclosures

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.


Continue Reading A Glimpse into Required Climate Risk Disclosure Considerations by the SEC

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.


Continue Reading “You Cannot Direct the Wind, But You Can Adjust Your Sails.” – The SEC Speaks on a Board’s Role in ESG Matters

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.


Continue Reading ESG, SEC and the World Around Us

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.

Background

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.)


Continue Reading Adjusting for Litigation Expenses in a Non-GAAP Financial Measure