Category Archives: Corporate Governance

First SEC Staff Comments on Recent Non-GAAP CDIs

As many of us have noticed, the first comment letters from the staff in the SEC’s Division of Corporation Finance, following Corp Fin’s recent issuance of new CDI guidance on the presentation of non-GAAP financial measures, have become available publicly.  The comment letters shed additional useful light on Corp Fin’s views concerning non-GAAP presentations.

One of the comment letters sent to Alexandria Real Estate Equities, Inc. on June 20, 2016, provides a particularly helpful glimpse into Corp Fin’s views about the use of non-GAAP information in the executive summary of MD&A.  The staff’s letter includes the following comment in reference to MD&A in the registrant’s 2015 Form 10-K:

We note that in your executive summary you focus on key non-GAAP financial measures and not GAAP financial measures which may be inconsistent with the updated Compliance and Disclosure Interpretations issued on May 17, 2016 (specifically Question 102.10). We also note issues related to prominence within your earnings release filed on February 1, 2016. Please review this guidance when preparing your next earnings release.

Indeed, the executive summary portion of the MD&A – when initially conceptualized in the SEC’s 2003 release providing interpretive guidance in the preparation of MD&A – was supposed to include an overview to facilitate investor understanding.  The overview was intended to reflect the most important matters on which management focuses in evaluating operating performance and financial condition.  In particular, the overview was not supposed to be duplicative, but rather more of a “dashboard” providing investors insight in management’s operation and management of the business.

Looking back at the release to write this blog entry, I note references, with regard to Commission guidance on preparation of the MD&A overview, explaining that the presentation should inform investors about how the company earns revenues and income and generates cash, among other matters, but should not include boilerplate disclaimers and other generic language.  The Commission even acknowledged that the overview “cannot disclose everything and should not be considered by itself in determining whether a company has made full disclosure.”

Many companies have presented in their MD&A overview those non-GAAP measures used by management to operate the business and otherwise manage the company.  Where appropriate, references typically are made to the information appearing elsewhere in the document, presented to enable compliance with applicable rules and guidance for non-GAAP presentations.  Interestingly, the staff, in its comment, questions the “prominence” of the non-GAAP presentation in the context of the earnings release (noting that the staff provides less specificity in the portion of its comment relating to the MD&A overview).  This focus on prominence – to the extent the staff’s concerns relate to the MD&A overview – is worth further consideration in preparing MD&A disclosure.   In this connection, query whether the staff – in questioning prominence – could be expressing a view that when management analyzes for investors the measures on which it focuses in managing the business, if management relies on non-GAAP measures, it necessarily must focus on (and explain) – with no less prominence – the corresponding GAAP measures.

David N. Feldman

OTCQX Strengthens Listing and Governance Requirements

The OTCQX, owned by OTC Markets, Inc., announced last week that they are increasing their listing and governance requirements effective January 1. The QX is the highest tier of trading among the OTC options. There will now be a higher initial bid price of $0.25 to trade on the OTCQX U.S. tier.  US companies on the QX will have to keep a price above $0.10. International companies will be required to meet new initial and ongoing minimum bid prices of $0.25 and $0.10 to trade on the OTCQX International tier. Both US and international companies will have higher initial and ongoing market capitalizations of $10 million and $5 million, respectively.  All companies now will be required to have at least two market makers.

In addition, there are new minimum corporate governance requirements for American companies on the QX. These are: a minimum of two independent directors on the board of directors; an audit committee composed of a majority of independent directors; and they must conduct annual shareholders’ meetings and submit annual financial reports to shareholders at least 15 calendar days prior to such meetings. They also added even more stringent new requirements for the higher level “premier” tier on the QX.

In their announcement, OTC Markets CEO Cromwell Coulson acknowledged the purpose of these changes is to strengthen the legitimacy of the QX and get more attention from investors, Wall Street firms and analysts for these companies. My take: good stuff!

The Comverge Case: Fiduciary Duties and Break-up Fees in M&A

Our partner Richard Renck in Wilmington recently posted an entry on our Delaware Business Law Blog regarding the Comverge case decided last month by the Delaware Court of Chancery.   Among other things, the Court’s opinion provides practitioners and clients with insight regarding break-up fees as well as a road map of  how the Court of Chancery reviews challenges to third-party sale transactions, approved by a disinterested board, under the enhanced scrutiny of Revlon.  Please see Richard’s post here.

NYSE Further Narrows Broker Discretionary Voting: Potential Impact on a Company’s Proxy Season Planning

The New York Stock Exchange (NYSE) once again has limited the ability of a broker to vote on proposals at shareholder meetings for which the broker has not received voting instructions from its customers. This narrowing follows recent rule amendments triggered by the Dodd-Frank Act prohibiting brokers from voting uninstructed shares in the election of directors and on proposals relating to executive compensation.

Continue reading NYSE Further Narrows Broker Discretionary Voting: Potential Impact on a Company’s Proxy Season Planning

Executive Compensation: Negative Say-on-Pay Vote Does Not Trump Board Authority

In an important battle in the ongoing executive compensation wars, last week a federal court in Oregon affirmed that directors of Oregon corporations are indeed protected by the business judgment rule in making executive compensation decisions. In ruling that the claim in Plumbers Local No. 137 Pension Fund v. Davis should be dismissed, the specifically declined to follow a recent controversial decision by an Ohio court allowing a say-on-pay lawsuit to proceed under similar circumstances.

Continue reading Executive Compensation: Negative Say-on-Pay Vote Does Not Trump Board Authority