Monthly Archives: January 2018

Points to Remember When Preparing Your Form 10-K

James Moloney and Lori Zyskowski are partners at Gibson Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Mr. Moloney and Ms. Zyskowski.

With all of the substantive issues impacting disclosures in companies’ upcoming annual reports, there are a few technical points reporting companies should bear in mind when preparing their annual report. Note that some of these issues are easy to miss given that they are not yet reflected in the official PDF of Form 10-K.

Addition of Item 16 (Form 10-K Summary). In 2016, the U.S. Securities and Exchange Commission (the “SEC”) adopted an interim final rule that amended Part IV of Form 10-K to add new Item 16. This item provides that “a registrant may, at its option, include a summary in its Form 10-K.” While the SEC’s interim final rule shows what Item 16 will look like, the PDF of Form 10-K included in the SEC’s official forms list still does not include Item 16. Interestingly, this PDF of Form 10-K—which is hosted on the SEC’s website, but is not directly linked from the SEC’s official forms list—has been updated to include Item 16 (but not the next item in our list). Even if a company chooses not to include a Form 10-K summary, pursuant to Exchange Act Rule 12b-13, the company should include the item number and caption (i.e., “Item 16. Form 10-K Summary”) in Part IV and state that the item is not applicable. In addition, companies should remember to revise the table of contents to include new Item 16.


Uncertainty, Prospectus Content, and the Pricing of Initial Public Offerings

Nicholas G. Crain is Assistant Professor of Finance at Vanderbilt University. This post is based on a paper by Professor Crain, Robert Parrino, Professor of Finance at the University of Texas at Austin; and Raji Srinivasan, Professor in the Department of Marketing at the University of Texas at Austin.

Setting the offer price of an initial public offering (IPO) to accurately reflect the value of a firm’s common stock creates high stakes for both the firm and its underwriters. Pricing the shares too low would result in a wealth transfer from old shareholders to new shareholders; pricing the shares too high may result in a failed issue, or poor initial returns that adversely affect the reputation of the firm and underwriter. In a new working paper, we study how information is incorporated into the price of initial public offerings.


Informed Trading and Cybersecurity Breaches

Joshua Mitts is Associate Professor of Law and Eric Talley is Isidor & Seville Sulzbacher Professor of Law at Columbia Law School. This post is based on their recent paper.

A key pillar of the digital economy—the ease of accessing/copying/distribution at large scale—is frequently also its Achilles Heel, in the form of cybersecurity risk. The massive and cataclysmic data breach of Equifax in September 2017, compromising highly confidential information of tens of millions of clients (including Social Security numbers), is hardly the first of its kind – and it is clearly not the last. For well over a decade, firms and organizations that store confidential data digitally have been potential (and actual) targets of similar types of attacks often with analogously cataclysmic implications for victims.

In securities-market settings, of course, one person’s catastrophe can be another’s arbitrage play: And so it was that in the late summer of 2016, a short hedge fund, Muddy Waters Capital, opened a confidential line of communication with MedSec, a start-up cybersecurity firm that claimed to have discovered a serious security flaw in the pacemakers produced by St. Jude Medical, a then-public medical device. Only after taking a substantial short position in St. Jude did Muddy Waters publicly disclose the claimed vulnerability, causing an immediate fall in St. Jude’s stock price in excess of eight percent. Similar episodes of material changes in value after disclosure of a cybersecurity event are routine.


Corporate Governance Update: Boards, Sexual Harassment, and Gender Diversity

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Katz and Ms. McIntosh which originally appeared in the New York Law Journal.

In light of recent events, corporate directors may consider adding an item to the agenda for their next board meeting: the issue of potential sexual misconduct at the company. A recent study indicates that the topic would be new for most public company boards, notwithstanding the fact that it relates to key elements of board-level governance: company culture, tone-at-the-top, risk management, and crisis management. Sexual misconduct in the workplace can take a devastating human toll. Moreover, the issue implicates gender equality and gender diversity concerns more broadly, and boards that include a meaningful proportion of female directors should be better positioned to address sexual harassment and gender equality issues.


Weekly Roundup: January 19–25, 2018

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This roundup contains a collection of the posts published on the Forum during the week of January 19–25, 2018.

The Option to Quit: The Effect of Employee Stock Options on Turnover

The Appraisal Landscape: Key Points, Open Issues, and Practice Points

Remarks on Securities Market Regulation

Bebchuk Leads SSRN’s 2017 Citation Rankings

Evolution or Revolution for Companies with Multi-Class Share Structures

Pamela Marcogliese is a partner and Elizabeth Bieber is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Ms. Marcogliese and Ms. Bieber. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

This past year has been marked by significant and, in some cases, opposing attitudes and practices with respect to multi-class share structures. We are likely to see some of this churn continue in 2018 as the various market participants continue to define or refine their positions on this issue.

In 2016, a coalition of investors and pension funds lobbied against multi-class structures and, in 2017, the Council for Institutional Investors (CII) was vocal about its view that one vote per share is central to good governance. This movement is largely in connection with a minority trend of multi-class high-vote/low-vote and, sometimes, no-vote equity structures. In the spring of 2017, the initial public offering (IPO) of Snap Inc. put significant pressure on the issue when Snap offered its no-vote common stock to the public, followed shortly by Blue Apron’s IPO, which sold a class of low-vote stock to the public, while its capital structure also has a class of non-voting stock. Both companies suffered significant stock price drops following their IPOs.


U.S. Tax Reform: Changes to 162(m) and Implications for Investors

David Kokell is Head of U.S. Compensation Research, John Roe is Head of ISS Analytics, and Kosmas Papadopoulos is Managing Editor at Institutional Shareholder Services, Inc. This post is based on an ISS publication by Mr. Kokell, Mr. Roe, and Mr. Papadopoulos.

The Tax Cuts and Jobs Act of 2017 introduces significant changes to Section 162(m) of the Internal Revenue Code, which regulates several compensation-related practices in the United States. The changes raise many questions about how companies will adapt with respect to disclosure practices, general meeting agendas, and—more importantly—pay structures. To help make sense of it all, we turned to David Kokell, Head of U.S. Compensation Research at ISS, who provided insight into how ISS will assess potential changes in compensation practices as a result of the new legislation. Before we delve into the discussion, it is worth reviewing the changes to 162(m) in order to understand their potential impact.


Say on Pay: Is It Needed? Does it Work?

Stephen F. O’Byrne is the President of Shareholder Value Advisors. This post is based on an article by Mr. O’Byrne, forthcoming in the Journal of Applied Corporate Finance.

There is little need for shareholder oversight of executive pay if directors do a good job providing oversight themselves or have strong incentives to do a good job. In this article, we’ll show that there is substantial evidence that directors do a poor job overseeing executive pay and that directors have weak incentives to pursue shareholder interests in executive pay. We’ll then look at Say on Pay and present evidence that Say on Pay voting is sensitive to differences in pay for performance, but so forgiving that extraordinary pay premiums are required to elicit a majority “no” vote. We will show that three quarters of institutional investors have lower SOP voting quality—that is, less informed and fair voting ‐ than the average investor and almost all have a short‐term focus, with much greater vote sensitivity to current year grant date pay premiums than to long‐term pay alignment and cost. We’ll conclude with a proposal explaining how institutional investors can improve their SOP voting.


Bebchuk Leads SSRN’s 2017 Citation Rankings

Statistics released publicly by the Social Science Research Network (SSRN) indicate that, as of the end of 2017, Professor Lucian Bebchuk continued to lead SSRN citation rankings for law professors. Bebchuk ranked first among all law school professors in all fields in terms of the total number of citations to his work. Bebchuk has led the SSRN citation rankings for law professors at the end of each of the preceding ten years.

Professor Bebchuk’s works (available on his SSRN page here) have attracted a total of 4,411 citations. His top ten studies in terms of citations are as follows:


Remarks on Securities Market Regulation

Kara M. Stein is Commissioner of the U.S. Securities and Exchange Commission. This post is based on Commissioner Stein’s recent concluding remarks at an SEC-NYU Dialogue on Securities Market Regulation. The views expressed in this post are those of Ms. Stein and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good afternoon everyone. Thank you all for coming and contributing to a very lively discussion about how today’s companies interact with their shareholders. In particular, I want to thank our host, the NYU Salomon Center for the Study of Financial Institutions, because so much work goes into hosting events like today’s.

I also would like to thank each of the panelists, Jen Juergens and the rest of the SEC staff in the Division of Economic and Risk Analysis, and the Division of Corporation Finance.

As you know, today’s [Jan. 19, 2018] discussion is the fourth in a series of dialogues sponsored by NYU and the SEC focused on an exchange of ideas on today’s securities laws and whether our regulatory framework is effective in today’s environment. This past year, our conversations have covered a range of important topics—from crowdfunding and IPOs, to exchange-traded products, and now, shareholder engagement.


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