Yearly Archives: 2020

Leading Digital and Cybersecurity Risk Factor Disclosures for SEC Registrants

Paul Ferrillo is partner at McDermott Will & Emery LLP; Bob Zukis is Adjunct Professor of Management and Organization at the USC Marshall School of Business; and Christophe Veltsos is a Professor at Minnesota State University.

As the United States continues to reel under the systemic risks and failures of the expanding coronavirus, cybersecurity risk remains a present and escalating threat to America’s companies and its future. At the same time, the amount of business value reliant upon digital technologies continues to grow.

An accurate understanding of digital and cybersecurity risk is vital to protect investor and public interests now, and into the digital future. Both business risk and litigation risk will continue to grow alongside the migration to the digital future.

And regulators have taken notice. The SEC wants registrants to do a more specific job with risk factor disclosure and to specifically up their game with regard to cybersecurity risk disclosure.

Disclosure plays an important role in risk understanding, reduction, and litigation risk management. When it comes to vigorously defending cybersecurity breaches during litigation, companies depend upon both their actual duties of risk oversight and management, and what they’ve disclosed about risk.


From Managers to Markets: Valuation and the Shareholder Wealth Paradigm

James J. Park is Professor of Law at UCLA School of Law. This post is based on his recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

The shareholder wealth paradigm displaced a managerialist model where investors deferred to managers with the expertise to efficiently allocate resources within the firm. The corporate managers who administered such internal capital markets faced less pressure to generate profits than they do today. Managers viewed themselves as trustees with duties to balance the interests of various corporate stakeholders.

What happened to managerialism? The prevailing account is that ideology changed. Some scholars point to the 1970 publication of Milton Friedman’s vigorous defense of shareholder wealth maximization in the New York Times Magazine as a turning point. Corporate scandals during the 1970s reinforced the idea that corporate governance should focus on protecting shareholders from predatory managers.

This paper develops a new account of the shift from managers to markets as the primary drivers of corporate purpose. It shows that managerialism became less influential not because of shifts in ideology but because of fundamental changes in the methods investors used to value public companies. As management became viewed as a science that could be mastered, it became evident that stock values depended on the ability of management teams to generate corporate earnings over time. Investors became more confident that a company’s earnings could be projected over time and the value of those earnings discounted to present value should determine the fundamental value of that company’s stock.


Nasdaq Proposes New Listing Rules Related to Board Diversity

Ron S. Berenblat and Elizabeth Gonzalez-Sussman are partners at Olshan Frome Wolosky LLP. This post is based on their Olshan memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

On December 1, 2020, Nasdaq filed Proposed Rule 5605(f) with the U.S. Securities and Exchange Commission (“SEC”) to adopt new listing rules related to board diversity. If approved by the SEC, Proposed Rule 5605(f) would require all companies listed on Nasdaq’s U.S. exchange to publicly disclose their diversity statistics regarding their board of directors. Proposed Rule 5605(f) would also require all Nasdaq-listed companies to include a minimum number of individuals on their board of directors who self-identify in one or more of the following “Diverse” categories: female, underrepresented minority or LGBTQ+.

Specifically, all Nasdaq-listed companies, subject to certain exceptions, would be required by the time frame set forth below (A) to have at least one director who self-identifies as a female and at least one director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+, or (B) to explain why the company does not have at least two directors on its board who self-identify in the Diverse categories listed above.


Variety of Approaches to New Human Capital Resources Disclosure in 10-K Filings

David Gordon is a managing director, and Dina Bernstein and Andrew R. Lash are consultants at Frederic W. Cook & Co., Inc. This post is based on a FW Cook memorandum.


The SEC significantly revised the contents of Form 10-K, effective November 9, 2020. The SEC says the changes are intended to modernize the required disclosures relating to the description of the business, legal proceedings, and risk factors (Items 101, 103, and 105 in Regulation S-K). These revisions are the culmination of a process that began with the JOBS Act in 2012, which instructed the SEC to undertake a comprehensive evaluation of the 10-K disclosure requirements.

This post focuses on the portion of the new disclosure rules regarding HCR. Previously, the only applicable disclosure requirement was to list the number of employees as a whole (and, in some cases, also by segment). The new rule is much broader. Item 101(c)(2) requires that a registrant:


Realizable Pay Disclosures

Brian Johnson is Associate Director and Jared Sorhaindo is an Associate at ISS Corporate Solutions. This post is based on their ISS memorandum.

Executive Summary

“Realizable” pay assessments are often included in the Compensation Discussion & Analysis (“CD&A”) section of the proxy filing to provide a more accurate view of the actual value of compensation delivered to an executive, as opposed to the pay data disclosed in the Summary Compensation Table, which does not take into account the impact of recent share price movements on an executive’s compensation package. A common reason for including these supplemental analyses in the CD&A is to secure higher support levels for the Say-on-Pay proposal during periods of underperformance for a company: they can illustrate that executives are sharing the pain with broader shareholders as the actual value of their equity holdings has declined in lock-step with the decline in shareholder value. However, based on our review of S&P 500 companies, we have found no discernible aggregate positive impact on Say-on-Pay outcomes when disclosing realizable pay assessments in the proxy, even after controlling for key factors such as an ISS vote recommendation for Say-on-Pay or elevated concern levels exhibited under quantitative pay-for-performance frameworks.


New Executive Order Bans Investment in 31 Chinese Companies

Ama Adams is partner, Brendan Hanifin is counsel, and Emerson Siegle is an associate at Ropes & Gray LLP. This post is based on their Ropes & Gray memorandum.

On November 12, President Donald Trump signed an Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies (the “Executive Order”). [1] The Executive Order states that the People’s Republic of China (“PRC”) is “increasingly exploiting United States capital to resource and to enable the development and modernization of its military, intelligence, and other security apparatuses, which . . . directly threaten[s] the United States homeland and United States forces overseas.” The Executive Order declares a national emergency requiring action to prevent the PRC from “exploit[ing] United States investors to finance the development and modernization of [the PRC’s] military.” [2]

As detailed below, the Executive Order will prohibit U.S. persons [3] from purchasing or investing in publicly traded securities [4] of companies identified by the U.S. government as “Communist Chinese military companies.” The term “Communist Chinese military company” includes any company that the U.S. Department of Defense (“DOD”) has identified pursuant to Section 1237 of the National Defense Authorization Act for FY 1999. Currently, 31 companies meet this criterion, including two companies whose shares are traded on U.S. exchanges. [5] The list of firms includes aerospace, shipbuilding, construction, technology and communication companies.


Board Considerations for an Uncertain 2021

Holly J. Gregory is partner at Sidley Austin LLP. This post is based on her Sidley memorandum.

In the current “black swan” era of heightened economic turmoil, social unrest, and the COVID-19 pandemic, boards of public companies have had to explore a range of issues in response to rapidly emerging risks. Interrelated trends have emerged, including:

  • Renewed interest in the company’s purpose in society, including its role in providing the goods and services that meet basic needs, as well as in innovation.
  • Shifting emphasis from shareholder primacy to the interests of a broader set of stakeholders.
  • Accelerating interest in environmental, social, and governance (ESG) matters, particularly the company’s role in addressing social issues, including issues of racial and gender equality and social justice.
  • Enhanced focus on the value of human capital and related changes in the nature of work and the workplace.
  • The potential for significant reconfiguration of industries and business models, which raises concerns about business continuity.

These trends will shape the board’s focus and priorities in 2021. While the specific priorities and their order will vary from board to board based on the unique circumstances facing the company, the key focus areas are likely to include:


SEC Adopts Amendments to Permit the Use of Electronic Signatures

Kenneth M. Silverman is a partner and Zachary E. Freedman is a law clerk at Olshan Frome Wolosky LLP. This post is based on their Olshan memorandum.

On November 17, 2020, the U.S. Securities and Exchange Commission (the “SEC”) adopted amendments to Rule 302(b) of Regulation S-T that will permit a signatory to an electronic filing to sign a signature page or other document (an “authentication document”) with an electronic signature provided prescribed requirements are satisfied. This amendment will provide additional flexibility in complying with the authentication document requirement by providing signatories with the option of signing either manually or electronically in a manner consistent with the evidentiary purposes of the authentication document.

Prior to these amendments, each signatory to an electronic filing was required to sign an authentication document manually before or at the time of the electronic filing to authenticate, acknowledge or otherwise adopt the signature that appeared in typed form within the electronic filing. Under new Rule 302(b), a signatory has the option to use an electronic signature. This means that reporting companies will be able to file periodic and current reports and registration statements that have been signed electronically by appropriate parties, CEOs and CFOs will be able sign the certifications required to be filed with Forms 10-K and 10-Q electronically, and filers of Schedules 13D/G and Section 16 reports (Forms 3, 4 and 5) will be able to do so as well. The signing process for the electronic signature must:


Weekly Roundup: December 4–10, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of December 4–10, 2020.

Behavioral Corporate Finance: The Life Cycle of a CEO Career

Defining the Role of the Audit Committee in Overseeing ESG

Boards Beware: Accountability is Rising

Statement by Commissioner Roisman at a Meeting of the Asset Management Advisory Committee

ISS Updates its Voting Policies

Biden In the Boardroom

Glass Lewis and ISS Issue Final 2021 U.S. Voting Policies

All the President’s Friends: Political Access and Firm Value

SEC Harmonizes Regulation and Improves Access to Capital in Private Markets

2020 Director Compensation Report

Real Effects of Share Repurchases Legalization on Corporate Behaviors

Key Issues Facing Companies That Exceed Financial Expectations

The Forum Wars of Section 11

The Fear and the Bright Side of Financial Fragility

SEC Amends Exempt Offering Framework

SEC Amends Exempt Offering Framework

Eric Orsic, Tom Conaghan and Gary Emmanuel are partners at McDermott, Will & Emery LLP. This post is based on a McDermott memorandum by Mr. Orsic, Mr. Conaghan, Mr. Emmanuel, Robert H. Cohen, Ze’-ev Eiger, and Mark Mihanovic.

On November 2, 2020, the Securities and Exchange Commission (SEC) voted to amend the framework for exempt offerings under the Securities Act of 1933, as amended (Securities Act). The amendments generally establish a new integration framework, increase the offering limits for Regulation A, Regulation Crowdfunding and Rule 504 offerings, implement clear and consistent rules governing certain offering communications and harmonize disclosure and eligibility requirements and bad actor disqualification provisions. The SEC believes these amendments will promote capital formation and expand investment opportunities while preserving or enhancing important investor protections.

In Depth

On November 2, 2020, the SEC amended its rules under the Securities Act to harmonize, simplify and improve the exempt offering framework. The framework has undergone a number of changes over time, which has resulted in a complex and confusing set of rules. The amendments aim to alleviate these difficulties for the benefit of entrepreneurs and emerging companies, as well as for investors and more seasoned companies.

Through the amendments, the SEC has:

  • Established a new integration framework;
  • Increased the offering limits for Regulation A, Regulation Crowdfunding and Rule 504 offerings and revised individual investment limits;
  • Implemented clear and consistent rules governing offering communications, including allowing certain “test-the-waters” and “demo day” activities; and
  • Harmonized disclosure and eligibility requirements and bad actor disqualification provisions.


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