Introduction

Companies subject to U.S. reporting requirements may be required to provide additional information about relevant risks, uncertainties, impacts and opportunities related to climate change, as the U.S. Securities and Exchange Commission (SEC), in the first two months of President Joseph Biden’s administration, has begun analyzing whether current disclosures by such companies adequately inform investors about the impacts of the changing climate.

Not since 2010 has the SEC provided specific guidance to U.S. reporting companies on what information concerning climate change they are required to communicate to investors. [1] The 2010 SEC guidance, which remains in effect, articulates a “principles-based” disclosure framework rooted in the concept of materiality and does not mandate disclosure of any specific climate-related metrics. The guidance requires companies to disclose information about climate change’s potential or actual impacts on the company to the extent material to investors.

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As issuers prepare their Form 10-K and 20-F filings for fiscal year 2020, they should consider recent and upcoming changes to the disclosure rules of the Securities and Exchange Commission (“SEC”) and trending disclosure topics. This post summarizes several of those disclosure considerations and highlights the key changes to SEC rules that will affect Form 10-K and 20-F filings this upcoming reporting season.

General Disclosure Trends

As issuers prepare their annual SEC reports, they should consider a number of disclosure topics that continued to receive SEC and investor attention over the past year. Although some issuers may not need to make changes at this time, all issuers should evaluate whether their disclosures adequately address these topics. Issuers should also consider whether other issues that have received increasing attention present material risks that should be discussed, such as the misuse of customer data or exposure to government investigations and related liabilities.

COVID-19 Disclosure. In March and June 2020, the SEC issued guidance for reporting on the impact of the COVID-19 pandemic and related business and market disruptions. The guidance encourages companies to address the impact of COVID-19 on their business and financial condition, including liquidity and capital resources, and include questions that issuers should consider when assessing the effects of COVID-19. Importantly, the SEC staff indicated that disclosures should enable an investor to understand how management and the board of directors are analyzing the current and expected impacts of COVID-19 and be updated as facts and circumstances change. In preparing Form 10-K or 20-F filings, issuers should consider such topics as:

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Over the last several years, U.S. public companies have faced increasing pressure from investors and other stakeholders to disclose their environmental, social and governance (“ESG”) risks, practices and impacts. In the last few years, with more U.S. public companies publishing sustainability reports [1] and other ESG disclosures, some investors have expressed concern that the lack of a standardized ESG disclosure framework, which makes it difficult for investors to meaningfully evaluate and compare companies’ ESG practices and risks, reduces the value of such disclosures.

Although a number of ESG disclosure standards have been developed and some have been incorporated into mandatory reporting regimes by non-U.S. regulators, any implementation by a U.S. company of an ESG disclosure framework remains voluntary at this time. Despite several proposals in 2019 from U.S. federal lawmakers on ESG disclosure requirements (which have not been adopted to date), the Securities and Exchange Commission’s (“SEC”) January 2020 proposed amendments to the MD&A rules did not include requirements for specific ESG or climate-related disclosures. SEC Chairman Jay Clayton and Commissioner Hester Peirce issued statements reaffirming the existing principles-based, materiality-focused approach the Commission adopted in its 2010 guidance, [2] and highlighted threshold issues that pose challenges to imposing a standardized ESG disclosure regime, including the complex landscape surrounding ESG disclosures and the forward-looking nature of climate-related ESG disclosure. [3] However, public companies are facing mounting pressure from investors—including influential institutional investors such as BlackRock, Vanguard and State Street, which have indicated in public statements in the past year that they are in support of companies making ESG disclosures aligned with both the Sustainability Accounting Standards Board (“SASB”) and Task Force on Climate-Related Financial Disclosures (“TCFD”) frameworks [4]—to voluntarily adopt certain ESG disclosure standards, especially the SASB and the TCFD frameworks, which have gained particular traction in the United States. In light of the increased investor attention and the lack of a mandatory framework, it is important for U.S. issuers to closely monitor developments in this area, and consider whether the voluntary adoption of an ESG disclosure standard makes sense in light of the issuer’s specific circumstances—e.g., the views of its investors, the costs and benefits of implementation and feasibility of establishing adequate internal controls over any such disclosure—before implementing any such framework.

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Summary

In light of the impact of the COVID-19 pandemic, the New York Stock Exchange LLC (“NYSE”) filed notice of a proposed rule change on May 14 with the Securities and Exchange Commission (“SEC”), which became effective immediately. [1] Specifically, Section 312.03T (the “Temporary Rule”) of the NYSE Listed Company Manual (the “Manual”) provides a limited temporary exception from the application of the shareholder approval requirements in Section 312.03 of the Manual—also known as the “20% Rule”—and a limited attendant exception from the requirements of Section 303A.08 of the Manual (Shareholder Approval of Equity Compensation Plans). [2] The Temporary Rule is substantially similar to Nasdaq Listing Rule 5636T, which was filed by The Nasdaq Stock Market LLC on May 4, 2020 (the “Nasdaq Rule”). [3] Like the Nasdaq Rule, any securities issued in reliance on the exception must be issued by the later of June 30, 2020 and 30 calendar days following the date of the binding agreement governing the issuance, in each case, after the company has submitted a certification of its compliance with the requirements of the Temporary Rule and received approval from NYSE. Unlike the Nasdaq Rule, the Temporary Rule requires that a company certify that the proceeds of any issuance made pursuant to the Temporary Rule will not be used to fund any acquisition transaction and does not include a “safe harbor” provision waiving the requirement to obtain NYSE prior approval for transactions that meet specified conditions. The SEC is soliciting comments on the Temporary Rule for 21 days following publication in the Federal Register. [4]

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On February 14, 2019, the Nasdaq Stock Market LLC filed notice with the Securities and Exchange Commission of a rule change to “amend and clarify certain aspects of the listing process for Direct Listings.” [1] The rule, which became effective upon filing, clarifies the conditions under which private companies can list on Nasdaq through a direct listing, rather than by raising new capital through a traditional initial public offering, and is substantially similar to the direct listing rule adopted by the New York Stock Exchange in February 2018. [2] Like the NYSE rule, the Nasdaq rule covers companies applying to list their securities on Nasdaq upon effectiveness of a registration statement under the Securities Act of 1933 registering only the resale of securities sold in earlier private placements, and provides guidance on how Nasdaq calculates compliance with its initial listing standards for direct listings, including with respect to companies listing securities that do not have an established private placement market. The SEC is soliciting comments on the rule through March 15, 2019. [3]

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Corporate governance circles are abuzz with discussions about board refreshment, sustainability proposals and the repercussions of the #MeToo movement, among other hot topics. For most companies, however, these topics do not warrant immediate reactions. This post summarizes our recommendations and observations of emerging trends for the 2019 proxy season in response to the recent focus on these and other hot topics.

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On December 22, 2017, the Securities and Exchange Commission’s Division of Corporation Finance released Form 8-K Compliance and Disclosure Interpretation 110.02 and its Office of the Chief Accountant published Staff Accounting Bulletin No. 118, which provide guidance on reporting accounting impacts of the recently enacted tax reform legislation. The new C&DI clarifies that disclosure under Item 2.06 of Form 8-K (Material Impairments) is not triggered by the re-measurement of deferred tax assets due to a change in tax rates or tax laws. New SAB 118 provides guidance on reporting the income tax effects of U.S. tax reform for issuers that are not able to complete the accounting for certain tax effects by the time financial statements are issued covering the reporting period that includes the date of the enactment of the Tax Cuts and Jobs Act (December 22, 2017). [1]

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The Securities and Exchange Commission (“SEC”) announced on June 1, 2016 that it has approved an interim final amendment to Form 10-K, implementing Section 72001 of the Fixing America’s Surface Transportation (“FAST”) Act, [1] to expressly permit issuers to provide a summary of business and financial information contained in the annual report, provided that each item in the summary includes a cross-reference by hyperlink to the material in the report to which the item relates. This amendment will take effect immediately upon publication in the Federal Register. The SEC also requests comments on the amendment within 30 days after publication, including on whether it should be revised to include specific requirements as to the form of the summary and whether other annual reporting forms should be similarly amended.

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