Tag: Regulation Fair Disclosure

Institutional Investors and Corporate Short-Termism

Robert C. Pozen is a Senior Lecturer at MIT Sloan School of Management and a Senior Fellow at the Brookings Institution. This post is based on an article forthcoming in the Financial Analysts Journal. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

Across the world, a clamor is rising against corporate short-termism—the undue attention to quarterly earnings at the expense of long-term sustainable growth. In one survey of chief financial officers, the majority of respondents reported that they would forgo current spending on profitable long-term projects to avoid missing earnings estimates for the upcoming quarter.

Critics of short-termism have singled out a set of culprits—activist hedge funds that acquire 1% or 2% of a company’s stock and then push hard for measures designed to boost the stock price quickly but unsustainably. The typical activist program involves raising dividends, increasing stock buybacks, or spinning off corporate divisions—usually accompanied by a request for board seats.


SEC Issues Guidance on Use of Social Media in Offerings and Proxy Fights

Trevor Norwitz is a partner in the Corporate Department at Wachtell, Lipton, Rosen & Katz, where he focuses on mergers and acquisitions, corporate governance and securities law matters. This post is based on a Wachtell Lipton firm memorandum by Mr. Norwitz, Sabastian V. Niles, Eitan S. Hoenig, and Matthew I. Danzig.

The SEC staff has released new guidance regarding the use of social media such as Twitter in securities offerings, business combinations and proxy contests (as a senior SEC official telegraphed at the Tulane Corporate Law Institute conference). Until now, SEC legending requirements have restricted an issuer’s ability to communicate electronically using Twitter or similar technologies with built-in character limitations before having an effective registration statement for offerees, or definitive proxy statement for stockholders (as the legends generally exceed the character limits). Companies using Twitter and similar media with character limits can now satisfy these legend requirements by using an active hyperlink to the full legend and ensuring that the hyperlink itself clearly conveys that it leads to important information. Although the SEC guidance does not provide example language, hyperlinks styled as “Important Information” or “SEC Legend” would seem to satisfy this standard. Social media platforms that do not have restrictive character limitations, such as Facebook and LinkedIn, must still include the full legend in the body of the message to offerees or stockholders.


SEC Settles Regulation FD Case Against Former Vice President

The following post comes to us from John H. Sturc, partner and co-chair of the Securities Enforcement Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert.

On September 6, 2013, the Securities and Exchange Commission (SEC) announced that it had brought—and settled—a cease-and-desist case under Regulation Fair Disclosure (Reg. FD), which requires that public companies broadly disclose material nonpublic information to the public that their covered officers and employees intentionally or inadvertently disclose to market professionals and stockholders. The SEC charged Lawrence D. Polizzotto, a former Vice President of Investor Relations at First Solar, Inc., with selectively disclosing that the company was unlikely to receive financing under a conditional loan from the Department of Energy. Mr. Polizzotto agreed to pay a $50,000 fine to settle the charges, although he did not admit or deny the findings.

According to the SEC order, [1] Mr. Polizzotto attended a September 13, 2011 investor conference with the company’s then-CEO, who “publicly expressed confidence” that First Solar would receive three loan guarantees of $4.5 billion from the Department of Energy. Several executives, including Mr. Polizzotto, learned a couple of days later that First Solar would not get at least one of the loan guarantees. The company began discussing how and when to publicly disclose this information. However, before the company issued a public announcement, a number of analysts and stockholders began contacting the company after the House Committee on Energy and Commerce sent a letter to the Department of Energy inquiring about its loan guarantee program and the status of the guarantees that had not yet closed, including all three of First Solar’s conditional guarantees. Even though the company had not yet issued its public announcement, Mr. Polizzotto and his subordinate had phone conversations with more than 30 analysts and investors. They used talking points on the calls that “effectively signaled” First Solar would not receive one of the loan guarantees. The SEC charged that these calls violated Reg. FD, which requires simultaneous public disclosure of material nonpublic information that is intentionally disclosed by covered corporate officers and company spokespersons to market professionals and stockholders. [2] In addition to the $50,000 penalty from the settlement of these charges, Mr. Polizzotto agreed to cease and desist from violating Reg. FD and Section 13(a) of the Securities and Exchange Act of 1934.


How to Use Social Media for Regulation FD Compliance

Richard J. Sandler is a partner at Davis Polk & Wardwell LLP and co-head of the firm’s global corporate governance group. This post is based on a Davis Polk client memorandum.

Regulation FD, adopted by the SEC in 2000, prohibits “selective disclosure” by requiring public companies to disclose material information through broadly accessible channels. Thirteen years ago, this meant EDGAR filings, press releases and quarterly earnings calls.

The SEC recently issued a report of investigation under Section 21(a) of the Securities Exchange Act of 1934 regarding its inquiry into a post by Netflix’s CEO on his personal Facebook page. In the report, the SEC affirmed that a company may use social media to communicate with investors without violating Regulation FD – as long as the company had adequately informed the market that material information would be disclosed in this manner. The report states that whether a company’s social media disclosure satisfies Regulation FD will depend upon the principles outlined in the SEC’s 2008 guidance, Commission Guidance on the Use of Company Web Sites, while recapping that guidance in a way that should make these principles more workable for companies that want to use websites, social media and other evolving communication methods to disclose important information to the market.


The Board, Social Media and Regulation FD

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal; the full article, including footnotes, is available here.

The widespread use of social media in today’s global marketplace presents opportunities and challenges for all financial market participants, including boards of directors, investors and regulators. While social media outlets provide unprecedented pathways for companies to engage actively with investors, both large and small, as well as with reporters, analysts, customers, suppliers and other members of the corporate community, there are regulatory restrictions that public companies need to heed. Releasing information via Twitter, Facebook, and similar channels must be done with caution to avoid violating Securities and Exchange Commission (SEC) Regulation FD as it currently stands. Moreover, companies are vulnerable to negative publicity that can be quickly and widely disseminated over social media networks, even if they are not active participants in such channels.

As public companies increasingly use and rely upon the new avenues of communication provided by social media, it is correspondingly important for directors to be aware of the manner and extent of their companies’ use of social media and have a basic understanding of the risks and benefits of corporate participation. At the same time, it may be incumbent upon the SEC to revisit Regulation FD. The immediacy and availability of communications made through social media suit the purpose of Regulation FD far better than anything available at the time of its passage in 2000; by failing to update Regulation FD, the SEC may find that the rule is impeding rather than furthering its stated goals. Fundamentally, the interests of all market participants are aligned when it comes to encouraging companies to use social media consistently, effectively, and legally, as enhanced transparency and increased engagement generally benefit the market as a whole.


Regulation FD in the Age of Facebook and Twitter

Joseph A. Grundfest is the W. A. Franke Professor of Law and Business at Stanford University Law School.

The Staff of the Securities and Exchange Commission has announced its intention to recommend to the Commission that enforcement proceedings alleging a violation of Regulation FD be instituted against Netflix, Inc. and its CEO, Reed Hastings, because of a posting on Mr. Hastings’ personal Facebook page. Mr. Hastings’ webpage had more than 200,000 followers, including reporters who covered the posting in the traditional press. The posting was also the subject of a tweet by TechCrunch, which has approximately 2.5 million followers on Twitter.

This article, Regulation FD in the Age of Facebook and Twitter: Should the SEC Sue Netflix?, is in the form of an amicus Wells Submission suggesting that the Commission would, for nine distinct reasons, be prudent not to initiate an action on the facts of the Netflix posting. In particular, the public record suggests that the posting did not contain material information, was not a selective disclosure, and because of its spread through social media constituted a “broad non-exclusionary distribution” that did not violate Regulation FD. A prosecution would also diverge dramatically from all prior Regulation FD enforcement proceedings, and would violate the Commission’s prior representations not to “second guess” good faith efforts to comply with Regulation FD. In addition, the posting is not inconsistent with the Commission’s 2008 Guidance on the Use of Company Webpages — guidance that is seriously outdated because of the emergence of social media.


Applying Securities Laws to Social Media Communications

Holly J. Gregory is a corporate partner specializing in corporate governance at Weil, Gotshal & Manges LLP. This post is based on a Weil alert by Christopher Garcia and Melanie Conroy; the full document, including footnotes, is available here.

This month marked an important milestone in the development of securities law at its newest frontier: social media. For the first time, the Enforcement Division of the U.S. Securities and Exchange Commission (“SEC”) issued a Wells Notice based on a social media communication. This Wells Notice, which notified Netflix, Inc. and its CEO of the Enforcement Division’s intent to recommend an enforcement case to the Commission, demonstrates the potential for liability arising from disclosures by corporate officers through social media. Although the SEC itself uses social media to disclose important information, the agency has yet to offer formal guidance concerning the use of social media to communicate with the investing public. For this reason, the outcome of the SEC’s investigation into Netflix and its CEO’s social media usage will prove instructive to issuers, directors, corporate officers, investors, and members of the securities and white collar bars.


The Directors’ Duty to Inform

John Wilcox is Chairman of Sodali, a director of ShareOwners.org, and former Head of Corporate Governance at TIAA-CREF. The article discussed below is available here.

Comply-and-Explain: Should Directors Have a Duty to Inform?, published recently in Duke Law School’s Journal of Law and Contemporary Problems, argues that the directors of publicly held companies in the United States should be subject to a new state law duty requiring them to explain to shareholders how the board is exercising business judgment and acting in the best interests of the corporation.

The duty is derived from: (1) the Model Business Corporation Act (MBCA) Section 8.30 that requires directors to act in the best interest of the corporation and to share information material to the exercise of the board’s decision-making or oversight functions; (2) Section 3.C.4 of the American Bar Association’s Corporate Director’s Guidebook, that sets forth a director’s “duty of disclosure”; and (3) the Department of Labor ERISA requirements governing the fiduciary duties of institutional investors and their exercise of proxy votes. The duty to inform also builds on concepts from the UK’s principles-based, comply-or-explain governance system that gives directors wide discretion to customize governance policies provided that they explain how their decisions are intended to achieve business goals and serve the best interests of the company and its shareholders.


The Fifth Analyst Call: Investors Seek Greater Communication with Directors

The following posts comes to us from Deborah Gilshan, Corporate Governance Counsel at Railpen Investments, and Elizabeth McGeveran, Senior Vice President at F&C Asset Management. A statement with further information is available here.

A group of major and influential global institutional investors from North America, Europe and Australia , led by the UK’s Railpen Investments and F&C Asset Management, are seeking to build open and constructive dialogue with US boards of directors through a concrete, easy-to-implement solution – an idea we are calling a “Fifth Analyst Call.”

In a nutshell, companies would host an open call for their investors prior to the annual meeting – a fifth call added onto the calendar of quarterly analyst calls, with the focus on corporate governance. Prior to the annual meeting, investors consider important details related to the issuer, including whether or not to endorse a company’s compensation plan and the actions of the directors during the year. For their part, issuers produce a detailed proxy statement which represents the considered decisions of officers and directors. This is the natural time for a substantive, practical discussion about corporate governance issues, including compensation. The proxy statement offers a perfect opening for dialogue between shareholders and independent directors such as the lead director.


Investor Communication and “Fifth Analyst Call”

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal.

As the 2011 proxy season approaches, companies are focused on drafting their proxy statements and preparing for their annual meetings. With mandatory nonbinding say-on-pay votes on the ballot and continued focus by corporate governance activists on executive compensation, communication issues with investors, especially large stockholders, are taking on increased importance.

Recently, a group of institutional investors representing approximately $2.2 trillion in assets under management, led by Walden Asset Management, has asked that some companies host an annual conference call specifically for institutional investors to focus on corporate governance discussions in the proxy statement. [1] The call would be held after the publication of the company’s proxy statement and prior to the company’s annual meeting of stockholders. Each company that is approached by this group must consider this request in the context of its own situation; however, we offer some thoughts below on why companies may wish to resist this proposed new obligation. As a practical matter, such a conference call would be unlikely to provide investors with any useful information beyond the disclosures in the proxy statement; as a legal matter, any material, non-public information disclosed by the company must be provided to all stockholders, rather than to a select group of institutional investors.