Snell & Wilmer
Corporate Communicator


Jeffrey E. Beck


Jeffrey E. Beck

Joshua Schneiderman

Kevin Zen

Cheryl A. Ikegami

Helen Goldstein

Snell & Wilmer
Past Issues

Winter 2019 - 2020

2020 Annual Meeting Season

Dear clients and friends,

We present our traditional year-end issue of Snell & Wilmer’s Corporate Communicator to help you prepare for the upcoming annual report and proxy season. This issue highlights SEC reporting and corporate governance considerations that will be important this annual meeting season as well as in the upcoming year.

During 2020, members of our Corporate & Securities Group will continue to publish the Corporate Communicator, host business presentations, participate in seminars that address key issues of concern to our clients, and sponsor conferences and other key events. First on the calendar is our Twelfth Annual Proxy Season Update, which will be held in our Phoenix office on January 9, 2020. Finally, we are pleased to present our 2019 Tombstone, which highlights selected deals that Snell & Wilmer’s Corporate & Securities Group helped clients close during the year.

As always, we appreciate your relationship with Snell & Wilmer and we look forward to helping you make 2020 a successful year.

Very truly yours,

Snell & Wilmer
Corporate & Securities Group


Disclosure Simplification (New Rules in Place). In March 2019, the Securities and Exchange Commission (“SEC”) adopted certain amendments as part of its continuing efforts to modernize and simplify provisions of Regulation S-K. Many of these changes will be relevant when preparing this year’s annual reports on Form 10-K.

General Changes to Regulation S-K Provisions

  • Disclosure about a company’s physical properties is now required under Item 102 only to the extent material to the registrant.
  • In light of its emphasis on principles-based requirements, the SEC has eliminated the list of specific risk factor examples in Item 105. 
  • Pursuant to amended Item 303, registrants will generally be able to exclude discussion of the earliest of three years in the management discussion and analysis if the discussion is already included in a prior filing and the location in the prior filing is identified.  In addition, Item 303 will no longer expressly require a year-to-year comparison.  Although a year-to-year comparison may continue to be the preferred method of discussion, registrants may use any presentation that enhances a reader’s understanding of the financial condition, changes in financial condition and results of operation of the registrant. 
  • Pursuant to an amendment to Item 401, disclosure about executive officers of a registrant that is included in its Form 10-K in lieu of the proxy statement must now be under a required caption “Information about our Executive Officers” instead of “Executive officers of the registrant.” 
  • The new rules eliminate the checkbox on the cover page of Form 10-K that indicates whether disclosure of delinquent filers of reports under Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are included or anticipated.  In addition, amendments to Item 405 of Regulation S-K (a) revise the requirements as to what information concerning delinquencies can be relied on and (b) change the disclosure heading to “Delinquent Section 16(a) Reports” instead of “Section 16(a) Beneficial Ownership Reporting Compliance.” 
  • The reference to AU section 380, Communication with Audit Committees, in the audit committee report required by Item 407(d)(3)(i)(B) has been updated to refer more broadly to the applicable requirements of the Public Company Accounting Oversight Board and the SEC. 
  • With respect to incorporation by reference, the SEC has eliminated the five-year limitation in prior Item 10(d) and has revised other requirements to modernize procedures for such incorporation. 
  • The rules also require registrants to disclose on the cover pages of the various forms, information regarding the title of each class of securities registered pursuant to Section 12(b) of the Exchange Act, each exchange on which such securities are registered and the trading symbol for each such class.

Requirement for New Exhibit Containing a Description of Capital Stock and Other Registered Securities. New Item 601(b)(4)(vi) requires the filing of a new exhibit containing a description of each class of the registrant’s securities that is registered under Section 12 of the Exchange Act as of the end of the period covered by the report being filed. The requirement applies to any Form 10-K filed after May 1, 2019.

Other Amendments to Exhibit Requirements

  • A company will be able to omit confidential information in material contracts and certain other exhibits without concurrently submitting a confidential treatment request if it meets certain conditions. These conditions include the same substantive requirements as before the amendments. Exhibits must be clearly marked to indicate where information has been omitted and contain other specified disclosures. The exhibit index would also need to reflect that a portion of the exhibit has been omitted. Upon request, registrants would have to provide materials to the SEC staff similar to those currently required in a confidential treatment request, including an analysis of why the redacted information is not material and would likely cause competitive harm to the company if publicly disclosed.
  • Only newly reporting registrants will be required to file material contracts entered into within the two years prior to filing that have been fully performed.
  • Registrants do not need to file schedules or attachments to exhibits if the schedules and attachments do not contain material information and are not otherwise disclosed in the exhibit or disclosure document. The filed exhibit must contain a list briefly identifying the contents of omitted schedules and attachments. Personally identifiable information such as bank account numbers, social security numbers, home addresses and the like can be omitted where the disclosure of such information would constitute a clearly unwarranted invasion of personal privacy.

Disclosure Simplification (Continued). In August 2019, in furtherance of its broad and ongoing project to simplify periodic report disclosures, the SEC proposed principles-based amendments to three items of Regulation S-K, 101 (Description of Business), 103 (Legal Proceedings) and 105 (Risk Factors).

Regulation S-K, Item 101(a) currently requires a description of the general development of the company’s business during the past five years. The proposed rules would eliminate the reference to the five-year prescribed timeframe (three years for smaller reporting companies). The proposed rules would also limit disclosure to recent material developments and allow for a hyperlink to the full description to a prior filing (e.g., initial registration statement or prior Form 10-K). Regulation S-K, Item 101(c) currently requires a generally principles-based narrative description of the company’s business, including 12 topics of discussion (e.g., principal products or services; availability of raw materials; intellectual property; dependence on a single or few customers; backlog; competition; etc.). The proposed rules would clarify that the enumerated disclosure topics do not need to be addressed if they are not material to an understanding of the company’s business taken as a whole. The proposed rules would also eliminate certain of the enumerated topics (e.g., backlog, which the SEC indicated in the proposing release is better located in management’s discussion and analysis (“MD&A”)) and refresh the coverage points of others. For example, Item 101(c) currently requires disclosures of the number of employees and the proposed rules would refresh this item to provide a description of the company’s human capital resources. Also, Item 101(c) currently calls for a discussion of the material effects of compliance with environmental laws. This item would be refreshed to cover all material governmental regulations.

Regulation S-K, Item 103 currently requires disclosure of pending legal proceedings, including governmental investigations. The proposed rules would expressly permit some or all of the required information to be incorporated by reference or hyperlinked. In addition, the current monetary threshold for disclosure of environmental claims of $100,000 would be increased to $300,000. 

Regulation S-K, Item 105 currently requires the most significant risk factors that make an investment in the company risky or speculative. In response to concerns that risk factor disclosures have become longwinded, the SEC is proposing to add a requirement that companies include a risk factor summary if the risk factor disclosure exceeds 15 pages. Also, the proposed rules replace the requirement to disclose the “most significant” risks with the “material” risks. 

Inline XBRL Reminder. Most large accelerated filers have already adopted[1] the SEC’s requirement to submit financial statements and certain other information using Inline XBRL format. As a reminder, accelerated filers are required to adopt Inline XBRL beginning with their first Form 10-Q for the fiscal period ending on or after June 15, 2020 (for calendar year companies, the 2020 second quarter Form 10-Q).

SEC Comment Letter Trends. During the 12 months ended June 30, 2019, the most common comment area by the SEC was revenue recognition (number 5 in the prior year), followed by non-GAAP financial measures.[2] In the prior year, MD&A was the top comment area, also followed by non-GAAP financial measures. Also of note, segment reporting slipped from number 4 to number 8. According to Ernst & Young, other common comment areas included fair value measurements, intangible assets and goodwill, and income taxes.[3]

For revenue recognition, comments focused on identification of performance obligations, proper classification as agent or principal, variable consideration estimates, criteria for using the residual approach for estimating sales prices and disaggregation of revenue in the footnotes.[4] When commenting about MD&A, common themes included: information about known trends and uncertainties and results of operations (including, for example, requests that companies explain their results of operations in greater detail, including identifying and discussing the underlying factors driving significant changes and details about significant components of, and changes in, revenue and expense categories).[5] For comments about non-GAAP financial measures, the SEC continued its focus on a wide variety of issues, including the use of individually tailored accounting principles (especially relating to alternative revenue measures), presentation of GAAP measures with equal or greater prominence, reconciliation calculations, appropriateness of adjustments that exclude or smooth items identified as non-recurring, infrequent or unusual and discussion about why management believes presentation of non-GAAP measure(s) is useful information to investors.[6]

Enforcement Action for Failure to Timely Disclose Loss Contingency. In September 2019, the SEC and Mylan N.V. (“Mylan”) settled a complaint that Mylan violated accounting and disclosure rules by failing to timely disclose a confidential investigation by the United States Department of Justice ("DOJ") into Mylan’s pricing and classification of its popular EpiPen product.

As background, Mylan acquired the rights to the EpiPen in 2007 from Merck KGaA. Upon acquisition, Mylan continued to classify the EpiPen for purposes of Medicare and Medicaid reimbursement as a “generic” drug, as opposed to the alternative classification as a “branded” drug. The distinction is important because as a generic drug, Mylan was required to remit much smaller rebates to the government than it would have if the EpiPen was classified as a branded product. In 2014, the Centers for Medicare and Medicaid Services (“CMS”) asked Mylan to change its definition of the EpiPen to branded, which Mylan declined. Shortly thereafter, the DOJ opened a civil investigation of Mylan’s classification as it related to possible violation of the False Claims Act. Ultimately, in October 2016, Mylan disclosed that it had settled the DOJ investigation for $465 million.

Subsequently, the SEC commenced an investigation into Mylan’s disclosures relating to the DOJ investigation. The SEC’s complaint was based on violation of two distinct rules, Regulation S-K, Item 303, which requires companies to disclose any known trends or uncertainties, and SEC Regulation S-X, which requires companies to comply with GAAP, which in turn requires companies to (1) disclose “reasonable possible” losses, and (2) accrue “probable” losses.

In apparent response to the Regulation S-K, Item 303 requirement to describe known trends and uncertainties that have had or that the company reasonably expects will have a material favorable or unfavorable impact on net sales, revenues or income, Mylan disclosed in its 2014 and 2015 annual reports that CMS “may” take the position that its EpiPen classification (and thus its reimbursement submissions to the government) were wrong. But, at the time Mylan filed its 2014 and 2015 annual reports, CMS “had” taken the position that Mylan’s classification was wrong, which the SEC alleged in its complaint was misleading.

In its complaint, the SEC also alleged that Mylan violated Regulation S-X (i.e., GAAP) in two instances. First, the SEC alleged that Mylan should have disclosed the DOJ investigation as a material loss contingency when it became “reasonably possible,” which the SEC said was triggered in the third quarter of 2015 when Mylan (1) presented its case to the DOJ, but the DOJ refused to close the investigation, and (2) signed a tolling agreement. Second, the SEC alleged that Mylan should have accrued a loss in the second quarter of 2016 when it became probable and reasonably estimable, which the SEC said occurred when Mylan provided the DOJ with its damage estimate (non-trebled) of $114 to $260 million. Importantly, this was Mylan’s estimate only in the event its classification (and resulting reimbursements) were wrong, which at that time Mylan maintained were correct.

It is worth noting that around the time of the DOJ and SEC investigations, Mylan was under significant public and political scrutiny for dramatically raising the price of its EpiPen products from 2007 to 2016, which may have put some pressure or incentive on the DOJ and SEC to investigate and prosecute.

Practitioners have echoed some concern over the case because there is no absolute requirement to disclose otherwise confidential investigations, even at the Wells Notice stage. The Mylan complaint/settlement, at least on some level, illustrates the SEC’s view that there might be bright-line events that trigger disclosure and/or accrual of loss contingencies. That is, by alleging that (1) the mere refusal of the government to close an investigation and signing of a tolling agreement resulted in a “reasonably possible” loss contingency and (2) that the submission of damage estimate for settlement purposes, while still maintaining a position of no violation, resulted in a “probable” loss contingency.

Enforcement Action for Failing to Disclose Revenue Management Scheme. On September 16, 2019, the SEC announced that Marvell Technology Group (“Marvell”) agreed to settle charges that it misled investors by engaging in an undisclosed revenue management scheme in order to meet publicly issued revenue guidance. According to the SEC, Marvell orchestrated a scheme to accelerate, or “pull-in”, sales to a current quarter that were scheduled or forecasted to occur in a subsequent quarter. It is important to note that the SEC’s order does not allege that the scheme itself or Marvell’s accounting or revenue recognition principles were fraudulent or incorrect. Rather, the SEC charged that Marvell failed to publicly disclose the revenue management scheme in its periodic reports, thus concealing a substantial decline in customer demand, a loss in market share and ultimately reduced future sales (as future forecasted sales were “pulled-in” to the current quarter).

Faced with a persistent decline in customer demand and concern about continuing to miss guidance, the highest levels of Marvell management implemented a top-down process to establish sales targets, apparently notwithstanding protests from Marvell’s sales group that those targets were unrealistic. To persuade customers to agree to accelerate sales, Marvell offered various incentives, such as discounts, rebates, free products and relaxed payment terms. As the accelerated revenue scheme continued, the gap between actual sales and forecasted sales continued to grow in part because of deteriorating market conditions, but also in significant part because the “pull-in” sales were cannibalizing sales forecasted for future quarters. As a result, the SEC charged that Marvell failed to disclose in MD&A the revenue acceleration scheme and that a significant portion of its quarterly revenue represented pulled-in sales previously forecasted for future quarters. In addition, the SEC alleged that by failing to disclose the revenue acceleration scheme, Marvell also failed to advise investors of a material trend—that accelerating sales to the current quarter would likely adversely impact future sales and company performance, as required to be discussed pursuant to Regulation S-K, Item 303.


Environmental, Social and Governance Trends and Development

Climate Scorecard. At this point, public companies are keenly aware of the growing emphasis shareholders place on companies’ practices in regard to environmental, social and governance (“ESG”) issues. In furtherance of that heightened focus on ESG issues, in August 2019, Institutional Shareholder Services (“ISS”) announced the introduction of a new Climate Awareness Scorecard, which ISS said will “appear in a range of select ISS Benchmark and Specialty policy research reports.”

According to ISS, the Scorecard “distills and harmonizes publicly available data and ISS proprietary analysis on a company’s climate change-related disclosures, practices, and performance record, including its industry risk group.” The Scorecard is divided into three sections.

The first section measures a company’s “climate risk exposure.” A company’s climate risk exposure is evaluated based on two factors: (i) the company’s Industry Climate Risk Exposure, for which each company is a low, medium, or high climate risk exposure based on its specific industry and business activities, and (ii) the company’s Incident-Based Risk Exposure, which indicates whether the company is violating the standards of the Paris Agreement or other universally accepted climate norms.

The second section of the Scorecard measures a company’s “climate performance.” A company’s climate performance is also evaluated based on two factors: (i) the company’s current climate performance, which evaluates the company’s current direct and indirect greenhouse gas (GHG) emissions relative to that of its peers, and (ii) the company’s Forward-Looking Climate Performance, where the company is assigned a Carbon Risk Category (Leader, Performer, Underperformer, or Laggard) and Rating (0-100 scale, where 100 is best).

The third section of the Scorecard measures a company’s “climate disclosure.” In this section, ISS attempts to rate each company on its disclosure across four categories: (i) climate governance, (ii) strategy, (iii) risk management, and (iv) metrics and targets. Classifications assigned within each category are Standard Unmet, Partial Alignment, Meets Standard, or Exemplifies Standard.

Director Diversity. Board diversity issues will remain front and center in 2020. We’ve discussed in each of the last several Corporate Communicators the push for diversity by institutional investors, such as BlackRock and State Street Global Advisors and the initiatives undertaken by the New York City Comptroller Boardroom Accountability Project. 2019 was also the first year that California public companies were required to come into compliance with California’s law requiring women on boards.

Following on this trend, 2019 brought a few new developments in the Board diversity arena. Taking California’s lead, additional states have been exploring and, in some cases, adopting laws related to diversity. For instance in September, Illinois enacted a law requiring publicly listed companies headquartered in Illinois to disclose information in their state filings about (1) the racial, ethnic and gender diversity of their boards of directors, (2) how demographic diversity is considered in their processes for identifying and appointing director nominees and executive officers, and (3) their policies and practices for promoting diversity, equity and inclusion among the board of directors and executive officers. While no other state has gone quite as far as California in mandating diversity on Boards, the Illinois approach, of mandated disclosure, does seem to be the current focus for several states.

The SEC also took action on the issue of Board diversity earlier this year with the adoption of two Regulation S-K compliance and disclosure interpretations (“C&DIs”). Pursuant to the new C&DIs, if a board or nominating committee has considered a person’s self-identified diversity characteristics such as race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background of an individual in determining whether to recommend the candidate as a director, and the individual has consented to the company’s disclosure of those characteristics, the company’s proxy statement must include a discussion identifying those characteristics and describing how they were considered. Under the C&DIs, a company’s description of its diversity policies (already required to be disclosed under Item 407 of Regulation S-K) must include a discussion of how the company considers the self-identified diversity attributes of nominees, as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics.

Workplace Equity. Investors’ focus on diversity and equitable treatment wasn’t limited to the Boardroom in 2019, as we’ve seen an increased focus by the investor community on workplace equity in general. For example, in 2019 investment management firm Arjuna Capital released its second annual Gender Pay Scorecard, which gave grades of “A” through “F” to 46 of the world’s largest companies based on gender and racial pay. Half of the companies ranked received a failing grade of “F,” while only one company was awarded an “A.”

Several activist shareholders have been targeting public companies to pressure added disclosure around pay gaps. Many of the requests (and in some cases proposals) in 2019 have focused on median pay gap, which seeks disclosure of the median compensation value among all females in the workplace compared to the median compensation value among all males in the workplace. This reflects a slight shift from the focus in prior years, where shareholder requests tended to focus on wage gap percentages, which accounted for differences in compensation based on various factors, such as work performed (i.e., “equal pay for equal work”). In other words, the new focus on median pay gap statistics may highlight a pay gap that wasn’t prevalent based on wage gap percentage reporting. While several companies have attempted to seek “no-action” letter relief from the SEC to omit these disclosures, they have generally been unsuccessful.

2020 Proxy Voting Guidelines Updates

As is the case each year around this time, ISS and Glass, Lewis & Co. (“Glass Lewis”) both recently updated their proxy voting guidelines for the 2020 proxy season. Below is a summary of the key policy updates for the U.S. market.

ISS Proxy Voting Updates

Problematic Governance and Capital Structures for Newly Public Companies. ISS has updated its policy for newly public companies to address multi-class capital structures with unequal voting rights. For these companies, ISS will generally vote against or withhold votes from the entire board (except new nominees, who will be considered on a case-by-case basis) if, prior to or in connection with the company’s public offering, the company or its board implemented a multi-class capital structure in which the classes have unequal voting rights without subjecting the multi-class capital structure to a “reasonable” time-based sunset. In assessing the reasonableness of a time-based sunset provision, ISS will consider the company’s lifespan, its post-IPO ownership structure and the board’s disclosed rationale for the sunset period selected, with any sunset period of more than seven years from the date of the IPO to be deemed unreasonable.

Similarly, ISS will now generally vote against or withhold votes from directors individually, committee members, or the entire board (except new nominees, who will be considered on a case-by-case basis) if, prior to or in connection with the company’s public offering, the company or its board adopted certain bylaw or charter provisions that are considered to be materially adverse to shareholder rights, such as supermajority vote requirements to amend a company’s charter or bylaws, a classified board structure and other “egregious” provisions. In assessing these provisions, ISS further clarified that a reasonable sunset provision will be considered a mitigating factor.

Independent Board Chair Shareholder Proposals. With respect to shareholder proposals requiring that the board chair position be filled by an independent director, ISS has updated its policy to explicitly list the types of factors that will be given substantial weight in ISS’ approach to evaluating these proposals, which generally codifies the existing ISS policy application.

Board Gender Diversity. As highlighted last year, starting in 2020 for Russell 3000 and S&P 1500 companies, ISS will now recommend against the chair of the nominating committee (or other directors on a case-by-case basis) if the board lacks a female director. ISS further updated the mitigating factors that it will consider when applying the policy, which includes: (i) until Feb. 1, 2021, a firm commitment, as stated in the proxy statement, to appoint at least one woman to the board within a year; (ii) the presence of a woman on the board at the preceding annual meeting and a firm commitment to appoint at least one woman to the board within a year; or (iii) other relevant factors as applicable.

Exemptions for New Director Nominees. ISS has revised its definition of “new nominee” to mean a director who is being presented for election by shareholders for the first time; therefore, a new nominee is not necessarily a person who just joined the board. When making recommendations on director nominees, ISS takes into consideration if a nominee should be held responsible for an action taken by the board before joining. ISS clarified that this case-by-case consideration only applies to new nominees that have served on the board for less than one year and will depend on the timing of the appointment and the problematic governance issue in question.

Board Attendance. ISS will generally vote against or withhold votes from directors who attend less than 75% of the aggregate of their board and committee meetings for the period for which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. ISS has revised the policy to exclude nominees who served only part of the fiscal year.

Restrictions on Shareholders’ Rights. ISS will generally vote against or withhold votes from the members of the governance committee if the company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws. ISS has updated its policy to include “subject matter restrictions” as an example of an undue restriction, which encompasses prohibitions on shareholders being able to amend the particular bylaws that govern their ability to amend the bylaws. Additionally, in order to address the general increase in the number of companies submitting proposals to shareholders seeking ratification or approval of requirements in excess of Rule 14a-8 regarding the submission of binding bylaw amendments, ISS will generally recommend shareholders vote against or withhold votes from the members of the governance committee until shareholders are provided with an “unfettered ability to amend the bylaws” or until a proposal providing for such unfettered right is submitted for shareholder approval.

Gender Pay Gap Proposals. ISS has expanded its policy relating to shareholder proposals requesting reports on a company’s gender pay data to now also include requests for pay data by race or ethnicity. Accordingly, ISS will consider these shareholder proposals on a case-by-case basis.

Glass Lewis Proxy Voting Updates

Key Committee Performance. In evaluating the performance of governance committee and compensation committee members, Glass Lewis has updated its policy as follows:

  • Generally recommend voting against the governance committee chair when: (i) directors’ records for board and committee meeting attendance are not disclosed; or (ii) when it is indicated that a director attended less than 75% of board and committee meetings but disclosure is sufficiently vague that it is not possible to determine which specific director’s attendance was lacking.
  • Generally recommend voting against all members of the compensation committee when the board adopts a frequency for its say-on-pay votes other than the frequency approved by a plurality of shareholders.

Excluded Shareholder Proposals. In cases where a company seeks to exclude a Rule 14a-8 shareholder proposal and the SEC declines to state a view on whether a proposal should be excluded, Glass Lewis takes the position that such proposal should be included in the company’s proxy statement. Accordingly, Glass Lewis will now recommend voting against the members of the governance committee if the company ultimately chooses to exclude the proposal from its proxy statement. Additionally, in light of the fact that the SEC may now orally, instead of in writing, respond to a company’s no-action request as it relates to a shareholder proposal, Glass Lewis expects companies to provide some disclosure concerning verbal no-action relief if granted by the SEC. As a result, Glass Lewis will now recommend voting against the members of the governance committee if a company excludes the proposal from its proxy statement without such disclosure.

Contractual Payments and Arrangements. Glass Lewis has clarified its policy for say-on-pay proposals with respect to the analysis of both ongoing and new contractual payments and executive entitlements. In particular, Glass Lewis has provided a list of certain executive employment terms that may result in a negative say-on-pay vote recommendation, which includes excessively broad change in control triggers; inappropriate severance entitlements; inadequately explained or excessive sign-on arrangements; guaranteed bonuses (especially as a multiyear occurrence); and failure to address any concerning practices in amended employment agreements.

Company Responsiveness to Low Support for Say-on-Pay Proposals. Glass Lewis has expanded its discussion of what it considers to be an appropriate response following low shareholder support for the prior say-on-pay proposal, which applies where a company has received 20% or greater opposition from shareholders. In such situations, Glass Lewis expects companies to provide robust disclosure of engagement activities and specific changes made in response to shareholder feedback. A failure to provide adequate disclosure may result in a negative say-on-pay vote recommendation.

Exclusive Forum Provisions. Glass Lewis will generally recommend voting against the governance committee chair where the board adopts an exclusive forum provision without shareholder approval. Glass Lewis has updated its policy to allow for an exception if it can be reasonably determined that the exclusive forum provision has been narrowly crafted to suit the unique circumstances facing the company.

Additional Compensation Related Clarifying Amendments

Glass Lewis has updated certain policies relating to compensation as follows: 

  • In reviewing say-on-pay proposals, Glass Lewis will review any significant changes or modifications, including post-fiscal year end changes and one-time awards, particularly where the changes touch upon issues that are material to Glass Lewis recommendations.
  • With regards to short-term bonus or incentive plans, if a company has applied upward discretion, such as by lowering goals mid-year or increasing calculated payouts, Glass Lewis expects a robust discussion of why the decision was necessary.
  • Glass Lewis has clarified that excessively broad definitions of “change in control” are potentially problematic as they may lead to situations where executives receive additional compensation where no meaningful change in status or duties has occurred. Additionally, Glass Lewis has stated that any arrangement that is not explicitly a double-trigger change in control arrangement may be considered a single-trigger or modified single-trigger arrangement.

Supermajority Vote Requirements for Controlled Companies. For controlled companies, in the event there is a shareholder proposal requesting the company eliminate any supermajority vote standard, Glass Lewis may now recommend that shareholders vote against such proposals. In these controlled company situations, Glass Lewis believes a supermajority vote provision may act to protect minority shareholders and should therefore be maintained.

Gender Pay Equity. In evaluating shareholder proposals that request that companies disclose their median gender pay ratios, Glass Lewis will review these on a case-by-case basis. However, to the extent a company has provided sufficient information concerning their diversity initiatives, as well as information concerning how they are ensuring gender pay equity, Glass Lewis will generally recommend against these shareholder proposals.

2019 Annual Meeting Recap

Below is a summary of certain developments and trends relating to the 2019 U.S. annual meeting proxy season:

Director Elections. According to a report published by Broadridge Financial Solutions and PwC[7] in connection with the review of 4,059 public company annual meetings in 2019, the average overall shareholder support for directors in 2019 was approximately 95% of the shares cast compared to approximately 96% of the shares cast in 2018. However, while the average overall shareholder support was only down slightly year to year, the number of directors failing to receive majority support in 2019 increased 15% compared to 2018, while the number of directors failing to receive 70% support increased 23%. This reflects a generally increasing trend over the last five years regarding the number of directors who failed to reach these respective thresholds. Likely factors contributing to these trends are the fact that large institutional investors continue to adopt stricter over-boarding policies, as well as gender diversity policies.

Say-on-Pay. Shareholder support for say-on-pay proposals in 2019 remained generally consistent with 2018. Based on the corporate governance data as of September 30, 2019, collected by the EY Center for Board Matters for more than 3,000 U.S. public companies[8], overall shareholder support for say-on-pay proposals at S&P 500 companies was 90.5% in 2019, down from 91.2% in 2018. For Russell 3000 companies, overall shareholder support remained about the same in 2019 at approximately 90.7%. Additionally, the percentage of say-on-pay proposals at Russell 3000 companies in 2019 with less than 70% and 50% support was approximately 8.5% and 2.5%, respectively, which was largely in line with 2018 percentages.

Equity Compensation Plans. With regards to proposals for the approval of equity compensation plans, shareholder support continued to be strong at S&P 500 and Russell 3000 companies. Despite a slight increase in the percentage of these proposals with an “against” recommendation from ISS for 2019, all proposals for the approval of equity compensation plans at S&P 500 companies passed in 2019 and all but two proposals passed at Russell 3000 companies.[9]

Shareholder Proposals. Continuing the trend from recent years, environmental and social (“E&S”) proposals represented the largest category of shareholder proposals submitted followed by corporate governance proposals. Key corporate governance proposal topics during the 2019 proxy season included those related to independent board chairs, shareholder written consent, elimination of supermajority voting, board composition and proxy access, while key E&S proposal topics included political spending, environmental and human capital management (e.g., gender pay gap, workplace diversity, sexual harassment). Despite a higher number of E&S proposals submitted, more corporate governance proposals reached a shareholder vote than any other category of proposals and represented the majority of proposals that passed at companies.


Caremark Developments -- Do You Know What You Don’t Know?

In 1996, the Delaware courts created what has become known as a Caremark claim: an allegation that directors failed to exercise oversight of the organization. Directors are expected to create and monitor “information and reporting systems” that provide “timely, accurate information sufficient to allow management and the board... to reach informed judgements concerning both the corporation’s compliance with the law and its business performance.”

Actions attempting to show breach of this broad standard have until recently had limited success; the Delaware courts insisting that those alleging a failure of oversight show that the board knew that they were breaching their fiduciary obligations either by utterly failing to implement a reporting system or ignoring “red flags” generated by a reporting system.

In June 2019, the Delaware Supreme Court added a new path to a successful Caremark claim; one that, some fear, will become a multi-lane highway for plaintiff lawyers to attack directors when something goes wrong. The case behind this new ruling is undeniably tragic; listeria contaminated ice cream produced by Blue Bell Creameries (“Blue Bell”) killed three and sickened many. The resulting recall and plant shutdown caused a mass layoff and a liquidity crisis solved only by private equity investment that severely diluted shareholders. Blue Bell’s management was well aware of the food safety issues in its plants; this information, did not, however, make it to the board itself.

The Delaware court believed the plaintiff had sufficiently alleged that the board had “undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company's business operation.” Even though Blue Bell operated in a “highly regulated industry,” this external oversight was not, prima facie, a replacement for internal board oversight. Blue Bell’s directors tried to argue that management always discussed general operations with the board. In response, the court stated that, “[a]t every board meeting of any company it is likely that management will touch on some operational issue” and, that if this were sufficient oversight, Caremark would be a “chimera.” Instead of general oversight systems, the court stated that Delaware law requires that a board actively monitor “central compliance risks;” risks that are “mission critical.”

This new “mission critical” oversight standard was put to the test in another case that came before the Delaware courts just a few months later. Clovis Oncology, Inc. (“Clovis”), a pharmaceutical company, overstated results of a clinical trial on its most promising candidate for lung cancer treatment. The Delaware court pointed out a number of instances where the board was informed that the drug was not performing as expected but “[w]ith hands on their ears to muffle the alarms,” the board signed the annual report that misstated the trial results. Disclosure of the actual trial results caused what the Court of Chancery called a “corporate trauma in the form of a sudden and significant depression in market capitalization.” The court again signaled that external regulatory oversight is not a substitute for internal board oversight; “as fiduciaries, corporate managers must be informed of, and oversee compliance with, the regulatory environments in which their businesses operate.” The court interpreted the Blue Bell case as “underscor[ing] the importance of the board's oversight function when the company is operating in the midst of ‘mission critical’ regulatory compliance risk.” The court stated that, while it “does not demand omniscience,” it expected directors have a “sensitivity” to mission critical areas.

Recent SEC Action on Regulation of Proxy Advisor Voting Advice

Background. In its Concept Release on the U.S. Proxy System dated July 14, 2010 (“2010 Concept Release”), the SEC solicited comment on various aspects of the U.S. Proxy System. In discussing the relationship between voting power and economic interest, the SEC included a discussion of the role of proxy advisory firms in the proxy voting process. Recognizing the increased use over the years of proxy voting advice by institutional investors and investment advisors, who must vote for themselves or their clients on complex issues at a large number of companies, the Concept Release pointed out a number of potential issues raised by the use of proxy advisory firms. For example, it noted that informed shareholder voting could be impaired by insufficient disclosure of conflicts of interest and inadequate accountability for informational accuracy in the development and application of voting standards. The Concept Release also recognized arguments that proxy advisory firms are controlling or significantly influencing shareholder voting without appropriate oversight and without having an actual economic stake in the issuer. In discussing the state of regulation of proxy advisory firms, the Concept Release referred back to prior releases and guidance in which the SEC took the position that, as a general matter, the furnishing of proxy voting advice would be considered a “solicitation” for purposes of the proxy rules.

2019 Guidance. On August 21, 2019, the SEC issued its Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice (“Guidance”) in which it reiterated its position that, in general, proxy voting advice constitutes a solicitation under Section 14(a) of the Exchange Act. Section 14(a) makes it unlawful for any person to solicit a proxy, consent or authorization in respect of a security registered pursuant to Section 12 of the Exchange Act in contravention of SEC rules and regulations. The Guidance reflects the SEC’s belief that proxy advisory firms may be subject to the proxy rules because they provide voting recommendations that are reasonably calculated to result in the procurement, withholding, or revocation of a proxy, (i) even when they are not seeking a proxy authority for themselves, (ii) even when they are actually indifferent to the outcome of the vote, (iii) even if they are providing recommendations based on the application of the client’s own tailored voting guidelines, and (iv) even in circumstances where the client may not follow this advice. The fact that the proxy voting advice is given for the purpose of influencing shareholders’ decisions with respect to a vote is key to this analysis.

In the Guidance, the SEC acknowledges that persons engaged in a solicitation arising from the provision of proxy voting advice may avail themselves of applicable exemptions from the information and filing requirements of the federal proxy rules when specified conditions are met. Such exempted solicitations would, however, remain subject to the antifraud provisions of Exchange Act Rule 14a-9, which prohibits any solicitation from containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact and which must not omit to state any material fact necessary in order to make the statements therein not false or misleading. In discussing how Rule 14a-9 may apply in this context, the Guidance further discusses additional disclosures that may be needed to avoid Rule 14a-9 concerns. Accordingly, under the Guidance, the provider of proxy voting advice should consider whether it may need to disclose material information concerning: (i) the methodology used to formulate its voting advice on a particular matter, (ii) third-party information sources, and (iii) conflicts of interest that arise in connection with providing the proxy voting advice.

ISS Lawsuit. On October 31, 2019, ISS brought suit against the SEC in the United States District Court for the District of Columbia, seeking declaratory and injunctive relief and arguing that the Guidance is unlawful for several reasons. First, ISS argues that the Guidance exceeds the SEC’s statutory authority under Section 14(a) of the Exchange Act and is contrary to the plain language of the statute. ISS argues that a proxy advisor offers independent advice and research to its clients about how to vote their shares based on the proxy voting policy guidelines selected by the client, compared to a person who “solicits” a proxy by urging shareholders to vote a certain way in order to achieve a specific outcome in a shareholder vote. In addition, ISS argues that the Guidance is procedurally improper because it is a substantive rule that the SEC failed to promulgate pursuant to the notice-and-comment procedures of the Administrative Procedure Act and that it must be set aside as arbitrary and capricious. As to the latter position, ISS states that even though the Guidance marks a significant change in the regulatory regime applicable to proxy advice, the SEC has denied that it is changing its position at all.

Proposed Amendments to Proxy Rules. On November 5, 2019, the SEC proposed amendments to the proxy rules to codify its interpretations in the Guidance. In addition, the SEC proposed amendments to the exemptions from the information and filing requirements normally relied on by proxy advisors to add substantive new requirements and conditions to such reliance. Finally, the SEC proposed to amend Rule 14a-9 to highlight the types of information that a proxy voting firm may need to disclose to avoid a potential violation of the proxy rules.



1 For calendar year companies, this was required for fiscal periods ending on or after June 15, 2019.  [back]

2 See Ernst & Young LLP, SEC Comments and Trends, An Analysis of Current Reporting Issues (Sept. 2019).  [back]

3 See id. [back]

4 See id. [back]

5 See id[back]

6 See id.; see also, pwc, SEC comment letter trends (Sept. 6, 2019).  [back]

7 Broadridge Financial Solutions and PwC, See id. (2019). [back]

8 EY Center for Board Matters, Corporate Governance by the Numbers (September 30, 2019). [back]

9 Year-to-date through August 7, 2019. Sullivan & Cromwell LLP, 2019 Proxy Season Review: Part 3: Say-on-Pay Votes and Equity Compensation Plan Approval (August 7, 2019). [back]





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