Public Company Update – October One Minute Reads // Cooley // Global Law Firm

SEC adopts final pay-for-performance rules

In August 2022, the United States Securities and Exchange Commission announced the adoption of final rules requiring public companies to disclose information regarding the relationship between executive compensation actually paid to their named executives and the company’s financial performance. company. The new disclosure will be required in any proxy or information statement (in which disclosure under Section 402 of Regulation SK is required) of public companies, except foreign private issuers, registered investment companies and emerging growth companies. Small reporting companies are subject to tiered disclosure requirements. Disclosure will not be required in registration statements filed in connection with an initial public offering.

The final rules require companies to provide a table containing information on executive compensation and financial performance measures for their last five years (three years for small reporting companies). In the first year of disclosure, companies that are not small reporting companies will only be required to provide information for three years (two years for small reporting companies) with an additional year added in each of the following two years (a subsequent year for smaller reporting companies). reporting companies). The table should contain the measure of total compensation included in a company’s existing summary compensation table, as well as the actual executive compensation paid, as calculated by the new rule. Businesses (other than reporting small businesses) will also be required to provide a list of three to seven financial performance metrics that they believe are the most important metrics used to link business performance to compensation actually paid. . Covered companies must comply with the final rules in proxies and disclosures covering fiscal years ending on or after December 16, 2022. For more information on the final rules, including how to calculate compensation actually paid and how the chart should appear, see Pay-Per-Performance Client Alert, this Cooley PubCo blog post on the Payment-Performance Disclosure Rule, and the SEC’s Pay-Per-Performance Fact Sheet .

PCOAB Releases Audit Committee Resource

In August, the Public Company Accounting Oversight Board released a new resource for audit committees, including questions that public company audit committees may consider as part of their ongoing audit engagement. The publication is divided by subject and includes questions relating to fraud and other risks, initial public offerings and mergers and acquisitions activities, the performance of audits, auditor independence requirements, systems quality control and technology. Some notable issues from the report include:

  • How did economic factors (eg, supply chain disruption, inflation) influence the auditor’s risk assessment for the current year’s audit?
  • How does the lead auditor plan to handle the work previously done by other auditors in Russia, Ukraine or Belarus in the future?
  • How has the auditor considered the accounting implications of the main provisions of debt and equity instruments issued to founders, sponsors and private and public investors?
  • In the auditor’s opinion, what has been the impact of staff turnover in the company:
    • The quality of the company’s accounting and financial reporting processes and internal controls?
    • The preparation of the company for the audit?
  • What are the audit firm’s policies or procedures for identifying, evaluating, and addressing any threats to independence that may impact services provided to the company?
  • What is the audit firm doing to promote continuing education to keep audit staff informed of changes, particularly in standards and methodologies, but also in emerging topics or specialized industries?
  • What policies and procedures does the audit firm have regarding the conduct and follow-up of audit engagements involving digital assets (e.g., crypto mining), including consideration of risks associated with carrying out such audits?
  • What is the auditor’s opinion on management’s cybersecurity risk assessment approach, overall cybersecurity assessment, and conclusions?

SEC adopts inflation adjustments

On September 9, the SEC announced that it had adopted amended rules for implementing the inflation adjustments mandated by the Jumpstart Our Business Startups (JOBS) Act. In accordance with the statutory definition of an “emerging growth company” (EGC), the SEC is required to adjust the amount of annual gross income used to determine EGC status for inflation every five years.

The amendments increased this amount from $1,070,000,000 to $1,235,000,000, which may affect companies’ disclosure of their EGC status. The Amendments also contain adjustments for inflation to Section 4(a)(6) of the Securities Act, which includes dollar amounts for certain crowdfunding transactions that are used to determine eligibility for a exemption from securities registration under the securities law. For more information, see the SEC’s Fact Sheet on JOBS Act Inflation Adjustments.

Corporation Finance division to add offices for crypto and industrial applications and services

On September 9, the SEC announced plans to add a Crypto Assets Desk and an Industry Applications and Services Desk to the Corporate Finance Division’s Disclosure Review Program (DRP). The Office of Crypto Assets will be responsible for reviewing deposits involving crypto assets, as “[a]Divesting businesses and repositories to a single office will allow the DRP to better focus its resources and expertise to address unique and evolving file review issues related to crypto assets. The Office of Industrial Applications and Services is intended to relieve the burden of the Office of Life Sciences, which currently oversees filings for the largest number of companies, and will be responsible for “the non-pharmaceutical, non-biotechnology and non-pharmaceutical industry.” medicinal”. product companies currently assigned to the Office of Life Sciences. The DRP expects the new offices to be established later this fall.

ISS releases key takeaways from proxy season

On September 1, Institutional Shareholder Services released its key takeaways from the 2022 proxy season. Highlights include:

  • Virtual-only shareholder meetings remained the majority format in 2021, although usage has declined.
  • While the number of ‘vote no’ campaigns targeting directors of Russell 3000 companies hit a new high, the percentage of directors who received less than 80% support remained similar year-over-year .
  • Lack of racial and ethnic diversity appears to have been a significant factor for administrators who did not receive majority support.
  • More than 50% of all governance-related shareholder proposals that made it to the ballot related to special meeting rights.
  • To ensure passage of charter amendments, smaller companies are increasingly issuing preferred stock with enhanced voting rights, sometimes due to difficulties in achieving a quorum.

S&P Global Highlights Rising Investor Activism

S&P Global recently published an infographic showing the striking increase in investor activism during the first half of 2022. According to the publication, an all-time high of 777 activist campaigns were launched during this period, surpassing the previous record of 696 campaigns in the first half of 2020. 75% of the 777 campaigns launched had an environmental, social and governance (ESG) component, with social campaigns nearly quadrupling since 2018 (from 46 campaigns in 2018 to 182 campaigns in the first half of 2022 ). Campaigns with an environmental aspect also increased from 6% in 2018 to 13% in the first half of 2022. In line with the overall theme of the 2022 proxy season, investor campaigns in the first half saw the rate of lowest pass/settled in the past five years (12%), although the information technology sector had the highest pass rate at 19%.

ISS Reports on Key Themes of Climate Disclosure Comment Letters

On August 31, Institutional Shareholder Services published an article – SEC Climate Disclosure Comments Reveal Diversity of Views – which explores the key topics covered in a “representative” series of comments on the SEC’s proposed climate-related disclosure rules. The article highlights eight themes around which comments have largely revolved:

  1. Strong support for alignment of the proposed rules on the Task Force on Climate-Related Financial Disclosures.
  2. Support for the alignment of the proposed rules with the frameworks of the Sustainability Accounting Standards Board and the International Sustainability Standards Board.
  3. Business concerns about compliance burdens (in terms of time and money).
  4. Questions about the material relevance of the SEC’s proposals, including scenario analyzes and whether the data should be provided or included in a company’s filed financial accounts.
  5. Various opinions on the obligation to disclose indirect emissions (Scope 3).
  6. Concerns about the speculative nature of greenhouse gas disclosures and risks.
  7. Broad support for board oversight of climate risks, but differences in granular disclosure requirements.
  8. Disagreement on the authority of the SEC to require such disclosures.

The article further notes that most of the form letter comments expressed full support for the rules, while others were in favor but suggested that the requirements be aligned with other countries’ disclosure regimes.