New FASB and SEC Guidance on Pushdown Accounting

On November 18, the Financial Accounting Standards Board released new guidance on the use of "push down" accounting. Push down accounting refers to an acquired company's use in preparing its financial statements of the acquirer's accounting basis for the acquired company's assets and liabilities. The FASB's new guidance (Accounting Standards Update No. 2014-17) allows an acquired company the option of using push down accounting in its separate financial statements when another company "obtains control."

Simultaneously with the FASB's action, the SEC's Office of the Chief Accountant and Division of Corporation Finance issued a Staff Accounting Bulletin (SAB) to rescind portions of the staff's prior interpretive guidance on the use of push down accounting. The prior SEC guidance (SAB Topic 5.J) provided that an entity acquired in a purchase transaction should establish a new basis of accounting to reflect the acquirer's basis when a purchase transaction resulted in the entity "becoming substantially wholly owned." The rescission of Topic 5.J makes the SEC's guidance consistent with the FASB's new interpretation.

Thanks to Society member Dan Goelzer of Baker & McKenzie LLP for this update and see his October-November, 2014 summary of recent developments relating to audit committee oversight of financial reporting and auditing here.

D.C. Circuit Grants Petition to for Rehearing of Conflict Minerals Case

The DC Circuit Court granted the SEC and Amnesty International's petition for rehearing this week in the National Association of Manufacturers v. SEC action challenging the conflict minerals rule. The rehearing was sought to settle the conflict on conflict minerals---that is the difference between the NAM v. SEC in which the court held that under the First Amendment companies cannot be compelled to disclose "blood on their hands" and the en banc ruling in American Meat Institute v. U.S. Department of Agriculture which held that a company may be required to disclose where an animal is born, raised and slaughtered.

The three judge panel (Raymond Randolph, David Sentelle, and Sri Srinivasan) asked the parties to brief:

What effect, if any, does this court's ruling in AMI v. U.S. Department of Agriculture, have on the First Amendment issue in this case regarding the conflict mineral disclosure requirement?
 

What is the meaning of "purely factual and uncontroversial information" as used in Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985), and American Meat Institute v. U.S. Department of Agriculture, 760 F.3d 18 (D.C. Cir. 2014) (en banc)?
 

Is determination of what is "uncontroversial information" a question of fact? (citations omitted)

Chart of Standards of Review by Delaware Courts in Review of M&A Transactions

In a very timely release given the Society/Weinberg Center Delaware Law Issues Update Program that took place this week, Gibson Dunn is out with a memo on Delaware M&A that includes a chart that "identifies fact patterns common to Delaware M&A and provides a preliminary assessment of the likely standard of review applicable to transactions fitting such fact patterns." The chart provides 11 scenarios of fact patterns, and the likely standard of review under subsets of scenarios as part of those fact patterns.

Corporate Governance Should Not be a Mystery to Boards, Says Vanguard CEO; Raises Idea of Shareholder Relations Committee

Thanks to Ann Mule for highlighting this speech from Vanguard Chairman and CEO F. William McNabb III, delivered at the University of Delaware's John Weinberg Center for Corporate Governance on October 30, 2014.

McNabb's message was relatively simple:

Corporate governance should not be a mystery.

• For corporate boards, it should not be a mystery the way large investors vote their shares.
• And for investors, it should not be a mystery the way corporate boards govern their companies.

McNabb also shares Vanguards principles on corporate governance, including engagement, to which he devoted a significant amount of time. He noted that last year, Vanguard "sent out 923 letters (in total) to companies across the U.S., and 358 of those letters requested specific governance structure changes." [bold in original]. McNabb notes that about 80 companies have adopted substantive changes in response to the letters. Finally, he also floats a novel idea: that boards create a standing shareholder relations committee "for boards to gather those outside perspectives" discussed in the speech.

Microsoft Files Supplemental Filing in Advance of Annual Meeting; WSJ Reports ISS Negative Recommendation

The Wall Street Journal reported earlier this week that ISS has recommended against Microsoft's say on pay vote while Glass Lewis recommended in favor in connection with its upcoming annual meeting on December 3.

In a supplemental proxy filed on November 14 by Microsoft, former lead director and now Chairman John W. Thompson describes the many actions taken by the board in the last year, including appointing a new CEO, creating an independent Chair of the board, the addition of 4 new directors, and a redesigned compensation plan in which "[o]ver 80% of the [CEO's] reward opportunity is performance-based measured by our total shareholder return ("TSR") relative to the S&P 500."

The filing also has this to say about the proxy access proposal on the ballot:

While the Board is committed to strong governance practices, this proposal is not in the best interest of shareholders because it provides significant opportunities for misuse by shareholders with a short-term interest and lacks important safeguards that would protect the interests of long-term shareholders.

CII this month released a summary of the roundtable convened in July that "offered representatives of large companies and institutional investors the opportunity to share their concerns, identify common ground and discuss avenues for improving the efficiency and effectiveness of the shareholder proposal process." Companies and institutional investors "reached general agreement in certain areas," but "views diverged on how to address underlying specifics." The document provides a summary of participant views on communication between parties, clarity on objectives, and, the role of directors in the no-action process. Society members Amy Carriello and Jessica Lau of PepsiCo, Mike McCauley, Florida SBA, Susan Permut, EMC, Linda Scott, JPMorgan Chase, and Dannette Smith, UnitedHealth Group, were part of the dialog.

The Conference Board has recently made its full Proxy Voting Analytics (2010-2014) report available (you will need to create an account to access). The report provides a "5-year review of shareholder proposals, say-on-pay votes, and hedge fund activism."

Delaware Supreme Court Justice Ridgely Writes

The Honorable Henry duPont Ridgely, Justice, Supreme Court of Delaware gave a speech at the 22nd Annual SMU Corporate Counsel Symposium in Dallas, Texas, on October 31, titled The Emerging Role of Bylaws in Corporate Governance in which he discusses the historical background of the use of bylaws in corporate governance contexts, the recent case law and legislative response. With respect to fee-shifting bylaws, he notes:

Since the Court's decision in ATP Tour, a number of commentators have assumed that it applies equally to for-profit, stock corporations. The Delaware Supreme Court did not say that in ATP Tour, so this remains an open question. Nevertheless some commentators have suggested that the application of ATP Tour to stock corporations would effectively mitigate the cost of stockholder litigation. In 2013, stockholder plaintiffs challenged approximately 94% of all announced transactions, a significant rise from 2008, where only 54% of corporate transactions were challenged. Other commentators have argued that such a bylaw in this context would have a chilling effect on meritorious litigation and insulate directors from potential liability.

Justice Ridgely advises that any board considering a governance bylaw should ask these three questions:

(1) Is the bylaw facially valid?; (2) As applied, will the bylaw be inequitable?; and (3) Even if valid, facially and as applied, is it wise for our company to adopt this bylaw?

Society Migrating to New Association Management System - Look for Upcoming Communications

The Society is transitioning to a new Association Management System ("AMS") the week of December 1st.   An Association Management System is used by nearly all membership associations to track membership status and history, and committee and event participation.  Along  with providing benefits to staff, the new system will make it easier for members to manage their own profile, to renew their memberships, and to register for events.  The new AMS system will not affect the Society website or Huddle.  Look out for more communications about this in the next week.  You will be prompted to establish a new password.  As always, staff is available to answer any questions you may have.

Corporate Practices and Securities Law Committees Meet with Glass Lewis

Issuer members of the Corporate Practices, Securities Law and Small and Mid Cap Companies committees met with KT Rabin, President, and Bob McCormick, Chief Policy Officer, of Glass Lewis this week. Topics covered included: proxy access proposals, independent chair proposals, bylaw policies such as forum selection, fee shifting and arbitration, additional pay for certain directors, and board refreshment, among others. The upshot on most of the topics: disclosure disclosure disclosure: tell your own story. For example, boilerplate language describing the decision on leadership structure is particularly disliked.

IRRC Report Finds Major Disconnect Between Pay and Performance at S&P 1500 Companies

An IRRCi research paper titled The Alignment Gap Between Creating Value, Performance Measurement, and Long-Term Incentive Design by Mark Van Clieaf and Karel Leeflang, Partners, Organizational Capital Partners, and Stephen O'Byrne, President, Shareholder Value Advisors, has been published finding "a major disconnect between corporate operating performance, shareholder value and incentive plans." An excerpted summary of the findings of the report on the study of S&P 1500 companies are below:

• Economic performance explains only 12% of variance in CEO pay. More than 60% is explained by company size, industry, and existing company pay policy. None of those are performance driven.
• Some 75% of companies have no balance sheet or capital efficiency metrics in their disclosed performance measurement and long-term incentive plan design.
• Only 10% of all long-term incentives have a disclosed performance period for NEOs of greater than three years.
• Total shareholder return (TSR) is the most dominant performance metric in long-term incentive plans, present in more than 50% of all plans despite the fact that executives do not have line of sight accountability for key drivers that impact TSR outcomes.
• Nearly 60% of companies changed performance metrics for CEO compensation in 2013. . .

The study makes recommendations for enhancing long term value, including:

• Using ROIC and/or economic profit in performance measurement design rather than TSR or EPS;
• Adding future value improvement drivers (i.e. innovation, customer loyalty) to the performance metrics;
• Lengthening the longest performance-period for NEOs to longer than three years;

Relative Total Shareholder Return Performance Award Report

Fredrick W. Cook & Co., Inc. has published a report covering the largest 250 U.S. companies in the S&P 500 by market capitalization finding that:

Prevalence of relative TSR awards . . . has increased by 71% in the last five years (from 29% of the Top 250 companies in 2010 to 49% in 2014). However, companies that grant relative TSR awards tend to diversify their performance measures, with 71% of companies using relative TSR in combination with another financial performance metric.

This week's highlighted question from the Huddle is:

For companies that attach an Annual Report wrap to the 10-K, do you also provide a means for viewing it online? If you do, how do you inform shareholders that they can view it online? Do you find it effective for disclosure purposes and do you add additional features such as video and/or an interactive online experience? 

This question generated a lot of activity and many excellent answers (too many to note here) including:

In our experience, most companies post their 10-K wraps on their websites in pdf format. As you've probably seen, some companies issue press releases when their annual reports are posted, and some (generally the larger ones) include video or other content....If you do include video or other content, a question is whether it's considered to be part of your annual report for SEC purposes and therefore required to be furnished to the SEC.

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