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Comments of
Patrick G. Quick
June 10, 2010
Reg. FD applies to
material nonpublic information of any type, with no exclusion for
information related to governance or compensation matters. This is the
operative language of Reg. FD: "Whenever an issuer, or any person acting on
its behalf, discloses any material nonpublic information regarding that
issuer or its securities to any person described in paragraph (b)(1) of this
section, the issuer shall make public disclosure of that information . . ."
Under this language, for Reg. FD to require an issuer to make public
disclosure of information, the information must be both “material” and not
already public.
A key question is
whether nonpublic information that a company might discuss in a dialogue
with shareholders is "material" in a particular instance. The reference to
materiality in this context draws in information as to which there is a
substantial likelihood that a reasonable shareholder would consider it
important in making a decision to buy or sell securities. What is material
depends, among other things, on the facts and circumstances and on what
would impact investors' purchase and sale decisions. Unfortunately, there
is not much (if anything) that is black or white when it comes to
determining materiality, and companies must regularly make difficult
judgment calls about whether particular pieces of information are material.
I would not want to
minimize the significance to investors of information about governance or
compensation. Further, Reg. FD does not have an exception for information
on these subjects. But, I believe that, under many circumstances, it would
be easier for directors or management to have an open dialogue about
governance issues (e.g., maintaining or eliminating a staggered board,
separating the positions of chairman and CEO, mandatory retirement for
directors, majority voting terms, director independence) or compensation
issues (e.g., identity of peer group, terms of severance arrangements)
without violating Reg. FD. I say this because I believe there is a smaller
chance of saying something on these subjects in a dialogue with shareholders
that is both material and not already public than is the case for other
types of information, such as key operations issues. As to compensation,
one of the reasons this is true is that CD&A and other disclosure
requirements result in a public disclosure on compensation matters at a
level of detail that makes it difficult to say something that is material
that is not already disclosed.
For illustrative
purposes, here are four examples of possible topics that a company might
discuss with shareholders:
(A) Whether the company
should divest one or more divisions or businesses
(B) Whether the company
currently expects to meet its guidance for the year
(C) Whether the company
should revise its change in control severance agreements to eliminate
parachute tax gross ups
(D) Whether the company
should separate the positions of Chair and CEO
My view is that a
company could conclude that, under the circumstances, discussions with
shareholders regarding (C) and (D) are not likely to involve material
nonpublic information while discussions with shareholders regarding (A) and
(B) are likely to involve material nonpublic information. If a company
reaches that conclusion, it might try to steer dialogue with shareholders to
subjects (C) and (D) to avoid a violation of Reg. FD. |