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Forum Report:
Electronic Participation in Shareholder Meetings
Comments on Reg FD Application,
Resolving One of Questions
SEC
prohibition of disclosure only when selective
Focusing on whether “governance” is material to investor decisions
More
questions for professionals
Thanks to those of you who have responded to
Monday’s invitation of comments on the application of SEC Regulation
FD (Fair Disclosure) to information about corporate "governance" matters.
Based on these initial responses, we should be able to consider one of the
issues resolved and refine the focus of our attention regarding the other.
SEC
prohibition of disclosure only when selective
As several of you noticed, the SEC has posted a very direct “No” to the
question of whether FD prohibits directors’ private communications with
investors. Dated as of June 4, 2010 in its “Compliance
and Disclosure Interpretations,” the post explains that disclosure is
prohibited only if it is selective:
Question 101.11
Question: Does Regulation FD prohibit directors from speaking
privately with a shareholder or groups of shareholders?
Answer: No. Regulation FD prohibits a company or a person acting on
its behalf — such as directors, executive officers and investor relations
personnel — from selectively disclosing material, non-public information
to a shareholder under circumstances in which it is reasonably foreseeable
that the shareholder will purchase or sell the company's securities on the
basis of that information. If a company's directors are authorized to
speak on behalf of the company and plan on speaking privately with a
shareholder or group of shareholders, then the company should consider
implementing policies and procedures intended to help avoid Regulation FD
violations, such as pre-clearing discussion topics with the shareholder or
having company counsel participate in the meeting. In addition, because
Regulation FD does not apply to disclosures made to a person who expressly
agrees to maintain the disclosed information in confidence, a private
communication between an independent director and a shareholder would not
present Regulation FD issues if the shareholder provided such an express
agreement. [June 4, 2010]
Broc Romanek, the editor of
TheCorporateCounsel.net who will be conducting a
webcast in September on practices for electronic shareholder meetings,
pointed us to his
blog posting of this welcomed SEC clarification of what he called a
continuing “slew of misinformation” about FD. Those of you who have shared
his frustration will appreciate the value of the SEC’s authoritative
statement to encourage rather than restrict open communications.
Focusing on whether “governance” is material to investor decisions
The question of whether FD applies to “governance” information is much
more complicated, and stimulated more responses. There seems to be common
ground regarding the need to determine whether information would be
considered “material” regardless of its classification as a governance
issue, but there are clearly different views concerning the challenges of
making that determination – or simply avoiding the need to do so.
A leading corporate legal and governance officer offered an unofficial,
personal view of how a company should decide what information is subject
to FD, assuring us in further comments that the evidence of “thousands of
private company-analyst meetings and related communications each year”
suggests that “most folks decide that they are up to that task:”
A characterization or not as “governance” information is the wrong way to
look at FD. FD was put in place to aid in preventing insider trading, and
the specific context involved is the private meeting between analysts and
management where material nonpublic information may be disclosed. If
“governance” or any other information is material nonpublic information,
then it is subject to the FD restrictions.
Patrick Quick, the
Foley & Lardner securities law partner whose views had been reported
in the
article that stimulated our current attention to FD, provided this
summary of the SEC “material” standard as part of a more extensive
explanation of his views:
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.
…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.
[For the full text as submitted by the author, see
June 10, 2010 Comments of Patrick G. Quick.]
Several of you observed that most of the attention to defining what is
“material” has taken place in the context of legal proceedings. Most of
those, naturally, have been based on financial reporting issues. We were
fortunate to get an explanation of that perspective from Lynn Turner, who
was the chief accountant of the SEC at the time of its adoption of
Regulation FD and was responsible for the 1999 Staff Accounting Bulletin
99 that defined SEC views of materiality for financial reporting:
The SEC has long looked to the court cases on how it defines materiality….
I have clipped the following from Staff Accounting Bulletin No. 99 (see
attached) which addresses materiality in the context of financial
statements. …The SEC would look to these cases to determine if something
was material - is there “...a substantial likelihood that the . . . fact
would have been viewed by the reasonable investor as having significantly
altered the ‘total mix’ of information made available.” If so, if it is a
fact on governance, would the reasonable investors have considered it
material?
[For the full text as submitted by the author, including his excerpted
section of SAB 99, see June 7, 2010 Comments
of Lynn E. Turner.]
More questions for
professionals
For those of you with professional responsibilities to advise corporate
managers or investors in their communications practices, informal
discussions with Forum participants have raised additional questions that
you may want to consider.
Comments on these questions will be welcomed, relating either to FD
applications or to broader investor communication issues:
1. If the SEC requires reporting of information about a subject such
as compensation, should it be assumed that any additional information
providing investors with a better understanding of that subject would be
considered material?
2. If proper fiduciary management of fund assets requires incurring
costs for staff or outsourced review of information relevant to voting
decisions, would that information have to be considered material?
3.
If information could be expected to influence voting decisions, can
it be assumed that the potential influence of votes in itself might be a
basis for purchasing or selling a company’s securities, and that
information relating to that influence would therefore be considered
material?
Your comments will of course be welcomed on any other issues concerning
the E-Meetings program objectives to support more effective investor
communications.
GL – June 10, 2010
Gary Lutin
Chairman, The Shareholder Forum
c/o Lutin & Company
575 Madison Avenue, 10th Floor
New York, New York 10022
Tel: 212-605-0335
Email:
gl@shareholderforum.com
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