SIGNIFICANT DEVELOPMENTS FOR 2018 PROXY STATEMENTS AND ANNUAL REPORTS

SIGNIFICANT DEVELOPMENTS FOR 2018 PROXY STATEMENTS AND ANNUAL REPORTS

It is time to begin planning for the 2018 proxy and annual reporting season.  There are several developments this year, most notably the new pay ratio disclosure.  Also, current geopolitical developments require a thorough review of risk factor disclosures in the Annual Report on Form 10-K.  Here is an overview of the key matters that you should consider as you prepare for the proxy and annual reporting season.

Pay Ratio Disclosure.  Most public companies must include pay ratio disclosure in their proxy statements beginning in 2018 (exceptions are emerging growth companies, smaller reporting companies, foreign private issuers and most registered investment companies).  New Item 402(u) of Regulation S-K requires public companies to disclose

  • The median of the annual total compensation of all employees other than the chief executive officer;
  • The annual total compensation of the chief executive officer; and
  • the ratio of these amounts

The rule also requires a description of the methodology and material assumptions, adjustments and estimates used, as well as other details of how the calculations are made.  Here’s the link to the rule: https://www.ecfr.gov/cgi-bin/text-idx?amp;node=17:3.0.1.1.11&rgn=div5#se17.3.229_1402. The SEC has, to its credit, issued guidance to help companies comply.  In September 2017, the Division of Corporation Finance issued an interpretive release providing guidance on employing reasonable estimates, assumptions, methodologies, statistical samplings and internal records in connection with pay ratio disclosure.  Here’s the link to that release: https://www.sec.gov/rules/interp/2017/33-10415.pdf.

The Staff also provided additional guidance and provided examples on how to employ statistical samples and other methods to accurately determine the median employees’ compensation.  Here’s that link: https://www.sec.gov/corpfin/announcement/guidance-calculation-pay-ratio-disclosure.

We believe this will be a time consuming process, particularly in the first year.  Therefore, we suggest you allow time to review and possibly amend the compensation discussion and analysis to incorporate the pay ratio disclosures into the CD&A and other compensation disclosure.

Shareholder Proposals

Proxy Access.   The number of companies adopting proxy access continues to increase.  As of this date, more than 60% of companies in the S&P 500 Index have adopted charter or bylaw provisions dealing with proxy access. Current “market” provisions generally require shareholders to hold at least 3 percent of the outstanding stock for a period of 3 years and allow up to 20 shareholders to aggregate their shares for meeting the ownership requirements.  They also provide for a minimum level of support for renewal of nominations.  If you have not done so, you should consider adopting proxy access provisions to your charter and bylaws before shareholders propose the changes themselves.  At the very least, this will generate internal discussion and allow board members to better comprehend how the process will work for their company.

Environmental and Social Proposals.   These topics are likely to be the subject of shareholder proposals in 2018.  We expect environmental proposals – particularly relating to climate change – to increase this season.  When the Unites States withdrew from the Paris Climate Accord in 2017, companies and and even states have turned to private initiatives to address global warming and climate change.  Companies should expect and be prepared to address suggested initiatives on climate change.

Board diversity is also a popular topic.  Companies, though may be able to ward off these proposal by being proactive and adopting an active diversity program in the recruiting of board members and executive officers.  Similarly, lobbying and political activity has been the subject of increasing proposals.  You should consider and be prepared to address these topics if they come up.

Risk Factors for Annual Report on Form 10-K

Trump Administration and Brexit.  Recall that last year the transition of the Trump administration into office and Brexit were new risk factors that many companies included.  Sadly to say, there is still uncertainty on both of these matters, and companies whose operations may be influenced by either of these should consider continued inclusion.  Examples would include companies whose operations are dependent on travel and immigration policies, international trade agreements or worldwide economic conditions or currency fluctuations.  You should also consider whether other aspects of geopolitical stability are relevant to company operations and should also be included.  Examples include North Korea and the withdrawl of the U.S. from the Paris Climate Accord.

Cybersecurity.  Given the economic consequences that hacking and disruption have caused within the past year, cybersecurity risks are increasing.  You should review this risk factor and amend accordingly to take into account new developments over the past year, even if they did not directly affect your company.

10-K Exhibit Hyperlinks.  Finally, don’t forget that new rules require that the exhibits included with the Annual Report on Form 10-K be hyperlinked. The 10-K exhibits are typically voluminous, so it would be wise to begin assembling the URLs that will be required to comply with the new rule.

About Morgan Legal Group.  We are a high-end corporate law boutique.  We provide top-flight service for 1934 Act reporting for public companies without the enormous overhead that conventional upper-end firms have.  We have seasoned, experienced attorneys available to answer your questions and provide thorough and complete review of your periodic reports, proxy materials and Section 16 reporting obligations.  Call us now to discuss how we can work together.

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