This newsletter discusses noteworthy updates, key regulatory decisions and upcoming compliance reminders. You are welcome to contact us to discuss any of the topics. In this edition, we review:

Inline XBRL (and changes to Exchange Act Form cover pages) combined with securities disclosure simplification

The IRS’ New 162(m) Guidance: how to “Grandfather” Awards

By Lisa Van Fleet

The IRS has made some changes to Section 162(m) of the Internal Revenue Code (“Section 162(m”) in the 2017 tax reform law (the “Act). In this article, we will address 5 of the most common questions we’ve heard companies ask about the guidance and describe potential next steps.

Q 1: If a performance based compensation arrangement permits negative discretion to zero, are all payments made pursuant to that arrangement subject to 162(m)’s $1 million deduction limit?

A: Most likely, yes. The Notice clarifies that a compensatory arrangement is not a written binding contract to the extent that any amounts payable under the arrangement may be reduced to $0 upon the company’s exercise of negative discretion. However, if a portion of that amount is required to be paid under state law, then that portion of the payment would be grandfathered under Section 162(m) and would not be subject to its $1 million deduction limit. Companies covered by Section 162(m) should review their current compensation arrangements now to identify the contracts and plans that may be impacted by this guidance.

Q 2: What changes will constitute material modifications of grandfathered arrangements?

A: The Notice states that a material modification occurs, and therefore grandfathered status is lost, when an arrangement is amended to increase the amount of compensation payable to the employee. However, the Notice also clarifies that the following actions will not constitute material modifications to an otherwise grandfathered arrangement:

  • Acceleration of a payment if the payment is discounted to reasonably reflect the time value of money;
  • Deferral of a payment if any amount paid in excess of the amount deferred is based on either a reasonable rate of interest or a predetermined actual investment;
  • A supplemental payment that does not exceed a reasonable cost-of-living increase over the payment made in a prior year (e.g., a modest increase in base salary or target bonus); or
  • A supplemental payment that is not based on substantially the same elements or conditions as the compensation that is otherwise paid pursuant to the arrangement (e.g., new equity awards).

Companies should closely monitor any proposed changes to grandfathered compensation arrangements to verify that such changes do not result in the loss of grandfathered status.

Q 3: What happens when a grandfathered arrangement is renewed or extended?

A: The arrangement generally loses grandfathered status, effective as of the date that it was to be renewed or extended. The Notice provides that a grandfathered contract that is renewed or extended (whether automatically or otherwise) after November 2, 2017 will lose grandfathered status as of the date of renewal or extension, unless the employee had a unilateral right to require renewal in his or her sole discretion. For example, employment contracts commonly provide that they automatically renew as of a certain date unless either the company or the employee provides notice of termination at least 30 days before the termination date. These contracts will lose grandfathered status as of the date that termination would have been effective if that notice were given. Therefore, companies covered by Section 162(m) will want to monitor the renewal and termination dates of their grandfathered arrangements in order to determine and track when grandfathered status will be lost.

Q 4: How do the new Section 162(m) rules apply to compensatory arrangements with an individual who was not a covered employee as of November 2, 2017?

A: The Notice provides that if an individual became a covered employee solely as a result of the Act, then any payments made to that individual pursuant to a written binding contract as of November 2, 2017 are grandfathered and are not subject to Section 162(m)’s $1 million deduction limit. Therefore, with respect to a principal financial officer who first became a covered employee solely as a result of the Act, any payments made pursuant to written binding contract as of November 2, 2017 (e.g., an employment agreement or nonqualified deferred compensation plan) will not be subject to the $1 million deduction limit, provided that such contract has not been materially modified after November 2, 2017.

Q 5: What’s the best way to determine and monitor covered employees for 2018 and beyond?

A: Companies covered by Section 162(m) will need to develop and maintain a separate recordkeeping system for covered employees. The Notice clarifies that the Act expanded the individuals who are “covered employees” under Section 162(m) to any individual who is or was a covered employee for any taxable year beginning after December 31, 2016, regardless of whether

  • there is a subsequent change in the individual’s officer status, compensation, employment or death;
  • the individual’s compensation is required to be disclosed under applicable SEC disclosure rules (e.g., there is no relief for smaller reporting companies or emerging growth companies); or
  • the individual is employed by the company at the end of the applicable taxable year (e.g., in event of a corporate transaction that results in a shortened tax year).

Stay tuned for further developments.

By Robert Endicott

In late September 2018, the SEC charged Elon Musk, the Chairman and CEO of Tesla, with fraud in connection with a series of tweets in early August that were alleged to contain a series of false and misleading statements about his plan to take Tesla private. Importantly, the SEC also charged Tesla with a violation of Rule 13a-15 for alleged failures to maintain disclosure controls and procedures with respect to Musk’s communications.

In November 2013, Tesla had disclosed via Form 8-K that it intended to use Musk’s Twitter account as a means of announcing material information to the public about Tesla and its products and services and encouraging investors to review such information about Tesla distributed by Musk via his Twitter account. The SEC noted in its complaint that since that time, Musk has indeed tweeted material information about Tesla, including company financial projections and key non-financial metrics.

On August 7, 2018, Musk had initially tweeted that he was “considering taking Tesla private at $420” and that “[f]unding [was] secured.” This tweet was followed by a number of other tweets and other interactions, including between Tesla representatives and various analysts. Tesla’s share price rose significantly on August 7 on substantially increased trading volume, and trading was eventually halted that day. In addition to the charges filed against Musk personally in connection with the August 7 “Twitter storm,” the SEC filed separate charges against Tesla alleging that the company (1) did not have disclosure controls or procedures in place to assess whether the information distributed by Musk via Twitter account was required to be disclosed in Tesla’s 1934 Act filings and (2) did not have sufficient processes in place to ensure such information was accurate or complete.

To settle the SEC actions, Musk and Tesla agreed in late September 2018 not only to pay significant monetary penalties ($20 million each by Musk and Tesla), but also to a comprehensive set of undertakings, which were court-approved in mid-October, including requirements for:

  • Musk to resign as Chairman, to be replaced by an independent Chairman. He is ineligible to be re-elected Chairman for three years;
  • Tesla to add two new independent directors to its board;
  • Tesla to establish a new committee of independent directors and to adopt mandatory controls and procedures to oversee Musk’s public communications about the company; and
  • Tesla to employ within its legal department an experienced securities counsel.

The last point was not included in the press release announcing the settlement, but was noted in comments delivered by Steven Peikin, Co-Director of the SEC’s Enforcement Division, on October 3, 2018 at the PLI Seminar on White Collar Crime 2018 in New York City. Peikin noted in his remarks that the undertakings were specifically targeted to address, among other things, specific risks regarding potential harm to investors caused by “a lack of sufficient oversight and control of those communications” by Tesla. As with a number of other enforcement actions discussed at the seminar, Peikin stated that the equitable undertakings included in the settlement were viewed by the SEC as an important supplement to the monetary penalties because they were both forward-looking and precisely tailored to the facts and circumstances of the case. According to Peikin, the undertakings “were specifically targeted to put in place stronger corporate governance by increasing the independence of the Tesla board and imposing closer oversight and control of Musk’s communications.”

As a result of the foregoing, we would advise our public company clients to:

  • Review the composition of your company’s disclosure committee or other group that is charged with the company’s public disclosures to make sure it has adequate independence from those making company disclosures, as well as adequate federal securities law expertise.
  • Consider the implications of distributing material non-public information via traditional media outlets (e.g., interviews or other press interactions), social media or other methodologies other than 1934 Act filings. The ease with which such information can be disseminated via social (or traditional) media presents tricky issues around disclosure controls and procedures, whether a “duty to update” has been created, and in any event may lead to liability through shareholder lawsuits.
  • Such distribution methodologies may technically be Reg FD compliant, but run the risk of being less rigorously vetted, and may not include cautionary language or forward-looking safe harbor statements typically included in other types of statements.
  • Also, such statements may present tricky issues related to an implied duty to update. For example, Musk’s statements via Twitter did not immediately present Reg FD issues because of the November 2013 8-K that material information about Tesla would be distributed via Musk’s Twitter account; the issue was whether the statements were inaccurate or misleading.
  • Finally, even if there are no Reg FD issues from the SEC’s perspective, note that shareholders could file derivative lawsuits, as in the Tesla case, where shareholders are seeking damages and governance reforms.If you determine that regular or social media is an appropriate disclosure mechanism, review your disclosure controls and procedures and/or disclosure policies to ensure that your company has adequate procedures to both (1) fully vet statements for accuracy and completeness and (2) determine whether such statements need to be included in (or supplemented by) your company’s 1934 Act filings.

Finally, we note that on October 4, Musk tweeted congratulating the “Shortseller Enrichment Commission” for their “incredible work.” Since Musk seems (perhaps) not to have learned his lesson, the SEC may determine to make an even bigger example out of the next offender.

Preliminary Planning for the 2019 Proxy Season

By Caitlin Reardon-Ashley and R. Randall Wang

As 2018 comes to a close, public companies with fiscal years ending December 31, 2018 should begin preparing for the 2019 proxy season. While there are no significant new disclosure requirements for the 2019 proxy season, highlighted below is a selection of topics that boards of directors should consider as they plan ahead for their company’s next proxy filing.

  • Review Section 162(m) Disclosures in Proxy Statements. We recommend issuers review the Section 162(m) disclosures in their proxy statements. As the Internal Revenue Code Section 162(m) performance-based compensation exception has been eliminated by the Tax Cuts and Jobs Act, issuers should take the opportunity to closely review, and ensure the accuracy of, disclosure in the proxy statement about the role, if any, that deductibility of compensation plays in the compensation committee’s executive compensation decision-making process. As noted on our Benefits BCLP blog, on August 21, 2018, in IRS Notice 2018-68, the IRS provided its initial, albeit limited, guidance concerning the changes made to Internal Revenue Code Section 162(m) by the Tax Cuts and Jobs Act. Notably, the guidance on what compensation will be grandfathered, and therefore exempt from the new Section 162(m) provisions, may be very restrictive with respect to performance-based compensation that is subject to negative discretion, depending on the extent to which that discretion may be exercised under applicable law.
  • Perquisite Disclosures. As discussed in our last newsletter, the SEC continues to focus on improper disclosure of executive perquisites. We recommend public companies take steps to ensure that all staff are appropriately trained when compiling compensation disclosures. Recent SEC cases reinforce the need for robust controls and procedures to ensure proper evaluation and disclosure of perks. Proper procedures help reduce the likelihood of a disclosure issue but also may help reduce the severity of any penalty for an improper disclosure. Recent cases emphasize the need for focus and training about the “integrally and directly related” standard and the importance of timely completion of D&O questionnaires or other controls that would identify issues concerning perks.
  • Expanded Availability of “Smaller Reporting Company” Status. Effective September 10, 2018, the SEC expanded the availability of the scaled disclosure requirements for a company qualifying as a “smaller reporting company" (an “SRC”) to a broader range of registrants. As discussed in our last newsletter, the SEC amended the definition of “smaller reporting company” to increase the public float threshold (the cap on portion of shares held by public investors) to $250 million, up from the prior $75 million threshold. An issuer with a public float of less than $700 million may also qualify for SRC status under the amended rule if its annual revenues are less than $100 million.

The less rigorous reporting requirements for SRCs provide a number of benefits to qualifying companies. SRC status significantly reduces filing and audit expenses for qualifying companies. An ICBA study estimates that SRC status—thus exemption from the 404(b) reporting requirements—could cut audit fees for certain types of qualifying institutions by as much as 50%. Some SRCs may not be required to transition as a result of the more generous rules, and others who did not previously qualify as a SRC may wish to avail themselves of the scaled disclosure option. A reporting company will determine whether it qualifies as a SRC annually as of the last business day of its second fiscal quarter.

The adopting release, including the list of the scaled disclosure requirements for SRCs, can be found here.

  • No New Median Employee Determination May Be Required for CEO Pay Ratio. Most registrants with fiscal years ending December 31, other than smaller reporting companies or emerging growth companies, have already completed the first round of calculating and disclosing their CEO pay ratio results. Because the SEC’s rules only require a registrant to identify its median employee once every three years unless there has been a change in its employee population or employee compensation arrangements that the registrant believes would significantly impact the pay ratio disclosure, many registrants will likely not have to re-identify their median employees for their 2019 proxy filing. However, companies should evaluate whether any such change has occurred, recognizing that the rule requires disclosure if the same individual is being used and a brief description of the basis for the belief there have been no such changes.
  • Disclosure Simplification. The SEC’s recently adopted amendments to eliminate or modify certain disclosure requirements that had become redundant, overlapping, outdated or superseded became effective on November 5, 2018. Public companies should be updating disclosure controls to reflect these changes and those with a fiscal year ending December 31 should begin to prepare to reflect the changes in their upcoming Form 10-K filings. The amendments, which are largely technical, affect several disclosure requirements in Regulations S-K and S-X and various SEC forms, including Form 10-K. The SEC eliminated certain requirements relating to the description of an issuer’s business that were previously required to be disclosed under Item 1 of Form 10-K. The amendments also eliminated or revised certain other disclosure and exhibit requirements under Regulation S-K. Please see our Client Alert here for additional information.

Inline XBRL (and changes to Exchange Act Form cover pages) combined with securities disclosure simplification

By R. Randall Wang

Changes to Cover Pages of Periodic Reports

As previously reported in our August 2018 newsletter, the rule changes for smaller reporting companies included minor changes to the cover pages of registration statements and periodic reports (to remove the parenthetical next to the “non-accelerated filer” definition), including Forms 10-K and 10-Q – effective September 10, 2018. A registrant should now check all applicable boxes, e.g., both the Smaller Reporting Company box and the Non-Accelerated Filer box, as appropriate. Here is the blacklined change to the forms:

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b 2 of the Exchange Act.:

Large accelerated filer [ ]

Accelerated filer [ ]

Non accelerated filer [ ] (Do not check if a smaller reporting company)

Smaller reporting company [ ]

Emerging growth company [ ]

Similarly, the new Inline XBRL rules eliminated the references to compliance with website posting requirements for certain periodic reports, including Forms 10-K and 10-Q, effective September 17, 2018. Here is the blacklined change to the forms:

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ ] Yes [ ] No

Inline XBRL for Operating Companies

The new Inline XBRL requirements will apply to all operating company filers, including smaller reporting companies, emerging growth companies and foreign private issuers that currently file information in SBRL. The requirements will be phased in based on filer status, beginning with the first Form 10-Q for a fiscal period ending on or after the applicable compliance date, as follows:

  • Large accelerated filers that utilize GAAP -- Fiscal periods ending on or after June 15, 2019
  • Accelerated filers that utilize GAAP -- Fiscal periods ending on or after June 15, 2020
  • All other filers -- Fiscal periods ending on or after June 15, 2021

Inline XBRL requires companies to embed XBRL data into their HTML filings so that the document can be read by both people and machines. As a result, XBRL data will no longer need to be filed as a separate exhibit; however, certain contextual information about XBRL tags embedded in the filing will still be filed as an exhibit. The Inline XBRL requirement will aply to financial statement information in HTML regardless of whether it appears in a non-exhibit part of a filing and/or in one or more exhibits.

As indicated by the cover page change described above, companies are no longer required to post SBRL data on their corporate websites.

By Robert Endicott


ISS recently released its revised policy voting guidelines [link to the guidelines:] for 2019. The updates are effective for meetings on or after February 1, 2019. Topics covered include updates on:

  • Board gender diversity – beginning in 2020, ISS will recommend voting against nominating committee chairs (and other board members on a case-by-case basis) at companies where there are no women directors. This will be applicable to companies on the Russell 3000 or S&P 1500 indices.
  • Board attendance – where there is chronic poor attendance (three or more consecutive years with less than 75% attendance without a reasonable explanation), voting against that director as well as (1) against the chair of the nominating/governance committee after three years, (2) against all of the nominating/governance committee members after four years and (3) against all board members after five years.
  • Management proposals to ratify existing charter or bylaw provisions – adverse vote recommendations for individual directors, members of the governance committee or the full board, unless the proposition aligns with best practice, after taking into account certain specified factors, including presence of a shareholder proposal addressing the same issue on the same ballot, the board’s rationale for seeking the change, and the proposed actions should the ratification proposal fail.
  • Environmental and Social Proposals – codifying the six factors it takes into consideration when analyzing such proposals, which focus primarily on whether the implementation of the E&S proposal is likely to enhance or protect shareholder value, and taking into account significant controversies, fines, penalties or litigation associated with such practices.
  • Various compensation related updates – including the following:
    • ISS issued various updates to its Equity Scorecard
    • ISS will to continue to explore adding Economic Value Added (EVA) factors in its quantitative pay-for-performance analysis but declined to implement them for the 2019 proxy season
    • ISS will to continue to revise its methodology to identify outliers in non-employee director compensation before implementing its adverse vote recommendations.

Glass Lewis

Glass Lewis also recently released its revised policy voting guidelines [link to the guidelines:] for 2019. The updates are effective for meetings on or after January 1, 2019. Topics covered include updates on:

  • Board gender diversity – beginning in 2019, ISS will recommend voting against nominating committee chairs at companies where there are no women directors. It may recommend voting against other committee members based on an analysis of various factors, but also subject to disclosure of diversity considerations and rationale for not having female directors.
  • Conflicting and Excluded Proposals on Shareholder Meeting Rights – where management places its proposal and shareholder proposal requesting different thresholds for the right to call a meeting, Glass Lewis will recommend a vote for the lower threshold and against the higher threshold, and, in such cases, where the company currently does not have such a right, may recommend voting for the shareholder proposal and abstaining from the management proposal. If management has excluded a shareholder proposal and proposed ratifying an existing special meeting right, Glass Lewis will typically recommend voting against the proposal and all members of the governance committee.
  • Environmental and Social Risk Oversight – codifying the approach Glass Lewis takes on reviewing how boards are implementing this right. Glass Lewis may recommend voting against members of the board responsible for overseeing such oversight, and may recommend voting against those members (or members of the audit committee, if no explicit board oversight) if the company has mismanaged these risks to the detriment of shareholder value, or such mismanagement threatens shareholder value.
  • Various compensation related topics, including granting of front-loaded awards, severance and sign-on arrangements, bonus guarantees, excise tax gross-ups and clawbacks.