United States: 10 Tips For 10-Ks And Proxy Statements

With preparations shifting into high gear for calendar-year companies that file annual reports on Form 10-K and proxy statements with the US Securities and Exchange Commission (SEC), here are tips to consider when drafting these documents.

10-K Tips

Disclosure Update and Simplification. The SEC adopted "Disclosure Update and Simplification" amendments on August 17, 2018, which became effective on November 5, 2018. The amendments were designed to address disclosure requirements that the SEC considered to be redundant, duplicative, overlapping, outdated or superseded in light of other SEC disclosure requirements, US generally accepted accounting principles or changes in the "information environment." Annual reports on Form 10-K now need to comply with these amendments.

Many of the disclosure update and simplification amendments impact financial statements and related footnotes and items required by Regulation S-X. In some cases, the new requirements move disclosure from outside to inside the financial statements and, in other cases, from inside to outside the financial statements. These location changes impact audit review, XBRL tagging requirements and the ability to rely on the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995.

The disclosure update and simplification amendments also affect non-accounting portions of the Form 10-K. For example, companies are no longer required to provide two years of high and low sale prices for their stocks. Similarly, the requirement to disclose the amount and frequency of cash dividends has been eliminated, as has the requirement to include disclosure of the ratio of earnings to fixed charges. Other changes to the Form 10-K include elimination of segment financial information, elimination of amounts spent on research and development and elimination of financial information by geographic area in the business section. In each case, it is important to remember that, although the disclosure was eliminated from specified portions of the Form 10-K, corresponding disclosure may be needed or required in the notes to the financial statements or in the management's discussion and analysis (MD&A). The amendments also eliminate the requirement for the business section to include the address of the SEC's public reference room, although companies must state that the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC and must provide the address of that site. A company must also include its own Internet address, if it has a website, in the Form 10-K.

Companies should work closely with their accountants and counsel to be sure that their annual reports on Form 10-K comply with the new requirements. Companies should also consider whether they need to update their disclosure controls and procedures and/or their internal control over financial reporting in light of these amendments.

For further information about the disclosure update and simplification amendments, see our Legal Update "Capital Markets Implications of Amendments to Simplify and Update SEC Disclosure Rules," dated August 29, 2018.1

2. Cybersecurity Disclosure. Cybersecurity continues to grow as a global concern. Accordingly, companies should be sure that they are addressing this topic adequately in their annual reports on Form 10-K. In addition to discussing cybersecurity as a risk factor, companies should consider, based on facts and circumstances, whether they need to discuss cybersecurity more broadly in the context of their business and operations, legal proceedings, MD&A, financial statements, disclosure controls and procedures, and corporate governance. The SEC staff has been focusing on, and providing comments to companies regarding, cybersecurity disclosure. Due to the significance of cybersecurity issues, the SEC staff monitors press reports on cybersecurity incidents and may raise questions about the sufficiency of cybersecurity disclosure in SEC reports on that basis.

On February 21, 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. For more information on the SEC's cybersecurity guidance, see our Legal Update "SEC Issues Updated Guidance on Cybersecurity Disclosures," dated February 28, 2018.2

3. Brexit Disclosure. Disclosures made in prior years of expectations regarding how "Brexit" (i.e., the United Kingdom's potential withdrawal from the European Union) will impact a company should be reevaluated to determine if they are still current. Companies impacted by Brexit should include up-to-date disclosure in their annual reports on Form 10-K. Brexit disclosure should describe how Brexit is expected to impact the company and its operations, taking into account the current status of Brexit negotiations and agreements. For example, if a company relies on "passporting" to conduct its business, that should be discussed if the inability to passport is expected to have a material impact. Similarly, to the extent that Brexit is expected to have a material impact on a company's supply chain or employee base, that should be described.

Discussion of Brexit may be needed beyond the risk factor section of the Form 10-K. For example, Brexit disclosure might be appropriate in the business section or the MD&A. Given the impending March 2019 Brexit deadline and the uncertain and potentially changing landscape, Brexit disclosure may need to be reviewed and possibly revised to reflect new developments up to the time a company files its Form 10-K.

4. LIBOR Phase-Out Disclosure. The phase-out of the London Interbank Offered Rate (LIBOR) is another development that may have a significant effect on some companies. To the extent that the LIBOR phase-out presents a material issue for a company, the company should develop disclosure for its Form 10-K, not just as a risk factor but also for other sections of the Form 10-K, such as MD&A and business, as appropriate. For example, companies with outstanding floating rate notes based on LIBOR may need to address the events that trigger the substitution of the rate and implementation of the new rate. Although LIBOR disclosure considerations may evolve in the future as more information on the transition to alternative interest rate benchmarks becomes available, to the extent that the move away from LIBOR is a trend known to management that is expected to have a material impact on a company, disclosure is needed in the upcoming Form 10-K.

5. Technical 10-K Details. ITRA Compliance. Although there is no corresponding SEC regulation, the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA) continues to require Form 10-K disclosure if, during the period covered by the report, the company or any affiliate knowingly engaged in certain sanctionable activities, regardless of whether those actions violate US law and without any materiality threshold. Companies should evaluate ITRA compliance as part of their annual reporting process.

Hyperlinks. The SEC now generally requires the exhibits listed in the exhibit index of specified filings, including annual reports on Form 10-K, to be hyperlinked. It is worthwhile to double check the hyperlinks for exhibits that are being carried forward from the exhibit index contained in last year's annual report to confirm that each properly links to the identified document. SEC rules require that incorrect hyperlinks be fixed.

Cover Page Changes. Remember that there are two technical changes to the cover page of annual reports on Form 10-K this year. One change eliminates the instruction informing filers not to check the "Nonaccelerated filer" box if the issuer is a smaller reporting company (the amendments to the thresholds for smaller reporting company status also were recently amended and should be considered in connection with preparation of the annual report on Form 10-K3), as shown in the struck-out text below:

The second change, which relates to the SEC's adoption of the inline XBRL format for the submission of operating company financial statement information, reads as follows, with changes shown in struck-out text:

Proxy Statement Tips

6. Pay Ratio: Median Employee Determination. The pay ratio rule, which requires disclosure of the ratio of the annual total compensation of a company's median employee to that of its chief executive officer, permits a company to identify its median employee only once every three years as long as the company reasonably believes there has not been a change in its employee population or compensation arrangements that would significantly change the pay ratio disclosure. The analysis of whether a new determination of the median employee is required is a company-specific matter. For example, in some situations, a significant acquisition or divestiture may affect workforce composition or compensation arrangements, but that is not always the case.

In any event, each company needs to review its employee composition and compensation practices in order to assess whether it is required to re-identify its median employee for pay ratio disclosure. Companies should perform this process sufficiently in advance of the date on which they will be filing their proxy statements in order to allow time for the median employee's compensation and the pay ratio for 2018 to be calculated and confirmed. If a company concludes that it does not have to re-identify its median employee for its 2019 proxy statement, it will need to disclose that it is using the same median employee in its pay ratio calculation and describe briefly the reason for its belief that there have not been any changes requiring a newly determined median employee.

If the rules do not require a new determination of the median employee, but the median employee identified for the 2018 proxy statement pay ratio disclosure has left the company or has had compensation changes, the company may substitute another employee with substantially similar compensation as the median employee previously identified. In addition, the rules do not preclude a company from voluntarily conducting a new determination of its median employee, even if it is not technically required to do so. In any event, a company must disclose the date it selected to identify the median employee.

7. Hedging Disclosure. On December 18, 2018, the SEC adopted its final rule requiring disclosure of a company's policies and practices with respect to hedging of company securities by employees, officers and directors by adding new Item 407(i) to Regulation S-K.4 This rulemaking was mandated by Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Companies will not need to comply with the hedging disclosure rule during the 2019 proxy season. Most companies will not need to provide the new hedging disclosure until their proxy statements for election of directors during fiscal years beginning on or after July 1, 2019 (i.e., the 2020 proxy season). Smaller reporting companies and emerging growth companies will not need to comply with the new hedging disclosure rule until the 2021 proxy season. However, a company nevertheless may choose to include additional hedging disclosure in its 2019 proxy statement, whether or not such disclosure is fully compliant with Item 407(i). To the extent that a company has prohibited or restricted hedging, it may wish to voluntarily include disclosure in this year's proxy statement to call attention to this governance practice. The new hedging disclosure rule does not require companies to adopt or amend hedging policies. For more information on the hedging disclosure rules, see our Legal Update "SEC Adopts Dodd-Frank Hedging Disclosure Rule," dated December 27, 2018.5

8. ESG Disclosure. With growing interest in environmental, social and governance (ESG) issues among certain investors, some companies have chosen to discuss sustainability initiatives in distinct sections of their proxy statements. Enhanced ESG proxy disclosures may be well-received by institutional investors, proxy advisory firms and organizations that rate public company corporate governance. This approach may provide an opportunity for companies to control their ESG message and may provide a basis to guide shareholder engagement in this area.

Companies voluntarily adding ESG disclosure to their proxy statements should coordinate such disclosure with statements on their websites and other public statements to ensure consistency. Such disclosure needs to be carefully drafted. For example, aspirational efforts for ESG should not be presented as formal commitments by the company. Because ESG disclosure is multi-faceted, and, in some cases, quite specialized, it may make sense to involve personnel who do not otherwise assist with the proxy process in the drafting and review of the disclosure. Companies considering ESG proxy sections may need additional lead time to develop this disclosure.

9. Shareholder Engagement Disclosure. The compensation discussion and analysis (CD&A) must indicate whether—and, if so, how—the company took into account the prior year's say-on-pay vote. Because shareholder engagement on executive compensation can provide a basis for robust disclosure in response to this requirement, it is common for companies to discuss shareholder engagement in the CD&A section of their proxy statements.

Shareholder engagement, including engagement on issues other than compensation, is increasingly viewed as a positive governance measure. As a result, many companies are adding more comprehensive discussions of shareholder engagement in their proxy statements, including in sections outside of the CD&A. Such enhanced shareholder engagement disclosure may provide details, such as the scope of investors contacted and the actions taken as a result of shareholder feedback.

Expanding shareholder engagement disclosure in proxy statements gives companies the opportunity to present what they are doing to promote this significant corporate governance measure. Recognizing that some institutional investors and proxy advisory firms may judge companies based on their level of engagement with shareholders, companies may want to consider voluntarily expanding descriptions of their shareholder engagement in the proxy statement to get "credit" for what they are already doing.

10. Perquisite Disclosure. The SEC recently has focused on the adequacy of perquisite disclosure. Accordingly, it would be worthwhile for companies to confirm that they are properly disclosing and characterizing perquisites in their proxy statements. Companies should confirm that their disclosure controls and procedures are adequately identifying all perquisites being paid to their executive officers and directors. To the extent that companies include questions regarding perquisites in their director and officer questionnaires, they should be sure that complete responses have been provided to these questions.

Additional Information

For additional information about preparing annual reports and proxy statements this year, see our Legal Update "2019 Proxy and Annual Reporting Season: Let the Preparations Begin," dated September 17, 2018.6

Footnotes

1 Available at https://www.mayerbrown.com/Capital-Markets-Implications-of-Amendments-to-Simplify-and-Update-SEC-Disclosure-Rules-08-29-2018/.

2 Available at https://www.mayerbrown.com/SEC-Issues-Updated-Guidance-on-Cybersecurity-Disclosures-02-28-2018/.

3 For more information, see our Legal Update "SEC ExpandsDefinition of Smaller Reporting Company," dated July 9, 2018, available at https://www.mayerbrown.com/SECExpands-Definition-of-Smaller-Reporting-Company-07-09-2018/.

4 Available at https://www.sec.gov/rules/final/2018/33-10593.pdf.

5 Available at https://www.mayerbrown.com/sec-adoptsdodd-frank-hedging-disclosure-rule-12-27-2018/.

6 Available at https://www.mayerbrown.com/2019-Proxyand-Annual-Reporting-Season-Let-the-Preparations-Begin-09-17-2018/.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions