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10 January 2025

Things To Keep In Mind For Your Annual Report On Form 10-K And Proxy Statement

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Sheppard Mullin Richter & Hampton

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Sheppard Mullin is a full service Global 100 firm with over 1,000 attorneys in 16 offices located in the United States, Europe and Asia. Since 1927, companies have turned to Sheppard Mullin to handle corporate and technology matters, high stakes litigation and complex financial transactions. In the US, the firm’s clients include more than half of the Fortune 100.
This update summarizes new disclosure requirements and other things to keep in mind as you prepare your 10-K and 2025 annual meeting proxy statement.
United States Corporate/Commercial Law

This update summarizes new disclosure requirements and other things to keep in mind as you prepare your 10-K and 2025 annual meeting proxy statement.

New Disclosure Requirements
Equity Award Grant Practices

Under Reg. S-K Item 402(x), a company must provide:

  • narrative disclosure regarding its policies and practices with respect to the timing of grants of certain equity awards (stock options, stock appreciation rights and similar awards) as it relates to the release of material non-public information, including how the board determines when to grant awards and whether and how MNPI is taken into account; and
  • tabular disclosure of each such equity award granted to an NEO during the period beginning four business days before, and ending one business day after, the filing of an 8-K that discloses MNPI or a 10-Q or 10-K (the required disclosure includes the award's grant date, the number of shares subject to the award, the exercise price, the grant date fair value and percentage change in the market price of the underlying shares between one trading day before and one trading day following the disclosure of MNPI).

The disclosure is required in Part III of the 10-K (but can be incorporated therein from the proxy statement) and must be tagged in Inline XBRL.

The final rules were adopted in December 2022 and are available here.

Some companies are revisiting their equity award grant practices to determine if disclosure would be triggered by the new rules and, if so, considering timing grants to avoid such disclosure (e.g., scheduling regular grants for a day that is more than one business day after the filing of its 10-Q/10-K and scheduling all new hire grants for a preset date (e.g., on the last business day of each month)).

Insider Trading Policies Under Reg. S-K Item 408(b), a company must disclose whether it has adopted policies and procedures governing the purchase, sale and/or other dispositions of its securities by directors, officers and employees or the company itself (e.g., share buybacks) that are reasonably designed to promote compliance with insider trading laws and applicable listing standards, and if not, why not. The disclosure is required in Part III of the 10-K (but can be incorporated therein from the proxy statement) and must be tagged in Inline XBRL.

In addition, the company's insider trading policies and procedures must be filed as Exhibit 19 to its 10-K.

The final rules were adopted in December 2022 and are available here.

If it has not already, a company should consider amending its insider trading policy to reflect updates and trends related to: (i) Rule 10b5-1 and plans adopted thereunder; (ii) the treatment of gifts; and (iii) the scope of trading restrictions in the securities of other companies in light of the SEC's victory in the Panuwat "shadow trading" case.

Somewhat New Disclosure Requirements
Rule 10b5-1 Trading Plans Although not new for the upcoming 10-K, Reg. S-K Item 408(b) requires disclosure relating to the adoption, modification or termination of Rule 10b5-1 and non-Rule 10b5-1 trading plans by directors and officers during the applicable quarter (i.e., the fourth quarter for the 10-K).
Clawback Policies Although not new for the upcoming 10-K, exchange-listed companies were required to adopt clawback policies by December 1, 2023, and the policy was required to be filed as an Exhibit 97 to its 10-K. If your clawback policy has been amended since it was last filed as an exhibit, file the current version with the upcoming 10-K.
Clawback Recoveries

Under Reg. S-K Item 402(w), if, during or after the last completed fiscal year, a company had to prepare an accounting restatement that required a clawback or there was an outstanding balance of erroneously awarded compensation relating to a prior restatement, certain information must be disclosed in its proxy statement.

If an accounting restatement was prepared during the prior fiscal year but the company determined that erroneously awarded compensation did not have to be recovered, the company must disclose why this determination was reached under its clawback policy.

The disclosure is required in Part III of the 10-K (but can be incorporated therein from the proxy statement) and must be tagged in Inline XBRL.

Checkboxes on 10-K Facing Page Last year's 10-K for the first time included checkboxes on the facing page requiring the company to indicate (i) whether its financial statements reflected a correction of an error to previously issued financial statements and (ii) whether any error correction resulted in a restatement requiring a clawback analysis of incentive-based compensation received by any of the company's executive officers.
Cybersecurity Risk Management

Disclosure in Inline XBRL

Last year's 10-K for the first time required companies to disclose information regarding their cybersecurity risk management. For 10-Ks filed for fiscal years ending on or after December 15, 2024, this disclosure must be tagged in Inline XBRL.

Similarly, as of December 18, 2024, cybersecurity incident disclosures under 8-K Item 1.05 must be tagged in Inline XBRL.

Hot Topics
Artificial Intelligence

According to a February 2024 Bloomberg article, 41% of S&P 500 companies mentioned AI in their 2023 10-Ks, up from 35% in 2022 and 28% in 2021. According to the article, a majority of the disclosures focused on the risks of AI, while others focused on its benefit to the company's business.

In an April 2024 speech, Gubrir S. Grewal, the former Director of the SEC's Division of Enforcement, provided guidance on preparing for, and addressing, potential AI-related risks, and reminded companies to avoid engaging in "AI-washing" in violation of federal securities laws (e.g., statements regarding a company's use of AI that are materially false or misleading). Grewal suggested that companies focus on the three general principles of "proactive compliance" – education, engagement, and execution.

  • Companies should educate themselves about emerging and heightened AI risk areas as they relate to their businesses by reading the SEC's AI-related enforcement actions, reviewing SEC Chair Gary Gensler's speech highlighting multiple ways a firm's AI use may heighten risk or implicate the federal securities laws, and staying abreast of how potential AI-related issues are impacting companies in the real world.
  • Companies should assess whether their public statements regarding their incorporation of AI into their operations are accurate (as compared to aspirational) and assess whether AI presents a material risk to their operations.
  • Companies should consider whether their policies and procedures and internal controls should be updated due to their use of AI, and if so, that they tailor their policies and procedures to their operations and take steps to put such policies and procedures into practice, noting that putting policies and procedures into practice is where many companies fall short.

As to individual liability for a company's disclosure regarding security risks from AI, Grewal stated that the SEC will generally look at (i) what the person actually knew or should have known, (ii) what the person actually did or did not do, and (iii) how that measures up to the SEC's rules.

The State of Disclosure Review

In The State of Disclosure Review statement issued in June 2024, Erik Gerding, Director of the SEC's Division of Corporate Finance, highlighted AI as a disclosure priority, noting that an increasing number of companies mention AI in their periodic reports (in risk factors, business descriptions and MD&A). He flagged that disclosure may be warranted about how a company uses AI and the risks related thereto and about the board's role in risk oversight. Gerding noted that the SEC Staff will consider how companies are describing AI-related opportunities and risks, including, to the extent material, whether or not the company:

  • clearly defines what it means by AI and how AI could improve the company's results of operations, financial condition, and prospects;
  • provides tailored, rather than boilerplate, disclosures, commensurate with AIs materiality to the company, about material risks and the impact AI is reasonably likely to have on its business and financial results;
  • focuses on its current or proposed use of AI, rather than generic buzz not relating to its business; and
  • has a reasonable basis for its claims when discussing AI prospects.

Gerding also noted that the SEC Staff will review filings to assess compliance with recently adopted rules regarding:

  • disclosure of material cybersecurity incidents in 8-K Item 1.05;
  • disclosure of cybersecurity risk management, strategy, and governance matters in the 10-K;
  • the filing of clawback policies with the 10-K;
  • disclosure when a clawback recovery analysis is triggered;
  • pay versus performance disclosure;
  • the use of universal proxy cards in contested director elections; and
  • beneficial ownership reporting under the new, accelerated filing deadlines.
Earnings Calls and MD&A Disclosure In comment letters issued in connection with 10-K reviews in 2024, the SEC staff asked about why a particular statement a company made on an earnings call was not also disclosed in MD&A (e.g., why a strategy mentioned on an earnings call was not discussed in MD&A, and whether metrics mentioned on an earnings call should be disclosed in MD&A). In light of the above, companies should consider whether their MD&A and other disclosure in periodic reports reflects all material information that will be discussed on their earnings call.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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