Below is a high-level summary of applicable rule changes, guidance, and disclosure considerations for the 2022 reporting season for public companies.

Reminders for Preparing the Form 10-K

Amendments to MD&A and Certain Financial Disclosures. In November 2020, the U.S. Securities and Exchange Commission (SEC) adopted amendments to certain financial disclosure requirements in Regulation S-K, including the Management’s Discussion and Analysis (MD&A). These amendments became effective for annual reports on Form 10-K for fiscal years ending on or after August 9, 2021. These amendments:

• eliminate the requirement to disclose selected financial data,
• streamline the requirement to disclose supplementary quarterly financial data, and
• substantially amend Item 303 (MD&A) of Regulation S-K, to include, among other things:
  • a new Item 303(a) that sets forth the overarching objectives of MD&A,
  • an explicit and expansive disclosure requirement relating to critical accounting estimates,
  • a clarification of the two-step “known trends and uncertainties” test to determine the adequacy of their disclosures of known trends and uncertainties under the “reasonably likely” threshold,
  • elimination of the contractual obligations tabular disclosure,
  • optionality in the presentation for interim periods of material changes in results of operations (quarter comparisons), including either presentation on a quarter-over-quarter basis or on a sequential basis, and
  • the reorganization and recaptioning of the entire Item 303 and its instructions, generally, and codifying certain prior SEC guidance, including as set forth in the SEC's 1989 MD&A Interpretive Release and 2003 MD&A Interpretive Release.

For a detailed description of these amendments, please see our previous alert.

Many of the MD&A amendments codified previous SEC guidance, and if companies had previously drafted MD&A with that guidance in mind there may not be dramatic changes needed to respond to these amendments. Nevertheless, we suggest that the individuals who are drafting and reviewing MD&A for this year’s Form 10-K:

• read new Item 303(a), which sets forth the overarching objectives of MD&A, and review their entire MD&A anew with those objectives in mind,
• carefully review each amended requirement and evaluate each change against current disclosures, particularly the new requirements for critical accounting estimates,
• review carefully the SEC's clarification of the two-step test to determine the adequacy of their disclosures of known trends and uncertainties under the "reasonably likely" threshold, and
• consider whether there is material information in eliminated requirements and tables that should be conveyed in some other way now; for example, even though the contractual obligations table was eliminated, the SEC added a specific requirement to disclose material cash requirements from known contractual and other obligations in the liquidity section.

Climate Change Disclosure. The SEC has become increasingly focused on environmental, social, and governance (ESG) disclosures, particularly climate change disclosures. SEC Chair Gensler has instructed the SEC staff to prepare a proposal for climate change disclosure requirements, which is expected early in 2022. In the meantime, the SEC is issuing comment letters to individual companies with questions on climate disclosure and has released a sample comment letter with examples of the types of comments being issued. The examples include detailed and specific questions about a company’s climate-related disclosure (or absence of such disclosure). Many of the comments are focused on topics discussed in the SEC’s 2010 guidance on climate change disclosure. Companies should re-examine their materiality analysis for disclosure of climate risks, including quantitative information about such risk. For additional details related to climate change disclosures, please see our previous alert.

COVID-19 Disclosure. As the COVID-19 pandemic evolves, companies should continue to keep in mind the CF Disclosure Guidance: Topic No. 9 and CF Disclosure Guidance: Topic No. 9A published in 2020. In these guidance documents, the SEC staff encouraged companies to assess and disclose the evolving impacts of the COVID-19 pandemic. These disclosures should allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management and be revised as facts and circumstances evolve. As the second year of the pandemic comes to a close, companies should work through their COVID-19 disclosures (particularly MD&A and risk factors) to ensure disclosures adequately address new and evolving implications, such as return-to-work plans, hybrid work, labor shortages and supply issues, vaccine mandates, vaccine hesitancy, new variants, international conditions, and vaccine efficacy, among others. For additional details related to best practices for COVID-19 disclosures, please see our previous alert.

Cybersecurity and Data Privacy Disclosure. The SEC is continuing to focus on cybersecurity and data privacy disclosure. The SEC Enforcement Division’s Cyber Unit has brought a series of enforcement actions this year against companies for inadequate cybersecurity controls and disclosure, including sanctioning a company for disclosing that it “could” have a data privacy breach when it was aware that it had already experienced such a breach. The SEC’s regulatory agenda also includes proposed amendments to bolster cybersecurity controls and disclosures. As the SEC pushes for greater disclosure, companies should keep in mind SEC Interpretive Guidance on Public Company Cybersecurity Disclosures published in 2018. Companies should follow any proposed amendments and reevaluate their cybersecurity disclosures in light of recent developments.

Risk Factors. Companies should take a fresh look at risk factors. In addition to updated risks related to the ongoing COVID-19 pandemic (described above), companies should consider updates related to climate change; ESG; the transition away from LIBOR; cybersecurity and data privacy; and labor shortages and supply chain issues. For additional details about recent risk factor trends, please see the second edition of our Silicon Valley 150 Risk Factor Trends Report.

Human Capital Management. In 2021, there was significant variation in how companies approached the new human capital disclosure requirements in their annual reports on Form 10-K. Human capital disclosures discussed, among other topics, workforce composition; diversity, equity, and inclusion; compensation and benefits; recruiting and retention; health, safety and training, and corporate culture. Companies may consider benchmarking their human capital disclosure from 2021 against their peer companies to identify areas for potential enhancement. Companies may also consider any human capital management standards required or suggested by their major shareholders as set forth in their voting policies. Human capital disclosures should also be consistent with any sustainability or similar reports.

New Form 10-K Item: Holding Foreign Companies Accountable Act. In May 2021, the SEC adopted interim final rules that added a new Item 9C to Form 10-K captioned “Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.” In December 2021, the SEC adopted the interim final rules as final. While this new item does not apply to most companies, companies should remember to include the item and caption in their Form 10-K and indicate that the item is not applicable where appropriate. For additional details about Item 9C, please see our previous alert and the SEC’s Interim Final Rule.

SEC Comment Letter Trends. Based on a review of SEC comment letters for the 12 months ended June 30, 2021, the top three areas of focus: non-GAAP financial measures (in particular, relating to the effects of COVID-19); MD&A, including, results of operations, critical accounting policies and estimates, liquidity matters and business overview; and segment reporting. The volume of SEC staff comment letters was down 20 percent compared to the previous year. Companies should review these trends together with related disclosures as drafting of the Form 10-K gets underway. For additional details about SEC comment letter trends, please see SEC Reporting Update: Highlights of Trends in 2021 SEC Comment Letters by Ernst & Young.

Emerging Growth Company Transition. If a company’s status as an emerging growth company will terminate as of the end of its current fiscal year, the next year’s proxy statement will require several enhancements, including a full CD&A section. For additional details about the transition from Emerging Growth Company status, please see our previous alert.

Reminder of Electronic Signature Rules. Wilson Sonsini is proud to have drafted the petition that resulted in rules that now allow companies to execute SEC filings through electronic signatures. In order to utilize electronic signatures for SEC filings, however, signatories must manually sign an attestation agreeing that the use of an electronic signature constitutes the legal equivalent of such individual’s manual signature. Companies should include attestations as part of their onboarding process for new directors and applicable officers. If a company has not received a manually executed attestation for any new directors, companies should have one signed in advance of seeking signatures for their annual report on Form 10-K. A sample attestation can be found here. For additional details related to the use of electronic signatures for SEC filings, please see our previous alert.

Reminders for Preparing for Proxy Season

Virtual Meetings. Given ongoing COVID-19 concerns, virtual and hybrid annual meetings are likely to continue as a regular practice. Companies should start considering what format to use for their annual meetings this year. There are several important considerations for a virtual or hybrid annual meeting, including a review of applicable state law, the company's organizational documents, stock exchange requirements, proxy advisory firm and major investor voting policies, as well as other practical considerations such as logistics and Regulation FD (Fair Disclosure) concerns. Further, companies should start working with third-party service providers well in advance of filing their proxy statement to coordinate dates, services, and other logistics. For additional details about virtual and hybrid meetings, please see our previous alert.

Nasdaq Board Diversity Rule. In August 2021, the SEC approved the new board diversity rule for companies listed on the Nasdaq Stock Market (Nasdaq). This rule is designed to encourage greater board diversity and to require board diversity disclosures for Nasdaq-listed companies.

• Under Nasdaq Rule 5606, Nasdaq-listed companies are required to annually disclose aggregated statistical information about the board’s self-identified gender and racial characteristics and LGBTQ+ status in a standardized board diversity matrix. All Nasdaq-listed companies must comply with the board diversity matrix disclosure rule by the later of (1) August 8, 2022, or (2) the date that the company files its proxy statement for its 2022 annual meeting of shareholders (or, if the company does not file a proxy statement, in its annual report on Form 10-K or 20-F). If a company files its 2022 proxy statement (or its annual report on Form 10-K or 20-F) before August 8, 2022, and does not include the matrix, the company will have until August 8, 2022, to disclose its matrix either (1) on the company’s website or (2) in an amended annual report (such as on Form 10-K or 20-F).
• Subject to a transition period, Nasdaq-listed companies must either include on their board of directors, or publicly disclose why their board does not include, at least two diverse directors (the Diversity Objective). All Nasdaq companies are expected to have a diverse director by August 6, 2023, but companies will have additional time (based on their listing tier) to add the second diverse director.

Nasdaq-listed companies should add questions to their D&O questionnaires to elicit responses regarding the self-identified diversity characteristics required by Rule 5606 (as well as by other diversity requirements, such as California’s board diversity laws discussed below). Companies may also want to consider including questions about other diversity characteristics, such as a director’s military service, disability status, language, and/or culture. For additional details, please see Nasdaq’s Guidance on the new Board Diversity Rules, including examples of acceptable Diversity Matrix formats.

California Board Diversity Rules. Public companies with principal executive offices in California (regardless of their jurisdiction of incorporation), as disclosed on their Form 10-K, must have at least two female directors (if there are five or fewer directors) or three female directors (if there are six or more directors) by December 31, 2021. Last year, California expanded its board diversity mandate to require that these companies also have at least one director from an underrepresented community (as defined in the rules) no later than December 31, 2021. In 2022, these companies must have at least two directors from underrepresented communities (if they have more than four directors but less than nine directors) and three directors from underrepresented communities (if they have nine or more directors). As a reminder, companies should report their compliance with these diversity mandates for the current year by completing and filing a Corporate Disclosure Statement (Form SI-PT) with the California Secretary of State no later than December 31.¹ Please note: the only way to report compliance with the diversity mandates in a particular year is by filing a form SI-PT during that particular year. Companies that do not comply with these board diversity mandates are potentially subject to fines ranging from $100,000 for a first violation or a failure to timely file the required information with the California Secretary of State, to $300,000 for second or subsequent violations. However, it remains unclear whether the California Secretary of State has the authority to actually collect or enforce these fines, and a senior official from that office recently testified in a lawsuit challenging the “women on boards” law that penalties are not being imposed and there are no plans to do so. For additional details, please see our previous alert.

ESG. Many institutional investors view ESG and sustainability disclosures as a way to gain insight into a board’s approach to long-term value creation and risk management. These investors have been increasingly vocal about their expectations for transparency and reporting on these issues. In our forthcoming 2021 Silicon Valley 150 Corporate Governance Report, we expect to report a dramatic increase in SV150 companies proving ESG disclosure in their proxy statements, as well as on separate company websites and in separate ESG or sustainability reports. Companies should understand their shareholders’ voting guidelines and proxy advisory firm policies on key areas of focus, such as climate change, human capital management, and board diversity. Companies should engage with shareholders early in their reporting season to understand their priorities. In addition, companies should assess consistency across their disclosures and consider disclosure enhancements regarding any actions already being taken.

Compensation Issues.

• Proposed Clawback Rule. In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), in 2015, the SEC proposed a new rule directing national security exchanges and associations to establish listing standards requiring companies to adopt, disclose, and comply with a compensation clawback policy that require current and former executive officers to pay back incentive-based compensation that was awarded erroneously. As proposed, recovery would have been required without regard to fault and would equal the amount of incentive-based compensation that was paid in error based on an accounting restatement. However, the proposed rule was never adopted by the SEC. On October 14, 2021, the SEC announced that it was reopening the comment period for its previously proposed clawback rule. The SEC is currently expected to announce the final rule in spring 2022. Given renewed interest in the clawback rule, companies should consider how the proposed rule might impact its incentive compensation program and reevaluate any existing clawback policies or provisions. For additional details on the proposed clawback rule, please see the 2015 SEC Announcement and 2021 SEC Announcement.
• “Spring Loaded” Compensation Awards. In November 2021, the SEC issued new guidance about measuring the cost of spring-loaded compensation awards. Spring-loaded compensation wards are share-based compensation arrangements where a company grants stock options or other awards shortly before it announces market-moving information such as the disclosure of a significant transaction. In the Staff Accounting Bulletin (SAB) No. 120, the SEC staff advised companies to fully consider the impact that material non-public information could have on the value of spring-loaded awards when measuring the related cost. Companies should carefully review the SEC’s latest guidance before issuing any spring-loaded awards.

Shareholder Engagement. Investor expectations around shareholder engagement continue to grow. A robust and thoughtful shareholder engagement program—that solicits investor feedback and provides an opportunity to for the company to tell its story—is now table stakes for every public company.

• Most large institutional investors and global asset managers have internal investment stewardship and governance groups that actively engage with portfolio companies on matters relating to corporate governance, including ESG, board composition and effectiveness, risk management and oversight, executive compensation, and increasingly, human capital issues.
• It is incumbent on companies to understand the voting policies of their largest investors to avoid surprises. These policies are publicly discussed and typically updated yearly in advance of proxy season.
• Boards and management teams should review shareholder engagement efforts from 2021, with a particular focus on responding to feedback from shareholders related to corporate governance and executive compensation practices, as well as any feedback received from proxy advisory firms.

Shareholder Proposals. The amendments to Rule 14a-8 promulgated under the Securities Exchange Act of 1934 are currently effective. Most significantly, these amendments provide for a tiered approach to ownership requirements, with a shareholder being eligible to submit a proposal if the shareholder continuously held at least: (1) $2,000 of the company's voting securities for at least three years; (2) $15,000 of the company's voting securities for at least two years; or (3) $25,000 of the company's voting securities for at least one year. Given the rule changes, companies should scrutinize any proposals to ensure that they meet all procedural requirements, and promptly notify proponents if they do not. For additional details on the amended rules, please see our previous alert.

Universal Proxy. On November 17, 2021, the SEC adopted rules that will require the use of a single "universal" proxy card in connection with most contested elections of directors. The new rules will become effective on August 31, 2022. In preparation, companies should review their advance notice bylaws (and corporate profile more generally) to ensure that they are state-of-the-art and provide the expected level of protection and information. Further, companies should review their shareholder outreach programs with an eye toward the benefits of proactive communication with shareholders outside of the proxy season. For additional details related to new universal proxy rules, please see our previous alert.

NYSE Related Party Transaction Rules. In April 2021, the New York Stock Exchange (NYSE) amended Section 314.00 of its Listed Company Manual to require that the audit committee or another independent body of the board of directors conduct a reasonable prior review and oversight of all related party transactions. Under the amended Section 314.00, the term “related party transactions” was defined as transactions required to be disclosed pursuant to Item 404 of Regulation S-K, but “without applying the transaction threshold of that provision.” However, in August 2021, NYSE further amended Section 314.00 to provide that the review and approval requirement of the rule is only applicable to transactions that are required to be disclosed after taking into account the transaction thresholds set forth in Item 404 of Regulation S-K. NYSE-listed companies should ensure that their approval process for such transactions satisfies the new requirements under the amended Section 314.00. If any changes are necessary, companies should remember to update their proxy statements with any new approval procedures.

NYSE Amendment to “Votes Cast.” Under Section 312.07 of the NYSE Listed Company Manual, the minimum vote which constitutes shareholder approval was previously defined as approval by a majority of votes cast on a proposal in a proxy. Abstentions were historically treated as votes cast and therefore counted as votes "against" a proposal requiring shareholder approval, regardless of state law. Due to inconsistencies between the NYSE listing rules and state law, this policy created confusion for companies and their shareholders. In November 2021, NYSE amended this rule to provide that a company must calculate the votes cast in accordance with its governing documents and any applicable state law. Under Delaware law, abstentions are not considered “votes cast,” but companies may elect to alter voting standards in their governing documents. For additional details about this amendment, please see Section 312.07 of the NYSE Listed Company Manual.

Director Overboarding. Investors and proxy advisory firms continue to be concerned about the number of public company boards on which directors serve, often referred to as director overboarding. Both ISS and Glass Lewis have director overboarding policies and many large investors have implemented their own voting policies regarding overboarded directors. Companies should review their corporate governance guidelines against any overboarding policies that have been adopted by significant shareholders. A sampling of some of these policies is set forth below. The numbers in the table below correlate to the maximum number of boards on which the individual may serve before risking being considered overboarded.

Companies should review outside board service for each director as part of the nomination process. Board members serving on more than four or five public company boards (or more than two public company boards in the case of CEOs and executive officers) should be cautioned that they may receive lower shareholder support than the other nominees standing for election.

ISS/Glass Lewis Policy Changes.

• Gender Diversity Policies. Board composition and diversity continues to be a hot topic in corporate governance. In particular, proxy advisory firms have expanded their voting policies on board gender diversity. Currently, ISS will generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies in the Russell 3000 or S&P 1500 indices with no female directors on the company's board. Beginning with meetings on or after February 1, 2023, ISS will start applying its gender diversity policy to most public companies not just those the Russell 3000 and S&P 1500 indices. Similarly, effective January 1, 2022, Glass Lewis will generally recommend voting against the nominating committee chair of a board with fewer than two female directors (if there are more than six directors) and one female director (if there are six or fewer directors).
• Multi-Class Voting Policies. Proxy advisory are expanding their policies against multi-class capital structures with unequal voting rights. Previously, ISS implemented a voting policy on unequal voting rights applicable only to newly-public companies that adopted multi-class capital structures without a sunset mechanism. Starting on February 1, 2023, ISS will generally vote against or withhold from directors at all public companies with multi-class capital structures. Exceptions to this policy are limited to newly public companies with a reasonable sunset mechanism of no more than seven years from the date of going public. Likewise, Glass Lewis has also updated its approach to companies that have multi-class share structures with unequal voting rights. Beginning in 2022, Glass Lewis will recommend voting against the chair of the governance committee at companies with a multi-class share structure and unequal voting rights when the company does not provide for a reasonable sunset mechanism (generally seven years or less).

Companies should monitor proxy advisory firm and key institutional investor policy changes on these topics. For additional details, please see the ISS Proxy Voting Guidelines Updates for 2022 and Glass Lewis 2022 Policy Guidelines.

[1] Form SI-PT is technically due within 150 days of a company’s fiscal year end. If, however, a company has not yet filed the form during 2021, or if in the previously filed form did not report compliance with the diversity mandates, the company should file a new or updated form, as appropriate, before December 31, 2021.