DISCLOSURE DRAFTING TIPS

Welcome to my disclosure drafting tips! I hope to use this page to highlight some common errors that I find as I read annual reports, proxy statements, Forms ADV (or is that Form ADVs?), and other disclosure documents. The names have been changed to protect the innocent, but I promise: every “before” that you see here is real.

If your company has any particularly gnarly disclosure paragraphs that you want me to tackle, please send them along!

Instead of citing rules and requirements, tell us what you do (and other tidbits)

Original

The Board of Directors has determined the independence (or lack thereof) of each of the directors and nominees for director and concluded that a majority of our directors – 11 of 12 (92%) – are independent, as required and determined under the rules of New York Stock Exchange, on which exchange our Common Stock is listed for trading. Specifically, the Board determined that Mr. Omicron, as an executive of the Company, is not independent, and that each of Mses. Alpha, Beta, Gamma, and Delta, and Messrs. Epsilon, Zeta, Iota, Kappa, Lamda, Sigma and Omega are independent under Section 303A.02 of the New York Stock Exchange rules.

In making these independence determinations, the Board of Directors considered (i) whether a director had, within the last three years, any of the relationships under Section 303A.02(b) with us which would disqualify a director from being considered independent, and (ii) whether the director had any disclosable transaction or relationship with us under Item 404 of Regulation S-K of the Exchange Act, which relates to transactions and relationships between directors and their affiliates, on the one hand, and us and our affiliates (including management), on the other. The Board will also consider the factors suggested in the New York Stock Exchange’s Commentary to Section 303A.02, such as commercial, consulting and other relationships, or other interactions with management that do not meet the absolute thresholds under Section 303A.02 or Item 404(a) but which, nonetheless, could reflect upon a director’s independence from management when relevant circumstances exist; no such circumstances existed in 2017 or currently exist. When considering the materiality of any transactions or relationships that do not require disqualification under Section 303A.02(b), the Board would consider (and in the past has considered) the materiality of the transaction or relationship to the director, the director’s business organization and us and whether the relationship between (i) the director’s business organization and the Company, (ii) the director and the Company and (iii) the director and his business organization interfered with the director’s business judgment.

* * * * *

The Compensation Committee must be composed of three or more directors. All members must be independent under the rules of the New York Stock Exchange and Rule 10c-1 of the Exchange Act and must qualify as “outside” directors (as defined under Section 162(m) of the Internal Revenue Code of 1986, as amended (which we refer to as the “Code”), as such section was in effect immediately prior to its amendment pursuant to the U.S. Tax Cuts and Jobs Act of 2017), and as “non-employee” directors under Rule 16b-3 under the Exchange Act. The Board has determined that all current members satisfy such requirements. The Committee is charged with discharging the Board’s responsibilities relating to the compensation of our Chief Executive Officer and all of our other “executive officers” as defined under New York Stock Exchange rules (which covers both “executive officers” and “officers” under the Exchange Act). The Committee also has overall responsibility for approving or recommending to the Board approval of, and evaluating, all of our compensation plans, policies and programs and is responsible for preparing the disclosure required by Item 407(e)(5) of Regulation S-K to be included in the proxy statement for each annual meeting of stockholders.

Original, with commentary

The Board of Directors has determined the independence (or lack thereof) of each of the directors and nominees for director and concluded that a majority of our directors – 11 of 12 (92%) – are independent, as required and determined under the rules of New York Stock Exchange, on which exchange our Common Stock is listed for trading [people either know this or they don’t care, and it’s probably already said in a more logical place in the proxy anyway]. Specifically, the Board determined that Mr. Omicron, as an executive of the Company, is not independent, and that each of Mses. Alpha, Beta, Gamma, and Delta, and Messrs. Epsilon, Zeta, Iota, Kappa, Lamda, Sigma and Omega [since this is everyone else on the Board, why not just say “everyone else”?] are [each is] independent under Section 303A.02 of the New York Stock Exchange rules.

In making these independence determinations, the Board of Directors considered [past tense] (i) whether a director had, within the last three years, any of the relationships under Section 303A.02(b) with us which would disqualify a director from being considered independent, and (ii) whether the director had any disclosable transaction or relationship with us under Item 404 of Regulation S-K of the Exchange Act, which relates to transactions and relationships between directors and their affiliates, on the one hand, and us and our affiliates (including management), on the other [If you are going to have a clause explaining a rule, then explain the rule—i.e., “which requires disclosure of transactions…” I don’t think the clause is necessary.]. The Board will also consider [future tense, meaning they didn’t do it this time?] the factors suggested in the New York Stock Exchange’s Commentary to Section 303A.02, such as commercial, consulting and other relationships, or other interactions with management that do not meet the absolute thresholds under Section 303A.02 or Item 404(a) but which, nonetheless, could reflect upon a director’s independence from management when relevant circumstances exist [this does not say anything]; no such circumstances existed in 2017 or currently exist [since we don’t know what “such circumstances” are, this isn’t helpful, but if you want to have it, it should be an independent sentence]. When considering the materiality of any transactions or relationships that do not require disqualification under Section 303A.02(b), the Board would consider [conditional tense, but what are the conditions?] (and in the past has considered) [it’s not clear why this is helpful] the materiality of the transaction or relationship to the director, the director’s business organization and us and whether the relationship between (i) the director’s business organization and the Company, (ii) the director and the Company and (iii) the director and his business organization interfered with the director’s business judgment.

[My bottom line here is that it's not necessary to teach the reader what the rule requires and what the Board needs to consider. You can just say what the Board decided. If somebody wants to understand the basis for that action, they can read the rule.]

* * * * *

The Compensation Committee must be composed of three or more directors. [This is the rule. Why not say what the company actually does?] All members must be independent [same point] under the rules of the New York Stock Exchange and Rule 10c-1 of the Exchange Act and must qualify [same point] as “outside” directors (as defined under Section 162(m) of the Internal Revenue Code of 1986, as amended [another post explains my objection to this: nobody thinks you are relying on an outdated version of the statute] (which we refer to as the “Code”) [don’t belabor your defined terms], as such section was in effect immediately prior to its amendment [this is awkward phrasing—I think because it ascribes possession to an inanimate object] pursuant to the U.S. Tax Cuts and Jobs Act of 2017), and as “non-employee” directors under Rule 16b-3 under the Exchange Act. The Board has determined that all current members satisfy such requirements. The Committee is charged with discharging the Board’s responsibilities relating to the compensation of our Chief Executive Officer and all of our other “executive officers” [this is the most important point, and shouldn't be buried in the middle of a paragraph] as defined under New York Stock Exchange rules (which covers both “executive officers” and “officers” under the Exchange Act) [this is completely ancillary to the point of the sentence]. The Committee also has overall responsibility for approving or recommending to the Board approval of, and evaluating, all of our compensation plans, policies and programs and is responsible for preparing the disclosure required by Item 407(e)(5) of Regulation S-K to be included in the proxy statement for each annual meeting of stockholders [is there a single investor who knows this refers to the (largely pro forma) Compensation Committee report that typically follows the CD&A?].

Rewritten

The Board of Directors has evaluated the independence of each of the directors and nominees for director in relation to the rules of New York Stock Exchange (NYSE). The Board determined that Mr. Omicron, as an executive of Acme, is not independent, and that each of our other current directors is independent.

Other than Mr. Omicron, no director has a material relationship with ACME, either directly or as a partner, stockholder, or officer of an organization that has a relationship with ACME, nor does any other director have a direct or indirect material interest in any transaction involving ACME.

* * * * *

The Compensation Committee discharges the Board’s responsibilities relating to the compensation of our executive officers. The Compensation Committee also has overall responsibility for evaluating and approving, or recommending to the Board approval of, all of our compensation plans, policies, and programs, and is responsible for preparing the Compensation Committee Report that appears in this Proxy Statement.

The Board has determined that all members of the Compensation Committee satisfy the independence requirements under NYSE listing standards and SEC rules. Each member also qualifies as an “outside” director, as defined under Section 162(m) of the Internal Revenue Code of 1986 (Code) (as such section was in effect immediately before it was amended pursuant to the U.S. Tax Cuts and Jobs Act of 2017), and as a “non-employee” director under SEC Rule 16b-3.