Goodwin Insights January 18, 2022

Q+A With Goodwin’s Sean Donahue, Chair of Public Company Advisory Practice

Goodwin serves as outside counsel to more than 500 public companies across a variety of industries, of all different sizes, and listed on both U.S. and non-U.S. exchanges. Integrating with experts from Goodwin’s M&A/Corporate Governance, ERISA & Executive Compensation, Securities Litigation and Tax Practices, lawyers in the firm’s Public Company Advisory Practice provide full-service representation to help clients develop and achieve their business strategies. The practice and its lawyers have been recognized by Bloomberg, Chambers and Legal 500 as leaders in the field.

Our client relations team recently sat down with the practice’s chair, former SEC attorney Sean Donahue, to discuss the latest legal trends involving public companies and what our clients need to know.

SEC Commissioner Gensler has been in office for about nine months now. What have we seen so far and what can we expect going forward?

What we’ve seen so far is that there will likely be increased levels of disclosure requirements placed on public companies, especially with respect to cybersecurity, climate change, human capital and board diversity. There are also a couple Dodd-Frank rulemakings on compensation clawback and pay for performance that have been stuck in the proposal stages for five or six years now. Commissioner Gensler has reopened the comment period on clawbacks, and has indicated he'd like to get pay for performance done as well, so I think we’ll see these old Dodd-Frank rulemakings finalized. He has gotten universal proxy done, which will affect proxy contests because it will allow activist shareholders to include their nominees on the company's proxy card and vice versa. In addition, we may see some sort of reform of Schedule 13D reporting.

You’ve recently written about ESG (Environmental, Social and Governance) considerations for public companies. Can you talk about these issues and why board members should be aware of the corporate disclosure requirements around ESG?

Investors are focused on ESG, so first and foremost public companies need to ask, What is our overall ESG strategy and what is our strategy for messaging to investors on ESG issues? A lot of companies have some version of an ESG or corporate social responsibility report on their website. Even though these are not SEC filings, they are subject to potential liability under Rule 10b-5 of the Exchange Act, so it’s important to make sure those reports don't have any statements that could be problematic and also include appropriate disclaimers. It’s a tricky balance; companies need to get their message out and tell their story, but they also need to understand that what they say about ESG, especially in SEC filings, creates potential liability risk. Companies need to have good disclosure controls and procedures, and also avoid making statements that could eventually result in potential liability.

What other areas should public companies be focused on?

Board diversity continues to be an important area. The Nasdaq board diversity rule came out in August. There have been board diversity rules in California and institutional investor policies on board diversity. In addition, ISS and Glass Lewis have policies and issue voting recommendations based on the level of board diversity. Cybersecurity continues to be a focus for public companies, whether it's cyber-risk governance at the board level or developing policies for dealing with a cyber or ransomware attack. We also have a lot of clients contemplating becoming public companies and they should work with counsel to make sure they can answer the following questions: What should your post-IPO board look like from a skill-set standpoint? How should you consider diversity? Do you have the right disclosure controls and procedures in place with respect to cyber disclosures? ESG disclosures? What is your plan for ESG as you become a publicly traded company? Are you going to put out a report? These are all conversations happening in the pre-IPO planning phase or during the IPO so companies should be ready to talk about these issues as they prepare for life as an SEC reporting company.

Public companies have significant reporting requirements compared to their private counterparts. Do you see these requirements increasing or decreasing over time?

For several years the Staff of the SEC’s Division of Corporation Finance has worked with the Commission to streamline a lot of the disclosure requirements in the federal securities laws and in Regulation S-K. It's arguable, though, how much those have really been streamlined, even with modernization-type releases that have come out. With the current Commission, I don't see any disclosure requirements going away and I see half a dozen potential new disclosure requirements for public companies. With these additional disclosures, you have to ask what that really means from a cost perspective for public companies. The SEC has three missions: market integrity, capital formation and investor protection. What often happens with surges in capital markets, which we have right now, is that regulatory agencies react with increased regulation. When looking at the public company landscape, we should be mindful of the fact that at one time there were over 8,000 public companies in the U.S., that such number went down to approximately 3,600, and that the number of public companies is now back on the rise. During these market surges, the Commission needs to make sure it is protecting investors, while at the same time continuing to facilitate capital formation.

Your practice spends a lot of time developing internal awareness on the issues facing public companies. Why is it important that lawyers in other Goodwin practice areas know about these issues?

Goodwin focuses on five main industries, and it's important to share information about SEC developments and corporate governance trends across each of our industry groups. Our practice monitors and shares information about SEC regulations with our internal stakeholders. We also interface directly with clients on cutting-edge corporate governance and security regulatory matters. Our purpose is to serve as a central resource for both Goodwin clients and Goodwin lawyers in dealing with the complex issues that arise under the federal securities laws and corporate governance regimes. We analyze and write extensively on SEC developments and regulatory issues, sharing information both through external client alerts and internal bulletins. Our goal is to be a center of excellence for securities regulatory matters, SEC reporting and compliance, capital market transactions and corporate governance.