Public Company Update 2021

January 28, 2021 Deloitte & Touche LLP Public Company Update 2021

Joseph DiLeo, Managing Director, Deloitte & Touche LLP Joseph Kick, Managing Director, Deloitte & Touche LLP

January 28, 2021 Agenda

2020 AICPA Conference Highlights

Accounting and financial reporting

SEC update

Audit update

SEC Hot Topics

Non-GAAP measures and metrics

Comment letter trends

Question and Answer

SEC reporting Critical audit matters and matters (CAMs) rulemaking

Environment al, social, and governance Overall themes: SPACs (ESG) matters COVID-19, transparency, cooperation, and Complex Auditor communication. accounting independence matters

Reference rate Diversity, equity reform and inclusion (DEI)

Accounting and financial reporting update

ASC 606 Disclosures • Performance obligations. • Timing of revenue recognition. • Judgments around principal-versus-agent guidance. Disclosures that are Incentive Programs and Negative Revenue tailored to a company’s • Qualitative and quantitative information in MD&A. • Applies broadly to other transactions that impact the circumstances provides income statement. valuable information to users of the financial Segment Reporting • Entity-wide disclosures need to align with GAAP statements. financial statements. • Comment on multiple measures of segment profit or loss.

See Deloitte’s A Roadmap to SEC Comment Letter Considerations, Including Industry Insights for more information about our observations related to comment letters issued by the SEC staff.

Challenges to financial reporting across industries include:

• Contract modifications • Financing transactions –Revenue from contracts with customers • TDRs and debt extinguishments Preparers –Leases • Hedges of forecasted transactions –Compensation arrangements

The Office of the Chief Accountant responded to stakeholder concerns through the following: • Issuance of public statements Regulators • Responding to questions from stakeholders • Coordination with the FASB

The FASB responded to challenges faced by preparers by issuing the following: Standard-setters • FASB Staff Q&As • Technical Inquiries • Educational materials • Deferrals of adoption dates where needed

SEC update

• Refer to Division of Corporation Finance Disclosure Guidance Topic 9 and 9A. • Continue to update disclosures rather than rolling them forward from the prior quarter. • SEC staff will comment on: −Boilerplate disclosures, and −A focus on only short-term disclosures without consideration of the long- term impact. • Consider whether information provided on earnings calls should be included in MD&A.

Certain recent final rules issued by the SEC: • Financial Disclosures About Acquired and Disposed Businesses. • Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities. • Modernization of Regulation S-K Items 101, 103, and 105. • Modernization of Management’s Discussion and Analysis (Item 303), Selected Financial Data (Item 301), and Supplementary Financial Information (Item 302). −Effective 30 days after publication in Federal Register. −Early application is permitted on an item-by-Item basis after the effective date only if all aspects of that Item (e.g., Item 303) are adopted. −Must be applied for fiscal years ending more than 210 days after publication in Federal Register.

Final rule—effective November 9, 2020

Business Legal proceedings Risk factors

• Principles-based approach • Explicitly permit reference to other • Require summary if risk factors • Adds human capital disclosures as a parts of the filing exceed 15 pages potential topic (e.g., financial statements) • Require risk factors to be organized • Expand regulatory compliance • Increase disclosure threshold for under relevant headings with generally discussion from environmental to all environmental proceedings applicable risk factors listed at the end government regulation

Human capital

New requirement Things to consider Making the disclosure

• Required inclusion of certain human • Using a financial materiality lens, • Recognized ESG standards contain capital disclosures: consider: metrics and related disclosures for consistent and comparable reporting Description of the registrant’s – Human capital disclosures in the human capital resources company’s current ESG report • Subject the disclosures to appropriate internal controls and procedures – Results of the company’s most recent Any human capital measures materiality assessment or objectives that the registrant focuses on in managing the business – Measures for which the company has set goals … to the extent material to an understanding of the registrant’s business – Measures used in internal reporting taken as a whole.

Highlights: • Significant increase in the amount of proceeds raised in SPAC IPOs in recent months as well as the increased attention in such transactions from various market participants. • Review process for a SPAC transaction is consistent with the review process for a traditional IPO. • New Compliance and Disclosure Interpretation (CD&I) guidance issued on September 21, 2020 related to Form S-3 eligibility requirements. • Financial Reporting Manual (FRM) updated to clarify that the private operating company financial statements included in a SPAC’s merger proxy or registration statement must be audited in accordance with PCAOB standards.

Audit update

A CAM is any matter arising from the audit of the current period’s financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financ ial statements and (2) involved espec ially c hallenging, subjec tive, or c omplex auditor judgment.

CAMs by Topic (Filers with 2020 FYEs) Information based on 317 Form 10-K, 20-F and 40-F filings as of 10/31/2020

Other, 20% Goodwill and/or intangible assets, 21%

Sales return and allowances, 3%

Long-lived assets, 3%

Policy changes, 5% Revenue, 15%

Inventory, 6%

Other contingent liabilities, 7% Taxes, 11% Business combinations, 9%

Internal control over financial reporting update

SEC requirement Key reminders • Securities Exchange Act of 1934 Rules 13a-15(d) and • Maintain robust internal controls 15d-15(d) • Identify new controls to mitigate new • Regulation S-K, Item 308(c) risks • Evaluate changes in existing processes Deloitte resources and controls • Accounting, Disclosure, and Internal Control • Assess whether ICFR changes are Considerations Related to Coronavirus Disease 2019 material and disclosure is necessary • Reacting to COVID-19 in Internal Control over Financial Reporting • Document evaluation and assessment

Non-GAAP measures and metrics

Impact of COVID-19: • Be mindful of the SEC non-GAAP rules and related interpretations. • Adjustments for the impact of COVID-19 should be: −Directly attributable to COVID-19 or the associated economic downturn. −Incremental to normal operations. −Objectively quantifiable, as opposed to an estimated or hypothetical amount. Adjustments to revenue: • The Staff would likely object to non-GAAP measures that: −Adjust GAAP revenue to add back sales discounts, return allowances, or concessions. −Are called “net revenue” and subtract certain costs of sales from GAAP revenue. Consider the 2020 interpretive release on metrics in MD&A: −Clearly define metrics that are used and how they are calculated. −Disclose why they are useful to investors. −Describe how management uses the measure in operating the company’s business. Tailored accounting principles −Should not unnecessarily tailor a GAAP measure to conveniently fit your story.

• FRA 20-4 COVID-19 and Non-GAAP measures • Reflecting COVID-19 impacts (potential COVID-19 adjustments) in non-GAAP measures • Important disclosures associated with non-GAAP measures • Alternatives to non-GAAP measures

• Impairment of long-lived assets • Significant accounts receivable (A/R) • Contract termination costs (e.g., lease reserves breakage costs) • Expected credit losses • Facility or location shutdown costs • Unprecedented markdowns • Temporary cleaning costs • Depreciation of idled facilities • Employee termination or other • Furloughed employees and other related restructuring costs payments to idle employees • Temporary compensation for risk assumed by employees • Estimated lost revenue or profit • Government grants or insurance recoveries • Non-temporary increases or decreases to salary • Excess overhead

Comment letter trends

Reviews with comment letters

1,231 1,212 • Improving trends driven by: 916 617 − Access to Edgar 500 − More frequent reviews − Anticipation of a review − Effective communication of the SEC’s expectations 2016 2017 2018 2019 2020*

Average number of topics per review Average number of comment letters 3.2 1.4 1.4 1.4 2.7 2.4 2.1 2.2 1.3 1.3

2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 *2020 information will increase as additional reviews are made public. Historically the reviews with comment letters increase 16% as reviews are made public after the cutoff date for the statistics included above.

Non-GAAP measures Fair value MD&A ICFR Revenue recognition Segment reporting Signatures, exhibits, and agreements Contingencies Intangible assets and goodwill Inventory and cost of sales

Liquidity Impairment

Results of operations

Consistency with earnings releases/calls Non-GAAP

Which SEC comment trends are new to the 2020 “Top 10” list?

• State-sponsored terrorism and income taxes • Contingencies and inventory • MD&A and revenue • No changes - top 10 list is the same

Joe DiLeo Joe Kick • Managing Director • Managing Director • Deloitte & Touche LLP • Deloitte & Touche LLP • [email protected] • [email protected] • Office +1.203.761.3195 • Office +1.716.843.7275 • Cell +1.636.734.7453 • Cell +1.716.574.2415

Copyright © 2021 Deloitte Development LLC. All rights reserved. 26 This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

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C opyright © 2 021 D eloitte D evelopment L LC. A ll rights reserved. 2021 Corporate Governance and Disclosure Update

Craig Fischer January 28, 2021 Amendments to Regulation S-K Disclosure Requirements

. Amendments adopted as part of the SEC’s Disclosure Effectiveness Initiative in August 2020, became effective on Nov. 9, 2020 . Amendments reflect the SEC’s “principles-based” disclosure focus and approach . Item 101(a) – General Development of the Business – Amendments transition disclosure to a more flexible, principles-based disclosure requiring disclosure of information material to an understanding of the development of the company’s business . Provides a non-exclusive list of four topics to disclose if material - (1) material changes to business strategy, (2) nature and effects of any material bankruptcy proceeding, (3) the effects of any material merger and (4) the acquisition or disposition of a material amount of assets . In lieu of providing full general description in 10-K, permits disclosure that focuses on any material developments since the most recent report including the full discussion. If this approach is taken, company will be required to incorporate by reference the earlier disclosure into the updated filing by including one active hyperlink to the prior disclosure . Item 101(c) – Description of the Business – Amendments shift to a more principles-based approach by providing a non-exclusive list of potential disclosure topics . Retains six existing disclosure topics with some changes: (1) principal products produced and services rendered, and dependence on certain customers, (2) new products and competitive conditions, (3) sources and availability of raw materials and the duration and effect of specified intellectual property, (4) business subject to renegotiation or termination of government contracts, (5) seasonality of the business and (6) the number of persons employed . Adds a category for a description of a company’s human capital resources, including any human capital measures or objectives that a company focuses on in managing the business . SEC expects to see “meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs” . FW Cook Report, Nov. 2020 – Looked at 50 Form 10-Ks for companies with a $1b or greater market capitalization. Found significant differences in approach to human capital disclosure thus far . Length of disclosure – Minimum of 9 words, Maximum of 1,500 words, Median of 369 words . Topics covered most often – (i) Extensive headcount data, (ii) Diversity and inclusion, (iii) Employee development and training, (iv) Competitive pay and benefits, (v) Safety, (vi) Employee Benefits, (vii) Culture and values, (viii) Employee engagement, (ix) Recruitment . Also requires, if material, disclosure of the material effects that compliance with government regulations, including environmental regulations, may have upon the capital expenditures, earnings and competitive position of the company. Previously just focused on environmental regulations Amendments to Regulation S-K Disclosure Requirements - Continued

. Item 103 – Legal Proceedings . Instructions expressly allow a company to hyperlink or cross reference to legal proceedings disclosure that is located elsewhere in the filing

. For environmental proceedings disclosure, increases threshold from $100k to $300k. Also permits a company to establish its own materiality threshold not to exceed the lesser or $1m or 1% of current assets . If an alternative threshold is established, company must disclose that threshold in each of its Form 10-K and Form 10-Q filings

. Item 105 – Risk Factors . Changes disclosure standard from “most significant risks” to “material” factors that make an investment in the company risky . Amended rules requires a summary of principal risk factors if the risk factor section exceeds 15 pages . If required, the summary must appear at the beginning of the risk factor section, cannot exceed two pages in length and must take the form of a series of concise, bulleted or numbered statements

. Requires companies to organize their risk factors under relevant subheadings . If a company discloses any “generic” risk factors that could apply to any company, they must appear at the end of the section under the heading “General Risk Factors” . Amendments do not require a company to rank or prioritize their risk factors, though many companies already do this

. Risk Factor Update Focus – (i) COVID-19, (ii) cybersecurity, (iii) LIBOR, (iv) Brexit and (v) IP and Technology Risks (see CF Disclosure Topic No. 8 from Dec. 2019)

. Form 10-K Cover Page Change – Add checkbox to indicate whether an internal control over financial reporting auditor attestation is included in the filing . Inline XBRL – Inline XBRL requirement goes into effect for all other filers (other than LAFs and AFs) for fiscal periods ending after June 15, 2021 Amendments to MD&A and Other Financial Disclosure Requirements

. Amendments adopted by SEC in Nov. 2020 with an effective date of Feb. 10, 2021 . Amendments have a mandatory compliance date of Aug. 9, 2021, but allow for early voluntary compliance, on a Reg S-K item-by-item basis, in any filings made on or after Feb. 10, 2021 . On Jan. 20, 2021, Biden Administration instituted a regulatory freeze, including a request for agencies to consider postponing for 60 days the effective date for any issued rules that are not yet effective. As an independent agency, it appears that the SEC may voluntarily decide to follow this regulatory freeze, which would likely also require an SEC vote . Item 301 – Selected Financial Data – Amendments eliminate the requirement to provide the 5-year selected financial data table . Even though requirement eliminated, adopting release encouraged companies to “consider whether trend information for periods earlier than those presented in the financial statements may be necessary as part of MD&A’s objective to ‘provide material information relevant to an assessment of the financial condition and results of operations.’” . Item 302 – Supplementary Financial Data – Eliminates requirement to provide 2 yrs of tabular selected quarter financial statements, except if there are retrospective changes to the statement of comprehensive income during any of the quarters within the 2-yr period that are material . If provided, must also explain reasons for the material changes . Item 303 – Management’s Discussion and Analysis . New Item 303(a) – A new paragraph that sets forth the principles-based disclosure objectives for the MD&A, including that the disclosure is “expected to better allow investors to view the registrant from management’s perspective.” Disclosure should include the following: . material information relevant to an assessment of the financial condition and results of operations of the company, including an evaluation of the amounts and certainty of cash flows from operations and from outside sources; . the material financial and statistical data that the company believes will enhance a reader’s understanding of the company’s financial condition, cash flows and other changes in financial condition, and results of operations; and . material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition Amendments to MD&A and Other Financial Disclosure Requirements – Continued

. Item 303(b) – Discussion of Full Fiscal Year Results (Previously Item 303(a)) . Overall goal of providing investors with a more analytical discussion, rather than mechanical comparisons, to understand the reasons behind the material changes in quantitative and qualitative terms . Discussion to include material changes that occurred, including material changes within a line item that offset one another . If material to understand business, discussion to including segment information, geographic areas or product lines . Item 303(b)(1) – Liquidity and Capital Resources . Revisions represent a significant overhaul that is meant to clarify and modernize the disclosure requirements . Amendments require companies to disclose the company’s material cash requirements for known contractual and other obligations, including commitments for capital expenditures, instead of focusing only on disclosure of material commitments for capital expenditures. Also requires discussion of the types of obligations, relevant time periods for the cash requirements and sources of funds . Discussion of liquidity on a short-term and long-term basis . Previous Item 303(a)(5) – Tabular Disclosure of Contractual Obligations – Requirement to provide table of known contractual obligations eliminated, portions of prior requirement now included as part of Item 303(b)(1) discussion . Item 303(b)(2)(ii) – Known Trends Disclosure – Changes disclosure standard from “will cause” to “reasonably likely to cause,” which is to be determined based upon management’s assessment of whether a known trend is reasonably likely to come to fruition . Off-Balance Sheet Arrangements– Amendments eliminate the requirement for disclosure under a separately captioned section. Replaced with a principles-based instruction requiring a discussion of off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on a company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources . New Item 303(b)(3) – Critical Accounting Estimates – New section that explicitly requires discussion of critical accounting estimates (not just critical accounting policies), including changes in estimates and the sensitivity of the reported amounts to the underlying estimates . Critical Accounting Estimates is defined as estimates made in accordance with GAAP “that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.” COVID-19 Related SEC Staff Guidance

. Reminder that the SEC issued a significant amount of guidance related to COVID- 19 and disclosures during 2020 . CF Disclosure Topic No. 9 – March 2020 . Joint Statement on Earnings Releases – April 2020 . CF Disclosure Topic No. 9A – June 2020 . SEC Chief Accountant Statements – April and June 2020 . Emphasis from SEC Staff on: . Assessing and disclosing the evolving impact of COVID-19 on a company’s business, including forward-looking disclosures if possible; . Financing activities, including transparent disclosure regarding liquidity and funding risks; . Impact on supply chain and distribution systems; and . Other operational adjustments in response to COVID-19 SEC Guidance on Use of Key Performance Indicators

. SEC issued additional guidance on disclosure of KPIs in Feb. 2020 . A KPI is a quantitative (financial or non-financial) measure used to demonstrate performance of a business or operational objective . Examples include: active customers, monthly active users, same store sales, total subscribers, and total impressions . Pursuant to guidance, SEC expects to see the following when a KPI is used: . A clear definition of the metric and how it is calculated; . A statement indicating the reasons why the metric provides useful information to investors; and . A statement indicating how management uses the metric in managing or monitoring the performance of the business. . In addition, if presenting a KPI, a company should consider what additional information may be necessary to provide adequate context for an investor to understand the presented metric . If the method of calculation for a KPI is changed, SEC expects: . Disclosure regarding the differences in the way that the metric is calculated as compared to prior periods; . Reasons for the change; and . If material, recasting prior metrics to conform to the current presentation and placing the current disclosure in an appropriate context . Shortly after guidance issued, SEC settled an enforcement action against Diageo related to material inflation of KPIs Proposed Nasdaq Board Diversity Rules

. In Dec. 2020, Nasdaq filed a proposal with SEC to amend its listing standard to encourage greater board diversity and enhanced diversity disclosures for Nasdaq-listed companies . Nasdaq’s proposal received significant positive public support. In Jan. 2021, SEC extended review period until March 11, 2021 . Appointment of Diverse Directors . Proposed Rule uses a “Comply or Explain” approach . Listing rule would require Nasdaq-listed companies to have at least two members of the board who are diverse or to explain why they do not have two members who are diverse - including at least one who self-identifies as Female, and at least one who self-identifies as (i) Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities or (ii) LGBTQ+ . Foreign issuers and smaller reporting companies permitted to satisfy the diversity objectives with two directors who self-identify as Female . If diversity requirement is not met, company must explain the reasons why it does not have two diverse directors in its proxy statement or on its website. In terms of the substance of the disclosure, Nasdaq stated that it "would not assess the substance of the company's explanation, but would verify that the company has provided one." . Compliance phase-in period based upon Nasdaq listing tier . Nasdaq Global and Nasdaq Global Select Markets - at least one diverse director no later than two calendar years after the approval date, and at least two diverse directors no later than four calendar years after the approval date . Nasdaq Capital Market - at least one diverse director no later than two calendar years after the approval date, and at least two diverse directors no later than five calendar years after the approval date . Board Diversity Matrix Disclosure Requirement . Companies would be required to disclose board diversity annually, using a standard form board diversity matrix . Matrix would not include specific names of directors, rather would include the total number of directors and number of directors who self-identify based on certain characteristics - 1) gender identity (male, female, or non-binary), 2) race and ethnicity (Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities), and 3) LGBTQ+ . Board diversity matrix to be published in a company’s annual meeting proxy statement or on its website . For first year, companies will be required to disclose diversity statistics for current year only; after the first year, companies will be required to disclose diversity statistics for current year and the immediately preceding year . Disclosure requirement will become operative 1 year after the approval date ISS and Glass Lewis Key Policy Updates for 2021

. Key ISS Policy Updates - In Nov. 2020, ISS issued its 2021 Benchmark Polices Updates for 2021 Annual Meetings . Racial and Ethnic Board Diversity – Starting in 2022, ISS will recommend voting against or withholds for the nominating committee chair (and other relevant directors on a case-by-case basis) at any Russell 3000 or S&P 1500 company where there is no apparent racial and/or ethnic board diversity . Policy provides an exception if a company loses its racial/ethnic board diversity since its last annual meeting and has made a firm commitment to restore within a year . 2021 will be a transition period, but ISS will highlight in reports companies that lack racial or ethnic diversity . Policy does not specifically define what qualifies as racial or ethnic diversity for purposes of ISS’ review . Reminder – ISS’ gender diversity policy goes into effect for 2021 annual meeting. ISS will recommend against nominating committee chairs (and potentially other directors on a case-by-case basis) at Russell 3000 or S&P 1500 companies with no women on the board . Material E&S and Climate Risk – Updated policy clarifies that a board’s failure to oversee environmental, climate or social risks can constitute a material oversight failure resulting in recommendation against individual directors, committee members or the whole board . Virtual Meetings – ISS will generally support hybrid shareholders meeting. Some concern over virtual-only meetings, unless extenuating circumstance (i.e. COVID-19) or disclosure provided describing participation rights that are similar to those provided for in-person meetings . Exclusive Forum Provisions – Updates policy to generally recommend in favor, but depends on scope – 1. will recommend in favor of federal forum provisions for federal securities matters, but not if the provision designates a specific federal court; 2. will recommend in favor of Delaware exclusive forum provisions for Delaware companies; and 3. will take a case-by-case approach for state exclusive forum provisions other than for Delaware companies ISS and Glass Lewis Key Policy Updates for 2021 - Continued

. Key Glass Lewis Policy Updates - In Nov. 2020, Glass Lewis issued its 2021 Proxy Voting Guidelines . Board Diversity and Refreshment . For 2021, GL will note as a concern, any board with fewer than two female members. Starting in 2022, GL will recommend against the nominating committee chair of a board with six or more directors, but with fewer than two female directors. Minimum of one female member will still apply to smaller boards with fewer than six directors . GL will make voting recommendations based upon state law requirements as they become effective. For example, GL will generally recommend against the nominating committee chair at a California-headquartered company that fails to comply with the CA board diversity law . For 2021, GL will note in its report as a concern instances where the average tenure of non-executive directors is 10 years or more and no new independent directors joined the board in the past 5 years. No voting recommendation based upon policy in 2021 . Environmental and Social Risk Oversight – For S&P 500 companies, GL will note as a concern in its report the lack of clear disclosure regarding board oversight on E&S issues. Beginning in 2022, GL will generally recommend voting against the board governance committee chairs of S&P 500 companies for inadequate disclosure regarding board oversight of E&S issues . Virtual Meetings – Returns to pre-COVID-19 policy of recommending against the governance committee chair holding virtual-only shareholder meetings unless robust proxy disclosure provided addressing shareholder meeting participation . Particular focus on disclosure related to ability for shareholders to participate in meeting and ask questions . See Glass Lewis blog post, dated Jan 14, 2021 - https://www.glasslewis.com/glass-lewis-updated-approach-to-virtual-meetings- globally/ . State Street – For 2021, will vote against nominating committee chairs at S&P 500 companies that do not disclose the racial and ethnic composition of their boards . In order to gather this information, suggest to add questions to D&O questionnaires Modernizing Rule 14a-8 Regarding Shareholder Proposals

. Rule 14a-8 under 1934 Act – the shareholder proposal rule – sets out the procedural and substantive limitations to inclusion of a shareholder proposal in a company’s proxy statement . SEC adopted amendments to Rule 14a-8 on Sept. 23, 2020 . Amendments will not be in effect for upcoming 2021 proxy season, rather will begin to apply in the 2022 proxy season . Amendments to Rule 14a-8 made the following significant changes to the process: . Replaced current continuous stock ownership submission threshold ($2k or 1% of a company’s securities for at least 1 year) with three-tiered dollar-based continuous stock ownership threshold ($2k for 3 yrs, $15k for 2 yrs or $25k for 1 yr) and eliminates the 1% alternative . One time transition period during 2022 proxy season . Eliminates ability for a proponent to aggregate stock holdings with other small shareholders to meet eligibility thresholds. Co- filing of proposals still permissible, but each proponent must meet eligibility requirements . Proponents not permitted to submit more than one proposal for any single shareholder meeting, either directly or through the use of a representative . Adds requirement that proponent must state that it is able to engage with the company after the initial submission; no reciprocal obligation on the part of the company . Subject to meeting resubmission thresholds, under Rule 14a-8, company can exclude a “repeat” proposal if it deals with a matter previously included in proxy statement within prior 5 yrs. Amendments raise the resubmission thresholds to submit a “repeat” proposal Changes to Non-Issuer Financial Information Requirements

Non-Issuer Financial Information in connection with Acquisitions and Dispositions . In May 2020, SEC adopted eagerly awaited revisions to Reg S-X regarding financial disclosures for business acquisitions and dispositions . These amendments went into effect on Jan. 1, 2021, but companies were permitted to use the amended rules prior to effective date during 2020 . Key Amendments: . Reduces maximum period for which historical financial statements of an acquired business must be provided . Revised rules require presentation of (i) 2 years of historical financial statements if the acquisition is significant at a 40% or greater level or (ii) 1 year of historical financial statements if the acquisition is significant at a greater than 20% level but less than 40% level . Eliminates the need to provide prior corresponding interim period income statement (but retains the requirement to provide the current year interim period income statement) if only 1 year of historical financial statements is required . Allows use of “abbreviated financial statements” that do not require corporate-level allocations in lieu of full historical financial statements for certain carve-out transactions if conditions as specified in Rule 3-05(e) of Reg S-X are met . Increases the significance thresholds for dispositions from 10% to 20% . Changes the tests used to determine the “significance” of an acquisition or disposition in order to seek to avoid disclosure regarding non-material transactions . Permits the use of “management adjustments” that reflect estimable synergies and other effects of a transaction in the preparation of pro forma financial information Non-Issuer Financial Information for Registered Debt Offerings . Amendments to Reg S-X, Rule 3-10 make it easier to omit separate financial statements and reduce the required alternative supplemental financial and nonfinancial disclosure about the subsidiary issuers and/or guarantors and the guarantees . Amendments may cause many debt issuers, that currently do not comply with existing rules, to revisit whether to access the markets via a registered offering, instead of a Rule 144A private offering Proposed Rule 144 Changes

. In Dec. 2020, SEC released a proposal to amend Rule 144. Proposed rule is currently in the public comment period. . Pre-Covid 19, substantially all Form 144 filings were done in paper and mailed to SEC . In 2020, SEC issued a no-action position to permit the email filing of Form 144 (to [email protected]). Approximately 50% of filings during 2020 were done via email . Summary of helpful proposed changes: . Mandates electronic Form 144 filings via Edgar relating to issuers that are subject to Exchange Act reporting . Eliminates requirement to send Form 144s to issuer’s stock exchange . Eliminates Form 144 filing requirement related to issuers that are not subject to Exchange Act reporting . Extends the deadline for Form 144 filings to the end of the second business day following the sale execution day, which aligns with the Form 4 filing deadline . SEC intends to establish an online fillable Form 144 to simplify electronic filing process and provide a single user interface to file both Form 144s and Form 4s using the information entered into the interface fields to create separate Form 4 and Form 144 filings. . Proposal also proposes to change Forms 4 and 5 to add an optional check box to indicate that a reported transaction is intended to satisfy Rule 10b5-1(c) . This change would allow the reporting person to indicate that the trade was effected under a 10b5-1 trading plan . Proposal also includes a technical change to eliminate “tacking” for securities acquired upon the conversion of the market-adjustable convertible securities The Rise of ESG Reporting

John J. Zak January 28, 2021 What is “ESG”?

. “ESG” stands for “environmental, social and governance” . It has become shorthand for many different topics: . “E” includes climate change, sustainability, water use, recycling, food waste, carbon footprint, supply chain management, ecosystem protection . “S” includes workforce diversity and inclusion, safety, human rights, ethical sourcing, pay equity, community mindedness, racial and economic justice . “G” includes board and C suite diversity and independence, compensation practices and policies, political engagement, stakeholder engagement, corporate purpose . Sometimes referred to as “corporate social responsibility”, or CSR

43 What is ESG Reporting?

. The disclosure of material ESG impacts, risks and opportunities from both a qualitative and quantitative perspective. . Disclosure of non-financial factors that impact a business’ bottom line. . Standardized, consistent, reliable and comparable ESG disclosures that investors need to protect their investments and allocate capital toward a sustainable economy. (SEC Commissioner Allison Lee) . … a set of benchmarks against which the conduct of business firms … can be gauged … conduct can then be calibrated against these benchmarks, usually producing some sort of alphanumeric scoring to identify degrees of underperformance. Patterns of underperformance are purported to reflect management and governance shortcomings, which in turn impact the market’s view of business firms’ sustainability in a world of shifting conduct goalposts, changes in investor preference, and attitude toward risk. (Ingo Walter, Sense and Nonsense in ESG Scoring, NYU Stern School Paper Nov. 2019)

44 Why do ESG Reporting?

. Large institutional investors are focused on ESG . State Street Global Advisors ($3.1T AUM) . Blackrock ($8.6T AUM) . Vanguard ($6.6T AUM) . ESG - focused funds are seeing large in-flows . $20.9B in first half of 2020 (per Morningstar) . Recent research shows strong ESG performance correlates to higher equity returns and lower risk . Proxy advisory firms, credit rating firms have announced initiatives to report on CSR/ESG . 90% of S&P 500 and 65% of Russell 1000 published sustainability or ESG reports in 2019 . Events of 2020 (COVID-19, George Floyd protests) have brought social considerations to the forefront . “There is a growing consensus among policymakers, public policy advocates, and market participants (including companies and investors) that private enterprise will need to become part of the solution, beyond merely complying with laws and regulations.” (per FTI Consulting)

45 What is the ESG Disclosure Framework?

. No current mandated SEC (but see 2010 climate-related disclosure guidance, conflict minerals/resource extraction disclosures, pay ratio proxy disclosure; recent “human capital management” rule (S-K 101(a)) . “Private ordering” on the issue was outgoing SEC chair’s preferred approach . New SEC Chair is widely expected to advance rules-based ESG disclosure requirements (at least with respect to climate change) . Variety of reporting regimes exist . GRI (Global Reporting Initiative) (most widely used) . CDP (Carbon Disclosure Project) (analyzes company submitted data, calculates ESG score) . TCFD (Task Force on Climate Related Disclosures) . SASB (Sustainability Accounting Standards Board) (industry specific standards) . UN Global Compact (requires annual report from signatories) . World Economic Forum White Paper (Sept. 2020) (standardized disclosure framework prepared by International Business Council and Big Four) . Industry-based resources available (NAREIT, EEI, IPIECA)

46 What is the ESG Disclosure Framework? (cont’d) . Third party ESG data and ratings providers exist . Bloomberg ESG Data Service . Corporate Knights (Corporate Knights Global 100) . RobecoSAM (Corporate Sustainability Index) . MSCI ESG Research . RepRisk (provides ESG reports globally on public/private cos.) . Sustainalytics (global coverage, industry-specific results) . Thomson Reuters ESG Data (global coverage) . It’s a competitive ratings world and everyone aspires to be the gold standard. But it’s hard to make gold out of a turnip … But even the most jaded skeptics and curmudgeons should pay attention. In a land of Voodoo, it’s usually good to know something about Voodoo.” (Walter, Sense and Nonsense in ESG Scoring)

47 ESG -- What to Disclose?

Assuming the absence of mandated disclosure: . Identify key ESG factors, how to measure them, and how to communicate them . No standardized process . Consult ESG guidelines, institutional investor guidelines, industry guidelines and peer approaches . Determine the intended audience and the disclosure framework (formal or bespoke) . Consider how ESG reporting fits with other internal controls and procedures . As with any other public statement, if you speak, speak accurately

48 ESG -- Where/How to Disclose?

. Consult industry and peer practice/investor preferences . Possible platforms include: . Proxy statements/glossy annual reports/letter to shareholders . include discussion of board/committee governance and oversight . sent directly to shareholders . CRS/Sustainability reports . Criticism is that traditional CSR reporting does not focus on risks and opportunities or link to business purpose and strategy . Company website . dedicated area with links to additional information . Annual and quarterly SEC reports . ESG items sometimes included in risk factors, MD&A . Earnings calls/supplemental slides

49 ESG – Board Attention/Oversight

. PwC 2020 Annual Corporate Directors Survey . 55% considered ESG issues part of enterprise risk management . 49% saw link between ESG issues and strategy . 51% recognized ESG issues were important to shareholders . 38% say ESG issues have impact on financial performance . 32% say Board needed more ESG reporting to it . Critics want directors with ESG-specific expertise, more women directors (who are more likely to say climate change and human rights should be part of business strategy), fewer ex-CEOs

50 ESG -- Oversight Framework (Best Case)

. CEO . assess and manage continually all risks to business and strategy including ESG-based risks . CLO . best suited to manage intersection of compliance, reporting and risk . Board of Directors . assess company’s ESG performance and practices against industry peers . assess ESG risks as part of overall enterprise risk management . assess whether professed ESG goals align with business strategy and corporate focus . Audit Committee . assess suitability of ESG framework . assess ESG processes and controls . assess whether third party assurance on ESG metrics is appropriate

51 ESG -- Oversight Framework (Best Case) (cont’d) . Compensation Committee . assess whether/how ESG goals should be/are factored into compensation decisions . assess human capital needs of the ESG function . is a dedicated C-suite officer position appropriate? . Nominating/Corporate Governance . assess whether Board has necessary skills to assess ESG performance . assess whether Board education on ESG issues is appropriate

52 ESG – Last Words

. “The industrial structure of ESG ratings industry and its hangers-on (such as ESG ratings advisory services) remains a work in progress. Both its inputs and outputs have a lot to prove. Accessing and filtering hundreds of quantitative and qualitative information points across thousands of companies by armies of assessors of unknown capacity boggles the mind … And when its all cooked down to an alphanumeric score or other display, what does it really mean in benchmarking against ESG targets that may themselves be controversial?” (Walter, Sense and Nonsense in ESG Scoring) . “Disclosure should be a means to achieving a more sustainable and inclusive capitalism.” (Larry Fink, Blackrock)

53 Polling Question

Does your company report regularly to the Board of Directors regarding ESG/sustainability issues?

. Yes . No

54 Executive Compensation

Ryan Murphy January 28, 2021 Final 162(m) Regulations

. Generally track IRS Notice 2018-68 and proposed regulations released in 2019. . One material difference from proposed regulations that bears mention regarding extension of exercise period for grandfathered stock options/SARs. . Assume an otherwise grandfathered option or SAR expires on the earlier of (i) the 10th anniversary of the grant date, or (ii) 90 days after termination of employment. Executive is terminating employment. As part of separation agreement, employer is willing to waive earlier expiration under clause (ii). Is this a material modification that results in loss of grandfathered status? Tax Withholding

. GLAM 2020-004 (May 22, 2020) . Issue: There is generally a delay between the date an option or SAR is exercised and the date the underlying shares are transferred to the holder’s brokerage account. Similarly, with an RSU, there is generally a delay between the date the employer initiates a transfer of shares and the date the shares are actually transferred to the holder’s brokerage account. In either case, the value of the underlying stock can fluctuate during this period. What value should be used for tax withholding purposes? . Conclusions . Stock Options and Stock-Settled SARs: Measurement date is exercise date. . Stock-Settled RSUs: Measurement date for ITW is date employer initiates transfer. Measurement date for FICA is based on vesting date, which could be earlier than date transfer is initiated. . Trap for the Unwary. If an employer accumulates $100,000 or more in employment taxes, those taxes must be deposited by the next day. GLAM concludes that taxes are accumulated on exercise date for options and SARs and the date the transfer is initiated for RSUs. Administrative waiver from failure to deposit penalties may be available where deposit occurs on day after settlement date. See Internal Revenue Manual 20.1.4.26.2 (updated May 26, 2020). Tax Reporting

. New for 2020 Taxable Year. Non-Employee Director compensation reportable on Form 1099-NEC, not 1099-MISC. Deadline to furnish is February 1, 2021. . Reminder that if incentive stock options were exercised, or there were employee stock purchase plan purchases, in 2020, Form 3921 (ISO exercises) and Form 3922 (ESPP purchases) must be furnished to employees by February 1, 2021. Say on Pay

. 2020 Recap . 3,093 companies held say on pay votes in 2020. . 70% received +90% for votes. . 2.1% (or 65 companies) failed. Of the 65, 22 had previously failed one or more votes. . By comparison, there were 2,993 say on pay votes in 2019. 2.3% (or 66 companies) failed for 2019. Say on Pay - COVID

. ISS published 11 FAQs relating to COVID on October 15, 2020. https://www.issgovernance.com/file/policy/active/americas/US-Preliminary-Compensation- Policies-FAQ-regarding-COVID.pdf . Glass Lewis also issued COVID guidance. https://www.glasslewis.com/wp- content/uploads/2020/09/US-Canada-Comp-Approach-to-COVID.pdf . Temporary reductions in base salary aren’t given much weight. . STI . If performance goals were modified or abandoned in favor of a discretionary bonus, ISS expects there to be disclosure relating to why the approach was taken, how that action furthered investors’ interests, and how the resulting payout compares with what would have been paid under the original program design. Where a discretionary bonus is provided, expectation is that these awards should still carry performance-based considerations and the underlying criteria disclosed. . If STI targets included lower performance targets vs. 2019, be prepared to explain why. . LTI. Generally don’t expect much change, given these are multi-year arrangements. However, moving to a relative performance metric vs. absolute may be viewed as reasonable. Switching to time-based awards likely to be viewed as problematic. . One-Time Awards. Again, be ready to explain why the award was provided. Vanguard and BlackRock proxy voting guidelines similarly take issue with one-off or special bonuses. Adjustments to Performance Goals

. Most common with annual STI programs. . Common adjustments disclosed in SEC filings: . Adding a new metric (e.g., cash flow, EBITDA, health and safety measures) to reflect new goals for the remainder of the year. . Reducing existing performance targets (and generally making a corresponding reduction to the payout opportunity). . Reducing threshold for receiving a bonus. . Resetting performance goals based on updated forecasts. . Bifurcating the year with prorated targets. . Switching from absolute performance metrics to relative metrics. . Abandoning original plan for a purely discretionary plan. Equity Plans

. ISS policy changes to equity plan voting policy. Available here: https://www.issgovernance.com/file/policy/active/americas/US-Equity- Compensation-Plans-FAQ.pdf . Background. ISS’ EPSC considers three main factors, including plan cost (shareholder value transfer (SVT)), plan features, and grant practices (e.g., burn rate). . Effective for meetings as of February 1, 2021, the threshold passing scores for the S&P 500 model and the Russell 3000 model have each increased by two points. Non-Russell 3000 remained unchanged. . As it does every year, ISS updated its burn rate maximums. Consideration should be given to lower benchmarks in developing equity budgets for 2021. . Burn rate generally equals (# of options/SARs granted + (# of full value awards granted * volatility multiplier)) ÷ weighted avg. common shares outstanding. . New FAQ regarding disclosure where prior equity plan will terminate upon approval of new equity plan for purposes of SVT analysis. See FAQ #11. Perks

. Background. Item 402(c)(2)(ix)(A) requires disclosure of perquisites and personal benefits that total at least $10,000. Perks also factor into determination of NEOs under Item 402(a). . In 2006, SEC issued Release 33-8732A that generally provided that an item is not perk or personal benefit where it is integral and directly related to the performance of the executive’s duties (i.e., is the item needed) or, alternatively, it is generally available on a non- discriminatory basis to all employees. . In response to COVID, the SEC released new Regulation S-K C&DI 219.05. C&DI reinforces existing rule, but provides example that enhanced technology for home office may not be a perk where there is a local stay-at-home order. On the other hand, the C&DI indicates that company-provided transportation to avoid taking public transit may not be a perk, unless it meets one of the two tests in Release 33-8732A. Perk Enforcement Actions

. In September 2020, SEC announced settled charges against Hilton Worldwide Holdings for failing to properly disclose perks of approximately $1.7 million between 2015 and 2018 for travel-related personal benefits (e.g., corporate aircraft and hotel stays). . In June 2020, SEC announced settled charges against Argo Group International Holdings, Ltd. for failing to properly disclose $1.2 million perks (including retirement and financial benefits, corporate aircraft, personal travel and housing costs, among other perks) provided to its former CEO between 2014 and 2018. . It had been a couple years since the most recent perks enforcement action relating to perks. So, two settlements in a matter of months is notable. Pay Ratio

. Many companies will be redetermining their median employee for 2020. . Item 402(u)(3) defines “employee” as a full-time, part-time, seasonal, or temporary worker of the registrant. . An October 2016 C&DI includes a Q&A regarding furloughed employees. It acknowledges that Item 402(u) does not define or address furloughed employees and provides that registrants will need to determine whether furloughed workers should be treated as employees based on the facts and circumstances. See C&DI 128C.04. . Even for companies who are not redetermining their median employee, they may need to evaluate whether there has been a change in its employee population or compensation arrangements that may result in a significant change in its pay ratio disclosure. Pay Ratio

. Excerpt of Pay Ratio disclosure for Darden Restaurants: . We prepared a listing of all of the Company’s employees as of February 24, 2020, three months prior to our fiscal year end, resulting in a list of approximately 189,000 employees after certain permitted exclusions. As permitted by the de minimis exception under applicable SEC rules, we excluded all of our non-United States based employees, as they represented less than 5 percent of our total workforce. We excluded approximately 1,000 employees located in Canada and one employee located in Malaysia. The remaining employees were all based in the United States. We also excluded new hires who had not yet received their first paycheck. As a result of the COVID-19 pandemic’s impact on our operations, including the temporary closure of all of our dining rooms beginning in March 2020, we placed many restaurant and corporate team members on furlough for portions of the fourth quarter of fiscal 2020. At the highest point during that quarter, approximately 150,000 team members were on furlough. We included these furloughed team members as employees for purposes of the calculations. . We organized the resulting list by a consistently applied compensation measure (the Compensation Measure). The Compensation Measure that we used was comprised of all items of compensation, both cash and non-cash paid to our employees during the fiscal year, as represented in our corporate payroll system, excluding items such as Flex Comp awards, performance stock unit awards, restricted stock awards and certain other similar or related items that are not widely distributed to all employees. We annualized the compensation of employees who were hired during fiscal 2020. We did not annualize the compensation of our furloughed employees for the period of their furlough. We included amounts paid under our emergency pay program for the furloughed team members as compensation. We then determined the median amount from this list and the related employee is our “median employee.” The median employee determined for fiscal 2020 is a part time team member at one of our restaurants. Our median employee for fiscal 2020 was on furlough for a portion of the fourth fiscal quarter and received compensation from our emergency pay program. . Available here: https://www.sec.gov/Archives/edgar/data/940944/000094094420000053/def14a2020definitiveproxys.htm#sF351 C8D38CB8516BA24AC176DAF6E0F6 Platform Workers

. In November, SEC proposed amendments to Rule 701 and Form S- 8 registration statements to accommodate “platform workers” who provide services through an organization’s technology platform. Limited 5-year time period to assess and analyze how the exemption is being used. Requirement to provide SEC with information every 6 months. . Conditions: . Organization must control the platform. . No more than 15% of a worker’s compensation during a 12-month period consists of securities. . No more than $75,000 of compensation is received in the form of securities during a 36-month period. . Amount and terms of securities cannot be subject to individual bargaining or election to receive securities/cash. . For Rule 701 issuances, reasonable steps must be taken to prohibit the transfer of securities. Miscellaneous COVID Compensation Issues

. Need to file 8-K if compensation program modified due to COVID? . Reporting bonuses for 2020 in the correct column of the summary compensation table. . If a NEO voluntarily waived base salary or bonus, be careful of reporting that correctly in the summary compensation table (and in determining NEO status). See Reg S-K C&DI 119.25 and 119.26. Polling Question

Has your company included an ESG item as a performance metric for its annual STI program?

. Yes . No CLE Credit

If you are requesting CLE credit, please email the code below to [email protected].

CLE credit code: JAN28CLE Questions?

71 Contact Information

John Zak Craig Fischer Ryan Murphy Hodgson Russ LLP Hodgson Russ LLP Hodgson Russ LLP 716.848.1253 716.848.1266 716.848.1241 [email protected] [email protected] [email protected]

Joseph Kick Joseph DiLeo Deloitte & Touche LLP Deloitte & Touche LLP 716.843.7275 203.761.3195 [email protected] [email protected] 72