July 17, 2018

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Did The SEC’s Pay Ratio Guidance Miss Conjunction Junction?

Last week, the Securities and Exchange Commission issued interpretive guidance to assist issuers in complying with the pay ratio rule.  At the same time, the Division of Corporation Finance staff issued guidance concerning how companies might use statistical sampling technologies and “other reasonable methods” in implementing the pay ratio rule.  I am sure that both guides will receive widespread coverage by other commenters.

I was puzzled, however, by the staff’s response to the following question:

May registrants combine the use of reasonable estimates with the use of statistical sampling or other reasonable methodologies?  For instance, is a registrant with multinational operations or multiple business lines permitted to use sampling for some geographic/business units and a combination of other methodologies and reasonable estimates for other geographic/business units?

The staff’s answer is unequivocal, but its explanation was incomplete:

Yes.  Instruction 4.2 to Item 402(u) expressly provides that:

In determining the employees from which the median employee is identified, a registrant may use its employee population or statistical sampling and/or other reasonable methods.

The use of “and/or” in the Instruction indicates that a registrant is permitted to use statistical sampling, other reasonable methods or a combination of statistical sampling and other reasonable methods. . . .

The problem is that the Instruction actually contemplates three different methods, which for brevity I will designate as A (employee population), B (statistical sampling), and C (other reasonable methods).  The staff’s guidance states that it is permitted to use B or C or B and C.  What about A?  Why does the Instruction state A or B and/or C?  Does this mean that a company may use A or (B or C) or (B and C) but not A and (B or C) or A and (B and C)?  If the SEC had intended to permit A and (B or C) or A and (B and C), why doesn’t the instruction read “employee population and/or statistical sampling and/or other reasonable methods”?  Obviously, the SEC believes that the “and/or” has a specific meaning and that meaning differs from simply “or”.

“Conjunction junction what’s their function?
I got “and”, “but” and “or” they’ll take you pretty far.”

American University – Washington College of Law Professor Ira P. Robbins has written an entire law review article on the subject of “and/or”.  The abstract of Professor Robbins’ article concludes:

Despite the few contexts in which and/or should be avoided, the construct should not be discarded simply because individuals occasionally misuse the term. After all, legal drafters and courts commonly struggle with using and interpreting “and” and “or,” words that are riddled with ambiguity. And/or has a precise meaning; it allows for the possibility of conveying options in the alternative. As with many consistent errors in legal writing, the problem lies not with the term and/or itself, but with a lack of close attention to detail. Legal drafters should use it with the same level of care with which they use any other word or phrase.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...