The Freshfields team recently reviewed the governance terms of 86 sponsor-backed companies that went public between 2021 and 2025. In this blog, they share some of their key findings. Here are some excerpts, but read the full blog for more context:
– 90% of the surveyed companies retained “controlled company” status under applicable listing standards following their IPO.
– 87% of surveyed companies granted sponsors the right to nominate or designate directors to serve on the public company’s board. 77% permitted the sponsor to designate a majority or supermajority of the board. In 26% of companies, sponsors secured the right to designate the chairperson of the board.
– 58% of surveyed companies went public with a majority-independent board despite having no obligation to do so. Nearly all (95%) established a compensation committee, and 90% had a nominating and governance committee in place.
– In 57% of surveyed companies, the sponsor retained the right to designate at least one member of the audit committee, and in 61%, the sponsor held the same right over the compensation committee.
– Almost half (47%) of the surveyed companies with shareholder agreements in place gave sponsors consent or veto rights over key corporate actions following the IPO [. . .] In the majority of cases where veto rights were granted (86%), the sponsor owned at least 50% of the outstanding shares at the time of the IPO.
– 93% of surveyed companies permitted stockholder action by written consent [. . .] 84% permitted shareholders to call special meetings. In both cases, these rights are structured for sponsor use and typically sunset once sponsor ownership falls below a defined threshold.
– 77% of surveyed companies have a springing supermajority requirement for charter amendments, which takes effect once the sponsor’s voting power decreases to a certain level.
– 27% of the surveyed companies used an Up-C structure.
– 12% of surveyed companies had dual-class share structures at the time of IPO [. . .] Of the companies with high-vote/low-vote dual-class structures, nine out of ten were founder-led, reflecting that dual-class structures remain relatively uncommon in pure sponsor-backed IPOs.
Listed companies with operations in the United States face growing product liability, environmental and related litigation threats. Some of the world’s largest corporate groups have seen billions erased from their market capitalization overnight. Yet most listed companies still ignore the best defense available for managing their litigation exposure: ring-fenced subsidiaries. This failure has—and will—hit share prices hard if and when analysts start to price in major litigation risk from non-strategic operations.
The memo explains that ring-fencing goes beyond veil piercing. It’s focused on protecting a parent entity from creditor tactics that would be employed in a subsidiary bankruptcy.
In some cases, ring-fencing simply increases the leverage of the parent in litigation settlement discussions by clarifying that only invested equity capital is at risk. In other cases, ring-fencing is essential to permit a successful Chapter 11 filing to manage the subsidiary’s litigation liabilities without recourse to the group. And, in many cases, the ‘option’ created by ring-fencing is not called upon because the litigation threat dissipates or can be absorbed by equity capital already invested in the subsidiary.
Ring-fencing can help corporate defendants negotiate successful settlements in product liability or mass-tort litigation. For example:
In a class action context, lead plaintiff counsel will focus on the presence or absence of ring-fencing as a critical factual question that drives the amount and the structure of their settlement demands. And once the defendants and lead counsel strike a deal, ringfencing can be a key to limit opt-outs and facilitate court approval of the settlement as reasonable [. . .]
In a recent product liability matter for a multinational client, we were able to begin mediation by explaining to assembled plaintiff counsel that the last three years of operations and litigation defense had been financed with hundreds of millions of dollars of secured loans from the corporate parent, and that all of this recent secured debt ranked senior to litigation claims on the manufacturing business they were suing.
The memo explains what’s involved in a ring-fencing review. It includes an 8- to 10-page list of specific questions covering topics like legal separateness, group financing and cash management, IP rights, allocations of assets & liabilities, sources of agency and direct exposure, points of contact and intercompany claims, tax matters, insurance coverage and subsidiary officers & directors.
We recently posted the transcript for our “The SEC’s Semiannual Reporting Proposal: Considering the Alternatives” webcast, during which the all-star line-up of Skadden’s Brian Breheny, WilmerHale’s Meredith Cross, Gibson Dunn’s Tom Kim and Goodwin’s (and our own) Dave Lynn discussed the SEC’s proposed amendments that would allow public companies to elect to file semiannual reports on new Form 10-S, rather than filing quarterly reports on Form 10-Q. They addressed:
– The SEC’s proposed rule changes to the periodic reporting system
– The SEC’s proposed changes to financial statement requirements
– Potential areas for changes to the proposed rules – The experience of public companies in other jurisdictions with optional semiannual reporting – Considerations for companies when deciding to elect semiannual reporting – Potential challenges of semiannual reporting for areas such as insider trading compliance, share repurchase activity, capital-raising and investor communications – The ways in which earnings releases and earnings calls may change for companies opting into semiannual reporting – The relationship of the semiannual reporting proposal to other SEC initiatives
Members of TheCorporateCounsel.net can access the transcript of this program. If you are not a member, email info@ccrcorp.com to sign up today and get access to the full transcript – or call us at 800.737.1271.
Yesterday, the SEC announced that Kathleen M. Hutchinson has been appointed as Director of the Office of International Affairs (OIA). OIA advises on international policy and coordinates with foreign authorities to facilitate cross-border enforcement, among other things. The announcement notes:
Ms. Hutchinson has served as OIA’s Acting Director since January 2025. She started at the SEC in 2003 as an attorney-advisor in the Office of Compliance Inspections and Examinations, now the Division of Examinations, and joined OIA in 2008. Ms. Hutchinson has held several other positions in OIA, including Deputy Director and Assistant Director. She has twice served as Acting Director of the office.
Kathleen earned a J.D./M.A. from American University’s Washington College of Law and School of International Service. She holds a B.A. from Binghamton University. She began her legal career in private practice in Washington D.C. and New York City.
Yesterday, Corp Fin posted new Securities Act Sections CFI 142.01, which addresses the contents of a registration statement of securities underlying rights that are to be listed on an exchange. Here’s the text of the CFI:
Question: A company seeks to list rights on a national securities exchange in connection with a business combination transaction without the underlying securities also being listed. As required by the exchange, the company must have an effective registration statement, prior to the rights being listed, that registers the issuance of the underlying securities upon exercise of the rights. Must the registration statement contain information regarding the specific transaction and the business to be acquired?
Answer: Yes. The registration statement must contain information about the contemplated business combination transaction and the business to be acquired. [June 23, 2026]
I don’t have a lot of experience in this area, but I think some practitioners have argued that if an issuer is only listing rights and not the underlying stock, it could file a “generic” registration statement to satisfy exchange listing requirements and defer detailed disclosures about the potential business combination until the rights were exercised. To my knowledge, the Staff has never signed off on that approach, and this new CFI appears to effectively foreclose it.
As Liz shared, we’re running an 18-question anonymous survey – prepared in collaboration with our friends at Fenwick & West and Orrick – on how public companies and late-stage private companies (in various industries and with various market caps) are thinking about the SEC’s recent semiannual reporting proposal and the push to extend trading hours.
As Liz noted, the semiannual reporting rules are just at the proposal stage. That means aggregated data from responses to surveys like this one may provide helpful info in the rulemaking process. We want to be sensitive to the many comment deadlines in July, so if you want to contribute to the discussion by participating in the survey, please do so by tomorrow morning.
You don’t have to be a member of TheCorporateCounsel.net to take the survey, so we invite all of our readers to take a few minutes to complete it. The results to date will pop up at the completion of the survey, and we’ll share the final results when the survey closes.
On Monday, the SEC submitted a proposal to OIRA titled “Electronic Delivery of Information Under the Federal Securities Laws.” While the document itself isn’t publicly available (and this proposal wasn’t on the latest Reg Flex Agenda), recent speeches have suggested that the SEC Staff was working on rulemaking along these lines. For example, as this Reed Smith blog notes, in testimony before the House Financial Services Committee and the Senate Committee on Banking, Housing, and Urban Affairs in February, Chairman Paul Atkins “said the agency is examining recordkeeping expectations for digital communications and ways to increase flexibility around electronic delivery of shareholder and investor materials.” At SEC Speaks in March, he continued the discussion:
As just one example of the gulf between regulation and reality, our rules still default to paper delivery for shareholder communications. In an age of algorithmic trading and artificial intelligence, I believe that requirement ought to be a relic, not a standard.
In fact, not long after the first SEC Speaks in the seventies, the late SEC Commissioner Roberta Karmel observed that “data analyzing technology has progressed to a point of magnitude superior to that available just brief years ago.” Commissioner Karmel added—around the advent of the word processor, mind you—that “although these developments have augmented the complexity and efficiency of the private financial sector, the SEC has not enjoyed all the benefits of this improved technology.” Her words were at once a warning and an enduring appeal for financial regulators to do a better job at keeping pace. We are resolved to answer that call by refusing to remain tethered to the tools or the temperament of a bygone era.
Commissioner Peirce and Brian Daly, Director of the Division of Investment Management, have suggested (subject to the standard disclaimer) in speeches at the Investment Company Institute (ICI) Investment Management Conference and ICI Winter Board Meeting, respectively, that the SEC eventually consider going 10 steps further than just making electronic delivery the default. These speeches focused on fund disclosure documents, but their descriptions of ways fund disclosures might become “interactive and personalized” are fascinating.
Thanks to this Wilson Sonsini alert for sharing the first Item 1.05 Form 8-K filed in connection with “shadow AI” (unauthorized AI use). Here’s the background from the alert:
On May 5, 2026, a Pennsylvania-based regional bank, Community Bank, the wholly owned subsidiary of CB Financial Services, Inc. (CB), detected a cybersecurity incident caused by the use of an unauthorized AI application which exposed sensitive customer information. Unlike the usual cybersecurity incident involving an attack on the company’s systems by a third-party bad actor or sabotage by an internal party, the exposure of confidential information in this case arose from the improper use of AI, presumably by a bank employee who turned to the unauthorized AI for efficiencies in handling customer information. Two days later, CB determined the incident was material and filed a Form 8-K under Item 1.05.
The alert says that this incident is a good reminder that:
– A cybersecurity incident need not involve an external attacker or system intrusion or material financial consequences to qualify as material under Item 1.05.
– Insider misuse of technology, including unauthorized use of AI tools, can independently trigger SEC disclosure obligations if the confidential information at risk is sensitive and extensive such that a company determines the incident is material.
Nasdaq’s proposal to impose a new $5 million minimum market cap requirement for continued listing, like a few other stock exchange proposals in recent years, has gone through a long process already. The SEC extended the time to act on this proposal back in March, and then the day before the Commission was required to take action, an order was posted instituting proceedings to determine whether to approve or disapprove the proposed rule change, soliciting additional comment on specific areas of concern. On Monday, the SEC posted a new notice to solicit comments on a revised proposal from Nasdaq.
We already shared some of the critical comments that had been received as of April. After that date, the Commission received comments from the Security Traders Association, Better Markets, OTC Markets Group, PTG, Securities Industry and Financial Markets Association, and Citadel, all in support of the initial proposal, and comments from law firms, three listed companies and the Small Public Company Coalition, all opposing.
In its amended proposal, Nasdaq addresses concerns by commentators by giving the Hearings Panel more discretion:
As a preliminary matter, Nasdaq acknowledges the position taken by some of the Objecting Commenters that some companies with a low market capitalization may meaningfully recover and therefore their continued listing on the Exchange maybe appropriate. Accordingly, in this Amendment No. 1, as described above, Nasdaq now proposes to modify the Initial Proposal, which would have prevented a Hearings Panel from reinstating a company that failed to maintain a minimum of $5 million MVLS. Instead, Nasdaq now proposes to adopt Listing Rule 5815(c)(1)(I) to provide that in the case of a company that received a Staff Delisting Determination due to a failure to maintain MVLS of at least $5 million under Rule 5450(a)(3) or 5550(a)(6), the Hearings Panel where it deems appropriate, may grant an exception for a period not to exceed 180 days from the Staff Delisting Determination for the company to demonstrate that it meets all requirements for initial listing.
Nasdaq believes that this approach appropriately balances the Exchange’s obligation to protect investors while allowing a company whose operational and financial difficulties are indeed temporary to demonstrate to an independent Hearings Panel that continued listing is appropriate. With this change, Nasdaq believes that the revised proposal addresses concerns raised by several commentators arguing that the Initial Proposal did not accommodate scenarios where situational factors result in temporary declines in a company’s valuation are unrelated to its actual financial health.
Nasdaq determined not to address other comments. For example:
– “Several commenters raised concerns regarding the removal of the automatic stay of suspension pending Hearings Panel review. Nasdaq continues to believe that immediate suspension from trading for a company that failed to maintain $5 million MVLS threshold over 30 consecutive business days is appropriate.”
– “Nasdaq also continues to believe that it is appropriate to issue a Staff Delisting Determination to a company for failure to maintain MVLS of at least $5 million over 30 consecutive business days.”
– “Nasdaq also continues to believe that providing a cure period is not appropriate where a company failed to maintain MVLS of at least $5 million over 30 consecutive business days.”
– “[S]everal commenters stated that the $5 million MVLS threshold, coupled with automatic suspension after 30 consecutive business days, could increase the potential for manipulative trading and market abuse in an effort to drive down the value of a company’s stock, causing a company to be delisted. Nasdaq notes that market manipulation is illegal. Nasdaq believes that if Objecting Commenters are in possession of evidence indicating that federal securities laws are violated, they should submit such evidence to the appropriate authorities for investigation and enforcement.”
Notably, this is not a notice of filing & immediate effectiveness. Comments on the amended proposal are due 15 days after publication in the Federal Register.
Apparently, the providers of the major AI models are actively moving from flat-fee pricing to usage-based, token pricing. It’s creating some challenges for IT budgets. And that means, as this Troutman Pepper Locke alert describes, that this shift may also have disclosure implications for public companies, especially for MD&A.
Since “increased expenses incurred with AI token costs” may have a material impact on a company’s financial statements, MD&A disclosure may need to address:
– The reason for period-to-period changes in operating costs, discussed in quantitative and qualitative terms, to the extent AI costs are already having a financial statement impact;
– Known trends or uncertainties reasonably likely to cause a material change in the relationship between costs and revenues if the pricing shift and AI adoption results in the two-part “reasonably likely” assessment being met;
– AI investments or token consumption as known trends, demands, commitments, events or uncertainties reasonably likely to impact the company’s liquidity; or
– AI usage metrics (like token consumption rates, per-employee spend or AI ROI), if tracked, as key performance indicators (KPIs) used to manage the business.
The accounting — and disclosure — may be different industry by industry or company by company:
Different companies may account for AI token costs differently. For example, some companies may account for token costs in costs of revenue, while others may account for them as general and administrative (G&A) costs. For other companies, AI token costs might be accounted for research and development (R&D) expenses. For example, AI has started to significantly affect biopharmaceutical and biotechnology companies by rapidly transforming the drug development process, enhancing and speeding target identification, molecular design, clinical trials optimization, and regulatory processes — these companies are likely to record AI token costs as R&D expenses.
With the second quarter about to close for calendar year companies, the alert suggests four steps companies should take as they prepare for their next 10-Q, including assessing the materiality of AI costs, evaluating the cost structure shift, reviewing internal AI monitoring and governance and coordinating across legal, finance and IT to assess disclosure requirements.
