TheCorporateCounsel.net

March 24, 2023

Securities Offerings: SEC Taking a Broad View

Earlier this week, the SEC announced charges against a “crypto asset entrepreneur” and three of his wholly-owned companies for what the SEC is saying were unregistered offers & sales of crypto asset securities, as well as market manipulation allegations based on purported “wash trades.” What’s interesting even if you’re not generally following the ins & outs of crypto is that in its 50-page (!) complaint – the SEC has taken an expansive view of the type of activity that violates Sections 5(a) and 5(c) of the Securities Act, which require issuers to register offerings of securities through an effective registration statement before the securities are offered and sold to the public (or to have a valid exemption from registration).

The Commission has taken issue not just with sales for cash, but also “giveaways.” For example, in regard to an “emoji contest” in which participants could win a combined 31,000 of the coins at issue for sharing what the SEC calls “promotional artwork” and emojis on social media, the complaint says:

By entering the “emoji contest,” participants provided the defendants with valuable consideration—the online promotion of the their platform and ecosystem, promotional artwork to feature on the their website, and the Twitter and Facebook handles of entrants and their tagged friends—in exchange for an opportunity to receive their crypto assets.

Neither the defendant nor his entities took any steps to exclude U.S. persons from receiving coins in this offering, and at least one of the winners who received the crypto assets was a resident of this District.

Airdrops: also problematic, in the SEC’s view.

There’s a lot more to this complaint, which as I mentioned goes on for 50 pages. It’s just the latest in a string of SEC crypto-related enforcement actions and head-shakings, all of which build on a a 50% year-over-year increase in enforcement actions in 2022. Coinbase also furnished a Form 8-K this week to disclose its receipt of a Wells Notice which the company believes could relate to its spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet.

Since John covered an NBA connection a few weeks ago and I don’t want to let anyone down who follows this blog for celebrity gossip, I’ll note that expectant mom Lindsay Lohan and several others were also caught up in this. They settled allegations that they illegally touted the crypto assets.

Liz Dunshee

March 24, 2023

Gen X: Finally Getting Validated

At the risk of the boomers telling me to “get off their lawn” and millennials asking, “what about us?” – I’d like to flag a study from three assistant/associate professors at the University of New Hampshire that says Gen Xers have left their “slacker” stereotype behind in the boardroom and are associated with significantly better company performance. Here’s more detail:

Our analysis indicates that the percentage of Gen X directors on the board is significantly and positively related to firm value. We use several econometric techniques to address the concern that this effect could be driven by a simple age effect or by other director and firm characteristics correlated with the likelihood of having Gen X directors on the board.

Furthermore, we shed light on the potential channels through which Gen X directors could be influencing company performance. First, we find that firms with Gen X directors make value enhancing investments in corporate social responsibility (CSR). Second, we document that male Gen X directors facilitate the inclusion of women on the board which ultimately leads to better firm performance. Lastly, we find that Gen X directors are especially valuable for firms that engage in knowledge-intensive activities.

The usual caveats apply here – the data is backward-looking & has already aged (although the data set goes through 2017, that feels like a lifetime ago…how are these companies doing today?). As someone “on the cusp” and not clearly a member of any specific generation, I have no real dog in this fight. The point is that for one shining moment in time, Gen X is the MVP. Let’s allow them to relish it.

Liz Dunshee

March 24, 2023

ESG: Make a Buck Off Humanity’s Demise

Look, I’m sorry if this makes me a downer as we head into the weekend, but this headline from ISS Corporate Solutions shows that capitalism will outlive cockroaches: “The Looming Antimicrobial Resistance (AMR) Pandemic: Opportunities for Investors.”

Maybe you find this inspiring. “Now I can hedge against a painful encounter with MRSA!” you say as you trade stocks on your way to the hospital. If that’s the case, good on you, please do not let me rain on your parade.

ICS makes a compelling case for this being a measurable “ESG” issue – with these types of data points:

– Share of net sales of antibiotics dedicated to intensive animal farming

– Hygiene management methods at healthcare facilities

– Reducing pharmaceutical ingredients, including antimicrobials, in wastewater at production sites

This all makes sense, but the headline without that context is the type of thing that gives ESG a reputation for being totally absurd in some circles. You would think that humanity could pull together just for the sake of the common good, but apparently “seeking alpha” is the only thing that folks can agree on.

Liz Dunshee

March 23, 2023

Shadow Trading: Report Raises the Profile of “Potentially Troubling” Trading Patterns

The SEC scored a big win last year on a novel “shadow trading” case that it brought in 2021, when a federal court allowed the litigation to proceed. That case hasn’t been decided – but if the SEC is feeling lucky, a ProPublica investigation that was published last week may give the Enforcement Division a jumpstart in finding more trades to investigate. Here’s an excerpt:

ProPublica analyzed millions of those trades, isolated those by corporate executives trading in companies related to their own, then identified transactions that were anomalous — either because of the size of the bets or because individuals were trading a particular stock for the first time or using high-risk, high-return options for the first time.

The records give no indication as to why executives made particular trades or what information they possessed; they may have simply been relying on years of broad industry knowledge to make astute bets at fortuitous moments. Still, the records show many instances where the executives bought and sold with exquisite timing.

Such trading records have never been publicly available. Even the SEC itself doesn’t have such a comprehensive database. The records provide an unprecedented glimpse into how the titans of American industry make themselves even wealthier in the stock market.

Bloomberg’s Matt Levine pointed out that there are situations where executives may be making these types of trades for non-nefarious reasons, such as hedging:

One possibility here is that he was deeply informed about the auction, he had nonpublic information that made him think that Nationstar would win, and he bought Nationstar stock to bet on it going up. Another possibility is, look, there was an auction, somebody was going to win, and it would be good for him if his company won and bad for him if another company won. He did his best to win, but he bought shares in the other company to cushion the blow in case he lost. If Ocwen had won this auction, presumably he’d have a loss on his Nationstar shares, but he’d have a gain on his Ocwen shares and his career generally; this $157,000 gain was the consolation prize.

If the SEC starts pursuing this theory more aggressively, that type of bet may not be worth the risk. The Commission is already using data analytics to find irregular trades, and so is the DOJ! So, this new “data trove” may add to the regulators’ arsenal.

The question for us compliance folks is whether the insider trading policy should include a broad prohibition on trading in other public company securities, including competitors. Having that language could make it more likely that an insider would face consequences for “shadow trading” – but it may also provide more protection to the company, if it gets caught up in the investigation. Ideally, it also would keep everyone out of hot water in the first place. This report could help executives take the prohibition to heart.

Liz Dunshee

March 23, 2023

Rule 10b5-1 Plans: New Rules Throwing a Wrench in “Sell-to-Cover” Arrangements

One of the many practical difficulties in complying with the SEC’s new parameters for Rule 10b5-1 plans is navigating the fact that what may seem like “plain vanilla” transactions relating to equity awards can cause problems for your insiders and company. A member recently asked this question on our “Q&A Forum” (#11,532):

Our plan documents (like several other companies) permit the company to require award recipients to satisfy tax withholding obligations through sell to cover transactions at the time of award vesting (here, RSUs), and authorize the company to determine the means of the sell to cover transaction and even to arrange the sale on behalf of the award recipient without consent. In terms of amount of shares to be sold, the company is authorized only to sell shares in an amount necessary to satisfy tax withholding obligations.

The company is looking to exercise this right as a standing requirement for all award recipients going forward until further notice. Under the new 10b5-1 rules, (1) would the company’s exercise of this right typically have the benefit of being a 10b5-1 plan “eligible sell to cover transaction” by itself, (2) would the sell to cover transaction require a 90-day cooling off period and (3) can the company only force the sell to cover transaction when it is not in possession of MNPI? (I presume the sell to cover transaction would be matchable for any Section 16 officer participant, given it would still be a sale by the award recipient.)

John responded:

I suppose it’s possible that a properly structured plan like the one you’ve outlined might be able to fit within the confines of the “sell-to-cover” exemption, although as our panelists pointed out in our webcast on the 10b5-1 amendments, there are all sorts of issues that may make the sell-to-cover exemption extremely cumbersome in practice. I also discussed those issues in the most recent issue of The Corporate Counsel newsletter.

Since the sell-to-cover exemption only applies to the restriction on multiple plans, I believe the cooling off period would apply to transactions under that plan. However, even if you structure these plans to meet Rule 10b5-1’s requirements with respect to the executives, I think that the fact that the company would effectively control the sales made under this arrangement would compel it to either structure the plan in way that permitted the company itself to rely upon Rule 10b5-1 or to make sales only at times when it was not in possession of MNPI and otherwise in accordance with the provisions of its insider trading policies.

Suffice it to say, it is easy to get tripped up under these new rules. Make sure to think carefully about any transactions, and remember that Form 4 and Form 5 filings made after April 1st will need to have a checkbox that says whether a trade is made pursuant to a Rule 10b5-1 plan. Alan blogged the other day on Section16.net that Edgar has been updated to accomodate that revision.

Liz Dunshee

March 23, 2023

Shareholder Agreements: Will New Delaware Case Stall Unequal Rights at Public Companies?

A new Delaware case that was filed last week may impact how far stockholder agreements can go, as reported in Law360. Brian Seavitt – who was also a plaintiff in the SolarWinds litigation – filed a class action complaint taking issue with a stockholder agreement between a publicly held company and two private equity firms.

The stockholder agreement gives the firms a contractual right to remove directors, approve borrowing arrangements and other significant corporate transactions, and terminate or hire the CEO. It also allows the private equity directors to veto other directors’ selections to fill board vacancies. The plaintiff wants to invalidate parts of the agreement as unenforceable under the Delaware General Corporation Law.

Private equity folks will be watching this case as it proceeds. On Twitter, Tulane’s Ann Lipton pointed out that it also could have implications for public companies with “special governance rights.” A 2021 study that Ann shared from Michigan Law School’s Gabriel Rauterberg found that 15% of companies going public from 2013 – 2018 had a shareholder agreement that continued after the IPO.

In addition, dual-class shares have surged in prevalence at new public companies over the past few years – with nearly one-third of 2021 IPOs having that capital structure. The rights in a dual-class situation can vary – as explained in this paper from BYU Law’s Jarrod & Gladriel Shobe that Ann linked to – but whichever way you slice it, the structure isn’t not appreciated by institutional investors. Those investors have risen up to fight for equal rights for common equity holders – and they likely will be watching this lawsuit.

Liz Dunshee

March 22, 2023

Proxy Disclosure & 20th Annual Executive Compensation Conferences: Blockbuster Lineup for Practical Guidance!

The clock is ticking on the “early bird” registration deal for our pair of combined “Proxy Disclosure & 20th Annual Executive Compensation Conference.” The agenda lineup is in place – 19 panels over 3 days – full of practical action items from leading experts in our community. Sessions include:

1. Erik Gerding: The Latest From Corp Fin

2. The SEC All-Stars: Proxy Season Insights

3. Board Leadership Disclosures: Lessons From Corp Fin’s Sweep

4. Director Skills & Backgrounds: Why Your Disclosures Need a Refresh… & How To Do It

5. Proxy Fights: Practical Steps for UPC’s Sophomore Year

6. Proxy Disclosures: 12 Things You’ve Overlooked

7. Shareholder Proposals: Finding Success in a Challenging Environment

8. The Latest on Rule 14a-8 No-Action Relief

9. Political Spending: Practical Governance & Disclosure Steps for Fraught Times

10. Human Capital Management: Are You Ready for Detailed Disclosure?

11. Insider Trading & Buybacks: What You Need to Do Now

12. Cyber Risk Disclosures: Key Action Items

13. Climate Disclosures: Requirements & Risks

14. The SEC All-Stars: Executive Pay Nuggets

15. The Top Compensation Consultants Speak

16. Pay Versus Performance: What’s New for Year Two

17. Clawbacks: Key Action Items Now

18. ESG Metrics: Beyond the Basics

19. Navigating ISS & Glass Lewis

I’m very proud of the group of experienced speakers that we’ll be bringing together here – lots of former SEC Staff and other heavy hitters – it’s difficult to spotlight specific folks because everyone is so great! And (especially now that I’ve returned to private practice) I’m excited to get practical guidance as we head into another challenging proxy season & grapple with SEC rule changes, Delaware law issues, an unpredictable political environment, and more.

The Conferences are virtual, September 20th – 22nd. You can bundle registration with the “2nd Annual Practical ESG Conference” that’s happening virtually on September 19th, for an additional discount. Register online by credit card – or by emailing sales@ccrcorp.com. Or, call 1.800.737.1271. Here’s a reminder of the benefits of attending:

– The Conferences are timed & organized to give you the very latest action items that you’ll need to prepare for the flurry of year-end and proxy season activity. Why spend time & money tracking down piecemeal updates to share with your higher-ups & board – all while you’re under a deadline and have other pressing obligations, increasing the risk of mistakes – when you can get all of the key pointers at once?

– Unlike some conferences, the on-demand archives (and transcripts!) will be available at no additional charge to attendees after the event, and you can continue to access them all the way till July 2024. That means you can continue to refer back to the sessions as issues arise. Again, saving time & money.

– Due to new SEC rules, the shareholder proposal environment, the increasing emphasis on risk oversight and pressures that companies are facing from both ends of the political spectrum, the performance of boards, individual directors and – thanks to Delaware’s latest spin on Caremark, individual officers – will be subject to greater & greater scrutiny in the coming proxy seasons. That could affect director elections, as well as your company’s ability to raise capital, and your directors’ and officers’ exposure to derivative claims. Our expert panelists will be sharing practical action items to protect your board & officers – and risks to watch out for. Facing a low vote for any director is a nightmare scenario, even if you’re not the target of a proxy contest. This event will empower you to avoid that situation.

Liz Dunshee

March 22, 2023

Proxy Voting & Investments: DOL’s “ESG” Rule Survives Death Threat

On Monday, President Biden vetoed a resolution that would have overturned the latest version of the DOL’s “ESG” rule, which was vulnerable because it was just finalized in November. I blogged about the rule on our “Proxy Season Blog” at that time – it allows ERISA fiduciaries to consider ESG factors in the selection of investments for retirement plans and in proxy voting.

With this being the first veto of Biden’s Presidency, it’s getting a lot of press – including on this recent episode of “The Daily” podcast, which succinctly overviews “the state of ESG” for anyone who’s understandably lost track of the back & forth.

Unfortunately for those of us who spend time on ESG-related shareholder resolutions and engagements, we know that this is just the latest chapter in a saga that has been playing out for many years – with the Biden Administration’s 2022 iteration of the rule changing a version that had been finalized by the Trump Administration in 2020 that would have prohibited consideration of ESG factors by ERISA fiduciaries in investing, and so on, back to at least 2015. I personally am finding that this history makes it harder to share in any excitement or outrage that is accompanying this veto.

We’re keeping track of the various iterations of the DOL regs & guidance in our “ESG” Practice Area (and on PracticalESG.com). For now, you just need to know that nothing is changing…but if history is any guide, it probably will in the future.

Liz Dunshee

March 22, 2023

Audit Committees: Questions to Ask When Your Lead Auditor Outsources Work

On Friday, the SEC’s Chief Accountant, Paul Munter, issued a statement on the responsibilities of lead auditors to conduct high-quality audits when involving other auditors. He notes this has become a prevalent practice:

The increasing integration of world economies and the resultant globalization of multinational public companies has led to increased use of, and more significant roles for, accounting firms and individual accountants other than the lead auditor (“other auditors”) on many issuer audit engagements.

In 2021, for example, 26 percent of all issuer audit engagements and 57 percent of large accelerated filer audits involved the use of other auditors by the lead auditor. In some cases, engagements include the use of other auditors that may not even be registered with the Public Company Accounting Oversight Board (“PCAOB”) and that work in countries with different business cultures and languages from those of the lead auditor.

Here’s the part that’s most relevant to audit committees & companies – and those of us who advise them:

Audit committees make significant contributions to financial reporting through their critical oversight of the independent auditors. With respect to the use of other auditors, audit committees should be actively engaging with the lead auditor to consider the sufficiency of their quality control system, specifically those policies and procedures around supervision and evaluation of the audit work performed by other auditors. This also includes giving careful consideration to the lead auditor’s use of other auditors, especially in areas of significant risk, and engaging in related dialogue in response to communication requirements. Potential questions that audit committees could be asking their auditors include, but are not limited to the following:

– Are there other participating accounting firms that play a substantial role in the audit?

– If so, are they registered with the PCAOB and subject to PCAOB inspections?

– How does the lead auditor supervise the audit work performed by other auditors?

– How does the lead auditor assure that the work is being performed by other auditors that understand the requirements of the applicable financial reporting framework and the PCAOB’s auditing and related professional standards?

We also remind issuers and audit committees that if an unregistered firm plays a substantial role in the audit, the issuer’s financial statements are considered to be “not audited.” Any accompanying annual report, proxy statement, or registration statement containing or incorporating by reference such financial statements creates potential liabilities for the issuer and others, and may result in time consuming and costly remediation efforts. Therefore, management and audit committees should engage with the auditors regarding the PCAOB registration status of other auditors.

The statement also covers lead auditor’s responsibilities in these situations and how those responsibilities are incorporated in PCAOB standards. Paul has been preaching the need to pay attention to audit quality in a series of speeches over the past several years – including this one focused on engagement structures specific to China-based audits, commentary on auditor independence, and this 2021 year-end statement that flags “audit quality” as a key focus area.

Liz Dunshee

March 21, 2023

Corp Fin Comments: Climate Disclosure Makes the “Top 3”!

The SEC’s proposed climate disclosure rules aren’t yet final, but companies should still be paying close attention to the Commission’s 2010 interpretive release. A recent PwC analysis of Corp Fin’s 2022 disclosure review activity underscores why: climate disclosure has broken into the “top 3” most prevalent topics that are drawing comments on Form 10-K & 10-Q filings – a trend that was noticeable as early as Q1 last year.

If you haven’t already made sure that your CSR/ESG/Sustainability report and your SEC filings are consistent with each other – not just “not conflicting” but also in terms of expansiveness – now is the time to do that. PwC explains:

These comments are largely focused on information related to climate change-related risks and opportunities that may be required in a company’s description of business, legal proceedings, risk factors, and management’s discussion and analysis of financial condition and results of operations. In these letters, the staff frequently commented on:

– inconsistencies between a registrant’s corporate social responsibility report and its SEC filings;

– the lack of disclosure in a registrant’s SEC filing of the risks, trends, and impact of climate change for the registrant and its business; and

– the lack of disclosure in a registrant’s SEC filings related to pending, or existing climate-related legislation and regulations that could have a material impact on a registrant’s business.

The memo gives several examples of specific comments that have been issued. Here’s a few:

– We note that you provided more expansive disclosure in your corporate social responsibility report (CSR report) than you provided in your SEC filings. Please advise us what consideration you gave to providing the same type of climate-related disclosure in your SEC filings as you provided in your CSR report.

– Disclose the material effects of transition risks related to climate change that may affect your business, financial condition, and results of operations, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks, or technological changes.

– There have been significant developments in federal and state legislation and regulation and international accords regarding climate change that you have not discussed in your filing. Please revise your disclosure to identify material pending or existing climate change-related legislation, regulations, and international accords and describe any material effect on your business, financial condition, and results of operations.

Other areas of focus during the past year included several “old favorites”: MD&A, non-GAAP, segment reporting, revenue recognition, disclosure controls, and more. We’re posting info about comment letter trends in our “Comment Letter” Practice Area, which is also where you can find our “SEC Comment Letter Process Handbook.” The Handbook shares guidance on how to navigate the response process and includes insights from Sidley’s Sonia Barros & Sara von Althann, who both spent time on the Staff.

Liz Dunshee