TheCorporateCounsel.net

January 22, 2021

Commissioner Lee Designated as Acting SEC Chair

Yesterday, the SEC announced that President Biden designated Commissioner Allison Herren Lee as Acting Chair of the agency. Right before the end of the year, President Trump designated Commissioner Elad Roisman as Acting Chair following former Chairman Jay Clayton’s departure.  Commissioners Hester Peirce, Elad Roisman and Caroline Crenshaw issued a statement congratulating Commissioner Lee on her designation as Acting Chair. Earlier this week, the President nominated Gary Gensler to serve as SEC Chair and until he goes through the confirmation process, Acting Chair Lee will preside over a four-person Commission.

Plan Ahead: 2021 Peak Edgar Filing Dates

Now that 2021 is here, it might be a good idea to check your calendar – the SEC published the list of 2021 peak filing days.  Identified peak filing dates are based on historical data and the SEC says that the filing volume on peak days tends to be highest in the last hour of the filing day.  The SEC also says that filers who contact Filer Support on peak filing dates may experience longer than usual wait times.

Difficult D&O Pricing Environment: Consider Doubling SPAC D&O Premium Estimates

I recently blogged about how, during what is a challenging D&O pricing environment, some insurers are starting to look at company diversity practices. As the SPAC craze continues, SPACs are running into more issues with D&O insurance pricing. A recent Mayer Brown Free Writing & Perspectives blog says D&O pricing for SPAC sponsors has increased dramatically in just a few weeks:

The contributing factors to the difficult D&O pricing environment include the fact that there are only a handful of insurers who are willing to write D&O coverage for SPACs and these same insurers have been inundated with requests for such coverage over the last few weeks and are running out of annual capacity.

These factors and others have driven SPAC D&O pricing to levels that are 100% to 200% higher than they were just a few weeks ago. As a result, the cost of a $20 million D&O policy has jumped from mid-$400,000s to between $900,000 and $1,100,000 just in the last month and in turn has led to hundreds of thousands of dollars in unplanned expenditures. SPACs looking at previous SPAC S-1 registration statements should be mindful that D&O insurance cost estimates in typical S-1s may have been actionable several years ago but are wishful thinking in today’s D&O market.

A recent Business Insurance article says D&O liability pricing isn’t getting any better.  The article says pricing is going up and underwriters are raising retentions. As to when we’ll start seeing pricing improvements, the article says some believe there won’t be a letup until sometime in the third quarter of this year.

– Lynn Jokela

January 21, 2021

M&A Financial Disclosure: New Rules Effective Now

The new rules governing financial information that public companies must provide for significant acquisitions & divestitures, which were adopted last May, became effective January 1st. The amendments made conforming changes to Items 2.01 and 9.01 of Form 8-K relating to, among other things, determining significance of an acquisition.

Those conforming changes to Form 8-K are outlined beginning on page 71 of the rules published in the Federal Register. However, as a heads up to anyone preparing this Form 8-K disclosure, it appears that the Form 8-K available on the SEC’s Forms List was last updated in May 2019 and does not yet reflect these updates.  For those looking for information about M&A financial disclosure – we have memos about the new rules posted in our “Accounting Overview” Practice Area.

It doesn’t appear these rules will be affected by the regulatory freeze President Biden imposed yesterday, which we’re still learning more about. As noted in this Cooley blog, these rules could be among several as possibly being negated under the Congressional Review Act, but at least historically, it’s been rare for that to happen.

“Say-on-Climate”: Future Routine Vote?

Back in December, Liz blogged on our “Proxy Season Blog” about Unilever’s plan to seek shareholder approval for its climate action plan. A recent Agenda Week article reports that at least seven North American companies received shareholder proposals requesting advisory votes on company climate change plans. The article says investors behind the proposals include hedge fund TCI Fund Management and As You Sow – they want regular votes on climate change so shareholders have a say on whether company progress on climate change is moving along fast enough. Although seven proposals aren’t a lot, the proposals are taking hold in Europe:

While this may be the first time many companies in the U.S. are dealing with say-on-climate proposals, the vote has been gaining traction in Europe. Aena, a Spanish airline operator, was the first company to adopt an annual shareholder advisory vote on its climate plan and progress after engaging with TCI late last year. And one European investor, Ethos Foundation, which serves as a proxy advisor to Swiss pension funds, adjusted its proxy-voting guidelines for the 2021 season to support say-on-climate proposals.

The article quotes the CEO of Ethos Foundation as saying ‘We don’t expect too many votes this year, but the pressure is increasing as some European companies already decided to adopt this advisory vote, and Unilever is one of them. We decided to put this in our guidelines early to set the tone and tell companies what we expect and to influence other investors to push for the right to vote on climate transition plans.’

For U.S. companies, a proposal at Moody’s has been withdrawn, presumably in response to Moody’s announcement that it would support the “say-on-climate” campaign – shareholders will vote on Moody’s climate transition plan at its 2021 shareholder meeting.  It’s possible more of the seven North American proposals will be withdrawn before this year’s shareholder meetings but in the meantime, it doesn’t seem like much of a stretch to think we may see more of these proposals coming down the pike. It’s probably a little early though to make a call saying whether these proposals might be on their way to becoming another “routine” annual meeting voting matter.

Financial Fraud Schemes: Familiar Common Themes

Throughout the last year, we’ve continued to read about SEC enforcement actions and the Enforcement Division’s continued focus on financial fraud. Many expect the Enforcement Division to be more active and aggressive in the coming years. To help companies protect against financial fraud, a recent study from the Anti-Fraud Collaboration analyzed SEC enforcement actions and provides insight into common financial fraud themes – it says the most common schemes and areas at higher risk for manipulation aren’t necessarily new.  Here are some of the study’s findings:

The kinds of business challenges that were frequently present in enforcement cases—pressure to meet analyst expectations, increased supplier costs, slowing demand for products, and more—are exacerbated during a crisis like COVID-19.  These kinds of challenges and issues suggest a need for the board and audit committee, management, and internal and external auditors to be attuned to both quantitative and qualitative metrics.

The most common type of fraud incident was improper revenue recognition (43%). Reserves manipulation (24%), inventory misstatement (11%), and loan impairment issues (11%) were other common financial statement fraud schemes. Improper revenue recognition was among the top two fraud schemes from 2014 through mid-2019.

Some industries were charged more frequently than others. Technology services companies (17%) were the most commonly charged industry. Finance (13%), energy (11%), and manufacturing (9%) were also charged in the enforcement actions.

The study includes cites case examples of common financial fraud schemes along with the result. In terms of what companies should do, the study reminds companies to continue exercising skepticism and attention to potential risks. It suggests companies should remain focused on the fundamentals—controls, processes, and environments that impact financial recordkeeping and decision-making—and company-specific risks by conducting regular risk assessments.

– Lynn Jokela

January 20, 2021

End of an Era: Corp Fin’s Shelley Parratt to Retire

Yesterday, the SEC announced Shelley Parratt is retiring after a remarkable 35 years of service with the agency.  For many, Shelley’s name is synonymous with Corp Fin – she’s currently the Division’s Acting Director and joined Corp Fin in 1986.  Over the years, Shelley served on three occasions as the Division’s Acting Director – here’s Broc’s blog from 2009 when she became Acting Director – and has served as Corp Fin’s Deputy Director since 2003. The press release includes several highlights of Shelley’s career and notes she led Corp Fin’s Disclosure Program for more than 25 years. In recognition of her service, Shelley has received numerous awards, including the Distinguished Service Award, the SEC’s highest honorary award.  She’s also been recognized for her role in promoting women in leadership roles, this excerpt from the SEC’s press release provides a highlight:

Throughout her tenure, Ms. Parratt served as a trusted mentor for countless current and former SEC staff members. As one of the longest serving female senior executives at the SEC, Ms. Parratt used her role to mentor and promote women into leadership roles. Always focused on the present and future needs of the Division, she helped lead the Division’s efforts to enhance diversity and inclusion, knowledge management and staff training with a primary focus on developing the Division’s future leaders. SEC Chair Mary Jo White recognized these efforts by presenting her with the Leading for the Future award in 2016.

Acting Chair Roisman recognized Shelley’s service and contributions, saying ‘Shelley epitomizes the dedication and expertise that are hallmarks of the SEC’s professionals, and we owe her a great debt of gratitude for her decades of public service.’

Shareholders Approve Public Company Conversion to PBC – In a Landslide!

Last fall, Liz blogged about some of the possible benefits of B-corps. At that time, Veeva Systems had formed a board committee to explore becoming a public benefit corporation. Of course one hurdle to a public company PBC conversion is the need for shareholder approval. Last week, Veeva announced that its shareholders gave the company two thumbs up as they overwhelmingly approved the company’s proposal to convert to a PBC – the company received support from 99% of its voting shareholders.  On February 1, Veeva will become a PBC, making it the first publicly traded company and largest-ever to convert to a PBC, here’s an excerpt from the company’s press release:

As a PBC, Veeva will remain a for-profit corporation but will be legally responsible to balance the interests of multiple stakeholders, including customers, employees, partners, and shareholders. It will also broaden its certificate of incorporation to include a public benefit purpose, ‘to help make the industries it serves more productive and create high-quality employment opportunities.’

A key technology partner to the life sciences industry, Veeva is dedicated to customers’ mission to advance human health and wellbeing. This move aligns Veeva’s legal charter with this broader mission and the company’s core values, including do the right thing, customer success, and employee success.

Tomorrow’s Webcast: “The Latest: Your Upcoming Proxy Disclosures”

Tune in tomorrow for the CompensationStandards.com webcast – “The Latest: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance – including the latest SEC positions – about how to use your executive & director pay disclosure to improve voting outcomes and protect your board, as well as how to handle the most difficult issues on oversight, engagement and disclosure of executive & director pay.

– Lynn Jokela

January 19, 2021

Gary Gensler Tapped for Nomination as Next SEC Chair

Yesterday President-elect Biden announced several additional picks for his administration, including his intention to nominate Gary Gensler to serve as SEC Chair.  Gensler is currently a professor at MIT’s Sloan School of Management, previously served as Chairman of the Commodity Futures Trading Commission and is a former Goldman Sachs executive.  Speculation about who President-elect Biden would nominate for the SEC chair position has been swirling for a while now, although over the last week, several media outlets began reporting that Gensler would get the nomination – here’s a NYT story from last week.

With the incoming administration, the NYT reports that the SEC might focus on disclosures relating to climate change risk, political donations and boardroom diversity, while also potentially rethinking rules around stock buybacks. Some have noted that Gensler taught courses on cryptocurrencies at MIT and speculate that rules on digital currencies may also come into focus.  He’s also likely to step up enforcement efforts at the agency and some are saying he will favor aggressive regulation for financial institutions and companies.

It’s hard to say exactly when the agency’s new chair will be confirmed.  Back in 2017 when former Chairman Clayton was nominated, the timeline went like this: nomination announced in early January, Senate Banking Committee met to approve the nomination in early April and full Senate confirmation came along in early May.

Glass Lewis Refines Policy on Virtual Shareholder Meetings

In our webcast last week, one of the topics Courteney Keatinge, Glass Lewis’s Senior Director of ESG Research, talked about was the proxy advisor’s policy on virtual shareholder meetings. Glass Lewis supports virtual participation in shareholder meetings but has concerns when a company doesn’t provide “robust” disclosure about shareholder participation rights. There’s been a refinement to that policy, which Glass Lewis shared in a recent blog post.

One tweak in the proxy advisor’s expectations relates to when there are restrictions on the ability of shareholders to question the board during the meeting. In these situations, the proxy advisor expects a transparent disclosure about the company’s commitment to post questions and answers on the company’s shareholder meeting or IR website. The blog post also provides insight about the proxy advisor’s views relating to hybrid meetings, in-person meetings, amendments allowing virtual or hybrid meetings and allowing virtual participation by directors and executives. After last year, many, if not most, companies have experience holding a virtual shareholder meeting so shareholder expectations about information they need to participate and ask questions will likely be higher.  Here’s an excerpt about the proxy advisor’s VSM disclosure expectations:

Companies can mitigate risk of reduction in shareholder rights by transparently addressing:

– When, where, and how shareholders will have an opportunity to ask questions related to the subjects normally discussed at the annual meeting, including a timeline for submitting questions, types of appropriate questions, and rules for how questions and comments will be recognised and disclosed to shareholders.

– In particular where there are restrictions on the ability of shareholders to question the board during the meeting – the manner in which appropriate questions received prior to or during the meeting will be addressed by the board; this should include a commitment that questions which meet the board’s guidelines are answered in a format that is accessible by all shareholders, such as on the company’s AGM or investor relations website.

– The procedure and requirements to participate in the meeting and/or access the meeting platform.

– Technical support that is available to shareholders prior to and during the meeting.

In the most egregious cases where inadequate disclosure of the aforementioned has been provided to shareholders at the time of convocation, we will generally recommend that shareholders hold the board or relevant directors accountable and depending on a company’s governance structure, country of incorporation and meeting agenda Glass Lewis may recommend shareholders vote “against” members of the governance committee, board chair or other agenda items relating to board composition and performance.

Inauguration Day: Business as Usual for Edgar

With the inauguration tomorrow, some have SEC filings top of mind.  For those that do, the SEC issued an announcement that Edgar will operate normally that day.  The announcement is somewhat matter of course for the agency as it issued a similar announcement for the 2017 inauguration.

– Lynn Jokela

January 15, 2021

Financial Reporting: Mind Your XBRL Tags

There are few topics that make my eyes glaze over more quickly than anything related to XBRL. But in a recent FEI article, former SEC Chief Accountant Wes Bricker says that companies and audit committees need to pay closer attention to the quality of their efforts to comply with XBRL tagging requirements:

While more regulators have been requiring XBRL in recent years, its use hasn’t been without challenges: for instance, errors, inconsistent tagging of the same information across companies or mis-tagging tags are ongoing issues. And there are even technology companies that have emerged over the past few years that mine XBRL-public filings, remedy the problematic data and then sell the corrected data back to those that use XBRL data (including back to companies themselves).

While any errors in financial reporting or other processes is cause for concern across the market because of its corrosive impact on confidence over time, with XBRL errors there’s also a potential corrosive effect for individual companies, such as potential negative impacts to stock price, credit ratings, and even reputation.

The article notes that errors are difficult to scrub from the Internet, even following a corrective amendment – and the consequences can be significant. Reporting errors caused by XBRL issues could pose reputational risks, which can be compounded if tagging inaccuracies are overlooked and carried forward into future periods. Faulty XBRL data also could bring about errors in rating agencies’ models – which in a worst case scenario could result in a lower credit rating and higher borrowing costs.

Despite these stakes, the XBRL tagging error rate is high.  According to this Toppan Merrill blog discussing the article, 34% of September 10-K & 10-Q filings reportedly contained tagging errors. That blog also points filers to the US XBRL Data Quality Committee’s website, which provides a free service permitting companies to check their filings.

Wes Bricker’s article recommends actions that companies and audit committees should take to enhance the XBRL process, including enhanced education and training of staff in corporate accounting, finance, treasury, and investor relations. The article didn’t mention the need to loop in the legal department or outside counsel – which is good, because my eyes glazed over about three paragraphs ago. But as Liz blogged last month, if SEC commissioner Allison Herron Lee gets her way, we all may have to force ourselves to pay closer attention to XBRL tagging issues.

Insider Trading: Capitalizing On Cyber Breaches

In a recent Institutional Investor article, the authors of a new study suggest that there’s been quite a bit of insider trading during the period immediately following a breach. The study looked at options trading during the period between the time a cyber attack was experienced and when it was disclosed – and it reached some interesting conclusions:

We observed bearish call and hedging put strategies increasing prior to the official breach announcements. These effects were most significant for out-of-the-money, at-the-money, and in-the-money put options, which typically have the highest liquidity. Additionally, we found a spike in investors buying insurance against a stock crashing right before that company told the world it had been hacked.

An increase in deep out-of-the-money trades indicates that informed investors expect negative news in the future. We also saw that the options trading activity before a firm’s breach disclosure was related to the negative abnormal stock returns the firm experienced after the disclosure. Thus the pre-disclosure trading activity was consistent with informed investors profiting from or buying insurance against a stock crashing right before the company told the world it had been hacked.

The good news is that the authors found that the amount of potential insider trading around cyber breaches has declined over the past decade, which they attribute to increased scrutiny of breaches and greater awareness of trading around them before official announcements.

Private Offering Simplification Rules: We Have An Effective Date

The SEC’s recent amendments simplifying the regulation of private offerings were published in the Federal Register yesterday, and will become effective on March 15, 2021. We’ve just scheduled a webcast for February 17th to help you get up to speed on the new regime. Be sure to tune in!

– John Jenkins

January 14, 2021

Political Spending: Will the Pause Change the Game?

Last week’s attack on the Capitol – I still can’t believe I’m writing those words – has prompted many companies to hit pause on their political contributions. Initially, corporate donors targeted Republican lawmakers who objected to the certification of President-Elect Biden’s victory, but many have at least temporarily halted all political contributions.

Critics have suggested that these actions are merely symbolic, and that companies will jump back into the political game once the news cycle moves on to something else. I have no doubt that they’ll be back, but it’s just possible that last week’s attack may represent a turning point when it comes to how companies approach political spending.  Why?  Well, this pause isn’t occurring in a vacuum, and it may help accelerate some existing and emerging trends:

– Institutional investors and companies are under increasing pressure to align their political spending with their stated priorities & to disclose more information about that spending. Ironically, on the day of the attack, Liz’s lead blog was all about BlackRock’s efforts to urge greater transparency among the companies in which it invests when it comes to corporate political activities.

– The results of the latest CPA-Zicklin survey indicate that companies themselves are continuing to become more transparent about & accountable for their political spending.

– Activist investors increasingly look for ESG hooks to expand their base of investor support for their campaigns. In an increasingly divided and volatile environment, a company’s political spending may prove to be low hanging fruit for activists.

It also looks like political spending disclosure will be a priority issue for the SEC under the Biden Administration. The SEC will need a little help from Congress if the agency intends to act on disclosure rules. As I blogged last month, Congress recently continued the bipartisan tradition of stealthily prohibiting the SEC from using any of its funding to adopt political spending disclosure rules.

Why Don’t Ex-SEC Enforcement Lawyers Join the Plaintiffs’ Bar?

This week’s announcements of the departure of the SEC’s Chief Accountant & its Acting Director of Enforcement are a reminder that a change in presidential administrations always results in an exodus of senior SEC Staff to positions in the private sector. The SEC’s senior accountants usually find their way to the Big 4 in some capacity, while many former SEC enforcement lawyers end up with positions in private law firms. However, few former SEC lawyers opt to work for firms on the plaintiffs’ side, despite the potentially lucrative nature of that work.

Michele Leder (aka footnoted.com) recently tweeted about a study that explores why that’s the case. This ProMarket blog from the study’s author suggests that the reasons are likely more complex than the simplistic “quid pro quo” explanation that usually has been put forth by academics:

While traditional academic analysis of the “revolving door” focuses on evidence of a material quid pro quo — for instance, an enforcement attorney who receives an offer of lucrative private sector employment in exchange for going “easy” on that target while she’s in government — more recent work has acknowledged that government officials may come to internalize industry preferences as a result of softer mechanisms and influences.

The rapidly revolving door between the SEC and the defense bar, and the close contact SEC attorneys have with defense-side attorneys throughout investigations and enforcement actions, give SEC attorneys ample exposure to the defense bar’s characteristic skepticism and hostility towards securities class actions and the lawyers who pursue those cases. By contrast, SEC attorneys are unlikely to have any direct contact with plaintiffs’ attorneys, even when there is a parallel private lawsuit against a company they are pursuing.

Interestingly, there is one area on the plaintiffs’ side that former SEC enforcement lawyers have apparently embraced – representing whistleblowers. The blog notes that whistleblower cases differ from traditional plaintiffs’ work in that they are oriented around the SEC itself, and permit former Staff members to leverage their unique government expertise and connections for a competitive advantage.

Transcript: “Covid-19 Busted Deal Litigation – The Delaware Chancery Court Speaks!”

We have posted the transcript for the recent DealLawyers.com webcast – “Covid-19 Busted Deal Litigation: The Delaware Chancery Court Speaks!”

John Jenkins

January 13, 2021

MD&A & Financial Disclosures: What’s the Compliance Date?

Yesterday, I blogged about the effective date & mandatory compliance date for the SEC’s new MD&A and financial disclosure rules.  Unfortunately, there appears to be a bit of confusion within the U.S. government about when companies will be required to comply with the new rules.  The version of the adopting release for the rules published in the Federal Register (p. 2109) says that the mandatory compliance date is August 9, 2021, while the updated version at the SEC’s website (p. 104) says the compliance date is September 8, 2021.

The version originally published by the SEC said that the mandatory compliance date would be 210 days after publication of the rules in the Federal Register, which gets you to August 9th.  The September 8th date is 210 days after the effective date of the rules.  Well, at least we have some time to sort this out – although I think the Federal Register version controls.

Update: August 9th it is! The SEC has revised the version of the adopting release on its website to conform to the Federal Register.

SEC Solicits Comment on NYSE Shareholder Approval Proposal

Last month, the NYSE submitted proposed amendments to its shareholder approval rules. On December 28th, the SEC issued a notice soliciting public comment on the proposed rule change. Here’s the intro from this Mayer Brown blog:

On December 16, 2020, the New York Stock Exchange (“NYSE”) filed a proposed rule change to certain of its shareholder approval requirements, which would bring the NYSE’s shareholder approval rules into closer alignment with those of Nasdaq. Last year, the NYSE temporarily waived certain requirements under Section 312 in order to provide listed companies with greater flexibility to raise capital during the COVID-19 crisis (the NYSE has proposed to extend these temporary waivers through March 31, 2021). The NYSE’s proposed rule change includes amendments that are identical to such waivers.

The blog also provides details on other aspects of the rule proposal. The NYSE’s temporary waiver of certain requirements under Section 312 was initially issued back in April 2020. It was originally scheduled to expire in June 2020, but was subsequently extended to the end of the year & recently extended again until March 31, 2021.  The comment period on the rule proposal expires 21 days after publication of the notice in the Federal Register – or maybe September 8th, I don’t know. . .

Tomorrow’s Webcast: Glass Lewis Dialogue – Forecast for the 2021 Proxy Season

Tune in tomorrow for the webcast – “Glass Lewis Dialogue: Forecast for the 2021 Proxy Season” – to hear Courteney Keatinge of Glass Lewis, Ning Chiu of Davis Polk and Bob Lamm of Gunster discuss what to expect with the new proxy adviser rules, investors’ focus on diversity and other ESG issues, virtual meetings and other pandemic-related developments.

Earlier this week over on “The Proxy Season Blog”, Liz blogged about State Street’s efforts to ratchet up the pressure on boards to address diversity issues, which makes this webcast even more timely!

John Jenkins

January 12, 2021

Board Self-Evaluations: Factoring 2020 Into the Equation

The calendar says it’s 2021, but the distressing events in Washington last week suggest that the 2020 dumpster fire continues to rage on unabated.  This Bryan Cave blog says that as much as we’d all like to put 2020 in the rear-view mirror, boards should factor the year’s lessons into the topics they discuss during upcoming board evaluations.  Here are some suggested supplemental discussion topics prepared with the annus horribilis in mind:

– All board members have sufficient technology capabilities, IT infrastructure and cybersecurity protections to effectively access board materials, prepare for and participate in board meetings in the virtual environment.

– Board members pay sufficient attention to environmental and social consequences and potential risks resulting from the company’s activities.

–  Board members are able to clearly and effectively communicate with each other and with management in the virtual environment, enabling them to fulfill their responsibilities and make rapid and significant decisions during the COVID-19 pandemic.

– All board members, regardless of their gender, race or ethnicity, feel that their voices are heard and their contributions are respected and valued.

The blog suggests several additional topics for consideration in the self-evaluation process. It says that expanding the process to cover these topics will assist boards in learning from the events of 2020 & in taking appropriate actions to adapt to the pandemic and address the other areas of heightened investor concern that arose last year.

SEC Enforcement: Ripple’s “Takin’ It To The Tweets. . .”

I think the last time I blogged about the fraught relationship between the crypto folks & SEC Enforcement, I reviewed how Kik Interactive got clobbered by a federal judge after it actively courted an enforcement proceeding. Daring the SEC to bring an enforcement action is something that I have a hard time understanding, but then again, I have a hard time understanding quite a few things about the digital asset evangelists.

The latest situation to befuddle me involves Ripple Labs, which recently found itself the target of the customary SEC enforcement action alleging that its $1.3 billion unregistered offering of digital assets violated Section 5 of the Securities Act. Being crypto folks, Ripple’s management went out and did a very crypto thing in response to the SEC’s allegations.  Instead of just issuing the standard press release indicating that the company intended to vigorously contest the SEC’s claims, Ripple opted to take to social media, where its CEO Brad Garlinghouse posted a 10 tweet thread addressing “5 key questions” raised by the proceeding.  Not to be outdone, Ripple’s GC weighed-in with a brief thread of his own addressing the lawsuit.

Admittedly, this isn’t functionally all that much different from addressing a major piece of litigation or an SEC enforcement action in an investor call.  But one of the benefits of the more traditional approach is that you avoid the baggage that comes along with the “rage as a service” platform known as Twitter – such as being on the receiving end of a grenade like this in your mentions:

Ouch! That’ll leave a mark.

MD&A & Financial Disclosures: Effective Date of the New Rules

One of our members pointed out in our Q&A Forum that the SEC’s amendments to the MD&A and financial disclosure rules were published in the Federal Register on Monday. The rules will be effective February 10, 2021 – and early compliance is permitted for filings made after that date, so long as the company provides disclosure responsive to an amended item in its entirety. However, companies are not required to comply with the new rules until the first fiscal year ending on or after August 9, 2021 (210 days after the Federal Register publication date).

Since the clock is now ticking, be sure to check out today’s webcast on the new rules!

John Jenkins

January 11, 2021

Peak SPAC: LMAO! Looks Like I Made a Bad Call. . .

Remember when I blogged that the Playboy Enterprises deal was “peak SPAC”? Upon further review, I think I made a bad call. On Friday, Bloomberg’s Eric Balchunas tweeted about a Form S-1 filing by a SPAC called “LMF Acquisition Opportunities, Inc,” which I think beats Playboy pretty handily.  What makes this deal stand out? Well, the cover page of the prospectus discloses that the Nasdaq trading symbol for the company’s Class A Common Stock is “LMAO.” A quick perusal of the filing indicates that the company is looking to raise $75 million. I guess if it does, then it will be in a position to LMAO all the way to the bank. If that isn’t peak SPAC, I don’t know what is.

While we’re on the topic of “peak SPAC,” a recent WSJ opinion piece suggests that the “SPAC bubble” may soon burst – and that this would be a good thing for investors.  This excerpt explains why:

We studied SPACs that completed mergers between January 2019 and June 2020 and found that, on average, they lost 12% of their value within six months following the merger, while the Nasdaq rose roughly 30%. Even with these drops in share price, the 20% that the sponsor gets essentially for free provides a nice return on its investment. The sponsors of these SPACs enjoyed a return on investment of more than 500% as of the end of 2020.

LMAO indeed!

IPOs: The Outlook for 2021

Baker McKenzie recently issued its 2020 IPO Report, which discusses the current year’s activity & the trends to watch for in 2021. Peak SPAC or not, it looks like SPAC deals will continue to feature prominently in the mix – at until things return to a more normal environment:

In looking at what 2021 holds for the IPO markets, the economic outlook will largely hinge on the distribution of a vaccine to COVID-19, heralding the official beginning of a return to “normalcy” and the full return of consumer confidence. As businesses successfully re-engineer their financial statements to an economic environment of recovery, we can expect to see capital raises for businesses to start expanding and investing in their growth and development, leading to a ripple effect of economic activity.

Until then, we will likely continue to see a proliferation of Special Purpose Acquisition Companies (SPACs) as well as businesses continuing to access the capital markets in conventional ways with going public, given that there remains a huge amount of dry powder in the private equity markets.

SPACs have historically been met with skepticism by the market and investors alike, but improved regulatory requirements and a number of recent high profile and successful acquisitions have helped to build the interest and momentum behind one of this year’s biggest trends. While these regulatory requirements vary across geographies, the more risk-averse framework in the US is one of the primary reasons that almost all SPAC activity takes place in New York.

The report notes that SPAC deals drove a huge increase in US domestic IPO activity during 2020, and points out that continuing tensions between the U.S. and China and the recent enactment of the Holding Foreign Companies Accountable Act has led to a number of jurisdictions, Hong Kong and London in particular, planning and introducing regulatory changes on stock exchanges in an effort to lure China-based listings away from the U.S. markets.

Tomorrow’s Webcast: “Streamlined MD&A and Financial Disclosures – Early Considerations”

Tune in tomorrow for the webcast – “Streamlined MD&A and Financial Disclosures: Early Considerations” – to hear our own Dave Lynn of Morrison & Foerster, Bryan Brown of Jones Day, Lyuba Goltser of Weil, Gotshal & Manges and John Newell of Goodwin Procter discuss the newly amended MD&A and financial disclosure rules and the benefits and drawbacks of voluntary early compliance.

John Jenkins

January 8, 2021

Podcasts! Podcasts! Podcasts!

If you’re looking for an easy way to connect the dots on disclosure and ESG issues, we’ve got you covered with podcasts! Sit in on a convo between Dave Lynn and his guests on our “Deep Dive With Dave” series, or get governance highlights from my interviews of members of our community. Check out our latest episodes below – and you can also visit our podcast page for new postings:

In this 23-minute episode, Dave and WilmerHale’s Lillian Brown discuss these shareholder proposal developments:

– Key takeaways from the 2020 proxy season

– Evaluating the SEC Staff’s approach to no-action requests in 2020

– Should I include a board analysis in my shareholder proposal no-action letter?

– New and revised proposal topics for 2021

In this 30-minute episode, Dave and our own John Jenkins give a “risk factor workshop” for companies preparing to comply with the SEC’s amendments to Item 105 of Reg S-K and to explain the impact of the pandemic. Dave and John built on the very practical “Best Practices for Drafting Your Risk Factors” in the January-February 2018 issue of The Corporate Counsel newsletter and covered these topics:

– Tackling the amendments to Item 105 of Regulation S-K

– Hypothetical risk factor language – where are we now?

– What should I do with my COVID-19 risk factor in the next Form 10-K?

– What are some other risk areas for 2021?

– John’s risk factor tips

In this 13-minute episode with EY Partner and former Corp Fin Chief Accountant Mark Kronforst, Dave and Mark examine the Reg S-X amendments for disclosure about acquisitions & dispositions, including:

– How significant are these changes to Regulation S-X for public companies?

– How do the new significance tests work?

– Will companies need to provide more pro forma financial information?

– Do the changes to the significance tests affect disclosures outside of Rule 3-05, such as Rule 3-09?

– What potential pitfalls should companies consider with this new approach?

– When do these changes go into effect and how does early compliance work?

In this 15-minute episode, I talked with Alan Smith, chair of Fenwick & West’s corporate group, about the phenomenon of virtual board meetings. We covered these topics:

– What special issues exist for boards of directors who are meeting in a virtual format

– What should board advisors be doing to ensure that the board meetings are secure from a technology perspective and that all document retention policies are being followed for notes or recordings

– What are some effective practices to encourage the type of dialogue and interaction that boards would have at an in-person meeting

– Beneficial “virtual” practices that could continue after the pandemic

– Recommended steps for companies who are bringing on one or more directors while we’re in this environment – either because they’re newly public or just because of regular refreshment practices

– Traps for the unwary that board advisors should be watching for

Lastly, I continue to team up with Courtney Kamlet of Vontier to interview “Women Governance Gurus” about their career paths – and what they see on the horizon. Feedspot recently ranked us as one of the “Top 15” corporate governance podcasts on the web. Check out our latest episodes:

Kristina Fink, Vice President, Group Counsel, Deputy Corporate Secretary at American Express

Tanuja Dehne, President & CEO of the Geraldine R. Dodge Foundation and a public company board member

SEC Rulemaking: Will 2020’s Efforts Be Undone?

Our colleague Mike Gettelman blogged earlier this week about the prospect of recent SEC rulemaking being undone by the Congressional Review Act – a complicated and rarely used law that allows Congress to overturn rules adopted by federal agencies like the Commission. Mike cited 11 rules adopted by a 3-2 vote since July, which could be vulnerable to this clawback.

In the year-end report on the activities of the Office of the Investor Advocate (which is required to be delivered to committees in the House and Senate), Rick Fleming also called for the SEC to reverse several of its own rules, including:

– Rule 14a-8 Amendments – arguing the rules diminish the ability of shareholders with smaller investments to submit proposals and disagreeing with the economic analysis in the rulemaking

– Proxy Advisor Rules – saying investors shouldn’t be forced to pay for feedback mechanisms for companies and that the rules may result in the suppression of dissenting views

– Private Offering Harmonization – expressing a concern with the continued shift of capital-raising from public to private markets

The report also urges the Commission to adopt rules about ESG disclosures, making companies’ SEC filings machine-readable and minimum listing standards for all stock exchanges. Time will tell whether the SEC under the new Administration will revisit – or refine – activities under former Chair Jay Clayton, or will prioritize other initiatives.

A Corner of Normality

What a week. I blogged on Wednesday about BlackRock’s new expectations for political spending disclosure and also on our Mentor Blog about the CLO’s role in CEO “activism.” By the end of that day, a major trade organization which counts 14,000 companies in its membership ranks called for the Vice President to invoke the 25th Amendment. The Business Roundtable, the US Chamber and several individual CEOs also issued statements condemning the assault on the Capitol and the threat to the peaceful transition of power.

On the one hand, it’s difficult to focus on “business as usual” in the midst of the events of this week and the past year. But I, for one, also appreciate having a corner of normality – some form of connection to each other, some info that can make work easier and maybe even some entertainment. We’ll do our best to continue to offer stability – and an alternative to doomscrolling.

Liz Dunshee