May 1, 2015

Corp Fin Comments: More Readable Responses Produces Better Results?

Check out this new study by a trio of professors entitled “Consequences of Writing Not So Readable Responses to SEC Comment Letters.” Here’s the abstract:

An emerging literature shows that shareholders benefit from the Securities and Exchange Commission’s (SEC) filing review process in terms of improved disclosures and reduced information asymmetry. However, SEC filing reviews also impose significant costs on companies because the comment letter remediation process diverts substantial time and resources away from normal operations. Using the Fog index to measure the readability of the company’s response to an SEC comment letter, we find that more readable company responses are associated with shorter response times (i.e., the number of days it takes the SEC to respond to the company’s initial response letter and the number of days it takes the SEC to close the filing review), a lower likelihood the SEC issues follow up comments, fewer rounds of comments, and a lower probability of a restatement stemming from the filing review.

Thus, we identify a relatively easy and inexpensive way for companies to mitigate the costs of the comment letter remediation process. We expect that our results will be of interest to managers, boards of directors, audit committees, and other stakeholders involved in formulating responses to SEC comments because they suggest that response readability can have a significant effect on regulators’ reaction to the disclosure.

I’d be interested in your thoughts before I weigh in with my ten cents…

Will El Paso Pipeline Shake Up Shareholder Derivative Actions?

Recently, Delaware VC Laster delivered a post-trial opinion – In re El Paso Pipeline Partners Derivative Litigation – about a series of related-party transactions known as dropdowns, in which a controlled entity purchases assets from its parent. Notably, $171 million in damages was awarded. We have posted memos about the case in our “Related-Party Transactions” Practice Area. One quote from the court opinion is:

“Recognizing that the derivative action was invented in equity to be a flexible remedy to prevent injustice, it would seem within the power of a court of equity to recharacterize an award of money damages that otherwise would go to the entity as an award of money damages allocated across the units that were outstanding as of the effective time . . .”

If this revision to the common understanding – based on established legal precedent about the distinction & legal implications – of derivative v. shareholder class actions claims is broadly adopted, it may have far-reaching implications…

Happy Anniversary Baby! 13 Years of Blogging & Counting

Sunday will mark 13 years of my blither and bother on this blog (note the Blog is nearly 12 years old – not shabby!). It’s one time of the year that I feel entitled to toot my own horn – as it takes stamina and boldness to blog for so long. A hearty “thanks” to all those that read this blog for putting up with my personality. I’m sure I won’t get more refined with age…

Our May Eminders is Posted!

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– Broc Romanek