November 13, 2018

Safe Harbor Disclaimers: A License to Lie?

This “IR Magazine” article says that a recent study suggests that critics of the forward-looking statements safe harbor may have a point when they say it gives companies a “license to lie.” Here’s the intro:

When forward-looking statements are accompanied by a legal disclaimer, inexperienced investors are more likely to forgive a company missing its projections – even when management is shown to have knowingly misled investors, according to a new academic study published recently in “The Accounting Review.” The research was led by H Scott Asay of the University of Iowa and Jeffrey Hales of the Georgia Institute of Technology. They contend that legal disclaimers protect public companies from reprisal and therefore harm vulnerable investors in the process – going so far as to cite one attorney’s description that these disclaimers afford management the ‘license to lie’.

The study broke investors into four groups, all of whom were given the same company release to review. They were told that the company missed its earnings projections. The first two groups were told that management acted in good faith. One group’s press release contained a legal disclaimer, while the other group’s did not. Both of the first two groups were less inclined to seek compensation for the missed projections, and the legal disclaimer had no effect on their views.

The second two groups were provided with the same information, except that they were told management knew that it couldn’t hit its projections. Those investors in the group whose press release included a disclaimer were less inclined to seek compensation than those whose press release did not include a disclaimer. The study’s authors contend that this means disclaimers are likely to dissuade investors from pursuing claims – even if they know they’ve been lied to.

China Tech IPOs Raise the CEO “Pig-Out” Bar

A tip of the hat to China’s tech sector – this BusinessWeek article says those companies have no shame when it comes to compensating CEOs for their work in taking a company public:

It’s a good time for founders in China to take their startups public, at least by one measure.

Chief executive officers are beginning to get ten-figure bonuses with their initial public offerings. In the latest example, the CEO of Shanghai-based Pinduoduo, received at least $1 billion of stock without any performance hurdles as his e-commerce company prepares for a U.S. IPO. Lei Jun, the head of Beijing-based smartphone maker Xiaomi Corp. saw a $1.5 billion payday, with no strings attached, when his company went public in July. When went public in 2014 it incurred $591 million of costs from a stock grant to its chief.

Well, Marx never said that the “Vanguard of the Proletariat” had to serve the revolution for free. Does anybody know if there’s a Mandarin word for chutzpah?

Tomorrow’s Webcast:  “GDPR’s Impact on M&A”

Tune in tomorrow for the webcast – “GDPR’s Impact on M&A” – to hear Davis Polk’s Avi Gesser and Daniel Foerster discuss the implications of the EU’s General Data Protection Regulation for M&A transactions. Please print out these “Course Materials” in advance…

John Jenkins