Monthly Archives: January 2019

January 31, 2019

Direct Listings: Will “Non-IPOs” Become the New IPOs?

I blogged last year about Spotify’s decision to forego a traditional IPO in favor of a direct listing. Now, according to this recent WSJ report, it appears that fellow unicorn Slack Technologies will follow the same path.  Bloomberg’s Matt Levine thinks that may be a big deal:

We talked a bunch about the Spotify direct listing when it happened, but it is hard to overstate the importance of the second big high-profile direct listing. There’s a reason that people still talk about Google’s Dutch auction IPO, 15 years later: because it didn’t inspire imitators. It didn’t become a standard tool of corporate finance, an option that is on the table for every company. It’s just a weird thing that Google did once.

But if Slack follows Spotify’s lead in going public by direct listing, then it is much more likely to become a thing. Other tech companies considering going public won’t think “should we do that weird thing that Spotify did” but rather “what are the pros and cons of direct listings compared to initial public offerings?” Investment banks will—reluctantly!—put together pitchbook pages explaining direct listings and touting their own credentials at leading them. (“Haven’t only three banks ever led a big direct listing in the U.S.,” you might ask, but that just means that you don’t understand how pitchbook credentials work. Every bank is the market leader in everything, in the safety of their own pitchbooks.)

Matt says that the viability of the direct listing alternative may lead to a much more customized process of going public than the traditional IPO:

It used to be that, if you wanted to go public, there was one way to do it. Now there are two. But the choice creates the possibility of more choice, of unlimited customization, of tweaking each feature to get exactly the tradeoffs you want.

Wow. And to think that I haven’t even tried avocado toast yet!  Also check out this Cydney Posner blog on Matt’s article.

Crisis Management: Benchmarking Your Response Plan

This recent Morrison & Forester/Ethisphere survey is intended to assist companies in benchmarking their crisis management planning efforts by providing insight into current trends in crisis management & highlighting best practices.  Here’s an excerpt discussing the frequency with which specific topics are addressed in crisis management plans:

One of the areas our survey explored in depth involved the types of events companies included in their crisis management plans. The most common response was “cyber breach,” with 67% of respondents answering that they had plans that addressed such an event.

The next most commonly included crisis events were “workplace violence or harassment” (reflecting additional steps being taken by companies to address these issues in the #MeToo era) (56.5%), followed by events relating to a government investigation (44.2%) and environmental damage (44.8%).

Beyond those, tied at 5th and 6th, were preparations for an anti-corruption violation (40.9%) and an IP (Intellectual Property) theft event (40.9%), followed by terrorism (36.4%), high stakes litigation (31.8%), and product recall (26%).

Other topics addressed include methods to boost organizational confidence in a crisis management plan & the role of outside counsel.

Privacy: France Smacks Google for Alleged GDPR Violations

Last week, Google earned the unwanted distinction of being the first U.S.-based company to be sanctioned for alleged violations of the EU’s GDPR. Here’s the intro from this Dinsmore & Shohl memo:

On January 21, 2019, Google was fined nearly $57 million (approximately 50 million euros) by France’s Data Protection Authority, CNIL, for an alleged violation of the General Data Protection Regulation (GDPR). CNIL found Google violated the GDPR based on a lack of transparency, inadequate information, and lack of valid consent regarding ad personalization. This fine is the largest imposed under the GDPR since it went into effect in May 2018 and the first to be imposed on a U.S.-based company.

The memo lays out the specific areas with which French regulators found fault, and notes that the proceeding was likely intended to send a message to all U.S.-based organizations that collect data on EU citizens.

John Jenkins

January 30, 2019

Internal Controls: There’s a Limit to the SEC’s Patience

Yesterday, the SEC announced enforcement proceedings against four companies that were unable to get their acts together when it came to internal control over financial reporting. Lots of companies encounter ICFR issues & disclose material weaknesses every year, so should they all be worried about the Division of Enforcement knocking at their door?

My guess is probably not – because the targets of these proceedings were a pretty unique group.  As this excerpt from the SEC’s press release explains, to say that they all had longstanding ICFR issues is a huge understatement:

The Securities and Exchange Commission today announced settled charges against four public companies for failing to maintain internal control over financial reporting (ICFR) for seven to 10 consecutive annual reporting periods. Two of the charged companies also failed to complete the required evaluation of the effectiveness of ICFR for two consecutive annual reporting periods.

According to the SEC’s orders, year after year, the four companies disclosed material weaknesses in ICFR involving certain high-risk areas of their financial statement presentation. As discussed in the SEC orders, each of the four companies took months, or years, to remediate their material weaknesses after being contacted by the SEC staff. One of the companies is still in the process of remediating its material weaknesses.

One of the big lessons here is that it’s not enough to disclose your internal controls problems – you’ve got to fix them. The press release quotes Associate Director of Enforcement Melissa Hodgman as saying that companies “cannot hide behind disclosures as a way to meet their ICFR obligations. Disclosure of material weaknesses is not enough without meaningful remediation.”

Each of the four companies agreed to a cease and desist order & the payment of civil penalties. In addition, the group’s medalist – which disclosed a material weakness in ICFR each year for an entire decade(!) – was required to retain an independent consultant to ensure remediation of material weaknesses, including those involving related party transactions.

SOX 404: Maybe You Hate It, But Investors Don’t

Okay, the example of the “Gang of 4” in today’s lead blog notwithstanding, I confess that I’m still not a big fan of Sarbanes-Oxley’s Section 404. I guess I’m one of those people who think that it’s led to a lot of unproductive corporate navel gazing, and that this outweighs its merits.

Based on my experience, there seem to be a lot of other “404 haters” out there among my fellow lawyers. But I’m afraid a constituency a lot more important than us may have a different opinion about Section 404’s internal controls reporting mandate.  According to this article, a new study claims that investors like internal controls reporting quite a bit. The study cites investor reaction to decisions to opt-out of internal control audits for newly-acquired companies in support of its claim:

Looking at the impact of a rule that enables companies for one year to opt out of IC audits for newly acquired firms, the paper reveals a significant drop in the acquirer’s stock on the day the opt-out becomes public with the issuance of the acquiring company’s annual report.

Depending on how this decline is calculated, one-day abnormal stock returns compared with opt-in companies can be as much as 44 basis points, according to the study authors, Robert Carnes of the University of Florida, Dane Christensen of the University of Oregon, and Phillip Lamoreaux of Arizona State University.

…[T]hey found the stock-price dip occasioned by opting out of internal controls audits becomes more pronounced the greater the size of the acquired entity relative to the size of the acquirer, as would be expected if investors value an auditor’s internal control assurance. The professors also found a more negative effect for acquisitions in the first half of a buyer’s fiscal year, suggesting that opting out becomes more suspect to investors the more time acquirers have to integrate the two companies’ finances.

A big reason for investors’ negative reaction to an opt-out decision is that – as I’ve previously blogged – it frequently proves to be a red flag portending future restatements.

Transcript: “The Latest – Your Upcoming Proxy Disclosures”

We’ve posted the transcript for our recent webcast: “The Latest – Your Upcoming Proxy Disclosures.”

John Jenkins

January 29, 2019

Restatements: “Out-of-Period Adjustments” On the Rise

When you find a mistake in the financials, one of the first questions that must be answered – after you stop hyperventilating – is “how do we correct the error?” This Audit Analytics blog reviews how companies have answered that question in recent years.  The blog says that there’s been a trend away from restatements & toward the more benign “out-of-period adjustments” – and suggests that better internal controls may be part of the reason for it.

This excerpt reviews the issues that most frequently resulted in out-of-period adjustments and restatements during the period from 2009-2016:

When it comes to which types of issues are being corrected via out-of-period adjustments, taxes topped the list for the last 8 years. In 2016, companies recorded 85 tax related out-of-period adjustments – 26% of all the out of period adjustments recorded during the year. Second and third of the top issues were liabilities (14%) and revenue recognition (12%).

The most common issues being corrected differ when looking at restatements. Securities (debt, quasi-debt, warrants & equity) issues ranked at the top, comprising 17.6% of restatements in 2016, whereas they account for only 5.8% of out-of-period adjustments during the same year. Classification issues was the next most common restatement issue (14.2% of all 2016 restatements).

Ultimately though, the deciding factor between a restatement and an out-of-period adjustment is materiality, and the blog notes that when it comes to materiality, size matters.  For most of the periods surveyed, the largest restatement was bigger than the largest out of period adjustment.

SEC’s Shutdown: “Keep On Rockin’ In The Free World. . .”

The government shutdown caused a lot of financial hardship, so we tip our hats to the band “G.O.A.T. Rodeo” – which played a concert in DC last week to provide some free entertainment and raise a little money for displaced federal workers. It turns out that the membership of the band isn’t what you might expect. As this Bloomberg Business Week article notes, the SEC Staff is well represented in the band:

The U.S. Securities and Exchange Commission lawyers who took the stage at Washington’s Rock & Roll Hotel Thursday night have won accolades for suing Goldman Sachs Group Inc. and writing rules for Wall Street traders. This time, their greatest hits were more of the heavy metal variety.

Prompted by the government shutdown, the SEC workers — who moonlight in a band called G.O.A.T. Rodeo — played a concert for fellow furlough victims. The plan was to raise some money for a charitable fund that helps federal employees and blow off some pressure that’s been building over the past month.

“We’ve been going a little crazy around my house, stir crazy, not working,’’ said Stacy Puente, an SEC attorney, before she launched into Ozzy Osbourne’s hit “Crazy Train.” The crowd, many of whom were also missing paychecks and unable to go to their jobs at the SEC and other agencies, nodded their heads and pumped fists in the air.

Vocalist Stacy Puente was joined by SEC enforcement lawyer Reid Muoio on drums, while other SEC staffers played lead guitar & keyboards. By the way, I love the band’s name – and there’s nothing more appropriate than having a band named “G.O.A.T. Rodeo” play a fundraiser for people feeling the pain of our national “goat rodeo.”

Transcript: “Pat McGurn’s Forecast for 2019 Proxy Season”

We have posted the transcript for our recent webcast: “Pat McGurn’s Forecast for the 2019 Proxy Season.”

John Jenkins

January 28, 2019

Corp Fin’s Post-Shutdown Plan: “First Come, First Served”

Over the weekend, SEC Chair Jay Clayton posted a statement saying that the SEC has “resumed normal staffing levels and is returning to normal operations.” But this excerpt seems to acknowledge that getting back to full speed is going to take some real effort:

The leaders of our Divisions and Offices, in consultation with various members of our staff, are continuing to assess how to most effectively transition to normal operations. Certain of these Divisions and Offices, including our Divisions of Corporation Finance, Trading and Markets, Investment Management and our Office of Compliance Inspections and Examinations, will be publishing statements in the coming days regarding their transition plans.

As promised, Corp Fin subsequently posted its own statement – and said that when it comes to tackling its backlog, the general approach is going to be “first come, first served. Here’s an excerpt:

The Division of Corporation Finance is returning to normal operations. In general, we anticipate addressing filings, submissions and requests for staff action based on when an item was submitted. In other words, absent compelling circumstances, we expect to address matters in the order in which they were received.

Corp Fin’s statement also notes that although the Staff will be available to respond to questions, “their response time may be longer than ordinary.”  That shouldn’t surprise anyone. The shutdown has led to a big logjam in IPOs, and has thrown a monkey wrench into the 14a-8 no-action process. While those issues have gotten most of the attention, I can only guess at the backlog of ’34 Act comment letters and other ordinary course business that the Staff will have to work through.

In short,  the Staff has a big mess that it’s going to have to clean up over the coming weeks.  At the same time, private sector lawyers are going to be under a lot of pressure to get their client’s projects moving again.  Both sides of the table should cut each other some slack as we work through this.  We didn’t make the mess – but when it comes to the cleanup, we’re all in this together.

Check out this Skadden memo, this Cooley blog and this Weil blog for more information about Corp Fin’s grand reopening – including a discussion of IPO & shareholder proposal-related issues.

Registration Statements: What If You Pulled The Delaying Amendment?

As Broc blogged last month, during the shutdown, the SEC invited companies with pending registration statements to pull their delaying amendments.  For companies that opted to do that, the question becomes, “now what do we do?”  Here’s what Corp Fin’s statement says:

Consistent with the Division’s Questions and Answers in connection with its statement regarding Actions During a Government Shutdown, some registrants omitted or removed delaying amendments from their registration statements. We will consider requests to accelerate the effective date of those registration statements if they are amended to include a delaying amendment prior to the end of the 20 day period and acceleration is appropriate.

In cases where we believe it would be appropriate for a registrant to amend to include a delaying amendment, we will notify that registrant. We remind registrants that Rule 430A is only available with respect to registration statements that we declare effective and is not available to registration statements that go effective as a result of the passage of time.

So, the bottom line appears to be that if you’ve pulled a delaying amendment & the Staff has an issue with that (such as unresolved comments), they’ll let you know.  Otherwise, they’ll leave you to your fate – unless you add the amendment back yourself.

Tomorrow’s Webcast: “Controlling Shareholders – The Latest Developments”

Tune in tomorrow for the webcast – “Controlling Shareholders: The Latest Developments” – to hear Potter Anderson’s Brad Davey, Cravath’s Keith Hallam, Greenberg Traurig’s Cliff Neimeth and Sullivan & Cromwell’s Melissa Sawyer discuss the latest developments surrounding transactions involving controlling shareholders.

John Jenkins

January 25, 2019

Shutdown: Nasdaq’s Five New FAQs

Speculation’s been mounting about whether Nasdaq will approve listing applications from companies that want to raise capital during the shutdown – I blogged yesterday that they might be warming up to IPOs under limited circumstances. In response, the exchange has now issued five FAQs to explain how they’ll handle new listings – as well as the shutdown’s impact on currently-listed companies.

For IPOs and OTC-traded ’33 Act registrations, Nasdaq is more open to listing companies that substantially completed the comment process before the shutdown began – and suggests that companies in that position call the Listing Qualifications Staff to discuss the situation. At this time, Nasdaq remains reluctant to list companies that are just starting the IPO process…but they don’t entirely close the door on that possibility.

Here’s a video from Dave & Marty about the shutdown…

Delaware’s Sustainability Certification: First Filer

Last summer, John blogged about Delaware’s new “Transparency and Sustainability Standards Act” – a voluntary certification program (or as John calls it, “the corporate equivalent of buying a Subaru”). Now, the first company is trying it out – a Euronext-traded company called “DSM” (also known as “Royal DSM”). Here’s the integrated annual report that’s posted to the state’s certification page.

The NYSE’s Annual Compliance Letter

The NYSE has sent its “annual compliance letter” to remind listed companies of their obligations. There aren’t any new rules this year – but the letter highlights that the NYSE’s “Timely Alert/Material News Policy” now requires companies to provide notice to the Exchange at least 10 minutes before making any public announcement about a dividend or stock distribution, even outside of trading hours.

Transcript: “How Boards Should Handle Politics as a Governance Risk”

We have posted the transcript for our recent webcast: “How Boards Should Handle Politics as a Governance Risk.”

Liz Dunshee

January 24, 2019

First IPO Without Delaying Amendment?

It’s hard to imagine the government shutdown continuing for another 19 days – but this amended Form S-1 filed yesterday by Gossamer Bio does just that. Just like Corp Fin’s shutdown FAQ #5 instructs, the cover page sets the proposed offering price and says:

This registration statement shall hereafter become effective in accordance with the provisions of Section 8(a) of the Securities Act of 1933.

For those playing along at home, that means the effective date is scheduled for February 12th. The registration statement also includes this risk factor:

As a result of the shutdown of the federal government, we have determined to rely on Section 8(a) of the Securities Act to cause the registration statement of which this prospectus forms a part to become effective automatically. Our reliance on Section 8(a) could result in a number of adverse consequences, including the potential for a need for us to file a post-effective amendment and distribute an updated prospectus to investors, or a stop order issued preventing use of the registration statement, and a corresponding substantial stock price decline, litigation, reputational harm or other negative results.

The registration statement of which this prospectus forms a part is expected to become automatically effective by operation of Section 8(a) of the Securities Act on the 20th calendar day after the most recent amendment of the registration statement filed with the SEC, in lieu of the SEC declaring the registration statement effective following the completion of its review. Although our reliance on Section 8(a) does not relieve us and other parties from the responsibility for the adequacy and accuracy of the disclosure set forth in the registration statement and for ensuring that the registration statement complies with applicable requirements, use of Section 8(a) poses a risk that, after the date of this prospectus, we may be required to file a post-effective amendment to the registration statement and distribute an updated prospectus to investors, or otherwise abandon this offering, if changes to the information in this prospectus are required, or if a stop order under Section 8(d) of the Securities Act prevents continued use of the registration statement. These or similar events could cause the trading price of our common stock to decline substantially, result in securities class action or other litigation, and subject us to significant monetary damages, reputational harm and other negative results.

I blogged yesterday that Nasdaq wasn’t eager to allow listings for companies whose registration statements haven’t gone through full SEC review, and that was a barrier to going public right now even though the SEC is allowing companies to file registration statements without the delaying amendment. And while I continue to think that “eager” would be an overstatement, the WSJ later reported that the exchange is warming up to the workaround – especially for the handful of companies that have worked through pre-shutdown SEC comments. So, Gossamer and the other trailblazers are (cautiously) moving forward. No doubt they’re also considering how to pivot if the SEC returns to its full strength within the next couple weeks.

BlackRock’s Annual Letter: Linking Purpose & Profits

Last week, two of the world’s largest asset managers gave their annual “heads up” to companies about this year’s engagement priorities. This NYT write-up describes how BlackRock CEO Larry Fink exhorts CEOs to be “leaders in a divided world” – while Bloomberg’s Matt Levine wonders if Larry Fink is now the late-capitalist version of “president of the world.” But a takeaway for us governance people is that the leadership suggestions have a human capital tone – helping workers prepare for jobs of the future, as well as retirement.

The letter also refines last year’s directive to pursue the greater good by emphasizing the compatibility and co-dependence of purpose & profits. When it comes to preparing for this year’s engagements, here’s what BlackRock’s new annual letter identifies as priorities (also see this Cooley blog and this Weil blog):

BlackRock’s Investment Stewardship engagement priorities for 2019 are: governance, including your company’s approach to board diversity; corporate strategy and capital allocation; compensation that promotes long-termism; environmental risks and opportunities; and human capital management. These priorities reflect our commitment to engaging around issues that influence a company’s prospects not over the next quarter, but over the long horizons that our clients are planning for.

In these engagements, we do not focus on your day-to-day operations, but instead seek to understand your strategy for achieving long-term growth. … [W]e seek to understand how a company’s purpose informs its strategy and culture to underpin sustainable financial performance. Details on our approach to engaging on these issues can be found at

State Street’s Letter: “Culture Eats Strategy for Breakfast”

Not inconsistent with BlackRock’s asks, last week on our “Proxy Season Blog” I wrote that pension funds want to know about your culture. According to their annual letter, that topic is also pretty important to State Street. SSGA has created a framework to help boards align culture & strategy (see page 6) – and they’ll be asking these questions during engagements:

– Can the director(s) articulate the current corporate culture?

– What does the board value about the current culture? What does it see as strengths? How can the corporate culture improve?

– How is senior management influencing or effecting change in the corporate culture?

– How is the board monitoring the progress?

Liz Dunshee

January 23, 2019

More on “Shareholder Proposals: Impact of SEC’s Shutdown?”

A few weeks ago, Broc blogged about how a government shutdown was gonna really disrupt the processing of no-action requests related to shareholder proposals if the shutdown went much longer. Now that the conjecture has become reality, we just fielded this question in our “Q&A Forum” (#9722):

We submitted a no-action request to the Staff to exclude a shareholder proposal made under Rule 14a-8 during the shutdown but obviously haven’t heard anything. Seems like we will be forced to include it as our date for providing the proponent our Statement in Opposition and eventual filing are coming up in a week or two. Any other thoughts, reasons we can exclude the proposal even if we don’t hear from the SEC?

My response was:

You might have seen this recent Reuters article – and this WSJ article. Here’s a quote from Ron Mueller in the WSJ article: “If the shutdown continues even after a company needs to send out its proxy statement to shareholders, the company could include proposals in the statements but not make them subject to a vote, saying it is awaiting a determination from the SEC, Mr. Mueller said. A company also can negotiate with shareholders who made a proposal, striking a deal that results in it withdrawing the SEC application and removing the proposal from the proxy in exchange for concessions.”

And Broc added:

This sure is interesting stuff since it’s novel. On page 41 of our “Shareholder Proposals Handbook,” there’s a section about exclusion without Staff relief. I talk about the risk of an SEC enforcement action – but I don’t know how high that risk would really be in these circumstances. Of course, it will depend on how strong your argument is that a proposal is excludable under one – or more – of the exclusion bases in Rule 14a-8. So I imagine companies might do some hard thinking and see how comfortable they are about exclusion without the no-action relief…

Removing the Delaying Amendment: Nasdaq Gets Nervous

As the shutdown drags on, we’ve blogged several times that removing the delaying amendment is really the only way to go effective with a registration statement right now. But that’s a big deviation from standard practice – and this WSJ article reports that (not surprisingly) it’s making banks & exchanges nervous. Here’s an excerpt:

But the Nasdaq Stock Market, where both companies are aiming to list, has balked at firms using the method over worries that such deals could be vulnerable to regulatory or legal challenge later on, according to people familiar with the matter. Still, the exchange hasn’t ruled it out in certain cases, one of the people said. Some bankers have also been wary of such deals.

Proceeding without Corp Fin’s signoff could carry substantive risk, some bankers and lawyers say. If the IPO disclosures given to investors are later shown to have shortcomings, plaintiffs’ lawyers could pounce and point to the unusual way the deals were done.

Another downside to the automatic route is companies would need to price their stock at least 20 days in advance of trading, whereas in a traditional IPO the price is set the day before trading begins. Bankers worry the price might become stale as economic crosswinds or other factors could affect demand for the offering.

Against my better judgment, I read some of the comments on that WSJ article. Here’s a taste:

Capitalists do not need government bureaucrats to raise capital. Abolish the SEC and let markets work.

Point taken that companies have been moving away from traditional IPOs – and this Matt Levine blog imagines a functioning world in which the SEC is accidentally no longer involved in that process…

How the Shutdown Impacts the SEC’s Enforcement Program

Check out this piece from John Reed Stark about how the government shutdown impacts the SEC’s enforcement program…

Liz Dunshee

January 22, 2019

Today’s Webcast: “12 Tricks to Help You During Proxy Season”

Tune in today for the webcast — “12 Tricks to Help You During Proxy Season” — to hear Aon’s Karla Bos, Intel’s Irving Gomez, Gibson Dunn’s Beth Ising and Microsoft’s Peter Kraus share practical advice on how to enhance your proxy season efforts without sacrificing your sanity. The agenda includes:

1. Organize & Draft Your Proxy In the Way That Makes Sense This Year
2. When Developing Your Engagement Strategy, Consider the SEC’s “Rules of Engagement”
3. Keep a Hard Copy of Your Proxy on Your Desk for Note-Taking
4. “Tell It Like It Is” – And Don’t Save “Board Responsiveness” for Low Vote Results
5. Negotiating PR Aspects of Shareholder Proposal Withdrawals
6. Three “Forget-Me-Nots” When Presenting Shareholder Proposals (And Your Response) in the Proxy
7. Capitalize on Your 10-K
8. Get Outside Help, But Don’t Outsource to Excess
9. Use Graphics & Formatting in a Productive Way
10. Proxy Review: Use Fresh Eyes, Particularly for Quality Assurance
11. Watch Those Shareholder Proposal & Nomination Deadlines
12. Call the Experts to Assist with Shareholder Proposals
13. Engage, But Don’t Count on It to “Carry the Day”
14. Shareholder Engagement: Develop Relationships Before You Need Them

Insider Trading: House Bill Targets 10b5-1 Plans

Last week, the House Committee on Financial Services re-introduced a bill on a bipartisan basis – the “Promoting Transparent Standards for Corporate Insiders Act” – which would require the SEC to study whether Rule 10b5-1 should be amended to add more procedural restrictions for trading plans. The potential amendments would:

– Limit the ability of companies & insiders to adopt a trading plan to a time when the company or insider is permitted to buy or sell securities during issuer-adopted trading windows

– Limit the ability of companies and insiders to adopt multiple trading plans

– Establish a mandatory delay between the adoption of a trading plan and the execution of the first trade under the plan (and if so, whether the delay should be the same for plans adopted during versus outside a trading window, and whether any exceptions to a delay are appropriate)

– Limit the frequency with which companies and insiders may modify or cancel trading plans

– Require companies and insiders to file trading plan adoptions, amendments, terminations and transactions with the SEC

– Require boards of companies to adopt policies covering trading plans, periodically monitor trading plan transactions and ensure that company policies discuss trading plan use in the context of hedging policies and stock ownership guidelines

SEC Commissioner Nominee: Stalled Due to Shutdown

Since Kara Stein’s holdover term expired last month, we’re once again down to four Commissioners. Broc’s blogged about nomination delays becoming more common – and it looks like this go-round will follow suit. As this WSJ article reports, the government shutdown is taking the blame this year. Here’s an excerpt:

Mr. Schumer recommended [several months ago] the White House nominate former SEC staffer Allison Lee to fill a vacancy on the commission left by the recent departure of Kara Stein, the people familiar with the matter said. Ms. Lee, who formerly served as an aide to Ms. Stein, also worked as an attorney in the SEC’s enforcement division for over a decade before retiring from the commission last January, according to her profile on LinkedIn.

Some Democrats also are worried the White House is purposely slow-walking liberal nominees to the positions, particularly Ms. Lee, whose name has been pending with the Trump administration for several months. Republican policy makers maintain the shutdown has stretched staff thin within the executive branch [straining its ability to do background checks and other necessary paperwork].

Liz Dunshee

January 18, 2019

“Arbitration” Shareholder Proposals: Man Bites Dog

This recent Bloomberg Law blog describes a shareholder proposal – and a company’s response – that you definitely don’t see every day. Here’s the intro:

The recent no-action request from Johnson & Johnson to exclude a shareholder proposal from its proxy materials creates a rather unique dynamic. It is indeed an unusual day when a shareholder submits a proposal that could curtail investor rights, and the company responds with a full-throated defense of the shareholders’ right to file suit against it.

That peculiar set of circumstances resulted from an investor request to have the Johnson & Johnson board adopt a bylaw requiring the arbitration of all claims brought by investors arising under the federal securities laws, and providing that any such claims may not be brought as a class and may not be consolidated or otherwise joined.

Geez, and I thought it was odd when Steelers fans were rooting for the Browns to beat Baltimore a few weeks back. . . Anyway, the shareholder proponent is Hal Scott, an emeritus Harvard Law School prof who’s a long-time opponent of shareholder class action litigation.

This situation has produced some very strange bedfellows – check out the signatories to this recent letter to SEC Chair Jay Clayton urging it to grant the no-action relief that J&J’s requested and to reaffirm the SEC’s position that arbitration clauses violate the securities laws.

ESG: Why Boards Should Care About the SASB’s Sustainability Standards

I recently blogged about the SASB’s adoption of he first-ever industry-specific sustainability accounting standards designed to facilitate communication of financially-material sustainability information to investors. This BDO memo reviews the new standards and provides an overview of both SEC-mandated sustainability disclosures & the information increasingly demanded by investors.

The memo acknowledges that sustainability has been a back-burner issue for many corporate boards, but says there are reasons that companies should embrace the new standards and the enhanced sustainability disclosure they contemplate. Potential benefits of this approach include:

Realization:Tangible returns being realized in adoption of sustainable practices
Competitive differentiator: Use of voluntary disclosure as opportunity to tell unique stories to the marketplace which can serve as competitive differentiators
Capitalizing on investment trends: Cultivation and incorporation of evolving investing practices in companies that can demonstrate long term value creation initiatives
Demonstration of connected corporate strategy: Strengthening corporate strategy with forward-thinking, sustainable practices
Engagement of shareholders: Getting out in front of the threat of increasing shareholder proposals focused on ESG
Protect reputation and improve public relations: Communicating fulfillment of a deemed duty by the market as a “good corporate citizen”
Attraction and retention of talent: A potential further differentiator in war for attracting and retaining good talent

If these reasons aren’t enough, this Davis Polk blog offers another one – rating agencies are increasing their focus on ESG risks.

SEC Shutdown: ALJs Ordered to Stand Down

Yesterday, the SEC issued this updated statement on its operations during the shutdown. Among other things, that update says that the agency is still at work on “emergency enforcement matters,” including “investigations of ongoing fraud or conduct that poses a threat of imminent harm to investors, such as ongoing fraud or misconduct.”

But it’s far from business as usual on the enforcement front. In fact, pending SEC administrative proceedings are among the government shutdown’s latest casualties.  On Tuesday, the SEC issued this order staying all pending administrative proceedings.  This excerpt gives you the gist of it:

The Commission stays all pending administrative proceedings initiated by an order instituting proceedings that set the matter down for a hearing before either an administrative law judge or the Commission. The stay is effective immediately and shall remain operative pending further order of the Commission.

The order permits parties to ask that the stay be lifted, but only in very limited situations, such as in the case of “emergencies involving the safety of human life or the protection of property.”

John Jenkins

January 17, 2019

Fake News: Phony BlackRock CEO Letter Hits the Street

People seem to ponder, contemplate & generally ruminate over the annual letter from BlackRock’s CEO Larry Fink like it’s a pronouncement from the Oracle at Delphi.  Since it gets so much attention, I guess we shouldn’t be all that surprised that somebody would decide to issue a fake version of this year’s letter. Here’s an excerpt from this Barron’s article:

Larry Fink’s annual letter to Corporate America is widely anticipated. But an email Wednesday purporting to be from the BlackRock CEO that was sent to media outlets, including Barron’s, wasn’t the real thing—even though it contained lofty rhetoric and finger-wagging about the risks of climate change, one of Fink’s favorite subjects. It also included a series of purported initiatives including an eyebrow-raising plan to divest from fossil fuel companies.

The hoaxters were certainly media-savvy, not to mention thorough: The fake letter was accompanied by a fake website, and followed by a separate, fake statement from one of BlackRock’s top public relations people. A (real) BlackRock spokesman said the company is investigating.

BlackRock posted the real version of Fink’s letter later in the day. A CNBC story says that the hoax is being pinned on environmental activists, and Barron’s characterized the perpetrator of the hoax as a “prankster,” but I guess I have my doubts. The hoax was elaborate, timed to coincide with BlackRock’s earnings release, and appears to have been designed to move markets. It seems at least possible that “fraudster” may turn out to be a more apt characterization than “prankster.”

Yesterday was a big day for elaborate media hoaxes. If you’re looking for “pranksters,” the activists responsible for the fake edition of yesterday’s Washington Post appear to fit the bill. Notorious Democratic prankster & Richard Nixon tormentor Dick Tuck would’ve been proud.

CEO Activism: Should CEOs Speak Out or “Shut Up & Sing”?

Larry Fink hasn’t been shy about speaking out on social issues, but historically, most corporate CEOs have been pretty averse to the idea of wading into the public debate on social or political topics. There’s a perception that this is changing – and a growing debate about whether CEOs should speak out or just “shut up and sing.” This Stanford study takes a look at the prevalence of CEO activism, the range of advocacy positions taken by CEOs, and the public’s reaction to it.

The study concludes that CEO activism in the media isn’t as widespread as it may be perceived, with only 28% of S&P 500 and 12% of S&P 1500 CEOs making public statements about social, environmental or political issues. Those statements generally were concentrated in a handful of areas – with diversity, environmental issues, and immigration and human rights being the most prevalent. When it comes to social media, only 11% of S&P 1500 CEOs have Twitter accounts, and less than half of them used Twitter as a platform for this type of advocacy.

The study found that the public’s reaction to CEO activism on these topics was mixed. Here’s an excerpt with the details:

In a survey of 3,544 individuals, the Rock Center for Corporate Governance at Stanford University found that two-thirds (65%) of the public believe that the CEOs of large companies should use their position and potential influence to advocate on behalf of social, environmental, or political issues they care about personally, while one-third (35%) do not.

Members of the public are most in favor of CEO activism about environmental issues, such as clean air or water (78%), renewable energy (68%), sustainability (65%), and climate change (65%). They are also generally positive about widespread social issues, such as healthcare (69%), income inequality (66%), poverty (65%) and taxes (58%).

The public reaction is much more mixed about issues of diversity and equality. Fifty-four percent of Americans support CEO activism about racial issues, while 29% do not; 43% support activism about LGBTQ rights, while 32% do not; and only 40% support activism about gender issues,while 37% do not. Contentious social issues—such as gun control and abortion—and politics and religion garner the least favorable reactions. Of these issues, CEOs speaking up about gun control is the only one with a net-favorable position (45% favorable versus 35% unfavorable). Abortion (37% versus 39%), politics (33% versus 43%), and religion (31% versus 45%) all elicit net-unfavorable reactions.

When it comes to consumer behavior, the study says that Americans are significantly more likely to recall products or services they used less of based on a CEO’s comments than to recall those they used more of in response to those comments. The study says that demonstrates that CEO activism is a double edged sword – while it can build customer loyalty, it can also alienate large segments of the customer base.

January-February Issue: Deal Lawyers Print Newsletter

This January-February issue of the Deal Lawyers print newsletter was just posted – & also mailed – and includes articles on (try a 2019 no-risk trial):

– Cross-Border Carve-Out Transactions
– The Odd Couple: Indemnification and R&W Insurance
– Fairness Opinions: How to Avoid Provider Conflicts
– Standards of Review: When the Controlling Shareholder Isn’t a Buyer

Remember that – as a “thank you” to those that subscribe to both & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

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John Jenkins