Monthly Archives: February 2019

February 28, 2019

Climate Change: Top Engagement Priority for Many Investors

In Morrow Sodali’s latest institutional investor survey, 85% of respondents said that climate change was their most important engagement topic (up 31% from last year) – although when it comes to disclosure, they’re more focused on getting human capital details. Maybe this result isn’t too surprising given that the 46 global survey participants are all signatories to the UN’s Principles for Responsible Investment – but their combined $33 trillion of assets under management is nothing to sneeze at (and yes, the “Big 4” US institutional investors – BlackRock, Vanguard, State Street & Fidelity – are all PRI signatories).

When it comes to voting, the survey says that governance policies & practices are by far the most important factor. Also, some investors are more willing these days to nuance their voting decisions based on information gained in engagements, but some continue to rigidly adhere to stated policies. So you just have to know who you’re dealing with. And be aware that the cost to nuanced decision-making is a greater demand for transparency and director involvement in engagements (87% said that director involvement helps their evaluation of a company’s culture, purpose & reputational risks). Here’s a few other hot topics that will continue to impact board meetings, engagements and disclosure (also see this “Harvard Law” blog):

– Board composition & competence – skills & qualifications are the most important factor in evaluating directors, with diversity lagging behind

– Executive pay – pay-for-performance, rigor of performance targets and the inclusion of long-term performance targets are all important, and investors are beginning to engage collectively on this topic

– Human capital management and corporate culture – including succession planning to prepare for the risk of abrupt executive departures that could result from a scandal

Audit Committees: Tech’s Impact on Financial Reporting

Tech disruption is coming to an audit near you. Whether it’s turning to tech firms for the “data gathering” phase of the audit, or ensuring that automated financial record-keeping and reporting is accurate – which are both increasingly common according to this WSJ article – audit committees need to oversee the related financial reporting risks. Fortunately, the “Center for Audit Quality” has released a tool for audit committees that explains the impact of emerging technologies on the oversight framework. In addition to identifying other helpful resources, the CAQ’s tool contains suggested questions for a number of key tasks.

Large-Cap Directors: Bad News for Small-Caps?

If the director recruitment industry is any indication, experienced large-cap directors are in high demand. And for good reason – they’ve likely had first-hand involvement with a variety of board, management & shareholder situations. But since small-caps tend to have more retail shareholders, fewer resources and different types of business issues, that large company experience could be a double-edged sword.

In this blog, Adam Epstein covers six potential “negatives” – and makes it clear that impressive credentials don’t negate the need to find the right fit and remain attuned to director & board performance. Here’s an excerpt:

Form over substance: If a large-cap company is akin to an aircraft carrier, many small-caps are more like speedboats. The former takes dozens of people and extended periods of time to change speed or course, while the latter can take one or two people and happen in a matter of seconds. When you try and operate a speedboat the same way as an aircraft carrier, it’s pretty easy to hit other stuff… or sink. Every small-cap investor has a story about a portfolio company that sunk – or came needlessly close to it – because a newly-appointed board member from the large-cap world unconsciously redirected the board’s attention away from key existential threats to never-ending boardroom box-checking.

Misplaced emphasis on proxy advisors: Large-cap companies are typically more than 80 percent owned by large institutional investors. Those investors, in turn, can place a high degree of emphasis upon third-party advisors that educate institutional investors how they should consider voting on various annual proxy proposals. These so-called proxy advisors (e.g., ISS, Glass Lewis, etc.), can be highly impactful on board appointments and director compensation, among other things, and large-cap board members can get transfixed upon remaining within the good graces of ISS, et al. Regrettably, many large-cap emigres assume that their small-cap colleagues should be equally concerned about proxy advisors, despite the fact that many small-caps are majority owned and traded by retail (i.e., nonprofessional) investors who don’t care one iota about what any proxy advisor says… about anything. The result isn’t pretty, because when small-cap boards lose primary focus on strategy, innovation, culture, and capital formation, and instead become enamored with proxy advisors, bad things tend to happen.

Corporate finance disasters: Large-cap companies rarely need to access the equity capital markets, and when they do it’s almost always from a position of strength and leverage – strong balance sheets and extremely liquid stocks. On the other hand, many small-caps are serial capital raisers, and often transact financings from positions of weakness and vulnerability – everyone knows they are running out of money and their stock is illiquid. Here’s the rub: when I was an institutional investor, many of our portfolio companies either waited too long to raise “must have” capital, or they turned down “market terms” all because a large-cap board member noisily applied big company corporate finance sensibilities to a marketplace they didn’t understand – at all. This problem is exacerbated by the fact that “other” board members are often overly deferential to the new board member who operated, governed or advised famous companies. Just because someone works on an Indy 500 pit crew, doesn’t mean they are the best person to change the brakes on your Lexus.

Liz Dunshee

February 27, 2019

Survey Results: Board Fees for CEO Search

Here are results from our recent survey on board fees for CEO searches (the sample size was small, FYI):

1. During our most recent CEO search, we paid a search-related fee to the directors who led the search:
– Yes – 7%
– No – 57%
– We haven’t conducted a CEO search – 36%

2. For those paid the search-related fee, the total amount paid to each director was:
– $25,000 or more – 0%
– $15,000-$25,000 – 50%
– $5,000-$15,000 – 0%
– Less than $5,000 – 50%

3. For those paid the search-related fee, the fee was structured as:
– Per-meeting & per-interview fee – 0%
– Periodic additional retainer – 0%
– Additional “committee” fee – 100%

4. For those paid the search-related fee, the fee was based on:
– Compensation consultant survey & recommendation – 50%
– Informal estimate of extra time commitment – 50%

Please take a moment to participate anonymously in these surveys:

“Quick Survey on Ending Blackout Periods”
“Quick Survey on Drafting Proxy Statements, Glossy Annual Reports & Form 10-Ks”

D&O Insurance: Policy Priorities

This 28-page survey from Allen & Overy and Willis Towers Watson summarizes the most common D&O concerns – not too surprising that cyber threats now top the list, but less expected is the fact that health & safety is now in the top five – as well as the coverage issues that are most important to directors and officers. These are their top policy priorities:

1. D&O policy and/or company indemnification is able to respond to claims in all jurisdictions

2. How claims against D&Os will be controlled and settled

3. Broad definition of who is insured

4. Clear and easy-to-follow policy terms

5. Whether there is cover for the cost of advice at the early stages of an investigation

Cyber Insurance: Standalone Policies Gain Steam

This PartnerRe/Advisen survey of cyber insurance trends reports that for the last couple years, companies have been shifting from endorsements to standalone policies – in order to get higher dedicated limits and expanded business interruption coverage. In fact, as also noted in this Allianz survey, “BI” coverage was the most sought-after type of protection – displacing data breach from its long-standing spot at the top of cyber-protection priority lists. It’s also helpful to know that many more small- and mid-sized companies are hopping on the cyber insurance bandwagon.

Liz Dunshee

February 26, 2019

SEC Seeks Contempt Order for Tesla’s Musk Over New Tweet

Here we go again. Elon Musk can’t quit Twitter – which means the SEC can’t quit Elon. It was only last October that the Tesla CEO settled with the SEC on allegations of securities fraud, after a series of surprising “going private” tweets. Part of the settlement required Musk to get internal pre-approval of tweets that could contain material info about the company. But, as Broc and others predicted, it was a pretty tall order to think a mere mortal could stand between Elon and his social media.

Last week, Elon tweeted some production stats without getting that internal pre-approval. The SEC responded yesterday with this motion – asking the federal district court in Manhattan to hold Musk in contempt for violating the court-approved settlement. The motion is worth reading – it includes Tesla’s “Senior Executives Communications Policy” as well as a look into how the policy was being applied, and an excerpt from Musk’s December interview with “60 Minutes” Lesley Stahl in which Musk essentially thumbed his nose at the SEC.

If you don’t have time for that (or you don’t read Elon’s Twitter feed), this WaPo article also provides a good overview & analysis (also see this WSJ article and this NYT article). Here’s an excerpt:

It is not surprising that the SEC felt compelled to ask for Musk to be found in contempt, said Charles Elson of the University of Delaware. “They have to react. From an agency standpoint, if you show outright contempt towards the agency and they do nothing, how are they ever going to enforce the law?,” he said.

The SEC could ask the judge to increase the $20 million fine Musk has already paid or move to punish the company’s board if they don’t rein him in, said Adam Epstein, a corporate-governance advisor. But SEC is not likely to ask that Musk be removed from the company altogether, as it initially did last year, he said. “He has a pattern and practice of tweeting in an inflammatory fashion for years,” Epstein said. “He probably knows that the government is not going from Defcon 5 to Defcon 1 to remove him from the company, because that would be the worst possible outcome for investors. He’s clearly created more value than he’s hurt shareholders by his tweeting.”

Non-GAAP: Recognizing “Individually Tailored” Measures

As this ‘Journal of Accountancy’ article explains, Corp Fin clarified in 2016 that non-GAAP measures that substitute individually-tailored recognition & measurement methods for those of GAAP could violate Rule 100(b) of Regulation G (see CDI 100.04). Head scratching ensued – even at the Big 4 – because nobody knew the meaning of “individually tailored.” But the article reports that at the most recent AICPA conference, Patrick Gilmore (a Corp Fin Deputy Chief Accountant) provided these questions to guide the assessment:

– Does the adjustment shift GAAP from an accrual basis of accounting to a cash or modified basis of accounting? For example, Gilmore said using cash receipts or billings as a proxy for revenue for a subscription-based business that recognizes revenue over time would provide a profitability measure that would be determined on a mixed basis of accounting and would be an individually tailored accounting principle.

– Does the adjustment add in transactions that are also reportable in the company’s financial statements? As an example, Gilmore said adjusting from the guidance for determining whether a company is a principal or an agent could result in presenting transactions that don’t qualify as your own under GAAP and may be an individually tailored accounting principle.

– Does the adjustment reflect parts, but not all, of an accounting concept? For example, Gilmore said adjusting income tax effects for cash taxes but not for temporary or permanent differences may be an individually tailored accounting principle.

– Does the adjustment render the measure inconsistent with the economics of a transaction or an agreement? As an example, Gilmore cited some companies that earn revenue from operating leases, but also from sales-type leases or financing leases. “They will adjust revenue for the sales-type or financing leases as if they were operating leases, thus ignoring some of the economics of the lease agreements that they have,” he said.

Would Your Investors Support An Activist?

This recent “Trust Barometer” from the Edelman communications firm has lots of intel about what’s driving investment decisions – based on responses from 500 chief investment officers, PMs and buy-side analysts. This article recaps the declining level of trust in business and suggests that companies with higher trust levels, gained via accurate & transparent reporting, experience steadier (and better) share prices.

But what most caught my eye were the investors’ views on activism – especially since this WSJ article reports that there were a record number of activist campaigns last year, and Broc recently blogged that mutual funds are increasingly willing to employ activist tactics:

– 87% of investors are more open to taking an activists approach to investing

– 92% will support a “reputable” activist if they believe change is necessary at the company

– 87% think companies are unprepared for activist campaigns

Liz Dunshee

February 25, 2019

Tech IPOs: 239 Million Reasons to Stay Private?

This “Tech IPO Pipeline” from CB Insights shows that the SEC still has some work to do if it wants to make public offerings as attractive as private funding or an M&A deal. Maybe the SEC’s recent “testing the waters” proposal will help…but this article says it may be more of a market issue, with money migrating to private markets at an unusual rate. Here’s a summary of the pipeline report from Mayer Brown’s blog:

In 2013, the median time between first funding and IPO for U.S. VC-backed tech companies was 6.9 years compared to 10.1 years for tech companies that went public in 2018. In 2018, tech companies raised, on average, $239 million before undertaking their IPOs, which is almost 1.4x the amount raised in 2017, and over 3.7x as much as 2012 figures.

The mega-round financing trend, wherein companies raise over $100 million per round, was also prevalent in the tech-sector, with almost 120 mega-round financings completed in 2018. Tech-focused private equity firms continue to acquire majority stakes in tech companies that are nearing liquidity opportunities, whether IPOs or M&A exits. However, M&A exits continue to replace IPOs.

Pre-IPO Governance: Institutional Investor View

In this interview, Bob McCormick of PJT Camberview points out that it’s not just private equity and VC investors who are funding large pre-IPO companies – institutional investors are also involved. He asked Donna Anderson of T. Rowe Price how much they care about pre-IPO governance, and here’s what she said:

Our approach is to be consistent: we have principles we believe in, whether companies are public or private. For example, our public voting policy is to oppose certain key board members for any company that is controlled by means of dual class stock with differentiated voting rights. We accompany these votes with an explanation to the company as to why we have concerns with that structure for the long-term. Any features we oppose on the public side, we would not tend to consent to them on the private side either.

But it’s really not about applying a rules-based framework. These private companies are looking to their early investors to be their partners, and that’s the attitude we take. It’s about helping them along the journey, helping them find a governance structure that might be appropriate for them today vs. five or ten years from now. Our role in this is not to be the cops on the beat – it’s a consultative relationship. We’re helping to prepare them, if going public is in their plans, for what that will look like in the world of public shareholders, proxy advisors, votes and shareholder rights.

Pre-IPO Governance: When Do Changes Happen?

When it comes to the pre-IPO governance journey, this survey from Stanford’s Rock Center for Corporate Governance says that most companies start transitioning to public company “best practices” about 2-3 years before they go public. Here’s seven examples of how corporate governance practices evolve from startup through IPO:

1. Companies typically add their first independent director to the board 3 years prior to IPO. This occurs around the same time the company first becomes serious about developing a corporate governance system.

2. On average, companies add 3 independent directors prior to IPO. This number varies widely across companies.

3. 53% of companies go public with founder-CEOs. Companies who bring in a non-founder CEO do so 5 years before the IPO, on average. But most companies say that those leaders were hired to scale the company, not necessarily take it public.

4. CFOs are more likely than CEOs to be brought on as part of the IPO process – typically 3 years before going public. Many companies also transition from a regional auditor to a Big Four accounting firm.

5. An internal GC is the “least necessary” governance feature – many companies rely on external counsel.

6. Executive compensation doesn’t change as companies approach the IPO – and KPIs are common – but it becomes more formalized with financial targets afterwards.

7. Only 12% of founders & CEOs believe the quality of governance impacts IPO pricing – but most agree that having a high-quality governance system is required by institutional investors and the SEC.

Liz Dunshee

February 22, 2019

The Politicization of the SEC

I remember a time when you didn’t even know which political party that a particular SEC Commissioner was from. It didn’t matter because the SEC’s mission of investor protection was politically colorblind. I still believe that many SEC Commissioners operate with that same philosophy. Although that gets harder & harder to accomplish these days when the backgrounds of most SEC Commissioners seem to be former staffers of the Senate Banking Committee.

Anyway, this Reuters article entitled “Republican frustrations grow as SEC chair proves frequent ally of Democrats” angered me because I still believe that the SEC’s primary mission should be investor protection. And that it shouldn’t be a political football. The SEC is intended to be an independent agency. But without self-funding, that can be difficult to avoid sometimes…

Interpretive Guidance: From the Staff or Commission?

Meanwhile, the debate about whether the SEC should communicate its views with Commission-level guidance – not Staff-level guidance – continues with this recent speech from SEC Commissioner Hester Peirce (and some people even want less Commission-level guidance; remember when former Commissioner Piwowar suggested shorter adopting releases). This debate has a partisan tinge to it as some GOP members of Congress have been harping on this issue for more than a decade.

I’m not a big fan of Commission-level guidance. Most Commissioners don’t have the depth of experience in securities laws matters that senior SEC Staffers do – and they certainly don’t have the same level of resources. There are only so many hours in the day. And for what it’s worth, I think a lot more Staff guidance gets run past the Commissioners than ever before – which should make this topic a non-issue. I could be wrong but I believe non-controversial CDIs go out without Commission input, but more significant guidance – like Staff Legal Bulletins & things like conflict minerals guidance – almost certainly get run past the Commissioners (or at least the Chair) before they are issued by the Staff. There isn’t any formal vote; I think it’s more an informational thing…

Broc Tales: “Career Advice”

After over two years of Reg FD-related blogging on my “Broc Tales Blog,” the latest batch of stories come in the form of a dialogue between John & me about how to best manage your career. Some of the topics we tackle include:

1. Be Willing to Adapt
2. Be Ready at All Times
3. Be Prepared for Lifelong Learning
4. Set Regular Goals
5. Push Yourself (& Be Mindful When You Do)
6. Don’t Be Afraid to be a Trailblazer
7. Save Cash
8. Be Responsive
9. Hang Out With Good People
10. Hang Out With Good People (Online)

Broc Romanek

February 21, 2019

More on “Coming Soon: Senate Bill for Buyback Restrictions”

A few weeks ago, Liz blogged about a Senate bill from two Democrats that would allow companies to repurchase shares only if they pay their workers well (see this MarketWatch article for the potential consequences). Now Republican Senator Marco Rubio has released a report that calls for ending the tax advantages that buybacks enjoy over dividends (see this article). So there is a bipartisan push to limit stock repurchases, although with far different approaches to doing so…

Here’s a press release from CII about its views on buybacks – essentially warning Congress against regulation and urging better disclosure from companies about the rationale for their buybacks…

ISS Bribery Scandal: Conviction for Former Georgeson Employee

A long while back, I blogged about an ex-Georgeson solicitor who bribed an ISS employee to get confidential voting information. As noted in this Goodwin alert (scroll down), that person has been convicted and is now facing up to 20 years in prison…

Yikes. I could see how there’s a grey area in there, which is scary with all the client entertainment that goes on at all types of firms. Hopefully, the prosecutors won’t pursue the max sentence…

D&O Cyber Lawsuits Continue

Recently, Melissa Krasnow of VLP Law Group sent over this article describing how many D&O cyber lawsuits were filed after the EU’s GDPR went into effect on May 25th. Melissa also sent this recent decision to allow the federal securities law class action cyber lawsuit to proceed against Equifax and its former CEO.

Before disclosing the data breach to the public for the first time, Equifax’s former CEO said, in a presentation that is available on YouTube: “when you have the size database we have, it’s very attractive for others to try to get into our database, so it is a huge priority for as you might guess. [Data fraud] is my number one worry, obviously.”

Melissa anticipates that the trend of D&O cyber lawsuits will continue and more lawsuits will be filed due to:

– Cyber events that occur
– Existing and evolving privacy and cybersecurity regulation and enforcement in the US, Canada, EU and globally
– Interest of plaintiffs attorneys in pursuing these lawsuits
– Settlement of some of these lawsuits (which has occurred in certain lawsuits)
– Blind spots/shortcomings regarding how certain organizations and their executives and directors address privacy and cybersecurity (including lack of awareness/information regarding these lawsuits)

Broc Romanek

February 20, 2019

SEC Proposes “Test the Waters” For All Companies

Yesterday, the SEC issued this 76-page proposing release would expand the “test-the-waters” accommodation from EGCs to all companies, including investment companies. Here’s the SEC’s press release – we’ll be posting memos in our “Securities Act Reform” Practice Area as they come in (and here’s Steve Quinlivan’s blog and this MarketWatch article).

With this proposal, the SEC seeks to allow all companies to benefit from all the changes that the JOBS Act gave EGCs. Some of the JOBS Act benefits had already been widely available, as Corp Fin opened up the confidential filing process to all companies two years ago. If this proposal is adopted, the “testing-the-waters” part of the JOBS Act will also be extended to a broader range of companies. There’s a 60-day comment period.

Nasdaq Clarifies “Direct Listing” Rule Change

Recently, John blogged about high-profile companies starting to use the “direct listing” route to go public rather than the traditional IPO path. This type of offering was facilitated by the NYSE changing its rules last year to permit a direct listing.

As noted in this Steve Quinlivan blog, Nasdaq recently filed an immediately effective rule proposal with the SEC that clarifies how the process works for direct listings on that exchange without an IPO. Over the years, there have been a handful of direct listings on Nasdaq…

Internal Controls: Some EGCs Might Get Their 404(b) Exemptions Extended

Here’s the intro from this blog by Cooley’s Cydney Posner:

A bipartisan group of senators has introduced a new bill, the ‘Fostering Innovation Act of 2019’ (S. 452), that would amend SOX to provide a temporary exemption from the auditor attestation requirements of Section 404(b) for low-revenue issuers, such as biotechs. The bill is designed to help those EGCs that will lose their exemptions from SOX 404(b) five years after their IPOs, but still do not report much revenue. For those companies, proponents contend, the auditor attestation requirement is time-consuming and expensive, diverting capital from other critical uses, such as R&D.

According to the press release, the bill would provide “a very narrow fix that temporarily extends the Sarbanes-Oxley Section 404(b) exemption for an additional five years for a small subset of EGCs with annual average revenue of less than $50 million and less than $700 million in public float.”

Broc Romanek

February 19, 2019

“SAY” for Retail Shareholders: Shades of the Defunct “Moxy Vote”

This CNBC article describes how Tesla recently used a new plaform – called “Say” – for retail shareholders to ask questions during an earnings call. It reminds me of “Moxy Vote,” which went belly up in 2012. Here’s a 2011 podcast that I taped with Moxy Vote’s CEO.

Here’s the intro from the CNBC article (also see this blog from Jim McRitchie for an overall look at this market):

Tesla Chief Executive Office Elon Musk speaks at his company’s factory in Fremont, California. Tesla opened its fourth quarter conference call on Wednesday by fielding questions submitted through a mobile app by some of its mom and pop investors. It’s was a far less contentious call than the one last May, when CEO Elon Musk sparred with professional Wall Street analysts over their questions about Tesla’s production issues and cash burn rate. Musk lashed out at one analyst who asked about Tesla’s capital requirements, saying “Boring, bonehead questions are not cool.” He later apologized.

Earnings conference calls normally feature a polite repartee between company executives and research analysts and are seldom open to questions from news reporters (CNBC’s Phil LeBeau did slip in a question during the October call) much less ordinary investors. But Musk’s conference calls in recent quarters have been a little higher-octane. The call in May featured a surprising guest in the form of a 20-something YouTuber and small Tesla shareholder named Galileo Russell, who was allowed to pepper Musk with questions.

Russell, whose YouTube channel is a grass roots forum for Tesla shareholders, teamed up with a tech startup called Say that is backed by hedge fund manager Steve Cohen’s private Point72 Ventures. Say is a mobile app that aims to give individual shareholders more power in voting on company issues and communicating with companies as shareholders.

Say was the app gathering the questions submitted to Musk on Wednesday. Musk and other executives on the call ended up answering four of them, including one about how a recession could affect demand (Musk said he still sees orders of 500,000 for Model 3 in a recession environment), the time-line for self-driving features (Musk said they’re working on traffic light technology and navigating complex parking lots), batteries (wouldn’t comment on product development), and Tesla semi and Model Y (Musk says they might unveil the Tesla pickup truck this summer).

Musk has had to shore up his shareholder relations after sending everyone into a frenzy last year by casually tweeting that he was considering taking Tesla private. He paid $20 million to settle with the SEC over that tweet. The questions submitted for Wednesday’s call represented a tiny sliver of Tesla’s 171 million shares outstanding. Musk didn’t directly answer one about reputation issues. But on the Say app, where people were voting on which questions they wanted asked, it was the most popular one going into Wednesday’s call.

So How Does “SAY” Work?

According to this set of FAQs on SAY’s site, shareholders get verified by linking their brokerage account and confirming they own company stock. Then, they can submit as many as 3 questions. Shareholders can also “vote” in support of questions raised by other shareholders on the SAY platform. SAY’s site displays how many votes each question receives – as well as the total number of shares that those votes represent.

During Tesla’s earnings call, hundreds of questions were submitted via the SAY platform – here’s Tesla’s CEO answering some of those questions on Twitter

Today’s Webcast: “Audit Committees in Action – The Latest Developments”

Tune in today for the webcast — “Audit Committees in Action: The Latest Developments” — to hear Deloitte’s Consuelo Hitchcock, EY’s Josh Jones and Gibson Dunn’s Mike Scanlon catch us up on a host of new SEC, FASB & PCAOB developments that impact how audit committees operate — and more.

Broc Romanek

February 15, 2019

Diversity: Proposed Legislation Would Mandate D&O Disclosure

Last week, Corp Fin issued new CDIs addressing board diversity disclosure issues.  Now, Rep. Greg Meeks (D-NY) & Sen. Bob Menendez (D-NJ) have introduced legislation that would require companies to disclose self-identified demographic info about their board & executive officers.  Here’s an excerpt from a recent Weil blog summarizing the proposed legislation:

The bill, which garnered the support of the Council for Institutional Investors and the U.S. Chamber of Commerce, would require public companies to disclose annually in their proxy statements data on the racial, ethnic, and gender composition, as well as veteran status, of its board of directors, director nominees and executive officers based on voluntary self-identification. Moreover, disclosure regarding the adoption of any board policy, plan or strategy to promote racial, ethnic, and gender diversity would be required.

The bill would also require the SEC’s Office of Minority and Women Inclusion to publish best practices for corporate reporting on diversity.  Rep. Meeks introduced the same legislation during the last Congress, but it went nowhere. With Democrats controlling the House & support from the CII &  the  U.S. Chamber of Commerce, perhaps it will get more traction this time around.

Board Gender Diversity: Will Supply Meet Demand?

Recently, Liz wrote on “The Mentor Blog” that assuming current board composition, California’s board gender diversity statute will require Golden State companies to find over 1000 women directors by the end of 2021.

A recent study on the market’s reaction to the statute suggests that there is some concern among investors that there won’t be enough qualified female director candidates to meet that demand – and this concern has implications for companies located in & outside of California. Here’s an excerpt from the study’s abstract:

On September 30, 2018, California became the first U.S. state to introduce a mandatory board gender quota applicable to all firms headquartered in the state. Using a large sample of publicly-listed firms headquartered in the U.S., we find that the introduction of the quota is associated with significantly negative announcement returns to California-headquartered firms. Consistent with the quota imposing frictions, this effect is larger for firms requiring more female directors to comply with the quota.

According to the study, California headquartered companies had a 0.47% lower return on the first day after the quota announcement than a control group of matched on size and industry. It says that this effect is larger for companies needing to add more female directors to comply with the quota and for those with low corporate governance standards – results that are consistent with the theory that smaller companies and those with poor governance could have a hard time recruiting qualified women candidates.

The study also identified negative “spillover” effects on returns for companies headquartered outside California. These were concentrated among companies in industries where California-based companies need to recruit a lot of female directors to comply with the law. Companies headquartered in “blue” states were also negatively affected – perhaps due to perceptions that they were more likely to become subject to a board gender quota than those based in “red” states.

Europe’s experience with a female quota requirement for boards suggests that companies may want to expand their search to some less traditional sectors – such as women working in leadership positions in government, non-profits & academia.

January-February Issue of “The Corporate Counsel”

We recently mailed the January-February issue of “The Corporate Counsel” print newsletter (try a no-risk trial). The topics include:

– Tone Deaf at the Top: Now It’s Your Problem When an Executive Messes Up

1. Is There an Insider Trading Problem?
2. An Unusually-Timed Form 4 Attracts Attention
3. Beware of the Potential for Shareholder Derivative Suits
4. There Are Disclosure Issues Everywhere
5. Sanctions & Remedial Steps

– Reg A Gets an Upgrade: Opening the Exemption to Reporting Issuers
– Annual Season Items
– Non-GAAP: “Equal or Greater” Prominence Applies to Your Earnings Release
– Form S-3 is Sometimes a “Come as You Were” Party

John Jenkins

February 14, 2019

Insider Trading: “Who Watches the Watchers?”

The Roman poet Juvenal famously asked “quis custodiet ipsos custodies” – “Who watches the watchers?” When it comes to public company gatekeepers, SEC Enforcement’s answer is “we do.” That’s clearly the message sent by the insider trading complaint that the SEC filed yesterday against a former Apple lawyer who, among other things, was responsible for overseeing compliance with the company’s insider trading program! Yes, the person responsible for insider trading compliance is alleged to have engaged in illegal insider trading!

Here’s an excerpt from the SEC’s press release that lays out the agency’s allegations:

The SEC’s complaint alleges that Gene Daniel Levoff, an attorney who previously served as Apple’s global head of corporate law and corporate secretary, received confidential information about Apple’s quarterly earnings announcements in his role on a committee of senior executives who reviewed the company’s draft earnings materials prior to their public dissemination.

Using this confidential information, Levoff traded Apple securities ahead of three quarterly earnings announcements in 2015 and 2016 and made approximately $382,000 in combined profits and losses avoided. The SEC’s complaint alleges that Levoff was responsible for securities laws compliance at Apple, including compliance with insider trading laws. As part of his responsibilities, Levoff reviewed and approved the company’s insider trading policy and notified employees of their obligations under the insider trading policy around quarterly earnings announcements.

Parallel criminal charges were also filed. Obviously, it’s up to the SEC to prove the conduct it alleges here, but this seems as good a time as any to remind you of Broc’s recent advice to anyone thinking about dabbling in insider trading – don’t do it!

In the interest of full disclosure, I confess that I’m nowhere near as erudite as the first sentence of this blog would suggest. Truth be told, I remembered the English version of the “who watches the watchers” quote from the “Watchmen” movie – and then I just got all of that Juvenal stuff by Googling it.

SEC’s Peirce Says “Lighten Up” On Howey For The Crypto

The Howey test considers “investment contracts” to be securities if they involve an investment of money in a common enterprise with an expectation of profit to be derived “solely from the efforts of others.” The SEC’s position has been that many token deals fit squarely within the definition of an “investment contract.” But in a recent speech, SEC Commissioner Hester Peirce suggested that the agency should take more flexible approach when it comes to applying the Howey test to digital assets:

While the application of the Howey test seems generally to make sense in this space, we need to tread carefully. Token offerings do not always map perfectly onto traditional securities offerings. For example, as a recent report from Coin Center noted, the decentralized nature of token offerings can mean that the capital raised through token sales may not be truly owned or controlled by a company. Functions traditionally completed by people designated as “issuers” or “promoters” under securities laws—which, importantly, bestow those roles with certain responsibilities and potential liabilities—may be performed by a number of unaffiliated people, or by no one at all.

Commissioner Peirce pointed out that since some token environments aren’t centralized & contemplate important roles for individuals “through mining, providing development services, or other tasks,” the SEC must avoid casting “the Howey net so wide that it swallows the “efforts of others” prong entirely.”

She expressed concern that some apparently legitimate projects may be made untenable by the federal securities laws, and also observed that regulators “ought not to assume that absent the application of the securities laws to the world of tokens, there would never be any order.” Well folks, they don’t call her “Crypto Mom” for nothin’!

At-the-Market Offerings: Hot! Hot! Hot!

Given how volatile the stock market was last year, it probably shouldn’t come as a big surprise that “at-the-market” offerings had a gangbuster year. This Bloomberg Law blog has the details:

An impressive 202 ATM offerings announced in 2018 were projected to raise a total of $31.75 billion, the largest amount in the last ten years. The average deal size for an ATM offering announced in 2018 was $157 million. To put things in perspective, 274 IPOs were priced in 2018 and raised $64.74 billion. Looking at industry distribution for ATM offerings in 2018, 52 percent were announced by companies in the Consumer, Non-Cyclical sector and 27 percent came from the Financial sector.

The two largest ATM offerings announced in 2018 were by: MPLX LP (announced on March 13, in the Energy sector and projected to raise $1.74 billion) and Annaly Capital Management Inc. (announced on January 3, in the Financial sector and projected to raise $1.50 billion).

ATMs were pretty popular shortly after the financial crisis, but fell out of fashion. The blog says that over the last 5 years, use of this financing tool has rebounded – along with market jitters.

John Jenkins