March 25, 2019

Proxy Advisors: “What’s Sauce for the Goose . . .”

According to this recent WSJ article, the SEC may issue a proposal to regulate ISS, Glass Lewis & the gang as soon as this spring. Here’s an excerpt:

The SEC is expected to propose the first U.S. rules on proxy-advice companies following an organized campaign by public companies that think proxy-advisory firms have too much sway over shareholder proposals. Lobbying and advocacy groups, including the U.S. Chamber of Commerce and the National Association of Manufacturers, and stock exchanges, such as the Nasdaq and the New York Stock Exchange, have mounted a well-funded offensive against the industry, which is dominated by two firms. The groups have purchased advertisements targeting proxy advisers, sponsored a Washington think-tank event and testified at multiple Senate committee hearings on the issue.

Corporations say the advisory firms—which make recommendations to shareholders on how to vote on corporate governance issues—have too much sway over corporate decision-making. Companies argue that they spend too much time and money fighting proposals they think would be detrimental to their overall performance.

Despite the astroturf advocacy on this issue by the “Main Street Investors Coalition,” an organization that seems to have been essentially a sock puppet for NAM & the Chamber, I’m not going to pretend that I’m sorry to see that proxy advisors may finally face some sort of SEC oversight.

There’s certainly a sizeable group of people who view proxy advisors as indispensable tools for promoting shareholder democracy & believe that they should remain free from oversight. Not me. I haven’t embraced the theology of shareholder supremacy & don’t take it as revealed truth that directors should prostrate themselves before the company’s “true owners” [sic]. I also don’t think that “good governance” means reflexively endorsing any proposal that reduces the board’s power and enhances the power of whatever amorphous mass of casino capitalists happens to be holding shares at any given instant.

Once you cut through the pious propaganda from one side about “shareowner democracy” and from the other about “the perils of short-termism,” this is ultimately a cynical struggle between two powerful factions for control over who has the final say at public companies. Proxy advisors have been effectively weaponized by the investor side of that struggle, & their use should be regulated just as management’s use of its own weapons are.  After all, what’s sauce for the goose is sauce for the gander.

The SEC isn’t just focusing narrowly on proxy advisors. This recent speech by Commissioner Roisman indicates that it’s also focusing on how those recommendations are used by institutional investors and how those investors ensure they are using them responsibly.

Testing the Waters: Avoiding a General Solicitation Issue

This Locke Lord blog discusses a potential issue around “testing the waters” that not many have focused on – how to maximize a company’s flexibility to pursue private financing after it’s tested the waters & opted not to pursue a public financing. The biggest concern in this scenario is the possibility that testing the waters for the public deal might be regarded as a “general solicitation” for the private financing.

Fortunately, the blog says that this outcome can be avoided if the company takes a careful approach to how it tests the waters for the potential public deal. Here’s an excerpt:

Although the SEC does not appear to have addressed this question directly, our advice and prevailing market practice is that if the test-the-waters activity is properly structured an issuer can avoid its being a general solicitation. The key to avoiding a general solicitation is carefully selecting the investors with which the issuer will test-the-waters. If the test-the-waters activity does not involve a general solicitation, there should be no concern doing a subsequent private offering, either to the investors with which the waters were tested or other investors.

The blog points out that it typically shouldn’t be too difficult to plan a test-the-waters effort to avoid general solicitation – the investors contacted will all have to be institutions, and it’s likely either the company or its banker will have a preexisting substantive relationship with them.

Blockchain: ABA’s “Digital & Digitized Assets” White Paper

The ABA’s Business Law Section just published this 353-page white paper addressing jurisdictional issues relating to blockchain technology, cryptocurrencies & other digital assets. This excerpt from a recent Paul Hastings memo summarizes the contents:

The white paper tackles a number of topic areas relevant to the ever-changing cryptocurrency and digital asset landscape, including:

– Background information regarding digital assets and blockchain technologies, including associated trading platforms, security issues, and characteristics and features of digital assets and virtual currencies;

– Regulation by the Commodity Futures Trading Commission under the Commodity Exchange Act, including the CFTC’s approach to classifying and regulating virtual currencies and related derivatives;

– The SEC’s regulation under the Securities Act, the Securities Exchange Act, the Investment Company Act, and the Investment Advisers Act, including when the SEC classifies a digital asset as a “security;”

– The interplay, and sometimes tension, between SEC and CFTC regulations;

– FinCEN regulation of digital assets, including in relation to anti-money laundering and know-your-customer requirements;

– International regulation of digital assets and blockchain technology throughout Europe, Asia, Australia, and globally; and

– State law considerations, including state law licensing requirements and state-specific regulations.

John Jenkins