May 14, 2019

Proxy Strike Suits: What We’re Hearing About This Year’s Targets

It’s proxy season, which means it’s also proxy strike suit season. We’ve recently heard reports from several members that plaintiffs are targeting disclosures surrounding whether brokers will be permitted to vote on particular proposals & the effect of abstentions and non-votes, as well as disclosures relating to compensation plans being submitted for a shareholder vote.

Here’s what we have learned:

– The plaintiffs’ bar has been sending demand letters to companies alleging inadequate or inaccurate disclosure about the vote required to approve proposals included on the company’s proxy materials, and threatening legal action in the event that corrective disclosure is not provided.

– Similar demand letters have been sent to companies with compensation plans on the ballot, alleging inadequate disclosure under Item 10(a) of Schedule 14A, which relates to general disclosures relating to compensation plans being submitted for shareholder approval.

– These demand letters typically arrive shortly before the scheduled date for the annual meeting, and a number of companies have filed DEFA 14As to reflect revised disclosure relating to these matters.

– Resolution of the issues raised in the demand letters is typically accompanied by a demand for legal fees.

These are not new areas of proxy disclosure for plaintiffs to pursue. Compensation plan disclosures have long been an attractive target, and disclosures about the effect of abstentions & non-votes were the subject of at least one high-profile case in 2014 & a number of demand letters over the last few years. It’s also easy to see why plaintiffs might like to single out disclosures in these areas for potential challenges.

When it comes to broker non-vote disclosures, the application of NYSE Rule 452 is sometimes unclear, and the Exchange’s interpretation of what proposals are “routine” does not always align with what one might expect. On top of that, the impact of broker non-votes on the outcome of any given proposal may depend on state law, charter provisions, and the nature of the proposal itself. In other words, this is complicated stuff – and it’s easy to make a mistake.

Item 10(a) of Schedule 14A seems more straightforward – essentially requiring companies to summarize the material features of the plan and information about the number of participants & how they are selected. But these requirements are also very open-ended, and leave plenty of room for second-guessing disclosure decisions. We’ll have more on this in the next issue of The Corporate Counsel newsletter.

Uber IPO: The Biggest Loser?

Uber’s IPO didn’t exactly have a gangbusters first day of trading.  There have been plenty of IPOs that have had worse openings than Uber’s 7.6% decline from its IPO price, but according to this Gizmodo article, the sheer size of the deal made the dollar losses suffered during Uber’s first day the largest in U.S. history:

According to University of Florida professor Jay Ritter, Uber’s 7.62 percent decline since hitting the NYSE makes it “bigger than first day dollar losses of any prior IPO in the U.S.” In terms of percentage losses, Uber’s dip doesn’t even scratch the surface of the worst IPOs. But the staggering valuation of the company makes it, in raw scale, “among the top 10 IPOs ever” including companies outside the U.S., Ritter told Gizmodo in a phone interview. That single digit decline resulted in an estimated $617 million paper losses.

Oh well, easy come, easy go. To make matters worse, the article points out that this first-day loss comes despite the fact that Uber’s IPO valuation of $76.5 billion represented a significant haircut from the  $90 billion and $120 billion valuation that some analysts placed on the company just a month before the offering.

Direct Listings: A Lot to Like If You’re a Venture Investor

We’ve previously blogged about the willingness of some unicorns to bypass IPOs and pursue direct listings. With Uber & Lyft’s IPOs both landing with a resounding thud, this WSJ article says that there may be a lot to like about this alternative for venture investors. This excerpt quotes Canaan Partners’ Michael Gilroy on why that’s the case:

Mr. Gilroy said one advantage of direct listings is they are cheaper. Companies holding direct listings still hire bankers, but the costs are notably lower than the traditional process. “The fees are far too high for what they’re doing” in an IPO, he said. A direct listing lacks mechanisms like greenshoe options, which allow bankers to buy shares to help keep the price stable—so direct listings risk a large drop in prices when shares first hit public markets. However, because direct listings don’t raise new capital, existing shareholders benefit because their ownership isn’t diluted.

In addition, direct listings eliminate lockup agreements, which restrict the sale of shares by existing holders. That can be attractive for employees and venture capital investors, who can sell shares immediately. With traditional IPOs, they often have to wait several months to sell their holdings. “VCs are not professional public investors,” said Mr. Gilroy. “Six months can be a significant difference in your return profile for the company.”

As Liz blogged last month, Slack’s already on its way to a direct listing – and if the stock pops, that may prompt more high-profile, cash-rich unicorns to consider this alternative.  Regardless of its deal structure, a lot may be riding on how Slack performs out of the gate. If it lays an egg, this Axios Pro Rata newsletter says that unicorns may be yesterday’s news as far as Wall Street’s concerned.

John Jenkins