July 16, 2019

Corp Fin Issues “LIBOR Transition Risks” Statement

LIBOR is going away in 2021 – and the SEC Staff is reiterating that companies should prepare – and adequately disclose the associated risks. Last week, Corp Fin issued a joint statement with the Division of Investment Management, Division of Trading & Markets and Office of the Chief Accountant to say that companies should identify their exposure under contracts that extend past 2021 and consider whether future contracts should use an alternative rate. Corp Fin’s portion of the statement also says:

As companies consider the questions in the section above entitled “Managing the Transition from LIBOR” and address the risks presented by LIBOR’s expected discontinuation, it is important to keep investors informed about the progress toward risk identification and mitigation, and the anticipated impact on the company, if material. In deciding what disclosures are relevant and appropriate, CF encourages companies to consider the following guidance.

– The evaluation and mitigation of risks related to the expected discontinuation of LIBOR may span several reporting periods. Consider disclosing the status of company efforts to date and the significant matters yet to be addressed.

– When a company has identified a material exposure to LIBOR but does not yet know or cannot yet reasonably estimate the expected impact, consider disclosing that fact.

– Disclosures that allow investors to see this issue through the eyes of management are likely to be the most useful for investors. This may entail sharing information used by management and the board in assessing and monitoring how transitioning from LIBOR to an alternative reference rate may affect the company. This could include qualitative disclosures and, when material, quantitative disclosures, such as the notional value of contracts referencing LIBOR and extending past 2021.

At this stage in the transition away from LIBOR, we note that companies most frequently providing LIBOR transition disclosure are in the real estate, banking, and insurance industries. We also note that, based on our reviews to date, the larger the company, the more likely it is to disclose risks related to LIBOR’s expected discontinuation. However, for every contract held by one of these companies providing disclosure, there is a counterparty that may not yet be aware of the risks it faces or the actions needed to mitigate those risks. We therefore encourage every company, if it has not already done so, to begin planning for this important transition.

Buybacks: Rulemaking Petition Wants to “Repeal & Replace” Rule 10b-18

A few weeks ago, the AFL-CIO and 18 other organizations submitted this rulemaking petition to call for more comprehensive rules around stock buybacks. Here’s an excerpt from this Wachtell Lipton memo (also see this Cooley blog):

The petition contends that the current rule has “failed to prevent executives from using repurchases to boost a company’s stock price or meet other performance goals at the expense of investing in its workers,” and that the existing disclosure requirements are inadequate. The petitioners cite evidence that corporations devote substantial capital to buybacks, noting the recent uptick following the enactment of the Tax Cuts and Jobs Act, and argue that the funds would be better spent on “wages, training, hiring” and other capital investments. The petitioners request that the SEC develop a “more comprehensive framework” to deter manipulation and protect workers, and propose that the SEC consider certain suggestions made in prior rulemaking processes (including additional disclosure requirements and tighter trading limits) and consider adopting regulatory features imposed in certain other countries (such as shareholder approval requirements and prohibitions on executive trading).

The History of Stock Buybacks

This WSJ article posits that “Share buybacks are as American as mom, apple pie and hot dogs on the Fourth of July.” They’ve been around since the 1800s – and were often mandatory back then, in order to keep management from pocketing extra profits. Bloomberg’s Matt Levine suggests that maybe the changing sentiment about this practice has more to do with our modern expectations for “corporate purpose” than with the supposed unfairness of profits going to shareholders rather than workers:

In the olden days, you’d start a company and call it like Pennsylvania Tin Folding Ltd., and its purpose would be to fold tin in Pennsylvania, and it would never occur to you to fold tin in Ohio, or to fold nickel, or to twist tin, or to do anything else not in the name. You’d raise money from investors for a purpose, and do the purpose, and if it was profitable you’d give the money to the investors; you’d stay in your lane.

In modern times, you start a company and call it like Alphabet Inc., and its purpose is be to sell online advertisements against search results, and when that turns out to be an extraordinarily lucrative business it will get into other businesses like email and self-driving cars and human immortality. And no one thinks this is the least bit weird; everyone says “well of course who should end the tyranny of death if not the search-ad guys?” And this becomes the normal way of thinking, so that any profitable mobile-phone or social-networking or whatever company that doesn’t plow its profits back into grandiose moonshot projects is somehow failing in its duty to humanity. How are we going to fund our most ambitious collective goals, if not by social-media startup founders making whimsical decisions about what to do with their retained earnings?

Liz Dunshee