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Monthly Archives: May 2020

May 29, 2020

Covid-19 Law Firm Swag

During the Covid-19 pandemic, opportunities to join together for an in-person lunch-hour CLE while collecting the usual law firm swag are basically non-existent.  So, what a nice surprise to receive law firm swag via email – Winston + Friends Cookbook!  For someone who loves to eat and try new recipes, this made my day and hope some of you enjoy it too.  Here’s the backstory to the 174-page cookbook from the firm’s email:

Soon after the COVID-19 pandemic left us no choice but to work remotely, Winston employees began a quarantine recipe exchange as a way to stay connected (and well-fed). What started as an internal email exchange among Winston personnel across the United States, has now led to a Winston + Friends Cookbook that contains over 100 recipes from Winston employees world-wide, as well as friends of the firm, including clients and professional chefs. The Winston + Friends Cookbook has delicious recipes for breakfast and brunch, condiments and sauces, appetizers, soups and salads, entrées, side dishes, desserts, and drinks.

Given the uncertain times, and the effects that this pandemic has had on access to food, the firm and our people have donated substantial sums to food-based organizations around the globe (and through our pro bono efforts have helped secure DACA renewals for front line food workers).  Should you choose to help, we share at the end of the cookbook organizations founded or run by contributors to the cookbook as well as the contact information for Feeding America, the largest hunger-relief organization in the United States.

Board Gender Diversity: Another State Mandate

We’ve blogged before about board gender diversity and there are plenty of studies analyzing and reporting progress. These numbers will likely climb again as a recent Dorsey blog says the State of Washington will require gender diversity on public company boards or board diversity disclosure by January 1, 2022.  The blog says to meet this gender diversity requirement, a public company will have a gender-diverse board of directors if, for at least 270 days of the fiscal year preceding the applicable annual meeting, individuals who self-identify as women comprise at least 25% of the directors serving on the board.

For companies that don’t meet the gender diversity requirement by 2022, the blog describes Washington’s disclosure requirements.  One of the disclosure requirements includes discussion of any policy adopted by the board relating to identifying and nominating diverse director candidates for election and if there isn’t such a policy, the reasons why.

Washington will likely see an uptick in female directors much like California did.  And, as this Shearman & Sterling blog notes, attention on board diversity will continue as several other states have considered similar legislation.  In terms of progress, Equilar has been tracking board gender diversity at Russell 3000 companies and yesterday it issued its Q1 2020 report showing continued improvement.  Equilar’s website commentary on the report says over the last quarter, the percentage of companies that previously had zero women on their board dropped from 7.7% to 7.1% and 129 companies have boards with between 40% and 50% women, up from 114 companies last quarter.

Importance of Updating Risk Management Programs

A recent Nixon Peabody memo reminds management teams to ensure risk management policies and procedures are updated, implemented and that any crises are resolved – ignoring a “red flag” may indicate a breach of management’s duty of care.  The memo provides suggestions for updating company risk management programs, saying it’s now more important than ever, as many existing risk management programs may no longer be adequate during the Covid-19 pandemic.  Here’s an excerpt:

Such procedures must be updated in accordance with state and federal recommendations and address not only the damage caused so far, but the arduous task of reopening, and the potential for similar or greater crises down the line.  In particular, companies must have risk management policies and procedures updated for coronavirus in relation to:

– Possible industry-specific impacts

– Continuity of business issues

– Supply chain disruption

– Increased risk of litigation

– Decreased or impaired workforce

– Increased cybersecurity risks

Furthermore, under the current circumstances, company management cannot simply enact such risk management and step aside. Management is well-advised, for example, to set up COVID-19 subcommittees to report on a regular, if not daily, basis. Regular meetings, with minutes, must be held in response to the changing COVID-19 landscape to document the measures that are being taken, and the motivations for business decisions, to help stave off future regulator actions and derivative litigation.

Management should report about what it’s doing and what advice and guidance it’s relying on.  The memo also says in certain circumstances it may be appropriate for management to bring in an inside or outside expert to present to the board – doing so can help bolster the board’s record of diligence.  Management and the board should document the advice sought and how it was applied.

– Lynn Jokela

May 28, 2020

SEC Chairman Clayton’s ESG Comments

Last week when SEC Chairman Jay Clayton spoke before the SEC Investor Advisory Committee meeting, he concluded his remarks by noting his views on disclosure of ESG matters – saying that lumping “E”, “S” and “G” disclosure matters together reduces the usefulness of the disclosures.  Yesterday, Chairman Clayton re-emphasized his view in remarks before a meeting of the SEC’s Asset Management Advisory Committee.  Here’s an excerpt from Chairman Clayton’s remarks yesterday:

I believe I have made it clear that, while I believe that in many cases one or more “E” issues, “S” issues, or “G” issues are material to an investment decision, I have not seen circumstances where combining an analysis of E, S and G together, across a broad range of companies, for example with a “rating” or “score,” particularly a single rating or score, would facilitate meaningful investment analysis that was not significantly over-inclusive and imprecise.

Along with everyone else that has compiled data and responses for surveys used in ESG ratings, it seems safe to say that Chairman Clayton isn’t a fan of the proliferation of ESG ratings either.

The Commission has a tall order now that the SEC Investor Advisory Committee approved its recommendation suggesting the Commission get moving on ESG disclosure.  Part of the Investor Advisory Committee’s recommendation is that the Commission conduct outreach about ESG reporting requirements to investors, companies and others.  The Commission is clearly conducting outreach by gathering information from the Investor Advisory Committee and Asset Management Advisory Committee – although at this point, it’s hard to tell where the Commission’s effort on ESG disclosure goes from here – or for that matter, whether it will go any further.

Proxy Advisor Regulation – Is a Speed Bump the Answer?

Proxy advisors and others are voicing displeasure at the notion of a “speed bump” when it comes to proxy advisor reports.  Even though the comment period for the SEC’s proposed proxy advisor regulations closed back in February, concerned voices haven’t quieted.  The latest concern relates to the “speed bump” that Commissioner Elad Roisman spoke about back in March at CII’s spring conference.

During his remarks, Commissioner Roisman mentioned one idea that would allow contemporaneous review – companies would receive and review a proxy advisor’s report at the same time the proxy advisor sent the report to its clients.  While a company reviewed a proxy advisor’s report, as a way to manage “automatic voting,” Commissioner Roisman suggested a “speed bump” – basically a time period during which the proxy advisor would disable any automatic voting submission features.

While some see contemporaneous review and a speed bump as an improvement compared to how things stand today, the constituents that don’t are jumping on the “voice of concern bandwagon.”

First, a CFA Institute blog says they want the SEC to propose new rules so details of contemporaneous review and the speed bump can be better understood.  Without reopening a revised proposal for comments, the blog says the SEC risks shutting out stakeholders from providing comments.

A recent Pension & Investments article, titled “Truce sorely wanted on proxy proposal championed by SEC” (subscription required), quotes Glass Lewis’s SVP & GC, Nichol Garzon-Mitchell, as saying the proxy advisor still has concerns about some of the alternatives the SEC may be considering and that details of a new proposed approach should be vetted through public comment.  The article also quotes representatives of the Investment Advisor Association and the Council of Institutional Investors as saying that the idea of contemporaneous review and a speed bump is promising but more information is needed and basically the SEC should re-propose the rule to sort out potential concerns and issues.

ISS declined to comment for that article, but separately a recent opinion piece from ISS’s head of Governance Research & Voting,  Lorraine Kelly, also voices displeasure about the “speed bump” solution.  The opinion piece echoes the IIA and CII concerns and suggests because the alternative proposal is so different from the original rule proposal it should require the rulemaking process to go back to start over.  The opinion piece concludes by suggesting the SEC shelve the proposed rules.

Give the Commission credit, it’s no easy task to try to change or improve the process around proxy advisor reports and they’ve stepped up to try and address it.  The proposed rules are controversial and no matter what is done, somebody’s probably not going to like it.  At the same time, companies have been frustrated for years with the existing process for proxy advisor reports so some change would likely be welcome news.

Post-Mortem Assessment of Virtual Financial Close

Working remote continues for many and a recent Deloitte memo takes a look back at what, for most, was the first virtual financial close to help smooth the effort the next time around.  Many companies had to adjust financial close processes on the fly and the memo says this may have raised questions about internal controls and it lists questions to help guide an assessment of potential weaknesses.

Knowing that the recent virtual financial close likely won’t be the last, if companies haven’t already done so, the memo serves as a reminder that now might be a good time to conduct a post-mortem of the most recent quarter-close experience.  For a post-mortem assessment, the memo provides questions covering accounting and reporting impacts, impacts on the timeline, close and task management, governance and compliance, resourcing, technology, and remote working.  Here’s an excerpt of questions about accounting and reporting impacts:

What were the technical accounting or disclosure impacts of the current pandemic—and how might they change in future periods?

Which elements of the financial statements needed increased focus?

Was there adequate time allowed for management reviews at all levels?

Where does management have limited transparency into the results and underlying drivers?

Were there any new focus areas for the external audit this period, or places where auditors spent additional time?

– Lynn Jokela

May 27, 2020

Independent Chair Proposals in a COVID-19 World

Here’s a note from Rhonda Brauer:

In the pre-COVID-19 world, I was monitoring independent chair proposals for the 2020 proxy season.  I was particularly interested in those submitted by members of the Investors for Opioid & Pharmaceutical Accountability (IOPA), which was established in July 2017 to focus on opioid-related risks and which has since expanded to include drug-pricing risks.  While I still believe in the momentum for these proposals, the pandemic appears to have temporarily changed things.

As these proposals became public and IOPA members filed exempt solicitations in support (see, e.g., Johnson & Johnson, Eli Lilly and Gilead Sciences), it seemed possible that the time had finally come for independent chairs in the pharmaceutical industry.  Not only had opioid abuses and anti-competitive drug pricing become “kitchen table” topics, but more conventional corporate voices had also added support.  According to the 2019 U.S. Spencer Stuart Board Index, the number of S&P 500 companies with independent board chairs more than doubled over the past decade, to now include one-third of the companies; and among the 18 Biotechnology/Pharmaceutical companies, seven have independent chairs, including Biogen Idec, Regeneron Pharmaceuticals, Perrigo Company and Nektar Therapeutics.  PwC and the Harvard Business Review also weighed in to support independent chairs.

For a time, independent chair proposals seemed as if they could achieve majority votes, and CEO/chair separations could take place, in this industry, as they had for financial companies that shared responsibility for significant national crises, such as Bank of America and Wells Fargo.  Then the pandemic hit, and priorities changed for companies, investors and regulators.  Independent chair votes at pharmaceutical companies have received significant support (based on For/For + Against), including:

  • 42% at J&J, where the vote had been increasing in recent years and where there was majority support for another IOPA proposal requesting a board report on governance of opioid-related risks;
  • 34% at Eli Lilly, where it was a first-time proposal and where the vote would be 40% if the Lilly Endowment shares were backed out;
  • 44.5% at Bristol-Myers Squibb, another first-time proposal; and
  • 43.5% at Gilead Sciences, significantly higher than 29% in 2019 and the only over-40% vote that didn’t receive a FOR recommendation from ISS

 
Two non-IOPA independent chair proposals have passed this season:  at Boeing (53%), where there have been significant legal, cultural and regulatory concerns; and medical products company Baxter International (55%), where a March 2020 restatement apparently raised sufficient investor concern.  Some thoughts on what may be going on:

  • As I blogged earlier, the pandemic has sharpened investor focus on COVID-19-related issues.  While investors are still raising non-COVID ESG issues, there is some sensitivity about piling on too much in their engagements with – and votes at – companies;
  • Pharmaceutical companies may be getting a slight pass, as the nation is looking to them to find COVID-19 cures, vaccines and tests;
  • Unlike Glass Lewis that supports most independent chair proposals, ISS appeared unconvinced of the need for structural leadership change at some of the IOPA-targeted companies, although their AGAINST recommendations left some room for evaluating what happens over the next year; and
  • Boeing hit a tipping point with investors, even with a currently independent chair.

 
Stay tuned for a few more 2020 voting results, as well as for how the off-season engagements and 2021 proposals evolve around this proposal.  The time for independent chairs may yet arrive more broadly in the United States.

PPP: More Guidance About Loan Forgiveness

As we’ve blogged before, the Paycheck Protection Program has been fraught with issues and guidance about the program has been seemingly endless.  Late last Friday, while some headed out for a weekend party, the SBA issued two PPP Interim Final Rules – the first IFR relates to requirements for loan forgiveness, the second IFR relates to the loan review process and borrower and lender responsibilities.  Here’s a Venable memo highlighting notable aspects of the latest guidance, here’s another with key insights from Sidley.

Audit Committee Covid-19 Checklist

For those looking for another resource to help ensure the audit committee is covering all the bases when it comes to Covid-19, AICPA has answered the call. AICPA issued a checklist specifically related to audit committee Covid-19 oversight responsibilities – it’s in the form of questions and is intended to guide conversations to help identify weaknesses needing attention. AICPA says these questions should be discussed in an open forum with the audit committee, management and internal and external auditors – it could serve as a helpful oversight confirmation resource.

– Lynn Jokela

May 26, 2020

SEC Investor Advisory Committee: Time to Take-up ESG Disclosure

Late last week, the SEC’s Investor Advisory Committee approved a recommendation that encourages the SEC to begin addressing ESG disclosure.  The recommendation might best be summed up as asking the SEC to “get moving” on ESG disclosure.  Throughout the recommendation it reiterates familiar concerns raised by many including the “plethora” of ESG data provider questionnaires that create an exorbitant amount of work for companies – leaving many questioning whether the information that’s collected is material to investors and leaving others to set questionnaires aside due to resource constraints.  The recommendation also says the SEC should take the lead or some other jurisdiction will.  Here’s an excerpt:

The US capital markets are the largest and deepest in the world. Therefore, the SEC should take the lead on this issue by establishing a principles-based framework that will provide the Issuer-specific material, decision-useful, information that investors (both institutional and retail) require to make investment and voting decisions. This disclosure should be based upon the same information that companies use to make their own business decisions. If the SEC does not take the lead, it is highly likely that other jurisdictions will impose standards in the next few years that US Issuers will be bound to follow, either directly or indirectly, due to the global nature of the flow of investment into the US markets.

The recommendation itself doesn’t call for specific reporting standards or a specific framework and instead references existing standards – GRI, SASB and the TCFD framework, etc. – as examples to help shape the SEC’s thinking.

Although the committee approved the recommendation, this blog describes views of committee members that opposed it:

Those who were not in favor of the recommendation expressed concerns about the ambiguity of the term “materiality,” and that ESG ratings should be left to the private parties, rather than mandating a central group, such as the SEC. Creating such a framework would be both expensive and inconclusive since private parties have yet to come to consensus themselves due to the issue’s complexity.  The naysayers also suggested protecting the Financial Accounting Standards Board from being “diluted” by the new ESG standards.

Another blog further summarizes committee member views and notes that, Commissioner Hester Peirce expressed her reservations about the recommendation – here’s her remarks in which she says today’s securities disclosure framework is “very good at handling all types of material information.”

Initial SEC Comment Letters Addressing Covid-19 Disclosures

For those wanting to get a sense of what the SEC might be looking at when reviewing Covid-19 related disclosures, a recent Intelligize blog reviewed some early SEC comment letters for insight.  The blog provides links to the comment letters so they’re available to provide full context and it identifies five initial lessons:

– Understand the continuum between risk factors’ reasonably likely known effects and MD&A’s known trends

– Provide forward-looking insights about the impact of Covid-19

– Provide a complete picture with your metrics

– Clarify the impact of any facility closures or supply chain issues

– Ensure that material information included in press releases also appears in SEC filings

Post-Covid-19 Governance & Social Purpose

Will board governance change in a post-Covid-19 world?  That’s a question considered in a recent Deloitte memo and it lists questions that should be on the radar for boards when thinking about their oversight role.  The memo lists considerations involving overboarding, succession planning, oversight, investor concerns and social purpose and stakeholder governance.  Questions for boards to consider about social purpose and stakeholder governance include:

– Will the pandemic cause a reordering of US business priorities?

– Will considerations regarding social purpose be impacted by continued market declines?

– Will the pandemic increase or decrease the focus on diversity, equity, and inclusion?

– Will shareholder value come back as being the primary priority?

– Lynn Jokela

May 22, 2020

SEC Adopts Overhaul of M&A Financial Info

Yesterday, the SEC announced that it had adopted amendments overhauling the rules governing the financial information that public companies must provide for significant acquisitions & divestitures. Here’s the 267-page adopting release. Highlights of the rule changes include:

– Updating the significance tests in Rule 1-02(w) and elsewhere by revising the investment test to compare the registrant’s investments in and advances to the acquired or disposed business to the registrant’s aggregate worldwide market value if available; revising the income test by adding a revenue component; expanding the use of pro forma financial information in measuring significance; and conforming, to the extent applicable, the significance threshold and tests for disposed businesses to those used for acquired businesses;

– Modifying and enhancing the required disclosure for the aggregate effect of acquisitions for which financial statements are not required or are not yet required by eliminating historical financial statements for insignificant businesses and expanding the pro forma financial information to depict the aggregate effect in all material respects;

– Requiring the acquired company financial statements to cover no more than the two most recent fiscal years;

– Permitting disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity;

– Permitting the use of, or reconciliation to, IFRS standards in certain circumstances;

– No longer requiring separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for nine months or a complete fiscal year, depending on significance;

The changes also impact financial statements required under Rule 3-14 of Regulation S-X (which deals with acquisitions of real estate operations), amend existing pro forma requirements to improve the content and relevance of required pro forma financial information, and make corresponding changes in the rules applicable to smaller reporting companies under Article 8 of Regulation S-X.

I suppose you’re wondering if the SEC split along partisan lines once again – well, of course they did!  Here’s Commissioner Allison Herren Lee’s dissenting statement. We’ll be posting memos in our “Accounting Overview” Practice Area.

Memorial Day 2020: Grant Us Peace

John Jenkins

May 21, 2020

Non-GAAP: Are Companies Adjusting Away Covid-19?

The Financial Times recently reported that some companies have presented non-GAAP metrics – such as “EBITDAC” – that effectively adjust away the effects of the Covid-19 pandemic on their operations. Maybe I’m too cynical, but presenting “as adjusted” numbers that back out an event of the pandemic’s magnitude seems akin to asking a question like, “Other than that, Mrs. Lincoln, how did you enjoy the play?”

Just how prevalent are presentations of non-GAAP Covid-19 adjusted numbers? According to a recent Bass Berry survey, not very. The firm reviewed 55 public companies that presented Adjusted EBITDA in earnings releases during the period from April 1, 2020, to May 14, 2020. This excerpt says that only a handful included Covid-19 related adjustments in their Adjusted EBITDA presentations, but a number did narratively disclose the impact Covid-19 had on that metric:

Of the surveyed companies, five companies, or 9%, included an adjustment in their calculation of Adjusted EBITDA related in some form to the COVID-19 pandemic, and 91% did not. Certain surveyed companies within this 91% group, while not including an adjustment for COVID-19 in the definition of Adjusted EBITDA, noted the impact that the COVID-19 pandemic had on Adjusted EBITDA at either the consolidated or the segment level (for example, by noting that the COVID-19 pandemic had a specified percentage impact on Adjusted EBITDA as the result of the shutdown of a manufacturing facility as the result of the COVID-19 pandemic).

That seems to me to be a better way to present this information than adjusting it away. Covid-19’s impact on key performance indicators is clearly relevant information, but including it in the Adjusted EBITDA metric itself implies that it should be regarded as a one-time event. Unfortunately, it appears that the pandemic is more like the “new normal,” and may impact operations in future periods even more significantly than it did during the first quarter.

Virtual Meeting Admission Practices: Public Companies Respond

We’ve run a couple of blogs in recent weeks that have aired investor criticism of admissions practices for virtual annual meetings. That has prompted responses from some of our members. This one is representative:

I’m the Assistant Secretary of a company that held its first virtual meeting this year. We have two service providers – Corporate Election Services mails to our registered holders and Broadridge mails to most of the beneficial holders. When we switched our meeting to a virtual meeting, we had two options. Have Broadridge host the virtual meeting so most could have a control number to access the meeting. This would have required us to re-mail to the registered holders a new proxy card. This would have canceled their votes and required re-voting.

The second option was to have Corporate Election Services run the virtual meeting using the model we use for attendance at our in-person meeting. Registered shareholders all have access to the in-person meeting in normal years because they receive an admission card with their proxy card or they can come to the meeting and check in using the registered shareholder list we keep on hand. Beneficial holders are not on the registered roles so to attend the in-person meeting they need to provide a legal proxy from their broker. Sometimes we accept a brokerage statement for a beneficial holder to attend in person.

Rather than re-mail, we choose to hold the virtual meeting the same way we would have held the in-person meeting – the same method described in the post above. We did have a couple of complaints. Note that Computershare hosted virtual meetings are also using this same access model. Also note that not all brokers use Broadridge so if Broadridge hosts, some beneficials still do not have access.

Admission practices for physical annual meetings vary, but it isn’t unusual to require some proof of beneficial ownership. As the member’s comments suggest, there’s usually some flexibility when it comes to the credentials required for admissions that doesn’t necessarily translate to a virtual platform. But the bottom line is that many companies that are being criticized for their virtual admissions policies aren’t doing anything that hasn’t been standard practice at their physical meetings in prior years.

Earnings Season: Trends During the Covid-19 Crisis

In their recent statement on Covid-19 disclosures, SEC Chair Jay Clayton & Corp Fin Director Bill Hinman said that this earnings season would not be routine. In that same vein, “Investor Relations” magazine recently published an article about trends that IR professionals have identified from companies’ recent earnings reports & calls. This excerpt points out that the crisis has “softened” some of the commentary from executives:

Given the current circumstances, corporate leaders have understandably focused less on market performance and more on their Covid-19 response. ‘While mitigating actions in most cases include cost cutting, the current crisis has provided an opportunity for leadership to show its human side and demonstrate genuine affection and respect for employees,’ says Sandra Novakov, head of IR at Citigate Dewe Rogerson, who is based in London. As an example, she points to the personal CEO message delivered by ABF, a Citigate client, in its interim results announcement.

The article identifies several other trends, including detailed scenario planning, intraquarter updates, and increased use of prerecorded comments.

John Jenkins

May 20, 2020

PPP Loans: Are Public Company Borrowers Really the Bad Guys?

Yesterday, I blogged about the SEC’s apparent initiation of an enforcement sweep targeting public companies that borrowed money under the Paycheck Protection Program.  Public company borrowers have been sharply criticized by the media, lawmakers, and the Secretary of the Treasury himself.  But is it fair to lump all public companies together as the bad guys – or are some just convenient scapegoats for a program that simply hasn’t been well administered?

This NY Times article provides a more nuanced picture of public company PPP borrowers and the plight many of them face than has been presented in other media reports.  While the SBA’s guidance says that the government will be skeptical when it comes to need certifications from public companies with “substantial market value” and “access to capital markets,” it still isn’t entirely clear what those terms mean. Furthermore, this excerpt from the article about a small cap called RealNetworks suggests that – no matter how you define the terms – it’s hard to conclude that a lot of small caps have either substantial market value or access to the capital markets at this time:

RealNetworks struggled, too, as the pandemic transformed American life. The company went public during the dot-com boom of the 1990s, only to see its stock fall in the subsequent bust. In recent years, it has marketed a facial recognition product to casinos and airports, among other venues. But its share price has fallen. At the end of February, it was hovering just above a dollar. Then the virus crippled travel and hospitality businesses. Companies that had been possible clients before the pandemic made it clear that they wouldn’t engage its services this year.

Rob Glaser, RealNetworks’ chief executive, said the pandemic had put a “bull’s-eye” on the company’s facial recognition offering. He said it was “not as devastating to our company as if we were a cruise ship company or an airline or a restaurant chain, but we were directly affected.”

RealNetworks qualified for $2.9 million and got its loan. According to the article, it has apparently decided to keep it. That doesn’t seem unreasonable to me. The company’s market cap is $44 million, its stock closed on Tuesday at $1.18 per share, and it received a delisting notiice from Nasdaq the day before it received its PPP loan. In terms of access to capital, the company’s most recent financing came entirely from the pockets of its CEO.

Some public companies that received PPP loans clearly shouldn’t have, but the same is also true for some private companies. I mean c’mon – the Lakers? In any event, it’s hard for me to see a small cap public company like this one being anybody’s idea of poster child for abusive conduct. Lumping all “public company borrowers” together as being unworthy participants in the program just doesn’t reflect reality.

PPP Loan Forgiveness: It’s Complicated. . . 

The SBA issued its PPP loan forgiveness application last week, and it’s apparently pretty complicated.  Here’s an excerpt from Crowell & Moring’s memo on the application:

On May 15, 2020, the Small Business Administration (SBA) released the Paycheck Protection Program Loan Forgiveness Application which is comprised of a PPP Loan Forgiveness Calculation Form (SBA Form 3508), including related certifications, and worksheets to assist in making the calculations. Although the SBA has yet to release further guidance on PPP Loan forgiveness, the Loan Forgiveness Application does provide some guidance on elements of forgiveness that were not clear from either the text of the Cares Act, or the SBA’s Interim Final Rules and FAQs. However, the complexity of the application and the onerous submission requirements present challenges for small businesses and create a further need for guidance and legal/accounting support.

I took a look at the application, and it does appear to be fairly daunting. For example, there’s an entire page of instructions devoted solely to the payroll, FTE, & non-payroll documentation that must be submitted with the application or retained by the borrower. In keeping with the government’s “Ready. . . FIRE!. . .Aim” approach to this program, now that the SBA has published the application, it will eventually tell people how they are supposed to complete it.

Tomorrow’s Webcast: “Middle Market M&A – The Latest Developments”

Tune in tomorrow for the DealLawyers.com webcast – “Middle Market M&A: The Latest Developments” – to hear to hear Citizens M&A Advisory’s Charles Aquino, Mintz Levin’s Marc Mantell and Duane Morris’s Richard Silfen discuss the state of the middle market and issues dealmakers are confronting in 2020, including bridging valuation gaps, Covid-19’s implications for deal structure and process, and the evolution of deal terms in the Covid-19 environment.

John Jenkins

May 19, 2020

PPP Loans: SEC Enforcement Sweep of Public Company Borrowers?

Public company borrowers under the Paycheck Protection Program have received plenty of criticism. Now, according to this Bryan Cave blog, their hot seat just got even hotter, because these companies appear to be targets in an SEC enforcement sweep. Here’s the intro:

We understand that several issuers and regulated entities that publicly disclosed their receipt of funds from the SBA’s Paycheck Protection Program (PPP), established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, have received requests for information from the SEC’s Division of Enforcement. In general, the requested information appears to concern the recipients’ eligibility and need for PPP funds, the financial impact on recipients of the pandemic and government response, and recipients’ assessment of their viability and access to funding.

This SEC outreach is rumored to be part of a sweep styled In the Matter of Certain Paycheck Protection Program Loan Recipients. The SEC is reportedly investigating whether certain recipients’ excessively positive or insufficiently negative statements in recent 10-Qs may have been inconsistent with certifications made in PPP applications regarding the necessity of funding. These information requests are voluntary at this time, and it appears that not all PPP loan recipients are receiving document requests.

There may be a correlation between large funding amounts and SEC scrutiny, both in terms of attracting interest and avoiding the impact of the SBA’s announced safe harbor for loans less than $2 million (though the safe harbor does not explicitly affect the SEC). Recent news reports indicate that the Department of Justice Fraud Section also is investigating possible misconduct by PPP loan applicants. Initial DOJ actions have focused on potential overstatement of payroll costs and/or employee headcount, as well as misuse of PPP proceeds.

In addition to public company borrowers, we have heard anecdotally that investment advisors and brokerage firms that received PPP loans are also targeted in the sweep. The blog says that while existing allegations appear to focus on “extreme behavior,” it is expected that less egregious borrowers may be caught up in the dragnet.

SEC Enforcement: Covid-19 Steering Committee Established

News of a potential enforcement sweep came only a few days after co-director of the SEC’s Division of Enforcement Steve Peikin gave a speech announcing that the Division had formed a steering committee to coordinate Covid-19 related enforcement activities:

In late March my co-Director, Stephanie Avakian, and I formed a Coronavirus Steering Committee to coordinate the Division of Enforcement’s response to coronavirus-related enforcement issues. The Steering Committee comprises approximately two dozen leaders from across the Division, including representatives from our various specialized units, from our Home Office and various regional offices, and from our Office of Market Intelligence.

The Steering Committee’s mandate is to proactively identify and monitor areas of potential misconduct, ensure appropriate allocation of our resources, avoid duplication of efforts, coordinate responses as appropriate with other state and federal agencies, and ensure consistency in the manner in which the women and men of the Division address coronavirus-related matters.

While the speech didn’t specifically identify PPP loan recipients as potential targets, it did identify a number of other areas of emphasis, including microcap fraud and insider trading.

Steve Peikin also said that the Division has developed a “systematic process to review public filings from issuers in highly-impacted industries, with a focus on identifying disclosures that appear to be significantly out of step with others in the same industry” and “disclosures, impairments, or valuations that may attempt to disguise previously undisclosed problems or weaknesses as coronavirus-related.” Stay tuned.

NYSE Temporarily Eases Approval Requirements for Covid-19 Share Issuances

Earlier this month, I blogged about Nasdaq’s adoption of a temporary rule easing the shareholder approval requirements applicable to listed companies looking to raise private capital during the Covid-19 crisis.  Last week, the SEC approved a similar NYSE rule proposal.  This Stinson memo has the details. Here’s an excerpt:

The SEC has approved, effective immediately, new Section 312.03T of the NYSE Listed Company Manual. Section 312.03T provides a limited, temporary exception from the shareholder approval requirements in Section 312.03(c), accompanied, in certain narrow circumstances, by a limited exception from Sections 312.03(a) and (b) and Section 303A.08. The exception in Section 312.03T is available until and including June 30, 2020.

Among other things, and subject to certain exceptions, Section 312.03(c) of the Manual requires shareholder approval for certain issuances of over 20% of outstanding shares or voting power. Section 312.03(a) references the requirement for shareholder approval of equity compensation plans set forth in 303A.08 of the Manual. Section 312.03(b) requires shareholder approval for issuance of equity securities to certain related parties.

Listed companies may take advantage of the temporary rules only in limited circumstances arising out of Covid-19’s impact on their results of operations and financial condition. Companies must also jump through a number of other hoops, including audit committee and NYSE approval. Additional conditions apply for issuances under the other temporary rules.

John Jenkins

May 18, 2020

The Fire Next Time? CFOs Say Contingency Plans Lacking for Covid-19 2nd Wave

As the U.S. slowly reopens for business, we’re already hearing warnings that a second wave of the pandemic is likely heading our way in the fall. Since that’s the case, a recent Gartner survey finding that 42% of CFOs have not addressed a potential second wave in their planning for the remainder of the year is a little disconcerting. Here’s an excerpt:

A Gartner, Inc. survey of 99 CFOs and finance leaders taken April 14-19, 2020 revealed that 42% of CFOs are not incorporating a second wave outbreak of COVID-19 in the financial scenarios they are building for the remainder of 2020. Additional survey data showed that only 8% of CFOs have a second wave factored into all their planning scenarios, and only 22% have a second wave factored into their “most likely” scenario. The lack of planning comes even as CFOs express a cautious approach as to when they will fully reopen their operations and bring employees back to their normal office routines.

“As CFOs are attempting to project revenue and profits for 2020, it’s surprising that 42% are not baking a second wave of COVID-19 into any of their scenarios” said Alexander Bant, practice vice president, research, for the Gartner Finance practice. “Our latest CFO data also reveals that most executive teams are still trying to decide what factors they should use to determine how and when to reopen their offices and facilities.”

In fairness, this survey was taken a full month ago, and a lot has changed since then. But with the Covid-19 pandemic already spawning securities litigation, the potential lack of preparedness for a second wave presents governance and disclosure issues that may make attractive targets for plaintiffs.

IPOs: SPACs Ride High in April & Don’t Get Shot Down in May

The Covid-19 related turmoil in the stock markets during the past few months has put a damper on IPO activity, but this WSJ article says that April was a boom time for SPAC IPOs. Here’s an excerpt:

The companies raising the most money in the IPO market right now have no revenue, aren’t profitable and lack long-term business plans. That is by design: They are blank-check companies, whose purpose is to raise money for acquisitions. So far this year, these special-purpose acquisition companies, or SPACs, have raised $6.5 billion, on pace for their biggest year ever, according to Dealogic. In April, 80% of all money raised for U.S. initial public offerings went to blank-check firms, compared with an average of 9% over the past decade.

SPACs accounted for $2.2 billion of the $2.6 billion raised in IPOs last month, and they’ve raised another $575 million so far this month. The article suggests that investors’ fondness for SPACs arises from their belief that “there will be good deals to scoop up when the coronavirus subsides.”

Tomorrow’s Webcast: “Political Spending – What Now?”

Tune-in tomorrow for the webcast – “Political Spending: What Now?” – to hear DF King’s Zally Ahmadi, Skadden’s Hagen Ganem and Wilmer Hale’s Brendan McGuire discuss an overview of the current climate for political spending, corporate governance/board oversight, key considerations for political spending policies, political spending disclosure, shareholder engagement and shareholder proposal trends and voting behavior.

John Jenkins

May 15, 2020

Contested Virtual Shareholder Meeting – It’s a First!

We’ve blogged quite a bit about virtual annual meetings and here’s another development – a recent Wachtell Lipton memo discusses the first contested virtual annual meeting – it took place at TEGNA Inc. The memo reports the company’s nominees were re-elected and the bottom line message is that a contested virtual meeting is an option.  Given the stakes involved with a contested meeting, the memo includes practical considerations to keep in mind if you find yourself navigating a contested virtual meeting:

– Customization may be required for the virtual meeting platform: this may necessitate help from outside service providers

– Conduct dry runs with cross-functional teams: include IT, legal, outside counsel, proxy solicitors, public-relations advisors

– Coordinate with inspector of elections in advance: alternative means of communication with both parties will be needed, determine process for submitting all proxies & ballots before polls close

– Ensure both parties understand rules and processes

The memo also discusses whether virtual shareholder meetings provide more opportunities than in-person meetings for shareholders to vote by ballot and split their votes between company and dissident director-nominees. Activists have long called for “universal ballots” that would allow shareholders to “mix and match” votes.  For now, the memo says because virtual meetings are easier to attend than in-person meetings, maybe they provide more opportunities for shareholders to mix and match their votes.  But, whether the meeting is virtual or in-person, it’s still a bit of a process to vote by ballot.

It’s Proxy Season, Plumbing Needs Some Attention

Last week, John blogged about some issues investors have run into this year with virtual shareholder meetings – noting too that Doug Chia is keeping a diary of his virtual shareholder meeting experiences.  Doug’s notes from an experience at one shareholder meeting makes it painfully obvious the patchwork of proxy plumbing needs some attention.  Here’s an excerpt:

Knowing you need a control number to enter any virtual annual meeting, I asked my broker for the control numbers I would need to attend the virtual annual meetings of a bunch of companies, including Danaher.  It turns out my broker gave me the control number to vote my shares in advance of the meeting, not the control number to attend the meeting. Nope, they’re not the same, at least not for this particular meeting.

What I needed to do to get the meeting attendance control number was go through the steps to (1) ask for and get a legal proxy from my broker, (2) scan and email it to the transfer agent at least six days before the meeting, (3) watch for an email back from the transfer agent with the control number, and then (4) use that number along with the password listed on the notice to enter the meeting site on the day-of. I assumed that if I asked my broker for the control number, they’d be able to just get it and save me the hassle. (“When you assume….”)

So, is what I’m saying that this so-called “plumbing” system is such that if Mr. & Ms. Main Street hold shares of a company through a broker, which most people do because most people buy shares through a broker, then they’ll always have to jump through all of those hoops I described above just to attend the one meeting the Streets have the legal right to attend? The answer is… it depends!

The experience will vary depending on a company’s service providers to no fault of the service providers.  Doug says that the process will be different for different meetings because using different combinations of vendors can result in different processes being necessary to get into these virtual meetings.  Maybe it’s time proxy plumbing gets some needed attention…I prefer not to call in the plumber but this year’s annual meeting process is bringing this issue back to the fore.

As a point of contrast, Doug posted notes from his experience at Intel’s audio-only meeting – Intel has held virtual-only meetings for years and it sounds like they’ve got the process down pat.

PPP Safe Harbor Extended Until Monday!

It turns out the SBA wasn’t done Wednesday when they issued FAQ #46 “clarifying” the safe harbor for returning Paycheck Protection Program funds.  Sometime later in the day, the SBA added FAQ #47 extending the PPP safe harbor until Monday, May 18th.  A little more time for companies to think over whether to return the funds …

– Lynn Jokela