Monthly Archives: May 2020

May 14, 2020

PPP Good-Faith Need Certification: SBA Issues Another FAQ

Last week, when John blogged about the deadline for borrowers to return Paycheck Protection Program funds without penalty, he also noted that the SBA said it would provide additional guidance on the PPP’s need certification requirement.  Yesterday, right before today’s expiration of the safe harbor, the Treasury Department and SBA issued FAQ #46.  The need certification has been a tricky issue, in part, due to a previous FAQ issued by the SBA.

FAQ #46 gives a safe harbor to borrower’s receiving a PPP loan of less than $2 million but then the FAQ goes on to say that those receiving more than $2 million might still be okay.  Not sure this new FAQ completely clears things up but for those still contemplating whether to return PPP funds, here it is:

Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

There have been lots of law firm memos about the PPP requirements, including several yesterday about FAQ #46.  A memo from Crowell & Moring described the SBA’s shifting guidance as sending borrowers on a roller coaster ride.  For anyone wanting to reminisce about a “fun” ride, here’s a roller-coaster video from a Minnesota amusement park ride.

Director Service on Multiple Boards – CPA-Zicklin Data Pivot

The Center for Political Accountability may be taking its analysis of political and lobbying contribution disclosures a bit further than its annual CPA-Zicklin ranking.  A blog says that CPA has looked for overlap among directors – meaning directors serving on boards of CPA-Zicklin top-ranked companies who also serve on boards of companies ranked in the CPA-Zicklin bottom-tier.

The blog says that CPA identified at least 85 directors holding positions on two or more boards of companies that are both in the top-tier and also the bottom-tier of the CPA-Zicklin index.  In the blog, Bruce Freed, CPA’s president, had this to say about the “overlap” situation:

Either directors of top-tier companies are not fulfilling their fiduciary responsibility by pressing the lower-tier company to manage the risk posed by corporate political spending by adopting political disclosure and accountability policies, or the directors of bottom-dweller companies are not learning from the practices of the top-tier companies on whose boards they sit.

Not to go out on a limb but every company is unique, including the make-up of its board, the degree of transparency the board and senior leaders engage in, and its political and lobbying spend.  For various reasons, companies will differ in the degree of political and lobbying contribution disclosures.  There’s no indication of CPA-Zicklin’s future plans with this data but something for directors to make note of if they find themselves tagged in this latest report.

Board’s Role in Improving Diverse Leadership Teams

We’ve blogged quite a bit about board diversity and some of the progress that’s been recognized.  Focus might be beginning to shift to C-suite and management diversity where, according to this Boston Consulting Group memo, progress lags.  The memo says boards may be more diverse but they’re likely following recommendations of less diverse leadership teams.  In fact, the memo says that among companies in the UK’s FTSE 100 Index in 2019, women held 39% of non-management director positions, but they represented just 11% of executive positions and only 7% of CEOs.

The memo lists three priorities for boards to help improve diversity and inclusion efforts at companies.  Within each priority, there’s a list of questions for boards to consider or ask their management teams.  Here’ s an excerpt about holding leaders accountable:

Boards need to set explicit goals for D&I, track progress, and hold leaders accountable for results. Multiyear goals need to be established for the organization and broken down by individual business unit.  Key questions include:

– How is leadership compensation tied to D&I goals?

– What are the CEO’s objectives for D&I over the next one, three, and five years?

– What strategic programs and tactical interventions are in place to support diversity? How are they used?

– What happens when the company doesn’t hit its D&I goals?

– Lynn Jokela

May 13, 2020

Covid-19 & ESG: Social Issues in the Spotlight

It looks like another effect of Covid-19 might be a shift of investors’ ESG focus by placing more emphasis on social issues – perhaps the focus on climate will need to share the spotlight.  As noted in this SGP 2020 proxy season blog, the “S” issues in ESG were frequently focused on culture and diversity and now, there’s greater focus on worker safety and employee engagement.

ESG funds are getting a lot of attention these days with many noting how ESG funds fared better than the overall market during ongoing turbulence – here’s a WSJ headline and a Morningstar report showing how sustainable funds generally outperformed conventional benchmarks during the first quarter.  Not too long ago, Rhonda Brauer blogged about initial investor responses to the Covid-19 pandemic and noted how some investors have been asking companies to prioritize worker health & safety among other things.

Climate concerns are clearly still a priority, but a recent letter from the International Corporate Governance Network about shared governance responsibilities places emphasis on social issues.  The focus on social issues coexists with a long-term perspective aimed at protecting financial stability and longer-term sustainability.  The letter says Covid-19 presents a new era of engagement and lists governance priorities for companies and for investors – with social issues topping the list. Here’s an excerpt:

The ICGN Statement of Shared Governance Responsibilities broadly emphasizes the need for companies to:

– Prioritize employee safety and welfare while meeting short-term liquidity requirements to preserve financial health and solvency

– Pursue a long-term view on social responsibility, fairness and sustainable value creation and publicly define a social purpose as we all adjust to a new reality

– Take a holistic and equitable approach to capital allocation decisions, considering the workforce, stakeholders and providers of capital

– Communicate comprehensively with all stakeholders to instill confidence and trust in a company’s approach to build resilience into strategy and operations

– The Covid-19 pandemic presents the most significant public health and economic crisis of our time and calls for new forms of cooperation on a global scale. It has ignited an acute recognition of social failures and deep gender, racial and income inequality.

Call for SEC to Sharpen Covid-19 Disclosure Guidance

Some may have read the Council for Institutional Investor’s letter to the SEC’s Investor Advisory Committee sent last week.  Tucked in the middle of the letter between complimenting the SEC’s efforts on disclosure during the Covid-19 pandemic and concerns about virtual shareholder meetings is a call for the SEC to ramp up disclosure of human capital management and customer safety.  Even though the request is in the context of Covid-19, one has to wonder whether this could lead to additional calls later.  Here’s an excerpt from the letter:

A critical set of issues for successful operation now is safety of employees and customers. In many cases, it appears to us highly relevant to investors how companies are assuring safety, including policies on leave and sick pay, as well as safety equipment and protocols at workplaces. And for companies with operations in hiatus due to government orders and/or temporary absence of demand, the ability to gear back up will depend in part on credibility of safety steps that are taken. A question within this topic is whether and how companies are testing (or plan to test) workers for Covid-19 and for antibodies, which will be important for confidence to move forward, particularly to the extent there is not a broad and effective government-sponsored testing regime.

We believe it could sharpen the March 25 guidance for the Division to consider further relevant questions on these matters. We believe that some companies have been very forthcoming on these issues, and it may be early to render negative judgments on companies that have largely shut operations as we arguably are (at most) in the beginning stages of re-opening sectors of the economy. But it would be useful for the Division to consider whether it can prod useful Covid-19 related disclosure on matters of human capital management and customer safety, as it has in other areas.

Companies Targeted for Return of PPP Funds

John’s blogged a few times about issues with the Paycheck Protection Program.  For companies that might be questioning whether to return PPP funds, a couple of recent memos high-light reasons it’d be a good idea to make sure PPP loan recipients were really the intended beneficiaries of this CARES Act program.  The safe harbor to return PPP funds without penalty ends tomorrow – May 14 – John blogged about this extended deadline last week.

First, the U.S. House Select Subcommittee has targeted five companies to return PPP loans or to produce necessary supporting documentation.  A McGuireWoods memo summarizes this development and says each of the targeted companies are public companies with market caps of more than $25 million, received loans of $10 million or more and had over 600 employees.  The memo advises companies to carefully document the analysis used in determining eligibility for the loans and otherwise mitigate risk and potential future liability.

Next, a Nixon Peabody memo points out the government is keeping a close watch for potentially fraudulent activity.  Last week, the Department of Justice announced criminal charges against two people who allegedly filed fraudulent PPP loan applications.  The memo says that the DOJ caught on to the plot before any PPP funds were distributed to the individuals.  The DOJ brought charges alleging conspiracy to make false statements and commit bank fraud, among other felony offenses.  One clear takeaway from the memo is that all CARES Act beneficiaries should prepare for heightened government scrutiny.

– Lynn Jokela

May 12, 2020

Proposed Shareholder Resubmission Thresholds: Disproportionate Effect?

That’s what a recent report issued by the Council of Institutional Investors says.  A lot has been said about the SEC’s proposed rules relating to the shareholder proposal process, including changes to the submission and resubmission thresholds – John blogged a while back about some of the colorful comment letters and one story says that the SEC was flooded with over 13,000 comment letters.  CII’s report examined shareholder proposal data from 2011 through third quarter 2019 and found that, had the proposed resubmission thresholds been in effect, certain proposals would have been excluded more than others.

Here’s some of CII’s findings:

– CII estimates the 5/15/25 resubmission thresholds, paired with the 10% momentum requirement, would have more than doubled the number of proposals excluded

– Unlike the proposed higher thresholds, the new momentum requirement would have impacted governance proposals considerably more than environmental or social proposals

– Overall, CII’s study showed that proposals requiring independent board chairs and those relating to political contributions and lobbying were the types of proposals that would be most impacted by the proposed rules – meaning more frequently excluded from proxy statements

It’s not necessarily surprising that the new resubmission thresholds potentially increase the number of proposals that would be excluded, although it’s interesting that this study shows it would impact governance proposals more than others.  At this time, it’s not certain the Commission will approve the rules as proposed or whether further changes are on the horizon.

SEC Chairman Clayton Executive Roster Updates

The SEC has been busy!  Yesterday, SEC Chairman Jay Clayton released an updated roster of his executive staff, including some additions.  After issuing and updating Covid-19 related guidance, holding virtual/web meetings and announcing awards to whistleblowers it looks like, for a brief moment anyway, the SEC’s focused on organizational matters.

John Moses was named Managing Executive in the Office of the Chairman and in the role, he will advise the Chairman on matters relating to agency administration, operations and management, and will serve as the Chairman’s primary liaison to divisions and offices on these matters.  Moses was previously the Deputy Director in the SEC’s Office of Minority and Women Inclusion.

Peter Uhlmann, who has been serving as Managing Executive in the Office of the Chairman, will assume a new role in the agency’s Office of Compliance Inspections and Examinations. Uhlmann will join the OCIE’s Office of Chief Counsel as Assistant Director for Compliance, where he will oversee internal compliance, ethics, and operational risk management efforts for the SEC’s National Exam Program and its more than 1,000 employees.

Tomorrow’s Webcast: “Capital Raising in Turbulent Times”

Tune in tomorrow for the webcast – “Capital Raising in Turbulent Times” to hear Manatt, Phelps & Phillips’ Katherine Blair, Wilson Sonsini’s Richard Blake, Locke Lord’s Rob Evans and Jones Day’s Mike Solecki discuss the current state of the new issues market for debt and equity and they will explore financing and liability management alternatives.  Don’t miss it!

– Lynn Jokela

May 11, 2020

Positive Effects from Publicizing Crisis Response

Even though the market went up last Friday, with unemployment and food lines growing by the day and Covid-19 persisting, it’s clear we’re in a crisis.  If anyone’s ever questioned the importance of a crisis response planning exercise, you might want to give them a copy of a recent study from State Street.  And when crisis strikes, pull the PR team in and make sure the public hears about all the good things the company is doing.

The study shows how a company’s response to the Covid-19 pandemic impacts stock performance and institutional money flow – a good case study of the positive effects of crisis planning and response.  State Street’s website provides this intro:

COVID-19 has forced companies to respond swiftly to the pandemic and highlight their resilience to investors. Exploring how their actions affect stock performance, we found that companies seen as protecting employees and securing their supply chain experienced higher institutional money flows and less negative returns, especially when those practices garnered significant public attention. Firms that most prominently re-purposed their operations to provide in-demand solutions to the crisis experienced a significant positive impact on returns. This evidence challenges the notion that shareholder and employee interests are in conflict. It also suggests that corporate disclosure and media coverage play a significant role in how corporate responses to crisis management decisions could influence investor behavior and impact stock performance.

Cybersecurity: What Investors Want to Know

Speaking of crises, we’ve blogged before about the potential for severe repercussions from a cyber breach – and cybersecurity continues to get significant attention from management and boards. You don’t have to look far to read about another data incident – MGM acknowledged one not too long ago.  Back in February, I blogged about the SEC OCIE Observations and the importance of testing your cyber response plan and according to one pre-Covid-19 study, the vast majority of companies planned to increase cybersecurity budgets for 2020.

Now investors are wanting to know more about cybersecurity too.  A report from SquareWell Partners says that of the 20 largest institutional investors, 14 include cybersecurity as a major discussion topic during engagement with companies.  Besides wanting to discuss cybersecurity with companies, the report says some investors have issued position papers about cybersecurity – and 2 of the 20 largest investors have incorporated cybersecurity into their voting policies – time will tell if more do this.

The report includes a list of questions to help investors understand a company’s policies, oversight and resources related to cybersecurity. The list might serve as a helpful prep tool for companies in the midst of engagement with investors.

Reference for State Reopening Status & Requirements

For those trying to keep track of the ever changing state reopenings and requirements to do so, this chart from Cleary Gottlieb might help.  The chart covers all 50 states plus the District of Columbia and provides an overview of the status of closing orders and reopening plans, as well as any social distancing, sanitation, and occupancy operating requirements imposed on businesses during the closures and reopenings.  Information in the chart is summarized so those relying on the chart are reminded to consult the relevant state orders and guidance for complete details.

– Lynn Jokela

May 8, 2020

Securities Act Liability: Fed. Court Says Section 11 Applies to Direct Listings

Earlier this year, I blogged about the possibility that the use of direct listings instead of traditional IPOs might allow companies to avoid the Section 11 claims that so often accompany IPOs. This Orrick memo says that a recent California federal court decision suggests that this hope may be misplaced:

On April 21, 2020, Judge Susan Illston of the U.S. District Court for the Northern District of California denied defendants’ motion to dismiss a securities class action complaint brought by a shareholder of Slack Technologies, Inc. following the company’s 2019 direct listing. Pirani v. Slack Technologies, Inc. , No. 19-cv-05857-SI (N.D. Cal. Apr. 21, 2020).

Rejecting defendants’ argument that the plaintiff lacked standing to pursue claims under Section 11 of the Securities Act, the court held, in a matter of apparent first impression, that in the unique situation of a direct listing in which shares registered under the Securities Act become publicly tradeable on the same day that unregistered shares become publicly tradeable, a plaintiff does not lack standing to sue under Section 11 even though the plaintiff cannot show that her shares were registered.

The memo goes on to summarize the judge’s reasoning, which appears to be based almost entirely on policy considerations underlying Section 11.  We’re posting memos in our “Securities Act Liability” Practice Area.

“No Respect at All”: Are Dual Class Companies Undervalued?

Dual class companies are the Rodney Dangerfield of corporate governance – “No respect. . .I’m tellin’ ya, I don’t get no respect at all!” It’s hard to find any love for them among investor advocates, who’ve made “one share, one vote” a central underpinning of their good governance creed. But does their zeal for this revealed truth result in the undervaluation of dual class companies? That’s the conclusion of a recent study by a Cambridge University law prof. Here’s the abstract:

Dual-class stock enables a company’s controller to retain voting control of a corporation while holding a disproportionately lower level of the corporation’s cash-flow rights. Dual-class stock has led a tortured life in the US. Between institutional investor derision and the exclusion or restriction of dual-class stock from certain indices, one may assume that dual-class structure must be harmful to outside stockholders.

However, in this article, the existing empirical evidence on US dual-class stock will be reassessed by contrasting studies that use different measures of performance. It will be shown that although dual-class firms are generally valued less than similar one-share, one-vote firms, they perform as well as, and, in many cases, outperform, such firms from the perspective of operating performance and stock returns. When it comes to dual-class stock, more than meets the eye, and a presumption that dual-class stock is harmful for outside stockholders should not guide policy formulation.

The study argues that the market discounts dual-class stock to protect itself against the potential that the downsides of the structure will outweigh the benefits, but that those downsides seldom emerge. As a result, outside stockholders are not harmed by dual-class stock. Instead, they invest in dual-class stock at a discounted price which organically protects them against the potential for future abuses, and that, if anything, discounts dual-class stock too much.

Capital Markets: Time to Dust-Off the Alternative Equity Offering Playbook? 

In times like these, many public companies that otherwise might be good candidates for a traditional equity offering may need to look at alternative strategies.  That means ATMs, PIPEs, registered directs, and even equity lines are on the table for companies that haven’t previously considered them.  If you haven’t done one of those deals since the last time the world ended, you should take a look at this Proskauer memo on alternative equity offerings.  It provides a detailed overview of each of these alternative equity financing options.

If you’re considering tapping the capital markets, be sure not to miss our upcoming webcast – “Capital Raising in Turbulent Times” – which will address the current state of the new issues market for debt and equity, and explore financing and liability management alternatives.

John Jenkins

May 7, 2020

Virtual Annual Meetings: Proposed Legislation Would Aid Delaware Companies

Yesterday, I blogged about the bind that some Delaware companies find themselves in when it comes to switching their annual meetings from a physical location to a virtual only meeting. The problem stems from the fact that public companies that first gave notice of their annual meeting after the date of Gov. Carney’s April 7th order providing relief from DGCL notice requirements for such a switch aren’t eligible to rely on it.

That means that these companies can’t be certain that merely complying with the SEC’s guidance on providing notice of  a change to a virtual meeting will be compliant with the DGCL’s notice requirements.  Many are concerned about their ability to provide the formal notice of a change required by the DGCL in a timely manner.

Help for these companies may be on the way in the form of proposed 2020 amendments to the DGCL recently endorsed by the Corporate Law Section of the Delaware Bar. While the legislature needs to act on the proposal, Section 4 of the proposed legislation would amend Section 110 of the DGCL to provide the board of a public company with the authority during an emergency to:

Notify stockholders of any postponement or a change of the place of the meeting (or a change to hold the meeting solely by means of remote communication) solely by a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to § 13, § 14 or § 15(d) of [the Exchange Act] and such rules and regulations.

Section 23 of the proposed legislation would make this authority retroactive to January 1, 2020  “with respect to any emergency condition occurring on or after such date and with respect to any action contemplated by Section 4 of this Act and taken on or after such date by or on behalf of the corporation with respect to a meeting of stockholders held . . . during the pendency of such condition.”

I’m told that the Delaware Bar is seeking immediate consideration of these emergency amendments, but that the legislature has not yet reconvened from its Covid-19 imposed hiatus.

Nasdaq Temporarily Eases Approval Requirements for Covid-19 Share Issuances

Earlier this week, the SEC approved a temporary Nasdaq rule that would provide listed companies with a temporary exception from certain shareholder approval requirements through June 30, 2020 in order to streamline issuers’ access to capital. Here’s an excerpt from Nasdaq’s issuer alert summarizing the rule:

The exception is limited to circumstances where the delay in securing shareholder approval would:

– Have a material adverse impact on the company’s ability to maintain operations under its pre COVID-19 business plan;
– Result in workforce reductions;
– Adversely impact the company’s ability to undertake new initiatives in response to COVID-19; or
– Seriously jeopardize the financial viability of the enterprise.

In order to rely on the exception, among other requirements, the company would also have to demonstrate to Nasdaq that the need for the transaction is due to circumstances related to COVID-19 and that the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company.

No prior approval of the exception by Nasdaq is required if the maximum issuance of common stock (or securities convertible into common stock) issuable in the transaction is less than 25% of the total shares outstanding and less than 25% of the voting power outstanding before the transaction; and the maximum discount to the Minimum Price at which shares could be issued is 15% (the “Safe Harbor Provision”).

Companies that fit within this Safe Harbor Provision must notify Nasdaq as promptly as possible, and at least two days before issuing shares, but aren’t required to wait required 15 calendar days after filing the listing of additional shares notification. If a transaction falls outside of the Safe Harbor Provision, Nasdaq must approve the company’s reliance on the exception before the company can issue any securities in the transaction. Here’s a Nasdaq FAQ on the rule as well as its supplemental instructions to listed companies.

PPP Loans: Borrowers Get Another Week to Decide to Whether to “Hold’em or Fold’em”

In the latest chapter of the Paycheck Protection Program saga, the SBA issued FAQ #43, which extends the deadline for borrowers to take advantage of the safe harbor for repayment of PPP loans from May 7th to May 14th.  The SBA says that it will provide additional guidance on the PPP’s need certification requirement prior to that deadline. Yeah, sure, that should clear things up. . .

John Jenkins

May 6, 2020

Virtual Annual Meetings: CII Weighs In With Investor Concerns

A number of companies have transitioned to virtual annual meetings as a result of the Covid-19 crisis, and according to the CII’s recent letter to the SEC’s Investor Advisory Committee, it has been kind of a bumpy ride from an investor perspective. Companies that are looking for ways to make their own virtual meetings more investor friendly should take a look at the CII’s letter. Here’s an excerpt summarizing some of the anecdotal concerns that the CII has heard from investors about the virtual meeting process:

– Shareholders struggling to log in for meetings.

– Inability to ask questions in some cases if the shareholder has voted in advance by proxy. We understand that one virtual meeting platform provides that for a beneficial owner to ask questions, the record holder must transfer a legal proxy to the beneficial owner. This would require the record holder to withdraw its vote if it already had voted before executing the required legal proxy because the voting would transfer to the beneficial holder. These rules unnecessarily hamper the ability of beneficial owners to participate in meetings, even at companies that use effective technology and rules for participation by shareholders who get into the meeting.

– Shareholders unable to ask questions during the meeting. In some cases, questions are limited to those that can be submitted in writing in advance, which interferes with the potential for interplay between meeting content and questions or comments.

– Lack of transparency on questions asked by shareholders, making it possible that company officials cherry-pick questions to which to respond. This obviously is an issue if time limits for a meeting prevent responses to all questions. At one large company at which shareholder questions went unanswered, we understand the company provided only 10 minutes for Q&A.

– Conflicting channels for shareholder participation, with shareholder resolution proponents required to be on a line that is different than that used for general shareholder Q&A.

– At least one company prohibiting a shareholder proponent from speaking on behalf of their proposal.

– Snafus with control numbers not working to permit shareholders to log into a meeting.

The CII acknowledges that some of these problems may be attributable in part to the speed with which many companies have shifted to virtual-only meetings, but it is concerned about the precedents that may be set this year.

Virtual Annual Meetings: Delaware’s Relief Order Leaves Some Companies Uncovered

Last month, I blogged about Delaware Gov. John Carney’s order permitting public companies that had previously noticed physical annual meetings to switch to virtual annual meetings simply by complying with the SEC’s guidance, without the need to provide further notice under applicable provisions of the DGCL. That order was extremely helpful for companies covered by it, but it turns out that a number of companies weren’t – and some of them find themselves in a bind.

As this Morris Nichols memo points out, the order only applies to companies that provided notice of a physical meeting prior to the April 7th date of the order. Companies that first mailed their proxy materials after that date apparently are not covered by it. One of our members recently posted a comment in our Q&A forum about a tragic situation that’s compounding the problems companies that aren’t covered by the order face:

This is really unfortunate. I understand that Broadridge is struggling right now to get materials mailed to shareholders. If reports are to be believed, they had an outbreak at a warehouse in NY resulting in several deaths. Their staffing levels have been drastically reduced as they are trying to comply with social distancing efforts. And they are notifying clients of delays in mailings of material and fulfilling requests for hard copy materials. Requiring notices of changes to a virtual meeting format (rather than just press release/SEC filing) will only compound the problem.

One workaround that’s been suggested to handle mailing delays resulting from the critical need to prioritize worker safety is to bypass Broadridge and mail any new notice to record holders only. Since only those holders are entitled to receive notice under state law, it seems to me that this may be a viable solution for companies that don’t have large numbers of record holders.

On the other hand, many of the orders issued by other states permitting deviations from statutory practice due to Covid-19 are prospective in nature, while Delaware’s applied only to actions taken prior to the order. Perhaps Delaware’s order could be revised to take the same approach?

Virtual Annual Meetings: Doug Chia’s Attending Them So You Don’t Have To. . .

Soundboard Governance’s Doug Chia attended Wells Fargo’s virtual annual meeting and posted a detailed summary that’s a must read for anyone considering going virtual this year. His write-up provides plenty of insights into how the meeting was conducted – including commentary on the virtual meeting platform, the manner in which the Q&A was conducted, and how shareholder proposals were presented.

Doug’s attending other meetings and posting similar summaries (here’s one about Berkshire Hathaway’s meeting that he posted earlier this week), so stay tuned.

John Jenkins

May 5, 2020

Staff Issues FAQs on Covid-19 Relief

Yesterday, the Staff issued four FAQs addressing issues arising under the SEC’s exemptive order extending filing deadlines for companies impacted by the Covid-19 crisis.  The FAQs offer guidance on the disclosures required by companies seeking to avail themselves of the relief provided by the order, as well as the implications of reliance on the order for S-3 issuers. Here’s one that deals with a company’s eligibility to file a new Form S-3 during the extension period:

3. Question: Is a registrant relying on the COVID-19 Order to delay a required filing eligible to file a new Form S-3 registration statement between the original due date of a filing and the extended due date, and will the staff accelerate the effectiveness of registration statements that do not contain all required information?

Answer: Between the original due date of a required filing and the due date as extended by the COVID-19 Order, a registrant may file a new Form S-3 registration statement even if the registrant has not filed the required periodic report prior to the filing of the registration statement. The staff will consider the registrant to be current and timely in its Exchange Act reporting if the Form 8-K disclosing reliance on the COVID-19 Order is properly furnished. The registrant will no longer be considered current and timely, and will lose eligibility to file new registration statements on Form S-3, if it fails to file the required report by the due date as extended by the COVID-19 Order. Registrants with compelling and well-documented facts may contact the staff to discuss their specific capital raising needs. However, registrants relying on the COVID-19 Order should note that the staff will be unlikely to accelerate the effective date of a Form S-3 until such time as any information required to be included in the Form S-3 is filed. [May 4, 2020]

If you’re wondering why the Staff issued this guidance in the form of “FAQs” instead of the more customary CDIs, the FAQs say that it has to do with the “unique circumstances” of the Covid-19 crisis that prompted the issuance of the exemptive order in the first place.

Covid-19 Litigation: It’s Not What You’ve Said, It’s What You’re Going to Say

Over on the D&O Discourse blog, Doug Greene shares some thoughts about whether we’ll see a wave of Covid-19 crisis-based disclosure litigation. He thinks that what you said before the economy hit the wall probably won’t get you into trouble, but what you say going forward just might. This excerpt explains his reasoning:

Why don’t I think there will be a wave based on the economic downturn over the past two months? Everyone is in the same boat, so it’s difficult for plaintiffs to identify and prove that any particular company’s disclosures or governance problems caused economic harm. And plaintiffs need to choose extra-wisely, because many judges would be offended by accusations of fraud and poor oversight over problems caused by a pandemic – it would feel opportunistic.

But going forward, disclosure and governance will be judged far differently – almost in the polar-opposite way. Moving forward, judges will have no patience for companies whose disclosures are not careful or boards whose oversight fails to meet the moment. The legal standards governing disclosure and governance litigation are judged from inferences drawn in context by judges who are themselves living the context. They will be critical of disclosures that feel exaggerated and governance that feels lax. Company-specific stock drops and governance failures will be easy for the plaintiffs’ bar to spot in the coming months and years.

The blog goes on to provide some insights about how companies can best position themselves to defend both securities class action lawsuits & shareholder derivative actions based on disclosures and alleged governance lapses associated with the Covid-19 crisis.

Conflict Minerals: Form SD Due June 1 – No Covid-19 Relief

This Skadden memo provides a reminder that the SEC’s exemptive order providing extended filing deadlines relief doesn’t apply to your Form SD filing:

As a reminder, conflict minerals disclosures on Forms SD are required to be filed with the Securities and Exchange Commission (SEC) no later than June 1, 2020. This remains true despite the impact of COVID-19, given that Forms SD are not covered by the SEC’s order allowing public companies to delay certain reports in light of the pandemic.

John Jenkins

May 4, 2020

Elon Musk’s Big Week: “What an Eccentric Performance!”

I think it’s fair to say that America’s favorite James Bond villain had quite a week. It started on Tuesday, when Tesla dropped this little disclosure tidbit in a Form 10-K/A:

Tesla determined not to renew its directors and officers liability insurance policy for the 2019-2020 year due to disproportionately high premiums quoted by insurance companies. Instead, Elon Musk agreed with Tesla to personally provide coverage substantially equivalent to such a policy for a one-year period, and the other members of the Board are third-party beneficiaries thereof. The Board concluded that because such arrangement is governed by a binding agreement with Tesla as to which Mr. Musk does not have unilateral discretion to perform, and is intended to replace an ordinary course insurance policy, it would not impair the independent judgment of the other members of the Board.

There are obviously no issues with this little cost-saving move, right? Elon followed that up on Wednesday with an earnings call featuring an expletive-laden tirade against “fascist” Covid-19 stay-at-home orders.

Musk’s grand finale came in the form of a bizarre Friday tweetstorm that started with a tweet to the effect that he was selling almost all of his possessions. Elon then provided some eyebrow-raising investment advice – “Tesla stock price too high imo.”  He segued into excerpts from “The Star Spangled Banner,” then came a little “Braveheart” riff, followed by a brief bit of existential musing. He wrapped things up with by letting us know that “my gf @Grimezsz is mad at me.”

Girlfriend’s mad, huh? Well, she must be a Tesla shareholder. The company’s stock price plummeted 10% after the tweetstorm. Isn’t there supposed to be somebody responsible for pre-clearing Elon’s potentially market-moving tweets? Yeah, well we told you that wasn’t going to work.

So, that was the week that was. It’s really a shame that Elon Musk is an immigrant & isn’t allowed to channel his energies into a run for president like literally every other billionaire egomaniac in America. Overall, I think King Arthur put it best in “Monty Python & The Holy Grail”  – “What an eccentric performance!”

“Funding Secured”: Tesla Can’t Shake Lawsuit Over Last Batch of Musk’s Tweets

I know some of you may be scratching your heads about the Tesla board’s willingness to sign-off on the company’s – ahem – “unorthodox” D&O liability protection arrangements. After Friday’s tweetstorm, many of those directors also may be second-guessing that decision – if for no other reason that they’re all still knee deep in the mess Elon created the last time that he let loose on social media.

That’s because a California federal judge recently refused to dismiss a lawsuit filed against Tesla, its board & Musk arising out of his August 2018 tweetstorm. This excerpt from a recent Shearman & Sterling blog on the case has the details:

Defendants moved to dismiss for on several grounds, including that the tweets were merely aspirational and not factual, that they were made by the CEO in his individual capacity and not on behalf of the Company, and that the complaint failed to adequately allege scienter. The Court disagreed. First, the Court opined that even statements of opinion could be misleading if they conveyed facts, which the tweets allegedly did by referencing a specific price of $420 and by identifying specific financial and legal advisors. The Court also found that the complaint had adequately alleged that a reasonable investor would read the tweets as statements of facts based on the affirmative nature of the statements and subsequent exchanges on Twitter confirming those statements.

Second, the Court found that the CEO’s statements from his personal Twitter account were made within the scope of his authority, relying on the fact the CEO co-founded the Company, was on its Board, and that the Company had notified its investors in 2013 that additional information regarding the Company could be found on the CEO’s and Company’s Twitter accounts.

Finally, contemporaneous correspondence that allegedly showed that the CEO was aware of significant hurdles to the transaction and that he harbored animosity against short-sellers, as well as the swift settlement reached with the SEC within a few days of the SEC’s complaint, in the eyes if the court, all supported an inference of scienter sufficient to survive the motion.

Meanwhile, Elon’s not faring any better in Delaware, where back in February, Vice Chancellor Slights denied the Tesla defendants’ motion for summary judgment in the fiduciary duty lawsuit arising out of Tesla’s acquisition of SolarCity, a company in which Musk owned a 21% stake. The Tesla directors settled out – so Elon finds himself the last man standing as the case heads to trial.

PPP Loans: Tax Deduction? If They’re Forgiven, Forget It

One of the things that makes the Payroll Protection Program so attractive is that if a borrower spend its loan proceeds properly (on items such as payroll, rent and utilities), the loan will be forgiven. Furthermore, Section 1106(i) of the CARES Act, provides that the forgiven loans are excluded from gross income, which means that the borrower receives the loan amount (without a repayment obligation) entirely tax-free.

But what about the tax deduction that would ordinarily apply to those business expenditures made in order to obtain loan forgiveness? According to this recent memo from my colleagues at Calfee, there’s a limit to Uncle Sam’s generosity:

The question arises because Section 265 of the Internal Revenue Code provides that a taxpayer cannot take tax deductions, even if otherwise allowable, if the deductions are allocable to income that is exempt from tax. The general purpose of Section 265 is to prevent taxpayers from enjoying a “double” tax benefit (i.e., tax-exempt income generating tax deductions).

In Notice 2020-32, released today, the IRS clarifies that Section 265 does in fact apply to PPP loans and prevents taxpayers from deducting expenses that lead to forgiveness under the CARES Act. This interpretation will have the effect of negating much (if not all) of the tax benefit Congress provided with the exclusion under Section 1106(i). Given the larger goal of Congress to inject cash into struggling businesses, this result had some wondering (before today) whether the IRS would apply Section 265 to PPP loan forgiveness.

John Jenkins

May 1, 2020

Another Caremark Claim Survives Motion to Dismiss

Last fall, John blogged about a Caremark claim surviving a motion to dismiss.  This was a big deal because at the time it was the second case in a year that the Delaware courts declined to dismiss at the pleading stage following decades of routinely doing so.  Now, earlier this week the Delaware Court of Chancery issued a 41-page opinion in Hughes v. Hu and declined to dismiss another Caremark claim.

In the most recent case, Vice Chancellor Laster held that the plaintiff adequately pled that the director defendants, who served on the company’s audit committee, breached their fiduciary duties by failing to oversee the company’s financial statements and related party transactions.  The plaintiff alleged that the directors’ failures led to the company’s need to restate its financial statements, thereby causing the company harm.

Steve Quinlivan’s blog provides a nice summary, here’s an excerpt:

The Court found the allegations in this case support inferences that the board members did not make a good faith effort to do their jobs. The Audit Committee only met when spurred by the requirements of the federal securities laws. Their abbreviated meetings suggest that they devoted patently inadequate time to their work. Their pattern of behavior indicates that they followed management blindly, even after management had demonstrated an inability to report accurately about related-party transactions.

For instance, documents that the Company produced indicated that the Audit Committee never met for longer than one hour and typically only once per year. Each time they purported to cover multiple agenda items that included a review of the Company’s financial performance in addition to reviewing its related-party transactions. On at least two occasions, they missed important issues that they then had to address through action by written consent. According to the Court, the plaintiff was entitled to the inference that the board was not fulfilling its oversight duties.

Last fall, John wondered whether Caremark was becoming a more viable theory of liability or the board’s conduct in recent cases was just more egregious.  It’s still early…we’ll see if any other pleading-stage dismissals show up in 2020 to form more of a pattern.

The facts in Hughes seem pretty egregious and the Court’s opinion says the defendants face a substantial likelihood of liability under Caremark.  But, as Steve Quinlivan notes at the end of his blog, the Court hasn’t found any of the defendants liable for the actions alleged in the complaint.

PCAOB Wants Comments on CAM Requirements

The PCAOB wants comments on experiences so far with the new CAM disclosure requirement. Comments are encouraged from all interested stakeholders and should be submitted by June 15, 2020.  Information on the comment process can be found on this PCAOB Request for Comment.  The Comment Request includes a list of questions for consideration and asks commenters to provide data, evidence or other specific examples to support comments.

The PCAOB says it’s conducting an interim analysis to understand how auditors responded to the CAM requirements, how investors are using CAM disclosures and audit committee and preparer experiences.  From there, the PCAOB will consider whether additional guidance or other steps may be appropriate.  The PCAOB plans to report its interim review findings toward the end of the year.

Speaking of CAMs, according to a recent Audit Analytics’ blog, so far disclosure of the audit committee’s role regarding CAMs isn’t too prevalent.  The blog says the firm reviewed 770 S&P 1500 proxy statement disclosures filed between July 1, 2019 and March 31, 2020 to look for disclosures about the audit committee’s role with CAMs.

Of course, the new disclosure requirement relating to CAMs requires auditors to share any CAMs with the audit committee as part of the draft auditor report, but the audit committee doesn’t need to approve or determine CAMs.  So, even though there’s been a trend of expanding audit committee disclosure, audit committees wouldn’t necessarily need to say much about how they’re engaging in the new disclosure requirement – although the blog does say we’ll probably see more of this disclosure as time goes on.  Here’s some of their findings:

In the first quarter 2020, they found slightly over 6% of S&P 1500 proxy statements filed included CAMs in audit committee disclosure – the majority of which included mention in the audit committee report of the proxy

Of proxy statements that included audit committee disclosure of CAMs, 61% were from the S&P 500 – although, overall most companies haven’t included this disclosure in proxy statements

When disclosure is included in the proxy statement, it often identifies the audit committee’s role as either reviewing the CAMs, discussing CAMs with the independent auditor or both

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Lynn Jokela