Did you know that Thomas Jefferson had only 17 days to write the Declaration of Independence? I admit feeling conflicted that we still celebrate someone who turned out to be so pro-slavery in his older years, but I also find it impressive that young TJ met that deadline.
Beware EDGAR Technical Issues
It’s not the news I want to be bringing as we head into a holiday weekend, but it’s time to end the silent suffering of those who’ve attempted filings this week. With end-of-period equity awards triggering Form 4s, that’s a lot of people!
After a day of headaches on Monday, the SEC’s EDGAR Filer Communications circulated an email late that evening reporting the issues experienced at 4:30pm – right as many were trying to make filings – had been resolved (there had been no notice earlier in the day that an issue was occurring, and there were a lot of frustrated people attempting filings and questioning whether their filing agent was to blame). The “EDGAR News & Announcements” page offers this relief:
The SEC will automatically date as June 29, 2020 all filings made between 5:30 p.m. ET and 10:30 p.m. ET on June 29, 2020. For other filing date adjustments, please contact Filer Support at 202-551-8900 option 3.
However, Monday’s email also warned that filers could continue to experience technical problems with their custom codes. That happened yesterday, with a notice in the morning that EDGAR was experiencing technical difficulties and a notice in the afternoon that EDGAR would be down for a short amount of time for technical repair.
Kudos to the SEC for making real-time announcements yesterday and for keeping the “EDGAR News & Announcements” page updated – you should visit that page and follow the posted instructions if you’re having problems. Fingers crossed that the issue is now fully resolved!
– Liz Dunshee
Late last year, we were tracking the saga of the NYSE’s “direct listing” proposal for primary offerings. A lot has happened since then, and you’d be forgiven if you assumed that going public without the benefit of a traditionally marketed & placed IPO was no longer a very attractive option. But the NYSE hasn’t given up hope that we’ll return to better times. Last week, they filed the third version of a proposed rule change that would permit companies to raise money in a “direct listing.”
As this Davis Polk memo explains, this version of the proposal gives more detail about the mechanics of a direct listing – but it would also make this path available to fewer companies:
The NYSE’s current proposal eliminates the 90-day grace period that was previously proposed for the minimum holder requirement. As a result, both primary and secondary direct listings would continue to be subject to the requirement to have 400 shareholders at the time of initial listing.This requirement will continue to preclude many private companies from pursuing a direct listing because they do not having the required number of round lot holders.
Unlike the prior proposals, this version also provides more granular detail around the auction process for a primary direct listing. Significantly, the auction process would require that the company disclose a price range and the number of shares to be sold in the SEC registration statement for a primary direct listing, and would require that the opening auction price be within the disclosed price range. For purposes of the opening auction, the company would be required to submit a limit order for the number of shares that it wishes to sell, with the limit set at the bottom end of the price range. The proposed rule changes would not allow the company’s limit order to be cancelled or modified, and the limit order would need to be executed in full in order to conduct the primary direct listing
Suspending Preferred Dividends? Your Form S-3 Might Be At Risk
As some companies look to suspend dividend payments due to economic fallout from the pandemic, here’s a reminder from a recent Mayer Brown blog:
In order to remain eligible to use a Form S-3 registration statement, among other requirements, neither the issuer nor any of its consolidated or unconsolidated subsidiaries shall have failed to pay any dividend on its preferred stock since the end of the last fiscal year for which audited financial statements are included in the registration statement (General Instruction I.A.4 of Form S-3). The reference to materiality in the instruction does not apply to the failure to declare dividends on preferred stock.
A declared but unpaid dividend on preferred stock would disqualify an issuer from using Form S-3, as would the existence of accrued and unpaid dividends on cumulative preferred stock. The issuer also would be disqualified from using Form S-3 even if it has a history of accumulating such dividends for three quarters before paying them at the end of each year.
The blog notes a few ins & outs of this analysis – including that eligibility remains intact if a board doesn’t declare a dividend on non-cumulative preferred stock, or if the terms of the debt permit deferred payments and the deferral isn’t a default, since no liability arises under the terms of the stock. Also, even if a dividend payment on cumulative preferred stock was missed, a company can continue to use an already effective Form S-3 registration statement so long as there is no need to update the registration statement.
Secured Notes Offerings: Covid-19 Trends
In these desperate times, more companies are turning to secured notes to keep them afloat – and it’s not a terrible option, given current pricing and the possibility that other loans will be unaffected. This 3-page Cleary Gottlieb memo discusses current trends to consider – including disclosure, timing, covenants, collateral & intercreditor issues, call protection and reporting. Here’s an excerpt:
A common trend for these new secured notes offerings has been a five-year maturity, with two years of call protection, resulting in a much shorter tenor than the usual seven- to eight-year maturity for secured notes. This trend for a shorter tenor offers more flexibility to the issuer for refinancing if circumstances improve but still provides noteholders with more call protection than would be typical for a credit facility.
One feature in pre-crisis secured notesofferings, a 10% per annum call right at 103% for the first years after the offering (or if shorter, during the non-call period), appears to have fallen away in these recent secured notes deals.
– Liz Dunshee
Amidst the pandemic, the “corporate purpose” debate continues – a few say it’s even intensified, given some companies’ need to prioritize long-term viability & employee well-being over dividend payments or other capital allocation decisions that would benefit shareholders. A recent Wachtell Lipton memo defines “purpose” as:
The purpose of a corporation is to conduct a lawful, ethical, profitable and sustainable business in order to create value over the long-term, which requires consideration of the stakeholders that are critical to its success (shareholders, employees, customers, suppliers, creditors and communities), as determined by the corporation and the board of directors using its business judgment and with regular engagement with shareholders, who are essential partners in supporting the corporation’s pursuit of this mission.
In response to Wachtell’s positions, Skadden published this memo – which argues that shareholder primacy is still the name of the game. And practically speaking, companies’ ability to accommodate non-shareholder stakeholders is likely to turn on shareholder preferences.
That’s why this recent SquareWell Partners survey – of investors who collectively manage over $22 trillion in assets – is a worthwhile read. It covers whether “corporate purpose” is relevant to investors, who they believe should be responsible for delivering it, how it should be measured and how investors intend to hold companies responsible for putting it into practice. Here are a few key takeaways (also see this Harvard Law School blog):
1. 93% of shareholders believe that purpose is a necessary grounding for a successful long-term strategy
2. Nearly half of the participating investors suggested that they expect the company’s purpose to be in line with the UN Sustainable Development Goals
3. 86% expect firms to report on the delivery of purpose – with 75% emphasizing the need for KPIs
4. Most investors suggest that the company’s purpose has a dedicated section within their annual report (or equivalent document) closely followed by a formal statement from the board addressing the company’s purpose
5. Investors will look to see if there is consistent disclosure regarding the implementation of the purpose, stakeholder concerns, employee turnover, etc. to evaluate whether the company’s purpose is effective
6. Only one-third of participating investors expect to have a vote on a company’s purpose but almost two-thirds are engaging with companies on the topic
7. Whilst a quarter of the participating investors suggested that they will not oppose any agenda items if they are not satisfied with a company’s purpose, investors will most likely target the election of board members (including the board chair), discharge (where possible), etc.
Proxy Advisors & Shareholder Proposals: SEC’s Investor Advocate Still Wants a Proposal “Do-Over”
Way back in January, Lynn blogged on our “Proxy Season Blog” that the SEC’s Investor Advisory Committee recommended to the Commission that it revise and re-propose its rules on proxy advisors & shareholder proposal submission thresholds. Earlier this week, the SEC’s “Office of the Investor Advocate” – which is a member of the Investor Advisory Committee – reiterated that recommendation in its “Report on Objectives for Fiscal Year 2021.”
The Investor Advocate’s report on objectives is due by June 30th each year and relates to the government fiscal year that begins October 1st. It goes directly to Congress without any review or comment by the Commission or Staff. The report has this to say about proxy plumbing:
Much of the concern expressed by investors has centered on the economic analysis in the rulemakings. For example, the SEC’s Investor Advisory Committee submitted a recommendation to the Commission that it revise and repropose the rules, citing a number of ways in which the proposing releases failed to meet the SEC’s published guidance for conducting economic analyses.
The recommendation also noted that there are well-known problems with respect to so-called “proxy plumbing,” or the processes by which shares are voted and counted, and suggested that the Commission should prioritize efforts to address those concerns. In other words, before addressing concerns of the business community about the advice investors seek, the Commission should ensure that investors’ votes are actually counted.
In addition, the Investor Advocate includes in its 2021 policy agenda “corporate disclosure and investor protection in registered & exempt offerings” – calling for:
– Improved “human capital management” disclosure, possibly going beyond the “principles-based” approach that the Commission proposed last August
– Attention to “machine readable” disclosures outside of financials – noting that prior “disclosure effectiveness” changes have catered to investors who are manually accessing & analyzing info, but more & more investors are now using digital processes
– Consideration of whether the expansion of registration exemptions undermines public markets and ignores the value of registered offerings & public disclosure
The report also includes a special 3-page overview of the impact of Covid-19 on investors – highlighting eroding confidence of individual investors in stocks & mutual funds as beneficial long-term investments.
Our July Eminders is Posted!
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– Liz Dunshee
