Monthly Archives: May 2021

May 28, 2021

Covid-Related Securities Actions: Plaintiffs Begin Bumping Up Against PSLRA Hurdle

A recent post from Alston & Bird attorneys Elizabeth Clark and Robert Long provides a summary of several initial court decisions involving Covid-19-related securities actions. In these cases, courts ruled on early-stage motions to dismiss and even though the decisions were mixed, the authors say plaintiffs will face major hurdles in bringing claims related to Covid-19’s impact on a company’s business operations.

Three initial decisions on motions to dismiss reflect that courts are going to closely scrutinize allegations related to COVID-19 and analyze challenged statements in view of the pandemic-related information available at the time, including scrutinizing what the company could have reasonably known at the time of its public statements.

The primary takeaway is that, even in the wake of a global pandemic and unprecedented volatility in the stock market, courts continue to recognize that the heightened pleading standard of the Private Securities Litigation Reform Act acts as a roadblock to ferret out thin and conclusory claims even at the earliest stage of a securities fraud case.

One case the authors discuss involved Norwegian Cruise Line and in that case, the court found certain company statements constituted nothing more than corporate puffery. The case emphasizes the importance of including a comprehensive safe harbor disclosure statement. In granting the motion to dismiss, the court said that many of the challenged statements were accompanied by specific, cautionary language and were protected by the PSLRA’s safe harbor provision.

Take Our Quick Surveys: Board Meeting Health Protocols & Insider Trading – COVID-19 Adjustments

We’re continuing to post memos about “return to work” and other pandemic issues in our “COVID-19” Practice Area – but one topic that isn’t getting as much attention is what companies are planning to do to keep their boards productive, cohesive & healthy. Please take a moment to participate in our anonymous “Quick Survey: Board Meeting Health Protocols”.

While you’re there, please also give your input on our “Quick Survey: Insider Trading – COVID-19 Adjustments”. Don’t forget to mark your calendars for our July 20th webcast, “Insider Trading Policies & Rule 10b5-1 Plans.”

Memorial Day Weekend

Many have made it through another long proxy season – as I blogged earlier this week, it’s been a wild ride this year. We wish each of you an enjoyable Memorial Day weekend, we’ll be back here on Tuesday.  Please take a moment to honor and remember those who have sacrificed for our country.

– Lynn Jokela

May 27, 2021

Activist Wins at Least 2 Exxon Board Seats in Historic Campaign

This year’s wild proxy season continued yesterday when ExxonMobil announced that a dissident won at least two seats on the company’s 12-member board. The dissident – Engine No. 1 – has waged a campaign that pressures the company to set a “climate transition” plan that would result in net-zero emissions from the company – and its products – by 2050.

Considering Engine No. 1’s ownership stake in Exxon is only about 0.02%, it’s remarkable that the hedge fund pulled this off. It came at no small cost – this has been one of the most expensive proxy fights ever, with Exxon spending at least $35 million and Engine No. 1 spending $30 million. Reports are based on preliminary voting results, so until the final vote results are released it’s unclear how close the vote was for the two seats that were won. As of yesterday afternoon, there were two more seats still up for grabs. The vote was so hotly contested that Exxon called a recess during the meeting as votes were still being cast.

This WSJ article summarizes the proxy contest. Here’s a snippet about yesterday’s drama:

Both sides feverishly made their case to investors until the last minute. Exxon delayed the closing of the voting by an hour Wednesday morning and Engine No. 1 said the company was calling investors to ask them to change their votes. In a message sent to shareholders, the fund urged them ‘not to fall prey to any such strategic efforts.’

In another somewhat new practice, Vanguard posted a vote bulletin saying it backed two dissident nominees and BlackRock posted its vote bulletin for Exxon’s meeting yesterday afternoon, nearly in real time. As I blogged yesterday morning, word was already out that BlackRock was planning to support three dissident nominees. BlackRock said that, although Exxon had announced more commitments and transparency, it believes more urgent action is needed. Here’s an excerpt from BlackRock’s bulletin:

We believe that three of the four directors nominated by Engine No. 1 bring relevant private sector experience including independent U.S. energy production (Mr. Goff); renewable products, including wind energy (Ms. Heitala); and energy infrastructure, legislation and new energy technology (Mr. Karsner). Hence, we believe that this suite of directors will complement the skills and experience of the remaining incumbent directors, bringing fresh perspectives as well as successful track records of value creation for shareholders.

BIS supported the re-election of Mr. Frazier and Mr. Woods because our engagement with each of them over the past several months has given us greater confidence that they are prepared to internalize shareholder feedback, and lead the company, in their respective roles as Lead Independent Director and CEO, on a more ambitious course of action in adapting to the energy transition and responding to shareholders. We also believe some leadership stability is important in the context of the urgency with which the company is expected to deliver on its commitments.

Many predict the vote result will force the company to change its strategy, which has been fossil fuel focused. Institutional holders are signaling that they’re willing to take drastic action to reduce climate risks, which may also jolt the energy sector – and others. The vote is even more shocking in light of the fact that the company had already added three directors earlier this year in response to activist pressure, including Jeff Ubben. That means that if any additional dissidents are certified as elected, new directors would comprise at least half of the board.

As an exclamation point yesterday, shareholders not only approved a change in leadership, they also approved proposals calling for more info on climate lobbying and other lobbying activities, which weren’t supported by the board.

Whistleblower Awards Continue Rolling Along

Liz blogged back in March about a SEC whistleblower award and noted the Commission had already made 40 individual awards this year. Since then, the Commission has awarded more and last week announced a few more. First, there was an announcement of awards totaling more than $31 million in connection with two enforcement actions, with the awards divided between two whistleblowers in each action.

In the first order, the SEC awarded almost $27 million to two claimants who provided SEC staff with new information and assistance during an existing investigation, including meeting with the staff in person on multiple days. Their information and cooperation helped the Commission bring the enforcement action, which resulted in the return of millions of dollars to harmed investors.

In the second order, the SEC awarded one whistleblower an award of approximately $3.75 million and the other whistleblower an award of approximately $750,000. While both whistleblowers independently provided information that assisted SEC staff in an ongoing investigation, the whistleblower who received the larger award provided information and assistance that was more important to the resolution of the overall case.

Also last week, the Commission announced an award totaling more than $28 million and this one was in connection with an Enforcement Division action and a related action by another federal agency. Based on information received from the whistleblower’s attorneys, the WSJ reported that the award was in connection with a bribery settlement. Although the SEC’s whistleblower program provides that whistleblower’s can receive up to 30% of monetary penalties when their tips result in a successful enforcement action and when the penalties total more than $1 million, the WSJ said the $28 million award represented 10% of the monetary penalties collected from both the SEC and DOJ actions. It’s not entirely clear what led to the lower percentage award in this case, but the article does say that the settlement involved different regions than the one initially identified by the whistleblower.

Since first issuing an award in 2012, with last week’s awards, the agency has awarded approximately $903 million to 163 individuals. As these awards continue rolling along, it’s looking like it may be possible for the agency to surpass $1 billion in total awards under its program sometime later this year.

Former Chief of SEC Whistleblower Office Joins Arnold & Porter

The SEC announced back in April that Jane Norberg was leaving the agency that month, she had served as Chief of the agency’s Office of the Whistleblower. Jane had been with the Office since near its inception in 2012 serving as its first Deputy Chief and, since 2016, its Chief. With what’s seeming like pretty regular whistleblower award announcements, it appears that securities enforcement practices could see a good volume of work and earlier this week, Arnold & Porter announced that Jane has joined the firm’s Securities Enforcement and Litigation Practice as a partner in its Washington DC office. In the announcement, Richard Alexander, the firm’s chairman, commented that Jane’s joining the firm at a time when whistleblower-driven investigations and enforcement actions are ticking up. A Bloomberg piece citing Jane’s move to private practice quotes her as saying she ‘expects this administration to be very pro-whistleblower.’

Find More on Our Other Blogs!!

We are gradually resuming our blog email notifications – and hope you’ll enjoy the improvements. In the meantime, don’t forget that you can visit the blog landing pages for our latest entries. For members of, that includes Mike Gettelman’s Blog (with recent posts about NY private offerings and crypto predictions), as well as our Mentor Blog (with recent posts about director tenure, board assessments, and more).

Members of can visit that page for recent proxy disclosure samples, via Mark Borges’ Proxy Disclosure Blog (with recent samples of corporate responsibility and perks disclosures) and for Mike Melbinger’s take on hot executive pay and related issues, via Melbinger’s Compensation Blog.

Members of can access Alan Dye’s Blog for news on that front (with a recent post about attorney’s fees on a profit disgorgement case).

And our free Blog is also still going strong every day with John’s M&A nuggets!

– Lynn Jokela

May 26, 2021

Proxy Contest: BlackRock Reportedly Backs Several Dissident Nominees

Back in December, I blogged about whether sustainability concerns would lead to more proxy contests. At that time, Engine No. 1 LLC launched a campaign to name four directors to Exxon Mobil’s board. We didn’t know then whether the campaign would continue gathering steam but it has and yesterday, Reuters reported that BlackRock intends to back three of Engine No. 1’s director nominees to join Exxon’s board. It’s not too often that you hear of a large asset manager backing dissident nominees and here, BlackRock is Exxon’s second largest shareholder, holding a 6.7% stake in the company.

Exxon’s annual shareholder meeting is scheduled for today. This Politico article takes a deeper dive on this proxy contest and says ISS and Glass Lewis made recommendations that favor Engine No. 1. Other shareholders that are reportedly supporting Engine No. 1 include CalSTRS, CalPERS, the New York State Common Retirement Fund, Legal & General and Federated Hermes. Engine No. 1’s focus of attack has been about the company’s financial performance and decision making around investment in cleaner energy and many are watching to see which way votes are cast by large asset managers. Here’s an excerpt with more:

The vote will also be watched for how certain shareholders cast their ballots. Vanguard, BlackRock and State Street, three of the world’s largest asset managers, are Exxon Mobil’s biggest shareholders. Those companies haven’t indicated how they’ll vote, but all have drawn complaints from other investors and environmentalists such as the Sierra Club, who say they have failed to deliver on their own pledges to put a premium on environmental, social and governance, or ESG, metrics.

‘I am tracking the voting records of BlackRock and Vanguard, and expect full transparency and sufficient explanations regarding the reasoning and justification for the votes BlackRock and Vanguard cast,’ Wisconsin State Treasurer Sarah Godlewski said in a written statement. ‘It is critical for the financial resiliency of our funds that asset managers hold corporate boards accountable and stop at nothing less than a guaranteed commitment to address systemic climate risk.’

The article notes that even with the support of BlackRock, Engine No. 1 doesn’t have an easy path because nearly half of Exxon’s shares are held by retail shareholders, which tend to vote with management. The article says Exxon’s 20 largest shareholders only hold 35% of the vote.

Glass Lewis Recommends Ouster of Female Board Chair Due to Board’s Gender Imbalance, Huh?

With eyes on board diversity, a recent article in the Guardian caught my eye as the headline said shareholders have been urged to vote out a board chair due to gender imbalance.  As I read a little further, I was surprised to see that Glass Lewis has recommended the ouster of the board chair although the board chair happens to be a woman.  Although the company, Playtech is a constituent of the FTSE 250 and UK based, the situation sends a message about how Glass Lewis could view a similar situation should it arise here.

Should Playtech’s chair be ousted, its board will be left with an even greater gender imbalance.  What gives?  According to the article, the board makeup includes 7 members, 2 of which are women, which is below the 33% target for board gender diversity. Although the target is voluntary, Glass Lewis takes a tough stance in holding the board, and in this case the board chair, accountable for lack of progress on improving the company’s diversity:

While the government-backed 33% target is voluntary, Glass Lewis reprimanded Playtech for its failure to follow its peers and improve its boardroom gender diversity. The company is adding another male director at its upcoming meeting, which means women would only occupy a quarter of Playtech’s board positions. Women represented just 19% of senior management, while 39% of the firm’s employees were female.

Glass Lewis criticised Playtech’s stance on improving diversity at the company, saying that it had ‘failed to adequately outline any measurable diversity objectives, instead opting for boilerplate language which provides little insight into what strategy the board is employing to enhance diversity’.

The advisory group added: ‘The board has not disclosed any commitment to achieve the Hampton-Alexander Review targets within a defined time frame despite the company failing to achieve the same by the 2020 deadline.’

There’s likely more to the story than the Guardian was able to pull together for its article. Word to the wise for companies thinking that placing a woman in a board leadership role will appease Glass Lewis to the point of looking past other diversity shortcomings, that move probably won’t help win over the folks at Glass Lewis. Also, ISS takes a similar stance for racial diversity, they’ll vote out a board leader even if they themselves are from an underrepresented community – see Liz’s blog from a couple weeks back.

Annual Meeting Season: Wild Ride in UK Too

Many will probably agree that this year’s annual meeting season is turning out to be a bit of a wild ride. Liz and I have been blogging on our “Proxy Season Blog” about some of the early vote results as several shareholder proposals have received majority shareholder support, while others, despite being first-year proposals have received over 30% shareholder support.  Meanwhile, Liz blogged not too long ago about increased opposition to say-on-pay proposals this year.

For more on this year’s wild ride, last week Reuters reported that over in the UK, Lloyds Banking Group had to temporarily adjourn its annual meeting due to a shareholder repeatedly shouting complaints.  According to the story, the chairman adjourned the meeting and after 15 minutes of disruption, in which the shareholder was removed and the webcast suspended, the meeting was restarted. With most companies holding annual meetings virtually, it was somewhat surprising to read about the interruption, but the FT reported that Lloyds made a last minute shift and decided to allow up to 100 shareholders to attend. Although the article says only 10 investors attended, it only takes one to bring an element of disarray to a meeting.

To help plan and prepare for any sort of disruption at your annual meeting, see our checklists that are available to members online.  Here are a few relating to annual meetings that can help ensure your meeting runs smoothly: Adjournment & Postponement, Rules of Conduct & Procedure, Meeting Surprises, Security for Annual Meetings, and Virtual Annual Meetings.

– Lynn Jokela

May 25, 2021

Rule 10b5-1: Changes Could be on the Horizon

Back in February, three Democratic US Senators wrote to then Acting SEC Chair Allison Herren Lee urging the SEC to reexamine its policies on Rule 10b5-1 plans – Liz blogged about it at the time.  Since then, Commissioner Lee responded to the Senators with a letter saying that she instructed the staff to review Rule 10b5-1 and develop recommendations for possible changes. This excerpt from Commissioner Lee’s letter touches on aspects of the Rule for which Commissioner Lee requested review:

The Commission adopted Rule 10b5-1 in August 2000 and has not substantively revisited it since then. In the intervening years, market developments and other circumstances have revealed aspects of the rule that may need to be reconsidered, including whether better disclosures about these plans are warranted. Your letter identifies a number of approaches, such as cooling off periods, that may enhance the rule’s effectiveness. With respect to disclosure, there are no specific requirements related to information about 10b5-1 plans and, while some public companies do disclose the details of transactions made pursuant to their 10b5-1 plans, many do not. Similarly, while some insiders indicate on their beneficial ownership reporting forms when transactions are conducted pursuant to 10b5-1 plans, many do not.

As part of this review, the staff will consider the points you raise with respect to public disclosure of 10b5-1 plans, cooling off periods and short-swing profits.

In their February letter, the US Senators requested feedback about the number of enforcement actions the SEC had taken with regarding to 10b5-1 plans in the last five years.  They also requested information about actions the SEC takes to ensure 10b5-1 plans are compliant with SEC rules.  Commissioner Lee’s letter outlines, and includes a brief summary of, the Enforcement actions brought over the last five years that include mention of Rule 10b5-1 plans and says the Enforcement Division will continue to evaluate, as appropriate, Rule 10b5-1 plans during its investigations into potential Enforcement actions.

Reforms to Rule 10b5-1 could be on the horizon.  Commissioner Caroline Crenshaw reportedly views a “cooling-off” period as a solution.  And, as part of his confirmation process, SEC Chair Gary Gensler’s response to questions indicate he would consider modernizing Rule 10b5-1.

To help stay on top of the latest developments, mark your calendars for July 20th and tune in to our webcast “Insider Trading Policies & Rule 10b5-1 Plans”– to hear our own Dave Lynn of Morrison & Foerster, Meredith Cross of WilmerHale, Alan Dye of Hogan Lovells and Section and Haima Marlier of Morrison & Foerster discuss the new enforcement environment, Rule 10b5-1 plan considerations for share buybacks, intersection of insider trading policies and Rule 10b5-1 plans, blackout period trends and more!

Executive Order: Climate Disclosures Get a Push From the Top

Here’s something my colleague Lawrence blogged last week on (also see this Cooley blog):

Late Thursday afternoon, President Biden issued an Executive Order on Climate-Related Financial Risk, which has been rumored to be coming for a couple months. It establishes the Administration’s policy to:

– Advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk … including both physical and transition risks;

– Act to mitigate that risk and its drivers, while accounting for and addressing disparate impacts on disadvantaged communities and communities of color … and spurring the creation of well-paying jobs; and

– Achieve the target of a net-zero emissions economy by no later than 2050.

Major highlights of the EO include:

  • Developing a formal comprehensive, Government-wide strategy regarding the measurement, assessment, mitigation, and disclosure of climate-related financial risk to Federal Government programs, assets, and liabilities – in order to increase the long-term stability of Federal operations;


  • Requiring The Secretary of the Treasury to assess, in a detailed and comprehensive manner, the climate-related financial risk, including both physical and transition risks, to the financial stability of the Federal Government and the stability of the U.S. financial system. The report issued by Treasury is to include a discussion of:
      • the necessity of any actions to enhance climate-related disclosures by regulated entities to mitigate climate-related financial risk to the financial system or assets – and a recommended implementation plan for taking those actions, and
      • any current approaches to incorporating the consideration of climate-related financial risk into Financial Stability Oversight Council (FSOC) members’ respective regulatory and supervisory activities and any impediments they faced in adopting those approaches.


  • Treasury is also required to direct the Federal Insurance Office to assess climate-related issues or gaps in the supervision and regulation of insurers.
      • The Secretary of Labor must consider publishing, by September 2021, for notice and comment, a proposed rule to suspend, revise, or rescind the prior administration’s rules that would limit ERISA plans’ ability to consider ESG factors in investment & voting decisions (85 Fed. Reg. 72846 and 85 Fed. Reg. 81658) – this type of action would go further than the DOL’s previously-announced non-enforcement policy for these rules and is intended to bolster the resilience of 401(k) and pension investments.


    • OMB and the Director of the National Economic Council, in consultation with the Secretary of the Treasury, are directed to develop options to enhance accounting standards for Federal financial reporting where appropriate and should identify any opportunities to further encourage market adoption of such standards.


  • The Federal Acquisition Regulatory Council is to consider amending the Federal Acquisition Regulation (FAR) to:
    • require major Federal suppliers to publicly disclose greenhouse gas emissions and climate-related financial risk and to set science-based reduction targets; and
    • ensure that major Federal agency procurements minimize the risk of climate change, including requiring the social cost of greenhouse gas emissions to be considered in procurement decisions and, where appropriate and feasible, give preference to bids and proposals from suppliers with a lower social cost of greenhouse gas emissions.

The official fact sheet was also made available.

2020 Hotline & Incident Reporting: Overall Report Volume Declined Although Not Uniformly

Navex Global recently released its “2021 Incident Management Benchmark Report.” The report provides data collected from over 3000 organizations that received 10 or more hotline or other incident reports in 2020.  The report’s executive summary notes that findings can only be understood within the context of Covid-19 so key measures are reviewed on a month-to-month basis. Here are a few highlights:

Overall incident report volumes decreased although not across the board. For the first time in the history of our annual benchmark the median number of reports declined, dropping to 1.3 reports per 100 employees. A month-to-month analysis reveals the extent to which this decline was driven by COVID-related events. After an initial reporting increase in March (when state of emergency and stay-at-home orders were first declared), reporting levels quickly plummeted by over 30%, reaching record lows in May. To date, report volumes have yet to return to their pre-COVID levels. While the report volume median decreased, the overall range actually increased, reflecting greater volatility and variation within the customer base. Thus, it is inaccurate to state that all, or even most, firms had a uniform experience.

Among other things, the report also found online reporting continues to accelerate while telephonic reporting has declined, anonymous reporting continued on a slow downward trajectory, and the gap between incident occurrence and reporting increased, especially in accounting, auditing and financial reporting where it increased from 16 days to 36 days.

Programming Note: Pausing Blog Emails

Our blog email notifications are paused while we migrate to a new delivery platform. We expect to resume as soon as possible with some improvements we hope you all enjoy. In the meantime, you can continue to find our latest blogs on this page and on social media. Thank you for your patience!

– Lynn Jokela

May 24, 2021

SPACs Not Catching a Break, SEC Disapproves Nasdaq Proposed Rule Change

The SEC signaled again that it may not be all in on SPACs the way some might be hoping. Last week, the SEC issued an Order disapproving Nasdaq’s proposed rule change relating to SPACs. Nasdaq’s proposed rule change would’ve allowed SPACs that plan to complete one or more business combinations an additional 15 calendar days following the closing of a merger to demonstrate that the SPAC had satisfied the round lot shareholder requirement. As part of the rationale for proposing the rule change, Nasdaq noted difficulty SPACs can encounter when gathering evidence to demonstrate satisfaction of the shareholder requirement because SPAC shareholders may redeem their shares right up until the time of the merger.

As noted in the SEC Order, CII submitted a comment letter to the SEC expressing concern about whether Nasdaq’s proposed rule change was consistent with the protection of investors and the public interest. The SEC shared that concern, and in disapproving the proposal said that Nasdaq didn’t explain how the proposal addresses regulatory risks to fair and orderly markets, investor protection and the public interest and manipulation concerns.

While Nasdaq has amended its proposal to require certain public disclosure, the Commission does not believe the disclosure required by the proposed rule adequately addresses the potential risks associated with trading during a time period in which the minimum number of round lot shareholders may not be present, nor has Nasdaq explained why subjecting shareholders to this potential risk is consistent with the protection of investors and the public interest, and the other requirements of Section 6(b)(5) of the Exchange Act.

Direct Listings: SEC Approves Nasdaq Proposal

At the end of last year, I blogged about Nasdaq’s primary direct listing proposal, which was awaiting SEC review following the SEC’s approval of the NYSE direct listing rule.  After a bit of a wait, last week the SEC approved Nasdaq’s proposed rule to permit primary direct listings. This Paul Weiss memo summarizes the rule, which is effective immediately.

The rule will allow companies to undertake an IPO and concurrent Nasdaq listing without the use of underwriters – previously direct listings were only available for secondary offerings by existing shareholders. Over time we’ll see to what extent primary direct listings take off. Direct listings aren’t without risks, but they do offer certain advantages, which may be best suited for companies with strong name recognition.

PPP Loan Forgiveness Review: Consider Preparing for Potential Forgiveness Appeal Now

Last year, when the SBA rolled out the paycheck protection program, questions arose about whether companies made their “need certifications” in good faith. A borrower’s need certification was important because it could impact whether the SBA denied a PPP loan or ultimately forgiveness of a loan.  Recent data on the SBA website showed it had approved over 11 million PPP loans, forgiven over three million and thousands more were under review.

A Baker Donelson memo summarizes procedures relating to the PPP need certification and notes that the SBA never stated that it would only analyze the need certification during the loan review. Should the SBA deny forgiveness of a PPP loan, John blogged earlier this year about the short window to file an appeal. Baker Donelson’s memo says PPP borrowers should prepare a record for any potential appeal during the SBA’s review process, here’s an excerpt with more about reasons some companies should prepare now:

Significantly, the standard of review for PPP loan appeals “is whether the SBA loan review decision was based on clear error of fact or law” and the appellant has the burden of proof by a preponderance of the evidence.4 Therefore, when appealing any decision related to a PPP loan, the appellant will be in the best possible position if it can show that the SBA made a clear error of fact or law based on the information that was before SBA at the time when SBA made its decision. This means that the PPP loan borrower should include as much helpful information as possible in the record before SBA makes its final decision. For example, when OHA decides size appeals in the government contracts context, it frequently rules that information that was not before SBA when the formal size determination was made is not relevant to the appeal.5 While SBA size protest cases show that OHA does sometimes allow supplementation of the record when the new evidence “is relevant to the issues on appeal, does not unduly enlarge those issues, and clarifies the facts on those issues,”6 it is still best for the borrower to include as much helpful information as possible in the administrative record. Therefore, borrowers should make every effort to get information into the administrative record that it believes will assist its PPP loan review by the SBA or any appeal of the SBA’s decision.

The memo also outlines steps for companies to consider so they can get as much helpful information into the record to help in an appeal process.

– Lynn Jokela

May 21, 2021

Financial Reporting: SPAC Warrant Fix in the Works?

Last month, the SEC threw a monkey wrench into the SPAC market when the Corp Fin Director & the Chief Accountant issued a joint statement on accounting for SPAC warrants.  To make a long story short, the Staff’s position is that a lot of SPACs may have been incorrectly classifying certain warrants as equity instead of as a liability.  As Lynn suggested it might when she blogged about the joint statement last month, the Staff’s position has led to a wave of restatements.

But a wave of restatements might not even have been the biggest problem arising out of this guidance for SPACs.  That’s because SPAC IPOs have essentially come to a halt due to uncertainties about what tweaks to warrant terms would satisfy the SEC.  Now, according to this CFO Dive article, a fix may be in the works:

A form of warrant that isn’t accounted for as a liability for special purpose acquisition companies (SPACs) is under development, but until that process is completed and gets an okay by the Securities and Exchange Commission, sponsors and others with an interest in the market face uncertain terrain, Gerry Spedale said in a Gibson, Dunn Crutcher webcast last week.

“You have accounting firms and law firms working together on that form, and that needs to get blessed by the SEC before everyone’s going to be comfortable moving forward with that approach,” said Spedale, a Gibson, Dunn & Crutcher partner.

The article says that this process is going to take several weeks, which means the SPAC IPO market is going to continue to face significant uncertainty for a while longer. Then again, maybe that’s not such a bad thing.

SEC Enforcement: “Known Trends” Continues to Trend

Earlier this month, the SEC announced a settled enforcement proceeding against Under Armour arising out of allegedly misleading disclosures concerning the reasons for revenue growth and failing to disclose known uncertainties about future revenue growth. This Locke Lord blog points out that efforts to manage earnings to meet analyst expectations may have consequences for MD&A disclosure even if they don’t involve improper accounting:

According to the SEC order, Under Armour, in order to meet analyst projections and sustain its 20% quarter over quarter revenue growth record, pressured customers to move purchases forward into the current quarter, and did this for a number of consecutive quarters. There was no finding that Under Armour’s accounting for these sales as revenues was improper since the sales were actually made.

However, Under Armour gave the same reasons for revenue growth as it had before in earnings releases and its MD&A, without indicating that it was pulling revenues forward to maintain its growth and that this was an unsustainable practice, especially since doing so made it harder to sustain the rate of growth as a result of increasing the prior year’s base and taking revenues from the later year.

Without admitting or denying the findings in the SEC’s order, Under Armour agreed to cease and desist from violations of Section 17(a) of the Securities Act and certain reporting provisions of the securities laws, and to pay a $9 million penalty.

It’s worth noting that this is the third “known trends” enforcement proceeding against a high-profile public company that the SEC has brought since the beginning of 2020. Diageo PLC settled similar charges in February 2020, and HP did the same last September.  All of these proceedings involved MD&A disclosure shortcomings concerning the future implications of actions taken to enable companies to meet current period earnings estimates.

In Memoriam: Jason Morse

This has been a difficult week for all of us at CCRcorp. On Monday, May 17th, our friend and colleague Jason Morse passed away unexpectedly. Jason had been an Account Executive with our company for more than two years, and our office will be closed today in honor of his memory. On behalf of everyone at CCRcorp, I want to offer our sincere condolences to Jason’s family and friends, and in particular to his sons, of whom he was so proud.

Over the past several days, many colleagues have shared remembrances of Jason on our Intranet page. As I read them, I was struck by the repeated references to his kindness, generosity, and good cheer. One colleague remembered Jason as “the person who without fail would always wish me a “Good Morning!” with a big smile on his face, as soon as I walked into the office.” Several others mentioned how Jason made them feel so welcome when they first joined the company. Another told the story of how Jason gave away his own lunch to a colleague who had forgotten to bring his from home.

Many years ago, I read William Wordsworth’s poem “Tintern Abbey.”  At one point in the poem, Wordsworth speaks of “that best portion of a good man’s life / His little, nameless, unremembered, acts / Of kindness and of love.” Those words resonated with me, and I found comfort in reflecting upon them when my own father passed away. Reading what my colleagues had to say about Jason brought those words to mind again. I hope they will serve as a source of comfort to his family and friends as they remember the life of this good man. May he rest in peace.

John Jenkins

May 20, 2021

Stock Buybacks: Back in a Big Way

Last year, Lynn blogged about a Sanford Bernstein report that suggested stock buybacks were fading as a result of the pandemic & predicted that they were likely to be “severely curtailed” for the next several years.  That seemed like a safe bet at the time, particularly when the CARES Act banned recipients of government bailouts from engaging in buybacks.

But according to this WSJ article, that prediction turned out to be about as good as the infamous Sports Illustrated cover that predicted the Cleveland Indians would win the AL pennant in 1987. A year later, and this excerpt says that buybacks are back with a vengeance:

After a year of hoarding cash, American corporations are ready to reward investors again. Companies across industries have been buying back stock and raising dividends at a brisk pace this year. That is a sharp reversal from 2020, when they suspended or cut such programs, warning of the urgent need to preserve liquidity in the early stages of the Covid-19 pandemic.

Already this year, U.S. companies have authorized $504 billion of share repurchases, according to Goldman Sachs Group data through May 7, the most during that period in at least 22 years. The pace of announcements trounces even the 2018 bonanza that followed the sweeping tax overhaul of late 2017.

Cleveland finished the 1987 season with a record of 61-101, 37 games behind the Tigers in the AL East. Still, I’m hard pressed to say Sports Illustrated did worse on that call than Sanford Bernstein did on this one.

ESG Disclosure Litigation: Derivative Claims Fizzle

Last year, it appeared that derivative claims based upon allegedly false or misleading corporate statements about diversity and other ESG-related areas might be the next big thing from the plaintiffs’ bar. But this Sidley blog says that, so far, these cases have fizzled.

Complaints in these cases generally allege breaches of fiduciary duty arising out of directors’ failure to address board diversity, and – in order to get into federal court – claims under Section 14(a) of the Exchange Act premised on allegedly false statements about diversity efforts in proxy statements. This excerpt from the blog says that these claims haven’t gotten much traction with courts:

The Facebook case was the first one decided. On March 19, 2021, Magistrate Judge Beeler held that the breach of fiduciary duty claims failed because the plaintiff did not establish that pre-suit demand was excused. In reaching this decision, the court stated that to show that demand would have been futile, the plaintiff needed to plead “actual or constructive knowledge that their conduct was legally improper” and that, in reviewing the actual composition of the board which included two black directors, four women directors and one director who is openly gay, the plaintiff had not satisfied the requirement.

These same facts also helped defeat the Section 14(a) claim of misleading statements about diversity in the company’s proxy. In addition, the court found that the statements in the proxy were immaterial as they were inactionable puffery and further, that there was no corporate loss that could be connected to the statements.

Of particular interest to those following Delaware law is that the court also held that the case had been filed in the wrong forum because Facebook had adopted a Delaware Chancery forum selection clause which was applicable to these claims.

The case against the board of Gap Inc. was similarly dismissed on April 27, 2021, on the basis of the company’s forum selection bylaw, which designated the Delaware Court of Chancery as the exclusive jurisdiction for derivative claims or breach of fiduciary duty claims. The plaintiff argued that applying the forum selection bylaw to this case was against public policy as it deprived her of the right to assert her Section 14(a) proxy statement claim, which can be brought only in federal court. Magistrate Judge Sallie Kim rejected the plaintiff’s arguments on the grounds that the plaintiff was not without remedy as she could bring her breach of fiduciary duty state law claims in Chancery Court.

The blog goes on to note that the more significant aspect of these decisions may be that both ND Cal. courts upheld Delaware forum selection bylaw provisions even when the result was that the plaintiffs’ Section 14(a) claims had no forum in which they could be brought. I recently blogged about that aspect of these decisions over on

Investor Conferences: Most Still Virtual for 2021

The country is finally starting to open up again as the pandemic begins to fade and the percentage of the vaccinated population continues to grow, but this IR Magazine article says that most sponsors of investor conferences aren’t ready to go back to fully in-person or hybrid events just yet:

While some investment banks are preparing for a tentative return to small in-person events in the coming months, the majority of investor events will likely continue to be held virtually this year, according to a study conducted by OpenExchange. Three out of four investor conferences during the second half of 2021 will be entirely virtual, according to OpenExchange’s survey of 139 decision-makers at 30 financial institutions.

The article says that sponsors are preparing for hybrid events, with 1/3rd expecting to hold their first hybrid investor conference by October and 2/3rds by the end of the year. Going forward, hybrid formats for investor conferences are expected to be the new normal, with 70% of 2022 events and 58% of 2023 events expected to have both physical and virtual components.

John Jenkins

May 19, 2021

Insider Trading: New York AG to Point & Shoot at Kodak?

According to this Reuters article, the NY AG is preparing to file an insider trading lawsuit against Eastman Kodak and its CEO.  The allegations arose out of last summer’s debacle surrounding insider transactions in Kodak stock in advance of the announcement of a potentially transformational new loan from the federal government. Here’s an excerpt from the Reuters piece:

The New York attorney general’s office is preparing an insider-trading lawsuit against Eastman Kodak Co and its top executive, focusing on stock purchases that preceded an ill-fated deal with the Trump administration to finance a pharmaceutical venture during the COVID-19 pandemic, according to the company and people familiar with the matter.

The emerging civil case centers on Executive Chairman Jim Continenza’s June 23, 2020, purchase of nearly 47,000 Kodak shares, Kodak said in a quarterly Securities and Exchange Commission filing on Monday. Continenza, the company chairman starting in September 2013 and executive chairman since February 2019, took on the additional role of CEO in July 2020.

The trades occurred weeks before the Trump administration unveiled a tentative agreement to lend the company $765 million backing production of pharmaceutical components for help fighting the pandemic. Kodak’s stock experienced a roller coaster following the late-July announcement, skyrocketing more than 1,000% before falling.

As Lynn blogged last September, a report by independent counsel retained by a Kodak special committee concluded, among other things, that the company’s CEO did not trade while in possession of MNPI (see the discussion beginning at p. 36). Among other things, the report noted that the CEO traded during an open window, and pre-cleared his trades with the company’s GC, who indicated that he didn’t believe that discussions about the potential loan had risen to the level of MNPI at the time of the CEO’s transactions.

That combination of factors would appear to make it difficult to satisfy Rule 10b-5’s scienter requirement, but that’s not a problem for NY AG Letitia James.  She has the Martin Act at her disposal – and there’s no need to prove scienter for civil or even misdemeanor criminal securities fraud claims under that nightmare of a statute.

As I’ve mentioned before, I grew up in Rochester, NY, and the parade of negative news about our fallen giant over the past several decades depresses me more than anybody who didn’t grow up there can begin to imagine. I remember how things used to be with Kodak, and it’s fair to say that I have a sentimental attachment to this company. As somebody once put it, “nostalgia – it’s delicate, but potent.”

Update: Here’s a statement on the matter I received from a spokesperson for Kodak:

“The Attorney General has threatened to file a lawsuit premised on an unprecedented and novel application of insider trading law that seeks to impose liability in the absence of evidence of intent. The threatened litigation would not be supported by legal precedent or the facts. Mr. Continenza did not engage in insider trading. He was not in possession of material non-public information when he made the trade at issue, and his small stock purchase fully complied with Kodak’s insider trading policies, was pre-approved by Kodak’s General Counsel, and was subsequently found to be compliant by outside counsel in an independent investigation. Importantly, Mr. Continenza has bought Kodak stock in virtually every open window period – and has never sold a single share. As we understand the Attorney General’s theory, the contemplated lawsuit would have a chilling effect on directors and executives of every public company, who could never invest in their own companies without fear of having good-faith decisions, pre-approved by counsel, second-guessed by regulators and charged as violations of law.”

PPP Fraud: Down the Shore, Everything’s Not Alright

Another place to which I have a pretty deep attachment is New Jersey. I was born there, still have lots of family there, and have been going “down the shore” for summer vacations on Long Beach Island for as long as I can remember.  But it turns out  – with apologies to Tom Waits – that down the shore, everything’s not alright. In fact, according to this ProPublica article, my favorite vacation spot is a target of opportunity for PPP fraudsters:

The shoreline communities of Ocean County, New Jersey, are a summertime getaway for throngs of urbanites, lined with vacation homes and ice cream parlors. Not exactly pastoral — which is odd, considering dozens of Paycheck Protection Program loans to supposed farms that flowed into the beach towns last year.

As the first round of the federal government’s relief program for small businesses wound down last summer, “Ritter Wheat Club” and “Deely Nuts,” ostensibly a wheat farm and a tree nut farm, each got $20,833, the maximum amount available for sole proprietorships. “Tomato Cramber,” up the coast in Brielle, got $12,739, while “Seaweed Bleiman” in Manahawkin got $19,957.

None of these entities exist in New Jersey’s business records, and the owners of the homes at which they are purportedly located expressed surprise when contacted by ProPublica. One entity categorized as a cattle ranch, “Beefy King,” was registered in PPP records to the home address of Joe Mancini, the mayor of Long Beach Township.

“There’s no farming here: We’re a sandbar, for Christ’s sake,” said Mancini, reached by telephone. Mancini said that he had no cows at his home, just three dogs.

Anyway, much of the problems arose out of loans initiated by an online lender, Kabbage, and the article says that they’re in large part the result of the program’s efforts to shove money out the door as quickly as possible during the height of the pandemic’s economic impact.  The bottom line is that this is yet another data point indicating that there’s going to be quite a mess to clean up over the next several years.

More on “Corporate Governance Gaming”: ESG Crusaders or Gritty Gadflies?

Last Friday, Liz blogged about the potential shareholder voting implications of the “gamification” of the stock market. She noted a forthcoming study that suggests the new Gen Z & Millennial investors who’ve recently entered the market might coalesce around ESG issues and drive greater corporate accountability. Liz expressed some skepticism about this potential outcome. Given what usually happens when the Internet gets its hands on anything, I’m downright dubious.

For example, remember when the British government decided to let the Internet name a new research ship, and ended up – hilariously – with “Boaty McBoatface”? How about when PepsiCo decided to hold an online “Dub the Dew” contest to let the Internet come up with a name for a new flavor of Mountain Dew? The top choices were “Hitler Did Nothing Wrong” and “Diabeetus.”

The bottom line is that “gamers gonna game,” and that on the Internet, the anarchy is the point. My guess is that with the meme stocks crowd, we’re more likely to see a push to elect Gritty to GameStop’s board than we are to see a push for a socially conscious ESG agenda.

John Jenkins

May 18, 2021

Crypto: The SEC’s Enforcement Scorecard

If you follow the SEC’s social media accounts, you know that almost anything the agency or commissioners post on any topic receives a deluge of responses from crypto fans ranting about the SEC’s enforcement actions targeting digital assets.  Regardless of the merits of those rants, a recent Cornerstone Research report shows that the SEC has brought quite a few crypto-related enforcement actions over the years. Here are some of the highlights:

– Through December 31, 2020, the SEC has brought 75 enforcement actions and issued 19 trading suspension orders against digital asset market participants

– More than 70% of the SEC’s actions involved allegations of unregistered securities offerings, while 58% of its cases involved allegations of unregistered offerings combined with fraud. Over half (52%) of the actions involved unregistered securities offering allegations relating to ICOs.

– Other allegations include failure to register as a broker or an exchange, failure to register swap offerings to non-eligible contract participants, and failure to disclosure promoter compensation.

– 43 enforcement actions were initiated in federal court, while 32 were brought as SEC administrative proceedings. Of the 43 federal court cases, 34 involved a mix of individuals and firms as defendants. In seven cases, the defendants were individuals only, while two cases involved firms only. In 19 of the 32 administrative proceedings, the respondents were firms only. The SEC charged individuals only in six actions, or a mix of individual and firms in seven actions.

Many involved in the digital asset space have speculated that the SEC might be a more crypto-friendly environment with Gary Gensler as chair, under the assumption that his greater understanding of crypto would lead to a lighter regulatory touch.  Based on his recent statements, however, while his tenure may see a push for greater clarity when it comes to regulation of digital assets as securities, that doesn’t necessarily translate into a “light touch.”

Staff Comments: “Hey, Where’s Your Earnings Release 8-K?”

For most companies, furnishing an Item 2.02 Form 8-K is a routine part of the earnings release process.  But in a recent comment letter to CSW Industrials on its 2020 Form 10-K, the Staff noted that it had seen earnings releases on the company’s website, but that the company had not furnished any Item 2.02 8-Ks. Naturally, the Staff’s comment was “please tell us why you have not furnished these earnings releases under Item 2.02 of Form 8-K.” The company’s response was interesting. Here’s an excerpt:

For many years, the Company has issued earnings releases related to completed fiscal periods after the Company has filed with the SEC its Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K relating to such fiscal periods. Further, the Company believes, based on reviews performed as part of the Company’s disclosure control procedures, that its earnings releases report substantially the same information contained in the applicable Form 10-Q or Form 10-K filings and have not disclosed any additional material non-public information related to the applicable completed fiscal period.

As a result, the company said that it “has not been required to furnish such earnings releases under Item 2.02(a) of Form 8-K.” After the Staff raised a further comment questioning whether certain disclosure in the earnings releases was contained in the company’s periodic reports, the company responded by pointing to the relevant language in those reports.  The Staff did not comment further.

Risk Factor Disclosures: Before & After

Last year, the SEC adopted amendments to Item 101, 103 & 105 of Regulation S-K. The amendments were effective in November, and this recent SEC Institute blog reports how one company responded to the changes to Item 105’s risk factor disclosure requirements in its recent Form 10-K filing. Here’s an excerpt:

In Lumen Technologies’ Form 10-K for the year-ended December 31, 2019, risk factors are on pages 20 to 48, 28 pages long. Risks described range from “Risks Affecting Our Business” to “Other Risks.” It would be fair to say that some of the risk factors, such as “We may not be able to compete successfully against current and future competitors” might be “risks that could apply generically to any registrant or any offering.”

After implementing the new disclosure requirements, and a major amount of work, in Lumen Technologies’ Form 10-K for the year ended December 31, 2020, risk factors are on pages 21 to 32. This is a reduction from 28 to 11 pages! The revised disclosures start with “Business Risks,” a simpler and more direct heading, and finish with “General Risks” as required by the new rule. Interestingly, the General Risks are less than one page. Competitive issues are addressed in a more tailored risk factor titled “We operate in an intensely competitive industry and existing and future competitive pressures could harm our performance.”

The blog quotes Associate GC David Hamm as saying that the company used the amendments to “take a fresh look” at its risk factor disclosure, which resulted in a more direct and more investor-friendly presentation.

John Jenkins

May 17, 2021

Human Capital Management: What Might a New Rule Proposal Look Like?

Speaking before the SEC’s 8th Annual Conference on Financial Market Regulation, SEC Chair Gary Gensler reportedly stated that the Staff was working on a new rule addressing disclosure of human capital metrics.  If you’re thinking, “didn’t they just do this?” the answer is “sort of.” Last year’s S-K modernization rules addressed human capital, but from a principles-based perspective only. Now, they’re talking about mandatory line-item disclosures focusing on specific metrics.

What might those metrics be? Commissioner Lee’s dissenting statement on last year’s rule adoption might provide some insight. In that statement, she cited favorably comments on the rule proposal received from the Human Capital Management Association, which called for a combination of a principles-based & line-item disclosures.  In particular, the HCMA cited four specific metrics that should be required disclosure for all registrants:

1. The number of people employed by the issuer, broken down by full-time and part-time employees along with contingent workers who produce its products or provide its services (independent contractors, supplied through subcontracting relationship, temporary employees, etc.);

2. The total cost of the issuer’s workforce, including wages, benefits and other transfer payments, and other employee expenses;

3. Turnover or similar workforce stability metric; and

4. Workforce diversity data, concentrating on gender and ethnic/racial diversity across different levels of seniority.

These four metrics also have been cited in media reports concerning Gary Gensler’s remarks about a new human capital rule proposal, and given Commissioner Lee’s prior favorable reference to the HCMA comment letter, it’s probably a pretty good bet that they are likely to be included in any proposal forthcoming from the SEC.

Reg D: 2013 Amendment Proposals Back On The Table?

In her keynote speech at last week’s conference, Commissioner Caroline Crenshaw expressed concern that the SEC has taken actions in recent years to make it easier for issuers and investors to access the private markets without having a lot of information about those markets. Here’s an excerpt:

So do the actions the Commission took to expand access to private markets further our agency’s mission? It is a question that is harder than it should be to answer, because for the most part, we lack good data on private issuers and offerings. What we do know is that the private markets have increased in size over the years, both in absolute terms and relative to the public markets. The amount of capital raised via exempt offerings now far outpaces the amount raised on the public markets. Offerings under Regulation D alone accounted for $1.5 trillion of proceeds in 2019, compared with $1.2 trillion in the public markets.

And yet, while these markets have been expanding, the information we are collecting about them has not. For the most part, we do not know who invested in these private market offerings or how their investments performed.

Commissioner Crenshaw went on to call for the SEC to adopt amendments to Reg D that were proposed in 2013 & subsequently fell off the face of the earth. In case you’ve forgotten, these proposals would:

– require the filing of a Form D in Rule 506(c) offerings before the issuer engages in general solicitation;
– require the filing of a closing amendment to Form D after the termination of any Rule 506 offering;
– require written general solicitation materials used in Rule 506(c) offerings to include certain legends and other disclosures;
– require the submission, on a temporary basis, of written general solicitation materials used in Rule 506(c) offerings to the Commission;
– disqualify an issuer from relying on Rule 506 for one year for future offerings if the issuer, or any predecessor or affiliate of the issuer, did not comply, within the last five years, with Form D filing requirements in a Rule 506 offering; and
– amend Form D to require additional information about offerings conducted in reliance on Regulation D.

The rule proposals received a lot of pushback from commenters, including this letter from the ABA’s Federal Regulations of Securities Committee, which contended that they were “especially ill-suited” for small business issuers, “which often operate without the advice of sophisticated counsel that would be necessary to ensure compliance with the proposed rules’ detailed requirements, and avoid their pitfalls.”

Crowdfunding: Corp Fin Updates Guidance on Form C EDGAR Filings

In March, I blogged about guidance on EDGAR filings of Form C that Corp Fin issued shortly after the SEC’s private offering simplification rule amendments went into effect. The first part of the original guidance addressed the fact that the form hadn’t caught up to the rule changes, and provided advice to companies that are taking advantage of the new $5 million size limit for crowdfunded offerings on how to fill out a form that only contemplates a $1.07 million maximum offering size.

On Friday, Corp Fin updated that guidance to reflect the fact that the form’s been updated to reflect the higher maximum offering size limit. Here’s the relevant language:

Effective May 10, 2021, the changes to the XML-based fillable form have been implemented and issuers are now able to, and must, provide accurate offering amounts in the XML-based fillable form and in the offering document attached as an exhibit to the Form C. An issuer that previously completed the offering amount fields by including $1,070,000 in the XML-based fillable form in reliance on prior staff guidance must update its Cover Page to provide the actual offering amounts if it files an amendment to the Form C after May 10, 2021.

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John Jenkins