It is with a heavy heart that I share the sad news that we lost a legend of the SEC’s Division of Corporation Finance and the securities bar, Abbie Arms. Abbie passed away on May 19, 2021 at the age of 73 after a long and difficult battle with lung disease. For many years, Abbie served in key senior positions in Corp Fin, where she shaped regulatory policy on many important capital markets and public company issues.
Abbie was a brilliant securities lawyer who was highly skilled at analyzing complex issues and formulating appropriate regulatory responses that were consistent with the Commission’s investor protection mandate. Abbie loved working at the SEC and mentoring and teaching young lawyers in the Division. In my formative years at the SEC, I learned much about the operation of the Securities Act from being in meetings with Abbie, and I still use and value those insights to this day.
After leaving the SEC, Abbie practiced for many years at Shearman & Sterling LLP, where she was able to assist the firm’s clients with her extraordinary knowledge and skills as a securities lawyer. She also served as a Trustee of the SEC Historical Society from 2007-2013. Abbie was a loving and compassionate person who was loved and admired by her family, friends, co-workers and community. We will greatly miss Abbie and we offer our sincerest condolences to her family and many friends.
The May-June issue of “The Corporate Counsel” newsletter is in the mail (try a no-risk trial). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. The issue includes articles on:
– Fun in the Summer — Navigating the Filer Status Maze
– Fighting to Keep Your Secrets — A Fresh Look at Confidential Treatment
Dave & I have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues and we’ve just posted one for this issue. Be sure to check it out!
According to this Institutional Investor article, a new study finds that “green bonds” proved to be an attractive safe haven investment during the pandemic:
Climate-friendly debt served as a better protection against large market fluctuations than gold, as well as performing better than other environmental, social, and governance investments, according to new research from Imran Yousaf of Pakistan’s Air University, Muhammed Tahir Suleman of the University of Otago in New Zealand, and Riza Demirer of Southern Illinois University Edwardsville.
In the paper, the trio argued that green bonds were the “preferable safe haven” investment for passive investors hoping to defend their portfolios against the “uncertainty” of the pandemic. Conventional stock portfolios that included green bonds saw the highest risk-adjusted returns during the pandemic when compared against equity portfolios supplemented by gold and other ESG assets, the researchers found.
That’s the good news. The bad news is that – at least on the junk end of the spectrum – green bonds may not turn out to be so green at the end of the day. The problem is that these issuers are disclosing to investors that they may not be able to use the proceeds of the financings for the purposes that they intended. The disclosure I’ve seen is pretty robust (check out the last risk factor on p. S-23 of Dana’s recent pro supp), so investors don’t have a lot of recourse if the proceeds aren’t deployed according to plan, but that doesn’t seem to bother many of them. Here’s an excerpt from this WSJ article:
Companies that issue green bonds create frameworks specifying the use of proceeds for objectives like transitioning to renewable energy. They also hire third parties to verify that the objectives are being met. If a borrower fails verification, however, bondholders have no legal right to seek compensation. “There are no mechanisms to ensure investors that the green investment will actually occur,” said Mitu Gulati, a law professor at the University of Virginia. “The only conclusion I can draw from that is that investors don’t actually care. It’s so much eyewash.”
The article says that the risk that climate-friendly promises may turn out to be illusory wasn’t a big concern when these securities were issued exclusively by investment grade commitments with long-held commitments to stability, but now, as junk issuers enter the market, the concern is that many of them may discover that Kermit the Frog was right – it’s not easy being green.
Shareholder activists have made effective use of social media platforms in their campaigns, but corporations have been slower to adopt non-traditional channels of communications with investors. According to this Corporate Secretary article, that’s another thing that’s changed due to the pandemic. Here’s an excerpt:
Historically, shareholder activists have been better at using social media and digital communications tools to wield influence during a contested situation, with many issuers taking a conservative approach to social media and digital communications. But the pandemic has forced a greater adoption of tools such as videoconferencing and social media communications, and Bruce Goldfarb, founder, president and CEO at Okapi Partners, says he’s seeing more adoption of social media this year.
‘There were some companies that used social media as part of their IR process prior to the pandemic – especially companies that already made use of social media in their marketing and sales efforts – but investors would much more frequently file materials they had posted on social media,’ he points out. ‘More companies have recently done so, and that evolution is at least partly attributable to the pandemic.’ Goldfarb adds that he is seeing more examples of additional proxy materials being filed with the SEC this year – particularly LinkedIn and Twitter posts.
The article says that companies are increasingly open to alternative channels of communication with shareholders, and that social media could be a particularly useful tool for shareholder engagement by companies that have seen a big jump in retail investors this year (gee, who might they be referring to?), but that they need support from their advisors and outside counsel.
The May-June issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:
– A Comparison of Public and Private Acquisitions: New Data Highlights Recent Trends in Private Company Deal Terms
– Representations and Warranties Insurance: No Longer Optional for Strategic Buyers
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
A few months ago, I blogged about the materiality standard and the hazards associated with the SEC serving up disclosure mandates designed to give investors “what they want.” But in a recent speech, Commissioner Allison Herren Lee put forward a different perspective on the materiality standard. She made several provocative comments in her speech, but to me the most striking was her statement that “[f]inally, investors, the arbiters of materiality, have been overwhelmingly clear in their views that climate risk and other ESG matters are material to their investment and voting decisions.”
I think Commissioner Lee is pushing the envelope here. Investors are not “the arbiters of materiality” under the securities laws. Instead, materiality is determined by a third party’s assessment of whether information would be significant to a hypothetical “reasonable investor” in making an investment decision. It’s an objective test, and it contemplates a very different inquiry from one that focuses on the subjective assessments of a particular investor or group of investors.
Don’t take my word for this – in the Reg FD adopting release, the SEC itself said that “materiality is an objective test keyed to the reasonable investor. . .” Prioritizing subjective and potentially agenda-driven investor statements about desired disclosure mandates isn’t a great fit with a purportedly objective standard. But such an approach would make it easier to avoid the need to show some financial consequences to public companies or the value of their stock before information could be regarded as material, and that may help explain its attraction to ESG disclosure advocates.
Financial considerations have always been fundamental to the materiality concept under the securities laws. After all, it’s a reasonable investor test and not a reasonable person test. I think this is where things get a little squishy with ESG disclosure. It’s indisputable that an issue like climate change will impose substantial costs on society as a whole. But it’s less clear that it will have a significant financial impact on most businesses and the value of their securities. In fact, a 2018 IPCC publication stated that “for most economic sectors, the impact of climate change will be small relative to the impacts of other drivers.”
For a financial regulator like the SEC, that discrepancy between societal costs and costs to public companies and markets creates a potential disconnect, the implications of which Commissioner Roisman highlighted in a recent speech:
It seems that some of the interest, particularly in “E” and “S” disclosures, is not in what risks environmental or social factors pose to the company, but rather what risks the company poses to, for example, the climate. To the extent that the interest is in understanding risks the company poses to the climate, what makes the SEC the appropriate federal government agency to require these disclosures, as opposed to, for example, the Environmental Protection Agency?
In a draft article submitted in response to the SEC’s request for comment on climate change disclosures, UVA law profs Paul and Julia Mahoney argue that the SEC is not the right agency to mandate ESG disclosures. They contend that the push for disclosure is being led by institutions whose purpose is in part “to pursue public policy goals outside the normal political process,” and whose statements asserting the supposed financial value of ESG are “cheap talk that conveys no information other than that the institution wants the SEC to require the disclosures.” What’s more, the article says that by doing so, the SEC “risks eroding public trust in its capacity and willingness to serve as an apolitical, technocratic regulator of the capital markets.”
The meme stock saga took another interesting turn last week, when the arbiters of materiality from Reddit charged Wall Street and drove several of their favorites to staggering new heights. That’s nothing new – it’s been happening all year. But what’s a bit different this time is the way that one company, AMC, has decided to whole-heartedly embrace its “apes.” This Verge article explains:
AMC announced today that it was creating AMC Investor Connect, “an innovative, proactive communication initiative that will put AMC in direct communication with its extraordinary base of enthusiastic and passionate individual shareholders to keep them up to date about important company information and to provide them with special offers.” This represents “a groundbreaking new approach” to communicating with retail investors, the company says. It’s a shame they didn’t put a bunch of rocket emojis in the announcement — after all, there’s no need to be coy. We all know exactly who AMC is speaking to, and if they sign up today, they’re getting free popcorn.
The AMC Investor Connect website bears virtually no resemblance to a traditional investor relations site, and is tied in with its existing “AMC Stubs” affinity program. Meanwhile, AMC’s CEO continued the company’s new age investor outreach when he sat down for an hour long YouTube interview on the “Trey’s Trades” channel, in which he made a pitch for support of the company’s proposal to authorize an additional 25 million shares of common stock. Apparently, he wasn’t wearing any pants during the interview, which I guess is a thing arbiters of materiality like meme stock CEOs to do these days.
Meanwhile, the SEC said it was observing the meme stock market for signs of “manipulative trading or other misconduct.” General goofiness, it appears, remains outside of the agency’s jurisdiction.
AMC needs those additional 25 million shares its CEO was lobbying for because it’s been taking advantage of its skyrocketing stock price to issue plenty of new stock. It raised over $500 million in an ATM offering launched last Thursday, and more than $1.2 billion over the last month. If you’re scratching your head about why anybody would buy newly issued stock at these valuations, well, according to this excerpt from the risk factors section of AMC’s pro supp, the company’s kind of wondering the same thing:
We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last. Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.
That sounds a lot like the disclosure Hertz put in the pro supp for its aborted offering last summer, and in the end, the retail investors who bought into that company did okay. But what are the odds for AMC’s new investors? According to analysts, they’re not real good – even after the capital raise, one analyst said that AMC’s stock would need to drop by 85% in order to appropriately reflect its intrinsic value.
You can certainly understand why AMC would want to use the opportunity created by the current craziness to raise additional capital, and that’s not an unprecedented step for a company in its position to take. But GameStop and the other similarly situated companies haven’t accompanied their opportunistic financings with aggressive efforts to promote their stock to retail investors at prices they acknowledge to be sky high.
That seems to me to be a very risky approach. If AMC’s valuation tumbles back to earth while it’s sitting on a pile of fresh cash or a nicely cleaned-up balance sheet, my guess is that there will be plenty of activist hedge funds attracted to it not by free popcorn, but by the smell of blood in the water.
Last month, Lynn blogged about calls for changes to Rule 10b5-1, and it now looks like potential changes are officially in the works. In remarks to the WSJ’s CFO Network Summit yesterday, SEC Chair Gary Gensler said that 10b5-1 plans had led to “real cracks in our insider trading regime” and announced that he had asked the Staff to provide recommendations on how the SEC might “freshen up” Rule 10b5-1. Gensler detailed a number of specific areas of concern in his remarks. These include:
– The lack of a mandatory “cooling off period” between the time a 10b5-1 plan is adopted and the first trade, which he said might be perceived by some bad actors as a “loophole” to participate in insider trading. Gensler noted that the idea of a cooling off period of between 4 to 6 months had received bipartisan support and should be explored further.
– The ability of insiders to cancel 10b5-1 plans at any time, which allows them to exit a plan while they’re in possession of MNPI.
– The lack of mandatory disclosure requirements regarding the adoption, modification, and terms of Rule 10b5‑1 plans.
– The absence of limits on the number of 10b5-1 plans that insiders can adopt. The ability to adopt multiple plans and cancel them may lead the. With the ability to enter into multiple plans, and potentially to cancel them, Gensler says insiders might have the mistaken belief that they a “free option” to select the most favorable plan to sell under.
Gensler also indicated that the Staff will look into other possible reforms to the rule, “including the intersection with share buybacks.” None of the specific areas of concern that the Chair identified in his remarks comes as any great surprise, and all involve actions that run contrary to consensus “best practices” for 10b5-1 plans. In fact, since Jay Clayton touched on many of these concerns about 10b5-1 plans in a November 2019 speech, this may be one of those rare areas where we might have reason to hope that proposed rule changes might actually receive bipartisan support among the commissioners.
If you’ve been reading my blogs for a while, then you know that the institutional investor-led crusade against dual-class IPO structures has long been one of my favorite hobby horses. I didn’t think there was any way that I could have been less sympathetic to institutional investors’ “buy first, whine later” approach to dual-class IPOs – that is, until I saw the disastrous Deliveroo IPO unfold across the pond.
This article from FT.com indicates that one of the reasons that the offering tanked is that investors balked at its dual-class structure. Of course, a dual-class structure is novel in London, and it was also far from the only bit of hair on that deal, but some of the City’s biggest investors nevertheless cited it as one of the reasons they refused to sign-on. I say good for them – and what’s stopping U.S. institutions from doing the same?
In responding to a question like this, institutions frequently point to supposedly insurmountable “collective action problems” around this issue, or they cite the plight of the poor index funds, which have no choice but to buy stocks included in the relevant indices. But I think there’s evidence to suggest that if an IPO truly raises significant governance concerns, institutions are willing to walk away from it. I also think that whatever its merits when it comes to aftermarket purchases, the point about index funds doesn’t carry much weight when it comes to pushing back against dual-class IPOs, because index funds don’t buy IPOs.
All that leads me to believe that complaints about dual-class IPOs aren’t about “good governance” – whatever that means. Instead, they’re tactical. They’re designed to ensure that investors who provide fresh capital at the time of the IPO or afterward ultimately have the upper hand at public companies.
There’s nothing wrong with that objective, but I don’t believe there’s anything wrong with founders using their leverage to push back against it. There’s no reason for the exchanges, the SEC, Congress or the Delaware legislature to intervene. Institutions have all the tools they need to fight this fight on their own. In fact, they have trillions of them.