We’re 6 months in to the Biden regime – and even though Gurbir Grewal just officially joined the Commission as the Director of the Division of Enforcement yesterday, it’s been quite a year already. And, every indication is that more scrutiny is expected going forward. This 21-page Gibson Dunn memo recaps trends & significant cases in the first half of the year. Here are some of the biggies:
1. Climate & ESG Task Force – charged with developing initiatives to identify ESG-related misconduct and analyzing data to identify potential violations. Additionally, the task force aims to identify misstatements in issuers’ disclosure of climate risks and to analyze disclosure and compliance issues related to ESG stakeholders and investors.
2. SPACs – A string of pronouncements in the spring was followed by announcement of the first enforcement action earlier this month.
4. Shifting Approach to Corporate Penalties – In March, SEC Commissioner Caroline Crenshaw criticized the SEC’s 2006 guidance on its approach to penalties. Gibson Dunn notes that if the Commission is no longer following the 2006 guidance, then untethered from a consideration of corporate benefit or shareholder cost-benefit, the Commission’s posture on corporate penalties is vulnerable to subjective assessments of egregiousness and corporate cooperation. Moreover, unlike calculations under the US Sentencing Guidelines, there is no public disclosure of exactly how the SEC reaches a particular penalty, leaving companies and counsel unable to understand the basis for any negotiated penalty amount.
5. Discovery of Staff Positions – In recent litigation, defendants have been able to get internal Staff documents and even depose former Corp Fin Director Bill Hinman.
6. Whistleblower Awards – Coming in at a record pace.
As we look toward the Form 10-K deadline for June 30th companies, here’s a reminder of our benchmarking survey on “human capital” disclosures. The responses below are from companies with market cap exceeding $10 billion (check out the full results for responses from different market caps):
1. Which HCM topics will you discuss in your Form 10-K? (select all that apply)
– Description of company’s diversity and inclusion initiatives – 72%
– Workforce health & safety – 72%
– Information about company culture and/or employee engagement – 67%
– Company investment in continuing education/training opportunities – 44%
– Information about retention/turnover at your company – 28%
– Succession planning – 11%
– Legal or regulatory proceedings relating to employee management – 0%
2. Will you include quantitative HCM disclosures? (select only one)
– We’re considering doing so, but we haven’t decided yet – 52%
– Yes, we’re planning to include some quantitative disclosures – 32%
– No, we’re not planning to include any quantitative disclosures – 16%
3. What type of quantitative data is your company planning to disclose? (select all that apply)
– Employee turnover rates – 67%
– Workforce gender, racial/ethnic diversity composition data – 67%
– Breakdown of full-time versus part-time employees – 33%
– Scores from employee engagement surveys – 33%
– Workforce health & safety metrics – 33%
– Internal promotion rate – 17%
– Absenteeism rate as a percentage of total hours worked – 0%
– Dollar amount of company investment in continuing education/training opportunities, such as total spend on training per employee per year – 0%
– Geographic mix of employees – 0%
– Mental health well-being rate – 0%
– Pay equity metrics – 0%
– Volume of legal/regulatory proceedings related to employee management – 0%
Robinhood – the app that set retail stock trading on fire – is itself going public this week. Here’s the Form S-1, which says that the company plans to sell up to one-third of its IPO shares directly through its app. The deal is getting a lot of press – and this Nasdaq article says it’s just one of 17 IPOs on the ticket for this week. This week’s activity isn’t unusual, either. Including SPAC shells, there were 1,070 IPOs during the first half of this year. 1,070!
With the IPO market remaining hot for about a year now – and, as John blogged last week, the SPAC assembly line cranking back up – is it safe to say that the decades-long trend of declining public companies is reversing? As of the end of last year, the number of public companies had already climbed modestly – and this EY memo elaborates on encouraging stats from the first half of 2021:
– The first half of 2021 (1H 2021) saw 1,070 IPOs with total proceeds of US$222b. Globally, deal numbers increased 150% year-on-year (YOY), while proceeds rose by 215%. Strong performance between January and April plus June, pushed 1H IPO deal numbers and proceeds to their highest levels in 20 years. 1H 2021 deal numbers were 18% higher and proceeds were 71% higher compared with the former record of 1H 2007 (908 IPOs, raising US$129.8b).
– Equity markets, buoyant from positive corporate results and growth forecasts on gradual economic recovery, and market liquidity have hit new heights and provided favorable conditions for the IPO mark.
– Q2 2021 IPO deal numbers and proceeds were 597 IPOs and US$111.6b, respectively. Q2 2021 was the most active second quarter by deal numbers and proceeds in the last 20 years, and beat previous records in Q2 2007 (522 IPOs raising US$87.7b).
– Q2 2021 was 206% and 166% higher, respectively, by deal numbers and proceeds compared with Q2 2020.
– A healthy pipeline of unicorns, which are set to make their way to public markets in 2H 2021, should help to ensure a busy Q3 when the traditional holiday periods will still be affected by the travel restrictions in many countries. And despite the slowdown in SPAC IPOs in Q2 2021, companies can now realistically assess the different ways of coming to the capital market, adding SPAC mergers and direct listings into their traditional IPO considerations.
The memo says plenty of industries are “winners” in this frothy market – tech, healthcare & industrials, materials, companies that benefit from lockdowns…and also those expecting a payday when things open back up. The jury is out on whether it’s a bubble, but it’s worth enjoying the moment.
If you’re newly public – or advising IPO companies – don’t miss our August 25th webcast, “Newly Public: Building Reporting & Governance Functions.” Hear David Bell of Fenwick, Jared Brandman of National Vision, Courtney Kamlet of Vontier and Trâm Phi of DocuSign discuss lessons learned from their experience successfully managing the process of going through the IPO and creating processes from scratch.
The reason I get so excited about the rising number of public companies is because it means more & more interesting businesses – and more & more great people – are joining our community. Not to mention, we all get to do more of the securities & corporate governance work we like.
So, who are the newest issuers? This site names 644 companies that have gone public so far this year – and this “IPO tracker” sorts 47 tech IPOs by type of offering (traditional IPO, direct listing, de-SPAC).
John blogged last week about Robinhood’s “non-lockup” – allowing up to 15% of shares held by employees, officers & directors to be sold immediately upon commencement of trading. Tulane Law prof Ann Lipton has now taken a deeper dive into what this could mean for Section 11 liability. Here’s an excerpt:
Section 11, of course, permits purchasers of registered securities to sue when the security’s price drops below the offering price, if the registration statement contains false or omitted information. Section 11 claims don’t require a showing of scienter, but there’s a catch: the plaintiff must be able to show that his or her shares were, in fact, issued pursuant to the defective registration statement; unregistered shares, or shares issued pursuant to some other registration statement, won’t qualify. Which means, if there’s a “mixed” pool of shares trading – some of which were issued on the defective registration statement, and some of which were not – an open-market purchaser will have trouble establishing that his or her shares were part of the registered group, which could bar Section 11 claims no matter how deceptive the registration statement may turn out to have been.
As I previously posted, this requirement has already created some havoc in the context of direct listings – and the Slack case, described in my blog post, has been pending before the Ninth Circuit basically forever – but most traditional IPOs require that pre-IPO shares be locked up at least for 180 days after the offering. The lockup means that at least for the first 180 days, all shares available to trade are registered shares, and anyone who buys in that period will be able to show that their shares were traceable to the registration statement. If there’s a problem with that registration statement, those early purchasers will be able to advance Section 11 claims.
Currently, the law isn’t clear on whether – or to what extent – Section 11 claims will be barred by the mixing of unregistered shares along with registered shares in an offering, or at what stage of litigation plaintiffs have to prove “traceability.” One reason Robinhood’s IPO is interesting is because it may give courts a chance to weigh in.
The theory behind the proxy advisory industry is that it helps its clients fulfill their fiduciary duties by allowing them to vote their shares in accordance with what their informed preferences would have been if they did their own research. A recent study suggests that this isn’t how it works in practice. Here’s an excerpt from the abstract:
Our main finding, for the period 2004-2017, is that proxy advice did not result in funds voting as if they were informed – more often than not it pushed them in the opposite direction – and this distorting effect was particularly noticeable for ISS. The finding is robust to several strategies designed to control for endogeneity of acquiring information and seeking proxy advice, including fixed effects and instrumental variables.
We also show that advice distorted votes toward policies favored by socially responsible investment (SRI) funds, and provide suggestive evidence consistent with the idea that proxy advisors slanted their recommendations toward the preferences of SRI funds because of pressure from activists.
The study started by looking at how informed funds (those that accessed proxy materials on EDGAR) voted, and compared that to how the funds that relied on proxy advisors voted across a range of 9 common governance-related proposals (these included board declassification, independent chair, majority vote, political contributions and proxy access proposals). With the exception of declassification proposals, the study found that those funds that relied on proxy advisors voted more frequently in favor of these proposals than did their informed counterparts. The study found that ISS’s advice moved its customers in the “wrong” direction on 7 out of the 9 proposals. Glass Lewis fared better, with its advice moving customers in the same direction as informed funds on 6 out of the 9 proposals.
So, this study suggests that proxy advisor voting recommendations are slanted because of activist pressure, which results in their non-SRI clients often voting in ways that are contrary to what their informed preferences would have been. If that holds up, it’s not a good look for the proxy advisors or the fiduciaries that hire them.
Here’s another study that’s sure to honk off the governance-industrial complex. Critics of some of the corporate governance reforms put in place over the past two decades like to suggest that the increased “navel gazing” required of corporate boards in the name of good governance makes public companies less innovative. According to a recent study, they may be on to something. Here’s the abstract:
In this study, we investigate the effect of corporate governance reforms on corporate innovation by constructing a comprehensive firm-level panel dataset across 58 countries from 2000 to 2015. We find that both the quantity and quality of innovation decrease after the initiation of the reforms. Affected firms also conduct less innovation that explores new knowledge versus that exploits existing knowledge.
The effect is more pronounced for firms operating in more competitive industries or with higher operational uncertainty. The results suggest that corporate governance reforms may induce managerial myopia and mitigate long-term investment in risky innovation.
Maybe this explains why we get a billion new smart phone apps every year but I’m still waiting for my jetpack.
Earlier this week, I blogged about the phenomenon of “remote-first” public companies that purportedly don’t have principal executive offices. Keith Bishop recently blogged that the location of a company’s principal executive offices can have some important real world implications – including determining whether the company is subject to California’s board gender diversity statute. Here’s an excerpt:
California’s new board gender quota law places great weight on the location of a corporation’s principal executive offices. The law applies to a publicly held foreign corporation when its principal executive offices, according to its Form 10-K, are located in California. Cal. Corp. Code § 301.3(a). The law also applies to a publicly held domestic corporations, but it is not clear whether it applies only when their principal executive offices are located in California.
Keith notes that the SEC doesn’t define the term “principal executive offices” for purposes of 10-K filings and provides some examples – in addition to our homeless issuers – of companies have taken a somewhat “flexible” approach to where their principal executive offices are located.
Most of us look at climate change disclosure obligations in the context of what the SEC now requires or what the agency will require in the future. This Winston & Strawn blog provides a reminder that other disclosure obligations may exist – and that alleged violations of them are being aggressively pursued by state AGs. The blog discusses litigation brought by Massachusetts against ExxonMobil alleging that it deceived consumers about the impact of climate change on its business. In addition, this excerpt lists some other pending actions by state AGs targeting climate-related disclosures:
– Connecticut. Attorney General William Tong sued Exxon under the Connecticut Unfair Trade Practices Act. This suit alleges: “ExxonMobil knew that continuing to burn fossil fuels would have a significant impact on the environment, public health and our economy,” yet ExxonMobil did not disclose that to the public.
– Delaware. Attorney General Kathleen Jennings filed a lawsuit against BP America Inc. and many other companies. The state asserts common law claims and a claim under Delaware’s Consumer Fraud Act. It alleges the defendants’ failures to disclose “their products’ known dangers—and simultaneous promotion of their unrestrained use—drove consumption, and thus greenhouse gas pollution, and thus the climate crisis.”
– District of Columbia. Attorney General Karl Racine filed a lawsuit against BP plc, Chevron, Royal Dutch Shell, and others. The suit similarly alleges these entities failed to disclose to consumers the role their products play in causing climate change.
– Minnesota. Attorney General Keith Ellison filed a complaint against ExxonMobil, the American Petroleum Institute, Koch Industries, and Exxon and Koch subsidiaries. It similarly accuses the defendants of insufficient disclosure and acts associated with climate change.
The blog also says that while most of the actions so far have targeted the oil & gas industry, state AGs are on record as having said that most U.S. companies have not adequately considered or disclosed climate-related financial risk. The blog says that they are eyeing tech companies and those in the agriculture sector as possible litigation targets.
While SPACs have been a hot property in the capital markets, it turns out that they’ve been a sure thing for short sellers too, or at least that’s what this excerpt from a recent Institutional Investor article says:
Even as the broader stock market hit a record in the first half of 2021, with the S&P 500 index gaining 15%, short sellers found what has seemed to be a surefire place to make money: special-purpose acquisition companies. Since SPACs began to soar last year, activist short sellers have set their sights on 22 of them. The vast majority of those — 16 — were the subject of short reports this year, according to Breakout Point, a Germany-based research firm and data provider.
The short sellers have an impressive record: One week after they unveiled their SPAC targets, the stocks fell 14.2% on average, Breakout Point said. And they kept falling. After one month, they were down 24.7% on average. Moreover, “SPACs are better performing” than other short targets over the past year and a half, Breakout Point’s Ivan Cosovic told Institutional Investor. Since 2020, the stocks of SPAC shorts have declined 17.5% on average year to date, while the average decline of all new activist shorts was 13.5%.
One notable exception to this string of short-seller wins: SPAC pioneer Virgin Galactic. The article says that the stock’s up 44% since a short report was issued on it in early June. I guess the lesson is that you shouldn’t bet against billionaires who want to be astronauts.