The Wilson Sonsini report reviews IPO filing, pricing, and value statistics for 123 initial public offerings completed by U.S.-based technology and life sciences companies between January 1 and June 30, 2021. In addition, the report addresses governance provisions, ownership & structure, and defensive measures. There are all sorts of interesting tidbits in here, including this excerpt on dual class capital structures:
Of the 123 companies considered, 36 companies (29.3%) had multiple classes of common stock. Of those 36 companies, 29 were technology companies and seven were life sciences companies. Thirty-two of the 36 companies implemented dual-class common stock. Four companies implemented multi-class common stock, all of which were technology companies. None of the life sciences companies implemented multi-class common stock.
Typically, when a company has multiple classes of stock, one class has more voting power while the other class has limited or no voting rights. Dual- or multi-class stock is often implemented to give existing stockholders—including founders or other executives—more control. However, multiple classes can be implemented for other reasons, including company structuring and regulatory compliance reasons.
Many companies that implement a dual- or multi-class structure with high-vote shares include a sunset provision in the charter where the high-vote shares fall away upon the occurrence of one or more specified conditions, such as the date on which all high-vote shares represent less than a certain percentage of all shares outstanding, after a specified time period, or upon the occurrence of a specific event, such as the death of a founder. Of the 36 companies that had multiple classes of common stock, 28 companies (77.8%) had a sunset provision.
The report also briefly discusses the prevalence and terms of early lock-up releases, concurrent private placements, indications of interest, direct listings, and directed share programs.
– John Jenkins
Watchdog Research recently reported the results of its analysis of trading by public company executives, which indicated that there’s a correlation between executives dumping large amounts of stock and subsequent securities class action filings. While acknowledging that executives often sell some stock to support their lifestyle, Watchdog assigned a “red flag” to sales involving more than 50% of an executive’s holdings or sales of more than $500K by either the CEO or the CFO. Here’s what they concluded from analyzing those red flag transactions & class action filings over a five-year period:
In our analysis we found that red-flag insider sales nearly doubled the probability that a company would be subject to a securities class action lawsuit in the following year. Interestingly, this correlation between insider sales and securities class actions is significantly weaker if you look at events in the same calendar year. A red-flag insider sale only increases the probability of having a Securities Class Action during the same calendar year by a factor of 1.35.
This disparity in risk between the year the trade is made, and the year following the trade means that the correlation is not simply due to the fact that both red flag insider sales and securities litigation disproportionately affects large companies. The fact that the association between insider sales and securities litigation grows stronger over time has troubling implications. It indicates that executives may be trading on material information concerning potential adverse events as much as a year before that information reaches the public.
– John Jenkins
Okay, unlike the “shadow trading” insider trading case that Liz blogged about last week, the one announced by the SEC yesterday was pretty prosaic. It basically involved adding a tippee defendant to an ongoing enforcement proceeding. Here’s an excerpt from the SEC’s press release:
The Securities and Exchange Commission announces insider trading charges against Robert J. Maron of Thousand Oaks, California, who generated more than $1 million in profits by trading in the securities of Illumina, Inc. ahead of an October 10, 2016 Illumina financial performance announcement.
The SEC’s amended complaint, filed on August 30, 2021 in the United States District Court for the Southern District of New York, alleges that Martha Patricia Bustos, formerly an Illumina accountant, tipped Donald Blakstad in advance of Illumina’s October 16, 2016 announcement. Blakstad, in turn, tipped Maron, who purchased Illumina securities and realized more than $1 million in profits.
Yes, you’ve seen cases like this a million times, so why am I blogging about it? Well, it turns out that according to the SEC’s press release, the new defendant is a “Calfornia-based watch dealer,” and the chance to pen a headline that was such an easy play on “Who Watches the Watchmen?” was more than my boomer dad brain could resist.
– John Jenkins
It isn’t unusual to see a registration statement or a prospectus supplement include a recent developments section disclosing “flash numbers” – preliminary revenue and income information for a quarter that hasn’t yet been finalized. The Staff scrutinizes flash number disclosures pretty closely if they’re reviewing a filing, and they often have questions for the issuer about the basis for its disclosure and whether it is appropriately balanced.
This recent Bass Berry blog points out that the Staff’s comments may also target disclaimer language relating to the flash numbers. The blog cites a recent IPO registration statement that included flash numbers accompanied by the following disclaimer:
This preliminary financial information is not a comprehensive statement of our financial results for this period, and our actual results may differ materially from these estimates due to the completion of our financial closing procedures, final adjustments, and other developments that may arise between now and the time the closing procedures for the fiscal quarter are completed.
The Staff asked the company to remove the disclaimer, noting that “If you choose to disclose preliminary results, you should be able to assert that the actual results are not expected to differ materially from that reflected in the preliminary results.” The company complied with the comment. This excerpt from the blog lays out the key takeaway for public companies from this exchange:
This comment letter exchange serves as a reminder that the SEC Staff generally disfavors disclaimer language aimed at limiting investors from relying on the information being provided. (As another example, see the Titan Section 21(a) Report related to whether investors could rely on the reps and warranties in a merger agreement.) As such, companies that are faced with issuing preliminary financial results, whether in a ’33 Act or ’34 Act setting, should ensure that they are comfortable with investors relying on the information presented, even if the results are only preliminary and unaudited.
I’ve always found the issues surrounding the use of flash numbers to be extremely interesting – and apparently many of you have as well. In fact, our 2017 webcast on the use of flash numbers in offerings was one of the most popular we’ve ever done. It may be time to think about an encore in the near future.
– John Jenkins
This recent blog from Perkins Coie’s Jason Day discusses the merits of in-house lawyers attempting to keep on top of SEC Staff comment letter trends. The short version is that Jason thinks it’s probably best to rely on your outside counsel & auditors to monitor the big picture, but there is merit in keeping an eye on the comments your peer companies are receiving. The blog also offers up some helpful tips for anyone – whether in-house or at a law firm – who is trying to monitor comment trends:
Know the Current Hot Topics –The SEC typically focuses many of its comments on several current hot button issues (e.g., financial measures not in accordance with generally accepted accounting practices, fair value measurements and estimates, loss contingencies, or segment reporting, among others).
Monitor Peer Comments –You can prepare for and preempt potential SEC comments before you file by knowing the current hot button issues. You can track and monitor the comments and responses of your industry peers or proactively consult with your audit firm or outside counsel for updates on emerging comment trends.
Monitor Broader Disclosure Trends – While its prudent to stay ahead of SEC comment trends to preempt easily addressed comments, don’t lose sight that many current disclosure trends are not driven by SEC rules or comments. Today’s SEC disclosure trends, like the current focus on ESG topics, arise from investor, proxy advisor or stakeholder initiatives with SEC rulemaking catching up later, if at all.
This is all good advice, but I’m particularly enthusiastic in my endorsement of the suggestion to monitor peer group comments. I’ve always been surprised at how relatively few companies seem to monitor the comments that their peers receive on a regular basis, but I’ve also never seen a lawyer who flagged a significant peer group comment trend in advance not end up being a hero to the entire corporate SEC reporting team.
– John Jenkins
Inflation may be haunting many areas of the economy, but the SEC’s filing fees continue their deflationary trend. Last week, the SEC issued this fee rate advisory that sets the filing fees for registration statements & certain other transactions for fiscal 2022. The current filing fee rate is $109.10 per million (the same rate applies under Sections 13(e) and 14(g)). Under the SEC’s new order, the rate will decrease to $92.7 per million. That’s a 15.0% decrease, and it follows last year’s nearly 16% decrease. As always, the new rate will apply effective October 1, 2021, which is when the SEC’s new fiscal year begins.
– John Jenkins
We’re regularly posting new podcasts for members! They’re perfect for drive-time if you’re traveling over these final summer weekends. Here are the latest episodes:
1. A 30-minute interview of Professor Marc Steinberg about his book “Rethinking Securities Law,” in which we discuss:
– What led Marc to write the book
– Why the securities laws should impose an affirmative duty to disclose material information
– How market confidence would improve if insiders were required to make Section 16 filings *before* they trade, and if Rule 10b5-1 reforms were adopted
– Federal corporate governance concepts including independent board chairs, employee representatives on the compensation committee, and more
– Giving “say-on-pay” more teeth
– Why the SEC’s current focus on ESG disclosure is misplaced
2. A 13-minute interview of Davis Polk’s Ning Chiu, as part of the “Women Governance Trailblazers” series that I co-host with Vontier’s Courtney Kamlet, in which we discuss:
– Ning’s path to becoming a Partner in Davis Polk’s Capital Markets Group
– What’s surprised Ning as she’s progressed in her career
– How Ning helps mentor rising governance stars at her firm, and how she serves as a thought leader
– How Ning is advising her clients as the focus on human capital management other “ESG” topics increases
– What Ning thinks women in the corporate governance field can add to the current conversation on the societal role of companies
3. A 19-minute interview of Uber’s Marian Macindoe, as part of the “Women Governance Trailblazers” series that I co-host with Vontier’s Courtney Kamlet, in which we discuss:
– Marian’s career path from being a senior proxy research analyst at Glass Lewis, to Chevron, to Charles Schwab, to her current role as Head of ESG Strategy & Engagement at Uber
– What’s surprised Marian as she’s progressed in her career
– What major governance shifts Marian has noticed over the years in her different roles
– One thing Marian would like people to know about ESG and investor engagement isn’t typically discussed
– What Marian thinks women in the corporate governance field can add to the current conversation on the societal role of companies
– Liz Dunshee
I blogged last week about the SEC’s insider trading case against Medivation’s former biz dev guy – and I confess I struggled with the headline! I wasn’t really sure what to make of the allegations. Thankfully, a couple of members sent resources – and we’ve been posting additional memos in our “Insider Trading” Practice Area. This Wachtell Lipton memo expands on issues the case could turn on:
Most corporate insider trading policies include a provision similar to Medivation’s prohibition of trades in the securities of other companies on the basis of the employer’s information. But the Panuwat allegations are quite different from the concerns that usually animate such policies; for example, companies recognize that their employees may learn of confidential plans to enter into a material contract with a supplier, to acquire a target company, or to terminate a material relationship with a vendor, and accordingly, their policies prohibit trading in the securities of the supplier, target or vendor before the news becomes public.
By contrast, the connection between the information that Panuwat allegedly received and the company in whose securities he traded was indirect, and the information did not arise from any dealings between his employer and Incyte. As the Panuwat litigation proceeds, the issue of materiality is likely to be hard-fought. The courtroom battle can be expected to center on issues such as how likely or uncertain it was that the Medivation news would affect Incyte’s stock price, as well as on the indirect nature of the connection between Medivation’s information and the securities in which Panuwat traded. The case will likely also test the SEC’s assertion that Panuwat misappropriated Medivation’s information when he traded. The courts will ultimately need to determine whether the misappropriation theory of insider trading liability extends to these facts.
In this 20-year old article, Yale Law Prof Ian Ayres & Stanford Law Prof Joe Bankman call this type of transaction “trading in stock substitutes” – and say that it’s legal and somewhat common. A similar analysis from just last year by Mihir Mehta, David Reeb and Wanli Zhao calls it “shadow trading.” According to the authors, shadow trading remains pretty widespread. But it’s an untested legal theory because it’s almost never prosecuted – in part because it’s difficult to detect. This new case suggests that the SEC’s data analytics are getting more advanced, and now a court has a chance to weigh in on whether or not this activity is legal. Here’s another nugget from the study:
Firms have incentives to prohibit employees from using their private information to facilitate shadow trading as the public revelation of such activities could adversely affect their business relationships and thus, their operations and profits. … [F]irm-mandated prohibitions appear to be effective. Our results show that shadow trading is significantly higher when source firms do not prohibit employees from engaging in shadow trading relative to when they prohibit shadow trading. Although mostly untested in the U.S. judicial system, such company regulations arguably create a fiduciary responsibility for employees not to exploit their private information in economically-linked firms.
As I pointed out last week, Medivation’s policy did contain that type of broad prohibition, according to the SEC’s complaint. That could end up being an important fact. For more analysis, see this Cooley blog.
SEC Enforcement has been busy on insider trading cases. Last week, they also announced charges against former employees of a popular streaming service who were allegedly tipping non-public info about subscription numbers to friends & family who traded in advance of earnings announcements – to the tune of $3 million in profits. In another recently announced case, the complaint alleges that the wife of a guy on a deal team traded in target stock unbeknownst to her spouse. All good fodder for your compliance programs…
– Liz Dunshee
Here’s something our colleague Lawrence Heim blogged last week on PracticalESG.com:
I’ve advocated for replacing outdated “sustainability” lingo with the more up-to-date (and perhaps better-marketed) term “ESG.” But according to this recent survey from the US Chamber of Commerce, NSADAQ, the Silicon Valley Leadership Group and other trade organizations, the initialism may be picking up some baggage of its own.
The survey – reflecting responses from 436 CEOs, CFOs, GCs, corporate secretaries, IR and sustainability folks at companies across industries and market caps – is aimed at influencing the SEC’s potential ESG disclosure proposals. Only 8% of the respondents feel that “ESG” encompasses a generally understood set of issues that can be easily defined by regulators. 61% said it’s a subjective term that means different things to different companies and can’t be easily defined by regulators.
Here are some of the other findings:
– 59% of the respondents have increased the amount of climate disclosure they provide since 2010, with half of those doing so in their Risk Factors disclosure (Item 105 of Regulation S-K).
– Half of the respondents think standard ESG disclosure frameworks are confusing and address immaterial information – but they use them anyway: 44% use SASB, 31% use GRI and 29% use TCFD. Surprisingly, 41% of respondents do not rely on any standard-setting body in developing their ESG disclosures for SEC or other communications.
– There is overwhelming agreement (95%) that shareholders are the intended audience of ESG disclosure. Other audiences receiving more than 80% of votes are employees, customers and ESG standards/ratings bodies.
– Despite effort put into the disclosures, one-third of the respondents “seldom” hear feedback from shareholders, with only 41% indicating they “sometimes” hear from shareholders.
– 63% communicate to shareholders about climate change.
– 89% support tailoring ESG disclosures for smaller and/or newly public companies.
– 24% of companies would support CEO/CFO certifications of climate change disclosures, with 22% supporting a requirement for third-party assurance. 47% oppose executive certifications and 57% oppose assurance. A mere 28% of respondents currently engage third parties for assurance or audits of their ESG disclosures.
What This Means
Regulators may take the report findings as weighing in favor of principles-based disclosure, which could simplify the SEC’s rulemaking effort. The downside of principles-based disclosure is that it may not provide the comparability that investors are looking for. And if it doesn’t, then companies might still find themselves wading through mountains of surveys and conflicting disclosure requests.
ESG and sustainability professionals should thoughtfully consider what I believe is a most important message: even though “ESG” has the attention of executives and management at the moment, that may be tenuous. Without a regulatory mandate, executives may question the value of costs/efforts that are voluntary, fractious, inconsistent, do not lend themselves to comparability with peers, and which result in limited feedback from intended recipients. Where ESG initiatives are clear and direct operational or strategic business imperatives, executives will support them as such.
– Liz Dunshee
The SEC announced last week that it’s releasing free “Application Programming Interfaces” that aggregate Edgar submission history and XBRL data. While institutional investors already use XBRL to analyze massive amounts of data, the retail crowd has largely ignored the resource. APIs could change that, because they’ll allow developers to create apps that directly cater to individuals.
The APIs are updated in real-time as filings are made – with submission APIs having a processing delay of less than a second and the xbrl APIs having a delay of under a minute (potentially longer during peak filing times). Time will tell whether the meme stock traders will take advantage of this new information flow. The SEC even has a page that shows how to program with these APIs. It could be a good time to learn how to code!
– Liz Dunshee