Companies that decide to defer their IPO plans in light of current market conditions would be wise to spend some time on efforts to improve the diversity of their boards. This WilmerHale memo (p. 13) addresses SEC & Nasdaq rules, proxy advisor & institutional investor policies, state law requirements and other drivers of increased board diversity that need to be considered in the IPO planning process. Here’s an excerpt on the growing number of state law initiatives addressing board diversity:
States are playing an increasingly active role in promoting board diversity among companies that are incorporated under their laws or satisfy other criteria. For example, California and Washington mandate specified levels and types of board diversity, while Illinois, Maryland and New York mandate disclosure regarding board diversity. Other states are considering mandatory board diversity legislation, or have adopted (or are considering) non-binding resolutions urging public companies to increase board diversity. This is a quickly evolving area; companies need to monitor developments in applicable states to remain in compliance.
The memo also points out Goldman Sachs’ decision not to underwrite deals for companies that don’t satisfy board diversity standards. While it says that other bulge-bracket banks haven’t as yet followed suit, it also emphasizes that the momentum created by various other stakeholders’ efforts to promote diversity is something that needs to be taken into account by IPO candidates.
According to this Audit Analytics report reviewing 21 years of “going concern” qualifications in public company audit reports, 2020 was a bit of a milestone year. Here’s an excerpt from the report’s intro:
The number of companies that received a going concern opinion during fiscal year (FY) 2020 declined to a record low of just 1,261. The percentage of companies that received a going concern opinion during FY2020 also declined to a record low of 17.9%. Going concern opinions have been declining since they peaked during FY2008 with 2,851 – during the height of the financial crisis. FY2008 also saw a high of 28.2% of companies receive a going concern opinion.
The gradual decline in going concern opinions since FY2008 had brought the percentage of companies that received a going concern opinion in line with pre-financial crisis figures. But the steepness of the FY2020 decline has brought all new lows. The decline was led by improvements from smaller and mid-size companies. Non-accelerated filers saw a 10.5 percentage point decline, and accelerated filers saw a 5.5 percentage point decline in the percentage of companies that received a going concern opinion during FY2020.
The report also addressed the reasons for going concern qualifications. Many reports listed multiple factors, but leading the pack was “recurring losses,” which was cited in 71% of all 2020 going concern opinions. While that’s down from its peak of 85% in 2018, the recurring losses issue was still cited twice as much as cash constraints, which were the second most frequently cited issue. The report notes that despite the SPAC boom, the percentage of reports citing no or limited operations as a reason for a going concern qualification declined over the past decade from 48% to 21%.
Over on “Radical Compliance”, Matt Kelly blogged about a recent Association of Fraud Examiners benchmarking report on the technologies companies use to fight fraud. The blog says that corporate approaches to detecting and preventing fraud could use some updating:
The most telling line in the report comes right at the start: “Our study indicates that the most commonly used analytics are the tried-and-true techniques that organizations have found success with for decades,” such as exception reporting and anomaly detection, as well as automated monitoring of red flags and business rules. More than half of respondents said they use such techniques.
Along similar lines, the two risk areas most commonly monitored with analytics were fraudulent disbursements and outgoing payments (cited by 43 percent of respondents) and procurement and purchasing fraud (41 percent of respondents). That’s great, but outgoing payments and procurement are financial functions that every business in the universe has, and two primary vectors for fraud. So it’s only natural that they’re also the functions most likely to get the anti-fraud analytics treatment.
On the other hand, if we want an example of companies not yet embracing the full potential of anti-fraud analytics, the ACFE also had an interesting stat about what sources of data companies use for their analytics efforts. Eighty percent of respondents said they use structured data, such as invoice amounts listed in databases or dates included on purchase numbers. Only 33 percent, however, used unstructured data — random information that might exist in emails, PowerPoint presentations, or other sources, and that doesn’t neatly export into an Excel table.
Unstructured information is where the good stuff is, especially for frauds that involve multiple employees who might be talking with each other about their scams. That said, unstructured information is also more difficult to process. “This highlights that most organizations still rely heavily on traditional analytics approaches and data sources to drive their anti-fraud programs,” the ACFE says. Indeed.
The blog explores other areas covered by the report, including the surprising number of companies that don’t use case management software and the increasing importance of technology in fraud assessments in the Covid-19 era.
Law firm lawyers wouldn’t dream of practicing law without having a malpractice policy in place, but those policies are far from ubiquitous among in-house lawyers. This Woodruff Sawyer blog takes a look at whether in-house lawyers should consider malpractice insurance. The blog says that the good news is that if you’re worried about your employer suing you, that’s unlikely. (Of course, getting fired is a whole other kettle of fish). However, this excerpt says that there still may be some situations in which “employed lawyers insurance” may make sense:
So, when is employed lawyers insurance useful? Here are a few scenarios:
Someone Other Than the Employer Perceives an Attorney-Client Relationship with You. Say, for example, during your day-to-day dealings with other employees, someone casually asks a question about whether he should exercise his options, or about a speeding ticket or an apartment eviction. If this person now perceives that you are his lawyer because of that exchange, it’s possible that he could sue you for malpractice.
Employed lawyers insurance gives an extra layer of protection here, but it’s certainly better to avoid casually giving advice to folks who are not your clients. Your best practice is to be deliberate about refraining from giving legal advice to those with whom you do not want to have an attorney-client relationship.
If you’re in a work environment where, as a cultural matter, you feel obligated to answer these types of questions, employed lawyers insurance is something you might consider. The same is true if part of your job is to give advice to third parties that are not technically the same as your employer, for example the charitable trust “arm” of your employer.
You Are Moonlighting. Employers sometimes encourage their employees to moonlight on a pro bono basis. Employed lawyers insurance responds if you are sued for malpractice as a result of these activities. The insurance will also typically provide your defense costs should you find yourself the subject of a hearing in front of the California Bar.
You Are Concerned That Your Employer Won’t Indemnify You. You may work for an employer whom you perceive will not defend you if a third party (a vendor or customer, for example) decides to sue you for legal malpractice for whatever reason, or you are worried that your company might be insolvent (and thus can’t indemnify you) at the time of the suit.
The blog reviews how these policies work and their typical exclusions, and also addresses alternatives, including personal indemnification agreements and, in some cases, D&O insurance.
This recent article by Bloomberg Law’s Preston Brewer analyzes the results of a survey of in-house & outside securities and capital markets lawyers concerning allocation of drafting responsibilities. The survey suggests that in-house and outside counsel are usually on the same page when it comes to who should take the lead role in drafting documents, but this excerpt says that there are also some interesting areas of divergence:
Law firm attorneys overwhelmingly see due diligence request lists (68%) and term sheets (68%) as duties within their purview, while 62% of in-house respondents said they would keep due diligence lists in-house—and a full 75% of them view preparation of term sheets as a task for in-house counsel.
Less dramatically, substantially more outside counsel said they would assign themselves securities offering documents (a margin of 15 percentage points for SEC Form S-1 registration statements and private placement memoranda). For closing checklists, an astounding 100% of law firm attorney respondents would give the work to themselves versus 82% of in-house counsel choosing to assign that work to outside attorneys.
I don’t know about you folks, but speaking for myself, if an in-house colleague offered to take drafting responsibility for due diligence requests & term sheets for deals that we were working on, they would immediately move into the LARGE holiday gift basket category.
The survey found that 41% of respondents said they expect more work to go to outside counsel over the next five years, while 20% expected more work to go to inside counsel & 39% expected the mix to remain the same. That number surprises me, given the high & ever-increasing level of expertise among corporate law departments – although it may be a bit skewed by the fact that 28 of the 47 survey respondents were law firm lawyers.
The survey has a bunch of other interesting material in it involving both private and public companies, and one of the biggest takeaways is that both outside and in-house securities lawyers are pretty optimistic about the future of their practice. Attorneys feel strongly that corporate practice and securities law is a growth industry for both law firms and in-house counsel. The survey says that 70% expect increased activity in private company work, and more than half expect growth in private equity and public company representations.
Okay, a few years ago, I blogged about research suggesting that the much-maligned staggered board was actually good for shareholders. That renaissance lasted about two days, at which point it became painfully obvious that investors were having none of it. Now, I’m again peeking out of my shell to highlight another study that says staggered boards may be beneficial. Here’s the abstract:
Staggered boards (SBs) are one of the most potent common entrenchment devices, and their value effects are considerably debated. We study SBs’ effects on firm value, managerial behavior, and investor composition using a quasi-experimental setting: a 1990 law that imposed an SB on all Massachusetts-incorporated firms. The law led to an increase in Tobin’s Q, investment in CAPEX and R&D, patents, higher-quality patented innovations, and resulted in higher profitability. These effects are concentrated in innovating firms, especially those facing greater Wall Street scrutiny. An increase in institutional and dedicated investors also accompanied the imposition of SBs, facilitating a longer-term orientation. The evidence suggests SBs can benefit early-life-cycle firms facing high information asymmetries by allowing their managers to focus on long-term investments and innovations.
No, I’m not exactly sure what “Tobin’s Q” is either. You know who does know though? Cooley’s Cydney Posner, who has taken a deep dive into the study and its conclusions over on her blog. To me, the big takeaway from all of this is that while we’re all in favor of good corporate governance, the evidence continues to suggest that nobody really knows exactly what that is.
The folks at Bass Berry recently held a webcast on the new universal proxy rules and have posted this blog summarizing the key takeaways from the program. Among other things, the blog includes a chart that briefly comparing the differences between the typical proxy access bylaw and the universal proxy rules. As you know, I can’t resist quick reference materials that I can quickly glance at and use to fake my way through a conference call, and this chart clearly makes the cut. Check it out!
We’re seeing a tremendously positive reception to our new membership site, PracticalESG.com. Thank you to everyone who’s signed up so far!
In the first couple of weeks of being live, we’ve continued to build out our organized content library with practical checklists and analysis – and we’ve held the following webcasts for members:
Don’t miss out! Only one week remains in our offer for 25% off the regular subscription pricing. You can sign up online – or email sales@ccrcorp.com today or call 1-800-737-1271 – to take advantage of this one-time promo event and get tools to make your ESG efforts easier & more successful.
Yesterday, the SEC gave notice of an open meeting next Wednesday, March 9th. There’s one item on the agenda:
The Commission will consider whether to propose amendments regarding cybersecurity risk management, strategy, governance, and incident disclosure.
This meeting isn’t too much of a surprise. It comes on the heels of last month’s cybersecurity proposal for registered investment advisers and investment companies – and at a time when cyber threat levels have reached new heights. Lawmakers have been urging SEC Chair Gary Gensler to follow through on his plan to propose rules. John blogged a couple months ago about what the new disclosure rules might include.
In a webcast last year – “Cyber, Data & Social: Getting in Front of Governance” – we talked about the importance of social media oversight & controls. The guidance is more on-point than ever now that shareholders have filed a class action complaint against a company for mistakenly tweeting just a portion of financial results (the good part, about a revenue jump).
The tweet – which was subsequently deleted – went out before the scheduled release time for the official earnings release, which provided a less rosy full picture (net loss and a miss of analyst estimates). Shareholders are therefore alleging that the tweet omitted material information and violated Section 10(b) and Rule 10b-5. Over on the “D&O Diary” blog Kevin LaCroix provides analysis:
This lawsuit has only just been filed and it remains to be seen how it will fare. Among other challenges the plaintiffs will face is demonstrating that the defendants acted with scienter – this pretty obviously was a goof-up of some kind, not some devious plan to hoodwink the market. Pretty clearly, something got short-circuited in the social media publication process. Arguably, the mistake was planning any type of social media release in advance of the release of the full results. But while these missteps may be deeply regrettable and even arguably negligent, it remains to be seen whether they will prove to be sufficient to establish securities fraud.
Among the many unusual features of this complaint is the unusually short class period. The putative class of investors on whose behalf the complaint was filed consists of investors who traded during a very short time period on the afternoon of February 10. I am sure there are readers out there who will point out similarly short class periods, but a class period this short is, in my experience, highly unusual if not unique. In addition to the short class period, the complaint itself –– which weighs in at nine pages in length – might be the shortest securities class action lawsuit complaint I have ever seen.
The one thing that is for sure is that the allegations in this complaint underscore the need for companies to build some protective processes around their social media practices, particularly when it comes to using social media to transmit news about the company’s operating and financial performance. As I noted above, the real error here may have been using social media to release partial financial results ahead of the full financial release. At a minimum, the allegations show that if the company is going to incorporate social media activities as part of its release of financial results, the social media activities should be carefully coordinated with the more traditional releases. Arguably, the use of social media should be as fully supervised as a full release would be.