Earlier this week, I blogged about Commissioner Peirce’s statement criticizing the SEC’s failure to act on a SPAC’s acceleration request for its Form S-4 registration statement. In that blog, I said that it was hard to assess the validity of her criticism, because the correspondence between the issuer and the Staff hadn’t been released yet. WilmerHale’s David Westenberg subsequently reached out to remind me that since the S-4 was not declared effective, the Staff will not publicly release the review correspondence, although it may be possible to obtain it with a FOIA request.
– John Jenkins
On her Twitter account, Olga Usvyatsky flagged a recent comment letter exchange between UPS & the Staff dealing with the potential impact of Russia’s invasion of Ukraine. The Staff’s comment focused on risk factor disclosure concerning the impact of changes in general economic conditions set forth on page 9 of the company’s Form 10-K. This excerpt from UPS’s response letter includes the Staff’s comment & the company’s response:
1.You refer to the adverse impact on your business due to geopolitical uncertainties and conflicts in the Russian Federation and Ukraine. Please describe the adverse impact of Russia’s invasion of the Ukraine on your business, including the impact on your operations and potential asset impairments.
Response to Comment 1:
The Company does not have any material business, operations or assets in Russia, Belarus or Ukraine, and has not been materially impacted by the actions of the Russian government. The Company’s total revenue from these three countries constitutes less than 1.0% of consolidated revenue.
As has been disclosed by the Company on its corporate website, www.ups.com, as a result of Russia’s invasion of Ukraine, the Company has temporarily suspended all shipping services to, from and within Ukraine, Belarus and Russia, until further notice. In addition, the Company has halted overflights of Russia, with no material impact on the Company’s costs.
If and when the actions of the Russian government are reasonably likely to materially impact the Company or its operations, the Company undertakes to include appropriate disclosures in its public filings.
The Staff had no further comments for UPS, but Olga’s tweet said that it was reasonable to assume other companies will be receiving similar comments. A quick search of the EDGAR database confirms that assumption was correct. A search for filing review correspondence containing the word “Ukraine” from 3/1 to 4/19 found two other issuers that had received publicly available comments relating to the Ukraine crisis. Here are links to response letters addressing Ukraine-related comments issued to ESAB Corp. and Teucrium Commodity Trust.
– John Jenkins
Yesterday’s NY Times contained an opinion piece from Adam Liptak discussing the First Amendment issues surrounding the SEC’s “neither admit nor deny” settlement policy. Liptak notes that a cert petition for review of a case challenging that policy has recently been filed with the SCOTUS. The case, Romeril v. SEC, involves a former Xerox executive’s efforts to obtain relief from a 2003 “neither admit nor deny” settlement with the SEC. In September 2021, the 2nd Circuit upheld the SDNY’s decision to deny the plaintiff’s motion for relief from judgment.
This excerpt from the cert petition’s “Questions Presented” section notes that the constitutional issues associated with the policy are front and center:
1. Does it violate the First Amendment for the Securities and Exchange Commission to impose a requirement that any party with whom it settles must agree to a lifelong prior restraint barring any statement, however truthful and whenever and however expressed, that even suggests that any allegation in a Securities and Exchange Commission Complaint is insupportable?
2. Does the Securities and Exchange Commission violate the Due Process Clause when it requires that any party with whom it settles must sign an SEC-drafted Consent Form waiving his due process rights and agree to a lifelong prior restraint barring any statement, however truthful and whenever and however expressed, that even suggests that any allegation in a Securities and Exchange Commission Complaint is insupportable?
Liptak notes that the Court grants very few petitions for cert, but that this one might have a shot because of the divergent approaches that lower courts have taken when it comes to gag orders imposed by the government. Okay, fair enough, but the cynic in me says there’s another reason the SCOTUS might take this case – given the present ideological makeup of the Court, there are likely several justices who wouldn’t mind the chance to bloody a federal agency’s nose when it comes to what they perceive as overreaching conduct.
Personally, I’ve come to really dislike the “neither admit nor deny” policy. I’ve seen situations where the agency has announced the filing of aggressive & career-damaging complaints on its website, only to settle for significantly less years later. To add insult to injury, the SEC routinely issues statements on its website trumpeting all of its settlements as victories, while the other parties can merely grit their teeth & hold their tongues.
– John Jenkins
The March-April issue of “The Corporate Counsel” newsletter is in the mail (email firstname.lastname@example.org to subscribe to this essential resource). 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. This issue includes the following articles:
– SEC Proposes Breathtaking Climate Disclosure Rules
– A Long Road to Regulations: The SEC’s Cybersecurity Disclosure Proposals
– Beneficial Ownership in the Spotlight: The SEC Proposes Much Needed Reforms
Dave & I also have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues. We’ll be posting one for this issue soon. Be sure to check it out on our “Podcasts” page!
– John Jenkins
It can happen to any public company – an executive is having a one-on-one with an investor or analyst, and inadvertently discloses a tidbit of information that may be material nonpublic information. If it is, then Reg FD requires the company to promptly disclose that information to the public. But what internal procedures should companies follow in determining whether they have a Reg FD issue? That’s the topic of this Woodruff Sawyer blog, which lays out three steps that a company that finds itself in this situation should take:
1. Avoid making premature conclusions. Many times, potential Regulation FD issues are flagged by non-lawyers that were present at a meeting where the authorized speaker disclosed nonpublic information. In some cases, the issue may be flagged by the authorized speaker. Individuals may naturally jump to conclusions as to the character of disclosure. That should be avoided. Best practice for these individuals is to limit internal discussions and communications—particularly if they are in writing—regarding a potential Regulation FD disclosure issue to the particular facts and leave legal assessments to legal counsel.
2. Immediately contact legal counsel. A materiality determination will generally require, among other things, that counsel consult with other functions/departments within the company to assess whether the authorized speaker has in fact inadvertently disclosed material nonpublic information. This can take time—something the company doesn’t have much of. Remember, a company must publicly disclose material nonpublic information following an unintentional selective disclosure of that information before the later of (a) 24 hours or (b) the beginning of the next day’s trading on the New York Stock Exchange (NYSE). As a result, it is imperative that counsel have as much runway to assess the issue. If public disclosure is determined to be required, counsel will need to help to prepare that disclosure along with other internal stakeholders, which may be management, investor relations and finance.
3. Make certain that relevant internal stakeholders are involved, updated as to developments and made aware of the outcome. Ideally, a company will have already identified the team that should be involved in reviewing Regulation FD related issues before having to put up the Bat-Signal. At a minimum, that team should include in-house counsel, investor relations, and finance.
This third point is critical because if the disclosure results in stock price movements, the company may receive inquiries from analysts, investors, stock exchanges & the SEC. Since no single function will be on the receiving end of all of those inquiries, it’s important to involve all relevant internal stakeholders to ensure there are no information gaps.
After I posted this, a member reached out to us with the following comment, and it’s a good one: “Also, no one should trade until the situation is worked out. Insider trading while material information has been disclosed only selectively, creates additional issues for the traders, putative tipper(s) and the issuer.”
– John Jenkins
Twitter has been a great source of DealLawyers.com blogs this week, but the bird app also was recently involved in some litigation of interest to securities & capital markets lawyers. The 10b-5 Daily points out that last month, the 9th Circuit held that Twitter did not have a duty to update statements about its product development efforts. This excerpt summarizes the facts of the case and the Court’s decision:
In Weston Family Partnership LLP v. Twitter, 2022 WL 853252 (9th Cir. March 23, 2022), the plaintiffs alleged that Twitter had misled investors about problems with its Mobile App Promotion (MAP) product. In August 2019, Twitter announced that software bugs in the MAP product had caused the sharing of the cell phone location data of its users and that it had “fixed these issues.” Several months later, the company disclosed that software bugs continued to exist and reported a $25 million revenue shortfall.
The district court dismissed the claims. On appeal, the Ninth Circuit found that “fixed these issues” referred to no longer sharing the cell phone location data, not the software bugs. Moreover, Twitter had no duty to update investors about the progress of its MAP product and the plaintiffs had not plausibly alleged that the software bugs had materialized and impacted revenue prior to August 2019.
The Court’s language on the duty to update is likely to find its way into countless future briefs:
Plaintiffs suggest that Twitter—when faced with a setback in dealing with software bugs plaguing its MAP program—had a legal duty to disclose it to the investing public. Not so. While society may have become accustomed to being instantly in the loop about the latest news (thanks in part to Twitter), our securities laws do not impose a similar requirement. Section 10(b) and Rule 10b-5 “do not create an affirmative duty to disclose any and all material information.” Matrixx, 563 U.S. at 44.
Put another way, companies do not have an obligation to offer an instantaneous update of every internal development, especially when it involves the oft-tortuous path of product development. See Vantive, 283 F.3d at 1085 (“If the challenged statement is not false or misleading, it does not become actionable merely because it is incomplete.”). Indeed, to do so would inject instability into the securities market, as stocks may wildly gyrate based on even fleeting developments. A company must disclose a negative internal development only if its omission would make other statements materially misleading.
– John Jenkins
Stan Keller’s “Integration of Public and Private Offerings” outline has long been the go-to resource for lawyers trying to work their way through integration issues in securities transactions. Stan recently updated his outline and was kind enough to provide a copy to us, which we’ve posted in our “Integration” Practice Area. If you’re not familiar with it – well, you must be new here!
The outline focuses on SEC rules and interpretations that relate to the integration of private and public offerings and how they affect the capital formation process. Importantly, the outline also reviews the SEC’s approach to integration of offerings generally as it has evolved to date, including the major changes that became effective in March 2021. It remains a terrific resource and one you should definitely keep close at hand.
– John Jenkins
On April 14, 2022, a SPAC called Alberton Acquisition Corporation filed a Form 8-K announcing that its de-SPAC target had decided to terminate its merger agreement with the Alberton because the deal would not be completed before its April 26, 2022 “drop dead” date. The 8-K includes a somewhat elliptical reference to the fact that Alberton’s Form S-4 registration statement for the transaction hadn’t been declared effective by the SEC as of April 13, 2022. That announcement prompted an extraordinary statement from Commissioner Hester Peirce criticizing the SEC for its inaction concerning that registration statement.
Alberton’s reference to the status of the registration statement may have been elliptical, but Commissioner Peirce’s was very direct. She said that the SEC failed to act on Alberton’s acceleration request, and that its inaction had everything to do with the company’s status as a SPAC:
Commission inaction on a request for acceleration of the effective date of a registration statement is highly unusual. Rule 461(b) of the Securities Act of 1933 explains the statutory considerations for the Commission when determining to accelerate the effective date of a registration statement, lists specific situations in which the Commission “may refuse to accelerate the effective date,” and states that “it is the general policy of the Commission, upon request, . . . to permit acceleration of the effective date of the registration statement as soon as possible after the filing of appropriate amendments, if any.” Here, no Commission action has been taken, so there is no obligation to explain why the registration statement was not declared effective.
The failure to take an otherwise routine step makes sense only in the larger context of the Commission’s newfound hostility to SPAC capital formation. The SPAC completed its IPO in October 2018 with the intent to complete a business combination within 18 months. SPAC shareholders approved two extensions of that timeline prior to a merger agreement being entered into in October 2020 with SolarMax, a solar energy company with operations in China. SPAC shareholders subsequently approved two further extensions of the timeline within which to complete the business combination, resulting in the current deadline of April 26, 2022. Meanwhile, the SPAC filed eight amendments to its registration statement relating to the business combination since October 2020, including the most recent April 4, 2022 amendment.
Commissioner Peirce goes on to recount other developments on the SPAC front over the course of the past 18 months, including “most significantly,” the SEC’s decision last month to propose “sweeping rules pertaining to SPACs, including a proposed non-exclusive safe harbor under the Investment Company Act of 1940.” Among other things, that safe harbor would require a SPAC to enter into a de-SPAC agreement within 18 months of their IPO & complete the deal within 24 months following the IPO.
Alberton has been a SPAC for more than 24 months, and Commissioner Peirce speculated that, because the failure to act on the acceleration request came less than a month after the release of the SPAC proposal, “this SPAC might be a victim of the parameters of a non-exclusive safe harbor that have not yet been adopted.” Her critique also hinted at potential due process issues associated with the SEC’s action, pointing out that “[w]ithout affording some notice, the Commission cannot turn on a dime and start treating SPACs that do not meet an arbitrarily determined timeline as investment companies.” She concludes her statement by questioning the SEC’s good faith with respect to this matter:
It is not a good look for the Commission to run a SPAC through the gauntlet of addressing disclosure comments only to say, “Oh, and by the way, now you are too old to be anything other than an investment company.” We must always engage registrants in the same good faith that we expect of them. A failure to do so would undermine the credibility of this agency.
Unfortunately, it’s difficult to assess the validity of Commissioner Peirce’s allegations. The Staff comment letters and company responses haven’t been made public yet, and with eight amendments (!) to the company’s Form S-4, it’s fair to say that this deal had a lot of hair on it, regardless of the SEC’s hostility toward SPACs. Furthermore, eleventh hour comments that throw the timing of an offering off-course aren’t unheard of outside of the SPAC realm either. Nevertheless, this situation certainly raises a lot of questions about how future SPAC filings will – or will not – be processed.
– John Jenkins
In response to sanctions imposed on Russia for its unprovoked invasion of Ukraine, the Putin regime has promised to take countermeasures in an effort to make foreign investors feel some pain. This King & Spalding memo says that investors harmed by these actions may have recourse against Russia under various international treaties, assuming that a diplomatic resolution for addressing those claims cannot be achieved. This excerpt describes Russia’s treaty obligations that may give rise to claims by foreign investors:
There are currently 62 bilateral investment treaties (“BITs”) in force between Russia and key jurisdictions such as Canada, the Netherlands, Singapore, Switzerland, Turkey, the United Arab Emirates, and the United Kingdom, but not the United States. Russia is also party to several multilateral treaties that provide investment protection guarantees, most notably the Energy Charter Treaty (the “ECT”). Although Russia never ratified the ECT and sought to terminate its provisional application in 2009, the ECT contains a 20 year “survival” mechanism. This arguably means that Russia will remain bound by investment protection guarantees in the ECT until 2029.
These investment treaties provide investors and their investments in Russia with several protections, although the scope and nature of those protections will vary depending on the particular treaty, and allow affected investors to bring legal claims directly against Russia for violations of these guaranteed protections.
By now, you’re probably saying, “that’s swell, but how are investors going to collect any damage awards they receive?” The memo says that there may be way to do that:
In the likely event that Russia fails to voluntarily pay an adverse arbitral award, a foreign investor will need to enforce its award against Russian state-owned assets located outside Russia. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the “New York Convention”) is a multilateral treaty that requires its 169 Contracting States (which include Russia) to recognize and enforce arbitration awards rendered in other Contracting States, subject to very limited exceptions.
The memo acknowledges that enforcement will pose significant challenges, but because international sanctions regimes have frozen many billions of dollars in Russian assets, investors that can identify frozen assets belonging to certain Russian state-owned entities may be able to enforce arbitral awards against those assets.
– John Jenkins
Join us tomorrow at 2 pm eastern for the webcast – “The (Former) Corp Fin Staff Forum” – to hear former senior SEC Staff members Sonia Barros of Sidley Austin, Meredith Cross of WilmerHale LLP, Tom Kim of Gibson Dunn & Crutcher, LLP, Keir Gumbs, Chief Legal Officer, Broadridge Financial Solutions, and Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net discuss recent rulemaking & other SEC initiatives and provide practical guidance about what you should be doing as a result.
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– John Jenkins