I recently blogged about the role political risk insurance might play in helping companies recoup some of their losses arising out of Russia’s invasion of Ukraine. Yesterday’s WSJ included an article on the growing demand for political risk insurance since the Ukraine crisis began, but notes that it’s focused on another geopolitical nightmare scenario – a Chinese invasion of Taiwan. This excerpt quotes Daniel Riordan, who’s in charge of Vantage Group’s political risk business:
“They’re concerned about the potential for China getting even more aggressive with Taiwan, particularly in the wake of Russia’s invading Ukraine,” said Mr. Riordan, adding that his political risk business has seen an influx of new clients. “We’re seeing boards who are saying, ‘OK, where’s our political risk insurance?’” he said.
Mr. Riordan said his political risk business—measured in the volume of new insurance proposals submitted to underwriters—jumped about 25% from the last quarter of 2021 to the first quarter of 2022, driven in part by China-related concerns. The increase bucked a normal trend of business slowdown over that time frame, he said.
Beijing regards Taiwan as an integral part of the People’s Republic of China, while Taiwan views itself as a sovereign and independent state. Tensions between the two have risen in recent years, as China has suppressed Hong Kong’s democratic aspirations and repeatedly dispatched military aircraft into Taiwan’s air-defense zone.
The article says that Taiwan-related political risk insurance has been purchased to cover risks in the tech & power sectors, reflecting Taiwan’s dominance in semiconductors and its wind-power industry. In mainland China, it’s companies with manufacturing operations there that are the prime customers for political risk insurance. Not surprisingly, the article also says that pricing is on the rise and that the number of underwriters participating in the market is starting to decline.
If your company has significant exposure to either Taiwan or China – and who doesn’t? – then you may want to look into political risk insurance or other alternatives to mitigate the risk of an armed conflict. If war breaks out between China & Taiwan and your board hasn’t devoted serious attention to alternatives for mitigating political risk in those countries, they may well be setting themselves up for a Caremark claim. Of course, if China invades Taiwan, corporate director liability may be pretty far down the list of our concerns.
Last week, a member asked a question in the Q&A Forum about whether anyone else was experiencing a situation where an EDGAR filing had been made & accepted but wasn’t showing up on the SEC’s website for several days. Nobody responded – and I hadn’t heard anything – so I assumed that this might be an isolated problem. It turns out that’s not the case. Yesterday, I received the following heads up from a member confirming that multiple filers are experiencing this same issue with EDGAR:
We have had multiple clients in the past week that have experienced issues with EDGAR where a submission was made and accepted, but it doesn’t show up on EDGAR for several days. (When it shows up on EDGAR, it is placed in the correct time when accepted.) We’ve contacted the EDGAR office about this and they are aware of the issue and are working to resolve it. (For what it’s worth, we’ve heard that sometimes the filing show up on Westlaw or other third party vendor much sooner than it shows up on public EDGAR, so it is likely a glitch in the public EDGAR system.)
Apparently, some filings may show up on the “Latest Filings” page before appearing on the company’s page, and we’re told that if you keep refreshing the site, your filing will eventually show up.
Yesterday, the SEC extended the comment period for its controversial climate change disclosure proposal to June 17th. The comment period was scheduled to expire on May 20th, and as Dave blogged a few weeks ago, the SEC has been taking a lot of heat over the relatively brief length of the comment period originally established for the proposal. The SEC’s press release also announced the reopening of the comment period for the SEC’s proposed overhaul of private fund advisor rules & its recent proposal regarding the definition of an “exchange” and amendments to Regulation ATS (Reg ATS). The comment period for these proposals will expire 30 days following publication of the reopening release in the Federal Register.
These latter two proposals – which combined exceed 900 pages – originally provided for a 30-day comment period. As with the climate change proposals, the SEC took some heat here over the length of the original comment period. Check out this rather pointed excerpt from the American Securities Association’s comment letter on the private fund advisors proposal:
The Proposal is just one of the many complex and consequential rulemakings the SEC has proposed in recent months. To date, the SEC has proposed sixteen new rulemakings, in addition to several others that were proposed at the end of 2021. Most of these proposals run to hundreds of pages in length, and often include hundreds of questions that commenters must consider when assessing the impact of potential new rules.
The Proposal itself is 342 pages and includes several very specific questions, some of which hint at further mandates that are not fully explored or analyzed in the release. Yet the SEC provided the public only thirty (30) days to comment on the Proposal. This is simply an inadequate amount of time for the public to properly consider how the contents of the Proposal will affect the U.S. securities markets – particularly when many entities are simultaneously considering and developing comments on over a dozen other rulemakings from the SEC, trying to navigate unprecedented market volatility.
We haven’t covered the Reg ATS proposal here, but crypto-world is freaking out about it, and the ASA submitted an identical critique concerning the length of the comment period for that proposal.
It’s hard to say whether the SEC’s action represents a broad retreat from its recent preference for short comment periods, but it appears that the SEC recognized that adopting short comment periods for these lengthy, intricate & controversial rule proposals wasn’t a good look – and it deserves some credit for the decision to extend them.
I’m sure it won’t escape the watchful eye of conspiracy theorists that the expiration date of the climate change proposal’s comment period now coincides with the 50th anniversary of the Watergate break-in. However, as a Cleveland Browns fan, I prefer to note that it also coincides with the 28th birthday of the team’s recently acquired WR, Amari Cooper.
This Weil survey reviews governance & liquidity arrangements in 2021 sponsor-backed IPOs. The survey reviewed the terms of 15 U.S. IPOs by companies that had one or more private equity sponsors. Of these transactions, 10 were “club” deals involving more than one sponsor, while the remaining five were single-sponsor deals. Here are some of the conclusions on corporate governance arrangements:
– Consistent with previous years, in a significant majority of surveyed deals (87%), Sponsor-backed IPO companies availed themselves of at least some “controlled company” exemptions available under applicable listing requirements, which, among other things, exempt such companies from certain board and committee director independence requirements (other than with respect to the audit committee). Notably, even though companies are availing themselves of the controlled company exemptions, most Sponsor-backed companies are going public with a majority of independent directors.
– Consistent with previous years, Sponsors in the surveyed deals typically (93%) adopted a classified board structure for the newly public company in connection with an IPO. In one of the surveyed deals, the classified board structure established in connection with the IPO is subject to “sunset” (triggered upon the earlier of 5 years following the IPO or when Sponsor’s ownership drops below 50% of the voting power of the common stock necessary to elect directors) to address governance and proxy advisory firm concerns.
– In a significant majority of surveyed deals (80%), Sponsors secured contractual rights to nominate or designate directors to serve on the public company’s board of directors (in some cases, including committees) following an IPO. Such director nomination rights were secured in all “club” deals and in 40% of single-Sponsor deals. In 70% of “club” deals where Sponsors secured contractual rights to nominate or designate directors and in 100% of such single-Sponsor deals, Sponsors secured the right to elect a majority of the directors constituting the board.
The survey says that all of the transactions included provisions secured the ability of shareholders to act by written consent so long as sponsors held a specified ownership percentage. In addition, in 70% of “club” deals and in 20% single-sponsor deals, sponsors had the right to call special meetings of shareholders so long as they held a specified ownership percentage. All of the surveyed deals included a waiver of the corporate opportunity doctrine in favor of the sponsor in their post-IPO charter documents.
The validity and accuracy of the assessments and subsequent company decisions rests heavily on ensuring you have and use high quality ESG data and that there is accountability for progress on the company’s ESG strategy. The data must be credible, validated and reported as appropriate to the board. For more on this, join us today at 2pm Eastern for our PracticalESG.com webcast “Putting the ‘G’ First: Oversight of ‘E’ & ‘S’ in ESG”. Sunrun’s Sundance Banks, Orrick’s JT Ho, Delta Air Lines’ Stephanie Bignon and American Express’s Kristina Fink will share their insights on prioritizing governance and overseeing E&S issues.
You can attend the webcast for free if you are a PracticalESG.com member. Registration information is available on the webcast page – but remember that the incremental cost of a membership gets you much more bang for your buck. If you’re not already a member with access to our full suite of resources, sign up online or by emailing sales@ccrcorp.com or calling 800-737-1271. Our “100 Day Promise” allows you to try a subscription at no risk for 100 days – within that time, you may cancel for any reason and receive a full refund!
On Friday, the SEC announced that it had initiated a settled enforcement proceeding against NVIDIA Corporation arising out of allegedly misleading MD&A disclosure relating to the impact of cryptocurrency mining on its business. Here’s an excerpt from the SEC’s press release:
In two of its Forms 10-Q for its fiscal year 2018, NVIDIA reported material growth in revenue within its gaming business. NVIDIA had information, however, that this increase in gaming sales was driven in significant part by cryptomining. Despite this, NVIDIA did not disclose in its Forms 10-Q, as it was required to do, these significant earnings and cash flow fluctuations related to a volatile business for investors to ascertain the likelihood that past performance was indicative of future performance.
The SEC’s order also finds that NVIDIA’s omissions of material information about the growth of its gaming business were misleading given that NVIDIA did make statements about how other parts of the company’s business were driven by demand for crypto, creating the impression that the company’s gaming business was not significantly affected by cryptomining.
In terms of the specific disclosure obligations that NVIDIA allegedly violated, the SEC’s order cites the provisions of current Item 303(c) of Reg S-K that require companies to call out unusual items impacting their financial results, and to “identify any significant elements of the registrant’s income or loss from continuing operations which do not arise from or are not necessarily representative of the registrant’s ongoing business.” Without admitting or denying the SEC’s allegations, the company consented to an order requiring it to cease & desist from future violations of Section 17(a)(2) and (3) of the Securities Act and the books and records provisions of the Exchange Act. It also agreed to a $5.5 million civil monetary penalty.
The SEC’s press release says that the investigation was conducted by lawyers from its recently revamped Crypto Assets and Cyber Unit. Since that’s the case, the most important takeaway here may well be that isn’t just the folks peddling digital assets who need to be aware that the Division of Enforcement’s “Crypto Cops” are watching, but also more traditional companies with businesses that are being affected by the crypto craze.
Earlier this year, I blogged about the topic of “regulation by enforcement.” At the time, I noted that the SEC denies that it engages in this conduct, but I also pointed out that courts are sometimes sympathetic to defendants’ claims that due process requires them to have adequate notice that they are potentially violating the law. Claims that the SEC is attempting to regulate by enforcement have featured prominently in its high-profile litigation against crypto heavyweight Ripple Labs, with the company asserting that it had not received “fair notice” that its XRP cryptocurrency was a security.
Ripple scored a win in March when the SDNY issued an order denying the SEC’s motion to strike Ripple’s fair notice defense. This excerpt from a Reuters article on the decision summarizes the ruling:
The SEC claimed that the defendants failed to register transactions in its digital asset, XRP, as “investment contracts” under Section 5 of the Securities Act, while the defendants contended it is not sufficiently clear that the phrase “investment contract” applies to transactions in XRP and thus raised a fair notice defense. The fair notice defense arises under the U.S. Constitution’s Due Process Clause and requires that the language of any criminal statute be sufficiently clear to objectively give fair notice of what is prohibited (See F.C.C. v. Fox Television Stations, Inc., 567 U.S. 239, 253 (2012)).
The court denied the SEC’s motion to strike Ripple’s fair notice defense; its opinion represents a significant victory for the defense. This opinion will allow the defense to marshal, on summary judgment, significant and invaluable discovery from the SEC into its own views on how XRP and other digital assets should be classified.
The article also points out that the SEC was successful in its effort to strike the defense in its lawsuit against Kik Interactive. It goes on to say that the ruling is potentially a big deal, because “if future digital asset defendants may successfully bring fair notice defenses under Section 5 based on allegations regarding the SEC’s own conduct, that will open the door in discovery to, at a minimum, requests for the SEC’s notes from meetings with third parties in the digital asset space, draft speeches from SEC leaders on how various digital assets should be categorized, and documents containing the SEC’s formal positions on whether a given digital asset qualifies as a security.”
Mondays are tough enough without having to work your way through a bunch of blogs that are more somber than the PBS NewsHour. Since my first couple of blogs today were pretty serious, I wanted to be sure to close on a lighter note. When I want to do that, the first thing I look for is news on the Wu-Tang Clan that has even the most tangential ties to stuff we cover here. Fortunately, America’s most entrepreneurial hip-hop artists never let me down.
As you know, various Wu-Tang members have jumped into crypto in a big – if not always successful – way, and I’m pleased to tell you that they’re still at it. In one of our more recent check-ins with The Wu-Tang Clan, I discussed Method Man’s nascent NFT venture, which involved him launching his own comics universe. Based on more recent media reports, it looks like he’s launched his venture on the metaverse, or more accurately, the “MEFaverse.” Here’s the project’s website, which provides more details on its “About Us” page:
The MEFaverse is the first metaversal world (Wu York City) where holders get to experience a graphic novel and not simply read it. The story revolves around Method Man, founding member of the greatest Hip Hop group of all time, Wu-Tang Clan, in a world where he became a literal superhero and not just a lyrical one. The project combines all things Hip Hop, skateboarding, and comic books in a format that speaks to all ages. This is where In Real Life (IRL) meets the metaverse.
Sound good? It looks like you need to pony up .08 ETH in order to join in. I’m not sure I understand everything that Method Man’s doing here, but I do think this may be the closest I’ve come to actually understanding a crypto project.
A couple of other Wu-Tang related developments. First, if you’re looking to invest your ever-dwindling 401(k) in Wu-Tang Clan-related NFTs – and let’s face it, at this point could you do any worse than the stock market? – OpenSea has a large collection for your perusal. Second, if you’re looking to buy a home in the Milwaukee area, be sure to check out realtor Jonathan Frost, who reminds us that “Low Mortgage Rates are Temporary, but Wu-Tang is Forever.”
I blogged earlier this week about a shareholder proposal that urged a company to impose additional restrictions on Rule 10b5-1 plans, which largely mirror the conditions in the SEC’s proposed changes to Rule 10b5-1. The shareholder proposal didn’t pass, but nearly 49% of shareholders voted in favor of it.
A member emailed this note in response:
It occurred to me that not enough attention has been paid to the issue surrounding the legal framework for insider trading violations and the SEC’s proposal to restrict the 10b5-1 affirmative defenses. It is one thing for a company to adopt a policy limiting the use of the 10b5-1 safe harbor, even in response to a shareholder proposal, but it is another for the SEC to seek to limit defenses to insider trading violations that is inconsistent with the legal requirements for insider trading liability.
The member noted that the ABA comment letter to the SEC on the Rule 10b5-1 proposal raises this concern. The ABA comment letters always draw a strong team of participants, and this one includes heavy hitters Stan Keller and John Huber, among other very accomplished members of the securities law community (if you have been practicing in this space for more than a few years, you will probably recognize all of the names on this particular letter). Here’s an excerpt:
Moreover, we are concerned that adding the proposed conditions to the affirmative defenses in Rule 10b5-1 as it is now constructed would be inconsistent with insider trading law. In our letter dated May 8, 2000 commenting on the proposal to adopt Rule 10b5-1, we expressed our concern about whether the enumerated affirmative defenses fully reflected insider trading law and suggested that they be designated as non-exclusive safe harbors or that a catch-all affirmative defense be added. The Commission chose not to take our suggestions in adopting Rule 10b5-1.
However, that was not particularly problematic because the affirmative defenses in the rule as adopted were closely aligned with insider trading law. That would not be the case though if the Commission were to adopt the proposed amendments because of the substantial limitations that would be imposed on the affirmative defenses. Accordingly, we are concerned that the proposal, if adopted, would depart from established insider trading law. To illustrate: under current Rule 10b5-1 a person who does not have material non-public information could grant discretionary authority to sell shares to a third party; that third party can then sell at a time it does not have material nonpublic information even if the person granting the authority, who may not even know about the sale at the time it is made, then has material nonpublic information.
If the Rule 10b5-1 affirmative defenses are unavailable because one or more of the conditions that would be added by the proposal (such as a cooling-off period) have not been met, the person who granted the discretionary authority in the foregoing circumstances still may not be violating Rule 10b-5 even though it is not relying directly on Rule 10b5-1 as amended.
We therefore recommend that the Commission reconsider its approach in light of these concerns and either:
(i) If there are demonstrable abuses in how Rule 10b5-1 is currently being used, the Commission should address them directly. For example, if terminating a plan in order to take advantage of material nonpublic information is considered an abuse, the Commission could make clear that such a termination would violate the good faith requirement of Rule 10b5-1 and the plan would not be a defense to liability as provided in Rule 10b5-1(c)(1)(ii). This targeted approach would address an abuse but not interfere with other terminations for good reason that are not abusive; or
(ii) If additional requirements to the availability of the affirmative defenses along the lines of those proposed are adopted, the rule should expressly recognize that it provides non-exclusive safe harbors so that Rule 10b5-1 as amended is consistent with insider trading law. Recognition of safe harbors would encourage adoption of practices consistent with the safe harbors, but to be effective the safe harbors should reflect prevailing practices, such as those we describe below, adopted by companies designed to ensure compliance and prevent abuses.
On his D&O Diary blog, Kevin LaCroix has been tracking securities lawsuits and D&O claims that stemmed from sexual misconduct allegations. Last week, he analyzed the recent news that CBS had agreed to settle a securities class action lawsuit that was filed when news of inappropriate behavior by the company’s former CEO surfaced, and was followed by a 6% decline in company stock price. Kevin notes:
In their amended complaint (here), the plaintiffs alleged that the defendants had on numerous occasions stated that the company maintained the highest standards for ethics and appropriate business actions, and that the company had a zero tolerance policy for sexual harassment, while in fact the company had a pervasive culture of sexual misconduct; that the company’s culture created an undisclosed risk that Moonves would have to leave the company; and that after the #MeToo story first began to emerge the defendants – and Moonves in particular—made a number of reassuring statements about the company and its practices, which the plaintiffs allege were misleading. The complaint further alleges that a number of CBS executives, including Moonves, sold millions of dollars’ worth of their personal holding in company stock in advance of the revelations about Moonves.
As detailed here, on January 15, 2020, in a lengthy and detailed opinion, Southern District of New York Judge Valerie Caproni largely granted the defendants’ motion to dismiss the lawsuit. Although she largely rejected the plaintiffs’ claims, Judge Caproni did find one statement that Moonves himself had made at a November 29, 2017 industry event to be false and misleading. Moonves had said that the #MeToo movement was a “watershed event,” adding that “It’s important that a company’s culture will not allow for this. And that’s the thing that is far-reaching. There’s a lot we’re learning. There’s a lot we didn’t know.”
Judge Caproni found, taking the allegations in the light most favorable to the plaintiffs, that this statement was — “just barely” — false and misleading, as it implied that Moonves was just learning for the first time about these kinds of allegations when he was at the time actively seeking to conceal his own misconduct. The statement also falsely implied that he was not personally at risk himself.
Kevin explains that the plaintiffs ended up with a $14.75 million settlement payable by the company or its insurers – not record-breaking, but nothing to sneeze at. Meanwhile, Kevin also blogged that a court dismissed a securities fraud suit against Activision Blizzard.
Results here are decidedly mixed, as Kevin notes. But because lawsuits are distracting, attract negative attention and do sometimes result in significant payouts, boards will need to continue to pay attention to corporate culture risks and executive misbehavior. We have a checklist for members on this topic, which we recently updated to reflect legal restrictions on mandatory arbitration provisions. This checklist provides step-by-step considerations for risk assessments and more. If you aren’t already a member, sign up today to get access – you can become a member online, by calling 1-800-737-1271, or by emailing sales@ccrcorp.com. Our “100 Day Promise” means there’s no risk to signing up!