Woodruff Sawyer recently published their D&O Market Update, and like other commentators, Woodruff Sawyer expresses a pretty optimistic view on D&O insurance premium trends. This excerpt discusses the changes in the market that occurred during the first half of this year:
During 1H 2022, pricing trends flipped from where they were in 2H 2021. This shift is most dramatic for those business sectors where Woodruff Sawyer’s clients happen to be most heavily weighted: life science, technology, and IPOs. These industry segments were hit hardest by the hard market and consequently are gaining the most benefit from the current, more competitive market. More mature companies or those in less risky industries are also benefiting from the improving market, but the scale of the percentage decreases through the rest of this year and into 2023 will be somewhat more muted.
As always, clients beset by tricky litigation, or litigation precursors such as large stock drops after releasing bad news, may still see increases. Comparing data from 2H 2021 with 1H 2022 is telling. According to Woodruff Sawyer’s data, 70% of clients renewing between July and December of 2021 received an increase. Starting in January of 2022, the trend flipped: 16% of clients experienced an increase, 15% obtained a flat renewal, and 69% obtained a decrease.
The report says that another contributing factor to the improved premium environment is competition provided by new entrants to the public company D&O insurance market. These folks were enticed to jump into the market by the rising premium environment of 2020 & 2021. Now, they’re helping to hold the line on premium increases.
Last week, the SEC announced the settlement of an enforcement proceeding against VMWare in which it alleged that the company misled investors about its order backlog management practices, which allowed it to push revenue into future quarters by delaying customer deliveries to customers. Here’s an excerpt from the SEC’s press release announcing the settlement:
The SEC’s order finds that, beginning in fiscal year 2019, VMware began delaying the delivery of license keys on some sales orders until just after quarter-end so that it could recognize revenue from the corresponding license sales in the following quarter. According to the SEC’s order, VMware shifted tens of millions of dollars in revenue into future quarters, building a buffer in those periods and obscuring the company’s financial performance as its business slowed relative to projections in fiscal year 2020. Although VMware publicly disclosed that its backlog was “managed based upon multiple considerations,” it did not reveal to investors that it used the backlog to manage the timing of the company’s revenue recognition.
Under the terms of the SEC’s order, the company agreed, without admitting or denying the agency’s allegations, to refrain from future violations of Section 17(a)(2) and 17(a)(3) of the Securities Act & the books and records provisions of the Exchange Act. Over on Radical Compliance, Matt Kelly blogged some thoughts on some of the proceeding’s implications for internal controls:
The company did have a written policy about how to use discretionary holds; but that policy was so broadly worded — “backlog is managed based upon multiple considerations, including product and geography” — that executives could twist the policy to fit whatever aims they wanted. Like, say, manipulating the sales backlog to meet earnings expectations and hide weakness in revenue growth.
In theory, one could say that management should have had more disciplined documentation requirements, forcing executives to justify their discretionary holds according to more objective criteria. I’ve mentioned that concept before, in other posts about poor management judgment that gets the company into trouble. Your internal controls should require enough documentation that poor decisions stick out like a sore thumb, so that auditors or the board’s audit committee can see those bad choices from a mile away.
Then again, there’s a broader lapse in management judgment here, too. The SEC rapped VMWare on the knuckles for failing to disclose that it used discretionary holds to manage earnings; but even if the company had disclosed that, does anyone believe that would be a good idea?
By the way, the SEC’s fiscal year ends next Friday, so brace yourself for the customary torrent of year-end announcements relating to settled enforcement actions.
When I was working on a lot of IPOs, it used to drive me nuts when one of the bankers would try to have the prospectus characterize the issuer as “a leading” or, worse, “the leading” company in its particular industry or market. I’d usually make some effort to push back against this, for a couple of reasons. The first was that most of the clients I took public often had less than $100 million in revenues – and sometimes a lot less – so the claims sometimes didn’t pass the “now say it with a straight-face” test. The second was that the issuer often had a hard time finding data to objectively back up its claims to leadership.
Invariably, the filing would contain some version of the banker’s language and, just as invariably, the Staff would respond with a request to clarify the claim of leadership & provide some proof of this claim. That usually resulted in some form of additional hedging language to the prospectus that the bankers hated. It’s been more than 10 years since I’ve worked on an IPO, but I’m heartened to see that, according to this SEC Institute blog, some things never change. Companies continue to make these claims in their IPO prospectuses, and the Staff continues to push back.
The blog provides a couple of examples of recent Staff comments that you can point to if you’re looking for some ammo to persuade an investment banker to add appropriate qualifying language to the prospectus summary before the Staff asks for it.
WilmerHale’s Gregory Wiessner reached out with a great observation on this topic: “On your entry about being “the leading/a leading…”, one way I’ve persuaded clients to think about this is when they later go for merger review. Once you start getting to large M&A, those statements can leave you smarting over market control and further reviews. All of a sudden, there is competition lurking everywhere.”
One of the things about this job that’s an ongoing lesson in humility for me is how many of our readers are terrific bloggers in their own right. Andrew Abramowitz is one of those folks. He’s a lawyer in New York who doesn’t blog a lot, but when he does, he almost always has something interesting to say. He posted this blog with some tips on boorish behaviors to avoid when reviewing & commenting on documents. Here’s an excerpt:
Sending Uneditable Drafts. Often I will receive initial drafts of an agreement in PDF or read-only form. In other words, I can’t easily get into the document to provide edits. Sometimes it’s possible to convert the PDF to Word, but the formatting is garbled. Of course, I can provide the comments in other ways besides directly editing the document, but the point is that you’ve made it harder for me to do my job. If the intent in doing this is to discourage commenting, at least with me it may have the opposite effect, by reducing my trust of the other side. The time to create PDF versions is when both sides are in agreement and ready to execute.
Providing Comments in Installments. When you provide a set of comments, they should represent all of your side’s input on the agreement, unless you state otherwise explicitly (e.g., the client is still reviewing, it’s subject to tax counsel’s review, etc.). When you’ve received a set of comments, you can decide with the client that of the, say, ten substantive comments, you’ll compromise on five of them and push back on the remainder. If, however, the other attorney then announces that they have five new substantive comments that they could have raised earlier, then the universe of comments is larger than you had understood when responding to the initial set.
There are some other great pieces of “don’t be that lawyer” advice in the blog, so be sure to check out the whole thing.
In a recent speech, Deputy AG Lisa Monaco announced changes to the DOJ’s policies on corporate criminal enforcement. According to this Morgan Lewis memo, the changes are being billed by the DOJ as “one of the most comprehensive overhauls of corporate enforcement in years, build on existing policies in an attempt to further DOJ’s current tough-on-white-collar-crime approach.” Among other things, the changes are intended to enhance individual accountability, modify the way in which the DOJ treats prior misconduct, and encourage self-disclosure. This excerpt on the policy’s efforts to enhance individual accountability indicates that companies desiring cooperation credit need to move very quickly to get information to the government:
Monaco described individual accountability as DOJ’s “top priority” and said that it is committed to “do more and move faster.” To that end, Monaco announced changes designed to “speed up the clock” on individual prosecutions. Under the policy announced by former Deputy Attorney General (DAG) Sally Yates in 2015, and relaxed under the prior administration, companies seeking cooperation credit were required to completely disclose to DOJ all relevant facts about individual misconduct.
Monaco announced on September 15 a new policy that incorporates the Yates memo’s message while placing additional emphasis on the speed of disclosure by requiring cooperating companies to come forward more quickly with evidence of individual wrongdoing. Monaco said that when a company discovers a “hot” document or email that points to individual criminal culpability, it should immediately produce it to DOJ.
According to Monaco, failure to quickly turn over evidence implicating individuals—even to complete an internal investigation—or “gamesmanship” with the timing of document productions, will result in the reduction or denial of cooperation credit. Monaco also stated that DOJ will not sign DPAs or NPAs with companies until it has either commenced any relevant individual prosecutions or has developed a full investigative plan and timeline for doing so.
In her speech, Deputy AG Monaco also said that the DOJ would release new guidance for prosecutors about identifying the need for & selecting an independent compliance monitor and providing appropriate oversight to the monitor’s work. As Liz blogged yesterday over on CompensationStandards.com, Monaco also addressed how the DOJ will consider corporate compensation programs & clawback policies in criminal enforcement decisions. We’re posting memos in our “White Collar Crime” Practice Area.
Remember the SEC’s Reg FD enforcement proceeding against AT&T? Well, a SDNY judge recently rejected AT&T’s bid to dismiss the SEC’s case against it. Among other things, the defendants contended that Reg FD is a content-based restriction on speech that must be narrowly tailored to advance a compelling governmental interest or, alternatively, compelled speech subject to strict 1st Amendment scrutiny. The judge rejected those claims, and this excerpt from Cydney Posner’s blog on the case summarizes his reasoning:
With respect to the contention that Reg FD compels speech, the Court determined that it is not political speech or opinion, subject to strict scrutiny, but rather is “more akin to the interest in avoiding consumer deception that underlies numerous statutory and regulatory disclosure requirements. These historically have been upheld provided they are reasonably related to preventing the deception of consumers.” The SEC contended that Reg FD was instead comparable to compelled commercial speech—“expression related solely to the economic interest of the speaker and its audience,” and subject to rational-basis review under SCOTUS’s decision, Zauderer v. Office of Disciplinary Counsel (1985). . .
However, although there were similarities, according to the Court, “case law to date has stopped short of equating the two.” While the commercial speech doctrine was a “closer fit,” in the Court’s view, it has “centered on advertisements or speech otherwise proposing a commercial transaction,” and is thus “ultimately also a mismatch for the speech covered by Reg FD.” Reg FD involves broader communications, the Court said, and rejected the SEC’s invocation of compelled commercial speech cases as “inapposite” or only “lightly instructive.” The Court concluded that “Reg FD’s idiosyncratic quality makes it an imperfect fit for any existing familiar First Amendment framework.”
The Court instead applied an intermediate scrutiny standard to Reg FD and the blog points out that it concluded that the “asserted government interest in combatting selective MNPI disclosures was substantial and directly advanced the government interest asserted—market integrity and protection of investors.” It’s worth noting that this is just one of the issues addressed in the Court’s 129-page opinion, and if you’re interested in reading more about the case, check out Cydney’s blog, which takes a deep dive into the decision.
Jim McRitchie recently blogged about his review of a survey on virtual annual meeting practices conducted by the Interfaith Center for Corporate Responsibility. One of the questions asked by the survey was “How many seconds did shareholders have to vote after the last proposal was presented?” Jim says that the answer is “not many”:
The ICCR survey documents that 10 out of 31 companies allowed 0-10 seconds to vote at annual meetings after proposals were presented. 5 allowed up to 30 seconds. 6 allowed 50-60 seconds and 10 allowed 2 minutes or more to vote.
As someone who did annual meetings for public company clients for 35 years, I can’t say I’m surprised at the results. Pre-COVID, once you got outside the realm of the Fortune 500, it was the rare annual meeting that attracted more than a handful of people – and most of them were the company’s service providers. That meant that the top priority for the management & the company’s lawyers wasn’t shareholder engagement, but instead making sure that all the required legal boxes were checked off as quickly and painlessly as possible. That’s certainly how I approached the process.
I think this traditional approach is becoming increasingly obsolete as virtual or hybrid meetings become ever more prevalent. With many more eyes on what happens in the meeting than there used to be, fairness points like the one Jim raises will become an increasingly important factor in how investors perceive a company.
The potential risks of litigation that might arise out of the SEC’s climate change proposals are among the greatest concerns that public companies & their advisors have about the adoption of these sweeping new disclosure obligations. This Cleary memo provides an overview of some of the specific federal and state claims that might arise under the new disclosure regime, and also discusses some of hurdles that plaintiffs might face in bringing those claims. This excerpt addresses the challenges of establishing the “materiality” of the new disclosures:
At least in the near term, the materiality element may pose the most significant challenge for potential plaintiffs. Disclosures are considered “material” for these purposes if there is a substantial likelihood that a reasonable investor would consider the disclosed information important in deciding how to vote or make an investment decision. Under this standard, the impact of any given piece of information on a company’s stock price generally is a key element of the materiality analysis under current law.
But it is not clear that the market would necessarily consider all of the disclosures required by the SEC’s proposed rules to be important so as to make them “material” under this historical test. Indeed, certain disclosure requirements seem to be based not on what a “reasonable investor” would view as important, but instead on what general stakeholders and the greater public would find significant. For example, the Scope 3 emissions disclosures seem to be based on general concern over climate accountability, rather than the company’s own long-term financial value.
I think this is a great point, but there’s also some authority out there to the effect that information required by SEC line-items is presumptively material. See, e.g., Howing Co. v. Nationwide, (6th Cir. 1991); In re Craftmatic Securities Litigation, (3d. Cir. 1989) (“[d]isclosures mandated by law are presumably material”). Like the author of this law review article, I think these courts are confusing materiality with the duty to disclose, but as Sgt. Phil Esterhaus used to say in the great 1980s cop drama Hill Street Blues – “let’s be careful out there.”
Cleary’s memo doesn’t address claims that the SEC’s proposed climate disclosure rules are unconstitutional, but this recent WSJ opinion piece shows that opponents of the proposal continue to make that argument.
I’m far from a crypto enthusiast, so what little I know about “Digital Autonomous Organizations,” or DAOs, is pretty much attributable to my efforts to keep tabs on The Wu-Tang Clan’s entrepreneurial activities. I suspect that some of you may be in the same boat. Fortunately, this Fried Frank “DAO Primer” offers all of us a chance to get more up-to-speed on DAOs, starting with very basic topics like “How DAOs Work”:
A DAO is an unincorporated business organization that operates on blockchain software and is run directly by those who have invested in it (the “contributors” or “members”). It is essentially an internet community with a shared purpose and the equivalent of a shared online bank account. Through a DAO, people can raise money (potentially large amounts) and organize energy aimed at a joint project, without a formalistic corporate overlay. DAOs have no physical headquarters, offices, or bank accounts; there are no directors, hired managers, other leaders, or employees.
A DAO’s governance rules and the parameters for its decision-making are encoded into the blockchain software on which it runs, making management essentially self-executing (through so-called “smart contracts” created by the coding); and all of the DAO’s transactions are immutably recorded on the blockchain, providing transparency to its members. Once a DAO’s purpose and rules are established and the code reflecting them is created, there is no need for human involvement unless a member wishes to propose for a vote of the members any change to the DAO’s purpose or the encoded rules (such as those governing how the DAO’s funds are to be spent).
The primer goes on to discuss a variety of other topics, including the purposes for which DAOs are used, how they raise funds, how investors make a profit, their advantages and disadvantages, and the various legal issues associated with DAOs.
Mark your calendar for our webcast, “Cryptocurrency: Making Sense of the State of Play” – coming up on Thursday, October 6th. Hear from Ava Labs’ Lee Schneider, Liquid Advisors’ Annemarie Tierney, Cooley’s Nancy Wojtas and Coinbase’s Jolie Yang about current regulatory posturing and risks, structuring deals & products in the current regulatory environment, lessons from recent high-profile token collapses, and guidance on how to navigate uncertainties.
This webcast is free to members of TheCorporateCounsel.net and is available to non-members for $595. If you aren’t already a member, sign up now and take advantage of our no-risk “100-Day Promise” – during the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
Happy “International Talk Like a Pirate Day” to those who celebrate. In honor of the holiday, I’m going to do something I rarely do – recommend a law review article to you just because it’s really interesting. The last time I did this was with Sarah Haan’s remarkable piece on how the rise of women investors in the early 20th century influenced the evolution of modern corporate governance concepts. Today – in keeping with Talk Like a Pirate Day’s nautical theme – I’d like to recommend Prof. Robert Anderson’s new article, “The Sea Corporation.”
In law school, we were all taught that limited liability and the other attributes surrounding a corporation were unique to that entity and arose in connection with its creation. This article says that just isn’t the case, and that maritime law’s treatment of ships and their owners was remarkably similar. Here’s an excerpt from the abstract:
Commentators widely attribute the corporation’s success to a set of features thought to be unique to the corporation, including limited liability, transferable shares, centralized management, and entity shielding. Indeed, the consensus among economic and legal historians is that these essential corporate features created a unique economic entity that rapidly displaced the obsolete partnership.
This Article argues that these economic features were not unique to the corporation, nor did they first develop in the business corporation. Over many centuries, the maritime law developed a sophisticated system of business organization around the entity of the merchant ship, creating a framework of legal principles that operated as a proto-corporate law. Like modern corporate law, this maritime organizational law gave legal personality to the ship, limited liability, transferable shares, centralized management, and entity shielding. The resulting “sea corporations” were the closest to a modern corporation that was available continuously throughout the 17th through early 19th centuries in Europe and the United States.
Prof. Anderson’s conclusion is that the independent emergence of this legal model for merchant ships shows that it was external commercial needs that drove the development of the key legal attributes we associate with the corporation. The corporation wasn’t a unique technological development that enabled the industrial revolution, but simply a more versatile version of what the maritime law had already developed.