Monthly Archives: March 2023

March 28, 2023

Activism: Thinking Like an Activist Pays Dividends

Here’s something I posted last week over on the blog:

A recent Stanford report on shareholder activism highlights some of the ways in shareholder activism and companies’ responses to it continue to evolve. In recent years, companies have frequently been admonished to “think like an activist” and identify & address potential weaknesses before activists leverage them into a successful campaign. This excerpt from the report says that’s proven to have been good advice:

As a result, more companies are looking at themselves through the lens of an activist and proactively taking actions that an activist would advocate (thereby weakening the argument for an activism campaign). Given that activists derive their power from gaining shareholder support, this means companies too are more likely to think in terms of maintaining shareholder support. Companies conduct preparedness exercises and advanced planning to discuss how they would respond, even before an activist engagement takes place. Preparedness also means that boards are much more conversant and comfortable with activism.

These practices took a dramatic step forward following the high-profile campaign between Nelson Peltz and Dupont, in which mega-cap companies realized they are not too big to become a target. Preparedness exercises have since proliferated to many large, medium and, in some cases, small-sized firms.

One result of this preparation is that companies have increased their success when campaigns come to a vote. According to statistics from FTI Consulting, whereas the activism slate historically has prevailed 50 percent of the time in a proxy contest, in recent years that success rate declined below 30 percent. Only around 30 directors are replaced each year in contested elections in the United States.

The report notes that how the universal proxy rules will affect these statistics remains to be seen, but says that boards will study early campaigns in order to learn how to improve their responses to activists in the new environment.

John Jenkins

March 28, 2023

Compliance Dates: Form 4 & 5 Checkbox & Electronic Form 144 Deadlines Looming!

Well, you can’t say we haven’t warned you about a couple of looming compliance deadlines for recent rule changes – but we’ll do it again anyway with the help of this White & Case memo. The memo reminds readers that the new 10b5-1 checkboxes for Form 4s & 5s will be required beginning April 3rd and that electronic Form 144s will be required beginning on April 13th. This excerpt highlights the actions that affiliates who trade in reliance on Rule 144 may need to take prior to the deadline:

Importantly, affiliates required to file Forms 144 should obtain and/or confirm their EDGAR codes needed to make the required electronic filings well ahead of a planned sale. For directors and executive officers selling issuer equity securities, issuers should be prepared to obtain and/or confirm those codes on their behalf, and should also check with brokers used by the company and insiders to confirm that the necessary steps are being taken to make the electronic Form 144 filings on a timely basis.

Directors and executive officers of foreign private issuers (“FPIs”) do not typically have EDGAR codes; therefore, before Form 144 electronic filings become mandatory, FPIs will need to apply for and receive EDGAR codes for all of their directors and executive officers who may rely on Rule 144 for sales of issuer equity securities.

If you have questions on Rule 144, don’t forget our Rule 144 Forum, where Robert Barron has been responding to our members’ questions for more than 20 years. If you have questions on the new checkbox requirement, the recent changes in gift reporting, or any other Section 16 issues, you can use the Q&A Forum on to direct them to Alan Dye – and that alone is reason enough to subscribe if you don’t already! Please email or visit our membership center to subscribe to this invaluable resource online.

John Jenkins

March 27, 2023

Risk Management: Protecting Your Company From the Next Banking Crisis

We’re continuing to post resources on the fallout from the collapse of SVB in our “Financial Institutions” Practice Area. Unfortunately, it still looks like there’s a chance that we could end up with a broader banking crisis on our hands – but even if we all dodge the bullet on this one, companies would be wise to consider how to mitigate the risks of a future crisis on their own businesses.  This Freshfields memo recommends that companies implement an investment policy to actively manage those risks:

Every company should adopt an investment policy and actively manage investment risk. An investment policy prescribes how management should invest the company’s cash balances. For operating companies, investment policies accomplish at least two goals. First, the policies set forth the types of securities in which the company can invest and requires management to monitor the maturity profiles of such securities, any liquidity concerns and the performance of the investment portfolio.

Second, for operating companies, investment policies are designed to ensure that a company’s cash resources are not deployed in a manner that would inadvertently cause the company to become an investment company under the Investment Company Act of 1940, as amended. This is important because a failure to register as an operating company, even if inadvertent, can have significant negative direct and indirect consequences, including the potential unenforceability of all of the company’s contracts, SEC enforcement action and litigation.

The memo says that the policy should address, among other things, the company’s liquidity needs, cash flows, cash balances and portfolio performance, risk & concentration limits, and alternative capital sources. It also addresses the oversight responsibilities of management and the board, and the role that legal can play in helping to develop the policy and ensure that it works as intended.

John Jenkins

March 27, 2023

Crisis Communications: Disclosure Controls Need to Meet the Challenge

This Wachtell memo says that the SEC’s recent settled enforcement action against Blackbaud provides a reminder to companies that when they communicate about a corporate crisis, their disclosure controls and procedures need to be sufficient to ensure that those communications are accurate. As this excerpt indicates, among other things, this requires companies to make sure that appropriate information about the facts on the ground is communicated to those making decisions about disclosure:

On July 16, 2020, Blackbaud disclosed that it had discovered a ransomware attack, but also stated that the attacker did not access any donor bank account information or Social Security numbers. According to the SEC’s order, within a matter of days, Blackbaud’s technology and customer service personnel learned that the statement about access to sensitive information was erroneous.

Nonetheless, those personnel failed to communicate that knowledge to senior management. As a result, not only did Blackbaud fail to correct the erroneous disclosure, but it also subsequently filed a Form 10-Q that failed to disclose that the attacker removed sensitive customer data. The SEC charged Blackbaud with negligence-based misrepresentations, as well as reporting violations and failure to maintain adequate disclosure controls.

The memo notes that the SEC imposed a $3 million civil penalty in this proceeding, and contrasts that with the $1 million penalty it imposed in a very similar 2021 proceeding involving Pearson. It suggests that it’s reasonable to assume that the SEC is acting on its well-publicized warnings that the penalties are going up.

John Jenkins

March 27, 2023

SEC Cautions Investors on Crypto Securities

The crypto bros have been having a bit of a moment in recent weeks, as bitcoin rallied while bank stocks burned. Some crypto-evangelists have contended that recent events have “exposed the fractional reserve banking system’s core limitations and strengthened the case for investing in bitcoin”.  You folks do what you want, but I think it’s worth comparing the relative outcomes for SVB & FTX depositors before pulling your life’s savings out of the federally insured banking system and making a bet that Charlie Munger isn’t right about everyone’s favorite digital tulip.

Anyway, the SEC made it pretty clear last week that the crypto bros aren’t making much headway with it. In addition to Coinbase’s disclosure that it had received a Wells notice from the agency, the SEC’s Office of Investor Education & Advocacy issued an investor bulletin on Thursday warning about the risks of crypto investments.  The bulletin was lengthy, but the SEC started it off with this “TLDR” summary:

TLDR: The SEC’s Office of Investor Education and Advocacy continues to urge investors to be cautious if considering an investment involving crypto asset securities. Investments in crypto asset securities can be exceptionally volatile and speculative, and the platforms where investors buy, sell, borrow, or lend these securities may lack important protections for investors. The risk of loss for individual investors who participate in transactions involving crypto assets, including crypto asset securities, remains significant. The only money you should put at risk with any speculative investment is money you can afford to lose entirely.

Among other things, the bulletin points out that those offering crypto asset investments or services may not be complying with applicable law, including federal securities laws, and that the marketplace is full of fraudsters peddling scams to retail investors.

John Jenkins

March 24, 2023

Securities Offerings: SEC Taking a Broad View

Earlier this week, the SEC announced charges against a “crypto asset entrepreneur” and three of his wholly-owned companies for what the SEC is saying were unregistered offers & sales of crypto asset securities, as well as market manipulation allegations based on purported “wash trades.” What’s interesting even if you’re not generally following the ins & outs of crypto is that in its 50-page (!) complaint – the SEC has taken an expansive view of the type of activity that violates Sections 5(a) and 5(c) of the Securities Act, which require issuers to register offerings of securities through an effective registration statement before the securities are offered and sold to the public (or to have a valid exemption from registration).

The Commission has taken issue not just with sales for cash, but also “giveaways.” For example, in regard to an “emoji contest” in which participants could win a combined 31,000 of the coins at issue for sharing what the SEC calls “promotional artwork” and emojis on social media, the complaint says:

By entering the “emoji contest,” participants provided the defendants with valuable consideration—the online promotion of the their platform and ecosystem, promotional artwork to feature on the their website, and the Twitter and Facebook handles of entrants and their tagged friends—in exchange for an opportunity to receive their crypto assets.

Neither the defendant nor his entities took any steps to exclude U.S. persons from receiving coins in this offering, and at least one of the winners who received the crypto assets was a resident of this District.

Airdrops: also problematic, in the SEC’s view.

There’s a lot more to this complaint, which as I mentioned goes on for 50 pages. It’s just the latest in a string of SEC crypto-related enforcement actions and head-shakings, all of which build on a a 50% year-over-year increase in enforcement actions in 2022. Coinbase also furnished a Form 8-K this week to disclose its receipt of a Wells Notice which the company believes could relate to its spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet.

Since John covered an NBA connection a few weeks ago and I don’t want to let anyone down who follows this blog for celebrity gossip, I’ll note that expectant mom Lindsay Lohan and several others were also caught up in this. They settled allegations that they illegally touted the crypto assets.

Liz Dunshee

March 24, 2023

Gen X: Finally Getting Validated

At the risk of the boomers telling me to “get off their lawn” and millennials asking, “what about us?” – I’d like to flag a study from three assistant/associate professors at the University of New Hampshire that says Gen Xers have left their “slacker” stereotype behind in the boardroom and are associated with significantly better company performance. Here’s more detail:

Our analysis indicates that the percentage of Gen X directors on the board is significantly and positively related to firm value. We use several econometric techniques to address the concern that this effect could be driven by a simple age effect or by other director and firm characteristics correlated with the likelihood of having Gen X directors on the board.

Furthermore, we shed light on the potential channels through which Gen X directors could be influencing company performance. First, we find that firms with Gen X directors make value enhancing investments in corporate social responsibility (CSR). Second, we document that male Gen X directors facilitate the inclusion of women on the board which ultimately leads to better firm performance. Lastly, we find that Gen X directors are especially valuable for firms that engage in knowledge-intensive activities.

The usual caveats apply here – the data is backward-looking & has already aged (although the data set goes through 2017, that feels like a lifetime ago…how are these companies doing today?). As someone “on the cusp” and not clearly a member of any specific generation, I have no real dog in this fight. The point is that for one shining moment in time, Gen X is the MVP. Let’s allow them to relish it.

Liz Dunshee

March 24, 2023

ESG: Make a Buck Off Humanity’s Demise

Look, I’m sorry if this makes me a downer as we head into the weekend, but this headline from ISS Corporate Solutions shows that capitalism will outlive cockroaches: “The Looming Antimicrobial Resistance (AMR) Pandemic: Opportunities for Investors.”

Maybe you find this inspiring. “Now I can hedge against a painful encounter with MRSA!” you say as you trade stocks on your way to the hospital. If that’s the case, good on you, please do not let me rain on your parade.

ICS makes a compelling case for this being a measurable “ESG” issue – with these types of data points:

– Share of net sales of antibiotics dedicated to intensive animal farming

– Hygiene management methods at healthcare facilities

– Reducing pharmaceutical ingredients, including antimicrobials, in wastewater at production sites

This all makes sense, but the headline without that context is the type of thing that gives ESG a reputation for being totally absurd in some circles. You would think that humanity could pull together just for the sake of the common good, but apparently “seeking alpha” is the only thing that folks can agree on.

Liz Dunshee

March 23, 2023

Shadow Trading: Report Raises the Profile of “Potentially Troubling” Trading Patterns

The SEC scored a big win last year on a novel “shadow trading” case that it brought in 2021, when a federal court allowed the litigation to proceed. That case hasn’t been decided – but if the SEC is feeling lucky, a ProPublica investigation that was published last week may give the Enforcement Division a jumpstart in finding more trades to investigate. Here’s an excerpt:

ProPublica analyzed millions of those trades, isolated those by corporate executives trading in companies related to their own, then identified transactions that were anomalous — either because of the size of the bets or because individuals were trading a particular stock for the first time or using high-risk, high-return options for the first time.

The records give no indication as to why executives made particular trades or what information they possessed; they may have simply been relying on years of broad industry knowledge to make astute bets at fortuitous moments. Still, the records show many instances where the executives bought and sold with exquisite timing.

Such trading records have never been publicly available. Even the SEC itself doesn’t have such a comprehensive database. The records provide an unprecedented glimpse into how the titans of American industry make themselves even wealthier in the stock market.

Bloomberg’s Matt Levine pointed out that there are situations where executives may be making these types of trades for non-nefarious reasons, such as hedging:

One possibility here is that he was deeply informed about the auction, he had nonpublic information that made him think that Nationstar would win, and he bought Nationstar stock to bet on it going up. Another possibility is, look, there was an auction, somebody was going to win, and it would be good for him if his company won and bad for him if another company won. He did his best to win, but he bought shares in the other company to cushion the blow in case he lost. If Ocwen had won this auction, presumably he’d have a loss on his Nationstar shares, but he’d have a gain on his Ocwen shares and his career generally; this $157,000 gain was the consolation prize.

If the SEC starts pursuing this theory more aggressively, that type of bet may not be worth the risk. The Commission is already using data analytics to find irregular trades, and so is the DOJ! So, this new “data trove” may add to the regulators’ arsenal.

The question for us compliance folks is whether the insider trading policy should include a broad prohibition on trading in other public company securities, including competitors. Having that language could make it more likely that an insider would face consequences for “shadow trading” – but it may also provide more protection to the company, if it gets caught up in the investigation. Ideally, it also would keep everyone out of hot water in the first place. This report could help executives take the prohibition to heart.

Liz Dunshee

March 23, 2023

Rule 10b5-1 Plans: New Rules Throwing a Wrench in “Sell-to-Cover” Arrangements

One of the many practical difficulties in complying with the SEC’s new parameters for Rule 10b5-1 plans is navigating the fact that what may seem like “plain vanilla” transactions relating to equity awards can cause problems for your insiders and company. A member recently asked this question on our “Q&A Forum” (#11,532):

Our plan documents (like several other companies) permit the company to require award recipients to satisfy tax withholding obligations through sell to cover transactions at the time of award vesting (here, RSUs), and authorize the company to determine the means of the sell to cover transaction and even to arrange the sale on behalf of the award recipient without consent. In terms of amount of shares to be sold, the company is authorized only to sell shares in an amount necessary to satisfy tax withholding obligations.

The company is looking to exercise this right as a standing requirement for all award recipients going forward until further notice. Under the new 10b5-1 rules, (1) would the company’s exercise of this right typically have the benefit of being a 10b5-1 plan “eligible sell to cover transaction” by itself, (2) would the sell to cover transaction require a 90-day cooling off period and (3) can the company only force the sell to cover transaction when it is not in possession of MNPI? (I presume the sell to cover transaction would be matchable for any Section 16 officer participant, given it would still be a sale by the award recipient.)

John responded:

I suppose it’s possible that a properly structured plan like the one you’ve outlined might be able to fit within the confines of the “sell-to-cover” exemption, although as our panelists pointed out in our webcast on the 10b5-1 amendments, there are all sorts of issues that may make the sell-to-cover exemption extremely cumbersome in practice. I also discussed those issues in the most recent issue of The Corporate Counsel newsletter.

Since the sell-to-cover exemption only applies to the restriction on multiple plans, I believe the cooling off period would apply to transactions under that plan. However, even if you structure these plans to meet Rule 10b5-1’s requirements with respect to the executives, I think that the fact that the company would effectively control the sales made under this arrangement would compel it to either structure the plan in way that permitted the company itself to rely upon Rule 10b5-1 or to make sales only at times when it was not in possession of MNPI and otherwise in accordance with the provisions of its insider trading policies.

Suffice it to say, it is easy to get tripped up under these new rules. Make sure to think carefully about any transactions, and remember that Form 4 and Form 5 filings made after April 1st will need to have a checkbox that says whether a trade is made pursuant to a Rule 10b5-1 plan. Alan blogged the other day on that Edgar has been updated to accomodate that revision.

Liz Dunshee