According to this recent Cornerstone Research report, SEC & PCAOB accounting and auditing enforcement actions increased by 55% in 2022 from 2021, but remained below pre-pandemic levels. Here’s an excerpt with some of the specifics:
Actions referring to announced restatements and/or material weaknesses in internal control climbed to the highest level in recent years, and actions involving alleged violations of Section 304 of the Sarbanes-Oxley Act of 2002 (the so-called “clawback” provision) increased sharply.
Total monetary settlements dropped substantially in FY 2022 due, in part, to the absence of any very large settlements (i.e., those over $1 billion). The SEC acknowledged that 24% of the 90 respondents who settled in FY 2022 offered cooperation and/or undertook remedial efforts, up from 20% in FY 2021.
The most common allegations in actions initiated in FY 2022 related to a company’s revenue recognition and internal control over financial reporting. One or both violations were alleged in 63% of FY 2022 actions.
The market for sustainability-linked bonds has grown quickly in recent years, with issuances reaching $76.3 billion in 2022 according to Climate Bonds Initiative. The capital markets team at Mayer Brown recently released this insight providing practical considerations for documenting and structuring SLB issuances. For those new to sustainable finance, the article distinguishes SLBs from green bonds as follows:
SLBs are bonds where the financial and/or structural characteristics vary depending on whether or not predefined sustainability performance targets (“SPTs”), determined by reference to key sustainability performance indicators (“KPIs”), are met.
Unlike “green bonds”, there is no requirement that the proceeds be allocated to a sustainable project or purpose. The proceeds from an SLB may be used for general corporate purposes or, indeed, any other purpose.
The article goes on to review the following key points, specific to SLBs:
1. Align the SLB terms and conditions with the SLB framework
2. SLB specific risk factors and disclaimers
3. Redemption provisions
4. Failure to report need not be an event of default
5. Be clear with your recalculation language
6. Identify tax and accounting implications early on
7. Exercise caution with ECB eligibility
8. Seek to ensure credibility of KPIs, SPTs and implications of failing to hit SPTs
9. Manage your marketing material
10. Consider enhanced due diligence
It also notes that this is an evolving market and the Mayer Brown team is beginning to see other innovations that are presumably in early stages—including the increased use of “sustainability co-ordinator” mandate letters, step-down instruments and mechanisms linked to non-cash penalties, such as charitable donations and carbon credits.
This recent alert from Richards Layton & Finger summarizes the 2023 proposed amendments to the DGCL expected to be considered by the General Assembly this year. As the alert describes, if adopted, the amendments would make a number of changes to Section 242, which governs procedures for amendments to a company’s certificate of incorporation:
Section 242 will be revised to (i) eliminate the need to obtain the default vote of stockholders for charter amendments effecting specified types of forward stock splits and associated increases in the authorized number of shares, and (ii) reduce the minimum stockholder vote required to authorize a charter amendment increasing or decreasing the authorized shares of a class, or effecting a reverse split of the shares of a class, in circumstances where the shares of such class are listed on a national securities exchange immediately before the amendment becomes effective and meet the listing requirements of such exchange after the amendment becomes effective.
You heard that right! Here’s more:
New Section 242(d)(2) provides that a corporation may amend its certificate of incorporation to increase or decrease the authorized shares of a class of stock, or to effect a reverse stock split in respect of a class of stock, without obtaining the vote or votes otherwise required by Section 242(b) (i.e., at least a majority in voting power of the outstanding stock entitled to vote thereon) if (i) the shares subject to the reverse stock split are listed on a national exchange immediately before the amendment becomes effective and such corporation meets the listing requirement of such exchange relating to the minimum number of holders immediately after the amendment becomes effective, (ii) at a meeting of stockholders at which a vote is taken for and against the proposed amendment, the votes cast for the amendment exceed the votes cast against the amendment, and (iii) the amendment increases or decreases the number of shares of a class of stock that has not opted out of the class vote pursuant to the last sentence of Section 242(b)(2) (which sentence provides that an amendment to the certificate of incorporation to increase or decrease the authorized shares of a class, which would otherwise require a separate vote of the holders of the class, may be approved by the holders of the stock entitled to vote), the votes cast for the amendment by the holders of such class exceed the votes cast against the amendment by the holders of such class.
The proposed DGCL amendments would be a welcome development for Delaware companies with a large retail base to avoid any AMC-like legal Rummikub in the future!
In his remarks before the International Swaps and Derivatives Association Annual Meeting on May 10, SEC Chair Gary Gensler gave his two cents on the debt ceiling, and I can’t say they’ll help me sleep better at night. Here’s what he said:
Before I close, I’d like to say a few words regarding the ongoing discussions in Washington around the debt ceiling.
While we at the SEC have no direct role in those discussions, the outcome is directly consequential to each part of our mission: protecting investors, facilitating capital formation, and maintaining fair, orderly, and efficient markets.
We’ve already seen an effect in the pricing and liquidity of short-dated Treasury bills and continue to monitor for any additional tremors.
If the U.S. Treasury as an issuer were actually to default, it would have very significant, hard to predict, and likely lasting effects on investors, issuers, and markets alike.
In a word, it would make the Cyclone Roller Coaster at the 1933 Chicago World’s Fair look like a kiddie ride.
Here’s a post I recently shared on our Proxy Season Blog for members of this site:
Since their launch, the ISS Environmental and Social (E&S) Disclosure QualityScores have been a source of heartburn for many companies. With their placement in ISS’s well-reviewed and highly-anticipated proxy reports, boards and management teams can’t help but focus on them, even in cases where other ESG ratings—like MSCI and Sustainalytics—may be used more by investors.
ISS recently announced that it plans a comprehensive update to the E&S Disclosure QualityScore scoring methodology in the third quarter. Here’s more info on what’s coming:
More than 150 factors will be revised for greater relevance, close to 50 factors retired, and more than 60 new factors will be added. These additions are driven by the expansion of current disclosure coverage and the addition of new material topics. As a result of this methodology update, the Environmental & Social Disclosure QualityScore will be supported by 360 comprehensive and refined factors. The update will also include a review of the model’s materiality assessment, comprising an adjustment of category and factor-specific weights to better capture the depth and the extent of disclosure. Issuers within the coverage universe will have an opportunity to verify the new data in July prior to which ISS ESG will provide more granular details on the nature and scope of the planned enhancement.
It’s still too early to tell whether universal proxy is significantly changing the activism game, but it may at least be influencing smaller activists to move forward with campaigns. Here’s something that Meredith blogged yesterday on DealLawyers.com:
Michael Levin recently shared another UPC development – the second activist success story:
An individual investor, Daniel Mangless, owns 2.3% of Zevra Therapeutics (ZVRA), since 2019. Other than a few Form 13Gs for ZVRA and one other holding, the preliminary proxy statement for ZVRA was his first-ever SEC filing and, it appears, activist project.
He rather quietly nominated three candidates for three available seats on the seven-person classified BoD. ZVRA nominated the three incumbents, including the CEO and a director first appointed in November 2022. He also proposed reversing any bylaw amendments from 2023, which the ZVRA BoD could have approved but not disclosed to shareholders.
At the ASM last week, all three challengers won by a significant margin over the three incumbents. The bylaw amendment reversal also prevailed by a similar margin.
What’s a significant margin? All three activists won 80% of the votes cast, with the bylaw proposal passing with 84% of the vote. So, while UPC may have helped encourage the activist, it doesn’t appear to have impacted the outcome:
Shareholders didn’t see the need to split votes among incumbent and activist candidates, one of the features of UPC. All three challengers each received approximately the same votes, as did the three incumbents.
The other notable feature of this campaign was the activist’s particularly low expenses, estimated at $250,000.
I blogged earlier this week about a record-setting whistleblower award. A case that’s on the SCOTUS docket may affect the ability of future whistleblowers to establish claims. Here’s Kevin LaCroix at D&O Diary:
The U.S. Supreme Court has agreed to take up a case that will address the question of whether or not a claimant alleging that his employer fired him in retaliation for whistleblowing must prove that the employer acted with retaliatory intent. The court’s consideration of the case has important implications for claimants under the Sarbanes-Oxley Act’s anti-retaliation provisions, because claimants could face significantly greater difficulty in establishing their claims if they must prove that the employer acted with subjective intent to retaliate. The case could also have important implications for retaliation claims under other federal whistleblower protection laws. The Court’s May 1, 2023, order agreeing to take up the case can be found here.
Kevin gives background on the case & the cert petition, and discusses the potential impact:
The Second Circuit’s requirement of a showing of retaliatory intent “significantly raised the threshold for Sarbanes-Oxley whistleblower plaintiffs,” as the Seyfarth Shaw law firm put it in a memo published just after the Second Circuit issued its opinion. As the memo also noted, “a potentially significant number of cases will not meet the requirement” for the claimant to show retaliatory intent.
Moreover, this case not only has important implications for SOX whistleblowers; a number of other federal statutory provisions have anti-retaliation provisions that operate similarly to the provisions in SOX. As Senators Grassley and Widen put it in their amicus brief, at least 17 other federal statutes have “virtually identical whistleblower protection” provision, and so the Second Circuit’s holding, if not addressed, could significantly affect the level of protection available under a variety of whistleblower statutes.
The Supreme Court will hear argument on the case in the fall and it will likely issue its ruling in the case in early 2024. The case will be interesting to watch as it could significantly affect the difficulty for whistleblower plaintiffs to establish claims that they were retaliated against for the whistleblower activities.
When it comes to the big award that the SEC announced last week, the Financial Times Alphaville has a “low-confidence bet” that it was tied to the WhatsApp probe, which also happened to be the subject of an SEC announcement yesterday, and Bloomberg reported that the SEC is continuing to investigate “off-channel communications” at other brokers.
Last week, State Street Corporation announced three new publicly available data sets that will show portfolio allocation trends among large institutional investors. Here’s more detail:
– The Institutional Investor Holdings Indicator tracks the aggregate holdings of institutional investors across three asset classes: stocks, bonds and cash. Shifts in asset allocations convey information about how investors view the economy and their outlook for markets. When investors are bullish on markets, they tend to hold more stocks; when they are bearish, they tend to hold more cash and bonds. The Holdings Indicator is calculated daily and will be released monthly.
– Institutional Investor Risk Appetite Indicator is based on flows—buying and selling activity—rather than portfolio positions. It reveals whether investors, in aggregate, are buying or selling risky assets. For example, selling less risky bond or stock investments to buy riskier ones would drive up this score. While the Holdings Indicator tells us about current positioning, the Risk Appetite Indicator tells us about the direction of travel. The Risk Appetite Indicator is calculated daily and will be released monthly.
– The State Street S&P Global Institutional Investor Carbon Indicator tracks the overall exposure of institutional investor portfolio holdings to carbon emissions. Leveraging aggregated and anonymized custody and accounting data from State Street, together carbon emissions data from S&P Global powered by S&P Global Sustainble1, the indicator will show how institutional investors are managing their exposure to carbon risk, and what is driving shifts in these exposures. The Carbon Indicator will be released annually.
The tracker for carbon emissions is useful for anyone attempting to understand & predict investor behaviors on that topic, because it is a data-based alternative to the various polls & surveys that float around from time to time. In fact, State Street has already used the data for a new report – which shows that from March 2022 – March 2023, investors’ emissions exposures increased, while intensity exposures fell.
I don’t know whether that outcome was something investors were intentionally striving for, but it shows how complex and nuanced asset allocation is during this time of the energy transition – versus just “woke” or “not woke.” Here are the highlights from the study (also see this ESG Today article):
• The carbon emission exposures of institutional portfolios rose in between March 2022 and March 2023, returning to levels higher than any seen since 2019: portfolio companies emitted more carbon overall with emissions exposure rising over 8% from 3.93 to 4.27 million metric tonnes year over year.
• The efficiency with which portfolios leverage carbon emissions to generate revenues, however, increased, with carbon intensity exposure falling over 10% from 152 to 137 tonnes emitted per $1 million of revenue. These contrasting moves represent, respectively a sharp reversal in the trend of declining exposures and a continuation of the trend in efficiency gains that we observed between March 2018 and March 2021. The low emissions exposures of 2020 and 2021 were driven in part by global declines in emissions due to COVID restrictions, and these have reversed as the economy has recovered.
• From March 2022 to March 2023, high-carbon sectors, such as Energy, outperformed the overall market as oil prices remained elevated. These companies performed well even as the regulatory price of emissions rose in Europe.1 As a result of these higher valuations, Energy holdings represented a larger share of many institutional portfolios; this repricing was the main driver of increased weighted-average carbon emissions exposure at the portfolio level, while the general post-COVID renewal of economic activity accompanied increased emissions by Energy, Materials, and Utilities firms. The decrease in intensity exposure was driven by Energy and Materials companies – in this case by their reductions in company carbon intensity as firms grew revenues faster than emissions.
• Despite the fact that carbon-intensive sectors like Energy outperformed the market in 2022, many sophisticated decarbonization strategies also outperformed. This seeming paradox is due to the fact that sophisticated decarbonization strategies hold sector weights neutral and tilt toward more carbon efficient firms within each sector. For example, they might hold overall exposure to the Energy sector constant, but tilt toward more efficient emitters within that sector. As a result, they can benefit when energy prices rise since they are tilted toward companies that use energy more efficiently.
The DOJ announced this week that a former product manager at Coinbase has been sentenced to 2 years in federal prison for sharing confidential company info about token listings with his brother & friend so that they could trade in those tokens. Although the charges were unique because they were the first-ever insider trading case involving crypto and gave us an early sign that the SEC was going to take a harder stance on tokens being securities, this case also has ramifications for companies and employees in any industry – because it shows the harsh consequences that can result from insider trading.
A 2-year stint in federal prison is nothing to sneeze at. This Bloomberg article further highlights that prosecutors are out for blood, and details the parade of horribles that can accompany an insider trading conviction, in addition to jail time:
“This error in judgment has cost him everything: his career, his health, his relationships, his family’s name, and has seriously jeopardized the future of his relationship with his long-term girlfriend,” Wahi’s lawyer, David Miller, wrote in a sentencing memo. “Ishan has squandered years of hard study in school, tireless years of professional development, and forfeited his ability to work in what was a promising and lucrative career.”
Prosecutors sought a sentence of 37 to 46 months behind bars, the same amount called for by federal guidelines, saying that giving him just 10 months would send the wrong message.
Earlier this year, I blogged about a guilty plea & 10-month prison sentence for one of the tippees in this case. Last week, a former exec at a different company was convicted in an insider trading case involving NFTs.
With many companies taking a fresh look at insider trading policies and training programs right now, this sentence can serve as a reminder to insiders about why it’s important to follow the policy. See our “Insider Trading Policies Handbook” for an updated model policy and lots of practical guidance.
A recent study from a Marquette finance prof examines trends in Reg A offerings post-JOBS Act. This is useful since one of the goals of the JOBS Act was to make Regulation A a more viable option for capital raising by smaller companies, by significantly raising the maximum offering size and turning it into what became known as “Reg A+”.
The study shows that Reg A has become more popular since the JOBS Act was enacted. The number of qualified filings increased from an average of eight per year before the Act to over 160 annually in 2022. However – possibly due to continued perception of high offering costs, or just a general lack of awareness – Reg A is still an underdog when it comes to capital raising alternatives.
The study provides some insights & trends on qualification that may help anyone considering this route, and suggests ways that policy-makers can continue to help Reg A be all that it can be. Here are a few key data points, from this CLS summary:
– Number of Filings per Year: The number of filings increased over time (especially Tier 2 offerings), with a peak of 274 filings in 2021 (see Figure 2). (Tier 1 Reg A offerings allow companies to raise up to $20 million in a 12-month period, while Tier 2 Reg A offerings allow companies to raise up to $75 million in a 12-month period, but also have additional disclosure requirements and ongoing reporting obligations.)
– Percentage of Qualified Offerings by Year: The percentage of offerings qualified by the SEC increased from 39 percent in 2015 to 78 percent in 2022.
– Offering Size Distribution of Qualified Offerings: The average offering size of qualified offerings was $22 million, with a range of $1.5 million to $75 million. Larger offerings were positively associated with SEC qualification, indicating that issuers who align their offering size with their financial fundamentals are more likely to obtain SEC qualification.
– Use of Professional Advisers in the Registration Process: The use of professional advisers, such as lawyers and accountants, was positively associated with SEC qualification. Issuers who engage professional advisors earlier in the process likely signal a higher level of competency to the SEC.
– Industry Distribution of Qualified Offerings: The technology sector had the highest number of qualified offerings, followed by healthcare and consumer goods.