The latest issue of The Corporate Executive has been sent to the printer. It’s also available online to members of TheCorporateCounsel.net who subscribe to the electronic format. This issue is particularly timely as we head into proxy season and focus on proxy advisor policies:
– ‘Now What Do We Do?’ Dealing with Negative Proxy Advisor Recommendations
Read it now for practical tips for advance preparation and keep it handy for the future if you find yourself facing a surprise negative recommendation. Don’t miss out on all the practical guidance that The Corporate Executive has to offer. Email sales@ccrcorp.com to subscribe to this essential resource.
This post on the CS Blue Sky Blog highlights findings from “A Comparison of Direct Listings and Initial Public Offerings,” a study by Anna Bergman Brown of Clarkson University, Donal Byard of Baruch College, and Jangwon Suh of Queens College. Given suggestions by SEC commissioners and other regulators that direct listings present greater risk to investors than IPOs, the study assessed the types of companies that listed via IPO versus direct listing and the average price volatility post-listing.
The study used a sample of IPOs and direct listings on European stock exchanges given the historically few direct listings in US markets, despite their increasing popularity since Spotify’s in 2018. Here’s an excerpt summarizing the findings:
The first significant finding is that, on average, DL firms are significantly larger, more profitable, and less leveraged than IPO firms – all of which suggest that, on average, DL firms are less risky than IPO firms.
Our second significant finding is that, when we compare the post-listing price volatility of DLs with similar IPOs, consistent with some regulators’ suspicions, we find that DLs are riskier than IPOs in the immediate post-listing period: DLs have higher price volatility than similar IPOs in the immediate post-listing period. However, we find that this excess price volatility dissipates rather quickly: On average, it lasts for only 20 trading days.
We also find that, in industries with a richer “industry information environment” – i.e., where the existing listed firms in that industry already provide relatively high-quality public disclosures – there is no difference in post-listing price volatility across DLs and IPOs.
There is still the issue of traceability…and there’s more to come on that. For now, for more on direct listings, take a look at our “Direct Listings” Practice Area.
Last week, in Grabski v. Andreessen (Del. Ch.; 2/24), Chancellor McCormick denied a motion by directors and officers of Coinbase Global to dismiss claims that arose from Coinbase’s 2021 direct listing on Nasdaq. The plaintiff acquired stock in the direct listing and filed suit derivatively, alleging the defendants breached their fiduciary duties by selling $2.9 billion worth of stock in the direct listing based on MNPI and were unjustly enriched by the sales. A month after the listing, the company announced quarterly earnings and a capital raise through a notes offering and the stock price dropped.
Defendants sought to dismiss on the basis that the plaintiff failed to show the directors’ personal interest for demand futility purposes. Chancellor McCormick disagreed. After listing the amounts of sales by the director defendants, she states:
Plaintiff argues that it is reasonably conceivable that this amount of money was material to each Director Defendant such that none could impartially consider a pre-suit litigation demand attacking the sales. Plaintiff need not allege facts concerning each Director Defendant’s personal wealth to support this conclusion—$50 million is presumptively material. […] In the real world, the billions of dollars made by the Director Defendants constitutes a material personal benefit that would render a director incapable of impartially considering a demand attacking those sales. Demand is excused on this basis.
The opinion also found demand to be excused on the basis that the director defendants face a substantial likelihood of liability. The opinion only addresses one of the four categories of information plaintiff claims is MNPI — a 409A valuation approved by the board the same day as the direct listing. As to its materiality, the opinion declines to make any defendant-friendly inferences at the pleadings stage.
The defendants argued against the inference of scienter due to the proportion of their holdings represented by the sales and that they could have made more by selling more stock shortly after the initial sales but chose not to. To this, Chancellor McCormick said, “Plaintiff need not allege that Director Defendants maximized the value gained from their alleged impropriety” to infer scienter at the pleadings stage.
What does this mean for direct listings? The opinion says this:
Although the defendants’ briefs read like a philosophical apology for direct listings, the plaintiff’s claims do not place that relatively nascent transactional structure on the chopping block. Rather, this is yet another instance where a stockholder plaintiff calls on this court to deploy “well-worn fiduciary principles” to a new transactional setting.
2023 once again saw near-record levels of shareholder activism, and 2024 is already off to an interesting start! As activist strategies continue to evolve, it’s as important as ever to understand who the activists are and what makes them tick.
Tune in tomorrow at 2 pm ET for the webcast – “Activist Profiles & Playbooks” – to hear Juan Bonifacino of Spotlight Advisors, Anne Chapman of Joele Frank, Sydney Isaacs of H/Advisors Abernathy and Geoffrey Weinberg of Morrow Sodali discuss lessons from 2023, the evolution of activist strategies, UPC, what to expect from activists this proxy season and how to prepare.
We are making this DealLawyers.com webcast available on TheCorporateCounsel.net as a bonus to members – it will air on both sites.
If you attend the live version of this 1-hour program, CLE credit will be available in most states. You just need to fill out this form to submit your state and license number and complete the prompts during the program. All credits are pending state approval.
Members of TheCorporateCounsel.net and DealLawyers.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
Securities lawyers aren’t exactly known to be “early adopters” of new technology. We tend to be skeptical. But the latest leap in “AI” capabilities is hard to ignore. This Gibson Dunn memo gives examples of how data analytics and artificial intelligence can make disclosure compliance work easier and better – and explains why you should get up to speed sooner rather than later. Here’s an excerpt:
There are several ways companies could use data analytics technology to assess and mitigate the risks posed by current and coming disclosure requirements. As an initial matter, companies could use some of the third-party tools described above to test their data and disclosures.[45]
Companies could use existing data sets of SEC comment letters and enforcement actions to develop their own lists of SEC hot topics and trends. Companies could use data analytics technology to compare the disclosures of peer companies and compare those disclosures against their own. This type of analysis could help companies identify whether peers are handling their disclosures differently and inform changes to their disclosures if the analysis identifies gaps. Especially in uncertain or new regulatory environments, such as the SEC’s new cybersecurity reporting rules and its proposed emissions reporting rules, evaluating and learning from the disclosures of peer firms is an important way to mitigate risk. Data analytics technology can make that process more efficient and dynamic.
Companies could also employ data analytics technology to learn from the mistakes peer companies have made with their disclosures. For example, companies could analyze SEC or Environmental Protection Agency (EPA) enforcement actions and identify the issues that triggered regulatory scrutiny. Data analytics technology could enable analysis of a vast number of relevant enforcement actions to discern key compliance errors or patterns of enforcement. Companies could also cross reference the disclosures of peer companies against SEC or EPA enforcement actions to identify which disclosures triggered investigation and enforcement.
Looking inward to the company’s own data, data analytics technology could be used to evaluate internal controls and monitor and analyze hotline or whistleblower complaints. Similarly, companies could employ data analytics technology to analyze their own historical disclosures and compare them against current enforcement priorities and new regulations to determine what the potential risks are and what, if any, sections of the disclosures need to be updated or modified.
The memo also shares ways that data analytics can be used to mitigate activism and litigation risks, address fraud and non-compliance, combat corporate misinformation, and more. The memo cautions that AI still has plenty of shortcomings and cannot be fully trusted. That said, regulators, activists, and plaintiffs are already using this technology – so companies (and their advisors!) will be at a disadvantage if they don’t understand its capabilities. I, for one, will be welcoming our robot overlords with open arms.
Earlier this week, the U.S. Chamber of Commerce announced that it had teamed up with other business organizations to file a lawsuit against the state of California over its new climate disclosure laws. Here’s what my colleague Zach Barlow shared about this development on PracticalESG.com (also see this WSJ article):
California Climate Disclosure Bills SB 253 and SB 261 are being challenged in a new lawsuit brought by the American Chamber of Commerce. The lawsuit argues that the bills are unconstitutional on two main grounds:
1. The laws violate the First Amendment by compelling speech.
2. The federal government preempts California through the Clean Air Act and the Dormant Commerce Clause.
“Both laws unconstitutionally compel speech in violation of the First Amendment and seek to regulate an area that is outside California’s jurisdiction and subject to exclusive federal control by virtue of the Clean Air Act and the federalism principles embodied in our federal Constitution. These laws stand in conflict with existing federal law and the Constitution’s delegation to Congress of the power to regulate interstate commerce. This Court should enjoin the Defendants from carrying out the State’s plan.”
This case is not only important to the California laws, but could also shed light on what a challenge to the SEC’s upcoming Climate Related Disclosures could look like. In a case against the SEC’s rule, compelled speech will certainly be raised as an issue and this case could give us an idea of how persuasive that argument will be for the courts. Additionally, point number 2 is likely to be inverted in a future SEC challenge. Instead of arguing that the state is preempted because the federal government has the sole power to regulate emissions, the argument could invoke the Major Questions Doctrine and argue that the SEC as a federal agency doesn’t have statutory authority to regulate emissions – an argument made in comments to the SEC proposal.
The arguments here are interesting and success on either point could mean the end of SB 253 and SB 261 and introduces more uncertainty about the future of the laws. In January, it was revealed that a budget shortfall would hamstring funding for the bills’ implementation. It’s unlikely that we’ll have concrete answers about the bills’ future anytime soon as the legal challenge will take time. Whatever the initial outcome, the losing party is likely to appeal.
It’s podcast week! I am happy to share another “Timely Takes” podcast – which is indeed very timely as we enter the height of proxy season. In this 13-minute episode, John interviews Alexander McClean and Margaret Rhoda of Harter Secrest & Emery about:
1. Significant new SEC disclosure requirements
2. Recently adopted disclosure requirements that won’t apply in 2024
3. ISS & Glass Lewis 2024 policy updates
4. Advice for companies tackling their annual disclosure obligations
I’m finding that these episodes are perfect for the morning commute. If you’d like to join John or Meredith for a podcast to share insights on a securities law, capital markets or corporate governance topic, please reach out to them at john@thecorporatecounsel.net or mervine@ccrcorp.com.
Since 1972, the SEC has had a policy that defendants that settle civil claims with the Commission can’t go out afterwards and deny the allegations – which is not-so-affectionately known as the “gag rule.” Earlier this week, the Commission swatted down the latest attack on that rule – by denying a rulemaking petition from the “New Civil Liberties Alliance.” Those are the very same folks who are leading the charge against the Chevron defense in Relentless v. Dept. of Commerce – and who have engineered the SEC v. Cochran challenges to the SEC’s administrative law judge system.
SEC Chair Gary Gensler took the opportunity to make a statement about the benefits of the settlement policy. Here’s an excerpt:
Entering into a settlement is a consequential choice for both the SEC and the defendant. The Commission, in agreeing to settle a case, is relinquishing the opportunity to present the case in court. The defendant, on the other hand, relinquishes the right to defend the case in court, in the press, and in the eyes of the public. Both parties are agreeing to a set of terms based upon this 1972 policy.
More than 50 years on, I think this policy has served the public and the Commission well. I believe that amending this policy in the manner proposed by the Petitioner would alter the impact of enforcement settlements if defendants could deny any wrongdoing in the court of public opinion and dismiss sanctions as the cost of doing business without the Commission being able to revive its ability to have its day in court.
He also implies that the settlement orders are “required reading” for anyone else who wants to stay out of trouble:
Further, an essential component of settlements is the public recitation of the facts. It informs the market as to what conduct is violative of the securities laws. It alerts investors that the Commission seeks to deter that conduct, and it helps other market participants comply with the law. A settlement that allows the denial of wrongdoing undermines the value provided by the recitation of the facts, and it muddies the message to the public.
As you can imagine, the “neither admit nor deny” policy is not roundly supported by companies and other defendants. It’s also drawn harsh criticism – on 1st Amendment grounds – from a federal court. You know who else isn’t a fan? SEC Commissioner Hester Peirce. Here’s an excerpt from her lengthy dissent from this week’s decision to deny the NCLA rulemaking petition:
The demand by the government that a defendant waive a fundamental constitutional right as a condition of settlement ought to be supported by a compelling rationale. Yet, as discussed above, the Commission’s rationale of record—that the no-deny policy is necessary to “avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact occur”—lacks firm footing. It would look bad if the SEC’s settlements were shown to be baseless, unfairly negotiated, or legally flawed. The most logical solution to that concern, however, is to make sure that settlements are rooted in fact, are fairly negotiated, and are legally sound. Employing superior bargaining power to extract an agreement that defendants agree not to denigrate the settlement is a suboptimal solution.
In the end, far from shoring up the Commission’s integrity, the reliance on these no-denial conditions undermines it. More than a decade ago, a court aptly explained the problematic perceptions that flow from the Commission’s practice of settling without admissions and prohibiting denials:
[H]ere an agency of the United States is saying, in effect, “Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it.”
Keep in mind that when it comes to the “neither admit nor deny” policy, things could be worse! I don’t know the extent to which this materialized, but a couple years ago, Enforcement Director Gurbir Grewal indicated that the Staff and Commission might get more aggressive in requiring admissions as a condition to settlement, meaning that defendants would end up with a one-sided condition of “no deny.” My guess is that this is little consolation to the NCLA. Given their recent track record in court, perhaps there will be more to come…
Meredith blogged last year that the requirement for auditors to identify “critical audit matters” has not been living up to the PCAOB’s hopes & dreams. But based on a 3-year review of CAM trends from Ideagen Audit Analytics, it’s not because the requirement has somehow been overlooked. According to the report, 65% of 2022 opinions identified at least one CAM. This blog from Cooley’s Cydney Posner covers which topics have been most prevalent:
But taking a deeper dive, IAA pooled the CAMs related to many business combinations—asset valuation, fair value and impairment—and the result was the most common CAM subject: according to IAA, 33% of all FY2022 opinions with CAMs included a CAM for fair value of assets, exceeding the single subject total percentage for revenue recognition in FY2022. IAA notes that fair-value-related CAMs hit their highest percentage in FY2020 at 30% of total CAMs, which IAA attributes to “the uncertain forecasts indicating potential impairment during the pandemic.”
Among industries, IAA reports, CAMs regarding revenue from customer contracts were disclosed most frequently by “companies in the manufacturing industry, at 1,049 CAMs, and the services industry, at 1,045, each representing 39% of all CAMs with that topic.” It was also the most common CAM topic for companies in the manufacturing, services and construction industries. IAA observes that different characteristics of each industry may lead auditors to focus on specific audit areas.
Overall, as Cydney notes, the study flags revenue recognition from customer contracts as the most common CAM, at 13% of CAMs over the three-year period.
If you’re a geek for corporate governance, make sure to check out this 15-minute episode of our “Women Governance Trailblazers” podcast. Abby Adlerman joined us to discuss what’s going on in boardrooms – and how to keep up. Abby is CEO and founder of Boardspan, which provides measurement & analytics tools to boards. We discussed:
1. Abby’s career journey in corporate governance & finance – as an accomplished investment banker, e-commerce startup founder, Managing Director at Russell Reynolds, and CEO and founder of Boardspan.
2. Abby’s approach to keeping up with the dynamic corporate governance landscape, the biggest pivots that she has seen in the past few years, and what boards should be doing about AI.
3. The nature of conversations Abby has with boards, and how that has changed over time.
4. A usable framework for measuring culture at the board level.
5. What Abby thinks women in the corporate governance field can add to the current conversation on the societal role of companies.
I co-host “Women Governance Trailblazers” with Vontier’s Courtney Kamlet. We’ve been doing monthly interviews for almost 5 years! To listen to any of our prior episodes, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.