Last week’s IAC meeting must have been pretty busy, because in addition to the 10b5-1 reform recommendations, it also received a subcommittee’s draft recommendations on enhancing SPAC disclosure. This excerpt from a recent CFO Dive article summarizes the key recommendations:
Based on the draft document, the advisory committee would recommend SPACs be required to:
– describe the role of its sponsor (including “insiders or affiliates such as celebrity sponsors/advisors”), their “expertise and capital contributions,” and any potential conflicts of interest, according to the advisory committee’s draft document;
– enable investors to gauge risks by providing “plain English” disclosure about stages in the SPAC process, including the “promote” to be paid to sponsors and the impact on dilution of shares and;
– detail “the mechanics and timeline of the SPAC process,” including a description of the asset to be purchased, events required during the next two years for the asset to appreciate and the shareholder approval process at the time of de-SPAC.
The draft also includes a recommendation that the SEC publish an analysis of the players in the various SPAC stages, their compensation, and their incentives. Following the publication of that analysis, the IAC may follow-up with additional actions or recommendations regarding SPACs.
If you take the time to read the draft, I think you’ll come away with the sense that the IAC subcommittee is very uncomfortable with how little is known about the post-2019 SPAC market. In particular, with so many SPACs still looking to complete their merger transactions, the draft says that “the greatest risk of SPACs to investors may remain ahead with the merger being a point of significant inflection for investors – and their related risk and returns.”
Speaking of SPACs & SPAC mergers, be sure to tune in to our September 22nd joint webcast with DealLawyers.com on “Navigating De-SPACs in Heavy Seas” to hear our panel of experts discuss the De-SPAC process and the challenges presented by the current regulatory environment.
The Wilson Sonsini report reviews IPO filing, pricing, and value statistics for 123 initial public offerings completed by U.S.-based technology and life sciences companies between January 1 and June 30, 2021. In addition, the report addresses governance provisions, ownership & structure, and defensive measures. There are all sorts of interesting tidbits in here, including this excerpt on dual class capital structures:
Of the 123 companies considered, 36 companies (29.3%) had multiple classes of common stock. Of those 36 companies, 29 were technology companies and seven were life sciences companies. Thirty-two of the 36 companies implemented dual-class common stock. Four companies implemented multi-class common stock, all of which were technology companies. None of the life sciences companies implemented multi-class common stock.
Typically, when a company has multiple classes of stock, one class has more voting power while the other class has limited or no voting rights. Dual- or multi-class stock is often implemented to give existing stockholders—including founders or other executives—more control. However, multiple classes can be implemented for other reasons, including company structuring and regulatory compliance reasons.
Many companies that implement a dual- or multi-class structure with high-vote shares include a sunset provision in the charter where the high-vote shares fall away upon the occurrence of one or more specified conditions, such as the date on which all high-vote shares represent less than a certain percentage of all shares outstanding, after a specified time period, or upon the occurrence of a specific event, such as the death of a founder. Of the 36 companies that had multiple classes of common stock, 28 companies (77.8%) had a sunset provision.
The report also briefly discusses the prevalence and terms of early lock-up releases, concurrent private placements, indications of interest, direct listings, and directed share programs.
Watchdog Research recently reported the results of its analysis of trading by public company executives, which indicated that there’s a correlation between executives dumping large amounts of stock and subsequent securities class action filings. While acknowledging that executives often sell some stock to support their lifestyle, Watchdog assigned a “red flag” to sales involving more than 50% of an executive’s holdings or sales of more than $500K by either the CEO or the CFO. Here’s what they concluded from analyzing those red flag transactions & class action filings over a five-year period:
In our analysis we found that red-flag insider sales nearly doubled the probability that a company would be subject to a securities class action lawsuit in the following year. Interestingly, this correlation between insider sales and securities class actions is significantly weaker if you look at events in the same calendar year. A red-flag insider sale only increases the probability of having a Securities Class Action during the same calendar year by a factor of 1.35.
This disparity in risk between the year the trade is made, and the year following the trade means that the correlation is not simply due to the fact that both red flag insider sales and securities litigation disproportionately affects large companies. The fact that the association between insider sales and securities litigation grows stronger over time has troubling implications. It indicates that executives may be trading on material information concerning potential adverse events as much as a year before that information reaches the public.
Okay, unlike the “shadow trading” insider trading case that Liz blogged about last week, the one announced by the SEC yesterday was pretty prosaic. It basically involved adding a tippee defendant to an ongoing enforcement proceeding. Here’s an excerpt from the SEC’s press release:
The Securities and Exchange Commission announces insider trading charges against Robert J. Maron of Thousand Oaks, California, who generated more than $1 million in profits by trading in the securities of Illumina, Inc. ahead of an October 10, 2016 Illumina financial performance announcement.
The SEC’s amended complaint, filed on August 30, 2021 in the United States District Court for the Southern District of New York, alleges that Martha Patricia Bustos, formerly an Illumina accountant, tipped Donald Blakstad in advance of Illumina’s October 16, 2016 announcement. Blakstad, in turn, tipped Maron, who purchased Illumina securities and realized more than $1 million in profits.
Yes, you’ve seen cases like this a million times, so why am I blogging about it? Well, it turns out that according to the SEC’s press release, the new defendant is a “Calfornia-based watch dealer,” and the chance to pen a headline that was such an easy play on “Who Watches the Watchmen?” was more than my boomer dad brain could resist.
It isn’t unusual to see a registration statement or a prospectus supplement include a recent developments section disclosing “flash numbers” – preliminary revenue and income information for a quarter that hasn’t yet been finalized. The Staff scrutinizes flash number disclosures pretty closely if they’re reviewing a filing, and they often have questions for the issuer about the basis for its disclosure and whether it is appropriately balanced.
This recent Bass Berry blog points out that the Staff’s comments may also target disclaimer language relating to the flash numbers. The blog cites a recent IPO registration statement that included flash numbers accompanied by the following disclaimer:
This preliminary financial information is not a comprehensive statement of our financial results for this period, and our actual results may differ materially from these estimates due to the completion of our financial closing procedures, final adjustments, and other developments that may arise between now and the time the closing procedures for the fiscal quarter are completed.
The Staff asked the company to remove the disclaimer, noting that “If you choose to disclose preliminary results, you should be able to assert that the actual results are not expected to differ materially from that reflected in the preliminary results.” The company complied with the comment. This excerpt from the blog lays out the key takeaway for public companies from this exchange:
This comment letter exchange serves as a reminder that the SEC Staff generally disfavors disclaimer language aimed at limiting investors from relying on the information being provided. (As another example, see the Titan Section 21(a) Report related to whether investors could rely on the reps and warranties in a merger agreement.) As such, companies that are faced with issuing preliminary financial results, whether in a ’33 Act or ’34 Act setting, should ensure that they are comfortable with investors relying on the information presented, even if the results are only preliminary and unaudited.
I’ve always found the issues surrounding the use of flash numbers to be extremely interesting – and apparently many of you have as well. In fact, our 2017 webcast on the use of flash numbers in offerings was one of the most popular we’ve ever done. It may be time to think about an encore in the near future.
This recent blog from Perkins Coie’s Jason Day discusses the merits of in-house lawyers attempting to keep on top of SEC Staff comment letter trends. The short version is that Jason thinks it’s probably best to rely on your outside counsel & auditors to monitor the big picture, but there is merit in keeping an eye on the comments your peer companies are receiving. The blog also offers up some helpful tips for anyone – whether in-house or at a law firm – who is trying to monitor comment trends:
Know the Current Hot Topics –The SEC typically focuses many of its comments on several current hot button issues (e.g., financial measures not in accordance with generally accepted accounting practices, fair value measurements and estimates, loss contingencies, or segment reporting, among others).
Monitor Peer Comments –You can prepare for and preempt potential SEC comments before you file by knowing the current hot button issues. You can track and monitor the comments and responses of your industry peers or proactively consult with your audit firm or outside counsel for updates on emerging comment trends.
Monitor Broader Disclosure Trends – While its prudent to stay ahead of SEC comment trends to preempt easily addressed comments, don’t lose sight that many current disclosure trends are not driven by SEC rules or comments. Today’s SEC disclosure trends, like the current focus on ESG topics, arise from investor, proxy advisor or stakeholder initiatives with SEC rulemaking catching up later, if at all.
This is all good advice, but I’m particularly enthusiastic in my endorsement of the suggestion to monitor peer group comments. I’ve always been surprised at how relatively few companies seem to monitor the comments that their peers receive on a regular basis, but I’ve also never seen a lawyer who flagged a significant peer group comment trend in advance not end up being a hero to the entire corporate SEC reporting team.
Inflation may be haunting many areas of the economy, but the SEC’s filing fees continue their deflationary trend. Last week, the SEC issued this fee rate advisory that sets the filing fees for registration statements & certain other transactions for fiscal 2022. The current filing fee rate is $109.10 per million (the same rate applies under Sections 13(e) and 14(g)). Under the SEC’s new order, the rate will decrease to $92.7 per million. That’s a 15.0% decrease, and it follows last year’s nearly 16% decrease. As always, the new rate will apply effective October 1, 2021, which is when the SEC’s new fiscal year begins.
A recent Spencer Stuart Survey of nominating/governance committee chairs sheds some light on their priorities during the current year. In early 2021, the firm surveyed 77 committee chairs to find out what this year’s “top of mind” issues are, how their recruitment efforts have changed, and where the composition of their boards is headed. Here are some of the highlights:
– The top five governance priorities reported by survey respondents were enhancing ESG oversight (69%), enhancing racial and ethnic diversity (44%), developing a board succession strategy (39%), enhancing board effectiveness (38%) and overseeing company wide DEI efforts (36%).
– The top five recruiting priorities reported by survey respondents were adding directors from an underrepresented group (58%), directors with global perspectives & experiences (43%), directors with technology expertise (40%), directors with financial expertise (39%) and directors with operational expertise (38%).
– Interestingly, gender diversity, which was last year’s fourth most highly rated governance priority, did not crack this year’s top five. In terms of recruiting profiles, the survey says it fell from 3rd place to 10th.
– The number of respondents reporting that their board had underperforming directors dropped from 35% in 2020 to 18% this year.
Many commenters have expressed concern about the ability of companies to identify qualified directors from underrepresented groups, but 83% of the committee chairs surveyed reported no issues with recruiting directors with diverse backgrounds.
Earlier this year, the DOJ announced the formation of a “Covid-19 Fraud Enforcement Task Force.” The task force is a joint effort between DOJ & other governmental agencies, and Attorney General Garland promises that it “will use every available federal tool—including criminal, civil, and administrative actions—to combat and prevent Covid-19 related fraud.”
This Woodruff Sawyer blog says that the task force is likely to result in a full-court press targeting potential fraud by recipients of government funds in pandemic-related programs. That likely means that many companies are going to be subjected to probes by the DOJ or other agencies looking for potential violations of the False Claims Act (FCA). These investigations may be disruptive, but at least you can count on your D&O policy to pick up the tab, right? Well, as this excerpt from the blog explains, the answer is complicated:
One area of frustration for many companies will be the lack of response from a D&O insurance policy for governmental investigations of corporate entities. While some D&O insurance policies may provide limited coverage for the governmental investigation of a corporate entity, this is increasingly unusual. As a result, very large legal fees for these investigations are likely to fall on the corporation.
D&O insurance policies, on the other hand, may respond to defend individuals who are the target of government enforcement actions. However, this coverage is typically only available after the government has made it very clear whom they are pursuing, something that often happens quite late in an investigation process.
Having said that, some polices provide limited coverage for “pre-claim inquiries.” This means insurance coverage for legal counsel for individuals asked to respond to government subpoenas. The cost of document production for documents under the control of the company, however, is typically not covered by D&O insurance.
If there is an FCA investigation that, when disclosed, causes your company’s stock price fall, you can typically expect to be able to rely on your D&O insurance. A modern D&O insurance policy usually covers a securities claim or a breach-of-fiduciary-duty suit related to disclosure concerning the government investigating the company under the FCA. However, the insurance would not cover any settlements with the government. This is because Side C of the D&O insurance policy only covers securities claims. An FCA claim is not a securities claim.
The blog also points out that most D&O policies have an exclusion for claims involving intentional fraud, and that fines and penalties are typically excluded from coverage. Even if coverage is potentially available, the blog provides a reminder that government agencies often demand that companies and individuals forgo any insurance or rights to indemnification when settling with the government.
