Over the years, I’ve represented a few directors who were considering resigning from public company boards, and it’s always a difficult situation. Even if the company is heading in a direction they don’t agree with or they have ethical concerns, few board members find it easy to step down. This recent Perkins Coie blog addresses those difficulties, and this excerpt provides some tips for directors on how to handle their departure in a responsible fashion:
1. Assess what’s making you uncomfortable.
2. Do all you can to seek to address the issues. That includes the need to create a record (that’s important, to come up with some sort of documentation) – that the board has taken all the possible steps to address any improper or possibly illegal actions identified at the company. You want to establish a clear record that you – and any fellow resigning directors – have done all you possibly can to address the malfeasance, illegality or impropriety. Then, in anticipation of resignation, circulate a draft statement of the reasons, the efforts taken, and how those efforts have been stonewalled.
3. Pass the baton. So then – before you leave remember that your successors on the board will need to grapple with many of the same issues. So do a thorough baton-passing to the directors who are remaining or coming on board.
We’ve known for some time that the SEC’s Division of Enforcement has been taking a hard look at SPAC deals, and yesterday it announced an enforcement action against, well, EVERYBODY involved in an allegedly fraudulent SPAC transaction. This excerpt from the SEC’s press release gives you a sense for how widely the Division of Enforcement cast its net:
The Securities and Exchange Commission today announced charges against special purpose acquisition corporation Stable Road Acquisition Company, its sponsor SRC-NI, its CEO Brian Kabot, the SPAC’s proposed merger target Momentus Inc., and Momentus’s founder and former CEO Mikhail Kokorich for misleading claims about Momentus’s technology and about national security risks associated with Kokorich.
The SPAC, the sponsor, the target & both CEOs – that’s quite a haul! Apparently Momentus’s former CEO is continuing to litigate the charges against him, but the other defendants settled with the SEC. Under the terms of the SEC’s order, each of the settling defendants agreed to cease and desist from violations of certain antifraud provisions of the federal securities laws and to pay civil monetary penalties aggregating $8 million.
But that’s not all. Momentus and the other parties agreed to a number of undertakings. These include establishing an independent board committee to police compliance with the SEC’s order, retaining an independent consultant to review Momentus’s disclosure controls and implementing changes recommended by that consultant. The order also calls for the parties to offer rescission to PIPE investors, and for the sponsor to forego 250,000 founders shares.
Although the misleading claims at issue were initially made by the target, the SEC found fault with the due diligence investigation conducted by the SPAC and its CEO, which led to the filing of inaccurate registration statements and proxy solicitations.
You know how much I love it when celebrities intersect with our little corner of the world, right? Well, then I’m sure it comes as no surprise that I can’t resist blogging about this NYT article discussing Spike Lee’s foray into promoting a cryptocurrency business:
Before Spike Lee accepted cryptocurrency, he turned down Crocs. Years ago, the filmmaker rejected an offer to buy into the Colorado company that makes perforated foam clogs, a decision that caused him to miss out when its stock soared on the strength of the footwear fad.
“I wish I would’ve given some money back then,” Mr. Lee said in a recent interview. “Anytime something is new, you’re going to have people who are going to be skeptical. With some of the best ideas, people thought the inventors were crazy.”
Now he has taken a leap into another cultural craze, having agreed to direct and star in a television commercial for Coin Cloud, a company that makes kiosks for buying and selling Bitcoin and other virtual currencies. Although cryptocurrency is not widely used for transactions, an increasing number of merchants now accept it as payment.
The article says he shot the commercial last month. Honestly, I can’t wait to see it – “What makes Cloud Coin the greatest crypto company in the universe? It’s gotta be the shoes!”
Over on the “D&O Diary,” Kevin LaCroix reports that federal securities class action filings declined significantly during the first half of 2021. Here’s an excerpt summarizing his findings:
Federal court securities class action lawsuit filings declined in the first half of 2021 to the lowest semiannual levels in several years. Several factors contributed to this relative decline, most significantly the shift by plaintiffs’ lawyers toward filing federal court merger objection lawsuits as individual actions rather than as class actions. In addition, as discussed further below, other factors contributed to the relative decline. The filing levels in the year’s first six months puts the filing for the full year 2021 on pace for the lowest annual filing levels since 2015, after several intervening years in which filings were at historically high levels.
Merger objection class action filings dropped by 81% this year. Unfortunately, that doesn’t mean that the number of those lawsuits is actually declining, but merely that they’re being filed as individual actions. Why? Kevin says it’s to reduce the likelihood of court scrutiny of plaintiffs lawyers’ merger objection mootness fee “racket”.
Last month, I blogged about AMC’s efforts to cultivate the meme stock “apes” who’ve pushed the company’s valuation to staggering heights. Part of that effort was directed at persuading stockholders to authorize another 25 million shares so the company could continue its efforts to shore up its balance sheet through stock sales. That effort apparently failed, as AMC’s CEOSilverback Adam Aron acknowledged when he took that proposal off the table last week. Here’s an excerpt from a recent Marketwatch.com article:
In a Tuesday morning filing, AMC Entertainment disclosed that it is abandoning its request that shareholders approve an issuance of 25 million new shares as part of a planned capital increase that would have allowed the company to leverage its alpha “meme stock” status but also diluted the stakes of existing stockholders who are overwhelmingly retail investors and who have made their opposition to the plan quite plain on social media.
AMC chief Adam Aron, who has made a habit of engaging directly with the retail investors now thought to hold roughly 80% of his company’s shares, took to Twitter minutes after the filing to let his base know that they were the reason behind his decision.
Accompanied by a picture of the words “I see you, I hear you, I value you,” Aron tweeted that while he still wants the capital from 25 million new shares to pay down AMC’s remaining debt load and give him cash reserves to play with as the theater industry recovers, he is acutely aware of the difference in opinion among AMC’s retail base on social media and “does not want to proceed with such a split.”
While AMC pitched this as a move to keep its retail investors happy, there may be a more pragmatic issue associated with the decision that other meme stocks may also have to face. Put simply, the problem is that retail investors don’t vote. And as this Axios article points out, with an investor base that’s 80% retail, “it’s not clear whether enough of them would have ‘shown up’ to even move the vote forward.”
In other words, AMC may have a tough enough time just getting a quorum for its annual meeting, let alone persuading a majority of the outstanding shares to vote in favor of a charter amendment. As Lynn blogged last week, at least one public company has already had to adjourn its meeting due to the absence of a quorum. With the rise of retail ownership in public companies and TD Ameritrade’s policy change on discretionary voting, chances are that other retail investor-heavy companies are also going to find pulling a quorum together to be a challenge.
If you’re interested in a deep dive into the comments on climate change disclosure received in response to Commissioner Lee’s invitation, be sure to check out this Davis Polk memo, which provides an overview of the type of commenters who weighed-in, summarizes the most salient topics raised in comments, and discusses the SEC’s potential next steps. This excerpt lists the topics covered by commenters that the memo summarizes:
– Does the SEC have authority to mandate climate disclosures, and would doing so survive the cost-benefit analysis required for rulemaking?
– Given a perceived desire for both meaningful and comparable climate disclosures, which types of disclosure standards (e.g., general or industry-specific standards, a single global standard or multiple standards around the world and a standard drawing on existing third-party frameworks or a novel framework) should the SEC use for any mandatory climate disclosure regime?
– If the SEC mandates climate disclosures, what information should the SEC require to be disclosed?
– Should the SEC provide protection from liability, whether through a safe harbor, having climate disclosures be furnished rather than filed or by requiring disclosures on a specialized form outside of 10‑Ks and 10-Qs?
– Should climate disclosures be subject to the same level of rigor as other types of SEC disclosures, such as financial disclosures, by imposing requirements for audit or assurance or internal controls?
– If the SEC creates a new disclosure mandate, should its scope include not only public companies but also private companies and not only climate disclosures but also ESG disclosures more broadly?
The memo also includes an appendix summarizing 30 letters submitted by high-profile academics, business and government representatives, standard setters and sustainability advocates.
One of the more provocative items contained in Commissioner Lee’s invitation to provide comments on potential climate change disclosure rules was this question:
What climate-related information is available with respect to private companies, and how should the Commission’s rules address private companies’ climate disclosures, such as through exempt offerings, or its oversight of certain investment advisers and funds?
Not surprisingly, this has attracted a lot of comments – pro and con. Ann Lipton recently blogged about the response to the possibility of private company disclosure, and included excerpts from comments submitted by some high-profile players, including representatives of private equity and major investors. Check the blog out – you may find some of their views to be a bit different than you might have expected.
According to a recent study, there is an epidemic of regulatory non-compliance in crowdfunding offerings so great that the author says it calls into question the continued viability of the crowdfunding experiment. Here’s an excerpt from the abstract:
The JOBS Act of 2012 launched a number of experiments in the regulation of securities offerings. The exemption it created that allows online equity crowdfunding offerings to retail investors garnered the most attention, in part due to widespread concerns regarding the potential for fraud and abuse. More than three years after the first crowdfunding offering, no empirical analysis of compliance has been conducted that would debunk or confirm critics’ concerns. This Article plugs that gap by analyzing a sample of 362 crowdfunding offerings and evaluating compliance with some of crowdfunding regulation’s simplest, most fundamental regulatory requirements.
During the first 13 months of crowdfunding, almost half of issuers failed to file complete financial statements that met the applicable standard of review, barely one-quarter of issuers that were required to file two annual reports did so, less than 15% of issuers timely filed the final amount raised in their offering, and the only data point on Form C that was reviewed was, far more often than not, substantially inaccurate. Finally, the third-largest crowdfunding funding portal may be violating the prohibition against a funding portal’s giving advice. In short, these findings reveal a deeply embedded culture of noncompliance.
In light of the SEC’s decision last year to raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million and to liberalize the rules on investments by both accredited & non-accredited investors, these allegations are pretty alarming. They become even more alarming after taking into account projections that the global crowdfunding market will grow by nearly $200 billion over the next four years.
We’ve previously blogged about Corp Fin’s push for more disclosure about supply chain finance arrangements & FASB’s decision to study a disclosure requirement. According to this WSJ article, FASB has decided to move forward with the goal of putting together a rule proposal by the end of this year. This excerpt describes supply chain finance arrangements and some of the reasons why formal disclosure requirements are under consideration:
As part of these programs, banks typically provide funding to pay a company’s supplier of goods and services. The supplier is paid earlier, but gets less than it would have without the agreement. The company pays the amount it owes the supplier to the bank, usually later than it would have paid its supplier. The bank then keeps the difference in exchange for its services. U.S. companies currently aren’t obliged to disclose supply-chain financing arrangements in their financial filings, which can make their liquidity position appear stronger than it actually is.
The tool has come under greater scrutiny from regulators and accounting rule-makers amid its growing popularity in recent years. Greensill Capital, a U.K.-based supply-chain finance provider, in March filed for insolvency after auditors of the company’s bank arm were unable to find evidence of collateral that one of its customers used for borrowing. Supply-chain financing was also a primary contributor to the 2018 implosion of U.K. firm Carillion PLC, according to Fitch Ratings.
The scope of the potential disclosure requirement was laid out at FASB’s June 30th meeting and summarized in FASB’s most recent project update. Companies would be required to describe the overall arrangements and would use certain contractual terms (such as the buyer confirmation) as indicators that an arrangement has been established. Disclosure would be required of the key terms of the arrangement as identified by management and the amount that the buyer has confirmed has been made available for suppliers to elect to be paid early for as of the end of reporting period. A description of where that amount appears on the balance sheet would also be required.
We’ve posted the transcript for the recent DealLawyers.com webcast: “The Leveraged ESOP as an Exit Alternative.” This program covered a lot of ground about an attractive alternative to a sale for many privately held companies. Shawn Ely of Lazear Capital Partners, Steve Goodman of Lynch, Cox, Gilman & Goodman, PSC & Steve Karzmer of Calfee, Halter & Griswold LLP addressed a number of topics, including
– Overview of a Leveraged ESOP
– Tax Aspects of Leveraged ESOPs for Sellers & the Company
– Structuring and Financing an ESOP Deal
– Corporate and ERISA Fiduciary Considerations
– Restrictions and Post-Closing Obligations
