Public companies took a lot of heat for taking PPP funds, but despite some well-publicized decisions to return the funds, this Bryan Cave blog says that the vast majority of public company borrowers decided to keep the money:
Based on a review of SEC filings, Bryan Cave Leighton Paisner identified over 850 borrowers who indicated that they had received PPP loan approvals. 107 of these borrowers, or roughly 12 percent, subsequently indicated that they either ultimately did not accept the loan, or returned the loan proceeds. About 25% of public companies who returned their loans had PPP borrowings that were less than the $2 million threshold for review indicated above.
Of the 759 public companies that elected not to return their PPP funds, approximately 73% received $2 million or less, while the remaining 27% had PPP loans of more than $2 million. About 8% of the public company recipients received less than $100,000, while over 55% received less than $1 million.
By our calculations, about 200 public companies with PPP loans in excess of $2 million elected to retain their PPP loans. About 60% of these loans were for between $2 and $5 million, 36% were for between $5 and $10 million, and 4% were for in excess of $10 million.
While public companies taking out PPP loans were sometimes unfairly criticized, other large borrowers took some heat as well. Stlll, the blog says that despite all the sound & fury, over 75% of PPP borrowers approved for a PPP loan in excess of $5 million decided to keep the money.
Supply Chain Finance: The Accounting Backstory
When I first saw the references to “supply chain financing” in Corp Fin’s Covid-19 guidance, I wasn’t really sure what the big deal was. I’m guessing that some others were also a little surprised to see how prominently supply chain financing featured in that guidance – and in recent Staff comment letters.
If you’re wondering where this all came from, check out this Jim Hamilton blog, which discusses the history of Staff concerns about accounting and disclosure issues surrounding supply chain financing, and says they can be traced all the way back to 2003. The basic issue is the appropriate classification of the obligation that arises when a purchaser gets financing from a lender to pay its vendors. The trouble is, as the Big 4 pointed out in a 2019 letter to FASB, U.S. GAAP currently offers little guidance on the question of how to account for these arrangements.
The blog reviews the accounting issues involved and the comment letters that the SEC has issued addressing supply chain financing disclosure. This excerpt summarizes the results of that comment letter review:
SEC staff have engaged in some comment letter dialogs with companies regarding supply chain financing. The theme of these dialogs is that SEC staff saw something unusual in the company’s filings, the company replies that the supply chain issue is nonmaterial, and the SEC accepts the companies’ promises of additional disclosure in future filings.
As Liz noted in her recent blog on this topic, the Staff’s interest pre-dates the pandemic, because it began issuing comments on supply chain financing in mid-2019. Perhaps it’s not a coincidence that the Big 4 reached out to FASB looking for guidance on the topic at around the same time.
Restatements: Common Reasons for “Big Rs” & “Little Rs”
Everybody makes mistakes, but when the accountants do, it’s terrifying. This Audit Analytics blog takes a look at how companies opted to correct errors in financial statements during 2019, and identifies the leading causes of “Big R” restatements and “Little R” out-of-period adjustments.
The five most common issues cited in Big R restatements in 2019 were revenue recognition (16.7%), cash flow statement classification errors (16.1%), securities – debt, quasi-debt, warrants & equity (15.3%), taxes (13.0%) and liabilities (12.2%). By way of comparison, the five most common issues cited in Little R restatements in 2019 were taxes (22.3%), revenue recognition (16.3%), expense recording (9.9%), inventory (9.9%), and value/diminution of PPE intangibles or fixed assets (7.4%)
Everyone involved in the SEC reporting process breathes a sigh of relief when it is determined that a particular error can be corrected through an out-of-period adjustment, because that means the prior period financial statements don’t have to be restated. (Okay, the fact that the CFO’s probably not going to prison either also may help explain the sighs of relief.)
But the blog points out that irrespective of their scale, restatements and out-of-period adjustments negatively impact the financial reporting of a company – and that even immaterial errors may predict future material weaknesses and errors in financial statements.
Last December, Corp Fin issued CF Disclosure Guidance Topic No. 7, which addresses the procedures for submitting a “traditional” confidential treatment request (i.e., one that doesn’t take advantage of the streamlined procedures for redacting confidential information in exhibits that were put into place last year). Yesterday, Corp Fin updated that guidance to address alternatives for handling expiring confidential treatment requests.
In essence, the updated guidance gives a company with an expiring CTR three alternatives: it may refile the unredacted exhibit, extend the confidential period pursuant to Rules 406 or 24b-2, or transition to the rules governing the filing of redacted exhibits under Regulation S-K Item 601. The guidance walks companies through the procedural steps involved with each of these alternatives.
Enforcement: SEC Brings Action for Failing to Deliver Final Prospectus
Here’s something you don’t see every day – last week, the SEC brought settled enforcement actions against an issuer and an underwriter for failing to deliver final prospectuses in connection with various shelf takedowns. Here’s an excerpt from the SEC’s press release announcing the proceedings:
The SEC’s orders find that NFS and FuelCell violated the prospectus delivery provisions of Section 5(b) of the Securities Act of 1933. The order charging NFS finds that it violated the underwriter prospectus delivery provisions of Securities Act Rule 173, and failed reasonably to supervise the traders that sold the FuelCell securities within the meaning of Section 15(b)(4)(E) of the Securities Exchange Act of 1934 and Section 203(e)(6) of the Investment Advisers Act of 1940.
Without admitting or denying the SEC’s findings, NFS and FuelCell have agreed to cease and desist from committing or causing any future violations of the charged provisions. In addition, NFS has agreed to be censured and has agreed to disgorge $797,905 in commissions, pay prejudgment interest of $163,288, and pay a penalty of $1,500,000. The SEC’s order against FuelCell recognized the company’s cooperation and self-report, both of which the SEC considered in determining not to impose a penalty against the company.
The genesis of the problem appears to have been the company’s failure to file 424(b) prospectuses in connection with its ATM offerings. That in turn led to violations of Section 5 by both the company and its underwriter. Their misfortune is our gain, however, because the SEC’s orders are a primer on the prospectus delivery requirement and the interplay between the statute and the rules governing the filing and delivery of the final prospectus.
I know from my own experience and from our Q&A Forum that there’s not a lot out there that ties all of these requirements together – and these orders do. Here’s the NFS order and here’s the FuelCell order.
By the way, I missed this enforcement action when it was first announced, but fortunately Ann Lipton flagged a Bloomberg Law article on it on her Twitter feed. If you practice corporate or securities law and you don’t follow Ann on social media, you’re making a big mistake. As my cousins from Maine would say, she’s “wicked smaht” & she posts all the time. You’ll learn a lot from her.
Wu-Tang Clan: Shkreli Shaolin Saga Coming to Netflix
We haven’t checked in on America’s most entrepreneurial hip-hop artists in some time, but the Wu-Tang Clan is back in the Business section of the paper again. It seems that Netflix is making a movie about the saga of fraudster Martin Shkreli, his $2 million purchase of the group’s “Once Upon a Time in Shaolin” album & his subsequent bizarre & convoluted beef with the Wu-Tang Clan. Here’s an excerpt from this Stereogum.com article:
There were seemingly endless twists and turns in the Shkreli/Wu-Tang saga, many of them diligently chronicled at this very website. Now, as Collider reports, the narrative will become the basis for a movie to be released via Netflix, also titled Once Upon A Time In Shaolin. Paul Downs Colaizzo (Brittany Runs A Marathon) will direct the film based on a script by Ian Edelman (How To Make It In America). Wu-Tang ringleader and longtime filmmaker RZA is producing the movie in cooperation with Brad Pitt’s production company Plan B. The story reportedly follows the auction for the album and its messy aftermath.
Speaking of RZA, here’s an interview with him in which he discusses the concept behind the Shaolin album, as well as his regrets about how it ended up in the hands of an “evil villain.” Check out our “Wu-Tang Clan” Practice Area for more Wu-Tang news.
In the corporate governance debate, there’s perhaps no more pejorative term than “short-termism.” But this “Institutional Investor” article cites a recent study that says short-term investors may not be so bad after all:
Short-term investors are widely seen as bad for the companies they invest in, because they are likely to focus on immediate changes in stock value — potentially at the expense of the company’s long-term profitability. But new research suggests that there may be times when a short-term focus can actually help companies perform better over the long run. The study, expected to be published in the scholarly journal Management Science, found that companies with more short-horizon investors — who trade stocks regularly — adapted more quickly when their competitive environments changed “radically.”
“Under these circumstances, firms and economies with disproportionately more short-term investors may appear more dynamic and avoid stagnation, indicating that short-horizon investors perform an important function in the economy,” wrote authors Mariassunta Giannetti (Stockholm School of Economics) and Xiaoyun Yu (Indiana University).
To put this a little more bluntly than the authors do, the study suggests that those who believe that short-term investors light a fire under corporate management may well have a point.
Public Offerings: ATMs Thrive in Pandemic
“At-the-market” offerings provide companies with flexibility to access the capital markets quickly, and that can be a very attractive option during times of volatility. Bloomberg Law recently published an analysis of second quarter ATM offerings, and the results indicate that this particular alternative to a traditional public offering has been very popular during the Covid-19 pandemic:
At-the-market (ATM) offerings surged in the second quarter of 2020, driven by a need for cheap capital and encouraged by continued investor buying during the pandemic downturn. The value of ATM deals far outpaced any other quarter since Q2 2009. Already through Aug. 10, ATM offerings have raised nearly $33 billion on 251 deals valued at least $1 million, exceeding 2019’s entire haul by $5.5 billion on 15 fewer deals.
According to Bloomberg Law, 108 at-the-market deals raising $14.2 billion were completed during the second quarter alone. That outpaced the first quarter of 2020, which saw 80 deals come to market and raise $9.1 billion. But you don’t have the full picture about just how hot ATM deals are until you realize that the number of deals and the amount raised during the first quarter of 2020 outstripped those metrics for every previous quarter during the past decade – and that the current quarter is on pace to surpass the second quarter.
Shelf Registrations & Takedowns: A Quick Reference
If you’ve read my blogs for any amount of time, you already know I’m a sucker for quick reference materials that I can pull out of a real or virtual desk drawer, glance at for 5 minutes, and then successfully fake my way through a conference call on the topic. This Mayer Brown memo on shelf registration statements & takedowns is the latest addition to my desk drawer.
The memo is only 10 pages long, but it provides a readable & comprehensive overview of topics that include eligibility issues, the types of transactions for which a shelf registration statement may be used, the benefits of WKSI status and liability considerations. Check it out!
We’ve been keeping an eye on pandemic risk factors since the “Before Time” (seriously, we first mentioned them in January). Most recently, we blogged about how to handle 1st quarter Covid-19 risk factor disclosure in 2nd quarter filings. Now, this Bass Berry blog takes a look at what kind of pandemic risk factor disclosures companies actually made in their second quarter filings. The blog says that 97% of the 75 Nasdaq & NYSE company filings surveyed included Covid-19 related risk factors. This excerpt provides some insight into the content of those disclosures:
During our review, we noted that updates to the COVID-19 risk factor disclosure included in second quarter Form 10-Qs generally coalesced around certain topics such as uncertainty regarding the duration of the COVID-19 pandemic, impact of the economic downturn, and changes in consumer behaviors both during and potentially after the pandemic.
In addition, some common themes arose in certain industries such as healthcare, with updated disclosures regarding the uncertainty around vaccine efficacy and deployment, and travel and energy, with updated disclosure highlighting potential risks resulting from prolonged social distancing and stay-at-home orders. Such emerging themes reveal that COVID-19 may be having a similar impact on peer companies and, as a result, an ongoing review of peer company risk factor disclosures should be undertaken.
These disclosures don’t appear to be static – according to the blog, approximately 2/3rds of the companies surveyed updated Covid-19 risk factor disclosure from their 1st quarter Form 10-Q disclosure. As for the 3% of companies that didn’t include a specific risk factor, all included language to the effect that the pandemic could exacerbate or heighten the risk factors that were previously disclosed in their Form 10-K.
Non-GAAP: EBITDAC Revisited
During the 1st quarter reporting cycle, some companies that were hit hard by the initial phase of the pandemic attempted to quantify its effect on their operations and present non-GAAP financial data that backed out Covid-19’s impact. As Liz blogged a couple of months ago, early returns from the 2nd quarter suggested that this practice was growing in popularity. According to this Brian Cave blog, more recent information on 2nd quarter reporting suggests that companies are shying away from “EBITDAC” disclosure, but that some are getting to the same place in a more stealthy fashion:
While few companies used the EBITDAC label as noted above, some appeared to be using the concept without the label. For example, some adjusted their adjusted EBITDA for COVID-19 expenses or presented gross margin without COVID-19 impacts. Such COVID-19 adjustments may be more likely to draw SEC scrutiny during ordinary periodic filing reviews, especially when viewed in hindsight. The staff has taken the position that “presenting a performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business could be misleading.”
The blog reminds companies of the Staff’s position in CF Disclosure Guidance: Topic 9 that it is inappropriate to present non-GAAP financial information “for the sole purpose of presenting a more favorable view of the company” & that management should highlight why it finds the measure useful and how it helps investors assess the pandemic’s impact on the company’s financial position and results of operations.
IPOs: Surfing Legend Joins the Lineup
A company called Laird Superfood recently filed an S-1 for an initial public offering. The company focuses on “highly differentiated plant-based and functional foods,” and currently offers “Superfood Creamer coffee creamers, Hydrate hydration products and beverage enhancing supplements, and roasted and instant coffees, teas and hot chocolate.”
As someone who once ate McDonald’s at The Louvre, you probably wouldn’t tag me as a guy who’d be real interested in “highly differentiated plant-based and functional foods,” and you’d be right. But it turns out that one of the co-founders of the company is Laird Hamilton, who is a surfing legend & somebody I’ve been a huge fan of ever since I saw him in the 2004 big wave surfing film, “Riding Giants.”
Am I a surfer? Gimme a break – I’m a fat old man who lives in Ohio. But I loved this movie for some reason, and Laird Hamilton is clearly its star. Check out this sequence about his spectacular ride on the “heaviest wave ever” at Teahupo’o (“Chopu”) in Tahiti.
Yesterday, the SEC scheduled an open meeting for August 26th. The meeting’s agenda features a couple of big potential rule amendments. This excerpt from the meeting’s Sunshine Act notice says that the first agenda item is:
Whether to adopt amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. These disclosure items, which have not undergone significant revisions in over 30 years, would be updated to account for developments since the rules’ adoption or last revision, to improve disclosure for investors, and to simplify compliance for registrants. Specifically, the amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and the disclosure of information that is not material.
There have been so many S-K-related proposals floating around that it’s sometimes hard to keep track, but this one relates to potential changes to Item 101, 103 & 105 that were proposed almost exactly a year ago. It’s worth noting that this is the proposal that raised the idea of requiring some kind of “human capital” disclosures – and it will be interesting to see what any final rule has to say about that topic.
SEC Open Meeting: “Accredited Investor” & “QIB” Definitions Also Up to Bat
The second item on next week’s agenda is also significant – and controversial. The Sunshine Act notice says that the SEC will consider:
whether to adopt amendments to the definition of “accredited investor” in Commission rules and the definition of “qualified institutional buyer” in Rule 144A under the Securities Act to update and improve the definition to identify more effectively investors that have sufficient financial sophistication to participate in certain private investment opportunities. The amendments are the product of years of efforts by the Commission and its staff to consider and analyze possible approaches to revising the accredited investor definition.
The SEC split 3-2 on the decision to issue these proposals last November, with Commissioner Allison Herron Lee & then-Commissioner Robert Jackson dissenting. As proposed, the amendments to the “accredited investor” definition would expand the number of investors eligible for that status by allowing individuals to qualify based on their professional knowledge, experience or certifications. The proposed amendments also would expand the list of entities that may qualify as accredited investors.
Business Interruption Insurance: Covid-19 Plaintiffs Get a Win
We’ve previously blogged about the challenges facing companies trying to assert claims under business interruption policies for pandemic-related losses, and the early returns from court cases involving these claims weren’t encouraging. One of the biggest challenges that plaintiffs have faced is persuading insurers & courts that their claims involve “physical loss,” which is a necessity under most policies in order to trigger coverage.
However, Alison Frankel blogged about a recent decision by a federal judge in Kansas City involving claims against Cincinnati Insurance that gives plaintiffs some reason for hope – and may even provide a roadmap for these claims. Here’s an excerpt:
The Kansas City plaintiffs, unlike plaintiffs in some of the previous cases, argued that the coronavirus – as a widespread, airborne virus that was rampant in the community – had likely infected their properties. It was the presence of the virus, they argued, that had rendered their businesses unsafe and unusable, forcing the shutdowns that triggered their insurance coverage.
Cincinnati, represented by Litchfield Cavo and Wallace Saunders, argued that COVID-19 did not trigger business interruption insurance coverage because it did not cause tangible, physical damage like a fire or hurricane. The coronavirus, Cincinnati argued, can be cleaned from surfaces or will otherwise die naturally within days, leaving no physical trace. Moreover, the insurer argued, the salons and restaurants hadn’t even shown the virus was actually present within their properties.
Judge Bough, however, said that under the ordinary meaning of “physical loss,” the policyholders suffered a loss when the spread of coronavirus led to prohibitions or restrictions on their businesses.
In the Judge’s view, although the coronavirus may not have caused physical damage, the insurer’s business interruption policy also covered physical loss – and a business may suffer physical loss if its premises are rendered unusable. Here’s what Alison says is the key takeaway for potential plaintiffs:
Argue that your business was likely contaminated by the coronavirus as it spread across the country through unseen droplets – and that the presence of the virus led to a physical loss, even if the particles did not cause lasting physical damage.
If you’re an investment grade issuer & want to lower your cost of capital the next time you go to market, this Politico article says you’d be well advised to use the money to fund ESG related projects, as Alphabet and Visa have recently done. This excerpt says there’s simply not enough ESG product to meet market demand:
This is a big year for investment-grade corporate debt — fueled in part by actions the Federal Reserve took in March allowing large companies to borrow more cheaply from private lenders. But the vast majority is not aligned with environmental, social and governance principles, said Jonny Fine, head of Investment Grade Syndicate at Goldman Sachs who played an integral role in the Alphabet deal. “The proportion of ESG this year is no different. It’s a very small part of our market overall,” Fine said. “The only difference we’re seeing in 2020, because we’ve had health care crises and racial divisions across the U.S., is the S in ESG has become much more important.”
So far this year, companies have issued nearly $1.5 trillion in new investment-grade debt. Less than 2 percent of that adheres to ESG standards. This reflects a problem in financial markets, Fine added. Right now, there aren’t enough ESG assets to satisfy demand from investors, who clamored for the bonds issued by Alphabet and Visa. Companies need to develop sustainability frameworks so they don’t miss out on the wave of cheap financing. “There is a very clear cost of capital disadvantage for a company that doesn’t have strong ESG principles,” Fine said.
Granted, Alphabet & Visa are both premium credits, but the pricing on their ESG-related debt was pretty phenomenal. Alphabet issued $5.75 billion at 0.8%, while Visa raised $500 million at 0.75%.
Unicorn IPO Litigation: Hung Up by Happy Talk?
One of my favorite snarky things to do is to make fun of Unicorn IPO filings. I know the poor lawyers involved must pull their hair out over some of the over-the-top statements that the underwriters & business folks insist on including in the prospectus, but a federal court’s decision in Uber’s IPO litigation may give those lawyers more leverage when arguing to tone things down.
This excerpt from a recent Jim Hamilton blog on a California federal judge’s denial of Uber’s motion to dismiss the case explains how the company’s prospectus “happy talk” made the plaintiffs’ claims stickier than they might otherwise have been:
The purchaser alleged that Uber’s registration statement omitted material facts about the legality of Uber’s business model, its passenger safety record, and its financial condition. Uber countered that each of these three categories was adequately disclosed, and the court agreed that the disclosures were well beyond boilerplate. Given the facts alleged, however, the court also concluded that the offering documents created an impression of a state of affairs that was materially different from what actually existed.
Specifically, Uber represented that while it had faced trouble in the past, it was on “a new path forward.” Despite this optimistic impression, the purchaser plausibly alleged that Uber was still using its old “playbook,” continuing, for example to view pay fines for violating local laws as a cost of doing business and intentionally delaying layoffs and restructuring to mislead the markets. Thus, the court said, what was disclosed was not enough to render what was not disclosed not misleading.
Mind you, the court reached this conclusion despite the fact that Uber’s lawyers included a 48-page Risk Factors section addressing many of these issues.
What’s in a Name? Hester Peirce is Okay with “Crypto Mom” Moniker
SEC Commissioner Hester Peirce was just reconfirmed by the Senate – along with new Commissioner Caroline Crenshaw. On the occasion of her reconfirmation, one intrepid tweeter (@BarbarianCap) asked if she was okay with her “Crypto Mom” nickname. In response, she tweeted: “It’s better than a lot of other names I have been called.” Me too, Commissioner, me too.
The Center for Audit Quality recently issued a report on Covid-19’s potential implications for this year’s audit. While we’ve touched on things like going concern issues in prior blogs, one of the matters discussed in the report that I haven’t seen before is how the pandemic may influence the determination of “Critical Audit Matters,” or CAMs. Here’s what the report has to say on this topic:
While COVID-19 in and of itself, or going concern uncertainty, would not necessarily meet the definition of a CAM, the pandemic could increase the subjectivity and complexity of a specific audit area such that it meets the definition of a CAM, when it otherwise may not have prior to the pandemic. In addition, for audits of large-accelerated filers, COVID-19 also could result in CAMs that were previously identified and communicated in the auditor’s report being expanded to include new assumptions that were especially challenging or complex due to the pandemic and/or result in changes to the auditor’s response to a previously identified CAM.
Until now, the requirement to disclose CAMs in an auditor’s report has been limited to large accelerated filers, but all issuers will have to comply with it for audits covering fiscal years completed on or after December 15, 2020 – so this is one that needs to be on everybody’s radar screen.
Critical Audit Matters: Due Diligence Questions
While we’re on the subject of CAMs, this recent Mayer Brown blog notes that because CAMs provide information about audit matters that required complicated auditor judgments & how the auditor responded to those matters, they are particularly helpful for people who are conducting due diligence. If you’re looking for something to get you started, they’ve also provided this template for due diligence questions regarding CAMs.
Audit Committees: PCAOB’s Conversations With Committee Chairs
Earlier this month, the PCAOB issued a report on its conversations with audit committee chairs about how audit committees are thinking about the effect of COVID-19 on financial reporting and the audit as they perform their oversight duties. This excerpt from a recent Wilmer Hale memo provides an overview of the results of those discussions:
Increased risks associated with remote work. The most common theme among audit committee chairs that recently met with the PCAOB dealt with risks regarding remote work arrangements, with most audit committee chairs describing the rapid shift to remote work arrangements as “effective.” This was equally applicable to the company’s employees and outside auditors.
Given the greater reliance on cloud computing in remote work environments, a number of audit committee chairs noted that they have been discussing cyber-related controls within the scope of the audit and increasing the focus on the controls’ effectiveness. Based on insights shared from audit committee chairs, the Summary includes a list of example questions that audit committees may want to discuss with their auditors regarding risks related to remote work arrangements.
Increased audit committee communications with the auditor. The Summary notes that a majority of audit committee chairs cited COVID-19 as a basis for more frequent communication between auditors and audit committees. Among the topics audit committees may want to discuss with auditors, in light of COVID-19, the Summary lists a handful of considerations, including challenges to completion of the audit, the cadence of communication with auditors and management, changes in the audit plan and potential disclosure changes resulting from COVID-19.
The memo says that audit committee chairs reported three forms of auditor communication that they have found useful: discussions about trends auditors are seeing, particularly those pertaining to industry peers; presentations about audit areas that may require greater attention due to the pandemic, and audit firm resources and webinars with industry-specific content.
Last month, the SEC issued a rule proposal that would increase the reporting threshold for Schedule 13F filings from $100 million to $3.5 billion – and oh boy, do the commenters hate it! Here’s a comment that, while fiery, is also pretty representative:
This is complete bull. You are supposed to be protecting investors, not making it easier for billion dollar hedge funds to manipulate markets. This proposal is a terrible idea and runs directly counter to the principles upon which the SEC was founded. What is the SEC thinking? This reeks of corruption.
So far, it’s mostly been retail investors who have weighed-in – and I mean a lot of retail investors. (According to a piece in the NYT DealBook yesterday, more than 1,500 people have commented to date). Apparently, some outreach to Reddit users may help explain the volume of comments. The big guns may soon fire as well. NIRI is circulating a joint comment letter for public company issuers to sign (it’s available here), and other investor and business groups and public companies are expected to comment as the deadline approaches.
Supply Chains: SEC Reporting on China Forced Labor on the Horizon?
Companies with supply chains in China should be prepared to comply with enhanced due diligence & reporting requirements. That’s the conclusion of this Foley Hoag blog, which surveys recent legislative initiatives aimed at Chinese companies’ use of forced labor from Xinjiang and other regions of the country. One pending piece of legislation could even result in an SEC reporting requirement:
A measure with more serious potential repercussions for companies is H.R. 6210, the Uyghur Forced Labor Prevention Act. H.R. 6210 lists all companies found by the Congressional-Executive Commission on China to be suspected of using the forced labor of ethnic minorities in China. Most of the companies on the list are in the processed food and apparel industries. More importantly, the measure establishes a rebuttable presumption that all goods manufactured in Xinjiang are made with forced labor; accordingly, such goods are banned under the Tariff Act of 1930 unless the Customs Border and Protection Commissioner certifies otherwise.
The bill would also impose sanctions and visa restrictions on individuals and senior Chinese officials determined to be complicit in forced labor in Xinjiang. Additionally, H.R. 6210 requires companies to certify annually to the Securities and Exchange Commission that their products do not contain forced labor inputs from Xinjiang.
The prospects for the legislation’s passage are uncertain, but the Chinese government is taking it seriously enough to have imposed sanctions on one of the bill’s co-sponsors, Sen. Marco Rubio (R-Fla.) and on the Congressional-Executive Commission on China, for which he and another co-sponsor of the legislation, Rep. Jim McGovern (D-Mass.), serve as co-chairs.
EDGAR Problems: Now It’s Personal. . .
The technical problems plaguing the EDGAR system this summer became a full-blown crisis last night – and by that I mean they directly affected me for the first time. (We priced a debt deal last night & it took a couple of hours to get the term sheet filed.) I guess the problems have been so persistent that last week, the SEC decided that it needed to post a bit of an explanation:
The SEC staff has been deploying significant technical upgrades to the EDGAR system. While these upgrades follow extensive planning and testing, unexpected performance issues that have arisen have inconvenienced filers. We apologize for these difficulties and wish to assure filers that we are working diligently to resolve the issues.
The statement goes on to say that should you experience problems or have any questions or concerns, you may contact Filer Support at (202) 551-8900, option 3, or FilerTechUnit@sec.gov. I sometimes think it might be interesting to work for the SEC, but I’ll tell you what – I definitely wouldn’t want to be the poor soul you get connected to if you hit “option 3.”
The SEC sure isn’t shying away from controversial topics this summer. Less than a month after adopting a somewhat watered-down version of its proposed proxy advisor regulations, the SEC has calendared an open meeting for next month to consider amendments to the shareholder proposal rules. Here’s an excerpt from the Sunshine Act Notice:
The Commission will consider whether to modernize and enhance the efficiency of the shareholder-proposal process for the benefit of all shareholders by adopting amendments to certain procedural requirements for the submission of shareholder proposals and the provision relating to resubmitted proposals under Rule 14a-8. The amendments being considered seek to modernize the system for the first time in over 35 years and reflect many years of engagement by Commission staff with investors, issuers and other market participants.
The SEC issued proposed rules last November that would increase the ownership thresholds for submission of proposals for inclusion in a company’s proxy statement & substantially raise the bar in terms of the favorable vote required to allow shareholders to resubmit proposals in subsequent years. Other proposed changes to Rule 14a-8(b) would subject shareholders using representatives to enhanced documentation requirements with respect to the authority of those agents, and require shareholder-proponents to express a willingness to meet with the company and provide contact & availability information.
The proposals have produced an avalanche of comments – both real and, apparently, of the “Astroturf” variety. For example, the proposal’s comments page discloses that the SEC received over 5,000 identical form comment letters opposing the proposal, but that it has also “received messages from certain of the email addresses that sent this comment letter indicating that the owner of the email address did not submit a comment letter.”
The meeting is scheduled for September 16th, which means that if rules are adopted, we’ll be all over them at our upcoming “Proxy Disclosure” & “Executive Pay” Conferences – which will be held entirely virtually over three days – September 21 – 23. We’ve offered a Live Nationwide Video Webcast for our conferences for years – one of the only events to do so – and we’re excited to build on that platform and make your digital experience better than ever. Act now to get the best price – here’s the registration information.
Proxy Advisor Regulation: ISS’s Lawsuit Against the SEC Marches On
The SEC’s new rules regulating proxy advisors may be a weaker broth than what was originally proposed, but ISS is still not happy about being on the receiving end of the proxy rules. Last year, ISS sued the SEC over its efforts to regulate the proxy advisory industry. The parties agreed to stay the proceedings pending the SEC’s action on its rule proposals, but now that those are in place, ISS says it’s “game on!” Here’s an excerpt from a statement from ISS’s CEO that was issued last week:
While last month’s rulemaking provides for certain exemptions to aspects of the SEC’s solicitation rules, we remain concerned that the rule will be used or interpreted in a way that could hamper our ability to continue to deliver to clients the timely and independent advice that they rely on to help make decisions with regard to the governance of their portfolio companies. We have today informed the U.S. District Court for the District of Columbia and the Commission of our intent to resume our lawsuit for many of the same core reasons we outlined in our October 31 complaint, as well additional concerns that we will articulate in the weeks ahead.
Over on her Twitter feed, Prof. Ann Lipton flagged a recent court filing indicating that it looks like ISS is going to amend its complaint – which originally focused on the guidance the SEC issued last August – to tackle the new rules directly. Check out the whole thread.
“Mr. Bad Example”: A Barry Minkow Docuseries?
When it comes to securities fraud, before there was Bernie Madoff, there was Barry Minkow. Then again, after there was Bernie Madoff, there was still Barry Minkow. Whether he’s scamming investors in the ZZZZ Best fraud, using his post-conviction “fraud investigation” business to faciliate his own insider trading, or fleecing the congregation of the San Diego church for which he improbably served as pastor, the guy positively sparkles with larceny. Now, this article from “Deadline” says that somebody is trying to put together a documentary series on Minkow.
I wish them better luck than the folks who got into bed with Minkow several years ago to make a movie about his life. As the article recounts, that project ran into some problems:
His life story was turned into the movie Con-Man, which he starred in alongside James Caan and Mark Hamill, but, as production was finishing, Minkow was charged with insider trading, having secretly used his Institute to short the stocks of the businesses he was investigating. While in jail, he also admits to defrauding his own church to help pay for his film.
Yeah, so that happened – and the movie was apparently horrible too. I don’t know what they plan to call the documentary, but as a big fan of the late, great Warren Zevon, may I suggest “Mr. Bad Example”?
According to Cornerstone Research’s 2020 Midyear Assessment, the number of securities lawsuits filed in federal & state courts dropped by 18% compared to the second half of 2019, and were at their lowest level since 2016. Kevin LaCroix recently blogged the details over on “The D&O Diary.” Here’s an excerpt:
According to the report, there were 182 securities class action lawsuits filed in state and federal court in the first half of 2020, which while below the 221 filed in the second half of 2019 and 207 filed in the first half of 2019, is still well above the semiannual average of 112 filings during the period 1997-2019. The 182 filings in the year’s first half is the lowest semiannual number of securities suit filings since the second half of 2016. The report states its view that a decline in Section 11 filings “was the primary reason for the overall reduction in filing activity in the first half of the year.”
The decline in the number of filings from the second half of 2019 to the first half of 2020 represented a drop in the number of filings of 18%. Core (or traditional) filings declined 13%, from 134 in the second half of 2019 to 117 in the first half of 2020. Due to the slowdown in merger deal activity, merger objection lawsuit filings also declined, from 87 in the second half of 2019 to 65 in the first six months of this year, representing a decline of 25%. The 65 first half merger-related suit filings in the first half of this year is the fewest number in federal courts since the second half of 2016.
In case you’re wondering, Cornerstone says that 11 Covid-19-related securities class actions have been filed through the end of June. Kevin’s also been monitoring those filings, and he pegs the number at 15. Lawsuits that Kevin includes in his list that Cornerstone doesn’t are those filed against Zoom, Colony Capital, Wells Fargo, and iAnthus Capital Holdings.
Kevin’s blog has links to prior posts that explain why he included these cases in his tally, but as far as I’m concerned, he doesn’t have to explain anything – he’s a fellow Clevelander, so I’ve got his back.
Crypto Enforcement: Here Comes The Martin Act!
Those of you who are of my vintage likely remember the commercials for Ron Popeil’s Veg-O-Matic that touted its 1,001 household uses – “It slices! It dices! It makes julienne fries!” Well, New York’s Martin Act just keeps on proving that it’s the Empire State’s answer to the Veg-O-Matic. This DLA Piper memo says that the Appellate Division of New York’s 1st Dept. recently upheld a lower court ruling authorizing the statute’s use as the basis for the New York AG’s long-running investigation of the virtual currency “tether.” This excerpt lays out the key takeaway from the Court’s decision:
The decision is a timely reminder to companies and individuals in the FinTech sector that the New York AG has broad power to investigate suspected fraud in the realm of virtual currencies. Dealing with the New York AG’s Investor Protection Bureau may be a disorienting experience for white collar practitioners used to responding to inquiries by federal regulators.
The text of the Martin Act places few clear limits on the New York AG’s investigative authority, and the office is not constrained by the large body of guidance memorialized in the US Department of Justice’s manual for prosecutors and other published federal enforcement guidelines that help practitioners attempt to deal with regulators on a level playing field.
If you old folks don’t remember the Veg-O-Matic, I bet you remember the Bass-O-Matic. (I feel sorry for you kids today, I really do).
EDGAR’s On the Fritz Again
One of my colleagues was in the unenviable position of trying to file a couple of S-8s & an S-3 yesterday, and he learned to his chagrin that the EDGAR system was once again experiencing technical difficulties. According to the EDGAR News & Announcements page on the SEC’s website, they’re working on it:
The EDGAR system is currently experiencing technical difficulties. Our technical staff is working to resolve the issue. Please check this site for updates. We apologize for any inconvenience this may cause.
Fortunately, our registration statement filings were eventually accepted, and even though they didn’t show up on EDGAR until after 5:30 pm, we still received yesterday’s filing date. Still, I think my friend is starting to think the SEC is out to get him – he got caught up in the last malfunction trying to file a couple of 11-Ks.
