The meme stock saga took another interesting turn last week, when the arbiters of materiality from Reddit charged Wall Street and drove several of their favorites to staggering new heights. That’s nothing new – it’s been happening all year. But what’s a bit different this time is the way that one company, AMC, has decided to whole-heartedly embrace its “apes.” This Verge article explains:
AMC announced today that it was creating AMC Investor Connect, “an innovative, proactive communication initiative that will put AMC in direct communication with its extraordinary base of enthusiastic and passionate individual shareholders to keep them up to date about important company information and to provide them with special offers.” This represents “a groundbreaking new approach” to communicating with retail investors, the company says. It’s a shame they didn’t put a bunch of rocket emojis in the announcement — after all, there’s no need to be coy. We all know exactly who AMC is speaking to, and if they sign up today, they’re getting free popcorn.
The AMC Investor Connect website bears virtually no resemblance to a traditional investor relations site, and is tied in with its existing “AMC Stubs” affinity program. Meanwhile, AMC’s CEO continued the company’s new age investor outreach when he sat down for an hour long YouTube interview on the “Trey’s Trades” channel, in which he made a pitch for support of the company’s proposal to authorize an additional 25 million shares of common stock. Apparently, he wasn’t wearing any pants during the interview, which I guess is a thing arbiters of materiality like meme stock CEOs to do these days.
Meanwhile, the SEC said it was observing the meme stock market for signs of “manipulative trading or other misconduct.” General goofiness, it appears, remains outside of the agency’s jurisdiction.
AMC needs those additional 25 million shares its CEO was lobbying for because it’s been taking advantage of its skyrocketing stock price to issue plenty of new stock. It raised over $500 million in an ATM offering launched last Thursday, and more than $1.2 billion over the last month. If you’re scratching your head about why anybody would buy newly issued stock at these valuations, well, according to this excerpt from the risk factors section of AMC’s pro supp, the company’s kind of wondering the same thing:
We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last. Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.
That sounds a lot like the disclosure Hertz put in the pro supp for its aborted offering last summer, and in the end, the retail investors who bought into that company did okay. But what are the odds for AMC’s new investors? According to analysts, they’re not real good – even after the capital raise, one analyst said that AMC’s stock would need to drop by 85% in order to appropriately reflect its intrinsic value.
You can certainly understand why AMC would want to use the opportunity created by the current craziness to raise additional capital, and that’s not an unprecedented step for a company in its position to take. But GameStop and the other similarly situated companies haven’t accompanied their opportunistic financings with aggressive efforts to promote their stock to retail investors at prices they acknowledge to be sky high.
That seems to me to be a very risky approach. If AMC’s valuation tumbles back to earth while it’s sitting on a pile of fresh cash or a nicely cleaned-up balance sheet, my guess is that there will be plenty of activist hedge funds attracted to it not by free popcorn, but by the smell of blood in the water.
Last month, Lynn blogged about calls for changes to Rule 10b5-1, and it now looks like potential changes are officially in the works. In remarks to the WSJ’s CFO Network Summit yesterday, SEC Chair Gary Gensler said that 10b5-1 plans had led to “real cracks in our insider trading regime” and announced that he had asked the Staff to provide recommendations on how the SEC might “freshen up” Rule 10b5-1. Gensler detailed a number of specific areas of concern in his remarks. These include:
– The lack of a mandatory “cooling off period” between the time a 10b5-1 plan is adopted and the first trade, which he said might be perceived by some bad actors as a “loophole” to participate in insider trading. Gensler noted that the idea of a cooling off period of between 4 to 6 months had received bipartisan support and should be explored further.
– The ability of insiders to cancel 10b5-1 plans at any time, which allows them to exit a plan while they’re in possession of MNPI.
– The lack of mandatory disclosure requirements regarding the adoption, modification, and terms of Rule 10b5‑1 plans.
– The absence of limits on the number of 10b5-1 plans that insiders can adopt. The ability to adopt multiple plans and cancel them may lead the. With the ability to enter into multiple plans, and potentially to cancel them, Gensler says insiders might have the mistaken belief that they a “free option” to select the most favorable plan to sell under.
Gensler also indicated that the Staff will look into other possible reforms to the rule, “including the intersection with share buybacks.” None of the specific areas of concern that the Chair identified in his remarks comes as any great surprise, and all involve actions that run contrary to consensus “best practices” for 10b5-1 plans. In fact, since Jay Clayton touched on many of these concerns about 10b5-1 plans in a November 2019 speech, this may be one of those rare areas where we might have reason to hope that proposed rule changes might actually receive bipartisan support among the commissioners.
If you’ve been reading my blogs for a while, then you know that the institutional investor-led crusade against dual-class IPO structures has long been one of my favorite hobby horses. I didn’t think there was any way that I could have been less sympathetic to institutional investors’ “buy first, whine later” approach to dual-class IPOs – that is, until I saw the disastrous Deliveroo IPO unfold across the pond.
This article from FT.com indicates that one of the reasons that the offering tanked is that investors balked at its dual-class structure. Of course, a dual-class structure is novel in London, and it was also far from the only bit of hair on that deal, but some of the City’s biggest investors nevertheless cited it as one of the reasons they refused to sign-on. I say good for them – and what’s stopping U.S. institutions from doing the same?
In responding to a question like this, institutions frequently point to supposedly insurmountable “collective action problems” around this issue, or they cite the plight of the poor index funds, which have no choice but to buy stocks included in the relevant indices. But I think there’s evidence to suggest that if an IPO truly raises significant governance concerns, institutions are willing to walk away from it. I also think that whatever its merits when it comes to aftermarket purchases, the point about index funds doesn’t carry much weight when it comes to pushing back against dual-class IPOs, because index funds don’t buy IPOs.
All that leads me to believe that complaints about dual-class IPOs aren’t about “good governance” – whatever that means. Instead, they’re tactical. They’re designed to ensure that investors who provide fresh capital at the time of the IPO or afterward ultimately have the upper hand at public companies.
There’s nothing wrong with that objective, but I don’t believe there’s anything wrong with founders using their leverage to push back against it. There’s no reason for the exchanges, the SEC, Congress or the Delaware legislature to intervene. Institutions have all the tools they need to fight this fight on their own. In fact, they have trillions of them.
We’ve blogged a few times about the SEC’s use of data analytics in enforcement. This Troutman Pepper memo says that the SEC is increasingly data-driven in its approach to identifying potential enforcement targets for enforcement actions. This excerpt highlights some specific areas where the SEC’s data analytics tools are being brought to bear:
Recent enforcement actions suggest that the SEC is targeting quarterly public filings. Quarterly reports are not subject to the same accounting oversight as annual reports. Recent cases highlighted by the agency as examples of data-based enforcement actions suggest that the SEC’s focus with data-based investigations is on quarterly reports and other areas where manipulation may be more likely to occur.
Reading between the lines of the press releases surrounding recent enforcement actions and other SEC commentary, it appears that the targets for these new enforcement initiatives are relatively small manipulations to figures that can have an outsized effect by causing a company to meet analysts’ EPS expectations or attain other quarterly results that, while not necessarily material in and of themselves, can have a significant impact on analyst and investor expectations or outlooks.
The memo says that the takeaway from recent enforcement actions a recurring pattern of meeting or barely exceeding EPS estimates may attract the SEC’s attention, particularly if that performance seems to be driven by “a single category that may register as an outlier against a company’s previous filings.” That kind of targeting suggests that the SEC’s data analytics tools are allowing it to zero in on previously hard-to-detect violations that in the past would have required significant resources to identify.
Apparently, public companies aren’t the only entities that prefer the occasional Friday news dump when it comes to controversial announcements. At approximately 4:00 pm eastern time on Friday, the SEC announced that it had removed PCAOB Chair William Duhnke and had designated Duane DesParte to serve as acting Chair. At the same time, the SEC announced that it was seeking candidates to replace all five current members of the PCAOB board. This article by Politico’s Kellie Mejdrich provides an overview of the politics behind the shakeup. Here’s an excerpt:
The sudden firing followed mounting pressure from [Senators] Warren, Sanders and several left-leaning groups who in recent weeks called on SEC Chair Gary Gensler to replace the entire board leading the PCAOB. The progressives warned that the agency, which was established after the Enron and WorldCom accounting scandals to inspect public company audits, was failing to crack down on corporate wrongdoing and was captured by industry.
Warren said Duhnke’s removal was “absolutely the right move” and she signaled that she would push for a bigger shakeup. The SEC, which is also responsible for hiring the PCAOB’s leaders, may grant her wish. The agency said it would seek candidates for all five of the regulator’s board positions, even as three of its members who serve five-year terms remain in place.
Over on the Radical Compliance blog, Matt Kelly reviews Duhnke’s “tumultuous and controversial” tenure as Chair of the PCAOB and provides some thoughts about what the changes are likely to mean for auditors and compliance professionals.
The SEC’s action prompted a dissenting statement from commissioners Peirce & Roisman, who said that the SEC acted in an “unprecedented manner that is unmoored from any practical standard that could be meaningfully applied in the future.” Mindful of the fact that under the leadership of Jay Clayton, the SEC took similar action to replace all incumbent PCAOB board members in 2017, the dissenting commissioners said that action was distinguishable, since most of the board members who were replaced at that time were serving after their terms had expired.
The dissenters didn’t mention the fact that the SEC’s 2017 action was also unprecedented. As the WSJ noted at the time, it represented the first time that PCAOB directors who desired a second term had ever been denied that opportunity by the SEC. That action was followed up by the SEC’s controversial decision to deny board member Kathleen Hamm a second term in 2019.
In light of the history here, the dissenters sound a bit like Captain Renault from Casablanca. C’mon guys, the PCAOB has been a political football for some time now, and what’s sauce for the goose is sauce for the gander.
A few weeks ago, I blogged about efforts to come up with a fix for the accounting issues associated with SPAC warrants identified in the joint statement from Corp Fin leadership. According to this White & Case memo, discussions between the accounting firms active in the SPAC market and the Staff have resulted in a consensus on how to structure SPAC warrants to permit them to be classified as equity & not as liabilities for financial reporting purposes.
The memo walks through the steps necessary to achieve equity treatment for pre-IPO SPACs, and this excerpt addresses the alternatives available to post-IPO SPACs to address their outstanding warrants:
SPACs that have completed their IPOs need to consider, in connection with their initial business combinations, whether to amend their warrant agreements to implement the changes to classify their warrants as equity instruments after the consummation of the business combination.
If the post-business combination company will only have a single class of common stock, the tender offer provision described above will not preclude equity classification because it would only be triggered when there is a change in control. In that case, only the private placement warrants would need to be addressed. If the post-business combination company will have a dual class structure (e.g., where certain former owners of the target company receive super-voting stock in the business combination), then the public warrants also will need to be addressed.
There are three approaches to be considered:
– Accept liability treatment for the warrants on a going forward basis;
– Seek the approval of warrantholders to amend the warrant agreement concurrently with the solicitation of approval of the SPAC’s stockholders for the business combination; or
– Rely on the “warrant table,” if applicable, or a tender/exchange offer after the consummation of the business combination, to “redeem” or repurchase some or all of the then-outstanding SPAC warrants.
The memo says that if the parties desire to amend the warrant agreement, they will need to review that agreement’s amendment provisions in order to determine whether the holders of public warrants or private placement warrants need to approve the proposed changes.
We’ve posted the transcript for our recent webcast: “Capital Markets 2021.” If your practice involves capital markets transactions, you’ll want to check this out. Panelists Katherine Blair of Manatt, Sophia Hudson of Kirkland & Ellis, and Jay Knight of Bass Berry & Sims participated in an in-depth discussion of a number of topics, including:
– The State of the Capital Markets
– The SPAC Phenomenon
– Equity Financing Alternatives for Public Companies
– Debt Financing Alternatives: Investment-Grade/Non-Investment-Grade Issuers
– Recent Offering/Issue Trends
Last month, the SEC threw a monkey wrench into the SPAC market when the Corp Fin Director & the Chief Accountant issued a joint statement on accounting for SPAC warrants. To make a long story short, the Staff’s position is that a lot of SPACs may have been incorrectly classifying certain warrants as equity instead of as a liability. As Lynn suggested it might when she blogged about the joint statement last month, the Staff’s position has led to a wave of restatements.
But a wave of restatements might not even have been the biggest problem arising out of this guidance for SPACs. That’s because SPAC IPOs have essentially come to a halt due to uncertainties about what tweaks to warrant terms would satisfy the SEC. Now, according to this CFO Dive article, a fix may be in the works:
A form of warrant that isn’t accounted for as a liability for special purpose acquisition companies (SPACs) is under development, but until that process is completed and gets an okay by the Securities and Exchange Commission, sponsors and others with an interest in the market face uncertain terrain, Gerry Spedale said in a Gibson, Dunn Crutcher webcast last week.
“You have accounting firms and law firms working together on that form, and that needs to get blessed by the SEC before everyone’s going to be comfortable moving forward with that approach,” said Spedale, a Gibson, Dunn & Crutcher partner.
The article says that this process is going to take several weeks, which means the SPAC IPO market is going to continue to face significant uncertainty for a while longer. Then again, maybe that’s not such a bad thing.
SEC Enforcement: “Known Trends” Continues to Trend
Earlier this month, the SEC announced a settled enforcement proceeding against Under Armour arising out of allegedly misleading disclosures concerning the reasons for revenue growth and failing to disclose known uncertainties about future revenue growth. This Locke Lord blog points out that efforts to manage earnings to meet analyst expectations may have consequences for MD&A disclosure even if they don’t involve improper accounting:
According to the SEC order, Under Armour, in order to meet analyst projections and sustain its 20% quarter over quarter revenue growth record, pressured customers to move purchases forward into the current quarter, and did this for a number of consecutive quarters. There was no finding that Under Armour’s accounting for these sales as revenues was improper since the sales were actually made.
However, Under Armour gave the same reasons for revenue growth as it had before in earnings releases and its MD&A, without indicating that it was pulling revenues forward to maintain its growth and that this was an unsustainable practice, especially since doing so made it harder to sustain the rate of growth as a result of increasing the prior year’s base and taking revenues from the later year.
Without admitting or denying the findings in the SEC’s order, Under Armour agreed to cease and desist from violations of Section 17(a) of the Securities Act and certain reporting provisions of the securities laws, and to pay a $9 million penalty.
It’s worth noting that this is the third “known trends” enforcement proceeding against a high-profile public company that the SEC has brought since the beginning of 2020. Diageo PLC settled similar charges in February 2020, and HP did the same last September. All of these proceedings involved MD&A disclosure shortcomings concerning the future implications of actions taken to enable companies to meet current period earnings estimates.
In Memoriam: Jason Morse
This has been a difficult week for all of us at CCRcorp. On Monday, May 17th, our friend and colleague Jason Morse passed away unexpectedly. Jason had been an Account Executive with our company for more than two years, and our office will be closed today in honor of his memory. On behalf of everyone at CCRcorp, I want to offer our sincere condolences to Jason’s family and friends, and in particular to his sons, of whom he was so proud.
Over the past several days, many colleagues have shared remembrances of Jason on our Intranet page. As I read them, I was struck by the repeated references to his kindness, generosity, and good cheer. One colleague remembered Jason as “the person who without fail would always wish me a “Good Morning!” with a big smile on his face, as soon as I walked into the office.” Several others mentioned how Jason made them feel so welcome when they first joined the company. Another told the story of how Jason gave away his own lunch to a colleague who had forgotten to bring his from home.
Many years ago, I read William Wordsworth’s poem “Tintern Abbey.” At one point in the poem, Wordsworth speaks of “that best portion of a good man’s life / His little, nameless, unremembered, acts / Of kindness and of love.” Those words resonated with me, and I found comfort in reflecting upon them when my own father passed away. Reading what my colleagues had to say about Jason brought those words to mind again. I hope they will serve as a source of comfort to his family and friends as they remember the life of this good man. May he rest in peace.
Last year, Lynn blogged about a Sanford Bernstein report that suggested stock buybacks were fading as a result of the pandemic & predicted that they were likely to be “severely curtailed” for the next several years. That seemed like a safe bet at the time, particularly when the CARES Act banned recipients of government bailouts from engaging in buybacks.
But according to this WSJ article, that prediction turned out to be about as good as the infamous Sports Illustrated cover that predicted the Cleveland Indians would win the AL pennant in 1987. A year later, and this excerpt says that buybacks are back with a vengeance:
After a year of hoarding cash, American corporations are ready to reward investors again. Companies across industries have been buying back stock and raising dividends at a brisk pace this year. That is a sharp reversal from 2020, when they suspended or cut such programs, warning of the urgent need to preserve liquidity in the early stages of the Covid-19 pandemic.
Already this year, U.S. companies have authorized $504 billion of share repurchases, according to Goldman Sachs Group data through May 7, the most during that period in at least 22 years. The pace of announcements trounces even the 2018 bonanza that followed the sweeping tax overhaul of late 2017.
Cleveland finished the 1987 season with a record of 61-101, 37 games behind the Tigers in the AL East. Still, I’m hard pressed to say Sports Illustrated did worse on that call than Sanford Bernstein did on this one.
Last year, it appeared that derivative claims based upon allegedly false or misleading corporate statements about diversity and other ESG-related areas might be the next big thing from the plaintiffs’ bar. But this Sidley blog says that, so far, these cases have fizzled.
Complaints in these cases generally allege breaches of fiduciary duty arising out of directors’ failure to address board diversity, and – in order to get into federal court – claims under Section 14(a) of the Exchange Act premised on allegedly false statements about diversity efforts in proxy statements. This excerpt from the blog says that these claims haven’t gotten much traction with courts:
The Facebook case was the first one decided. On March 19, 2021, Magistrate Judge Beeler held that the breach of fiduciary duty claims failed because the plaintiff did not establish that pre-suit demand was excused. In reaching this decision, the court stated that to show that demand would have been futile, the plaintiff needed to plead “actual or constructive knowledge that their conduct was legally improper” and that, in reviewing the actual composition of the board which included two black directors, four women directors and one director who is openly gay, the plaintiff had not satisfied the requirement.
These same facts also helped defeat the Section 14(a) claim of misleading statements about diversity in the company’s proxy. In addition, the court found that the statements in the proxy were immaterial as they were inactionable puffery and further, that there was no corporate loss that could be connected to the statements.
Of particular interest to those following Delaware law is that the court also held that the case had been filed in the wrong forum because Facebook had adopted a Delaware Chancery forum selection clause which was applicable to these claims.
The case against the board of Gap Inc. was similarly dismissed on April 27, 2021, on the basis of the company’s forum selection bylaw, which designated the Delaware Court of Chancery as the exclusive jurisdiction for derivative claims or breach of fiduciary duty claims. The plaintiff argued that applying the forum selection bylaw to this case was against public policy as it deprived her of the right to assert her Section 14(a) proxy statement claim, which can be brought only in federal court. Magistrate Judge Sallie Kim rejected the plaintiff’s arguments on the grounds that the plaintiff was not without remedy as she could bring her breach of fiduciary duty state law claims in Chancery Court.
The blog goes on to note that the more significant aspect of these decisions may be that both ND Cal. courts upheld Delaware forum selection bylaw provisions even when the result was that the plaintiffs’ Section 14(a) claims had no forum in which they could be brought. I recently blogged about that aspect of these decisions over on DealLawyers.com
Investor Conferences: Most Still Virtual for 2021
The country is finally starting to open up again as the pandemic begins to fade and the percentage of the vaccinated population continues to grow, but this IR Magazine article says that most sponsors of investor conferences aren’t ready to go back to fully in-person or hybrid events just yet:
While some investment banks are preparing for a tentative return to small in-person events in the coming months, the majority of investor events will likely continue to be held virtually this year, according to a study conducted by OpenExchange. Three out of four investor conferences during the second half of 2021 will be entirely virtual, according to OpenExchange’s survey of 139 decision-makers at 30 financial institutions.
The article says that sponsors are preparing for hybrid events, with 1/3rd expecting to hold their first hybrid investor conference by October and 2/3rds by the end of the year. Going forward, hybrid formats for investor conferences are expected to be the new normal, with 70% of 2022 events and 58% of 2023 events expected to have both physical and virtual components.
