In response to the onset of the Covid-19 pandemic, many companies opted to include a risk factor addressing the pandemic in their 10-Qs for the first quarter of 2020. So, assuming that disclosure is still accurate & comprehensive, should you include it in your second quarter 10-Q? That’s the question addressed in this recent Bass Berry blog. Here’s an excerpt:
With respect to assessing whether to include potential COVID-19 risk factor disclosure in upcoming Form 10-Qs, as a starting point, Part II, Item 1A of Form 10-Q requires that public companies “set forth any material changes from risk factors as previously disclosed in the registrant’s Form 10-K” (emphasis added).
This language from Form 10-Q, on its face, would appear to require public companies to continue to disclose risk factors included in a prior Form 10-Q in any subsequent Form 10-Qs filed before the next Form 10-K in light of the statement about including material changes from the prior Form 10-K (compare the 2005 adopting release of the SEC promulgating this Form 10-Q risk factor requirement, which stated that the Form 10-Q should disclose risk factors “to reflect material changes from risks factors as previously disclosed in Exchange Act reports” (emphasis added).
The blog goes on to acknowledge that although practice has not been uniform, there is a good argument based on the text of Form 10-Q that public companies should continue to repeat (with updated language, as applicable) risk factors included in a prior Form 10-Q in subsequent Form 10-Qs filed during the fiscal year. This Bryan Cave blog takes a similar position, noting that “strict compliance” with the language of Item 1A has become “common practice.”
These views are consistent with the position we’ve taken in our “Risk Factors Disclosure Handbook.” However, one of our members pointed out that the Sept. 2010 issue of The Corporate Counsel reported that, despite the language of Item 1A, the Staff had advised that new risk factor disclosure included in a 10-Q does not need to be repeated in subsequent 10-Qs. After making some inquiries, I learned that this advice was likely provided informally in a private conversation. Unfortunately, the Staff never formalized that guidance, and we don’t know whether the Staff would take the same position (or any position) today, in the context of Covid-19.
2020 DGCL Amendments Signed into Law
On July 16, Delaware’s Gov. John Carney signed the 2020 amendments to the DGCL into law. This S&C memo has the details. As we blogged at the time the legislation was first introduced, it addresses some of the problems that Delaware corporations experienced this year in their efforts to transition to virtual annual meetings. Here’s an excerpt:
Under the emergency conditions described in DGCL §110(a), the Amendments provide a board of directors with discretion to postpone or change the place of a stockholder meeting. Amendments to Delaware’s General Corporation Law July 22, 2020 meeting (including to hold the meeting solely by means of remote communication). Public companies may notify stockholders of such a change solely by a document that is publicly filed with the Securities and Exchange Commission.
The amendments also update the definition of an “emergency” under Section 110 of the DGCL & expand it beyond the Cold War “Rocket Attack U.S.A.” scenario to include “an epidemic or pandemic, and a declaration of a national emergency by the United States government.”
CEO Turnover: Uneasy Lies the Head That Wears the Crown
There’s a grim joke among professional football players to the effect that the initials “NFL” stand for “Not for Long.” According to a recent Squarewell Partners study, the same can be said for those who serve as U.S. public company CEOs. Squarewell studied CEO departures at some of the world’s largest companies since the beginning of 2019, and reached some interesting conclusions. These include:
– US companies witnessed more CEO departures than the UK and Europe
– Official company disclosures suggest only 7% of CEOs were formally dismissed but we find that the actual figure of CEO dismissals should be 29%.
– 40% of dismissed Lead Executives recorded negative share price performance during their tenure.
– Only 20% of companies (that saw a CEO change) provided comprehensive disclosure surrounding their succession plans prior to their departure.
– 66% of newly appointed Lead Executives were promoted from within the organization.
– 10% of newly appointed Lead Executives were women.
In this second 30-minute podcast tribute to his friend & “Radio Show” co-host Marty Dunn, who died on June 15, 2020, Dave Lynn welcomes Marty’s colleagues from Corp Fin, private practice and the conference circuit to share their memories of Marty. Highlights include:
– The story behind the Dave & Marty puppet show
– Marty’s game saving “play at the plate” for the Corp Fin softball team
– Making a newcomer feel welcome
– Spending time with Marty & his family
– What it was like to be one of “Marty’s people”
– Marty’s extraordinary ability as a teacher and mentor
– Marty’s rendition of “Midnight Train to Georgia”
The podcast is accompanied by two of Dave & Marty’s legendary puppet shows from our 2015 & 2018 Proxy Disclosure Conferences.
Diversity: You Too, Plaintiffs’ Bar!
Lynn recently blogged about shareholder derivative lawsuits against Facebook & Oracle arising out of alleged inaction on diversity issues. In light of the plaintiffs’ bar’s fondness for diversity-based fiduciary duty claims, I thought it was fitting that the federal district court judge presiding over the Robinhood class action case decided that the plaintiffs’ bar needed to pay a little attention to its own diversity practices.
According to Alison Frankel’s recent blog, Judge James Donato rejected the application of two major plaintiffs firms to serve as lead counsel for the Robinhood litigation. This excerpt from the blog explains why:
Judge Donato, in an order Tuesday night, consolidated the cases – but rejected the leadership proposal. There was no doubt, he said, that Kaplan Fox and Cotchett would provide “highly professional and sophisticated representation” to the prospective class, given their “impressive history.” But Judge Donato said he was concerned that the proposed team lacked diversity.
There were no women among the proposed leaders of the case, the judge pointed out. He also noted that the list includes a lot of lawyers and law firms that frequently head class actions and MDLs. That experience might benefit the prospective class, he said, but “highlights the ‘repeat player’ problem in class counsel appointments that has burdened class action litigation and MDL proceedings.”
The judge’s order permitted the law firms to reapply after they reshuffled their starting lineups, but the blog says that the order may raise constitutional concerns based on Justice Samuel Alito’s criticism of a similar order in an antitrust case.
Going Concern: Update on Covid-19’s Toll
Back in May, I blogged about an Audit Analytics survey that identified 30 public company audit opinionsthat cited the COVID-19 pandemic as a contributing factor to substantial doubt about a company’s ability to continue as a going concern for the next twelve months. A more recent Audit Analytics survey says that the toll continues to grow:
Since our last update in May 2020, there have been 12 additional audit opinions filed with a going concern modification citing COVID-19 – a 40% increase over 7 weeks. For 3 of those companies, it was their first going concern, bringing the total up to 17 companies that were issued their first going concern in the last 5 years specifically citing the pandemic as a reason.
The blog is accompanied by a chart identifying the companies in question and the reasons they cited as contributing to the going concern qualification in their audit opinions.
According to a recent study, there’s a pretty good chance that all of the stimulus money currently sloshing around may stimulate some good old fashioned insider trading among the politically well-connected – at least that’s what the experience of the last time Washington fired its cash bazooka suggests. This Stanford article says that the study looked at trading by politically-connected insiders at TARP fund recipients during the 2008 financial crisis.
That program bailed out a lot of financial institutions, but it wasn’t a model of transparency & key details of the program were never publicly disclosed. This excerpt from the article says that insiders used that lack of transparency to their advantage:
This gave corporate insiders advance knowledge of the likely scope of government intervention and its impact on their institution. Larcker’s study finds evidence that many seemed to trade on the basis of this private information to earn higher returns than public shareholders. Prior to massive government stimulus, political connections had far less influence on trading decisions, the study shows. But in the nine months after TARP’s inception, transactions by politically connected insiders were correctly predicting future stock performance.
Federal law requires executives to disclosure equity stakes in their own firm through regulatory filings that investors pore over for clues about potential share price swings. The researchers’ analysis shows that trades were ramped up 30 days prior to TARP announcements. During allocation of government funds, insiders made 3,058 trades averaging $105,987 and yielding $22,251 in average market-adjusted profits ($68 million overall), significantly outperforming their unconnected counterparts.
One of the authors of the study suggests that the key to preventing abuses with the current stimulus spending lies in increased transparency – which he suggests the bipartisan insider trading legislation that the House passed last year would provide – and a longer cooling off period longer between a job in government and an executive position in the private sector, and vice versa. If I were you, I wouldn’t hold my breath on either of those recommendations being adopted.
Regal, But Not Quite Princely: Leo Strine’s Titles are a Mouthful
Over on ProfessorBainbridge.com, Stephen Bainbridge notes that former Del. Chief Justice Leo Strine is currently sporting a mouthful of titles. Take a deep breath everybody, because Leo Strine is:
Michael L. Wachter Distinguished Fellow in Law and Policy at the University of Pennsylvania Carey Law School; Ira M. Millstein Distinguished Senior Fellow at the Millstein Center at Columbia Law School; Senior Fellow, Harvard Program on Corporate Governance; Henry Crown Fellow, Aspen Institute; Of Counsel, Wachtell Lipton Rosen & Katz; former Chief Justice and Chancellor of the State of Delaware.
Prof. Bainbridge points out that, with his 60 word moniker, Strine easily outpaces Queen Elizabeth II, whose full title comes in at a paltry 33 words (which at least gives her something in common with the Rolling Rock beer label). But I’ve got some bad news for the former Chief Justice & the Queen – her husband Prince Philip crushes them both. Ready? Here we go:
His Royal Highness The Prince Philip, Duke of Edinburgh, Earl of Merioneth, Baron Greenwich, Royal Knight of the Most Noble Order of the Garter, Extra Knight of the Most Ancient and Most Noble Order of the Thistle, Member of the Order of Merit, Grand Master and First and Principal Knight Grand Cross of the Most Excellent Order of the British Empire, Knight of the Order of Australia, Additional Member of the Order of New Zealand, Extra Companion of the Queen’s Service Order, Royal Chief of the Order of Logohu, Extraordinary Companion of the Order of Canada, Extraordinary Commander of the Order of Military Merit, Lord of Her Majesty’s Most Honourable Privy Council, Privy Councillor of the Queen’s Privy Council for Canada, Personal Aide-de-Camp to Her Majesty, Lord High Admiral of the United Kingdom.
That’s a grueling 133 words, for those of you playing along at home. Prince Philip’s heritage may be Greek, but those titles would guarantee him a warm welcome from the crew of The H.M.S. Pinafore. The former Chief Justice’s titles may fall short of those of His Royal Highness, but his penchant for Gilbert & Sullivan-inspired judicial robes likely would make him a welcome guest on the Pinafore as well.
Audit Committees: Meetings & Processes in a Pandemic
The most recent edition of Deloitte’s “Audit Committee Brief” discusses priorities for the current quarter & future periods. I thought the discussion of how audit committees have adjusted their meetings and other committee processes in light of the limitations imposed by the Covid-19 pandemic was particularly interesting. Here’s an excerpt on prioritization of agenda items and meeting materials:
Many audit committee chairs have been reassessing the way their time is spent in meetings. Regardless of how the meeting structure has changed, prioritizing the agenda has been key for the committee’s effectiveness. Audit committee chairs should consider taking a step back to reevaluate what’s top priority. Simply following a previously created annual calendar or last quarter’s agenda may not allow the committee to focus on the right topics. Some audit committee chairs have pushed topics that aren’t top priority to later in the year or to consent agendas to allow more time for some of these critical discussions.
Many committees have reviewed meeting materials when considering ways to enhance effectiveness. Some companies are sharing more memos or narratives with pre-read materials; these provide committee members a bigger picture view and allow the members to come better prepared with questions. It can also provide a way to stay informed in between meetings. Some committees are providing more written questions to management before meetings. This doesn’t mean that questions are limited to those provided in advance, but it may help management come more prepared to discuss what’s important to the audit committee and allow for more robust discussions.
The publication also addresses topics such as financial reporting, forecasting, risk oversight, compliance and other challenges facing audit committees in the current environment.
Some of my most vivid memories of my days nights as a young lawyer involve watching bulge bracket investment bankers & their lawyers sit in a Bowne or R.R. Donelley conference room in the wee small hours & obsess over a prospectus’ compliance with the terms of the bank’s style guide.
These style guides were sometimes elaborate documents with detailed instructions about proper fonts, spacing, logos, front & back cover page & underwriting section language, together with a bunch of other formatting details for every kind of offering document imaginable. Sometimes, they even specified the color of ink to be used (“Morgan Stanley blue” anyone?).
And woe to you if your document departed from the style guide! Punishment was swift and merciless (or so it was said). I remember one poor soul literally sweating as he meticulously measured & remeasured the distance between lines on the back cover page of the prospectus, and then turned his attention to the front cover, to ensure that the red herring language aligned perfectly with the top and bottom lines of the page. You’d have thought the guy was about to cut a 20 karat diamond.
That kind of obsessiveness is why the news that Goldman Sachs has come up with a new font that’s free to use, but comes with an interesting catch, doesn’t surprise me in the least. What’s the catch? This Verge article explains:
Investment bank Goldman Sachs has released its very own typeface: an inoffensive set of sans-serif fonts dubbed Goldman Sans. But in the spirit of bankers everywhere, these fonts come with a catch in the contract. As their license states, you’re free to use Goldman Sans for just about anything you like so long as you don’t use it to criticize Goldman Sachs.
According to the article, the license prohibits the user from using the licensed font software to “disparage or suggest any affiliation with or endorsement by Goldman Sachs.” It looks like Goldman’s PR folks got wind of the negative media attention, however, because the license agreement no longer contains the anti-disparagement language.
I guess some people saw this as overreach by a firm that’s long been a magnet for criticism, but anyone who has worked with an investment banker totally gets why they originally included the language in the license. For a Goldman Sachs lifer, there could be no greater affront than to have an element of the firm’s sacred style guide weaponized against it!
Inline XBRL: Accelerated Filers, Ask Not for Whom the Bell Tolls. . .
This Bass Berry blog provides a reminder to accelerated filers preparing for their second quarter filings that they are going to have to comply with the inline XBRL requirements, including cover page tagging and the new Exhibit 104 requirement:
Public companies designated as accelerated filers who are preparing their periodic reports for fiscal periods ending on or after June 15, 2020 (i.e., upcoming second quarter 10-Qs for many companies) will be required to comply with the SEC’s previously adopted Inline eXtensible Business Reporting Language (iXBRL) digital reporting guidelines. Per the SEC’s phase-in guidelines, filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date.
Tomorrow’s Webcast: “Distressed M&A: Dealmaking in the New Normal”
Tune in tomorrow for the DealLawyers.com webcast – “Distressed M&A: Dealmaking in the New Normal” – to hear Woodruff Sawyer’s Yelena Dunaevsky, Fredrikson & Byron’s Mercedes Jackson, and Seyfarth’s Paul Pryant & James Sowka discuss the unique challenges and opportunities presented by acquisitions of distressed targets.
Like many businesses, my law firm’s offices have been operating on a restricted schedule for the past several months, and even though we’re in the process of transitioning to a full reopening, I suspect that many of our lawyers will continue to spend a lot of time working from home. My guess is that many other companies will have similar experiences. This Deloitte memo on the CLO’s role in reopenings highlights some of the cybersecurity challenges facing companies that will continue to have a large remote workforce. These include:
– Increases in socially engineered cyberattacks targeting financial and personally identifiable information (PII) data
– Cyber risk levels are elevated due to an increase in phishing and malware attacks.
– Some communication and collaboration tools may not be secure, even where these platforms have their own built-in controls.
– Client and customer data may be more vulnerable when employees work from home if employees are transmitting data on unsecure networks and/or saving or printing on home devices.
– Employees who previously did not work at home may not be familiar with cybersecurity and data protection leading practices. Most are likely to benefit from regular reminders related to cybersecurity leading practices.
– Potential threats to attorney-client privilege may arise where there are risks to cybersecurity or where attorney-client conversations may be overheard (by family members, for example).
In addition to reviewing cybersecurity insurance policies for potential coverage gaps associated with remote work, the memo recommends additional cybersecurity training to employees, communicating new and emerging threats as they arise, providing remote workers with the tools and instructions necessary to protect data and maintain data privacy protocols.
The memo also recommends that companies prioritize the preservation of the attorney-client privilege by taking actions such as reminding employees not to forward documents to personal email accounts or use other unsecure methods to transfer files or communicate with clients.
Covid-19: Changes to Internal Audit
Over on “Radical Compliance,” Matt Kelly blogged about the results of a recent survey conducted by the Institute of Internal Auditors that suggests that the Covid-19 crisis has resulted in some significant changes to the internal audit function. In addition to the inevitable budget-cutting, the survey suggests that risk assessments & updates to audit plans are likely to increase:
Survey respondents also said they will both conduct risk assessments and update their audit plans more often. This should surprise nobody, given how Covid-19 has put standard risk scenarios through the blender. Fraud risk, cybersecurity risk, user access controls, management review and sign-off of reconciliations or controls; they’ve all gone haywire.
A majority of respondents expect to increase their risk assessments to at least some degree, and 11% expect to increase the frequency significantly. Meanwhile, 68% of respondents say they’ll at least increase the frequency of updates to the audit plan.
That’s a lot of change and improvisation for the audit function. It implies an embrace of “agile auditing” — a concept the IIA and many others in the audit profession heartily support. It’s the idea that an audit function will run light on staff, heavy on technology, and stand ready to jump on emerging or fast-changing risks by working with other parts of the enterprise.
Covid-19 poses new risks across the enterprise, and since audit teams don’t have the time or personnel to engage in “ponderous” risk assessment & remediation planning efforts, the blog says that they will need to embrace a more swift, data-driven approach to assessment, testing, and remediation.
B Corps: DGCL Amendments Ease Transition Process
This Freshfields blog highlights how the 2020 amendments to the DGCL make it simpler for corporations to transition from soulless entities devoted to maximizing stockholder value to virtuous “public benefit corporations” devoted to uplifting humanity. This excerpt addresses elimination of supermajority approval requirement & appraisal rights risks that previously applied to transitioning entities:
Prior to these amendments, the approval of two thirds of a company’s outstanding stock entitled to vote was required to amend its charter to become a PBC. And, in the case of private companies, the decision to convert to a PBC triggered an opportunity for dissenting holders to exercise appraisal rights and thereby monetize their unlisted shares at the expense of the issuer.
Both of these requirements were procedurally onerous and a deterrent to conversion. The amendments will remove both the supermajority requirement and the right to appraisal. Companies may now convert to PBCs through a simple majority vote of their stockholders (plus whatever additional approvals are required under their organizational documents).
The amendments also make clear that a director’s ownership of stock in the PBC does not disqualify the director from being “disinterested” so that the director can benefit from the protection of the business judgment rule and the broad PBC exculpatory provisions when balancing the interests of various constituencies.
FT’s Alphaville blog recently discussed a new study dealing with corporate responses to short sellers. Public companies sometimes decide that discretion is the better part of valor when it comes to responding to an activist hedge fund’s announcement of a “short thesis.” But many others – about 1/3rd according to the study – opt to respond. Some of those companies announce that they’re initiating an internal investigation into the activist’s allegations. If that happens, the study says investors should run for their lives:
We find that when activist short seller targets announce internal investigations, the disclosure is associated with a 383% greater chance of a fraud finding . . . and a 61% lesser chance of being successfully acquired as an exit strategy, compared to the whole sample of targeted firms.
The study suggests that initiating an internal investigation based on an activist’s allegations implies that the firm’s directors are not sufficiently confident in management to trust that the existing disclosures and management representations are accurate.
While an internal investigation may be a red flag, if allegations are credible, it may also be the board’s only option. But what’s the best way for a company to respond to a report that it knows is inaccurate? The blog points to GE’s successful efforts to refute Harry Markopolos’s 2019 short report – which focused on highlighting the errors in the analysis without trashing the analyst – as a model response.
Audit Committees: Navigating the Pandemic
Dealing with the issues presented by the Covid-19 crisis has increased the already significant demands placed on audit committees. This Sidley memo (p. 7) provides some advice to audit committees on how to navigate the pandemic. This excerpt addresses disclosure & reporting issues:
Plaintiffs’ attorneys are investigating whether COVID-19 disclosure-related issues can support opportunistic securities class actions, with multiple cases already filed. Companies that express public confidence about their general prospects or their supply chain sufficiency despite dismal news about the economy and COVID-19’s impacts face heightened risk.
As always, companies should be careful to have support for statements at the time they are made. Watch for changing circumstances and adverse trends, in particular, as those circumstances change rapidly; describe them accurately as new developments. Ensure that public reporting is consistent with what the board is being told privately.
Shareholders also may second guess board-level decisions or inaction. So, consider documenting COVID-19-related considerations and responses to create a diligence record. Shareholders looking to file derivative actions often seek books and records before filing or making demands. Having a record of board considerations and responses can be very protective. Shareholder demands and books and records demands often come by mail, so companies should be alert to incoming mail when personnel are out of the office.
Other issues addressed in the memo include the importance of the “tone at the top” when it comes to health & safety concerns, the need to stay on top of operations & risks, the importance of being in sync with management when it comes to reporting, and a variety of other matters.
Capital Markets: Converts are Having a Moment
They say that “every dog has his day,” and according to this “CFO Dive” article, that day has apparently come for convertible debt. The article says that $21 billion in converts were issued during May – the highest monthly total on record. Traditionally, it has been small caps that have been attracted to convertible securities, but some big companies that have found themselves in financial hot water have recently turned to them as well. This excerpt explains the attraction of converts to issuers & investors in the current environment – as well as some reasons to think twice before diving in:
Start to finish, an issue can take two days, compared to weeks for high yield debt. The heightened uncertainty facing companies and investors over the last several months as a result of the coronavirus pandemic has led to a doubling of convertibles outstanding, compared to the same time last year. “Given the current volatile market environment and downward pressure on stock prices, it’s no surprise investor sentiment has turned negative around companies issuing equities to raise capital, primarily because of the dilutive effect on their stock holdings,” Heather Hall, CFO of fixed income tech company 280 CapMarkets, said.
When convertibles are changed into equity, they can impact shareholder value negatively, and have adverse effects on a company’s earnings metrics and projections, she said. Companies in competitive industries might want to consider the potential future dilutive effects on their share price, and corresponding negative implications to their overall market share and earnings per share metrics, Hall said, noting the dilutive effects to shareholder value that will be much larger, proportionally, in a smaller company. “The phenomenon of an activist investor who could potentially acquire the majority of the convertible debt and ‘run away’ with the company should be contemplated,” Hall warned.
For a more in-depth look at the pros & cons of issuing converts in the current environment, check out this Wachtell Lipton memo.
Just a couple of years ago, media reports suggested that the SEC’s universal proxy rule proposal was an “ex-parrot.” But this Davis Polk blog says that latest edition of the agency’s Reg Flex Agenda includes the proposal on the short list, together with proxy plumbing. Here’s an excerpt:
Worth noting is that the potential rulemaking related to universal proxies, proxy process amendments (a.k.a. “proxy plumbing”) and mandated electronic filings have moved up to the short-term agenda; formerly these were on the 2019 fall long-term agenda. The universal proxy is a proxy voting method meant to simplify the proxy process in a contested election and increase, as much as possible, the voting flexibility that is currently only afforded to shareholders who attend the meeting. Shareholders attending a meeting can select a director regardless of the slate the director’s name comes from, either the company’s or activist’s. The universal proxy card gives shareholders, who vote by proxy, the same flexibility.
The proxy process topic is a very large-complicated topic that involves voting mechanics and technology, including issues such as those associated with the complex system of share ownership and intermediaries. As customary, the Reg Flex Agenda provides no details; however, given the complexity of the issues, it is most likely that “low hanging fruit” will be addressed. Some of these were identified by the SEC Investor Advisory Committee Recommendation issued in September 2019, which included the use of universal proxies and were previously discussed in our blog.
The Reg Flex Agenda targets an October 2020 date for the finalization of the rule. However, the blog points out that an agency is not required to consider or act on any agenda item, and that SEC Reg Flex Agenda reflects solely the priorities of the Chairman and does not necessarily reflect the position of any other Commissioner.
ICFR: How Will Covid-19 Impact Material Weaknesses?
This FEI report on ICFR addresses the potential implications of the Covid-19 crisis on the assessment of whether material weaknesses in internal controls exist. Not surprisingly, this excerpt suggests that we’re likely to see more conclusions that material weaknesses exist than we have in recent years:
We’ll definitely see an increase in delayed filings and we’ll likely see an increase in material weakness disclosures. If remote work arrangements, facility closures or unavailability of key personnel due to illness result in an inability to apply or test control procedures, management may be forced to conclude that one or more material weaknesses in internal control exist, unless compensating preventive or detective controls are in place and able to be tested.
Satisfying the external auditors with sufficient evidence that controls are performing as intended could also be challenging in this environment. For example, people working remotely may not have access to typical work tools such as printers and scanners, making it difficult to evidence control performance.
The article also cautions that pandemic-related declines in earnings, revenues & other materiality benchmarks could also result in the inclusion of some items in the scope of this year’s internal control assessment that were excluded in prior years.
In April, the NYSE adopted a temporary rule easing the shareholder approval requirements applicable to listed companies looking to raise private capital during the Covid-19 crisis. That temporary rule was set to expire at the end of June, but due to the continuation of the Apocalypse, the NYSE opted to extend it through the end of September. Here’s the intro from this Mintz memo discussing the extension:
As discussed in our earlier Viewpoints advisory, the New York Stock Exchange temporarily allowed NYSE-listed companies to complete certain capital raising transactions involving related party issuances or the issuance of 20% or more of a company’s stock without shareholder approval under limited circumstances. As a result of the continuation of the coronavirus (“COVID-19”) pandemic, on July 2, 2020, the Securities and Exchange Commission approved an extension of the NYSE’s waiver of these shareholder approval rules in the circumstances discussed below through September 30, 2020.
According to a recent study cited in this “Institutional Investor” article, companies that implement social responsibility plans are twice as likely to enter activist hedge funds crosshairs as firms that are not addressing these issues:
The study, evaluating data on U.S.-based activist campaigns from 2000 to 2016, found that hedge funds are significantly more likely to target companies that have a strong performance record in corporate social responsibility. In fact, the likelihood of a company being targeted increased from 3% to 5% if their CSR scores rose by two standard deviations above the average. If companies are trying to do the right thing in industries that have historically not addressed environmental, social, or governance issues, they’re even more likely to be in the sight lines of activists, according to the study.
Ain’t that a kick in the head? According to Prof. Rodolphe Durand, one of the study’s authors, activists believe that these initiatives are a waste of money & distract management from efforts to maximize profits.
Prof. Durand says that if you want to prioritize ESG without attracting the attention of activists, forget the greenwashing & go all-in: “management teams that clearly articulate their operational and financial strategies for impact and ESG initiatives have a better chance of escaping an activist campaign than those who are vague about their plans.”
One of the top of mind issues for many companies in recent months has been whether their business interruption insurance policies will pick up part of the tab for Covid-19 losses. We blogged a few months ago that companies seeking to recover under those policies were likely to face an uphill climb. This Faegre Drinker memo reviews the first substantive judicial decision on Covid-19 coverage issues, and the result is consistent with that prediction:
Generally, insurers in such suits have taken the position that the virus has not caused physical damage to the insured’s property and therefore there has been no trigger for coverage under the terms of the policies at issue. Insurers have also argued that, under the terms of the policies, there can be no coverage for business interruption because losses caused by viruses are specifically excluded.
On July 2, 2020, a judge in Ingham County, Michigan issued what appears to be the first substantive decision in a COVID-19 business interruption coverage case. In Gavrilides Management Company, et al. v. Michigan Ins. Co., the insured argued that the virus exclusion did not apply because the loss of access was caused by the government orders, not by the virus. In addition, the insured argued that the loss of use of the property caused by the governmental orders constituted “direct physical loss” within the meaning of the policy. Applying Michigan law, the court rejected both arguments.
Ruling from the bench on a motion to dismiss, the judge held that “direct physical loss or damage” requires more than mere loss of use or access. The judge then held that the virus exclusion unambiguously excluded coverage caused by the impact of COVID-19.
Since the insureds’ arguments are similar to the arguments made in other cases, the memo says that case will undoubtedly be cited by insurers in other business interruption coverage cases pending throughout the country.
Financial Reporting: Staff Comments on Covid-19 Impairment Testing Disclosure
The pandemic’s economic impact has caused many companies to conclude that they need to conduct impairment testing. Companies that find themselves in that position may want to take a look at this Audit Analytics blog, which highlights a recent Staff comment on a Covid-19 Q1 impairment charge disclosure. Here’s the comment letter and here’s the company’s response.
On June 30th, the SEC held a roundtable on 2nd quarter reporting & Covid-19 disclosure. The panelists included a bunch of big shots from private equity firms and asset managers. This Mayer Brown blog summarizes the panel’s recommendations on Q2 & Covid-19 disclosure. Many of these recommendations focused on liquidity & human capital-related issues. Here are some of them:
– Provide specific and forward-looking guidance on the company’s liquidity position, including its expected cash burn and upcoming capital expenditures. Companies should consider including a best, middle and worst case liquidity scenario.
– Separately disclose the company’s short-term and long-term liquidity plans. Identify the company’s primary use of cash during the second quarter as compared to prior quarters.
– Specify, in a standardized format, the amount of liquidity that is currently available under the company’s existing financing facilities and if financial covenants prevent the company from accessing or drawing down from a disclosed financing source. Identify the time period that the company can expect to continue to operate with limited or no cash revenue.
– Explain management’s rationale for implementing announced executive compensation or staff reductions. Disclose changes to the company’s work force and expected impact on the company’s operations.
– Disclose the impact of the pandemic on the company’s human capital. Explain if the company’s employees will be able to work remotely and disclose the company-specific challenges. Estimate costs if the company expects to spend significantly on personal protective equipment in order to safely reopen.
The panelists said that investors also want to see qualitative disclosures addressing a company’s operational challenges & resiliency, as well as forward-looking disclosures & trend guidance, particularly around capital raising activities. In addition, investors are looking for companies to address the effect of recent social unrest on their business & employees, along with standardized disclosure about their racial and gender diversity, including a description of applicable hiring practices.
Beyond EBITDAC: Quantifying Covid-19’s Impact in Public Company Disclosures
Earlier this year, I blogged about the practice of presenting “EBITDAC”- type disclosures that adjust for Covid-19’s impact. A more recent blog from Liz suggests that this practice is growing in popularity. Clearly, disclosures about the effects of Covid-19 are very important, but non-GAAP disclosures that include estimates of lost revenue from the pandemic aren’t likely to make you many friends at the SEC.
Unfortunately, the quantitative disclosures about Covid-19 that can raise compliance issues aren’t limited to EBITDAC, and guidance about where to draw the line has been hard to come by. That’s why this Cleary Gottlieb memo about disclosures quantifying Covid-19’s impact is a very helpful resource. This excerpt addresses potential concerns about the accuracy & verifiability of Covid-19 adjustments:
Not all adjustments are created equal. Adjustments stemming from fairly objective charges, such as COVID-related contract terminations or purchases of personal protective equipment, are easier to isolate, quantify and support than charges related to supply chain interruptions and operational inefficiencies, which may reflect drivers beyond COVID-19. The more judgment calls that are needed in a company’s assessment of an adjustment, the more the company should consider its assumptions.
The SEC may be more likely to question the accuracy of the disclosure during its normal-course review of the company’s periodic filings, and there is also litigation risk surrounding COVID-impact disclosure that contains a misstatement or is otherwise inaccurate or unsupportable. In addition, it may be difficult for auditors to comfort such an adjustment in an underwritten offering. such as COVID-related contract terminations or purchases of personal protective equipment, are easier to isolate.
Through a user-friendly format that incorporates Q&As and concrete examples, the memo also provides insight on determining whether or not a particular disclosure involves a non-GAAP financial measure, whether the disclosure is permissible or potentially misleading, and other matters.
Companies looking into using non-GAAP financial measures to address the impact of Covid-19 should also check out this Deloitte memo on the topic.
Covid-19 Disclosure: Choose Your Words with Care!
A recent post over on the Jim Hamilton Blog discussed a webcast hosted by Securities Docket in which representatives of Latham & FTI participated. The webcast addressed a variety of pandemic-related disclosure & litigation issues, but one that I wanted to highlight involved the importance of careful attention to the wording of disclosure – particularly the use of the term “material adverse effect” when discussing Covid-19. Here’s an excerpt from remarks by Latham’s Keith Halverstam:
Halverstam also advised against using the term “material adverse effect” when it comes to making COVID-related disclosures related to company operations. While it might look good to the SEC, other parties such as the company’s lenders might see it as a violation of a covenant, making it harder for the company to draw on their revolving credit. Instead of using “material adverse effect,” companies can say, for example, that the pandemic has had “significant effects on revenue,” he recommended.
For some situations, there may be no choice but to use the “material adverse effect” terminology, but the point is that the words you chose to use may have implications that go well beyond the confines of the disclosure document.
As we reach the end of another tough week, I thought this Law.com article about the results of a recent ACC poll on lawyer wellness was worth noting. This may come as a surprise to you, but dealing with a pandemic, quarantine, economic collapse, civil unrest, job security & health worries, Zoom fatigue & unpaid second jobs as homeschool teachers is apparently stressful:
Nearly 50% reported “feeling tired or having little energy” while also having trouble sleeping. More than 43% were experiencing anxiety; 40% had trouble concentrating; nearly 22% reported an “increased use of substances,” such as alcohol and tobacco; and nearly 19% said they’d been depressed. Nearly 44% had anxiety. Unsurprisingly, nearly 50% of respondents reported having trouble switching off from work and nearly 75% were experiencing moderate to very high levels of burnout.
The good news is that 88% of respondents are – like you & me – working from home, which means that we can all enjoy our mental and emotional collapses in our slippers. So, if you’re finding this time to be a tough slog, know that you aren’t alone, and take comfort in the knowledge that human beings can be remarkably resilient creatures, even under the most trying conditions.
I’ll give you an example. During the Falklands War, the H.M.S. Sheffield was sunk by an Argentine missile. That would be enough to ruin anybody’s day, but nevertheless, as the survivors waited for rescue in the ship’s life boats, they sang “Always Look on the Bright Side of Life” from Monty Python’s “Life of Brian.” Since then, the song has become a bit of a tradition among British forces when the chips are down.
We can learn a thing or two from the Royal Navy – after all, they figured out scurvy, right? When things are bad, look for some pleasant distractions to help lighten the load. I highly recommend a nice long daily walk if your schedule & surroundings permit, but I’ve found a few other things during the current troubles that have brought a smile to my face.
For instance, there’s Sponge Bob in box seats at a South Korean baseball game, Vogue’s guide to face mask fashions, and the delightful feeling of schadenfreude that comes from seeing so many people learn the hard way that the “unmute” option on Zoom has the same catastrophic potential as the “reply all” option to an email. I also discovered that religious services are best experienced while reclining in a La-z-boy, & that, if you throw in Peyton Manning & Charles Barkley, anything – even golf – can be interesting to watch. Also, I make a heck of an almond flour banana bread now.
This isn’t much in the face of pestilence, economic turmoil & civil unrest, but these are the kind of small consolations that will get us through – at least until the Visigoths show up. You folks are on your own when that happens, but until then, always look on the bright side of life.
SEC Nominee: Caroline Crenshaw
Yesterday, the White House announced that President Trump would nominate veteran SEC senior counsel Caroline Crenshaw for the Democratic seat on the SEC that was vacated by Rob Jackson’s departure. She joined the agency in 2013 and has served in several capacities, including counsel to commissioners Stein and Jackson.
May-June Issue of “The Corporate Executive”
We’ve wrapped up the May-June issue of The Corporate Executive – and will be mailing it soon! It’s available now electronically to members of TheCorporateCounsel.net who also subscribe to the print newsletter at each of their locations (try a no-risk trial). This issue includes pieces on:
– The Impact of COVID-19 on Executive Compensation
– ISS and Glass Lewis Voting Policy Changes Due to COVID-19
– New Proposed Regulations under Internal Revenue Code Section 162(m)
