The Financial Times recently reported that some companies have presented non-GAAP metrics – such as “EBITDAC” – that effectively adjust away the effects of the Covid-19 pandemic on their operations. Maybe I’m too cynical, but presenting “as adjusted” numbers that back out an event of the pandemic’s magnitude seems akin to asking a question like, “Other than that, Mrs. Lincoln, how did you enjoy the play?”
Just how prevalent are presentations of non-GAAP Covid-19 adjusted numbers? According to a recent Bass Berry survey, not very. The firm reviewed 55 public companies that presented Adjusted EBITDA in earnings releases during the period from April 1, 2020, to May 14, 2020. This excerpt says that only a handful included Covid-19 related adjustments in their Adjusted EBITDA presentations, but a number did narratively disclose the impact Covid-19 had on that metric:
Of the surveyed companies, five companies, or 9%, included an adjustment in their calculation of Adjusted EBITDA related in some form to the COVID-19 pandemic, and 91% did not. Certain surveyed companies within this 91% group, while not including an adjustment for COVID-19 in the definition of Adjusted EBITDA, noted the impact that the COVID-19 pandemic had on Adjusted EBITDA at either the consolidated or the segment level (for example, by noting that the COVID-19 pandemic had a specified percentage impact on Adjusted EBITDA as the result of the shutdown of a manufacturing facility as the result of the COVID-19 pandemic).
That seems to me to be a better way to present this information than adjusting it away. Covid-19’s impact on key performance indicators is clearly relevant information, but including it in the Adjusted EBITDA metric itself implies that it should be regarded as a one-time event. Unfortunately, it appears that the pandemic is more like the “new normal,” and may impact operations in future periods even more significantly than it did during the first quarter.
Virtual Meeting Admission Practices: Public Companies Respond
We’ve run a couple of blogs in recent weeks that have aired investor criticism of admissions practices for virtual annual meetings. That has prompted responses from some of our members. This one is representative:
I’m the Assistant Secretary of a company that held its first virtual meeting this year. We have two service providers – Corporate Election Services mails to our registered holders and Broadridge mails to most of the beneficial holders. When we switched our meeting to a virtual meeting, we had two options. Have Broadridge host the virtual meeting so most could have a control number to access the meeting. This would have required us to re-mail to the registered holders a new proxy card. This would have canceled their votes and required re-voting.
The second option was to have Corporate Election Services run the virtual meeting using the model we use for attendance at our in-person meeting. Registered shareholders all have access to the in-person meeting in normal years because they receive an admission card with their proxy card or they can come to the meeting and check in using the registered shareholder list we keep on hand. Beneficial holders are not on the registered roles so to attend the in-person meeting they need to provide a legal proxy from their broker. Sometimes we accept a brokerage statement for a beneficial holder to attend in person.
Rather than re-mail, we choose to hold the virtual meeting the same way we would have held the in-person meeting – the same method described in the post above. We did have a couple of complaints. Note that Computershare hosted virtual meetings are also using this same access model. Also note that not all brokers use Broadridge so if Broadridge hosts, some beneficials still do not have access.
Admission practices for physical annual meetings vary, but it isn’t unusual to require some proof of beneficial ownership. As the member’s comments suggest, there’s usually some flexibility when it comes to the credentials required for admissions that doesn’t necessarily translate to a virtual platform. But the bottom line is that many companies that are being criticized for their virtual admissions policies aren’t doing anything that hasn’t been standard practice at their physical meetings in prior years.
Earnings Season: Trends During the Covid-19 Crisis
In their recent statement on Covid-19 disclosures, SEC Chair Jay Clayton & Corp Fin Director Bill Hinman said that this earnings season would not be routine. In that same vein, “Investor Relations” magazine recently published an article about trends that IR professionals have identified from companies’ recent earnings reports & calls. This excerpt points out that the crisis has “softened” some of the commentary from executives:
Given the current circumstances, corporate leaders have understandably focused less on market performance and more on their Covid-19 response. ‘While mitigating actions in most cases include cost cutting, the current crisis has provided an opportunity for leadership to show its human side and demonstrate genuine affection and respect for employees,’ says Sandra Novakov, head of IR at Citigate Dewe Rogerson, who is based in London. As an example, she points to the personal CEO message delivered by ABF, a Citigate client, in its interim results announcement.
The article identifies several other trends, including detailed scenario planning, intraquarter updates, and increased use of prerecorded comments.
Yesterday, I blogged about the SEC’s apparent initiation of an enforcement sweep targeting public companies that borrowed money under the Paycheck Protection Program. Public company borrowers have been sharply criticized by the media, lawmakers, and the Secretary of the Treasury himself. But is it fair to lump all public companies together as the bad guys – or are some just convenient scapegoats for a program that simply hasn’t been well administered?
This NY Times article provides a more nuanced picture of public company PPP borrowers and the plight many of them face than has been presented in other media reports. While the SBA’s guidance says that the government will be skeptical when it comes to need certifications from public companies with “substantial market value” and “access to capital markets,” it still isn’t entirely clear what those terms mean. Furthermore, this excerpt from the article about a small cap called RealNetworks suggests that – no matter how you define the terms – it’s hard to conclude that a lot of small caps have either substantial market value or access to the capital markets at this time:
RealNetworks struggled, too, as the pandemic transformed American life. The company went public during the dot-com boom of the 1990s, only to see its stock fall in the subsequent bust. In recent years, it has marketed a facial recognition product to casinos and airports, among other venues. But its share price has fallen. At the end of February, it was hovering just above a dollar. Then the virus crippled travel and hospitality businesses. Companies that had been possible clients before the pandemic made it clear that they wouldn’t engage its services this year.
Rob Glaser, RealNetworks’ chief executive, said the pandemic had put a “bull’s-eye” on the company’s facial recognition offering. He said it was “not as devastating to our company as if we were a cruise ship company or an airline or a restaurant chain, but we were directly affected.”
RealNetworks qualified for $2.9 million and got its loan. According to the article, it has apparently decided to keep it. That doesn’t seem unreasonable to me. The company’s market cap is $44 million, its stock closed on Tuesday at $1.18 per share, and it received a delisting notiice from Nasdaq the day before it received its PPP loan. In terms of access to capital, the company’s most recent financing came entirely from the pockets of its CEO.
Some public companies that received PPP loans clearly shouldn’t have, but the same is also true for some private companies. I mean c’mon – the Lakers? In any event, it’s hard for me to see a small cap public company like this one being anybody’s idea of poster child for abusive conduct. Lumping all “public company borrowers” together as being unworthy participants in the program just doesn’t reflect reality.
PPP Loan Forgiveness: It’s Complicated. . .
The SBA issued its PPP loan forgiveness application last week, and it’s apparently pretty complicated. Here’s an excerpt from Crowell & Moring’s memo on the application:
On May 15, 2020, the Small Business Administration (SBA) released the Paycheck Protection Program Loan Forgiveness Application which is comprised of a PPP Loan Forgiveness Calculation Form (SBA Form 3508), including related certifications, and worksheets to assist in making the calculations. Although the SBA has yet to release further guidance on PPP Loan forgiveness, the Loan Forgiveness Application does provide some guidance on elements of forgiveness that were not clear from either the text of the Cares Act, or the SBA’s Interim Final Rules and FAQs. However, the complexity of the application and the onerous submission requirements present challenges for small businesses and create a further need for guidance and legal/accounting support.
I took a look at the application, and it does appear to be fairly daunting. For example, there’s an entire page of instructions devoted solely to the payroll, FTE, & non-payroll documentation that must be submitted with the application or retained by the borrower. In keeping with the government’s “Ready. . . FIRE!. . .Aim” approach to this program, now that the SBA has published the application, it will eventually tell people how they are supposed to complete it.
Tomorrow’s Webcast: “Middle Market M&A – The Latest Developments”
Tune in tomorrow for the DealLawyers.com webcast – “Middle Market M&A: The Latest Developments” – to hear to hear Citizens M&A Advisory’s Charles Aquino, Mintz Levin’s Marc Mantell and Duane Morris’s Richard Silfen discuss the state of the middle market and issues dealmakers are confronting in 2020, including bridging valuation gaps, Covid-19’s implications for deal structure and process, and the evolution of deal terms in the Covid-19 environment.
Public company borrowers under the Paycheck Protection Program have received plenty of criticism. Now, according to this Bryan Cave blog, their hot seat just got even hotter, because these companies appear to be targets in an SEC enforcement sweep. Here’s the intro:
We understand that several issuers and regulated entities that publicly disclosed their receipt of funds from the SBA’s Paycheck Protection Program (PPP), established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, have received requests for information from the SEC’s Division of Enforcement. In general, the requested information appears to concern the recipients’ eligibility and need for PPP funds, the financial impact on recipients of the pandemic and government response, and recipients’ assessment of their viability and access to funding.
This SEC outreach is rumored to be part of a sweep styled In the Matter of Certain Paycheck Protection Program Loan Recipients. The SEC is reportedly investigating whether certain recipients’ excessively positive or insufficiently negative statements in recent 10-Qs may have been inconsistent with certifications made in PPP applications regarding the necessity of funding. These information requests are voluntary at this time, and it appears that not all PPP loan recipients are receiving document requests.
There may be a correlation between large funding amounts and SEC scrutiny, both in terms of attracting interest and avoiding the impact of the SBA’s announced safe harbor for loans less than $2 million (though the safe harbor does not explicitly affect the SEC). Recent news reports indicate that the Department of Justice Fraud Section also is investigating possible misconduct by PPP loan applicants. Initial DOJ actions have focused on potential overstatement of payroll costs and/or employee headcount, as well as misuse of PPP proceeds.
In addition to public company borrowers, we have heard anecdotally that investment advisors and brokerage firms that received PPP loans are also targeted in the sweep. The blog says that while existing allegations appear to focus on “extreme behavior,” it is expected that less egregious borrowers may be caught up in the dragnet.
SEC Enforcement: Covid-19 Steering Committee Established
News of a potential enforcement sweep came only a few days after co-director of the SEC’s Division of Enforcement Steve Peikin gave a speech announcing that the Division had formed a steering committee to coordinate Covid-19 related enforcement activities:
In late March my co-Director, Stephanie Avakian, and I formed a Coronavirus Steering Committee to coordinate the Division of Enforcement’s response to coronavirus-related enforcement issues. The Steering Committee comprises approximately two dozen leaders from across the Division, including representatives from our various specialized units, from our Home Office and various regional offices, and from our Office of Market Intelligence.
The Steering Committee’s mandate is to proactively identify and monitor areas of potential misconduct, ensure appropriate allocation of our resources, avoid duplication of efforts, coordinate responses as appropriate with other state and federal agencies, and ensure consistency in the manner in which the women and men of the Division address coronavirus-related matters.
While the speech didn’t specifically identify PPP loan recipients as potential targets, it did identify a number of other areas of emphasis, including microcap fraud and insider trading.
Steve Peikin also said that the Division has developed a “systematic process to review public filings from issuers in highly-impacted industries, with a focus on identifying disclosures that appear to be significantly out of step with others in the same industry” and “disclosures, impairments, or valuations that may attempt to disguise previously undisclosed problems or weaknesses as coronavirus-related.” Stay tuned.
NYSE Temporarily Eases Approval Requirements for Covid-19 Share Issuances
Earlier this month, I blogged about Nasdaq’s adoption of a temporary rule easing the shareholder approval requirements applicable to listed companies looking to raise private capital during the Covid-19 crisis. Last week, the SEC approved a similar NYSE rule proposal. This Stinson memo has the details. Here’s an excerpt:
The SEC has approved, effective immediately, new Section 312.03T of the NYSE Listed Company Manual. Section 312.03T provides a limited, temporary exception from the shareholder approval requirements in Section 312.03(c), accompanied, in certain narrow circumstances, by a limited exception from Sections 312.03(a) and (b) and Section 303A.08. The exception in Section 312.03T is available until and including June 30, 2020.
Among other things, and subject to certain exceptions, Section 312.03(c) of the Manual requires shareholder approval for certain issuances of over 20% of outstanding shares or voting power. Section 312.03(a) references the requirement for shareholder approval of equity compensation plans set forth in 303A.08 of the Manual. Section 312.03(b) requires shareholder approval for issuance of equity securities to certain related parties.
Listed companies may take advantage of the temporary rules only in limited circumstances arising out of Covid-19’s impact on their results of operations and financial condition. Companies must also jump through a number of other hoops, including audit committee and NYSE approval. Additional conditions apply for issuances under the other temporary rules.
As the U.S. slowly reopens for business, we’re already hearing warnings that a second wave of the pandemic is likely heading our way in the fall. Since that’s the case, a recent Gartner survey finding that 42% of CFOs have not addressed a potential second wave in their planning for the remainder of the year is a little disconcerting. Here’s an excerpt:
A Gartner, Inc. survey of 99 CFOs and finance leaders taken April 14-19, 2020 revealed that 42% of CFOs are not incorporating a second wave outbreak of COVID-19 in the financial scenarios they are building for the remainder of 2020. Additional survey data showed that only 8% of CFOs have a second wave factored into all their planning scenarios, and only 22% have a second wave factored into their “most likely” scenario. The lack of planning comes even as CFOs express a cautious approach as to when they will fully reopen their operations and bring employees back to their normal office routines.
“As CFOs are attempting to project revenue and profits for 2020, it’s surprising that 42% are not baking a second wave of COVID-19 into any of their scenarios” said Alexander Bant, practice vice president, research, for the Gartner Finance practice. “Our latest CFO data also reveals that most executive teams are still trying to decide what factors they should use to determine how and when to reopen their offices and facilities.”
In fairness, this survey was taken a full month ago, and a lot has changed since then. But with the Covid-19 pandemic already spawning securities litigation, the potential lack of preparedness for a second wave presents governance and disclosure issues that may make attractive targets for plaintiffs.
IPOs: SPACs Ride High in April & Don’t Get Shot Down in May
The Covid-19 related turmoil in the stock markets during the past few months has put a damper on IPO activity, but this WSJ article says that April was a boom time for SPAC IPOs. Here’s an excerpt:
The companies raising the most money in the IPO market right now have no revenue, aren’t profitable and lack long-term business plans. That is by design: They are blank-check companies, whose purpose is to raise money for acquisitions. So far this year, these special-purpose acquisition companies, or SPACs, have raised $6.5 billion, on pace for their biggest year ever, according to Dealogic. In April, 80% of all money raised for U.S. initial public offerings went to blank-check firms, compared with an average of 9% over the past decade.
SPACs accounted for $2.2 billion of the $2.6 billion raised in IPOs last month, and they’ve raised another $575 million so far this month. The article suggests that investors’ fondness for SPACs arises from their belief that “there will be good deals to scoop up when the coronavirus subsides.”
Tomorrow’s Webcast: “Political Spending – What Now?”
Tune-in tomorrow for the webcast – “Political Spending: What Now?” – to hear DF King’s Zally Ahmadi, Skadden’s Hagen Ganem and Wilmer Hale’s Brendan McGuire discuss an overview of the current climate for political spending, corporate governance/board oversight, key considerations for political spending policies, political spending disclosure, shareholder engagement and shareholder proposal trends and voting behavior.
Earlier this year, I blogged about the possibility that the use of direct listings instead of traditional IPOs might allow companies to avoid the Section 11 claims that so often accompany IPOs. This Orrick memo says that a recent California federal court decision suggests that this hope may be misplaced:
On April 21, 2020, Judge Susan Illston of the U.S. District Court for the Northern District of California denied defendants’ motion to dismiss a securities class action complaint brought by a shareholder of Slack Technologies, Inc. following the company’s 2019 direct listing. Pirani v. Slack Technologies, Inc. , No. 19-cv-05857-SI (N.D. Cal. Apr. 21, 2020).
Rejecting defendants’ argument that the plaintiff lacked standing to pursue claims under Section 11 of the Securities Act, the court held, in a matter of apparent first impression, that in the unique situation of a direct listing in which shares registered under the Securities Act become publicly tradeable on the same day that unregistered shares become publicly tradeable, a plaintiff does not lack standing to sue under Section 11 even though the plaintiff cannot show that her shares were registered.
The memo goes on to summarize the judge’s reasoning, which appears to be based almost entirely on policy considerations underlying Section 11. We’re posting memos in our “Securities Act Liability” Practice Area.
“No Respect at All”: Are Dual Class Companies Undervalued?
Dual class companies are the Rodney Dangerfield of corporate governance – “No respect. . .I’m tellin’ ya, I don’t get no respect at all!” It’s hard to find any love for them among investor advocates, who’ve made “one share, one vote” a central underpinning of their good governance creed. But does their zeal for this revealed truth result in the undervaluation of dual class companies? That’s the conclusion of a recent study by a Cambridge University law prof. Here’s the abstract:
Dual-class stock enables a company’s controller to retain voting control of a corporation while holding a disproportionately lower level of the corporation’s cash-flow rights. Dual-class stock has led a tortured life in the US. Between institutional investor derision and the exclusion or restriction of dual-class stock from certain indices, one may assume that dual-class structure must be harmful to outside stockholders.
However, in this article, the existing empirical evidence on US dual-class stock will be reassessed by contrasting studies that use different measures of performance. It will be shown that although dual-class firms are generally valued less than similar one-share, one-vote firms, they perform as well as, and, in many cases, outperform, such firms from the perspective of operating performance and stock returns. When it comes to dual-class stock, more than meets the eye, and a presumption that dual-class stock is harmful for outside stockholders should not guide policy formulation.
The study argues that the market discounts dual-class stock to protect itself against the potential that the downsides of the structure will outweigh the benefits, but that those downsides seldom emerge. As a result, outside stockholders are not harmed by dual-class stock. Instead, they invest in dual-class stock at a discounted price which organically protects them against the potential for future abuses, and that, if anything, discounts dual-class stock too much.
Capital Markets: Time to Dust-Off the Alternative Equity Offering Playbook?
In times like these, many public companies that otherwise might be good candidates for a traditional equity offering may need to look at alternative strategies. That means ATMs, PIPEs, registered directs, and even equity lines are on the table for companies that haven’t previously considered them. If you haven’t done one of those deals since the last time the world ended, you should take a look at this Proskauer memo on alternative equity offerings. It provides a detailed overview of each of these alternative equity financing options.
If you’re considering tapping the capital markets, be sure not to miss our upcoming webcast – “Capital Raising in Turbulent Times” – which will address the current state of the new issues market for debt and equity, and explore financing and liability management alternatives.
Yesterday, I blogged about the bind that some Delaware companies find themselves in when it comes to switching their annual meetings from a physical location to a virtual only meeting. The problem stems from the fact that public companies that first gave notice of their annual meeting after the date of Gov. Carney’s April 7th order providing relief from DGCL notice requirements for such a switch aren’t eligible to rely on it.
That means that these companies can’t be certain that merely complying with the SEC’s guidance on providing notice of a change to a virtual meeting will be compliant with the DGCL’s notice requirements. Many are concerned about their ability to provide the formal notice of a change required by the DGCL in a timely manner.
Help for these companies may be on the way in the form of proposed 2020 amendments to the DGCL recently endorsed by the Corporate Law Section of the Delaware Bar. While the legislature needs to act on the proposal, Section 4 of the proposed legislation would amend Section 110 of the DGCL to provide the board of a public company with the authority during an emergency to:
Notify stockholders of any postponement or a change of the place of the meeting (or a change to hold the meeting solely by means of remote communication) solely by a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to § 13, § 14 or § 15(d) of [the Exchange Act] and such rules and regulations.
Section 23 of the proposed legislation would make this authority retroactive to January 1, 2020 “with respect to any emergency condition occurring on or after such date and with respect to any action contemplated by Section 4 of this Act and taken on or after such date by or on behalf of the corporation with respect to a meeting of stockholders held . . . during the pendency of such condition.”
I’m told that the Delaware Bar is seeking immediate consideration of these emergency amendments, but that the legislature has not yet reconvened from its Covid-19 imposed hiatus.
Nasdaq Temporarily Eases Approval Requirements for Covid-19 Share Issuances
Earlier this week, the SEC approved a temporary Nasdaq rule that would provide listed companies with a temporary exception from certain shareholder approval requirements through June 30, 2020 in order to streamline issuers’ access to capital. Here’s an excerpt from Nasdaq’s issuer alert summarizing the rule:
The exception is limited to circumstances where the delay in securing shareholder approval would:
– Have a material adverse impact on the company’s ability to maintain operations under its pre COVID-19 business plan;
– Result in workforce reductions;
– Adversely impact the company’s ability to undertake new initiatives in response to COVID-19; or
– Seriously jeopardize the financial viability of the enterprise.
In order to rely on the exception, among other requirements, the company would also have to demonstrate to Nasdaq that the need for the transaction is due to circumstances related to COVID-19 and that the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company.
No prior approval of the exception by Nasdaq is required if the maximum issuance of common stock (or securities convertible into common stock) issuable in the transaction is less than 25% of the total shares outstanding and less than 25% of the voting power outstanding before the transaction; and the maximum discount to the Minimum Price at which shares could be issued is 15% (the “Safe Harbor Provision”).
Companies that fit within this Safe Harbor Provision must notify Nasdaq as promptly as possible, and at least two days before issuing shares, but aren’t required to wait required 15 calendar days after filing the listing of additional shares notification. If a transaction falls outside of the Safe Harbor Provision, Nasdaq must approve the company’s reliance on the exception before the company can issue any securities in the transaction. Here’s a Nasdaq FAQ on the rule as well as its supplemental instructions to listed companies.
PPP Loans: Borrowers Get Another Week to Decide to Whether to “Hold’em or Fold’em”
In the latest chapter of the Paycheck Protection Program saga, the SBA issued FAQ #43, which extends the deadline for borrowers to take advantage of the safe harbor for repayment of PPP loans from May 7th to May 14th. The SBA says that it will provide additional guidance on the PPP’s need certification requirement prior to that deadline. Yeah, sure, that should clear things up. . .
A number of companies have transitioned to virtual annual meetings as a result of the Covid-19 crisis, and according to the CII’s recent letter to the SEC’s Investor Advisory Committee, it has been kind of a bumpy ride from an investor perspective. Companies that are looking for ways to make their own virtual meetings more investor friendly should take a look at the CII’s letter. Here’s an excerpt summarizing some of the anecdotal concerns that the CII has heard from investors about the virtual meeting process:
– Shareholders struggling to log in for meetings.
– Inability to ask questions in some cases if the shareholder has voted in advance by proxy. We understand that one virtual meeting platform provides that for a beneficial owner to ask questions, the record holder must transfer a legal proxy to the beneficial owner. This would require the record holder to withdraw its vote if it already had voted before executing the required legal proxy because the voting would transfer to the beneficial holder. These rules unnecessarily hamper the ability of beneficial owners to participate in meetings, even at companies that use effective technology and rules for participation by shareholders who get into the meeting.
– Shareholders unable to ask questions during the meeting. In some cases, questions are limited to those that can be submitted in writing in advance, which interferes with the potential for interplay between meeting content and questions or comments.
– Lack of transparency on questions asked by shareholders, making it possible that company officials cherry-pick questions to which to respond. This obviously is an issue if time limits for a meeting prevent responses to all questions. At one large company at which shareholder questions went unanswered, we understand the company provided only 10 minutes for Q&A.
– Conflicting channels for shareholder participation, with shareholder resolution proponents required to be on a line that is different than that used for general shareholder Q&A.
– At least one company prohibiting a shareholder proponent from speaking on behalf of their proposal.
– Snafus with control numbers not working to permit shareholders to log into a meeting.
The CII acknowledges that some of these problems may be attributable in part to the speed with which many companies have shifted to virtual-only meetings, but it is concerned about the precedents that may be set this year.
Virtual Annual Meetings: Delaware’s Relief Order Leaves Some Companies Uncovered
Last month, I blogged about Delaware Gov. John Carney’s order permitting public companies that had previously noticed physical annual meetings to switch to virtual annual meetings simply by complying with the SEC’s guidance, without the need to provide further notice under applicable provisions of the DGCL. That order was extremely helpful for companies covered by it, but it turns out that a number of companies weren’t – and some of them find themselves in a bind.
As this Morris Nichols memo points out, the order only applies to companies that provided notice of a physical meeting prior to the April 7th date of the order. Companies that first mailed their proxy materials after that date apparently are not covered by it. One of our members recently posted a comment in our Q&A forum about a tragic situation that’s compounding the problems companies that aren’t covered by the order face:
This is really unfortunate. I understand that Broadridge is struggling right now to get materials mailed to shareholders. If reports are to be believed, they had an outbreak at a warehouse in NY resulting in several deaths. Their staffing levels have been drastically reduced as they are trying to comply with social distancing efforts. And they are notifying clients of delays in mailings of material and fulfilling requests for hard copy materials. Requiring notices of changes to a virtual meeting format (rather than just press release/SEC filing) will only compound the problem.
One workaround that’s been suggested to handle mailing delays resulting from the critical need to prioritize worker safety is to bypass Broadridge and mail any new notice to record holders only. Since only those holders are entitled to receive notice under state law, it seems to me that this may be a viable solution for companies that don’t have large numbers of record holders.
On the other hand, many of the orders issued by other states permitting deviations from statutory practice due to Covid-19 are prospective in nature, while Delaware’s applied only to actions taken prior to the order. Perhaps Delaware’s order could be revised to take the same approach?
Virtual Annual Meetings: Doug Chia’s Attending Them So You Don’t Have To. . .
Soundboard Governance’s Doug Chia attended Wells Fargo’s virtual annual meeting and posted a detailed summary that’s a must read for anyone considering going virtual this year. His write-up provides plenty of insights into how the meeting was conducted – including commentary on the virtual meeting platform, the manner in which the Q&A was conducted, and how shareholder proposals were presented.
Doug’s attending other meetings and posting similar summaries (here’s one about Berkshire Hathaway’s meeting that he posted earlier this week), so stay tuned.
Yesterday, the Staff issued four FAQs addressing issues arising under the SEC’s exemptive order extending filing deadlines for companies impacted by the Covid-19 crisis. The FAQs offer guidance on the disclosures required by companies seeking to avail themselves of the relief provided by the order, as well as the implications of reliance on the order for S-3 issuers. Here’s one that deals with a company’s eligibility to file a new Form S-3 during the extension period:
3. Question: Is a registrant relying on the COVID-19 Order to delay a required filing eligible to file a new Form S-3 registration statement between the original due date of a filing and the extended due date, and will the staff accelerate the effectiveness of registration statements that do not contain all required information?
Answer: Between the original due date of a required filing and the due date as extended by the COVID-19 Order, a registrant may file a new Form S-3 registration statement even if the registrant has not filed the required periodic report prior to the filing of the registration statement. The staff will consider the registrant to be current and timely in its Exchange Act reporting if the Form 8-K disclosing reliance on the COVID-19 Order is properly furnished. The registrant will no longer be considered current and timely, and will lose eligibility to file new registration statements on Form S-3, if it fails to file the required report by the due date as extended by the COVID-19 Order. Registrants with compelling and well-documented facts may contact the staff to discuss their specific capital raising needs. However, registrants relying on the COVID-19 Order should note that the staff will be unlikely to accelerate the effective date of a Form S-3 until such time as any information required to be included in the Form S-3 is filed. [May 4, 2020]
If you’re wondering why the Staff issued this guidance in the form of “FAQs” instead of the more customary CDIs, the FAQs say that it has to do with the “unique circumstances” of the Covid-19 crisis that prompted the issuance of the exemptive order in the first place.
Covid-19 Litigation: It’s Not What You’ve Said, It’s What You’re Going to Say
Over on the D&O Discourse blog, Doug Greene shares some thoughts about whether we’ll see a wave of Covid-19 crisis-based disclosure litigation. He thinks that what you said before the economy hit the wall probably won’t get you into trouble, but what you say going forward just might. This excerpt explains his reasoning:
Why don’t I think there will be a wave based on the economic downturn over the past two months? Everyone is in the same boat, so it’s difficult for plaintiffs to identify and prove that any particular company’s disclosures or governance problems caused economic harm. And plaintiffs need to choose extra-wisely, because many judges would be offended by accusations of fraud and poor oversight over problems caused by a pandemic – it would feel opportunistic.
But going forward, disclosure and governance will be judged far differently – almost in the polar-opposite way. Moving forward, judges will have no patience for companies whose disclosures are not careful or boards whose oversight fails to meet the moment. The legal standards governing disclosure and governance litigation are judged from inferences drawn in context by judges who are themselves living the context. They will be critical of disclosures that feel exaggerated and governance that feels lax. Company-specific stock drops and governance failures will be easy for the plaintiffs’ bar to spot in the coming months and years.
The blog goes on to provide some insights about how companies can best position themselves to defend both securities class action lawsuits & shareholder derivative actions based on disclosures and alleged governance lapses associated with the Covid-19 crisis.
Conflict Minerals: Form SD Due June 1 – No Covid-19 Relief
This Skadden memo provides a reminder that the SEC’s exemptive order providing extended filing deadlines relief doesn’t apply to your Form SD filing:
As a reminder, conflict minerals disclosures on Forms SD are required to be filed with the Securities and Exchange Commission (SEC) no later than June 1, 2020. This remains true despite the impact of COVID-19, given that Forms SD are not covered by the SEC’s order allowing public companies to delay certain reports in light of the pandemic.
I think it’s fair to say that America’s favorite James Bond villain had quite a week. It started on Tuesday, when Tesla dropped this little disclosure tidbit in a Form 10-K/A:
Tesla determined not to renew its directors and officers liability insurance policy for the 2019-2020 year due to disproportionately high premiums quoted by insurance companies. Instead, Elon Musk agreed with Tesla to personally provide coverage substantially equivalent to such a policy for a one-year period, and the other members of the Board are third-party beneficiaries thereof. The Board concluded that because such arrangement is governed by a binding agreement with Tesla as to which Mr. Musk does not have unilateral discretion to perform, and is intended to replace an ordinary course insurance policy, it would not impair the independent judgment of the other members of the Board.
There are obviously no issues with this little cost-saving move, right? Elon followed that up on Wednesday with an earnings call featuring an expletive-laden tirade against “fascist” Covid-19 stay-at-home orders.
Musk’s grand finale came in the form of a bizarre Friday tweetstorm that started with a tweet to the effect that he was selling almost all of his possessions. Elon then provided some eyebrow-raising investment advice – “Tesla stock price too high imo.” He segued into excerpts from “The Star Spangled Banner,” then came a little “Braveheart” riff, followed by a brief bit of existential musing. He wrapped things up with by letting us know that “my gf @Grimezsz is mad at me.”
Girlfriend’s mad, huh? Well, she must be a Tesla shareholder. The company’s stock price plummeted 10% after the tweetstorm. Isn’t there supposed to be somebody responsible for pre-clearing Elon’s potentially market-moving tweets? Yeah, well we told you that wasn’t going to work.
So, that was the week that was. It’s really a shame that Elon Musk is an immigrant & isn’t allowed to channel his energies into a run for president like literally every other billionaire egomaniac in America. Overall, I think King Arthur put it best in “Monty Python & The Holy Grail” – “What an eccentric performance!”
“Funding Secured”: Tesla Can’t Shake Lawsuit Over Last Batch of Musk’s Tweets
I know some of you may be scratching your heads about the Tesla board’s willingness to sign-off on the company’s – ahem – “unorthodox” D&O liability protection arrangements. After Friday’s tweetstorm, many of those directors also may be second-guessing that decision – if for no other reason that they’re all still knee deep in the mess Elon created the last time that he let loose on social media.
That’s because a California federal judge recently refused to dismiss a lawsuit filed against Tesla, its board & Musk arising out of his August 2018 tweetstorm. This excerpt from a recent Shearman & Sterling blog on the case has the details:
Defendants moved to dismiss for on several grounds, including that the tweets were merely aspirational and not factual, that they were made by the CEO in his individual capacity and not on behalf of the Company, and that the complaint failed to adequately allege scienter. The Court disagreed. First, the Court opined that even statements of opinion could be misleading if they conveyed facts, which the tweets allegedly did by referencing a specific price of $420 and by identifying specific financial and legal advisors. The Court also found that the complaint had adequately alleged that a reasonable investor would read the tweets as statements of facts based on the affirmative nature of the statements and subsequent exchanges on Twitter confirming those statements.
Second, the Court found that the CEO’s statements from his personal Twitter account were made within the scope of his authority, relying on the fact the CEO co-founded the Company, was on its Board, and that the Company had notified its investors in 2013 that additional information regarding the Company could be found on the CEO’s and Company’s Twitter accounts.
Finally, contemporaneous correspondence that allegedly showed that the CEO was aware of significant hurdles to the transaction and that he harbored animosity against short-sellers, as well as the swift settlement reached with the SEC within a few days of the SEC’s complaint, in the eyes if the court, all supported an inference of scienter sufficient to survive the motion.
Meanwhile, Elon’s not faring any better in Delaware, where back in February, Vice Chancellor Slights denied the Tesla defendants’ motion for summary judgment in the fiduciary duty lawsuit arising out of Tesla’s acquisition of SolarCity, a company in which Musk owned a 21% stake. The Tesla directors settled out – so Elon finds himself the last man standing as the case heads to trial.
PPP Loans: Tax Deduction? If They’re Forgiven, Forget It
One of the things that makes the Payroll Protection Program so attractive is that if a borrower spend its loan proceeds properly (on items such as payroll, rent and utilities), the loan will be forgiven. Furthermore, Section 1106(i) of the CARES Act, provides that the forgiven loans are excluded from gross income, which means that the borrower receives the loan amount (without a repayment obligation) entirely tax-free.
But what about the tax deduction that would ordinarily apply to those business expenditures made in order to obtain loan forgiveness? According to this recent memo from my colleagues at Calfee, there’s a limit to Uncle Sam’s generosity:
The question arises because Section 265 of the Internal Revenue Code provides that a taxpayer cannot take tax deductions, even if otherwise allowable, if the deductions are allocable to income that is exempt from tax. The general purpose of Section 265 is to prevent taxpayers from enjoying a “double” tax benefit (i.e., tax-exempt income generating tax deductions).
In Notice 2020-32, released today, the IRS clarifies that Section 265 does in fact apply to PPP loans and prevents taxpayers from deducting expenses that lead to forgiveness under the CARES Act. This interpretation will have the effect of negating much (if not all) of the tax benefit Congress provided with the exclusion under Section 1106(i). Given the larger goal of Congress to inject cash into struggling businesses, this result had some wondering (before today) whether the IRS would apply Section 265 to PPP loan forgiveness.
Well, you can’t say we didn’t warn you – a number of Paycheck Protection Program loan recipients are receiving heavy duty blowback from the media & politicians about whether they’re entitled to the loans they received. If your client finds itself in this position, it may well be asking – “should we give the money back?”
That question may be even more pressing in light of new FAQ #31 that the SBA issued yesterday morning, which addresses the certification of need that’s required in order to access the funding. The FAQ says that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”
As this Stinson memo points out, that guidance is – like almost everything the SBA has said about this program – as clear as mud:
As has become typical of the PPP, every attempt at clarification also raises new uncertainties. What is the threshold for “substantial market value”? Does a public company that would currently be unable to raise equity capital on favorable terms really have “access to capital markets” in a meaningful way? Should any debt financing be considered “significantly detrimental” to a business as compared to equity capital in light of the additional cash load it places on the borrower? If a borrower has undrawn but committed capital under its current financing facilities, can it still make the good faith certification required by the PPP application?
The memo says that in light of the very specific certifications and representations required of the applicant in its loan application, these questions should be considered with great care – and companies that aren’t comfortable with their answers should withdraw loan applications or repay loans that have already been received.
PPP Loans: Beware False Claims Act Whistleblowers
Companies that are thinking about repaying their loans ought to make their decisions prior to May 7th, because as this Bryan Cave blog points out, FAQ #31 provides a safe harbor for companies that repay their loans by that date. The blog also addresses the liabilities that companies may face if they received a PPP loan to which they weren’t entitled – and the risk that employees may blow the whistle:
In addition to the risk of governmental regulatory or enforcement action, impacted companies and lenders may face other litigation and reputation risk. Companies may wish to consider whether their employees may believe that other sources of funding were available and may raise those concerns internally and externally as purported whistleblowers, possibly resulting in assertion of False Claims Act claims.
Of course, one of the fun things about the False Claims Act is that it provides for treble damages. The blog says that companies may also face reputational scrutiny and adverse impact on business performance, particularly if Treasury & the SBA publish borrower information – which the Fed has already announced that it will do under its CARES Act lending programs.
Public Offerings: Doing a Deal in a Blackout Period
Speaking of public companies with access to the capital markets, stop me if you’ve heard this, but those markets are kind of turbulent right now. That means its essential for companies that need capital to be able to quickly access the market when a financing window opens. Unfortunately, some companies now find themselves in a “blackout period” pending the release of their first quarter results. This Davis Polk memo says that while that may complicate things, there’s no prohibition on a company accessing the capital markets during a blackout period, and it may be possible for a company to complete an offering if:
– Management has enough information about the current (or recently ended) quarter to be able to predict with a fair degree of confidence what the company’s reported results are likely to be;
– Management has a good track record of being able to judge its anticipated results at similar points in the information-gathering and reporting cycle;
– Management’s expectations for the quarter, and future periods, are either (i) at least in line with “the market’s” expectations as well as with management’s own previously announced guidance (if any) – or (ii) if management’s expectations are not so in line, the company and its underwriters conclude that the deviation is not material or the company is willing to “pre-release” its current expectations prior to the earnings release; and
– Management’s analysis of the going-forward impact on the company’s business of COVID-19 is sufficiently developed that disclosure can be made at the time of the offering that will be in line with what is disclosed when the 10-K, 20-F, 10-Q, 6-K or other filing is made.
The memo notes that as a result of the Covid-19 crisis, it may be difficult for management to forecast the company’s results beyond the current quarter. In situations like this, companies sometimes decide to withdraw previously issued guidance and not issue new guidance. But the memo stresses that withdrawing guidance is not a substitute for disclosure of underlying trends and uncertainties that could affect financial and operational performance.
The memo also walks through an analysis of the various matters that should be considered in addressing each of the factors identified above, as well as other matters such as the need to update disclosures of risk factors & known trends, potential selective disclosure issues, and reputational and legal risks. By the way, if you’re representing a client that’s considering an offering during a blackout period, I highly recommend that you take a look at the transcript from our 2017 webcast, “Flash Numbers in Offerings.”
