Yesterday, the SEC announced a proposal to amend the provisions of Rule 144(d) to prohibit “tacking” of certain market-adjustable convertible or exchangeable securities. The proposal would also modify and update the filing requirements for Form 144. (Here’s the 84-page proposing release.) This excerpt from the SEC’s press release summarizes the proposed changes to Rule 144’s tacking rules:
The proposal would amend Rule 144(d)(3)(ii) to eliminate “tacking” for securities acquired upon the conversion or exchange of the market-adjustable securities of an issuer that does not have a class of securities listed, or approved to be listed, on a national securities exchange. As a result, the holding period for the underlying securities, either six months for securities issued by a reporting company or one year for securities issued by a non-reporting company, would not begin until the conversion or exchange of the market-adjustable securities.
“Market-adjustable” conversion provisions are a common feature of “toxic” or “death spiral” securities. Instead of a pre-established conversion rate, the securities are issued with a conversion rate that represents a discount to the market price of the underlying securities at the time of conversion. If there’s no cap on the number of shares that may be issued or floor on the conversion price, the market adjustment feature means that the number of shares issuable upon conversion may be enormous.
Currently, holders of convertible securities are allowed to tack their holding periods for the securities held pre- and post-conversion for purposes of calculating their eligibility to resell under Rule 144 period. As this excerpt from the proposing release points out, the SEC thinks that’s a problem for market-adjustable securities:
If the securities are converted or exchanged after the Rule 144 holding period is satisfied, the underlying securities may be sold quickly into the public market at prices above the price at which they were acquired. Accordingly, initial purchasers or subsequent holders have an incentive to purchase the market-adjustable securities with a view to distribution of the underlying securities following conversion to capture the difference between the built-in discount and the market value of the underlying securities.
The SEC thinks these sellers look a lot like statutory underwriters, and proposes to remove this incentive by amending Rule 144(d)(3) to preclude tacking in the case of unlisted market-adjustable securities. Why distinguish between these securities and listed securities? According to the release, the answer is that the NYSE & Nasdaq listing rules put a cap on the amount of shares that may be issued without shareholder approval, which limits the ability of a company to issue market-adjustable securities & reduces the concerns of an unregistered distribution.
The SEC also proposes to tweak the filing requirements for Form 144. If adopted, the rules would require a Form 144 to be filed electronically, but the filing deadline would be changed so that the Form 144 could be filed concurrently with a Form 4 reporting the transaction. Rule 144 transactions involving securities of non-reporting companies would no longer require a Form 144 filing. The proposal also would amend Forms 4 and 5 to add an optional check box to indicate that a reported transaction was made under a Rule 10b5-1 plan.
Direct Listings: SEC Approves NYSE Proposal
Let’s see, where were we on the NYSE’s direct listing proposal? Oh yeah, last August, the SEC approved the proposed rule, but shortly thereafter, it stayed the rule in response to a petition for review filed by the CII. Yesterday, the SEC lifted that stay and approved the rule. In doing so, it rejected arguments that the direct listing proposal circumvented traditional due diligence processes & created a potential “end run” around Section 11 liability.
So, will this fundamentally change the IPO process as we know it? Probably not. Sure, there will always be the high-name recognition Unicorns like Palantir that may find a direct listing to be an attractive option – particularly now that primary shares may be offered. But most IPO candidates aren’t well known & need Wall Street to play its traditional role in the process.
CF Disclosure Guidance: SPACs
Looking very much like an agency that wants to get everything off its desk before the Christmas holiday, the SEC capped off a busy afternoon yesterday with Corp Fin’s issuance of new disclosure guidance. CF Disclosure Guidance Topic: No. 11 provides Corp Fin’s views regarding disclosure considerations for SPACs in connection with both their IPOs & subsequent de-SPAC transactions.
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Political Contributions Disclosure: SEC Can’t Spend Funding On Rules
One of our members pointed out to us that the 2021 Consolidated Appropriations Act that Congress passed last night includes the now customary prohibition on the SEC spending any of its funds on rules requiring the disclosure of political contributions. Here it is, in all its glory:
I called this a “now customary” prohibition because Congress has been doing the exact same thing in appropriations bills for several years now. Disclosure of political contributions is a controversial issue, and the decision to ban the SEC from taking any action on it would likely be controversial too – if anybody had time to complain. Congress’s bipartisan willingness to repeatedly bury this kind of decision in one paragraph of 5,000+ page appropriations bills isn’t exactly a “profile in courage.”
November-December Issue of “The Corporate Executive”
The November-December issue of The Corporate Executive was just posted – & also sent to the printer. It’s available now to members of TheCorporateCounsel.net who also subscribe to the electronic newsletter (try a no-risk trial). This issue includes articles on:
– Tax Withholding Deposits for Stock Plan Transactions—Understanding the New Relief
– Some Deferred Compensation Plans and Employment or Stock Award Agreements May Need to be Amended by December 31, 2020
– SEC Proposes Amendments to Rule 701 and Form S-8
Last week, Liz blogged about the passage of the Holding Foreign Companies Accountable Act, which amends the Sarbanes-Oxley Act to prohibit listing on US exchanges of foreign companies for which the PCAOB has been unable to inspect audit work papers. On Friday, President Trump took time from his busy schedule – which he swears does not include declaring martial law – to sign the legislation.
Shortly thereafter, SEC Chair Jay Clayton issued his own statement on the legislation – which this excerpt suggests has thrown a bit of a monkey-wrench into the SEC’s own rulemaking initiatives regarding China-based companies:
Prior to enactment of the Act, SEC staff were finalizing recommendations for proposed rules regarding enhanced listing standards for U.S. securities exchanges and auditor qualifications for the Commission’s consideration. Because of the substantial overlap between the staff’s proposal and the Act, I have directed the staff to consider providing a single consolidated proposal for the Commission’s consideration on issues related to the PCAOB’s access to audit work papers, exchange listing standards, and trading prohibitions.
The statement says that Chair Clayton has also asked the staff to consider additional issues relating to the Act’s implementation, including how its disclosure requirements can be implemented expeditiously and how any potential uncertainties can be addressed. He also acknowledged that this “pragmatic step” means that a rulemaking proposal won’t happen during his tenure.
Innovation: In-House Departments Leave Law Firms In the Dust?
This recent Thompson Hine survey on innovation in the legal profession says that in-house legal departments are way ahead of law firms when it comes to innovative approaches to legal services. This excerpt explains:
In-house legal departments continue to face extraordinary pressures — pressures that could be eased through law firm innovation. Budgets — already taking a hit before COVID-19 — are tighter than ever in the wake of the pandemic, and companies are looking for efficiencies at every turn.
But more than two-thirds of our survey respondents said their primary outside firms had made no progress in innovation over the past year. As a result, 91% of in-house law departments have taken innovation into their own hands. The changes in-house legal departments are making on their own show their priorities.
Nearly two-thirds of our buyers cited improved project management as a key change in their legal departments. Almost half have streamlined outside counsel panels, while more than 40% have implemented self-service tools and restructured departments and/or processes. Clearly, efficiency is the order of the day, particularly when you compare the numbers with those in our first survey. Sixty-three percent of in-house law departments had improved project management in 2019 vs. 8% in 2017; 41% had restructured departments or processes vs. 8% in 2017; and 33% had outsourced to alternative legal services providers in 2019 vs. 3% in 2017.
The survey suggests that law firms’ reluctance to innovate may be causing them to miss out on new business opportunities – 53% of in-house respondents would consider hiring a new law firm because it is innovative.
Cheat Sheet: 2020 Capital Markets Rulemaking
If you’re like me, you’re probably having a little trouble keeping up with the avalanche of rulemaking from the SEC over the past several months. If you find yourself in that position, you may want to hang on to a copy of Skadden’s 2020 Capital Markets Regulatory Review. This 13-page document provides a brief overview of some of the key capital markets and corporate governance reforms that have taken effect in 2020 or are poised to take effect in 2021.
Prof. Sarah Haan of Washington & Lee Law School recently posted a draft article online that’s eye opening, to say the least. In short, her thesis is that a trend that scholars have overlooked – the explosive growth in the percentage of stock owned by women during the early decades of the 20th century – played a major role in the development of the modern paradigm for public company corporate governance. Here’s an excerpt from the article’s abstract:
Corporate law scholarship has never before acknowledged that the early decades of the twentieth century, a transformational era in corporate law and theory, coincided with a major change in the gender of the stockholder class. Scholars have not considered the possibility that the sex of common stockholders, which was being tracked internally at companies, disclosed in annual reports, and publicly reported in the financial press, might have influenced business leaders’ views about corporate organization and governance.
This Article considers the implications of this history for some of the most important ideas in corporate law theory, including the “separation of ownership and control,” shareholder “passivity,” stakeholderism, and board representation. It argues that early twentieth-century gender politics helped shape foundational ideas of corporate governance theory, especially ideas concerning the role of shareholders. Outlining a research agenda where history intersects with corporate law’s most vital present-day problems, the Article lays out the evidence and invites the corporate law discipline to begin a conversation about gender, power, and the evolution of corporate law.
Some of the language in the abstract may make the article sound a little wonky, but in reality, it’s accessible and engaging. It sounds cliché to call a work “groundbreaking,” but I can’t come up with a better word to describe this one. I’m sure they’ll be plenty of back & forth among governance scholars on the merits of Prof. Haan’s arguments, but my take is that she may have put her finger on something that’s been hiding in plain sight for a long time.
Revenue Recognition: E-Commerce Disclosures a Sleeper Issue?
Many companies have seen their e-commerce sales explode as a result of the pandemic and, not surprisingly, many have also called this growth out in earnings releases & other disclosures. This Bass Berry blog says that the new requirement to disclose “disaggregated revenues” under ASC 606 may be a “sleeper issue” for some of these companies. Here’s an excerpt:
Under ASC 606-10-50-5, a public company must “disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.” Additionally, per the implementation guidance in ASC 606-10-55-90, when selecting the type of category (or categories) to use to disaggregate revenue, an entity should consider how the information about the entity’s revenue has been presented for other purposes, including the following:
– Disclosures presented outside of the financial statements such as MD&A, earnings releases and investor presentations.
– Information regularly reviewed by our Chief Operating Decision Maker (CODM).
– Any other information similar to the information identified in (1) and (2) that is used by the company or users of the financial statements to evaluate the company’s financial performance or make resource allocation decisions. (emphasis added)
In determining the categories to include, ASC 606-10-55-91 says that an entity should consider the following examples:
– The type of good or service (e.g., major product lines).
– Geographical region (e.g., country or region).
– Market or type of customer (e.g., government or non-government customers).
– Type of contract (e.g., fixed-price or time-and-materials).
– Contract duration (e.g., short- or long-term).
– Timing of transfer of goods or services (e.g., point-in-time or over time).
– Sales channels (e.g., direct to customers or through intermediaries).
The blog acknowledges that the company’s accounting staff and its outside auditor will make the final analysis on this issue, but suggests that the continued focus on e-commerce in public company disclosures might prompt more companies to conclude that they should disaggregate revenues by sales channels, including e-commerce sales. It also cautions that disaggregate revenue disclosure continues to be an area of interest for the Staff, and cites a recent comment letter exchange as an example of some of the issues that might be raised.
Blockchain & Beyond: FinHub Gets an Upgrade
In 2018, the SEC announced the establishment of “FinHub” within Corp Fin. Since then, FinHub has served as a resource for public engagement on blockchain & other FinTech-related issues and initiatives. Yesterday, the SEC announced that FinHub was being upgraded to an independent office. This excerpt from the SEC’s press release explains the decision:
Designating FinHub as a stand-alone office strengthens the SEC’s ability to continue fostering innovation in emerging technologies in our markets consistent with investor protection. The office will continue to lead the agency’s work to identify and analyze emerging financial technologies affecting the future of the securities industry, and engage with market participants, as technologies develop.
FinHub’s existing Director, Valerie Szczepanik will continue to serve in that capacity, and will “coordinate the analysis of emerging financial innovations and technologies across the SEC’s divisions and offices and with global regulators and will advise the Commission and SEC staff as they develop and implement policies this area.”
The SEC’s pre-Thanksgiving rulemaking frenzy gave my colleagues Liz & Lynn plenty to blog about over the last couple of weeks. In contrast, the well has been a little dry this week in terms of breaking news. That’s left me scrambling a bit for blog topics. I knew I had a couple of SPAC-related blogs in the hopper, but SPACs aren’t a topic with broad appeal outside of the folks in the IPO and M&A crowd. So, I wanted to hold off on them until I found a lead blog that would make the topic more relatable & interesting.
Fortunately, I recently stumbled across just what I was looking for – a SPAC story featuring a bona fide A-List celebrity! That’s because no less than Jay-Z himself has decided to participate in the SPAC boom. According to this Bloomberg article, he has signed on to serve as an officer for a cannabis SPAC:
Subversive Capital Acquisition Corp., a special-purpose company that’s growing in the cannabis business, said it acquired two California companies and named Shawn “Jay-Z” Carter as its chief visionary officer. Subversive is buying Caliva, a cannabis brand with direct-to-consumer sales, and Left Coast Ventures Inc., a producer of cannabis and hemp products. The deals will create a new holding company and include $36.5 million of equity commitments from new and existing shareholders.
The holding company, which will be called TPCO Holding Corp., expects revenue from the combined entities to be $185 million in 2020 and $334 million next year. The deals’ aim is to “both consolidate the California cannabis market and create an impactful global company.” The new company aims to reach 75% of California consumers and Jay-Z will run its brand strategy and work on a related project to reform criminal justice.
Jay-Z may be the only A-lister to become an exec at a cannabis-related business, but he’s far from the only celeb backing one. We’ve already blogged about Snoop Dogg’s venture capital activities targeting “The Chronic”, and the cannabis beverage brand Cann recently announced a number of its own celebrity investors, including the likes of Gwyneth Paltrow & Rebel Wilson.
If you think I get unduly excited when I find an excuse to blog about celebs – well, you’re probably right. The truth is that I’m a frustrated gossip columnist who would dearly love a gig on TMZ or Page Six.
To SPAC or Not to SPAC? That is the Question. . .
This Cooley blog has a lot of information about how the SPAC market continues to grow & evolve, but there’s one aspect of it in particular that I thought readers of this blog might find interesting – a discussion of the differences and similarities between a SPAC transaction and a traditional IPO. This excerpt addresses timing considerations:
Despite common misconceptions, the timeline for completing a de-SPAC transaction and an IPO are comparable—often between four to six months, although that timeframe can vary depending on SEC review and comment. In a SPAC transaction, parties can expect to take approximately four to six weeks to negotiate a business combination agreement and line up a PIPE, and then another two to four months to prepare and file a joint Form S-4/proxy and deal with any SEC comments. Just as it would in a traditional IPO, the target must be prepared to provide the required financial information and other documentation necessary to operate as a public company, including PCAOB financials.
Other topics addressed include lockups, SEC review, Rule 144 limitations applicable to SPACs, & governance matters. The blog also addresses key trends in de-SPAC transactions, which represent the biggest difference between the SPAC & traditional IPO route to the public market.
SPACs: Auditor Market Share
One of the interesting things about SPAC deals is the relative absence of the involvement of Big 4 audit firms. In fact, as this Audit Analytics blog reviewing auditor market share for SPACs makes clear, the market is dominated by two non-Big 4 firms:
When it comes to blank check initial public offerings (IPOs), two firms dominate the market: Withum and Marcum. Together, these two firms account for 90.2% of all blank check IPOs from January 1, 2019 to September 30, 2020, with 156 companies raising over $47.7 billion. Only two Big Four firms audited a blank check company at the time of IPO during this period; KPMG, with three clients, and PwC, with one.
What accounts for the relative absence of Big 4 firms from the blank check/SPAC market? An earlier blog suggests some reasons:
While blank check IPOs and SPACs have raised billions and can offer a quick public offering, the type of transaction can pose unique challenges, especially for auditors tasked with preparing the necessary filings. There are special considerations and nuances for these transactions and based on these complexities; it is not surprising that some audit firms have specialized teams for SPACs, while others prefer to focus business elsewhere.
Non-Big 4 firms’ dominance of this part of the IPO market isn’t a new development. The blog says that while the Big 4 had over 70% of the market share for all IPOs from 2004-2019, they had only 6.5% of the market share for blank check IPOs.
Yesterday, Nasdaq filed a rule proposal with the SEC that would require all listed companies to disclose board diversity statistics, and would require most of them to either satisfy specified board diversity requirements or disclose why they don’t. This excerpt from Nasdaq’s press release summarizes the requirements of the proposed rule:
Under the proposal, all Nasdaq-listed companies will be required to publicly disclose board-level diversity statistics through Nasdaq’s proposed disclosure framework within one year of the SEC’s approval of the listing rule. The timeframe to meet the minimum board composition expectations set forth in the proposal will be based on a company’s listing tier. Specifically, all companies will be expected to have one diverse director within two years of the SEC’s approval of the listing rule.
Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market will be expected to have two diverse directors within four years of the SEC’s approval of the listing rule. Companies listed on the Nasdaq Capital Market will be expected to have two diverse directors within five years of the SEC’s approval. For companies that are not in a position to meet the board composition objectives within the required timeframes, they will not be subject to delisting if they provide a public explanation of their reasons for not meeting the objectives.
Nasdaq has posted FAQs and a summary of what listed companies need to know about the rule proposal on its website. One of the things about the proposal that surprises me is how few listed companies currently satisfy the proposed diversity standard. According to this NYT DealBook report, Nasdaq says that more than 75% of listed companies do not meet the proposed standard.
That means that a lot of companies are going to have a lot of work to do if the rule is adopted. In order to assist those companies, Nasdaq also announced a partnership with Equilar to assist listed companies in addressing board composition issues.
Big 3 Asset Managers: Paging Ida Tarbell. . .
If you’ve studied American economic history, you’ve likely heard of journalist Ida Tarbell, whose landmark series of articles in McClure’s magazine on The Standard Oil Company was credited with accelerating the government’s 1911 breakup of the company. According to this provocative new report from The American Economic Liberties Project, the growing dominance of the Big Three asset managers poses the same kind of threats that trusts like Standard Oil posed at the turn of the last century. Here’s an excerpt:
Today, scholars of finance are increasingly raising concerns that the rise of mutual fund ownership of U.S. corporations is “reminiscent of the early 20th century system of finance capital when business was under the control of tycoons such as J.P. Morgan and J.D. Rockefeller.” Antitrust experts argue that the “historic trusts that motivated the creation of antitrust law were horizontal shareholders[,]” where a common set of investors own significant shares in corporations that are competitors in a market. In this sense, asset management firms have become a part of a new “money trust”—a system of financial architecture dominated by a few large banks, private equity firms, and hedge funds.
Modern financial markets are distinct from the robber baron era by the fact that ultimate ownership of corporate shares is dispersed across many investors and asset owners, albeit controlled by a small concentrated group of institutions. In this sense, it is a modern version of an old problem.
For a sense of the scale of the problem, the “Big Three” asset management firms—BlackRock, Vanguard and State Street—manage over $15 trillion in combined global assets under management, an amount equivalent to more than three-quarters of U.S. gross domestic product.
The report details how the outsized footprint of the Big Three & a handful of other institutions raises concerns about corporate governance, American economic competitiveness, the concentration of political power, and the stability of financial markets. It also offers some dramatic solutions – including limits on asset managers’ ownership of individual companies & companies within similar industries, concentration restrictions limiting the “economic exposure” of individual asset managers, and legislation mandating a “structural separation” of asset managers’ systemically important infrastructure activities from their other lines of business.
These are the kind of sweeping changes that would require sustained, bipartisan Congressional action to implement, and right now, that looks like a pipe dream – absent a lot of public outcry. But in 1900, the idea of breaking up Standard Oil seemed pretty far-fetched too. . .
OTC: An Overview of Rule 15c2-11
Before brokerage firms can quote securities of unlisted companies, they have to satisfy the informational & other requirements of Exchange Act Rule 15c2-11. While the rule regulates the activities of brokers, ensuring that sufficient information is available to permit them to quote an issuer’s securities is often quite important to the issuers themselves. Liz blogged about the SEC’s recent amendments to the rule, and this BakerHostetler memo provides a comprehensive summary of the rule & the changes made by the amendments. Here’s the intro:
The SEC recently adopted amendments to Rule 15c2-11 of the Securities Exchange Act of 1934. Generally, in an effort to prevent fraudulent, deceptive or manipulative acts or practices related to the quote, the Rule imposes restrictions on a broker-dealer’s ability to publish or submit securities quotations for unlisted companies. Specifically, the Rule governs the requirements that broker-dealers must satisfy before they publish or submit securities quotations for unlisted companies in a quotation medium other than a national securities exchange – in other words, the over-the-counter (OTC) market.
The Amendment adds additional investor protections by mandating that investors have access to the current and publicly available information of issuers whose securities trade on the OTC markets, and it further requires broker-dealers to confirm that certain information about the issuer and its security is current and publicly available before quoting that security.
The memo walks through the mechanics of the rule, the alternative methods by which its information requirements may be satisfied, and summarizes the effect of the amendments.
A recent Corporate Secretary article reported that nearly 75% of respondents to an impromptu survey at a recent ESG investment conference said that the “social” component of the ESG equation was the most difficult for companies to analyze and integrate. This Dix & Eaton blog has some ideas for how companies can start the process of thinking about what to say – in upcoming ESG reports & elsewhere – about that aspect of their ESG efforts. Here’s an excerpt:
– Employee safety and health, training, protective equipment – what programs did you put in place in response to the pandemic, what does your 2020 data say about the effectiveness of those efforts, what did you learn, and what might you commit to for the longer term?
– Human capital management – what have you done to retain key people during the pandemic, handle unavoidable pay cuts, furloughs and layoffs in a thoughtful way, position the company and its people to recover from the upheaval, facilitate remote working arrangements and effectively manage and engage a remote workforce?
– Human rights – do you have a published human rights policy, is it relevant and applied across all regions in which you operate, how do you evaluate its effectiveness, how do you deal with non-compliance, and how well are you monitoring your supply chain?
– UN SDGs – if the UN Sustainable Development Goals have not been part of your reporting to date, might now be the time to lend your support to UN goals such as No Poverty, Zero Hunger, Good Health and Well-Being, Quality Education, Gender Equality, Reduced Inequalities, Peace, Justice and Strong Institutions?
– Diversity, equity and inclusion – do you have a policy, what are your goals and metrics, what are you going to do differently, how much change is needed, and how fast will you move?
– Board diversity – many companies have made progress on gender diversity on the Board (with at least two female Directors, for example), but how are you going to address racial and ethnic diversity (which is not nearly as well developed)?
– Environmental justice – with both environmental and social angles, are you ready for this to become a prominent ESG topic? (We rarely see it addressed in current reports, but we think it will receive more attention going forward.)
The social component may be the most difficult part of ESG for companies to address, but the blog says that it will feature prominently in 2020 ESG reports – which Dix & Eaton expects will look much different than in prior years. In any event, with the emergence of a new “human capital” disclosure requirement & growing investor interest in the “S” in ESG, the corporate response to social concerns is a topic that’s likely to grow in importance over the next several years.
PPP Loans: More On “Tax Deduction? If They’re Forgiven, Forget It!”
Last spring, I blogged about the IRS’s position that, assuming they qualified for forgiveness of their loans, PPP borrowers could not deduct business expenses that they paid with their loan proceeds. This CFO Dive article says that the IRS has recently updated its position. Unfortunately, the news didn’t get any better for borrowers. Here’s an excerpt:
If you took out a paycheck protection program (PPP) loan from the federal government and expect it to be forgiven, you can’t deduct business expenses you paid using the loan proceeds, the IRS said in guidance it released this week.
The IRS’s position isn’t new. It released guidance in May prohibiting the deductibility of expenses using forgiven loan proceeds. This week’s guidance updates the previous release by having the prohibition apply before you know whether your loan will be forgiven. As long as you believe you meet the criteria for forgiveness, you’re not to deduct your expenses in your tax filing.
“If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not,” the IRS said in releasing the guidance. If it turns out your loan isn’t forgiven, you can deduct your expenses paid using the proceeds, the IRS said.
The article points out that the AICPA has challenged the IRS’s position as being inconsistent with the language of the CARES Act, and that bipartisan legislation to undo that position has been introduced in Congress. Stay tuned.
Our December E-Minders is Posted
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There’s an old saying to the effect that “comedy equals tragedy plus time.” It’s in that spirit that we offer up the topic of “holiday lowlights” to kick off this year’s holiday season. Honestly, we can’t think of a better topic for 2020, since the entire year has been one continuous lowlight.
I think one thing that everyone who practices corporate or securities law for a living can agree on is that you aren’t really a full-fledged lawyer until you’ve had at least one holiday season ruined completely by a mad rush of transactions or other work. For some reason, it really does seem like somebody turns on a fire hose of work the moment they hang a wreath in the office lobby.
Liz, Lynn and I were emailing back and forth a few months ago when this topic came up, and we thought it might be interesting to start 2020’s holiday season by tossing out some of our worst holiday season experiences & inviting you to share your own. If you’re game, we’ll share your stories in a blog early next year – after we’ve shooed 2020 out the door and are hopefully starting to see people roll up their sleeves for a vaccine. To get things started, here are some of your faithful editors’ own ghosts of Christmases & Hanukkahs past:
Lynn Jokela: I remember being shipped off on an impromptu flight to Fargo, North Dakota on Christmas Eve in order to obtain a signed & sealed closing document. The client then took me to lunch at a Chinese buffet that included sushi!! Yes, sushi. Did I mention this was in Fargo?
Liz Dunshee: I was so caught up with a tender offer and options backdating investigation that I overworked myself into the ER one Christmas. It was so bad that my mom had to come up for 2+ weeks to take care of me, a grown adult, because I couldn’t get out of bed. To make matters worse, I’d organized a big holiday party for friends near & far, they had it without me, and I’m still hearing about what a fabulous night it was, nearly 15 years later.
John Jenkins: I’ve been involved in lots of M&A deals that closed over the holidays, and for many years, I also had a small cap client with a 9/30 year-end that was entirely dependent on me to prepare its 10-K, and crunch time was always around the holidays. To make matters worse, the company shut down over Christmas week every year. But my worst experience involved an IPO that I was working on in 1993. Our daughter was born early December of that year, and our oldest wasn’t even two yet. I was still an associate. The partner put me on a plane to Indianapolis two days after she was born, and I spent four days a week there for the next month getting an IPO filing together. Why my wife stayed married to me, I’ll never know.
I’m sure many of you reading this are saying to yourselves – “Oh, I can top that!” Well, please do. Shoot Lynn, Liz or me an email with your holiday season horror stories and we’ll blog them in the new year (anonymously, if you prefer).
ISS: No More “Sneak Peaks” for S&P 500
Kudos to Bob Lamm for picking up on news from ISS that not many folks caught when it was first announced, and non-members may not have seen when Liz blogged about it at the time on our Proxy Season Blog. It’s kind of big news too. Here’s an excerpt from Bob’s recent blog:
On November 2, the eve of what was arguably one of the most newsworthy if not significant elections in recent history, ISS snuck out an announcement that, effective January 2, 2021, it would no longer provide draft proxy voting reports to the S&P 500. Apparently, ISS – which has long been criticized for limiting the distribution of draft voting reports to the S&P 500 – has decided that the way to eliminate that criticism is not to send out draft reports at all.
Instead, ISS will send out proxy voting reports to its clients — i.e., investors — earlier and will send reports to all issuers at the same time at no cost. Thus (according to ISS), companies will have the time to provide feedback, and we’re assured that its “formal ‘Alert’ process” will enable companies to correct any errors and investors to change their votes.
The blog points out that ISS justified its decision to change its review process by noting that its purpose was originally to “help check the factual accuracy” of its reports. ISS says that it has invested heavily in enhancing the accuracy of its data, and that the review process isn’t being used as it intended. Instead, it has led to “lobbying” by companies against ISS’s recommendations. Wow, they must have been completely shocked that companies responded in that way, huh?
Attesting Electronic Signatures: There’s a Form for That!
Lynn recently blogged about the welcome news that the SEC amended Rule 302(b) of Reg S-T to permit electronic signatures. As amended, the rule provides that before initially using an electronic signature to sign a filing, a signatory must manually sign a document attesting that he or she agrees that the use of an electronic signature for an SEC filing constitutes the legal equivalent of such individual’s manual signature. So, what should that attestation look like? This Steve Quinlivan blog offers up a form that might fit the bill. Check it out!
Yesterday, ISS announced its policy updates for next year. Here’s the policy document. The big news this year is that ISS is ratcheting up the pressure on companies to improve board diversity, and taking a more accommodating approach to exclusive forum bylaws. Here are a couple of excerpts from ISS’s executive summary of the policy changes:
– For 2021, ISS benchmark research reports for companies in the Russell 3000 or S&P 1500 indexes will highlight boards that lack racial and ethnic diversity (or lack disclosure of such) to help investors identify companies with which they may wish to engage and foster dialogue between investors and companies on this topic.
– For 2022, for companies in the Russell 3000 or S&P 1500 indexes where the board has no apparent racially or ethnically diverse members, ISS will recommend voting against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis).
– Under the new policy, ISS will generally recommend a vote for federal forum selection provisions in the charter or bylaws that specify “the district courts of the United States” as the exclusive forum for federal securities law matters and recommend a vote against provisions that restrict the forum to a particular federal district court.
– Under the updated policy for exclusive forum provisions for state law matters, in the absence of concerns about abuse of the provision or about poor governance more generally, ISS will generally recommend in favor of charter or bylaw provisions designating courts in Delaware as the exclusive forum for state corporate law matters at companies incorporated in that state.
We’ll be posting memos in our “Proxy Advisors” Practice Area. With proxy season just around the corner, check out this Davis Polk blog for a list of key dates on ISS & Glass Lewis’s calendars for the upcoming months.
California Voters Adopt New Privacy Statute
Remember how much fun getting geared up to comply with the CCPA and its seemingly endless rulemaking process was? Well if you enjoyed that, you’ll be delighted to learn that on election day, California voters passed Proposition 24, the California Privacy Rights Act (CPRA). This intro to Thompson Hine’s memo on the new statute provides an overview of its provisions:
On November 3, California voters approved Proposition 24, also known as the California Privacy Rights and Enforcement Act of 2020 (CPRA), which amends and expands upon California’s other landmark privacy legislation, the California Consumer Privacy Act of 2018 (CCPA). In particular, the CPRA establishes new data privacy rights for California residents, imposes new obligations and liabilities on businesses and service providers, and creates a regulatory agency empowered to enforce California privacy law and prosecute noncompliance. The CPRA becomes operative on January 1, 2023, and, with some exceptions, will apply to California residents’ personal information collected by organizations after January 1, 2022.
The CPRA’s proponents put Proposition 24 on the ballot because of their objections to several legislative amendments to the CCPA & the California AG’s new regulatory framework that they believe “significantly weakened” its safeguards. The memo reviews the key provisions of the CPRA, and notes that approving the CPRA ballot initiative, California voters made several substantive amendments to the CCPA – and effectively prevented California’s state government from undermining them through future legislation.
Post-Election Suggestion: “Look at Mills! Look at Mills!”
There’s a zero percent chance that I’m going to use this blog to wade into the giant cauldron of rage into which our country has descended following last week’s election. I’m also not going to minimize the differences that separate us. We have a lot of work to do. But, like you, I have friends and family members whose political opinions differ significantly from mine, and I’d kind of like to continue to share the country with them and with all of you.
With that objective in mind, I want to close out the week with a suggestion as to how we might at least start to turn down the temperature. This is going to sound strange, but hear me out – I would like you to watch this video of NBC’s coverage of the final lap of the men’s 10,000 meters at the 1964 Tokyo Olympics. It’s only about a minute long.
I know the video quality is terrible, but I’m guessing that you still felt the same chills that I did watching the last 100 meters of that race. You know what? The people who voted for the other guy felt those chills too, and it’s fair to say that the letters “U.S.A” on the front of Bill Mills’ uniform probably had a lot to do with that. I believe that this kind of shared feeling is what Abraham Lincoln was getting at in his First Inaugural Address, and since there’s no blogger alive who can follow Honest Abe, I’ll let him have the last word:
We are not enemies, but friends. We must not be enemies. Though passion may have strained, it must not break our bonds of affection. The mystic chords of memory, stretching from every battle-field, and patriot grave, to every living heart and hearthstone, all over this broad land, will yet swell the chorus of the Union, when again touched, as surely they will be, by the better angels of our nature.
3. Does your board have the same or different dollar thresholds requiring board approval for the following categories: acquisitions, financing transactions, general contracts, and real estate?
– Same – 38%
– Different – 62%
Please take a moment to participate anonymously in these surveys:
This SquareWell Partners report addresses investor approaches to ESG issues during 2020 and predicts how they will shape the dialogue between companies & shareholders during the upcoming year. This excerpt address investors’ increasing focus on capital allocation decisions:
As the impacts of COVID-19 will continue and the ‘V’-shaped recovery looking less likely, capital allocation decisions will require a delicate balancing act for companies in 2021 to manage the diverging expectations of its stakeholders (especially within its shareholder base regarding the payment of dividends).
Companies will be expected to justify their capital allocation decisions, whether it is to remunerate shareholders or not. Whilst investors like Schroders have communicated that they would be more flexible regarding capital raising requests, other investors (and proxy advisors) will scrutinize the management quality, urgency of the funds, and the long-term strategy before supporting any capital raise (as in the case at French mall operator, Unibail-Rodamco-Westfield).
The report cautions that while investors demonstrated restraint during the current year, 2021 will likely be a critical year during which investors will pass judgment on corporate actions or failures to act in response to the crisis.
Rule 10b5-1 Plans: No Affirmative Defense to Bad Publicity
Pfizer’s announcement earlier this week about the apparent efficacy of its Covid-19 vaccine is the best news the market – and the world – has heard this year. That announcement helped fuel a stock market surge, and according to media reports, Pfizer’s CEO & another executive sold a sizeable amount of the company’s shares during the rally.
The more thoughtful coverage of these sales pointed out that they were made under the terms of pre-existing Rule 10b5-1 plans, but the situation provides another example of the fact that whatever else a 10b5-1 plan does, it doesn’t provide an affirmative defense against bad publicity.
