Several companies facing hard times have decided that the key takeaway from the meme stock phenomenon is that no business headwinds are strong enough to deter meme stock “apes” in search of their “tendies”. Here’s an excerpt from a recent WSJ article:
The frenzied stock-buying activity that may have saved AMC Entertainment Holdings Inc. from bankruptcy is opening up a potential escape hatch for other troubled borrowers as well.
More companies with steep financial challenges are seeking a lifeline from equity markets, eager to capitalize on the surge of interest in stock buying from nonprofessional investors. Earlier this month, coal miner Peabody Energy Corp., offshore drilling contractor Transocean Ltd. and retailer Express Inc., all announced plans to sell stock, betting equity markets will support them despite heavy debt loads, recent losses and industry headwinds.
Selling stock isn’t the typical way for distressed companies to grab a lifeline. More often, they are forced to seek out rescue loans, sell off assets or pursue a merger, which can be difficult because of their existing debt. But equity markets now are more open to supporting troubled issuers, in large part because of risk-hungry individual investors eager to speculate, according to bankers and investors following the trend.
The companies identified in the article aren’t planning firm commitment underwritings. Instead, these companies – like AMC and other meme stocks – are planning to tap the market through ATM offerings. It will be interesting to see if this gambit works, but even after months of meme stock nuttiness, I have my doubts. Most of the meme stocks seem to have gained that status because of buzz generated on social media, and that’s hard for companies to gin up on their own.
Hey, I’ve got an idea – maybe instead of road shows, their CEOs could start giving interviews to YouTube personalities without wearing pants? You know – sort of a “sans-culottes for the sans-culottes” marketing strategy. I mean, it’s worked before , . .
Yesterday, the SEC announced that New Jersey Attorney General Gurbir Grewal had been appointed to serve as the agency’s Director of Enforcement. Grewal has served as The Garden State’s AG since January 2018, and prior to that time he spent much of his career as a federal prosecutor in New York and New Jersey.
The SEC’s 2019 enforcement action against Facebook highlighted the perils of hypothetical risk factors. Now, in In re Alphabet Securities Litig., (9th Cir.; 6/21) the 9th Circuit recently upheld disclosure claims against another tech titan premised on its alleged failure to update disclosure of a risk of a cyberbreach that was hypothetical when initially disclosed in a 10-K, but became very real by the time subsequent 10-Qs were filed. This Morrison & Foerster memo reviews the Court’s decision. This excerpt provides an overview of the complaint’s factual allegations:
The complaint alleged that in February 2018, Alphabet, Inc. (“Alphabet”), the holding company of Google LLC (“Google”), filed its 10-K for FY 2017. In the “risk factors” section, it listed potential consequences in the event third parties were to breach Google’s cybersecurity measures and obtain access to its users’ private data.
The complaint further alleged that in April 2018, the Alphabet CEO discovered that a bug had exposed Google user data for a three-year period. The company did not disclose the breach at the time. Further, it alleged that on April 23, 2018, and July 23, 2018, Alphabet filed 10-Qs, stating affirmatively that there had been “no material changes” to the risk factors set out in its 2017 10-K and made no disclosure about the data breach.
The WSJ published an article in October 2018 that disclosed the cyberbreach, Alphabet’s stock price took a hit, and the lawsuits soon followed. The District Court dismissed the plaintiffs’ complaint, but the 9th Circuit reversed. This excerpt from the memo lays out the Court’s reasoning:
The panel found it plausible that a reasonable investor reading the 10-Qs would have been misled by the company’s representation that there had been “no material changes” in the risk factors into believing that Google had not discovered a data breach. The panel relied on the Securities Exchange Commission’s guidance regarding the adequacy of cybersecurity-related disclosures as “judgments about the way the real world works” to inform its analysis of a
reasonable investor’s perspective.
Item 1A of Form 10-Q requires companies to update the risk factors disclosed in their 10-K filings to reflect any “material changes.” The Alphabet case makes it clear that when considering the perils of hypothetical risk factors, companies need to keep this updating requirement in mind if any of those risks have materialized since the 10-K was filed.
According to this Audit Analytics blog, “no” votes on auditor ratification proposals rose in 2020. Now, before we get carried away here, let’s start with the fact that support for these proposals is generally overwhelming – from January 1, 2018 to December 31, 2020, an average of 98% of votes were cast in favor of ratification. Still, these excerpts from the blog indicate that’s not the whole story:
– The occurrence of shareholders voting in large numbers against auditor ratification has been increasing. Over the last three years, there have been four instances when more than 40% of a company’s shareholders voted against ratification; three of those votes occurred in 2020.
– In 2020, there were 13 entities with more than 20% of shareholder votes cast against ratification. SPAR Group [SGRP], LM Funding America [LMFA], and Barnwell Industries [BRN] top this list, with more than 42% of votes against auditor ratification.
– Both SPAR Group and Barnwell Industries had previous votes where shareholders voted in large quantities against the company’s auditor. In 2019, 30.85% of SPAR Group’s shareholders voted against ratification. For Barnwell Industries, over 5% of shareholders voted against the company’s longstanding auditor in six of the last seven years. Worth noting, Barnwell Industries opted to change auditors in 2020.
Among the S&P 500, the blog says that incidence of no votes on ratification proposals is much lower. The blog includes a list of the 10 highest votes against ratification among the S&P 500, and notes that UDR (14%) and GE (11%) topped the list this year. UDR and GE were the only members of the S&P 500 with greater than 10% negative votes, and the 10th company on the list, Masco Corporation, received only a 7% vote against ratification.
Those numbers may seem low, but given the traditional levels of support for auditor ratification proposals, the blog says they are enough to “trigger a red flag.” So what do companies do in response to this “red flag”? While it is still rare for companies to change auditors in response to a large negative vote, that doesn’t necessarily mean that companies and their auditors don’t take notice. For instance, in an earlier blog, Audit Analytics cites academic research indicating that a high level of shareholder dissatisfaction with auditors leads to better audit quality.
Cooley’s Cydney Posner recently blogged this update on the status of litigation challenging California’s board gender diversity statute:
In Meland v. Padilla, a shareholder of a publicly traded company filed suit in federal district court seeking a declaratory judgment that SB 826, California’s board gender diversity statute, was unconstitutional under the equal protection provisions of the 14th Amendment. In April 2020, a federal judge dismissed that legal challenge on the basis of lack of standing.
On Monday, a three-judge panel of the 9th Circuit reversed that decision, allowing the case, now called Meland v. Weber, to go forward. The Court held that, because the plaintiff “plausibly alleged that SB 826 requires or encourages him to discriminate on the basis of sex, he has adequately alleged that he has standing to challenge SB 826’s constitutionality.”
Cydney’s blog also provides an overview of the potential constitutional issues raised by the California statute and the background of the litigation.
On Friday, the Staff issued 21 FAQs for recipients of its recent letter requesting certain companies to voluntarily provide information concerning the SolarWinds cyberattack. The FAQs provide answers to questions concerning, among other things, the scope and limitations of the “amnesty” that the Division of Enforcement is prepared to provide and how to respond to certain inquiries contained in the original letter.
Companies that received the letter should read the FAQs carefully and should also be sure to check out this blog from Perkins Coie. While the FAQs are all helpful, I think that for many companies, the Staff’s first FAQ raises the question they asked most often:
1. I received a notification from Zix Mail, is it legitimate?
The SEC uses Zix Mail service for sending encrypted messages in connection with its confidential investigations, including this one. When we send an encrypted message via Zix Mail, the recipient receives a notification message from Zix Mail. An authentic notification of a message from Zix Mail will:
i. Be sent only from sec.notification@zixmessagecenter.com
ii. Direct you to a link starting with “https://web1.zixmail.net”
The backstory here is that many companies that received the original email from the Division of Enforcement weren’t sure that it was legit, and some of them reached out to the Staff to confirm that it came from the SEC. After reading FAQ #1, can you blame them? Based on the SEC’s description of its email blast, this thing couldn’t have looked more like a phishing attempt if the Zix Mail email address had ended in “@hacker.ru”.
A few months ago, I blogged about the possibility that 13(d) reform might be on the SEC’s agenda. In a speech delivered last week, SEC Chair Gary Gensler confirmed that he has the beneficial ownership reporting rules in his sights. Here’s an excerpt:
In 1968, our Congress mandated that large shareholders of public companies disclose information that helps the public understand their ability to influence or control that company. Under current rules, beneficial owners of more than 5 percent of a public company’s equity securities who have control intent have 10 days to report their ownership.
We haven’t updated that deadline in over 50 years. Those rules might’ve been appropriate for the 1970s, but I have my doubts about whether they continue to make sense given the rapidity of current markets and technologies. I’ve asked staff how we might update these rules, including possibly shortening reporting deadlines.
Activists aren’t going to be thrilled with that development, but public companies and those who represent them are likely to continue their vocal support of a move to shorten filing deadlines. Chair Gensler went on to reference his desire for greater transparency concerning derivative swaps on individual companies that “provide exposure to the company without traditional equity ownership,” so perhaps an expansion of the definition of “beneficial ownership” under Section 13(d) to encompass these derivative positions might also be on the table.
The EDGAR system was closed on Friday, June 18th in observance of the new Juneteenth federal holiday. Since President Biden had signed the legislation only the day before, the decision to close EDGAR was made in a very short timeframe. Apparently, that resulted in a little internal confusion, and some filers who made filings after 5:30 pm on June 17th receiving a June 18th filing date. Since EDGAR was closed, that filing date doesn’t work, so on Friday, the SEC announced that those filers will have their filing dates automatically adjusted to June 21st.
The May-June issue of “The Corporate Counsel” newsletter is in the mail (try a no-risk trial). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. The issue includes articles on:
– Fun in the Summer — Navigating the Filer Status Maze
– Fighting to Keep Your Secrets — A Fresh Look at Confidential Treatment
Dave & I have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues and we’ve just posted one for this issue. Be sure to check it out!
According to this Institutional Investor article, a new study finds that “green bonds” proved to be an attractive safe haven investment during the pandemic:
Climate-friendly debt served as a better protection against large market fluctuations than gold, as well as performing better than other environmental, social, and governance investments, according to new research from Imran Yousaf of Pakistan’s Air University, Muhammed Tahir Suleman of the University of Otago in New Zealand, and Riza Demirer of Southern Illinois University Edwardsville.
In the paper, the trio argued that green bonds were the “preferable safe haven” investment for passive investors hoping to defend their portfolios against the “uncertainty” of the pandemic. Conventional stock portfolios that included green bonds saw the highest risk-adjusted returns during the pandemic when compared against equity portfolios supplemented by gold and other ESG assets, the researchers found.
That’s the good news. The bad news is that – at least on the junk end of the spectrum – green bonds may not turn out to be so green at the end of the day. The problem is that these issuers are disclosing to investors that they may not be able to use the proceeds of the financings for the purposes that they intended. The disclosure I’ve seen is pretty robust (check out the last risk factor on p. S-23 of Dana’s recent pro supp), so investors don’t have a lot of recourse if the proceeds aren’t deployed according to plan, but that doesn’t seem to bother many of them. Here’s an excerpt from this WSJ article:
Companies that issue green bonds create frameworks specifying the use of proceeds for objectives like transitioning to renewable energy. They also hire third parties to verify that the objectives are being met. If a borrower fails verification, however, bondholders have no legal right to seek compensation. “There are no mechanisms to ensure investors that the green investment will actually occur,” said Mitu Gulati, a law professor at the University of Virginia. “The only conclusion I can draw from that is that investors don’t actually care. It’s so much eyewash.”
The article says that the risk that climate-friendly promises may turn out to be illusory wasn’t a big concern when these securities were issued exclusively by investment grade commitments with long-held commitments to stability, but now, as junk issuers enter the market, the concern is that many of them may discover that Kermit the Frog was right – it’s not easy being green.
