Last month, the SEC issued a rule proposal that would increase the reporting threshold for Schedule 13F filings from $100 million to $3.5 billion – and oh boy, do the commenters hate it! Here’s a comment that, while fiery, is also pretty representative:
This is complete bull. You are supposed to be protecting investors, not making it easier for billion dollar hedge funds to manipulate markets. This proposal is a terrible idea and runs directly counter to the principles upon which the SEC was founded. What is the SEC thinking? This reeks of corruption.
So far, it’s mostly been retail investors who have weighed-in – and I mean a lot of retail investors. (According to a piece in the NYT DealBook yesterday, more than 1,500 people have commented to date). Apparently, some outreach to Reddit users may help explain the volume of comments. The big guns may soon fire as well. NIRI is circulating a joint comment letter for public company issuers to sign (it’s available here), and other investor and business groups and public companies are expected to comment as the deadline approaches.
Supply Chains: SEC Reporting on China Forced Labor on the Horizon?
Companies with supply chains in China should be prepared to comply with enhanced due diligence & reporting requirements. That’s the conclusion of this Foley Hoag blog, which surveys recent legislative initiatives aimed at Chinese companies’ use of forced labor from Xinjiang and other regions of the country. One pending piece of legislation could even result in an SEC reporting requirement:
A measure with more serious potential repercussions for companies is H.R. 6210, the Uyghur Forced Labor Prevention Act. H.R. 6210 lists all companies found by the Congressional-Executive Commission on China to be suspected of using the forced labor of ethnic minorities in China. Most of the companies on the list are in the processed food and apparel industries. More importantly, the measure establishes a rebuttable presumption that all goods manufactured in Xinjiang are made with forced labor; accordingly, such goods are banned under the Tariff Act of 1930 unless the Customs Border and Protection Commissioner certifies otherwise.
The bill would also impose sanctions and visa restrictions on individuals and senior Chinese officials determined to be complicit in forced labor in Xinjiang. Additionally, H.R. 6210 requires companies to certify annually to the Securities and Exchange Commission that their products do not contain forced labor inputs from Xinjiang.
The prospects for the legislation’s passage are uncertain, but the Chinese government is taking it seriously enough to have imposed sanctions on one of the bill’s co-sponsors, Sen. Marco Rubio (R-Fla.) and on the Congressional-Executive Commission on China, for which he and another co-sponsor of the legislation, Rep. Jim McGovern (D-Mass.), serve as co-chairs.
EDGAR Problems: Now It’s Personal. . .
The technical problems plaguing the EDGAR system this summer became a full-blown crisis last night – and by that I mean they directly affected me for the first time. (We priced a debt deal last night & it took a couple of hours to get the term sheet filed.) I guess the problems have been so persistent that last week, the SEC decided that it needed to post a bit of an explanation:
The SEC staff has been deploying significant technical upgrades to the EDGAR system. While these upgrades follow extensive planning and testing, unexpected performance issues that have arisen have inconvenienced filers. We apologize for these difficulties and wish to assure filers that we are working diligently to resolve the issues.
The statement goes on to say that should you experience problems or have any questions or concerns, you may contact Filer Support at (202) 551-8900, option 3, or FilerTechUnit@sec.gov. I sometimes think it might be interesting to work for the SEC, but I’ll tell you what – I definitely wouldn’t want to be the poor soul you get connected to if you hit “option 3.”
The SEC sure isn’t shying away from controversial topics this summer. Less than a month after adopting a somewhat watered-down version of its proposed proxy advisor regulations, the SEC has calendared an open meeting for next month to consider amendments to the shareholder proposal rules. Here’s an excerpt from the Sunshine Act Notice:
The Commission will consider whether to modernize and enhance the efficiency of the shareholder-proposal process for the benefit of all shareholders by adopting amendments to certain procedural requirements for the submission of shareholder proposals and the provision relating to resubmitted proposals under Rule 14a-8. The amendments being considered seek to modernize the system for the first time in over 35 years and reflect many years of engagement by Commission staff with investors, issuers and other market participants.
The SEC issued proposed rules last November that would increase the ownership thresholds for submission of proposals for inclusion in a company’s proxy statement & substantially raise the bar in terms of the favorable vote required to allow shareholders to resubmit proposals in subsequent years. Other proposed changes to Rule 14a-8(b) would subject shareholders using representatives to enhanced documentation requirements with respect to the authority of those agents, and require shareholder-proponents to express a willingness to meet with the company and provide contact & availability information.
The proposals have produced an avalanche of comments – both real and, apparently, of the “Astroturf” variety. For example, the proposal’s comments page discloses that the SEC received over 5,000 identical form comment letters opposing the proposal, but that it has also “received messages from certain of the email addresses that sent this comment letter indicating that the owner of the email address did not submit a comment letter.”
The meeting is scheduled for September 16th, which means that if rules are adopted, we’ll be all over them at our upcoming “Proxy Disclosure” & “Executive Pay” Conferences – which will be held entirely virtually over three days – September 21 – 23. We’ve offered a Live Nationwide Video Webcast for our conferences for years – one of the only events to do so – and we’re excited to build on that platform and make your digital experience better than ever. Act now to get the best price – here’s the registration information.
Proxy Advisor Regulation: ISS’s Lawsuit Against the SEC Marches On
The SEC’s new rules regulating proxy advisors may be a weaker broth than what was originally proposed, but ISS is still not happy about being on the receiving end of the proxy rules. Last year, ISS sued the SEC over its efforts to regulate the proxy advisory industry. The parties agreed to stay the proceedings pending the SEC’s action on its rule proposals, but now that those are in place, ISS says it’s “game on!” Here’s an excerpt from a statement from ISS’s CEO that was issued last week:
While last month’s rulemaking provides for certain exemptions to aspects of the SEC’s solicitation rules, we remain concerned that the rule will be used or interpreted in a way that could hamper our ability to continue to deliver to clients the timely and independent advice that they rely on to help make decisions with regard to the governance of their portfolio companies. We have today informed the U.S. District Court for the District of Columbia and the Commission of our intent to resume our lawsuit for many of the same core reasons we outlined in our October 31 complaint, as well additional concerns that we will articulate in the weeks ahead.
Over on her Twitter feed, Prof. Ann Lipton flagged a recent court filing indicating that it looks like ISS is going to amend its complaint – which originally focused on the guidance the SEC issued last August – to tackle the new rules directly. Check out the whole thread.
“Mr. Bad Example”: A Barry Minkow Docuseries?
When it comes to securities fraud, before there was Bernie Madoff, there was Barry Minkow. Then again, after there was Bernie Madoff, there was still Barry Minkow. Whether he’s scamming investors in the ZZZZ Best fraud, using his post-conviction “fraud investigation” business to faciliate his own insider trading, or fleecing the congregation of the San Diego church for which he improbably served as pastor, the guy positively sparkles with larceny. Now, this article from “Deadline” says that somebody is trying to put together a documentary series on Minkow.
I wish them better luck than the folks who got into bed with Minkow several years ago to make a movie about his life. As the article recounts, that project ran into some problems:
His life story was turned into the movie Con-Man, which he starred in alongside James Caan and Mark Hamill, but, as production was finishing, Minkow was charged with insider trading, having secretly used his Institute to short the stocks of the businesses he was investigating. While in jail, he also admits to defrauding his own church to help pay for his film.
Yeah, so that happened – and the movie was apparently horrible too. I don’t know what they plan to call the documentary, but as a big fan of the late, great Warren Zevon, may I suggest “Mr. Bad Example”?
According to Cornerstone Research’s 2020 Midyear Assessment, the number of securities lawsuits filed in federal & state courts dropped by 18% compared to the second half of 2019, and were at their lowest level since 2016. Kevin LaCroix recently blogged the details over on “The D&O Diary.” Here’s an excerpt:
According to the report, there were 182 securities class action lawsuits filed in state and federal court in the first half of 2020, which while below the 221 filed in the second half of 2019 and 207 filed in the first half of 2019, is still well above the semiannual average of 112 filings during the period 1997-2019. The 182 filings in the year’s first half is the lowest semiannual number of securities suit filings since the second half of 2016. The report states its view that a decline in Section 11 filings “was the primary reason for the overall reduction in filing activity in the first half of the year.”
The decline in the number of filings from the second half of 2019 to the first half of 2020 represented a drop in the number of filings of 18%. Core (or traditional) filings declined 13%, from 134 in the second half of 2019 to 117 in the first half of 2020. Due to the slowdown in merger deal activity, merger objection lawsuit filings also declined, from 87 in the second half of 2019 to 65 in the first six months of this year, representing a decline of 25%. The 65 first half merger-related suit filings in the first half of this year is the fewest number in federal courts since the second half of 2016.
In case you’re wondering, Cornerstone says that 11 Covid-19-related securities class actions have been filed through the end of June. Kevin’s also been monitoring those filings, and he pegs the number at 15. Lawsuits that Kevin includes in his list that Cornerstone doesn’t are those filed against Zoom, Colony Capital, Wells Fargo, and iAnthus Capital Holdings.
Kevin’s blog has links to prior posts that explain why he included these cases in his tally, but as far as I’m concerned, he doesn’t have to explain anything – he’s a fellow Clevelander, so I’ve got his back.
Crypto Enforcement: Here Comes The Martin Act!
Those of you who are of my vintage likely remember the commercials for Ron Popeil’s Veg-O-Matic that touted its 1,001 household uses – “It slices! It dices! It makes julienne fries!” Well, New York’s Martin Act just keeps on proving that it’s the Empire State’s answer to the Veg-O-Matic. This DLA Piper memo says that the Appellate Division of New York’s 1st Dept. recently upheld a lower court ruling authorizing the statute’s use as the basis for the New York AG’s long-running investigation of the virtual currency “tether.” This excerpt lays out the key takeaway from the Court’s decision:
The decision is a timely reminder to companies and individuals in the FinTech sector that the New York AG has broad power to investigate suspected fraud in the realm of virtual currencies. Dealing with the New York AG’s Investor Protection Bureau may be a disorienting experience for white collar practitioners used to responding to inquiries by federal regulators.
The text of the Martin Act places few clear limits on the New York AG’s investigative authority, and the office is not constrained by the large body of guidance memorialized in the US Department of Justice’s manual for prosecutors and other published federal enforcement guidelines that help practitioners attempt to deal with regulators on a level playing field.
If you old folks don’t remember the Veg-O-Matic, I bet you remember the Bass-O-Matic. (I feel sorry for you kids today, I really do).
EDGAR’s On the Fritz Again
One of my colleagues was in the unenviable position of trying to file a couple of S-8s & an S-3 yesterday, and he learned to his chagrin that the EDGAR system was once again experiencing technical difficulties. According to the EDGAR News & Announcements page on the SEC’s website, they’re working on it:
The EDGAR system is currently experiencing technical difficulties. Our technical staff is working to resolve the issue. Please check this site for updates. We apologize for any inconvenience this may cause.
Fortunately, our registration statement filings were eventually accepted, and even though they didn’t show up on EDGAR until after 5:30 pm, we still received yesterday’s filing date. Still, I think my friend is starting to think the SEC is out to get him – he got caught up in the last malfunction trying to file a couple of 11-Ks.
In response to the onset of the Covid-19 pandemic, many companies opted to include a risk factor addressing the pandemic in their 10-Qs for the first quarter of 2020. So, assuming that disclosure is still accurate & comprehensive, should you include it in your second quarter 10-Q? That’s the question addressed in this recent Bass Berry blog. Here’s an excerpt:
With respect to assessing whether to include potential COVID-19 risk factor disclosure in upcoming Form 10-Qs, as a starting point, Part II, Item 1A of Form 10-Q requires that public companies “set forth any material changes from risk factors as previously disclosed in the registrant’s Form 10-K” (emphasis added).
This language from Form 10-Q, on its face, would appear to require public companies to continue to disclose risk factors included in a prior Form 10-Q in any subsequent Form 10-Qs filed before the next Form 10-K in light of the statement about including material changes from the prior Form 10-K (compare the 2005 adopting release of the SEC promulgating this Form 10-Q risk factor requirement, which stated that the Form 10-Q should disclose risk factors “to reflect material changes from risks factors as previously disclosed in Exchange Act reports” (emphasis added).
The blog goes on to acknowledge that although practice has not been uniform, there is a good argument based on the text of Form 10-Q that public companies should continue to repeat (with updated language, as applicable) risk factors included in a prior Form 10-Q in subsequent Form 10-Qs filed during the fiscal year. This Bryan Cave blog takes a similar position, noting that “strict compliance” with the language of Item 1A has become “common practice.”
These views are consistent with the position we’ve taken in our “Risk Factors Disclosure Handbook.” However, one of our members pointed out that the Sept. 2010 issue of The Corporate Counsel reported that, despite the language of Item 1A, the Staff had advised that new risk factor disclosure included in a 10-Q does not need to be repeated in subsequent 10-Qs. After making some inquiries, I learned that this advice was likely provided informally in a private conversation. Unfortunately, the Staff never formalized that guidance, and we don’t know whether the Staff would take the same position (or any position) today, in the context of Covid-19.
2020 DGCL Amendments Signed into Law
On July 16, Delaware’s Gov. John Carney signed the 2020 amendments to the DGCL into law. This S&C memo has the details. As we blogged at the time the legislation was first introduced, it addresses some of the problems that Delaware corporations experienced this year in their efforts to transition to virtual annual meetings. Here’s an excerpt:
Under the emergency conditions described in DGCL §110(a), the Amendments provide a board of directors with discretion to postpone or change the place of a stockholder meeting. Amendments to Delaware’s General Corporation Law July 22, 2020 meeting (including to hold the meeting solely by means of remote communication). Public companies may notify stockholders of such a change solely by a document that is publicly filed with the Securities and Exchange Commission.
The amendments also update the definition of an “emergency” under Section 110 of the DGCL & expand it beyond the Cold War “Rocket Attack U.S.A.” scenario to include “an epidemic or pandemic, and a declaration of a national emergency by the United States government.”
CEO Turnover: Uneasy Lies the Head That Wears the Crown
There’s a grim joke among professional football players to the effect that the initials “NFL” stand for “Not for Long.” According to a recent Squarewell Partners study, the same can be said for those who serve as U.S. public company CEOs. Squarewell studied CEO departures at some of the world’s largest companies since the beginning of 2019, and reached some interesting conclusions. These include:
– US companies witnessed more CEO departures than the UK and Europe
– Official company disclosures suggest only 7% of CEOs were formally dismissed but we find that the actual figure of CEO dismissals should be 29%.
– 40% of dismissed Lead Executives recorded negative share price performance during their tenure.
– Only 20% of companies (that saw a CEO change) provided comprehensive disclosure surrounding their succession plans prior to their departure.
– 66% of newly appointed Lead Executives were promoted from within the organization.
– 10% of newly appointed Lead Executives were women.
In this second 30-minute podcast tribute to his friend & “Radio Show” co-host Marty Dunn, who died on June 15, 2020, Dave Lynn welcomes Marty’s colleagues from Corp Fin, private practice and the conference circuit to share their memories of Marty. Highlights include:
– The story behind the Dave & Marty puppet show
– Marty’s game saving “play at the plate” for the Corp Fin softball team
– Making a newcomer feel welcome
– Spending time with Marty & his family
– What it was like to be one of “Marty’s people”
– Marty’s extraordinary ability as a teacher and mentor
– Marty’s rendition of “Midnight Train to Georgia”
The podcast is accompanied by two of Dave & Marty’s legendary puppet shows from our 2015 & 2018 Proxy Disclosure Conferences.
Diversity: You Too, Plaintiffs’ Bar!
Lynn recently blogged about shareholder derivative lawsuits against Facebook & Oracle arising out of alleged inaction on diversity issues. In light of the plaintiffs’ bar’s fondness for diversity-based fiduciary duty claims, I thought it was fitting that the federal district court judge presiding over the Robinhood class action case decided that the plaintiffs’ bar needed to pay a little attention to its own diversity practices.
According to Alison Frankel’s recent blog, Judge James Donato rejected the application of two major plaintiffs firms to serve as lead counsel for the Robinhood litigation. This excerpt from the blog explains why:
Judge Donato, in an order Tuesday night, consolidated the cases – but rejected the leadership proposal. There was no doubt, he said, that Kaplan Fox and Cotchett would provide “highly professional and sophisticated representation” to the prospective class, given their “impressive history.” But Judge Donato said he was concerned that the proposed team lacked diversity.
There were no women among the proposed leaders of the case, the judge pointed out. He also noted that the list includes a lot of lawyers and law firms that frequently head class actions and MDLs. That experience might benefit the prospective class, he said, but “highlights the ‘repeat player’ problem in class counsel appointments that has burdened class action litigation and MDL proceedings.”
The judge’s order permitted the law firms to reapply after they reshuffled their starting lineups, but the blog says that the order may raise constitutional concerns based on Justice Samuel Alito’s criticism of a similar order in an antitrust case.
Going Concern: Update on Covid-19’s Toll
Back in May, I blogged about an Audit Analytics survey that identified 30 public company audit opinionsthat cited the COVID-19 pandemic as a contributing factor to substantial doubt about a company’s ability to continue as a going concern for the next twelve months. A more recent Audit Analytics survey says that the toll continues to grow:
Since our last update in May 2020, there have been 12 additional audit opinions filed with a going concern modification citing COVID-19 – a 40% increase over 7 weeks. For 3 of those companies, it was their first going concern, bringing the total up to 17 companies that were issued their first going concern in the last 5 years specifically citing the pandemic as a reason.
The blog is accompanied by a chart identifying the companies in question and the reasons they cited as contributing to the going concern qualification in their audit opinions.
According to a recent study, there’s a pretty good chance that all of the stimulus money currently sloshing around may stimulate some good old fashioned insider trading among the politically well-connected – at least that’s what the experience of the last time Washington fired its cash bazooka suggests. This Stanford article says that the study looked at trading by politically-connected insiders at TARP fund recipients during the 2008 financial crisis.
That program bailed out a lot of financial institutions, but it wasn’t a model of transparency & key details of the program were never publicly disclosed. This excerpt from the article says that insiders used that lack of transparency to their advantage:
This gave corporate insiders advance knowledge of the likely scope of government intervention and its impact on their institution. Larcker’s study finds evidence that many seemed to trade on the basis of this private information to earn higher returns than public shareholders. Prior to massive government stimulus, political connections had far less influence on trading decisions, the study shows. But in the nine months after TARP’s inception, transactions by politically connected insiders were correctly predicting future stock performance.
Federal law requires executives to disclosure equity stakes in their own firm through regulatory filings that investors pore over for clues about potential share price swings. The researchers’ analysis shows that trades were ramped up 30 days prior to TARP announcements. During allocation of government funds, insiders made 3,058 trades averaging $105,987 and yielding $22,251 in average market-adjusted profits ($68 million overall), significantly outperforming their unconnected counterparts.
One of the authors of the study suggests that the key to preventing abuses with the current stimulus spending lies in increased transparency – which he suggests the bipartisan insider trading legislation that the House passed last year would provide – and a longer cooling off period longer between a job in government and an executive position in the private sector, and vice versa. If I were you, I wouldn’t hold my breath on either of those recommendations being adopted.
Regal, But Not Quite Princely: Leo Strine’s Titles are a Mouthful
Over on ProfessorBainbridge.com, Stephen Bainbridge notes that former Del. Chief Justice Leo Strine is currently sporting a mouthful of titles. Take a deep breath everybody, because Leo Strine is:
Michael L. Wachter Distinguished Fellow in Law and Policy at the University of Pennsylvania Carey Law School; Ira M. Millstein Distinguished Senior Fellow at the Millstein Center at Columbia Law School; Senior Fellow, Harvard Program on Corporate Governance; Henry Crown Fellow, Aspen Institute; Of Counsel, Wachtell Lipton Rosen & Katz; former Chief Justice and Chancellor of the State of Delaware.
Prof. Bainbridge points out that, with his 60 word moniker, Strine easily outpaces Queen Elizabeth II, whose full title comes in at a paltry 33 words (which at least gives her something in common with the Rolling Rock beer label). But I’ve got some bad news for the former Chief Justice & the Queen – her husband Prince Philip crushes them both. Ready? Here we go:
His Royal Highness The Prince Philip, Duke of Edinburgh, Earl of Merioneth, Baron Greenwich, Royal Knight of the Most Noble Order of the Garter, Extra Knight of the Most Ancient and Most Noble Order of the Thistle, Member of the Order of Merit, Grand Master and First and Principal Knight Grand Cross of the Most Excellent Order of the British Empire, Knight of the Order of Australia, Additional Member of the Order of New Zealand, Extra Companion of the Queen’s Service Order, Royal Chief of the Order of Logohu, Extraordinary Companion of the Order of Canada, Extraordinary Commander of the Order of Military Merit, Lord of Her Majesty’s Most Honourable Privy Council, Privy Councillor of the Queen’s Privy Council for Canada, Personal Aide-de-Camp to Her Majesty, Lord High Admiral of the United Kingdom.
That’s a grueling 133 words, for those of you playing along at home. Prince Philip’s heritage may be Greek, but those titles would guarantee him a warm welcome from the crew of The H.M.S. Pinafore. The former Chief Justice’s titles may fall short of those of His Royal Highness, but his penchant for Gilbert & Sullivan-inspired judicial robes likely would make him a welcome guest on the Pinafore as well.
Audit Committees: Meetings & Processes in a Pandemic
The most recent edition of Deloitte’s “Audit Committee Brief” discusses priorities for the current quarter & future periods. I thought the discussion of how audit committees have adjusted their meetings and other committee processes in light of the limitations imposed by the Covid-19 pandemic was particularly interesting. Here’s an excerpt on prioritization of agenda items and meeting materials:
Many audit committee chairs have been reassessing the way their time is spent in meetings. Regardless of how the meeting structure has changed, prioritizing the agenda has been key for the committee’s effectiveness. Audit committee chairs should consider taking a step back to reevaluate what’s top priority. Simply following a previously created annual calendar or last quarter’s agenda may not allow the committee to focus on the right topics. Some audit committee chairs have pushed topics that aren’t top priority to later in the year or to consent agendas to allow more time for some of these critical discussions.
Many committees have reviewed meeting materials when considering ways to enhance effectiveness. Some companies are sharing more memos or narratives with pre-read materials; these provide committee members a bigger picture view and allow the members to come better prepared with questions. It can also provide a way to stay informed in between meetings. Some committees are providing more written questions to management before meetings. This doesn’t mean that questions are limited to those provided in advance, but it may help management come more prepared to discuss what’s important to the audit committee and allow for more robust discussions.
The publication also addresses topics such as financial reporting, forecasting, risk oversight, compliance and other challenges facing audit committees in the current environment.
Some of my most vivid memories of my days nights as a young lawyer involve watching bulge bracket investment bankers & their lawyers sit in a Bowne or R.R. Donelley conference room in the wee small hours & obsess over a prospectus’ compliance with the terms of the bank’s style guide.
These style guides were sometimes elaborate documents with detailed instructions about proper fonts, spacing, logos, front & back cover page & underwriting section language, together with a bunch of other formatting details for every kind of offering document imaginable. Sometimes, they even specified the color of ink to be used (“Morgan Stanley blue” anyone?).
And woe to you if your document departed from the style guide! Punishment was swift and merciless (or so it was said). I remember one poor soul literally sweating as he meticulously measured & remeasured the distance between lines on the back cover page of the prospectus, and then turned his attention to the front cover, to ensure that the red herring language aligned perfectly with the top and bottom lines of the page. You’d have thought the guy was about to cut a 20 karat diamond.
That kind of obsessiveness is why the news that Goldman Sachs has come up with a new font that’s free to use, but comes with an interesting catch, doesn’t surprise me in the least. What’s the catch? This Verge article explains:
Investment bank Goldman Sachs has released its very own typeface: an inoffensive set of sans-serif fonts dubbed Goldman Sans. But in the spirit of bankers everywhere, these fonts come with a catch in the contract. As their license states, you’re free to use Goldman Sans for just about anything you like so long as you don’t use it to criticize Goldman Sachs.
According to the article, the license prohibits the user from using the licensed font software to “disparage or suggest any affiliation with or endorsement by Goldman Sachs.” It looks like Goldman’s PR folks got wind of the negative media attention, however, because the license agreement no longer contains the anti-disparagement language.
I guess some people saw this as overreach by a firm that’s long been a magnet for criticism, but anyone who has worked with an investment banker totally gets why they originally included the language in the license. For a Goldman Sachs lifer, there could be no greater affront than to have an element of the firm’s sacred style guide weaponized against it!
Inline XBRL: Accelerated Filers, Ask Not for Whom the Bell Tolls. . .
This Bass Berry blog provides a reminder to accelerated filers preparing for their second quarter filings that they are going to have to comply with the inline XBRL requirements, including cover page tagging and the new Exhibit 104 requirement:
Public companies designated as accelerated filers who are preparing their periodic reports for fiscal periods ending on or after June 15, 2020 (i.e., upcoming second quarter 10-Qs for many companies) will be required to comply with the SEC’s previously adopted Inline eXtensible Business Reporting Language (iXBRL) digital reporting guidelines. Per the SEC’s phase-in guidelines, filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date.
Tomorrow’s Webcast: “Distressed M&A: Dealmaking in the New Normal”
Tune in tomorrow for the DealLawyers.com webcast – “Distressed M&A: Dealmaking in the New Normal” – to hear Woodruff Sawyer’s Yelena Dunaevsky, Fredrikson & Byron’s Mercedes Jackson, and Seyfarth’s Paul Pryant & James Sowka discuss the unique challenges and opportunities presented by acquisitions of distressed targets.
Like many businesses, my law firm’s offices have been operating on a restricted schedule for the past several months, and even though we’re in the process of transitioning to a full reopening, I suspect that many of our lawyers will continue to spend a lot of time working from home. My guess is that many other companies will have similar experiences. This Deloitte memo on the CLO’s role in reopenings highlights some of the cybersecurity challenges facing companies that will continue to have a large remote workforce. These include:
– Increases in socially engineered cyberattacks targeting financial and personally identifiable information (PII) data
– Cyber risk levels are elevated due to an increase in phishing and malware attacks.
– Some communication and collaboration tools may not be secure, even where these platforms have their own built-in controls.
– Client and customer data may be more vulnerable when employees work from home if employees are transmitting data on unsecure networks and/or saving or printing on home devices.
– Employees who previously did not work at home may not be familiar with cybersecurity and data protection leading practices. Most are likely to benefit from regular reminders related to cybersecurity leading practices.
– Potential threats to attorney-client privilege may arise where there are risks to cybersecurity or where attorney-client conversations may be overheard (by family members, for example).
In addition to reviewing cybersecurity insurance policies for potential coverage gaps associated with remote work, the memo recommends additional cybersecurity training to employees, communicating new and emerging threats as they arise, providing remote workers with the tools and instructions necessary to protect data and maintain data privacy protocols.
The memo also recommends that companies prioritize the preservation of the attorney-client privilege by taking actions such as reminding employees not to forward documents to personal email accounts or use other unsecure methods to transfer files or communicate with clients.
Covid-19: Changes to Internal Audit
Over on “Radical Compliance,” Matt Kelly blogged about the results of a recent survey conducted by the Institute of Internal Auditors that suggests that the Covid-19 crisis has resulted in some significant changes to the internal audit function. In addition to the inevitable budget-cutting, the survey suggests that risk assessments & updates to audit plans are likely to increase:
Survey respondents also said they will both conduct risk assessments and update their audit plans more often. This should surprise nobody, given how Covid-19 has put standard risk scenarios through the blender. Fraud risk, cybersecurity risk, user access controls, management review and sign-off of reconciliations or controls; they’ve all gone haywire.
A majority of respondents expect to increase their risk assessments to at least some degree, and 11% expect to increase the frequency significantly. Meanwhile, 68% of respondents say they’ll at least increase the frequency of updates to the audit plan.
That’s a lot of change and improvisation for the audit function. It implies an embrace of “agile auditing” — a concept the IIA and many others in the audit profession heartily support. It’s the idea that an audit function will run light on staff, heavy on technology, and stand ready to jump on emerging or fast-changing risks by working with other parts of the enterprise.
Covid-19 poses new risks across the enterprise, and since audit teams don’t have the time or personnel to engage in “ponderous” risk assessment & remediation planning efforts, the blog says that they will need to embrace a more swift, data-driven approach to assessment, testing, and remediation.
B Corps: DGCL Amendments Ease Transition Process
This Freshfields blog highlights how the 2020 amendments to the DGCL make it simpler for corporations to transition from soulless entities devoted to maximizing stockholder value to virtuous “public benefit corporations” devoted to uplifting humanity. This excerpt addresses elimination of supermajority approval requirement & appraisal rights risks that previously applied to transitioning entities:
Prior to these amendments, the approval of two thirds of a company’s outstanding stock entitled to vote was required to amend its charter to become a PBC. And, in the case of private companies, the decision to convert to a PBC triggered an opportunity for dissenting holders to exercise appraisal rights and thereby monetize their unlisted shares at the expense of the issuer.
Both of these requirements were procedurally onerous and a deterrent to conversion. The amendments will remove both the supermajority requirement and the right to appraisal. Companies may now convert to PBCs through a simple majority vote of their stockholders (plus whatever additional approvals are required under their organizational documents).
The amendments also make clear that a director’s ownership of stock in the PBC does not disqualify the director from being “disinterested” so that the director can benefit from the protection of the business judgment rule and the broad PBC exculpatory provisions when balancing the interests of various constituencies.
FT’s Alphaville blog recently discussed a new study dealing with corporate responses to short sellers. Public companies sometimes decide that discretion is the better part of valor when it comes to responding to an activist hedge fund’s announcement of a “short thesis.” But many others – about 1/3rd according to the study – opt to respond. Some of those companies announce that they’re initiating an internal investigation into the activist’s allegations. If that happens, the study says investors should run for their lives:
We find that when activist short seller targets announce internal investigations, the disclosure is associated with a 383% greater chance of a fraud finding . . . and a 61% lesser chance of being successfully acquired as an exit strategy, compared to the whole sample of targeted firms.
The study suggests that initiating an internal investigation based on an activist’s allegations implies that the firm’s directors are not sufficiently confident in management to trust that the existing disclosures and management representations are accurate.
While an internal investigation may be a red flag, if allegations are credible, it may also be the board’s only option. But what’s the best way for a company to respond to a report that it knows is inaccurate? The blog points to GE’s successful efforts to refute Harry Markopolos’s 2019 short report – which focused on highlighting the errors in the analysis without trashing the analyst – as a model response.
Audit Committees: Navigating the Pandemic
Dealing with the issues presented by the Covid-19 crisis has increased the already significant demands placed on audit committees. This Sidley memo (p. 7) provides some advice to audit committees on how to navigate the pandemic. This excerpt addresses disclosure & reporting issues:
Plaintiffs’ attorneys are investigating whether COVID-19 disclosure-related issues can support opportunistic securities class actions, with multiple cases already filed. Companies that express public confidence about their general prospects or their supply chain sufficiency despite dismal news about the economy and COVID-19’s impacts face heightened risk.
As always, companies should be careful to have support for statements at the time they are made. Watch for changing circumstances and adverse trends, in particular, as those circumstances change rapidly; describe them accurately as new developments. Ensure that public reporting is consistent with what the board is being told privately.
Shareholders also may second guess board-level decisions or inaction. So, consider documenting COVID-19-related considerations and responses to create a diligence record. Shareholders looking to file derivative actions often seek books and records before filing or making demands. Having a record of board considerations and responses can be very protective. Shareholder demands and books and records demands often come by mail, so companies should be alert to incoming mail when personnel are out of the office.
Other issues addressed in the memo include the importance of the “tone at the top” when it comes to health & safety concerns, the need to stay on top of operations & risks, the importance of being in sync with management when it comes to reporting, and a variety of other matters.
Capital Markets: Converts are Having a Moment
They say that “every dog has his day,” and according to this “CFO Dive” article, that day has apparently come for convertible debt. The article says that $21 billion in converts were issued during May – the highest monthly total on record. Traditionally, it has been small caps that have been attracted to convertible securities, but some big companies that have found themselves in financial hot water have recently turned to them as well. This excerpt explains the attraction of converts to issuers & investors in the current environment – as well as some reasons to think twice before diving in:
Start to finish, an issue can take two days, compared to weeks for high yield debt. The heightened uncertainty facing companies and investors over the last several months as a result of the coronavirus pandemic has led to a doubling of convertibles outstanding, compared to the same time last year. “Given the current volatile market environment and downward pressure on stock prices, it’s no surprise investor sentiment has turned negative around companies issuing equities to raise capital, primarily because of the dilutive effect on their stock holdings,” Heather Hall, CFO of fixed income tech company 280 CapMarkets, said.
When convertibles are changed into equity, they can impact shareholder value negatively, and have adverse effects on a company’s earnings metrics and projections, she said. Companies in competitive industries might want to consider the potential future dilutive effects on their share price, and corresponding negative implications to their overall market share and earnings per share metrics, Hall said, noting the dilutive effects to shareholder value that will be much larger, proportionally, in a smaller company. “The phenomenon of an activist investor who could potentially acquire the majority of the convertible debt and ‘run away’ with the company should be contemplated,” Hall warned.
For a more in-depth look at the pros & cons of issuing converts in the current environment, check out this Wachtell Lipton memo.
Just a couple of years ago, media reports suggested that the SEC’s universal proxy rule proposal was an “ex-parrot.” But this Davis Polk blog says that latest edition of the agency’s Reg Flex Agenda includes the proposal on the short list, together with proxy plumbing. Here’s an excerpt:
Worth noting is that the potential rulemaking related to universal proxies, proxy process amendments (a.k.a. “proxy plumbing”) and mandated electronic filings have moved up to the short-term agenda; formerly these were on the 2019 fall long-term agenda. The universal proxy is a proxy voting method meant to simplify the proxy process in a contested election and increase, as much as possible, the voting flexibility that is currently only afforded to shareholders who attend the meeting. Shareholders attending a meeting can select a director regardless of the slate the director’s name comes from, either the company’s or activist’s. The universal proxy card gives shareholders, who vote by proxy, the same flexibility.
The proxy process topic is a very large-complicated topic that involves voting mechanics and technology, including issues such as those associated with the complex system of share ownership and intermediaries. As customary, the Reg Flex Agenda provides no details; however, given the complexity of the issues, it is most likely that “low hanging fruit” will be addressed. Some of these were identified by the SEC Investor Advisory Committee Recommendation issued in September 2019, which included the use of universal proxies and were previously discussed in our blog.
The Reg Flex Agenda targets an October 2020 date for the finalization of the rule. However, the blog points out that an agency is not required to consider or act on any agenda item, and that SEC Reg Flex Agenda reflects solely the priorities of the Chairman and does not necessarily reflect the position of any other Commissioner.
ICFR: How Will Covid-19 Impact Material Weaknesses?
This FEI report on ICFR addresses the potential implications of the Covid-19 crisis on the assessment of whether material weaknesses in internal controls exist. Not surprisingly, this excerpt suggests that we’re likely to see more conclusions that material weaknesses exist than we have in recent years:
We’ll definitely see an increase in delayed filings and we’ll likely see an increase in material weakness disclosures. If remote work arrangements, facility closures or unavailability of key personnel due to illness result in an inability to apply or test control procedures, management may be forced to conclude that one or more material weaknesses in internal control exist, unless compensating preventive or detective controls are in place and able to be tested.
Satisfying the external auditors with sufficient evidence that controls are performing as intended could also be challenging in this environment. For example, people working remotely may not have access to typical work tools such as printers and scanners, making it difficult to evidence control performance.
The article also cautions that pandemic-related declines in earnings, revenues & other materiality benchmarks could also result in the inclusion of some items in the scope of this year’s internal control assessment that were excluded in prior years.
In April, the NYSE adopted a temporary rule easing the shareholder approval requirements applicable to listed companies looking to raise private capital during the Covid-19 crisis. That temporary rule was set to expire at the end of June, but due to the continuation of the Apocalypse, the NYSE opted to extend it through the end of September. Here’s the intro from this Mintz memo discussing the extension:
As discussed in our earlier Viewpoints advisory, the New York Stock Exchange temporarily allowed NYSE-listed companies to complete certain capital raising transactions involving related party issuances or the issuance of 20% or more of a company’s stock without shareholder approval under limited circumstances. As a result of the continuation of the coronavirus (“COVID-19”) pandemic, on July 2, 2020, the Securities and Exchange Commission approved an extension of the NYSE’s waiver of these shareholder approval rules in the circumstances discussed below through September 30, 2020.
