I have a friend who keeps trying to persuade me to buy a Tesla. He owns one, and I guess there’s some kind of bounty the company pays to Tesla owners who convince other people to pony up for their own E-Z-Go on steroids. I’ve told him he’s barking up the wrong tree. I’ve always driven a beater. My current ride is a 2012 Chevy Equinox with 140,000 miles on it. It goes through 2 quarts of oil a month and I’m still determined to keep it for at least another couple of years.
But I also confess that even if I was in the market for a new car, I just can’t see buying one from Elon Musk. The guy’s antics really rub me the wrong way. So it pains me to have to blog about him again – but I do. This time, Elon and his board have gotten themselves sideways with Tesla shareholders in the Delaware Chancery Court, and the issue isn’t his tweets, it’s his comp.
Last year, the Tesla board – and shareholders – signed-off on a pay deal that would provide Musk with a potentially gargantuan payout if its stock hit some very aggressive market cap & operational goals. How gargantuan? Try more than $50 billion. A shareholder subsequently filed a lawsuit against Musk and the Tesla board alleging that the comp award was a breach of fiduciary duty.
By way of background, the Chancery Court decided last year that Musk was a “controlling shareholder” of Tesla in an unrelated case, despite the fact that he owned only around 20% of the stock. So, for purposes of the motion to dismiss filed in this case, the parties treated him as if he was a controller. That complicates things considerably, because the default standard for reviewing for transactions between a company and its controlling shareholder – even comp decisions – is the demanding “entire fairness” standard and not the deferential business judgment rule.
Delaware has laid out a path to the business judgment rule for these transactions, but in his 40-page opinion denying the defendants’ motion to dismiss, Vice Chancellor Slights found that despite the approval of the comp award by Tesla’s shareholders, the process wasn’t good enough to allow this award to make the cut:
Had the Board ensured from the outset of “substantive economic negotiations” that both of Tesla’s qualified decision makers—an independent, fully functioning Compensation Committee and the minority stockholders—were able to engage in an informed review of the Award, followed by meaningful (i.e., otherwise uncoerced) approval, the Court’s reflexive suspicion of Musk’s coercive influence over the outcome would be abated. Business judgment deference at the pleadings stage would then be justified. Plaintiff has well pled, however, that the Board level review was not divorced from Musk’s influence. Entire fairness, therefore, must abide.
The Vice Chancellor held that the defendants were unable to establish that the award was entirely fair at the pleading stage, so he declined to dismiss the plaintiff’s breach of fiduciary duty & unjust enrichment claims. That probably means I’ll have to blog about Musk again at some point in the not-too-distant future. Lucky me.
SEC Settles Nissan Fraud Charges: Don’t Have the CEO Set Their Own Pay!
It’s been a big week for CEO compensation stories. Here’s something Liz blogged earlier this week on CompensationStandards.com: Wow. Broc & I have blogged a couple of times over the past year about the SEC’s Nissan investigation, which (among other reasons) is of interest because Nissan is a Japanese company, and also because of the bold efforts people took to conceal former CEO Carlos Ghosn’s pay.
Yesterday, the SEC announced that it settled Section 10(b)/Rule 10b-5 fraud charges with Nissan, Ghosn, and a former director/HR exec for omitting $140 worth of Ghosn’s compensation from Japanese securities filings – which were published in the US because the company’s securities trade as ADRs on the OTC – and which required information about executive pay. Allegedly, Ghosn went to all this effort to restructure & hide his pay because he was worried that people would criticize the amounts (pro tip: at least in the US, that’s a hint that you’re probably required to disclose the info).
Nissan is ponying up $15 million – while the individuals are getting off with civil fines of $1 million and $100k. Seems like a pretty good deal for those two, based on the allegations in the SEC’s complaint against them – e.g., Ghosn first brainstormed ways to conceal part of his pay by paying it through Nissan-related entities…when that didn’t work, he started entering into secret contracts with employees and executing backdated letters for LTIP awards, and decided that “postponing” pay (along with creative accounting) would get him around the disclosure obligations.
Initially, one problem here for the company might have been faulty internal controls. But according to the SEC’s complaint against the company, the fatal blow was that because Nissan had specifically delegated to Ghosn the authority to set individual pay arrangements – including his own! – he was acting within the scope of his employment when he intentionally misled investors, and the company was liable under the principles of respondeat superior. We can complain all we want about the burdensome listing rules here, but maybe they’re saving some companies from themselves…
Audit Reports: What Does Auditor Tenure Disclosure Look Like?
This Audit Analytics blog discusses the disclosures that accounting firms are including in their audit reports in response to the relatively new requirement to disclosure their tenure with a particular company. The blog says that although the PCAOB has provided guidance on determining & reporting tenure, “auditors have discretion regarding exactly what and how the information is disclosed, resulting in substantial variation in disclosures.”
Having reviewed the blog, I can assure you that auditors have used their discretion to ensure that all versions of tenure disclosure are extremely boring.
This Stinson blog highlights rule changes that could prompt a few tweaks to D&O questionnaires. Specifically, the blog notes that:
– Companies can now rely on Section 16 filings & written representations to determine whether an insider has delinquencies. As a result, companies may ask whether all required Section 16 reports have been filed on EDGAR instead of asking whether all of those reports have been provided to it.
– If Nasdaq’s proposed changes to the definition of the term “family member” are approved, Nasdaq-listed companies may want tweak the definition contained in their D&O questionnaires to reflect the changes.
The blog also urges companies to be cautious about eliminating references to Section 162(m) in D&O questionnaires for compensation committee members unless it’s clear that the committee isn’t required to administer any compensation arrangements under the transition rule.
Stinson’s blog is a reminder that although it may seem like proxy season just ended, it’s actually right around the corner. And to help you get ready, we’ve already scheduled our “Pat McGurn’s Forecast for 2020 Proxy Season” webcast for January 16th.
Today’s Open Commission Meeting: Cancelled
The SEC has cancelled the open meeting that it had previously scheduled for today to consider, among other things, adopting its “test the waters” for all proposal. No word on rescheduling yet.
I don’t know if this had anything to do with the decision to cancel the meeting, but all 5 Commissioners were grilled for several hours yesterday by the House Financial Services Committee. Committee Chair Maxine Waters (D – Cal.) opened the hearing with a statement that accused the SEC of “not fulfilling its mission as Wall Street’s cop.” No doubt a good time was had by all.
ESG: Investors Want Companies to Align with Paris Climate Goals
According to this Ceres press release, a group of 200 socially conscious institutional investors with more than $6.5 trillion in AUM sent a letter to 47 large public companies asking them to align their climate change lobbying activities with the Paris Agreement’s goal of limiting global temperature increase to less than 2° C and pursue efforts to hold it at 1.5° C.
The group’s letter doesn’t just address the lobbying activities of the individual companies – it also calls upon them to review those of any trade associations to which they belong and engage with the organization if its activities are inconsistent with the Paris Agreement’s goals. If companies are unable to persuade the association to modify its position, then the signatories ask that they “consider taking the steps necessary to disassociate your company from these policies.”
This SEC Institute blog flags a recent CFA Institute member survey addressing quarterly reporting & ESG disclosure. This excerpt says that quarterly reports are more important to investors than earnings releases, and that those reports & releases should be provided simultaneously:
The majority of survey respondents state that investors heavily rely on earnings releases because they are generally issued before quarterly financial reports. Respondents, however, indicate that quarterly reports remain more important to investors than earnings releases.
These quarterly reports provide a structured information set that follows accounting standards and regulatory guidelines and include incremental financial statement disclosures and management discussion and analysis. In addition, quarterly reports offer greater investor protections as they are certified by the officers of the company, subject companies to greater legal liability, and are reviewed by company auditors.
As for timing, the majority of respondents believe quarterly reports and earnings releases should be provided simultaneously because this would reduce the significant amount of time spent reconciling the contents of earnings releases with those of quarterly reports as well as ensure that investors can ask better questions during earnings calls by having access to the more detailed information contained in the quarterly report. Roundtable participants agree with these positions.
I understand why investors might like earnings releases & SEC reports to hit simultaneously, but I think many lawyers would say that idea is a non-starter. The problem is that earnings calls can go in all sorts of directions, and a lot of companies want to have the opportunity to take a last look at their draft filings make sure that all topics addressed in the call are appropriately addressed in what gets filed with the SEC. If they’re not, companies risk hearing about it in a Staff comment.
By the way, the survey also says that investors have no taste whatsoever for alternatives to 10-Q reporting or less frequent reports, and want companies to continue to provide quarterly earnings guidance.
When it comes to ESG reporting, the survey says that investors are for it, but because ESG means different things to different people, securities regulators need to provide uniform standards in order for that disclosure to be meaningful.
SEC Enforcement: Who Needs a CFO When You Have a POA?
Every now and again you stumble across an SEC enforcement proceeding that can only be described as “goofy.” I think the recently announced action against former Viking Energy CEO Tom Simeo easily qualifies for that description. According to the SEC’s press release announcing the litigation, the CEO “created the false impression to the public that Viking had an experienced financial professional involved in its operations and financial reporting as its CFO, when in reality, the Company had no CFO.”
At one point, the company apparently did appoint Guangfang “Cecile” Yang as its CFO, but the SEC alleges that there’s no evidence that she actually functioned as CFO “from at least November 2014 through Yang’s purported resignation in July 2016.” While the company didn’t actually have a CFO, according to the SEC’s complaint, the CEO did have something else:
One day after her appointment as Viking’s CFO, Yang also executed a power of attorney in favor of Simeo, authorizing Simeo to affix Yang’s signature to any and all documents – including filings with the SEC – that Yang was required to review and sign as Viking’s CFO and board member. The Company never disclosed in its filings that Yang had executed a power of attorney in favor of Simeo.
Simeo allegedly put that POA to good use, liberally affixing the purported CFO’s signature to various SEC filings & certifications. For some reason, the SEC appears to have found that troubling. . . .
Transcript: “Secrets of the Corporate Secretary Department”
We’ve posted the transcript for our recent webcast: “Secrets of the Corporate Secretary Department.”
Tomorrow morning, the House Financial Services Committee will hold an oversight hearing on the SEC in which all 5 SEC Commissioners will participate. If nothing else, the logistics of that hearing should be interesting. According to this Committee memorandum, here’s some of what’s on the agenda:
– The growth in private markets v. public markets
– Public company ESG disclosures
– The impact of the Supreme Court’s Kokesh decision on enforcement actions
– Application of the securities laws to cryptocurrencies
Although not of professional interest to most of our members, the SEC’s fiduciary rule is also on the agenda, & that may set off some fireworks.
About Those Private Markets. . .
It isn’t just Congress that’s interested in the growth of private v. public securities markets. According to this Reuters article, the continuing growth of private securities markets is something that’s concerning SEC Chair Jay Clayton as well:
“Why are people waiting so long to access capital from our public markets?” Clayton said. “Is it because there’s so much capital in the private markets or are we too short-term oriented, (is there) too much cost associated with going public?” Companies traditionally went public roughly six years after founding. Now, they often are not coming to market until 10 to 12 years after they were created, analysts said.
The NYT’s recent article on the impact of Airbnb’s delay in going public on its employee option-holders illustrates some of the real world consequences of companies deciding to postpone IPOs.
IPOs: VCs Eyeing “Direct Listing” Alternative
We’ve blogged about the potential of “direct listings” as an alternative to IPOs – and a couple of high-profile unicorns have already opted to take this path in lieu of an IPO. Now this “Axios Pro Rata” article says that another important constituency is taking a hard look at direct listings:
Venture capital’s call for more direct listings is growing louder, with a group of big-name investors and tech company executives expected to attend a private, invite-only “symposium” on the matter next month at a hotel in San Francisco. Among those expected to speak are Benchmark’s Bill Gurley, who’s been banging this drum for a while, Sequoia Capital’s Mike Moritz, who just write about direct listings in the FT, and Spotify CFO Barry McCarthy, whose company went public via a direct listing last year.
Why it matters is that there’s a growing investor consensus that the traditional VC-backed IPO process is antiquated and broken — too often benefiting a high-net-worth bank clients and a small pool of mutual and hedge funds, at the expense of issuers.
Big-time investment banks haven’t exactly covered themselves in glory with some recent traditional IPO filings, so if the VCs calling the shots on many deals revolt, the IPO process could be in for a big shake-up.
With everybody debating big picture issues like corporate purpose & stakeholder v. shareholder interests, this “Ethical Boardroom” article by Harvard’s Stephen Davis is a reminder that when it comes to good governance, there are more fundamental issues that need to be addressed – like making sure directors have the information they need to do their jobs.
The article points out that directors are “on the short end of a massive information imbalance.” They’re entirely dependent on management for their information flow, and even when they retain outside advisors, those advisors may be primarily loyal to management. This disparity gives management a routine advantage in influencing what gets on the board’s agenda and how matters are addressed. This excerpt says that the solution to this information imbalance may be an independent staff serving only the board:
Cementing the information imbalance is the fact that the typical company board has no everyday dedicated staff. Instead, directors rely on an executive – usually a company secretary or general counsel – who is accountable to and works for management. These officers are often the silent heroes of corporate life, as they attend to multiple, sometimes conflicting, constituencies and do so with high ethics and professionalism.
But make no mistake: they are not employed by and for the board. Indeed, outside observers would find it hard to fathom how companies go to such lengths to recruit great independent directors – only to make them largely dependent for help on the team they are supposed to oversee.
One of the interesting things that the article points out is that some companies have taken steps in this direction – although most of them appear to have done so in response to massive scandals. In that regard, in the wake of the Carlos Ghosn scandal, Nissan announced that it would establish an “office of the board” to improve the board’s ability to access information independently.
LIBOR Transition: FASB Exposure Draft Would Ease Accounting Burden
This recent blog from Stinson’s Steve Quinlivan flags a new FASB exposure draft that would make life a little easier when it comes to accounting for the impact of the upcoming elimination of LIBOR. Why should you care? Well, here’s an excerpt about the accounting hurdles companies could face absent the proposed relief:
Without any relief by FASB any contract modifications resulting from contract modification to implement a new reference rate would be required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. The application of existing accounting standards on modifications could be costly and burdensome due to the significant volume of affected contracts and the compressed time frame for making contract modifications.
In addition, changes in a reference rate could disallow the application of certain hedge accounting guidance, and certain hedge relationships may not qualify as highly effective during the period of the market-wide transition to a replacement rate. The inability to apply hedge accounting because of reference rate reform would result in financial reporting outcomes that would not reflect entities’ intended hedging strategies when those strategies continue to operate as effective hedges.
The proposed ASU would simplify accounting analyses under current GAAP for contract modifications if qualifying criteria are met & would allow hedging relationships to continue without de-designation as a result of certain LIBOR reform-related changes in their critical terms.
The Martin Act Gets Its Claws Sharpened
I’ve previously blogged about New York’s formidable Martin Act, which the NY AG uses as the basis to investigate and prosecute . . . well . . . just about anything. Last year, the statute had its claws trimmed when the NY Court of Appeals pared back its limitations period for non-scienter based fraud claims from 6 years to 3 years. But this New York Law Journal article reports that last month, NY Governor Andrew Cuomo signed legislation that essentially undid the Court’s decision & restored the 6 year statute of limitations.
Last month, Delaware Chief Justice Leo Strine co-authored a NYT opinion piece about the failure of retirement & index funds to approach voting & corporate governance issues with the needs of their own investors – the workers who invest their retirement savings with them – in mind. Here’s an excerpt:
Growing inequality and stagnant wages are forcing a much-needed debate about our corporate governance system. Are corporations producing returns only for stockholders? Or are they also creating quality jobs in a way that is environmentally responsible, fair to consumers and sustainable? Those same corporations recognize that things are badly out of balance. Businesses are making record profits, but workers are not sharing in those gains.
This discussion is necessary. But an essential player is missing from the debate: large institutional investors. For most Americans, their participation in the stock market is limited to the money they have invested in mutual funds to finance retirement, usually in 401(k) accounts through their employers. These worker-investors do not get to vote the shares that they indirectly hold in American public companies at those companies’ annual meetings. Rather, the institutions managing the mutual funds do.
Institutional investors elect corporate boards. Institutional investors vote on whether to sell the company and on nominations for new directors, and whether to support proposed compensation packages for executives. At the average S. & P. 500 company, the 15 largest institutional investors own over half the shares, effectively determining the outcomes of shareholder votes. And the top four stockholders control over 20 percent.
What this all means is that corporate governance reform will be effective only if institutional investors use their voting power properly. Corporate boards will not value the fair treatment of workers or avoid shortcuts that harm the environment and consumers if the institutional investors that elect them do not support them in doing the right thing. And they are unlikely to end the recent surge in stock buybacks as long as there is pressure from institutional investors for immediate returns.
Among other things, Strine and his co-author, Kennedy School senior fellow Andrew Weiss, argue that mutual funds should have voting policies “tailored to the objectives of long-term investors,” and should include “environmental, social, and most important of all, employee factors” in their investment & voting decisions. They’d also like to see a reduction in the number of shareholder votes, noting that each year, mutual funds are required to cast over 30,000 votes at shareholder meetings.
The failure of financial intermediaries to serve the broader interests of the working investors they represent has been a recurring theme for Chief Justice Strine. In one recent article, the Chief Justice called out them out for allowing companies to spend “worker-investors” money on political activities promoting policies that negatively impact those investors. In another article, he criticized the current corporate governance system for giving the most power over corporate decisions to investors like hedge funds – whose interests are least aligned with those of average shareholders.
Financial Intermediaries: 3 Cheers for the Big 3?
Liz recently blogged about research suggesting that the major index funds were “patsies” for management. Between that research, Chief Justice Strine’s critique of their failure to serve the interests of their investors, & concerns expressed over the implications of their ever-growing ownership positions in U.S. companies, BlackRock, State Street & Vanguard could sure use a friend.
It looks like they may have just found one in a new study that says the Big 3 have both the ability & the incentive to police misconduct by their portfolio companies – and that there’s evidence that they’re doing exactly that. Here’s an excerpt from the abstract:
In this paper, I argue that the remarkable size, permanence, and cross-market scope of the Big Three’s ownership stakes gives them the capacity and, in some cases, the incentive to punish and deter fraud and misconduct by portfolio companies. Corporate governance and securities regulation scholars have argued that these institutions have generally overriding incentives to refrain from meaningful corporate stewardship, but the facts on the ground tell a somewhat different story.
Drawing on a comprehensive review of the Big Three’s enforcement activities and interviews with key decision-makers for these institutions, I show how they have been using engagement, voting, and litigation to discipline culpable companies and managers. I also identify the “pro-enforcement” incentives that explain these actions.
The study bases its conclusions on an analysis of the involvement of the Big 3 in direct securities litigation, litigation arising out of the financial crisis, “just vote no” activism against directors of companies involved in fraud or misconduct, and significant engagements. It’s an interesting perspective – and a much more effective defense of the Big 3 than the specious stuff they’re peddling.
Restatements: 2018’s Scorecard
Audit Analytics recently released its annual report on public company restatements. Here’s an excerpt from Audit Analytics’ blog with some of the highlights:
– After 12 years of decline, the number of reissuance (“Big R”) restatements increased slightly in 2018.
– Around 70% of restatements disclosed were revision (“Little R”) restatements.
– Total restatements dropped for four consecutive years to an 18-year low.
– There were 171 restatements filed by accelerated filers, and 229 restatements disclosed by non-accelerated filers.
– About 54% of the restatements disclosed by publicly traded companies had no impact on earnings.
Shortly before the BRT issued its statement redefining its position on corporate purpose, Andrew Ross Sorkin profiled Jamie Gamble in the NYT DealBook. Gamble is a former Wall Street lawyer who has had a conversion experience and now says that the corporate clients he worked for are legally compelled to act like Patrick Bateman. Here’s an excerpt from his manifesto:
The most important problem in the world is a reasonable sounding provision of the corporate law that governs most major U.S. companies. That’s a big claim. It’s also slightly misleading. A better answer is that the above complex network of horribles all connect back to a common root that is nourished and guarded by the extraordinary power of corporate “persons” who are legally obligated to act like sociopaths.
The rule: corporate management and Boards of directors are obligated by law to make decisions that maximize the economic value of the company. Colloquially: when you invest your money in a company, the people who run that company are required to do their best to bring you the highest possible financial return on your investment rather than using your money to pursue any personal or social agenda.
Sociopath? Yes. The corporate entity is obligated to care only about itself and to define what is good as what makes it more money. Pretty close to a textbook case of antisocial personality disorder. And corporate persons are the most powerful people in our world.
Gamble’s solution – or at least part of it – would be to include language in corporate bylaws requiring boards to consider the interests of a broad range of constituencies beyond shareholders whenever they make a decision. By making this mandatory & providing shareholders with the ability to sue directors for violating these provisions, he thinks the beast can be tamed.
Counterpoint: Like Heck It Does!
Sorkin’s piece initially attracted a lot of attention, but then it sort of got overwhelmed by the sound & fury surrounding the BRT’s decision to bid farewell to shareholder primacy. That’s too bad, because I think Gamble’s views about the legal obligations of corporate directors are based on a false premise, and it’s the same one that seems to have framed at least some of the reaction to the BRT’s new statement of purpose.
I doubt there’s a single corporate lawyer who would dispute the contention that true sociopaths are by no means absent from America’s boardrooms or C-suites. But does the law really require sociopathic behavior? UCLA’s Stephen Bainbridge says no way – and also says that Sorkin & Gamble’s arguments amount to “a mass dump of uninformed silliness.” (You won’t like the Prof. when he’s mad). Here’s an excerpt from his recent blog responding to the DealBook article:
This argument is patently absurd. The corporation is a legal fiction. To paraphrase the first Baron Thurlow, who observed that the corporation has neither a soul to be damned nor a body to be kicked, the corporation has neither a mind to be psychoanalyzed not a brain to be diseased. Corporations are run by people, so if “they” act like sociopaths, it must be because they are run by sociopaths. It is estimated that psychopaths make up at most 1% of the population, so are we to believe they are disproportionately located in corporate C-suites?
Second, both Gamble and Sorkin grossly misstate the law. Sorkin writes:
“It may be an oversimplification, but if they veer from seeking profits in the name of other stakeholders, shareholders may have a legal case against them.”
That is not an oversimplification; it is a gross oversimplification. Absent proof that the directors were engaged in a breach of the duty of loyalty or certain takeover situations, the business judgment rule would preclude courts from reviewing director decisions. To be sure, that is not the purpose of the business judgment rule, but that is its effect.
Prof. Bainbridge is absolutely right on the law (see also this 2015 NYT opinion piece by the late Prof. Lynn Stout). But if you asked directors & officers of public companies what they think their legal obligations are, my guess is that their responses would be pretty consistent with Gamble’s characterization of what the law requires. The “value maximization” imperative has been internalized by a whole lot of D&Os, and has been used to justify some pretty cold-blooded corporate decisions.
By the way, if this debate sounds familiar, pundit Matthew Yglesias tweeted a similar comment last year – and got clobbered by legal academics.
“Stakeholder Governance”: What Happens to the BJR?
This recent blog from Alison Frankel poses an interesting question: if corporations undertake obligations to “stakeholders” & not merely shareholders, what does that mean for the business judgment rule? Here’s an excerpt:
Law firms are beginning to contemplate whether corporate boards will continue to be entitled to the deference afforded by the business judgment rule – which broadly shields directors from liability as long as they’re deemed to have acted in the corporation’s interest – if their decisions are prompted by rationales other than maximizing profits.
That’s particularly relevant in Delaware, where, as Chief Justice Leo Strine explained in a 2015 paper, The Dangers of Denial, corporate law is resolutely focused on stockholder welfare. Strine (who is due to retire from the Delaware Supreme Court by the end of October), is of the view that Delaware precedent does not provide leeway for judges to sanction board decisions that subordinate shareholder interests.
In other words, if directors put the interests of other stakeholders first, they risk losing the protection of the business judgment rule – at least in Delaware. If that’s so, then isn’t Gamble right about the law obligating boards to act like sociopaths in the pursuit of value maximization?
Nope. Except in very limited situations, the authority provided to Delaware directors under Section 141(a) of the DGCL includes the authority to set the time frame for achieving corporate goals without – as the Delaware Supreme Court put it in Paramount Communications v. Time – a “fixed investment horizon.” Deterimining that time frame is a matter of business judgment.
So, if you’re a director who is thinking about the long-term, you’ve got plenty of discretion to conclude in good faith that considering the interests of other stakeholders may be helpful in maximizing long-term shareholder value. But that doesn’t mean that members of the only stakeholder constituency that can vote won’t still lean on you mighty hard to do otherwise.
The sound & fury surrounding the BRT’s pronouncement prompted it to issue a lengthy “clarification” of its position – and it draws heavily on the idea of promoting the interests of other constituencies as being essential in order to create long-term shareholder value.
Dorsey’s Whitney Holmes shared the following comment, which I think nicely summarizes the issue of what Delaware law requires:
I believe that much of the debate misses the point that impact investors understand and now the BRT are starting to understand: for a given corporate decision not involving a sale of corporate control (or enactment of a preemptive defense against an acquisition), if
– choice A demonstrably returns $100 to shareholders and no benefit to anyone else, and
– choice B demonstrably returns $90 to shareholders and a meaningful but unquantifiable benefit to another interest (e.g. the environment, the wellbeing of employees, the community in which a manufacturing facility sits, etc.) that cannot be supported by a vague future benefit to the corporation that might somehow, someday be worth $10 or more, do the corporation’s directors have discretion in line with their fiduciary duties to choose B over A?
He says the answer under Delaware case law is “no,” and I think that’s right. If you’re ultimately called upon to make some sort of corporate “Sophie’s Choice,” you can’t prefer other stakeholders to shareholders – but given the deference under the BJR to the board’s assessment of the future shareholder value a particular decision would create, it’s doubtful that a board would ever find itself in this position.
According to a recent University of Alabama study, when you draft your next 10-K, it might be a good idea to put down your copy of Reg S-K and pick up a copy of “The Power of Positive Thinking.” That’s because, according to this CLS Blue Sky blog on the study, an upbeat 10-K correlates with improved stock performance, while a more downcast filing can result in your stock taking a hit:
Our results show that positive (negative) sentiment predicts higher (lower) abnormal return over days (0, +3) around the 10-K filing date, i.e., the filing period. Both sentiment measures also predict higher abnormal return over event windows of up to one month after the filing period. This finding suggests that the market underreacts to positive sentiment and overreacts to negative sentiment in the 10-K filing during the filing period. Moreover, both sentiment measures are significantly related to abnormal trading volume around the filing date.
By the way, it looks like Norman Vincent Peale was on to something – because the study also says that that companies with happier 10-Ks also produce better results over the course of the year than their more dour counterparts.
Transcript: “Joint Ventures – Practice Pointers (Part II)”
We have posted the transcript for the recent DealLawyers.com webcast: “Joint Ventures – Practice Pointers (Part II).” Here’s the transcript for the first “Joint Ventures – Practice Pointers” webcast.
Our September Eminders is Posted
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Around here, we’ve come to expect big things from unicorn IPO filings – and I’m delighted to say that ’The We Company’’s Form S-1 does not disappoint. I’ll let others comment on the company’s decision to use an Up-C structure, its financial performance & its corporate governance. I’m just going to let the document speak for itself. I’m sure the lawyers involved spent lots of time toning this thing down from what the business folks wanted – but in the end, “unicorns gonna unicorn.” Here’s the paragraph that leads off the “Prospectus Summary”:
We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness. We have built a worldwide platform that supports growth, shared experiences and true success. We provide our members with flexible access to beautiful spaces, a culture of inclusivity and the energy of an inspired community, all connected by our extensive technology infrastructure. We believe our company has the power to elevate how people work, live and grow.
My oldest son works for a startup in Chicago that’s housed in a WeWork space, but I haven’t seen any evidence of elevated consciousness in him. I don’t think they have free beer – or as page 145 of the prospectus refers to it, “Craft on Draft” – in the Chicago locations anymore, so maybe that’s what’s missing. Anyway, the company’s mission statement may sound goofy to a middle-aged guy like me, but management wants everybody to know they’re serious – so they put it in the “Risk Factors” section:
We may make decisions consistent with our mission that may reduce our short- or medium-term operating results.
Our mission is integral to everything we do, and many of our strategic and investment decisions are geared toward improving the experience of our members and the attractiveness of our community. While we believe that pursuing these goals will produce benefits to our business in the long-term, these decisions may adversely impact our short- or medium-term operating results and the long-term benefits that we expect to result from these initiatives may not materialize within the timeframe we expect or at all, which could harm our business and financial results.
Given how much media attention has been devoted to this offering, it’s no surprise that there’s also a gun-jumping risk factor on page 49. Apparently, it relates to comments that CEO Adam Neumann & CFO Artie Minson made to Axios & Business Insider back in May. Hey, if you’ve got a mission to raise the world’s consciousness, you’re sort of obligated to preach your evangel whenever the opportunity presents itself, right?
Related Party Transactions: We’ll Get to That Stuff – But First, Adam is Awesome!
I could go on like this, but I’ll do just one more – the “Related Party Transactions” section. To soften the blow of the nearly 11 full pages of related party transactions disclosure, the section begins with a testimonial to the CEO’s overall awesomeness:
Adam has served as the Company’s Chief Executive Officer and Chairman of the Company’s board of directors since our inception. From the day he co-founded WeWork, Adam has set the Company’s vision, strategic direction and execution priorities. Adam is a unique leader who has proven he can simultaneously wear the hats of visionary, operator and innovator, while thriving as a community and culture creator. Given his deep involvement in all aspects of the growth of our company, Adam’s personal dealings have evolved across a number of direct and indirect transactions and relationships with the Company. As we make the transition to a public company, we aim to provide clarity and transparency on the history of these relationships and transactions, as well as the background to the strategic governance decisions that have been made by Adam and the Company.
I’ve read this several times, and I love it more each time – especially the part about how the CEO’s “personal dealings have evolved across a number of direct and indirect transactions. . .” Of all the unicorn disclosure I’ve ever read, this just may be the “unicorniest”!
The Weed Beat: U.S. Capital Markets More Open to Cannabis-Related Businesses
This recent blog from Duane Morris’s David Feldman reviews recent U.S. financing activities involving cannabis-related businesses, and says that they have positive implications for U.S. based-businesses:
These developments likely will lead to fewer US companies feeling the need to go public in Canada, where previously companies believed capital was easier to access. Second, the growers and sellers of cannabis in the US, those that “touch the plant,” have not yet been permitted to list their shares on a national exchange. It will be interesting to see if and when the exchanges relent on their reticence to list these now large and fast-growing entrepreneurial enterprises as the march to US legalization continues. In the meantime, capital as fuel for growth is more and more available to these US businesses.
Every few years, we survey the practices relating to blackout & window periods (we’ve conducted over a dozen surveys in this area). Here’s the results from our latest one:
1. Which factor is most important in allowing a blackout period to end one day after an earnings release:
– Filer status being large accelerated filer and a WKSI – 19%
– Number of analysts providing coverage on company – 23%
– Average daily trading volume for the company – 10%
– None of the above is important – 48%
2. How many analysts covering the company is considered sufficient to allow blackout period to end one day after an earnings release:
– 1-5 – 3%
– 6-10 – 26%
– 11-15 – 13%
– 16 or more – 6%
– None of the above is important – 52%
3. What average daily trading volume is considered sufficient to allow blackout period to end one day after an earnings release:
– 1% of its outstanding common stock – 7%
– $5 million or more in average daily trading volume (daily trading volume x stock price) – 3%
– $10 million or more in average daily trading volume (daily trading volume x stock price) – 6%
– $25 million or more in average daily trading volume (daily trading volume x stock price) – 15%
– None of the above is important – 69%
Please take a moment to participate anonymously in these surveys:
Last week, the CII published a list of 159 directors who served on boards of 2018 & 2019 IPO companies that went public with dual-class share structures & no sunset provisions. The CII’s “Dual-Class Enablers Spreadsheet” identifies the other public boards on which these directors serve. Here’s an excerpt from the CII’s press release discussing its rationale for the “naming & shaming” approach:
“The board that brings a company to public markets with unequal voting rights is responsible for the decision to disempower public shareholders,” said CII Executive Director Ken Bertsch. “The board’s decision can be a red flag of discomfort with accountability to outside shareholders.” He said that investors “may want to raise concern about that in their engagement with other boards on which these directors serve. Some investors may choose to vote against directors of single-class companies who participated in pre-IPO board decisions to adopt dual-class equity structures without sunsets elsewhere.”
The release also says that the list may have a deterrent effect on private companies considering dual class structures. Perhaps that’s the case. After all, this is the first time that the CII has taken action that provides a potential reputational downside for the directors of these companies. But personally, I’m skeptical. I still think that companies will only be deterred from going public with dual class structures when investors finally abandon their “buy now, whine later” approach to investments in them.
BlackRock: “Remain Calm! All is Well!”
Remember my recent blog about BlackRock’s defense of the size of its investment positions in public companies? Well, it published another blog on the Harvard Governance Forum that defends the voting power those investments represent. BlackRock reviews various proxy voting scenarios – elections, M&A, say-on-pay & shareholder proposals and the average margins of victory for each. From that data, they draw this conclusion:
The view that asset managers are ‘determining’ the outcome of proxy votes is not supported by the data. The vast majority of ballot items are won or lost by margins greater than 30%, meaning that even the three largest asset managers combined could not change the vote outcome. While the small subset of votes on shareholder proposals tend to be closer, the considerable variation in voting records among asset managers negates the concept of a multi-firm voting bloc as the ‘swing vote”.
In other words, – “most votes aren’t close, so you shouldn’t worry that we have the ability to determine the outcome of all close votes.” These blogs certainly suggest that BlackRock is worried about the potential for regulatory intervention. But I don’t think they’re helping themselves by putting forward arguments that are so specious you can practically see beads of sweat forming on their upper lip.
