Earlier this year, I blogged about the possibility that the use of direct listings instead of traditional IPOs might allow companies to avoid the Section 11 claims that so often accompany IPOs. This Orrick memo says that a recent California federal court decision suggests that this hope may be misplaced:
On April 21, 2020, Judge Susan Illston of the U.S. District Court for the Northern District of California denied defendants’ motion to dismiss a securities class action complaint brought by a shareholder of Slack Technologies, Inc. following the company’s 2019 direct listing. Pirani v. Slack Technologies, Inc. , No. 19-cv-05857-SI (N.D. Cal. Apr. 21, 2020).
Rejecting defendants’ argument that the plaintiff lacked standing to pursue claims under Section 11 of the Securities Act, the court held, in a matter of apparent first impression, that in the unique situation of a direct listing in which shares registered under the Securities Act become publicly tradeable on the same day that unregistered shares become publicly tradeable, a plaintiff does not lack standing to sue under Section 11 even though the plaintiff cannot show that her shares were registered.
The memo goes on to summarize the judge’s reasoning, which appears to be based almost entirely on policy considerations underlying Section 11. We’re posting memos in our “Securities Act Liability” Practice Area.
“No Respect at All”: Are Dual Class Companies Undervalued?
Dual class companies are the Rodney Dangerfield of corporate governance – “No respect. . .I’m tellin’ ya, I don’t get no respect at all!” It’s hard to find any love for them among investor advocates, who’ve made “one share, one vote” a central underpinning of their good governance creed. But does their zeal for this revealed truth result in the undervaluation of dual class companies? That’s the conclusion of a recent study by a Cambridge University law prof. Here’s the abstract:
Dual-class stock enables a company’s controller to retain voting control of a corporation while holding a disproportionately lower level of the corporation’s cash-flow rights. Dual-class stock has led a tortured life in the US. Between institutional investor derision and the exclusion or restriction of dual-class stock from certain indices, one may assume that dual-class structure must be harmful to outside stockholders.
However, in this article, the existing empirical evidence on US dual-class stock will be reassessed by contrasting studies that use different measures of performance. It will be shown that although dual-class firms are generally valued less than similar one-share, one-vote firms, they perform as well as, and, in many cases, outperform, such firms from the perspective of operating performance and stock returns. When it comes to dual-class stock, more than meets the eye, and a presumption that dual-class stock is harmful for outside stockholders should not guide policy formulation.
The study argues that the market discounts dual-class stock to protect itself against the potential that the downsides of the structure will outweigh the benefits, but that those downsides seldom emerge. As a result, outside stockholders are not harmed by dual-class stock. Instead, they invest in dual-class stock at a discounted price which organically protects them against the potential for future abuses, and that, if anything, discounts dual-class stock too much.
Capital Markets: Time to Dust-Off the Alternative Equity Offering Playbook?
In times like these, many public companies that otherwise might be good candidates for a traditional equity offering may need to look at alternative strategies. That means ATMs, PIPEs, registered directs, and even equity lines are on the table for companies that haven’t previously considered them. If you haven’t done one of those deals since the last time the world ended, you should take a look at this Proskauer memo on alternative equity offerings. It provides a detailed overview of each of these alternative equity financing options.
If you’re considering tapping the capital markets, be sure not to miss our upcoming webcast – “Capital Raising in Turbulent Times” – which will address the current state of the new issues market for debt and equity, and explore financing and liability management alternatives.
Yesterday, I blogged about the bind that some Delaware companies find themselves in when it comes to switching their annual meetings from a physical location to a virtual only meeting. The problem stems from the fact that public companies that first gave notice of their annual meeting after the date of Gov. Carney’s April 7th order providing relief from DGCL notice requirements for such a switch aren’t eligible to rely on it.
That means that these companies can’t be certain that merely complying with the SEC’s guidance on providing notice of a change to a virtual meeting will be compliant with the DGCL’s notice requirements. Many are concerned about their ability to provide the formal notice of a change required by the DGCL in a timely manner.
Help for these companies may be on the way in the form of proposed 2020 amendments to the DGCL recently endorsed by the Corporate Law Section of the Delaware Bar. While the legislature needs to act on the proposal, Section 4 of the proposed legislation would amend Section 110 of the DGCL to provide the board of a public company with the authority during an emergency to:
Notify stockholders of any postponement or a change of the place of the meeting (or a change to hold the meeting solely by means of remote communication) solely by a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to § 13, § 14 or § 15(d) of [the Exchange Act] and such rules and regulations.
Section 23 of the proposed legislation would make this authority retroactive to January 1, 2020 “with respect to any emergency condition occurring on or after such date and with respect to any action contemplated by Section 4 of this Act and taken on or after such date by or on behalf of the corporation with respect to a meeting of stockholders held . . . during the pendency of such condition.”
I’m told that the Delaware Bar is seeking immediate consideration of these emergency amendments, but that the legislature has not yet reconvened from its Covid-19 imposed hiatus.
Nasdaq Temporarily Eases Approval Requirements for Covid-19 Share Issuances
Earlier this week, the SEC approved a temporary Nasdaq rule that would provide listed companies with a temporary exception from certain shareholder approval requirements through June 30, 2020 in order to streamline issuers’ access to capital. Here’s an excerpt from Nasdaq’s issuer alert summarizing the rule:
The exception is limited to circumstances where the delay in securing shareholder approval would:
– Have a material adverse impact on the company’s ability to maintain operations under its pre COVID-19 business plan;
– Result in workforce reductions;
– Adversely impact the company’s ability to undertake new initiatives in response to COVID-19; or
– Seriously jeopardize the financial viability of the enterprise.
In order to rely on the exception, among other requirements, the company would also have to demonstrate to Nasdaq that the need for the transaction is due to circumstances related to COVID-19 and that the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company.
No prior approval of the exception by Nasdaq is required if the maximum issuance of common stock (or securities convertible into common stock) issuable in the transaction is less than 25% of the total shares outstanding and less than 25% of the voting power outstanding before the transaction; and the maximum discount to the Minimum Price at which shares could be issued is 15% (the “Safe Harbor Provision”).
Companies that fit within this Safe Harbor Provision must notify Nasdaq as promptly as possible, and at least two days before issuing shares, but aren’t required to wait required 15 calendar days after filing the listing of additional shares notification. If a transaction falls outside of the Safe Harbor Provision, Nasdaq must approve the company’s reliance on the exception before the company can issue any securities in the transaction. Here’s a Nasdaq FAQ on the rule as well as its supplemental instructions to listed companies.
PPP Loans: Borrowers Get Another Week to Decide to Whether to “Hold’em or Fold’em”
In the latest chapter of the Paycheck Protection Program saga, the SBA issued FAQ #43, which extends the deadline for borrowers to take advantage of the safe harbor for repayment of PPP loans from May 7th to May 14th. The SBA says that it will provide additional guidance on the PPP’s need certification requirement prior to that deadline. Yeah, sure, that should clear things up. . .
A number of companies have transitioned to virtual annual meetings as a result of the Covid-19 crisis, and according to the CII’s recent letter to the SEC’s Investor Advisory Committee, it has been kind of a bumpy ride from an investor perspective. Companies that are looking for ways to make their own virtual meetings more investor friendly should take a look at the CII’s letter. Here’s an excerpt summarizing some of the anecdotal concerns that the CII has heard from investors about the virtual meeting process:
– Shareholders struggling to log in for meetings.
– Inability to ask questions in some cases if the shareholder has voted in advance by proxy. We understand that one virtual meeting platform provides that for a beneficial owner to ask questions, the record holder must transfer a legal proxy to the beneficial owner. This would require the record holder to withdraw its vote if it already had voted before executing the required legal proxy because the voting would transfer to the beneficial holder. These rules unnecessarily hamper the ability of beneficial owners to participate in meetings, even at companies that use effective technology and rules for participation by shareholders who get into the meeting.
– Shareholders unable to ask questions during the meeting. In some cases, questions are limited to those that can be submitted in writing in advance, which interferes with the potential for interplay between meeting content and questions or comments.
– Lack of transparency on questions asked by shareholders, making it possible that company officials cherry-pick questions to which to respond. This obviously is an issue if time limits for a meeting prevent responses to all questions. At one large company at which shareholder questions went unanswered, we understand the company provided only 10 minutes for Q&A.
– Conflicting channels for shareholder participation, with shareholder resolution proponents required to be on a line that is different than that used for general shareholder Q&A.
– At least one company prohibiting a shareholder proponent from speaking on behalf of their proposal.
– Snafus with control numbers not working to permit shareholders to log into a meeting.
The CII acknowledges that some of these problems may be attributable in part to the speed with which many companies have shifted to virtual-only meetings, but it is concerned about the precedents that may be set this year.
Virtual Annual Meetings: Delaware’s Relief Order Leaves Some Companies Uncovered
Last month, I blogged about Delaware Gov. John Carney’s order permitting public companies that had previously noticed physical annual meetings to switch to virtual annual meetings simply by complying with the SEC’s guidance, without the need to provide further notice under applicable provisions of the DGCL. That order was extremely helpful for companies covered by it, but it turns out that a number of companies weren’t – and some of them find themselves in a bind.
As this Morris Nichols memo points out, the order only applies to companies that provided notice of a physical meeting prior to the April 7th date of the order. Companies that first mailed their proxy materials after that date apparently are not covered by it. One of our members recently posted a comment in our Q&A forum about a tragic situation that’s compounding the problems companies that aren’t covered by the order face:
This is really unfortunate. I understand that Broadridge is struggling right now to get materials mailed to shareholders. If reports are to be believed, they had an outbreak at a warehouse in NY resulting in several deaths. Their staffing levels have been drastically reduced as they are trying to comply with social distancing efforts. And they are notifying clients of delays in mailings of material and fulfilling requests for hard copy materials. Requiring notices of changes to a virtual meeting format (rather than just press release/SEC filing) will only compound the problem.
One workaround that’s been suggested to handle mailing delays resulting from the critical need to prioritize worker safety is to bypass Broadridge and mail any new notice to record holders only. Since only those holders are entitled to receive notice under state law, it seems to me that this may be a viable solution for companies that don’t have large numbers of record holders.
On the other hand, many of the orders issued by other states permitting deviations from statutory practice due to Covid-19 are prospective in nature, while Delaware’s applied only to actions taken prior to the order. Perhaps Delaware’s order could be revised to take the same approach?
Virtual Annual Meetings: Doug Chia’s Attending Them So You Don’t Have To. . .
Soundboard Governance’s Doug Chia attended Wells Fargo’s virtual annual meeting and posted a detailed summary that’s a must read for anyone considering going virtual this year. His write-up provides plenty of insights into how the meeting was conducted – including commentary on the virtual meeting platform, the manner in which the Q&A was conducted, and how shareholder proposals were presented.
Doug’s attending other meetings and posting similar summaries (here’s one about Berkshire Hathaway’s meeting that he posted earlier this week), so stay tuned.
Yesterday, the Staff issued four FAQs addressing issues arising under the SEC’s exemptive order extending filing deadlines for companies impacted by the Covid-19 crisis. The FAQs offer guidance on the disclosures required by companies seeking to avail themselves of the relief provided by the order, as well as the implications of reliance on the order for S-3 issuers. Here’s one that deals with a company’s eligibility to file a new Form S-3 during the extension period:
3. Question: Is a registrant relying on the COVID-19 Order to delay a required filing eligible to file a new Form S-3 registration statement between the original due date of a filing and the extended due date, and will the staff accelerate the effectiveness of registration statements that do not contain all required information?
Answer: Between the original due date of a required filing and the due date as extended by the COVID-19 Order, a registrant may file a new Form S-3 registration statement even if the registrant has not filed the required periodic report prior to the filing of the registration statement. The staff will consider the registrant to be current and timely in its Exchange Act reporting if the Form 8-K disclosing reliance on the COVID-19 Order is properly furnished. The registrant will no longer be considered current and timely, and will lose eligibility to file new registration statements on Form S-3, if it fails to file the required report by the due date as extended by the COVID-19 Order. Registrants with compelling and well-documented facts may contact the staff to discuss their specific capital raising needs. However, registrants relying on the COVID-19 Order should note that the staff will be unlikely to accelerate the effective date of a Form S-3 until such time as any information required to be included in the Form S-3 is filed. [May 4, 2020]
If you’re wondering why the Staff issued this guidance in the form of “FAQs” instead of the more customary CDIs, the FAQs say that it has to do with the “unique circumstances” of the Covid-19 crisis that prompted the issuance of the exemptive order in the first place.
Covid-19 Litigation: It’s Not What You’ve Said, It’s What You’re Going to Say
Over on the D&O Discourse blog, Doug Greene shares some thoughts about whether we’ll see a wave of Covid-19 crisis-based disclosure litigation. He thinks that what you said before the economy hit the wall probably won’t get you into trouble, but what you say going forward just might. This excerpt explains his reasoning:
Why don’t I think there will be a wave based on the economic downturn over the past two months? Everyone is in the same boat, so it’s difficult for plaintiffs to identify and prove that any particular company’s disclosures or governance problems caused economic harm. And plaintiffs need to choose extra-wisely, because many judges would be offended by accusations of fraud and poor oversight over problems caused by a pandemic – it would feel opportunistic.
But going forward, disclosure and governance will be judged far differently – almost in the polar-opposite way. Moving forward, judges will have no patience for companies whose disclosures are not careful or boards whose oversight fails to meet the moment. The legal standards governing disclosure and governance litigation are judged from inferences drawn in context by judges who are themselves living the context. They will be critical of disclosures that feel exaggerated and governance that feels lax. Company-specific stock drops and governance failures will be easy for the plaintiffs’ bar to spot in the coming months and years.
The blog goes on to provide some insights about how companies can best position themselves to defend both securities class action lawsuits & shareholder derivative actions based on disclosures and alleged governance lapses associated with the Covid-19 crisis.
Conflict Minerals: Form SD Due June 1 – No Covid-19 Relief
This Skadden memo provides a reminder that the SEC’s exemptive order providing extended filing deadlines relief doesn’t apply to your Form SD filing:
As a reminder, conflict minerals disclosures on Forms SD are required to be filed with the Securities and Exchange Commission (SEC) no later than June 1, 2020. This remains true despite the impact of COVID-19, given that Forms SD are not covered by the SEC’s order allowing public companies to delay certain reports in light of the pandemic.
I think it’s fair to say that America’s favorite James Bond villain had quite a week. It started on Tuesday, when Tesla dropped this little disclosure tidbit in a Form 10-K/A:
Tesla determined not to renew its directors and officers liability insurance policy for the 2019-2020 year due to disproportionately high premiums quoted by insurance companies. Instead, Elon Musk agreed with Tesla to personally provide coverage substantially equivalent to such a policy for a one-year period, and the other members of the Board are third-party beneficiaries thereof. The Board concluded that because such arrangement is governed by a binding agreement with Tesla as to which Mr. Musk does not have unilateral discretion to perform, and is intended to replace an ordinary course insurance policy, it would not impair the independent judgment of the other members of the Board.
There are obviously no issues with this little cost-saving move, right? Elon followed that up on Wednesday with an earnings call featuring an expletive-laden tirade against “fascist” Covid-19 stay-at-home orders.
Musk’s grand finale came in the form of a bizarre Friday tweetstorm that started with a tweet to the effect that he was selling almost all of his possessions. Elon then provided some eyebrow-raising investment advice – “Tesla stock price too high imo.” He segued into excerpts from “The Star Spangled Banner,” then came a little “Braveheart” riff, followed by a brief bit of existential musing. He wrapped things up with by letting us know that “my gf @Grimezsz is mad at me.”
Girlfriend’s mad, huh? Well, she must be a Tesla shareholder. The company’s stock price plummeted 10% after the tweetstorm. Isn’t there supposed to be somebody responsible for pre-clearing Elon’s potentially market-moving tweets? Yeah, well we told you that wasn’t going to work.
So, that was the week that was. It’s really a shame that Elon Musk is an immigrant & isn’t allowed to channel his energies into a run for president like literally every other billionaire egomaniac in America. Overall, I think King Arthur put it best in “Monty Python & The Holy Grail” – “What an eccentric performance!”
“Funding Secured”: Tesla Can’t Shake Lawsuit Over Last Batch of Musk’s Tweets
I know some of you may be scratching your heads about the Tesla board’s willingness to sign-off on the company’s – ahem – “unorthodox” D&O liability protection arrangements. After Friday’s tweetstorm, many of those directors also may be second-guessing that decision – if for no other reason that they’re all still knee deep in the mess Elon created the last time that he let loose on social media.
That’s because a California federal judge recently refused to dismiss a lawsuit filed against Tesla, its board & Musk arising out of his August 2018 tweetstorm. This excerpt from a recent Shearman & Sterling blog on the case has the details:
Defendants moved to dismiss for on several grounds, including that the tweets were merely aspirational and not factual, that they were made by the CEO in his individual capacity and not on behalf of the Company, and that the complaint failed to adequately allege scienter. The Court disagreed. First, the Court opined that even statements of opinion could be misleading if they conveyed facts, which the tweets allegedly did by referencing a specific price of $420 and by identifying specific financial and legal advisors. The Court also found that the complaint had adequately alleged that a reasonable investor would read the tweets as statements of facts based on the affirmative nature of the statements and subsequent exchanges on Twitter confirming those statements.
Second, the Court found that the CEO’s statements from his personal Twitter account were made within the scope of his authority, relying on the fact the CEO co-founded the Company, was on its Board, and that the Company had notified its investors in 2013 that additional information regarding the Company could be found on the CEO’s and Company’s Twitter accounts.
Finally, contemporaneous correspondence that allegedly showed that the CEO was aware of significant hurdles to the transaction and that he harbored animosity against short-sellers, as well as the swift settlement reached with the SEC within a few days of the SEC’s complaint, in the eyes if the court, all supported an inference of scienter sufficient to survive the motion.
Meanwhile, Elon’s not faring any better in Delaware, where back in February, Vice Chancellor Slights denied the Tesla defendants’ motion for summary judgment in the fiduciary duty lawsuit arising out of Tesla’s acquisition of SolarCity, a company in which Musk owned a 21% stake. The Tesla directors settled out – so Elon finds himself the last man standing as the case heads to trial.
PPP Loans: Tax Deduction? If They’re Forgiven, Forget It
One of the things that makes the Payroll Protection Program so attractive is that if a borrower spend its loan proceeds properly (on items such as payroll, rent and utilities), the loan will be forgiven. Furthermore, Section 1106(i) of the CARES Act, provides that the forgiven loans are excluded from gross income, which means that the borrower receives the loan amount (without a repayment obligation) entirely tax-free.
But what about the tax deduction that would ordinarily apply to those business expenditures made in order to obtain loan forgiveness? According to this recent memo from my colleagues at Calfee, there’s a limit to Uncle Sam’s generosity:
The question arises because Section 265 of the Internal Revenue Code provides that a taxpayer cannot take tax deductions, even if otherwise allowable, if the deductions are allocable to income that is exempt from tax. The general purpose of Section 265 is to prevent taxpayers from enjoying a “double” tax benefit (i.e., tax-exempt income generating tax deductions).
In Notice 2020-32, released today, the IRS clarifies that Section 265 does in fact apply to PPP loans and prevents taxpayers from deducting expenses that lead to forgiveness under the CARES Act. This interpretation will have the effect of negating much (if not all) of the tax benefit Congress provided with the exclusion under Section 1106(i). Given the larger goal of Congress to inject cash into struggling businesses, this result had some wondering (before today) whether the IRS would apply Section 265 to PPP loan forgiveness.
Well, you can’t say we didn’t warn you – a number of Paycheck Protection Program loan recipients are receiving heavy duty blowback from the media & politicians about whether they’re entitled to the loans they received. If your client finds itself in this position, it may well be asking – “should we give the money back?”
That question may be even more pressing in light of new FAQ #31 that the SBA issued yesterday morning, which addresses the certification of need that’s required in order to access the funding. The FAQ says that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”
As this Stinson memo points out, that guidance is – like almost everything the SBA has said about this program – as clear as mud:
As has become typical of the PPP, every attempt at clarification also raises new uncertainties. What is the threshold for “substantial market value”? Does a public company that would currently be unable to raise equity capital on favorable terms really have “access to capital markets” in a meaningful way? Should any debt financing be considered “significantly detrimental” to a business as compared to equity capital in light of the additional cash load it places on the borrower? If a borrower has undrawn but committed capital under its current financing facilities, can it still make the good faith certification required by the PPP application?
The memo says that in light of the very specific certifications and representations required of the applicant in its loan application, these questions should be considered with great care – and companies that aren’t comfortable with their answers should withdraw loan applications or repay loans that have already been received.
PPP Loans: Beware False Claims Act Whistleblowers
Companies that are thinking about repaying their loans ought to make their decisions prior to May 7th, because as this Bryan Cave blog points out, FAQ #31 provides a safe harbor for companies that repay their loans by that date. The blog also addresses the liabilities that companies may face if they received a PPP loan to which they weren’t entitled – and the risk that employees may blow the whistle:
In addition to the risk of governmental regulatory or enforcement action, impacted companies and lenders may face other litigation and reputation risk. Companies may wish to consider whether their employees may believe that other sources of funding were available and may raise those concerns internally and externally as purported whistleblowers, possibly resulting in assertion of False Claims Act claims.
Of course, one of the fun things about the False Claims Act is that it provides for treble damages. The blog says that companies may also face reputational scrutiny and adverse impact on business performance, particularly if Treasury & the SBA publish borrower information – which the Fed has already announced that it will do under its CARES Act lending programs.
Public Offerings: Doing a Deal in a Blackout Period
Speaking of public companies with access to the capital markets, stop me if you’ve heard this, but those markets are kind of turbulent right now. That means its essential for companies that need capital to be able to quickly access the market when a financing window opens. Unfortunately, some companies now find themselves in a “blackout period” pending the release of their first quarter results. This Davis Polk memo says that while that may complicate things, there’s no prohibition on a company accessing the capital markets during a blackout period, and it may be possible for a company to complete an offering if:
– Management has enough information about the current (or recently ended) quarter to be able to predict with a fair degree of confidence what the company’s reported results are likely to be;
– Management has a good track record of being able to judge its anticipated results at similar points in the information-gathering and reporting cycle;
– Management’s expectations for the quarter, and future periods, are either (i) at least in line with “the market’s” expectations as well as with management’s own previously announced guidance (if any) – or (ii) if management’s expectations are not so in line, the company and its underwriters conclude that the deviation is not material or the company is willing to “pre-release” its current expectations prior to the earnings release; and
– Management’s analysis of the going-forward impact on the company’s business of COVID-19 is sufficiently developed that disclosure can be made at the time of the offering that will be in line with what is disclosed when the 10-K, 20-F, 10-Q, 6-K or other filing is made.
The memo notes that as a result of the Covid-19 crisis, it may be difficult for management to forecast the company’s results beyond the current quarter. In situations like this, companies sometimes decide to withdraw previously issued guidance and not issue new guidance. But the memo stresses that withdrawing guidance is not a substitute for disclosure of underlying trends and uncertainties that could affect financial and operational performance.
The memo also walks through an analysis of the various matters that should be considered in addressing each of the factors identified above, as well as other matters such as the need to update disclosures of risk factors & known trends, potential selective disclosure issues, and reputational and legal risks. By the way, if you’re representing a client that’s considering an offering during a blackout period, I highly recommend that you take a look at the transcript from our 2017 webcast, “Flash Numbers in Offerings.”
With so many companies moving to virtual meetings, one of the issues that’s become front & center is how shareholder Q&A sessions should be handled. This Bass Berry blog provides some insight into how companies have addressed that issue. The authors surveyed Fortune 100 public companies that filed their proxy statements after March 1, including those that opted for a virtual meeting after filing definitive materials. Of the companies surveyed:
– 6% are permitting stockholders to submit questions only in advance.
– 58% are permitting stockholders to submit questions only at the meeting.
– 32% are permitting stockholders to submit questions both in advance and at the meeting.
– 4% do not clearly address their Q&A in the proxy materials the style of their Q&A sessions couldn’t be determined.
The survey found a few outliers. One company chose to limit in-person attendance to a handful of officers and employees who will deliver proxy votes. Shareholders were encouraged to present questions to financial journalists listed in the company’s annual report, who will choose questions that they consider the most interesting and important. The survey doesn’t identify the company, and I want to respect its privacy as well – so all I can tell you is that its initials are “Berkshire Hathaway.”
The survey identified two other companies that are not permitting live Q&A. One required shareholders to submit questions up to three days in advance, while the other is requiring stockholders to submit their questions in advance only through a portal on the company’s website.
I haven’t seen any survey data on how companies that are holding virtual meetings are dealing with shareholder proposals, but I can tell you that the folks at ValueEdge Advisors are not happy with the way AT&T has chosen to handle them at its virtual meeting.
Listing Standards: NYSE Joins Nasdaq in Providing Relief From Price-Based Standards
Earlier this week, I blogged about Nasdaq’s rule change providing extended compliance periods for companies that fail to meet its minimum bid price & global market cap continued listing standards. On Tuesday, the NYSE received the SEC’s sign-off on a rule change providing similar relief to its listed companies. This excerpt from a recent Locke Lord blog provides the details:
NYSE-listed companies now have additional time to cure a deficiency if their stock has closed under $1.00 for 30 consecutive trading days. Now, days between April 21, 2020 and June 30, 2020 will not be counted toward the normal 6-month compliance period. Compliance periods will recommence on July 1, 2020 from the point at which they were suspended on April 21.
Listed companies will also have additional time if their average global market capitalization has fallen under $50 million for 30 consecutive trading days at a time when their stockholders’ equity is also under $50 million. These companies would normally have a maximum 18 months to cure the deficiency. These compliance periods are similarly suspended until July 1, 2020.
The exchanges have cut listed companies a lot of slack during the current market turmoil, but the news for troubled companies isn’t all good on the listing front. The blog also notes that Nasdaq adopted rules on the same day that actually shorten compliance periods for particularly distressed companies.
Jackpot! Whistleblower Hits for $27 Million
Well, in the midst of this colossal mess, I guess it’s nice to know that somebody had a good month. Last Thursday, the SEC announced that it had awarded a whistleblower who alerted it to misconduct a whopping $27 million. The SEC’s order lauded the whistleblower’s efforts to “repeatedly and strenuously” raise concerns about the misconduct internally. The SEC followed this up with a $5 million whistleblower award earlier this week. When it rains, it pours.
Yesterday, SEC Chair Jay Clayton and a group of senior SEC & PCAOB officials issued a joint statement warning about the risks posed by “emerging market” investments. While the statement addresses all emerging markets, it focuses on the 500 lb. gorilla of those markets – China. Here’s an excerpt from the introduction:
Over the past several decades, the portfolios of U.S. investors have become increasingly exposed to companies that are based in emerging markets or that otherwise have significant operations in emerging markets. This exposure includes investments in both U.S. issuers and foreign private issuers (“FPIs”) that are based in emerging markets or have significant operations in emerging markets. During this time, China has grown to be the largest emerging market economy and the world’s second largest economy.
The SEC’s mission is threefold: protect our investors, preserve market integrity and facilitate capital formation. Ensuring that investors and other market participants have access to high-quality, reliable disclosure, including financial reporting, is at the core of our efforts to promote each of those objectives. This commitment to high-quality disclosure standards—including meaningful, principled oversight and enforcement—has long been a focus of the SEC and, since its inception, the PCAOB.
Our ability to promote and enforce these standards in emerging markets is limited and is significantly dependent on the actions of local authorities—which, in turn, are constrained by national policy considerations in those countries. As a result, in many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse, in comparison to U.S. domestic companies. This significant asymmetry holds true even though disclosures, price quotes and other investor-oriented information often are presented in substantially the same form as for U.S. domestic companies.
The statement details risks and related considerations specific to “issuers, auditors, index providers & financial professionals.” These include concerns about the quality of financial information, the PCAOB’s continuing inability to inspect workpapers in China, the limited ability of U.S. authorities to bring enforcement actions in emerging markets, the limited rights & remedies available to shareholders, and the failure of passive investment strategies to account for these risks.
The statement also addresses concerns about disclosure, and emphasizes the importance of robust risk factor disclosure for companies with operations in emerging markets:
In light of both the significance and company-specific nature of the risks discussed in this statement, we expect issuers to present these risks prominently, in plain English and discuss them with specificity. Issuers based in emerging markets should consider providing a U.S. domestic investor-oriented comparative discussion of matters such as (1) how the company has met the applicable financial reporting and disclosure obligations, including those related to DCP and ICFR and (2) regulatory enforcement and investor-oriented remedies, including as a practical matter, in the event of a material disclosure violation or fraud or other financial misconduct more generally.
The statement was issued jointly by Chair Clayton, PCAOB Chair Bill Dunkhe, SEC Chief Accountant Sagar Teotia, and the Directors of Corp Fin & IM. With that kind of firepower mustered behind the statement, I think it’s fair to say that they aren’t fooling around here. Public companies based in China or with significant operations there should take a hard look at their risk factor disclosures, because it seems likely that they will be scrutinized closely by the Staff the next time their filings are pulled for review.
Covid-19 Crisis: Companies Adopt Emergency Bylaws to Ensure Board Operations
With all of the disruptions resulting from the Covid-19 pandemic, many companies are looking at board and management continuity issues, and some companies have opted to adopt an emergency bylaw to help address these issues. This recent Simpson Thacher memo discusses Section 110 of the DGCL, which allows companies to adopt emergency bylaws and sets forth what may be included in them. Among other things, these bylaws may permit companies to expand the class of persons who may call a board or committee meeting, and relax notice and quorum requirements for such a meeting.
Yesterday, Mastercard filed an Item 5.03 8-k announcing that its board had adopted an emergency bylaw, which provides that:
– a Board or committee meeting may be called by any director or officer by any feasible means, and notice of the meeting may be provided only to the directors that can be feasibly reached and by any feasible means; and
– the director(s) in attendance at the meeting shall constitute a quorum and may appoint one or more of the present directors to any standing or temporary committee as they deem necessary and appropriate
Mastercard isn’t the only company that has adopted an emergency bylaw in recent weeks. John Bean Technologies also adopted a similar provision, and other companies have long had emergency provisions in their own bylaws (see this Jack In The Box filing from 2005). If your bylaws don’t contain an emergency provision, now may be a good time to consider adopting one.
Transcript: “Activist Profiles & Playbooks”
We have posted the transcript for the recent DealLawyers.com webcast: “Activist Profiles & Playbooks.”
The Covid-19 crisis has created a number of challenges for public companies, and one of the potentially most significant is maintaining appropriate internal control over financial reporting. Crisis-related ICFR issues include managing newly remote workforces, the novel and often unfamiliar financial reporting issues created by the crisis, and – for companies receiving government assistance – the need to implement restrictions on executive comp, share repurchases and dividends, among other things.
This Hunton Andrews Kurth memo reviews the legal framework applicable to these issues, and offers insights on how to address them. Here’s an excerpt:
We recommend that companies begin to assess their existing disclosure and internal controls by taking stock of what has changed in the current financial reporting environment. Unique or novel accounting issues should be carefully analyzed, and expert advice sought when internal resources are insufficient.
Potential and actual disruptions to a company’s supply chain, customer base, operations, processes and workforce should be weighed when evaluating the operating effectiveness of legacy controls. As part of this process, companies should also assess any potential deficiencies in review-type internal controls and the ability of individuals to perform control duties in light of shelter-in-place orders and other company specific remote-work protocols.
Based on this assessment, companies should determine whether existing controls are sufficient to prepare financial statements and disclosure documents at the reasonable assurance level. If a legacy control cannot be performed as previously designed, companies should determine what new controls may be necessary to reduce the risk of errors and fraud. In doing so, they should ensure that any changes in design address both the original risks of material misstatement as well as any new risks. We anticipate regular dialogue with counsel, the auditors and audit committees on these topics.
The memo also says that public companies, particularly those receiving government assistance, should expect heightened scrutiny from the “media, putative whistleblowers, agency inspectors general, consumer watchdog groups, members of Congress and other political figures.” In this environment, the best way for companies to protect themselves is by maintaining a robust control environment and responding nimbly to changes in business circumstances that may require adjustments to those controls.
Covid-19 Crisis: Chart of Governmental Actions
If you represent a client with operations in multiple states, Faegre Drinker’s interactive chart of the various federal, state and local government orders associated with the Covid-19 crisis is a really handy resource. If you click on an individual state, you’ll be taken to a page that contains links to that state’s legislative and executive orders relating to Covid-19, as well as to orders issued by major municipalities within that state. It appears to be updated on a daily basis, so you’ll probably want to bookmark it.
Transcript: “The Top Compensation Consultants Speak”
We have posted the transcript for the recent CompensationStandards.com webcast: “The Top Compensation Consultants Speak.”
Management teams and their advisors always have plenty to think about when preparing for any quarter’s financial reporting, but when it comes to this one, well. . . like they say on “Rick & Morty” – “Wubba lubba dub dub!” If you’re waist deep in this process, you should take a look at this Weil memo, which provides in-depth checklists addressing issues to think about when preparing this quarter’s earnings release & Form 10-Q. Here’s an excerpt:
At the risk of stating the painfully obvious, the just-completed quarter has not been “normal” for public companies by any stretch of the imagination. As they turn from addressing complex operational matters and mitigation efforts to disclosure decision-making, corporate management, audit committees and boards are grappling with such questions as: Should the earnings release and conference call be delayed to give the company more time to come to grips with any number of novel or complex accounting issues generated by the “perfect storm” of the COVID-19 pandemic, global economic turmoil, and the rapid-fire pace of federal and state legislative and regulatory responses?
If it has not already done so, should the company withdraw or otherwise modify earnings guidance made early in Q1? What is the impact on the company of the Coronavirus Aid Relief and Economic Security Act (CARES Act) and its regulatory progeny? Will the company need to recognize impairments? And finally, given the uncertainty about when and how the economy will reopen and whether certain industries will undergo lasting structural change, the ultimate question: what insight can be given into what the future may hold for the company?
The checklists addresses these and other disclosure issues and includes a discussion of the relevant SEC and/or staff-level disclosure guidance that has been provided during the Covid-19 crisis. The checklists identify key action items and conclude with suggestions about “what to do now” in navigating this quarter’s disclosure challenges.
Listing Standards: Nasdaq Provides Temporary Relief from Price-Based Standards
On Friday, the SEC approved an immediately effective Nasdaq rule change that would allow listed companies more time to return to compliance with price-based continued listing standards, which relate to the minimum bid price and market value of publicly held shares. Here’s an excerpt from this Steve Quinlivan blog with a summary of the rule:
Under the approved rule Nasdaq will permit companies that are out of compliance with the Price-based Requirements additional time to regain compliance by tolling the compliance periods through and including June 30, 2020. However, throughout the tolling period, Nasdaq will continue to monitor these requirements and companies will continue to be notified about new instances of non-compliance with the Price-based Requirements in accordance with existing Nasdaq rules. Companies that are notified about non-compliance are required by Nasdaq rules to make a public announcement disclosing receipt of the notification by filing a Form 8-K, where required by SEC rules, or by issuing a press release.
Starting on July 1, 2020, companies will receive the balance of any pending compliance period in effect at the start of the tolling period to come back into compliance with the applicable requirement. Similarly, companies that were in the delisting hearings process would return to that process at the same stage they were in when the tolling period began. Companies that are newly identified as non-compliant during the tolling period will have 180 days to regain compliance, beginning on July 1, 2020.
According to this Reuters article, the NYSE has proposed to provide similar relief from its own price-based continued listing standards, but its initial proposal was rejected. The Exchange was reportedly “in talks” with the SEC about the rule proposal, but that was two weeks ago – and I haven’t seen anything more on this since then.
Cheat Sheet: Covid-19 Quick Reference
I’m a sucker for “cheat sheets” that I can use to get up to speed quickly & fake my way through a conference call, and Simpson Thacher’s 37-page “Covid-19 Quick Reference Guide” fits the bill when it comes to the Covid-19 crisis. It provides a bullet-point overview of securities, corporate, M&A, commercial finance and other considerations associated with the crisis, and also provides an overview of the CARES Act and other governmental responses.
