Yesterday, the SEC adopted amendments to the definitions of “Accelerated Filer” and “Large Accelerated Filer.” Here’s the 210-page adopting release. The most notable result of this action is that smaller reporting companies with less than $100 million in revenues will no longer have to provide auditor attestations of their Sarbanes-Oxley Section 404 reports. This excerpt from the SEC’s press release summarizing the changes says that the amendments will:
– Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller reporting company and had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. Business development companies will be excluded in analogous circumstances.
– Increase the transition thresholds for an accelerated and a large accelerated filer becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million;
– Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status; and
– Add a check box to the cover pages of annual reports on Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is included in the filing.
The need for relief from SOX 404 was a controversial topic, and as usual these days, the vote was along partisan lines. Republican Chair Jay Clayton and Commissioner Hester Peirce submitted statements in support of the rule, while Democratic Commissioner Allison Herren Lee filed a statement in dissent.
Two commissioners also provided some colorful social media commentary on the vote. Allison Lee tweeted: “There must be a limit to the number of times we can credibly assert to investors that we act in their best interests by making policy choices they directly oppose.” For some reason, Hester Peirce tweeted a photo of a cherry cobbler with “404” baked into it (your guess is as good as mine, folks).
Disclosure: What If Your CEO Is Diagnosed With the Coronavirus?
The COVID-19 outbreak creates plenty of disclosure issues about its potential impact on a company’s business and financial condition. But there’s another one lurking in the background – what if the CEO becomes ill? Unfortunately, based on what we know about the virus, that doesn’t seem to be an unlikely outcome for at least a few companies, so it probably makes sense to start thinking about that particular issue now.
If you’re inclined to do that, check out this recent blog from UCLA’s Stephen Bainbridge on this topic. The blog acknowledges that it may be prudent for the CEO to disclose this information to the board and shareholders, but says that the existence of a legal obligation to do is another matter. A lot may depend on what you’ve previously said – for example, have you singled out the potential loss of the CEO as a risk factor in prior disclosure? This excerpt says that in the absence of this or another disclosure trigger, there may not be a legal obligation to disclose the illness:
Even if the CEO’s health is material, a company could only be held liable for disclosing that information if there was a duty to disclose it. This is because, under the securities laws, “[s]ilence, absent a duty to disclose, is not misleading ….” Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988). Hence, for example, if the company put out a press release containing misleading information about the CEO’s health, it would have a duty to correct that statement. But simply remaining silent about the CEO’s health should not result in liability, because there is no SEC rule requiring disclosure or any caselaw imposing a duty to disclose such information.
Having said all that, there are some academics who think there should be such a duty, although they recognize that the law has not yet imposed such a duty.
Prof. Bainbridge cites the academic literature supporting the imposition of a duty to disclose a CEO’s significant health problem, but as someone who wasn’t on law review, I take great pleasure in omitting the citations from my blog. After all, it’s been a tough week, and – to quote Kevin Bacon’s character in the movie Diner – “it’s a smile.”
Thinking About a Buyback? Here’s Some Reassurance
If your board is thinking about stock buybacks in response to the ongoing market turmoil, this brief Davis Polk memo has some words of reassurance for your directors. The memo walks through a number of complex issues about buybacks that boards are currently dealing with.
While these issues aren’t amenable to short answers, the memo notes that in making decisions about them, “a Board that acts without any conflict, is well-informed, and goes through a proper process in deliberating to reach a decision, will be protected by the business judgment rule.” If your company is thinking about a buyback, be sure to check out our “Stock Buybacks Handbook” and the other resources in our “Stock Repurchases” Practice Area.
For many companies, annual meetings are just around the corner, and the COVID-19 pandemic has raised all sorts of questions about what they should do and whether a virtual meeting is a viable alternative.
Last week, Lynn blogged about Davis Polk’s memo on planning for coronavirus-related annual meeting developments. Since then, we’ve received memos addressing similar topics – including adding a virtual meeting component or going entirely to a virtual annual meeting – from Freshfields, DLA Piper, Hunton Andrews Kurth, Pepper Hamilton and Dechert. Also check out this Cleary Gottlieb blog. These resources address the relevant securities and corporate law issues, as well as investor relations and logistical considerations.
This Sidley memo says that one of the consequences of the coronavirus outbreak may be a decline in proxy contests during the current season. As this excerpt points out, the reason is that given current market volatility, activists may be unwilling to commit to the kind of long-term hold that a successful proxy fight would necessitate:
It is important to understand that if an activist launches a proxy contest to replace directors, an activist must be prepared to remain in the stock for the foreseeable future – at least until the annual shareholder meeting and, if successful in obtaining board seats, at least 6-12 months beyond that. While there are no legal restrictions to the contrary, as a practical matter, an activist cannot initiate a proxy contest and sell or reduce its position shortly afterward.
An activist who does this stands to lose credibility with long-term institutional investors and becomes more susceptible to being portrayed as a “short term” investor in future activism campaigns. It is even more difficult for an activist to exit a stock if an employee of the activist fund, rather than candidates that are at least nominally independent, takes a board seat. Material nonpublic information received by the activist employee in the board room is imputed to the activist fund, thereby restricting the fund’s ability to trade in the stock.
The memo cautions that once the crisis passes, companies should expect activists to return to proxy contests with a vengeance. It notes that 130 proxy contests were launched in 2009, after the financial crisis, and many companies that can hide during a bull market have their vulnerabilities laid bare during a downturn.
Antitakeover: Dual Class & Staggered Boards are Alive & Well in Silicon Valley
Fenwick & West just came out with its annual comparative survey of governance practices among Silicon Valley companies and the S&P 100. One of the things that jumps out at you is that while antitakeover charter provisions may be on the decline in most of corporate America, they’re thriving out west:
– Historically, dual-class capital structures were more prevalent among the S&P 100 companies than they were among the SV 150, but the number of tech companies that have them has risen from 10.9% of the SV 150 in 2017 to 12.7% in 2019), while the percentage of S&P 100 companies with dual class structures has remained steady at about 9% during that same period.
– Staggered boards are also much more common among the tech set than among S&P 100 companies. Classified boards increased from 50.7% of SV 150 companies in 2018 to 52.7% in the 2019 proxy season. That percentage reflects the large number of Silicon Valley IPOs in recent years, but the percentage of companies with staggered boards among the more mature top 15 SV 150 companies increased to 13.3% in the 2019 proxy season, after holding steady at 6.7% for the preceding 4 years. In contrast, only 5% of the S&P 100 had staggered boards in 2019.
Obviously, IPOs that are skewing the Silicon Valley numbers somewhat, but another factor in the greater extent of unfashionable antitakeover provisions in SV 150 charters may also have something to do with the amount of voting power sitting in their boardrooms. The survey reports that directors & officers of SV 150 companies own an average of 9.0% of the equity in their companies, while their counterparts at S&P 100 companies own an average of only 3.5%.
With apologies to “The Scarlet Pimpernel“, this blog’s title is a fair summary of the results of Morrow Sodali’s annual institutional investor survey. More than 40 global institutional investors with a combined $26 trillion in assets under management participated in the survey, which was conducted in January. Among its other highlights, the survey found that:
– All respondents state that ESG risks and opportunities played a greater role in their investment decisions during the last 12 months, with climate change being top of investors’ list (86%).
– Climate change (91%) and human capital management (64%) are cited as the top sustainability topics that investors will focus on when engaging with boards in 2020.
– Notably, investors now prioritize presence of ESG risks (32%) before a credible activist business strategy when deciding whether to support ESG activists.
– Overwhelmingly 91% of respondents expect companies to demonstrate a link between financial risks, opportunities and outcomes with climate-related disclosures. A total of 68% respondents believe that greater detail around the process to identify these risks and opportunities would significantly improve companies’ climate related disclosures.
– When it comes to the company’s ESG performance and approach, investors recommend SASB (81%) and TCFD (77%) as best standards to communicate their ESG information.
91% of the institutions surveyed said that that board level engagement is the most effective way for investors to influence board policies – and nearly half said they’d consider voting against a director to influence outcomes.
Conflict Minerals: Time for a Fresh Look at Disclosure & Compliance Programs
Remember when everybody thought the Conflict Minerals disclosure requirement was on the way out? Yeah, good times. . . Anyway, this Ropes & Gray memo says that changes in the global regulatory environment and increasing investor demands for information on conflict minerals mean that it’s time for companies to take a fresh look at the way they approach disclosure and compliance. Here’s the intro:
The seventh year of filings under the U.S. Conflict Minerals Rule will be due in slightly under three months. At most companies, conflict minerals reporting and compliance have been more or less static for the last few years. It is time for many companies to take a fresh look at their conflict minerals disclosure and compliance program. In some cases, disclosures have become outdated and compliance programs have not kept pace with market developments.
In addition, over the last few years, the global regulatory landscape has continued to evolve, both with respect to conflict minerals specifically and human rights more broadly, with more changes on the way. Furthermore, investor expectations concerning supply chains – as part of ESG integration by mainstream investors – continue to increase.
The biggest regulatory event on the horizon is EU Conflict Minerals Regulation, which takes effect on January 1, 2021. The EU Regulation generally will require importers of 3TG (tin, tantalum, tungsten and gold) minerals into the EU to establish management systems to support due diligence, conduct due diligence and make disclosures about the 3TG they import into the European Union.
The memo provides an in-depth overview of the EU Regulation, and notes that while only a small number of U.S. Form SD filers will also be subject to the EU Regulation, the conflict minerals compliance programs of a large number of U.S.-based companies will need to address the EU Regulation.
Board Governance: Should You Keep Your Ex-CEO on the Board?
Cooley’s Cydney Posner recently blogged about this Fortune article addressing whether your former CEO should remain on the board after their departure. This excerpt says that many governance experts think that’s a bad idea – particularly if your CEO will assume some sort of “Executive Chair” role:
Some governance gurus cited in the article consider making the transition to executive chair a “bad idea.” According to one governance expert, the position of executive chair really “means you’re CEO….The person with the CEO title is really the chief operating officer.” Another expert observed that a good CEO will see that it’s “not fair to the new person.” Another academic doesn’t hold back, calling it “a stupid idea.
All kinds of psychological factors get in the way. Maybe the new CEO owes his or her job to the predecessor. Or maybe the new CEO can’t stand the previous one. Maybe the old CEO brought all the other directors onto the board, and they feel loyal to him or her. It obstructs the new CEO from doing his or her job.” Another problem highlighted was the difficulty for the new CEO to change course or raise issues about the former CEO’s decisions when the former CEO is still in the room. Awkward, at a minimum.
On the other hand, Cydney says that the authors contend that retaining the CEO on the board or in a consulting capacity for a brief time may provide benefits in terms of continuity. Interestingly, the article also says that in situations where the former CEO isn’t a founder, keeping the CEO on the board “is negatively associated with the firm’s post-turnover financial performance.”
In what may be a sign of things to come for many of us, The Washington Post reports that last night, the SEC asked employees in its DC headquarters to work from home in response to concerns that an employee may have contracted the coronavirus:
The Securities and Exchange Commission on Monday asked employees at its D.C. headquarters to stay away from the office because of a potential coronavirus case, becoming the first major federal employer to turn to telework to avoid the spreading virus.
The announcement from the agency, which is charged with monitoring the financial markets, came after a day of turmoil on Wall Street, with the Dow Jones industrial average falling more than 2,000 points. The agency‘s notice, which was emailed shortly after 8 p.m., required employees working on the ninth floor of its office to stay home and encouraged all others to do the same.
While the SEC may be the first federal agency to ask employees to telecommute, a number of U.S. businesses have also implemented work from home policies for some employees in response to the outbreak. Many others are adopting contingency plans that contemplate doing the same. For instance, last night my law firm sent out an email directing everyone to take their laptop computers home each night, in case the decision was made to implement a work from home policy for personnel at one or more of our offices.
Coronavirus: Will Business Interruption Insurance Pick Up Some of the Tab?
Many companies are looking into whether forced closures resulting from the coronavirus outbreak are covered under their business interruption policies. This Stroock memo delves into that question, and it turns out – as usual when it comes to coverage issues – the answer is pretty complicated. But the bottom line is don’t bet on it. Here’s an excerpt from the intro:
With COVID-19 disrupting global supply chains and sales, businesses are losing income and incurring additional expenses as a result of the disruption. There likely will be an increase in insurance claims against insurance policies offering business interruption and/or contingent business interruption coverage. Whether the claims are covered will depend on the terms and conditions of the insurance policy and the circumstances of the loss.
One of the largest independent claim managers has cautioned that “successful claims under business interruption coverage for infection are not common.” Indeed, there are no reported cases in the United States regarding business interruption coverage in connection with human infectious disease epidemics or pandemics. However, commerce has never been as global as it is today.
The memo does a good job summarizing the various types of policies that provide business interruption insurance and the way in which they’ve been interpreted by the courts. After reading it, I think it’s fair to say that any company that seeks to recover under a business interruption policy should be prepared for a long and uncertain fight.
Auditor Refreshment: Every 87 Years Like Clockwork. . .
A recent Audit Analytics blog noted that Brown Forman recently changed its outside auditors for the first time in 87 years, and also pointed out that since 2018, there were only two other S&P 500 companies to change auditors after a longer tenured engagement. GM parted ways with Deloitte after 100 years, and DuPont de Nemours ended its relationship with that same firm after 113 years.
That raises the larger question of just how long have S&P 500 companies used the same auditors? The blog lays that out too, with a chart showing the frequency distribution of auditor tenure in 10-year increments. While only 38 companies have auditors with tenures exceeding 80 years, 94 companies – or nearly 20% of the S&P 500 – have had the same auditor firm for more than 50 years. More than half of the S&P 500 (265 companies) have had the same auditor for more than 20 years.
I guess we can add earnings calls to the ever-growing list of things that the coronavirus outbreak has thrown a giant monkeywrench into. This recent article from “CFO Dive” says that public company CFOs have been scrambling to explain the potential impact of the outbreak on their company’s bottom line during recent earnings calls. This excerpt provides some examples of what BigTech has been saying:
As of last week, references to coronavirus have been made over 8,000 times across over 1,000 companies on earnings call transcripts, natural language processing company Amenity Analytics found,
Apple led the pack as the first corporate giant to state that it wouldn’t meet its Q1 revenue projections due to the virus, which originated late last year in Wuhan, China. iPhones, which are manufactured in China, have experienced limited production and reduced domestic demand, Apple announced on February 17.
Microsoft soon after followed suit. “Although we see strong demand … the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call,” the company said last week. “As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated.”
The article also features commentary on the outbreak’s earnings impact from companies across a range of industries, including financial services, hospitality, retail, and consumer products. Spoiler alert: the news is not good.
Upcoming Webcast: “The Coronavirus – What Should Your Company Do Now?”
We’ve blogged so much & posted so many memos on the implications of the coronavirus outbreak that I’m starting to think that we should change our name to “TheCoronavirusCounsel.net.” But there’s no getting around the fact that this is a very big deal. In addition to its tragic & rising human cost, the COVID-19 outbreak has disrupted global supply chains, staggered financial markets, and created huge uncertainties for businesses and investors.
Those disruptions & uncertainties have important implications for public companies and those who advise them. That’s why we’ve just calendared a webcast – “The Coronavirus – What Should Your Company Do Now?” – for Thursday, March 19th. The webcast features Davis Polk’s Ning Chiu, WilmerHale’s Meredith Cross, Uber’s Keir Gumbs and our own Dave Lynn. The panelists will tackle some of the key issues confronting public companies & their lawyers as a result of this ongoing international public health emergency.
Tomorrow’s Webcast: Conduct of the Annual Meeting
Tune in tomorrow for the webcast – “Conduct of the Annual Meeting” – to hear McDonald’s Jennifer Card, Independent Inspector of Elections Carl Hagberg, and GE’s Brandon Smith talk about annual meeting logistics, dealing with the media, preparing officers & directors, rules of conduct, disruptive shareholders, tabulation issues and meeting post-mortems.
Yesterday, the SEC announced that it had instituted a settled enforcement action against actor, musician, environmentalist, martial arts master & Russian special envoy Steven Seagal for allegedly violating the anti-touting provisions of the Securities Act in connection with a digital asset offering. Here’s an excerpt from the SEC’s press release:
The SEC’s order finds that Seagal failed to disclose he was promised $250,000 in cash and $750,000 worth of B2G tokens in exchange for his promotions, which included posts on his public social media accounts encouraging the public not to “miss out” on Bitcoiin2Gen’s ICO and a press release titled “Zen Master Steven Seagal Has Become the Brand Ambassador of Bitcoiin2Gen.” A Bitcoiin2Gen press release also included a quotation from Seagal stating that he endorsed the ICO “wholeheartedly.”
These promotions came six months after the SEC’s 2017 DAO Report warning that coins sold in ICOs may be securities. The SEC has also advised that, in accordance with the anti-touting provisions of the federal securities laws, any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion.
According to the SEC’s order, in addition to consenting to a C&D on a neither admit nor deny basis, Vladimir Putin’s BFF agreed to disgorge all of the $157,000 in promotional payments that he received (plus interest) and to pay a $157,000 penalty. He also agreed not to promote any securities for three years.
If it’s any consolation to Louisiana’s most Googled d-lister, he’s not the first celebrity to run afoul of Section 17(b) of the Securities Act for touting a digital deal. Back in 2018, boxer Floyd Mayweather & music impresario DJ Khaled were tagged by the SEC for the same conduct.
D&O Insurance: Dealing with a Tough Market
Lynn recently blogged about the tightening market for D&O insurance. This Goodwin memo reviews some of the things that companies can do to put themselves in the best position to deal with current market conditions. In addition to careful advance planning with the company’s insurance brokers & coverage counsel, this excerpt highlights some alternatives for managing increased premiums:
Given daunting premium increases, insureds are also increasingly considering alternative ways to structure their insurance programs. For example, insureds may consider increasing the amount of their deductibles in order to reduce insurer risk, and thereby reduce the amount of premium charged (or reduce the size of a premium increase). In certain situations, insureds have also considered “captive insurance” programs to replace or supplement traditional insurance programs. (Captive insurance programs are in essence self-insurance programs owned and controlled by insureds rather than insurance companies).
Insureds may also consider reallocating more of their insurance program to so-called “Side A Difference-in Conditions (DIC)” coverage, which is less expensive coverage that is for the dedicated benefit of directors and officers only, excess of all other insurance and indemnification available to those individuals. Care should be taken with respect to any of these changes, however, in order to avoid unduly reducing important insurance protections in the event of claims.
Note the reference to “daunting” premium increases – the memo says that some companies are seeing premiums double without any change in risk profile. Deductibles for securities claims are also doubling in some cases, with IPO companies facing as much as a $10 million deductible. Yikes!
D&O Insurance: The Importance of Indemnification Agreements
With deductibles rising significantly, the importance of supplemental arrangements like “Side A” policies are well understood. But this recent blog from Woodruff Sawyer’s Priya Cherian Huskins says that the importance of individual indemnification agreements shouldn’t be overlooked – particularly given the risk that companies may opt for coverage that proves to be inadequate as premiums escalate. Here’s an excerpt:
An indemnification agreement in this context is a contract between individual director or officer and the company the director or officer serves. These agreements promise to (1) advance legal fees, and (2) pay loss (indemnification) on behalf of an individual should he or she be named in a lawsuit in his or her capacity as a director or officer of the company.
When properly structured, these agreements provide broad protection so that individuals have the right to hire a lawyer at the company’s expense from the moment they need protection, be it because they’re being investigated (including informally) by a regulator, accused of wrongdoing in a suit, or called as a witness in a case.
Directors & officers may think that they’re appropriately protected by corporate bylaws, but those often provide the company with discretion when it comes to advancement of expenses – and people can’t always rely on that discretion being exercised in their favor after they’ve departed. Indemnification agreements provide the individual with contractual rights obligating the company to defend an indemnitee, and will ensure that there’s a source of funding for those expenses so long as the company remains solvent.
Warren Buffett’s annual letter to Berkshire Hathaway shareholders came out last Saturday. It attracted the usual avalanche of media attention, but I recommend that you check out Kevin LaCroix’s particularly good write-up about it over on the “D&O Diary.” The letter contained its customary mix of insight & folksy charm, but it also once again featured a lot of griping about the Oracle of Omaha’s favorite hobby-horse, generally accepted accounting principles – specifically ASC Topic 321.
The fact that ASC 321 requires Berkshire Hathaway to mark many of its minority investments to market really frosts Buffett. He’s spilled a lot of ink on the topic – and its impact on the company’s bottom line – in each of his last 3 annual letters. Here’s an excerpt from the latest:
The adoption of the rule by the accounting profession, in fact, was a monumental shift in its own thinking. Before 2018, GAAP insisted – with an exception for companies whose business was to trade securities – that unrealized gains within a portfolio of stocks were never to be included in earnings and unrealized losses were to be included only if they were deemed “other than temporary.” Now, Berkshire must enshrine in each quarter’s bottom line – a key item of news for many investors, analysts and commentators – every up and down movement of the stocks it owns, however capricious those fluctuations may be.
Berkshire’s 2018 and 2019 years glaringly illustrate the argument we have with the new rule. In 2018, a down year for the stock market, our net unrealized gains decreased by $20.6 billion, and we therefore reported GAAP earnings of only $4 billion. In 2019, rising stock prices increased net unrealized gains by the aforementioned $53.7 billion, pushing GAAP earnings to the $81.4 billion reported at the beginning of this letter. Those market gyrations led to a crazy 1,900% increase in GAAP earnings!
Buffett’s position is that Berkshire’s a buy & hold investor, and he doesn’t think fluctuations in the value of its enormous stakes in Apple, Coca-Cola and other companies should run through its income statement. He says that just doesn’t reflect business reality for a company like his.
If GAAP Doesn’t Reflect Reality, Then Why You Mad, Bro?
It’s easy to understand Buffett’s beef with GAAP, because mark-to-market fluctuations in Berkshire’s investments add a huge amount of volatility to its bottom line. But here’s the thing – Berkshire made a business decision to take multi-billion dollar minority stakes in enormous companies. What if it had to sell one or more of those positions? That’s what ASC 321 is getting at – it shows users of the financial statements what that would look like.
That fire-sale mentality reflects GAAP’s conservative bias, and yes, it doesn’t necessarily reflect current business reality for a company sitting on a pile of cash that could fund the federal deficit, but Buffett’s allowed to tell people that – and he does, constantly. The fact that Buffett points this out doesn’t bother me, but the fact that he trashes GAAP to do it kind of does.
Of course, GAAP has its limitations, but GAAP disclosures usually provide insights into a business that shouldn’t be ignored. I’ve been practicing law long enough to know that when people constantly harp on the dirty deeds that GAAP’s doing to their company’s financial statements, it’s usually a sign that those financials are highlighting something that makes them uncomfortable.
In Buffett’s case, that “something” is likely the magnitude of the investments that Berkshire’s size compels it to make in order to move the needle – as well as the magnitude of the market risks to which those investments expose it. ASC 321 gives Berkshire no place to hide on this issue & highlights an even more fundamental question: does the Berkshire Hathaway conglomerate make sense anymore?
Restatements: A Quick Reference
When you’re as old as I am, you really develop a fondness for anything that you can quickly grab to remind you of all the things you’ve forgotten about stuff that any corporate lawyer should know. That’s why I really like this 12-page BDO guide on the fundamentals of restatements. There’s definitely enough in there on accounting changes, error corrections & reclassifications to let you fake your way through a conference call or two. Check it out!
If you’re a trend chaser, forget about canned booze or intermittent fasting – all the cool kids are now getting their own stock exchange. This Axios article discusses The Members Exchange, or MEMX, which is backed by the likes of Goldman Sachs, BofA & Morgan Stanley. It’s expected to go live this summer & compete with the NYSE and Nasdaq based on lower fees.
Meanwhile, not to be outdone by Wall Street’s brahmins, Silicon Valley bigwigs are backing the Long Term Stock Exchange, or LTSE. We’ve blogged about this one before, but according to this Marker article, the LTSE’s backers include Andreessen Horowitz, Peter Thiel’s Founders Fund, LinkedIn co-founder Reid Hoffman, & AOL founder Steve Case. CEO Eric Ries & his backers have big ambitions for the exchange:
When it launches — sometime late in the first quarter of this year, Ries hopes — the LTSE will be the 14th U.S. exchange registered for trading securities, but only the third active exchange that is approved for both trading and listing of public companies. That means, instead of IPO’ing on the NYSE or Nasdaq, companies will now have the option of listing shares, aka “going public,” on the LTSE.
DFS: New York’s New Regulatory King Kong?
Armed with the formidable Martin Act, the NY Attorney General’s office has long been one the most powerful state regulators in the country – but this WilmerHale memo says that if legislation introduced by NY Gov. Andrew Cuomo is enacted, the AG won’t be The Empire State’s only regulatory colossus:
In legislative language accompanying his proposed budget, New York Governor Andrew M. Cuomo proposes to significantly expand the powers of the New York Department of Financial Services (DFS), the state’s banking and insurance regulator. The Governor’s proposal would enlarge the department’s mission beyond banking and insurance oversight, transforming DFS into perhaps the most powerful state regulator in the nation, with new and broad jurisdiction and substantial enforcement powers over consumer products and services, business to business arrangements, and securities and investment advice.
Though significant in its scope, the Cuomo proposal is in many respects unsurprising. The Governor created DFS in 2011 upon merging the state’s Banking Department and Insurance Department; he initially sought to give DFS powers under the Martin Act, the state’s broad “blue sky” securities statute, but the Legislature declined to do so. Governor Cuomo has, however, expanded DFS’s jurisdiction in other ways in the years since its creation, including by granting it powers to police the state’s student loan servicing industry.
Among other things, the proposal would amend New York’s Financial Services Law to add securities to the definition of “financial product or service” and give DFS the power to regulate the provision of investment advice. As a result, the memo says that the proposal would effectively make DFS another securities regulator. There are a number of other provisions that would enhance DFS’s power to protect consumers, and would also grant DFS jurisdiction over fraud or misconduct in business-to-business transactions.
Lease Accounting Impact: Holy Cow!
We’ve blogged several times in recent years about the implementation of the new FASB lease accounting standard. Now that the standard’s in place for public companies, a recent article from “Accounting Today” says that the balance sheet impact has been staggering:
The new lease accounting standard caused lease liabilities for the average company to increase a whopping 1,475%, skyrocketing from $4.4 million before the transition to $68.9 million post transition, as operating leases were recorded on the balance sheet for the first time, according to a new study.
The study, from the lease accounting software provider LeaseQuery, analyzed more than 400 companies in its customer base and found that the increase was particularly striking in certain industries, such as financial services, where the amount of the average lease liability increased 6,070%. Similarly, in the health care industry, average lease liability liabilities went up 1,817 %, in the restaurant industry 1,743%, in the energy industry 1,542%, in retail 1,012%, and in manufacturing 495%.
Not surprisingly, the article says that companies found the transition to the new standard more difficult and more time consuming than they initially thought. Feedback from public companies prompted FASB to delay the new standard’s application to private companies in order to give them an extra year to get their act together.
With everybody’s 401(k) plan smarting from the stock market’s belated realization that the coronavirus epidemic was actually a thing, this Nelson Mullins memo seems particularly timely. It takes a deep dive into the potential disclosure issues that the ongoing outbreak may raise for public companies. As this excerpt demonstrates, the memo is a great resource for issue spotting:
The impact of CV may have repercussions on a number of disclosure areas, including liquidity and capital resources, sources and uses of funds, gross and net revenues in the short, medium and long term, and other economic and noneconomic, personal and ESG considerations. Enhanced or additional risk factor disclosure related to CV pursuant to Regulation S-K Item 105 may be needed if it is or becomes one of the most significant factors that make an investment in the company or any offering speculative or risky.
Since SEC disclosure is increasingly principles-based, even if there is not a rule specifically dealing with a situation that a company may find itself in related to CV, the principles of full and fair disclosure apply. Companies should be mindful that their planning for uncertainties that may arise as a result of CV and their response to events as they unfold may be material to an investment decision, and should plan accordingly.
Consider other situations where disclosure of material nonpublic information may be necessary, such as if senior management or boards become impaired and are unable to serve or whether a “material adverse change” in “prospects” has occurred or is reasonably likely to occur. Business interruption insurance policies may be triggered. “Act of God” provisions may be applicable. Contract disputes may occur over CV related matters. Professionals should review and update insider trading policies, blackout periods and trading activity monitoring in light of new information related to CV.
As if that wasn’t enough, the memo also addresses a variety of other legal issues that may arise as a result of the outbreak, including potential labor and employment law, privacy, and even cybersecurity considerations.
Coronavirus: Implications for Contracts
It really is difficult to get your arms around the sweeping legal & business implications of the coronavirus epidemic. This Cleary Gottlieb memo picks up on one of the topics alluded to in the Nelson Mullins memo – the potential inability of companies to perform their contractual obligations due to the impact of the epidemic on supply chains. This excerpt addresses the potential availability of the “force majeure” clause to provide relief from contractual liability:
Force majeure clauses seek to define circumstances beyond the parties’ control which can render performance of a contract substantially more onerous or impossible, and which may suspend, defer or release the duty to perform without liability. They can take a variety of forms but most list a number of specific events (as well as more general ‘catchall’ wording to make clear the preceding list is not exhaustive) which may constitute a “Force Majeure Event” and excuse or delay performance, or permit the cancellation of the contract.
Matters such as war, riots, invasion, famine, civil commotion, extreme weather, floods, strikes, fire, and government action (i.e. serious intervening events that are outside the control of ordinary commercial counterparties) are typically included within the scope of Force Majeure Events.
The memo reviews how courts in the U.K., the U.S. & France have interpreted these clauses, and also discusses how common law doctrines of frustration and impossibility of performance may come into play in situations involving U.K. or U.S. contracts. It also touches on the right of parties to contracts entered into after October 1, 2016 under French civil law right to renegotiate those contracts based on a change in circumstances.
EU Blacklists The Cayman Islands & My Wife’s Book Club Gets Skunked
All this coronavirus stuff has made this morning’s blog pretty depressing, so I want to close on a lighter note. My wife is part of a neighborhood book club. Last week, it was hosted by a woman who lives across the street. At one point in the evening, she let one of the family dogs – “Hank” – outside. Hank is a very good boy, but he’s about as smart as you’d think a dog named Hank might be. So, he quickly ended up on the losing end of an encounter with a skunk.
Being a dog, Hank promptly retreated back into the house, whereupon he shared his “Eau de Pepe le Pew” with all the book club members in attendance. Regrettably, all of those women, including my beloved, returned home to their spouses reeking of skunk. As the neighborhood Facebook page lit up with late night tips on how to launder skunk out of clothing, it dawned on me that I live in a sitcom.
It’s at times like these when I fantasize of escaping from my suburban Ohio sitcom life – this week’s episode written & directed by Larry David – to an exotic location like The Cayman Islands. So, it kind of bummed me out to learn that according to this Debevoise memo, the EU just added my fantasy island to its “tax blacklist.” The memo discusses the implications of this action, which are most relevant for investment funds.
Okay, so that’s probably not real relevant to most of you, but I was just looking for an excuse to tell you about the skunking of the Wyndgate Farms book club. Have a good day, everybody!
Well, it didn’t take long for the Division of Enforcement to focus everybody’s attention on the SEC’s recent guidance on the use of key performance indicators in MD&A, did it? This Fried Frank memo focuses on how that guidance may influence the use of ESG metrics in MD&A. While the guidance itself only references ESG metrics in a footnote, this excerpt says that what it had to say about them is consistent with recommendations of some well-known sustainability frameworks:
Although the Metrics Guidance is largely silent with respect to ESG metrics as a specific category, it does note that some companies “voluntarily disclose environmental metrics, including metrics regarding the observed effect of prior events on their operations.” In a footnote, the Metrics Guidance provides examples of metrics to which the guidance is intended to apply, which include a number of ESG metrics, such as total energy consumed, percentage breakdown of workforce, voluntary and/or involuntary employee turnover rate and data security breaches.
While the Metrics Guidance addresses ESG metrics only via footnote, it is consistent with the recommendations in certain voluntary sustainability frameworks that require both qualitative and quantitative disclosure associated with ESG metrics. For example, SASB’s Conceptual Framework notes that sustainability metrics should be accompanied by “a narrative description of any material factors necessary to ensure completeness, accuracy, and comparability of the data reported.”
In addition, the TCFD recommendations note that reporting companies should provide metrics on climate-related risks for historical periods to allow for trend analysis and, where not apparent, should provide a description of the methodologies used to calculate the climate metrics. Similarly, both SASB and TCFD emphasize the importance of having effective disclosure controls and governance, as well as verifying ESG data (by third-party auditors, if possible).
As the memo also points out, many companies have been criticized by stakeholders for using ESG metrics that aren’t “easily comparable, decision-useful, and verifiable.” The new guidance on MD&A key performance indicators heightens the stakes for these ESG disclosures, and companies that don’t respond appropriately may face a bigger downside than complaints about “greenwashing.”
ESG: Building Value Through Good Disclosure
This Latham memo says that companies have an opportunity to build value through their ESG initiatives & disclosure. The memo says that clear and transparent ESG disclosures can “build trust and demonstrate the company’s thoughtful management of ESG risks and opportunities.” This excerpt offers some specific suggestions for preparing ESG disclosures:
– Companies should take steps to ensure the consistency of disclosures in financial and sustainability reports.
– Even if information is included in the sustainability report, ESG information should be included in financial reports if material and called for by the regulations underpinning the disclosure documents.
– Information disclosed in sustainability reports is subject to the antifraud provisions of the securities laws even if not filed with the SEC. The information in companies’ sustainability reports should be scrutinized and verified to ensure its accuracy and completeness as if it were filed with the SEC.
– Companies should explain the importance of the ESG factors in their disclosures to help the reader to understand why the information is meaningful to the company and how it fits within the company’s strategy.
In today’s environment, I don’t think companies that want to address their ESG performance have any alternative to real transparency. The audience for ESG disclosures is increasingly sophisticated & extremely skeptical, so the historically preferred alternative of having the marketing department “put lipstick on the pig” when it comes to describing corporate ESG performance is likely to get you clobbered.
Transcript: “Conflict Minerals – Tackling Your Next Form SD”
We have posted the transcript for our recent webcast: “Conflict Minerals – Tackling Your Next Form SD.”
