Yesterday, in Lorenzo v. SEC, the US Supreme Court held – by a 6-2 vote – that dissemination of false statements with intent can fall within the scope of Rules 10b–5(a) & (c), even if the disseminator did not “make” the statements & consequently falls outside Rule 10b–5(b).
That’s a big win for the SEC – and a big loss for the securities defense bar. The decision is a retreat from the Court’s position in the Janus case, where it held that liability under Rule 10b-5(b) was limited to the “maker” of a false or misleading statement. As Broc subsequently blogged, the SEC responded to Janus by emphasizing its view that 10b-5(a) & (c) had a more expansive reach. The Lorenzo decision vindicates the SEC’s position. Here’s an excerpt from Justice Breyer’s opinion for the Court:
It would seem obvious that the words in these provisions are, as ordinarily used, sufficiently broad to include within their scope the dissemination of false or misleading information with the intent to defraud. By sending emails he understood to contain material untruths, Lorenzo “employ[ed]” a “device,” “scheme,” and “artifice to defraud” within the meaning of subsection (a) of the Rule, §10(b),and §17(a)(1). By the same conduct, he “engage[d] in a[n]act, practice, or course of business” that “operate[d] . . . as a fraud or deceit” under subsection (c) of the Rule.
Justices Thomas & Gorsuch dissented from the ruling, with Justice Thomas stating that the decision “eviscerates” Janus’s distinction between primary & secondary liability “by holding that a person who has not ‘made’ a fraudulent misstatement can nevertheless be primarily liable for it.” Justice Kavanaugh participated in the D.C. Circuit’s ruling on the case & recused himself from the Court’s deliberations. We’re posting memos in our “Securities Litigation” Practice Area.
Board Refreshment: What Do Companies Want From New Directors?
According to this Deloitte/Society for Corporate Governance Board Practices Survey, there are several characteristics that companies look for in new director candidates. This excerpt suggests that diversity – and specifically, gender diversity – tops the list:
94% said their boards are looking to increase board diversity. Of these, the majority (61%) said their boards are looking to increase gender diversity – far exceeding race and ethnicity (48%) and professional skills or experience (43%). Boards seeking to increase their diversity most commonly look to referrals from current directors (77%), suggesting that networking is still key to board succession, though search firms came in a close second (73%).
When it comes to professional experience, companies are most interested in directors who know the industry & those with leadership, accounting or tech backgrounds:
Specific industry experience topped the list. Also in the top 10: business leadership; accounting; digital or technology strategy (e.g., artificial intelligence, cryptocurrency, and social media); cyber; and IT (e.g., infrastructure, operations). While other types of professional experience, such as marketing and HR, may be overdue for board representation (and could contribute to diversity), they do not seem to be gaining traction as stand-alone recruitment priorities.
The survey covered 102 companies, the vast majority of which were either large or mid-caps, although a handful of small-cap companies were also included.
Board Refreshment: What Do They Get?
Okay, so now we know what companies say they want in a new board member – this recent EY survey on 2018’s class of new independent directors at Fortune 100 companies sheds some light on what they actually get. Here are some of the highlights:
– In 2018, 71% of the reviewed companies added at least one new nominee and 27% added two or more. This represents an increase from prior years when the levels were generally steady at around 56% and 21%, respectively.
– The areas of expertise most frequently cited in new nominations were: international business; corporate finance, accounting; and industry expertise. Around half of the new class was recognized for expertise in at least one of these categories. The next most common areas — technology; operations, manufacturing; and board service, corporate governance — were cited in 40% to 45% of new nominations.
– Women continued to represent around 40% of new nominees, contributing to a slight increase in overall board gender diversity; in 2018, 27% of existing independent directors were women, up from 25% in 2016.
Approximately half of 2018’s new class of directors consisted of the usual suspects – current & former CEOs, and that group was predominantly male. But when it came to non-CEO nominees, the genders were more balanced, and most of the new directors from non-corporate backgrounds were women.
Overall, the takeaway seems to be that Fortune 100 companies are adding new directors more frequently, and that those directors are increasingly younger & more female. While the characteristics & qualifications of new directors generally align with what companies say they’re looking for, it also looks like their fixation on former CEOs is working at cross-purposes with their diversity initiatives.
We’ve been following the saga of the “man bites dog” shareholder proposal asking Johnson & Johnson to adopt a bylaw mandating arbitration of securities claims. Last month, the Staff granted the company’s request to exclude the proposal from its proxy statement on the grounds that its implementation would violate applicable state law.
SEC Chair Jay Clayton weighed in with his own statement on this controversial topic, in which he at one point suggested that a court would be a “more appropriate venue to seek a binding determination of whether a shareholder proposal can be excluded.” Cooley’s Cydney Posner reports that the proponent seems to have taken his advice – because the dispute is now in the hands of a NJ federal court. This excerpt from her recent blog summarizes the proponent’s arguments:
The proponent argued that the proposal would not cause the company to violate federal law, because “the Federal Arbitration Act requires the enforcement of arbitration agreements, and Johnson & Johnson has been unable to identify any federal statute that ‘manifest[s] a clear intention to displace the Arbitration Act.’”
Nor, according to the proponent, would the proposal cause the company to violate NJ state law because “neither Johnson & Johnson nor the New Jersey Attorney General has identified any New Jersey statute or court decision that prohibits the enforcement of the arbitration agreements,” and, even if the NJ courts declined to enforce, that still would not mean that including the provision in the company’s bylaws would amount to a violation of NJ law.
That is, a “company does not ‘violate’ state law by entering into an arbitration agreement that happens to be unenforceable under the law of that state.” Finally, even if state law were shown to prohibit enforcement, it would be preempted by the Federal Arbitration Act and void. The proponent also stated that he intends to submit the “proposal again for the 2020 shareholder meeting, and it will continue submitting this proposal each year until the proposal is adopted by the shareholders.”
The proponent is seeking a declaratory judgment that J&J violated the securities laws by excluding the proposal, along with injunctive relief that would, among other things, require the company to include the proposal in supplemental proxy materials.
Audit Committees: PCAOB Promises More Communications
One of the perceived shortcomings of the PCAOB’s inspection process is that it sometimes reaches problematic conclusions about an accounting firm’s audit of a company without any input from the company itself. According to this recent annual “Staff Inspections Outlook for Audit Committees,” the PCAOB plans to increase its engagement with audit committees. Here’s an excerpt:
During 2019, we will provide an opportunity for audit committee chairs of certain companies whose audits are subject to inspection to engage in a dialogue with the inspections staff. The purpose of the audit committee dialogue is to provide further insight into our process and obtain their views. We expect to publish additional updates to audit committees regarding our inspections to provide observations from these interviews and our inspection findings.
The PCAOB went on to review its 2019 inspection priorities, and raised various topics – including sample questions – that audit committees might want to address with their auditors that relate to current issues of inspection focus.
Audit Committees: What If The PCAOB Calls?
So, what should you do if the PCAOB reaches out to your audit committee chair? This excerpt from a recent Stinson Leonard Street blog says you should watch your step:
We believe issuers should approach any such engagement cautiously, if at all. Perhaps the only circumstance for which this may be appropriate is upon assurance by the PCAOB that the inspection of the issuer is complete and final and no potential deficiencies were identified. Even then, issuers should consider whether there is any benefit to the dialogue. It is especially worth consideration because the PCAOB also announced it intends to publish additional updates to audit committees regarding its inspections including observations from these interviews and its inspection findings.
The blog points out that inspection findings can lead to restatements & potential liability for companies. Furthermore, issuers have no control over how the PCAOB will characterize the results of their engagement with the public. That means there is a risk that the audit committee chair or the company could be cast in a negative light.
The need to prepare for a possible phone call from the PCAOB may help address the chronic problem of audit committees sitting around with nothing to do, but if more assistance in keeping your committee busy is needed, check out this helpful list from PwC of 11,284 things that the audit committee should keep in mind for the end of the current fiscal quarter.
I recently stumbled upon Reg A filings for a bunch of fantasy football teams that are part of a national fantasy football league that’s supposed to kick-off this fall. Here’s the Form 1-A Offering Statement filed by the “Philadelphia Powderkegs” – and this excerpt from the filing tells you what they’re up to:
Philadelphia Powderkegs, Inc. is one of 12 Delaware corporations formed to represent teams (each a “Team” or collectively, “Teams”) in a national fantasy sports football league (“The Crown League”) which is to be operated by The Crown League, LLC, a Delaware limited liability company (“CRL”), the managing member and substantial owner of which is CrownThrown, Inc., a Delaware corporation (“CrownThrown”). CRL intends to launch the first publicly owned, professionally managed, national fantasy sports league.
CRL has two classes of membership interests: 49.992% of the membership and voting interests are controlled by the Class A members, all of which are held, in equal amounts, by us and the additional 11 companies that anticipate competing in The Crown League (in other words, each company Team will initially own 4.166% of the interests in CRL), and the remaining 50.008% of membership interests in CRL will be held by the Class B members of CRL, approximately 90% of which is currently held by CrownThrown.
Here are the other teams that filed Form 1-As with the SEC:
I instantly became a fan of the “Florida Mangos Wild” – do you see what they did there? According to the league’s fairly slick website, they also have a “franchise” representing New York, with the location of a 12th franchise to be determined.
Anyway, If you think this entire blog is just an excuse for me to brag about how my team – “Full Metal Jarvis” – won my fantasy football league’s championship this season, well. . . you’re right.
ESG: Banging the Drum for More Disclosure
This recent article from The Center for Executive Compensation reviews the multi-pronged efforts at requiring more disclosure from public companies on ESG issues. And as this excerpt points out, Congress may be getting into the game:
Rep. Maxine Waters (D-CA), Chair of the House Financial Services Committee published the Committee’s hearing schedule for March, and in addition to already-announced priorities, of particular note is a March 26 subcommittee hearing on “Building a Sustainable and Competitive Economy” which will focus on “proposals to improve environmental, social, and governance disclosures.”
The topic is not surprising given the increased interest in ESG information by both large investors — primarily the large index funds such as BlackRock, Vanguard and State Street — as well as the push for greater disclosures by investors with a specific advocacy bent. As we reported last month, a recent Morrow-Sodali study found that investors seek greater information on corporate culture, climate change and human capital metrics.
The memo also cites a recent WSJ report that says shareholder proposals asking companies to produce climate change disclosures are expected to jump to 75 or more in 2019 from 17 in 2018.
Our “Proxy Disclosure Conference”: Early Bird Ends April 5th
– The SEC All-Stars: A Frank Conversation
– Hedging Disclosures & More
– Section 162(m) Deductibility (Is There Really Any Grandfathering)
– Comp Issues: How to Handle PR & Employee Fallout
– The Top Compensation Consultants Speak
– Navigating ISS & Glass Lewis
– Clawbacks: #MeToo & More
– Director Pay Disclosures
– Proxy Disclosures: 20 Things You’ve Overlooked
– How to Handle Negative Proxy Advisor Recommendations
– Dealing with the Complexities of Perks
– The SEC All-Stars: The Bleeding Edge
– The Big Kahuna: Your Burning Questions Answered
– Hot Topics: 50 Practical Nuggets in 60 Minutes
According to this recent WSJ article, the SEC may issue a proposal to regulate ISS, Glass Lewis & the gang as soon as this spring. Here’s an excerpt:
The SEC is expected to propose the first U.S. rules on proxy-advice companies following an organized campaign by public companies that think proxy-advisory firms have too much sway over shareholder proposals. Lobbying and advocacy groups, including the U.S. Chamber of Commerce and the National Association of Manufacturers, and stock exchanges, such as the Nasdaq and the New York Stock Exchange, have mounted a well-funded offensive against the industry, which is dominated by two firms. The groups have purchased advertisements targeting proxy advisers, sponsored a Washington think-tank event and testified at multiple Senate committee hearings on the issue.
Corporations say the advisory firms—which make recommendations to shareholders on how to vote on corporate governance issues—have too much sway over corporate decision-making. Companies argue that they spend too much time and money fighting proposals they think would be detrimental to their overall performance.
Despite the astroturf advocacy on this issue by the “Main Street Investors Coalition,” an organization that seems to have been essentially a sock puppet for NAM & the Chamber, I’m not going to pretend that I’m sorry to see that proxy advisors may finally face some sort of SEC oversight.
There’s certainly a sizeable group of people who view proxy advisors as indispensable tools for promoting shareholder democracy & believe that they should remain free from oversight. Not me. I haven’t embraced the theology of shareholder supremacy & don’t take it as revealed truth that directors should prostrate themselves before the company’s “true owners” [sic]. I also don’t think that “good governance” means reflexively endorsing any proposal that reduces the board’s power and enhances the power of whatever amorphous mass of casino capitalists happens to be holding shares at any given instant.
Once you cut through the pious propaganda from one side about “shareowner democracy” and from the other about “the perils of short-termism,” this is ultimately a cynical struggle between two powerful factions for control over who has the final say at public companies. Proxy advisors have been effectively weaponized by the investor side of that struggle, & their use should be regulated just as management’s use of its own weapons are. After all, what’s sauce for the goose is sauce for the gander.
The SEC isn’t just focusing narrowly on proxy advisors. This recent speech by Commissioner Roisman indicates that it’s also focusing on how those recommendations are used by institutional investors and how those investors ensure they are using them responsibly.
Testing the Waters: Avoiding a General Solicitation Issue
This Locke Lord blog discusses a potential issue around “testing the waters” that not many have focused on – how to maximize a company’s flexibility to pursue private financing after it’s tested the waters & opted not to pursue a public financing. The biggest concern in this scenario is the possibility that testing the waters for the public deal might be regarded as a “general solicitation” for the private financing.
Fortunately, the blog says that this outcome can be avoided if the company takes a careful approach to how it tests the waters for the potential public deal. Here’s an excerpt:
Although the SEC does not appear to have addressed this question directly, our advice and prevailing market practice is that if the test-the-waters activity is properly structured an issuer can avoid its being a general solicitation. The key to avoiding a general solicitation is carefully selecting the investors with which the issuer will test-the-waters. If the test-the-waters activity does not involve a general solicitation, there should be no concern doing a subsequent private offering, either to the investors with which the waters were tested or other investors.
The blog points out that it typically shouldn’t be too difficult to plan a test-the-waters effort to avoid general solicitation – the investors contacted will all have to be institutions, and it’s likely either the company or its banker will have a preexisting substantive relationship with them.
Blockchain: ABA’s “Digital & Digitized Assets” White Paper
The ABA’s Business Law Section just published this 353-page white paper addressing jurisdictional issues relating to blockchain technology, cryptocurrencies & other digital assets. This excerpt from a recent Paul Hastings memo summarizes the contents:
The white paper tackles a number of topic areas relevant to the ever-changing cryptocurrency and digital asset landscape, including:
– Background information regarding digital assets and blockchain technologies, including associated trading platforms, security issues, and characteristics and features of digital assets and virtual currencies;
– Regulation by the Commodity Futures Trading Commission under the Commodity Exchange Act, including the CFTC’s approach to classifying and regulating virtual currencies and related derivatives;
– The SEC’s regulation under the Securities Act, the Securities Exchange Act, the Investment Company Act, and the Investment Advisers Act, including when the SEC classifies a digital asset as a “security;”
– The interplay, and sometimes tension, between SEC and CFTC regulations;
– FinCEN regulation of digital assets, including in relation to anti-money laundering and know-your-customer requirements;
– International regulation of digital assets and blockchain technology throughout Europe, Asia, Australia, and globally; and
– State law considerations, including state law licensing requirements and state-specific regulations.
Over on the “Business Law Prof Blog,” Prof. Haskell Murray flagged this Fordham study on pre-Securities Act prospectuses. It’s interesting for a number of reasons – not the least of which is that it includes as an appendix a copy of a Coca-Cola prospectus from 1919. Check it out!
Exempting The Crypto? The “Token Taxonomy Act”
Last month, I blogged about Commissioner Peirce’s comments calling for a lighter touch when it comes to regulating “decentralized” tokens. She’s got company in Congress. Late last year, Reps. Warren Davidson (R-Ohio) & Darren Soto (D-Fla.) introduced the “Token Taxonomy Act” – which would exempt “digital tokens” from key provisions of the federal securities laws.
This CoinDesk article notes that the legislation would carve out an exemption for the kind of digital assets to which Peirce advocated applying the Howey test with a lighter touch:
According to the text, the bill – among other items – seeks to exclude “digital tokens” from being defined as securities, amending both the Securities Act of 1933 and the Securities Exchange Act of 1934.
That definition has several components, all of which center around a degree of decentralization in which no one person or entity has control over an asset’s development or operation. This ostensibly would clear the way for cryptocurrencies that don’t have a central controller to be spared a securities designation.
The bill defines “digital tokens” as “digital units created… in response to the verification or collection of proposed transactions” (mining, basically) or “as an initial allocation of digital units that will otherwise be created” (as in a pre-mine). These tokens must be governed by “rules for the digital unit’s creation and supply that cannot be altered by a single person or group of persons under common control.”
Sorry if I come off like a digital Luddite – but is a broad statutory exemption from the securities laws really the best approach to an emerging asset category that few people understand, that’s been hyped relentlessly, and that’s rife with fraud?
IPOs: The Media Discovers “Cheap Stock” (Again)
Hey everybody – the media’s discovered “cheap stock” again. I know it’s been an issue in IPOs since Martin Van Buren was president, but for some reason it’s always huge news to the media when they stumble upon it. A couple of years ago, it was the NYT that breathlessly exposed the disparity between the valuation of equity awards made in advance of an IPO & the offering price. This time, it’s the WSJ that breaks the shocking news that private & public valuations are different:
A Wall Street Journal analysis of recent initial public offerings identified 68 companies that gave employees options to buy about $1.5 billion worth of shares in the 12-month run-up to their market debut. But the value of those shares was much higher based on a valuation model developed by academics—an estimated $2.2 billion, the equivalent of employees getting a 32% discount on the shares.
“The Journal’s findings show that the valuations being reported by companies are significantly below what the shares are really worth—the price that investors would pay for them,” said Will Gornall, an assistant finance professor at the University of British Columbia, in Vancouver.
What’s not clear from the WSJ’s article is whether it’s really comparing apples to apples in coming up with what the price “should” be for employee equity awards. The study seems to have just looked at the discount to the IPO price – the so-called “private company” discount. But pre-IPO equity awards usually have a lot of strings attached to them, such as vesting provisions and often onerous restrictions on transfer, and that affects their value too.
Here are the results of our recent survey on the use of board portals:
1. When it comes to board portals, our company:
– Doesn’t have one and isn’t considering using one in the near future – 3%
– Doesn’t have one but is considering whether to use one – 3%
– Adopted one within the past two years – 9%
– Adopted one more than two years ago – 84%
2. For those with board portals, our company:
– Licensed an off-the-shelf portal – 100%
– Built it in-house – 0%
– Hired a service provider to build a custom portal – 0%
3. For those with off-the-shelf board portals, we have:
– Asked whether our vendor has ever had a security breach – 24%
– Investigated our vendor’s security – 48%
– Plan to investigate our vendor’s security in the near future – 14%
– Not worried about our vendor’s security – 14%
Please take a moment to participate anonymously in these surveys:
Corporate Lonely Hearts: Public Shell Seeks Reverse Merger Partner
I think Jane Austen put it best when she said, “it is a truth universally acknowledged, that a private company in possession of a good fortune must be in want of a public shell to reverse merge with.” Well, she said something like that anyway. . .
However, finding your corporate soul mate isn’t always an easy process – and maybe that’s why one lonely public shell decided to take out a personals ad to let prospective suitors know it was available. The ad wasn’t shy about letting those suitors know that this shell had a lot to offer:
OTCQB Ready Fully Reporting Pink Trading Public Shell For Sale
– Selling control block (30,000,000 restricted shares)
– Has symbol, trading and quoted on the OTC Pink w/piggyback status OTCQB READY!
– FULLY REPORTING – FULLY AUDITED BY PCAOB ACCOUNTING FIRM
Other attributes included “DTC Eligible!” and “No regulatory issues.” Of course, as Madonna noted, “we are living in a material world,” so a suitor wasn’t going to get all this for free. So what was the price? “Cash & Carry – Ask $349,500.00.” The big question is – did true love prevail? Based on my sleuthing, it appears that the answer is yes. Our public shell – “China Grand Resorts” – seems to have found Jacksam Corporation, a maker of cannabis vaporizers for medical marijuana. The couple reverse merged last September & gave birth to a bouncing baby S-1 earlier this month.
Transcript: “Controlling Shareholders – The Latest Developments”
We have posted the transcript for the recent Deallawyers.com webcast: “Controlling Shareholders: The Latest Developments.”
In January, I blogged about the SEC’s enforcement proceedings against four companies that were unable to get their acts together when it came to ICFR. The SEC’s action was a shot across the bow of other companies that might have thought that full disclosure of a material weakness was sufficient. The SEC’s action delivered a clear message that when you’ve got an internal controls problem, you’ve got to fix it.
But at the same time, lots of companies have ICFR issues – and many material weaknesses can’t be fixed overnight. So which companies should be concerned that SEC Enforcement might soon be knocking at their doors? This ‘Audit Analytics’ blog may help companies assess their risk of being subject to an enforcement proceeding. It reviewed data on material weakness disclosures during the period from 2007-2017, and it concludes that the 4 companies targeted by the SEC in these proceedings all involved extreme cases of non-compliance:
When it comes to poor internal controls, these companies are some of the worst offenders, as the problems were allowed to linger for years. Looking at data from 2007 and 2018, 3.4% of registrants with any ineffective ICFR report had seven ineffective management ICFR reports, comparable to Digital Turbine. This percentage decreases to 1.9% for registrants such as LifeWay and CytoDyn that had nine ineffective ICFR reports. Overall, less than 10% of registrants with any ineffective ICFR management ICFR report had seven or more ineffective reports.
As the biggest of the four registrants, Grupo Simec is noteworthy, being one of only 72 companies traded on NYSE that had ineffective independent auditor’s reports on internal controls in 2017 and one of only two companies that has had ten ineffective audited reports since 2007.
While companies may take some solace in the fact that these 4 targets were outliers, the blog cautions that other firms with multiple ineffective ICFR reports but only minimal remedial actions could also be at risk.
Buffett to GAAP: “Get Off My Lawn!”
Last week, Warren Buffett’s annual letter to Berkshire-Hathaway shareholders landed – and while it had its usual on-brand mix of folksy humor and provocative statements (e.g., deals are too pricy & federal debt doesn’t matter), the Oracle of Omaha led off with a jeremiad against GAAP’s new “mark-to-market” requirement for unrealized securities gains & losses:
Berkshire earned $4.0 billion in 2018 utilizing generally accepted accounting principles (commonly called “GAAP”). The components of that figure are $24.8 billion in operating earnings, a $3.0 billion non-cash loss from an impairment of intangible assets (arising almost entirely from our equity interest in Kraft Heinz), $2.8 billion in realized capital gains from the sale of investment securities and a $20.6 billion loss from a reduction in the amount of unrealized capital gains that existed in our investment holdings.
A new GAAP rule requires us to include that last item in earnings. As I emphasized in the 2017 annual report, neither Berkshire’s Vice Chairman, Charlie Munger, nor I believe that rule to be sensible. Rather, both of us have consistently thought that at Berkshire this mark-to-market change would produce what I described as “wild and capricious swings in our bottom line.”
If Warren sounds grumpy, well, you would be too if you lost $25 billion in a single quarter, like Berkshire did due to Q4 mark-to-market adjustments. But he should take some consolation in the fact that Berkshire’s by no means alone in dealing with the increased volatility resulting from the new standard.
The mark-to-market requirement was expected to have a big impact on earnings for many companies, and it appears to be living up to its advance billing. For example, this recent Reuters article notes that the new standard’s effect on publicly traded PE funds such as Blackstone, Carlyle & KKR has been so significant that they’ve opted to deemphasize the traditional “economic net income” metric – which reflects mark-to-market adjustments – in favor of “distributable earnings,” which represents the actual cash available for paying dividends.
Delaware Chancery: Choosing Venezuela’s President Since 2019?
The Delaware Chancery Court has long played an outsized role in shaping the destiny of some of the world’s largest businesses. Now, this Bloomberg story says that the court may be called upon to weigh-in on the fate of a nation – because it may have to determine who is Venezuela’s lawful president as part of a battle for control over Citgo. Here’s an excerpt:
The leadership crisis in Venezuela could lead to an odd legal situation in the U.S. — a Delaware judge may be asked to decide who is the legitimate president of the South American country.
The issue could arise in the U.S. because of the power struggle over Citgo Petroleum Corp., the Houston-based refiner owned by Venezuela oil giant Petroleos de Venezuela SA. Last week, Juan Guaido, the U.S.-backed head of Venezuela’s National Assembly, named new directors to Citgo and PDVSA, a critical part of his strategy to seize oil assets and oust the regime headed by autocrat Nicolas Maduro, who remains in control of the military and other key parts of the government.
Venezuela’s president is the controlling shareholder of PDVSA, and the article speculates that lawyers for the U.S.-backed Guaido may set up a Chancery Court contest centering on who is Venezuela’s president by trying to remove Maduro’s directors and replacing them with his slate.
Big institutional holders seldom have trouble getting management’s ear – but traditionally, retail investors who weren’t willing to play the gadfly game could usually count on a polite brush-off from the IR department. Now, it looks like that situation may be changing. Broc recently blogged about SAY, a New York-based tech startup that provided a platform for retail investors to vote on questions to ask Elon Musk during a recent Tesla earnings call. But SAY’s not the only entity that’s trying to help retail investors be heard on matters that concern them. Check out ‘Stake’ – which aims to pair retail investors with a small group of socially responsible investment funds that will serve as “Champions” for their issues.
Stake provides a platform for retail shareholders to identify specific “Asks” that they want addressed by the companies in which they invest. Once an ‘Ask’ gets a critical mass of support, this excerpt from Stake’s website lays out what happens next:
When an Ask reaches its support goal, one of Stake’s Champions will take that Ask directly to company management, advocating on behalf of all those that supported the Ask. Our Champions are experts at persuading companies to improve their social and environmental impact, and they are already connected to the corporate decision-makers. Stake is a tool like none before. By connecting you with a professional Champion, your voice reaches the boardroom.
Investors who supported the specific “Ask” receive progress updates on the company’s response to it. Stake’s founders are themselves climate change activists & companies have implemented a number of the Asks that Stake’s allied funds championed.
I know it’s easy to be skeptical of efforts like these – and I have my doubts about how much traction Stake’s going to be able to get. But I’m also reminded that it only took David one stone to take down Goliath, & these folks have the potential to muster a lot more firepower than that.
Tomorrow’s Webcast: “Conduct of the Annual Meeting”
Tune in tomorrow for the webcast – “Conduct of the Annual Meeting” – to hear Nu Skin Enterprises’ Greg Belliston, The Brink Company’s Lindsay Blackwood, Foot Locker’s Sheilagh Clarke, Carl Hagberg of the “Shareholder Service Optimizer” and General Motors’ Rick Hansen talk about how to best prepare for your annual shareholders meeting.
Annual Reporting: Don’t Forget to Check On Your Filer Status!
This Akin Gump blog reminds companies to check on their filing status while they’re preparing to file their Form 10-K – many more companies may qualify as “smaller reporting companies” this year due to the SEC’s recent rule changes. Here’s an excerpt:
As public companies prepare to file their annual reports on Form 10-K for the year ended December 31, 2018, they should consider whether they qualify for smaller reporting company status under the recently amended definition of smaller reporting company, which became effective on September 10, 2018, and the related CDIs updated by Staff of the Division of Corporation Finance on November 7, 2018.
The amended SRC definition raises the threshold to allow more companies to qualify as an SRC and benefit from the election to use the scaled disclosure accommodations available to SRCs. SRCs may choose compliance with either the SRC scaled disclosure requirements or the larger company disclosure requirements on an item-by-item or “a la carte” basis for each filing as long as disclosures are provided consistently and permit investors to make period-to-period comparisons.
The blog also reminds companies thinking about taking advantage of scaled disclosure that, to the extent an SRC scaled item requirement is more rigorous than the same larger company item requirement, SRCs are required to comply with the more rigorous disclosure.
Lyft finally dropped the Form S-1 for its much anticipated IPO on Friday. The filing fundamentally changed humanity forever – or at least that’s the impression you’d get from reading Lyft’s overheated nuclear jargon-bomb of a prospectus. If you think I’m being unfair, check out this lofty description of the culture & values of a company that owes a healthy chunk of its business to ferrying around drunk people:
Our core values are Be Yourself, Uplift Others and Make it Happen. Our team members, who uphold our values and live our mission every day, are at the forefront of cultivating and spreading this culture across the drivers, riders and communities we serve. This continuous interaction across the entire Lyft community creates a virtuous cycle which further reinforces our culture and fuels our growth.
Look, I worked on a lot of IPOs back in the day, and I plead guilty to helping draft a lot of meaningless gibberish about companies doing things like “proactively leveraging synergies” in prospectus summaries with silly captions like “Our Strategic Vision” & “Our Competitive Advantage.” But this thing reads like a parody of a tech company prospectus – starting with the pink cover page & culminating in a founders’ letter accompanied by an assortment of photos & quotes from photogenic millennials whose lives have been transformed by one-click access to an unlicensed cab. Toss in the nearly $1 billion loss for the most recent year, and you’ve got truly state of the art stuff.
And maybe the biggest inside joke is that many people – including EU regulators – think ride share businesses like Lyft aren’t tech companies at all. Instead, they essentially view them as ‘gypsy cab’ apps. What’s more, in reading Lyft’s filing, you get the impression that its biggest market opportunity lies in the rapidly growing demographic of people who are too poor to buy their own cars. How do you spin that positively? You do it like this:
We believe that the world is at the beginning of a shift away from car ownership to Transportation-as-a-Service, or TaaS. Lyft is at the forefront of this massive societal change. Our ridesharing marketplace connects drivers with riders and we estimate it is available to over 95% of the U.S. population, as well as in select cities in Canada. In 2018, almost half of our riders reported that they use their cars less because of Lyft, and 22% reported that owning a car has become less important. As this evolution continues, we believe there is a massive opportunity for us to improve the lives of our riders by connecting them to more affordable and convenient transportation options
Of course, since the Lyft folks are working 24/7 to bring humanity into “the broad, sunlit uplands” of TaaS (not to be confused with TASS), management can’t afford to be distracted by the demands of public shareholders. Perhaps that’s why Lyft not only has a dual class capital structure, but also a staggered board, blank check preferred, and a prohibition on shareholder written consent actions, just to name some of its antitakeover protections. The CII has already weighed-in with the customary objections.
Personally, I couldn’t care less if Lyft wants to offer the public low vote stock – if you don’t like it, don’t buy it. But I’m looking forward to the post-closing pearl clutching about these provisions by the governance side of the house of the same institutions whose portfolio managers would likely stampede over their own children to get shares allocated to them in the deal.
If you’re looking for more of a deep dive into Lyft’s proposed IPO, check out this MarketWatch.com article.
Dual Class Companies: Are “Coattails” the Answer?
Lyft’s just the latest high profile IPO to include a dual class capital structure. There’s been a lot of sound & fury about public companies with these structures – and we’ve blogged about quite a bit of it. But this recent study claims that our neighbors to the north are the source of an idea for moving forward on this issue. Here’s the abstract:
The debate over whether dual class of shares increases or decreases share value, should be prohibited or not, should be subjected to mandatory sunset provisions, and so on has been heating up over the last few years. This paper reviews the pros and cons of dual class of shares in light of more recent empirical results of (mostly) American studies. The paper surveys the evolution of dual-class companies in the Canadian context and makes a number of recommendations to enhance the usefulness of this type of capital structure and protect the rights of minority shareholders.
The paper comes out against time-based sunset clauses but supports the obligation for dual-class companies to adopt a “coattail” provision, as is the case in Canada, which provision ensures that all shareholders will have to be offered the same price and conditions should the controlling shareholder decide to sell its controlling stake in the company. The paper also recommends that separate tallies of vote results be made public for each class of shares and that a third of board members be elected by shareholders with “inferior” voting rights.
Now, I hate to disabuse North America’s designated driver of its notion that “coattails” are a Canadian invention, but the there’s lots of precedent for this south of the border as well – and it goes back decades. You need look no further than my all-time favorite deal for evidence of this.
In the Cleveland Indians’ 1998 initial public offering, the company’s charter included a provision that generally prohibited the transfer of the high-vote shares held by then-owner Dick Jacobs other than as part of a transaction in which the low vote shares received the same consideration as the high-vote shares. And you can take my word for it – we weren’t innovators. In fact, we shamelessly stole that language from charter documents filed in several precedent transactions.
The SEC’s limited track record in litigation involving whether tokens are securities has been pretty good – but there was one recent blemish. In December, a California federal court denied the SEC’s motion for a preliminary injunction against Blockvest’s proposed token offering, holding that the agency had not provided enough information to deem the token a security. Here’s an excerpt from John Reed Stark’s blog describing the court’s decision:
On February 14, 2019, in a stunning and extraordinary reversal from his November decision, Judge Curiel sent shockwaves through the ICO industry. Specifically, Judge Curiel granted the SEC’s bid for a preliminary injunction against Blockvest after the SEC asked him to reconsider, based upon, “a [now] prima facie showing of Blockvest’s past securities violation and newly developed evidence which supported the conclusion that there is a reasonable likelihood of future violations.”
Last week, Corp Fin issued new CDIs addressing board diversity disclosure issues. Now, Rep. Greg Meeks (D-NY) & Sen. Bob Menendez (D-NJ) have introduced legislation that would require companies to disclose self-identified demographic info about their board & executive officers. Here’s an excerpt from a recent Weil blog summarizing the proposed legislation:
The bill, which garnered the support of the Council for Institutional Investors and the U.S. Chamber of Commerce, would require public companies to disclose annually in their proxy statements data on the racial, ethnic, and gender composition, as well as veteran status, of its board of directors, director nominees and executive officers based on voluntary self-identification. Moreover, disclosure regarding the adoption of any board policy, plan or strategy to promote racial, ethnic, and gender diversity would be required.
The bill would also require the SEC’s Office of Minority and Women Inclusion to publish best practices for corporate reporting on diversity. Rep. Meeks introduced the same legislation during the last Congress, but it went nowhere. With Democrats controlling the House & support from the CII & the U.S. Chamber of Commerce, perhaps it will get more traction this time around.
Board Gender Diversity: Will Supply Meet Demand?
Recently, Liz wrote on “The Mentor Blog” that assuming current board composition, California’s board gender diversity statute will require Golden State companies to find over 1000 women directors by the end of 2021.
A recent study on the market’s reaction to the statute suggests that there is some concern among investors that there won’t be enough qualified female director candidates to meet that demand – and this concern has implications for companies located in & outside of California. Here’s an excerpt from the study’s abstract:
On September 30, 2018, California became the first U.S. state to introduce a mandatory board gender quota applicable to all firms headquartered in the state. Using a large sample of publicly-listed firms headquartered in the U.S., we find that the introduction of the quota is associated with significantly negative announcement returns to California-headquartered firms. Consistent with the quota imposing frictions, this effect is larger for firms requiring more female directors to comply with the quota.
According to the study, California headquartered companies had a 0.47% lower return on the first day after the quota announcement than a control group of matched on size and industry. It says that this effect is larger for companies needing to add more female directors to comply with the quota and for those with low corporate governance standards – results that are consistent with the theory that smaller companies and those with poor governance could have a hard time recruiting qualified women candidates.
The study also identified negative “spillover” effects on returns for companies headquartered outside California. These were concentrated among companies in industries where California-based companies need to recruit a lot of female directors to comply with the law. Companies headquartered in “blue” states were also negatively affected – perhaps due to perceptions that they were more likely to become subject to a board gender quota than those based in “red” states.
Europe’s experience with a female quota requirement for boards suggests that companies may want to expand their search to some less traditional sectors – such as women working in leadership positions in government, non-profits & academia.
January-February Issue of “The Corporate Counsel”
We recently mailed the January-February issue of “The Corporate Counsel” print newsletter (try a no-risk trial). The topics include:
– Tone Deaf at the Top: Now It’s Your Problem When an Executive Messes Up
1. Is There an Insider Trading Problem?
2. An Unusually-Timed Form 4 Attracts Attention
3. Beware of the Potential for Shareholder Derivative Suits
4. There Are Disclosure Issues Everywhere
5. Sanctions & Remedial Steps
– Reg A Gets an Upgrade: Opening the Exemption to Reporting Issuers
– Annual Season Items
– Non-GAAP: “Equal or Greater” Prominence Applies to Your Earnings Release
– Form S-3 is Sometimes a “Come as You Were” Party
