Do you remember that “South Park” episode that aired during the financial crisis in which one of the characters deposits a $100 birthday check from his grandmother into the bank? The banker takes the money, “puts it to work” in a mutual fund and immediately announces “. . . and it’s gone!” That episode was the first thing that came to mind when I read this risk factor language in Hertz’s pro supp for a $500 million ATM offering launched in the midst of its Chapter 11 bankruptcy proceeding:
Although we cannot predict how our common stock will be treated under a plan, we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels.
That’s pretty bleak disclosure, and nobody can say they weren’t warned about the perils of this investment. Even so, Hertz’s decision to tap the public equity market – which the bankruptcy court approved last Friday – in its current financial state definitely raises the bar when it comes to corporate chutzpah. On the other hand, can you blame the company for trying to capitalize on the recent speculative frenzy in its stock in order to increase the size of its bankruptcy estate?
If “Davey the Day Trader” & the gang are willing to sign up to buy stock that the company is basically telling them is worthless, then maybe instead of South Park, I ought to cite 1920s speakeasy impresario Texas Guinan, who famously welcomed her customers by exclaiming, “Hello suckers! C’mon in and leave your wallets at the bar!”
IPOs: Virtual Road Shows On the Rise
The grueling, globe-trotting – “if it’s Tuesday this must be Zurich” – road show process has long been a big part of the IPO experience for management teams & their bankers. In the Covid-19 era, however, this PitchBook article says that virtual road shows may become the “new normal”:
Virtual IPO roadshows likely are here to stay after the pandemic, said Andreas Bernstorff, head of equity capital markets at BNP Paribas. BNP was one of the lead bankers for Peet’s €2.25 billion (around $2.55 billion) IPO on Euronext in May. Bernstorff acknowledged that sizing up a founder or its executives can be more difficult through video without making eye contact or reading body language.
Nevertheless, he said, virtual roadshows have exposed inefficiencies in the IPO process.
“The benefits are obviously avoiding traveling around the world, but also the fact that it can be a faster and more efficient way to reach more investors,” Bernstorff said. “It also has a very distinct benefit of being able, up to a degree, to shorten the period in which one needs to be in the market.”
The article says that fully virtual road shows may not make sense for all issuers. Companies with a low profile and those that operate in volatile markets will likely continue to find it necessary to meet in-person with key investors as part of the marketing process.
Will CLOs Turn the Covid-19 Crisis into a Full Blown Financial Crisis?
If you find yourself sleeping too soundly, check out this article from the July issue of The Atlantic. The article says that collateralized loan obligations, or CLOs, share many similarities with the CDOs that nearly tanked the global financial system a decade ago – and the balance sheets of major banks are full of them.
The problem is that these AAA rated pieces of paper are comprised of a bunch of low-quality corporate debt, and the rash of bankruptcy filings expected in the wake of the pandemic may well upset the applecart when it comes to the default rate assumptions on which those investment grade ratings were based. What’s the worst “worst case” scenario? According to the article, it’s very, very bad.
We’ve just added Bill Hinman – Director of the SEC’s Division of Corporation Finance – as another top-notch speaker at our popular conferences – the “Proxy Disclosure Conference” & “17th Annual Executive Compensation Conference” – which will now be held entirely virtually, September 21-23rd. We’ve offered a Live Nationwide Video Webcast for our conferences for years – one of the only events to do so – and we’re excited to build on that platform and make your digital experience better than ever. Act now to get an “early bird” discount – here’s the registration information. Here are the agendas – 18 panels over three days.
Among the panels are:
– Bill Hinman Speaks: The Latest from the SEC
– The SEC All-Stars: A Frank Pay Disclosure Conversation
– The SEC All-Stars: Q&A
– Pay-for-Performance: What Matters Now
– Pay-for-Performance: Q&A
– Directors in the Crosshairs: Pay, Diversity & More
– Dave & Marty: True or False?
– Pay Ratio: Latest Developments
– 162(m): Where Things Stand
– Clawbacks: What to Do Now
– Dealing with the Complexities of Perks
– How to Handle Negative Proxy Advisor Recommendations
– Human Capital: The Compensation Committee’s Role
– The Big Kahuna: Your Burning Questions Answered
– The SEC All-Stars: The Bleeding Edge
– The Top Compensation Consultants Speak
– Navigating ISS & Glass Lewis
– Hot Topics: 50 Practical Nuggets in 60 Minutes
PPP Loans: Media Giants Seek to Compel Disclosure of Borrowers
A lawsuit filed last week by The Washington Post, Bloomberg, The New York Times, Dow Jones and Pro Publica in a D.C. federal court seeks an order compelling the SBA to produce that information pursuant to outstanding FOIA requests submitted by the companies. The SBA has been slow-walking these requests, and Treasury Secretary Steve Mnuchin recently said that the identities of PPP borrowers won’t be disclosed. He appears to be hanging his hat on Exemption 4 from FOIA.
I guess we’ll see. I’m no FOIA expert, but if the question is whether information about the identity of a private borrower & loan amount are required to be disclosed under a FOIA request, the answer that I’ve seen from lawyers who’ve looked at the issue is yes, that information must be disclosed.
Transcript: “Politcal Spending – What Now?”
We have posted the transcript for our recent webcast: “Political Spending – What Now?”
Late Wednesday, the Senate unanimously passed the House version of the Paycheck Protection Flexibility Act, which President Trump is expected to sign into law. Among other things, the legislation extends the period during which PPP loans may be spent from eight to 24 weeks, and decreases the percentage of the loan that must be spent on payroll from 75% to 60%. This excerpt from a Journal of Accountancy article highlights some of the law’s key provisions:
– Current PPP borrowers can choose to extend the eight-week period to 24 weeks, or they can keep the original eight-week period. New PPP borrowers will have a 24-week covered period, but the covered period can’t extend beyond Dec. 31, 2020. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
– Under the language in the House bill, the payroll expenditure requirement drops to 60% from 75% but is now a cliff, meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven. Currently, a borrower is required to reduce the amount eligible for forgiveness if less than 75% of eligible funds are used for payroll costs, but forgiveness isn’t eliminated if the 75% threshold isn’t met. Rep. Chip Roy (Texas), who co-sponsored the bill in the House, said in a House speech that the bill intended the sliding scale to remain in effect at 60%. Senators Marco Rubio and Susan Collins indicated that technical tweaks could be made to the bill to restore the sliding scale.
– Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by Dec. 31, a change from the previous deadline of June 30.
– The legislation includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows borrowers to adjust because they could not find qualified employees or were unable to restore business operations to Feb. 15, 2020, levels due to COVID-19 related operating restrictions.
In addition, existing PPP loans – which originally had two year terms – may be extended to five years if the lender & borrower agree, and new PPP borrowers will have five years to repay their loans. The interest rate on PPP loans remains at 1%. PPP borrowers may also delay payment of their payroll taxes, which the CARES Act prohibited. The deadline to apply for PPP loans remains June 30th.
“Cha-Ching!” Whistleblower Hits for $50 Million
You know who isn’t going to need a PPP loan? The lucky individual who just hit the SEC’s whistleblower jackpot to the tune of nearly $50 million. This excerpt from the SEC’s press release announcing the award points out that it’s the largest in the whistleblower program’s history:
The Securities and Exchange Commission today announced a nearly $50 million whistleblower award to an individual who provided detailed, firsthand observations of misconduct by a company, which resulted in a successful enforcement action that returned a significant amount of money to harmed investors. This is the largest amount ever awarded to one individual under the SEC’s whistleblower program. The next largest is a $39 million award to an individual in 2018. Two individuals also shared a nearly $50 million whistleblower award that same year.
Here’s the SEC’s award order. As usual, all the good parts have been redacted, but this WSJ article has the details. The order indicates that another claimant sought a cut of the award, but the SEC shot that person’s claim down. Well, I guess we can’t all be winners. Personally, I think somebody like this should at least get some lovely parting gifts – you know, like Rice-a-Roni or a case of Turtle Wax – for playing the whistleblower game.
“What Then Must We Do?”
There’s a great scene in “The Year of Living Dangerously” in which photographer Billy Kwan takes journalist Guy Hamilton to witness the suffering of the poor in the slums of Jakarta. As they survey the scene, Kwan asks the question raised in St. Luke’s Gospel, “what then must we do?” Echoing John the Baptist’s response, Kwan’s answer is, “Don’t think about the major issues. You do what you can about the misery in front of you. You add your light to the sum of all light.”
As we end this week, I think many of us are asking Billy Kwan’s question. I thought about that when I read this article that a member passed along from the Yale School of Management about how white managers can respond to anti-black violence. It provides some suggestions about actions we can take in our own businesses to help make them places that aren’t just “non-racist,” but actively “anti-racist.” You may not agree with everything the author has to say, but engaging with these issues on our own turf is the first step in following Billy Kwan’s advice.
A recent Univ. of Georgia B-School study says that when it comes to maximizing the value of equity awards, corporate executives seem to never waste a crisis. Here’s an excerpt from a recent article discussing the study:
A recent study from management researchers at the University of Georgia Terry College of Business found a pattern of executives issuing negative press releases about their companies before their scheduled stock option grants. The practice, which is seen as unethical and sometimes illegal, allows the executives to increase their compensation by temporarily driving down the price of the stock when they are given the options.
“We can’t say with certainty that a given CEO is doing this,” said Tim Quigley, who studies CEO behavior and effectiveness at UGA’s Department of Management. “But we can look at the population and say, these trends would be very unlikely if a large number of CEOs were not purposely working to reduce the stock price before their option grants.”
If this sounds familiar, it might be because this is the second study in the last two years to suggest that CEOs may be manipulating the market price of the shares on the award dates in order to maximize the value of those awards. Of course, many companies time awards to occur shortly after the year-end numbers are announced, and if the numbers are bad, the stock price drops (and vice versa). Companies that have a practice of timing awards are required to disclose it in their CD&A discussion, but there isn’t anything illegal about it.
Nevertheless, these studies apparently suggest that there’s some intentionality on the part of senior executives when it comes to depressing stock prices around award dates. Since that’s the case, companies may want to take another look at the timing of their awards, and consider whether there is a pattern that might appear troubling. In that regard, the study suggests that spreading award dates throughout the year might provide a solution.
PPP Loan Certifications: D&O Issues for the Battles to Come
Most people expect the SBA & DOJ to engage in a robust enforcement effort when it comes to the PPP program. This recent D&O Diary guest blog by Pillsbury’s Peter Gillon addresses potential coverage issues under D&O policies that may be implicated by enforcement activities addressing loan certifications. This excerpt discusses the potential coverage for repayments of PPP loans:
A policyholder facing a PPP investigative or enforcement action might choose or be forced to repay the loan principal and would obviously like to claim this under its D&O policy. An insurer would likely argue that such amounts constituted disgorgement of “ill-gotten gains,” and deny coverage. Depending on applicable state law and the policy language, such an exclusion may or may not apply to preclude coverage for both the repayment of loan principal as well as defense costs.
For example, standard policy language defines covered “Loss” as “damages, judgments, settlements” and the cost of defense, but excludes amounts that are uninsurable as a matter of law. Carriers argue that, although they define the scope of what is covered Loss using broad undefined terms—“damages,” “judgments” and “settlements”—“public policy” prohibits them from indemnifying an insured for payment of restitution or disgorgement of ill-gotten gains. Insurers often assert this defense even when no case or statute declares such payments uninsurable.
However, Courts interpreting Delaware law (which for reasons beyond the scope of this piece generally applies to Delaware corporations) have rejected insurers’ attempts to deny coverage on this basis, holding that an insurer must meet its burden to prove that the personal conduct exclusion applies, including establishing by final adjudication that the gains were ill-gotten, before it can deny coverage on the basis that restitution is “uninsurable.”
Other issues addressed by the blog include those relating to coverage for governmental audits and internal investigations, criminal and civil penalties, entity and individual coverage, and the implications of the presence or absence of scienter on the availability of coverage.
PPP Loan Enforcement: En Garde!
This McGuire Woods memo says that regulatory agencies are already gearing up for enforcement activities surrounding the PPP loan program, and borrowers must prepare to respond quickly:
Regardless of borrower size or other qualifications, it is vital for companies to proactively document PPP compliance and prepare for effective defense of their eligibility and necessity certifications, as well as loan and forgiveness calculations. Waiting to receive an inquiry to gather supporting documentation may be too late.
Most inquiries provide 5-10 days for response. This is a very short timeframe for a company to research and gather supporting documentation. Applicants should consider seeking competent legal guidance related to collecting supporting materials and holding them in a central repository, contemporaneously as the events occur.
The memo offers tips to help companies prepare for the inevitable knock on the door, including the type of requests for production that they should anticipate receiving during the early stages of the government’s inquiry.
Last week, the Federal Reserve issued additional guidance on its “Main Street Lending Program” for small & mid-sized businesses. This Crowell & Moring memo provides an overview of the program, eligibility requirements, and the mechanics of how it will operate. Here’s an excerpt:
The Program, administered by the Boston Fed, is intended to facilitate lending to small and medium-sized businesses that were financially stable prior to the COVID-19 pandemic so that they may maintain operations and payroll during the COVID-19 pandemic emergency period. The Program operates through three types of loans (the New Loan Facility (“MSNLF ”), the Priority Loan Facility (“MSPLF ”), and the Expanded Loan Facility (“MSELF”)) each offering a 4-year term loan, with an adjustable interest rate based on LIBOR plus 300 basis points, and with principal and interest payments deferred during the first year of the loan. Loans range in size from $500,000 to $200 million, depending upon the loan facility selected.
The lending is conducted through lenders who meet the Program’s eligibility criteria (“Eligible Lenders”). Program loans are secured or unsecured new term loans originated after April 24, 2020 (in the case of MSNLF and MSPLF) or are based upon, and are an upsized tranche of an existing term loan to an ligible Borrower, originated on or before April 24, 2020 (in the case of MSELF).
The loans are full recourse loans, and unlike the SBA’s Paycheck Protection Programs (“PPP”) loans, the Program loans have no forgiveness of debt features. When the Boston Fed announces the opening of the Program, Eligible Lenders that wish to participate in the Program must first register with the Boston Fed. The Program will remain active until September 30, 2020, unless it is extended by the Federal Reserve and the Department of Treasury.
Eligible borrowers may use loan proceeds to maintain their U.S. operations & payroll until conditions normalize. While the new FAQs for the Program indicate that borrowers should undertake good-faith efforts to retain employees & payroll, businesses that have already laid-off or furloughed workers due to COVID-19 are eligible to apply for a loan. Copies of the FAQ and form documents for the Program are available on the Boston Fed’s website.
Reopening Risks: Covid-19 Waivers
For the first time in over three months, my pickup hockey group is going to be allowed to play this Sunday. Naturally, the rink is imposing all sorts of rules – we have to wear masks off the ice, we’re limited to 15 players, there is no locker room access, etc. Everyone also must sign a waiver that specifically addresses the risk of contracting the Covid-19 virus.
If your client is considering implementing a Covid-19 waiver policy, then you should take a look at this Cleary Gottlieb memo, which reviews the permissible scope of waivers & their enforceability. This excerpt addresses some of the unique issues raised by waivers purporting to address Covid-19 risks:
The primary question a court will likely consider is whether COVID-19 exposure is the kind of risk that can be waived. There is typically no requirement that the risks a customer waives be specifically related to the nature of the business drafting the waiver. Rather, waivers are limited by the common law requirements noted above, namely that the type of risk assumed be specifically enumerated and the presumption against the use of general waivers of all potential liability. It therefore seems that COVID19 waivers could be enforceable, provided that they are sufficiently concrete.
Whether these waivers would be seen as contrary to public policy, however, is a separate issue that courts will have to confront, and may well result in inconsistent outcomes as courts attempt to balance the public’s interests in preventing the spread of COVID-19, maintaining safe public spaces, and providing legal remedies for individuals exposed to COVID-19, against mitigating the chilling effect of legal risk on a reopening economy.
The memo also contains a helpful discussion of practical considerations for companies that are considering the implementation of waivers as part of their reopening strategies.
Transcript: “Capital Raising in Turbulent Times”
We have posted the transcript for our recent webcast: “Capital Raising in Turbulent Times.”
Companies and their auditors must periodically assess whether there is substantial doubt about the company’s ability to continue as a “going concern.” In normal times, this evaluation at major public companies usually results in the conclusion that the company doesn’t face going concern issues. But as this Gibson Dunn memo points out, these aren’t normal times, and going concern questions are on the front burner at many more companies than in years past.
The memo walks through the AICPA, FASB & PCAOB standards that apply to the going concern analysis, and the differences in the obligations imposed on issuers & outside auditors under them. It also addresses the implications that Covid-19 uncertainties may have for the analysis:
The list of adverse events set out in AS 2415 and Subtopic 205-40 that could potentially call a company’s viability into question includes items such as negative operating trends, work stoppages, and loan defaults. In some cases, the ultimate outcome of those events or circumstances will be uncertain at the time of management’s or the auditor’s assessment. The COVID-19 pandemic, however, raises a set of global uncertainties—concerning areas from public health to financial markets—whose complexity is an order of magnitude greater than that of the circumstances that may drive an entity’s going-concern analysis in normal times.
While Subtopic 205-40 requires only that an entity assess its ability to meet its obligations based on “relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued,” and AS 2415 similarly requires only that the auditor consider “his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor’s report,” both issuers and auditors should be aware that regulators and private plaintiffs will later assess their actions with twenty-twenty hindsight.
The memo says that in an environment like this, management & auditors should make, document & disclose their going concern evaluation process, the factors that could affect its ability to meet its obligations, and what is known and unknown about those factors and their implications. Finally, they need to make and document a good-faith assessment of how likely it will be that one or more of those factors will cause the company to be unable to meet its obligations during the relevant assessment period.
Going Concern: Covid-19’s Toll So Far
While Gibson Dunn’s memo focuses on issues companies and auditors must address when making a going concern assessment This recent Audit Analytics blog provides some input on the toll that Covid-19 has already taken when it comes to “going concern” conclusions:
As of May 20, 2020, there have been 30 audit opinions for SEC-registered public companies that have cited the COVID-19 pandemic as a contributing factor to substantial doubt about a company’s ability to continue as a going concern for the next twelve months. Of the 30 companies that received a going concern audit opinion citing COVID-19 as a contributing factor, 14 were issued their first going concern opinion within the last five years. This means that more than half of the companies receiving a going concern modification in their audit opinion citing COVID-19 were previously experiencing difficulties that could impact their ability to continue operating prior to the pandemic.
The blog reviews the disclosures made by companies that have cited Covid-19 as a contributing factor to a going concern qualification. Interestingly, for most of these companies, Covid-19 “unknowns” haven’t been the primary trigger for going concern issues. Instead, the blog says that going concern qualifications have been triggered primarily by the pandemic’s impact on other areas, such as a company’s inability to operate & subsequent liquidity concerns.
Cheat Sheet: Acquired Company Financials
If you’ve followed my blogs over the years, you know that aside from finding something that gives me an excuse to blog about celebrities, there’s nothing I like more than a good cheat sheet. This handy 2-pager from Latham & KPMG walks you through the process of determining whether you need to include acquired company financial statements in your registration statement – and yes, it’s been updated to reflect the SEC’s recent rule changes. Check it out!
I really don’t know how to lead things off today. It just doesn’t seem appropriate to jump into my usual spiel without acknowledging the events of the past several days. It’s been an awful weekend, at the end of terrible week, which wrapped up another dreadful month in an abominable year. I want to say something hopeful, and that’s hard right now, but I’m going to give it a shot.
I’m mindful that the epicenter of the latest crisis is Minneapolis, the beautiful city that my colleagues Liz and Lynn call home. But I’m from Cleveland, and when I saw a peaceful protest turn violent on the streets of my own city, I was struck by the fact that the unrest began just a couple of blocks from the old federal courthouse in downtown Cleveland. As I watched the news coverage, I thought about something that happened in that courthouse one day in 1918, and it reminded me that, no matter how bad things get, we seem to have been blessed throughout our history with more than our share of men and women who – to paraphrase Edward Kennedy’s eulogy for his brother Robert – “see things that never were, and say why not?”
It may surprise you to learn that a corporate tool like me thinks that the old lefty Eugene Debs was one of those people. Although I don’t agree with his politics, I still think he’s one of American history’s most interesting figures. He was a socialist, yet received over 6% of the popular vote in the 1912 presidential election. Debs also managed to get nearly 1 million votes in the 1920 presidential election – despite running from a prison cell. He was sent to that cell by a federal judge in that old federal courthouse in Cleveland.
To make a long story short, during the First World War, Debs gave an anti-war speech in Canton, Ohio and was convicted of violating the Espionage Act. He asked to address the court at his sentencing, and his speech that day has gone down in history. In the words of the journalist Heywood Broun, “he was for that one afternoon touched with inspiration. If anyone told me that tongues of fire danced upon his shoulders as he spoke, I would believe it.”
Debs stood up in the Cleveland courtroom, and began: “Your Honor, years ago I recognized my kinship with all living beings, and I made up my mind that I was not one bit better than the meanest on earth. I said then, and I say now, that while there is a lower class, I am in it, and while there is a criminal element I am of it, and while there is a soul in prison, I am not free.”
He went on to deliver a harsh critique of the American economic system, but also pledged his faith in the idea that the nation would change for the better, through non-violent means. He saved his best – and most poetic – rhetorical flourish for last:
“When the mariner, sailing over tropic seas, looks for relief from his weary watch, he turns his eyes toward the southern cross, burning luridly above the tempest-vexed ocean. As the midnight approaches, the southern cross begins to bend, the whirling worlds change their places, and with starry fingerpoints the Almighty marks the passage of time upon the dial of the universe, and though no bell may beat the glad tidings, the lookout knows that the midnight is passing and that relief and rest are close at hand. Let the people everywhere take heart of hope, for the cross is bending, the midnight is passing, and joy cometh with the morning.”
The judge was apparently unmoved by Debs’ eloquence, and sentenced him to 10 years in prison. President Harding commuted his sentence to time served in 1921. Please don’t misunderstand me – this isn’t meant to be a political statement. I don’t have a lot in common with Gene Debs when it comes to politics. But I don’t find that to be an impediment to admiring his fearlessness, idealism, and defiant belief that better days were ahead for the nation.
Those are qualities that Americans have always admired in our greatest leaders, regardless of their political affiliation. In trying times like these, I find hope in the knowledge that we can usually count on people with these qualities to step up, appeal to the better angels of our nature, and remind us of who we are supposed to be. If you take the time to look, you’ll see that lots of people like this are with us even now.
SPACs: Will More IPOs Mean More Lawsuits?
Last month, I blogged about the recent prominence of SPAC IPOs. While many traditional IPO candidates have put their deals on hold during the Covid-19 crisis, SPACs have prospered. But this recent Woodruff Sawyer blog cautions that the rise in SPAC IPOs may be followed by a rise in post-deal litigation. The blog says that it isn’t the IPO that SPACs have to worry about – it’s the M&A deals that come next that often trigger litigation. Here’s an excerpt addressing a recent SPAC-related M&A lawsuit:
Consider the 2019 case of Welch v. Meaux. The plaintiffs in this case brought both Section 11 and Section 10(b) claims against officers and directors of the publicly traded company in connection with a de-SPAC transaction. The case also included a claim concerning the subsequent follow-on offering. The SPAC in question, Landcadia, had raised $250 million in its 2016 IPO. Landcadia had 24 months to complete its business combination before being forced to return the proceeds to its investors. With two weeks to go before the deadline, Landcadia agreed to buy a mobile food ordering and delivery company.
Things did not go well with the target company after it became publicly traded. Plaintiffs ultimately brought suit, alleging material deficiencies in the proxy statement and subsequent registration statement. Their allegations included the charge that when the target company began publicly trading, investors were not told of all the risks being foisted onto them. Moreover, the plaintiffs alleged that they were deceived as to the company’s prospects for profitability. This case is still pending.
The blog also addresses securities class actions targeting SPAC-funded operating companies, and reviews some of the difficult issues that D&Os may face in bankruptcy proceedings due to the structure of SPAC transactions.
Our June Eminders is Posted!
We have posted the June issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!
Yesterday, the SEC announced that it had adopted amendments overhauling the rules governing the financial information that public companies must provide for significant acquisitions & divestitures. Here’s the 267-page adopting release. Highlights of the rule changes include:
– Updating the significance tests in Rule 1-02(w) and elsewhere by revising the investment test to compare the registrant’s investments in and advances to the acquired or disposed business to the registrant’s aggregate worldwide market value if available; revising the income test by adding a revenue component; expanding the use of pro forma financial information in measuring significance; and conforming, to the extent applicable, the significance threshold and tests for disposed businesses to those used for acquired businesses;
– Modifying and enhancing the required disclosure for the aggregate effect of acquisitions for which financial statements are not required or are not yet required by eliminating historical financial statements for insignificant businesses and expanding the pro forma financial information to depict the aggregate effect in all material respects;
– Requiring the acquired company financial statements to cover no more than the two most recent fiscal years;
– Permitting disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity;
– Permitting the use of, or reconciliation to, IFRS standards in certain circumstances;
– No longer requiring separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for nine months or a complete fiscal year, depending on significance;
The changes also impact financial statements required under Rule 3-14 of Regulation S-X (which deals with acquisitions of real estate operations), amend existing pro forma requirements to improve the content and relevance of required pro forma financial information, and make corresponding changes in the rules applicable to smaller reporting companies under Article 8 of Regulation S-X.
I suppose you’re wondering if the SEC split along partisan lines once again – well, of course they did! Here’s Commissioner Allison Herren Lee’s dissenting statement. We’ll be posting memos in our “Accounting Overview” Practice Area.
The Financial Times recently reported that some companies have presented non-GAAP metrics – such as “EBITDAC” – that effectively adjust away the effects of the Covid-19 pandemic on their operations. Maybe I’m too cynical, but presenting “as adjusted” numbers that back out an event of the pandemic’s magnitude seems akin to asking a question like, “Other than that, Mrs. Lincoln, how did you enjoy the play?”
Just how prevalent are presentations of non-GAAP Covid-19 adjusted numbers? According to a recent Bass Berry survey, not very. The firm reviewed 55 public companies that presented Adjusted EBITDA in earnings releases during the period from April 1, 2020, to May 14, 2020. This excerpt says that only a handful included Covid-19 related adjustments in their Adjusted EBITDA presentations, but a number did narratively disclose the impact Covid-19 had on that metric:
Of the surveyed companies, five companies, or 9%, included an adjustment in their calculation of Adjusted EBITDA related in some form to the COVID-19 pandemic, and 91% did not. Certain surveyed companies within this 91% group, while not including an adjustment for COVID-19 in the definition of Adjusted EBITDA, noted the impact that the COVID-19 pandemic had on Adjusted EBITDA at either the consolidated or the segment level (for example, by noting that the COVID-19 pandemic had a specified percentage impact on Adjusted EBITDA as the result of the shutdown of a manufacturing facility as the result of the COVID-19 pandemic).
That seems to me to be a better way to present this information than adjusting it away. Covid-19’s impact on key performance indicators is clearly relevant information, but including it in the Adjusted EBITDA metric itself implies that it should be regarded as a one-time event. Unfortunately, it appears that the pandemic is more like the “new normal,” and may impact operations in future periods even more significantly than it did during the first quarter.
Virtual Meeting Admission Practices: Public Companies Respond
We’ve run a couple of blogs in recent weeks that have aired investor criticism of admissions practices for virtual annual meetings. That has prompted responses from some of our members. This one is representative:
I’m the Assistant Secretary of a company that held its first virtual meeting this year. We have two service providers – Corporate Election Services mails to our registered holders and Broadridge mails to most of the beneficial holders. When we switched our meeting to a virtual meeting, we had two options. Have Broadridge host the virtual meeting so most could have a control number to access the meeting. This would have required us to re-mail to the registered holders a new proxy card. This would have canceled their votes and required re-voting.
The second option was to have Corporate Election Services run the virtual meeting using the model we use for attendance at our in-person meeting. Registered shareholders all have access to the in-person meeting in normal years because they receive an admission card with their proxy card or they can come to the meeting and check in using the registered shareholder list we keep on hand. Beneficial holders are not on the registered roles so to attend the in-person meeting they need to provide a legal proxy from their broker. Sometimes we accept a brokerage statement for a beneficial holder to attend in person.
Rather than re-mail, we choose to hold the virtual meeting the same way we would have held the in-person meeting – the same method described in the post above. We did have a couple of complaints. Note that Computershare hosted virtual meetings are also using this same access model. Also note that not all brokers use Broadridge so if Broadridge hosts, some beneficials still do not have access.
Admission practices for physical annual meetings vary, but it isn’t unusual to require some proof of beneficial ownership. As the member’s comments suggest, there’s usually some flexibility when it comes to the credentials required for admissions that doesn’t necessarily translate to a virtual platform. But the bottom line is that many companies that are being criticized for their virtual admissions policies aren’t doing anything that hasn’t been standard practice at their physical meetings in prior years.
Earnings Season: Trends During the Covid-19 Crisis
In their recent statement on Covid-19 disclosures, SEC Chair Jay Clayton & Corp Fin Director Bill Hinman said that this earnings season would not be routine. In that same vein, “Investor Relations” magazine recently published an article about trends that IR professionals have identified from companies’ recent earnings reports & calls. This excerpt points out that the crisis has “softened” some of the commentary from executives:
Given the current circumstances, corporate leaders have understandably focused less on market performance and more on their Covid-19 response. ‘While mitigating actions in most cases include cost cutting, the current crisis has provided an opportunity for leadership to show its human side and demonstrate genuine affection and respect for employees,’ says Sandra Novakov, head of IR at Citigate Dewe Rogerson, who is based in London. As an example, she points to the personal CEO message delivered by ABF, a Citigate client, in its interim results announcement.
The article identifies several other trends, including detailed scenario planning, intraquarter updates, and increased use of prerecorded comments.
Yesterday, I blogged about the SEC’s apparent initiation of an enforcement sweep targeting public companies that borrowed money under the Paycheck Protection Program. Public company borrowers have been sharply criticized by the media, lawmakers, and the Secretary of the Treasury himself. But is it fair to lump all public companies together as the bad guys – or are some just convenient scapegoats for a program that simply hasn’t been well administered?
This NY Times article provides a more nuanced picture of public company PPP borrowers and the plight many of them face than has been presented in other media reports. While the SBA’s guidance says that the government will be skeptical when it comes to need certifications from public companies with “substantial market value” and “access to capital markets,” it still isn’t entirely clear what those terms mean. Furthermore, this excerpt from the article about a small cap called RealNetworks suggests that – no matter how you define the terms – it’s hard to conclude that a lot of small caps have either substantial market value or access to the capital markets at this time:
RealNetworks struggled, too, as the pandemic transformed American life. The company went public during the dot-com boom of the 1990s, only to see its stock fall in the subsequent bust. In recent years, it has marketed a facial recognition product to casinos and airports, among other venues. But its share price has fallen. At the end of February, it was hovering just above a dollar. Then the virus crippled travel and hospitality businesses. Companies that had been possible clients before the pandemic made it clear that they wouldn’t engage its services this year.
Rob Glaser, RealNetworks’ chief executive, said the pandemic had put a “bull’s-eye” on the company’s facial recognition offering. He said it was “not as devastating to our company as if we were a cruise ship company or an airline or a restaurant chain, but we were directly affected.”
RealNetworks qualified for $2.9 million and got its loan. According to the article, it has apparently decided to keep it. That doesn’t seem unreasonable to me. The company’s market cap is $44 million, its stock closed on Tuesday at $1.18 per share, and it received a delisting notiice from Nasdaq the day before it received its PPP loan. In terms of access to capital, the company’s most recent financing came entirely from the pockets of its CEO.
Some public companies that received PPP loans clearly shouldn’t have, but the same is also true for some private companies. I mean c’mon – the Lakers? In any event, it’s hard for me to see a small cap public company like this one being anybody’s idea of poster child for abusive conduct. Lumping all “public company borrowers” together as being unworthy participants in the program just doesn’t reflect reality.
PPP Loan Forgiveness: It’s Complicated. . .
The SBA issued its PPP loan forgiveness application last week, and it’s apparently pretty complicated. Here’s an excerpt from Crowell & Moring’s memo on the application:
On May 15, 2020, the Small Business Administration (SBA) released the Paycheck Protection Program Loan Forgiveness Application which is comprised of a PPP Loan Forgiveness Calculation Form (SBA Form 3508), including related certifications, and worksheets to assist in making the calculations. Although the SBA has yet to release further guidance on PPP Loan forgiveness, the Loan Forgiveness Application does provide some guidance on elements of forgiveness that were not clear from either the text of the Cares Act, or the SBA’s Interim Final Rules and FAQs. However, the complexity of the application and the onerous submission requirements present challenges for small businesses and create a further need for guidance and legal/accounting support.
I took a look at the application, and it does appear to be fairly daunting. For example, there’s an entire page of instructions devoted solely to the payroll, FTE, & non-payroll documentation that must be submitted with the application or retained by the borrower. In keeping with the government’s “Ready. . . FIRE!. . .Aim” approach to this program, now that the SBA has published the application, it will eventually tell people how they are supposed to complete it.
Tomorrow’s Webcast: “Middle Market M&A – The Latest Developments”
Tune in tomorrow for the DealLawyers.com webcast – “Middle Market M&A: The Latest Developments” – to hear to hear Citizens M&A Advisory’s Charles Aquino, Mintz Levin’s Marc Mantell and Duane Morris’s Richard Silfen discuss the state of the middle market and issues dealmakers are confronting in 2020, including bridging valuation gaps, Covid-19’s implications for deal structure and process, and the evolution of deal terms in the Covid-19 environment.
