Last month, Delaware Chief Justice Leo Strine co-authored a NYT opinion piece about the failure of retirement & index funds to approach voting & corporate governance issues with the needs of their own investors – the workers who invest their retirement savings with them – in mind. Here’s an excerpt:
Growing inequality and stagnant wages are forcing a much-needed debate about our corporate governance system. Are corporations producing returns only for stockholders? Or are they also creating quality jobs in a way that is environmentally responsible, fair to consumers and sustainable? Those same corporations recognize that things are badly out of balance. Businesses are making record profits, but workers are not sharing in those gains.
This discussion is necessary. But an essential player is missing from the debate: large institutional investors. For most Americans, their participation in the stock market is limited to the money they have invested in mutual funds to finance retirement, usually in 401(k) accounts through their employers. These worker-investors do not get to vote the shares that they indirectly hold in American public companies at those companies’ annual meetings. Rather, the institutions managing the mutual funds do.
Institutional investors elect corporate boards. Institutional investors vote on whether to sell the company and on nominations for new directors, and whether to support proposed compensation packages for executives. At the average S. & P. 500 company, the 15 largest institutional investors own over half the shares, effectively determining the outcomes of shareholder votes. And the top four stockholders control over 20 percent.
What this all means is that corporate governance reform will be effective only if institutional investors use their voting power properly. Corporate boards will not value the fair treatment of workers or avoid shortcuts that harm the environment and consumers if the institutional investors that elect them do not support them in doing the right thing. And they are unlikely to end the recent surge in stock buybacks as long as there is pressure from institutional investors for immediate returns.
Among other things, Strine and his co-author, Kennedy School senior fellow Andrew Weiss, argue that mutual funds should have voting policies “tailored to the objectives of long-term investors,” and should include “environmental, social, and most important of all, employee factors” in their investment & voting decisions. They’d also like to see a reduction in the number of shareholder votes, noting that each year, mutual funds are required to cast over 30,000 votes at shareholder meetings.
The failure of financial intermediaries to serve the broader interests of the working investors they represent has been a recurring theme for Chief Justice Strine. In one recent article, the Chief Justice called out them out for allowing companies to spend “worker-investors” money on political activities promoting policies that negatively impact those investors. In another article, he criticized the current corporate governance system for giving the most power over corporate decisions to investors like hedge funds – whose interests are least aligned with those of average shareholders.
Financial Intermediaries: 3 Cheers for the Big 3?
Liz recently blogged about research suggesting that the major index funds were “patsies” for management. Between that research, Chief Justice Strine’s critique of their failure to serve the interests of their investors, & concerns expressed over the implications of their ever-growing ownership positions in U.S. companies, BlackRock, State Street & Vanguard could sure use a friend.
It looks like they may have just found one in a new study that says the Big 3 have both the ability & the incentive to police misconduct by their portfolio companies – and that there’s evidence that they’re doing exactly that. Here’s an excerpt from the abstract:
In this paper, I argue that the remarkable size, permanence, and cross-market scope of the Big Three’s ownership stakes gives them the capacity and, in some cases, the incentive to punish and deter fraud and misconduct by portfolio companies. Corporate governance and securities regulation scholars have argued that these institutions have generally overriding incentives to refrain from meaningful corporate stewardship, but the facts on the ground tell a somewhat different story.
Drawing on a comprehensive review of the Big Three’s enforcement activities and interviews with key decision-makers for these institutions, I show how they have been using engagement, voting, and litigation to discipline culpable companies and managers. I also identify the “pro-enforcement” incentives that explain these actions.
The study bases its conclusions on an analysis of the involvement of the Big 3 in direct securities litigation, litigation arising out of the financial crisis, “just vote no” activism against directors of companies involved in fraud or misconduct, and significant engagements. It’s an interesting perspective – and a much more effective defense of the Big 3 than the specious stuff they’re peddling.
Restatements: 2018’s Scorecard
Audit Analytics recently released its annual report on public company restatements. Here’s an excerpt from Audit Analytics’ blog with some of the highlights:
– After 12 years of decline, the number of reissuance (“Big R”) restatements increased slightly in 2018.
– Around 70% of restatements disclosed were revision (“Little R”) restatements.
– Total restatements dropped for four consecutive years to an 18-year low.
– There were 171 restatements filed by accelerated filers, and 229 restatements disclosed by non-accelerated filers.
– About 54% of the restatements disclosed by publicly traded companies had no impact on earnings.
Shortly before the BRT issued its statement redefining its position on corporate purpose, Andrew Ross Sorkin profiled Jamie Gamble in the NYT DealBook. Gamble is a former Wall Street lawyer who has had a conversion experience and now says that the corporate clients he worked for are legally compelled to act like Patrick Bateman. Here’s an excerpt from his manifesto:
The most important problem in the world is a reasonable sounding provision of the corporate law that governs most major U.S. companies. That’s a big claim. It’s also slightly misleading. A better answer is that the above complex network of horribles all connect back to a common root that is nourished and guarded by the extraordinary power of corporate “persons” who are legally obligated to act like sociopaths.
The rule: corporate management and Boards of directors are obligated by law to make decisions that maximize the economic value of the company. Colloquially: when you invest your money in a company, the people who run that company are required to do their best to bring you the highest possible financial return on your investment rather than using your money to pursue any personal or social agenda.
Sociopath? Yes. The corporate entity is obligated to care only about itself and to define what is good as what makes it more money. Pretty close to a textbook case of antisocial personality disorder. And corporate persons are the most powerful people in our world.
Gamble’s solution – or at least part of it – would be to include language in corporate bylaws requiring boards to consider the interests of a broad range of constituencies beyond shareholders whenever they make a decision. By making this mandatory & providing shareholders with the ability to sue directors for violating these provisions, he thinks the beast can be tamed.
Counterpoint: Like Heck It Does!
Sorkin’s piece initially attracted a lot of attention, but then it sort of got overwhelmed by the sound & fury surrounding the BRT’s decision to bid farewell to shareholder primacy. That’s too bad, because I think Gamble’s views about the legal obligations of corporate directors are based on a false premise, and it’s the same one that seems to have framed at least some of the reaction to the BRT’s new statement of purpose.
I doubt there’s a single corporate lawyer who would dispute the contention that true sociopaths are by no means absent from America’s boardrooms or C-suites. But does the law really require sociopathic behavior? UCLA’s Stephen Bainbridge says no way – and also says that Sorkin & Gamble’s arguments amount to “a mass dump of uninformed silliness.” (You won’t like the Prof. when he’s mad). Here’s an excerpt from his recent blog responding to the DealBook article:
This argument is patently absurd. The corporation is a legal fiction. To paraphrase the first Baron Thurlow, who observed that the corporation has neither a soul to be damned nor a body to be kicked, the corporation has neither a mind to be psychoanalyzed not a brain to be diseased. Corporations are run by people, so if “they” act like sociopaths, it must be because they are run by sociopaths. It is estimated that psychopaths make up at most 1% of the population, so are we to believe they are disproportionately located in corporate C-suites?
Second, both Gamble and Sorkin grossly misstate the law. Sorkin writes:
“It may be an oversimplification, but if they veer from seeking profits in the name of other stakeholders, shareholders may have a legal case against them.”
That is not an oversimplification; it is a gross oversimplification. Absent proof that the directors were engaged in a breach of the duty of loyalty or certain takeover situations, the business judgment rule would preclude courts from reviewing director decisions. To be sure, that is not the purpose of the business judgment rule, but that is its effect.
Prof. Bainbridge is absolutely right on the law (see also this 2015 NYT opinion piece by the late Prof. Lynn Stout). But if you asked directors & officers of public companies what they think their legal obligations are, my guess is that their responses would be pretty consistent with Gamble’s characterization of what the law requires. The “value maximization” imperative has been internalized by a whole lot of D&Os, and has been used to justify some pretty cold-blooded corporate decisions.
By the way, if this debate sounds familiar, pundit Matthew Yglesias tweeted a similar comment last year – and got clobbered by legal academics.
“Stakeholder Governance”: What Happens to the BJR?
This recent blog from Alison Frankel poses an interesting question: if corporations undertake obligations to “stakeholders” & not merely shareholders, what does that mean for the business judgment rule? Here’s an excerpt:
Law firms are beginning to contemplate whether corporate boards will continue to be entitled to the deference afforded by the business judgment rule – which broadly shields directors from liability as long as they’re deemed to have acted in the corporation’s interest – if their decisions are prompted by rationales other than maximizing profits.
That’s particularly relevant in Delaware, where, as Chief Justice Leo Strine explained in a 2015 paper, The Dangers of Denial, corporate law is resolutely focused on stockholder welfare. Strine (who is due to retire from the Delaware Supreme Court by the end of October), is of the view that Delaware precedent does not provide leeway for judges to sanction board decisions that subordinate shareholder interests.
In other words, if directors put the interests of other stakeholders first, they risk losing the protection of the business judgment rule – at least in Delaware. If that’s so, then isn’t Gamble right about the law obligating boards to act like sociopaths in the pursuit of value maximization?
Nope. Except in very limited situations, the authority provided to Delaware directors under Section 141(a) of the DGCL includes the authority to set the time frame for achieving corporate goals without – as the Delaware Supreme Court put it in Paramount Communications v. Time – a “fixed investment horizon.” Deterimining that time frame is a matter of business judgment.
So, if you’re a director who is thinking about the long-term, you’ve got plenty of discretion to conclude in good faith that considering the interests of other stakeholders may be helpful in maximizing long-term shareholder value. But that doesn’t mean that members of the only stakeholder constituency that can vote won’t still lean on you mighty hard to do otherwise.
The sound & fury surrounding the BRT’s pronouncement prompted it to issue a lengthy “clarification” of its position – and it draws heavily on the idea of promoting the interests of other constituencies as being essential in order to create long-term shareholder value.
Dorsey’s Whitney Holmes shared the following comment, which I think nicely summarizes the issue of what Delaware law requires:
I believe that much of the debate misses the point that impact investors understand and now the BRT are starting to understand: for a given corporate decision not involving a sale of corporate control (or enactment of a preemptive defense against an acquisition), if
– choice A demonstrably returns $100 to shareholders and no benefit to anyone else, and
– choice B demonstrably returns $90 to shareholders and a meaningful but unquantifiable benefit to another interest (e.g. the environment, the wellbeing of employees, the community in which a manufacturing facility sits, etc.) that cannot be supported by a vague future benefit to the corporation that might somehow, someday be worth $10 or more, do the corporation’s directors have discretion in line with their fiduciary duties to choose B over A?
He says the answer under Delaware case law is “no,” and I think that’s right. If you’re ultimately called upon to make some sort of corporate “Sophie’s Choice,” you can’t prefer other stakeholders to shareholders – but given the deference under the BJR to the board’s assessment of the future shareholder value a particular decision would create, it’s doubtful that a board would ever find itself in this position.
According to a recent University of Alabama study, when you draft your next 10-K, it might be a good idea to put down your copy of Reg S-K and pick up a copy of “The Power of Positive Thinking.” That’s because, according to this CLS Blue Sky blog on the study, an upbeat 10-K correlates with improved stock performance, while a more downcast filing can result in your stock taking a hit:
Our results show that positive (negative) sentiment predicts higher (lower) abnormal return over days (0, +3) around the 10-K filing date, i.e., the filing period. Both sentiment measures also predict higher abnormal return over event windows of up to one month after the filing period. This finding suggests that the market underreacts to positive sentiment and overreacts to negative sentiment in the 10-K filing during the filing period. Moreover, both sentiment measures are significantly related to abnormal trading volume around the filing date.
By the way, it looks like Norman Vincent Peale was on to something – because the study also says that that companies with happier 10-Ks also produce better results over the course of the year than their more dour counterparts.
Transcript: “Joint Ventures – Practice Pointers (Part II)”
We have posted the transcript for the recent DealLawyers.com webcast: “Joint Ventures – Practice Pointers (Part II).” Here’s the transcript for the first “Joint Ventures – Practice Pointers” webcast.
Our September Eminders is Posted
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Around here, we’ve come to expect big things from unicorn IPO filings – and I’m delighted to say that ’The We Company’’s Form S-1 does not disappoint. I’ll let others comment on the company’s decision to use an Up-C structure, its financial performance & its corporate governance. I’m just going to let the document speak for itself. I’m sure the lawyers involved spent lots of time toning this thing down from what the business folks wanted – but in the end, “unicorns gonna unicorn.” Here’s the paragraph that leads off the “Prospectus Summary”:
We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness. We have built a worldwide platform that supports growth, shared experiences and true success. We provide our members with flexible access to beautiful spaces, a culture of inclusivity and the energy of an inspired community, all connected by our extensive technology infrastructure. We believe our company has the power to elevate how people work, live and grow.
My oldest son works for a startup in Chicago that’s housed in a WeWork space, but I haven’t seen any evidence of elevated consciousness in him. I don’t think they have free beer – or as page 145 of the prospectus refers to it, “Craft on Draft” – in the Chicago locations anymore, so maybe that’s what’s missing. Anyway, the company’s mission statement may sound goofy to a middle-aged guy like me, but management wants everybody to know they’re serious – so they put it in the “Risk Factors” section:
We may make decisions consistent with our mission that may reduce our short- or medium-term operating results.
Our mission is integral to everything we do, and many of our strategic and investment decisions are geared toward improving the experience of our members and the attractiveness of our community. While we believe that pursuing these goals will produce benefits to our business in the long-term, these decisions may adversely impact our short- or medium-term operating results and the long-term benefits that we expect to result from these initiatives may not materialize within the timeframe we expect or at all, which could harm our business and financial results.
Given how much media attention has been devoted to this offering, it’s no surprise that there’s also a gun-jumping risk factor on page 49. Apparently, it relates to comments that CEO Adam Neumann & CFO Artie Minson made to Axios & Business Insider back in May. Hey, if you’ve got a mission to raise the world’s consciousness, you’re sort of obligated to preach your evangel whenever the opportunity presents itself, right?
Related Party Transactions: We’ll Get to That Stuff – But First, Adam is Awesome!
I could go on like this, but I’ll do just one more – the “Related Party Transactions” section. To soften the blow of the nearly 11 full pages of related party transactions disclosure, the section begins with a testimonial to the CEO’s overall awesomeness:
Adam has served as the Company’s Chief Executive Officer and Chairman of the Company’s board of directors since our inception. From the day he co-founded WeWork, Adam has set the Company’s vision, strategic direction and execution priorities. Adam is a unique leader who has proven he can simultaneously wear the hats of visionary, operator and innovator, while thriving as a community and culture creator. Given his deep involvement in all aspects of the growth of our company, Adam’s personal dealings have evolved across a number of direct and indirect transactions and relationships with the Company. As we make the transition to a public company, we aim to provide clarity and transparency on the history of these relationships and transactions, as well as the background to the strategic governance decisions that have been made by Adam and the Company.
I’ve read this several times, and I love it more each time – especially the part about how the CEO’s “personal dealings have evolved across a number of direct and indirect transactions. . .” Of all the unicorn disclosure I’ve ever read, this just may be the “unicorniest”!
The Weed Beat: U.S. Capital Markets More Open to Cannabis-Related Businesses
This recent blog from Duane Morris’s David Feldman reviews recent U.S. financing activities involving cannabis-related businesses, and says that they have positive implications for U.S. based-businesses:
These developments likely will lead to fewer US companies feeling the need to go public in Canada, where previously companies believed capital was easier to access. Second, the growers and sellers of cannabis in the US, those that “touch the plant,” have not yet been permitted to list their shares on a national exchange. It will be interesting to see if and when the exchanges relent on their reticence to list these now large and fast-growing entrepreneurial enterprises as the march to US legalization continues. In the meantime, capital as fuel for growth is more and more available to these US businesses.
Every few years, we survey the practices relating to blackout & window periods (we’ve conducted over a dozen surveys in this area). Here’s the results from our latest one:
1. Which factor is most important in allowing a blackout period to end one day after an earnings release:
– Filer status being large accelerated filer and a WKSI – 19%
– Number of analysts providing coverage on company – 23%
– Average daily trading volume for the company – 10%
– None of the above is important – 48%
2. How many analysts covering the company is considered sufficient to allow blackout period to end one day after an earnings release:
– 1-5 – 3%
– 6-10 – 26%
– 11-15 – 13%
– 16 or more – 6%
– None of the above is important – 52%
3. What average daily trading volume is considered sufficient to allow blackout period to end one day after an earnings release:
– 1% of its outstanding common stock – 7%
– $5 million or more in average daily trading volume (daily trading volume x stock price) – 3%
– $10 million or more in average daily trading volume (daily trading volume x stock price) – 6%
– $25 million or more in average daily trading volume (daily trading volume x stock price) – 15%
– None of the above is important – 69%
Please take a moment to participate anonymously in these surveys:
Last week, the CII published a list of 159 directors who served on boards of 2018 & 2019 IPO companies that went public with dual-class share structures & no sunset provisions. The CII’s “Dual-Class Enablers Spreadsheet” identifies the other public boards on which these directors serve. Here’s an excerpt from the CII’s press release discussing its rationale for the “naming & shaming” approach:
“The board that brings a company to public markets with unequal voting rights is responsible for the decision to disempower public shareholders,” said CII Executive Director Ken Bertsch. “The board’s decision can be a red flag of discomfort with accountability to outside shareholders.” He said that investors “may want to raise concern about that in their engagement with other boards on which these directors serve. Some investors may choose to vote against directors of single-class companies who participated in pre-IPO board decisions to adopt dual-class equity structures without sunsets elsewhere.”
The release also says that the list may have a deterrent effect on private companies considering dual class structures. Perhaps that’s the case. After all, this is the first time that the CII has taken action that provides a potential reputational downside for the directors of these companies. But personally, I’m skeptical. I still think that companies will only be deterred from going public with dual class structures when investors finally abandon their “buy now, whine later” approach to investments in them.
BlackRock: “Remain Calm! All is Well!”
Remember my recent blog about BlackRock’s defense of the size of its investment positions in public companies? Well, it published another blog on the Harvard Governance Forum that defends the voting power those investments represent. BlackRock reviews various proxy voting scenarios – elections, M&A, say-on-pay & shareholder proposals and the average margins of victory for each. From that data, they draw this conclusion:
The view that asset managers are ‘determining’ the outcome of proxy votes is not supported by the data. The vast majority of ballot items are won or lost by margins greater than 30%, meaning that even the three largest asset managers combined could not change the vote outcome. While the small subset of votes on shareholder proposals tend to be closer, the considerable variation in voting records among asset managers negates the concept of a multi-firm voting bloc as the ‘swing vote”.
In other words, – “most votes aren’t close, so you shouldn’t worry that we have the ability to determine the outcome of all close votes.” These blogs certainly suggest that BlackRock is worried about the potential for regulatory intervention. But I don’t think they’re helping themselves by putting forward arguments that are so specious you can practically see beads of sweat forming on their upper lip.
Yesterday, the SEC announced an open Commission meeting next Wednesday – August 21st – during which it will consider two agenda items. The first relates to potential guidance “regarding the proxy voting responsibilities of investment advisers under Rule 206(4)-6 under the Investment Advisers Act.” With this agenda item, the SEC may be considering guidance that revisits the extent to which an asset manager can outsource voting decisions to proxy advisors consistent with its fiduciary obligations. (See this Cydney Posner blog).
As this Gibson Dunn blog notes, the second agenda item also relates to proxy advisors:
The second agenda item is a Division of Corporation Finance matter captioned “Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice.” The notice describes this matter as follows:
The Commission will consider whether to publish an interpretation and related guidance regarding the applicability of certain rules, which the Commission has promulgated under Section 14 of the Securities Exchange Act of 1934, to proxy voting advice.
This item appears related to the rulemaking addressed in the SEC’s most recent Reg Flex agenda, which stated that the Division of Corporation Finance “is considering recommending that the Commission propose rule amendments to address certain advisors’ reliance on the proxy solicitation exemptions in Rule 14a-2(b).”
As I blogged at the time the SEC updated its Reg Flex Agenda, it’s unclear exactly what the SEC is going to propose about the ability of proxy advisors to continue rely on exemptions from proxy solicitation rules. Some commenters have called for the SEC to reconsider those exemptions – or at least impose additional conditions upon their use – as part of a broader initiative to regulate the proxy advisory industry.
These are controversial topics, so this should be an interesting meeting – well, I mean, if it goes forward. They seem to cancel these things with the same frequency as I cancel ‘Open Table’ reservations. We will be talking about the outcome of the SEC’s meeting at our “Proxy Disclosure Conference” coming up in a few weeks.
Fast Act S-K Simplification: Don’t Forget the New “Description of Securities” Exhibit!
In preparing an article for the most recent issue of “The Corporate Counsel” print newsletter, I looked at a bunch of 10-K filings made by large accelerated filers after the effective date of the Fast Act disclosure simplification rules. One of the more interesting things that I found was that nearly half of the filers whiffed on the requirements of new Item 601(b)(4)(vi) of Regulation S-K – which requires companies to include an exhibit briefly describing all securities registered under Section 12 of the Exchange Act.
So, consider this a reminder that you’ve got to include this exhibit in your next 10-K if you’re a large accelerated filer. If you’re wondering what it should look like, check out this recent blog from Stinson’s Steve Quinlivan, which reviews the new exhibit requirement & provides some samples.
After I posted this, Hogan Lovells’ David Crandall reached out with an idea about why so many companies may be overlooking this requirement:
We noticed that form checks by our associates were not picking up the new requirement, and it turns out that the eCFR website for Reg S-K Item 601 incorrectly lists the exhibit requirement as applying to Form 10-Ds rather than 10-Ks.
The adopting release omitted the headers to the Item 601 exhibit table and had the incorrect number of columns (14 compared to 16), which undoubtedly contributed to the error on the eCFR website. I’m not aware of any source that correctly lists the new requirement as applying to 10-Ks, absent the discussion of the amendment in the adopting release. There may be many diligent registrants out there who looked at Item 601 and figured that the new requirement only applied to asset-backed issuers filing on Form 10-D.
. . . And now, just a few hours after posting David’s comments, the eCFR website reference has been fixed! Thanks to David and to the folks in the government who addressed this so promptly.
Buybacks are Bad. Buybacks are Declining. The Decline in Buybacks is Bad.
The much criticized practice of corporate stock buybacks appears to have declined significantly this year. That’s great news, right? This Axios Markets report says “not exactly.” Here’s an excerpt:
After buying back more than $1 trillion of their own stock last year, public companies are slowing their share repurchases in 2019, and that will add to troubles for the market and the economy.
Why it matters: Buybacks have been a major catalyst for the market’s rise in recent years and remain an important driver of higher prices, as earnings growth has slowed and investors have become net sellers of equities. With the trade war weighing on business spending and confidence and earnings growth expected to weaken into negative territory for companies in both the second and third quarters this year, the stock market’s legs look increasingly fragile.
By the numbers: The record buyback binge in 2018 accounted for almost half of stocks’ EPS growth, the highest share since 2007. S&P reported earlier this year that Q1 2019 was the first quarter in 7 that the pace of buybacks slowed. That theme has continued through the year, as the 4-week average pace of buybacks has fallen 30% from 2018’s pace as of this week, data from Bank of America Merrill Lynch shows.
The report quotes a recent client note from BAML that says that investors have become “less enamored with buybacks,” and that late 2018 was “the turning point in this cycle of expanding debt balance sheets, buying growth and rewarding shareholders.” It says that the bottom line is that companies are preparing for the economy to slow and want to pare debt and hold cash in the event of a downturn.
Last week, the CLS Blue Sky Blog summarized a study on the use of humor in corporate earnings calls. The results were kind of interesting:
We find that managers are less likely to use humor on a call when the tone of analysts’ questions is negative, suggesting managers are deliberate about when to use humor. Further, our results indicate that managers are more likely to use humor if an analyst first uses humor on the call. We also find that the market reaction in the three days surrounding the conference call is more positive when managers use humor, a result that is partially driven by a muted reaction to negative manager tone when managers use humor. Additionally, our tests of analysts’ reactions indicate that managers’ use of humor is generally associated with upward revisions in analysts’ stock recommendations shortly after the call.
It looks like the takeaway here is that a little humor from your execs can give a bit of a bounce to your stock price. Everybody’s trying to make their earnings call stand out from the pack these days, and given the potential upside here it wouldn’t surprise me to see companies make a conscious effort to inject comic relief into the proceedings. Well, you folks can do what you want, but if you ask me, I’d be very cautious about trying to throw your CEO into the deep end of the humor pool.
My point is that comedy is a high-wire act, and chances are pretty good that your CEO isn’t funny. Worse, it’s almost a lock that most CEOs think they’re hysterical. After all, a lot of CEOs spend their days surrounded by people who tell them how awesome they are and laugh at all their jokes. That can lead to catastrophic consequences for CEOs who decide that Dave Chappelle has nothing on them and that breaking out their standup act on an earnings call is a great idea.
Here’s a case in point – last year at about this time, the subscription software provider Zuora attempted to turn its earnings call into a “dialogue” featuring ad-libbed attempts at humorous asides. The execs involved likely thought they were being amusing. According to this MarketWatch.com article, the market thought otherwise:
Wall Street didn’t seem too amused by the strange new take on an earnings call, which took place as shares were falling in the aftermarket. Zuora’s stock closed down 19% in Friday’s session, the largest single-day percentage drop in Zuora’s history as a public company.
Yikes! Any company that’s considering turning their next earnings call into an SNL skit should keep in mind Zuora’s cautionary tale – as well as the old theatrical adage that says “Dying is easy. Comedy is hard.”
The Dark Web: Troll Targets SEC Staffers
Like many governmental agencies, the SEC is never short of critics. The agency usually takes that criticism in stride – but one critic appears to be targeting individual Staff members online. This Claims Journal article says that the SEC thinks that crosses the line, and is taking some extraordinary steps to address potential reputational damage:
Elon Musk mocked it as the “Shortseller Enrichment Commission.” Billionaire Mark Cuban said it’s “useless.” Hedge fund legend Leon Cooperman called it “abusive.” For the U.S. Securities and Exchange Commission, such attacks come with the territory. But brushing them off is getting harder in the age of social media. One online foe has so troubled the agency’s staff that it’s made the remarkable move of seeking to hire an expert to burnish their images.
The contractor’s duties will include monitoring content about employees in the SEC’s vaunted enforcement division on the web and removing anything that’s “false or harmful,” according to a July 22 posting on a federal job site. The listing didn’t name the detractor, but the individual isn’t a well-known executive like Musk or Cuban, said a person familiar with the matter who asked not to be identified. The SEC accused the mystery adversary of violating securities laws, and the individual started assailing agency officials online, while taking steps to ensure Google and other search engines picked up the critiques.
While individual crackpots weren’t unheard of in the past, the article quotes John Reed Stark as saying that “before social media accounts became ubiquitous, most threats were confined to stock message boards.” Now everyone’s online, including most of the Staff – and that makes them easier targets for trolls.
Transcript: “How to Handle Hostile Attacks”
We have posted the transcript for the recent DealLawyers.com webcast: “How to Handle Hostile Attacks.”
Given the times in which we live, I guess it’s not surprising that some companies have added “risk factor” disclosure about the potential implications of an active shooter to their SEC filings. Here’s an excerpt from this WSJ article:
A handful of public companies have begun quietly warning investors about how gun violence could affect their financial performance. Companies such as Dave & Buster’s Entertainment Inc., Del Taco Restaurants Inc. and Stratus Properties Inc., a Texas-based real-estate firm, added references to active-shooter scenarios in the “risk factor” section of their latest annual reports, according to an analysis of Securities and Exchange Commission filings. The Cheesecake Factory Inc. has included it in its past four annual reports.
So, what do these risk factors look like? Here’s what The Cheesecake Factory said in its 2019 10-K (pg. 25):
Any act of violence at or threatened against our restaurants or the centers in which they are located, including active shooter situations and terrorist activities, may result in restricted access to our restaurants and/or restaurant closures in the short-term and, in the long-term, may cause our customers and staff to avoid our restaurants. Any such situation could adversely impact customer traffic and make it more difficult to fully staff our restaurants, which could materially adversely affect our financial performance.
Dave & Buster’s 10-K included identical language (pg. 23). The language in Del Taco’s 10-K (pg. 21), and Stratus’s 10-K (pg. 17) was a little different. While I understand why companies are doing this, I’m not sure this kind of thing is what risk factor disclosure is intended to capture. Our tendency (mine too) to throw any item that’s been added to our national anxiety closet into a risk factor isn’t very helpful to investors. The problem is that not all disclosure adds value – some just creates “noise.”
In the U.S., we’ve learned that an active shooter is the kind of random event could happen to anyone, and the effect of such an event on any business would be terrible. So to me, it’s sort of like getting struck by a killer asteroid. I think this is the kind of thing that Judge Easterbrook was getting at in this excerpt from his 1988 opinion in Weilgos v. Commonwealth Edison:
Issuers need not “disclose” Murphy’s Law or the Peter Principle, even though these have substantial effects on business. . . Securities laws require issuers to disclose firm-specific information; investors and analysts combine that information with knowledge about the competition, regulatory conditions, and the economy as a whole to produce a value for stock.
But let’s face it – you’re not going to change your approach here and neither am I. That’s because while we can debate risk factor metaphysics, the reality is that the explosive growth in event-driven securities class actions is a big part of our personal anxiety closets too.
Venture Capital: Snoop’s Got His Mind on His Money & His Money on His Mind
My kids think I’m dorkier than Ari Melber when I reference hip-hop. But there’s no way I’m not going to use a “Gin & Juice” reference in the title when this Pitchbook article says that Snoop Dogg is an investor in Swedish payment services provider Klarna, which is now Europe’s second most valuable VC-backed company with a $5.5 billion valuation following its recent $460 million capital raise. Here’s an excerpt:
Founded in 2005, Klarna provides consumer financing for purchases at third-party merchants. Rather than requiring consumers to pay in full via credit card at the time of sale, Klarna acts as a middleman to front the payment for a purchase, with merchants receiving the full amount upfront while the consumer repays Klarna over time.
The Swedish company is perhaps most recognizable for its partnership and investment relationship with Calvin Broadus, better known as Snoop Dogg. Broadus is front-and-center in Klarna’s recent marketing campaign, known as “Smoooth Dogg.” Such marketing efforts could prove beneficial as Klarna plans to use its new windfall to significantly expand in the US, Broadus’ home country and where his career grew rapidly in the 1990s.
Regular readers of this blog know that Snoop has some impressive culinary skills, but you also should note that this isn’t his first rodeo when it comes to venture capital. He’s an investor in both Reddit & the trading app Robinhood, and a general partner in Casa Verde Capital, which recently completed a $45 million capital raise & focuses on investments in – here’s a shock – the cannabis industry.
Cryptocurrencies: Kik Claps Back at SEC Complaint
In June, I blogged about the SEC’s decision to bring an enforcement action against Kik Interactive for its $100 million unregistered token deal. As that blog noted, Kik’s founders are crypto-evangelists who have raised a $5 million war chest to fund its defense against the SEC’s allegation that its tokens are “securities.” It recently filed a 130-page answer to the SEC’s complaint, in which it accuses the agency of “twisting the facts” about its Kin token. Check out this TechCrunch article for more details.
It’s not news to anyone reading this that the legal profession has big problems with depression, substance abuse, and other mental health issues. If you haven’t personally experienced any of these, you know friends or colleagues who have. But the question is, why are these problems so prevalent among lawyers?
This Law.com article is stirring up some controversy over its claims that when it comes to outside counsel, the problem is the client. Specifically, the article singles out law department attorneys as playing a big role in mental health issues among outside counsel. Here’s the gist of the argument:
Client demands for fast turnaround times, even on non-urgent matters, can leave outside counsel in constant crisis mode. That stress can lead to frayed relationships and mental health issues such as depression, addiction and anxiety, which firm lawyers are more likely to experience than corporate in-house counsel.
“We’re on this crisis level all the time because of the expectations coming from the clients,” said Dan Lukasik, the founder of Lawyers With Depression. He said “a change in the relationship” between firms and in-house clients is needed to improve law’s mental health culture.
Client demands are part of the stress equation, but so is the law firm environment, and I don’t think it’s at all fair to point the finger at in-house lawyers. If in-house attorneys set unreasonable expectations, it’s usually because their business people have set unreasonable expectations for them. In my experience, many in-house lawyers go out of their way to let you know if something they’re asking for isn’t urgent, and it’s exceedingly rare to find one who puts you through the ringer just for giggles.
I agree that most corporate lawyers operate “on a crisis level” all the time, but I think that has more to do with how we’re wired than it does with client demands or whether we’re in a law firm or a corporate setting. For instance, even if I know something’s not a crisis, I’ll often just assume the client needs me to attend to it immediately. That’s nuts, but I don’t think I’m alone. A lot of us are introverted, competitive, perfectionist, obsessive about our reputations & terrified of failure. Add in our professional bias toward catastrophic thinking, and you’ve got a bunch of gasoline-soaked rags just waiting for somebody to light a match when it comes to mental health problems.
Quick Poll: Why Do Lawyers Experience Mental Health Issues?
I just gave you my 2 cents about why I think so many of us struggle with mental health issues – check out this ABA Journal article for what other lawyers have to say about this topic. Here’s an anonymous poll so you can provide your thoughts:
survey tool
Transcript: “Joint Ventures – Practice Pointers”
We have posted the transcript for the recent DealLawyers.com webcast: “Joint Ventures – Practice Pointers.” We’ll have our second installment for this topic in an August 6th webcast: “Joint Ventures – Practice Pointers (Part II).”
There’s a great quote from the 5th Circuit’s 1981 decision in Huddleston v. Herman & MacLean that says that “to warn that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavorable events to happen when they have already occurred is deceit.” That quote pretty much sums up the basis for the SEC’s enforcement proceeding against Facebook that was announced yesterday. Here’s an excerpt from the SEC’s press release:
The Securities and Exchange Commission today announced charges against Facebook Inc. for making misleading disclosures regarding the risk of misuse of Facebook user data. For more than two years, Facebook’s public disclosures presented the risk of misuse of user data as merely hypothetical when Facebook knew that a third-party developer had actually misused Facebook user data. Public companies must identify and consider the material risks to their business and have procedures designed to make disclosures that are accurate in all material respects, including not continuing to describe a risk as hypothetical when it has in fact happened.
The misleading disclosures arose out of Cambridge Analytica’s unauthorized use of Facebook user data. Facebook allegedly found out about Cambridge Analytica’s antics in 2015, but didn’t revise its disclosure until two years later. Facebook consented to a “neither admit nor deny” settlement that, among other things, enjoins it from future violations of Section 17(a)(2) and (3) of the Securities Act and Section 13(a) of the Exchange Act & various rules thereunder.
The company also agreed to pay $100 million to settle the charges, which sounds like a lot, but is chump change to Facebook. After all, the company also agreed yesterday to pay a $5 billion fine to settle FTC charges arising out of customer data privacy lapses. Still, it seems to me that the real elephant in the room may not be the size of the settlement, but the fact that no individuals were named.
The SEC almost always names individuals in corporate disclosure cases, although it didn’t do so in last year’s high-profile data privacy case against Altaba (Yahoo!). In any event, there’s nothing in the press release to suggest that actions against any individuals are contemplated – despite language in the complaint to the effect that “more than 30 Facebook employees in different corporate groups including senior managers in Facebook’s communications, legal, operations, policy, and privacy groups” were aware that Cambridge Analytica had improperly been provided with user data.
The FTC Gives Facebook a New Board Committee!
Speaking of that FTC settlement, Bloomberg’s Matt Levine points out in his column that it has imposed some interesting governance obligations on Facebook that may curb some of Mark Zuckerberg’s power. One of the conditions imposed under the terms of the settlement is a new board privacy committee that is intended to be difficult for Zuckerberg to mess with. Here’s an excerpt from the FTC’s statement on the settlement:
The order creates greater accountability at the board of directors level. It establishes an independent privacy committee of Facebook’s board of directors, removing unfettered control by Facebook’s CEO Mark Zuckerberg over decisions affecting user privacy. Members of the privacy committee must be independent and will be appointed by an independent nominating committee. Members can only be fired by a supermajority of the Facebook board of directors.
Here’s Matt’s take on the independent privacy committee requirement:
The upshot is … look, it is not entirely clear to me what the upshot is; we’ll see what happens. But my rough analysis is that if Zuckerberg wanted to do a bad privacy thing, and the independent privacy directors told him not to, he’d have a tough time of doing it. He couldn’t remove the independent privacy directors from their posts.
Perhaps he could remove them from the board, but he’d have a hard time replacing them, because the independent nominating committee has “the sole authority” to pick new directors. I suppose he could replace the nominating committee too. These provisions aren’t ironclad. But surely their purpose really is to take the final authority over one aspect of Facebook out of the hands of Zuckerberg.
BlackRock: “Move Along – Nothing to See Here. . .”
According to this recent Harvard Governance Blog from its Vice Chair, BlackRock would like you to know that it & the rest of the Big 3 are really small players in the grand scheme of things:
As index funds are currently growing more quickly than actively managed funds, some critics have expressed concern about increasing concentration of public company ownership in the hands of index fund managers. While it is true that assets under management (or “AUM”) in index portfolios have grown, index funds and ETFs represent less than 10% of global equity assets. Further, equity investors, and hence public company shareholders, are dispersed across a diverse range of asset owners and asset managers.
As of year-end 2017, Vanguard, BlackRock, and State Street manage $3.5 trillion, $3.3 trillion, and $1.8 trillion in global equity assets, respectively. These investors represent a minority position in the $83 trillion global equity market. As shown in Exhibit 1, the combined AUM of these three managers represents just over 10% of global equity assets.
Umm, gee – isn’t 10% of all the equity assets in the world kind of a lot? I don’t know why we’re supposed to take a lot of comfort from that number – particularly since the Big 3 reportedly control 25% of the stock in the S&P 500 and are on course to increase that stake to more than 40% over the next two decades. These numbers aren’t small.
The blog also says that those AUM numbers are misleading, because they represent “a variety of investment strategies, each with different investment objectives, constraints, and time horizons. For example, BlackRock has more than 50 equity portfolio management teams managing nearly 2,000 equity portfolios.” That’s great – but when Larry Fink comes out with annual letters telling boards of portfolio companies “how things are gonna be,” those 2,000 equity portfolios look pretty monolithic.
By the way, if this “50 portfolio managers/2,000 portfolios” pitch sounds familiar to you, it may be because at some point you heard the same pitch from one of the Big 3 when it was lobbying your client to allow it to go over a poison pill threshold. At least that’s where I first heard it.
