Yesterday, the SEC announced an enforcement proceeding against Kik Interactive, which allegedly has engaged in a $100 million unregistered token offering. Here’s the SEC’s complaint. Ordinarily, the SEC’s decision to bring an enforcement action is the big news, but I’ve kind of buried the lede here. Why? Because this Forbes article says that Kik & its affiliated entity, the Kin Ecosystem Foundation, are positively itching for a fight:
Two years ago, messaging app Kik raised about $100 million in an initial coin offering for the Kin token. Three days later, the SEC reached out, and after much back and forth, finally notified Kik last fall that it intended to pursue an enforcement action against both Kik and the Kin Ecosystem Foundation.
However, Kik and Kin made a surprise move: It published its response to the SEC, detailing what seems like a pretty strong case for why their token sale was not an offering of securities and why their token currently does not meet the definition of a security. They also announced in the Wall Street Journal their plan to fight this out in court.
In order to fund their defense, these crypto folks did a very crypto thing – they started a legal defense fund called “Defend Crypto” to which people can contribute bitcoin & other cryptocurrencies. What’s the sales pitch? In short, they say that “the future of crypto is on the line,” & they’re fighting Cryptomageddon:
For the future of crypto, we all need Kin to win. This case will set a precedent and could serve as the new Howey Test for how cryptocurrencies are regulated in the United States. That’s why Kin set up the Defend Crypto fund to ensure that the funds are there to do this the right way.
The message seems to be resonating with its intended audience. The fund raised over $4.5 million even before the SEC filed its action. What’s more, these guys seem positively thrilled that they’ve been sued. This WSJ article quotes KiK’s CEO as saying in reaction to the SEC’s complaint that what’s “exciting” to him “is that this industry is finally going to get the clarity it so desperately needs.”
“Clarity” is a word that crypto-evangelists use a lot when it comes to the securities laws. Sure, there are aspects of the SEC’s position on digital assets that are murky, but every time I hear somebody from the crypto crowd speak, I get the sense that they believe “clarity” means having regulators tell them what they want to hear. Anyway, enjoy the heck out of your enforcement proceeding. . .
Endangered Species: Quarterly Guidance on the Way Out?
It wasn’t all that long ago that most public companies seemed to view providing quarterly forecasts as just one of the costs of being public. That sure doesn’t seem to be the case anymore. In fact, this recent OZY article reports that the practice of providing quarterly guidance may be going the way of the Dodo:
The number of American companies releasing guidance every three months has dropped from 75 % in 2003 to 27% in 2017, according to a new report by the nonprofit FCLT Global, which advocates against quarterly earnings guidance. The phenomenon is even rarer outside the United States. Among listed companies on the Euro Stoxx 300, less than 1 percent issued quarterly guidance between 2010 and 2016.
Several publicly listed companies that release quarterly sales and revenue information are joining the chorus against short-term financial thinking. Large publicly traded companies such as Cisco, GSK, Barclays and Unilever, along with some state pension funds and global investment firms, are among the members of FCLT, an acronym for Focusing Capital on the Long Term. The group presents data showing that such forecasting does not, as many argue, reduce stock price volatility.
Despite this research and the calls of prominent investor & corporate advocates to end quarterly guidance, I suspect that the practice will remain pretty resilient at the lower end of the food chain. Smaller caps are often desperate to please analysts and maintain whatever coverage they may have, so until securities analysts jump on the bandwagon, some of these companies are likely to still keep sticking their necks out.
More On “NYSE Proposes to Tweak Equity Compensation Plan Rules”
Last week, I blogged about the NYSE’s proposed changes to the definition of “fair market value” in Rule 303A.08. Troutman Sanders’ Brink Dickerson points out that there seems to be a bit of a disconnect between the NYSE’s proposal & the approach taken by Item 402 of S-K:
The change to 303A.08 is interesting in that it does not reconcile nicely with S-K 402(d)(2)(vii), which requires a separate column when the exercise price is “les than the closing market price of the underlying security.” A lot of my clients now use the closing price on the date of grant (1) to avoid this extra disclosure, and (2) because they would prefer the stock price to be unknown at the time of grant to minimize bullet-dodging, etc. Surprising that the NYSE would not go with the SEC’s default approach. Under the NYSE construct, you can only avoid the extra column with certainty if you make a grant after the market closes but not on the next day.
You’ve got to hand it to college fraternities – their members have an uncanny knack for getting themselves into serious trouble. Most fraternity misconduct is the predictable result of their often over-the-top drinking culture & reckless hazing practices. But while that kind of stuff has become a cliché, it doesn’t mean that frat boys are incapable of more innovative misconduct.
Here’s a case in point: according to this SEC press release, one enterprising young man has allegedly been running a Ponzi scheme out of a University of Georgia frat house! This excerpt from the press release indicates that the Division of Enforcement decided that when it comes to dealing with this kind of alleged misconduct, Dean Wormer had it right – “the time has come for somebody to put his foot down, and that foot is me”:
The Securities and Exchange Commission today announced an emergency action charging a recent college graduate with orchestrating a Ponzi scheme that targeted college students and young investors. The SEC is seeking an asset freeze and other emergency relief.
The SEC’s complaint alleges that Syed Arham Arbab, 22, conducted the fraud from a fraternity house near the University of Georgia campus in Athens, Georgia. Arbab allegedly offered investments in a purported hedge fund called “Artis Proficio Capital,” which he claimed had generated returns of as much as 56% in the prior year and for which investor funds were guaranteed up to $15,000.
Arbab also allegedly sold “bond agreements” which promised investors the return of their money along with a fixed rate of return. The SEC’s complaint alleges that at least eight college students, recent graduates, or their family members invested more than $269,000 in these investments.
According to the SEC’s complaint, no hedge fund existed, Arbab’s claimed performance returns were fictitious, and he never invested the funds as represented. Instead, as money was raised, Arbab allegedly placed substantial portions of investor funds in his personal bank and brokerage accounts, which he used for his own benefit, including trips to Las Vegas, shopping, travel, and entertainment.
As noted in the press release, the SEC is seeking an asset freeze & a whole bunch of other emergency relief. Still, I was a little disappointed to find no reference to “double secret probation” in the SEC’s complaint.
SCOTUS Punts on “Duty to Update”
The SCOTUS has managed to dodge some pretty controversial issues in recent weeks, and according to this D&O Diary blog, the question of whether the securities laws impose a “duty to update” is another controversy that you can add to the list. Here’s an excerpt:
In a little noticed-development last week, the U.S. Supreme Court denied the petition for a writ of certiorari in Hagan v. Khoja, in which former officials of a bankrupt pharmaceutical company sought to have the Court review a decision by the Ninth Circuit to revive a securities class action lawsuit against them.
Had the petition been granted, the Court would have been called upon to consider the controversial question of whether public companies have a duty to update prior disclosures that were accurate when made. The Court’s cert denial leaves the Ninth Circuit’s ruling standing and the questions surrounding the existence and requirements of a duty to update remain unsettled.
Insider Trading: Don’t Look Now, But Here Comes Congress. . .
This NYT DealBook article reports on “The Insider Trading Prohibition Act,” which recently cleared the House Financial Services Committee. The proposed legislation is intended to eliminate some of the uncertainty surrounding insider trading law – and expand the government’s ability to bring insider trading cases. This excerpt provides an example of the greater flexibility the legislation would provide to prosecutors:
The legislation also would move insider trading law away from its focus on a duty to keep information confidential by more broadly describing what constituted “wrongful” trading or transmission of confidential information. There would be four ways to show that the information had been obtained wrongfully: by theft, bribery or espionage; by violation of any federal law protecting computer data; by conversion, misappropriation or unauthorized and deceptive taking of information; and by breach of a fiduciary duty or breach of “any other personal or other relationship of trust and confidence.”
By expressly including a breach of a federal data privacy law or theft of information, the legislation would eliminate some of the uncertainties surrounding the application of insider trading law to the kind of “outsider trading” schemes exemplified by the 2016 hack on the SEC’s Edgar database.
This WilmerHale memo suggests that prosecutors have already found a work-around for some of the issues that Congress is trying to address with this legislation – a federal statute that was added to their arsenal as part of the Sarbanes-Oxley Act.
Check out the latest report from BarkerGilmore – a boutique executive search firm – about in-house counsel compensation trends. Among the findings:
– The average annual salary increase rate for all positions across industries increased to 4.4%, up 0.6% from the previous year.
– 41% of all respondents believe their compensation is below or significantly below that of their peers in other organizations, with labor & employment lawyers and insurance reporting the greatest dissatisfaction.
– 38% of respondents indicate that they would consider a new position within the next year due to compensation issues, 3% less than the previous year.
– Public company lawyers make more than private company lawyers, and public company GCs make a lot more – 41% more to be precise.
– On average, female in-house counsel earn 85% of what male in-house counsel earn. The disparity is largest at the General Counsel level, with a 17% gap, 5% smaller than the previous year.
On a completely unrelated note, when I saw BarkerGilmore’s press release on the study, I noticed that they were headquartered in Fairport, NY. This charming canal town is the hometown of the late Philip Seymour Hoffman, who once described it as being “like Kansas, if Kansas was in New York.” Why do I know so much about this little upstate New York burg? Well, Mr. Hoffman isn’t the only one who grew up there. (Hi Mom!)
“Finders”: Lawsuit Pushes Back Against SEC on Broker Registration
The SEC has historically taken a very limited view of the role that “finders” who are not registered broker-dealers can play in financings. But this recent blog from Andrew Abramowitz notes that one company has filed a lawsuit that pushes back against the SEC’s position. Here’s an excerpt:
A company proposing to do business as an unregistered finder, Platform Real Estate Inc., has now filed suit in the Southern District of New York against the SEC, seeking a declaratory judgment to the effect that broker-dealer registration is not required for the plaintiff and similar companies acting as a finder on behalf of private companies.
The essence of Platform Real Estate’s argument is that the Exchange Act generally, and Section 15(a) (the section requiring registration of those acting as broker-dealers) in particular, are intended to protect investors in the secondary market, like those purchasing shares traded on an exchange. The transactions that Platform Real Estate would be involved in, in contrast, are primary transactions, where a company issues and sells new shares to accredited investors who represent as to their intent to hold the shares potentially indefinitely.
In discussing the case, Andrew makes a point that I think a lot of lawyers representing small companies would agree with – most registered broker-dealers don’t want to deal with this segment of the market. There’s just not enough money to be made in these financings to justify their commitment of resources. That means there’s a real market need that is being filled by finders, and makes it critical to get some clear rules governing what they can and can’t do.
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 inputting your email address!
Yesterday, Corp Fin Director Bill Hinman issued an exemptive order permitting a company that was unable to provide the audited financial statements required under Rule 14a-3(b) to nevertheless solicit proxies for its upcoming annual meeting. Companies that don’t have audited financials are in a tough spot if they need to hold an annual meeting. Rule 14a-3(b) requires them to provide an annual report containing that information along with the proxy materials, and if they can’t do that, they can’t solicit proxies.
Many companies in this position opt to delay their annual meeting until they can comply with the proxy rules, but that’s not a viable strategy if you’ve received a court order compelling an annual meeting. That’s the situation in which Mimedx Group found itself & what prompted it to seek the exemptive order. Companies finding themselves in this kind of a bind should note both the potential availability of exemptive relief & the existence of the following conditions upon which the Mimedx Group order was premised:
– MiMedx is required to hold the Delayed 2018 Meeting as a result of an action taken by security holders pursuant to Florida law and the Florida Court ordering such meeting to be held on June 17, 2019;
– The company has made good-faith efforts to furnish the audited financial statements required by Rule 14a-3(b) before holding the Delayed 2018 Meeting but is unable to comply with this requirement;
– MiMedx has made a determination that it disclosed to security holders all available material information necessary for security holders to make an informed voting decision in accordance with Regulation 14A;
– Absent the grant of exemptive relief, MiMedx would be forced to violate either Florida law or the rules and regulations administered by the Commission; and
– The company faces a proxy contest with respect to the matters to be presented at the Delayed 2018 Meeting, with certain MiMedx security holders filing a definitive proxy statement soliciting proxies for, among other things, the election of their own director nominees.
These conditions weren’t pulled out of thin air. With the exception of the reference to the proxy contest, they mirror the requirements of Rule 30-1(f)(18), which sets forth the circumstances under which the Director of Corp Fin has been delegated authority to grant exemptive relief from the requirements of Rule 14a-3(b).
Chief Accountant Wes Bricker to Leave SEC
The SEC announced yesterday that Chief Accountant Wes Bricker is leaving the agency. It also announced that Deputy Chief Accountant Sagar Teotia will serve as Acting Chief Accountant when Bricker leaves next month.
Enforcement: What’s in a Name?
I was kind of taken aback a few days ago when I saw the SEC’s litigation release announcing an enforcement proceeding against “Henry Ford.” Obviously, the SEC isn’t bringing an action against the long-dead father of the Model T, but as a Clevelander, the case made me think of the great Harvey Pekar & his famous “What’s in a Name?” story. I know the connection with securities law is pretty tenuous, but hey, it’s Friday.
Last week, the SEC published its latest Reg Flex Agenda, and it looks like the Commissioners may wade into some pretty controversial areas in the near future – including proposing rules relating to proxy advisory firms & shareholder proposals. This excerpt from a recent Gibson Dunn blog highlights the significant additions to the agenda:
Notably, the Reg Flex Agenda for the first time now identifies the following four rulemaking projects as among those that the SEC expects to address over the coming year:
– Proposing rule amendments regarding the thresholds for shareholder proposals under Rule 14a‑8;
– Proposing rule amendments to address certain advisors’ reliance on the proxy solicitation exemptions in Rule 14a-2(b);
– Proposing rule amendments to modernize and simplify disclosures regarding Management’s Discussion & Analysis (MD&A), Selected Financial Data and Supplementary Financial Information; and
– Proposing rule amendments to Securities Act Rule 701, the exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements, and Form S-8, the registration statement for compensatory offerings by reporting companies (previously listed as a longer term project.).
The blog says that the SEC is generally expected to propose increases in the ownership & resubmission thresholds under Rule 14a-8. What the SEC is going to propose about the ability of proxy advisors to continue rely on exemptions from proxy solicitation rules is less clear – but some commenters have called for the SEC to reconsider those exemptions as part of a broader initiative to regulate the proxy advisory industry.
Potential changes to the shareholder proposal regime & the possible regulation of proxy advisors are likely to garner the most attention from the media, but my guess is that most of us will take an equal or greater interest in what the SEC proposes to do with MD&A, Rule 701 & Form S-8.
NYSE Proposes to Tweak Equity Compensation Plan Rules
Under NYSE rules, equity compensation plans are generally subject to shareholder approval. However, plans that allow participants to buy shares at a price equal to their “fair market value” are excluded from that requirement. Last week, the NYSE filed a proposed rule change with the SEC that would codify its long-standing practice for determining fair market value for purposes of this exclusion. This excerpt from a recent Steve Quinlivan blog summarizes the proposed change:
For purposes of the above exclusion from the definition of equity compensation plan, the Exchange has always interpreted “current fair market value” as requiring that the price used be the most recent official closing price on the Exchange. For the avoidance of doubt, the Exchange now proposes to include in Section 303A.08 text specifying how the fair market value of the issuer’s common stock should be calculated for this purpose. “Fair market value” will be defined as the most recent official closing price on the Exchange, as reported to the Consolidated Tape, at the time of the issuance of the securities.
The blog says that this means if the securities are issued after the close on a Tuesday, then Tuesday’s official closing price will be used. If they are issued at any time between the time of Monday’s close and Tuesday’s close, then Monday’s official closing price will be used.
Nasdaq Proposes to Tighten Initial Listing Standards
Since we’re on the topic of amendments to stock exchange rules, I confess that I somehow overlooked proposed rule changes that Nasdaq originally filed in March. In any event, Nasdaq wants to tighten its original listing standards and help assure adequate liquidity for listed securities. Here’s an excerpt from the proposal explaining what it’s proposing to do:
– First, Nasdaq proposes to revise its initial listing criteria to exclude restricted securities from the Exchange’s calculations of a company’s publicly held shares, market value of publicly held shares and round lot holders (“Initial Liquidity Calculations”). To do so, Nasdaq proposes to add three new definitions to define “restricted securities”, “unrestricted publicly held shares” and “unrestricted securities” and proposes to amend the definition of “round lot holder”.
– Second, Nasdaq proposes to impose a new requirement that at least 50% of a company’s round lot holders must each hold shares with a market value of at least $2,500.
– Third, Nasdaq proposes to adopt a new listing rule requiring a minimum average daily trading volume for securities trading over-the-counter (“OTC”) at the time of their listing.
No changes to continued listing standards are being proposed. I don’t feel too bad about missing this rule proposal when it was initially filed, because the SEC just extended the comment period to July 8th.
Last August, when the SEC adopted its disclosure simplification rules, it referred to FASB certain Reg S-X & S-K line items that overlapped with GAAP but called for incremental disclosure, and asked FASB to consider incorporating those additional disclosure requirements into GAAP. Here’s an excerpt from this SEC Institute blog describing FASB’s recent response:
On May 6, 2019, the FASB issued an exposure draft related to this “referral” from the SEC. The proposed amendments in the exposure draft would modify disclosure or presentation requirements in a variety of topics in the Codification, ranging from removing the impracticability exception, to the requirement to disclose revenues for each product and service or each group of similar products and services, to adding disclosure of where derivative instruments and their related gains and losses are reported in the statement of cash flows.
A chart summarizing the proposed changes to GAAP appears on page 5 of the exposure draft. FASB also decided not to implement some of potential changes referred by the SEC. These include changes to GAAP that would have required financial statement disclosure of:
– The formula for calculating the number of shares available for issuance under an equity comp plan required Item 201(d) of Reg S-K
– The identity of 10% customers required by Item 101(c) of Reg S-K
– Discounts on shares as a deduction from equity accounts either on the face of the balance sheet or in the notes as required by Rule 4-07 of Reg S-X
– Significant changes in the authorized or issued debt since the date of the latest balance sheet as required by Rule 4-08(f) of Reg S-X
– Amounts of related party transactions on the face of the financial statements as required by Rule 4-08(k)(1) of Reg S-X.
Comments on the proposed changes laid out in FASB’s exposure draft are due by June 28, 2019.
“Test the Waters” for All: Comments on SEC Proposal
In February, the SEC issued a proposal to expand expand the “test-the-waters” accommodation from EGCs to all companies. So far, about 20 comments have been submitted on the rule proposal. This “Corporate Secretary” article says that the bulk of them have been supportive, but comments submitted by the non-profit Better Markets questioned several aspects of the proposal. Here’s an excerpt from the article describing the organization’s concerns about the rule’s potential impact on unsophisticated investors:
Better Markets, which was founded following the financial crisis with an eye on reforming Wall Street, raises concerns about the SEC’s plan. For one thing, the group argues that the SEC proposal creates ‘a dangerous loophole’ by not requiring issuers, and those authorized to act on their behalf such as underwriters, to validate the status of the investor – to make sure the investor is truly a QIB or an IAI – before a solicitation is made.
‘This loophole would permit solicitations to retail and other investors that either lack financial sophistication or cannot bear the financial risks associated with investing in highly risky investments such as those offered by, for example, penny stock issuers, leveraged business development companies or asset-backed security issuers,’ writes Better Market president and CEO Dennis Kelleher.
Better Markets also wants companies that “test the waters” prior to an offering & decide to move forward to file their testing-the-water communications with the SEC.
SEC Signs Off On Silicon Valley Stock Exchange
Last November, Broc blogged about efforts by some Silicon Valley heavy hitters to establish a new stock exchange for startup tech companies. While efforts to obtain regulatory approval for the new exchange hit a snag at the time, the SEC approved the application of the Long-Term Stock Exchange last Friday. This Reuters article summarizes some of the features of the new exchange that are designed to promote long-term thinking on the part of companies that list there:
The new exchange would have extra rules designed to encourage companies to focus on long-term innovation rather than the grind of quarterly earnings reports by asking companies to limit executive bonuses that award short-term accomplishments.
It would also require more disclosure to investors about meeting key milestones and plans, and reward long-term shareholders by giving them more voting power the longer they hold the stock.
It’s that final point – time phased voting – that prompted the CII to file a letter opposing the LTSE’s application. While the CII doesn’t like “tenure voting,” this TechCrunch article notes that it’s an old concept that’s picked up a number of advocates in recent years. In the end, the SEC approved the application, noting that its rules do not mandate that an exchange impose a “one-share, one-vote” requirement on listed issuers.
There are few non-chargeable events that law firms fret about more than their CLE programs for clients & potential clients. Of course, that fretting usually focuses more on the PowerPoint slides than things like actually seeking input from prospective attendees about what they’re looking for and who they would like to see participate in the program.
This recent In-House Focus survey of in-house lawyers concerning their own experiences with law firm CLE provides some interesting perspectives on these topics. For example:
– 70% of survey respondents said CLE programming should feature diverse lawyers, presenters and faculty. But just 30% of respondents agreed that diversity is adequately represented in current CLE content. At the same time, nearly two-thirds of respondents believe that participating in CLE programming is an effective way for law firms to connect diverse lawyers to clients.
– 52% of respondents to IHF’s survey agreed that law firms should do a better job of facilitating introductions of their diverse lawyers to their clients, while just 5% disagreed. Further, 62% believe CLE programming is a good way to cultivate relationships between diverse lawyers and clients.
– 62% of respondents believe law firm CLE is not adequately tailored to in-house lawyers. Additionally, two-thirds agree that CLE content is more tailored to law firm practitioners than in-house lawyers. In fact, another 79% of respondents said they would be more inclined to watch a CLE program that included in-house lawyers as presenters who speak to their issues.
– When asked what are some things that would make CLE more pertinent to in-house lawyers, many responses revolved around the need for real-world examples. Some responses included: “concepts to reduce outside legal expenses,” “when to involve outside counsel and how to engage them,” and “case studies and sample scenarios from current in-house lawyers.”
You should really check out the whole survey. As somebody who has spent his entire career in a law firm environment, I thought it was pretty eye-opening.
Crypto Mom Wants SEC to Wear “Reasonableness Pants”
You may agree or disagree with her remarks, but a speech by SEC Commissioner Hester Peirce – aka “Crypto Mom” – is always bloggable Her recent speech at Rutgers-Camden Law School is no exception. In discussing the SEC’s enforcement program, she makes no bones about her opposition to the enforcement approach favored during the tenure of former Chair Mary Jo White:
Most enforcement recommendations the Commission receives from the staff are legally straightforward and not controversial, but a small subset causes me to ask whether we are wearing our reasonableness pants.
In particular, I am not a fan of the so-called “broken windows” philosophy, a more-is-always-better, punish-the-small-violations approach to enforcement. Instead, I assess, when reviewing an enforcement recommendation from our staff, whether the recommendation is using our enforcement resources wisely. I ask, was there a meaningful violation? Is this a matter that could have been handled by our exam program? Are there other appropriate responses in lieu of an enforcement action, such as a rulemaking, interpretative guidance, or an educational bulletin for investors?
While she devotes much of her discussion to the SEC’s enforcement program, her “reasonableness pants” comments extend to the agency’s approach to rulemaking & interpretive guidance as well:
Lots of people want the SEC to wade into a whole range of issues that are not properly within our purview. Increasingly, we are urged to tell companies how many women to have on their boards, to limit the ways companies and their shareholders may resolve disputes, to direct financial firms to avoid providing capital for certain industries, or to prohibit investors from getting access to certain products we think investors should not have in their portfolios.
We do not have the time, resources, or authority to do these things. We have other things to do that are not headline-grabbers, but are neatly within our core mission.
Issues that should take priority in her view include things like updating transfer agent rules, disclosure modernization, fixed income & equity market structure, and ensuring that companies and investors across the country can participate in the capital markets. Peirce said these issues may not be as “trendy” as those that the SEC is being urged to undertake , but “subsequent generations will look back at us in disgust and wonder why we sacrificed the health of our capital markets for the chance to look cool for a moment.”
Rookies of the Year: Do New Activist Directors Add Greater Value Than Other Newbies?
According to this recent study, “rookie activist directors” – unseasoned independent directors appointed at the prompting of activists – add greater value to a company than other unseasoned independent directors. Here’s the abstract:
We examine the value-enhancing role of unseasoned independent directors nominated through shareholder activism events (Activist UIDs). Firms appointing Activist UIDs experience a larger value increase than those appointing Nonactivist UIDs, particularly when Activist UIDs have relevant experience, when they sit on the monitoring committees, and when their sponsors hold large target ownership.
Most of the companies in the study seem to have been small caps, and I think that needs to be taken into account when considering the study’s results. Established activist investors are likely to have access to a deeper and higher quality pool of director candidates than most small caps could find on their own.
Yesterday, a couple of our sharp-eyed members alerted us to the fact that the SEC tweaked the cover pages of Form 10-Q & Form 8-K yet again over the past few days. The changes were made to bring these forms more closely in alignment with Form 10-K. Here’s an excerpt from this Gibson Dunn blog with the skinny on the latest changes:
– In the Form 8-K, the table showing the “Title of each class,” “Trading Symbol(s),” and “Name of each exchange on which registered” appears immediately after the checkbox for “Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))”; and
– In the Form 10-Q, the table showing the “Title of each class,” “Trading Symbol(s),” and “Name of each exchange on which registered” appears immediately after the line “(Former name, former address and former fiscal year, if changed since last report).”
Remember waaay back on Monday when I blogged about how staggered boards are now good again? Yeah, well, investors don’t appear inclined to agree. You don’t have to take my word for it – this Corporate Secretary article says that you can just ask Kellogg’s:
Kellogg Company shareholders have backed a move to introduce annual elections for directors but will have to vote for additional measures if the change is to be implemented – a hurdle they have not overcome at a previous attempt. The vote took place at the Kellogg AGM held late last month in Battle Creek, Michigan. Specifically, the proposal called on the company’s board to reorganize itself into one class with each director subject to election every year.
The hurdle referenced in the article is a clause requiring a charter amendment to remove the staggered board to be approved by 2/3rds of the outstanding shares – and that supermajority vote requirement has thwarted previous attempts to undo these provisions.
Corporate Governance: Wait, Nobody Said Anything About a Test!
For me, the best part of passing the bar examination was the knowledge that I’d never have to take another test again in my life. That’s why it was disheartening to learn that I just might have to take another one in the highly unlikely event that a public company someday wants to consider adding me to its board.
That’s because this fall, the NACD plans to roll out a voluntary certification program for board members, and it includes a certification exam. Don’t expect it to be quite as easy as the written exam you took when you got your driver’s license – the test has been designed by a committee whose members include a former Delaware Supreme Court Justice, a former SEC general counsel, & a former head of the FASB.
UCLA’s Prof. Stephen Bainbridge wants to sign up for the exam. He was a year ahead of me in law school and was an editor of the Law Review. On the other hand, I was one of those people who will be eternally grateful for UVA’s “B mean” grading policy. I’m guessing he probably wouldn’t even have to study for it. Me? Well, if I ever do have to take it, let’s just say that I hope it’s open book & there’s some kind of prep course.
It’s proxy season, which means it’s also proxy strike suit season. We’ve recently heard reports from several members that plaintiffs are targeting disclosures surrounding whether brokers will be permitted to vote on particular proposals & the effect of abstentions and non-votes, as well as disclosures relating to compensation plans being submitted for a shareholder vote.
Here’s what we have learned:
– The plaintiffs’ bar has been sending demand letters to companies alleging inadequate or inaccurate disclosure about the vote required to approve proposals included on the company’s proxy materials, and threatening legal action in the event that corrective disclosure is not provided.
– Similar demand letters have been sent to companies with compensation plans on the ballot, alleging inadequate disclosure under Item 10(a) of Schedule 14A, which relates to general disclosures relating to compensation plans being submitted for shareholder approval.
– These demand letters typically arrive shortly before the scheduled date for the annual meeting, and a number of companies have filed DEFA 14As to reflect revised disclosure relating to these matters.
– Resolution of the issues raised in the demand letters is typically accompanied by a demand for legal fees.
These are not new areas of proxy disclosure for plaintiffs to pursue. Compensation plan disclosures have long been an attractive target, and disclosures about the effect of abstentions & non-votes were the subject of at least one high-profile case in 2014 & a number of demand letters over the last few years. It’s also easy to see why plaintiffs might like to single out disclosures in these areas for potential challenges.
When it comes to broker non-vote disclosures, the application of NYSE Rule 452 is sometimes unclear, and the Exchange’s interpretation of what proposals are “routine” does not always align with what one might expect. On top of that, the impact of broker non-votes on the outcome of any given proposal may depend on state law, charter provisions, and the nature of the proposal itself. In other words, this is complicated stuff – and it’s easy to make a mistake.
Item 10(a) of Schedule 14A seems more straightforward – essentially requiring companies to summarize the material features of the plan and information about the number of participants & how they are selected. But these requirements are also very open-ended, and leave plenty of room for second-guessing disclosure decisions. We’ll have more on this in the next issue of The Corporate Counsel newsletter.
Uber IPO: The Biggest Loser?
Uber’s IPO didn’t exactly have a gangbusters first day of trading. There have been plenty of IPOs that have had worse openings than Uber’s 7.6% decline from its IPO price, but according to this Gizmodo article, the sheer size of the deal made the dollar losses suffered during Uber’s first day the largest in U.S. history:
According to University of Florida professor Jay Ritter, Uber’s 7.62 percent decline since hitting the NYSE makes it “bigger than first day dollar losses of any prior IPO in the U.S.” In terms of percentage losses, Uber’s dip doesn’t even scratch the surface of the worst IPOs. But the staggering valuation of the company makes it, in raw scale, “among the top 10 IPOs ever” including companies outside the U.S., Ritter told Gizmodo in a phone interview. That single digit decline resulted in an estimated $617 million paper losses.
Oh well, easy come, easy go. To make matters worse, the article points out that this first-day loss comes despite the fact that Uber’s IPO valuation of $76.5 billion represented a significant haircut from the $90 billion and $120 billion valuation that some analysts placed on the company just a month before the offering.
Direct Listings: A Lot to Like If You’re a Venture Investor
We’ve previously blogged about the willingness of some unicorns to bypass IPOs and pursue direct listings. With Uber & Lyft’s IPOs both landing with a resounding thud, this WSJ article says that there may be a lot to like about this alternative for venture investors. This excerpt quotes Canaan Partners’ Michael Gilroy on why that’s the case:
Mr. Gilroy said one advantage of direct listings is they are cheaper. Companies holding direct listings still hire bankers, but the costs are notably lower than the traditional process. “The fees are far too high for what they’re doing” in an IPO, he said. A direct listing lacks mechanisms like greenshoe options, which allow bankers to buy shares to help keep the price stable—so direct listings risk a large drop in prices when shares first hit public markets. However, because direct listings don’t raise new capital, existing shareholders benefit because their ownership isn’t diluted.
In addition, direct listings eliminate lockup agreements, which restrict the sale of shares by existing holders. That can be attractive for employees and venture capital investors, who can sell shares immediately. With traditional IPOs, they often have to wait several months to sell their holdings. “VCs are not professional public investors,” said Mr. Gilroy. “Six months can be a significant difference in your return profile for the company.”
As Liz blogged last month, Slack’s already on its way to a direct listing – and if the stock pops, that may prompt more high-profile, cash-rich unicorns to consider this alternative. Regardless of its deal structure, a lot may be riding on how Slack performs out of the gate. If it lays an egg, this Axios Pro Rata newsletter says that unicorns may be yesterday’s news as far as Wall Street’s concerned.
One of the worst things about insider trading is how frequently people are apparently willing to betray the trust of their friends and family. It’s just uncanny how often you see situations involving husbands and wives, parents and children, and longtime friends who trade on information provided to them in confidence. The SEC recently announced a settled enforcement action that allegedly involved another example of this kind of conduct. Here’s an excerpt from the SEC’s press release:
According to the SEC’s complaint, while Brian Fettner was a guest in the home of a longtime friend who was also the general counsel of Cintas Corporation, Fettner surreptiously viewed documents contemplating an acquisition of G&K Services Inc. by Cintas. Based on that information and without telling his friend, Fettner then purchased G&K Services stock in the brokerage accounts of his ex-wife and a former girlfriend, and persuaded his father and another girlfriend to purchase G&K shares. The complaint further alleges that after Cintas and G&K announced the merger on Aug. 16, 2016, G&K’s stock price jumped more than 17 percent, resulting in illicit profits from Fettner’s misconduct of more than $250,000.
The defendant consented to a permanent injunction prohibiting him from future violations of Rule 10b-5 and agreed to pay a penalty of approximately $250,000. Despite the outcome, if you read the complaint, you may wonder at first what separates what this guy did from Barry Switzer’s infamous eavesdropping? After all, the SEC alleges that Fettner “surreptiously viewed” documents that were left in relatively plain sight in a room that he seems to have entered with his friend’s permission.
As this recent blog from Keith Bishop points out, the difference may lie in the nature of the relationship between the parties. Under the misappropriation theory endorsed by the Supreme Court in U.S. v. O’Hagan, 521 U.S. 642 (1997), a person who misappropriates material nonpublic information from another may violate the law even without a duty to contemporaneous traders. It’s enough that there be some kind of obligation not to use the information – and the existence of “relationship of trust and confidence” with the source of the information will do the trick.
While Switzer and the person he overheard were merely casual acquaintances, the people involved here were close friends since middle school – and the SEC’s complaint alleged that was sufficient to establish the kind of relationship whose breach could trigger insider trading liability. And in this excerpt from his blog, Keith says that’s a conclusion you can add to the list of things that don’t make a lot of sense about insider trading law as it exists today:
The SEC’s allegations illustrate how the misappropriation theory of insider trading has become completely unmoored from the purposes of the securities laws. Congress did not enact Section 10(b) with a view to protecting guest-host relations. It is absurd that innocence and guilt turns on whether the guest and the host met in middle school or were only recently introduced.
If you stop & think about the implications of misappropriation theory, then maybe it isn’t all that uncanny about how many of these cases involve friends & family – the way the law has evolved, it’s those relationships that give insider trading allegations force.
Staggered Boards: Now They’re a Good Idea Again
A few weeks ago, I read an article that said eggs are bad again. As you may recall, eggs were good, then they were bad, then they were good, and now they’re bad again. Forgive me if I thought about the 50 year controversy over eggs when I read this Fortune article reporting on a new study that says staggered boards are a good thing. Here’s an excerpt on how stocks of companies with staggered boards have performed in recent years:
In recent years, staggered-board companies have wound up outperforming their peers—and significantly at that. For the five years through March, S&P 500 companies that utilized non-annual voting registered an average total return of 125%; for the index as a whole, the figure was 52%.
Honestly, sometimes the teeter-totter of corporate governance trends is harder to keep track of than the “scrambled, fried, poached or ‘OMG! One bite will kill you!'” controversy surrounding the food formerly known as the “incredible, edible egg.”
Tomorrow’s Webcast: “How to Handle a SEC Enforcement Inquiry Now”
Tune in tomorrow for the webcast – “How to Handle a SEC Enforcement Inquiry Now” – to hear to hear King & Spalding’s Dixie Johnson, Jones Day’s Joan McKown and Cooley’s Randall Lee analyze how to handle a SEC enforcement inquiry now.
