Disdain for the “Administrative State” is an article of faith among conservatives – and this Politico article discusses a recent OMB memo that’s likely to be music to their ears. Here’s an excerpt:
The White House on Thursday moved to curb the power of federal regulators by directing them to submit nonbinding guidance documents to the budget office for review, a step that could slow down the enactment of any rule with a potentially large impact on the economy. A memo from acting Office of Management and Budget Director Russell Vought would vastly broaden Congress’s ability to reject such guidance, subjecting the documents to the same scrutiny as regulations that carry the force of law.
The move is the latest salvo in a war waged by corporations and their Republican allies in government against what they view as backdoor rulemaking: agencies issuing regulatory documents that don’t go through the formal notice-and-comment process but can still be used as a cudgel against certain behavior.
The memo will have a potentially sweeping impact on agencies throughout the government including independent regulators like the Federal Reserve and the SEC. It calls on the agencies to regularly notify the Office of Information and Regulatory Affairs of upcoming guidance, along with determinations of whether it qualifies as “major” — the threshold for notifying Congress under the Congressional Review Act. Any guidance document deemed major by OIRA would need to be sent to Congress, which would then have the ability to strike it down under the review act, a law that gives lawmakers a short window to roll back a rule.
Compliance professionals should be very wary of what the Trump White House is trying to do here. In theory, restrained rulemaking is a reasonable idea — but time and again, we’ve seen this president and his sycophants in the White House playing with forces they’re too ignorant to use, bollixing up life for the rest of us.
For example, compliance officers of a certain age can remember the summer of 2008, and the feverish, improvisational rulemaking banking regulators tried back then to stave off the financial crisis. You’d really want OIRA review in the middle of something like that? You’d want Congress slowing down the process with 60-day approval windows?
In the real world, of course, if another crisis were to come along, you could bet your mortgage payment that the Trump Administration and Congress would grant some emergency stay of OIRA review, so regulators could move more quickly — and be left as the scapegoats, should the crisis explode anyway.
This isn’t the first time the Trump Administration has moved to curtail what it views as “rulemaking by guidance” – in 2017, former AG Jeff Sessions banned the DOJ from issuing guidance purporting to “create rights or obligations binding on persons or entities outside the Executive Branch.”
ESG: Trump Executive Order May Signal ERISA Fiduciaries to Watch Their Step
Last week was a big week for corporate America. In addition to the OMB memo, President Trump issued an executive order that contains a section directing the Secretary of Labor to “complete a review of available data filed with the Department of Labor by retirement plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) in order to identify whether there are discernible trends with respect to such plans’ investments in the energy sector.”
That sounds innocuous enough, but this Davis Polk blog suggests that something more significant may be afoot:
While the section does not directly address environmental, social and governance (ESG) disclosure, it restates the definition of materiality from the U.S. Supreme Court case, TSC Industries, Inc. v. Northway, Inc., and reiterates a company’s fiduciary duties to its shareholders to strive to maximize shareholder return, consistent with the long-term growth of the company.
This order comes on the heels of last week’s U.S. Senate Committee on Banking, Housing, and Urban Affairs hearing on ESG Principles in Investing and the Role of Asset Managers, Proxy Advisors and Other Intermediaries, as well as ongoing activity at the U.S. Securities and Exchange Commission level, with certain institutional investors agitating for additional ESG disclosure requirements.
The blog says that while the order is silent about how the study might be used, it may well serve as the starting point for a crackdown on plan fiduciaries’ ESG activism. One “obvious use” of the study’s results could be to enforce the DOL’s April 2018 guidance prohibiting plan fiduciaries from focusing on ESG factors “solely to benefit the greater societal good.”
SEC Staff Guidance: A “Secret Garden” of Private Law?
You know who else has some issues with regulatory guidance? SEC Commissioner Hester Peirce. In a recent speech, Commissioner Peirce expressed concern about the extent to which the SEC Staff provides non-public guidance about unresolved regulatory questions. Here’s an excerpt:
Some requests for clarification or guidance are inappropriate for handling through a time-consuming process that results in a published response. Indeed, as a Commissioner, I hope that the staff is engaging productively and responsively with market participants. I would not want to see this engagement become so burdensome to either staff or market participants that it discourages people from seeking informal guidance or the staff from providing it.
However, when staff provides non-public guidance, Professor Davis’s concerns become much more pronounced, and I believe that there is a line that can be crossed where non-public staff guidance goes from being merely helpful “l-o-r-e” lore to something that is more akin to secret law that, for all practical purposes, binds at least some (though perhaps not all) market participants without any opportunity for review or appeal.
Commissioner Pierce suggests that private interactions between the Staff and private parties in certain areas have created a “secret garden” of guidance that raises questions of fairness & transparency. Peirce isn’t suggesting eliminating the practice of providing private guidance, but does see a need to “take down the walls of the secret gardens at the SEC, or at least to make doorways into these gardens, so that the public can get a glimpse inside, assess the quality of what is growing within, and hold us accountable for what is found there.”
Yesterday, Corp Fin announced a streamlined procedure for extending previously granted confidential treatment orders covering information in material contracts. The announcement notes that, when it comes to extensions, simply filing the redacted exhibit as contemplated by the new Fast Act rules will not provide confidential treatment for information in the previously filed CTR. This excerpt from the announcement summarizes the new procedure:
We have developed a short form application to facilitate and streamline the process of filing an application to extend the time for which confidential treatment has been granted. It is a one-page document by which the applicant can affirm that the most recently considered application continues to be true, complete and accurate regarding the information for which the applicant continues to seek confidential treatment. With that affirmation, the applicant indicates its request that the Division extend the time period for confidential treatment for an additional three, five or 10 years and provides a brief explanation to support the request.
Companies don’t have to refile the unredacted contract with the extension request, and if the supporting analysis remains the same as presented in the most recent CTR, they won’t have to refile that either. If the applicant reduces the redactions, the revised redacted version of the contract must be filed with the short form extension application.
The short form application may only be used if the contract has already been the subject of an order granting a CTR, and it can’t be used to add new exhibits to the application or make additional redactions. For a deeper dive into the new process, check out this Cydney Posner blog. We’ve also updated our “Checklist on Confidential Treatment Requests” to reflect this new procedure.
Cybersecurity: Beware Cyberinsurance’s War Exclusion
This recent NYT article says that the cyberinsurance policy you pay big bucks for may have a big hole in it – thanks to the standard “war exclusion” contained in most policies. Here’s an excerpt:
Mondelez, owner of dozens of well-known food brands like Cadbury chocolate and Philadelphia cream cheese, was one of the hundreds of companies struck by the so-called NotPetya cyberstrike in 2017. Laptops froze suddenly as Mondelez employees worked at their desks. Email was unavailable, as was access to files on the corporate network. Logistics software that orchestrates deliveries and tracks invoices crashed.
Even with teams working around the clock, it was weeks before Mondelez recovered. Once the lost orders were tallied and the computer equipment was replaced, its financial hit was more than $100 million, according to court documents. After the ordeal, executives at the company took some solace in knowing that insurance would he lp cover the costs. Or so they thought.
Mondelez’s insurer, Zurich Insurance, said it would not be sending a reimbursement check. It cited a common, but rarely used, clause in insurance contracts: the “war exclusion,” which protects insurers from being saddled with costs related to damage from war.
The U.S. government said that Russia was responsible for the cyberattack, which made Mondelez & other companies “collateral damage in a cyberwar” & gave insurers an opening to deny coverage under the war exclusion. Mondelez & Merck, which was also denied coverage, sued their insurers & the issue is working its way through the courts. The stakes are high – given the prevalence of state-sponsorship when it comes to big cyberattacks, the article suggests that the outcome could go a long way to determining whether cyberinsurance is worthless.
ICOs: Reg D Remains the Preferred Route
I blogged last year about a MarketWatch article highlighting coin offerings’ increased reliance on Regulation D following the Staff’s 2017 guidance on coin offerings. This recent MarketWatch article says that while the volume of coin offerings is down, Reg D still seems to be the preferred route. Here’s an excerpt addressing the number of Form D filings for token deals:
MarketWatch counted 33 ICO-related fundraisings accepted by the SEC in the first quarter of 2019, with a total stated value of $1.9 billion. That is down from a peak of 99 in the second quarter of 2018. MarketWatch estimated there were 287 ICO-related fundraisings accepted by the SEC with a total stated value of $8.7 billion in 2018. That was a significant increase from 44 fundraisings filed with a total stated value of $2.1 billion in 2017.
Now that I’ve seen both Lyft’s prospectus & Uber’s recent filing, I’ve reached the conclusion that we here at TheCorporateCounsel.net need our own mission statement. Here’s what I’ve come up with: “Our mission is to end global warming, poverty & tooth decay by publishing online and print resources for corporate and capital markets lawyers.”
Does that mission statement seem a bit unrealistic given the nature of our business? Well, I think ours is arguably more tightly tethered to reality than what either of these two high profile tech companies cab dispatchers are peddling.
Lyft says its mission is to “Improve people’s lives with the world’s best transportation,” while Uber says that “our mission is to ignite opportunity by setting the world in motion.” Both companies extensively embellish on their mission statements, with Lyft contending that it is at the forefront of a “massive societal change,” while Uber counters with a statement that it “believes deeply” in its “bold mission” and has a “massive market opportunity.”
This is heady stuff for companies with core businesses based on an app that does what Danny DeVito did in the ’80s sitcom “Taxi” & whose financials suggest that they spend a lot of time shoveling money into a furnace. Although to be fair, Uber will also deliver your Pad Thai order, and it’s . . .you know. . . sorry about the other stuff.
These messianic mission statements & the puffery that accompanies them have become a cliché in tech deals. But it seems to me that they do little to aid investors and a lot to obfuscate what companies actually do. The whole approach reminds me of nothing so much as “The Great & Powerful Oz” exhorting Dorothy to “pay no attention to the man behind the curtain” – only what’s frequently behind the curtain in tech deals is an endless string of huge losses, and a path to future profitability that is far from certain.
By the way, there’s plenty of disclosure about what’s behind the curtain in these prospectuses, if you take a moment to look for it. For instance, Uber accompanies its announcement of the new millennium with a 46-page “Risk Factors” section, while Lyft’s “Risk Factors” section is 41 pages long. So investors who get carried away with the hype have only themselves to blame. Read the prospectus.
Regulation G: Coming to a CD&A Near You?
SEC Commissioner Robert Jackson recently co-authored a WSJ opinion piece calling for increased transparency about the use of non-GAAP numbers in setting executive pay. The article notes that Reg G generally requires companies to provide comparable GAAP information & a reconciliation, but acknowledges that this doesn’t apply to the CD&A discussion. The authors think it should:
Unfortunately, those requirements do not apply to the reports that compensation committees of corporate boards disclose to investors each year. Thus, committees choosing to use adjustments when deciding on payouts need not explain why an adjusted version of earnings is the right way to determine incentive pay for the company’s top managers. This increases the risk that adjustments will be used to justify windfalls to underperforming managers.
The SEC’s disclosure rules have not kept pace with changes in compensation practices, so investors cannot easily distinguish between high pay based on good performance and bloated pay justified by accounting gimmicks. That’s why we’re calling on the SEC to require companies to explain why non-GAAP measures are driving compensation decisions—and quantify any differences between adjusted criteria and GAAP. A few public companies already provide investors with this kind of transparency. Others can too.
Transcript: “The Top Compensation Consultants Speak”
We have posted the transcript for the recent CompensationStandards.com webcast: “The Top Compensation Consultants Speak.”
Yesterday, Corp Fin Director Bill Hinman & Senior Advisor for Digital Assets Valerie Szczepanik issued a statement announcing new Staff guidance on when tokens & other digital assets will be regarded as “securities” subject to SEC regulation. Here’s an excerpt:
As part of a continuing effort to assist those seeking to comply with the U.S. federal securities laws, FinHub is publishing a framework for analyzing whether a digital asset is offered and sold as an investment contract, and, therefore, is a security. The framework is not intended to be an exhaustive overview of the law, but rather, an analytical tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset.
Also, the Division of Corporation Finance is issuing a response to a no-action request, indicating that the Division will not recommend enforcement action to the Commission if the digital asset described in the request is offered or sold without registration under the U.S. federal securities laws.
The 13-page “Framework for ‘Investment Contract’ Analysis of Digital Assets” represents the most detailed guidance that the Staff has provided on the application of the Howey test to digital assets. It walks through each element of the Howey test and identifies key characteristics of a digital asset that influence the Staff’s views about whether that asset involves an “investment contract.”
The guidance in the Framework is likely to be helpful to issuers planning token offerings. But it’s unlikely to please the crypto-evangelists who seek a light touch – or even a “hands-off” approach – from the SEC. That’s because the Framework makes it very clear that the SEC will continue to apply the Howey test to digital assets with considerable rigor. As they say, if you don’t like it, write to Congress.
Digital Assets: So What About That “TurnKey Jet” No-Action Letter?
Bill Hinman’s statement referenced a new no-action letter – TurnKey Jet (4/3/19) – in which Corp Fin said it wouldn’t recommend an enforcement action against an issuer if it proceeded with a token offering without registration. This is pretty earth-shattering news, right? Yeah, not exactly. Don’t get me wrong – it’s certainly a landmark, but it’s also a fairly prosaic application of the Howey test to a deal involving the sale of fully-functional tokens structured in such a way as to squeeze out any profit potential associated with their ownership.
Corp Fin’s response letter walks through the key factors in its decision, some of which are highlighted in this excerpt from the request letter explaining why there’s no expectation of profit involved with the tokens:
It will not be technically possible to trade and transfer Tokens from the Platform in a non-Platform secondary market at a premium. Further, it will be economically impractical to trade Tokens within the Platform in a secondary market since TKJ will offer continuous, ongoing Token sales at one USD per Token which should cause the market price of Tokens not to exceed one USD per Token. These restrictions on transfer are indicative of the consumptive nature of the Tokens.
The TKJ Program memberships are non-equity memberships and will be non-transferable. The Consumers will represent that they are obtaining the TKJ memberships and Tokens for their own use and not as an investment or to profit. The TKJ memberships and Tokens will not be marketed to the public as investments. The funds that the Consumers prepay for the on-demand air charter services will be nonrefundable and will be immediately redeemable for air charter services, so no Consumer will have a reasonable expectation of profit.
Gosh, that kind of takes all the fun out of it, doesn’t it?
A New SEC Commissioner Nominee: Allison Lee
Earlier this week, the White House announced that President Trump had nominated Allison Lee to fill the vacant Democratic slot on the SEC. Allison previously served in the SEC’s Division of Enforcement & as Counsel to former Commissioner Kara Stein. This WSJ article says it is unclear when the Senate will hold her confirmation hearing. If she’s confirmed, the SEC will operate with a full slate of members – something that’s been unusual in recent years.
I don’t know if law students still do this, but when I was in law school, there were certain volumes that we would pull from the library’s stacks, set down on their spines & watch automatically fall open to the page of a particularly well-read case. This wasn’t because the case in question involved issues of great legal interest – instead, it was because the case involved issues of great prurient or comedic interest (read the dissent).
Anyway, I think we may have a new addition to the pantheon from – of all places – the Delaware Chancery Court. Behold Winklevoss Capital Fund v. Shaw, (Del. Ch.; 3/19), a case that has touches of both prurience & comedy. It recounts the saga of America’s most unlikeable twins’ ill-fated investment in “Treats!” – “a print & digital magazine depicting nude and semi-nude photography of models and celebrities.” So, what could go wrong with an investment in online sleaze? It turns out that the answer is “plenty.”
While the opinion is far from pornographic, it will do nothing to enhance any remaining faith you might have in the future of humanity & you may hate yourself for reading it. In short, it’s kinda fun. Don’t take my word for it – Steven Davidoff Solomon (a.k.a. “The Deal Professor”) has been having a good time tweeting snippets from it.
Escheatment: “They’re Baaaack!”
Look, don’t shoot the messenger here, okay? But if you thought escheatment issues were in the rearview mirror after the courts slapped Delaware around for its thuggish aggressive approach to unclaimed property audits, it looks like you were mistaken. This Morris Nichols memo says that enforcement is back with a vengeance. Here’s the intro:
For those who thought the State of Delaware had gone out of the unclaimed property business—think again. After a 2017 overhaul of Delaware’s unclaimed property laws and an increased emphasis on voluntary compliance with those laws, Delaware is sending out dozens of “invitations” to companies to enter its’ Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program (the “VDA Program”). Ignoring this invitation guarantees that a company will get audited by the state.
Delaware is also beginning to review companies’ reporting histories and their annual unclaimed property filings for accuracy and completeness and is strictly enforcing timelines and deadlines for companies under audit. All of this is a signal to Delaware companies that, while voluntary compliance is preferred by the state, audit—with assessed interest and penalties—is a very real consequence and an alternative that Delaware can and will pursue.
The memo highlights a number of reasons why companies might want to take advantage of Delaware’s VDA program – including the waiver of interest and penalties, and the fact that VDAs can be resolved more quickly than an audit & without involving other states.
Fast Act S-K Cleanup: A “Cheat Sheet”
If the 251-page adopting release for the SEC’s latest round of Fast Act S-K cleanup changes has you a bit befuddled, this recent Bass Berry blog may be just what you need. Not only does it summarize the changes, but it also includes a helpful “cheat sheet” in the form of a chart laying out the rules that have changed, the specific changes, & the reasons for them. Want more help getting your arms around the rule changes? We’re posting tons of memos in our “Disclosure Reform” Practice Area.
By the way, not everyone at the SEC is singing from the same hymnal when it comes to the new rules. Commission Jackson dissented from the SEC’s decision to adopt them, and issued a statement setting forth the reasons for his opposition.
Yesterday, in Lorenzo v. SEC, the US Supreme Court held – by a 6-2 vote – that dissemination of false statements with intent can fall within the scope of Rules 10b–5(a) & (c), even if the disseminator did not “make” the statements & consequently falls outside Rule 10b–5(b).
That’s a big win for the SEC – and a big loss for the securities defense bar. The decision is a retreat from the Court’s position in the Janus case, where it held that liability under Rule 10b-5(b) was limited to the “maker” of a false or misleading statement. As Broc subsequently blogged, the SEC responded to Janus by emphasizing its view that 10b-5(a) & (c) had a more expansive reach. The Lorenzo decision vindicates the SEC’s position. Here’s an excerpt from Justice Breyer’s opinion for the Court:
It would seem obvious that the words in these provisions are, as ordinarily used, sufficiently broad to include within their scope the dissemination of false or misleading information with the intent to defraud. By sending emails he understood to contain material untruths, Lorenzo “employ[ed]” a “device,” “scheme,” and “artifice to defraud” within the meaning of subsection (a) of the Rule, §10(b),and §17(a)(1). By the same conduct, he “engage[d] in a[n]act, practice, or course of business” that “operate[d] . . . as a fraud or deceit” under subsection (c) of the Rule.
Justices Thomas & Gorsuch dissented from the ruling, with Justice Thomas stating that the decision “eviscerates” Janus’s distinction between primary & secondary liability “by holding that a person who has not ‘made’ a fraudulent misstatement can nevertheless be primarily liable for it.” Justice Kavanaugh participated in the D.C. Circuit’s ruling on the case & recused himself from the Court’s deliberations. We’re posting memos in our “Securities Litigation” Practice Area.
Board Refreshment: What Do Companies Want From New Directors?
According to this Deloitte/Society for Corporate Governance Board Practices Survey, there are several characteristics that companies look for in new director candidates. This excerpt suggests that diversity – and specifically, gender diversity – tops the list:
94% said their boards are looking to increase board diversity. Of these, the majority (61%) said their boards are looking to increase gender diversity – far exceeding race and ethnicity (48%) and professional skills or experience (43%). Boards seeking to increase their diversity most commonly look to referrals from current directors (77%), suggesting that networking is still key to board succession, though search firms came in a close second (73%).
When it comes to professional experience, companies are most interested in directors who know the industry & those with leadership, accounting or tech backgrounds:
Specific industry experience topped the list. Also in the top 10: business leadership; accounting; digital or technology strategy (e.g., artificial intelligence, cryptocurrency, and social media); cyber; and IT (e.g., infrastructure, operations). While other types of professional experience, such as marketing and HR, may be overdue for board representation (and could contribute to diversity), they do not seem to be gaining traction as stand-alone recruitment priorities.
The survey covered 102 companies, the vast majority of which were either large or mid-caps, although a handful of small-cap companies were also included.
Board Refreshment: What Do They Get?
Okay, so now we know what companies say they want in a new board member – this recent EY survey on 2018’s class of new independent directors at Fortune 100 companies sheds some light on what they actually get. Here are some of the highlights:
– In 2018, 71% of the reviewed companies added at least one new nominee and 27% added two or more. This represents an increase from prior years when the levels were generally steady at around 56% and 21%, respectively.
– The areas of expertise most frequently cited in new nominations were: international business; corporate finance, accounting; and industry expertise. Around half of the new class was recognized for expertise in at least one of these categories. The next most common areas — technology; operations, manufacturing; and board service, corporate governance — were cited in 40% to 45% of new nominations.
– Women continued to represent around 40% of new nominees, contributing to a slight increase in overall board gender diversity; in 2018, 27% of existing independent directors were women, up from 25% in 2016.
Approximately half of 2018’s new class of directors consisted of the usual suspects – current & former CEOs, and that group was predominantly male. But when it came to non-CEO nominees, the genders were more balanced, and most of the new directors from non-corporate backgrounds were women.
Overall, the takeaway seems to be that Fortune 100 companies are adding new directors more frequently, and that those directors are increasingly younger & more female. While the characteristics & qualifications of new directors generally align with what companies say they’re looking for, it also looks like their fixation on former CEOs is working at cross-purposes with their diversity initiatives.
We’ve been following the saga of the “man bites dog” shareholder proposal asking Johnson & Johnson to adopt a bylaw mandating arbitration of securities claims. Last month, the Staff granted the company’s request to exclude the proposal from its proxy statement on the grounds that its implementation would violate applicable state law.
SEC Chair Jay Clayton weighed in with his own statement on this controversial topic, in which he at one point suggested that a court would be a “more appropriate venue to seek a binding determination of whether a shareholder proposal can be excluded.” Cooley’s Cydney Posner reports that the proponent seems to have taken his advice – because the dispute is now in the hands of a NJ federal court. This excerpt from her recent blog summarizes the proponent’s arguments:
The proponent argued that the proposal would not cause the company to violate federal law, because “the Federal Arbitration Act requires the enforcement of arbitration agreements, and Johnson & Johnson has been unable to identify any federal statute that ‘manifest[s] a clear intention to displace the Arbitration Act.’”
Nor, according to the proponent, would the proposal cause the company to violate NJ state law because “neither Johnson & Johnson nor the New Jersey Attorney General has identified any New Jersey statute or court decision that prohibits the enforcement of the arbitration agreements,” and, even if the NJ courts declined to enforce, that still would not mean that including the provision in the company’s bylaws would amount to a violation of NJ law.
That is, a “company does not ‘violate’ state law by entering into an arbitration agreement that happens to be unenforceable under the law of that state.” Finally, even if state law were shown to prohibit enforcement, it would be preempted by the Federal Arbitration Act and void. The proponent also stated that he intends to submit the “proposal again for the 2020 shareholder meeting, and it will continue submitting this proposal each year until the proposal is adopted by the shareholders.”
The proponent is seeking a declaratory judgment that J&J violated the securities laws by excluding the proposal, along with injunctive relief that would, among other things, require the company to include the proposal in supplemental proxy materials.
Audit Committees: PCAOB Promises More Communications
One of the perceived shortcomings of the PCAOB’s inspection process is that it sometimes reaches problematic conclusions about an accounting firm’s audit of a company without any input from the company itself. According to this recent annual “Staff Inspections Outlook for Audit Committees,” the PCAOB plans to increase its engagement with audit committees. Here’s an excerpt:
During 2019, we will provide an opportunity for audit committee chairs of certain companies whose audits are subject to inspection to engage in a dialogue with the inspections staff. The purpose of the audit committee dialogue is to provide further insight into our process and obtain their views. We expect to publish additional updates to audit committees regarding our inspections to provide observations from these interviews and our inspection findings.
The PCAOB went on to review its 2019 inspection priorities, and raised various topics – including sample questions – that audit committees might want to address with their auditors that relate to current issues of inspection focus.
Audit Committees: What If The PCAOB Calls?
So, what should you do if the PCAOB reaches out to your audit committee chair? This excerpt from a recent Stinson Leonard Street blog says you should watch your step:
We believe issuers should approach any such engagement cautiously, if at all. Perhaps the only circumstance for which this may be appropriate is upon assurance by the PCAOB that the inspection of the issuer is complete and final and no potential deficiencies were identified. Even then, issuers should consider whether there is any benefit to the dialogue. It is especially worth consideration because the PCAOB also announced it intends to publish additional updates to audit committees regarding its inspections including observations from these interviews and its inspection findings.
The blog points out that inspection findings can lead to restatements & potential liability for companies. Furthermore, issuers have no control over how the PCAOB will characterize the results of their engagement with the public. That means there is a risk that the audit committee chair or the company could be cast in a negative light.
The need to prepare for a possible phone call from the PCAOB may help address the chronic problem of audit committees sitting around with nothing to do, but if more assistance in keeping your committee busy is needed, check out this helpful list from PwC of 11,284 things that the audit committee should keep in mind for the end of the current fiscal quarter.
I recently stumbled upon Reg A filings for a bunch of fantasy football teams that are part of a national fantasy football league that’s supposed to kick-off this fall. Here’s the Form 1-A Offering Statement filed by the “Philadelphia Powderkegs” – and this excerpt from the filing tells you what they’re up to:
Philadelphia Powderkegs, Inc. is one of 12 Delaware corporations formed to represent teams (each a “Team” or collectively, “Teams”) in a national fantasy sports football league (“The Crown League”) which is to be operated by The Crown League, LLC, a Delaware limited liability company (“CRL”), the managing member and substantial owner of which is CrownThrown, Inc., a Delaware corporation (“CrownThrown”). CRL intends to launch the first publicly owned, professionally managed, national fantasy sports league.
CRL has two classes of membership interests: 49.992% of the membership and voting interests are controlled by the Class A members, all of which are held, in equal amounts, by us and the additional 11 companies that anticipate competing in The Crown League (in other words, each company Team will initially own 4.166% of the interests in CRL), and the remaining 50.008% of membership interests in CRL will be held by the Class B members of CRL, approximately 90% of which is currently held by CrownThrown.
Here are the other teams that filed Form 1-As with the SEC:
I instantly became a fan of the “Florida Mangos Wild” – do you see what they did there? According to the league’s fairly slick website, they also have a “franchise” representing New York, with the location of a 12th franchise to be determined.
Anyway, If you think this entire blog is just an excuse for me to brag about how my team – “Full Metal Jarvis” – won my fantasy football league’s championship this season, well. . . you’re right.
ESG: Banging the Drum for More Disclosure
This recent article from The Center for Executive Compensation reviews the multi-pronged efforts at requiring more disclosure from public companies on ESG issues. And as this excerpt points out, Congress may be getting into the game:
Rep. Maxine Waters (D-CA), Chair of the House Financial Services Committee published the Committee’s hearing schedule for March, and in addition to already-announced priorities, of particular note is a March 26 subcommittee hearing on “Building a Sustainable and Competitive Economy” which will focus on “proposals to improve environmental, social, and governance disclosures.”
The topic is not surprising given the increased interest in ESG information by both large investors — primarily the large index funds such as BlackRock, Vanguard and State Street — as well as the push for greater disclosures by investors with a specific advocacy bent. As we reported last month, a recent Morrow-Sodali study found that investors seek greater information on corporate culture, climate change and human capital metrics.
The memo also cites a recent WSJ report that says shareholder proposals asking companies to produce climate change disclosures are expected to jump to 75 or more in 2019 from 17 in 2018.
Our “Proxy Disclosure Conference”: Early Bird Ends April 5th
– The SEC All-Stars: A Frank Conversation
– Hedging Disclosures & More
– Section 162(m) Deductibility (Is There Really Any Grandfathering)
– Comp Issues: How to Handle PR & Employee Fallout
– The Top Compensation Consultants Speak
– Navigating ISS & Glass Lewis
– Clawbacks: #MeToo & More
– Director Pay Disclosures
– Proxy Disclosures: 20 Things You’ve Overlooked
– How to Handle Negative Proxy Advisor Recommendations
– Dealing with the Complexities of Perks
– The SEC All-Stars: The Bleeding Edge
– The Big Kahuna: Your Burning Questions Answered
– Hot Topics: 50 Practical Nuggets in 60 Minutes
According to this recent WSJ article, the SEC may issue a proposal to regulate ISS, Glass Lewis & the gang as soon as this spring. Here’s an excerpt:
The SEC is expected to propose the first U.S. rules on proxy-advice companies following an organized campaign by public companies that think proxy-advisory firms have too much sway over shareholder proposals. Lobbying and advocacy groups, including the U.S. Chamber of Commerce and the National Association of Manufacturers, and stock exchanges, such as the Nasdaq and the New York Stock Exchange, have mounted a well-funded offensive against the industry, which is dominated by two firms. The groups have purchased advertisements targeting proxy advisers, sponsored a Washington think-tank event and testified at multiple Senate committee hearings on the issue.
Corporations say the advisory firms—which make recommendations to shareholders on how to vote on corporate governance issues—have too much sway over corporate decision-making. Companies argue that they spend too much time and money fighting proposals they think would be detrimental to their overall performance.
Despite the astroturf advocacy on this issue by the “Main Street Investors Coalition,” an organization that seems to have been essentially a sock puppet for NAM & the Chamber, I’m not going to pretend that I’m sorry to see that proxy advisors may finally face some sort of SEC oversight.
There’s certainly a sizeable group of people who view proxy advisors as indispensable tools for promoting shareholder democracy & believe that they should remain free from oversight. Not me. I haven’t embraced the theology of shareholder supremacy & don’t take it as revealed truth that directors should prostrate themselves before the company’s “true owners” [sic]. I also don’t think that “good governance” means reflexively endorsing any proposal that reduces the board’s power and enhances the power of whatever amorphous mass of casino capitalists happens to be holding shares at any given instant.
Once you cut through the pious propaganda from one side about “shareowner democracy” and from the other about “the perils of short-termism,” this is ultimately a cynical struggle between two powerful factions for control over who has the final say at public companies. Proxy advisors have been effectively weaponized by the investor side of that struggle, & their use should be regulated just as management’s use of its own weapons are. After all, what’s sauce for the goose is sauce for the gander.
The SEC isn’t just focusing narrowly on proxy advisors. This recent speech by Commissioner Roisman indicates that it’s also focusing on how those recommendations are used by institutional investors and how those investors ensure they are using them responsibly.
Testing the Waters: Avoiding a General Solicitation Issue
This Locke Lord blog discusses a potential issue around “testing the waters” that not many have focused on – how to maximize a company’s flexibility to pursue private financing after it’s tested the waters & opted not to pursue a public financing. The biggest concern in this scenario is the possibility that testing the waters for the public deal might be regarded as a “general solicitation” for the private financing.
Fortunately, the blog says that this outcome can be avoided if the company takes a careful approach to how it tests the waters for the potential public deal. Here’s an excerpt:
Although the SEC does not appear to have addressed this question directly, our advice and prevailing market practice is that if the test-the-waters activity is properly structured an issuer can avoid its being a general solicitation. The key to avoiding a general solicitation is carefully selecting the investors with which the issuer will test-the-waters. If the test-the-waters activity does not involve a general solicitation, there should be no concern doing a subsequent private offering, either to the investors with which the waters were tested or other investors.
The blog points out that it typically shouldn’t be too difficult to plan a test-the-waters effort to avoid general solicitation – the investors contacted will all have to be institutions, and it’s likely either the company or its banker will have a preexisting substantive relationship with them.
Blockchain: ABA’s “Digital & Digitized Assets” White Paper
The ABA’s Business Law Section just published this 353-page white paper addressing jurisdictional issues relating to blockchain technology, cryptocurrencies & other digital assets. This excerpt from a recent Paul Hastings memo summarizes the contents:
The white paper tackles a number of topic areas relevant to the ever-changing cryptocurrency and digital asset landscape, including:
– Background information regarding digital assets and blockchain technologies, including associated trading platforms, security issues, and characteristics and features of digital assets and virtual currencies;
– Regulation by the Commodity Futures Trading Commission under the Commodity Exchange Act, including the CFTC’s approach to classifying and regulating virtual currencies and related derivatives;
– The SEC’s regulation under the Securities Act, the Securities Exchange Act, the Investment Company Act, and the Investment Advisers Act, including when the SEC classifies a digital asset as a “security;”
– The interplay, and sometimes tension, between SEC and CFTC regulations;
– FinCEN regulation of digital assets, including in relation to anti-money laundering and know-your-customer requirements;
– International regulation of digital assets and blockchain technology throughout Europe, Asia, Australia, and globally; and
– State law considerations, including state law licensing requirements and state-specific regulations.
Over on the “Business Law Prof Blog,” Prof. Haskell Murray flagged this Fordham study on pre-Securities Act prospectuses. It’s interesting for a number of reasons – not the least of which is that it includes as an appendix a copy of a Coca-Cola prospectus from 1919. Check it out!
Exempting The Crypto? The “Token Taxonomy Act”
Last month, I blogged about Commissioner Peirce’s comments calling for a lighter touch when it comes to regulating “decentralized” tokens. She’s got company in Congress. Late last year, Reps. Warren Davidson (R-Ohio) & Darren Soto (D-Fla.) introduced the “Token Taxonomy Act” – which would exempt “digital tokens” from key provisions of the federal securities laws.
This CoinDesk article notes that the legislation would carve out an exemption for the kind of digital assets to which Peirce advocated applying the Howey test with a lighter touch:
According to the text, the bill – among other items – seeks to exclude “digital tokens” from being defined as securities, amending both the Securities Act of 1933 and the Securities Exchange Act of 1934.
That definition has several components, all of which center around a degree of decentralization in which no one person or entity has control over an asset’s development or operation. This ostensibly would clear the way for cryptocurrencies that don’t have a central controller to be spared a securities designation.
The bill defines “digital tokens” as “digital units created… in response to the verification or collection of proposed transactions” (mining, basically) or “as an initial allocation of digital units that will otherwise be created” (as in a pre-mine). These tokens must be governed by “rules for the digital unit’s creation and supply that cannot be altered by a single person or group of persons under common control.”
Sorry if I come off like a digital Luddite – but is a broad statutory exemption from the securities laws really the best approach to an emerging asset category that few people understand, that’s been hyped relentlessly, and that’s rife with fraud?
IPOs: The Media Discovers “Cheap Stock” (Again)
Hey everybody – the media’s discovered “cheap stock” again. I know it’s been an issue in IPOs since Martin Van Buren was president, but for some reason it’s always huge news to the media when they stumble upon it. A couple of years ago, it was the NYT that breathlessly exposed the disparity between the valuation of equity awards made in advance of an IPO & the offering price. This time, it’s the WSJ that breaks the shocking news that private & public valuations are different:
A Wall Street Journal analysis of recent initial public offerings identified 68 companies that gave employees options to buy about $1.5 billion worth of shares in the 12-month run-up to their market debut. But the value of those shares was much higher based on a valuation model developed by academics—an estimated $2.2 billion, the equivalent of employees getting a 32% discount on the shares.
“The Journal’s findings show that the valuations being reported by companies are significantly below what the shares are really worth—the price that investors would pay for them,” said Will Gornall, an assistant finance professor at the University of British Columbia, in Vancouver.
What’s not clear from the WSJ’s article is whether it’s really comparing apples to apples in coming up with what the price “should” be for employee equity awards. The study seems to have just looked at the discount to the IPO price – the so-called “private company” discount. But pre-IPO equity awards usually have a lot of strings attached to them, such as vesting provisions and often onerous restrictions on transfer, and that affects their value too.
