In July, the SEC issued a highly-publicized Section 21(a) Report detailing the circumstances under which digital assets – such as “tokens” or “coins” – may be regarded as securities. In a recent speech, SEC Chair Jay Clayton touched on securities law issues surrounding ICOs – but as this blog from Duane Morris’ David Feldman notes, it was his off-script remarks that were the most interesting:
Chairman Clayton went a bit further today, going off his script to say that he has yet to see an ICO that doesn’t have “sufficient indicia” of being a securities offering. He also mentioned that the trading platforms could face SEC scrutiny and might have to either register as national securities exchanges or make clear they have an exemption from doing so.
Pro tip – If Jay Clayton hasn’t seen a ICO that didn’t involve a securities offering, you should expect the SEC to be skeptical of arguments that “this one’s different.”
ICOs: Disclose That I’m Getting Paid? But I’m a Celebrity!
I’ve reached the conclusion that the SEC is totally out of touch (said with “tongue in cheek”). If the folks who worked there watched TMZ like the rest of us, they’d know better than to suggest that our nation’s celebrities should have to comply with the law like ordinary people.
Unfortunately, based on this recent statement addressing unlawful celebrity promotional activities for ICOs, everybody at the SEC must be watching C-SPAN. Here’s an excerpt:
Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion. A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws. Persons making these endorsements may also be liable for potential violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, and for acting as unregistered brokers.
The reference to touting in the statement’s “parade of horribles” is interesting. Touting is prohibited by Section 17(b) of the Securities Act, but in recent years, it hasn’t featured prominently in the SEC’s enforcement efforts – that is, until last spring, when the Division of Enforcement conducted an anti-touting “sweep” targeting 27 firms and individuals. Of course, none of the defendants in those cases had their own television show, much less their own line of non-stick cookware. We’re posting memos about SEC enforcement actions in this area in our “ICOs” Practice Area.
ICOs: Most People Who’ve Heard of Coin Offerings Think They’re Illegal – and Plan to Invest
According to this LendEDU survey addressing public awareness of cryptocurrencies & initial coin offerings:
– 25% of Americans have heard of ICOs
– 21% of Americans believe that ICOs are illegal
– 15% of Americans intend to invest in ICOs
So, while roughly 85% of Americans who’ve heard of ICOs think they’re illegal, 60% of the members of that same group intend to invest in them. Now, I suppose some or all of that 15% could have come from the 75% of Americans whom the survey says have never heard of an ICO – but I’m not sure whether that’s better or worse…
Anyway, to me, this says 3 things:
– First, the SEC is going to have a heck of a time policing this stuff
– Second, the 60% deserve what they get
– Third, resistance is futile
Welcome to “DotCom II: The Tokening,” everybody! It’s a long way off, but we have just posted the flyer for this webcast: “The Latest on ICOs/Token Deals.”
This survey from communications firm Edelman says that companies have to do a lot to earn the trust of institutional investors – but that it’s worth their effort.
The report says that institutions are a pretty jaded bunch. They have a negative outlook about the political & investment environment, think companies are unprepared for the business risks created by the political climate, and don’t trust government or the media. Institutions also are prepared to act as change agents – 87% say they’d support an activist if they think change is necessary, & nearly the same percentage think that the companies they invest in aren’t prepared for an activist campaign.
In short, institutional investors don’t have a lot of trust in key watchdogs of corporate conduct or in the companies in which they invest – and they’re prepared to take things into their own hands. All-in-all, this doesn’t sound like the recipe for a very pleasant “Investor Day” – but the report provides some insight into key areas that help build investor trust. According to the report:
– 69% of investors believe that the way a company treats its employees impacts their trust in the company
– 87% say the customer satisfaction plays a big role in their level of trust
– 86% say that a reputation for innovation builds trust
– 77% say that equal voting rights are an important measure of trust
– 99% trust a company with a clear strategy more than those without one
Other factors cited as helping to build trust include speaking out on social issues that impact business, providing guidance on future results, an active and engaged board, & efforts to keep shareholders informed.
So what’s the payoff? According to the report, trust drives valuation and investment decisions among institutions – 77% say they bought or increased their investment positions in companies that they trusted, while more than 70% did not invest or underweighted stocks of companies that they did not trust.
Proxy Advisors: Input Sought on “Best Practice Principles”
As Broc blogged back in 2014, a group of European proxy advisors put forward a set of “Best Practice Principles for Shareholder Voting Research.” That group – known as the “Best Practice Principles Group” – now includes ISS & Glass Lewis as signatories, & is soliciting input from companies & investors about on whether those principles need to be revised in light of market experience & regulatory changes.
Tune in tomorrow for the DealLawyers.com webcast – “M&A Stories: Practical Guidance (Enjoyably Digested)” – to hear Withersworldwide’s Ridge Barker, Ropes & Gray’s Jane Goldstein, Morgan Lewis’ Keith Gottfried and our own John Jenkins share M&A “war stories” designed to both educate and entertain.
Here are the 15 stories that will be told during this program:
1. Dig Your Well Before You Are Thirsty
2. Diligence Isn’t Just About Looking for Problems, But for Opportunities Too
3. Expect the Unexpected
4. Keep Your Eye on the Ball
5. Keep Your Friends Close (And Your Enemies Closer)
6. Strategic Deals Require Creativity & Patience
7. The Speech the Director Never Delivered
8. Another Rat’s Nest
9. Don’t Attempt to Win the Championship Football Game With an All-Star Basketball Team
10. What Does Collegiality Really Mean?
11. The Board Book’s Tale: Bankers, Stick to the Numbers!
12. Preparing for Battle
13. Driving a Deal Is Not Unlike Filming a Movie
14. Assumptions Make an *%$ Out of You & Me
15. A Deal So Nice, We Did it Twice
In the wake of Corp Fin’s new Staff Legal Bulletin No. 14I, we have scheduled a webcast for tomorrow, Tuesday, November 14th – “Shareholder Proposals: Corp Fin Speaks” – during which Davis Polk’s Ning Chiu will ask Corp Fin’s Matt McNair about how the new SLB should be applied in practice. This webcast is freely available – even to nonmembers.
As reflected in the memos posted in our “Shareholder Proposals” Practice Area, there are a number of open issues to consider after the SLB – particularly logistical issues about how boards can timely act to qualify for the Staff’s new “ordinary business” position…
Governance: Do Companies Really Need an LTSE to Think Long-Term?
Over on “The Mentor Blog,” Broc recently blogged about the Long-Term Stock Exchange – a proposed new stock exchange designed to promote a long-term approach to governance. Among other innovations, the LTSE would impose a moratorium on guidance and embrace tenure voting.
This recent blog from Andrew Abramowitz asks whether we really need a new exchange to accomplish a more long-term approach by companies:
What is less clear to me is why it has to be a new stock exchange that is the mechanism for implementing these changes. There is no reason why any company listed on the NYSE or Nasdaq cannot (with appropriate internal board and stockholder approval) voluntarily comply with all the requirements that LTSE imposes.
Assuming there could be broad agreement on a set of standards for long-term orientation – perhaps a group of law and business professors can create and update something like that – then any public company can voluntarily decide to adhere to those standards and publicize that fact.
This November-December issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers – and includes articles on:
– Setting the Record Straight: Regulation G Doesn’t Apply to M&A Forecasts
– Structuring Asset Deals: “Traditional” vs. “Our Watch, Your Watch” Constructs
– Controlling Stockholders: Forging Ahead With “Entire Fairness”
(Or Playing It Safer)
– PRC Acquirors: How M&A Agreements Handle Risks & Challenges
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
If you weren’t paid to read a proxy statement, would you ever think about looking at anything other than the summary comp table? I know I wouldn’t – it’s just human nature to have a prurient interest in this kind of stuff. Maybe the Wu-Tang Clan put it best:
Cash Rules Everything Around Me
C.R.E.A.M. get the money
dolla dolla bill y’all. . .
Anyway, because they know that we’re dying to know, Equilar just issued a new study on General Counsel pay at 1,100 public companies. As with previous Equilar GC pay studies, this one isn’t publicly available, but here’s Equilar’s press release summarizing it. Here are the key findings:
– How Much – The median total compensation for General Counsels, broken out by revenue range was:
o Under $1 Billion: $918k
o $1 Billion to $5 Billion: $1.5 million
o $5 Billion to $15 Billion: $2.4 million
o Over $15 Billion: $3.8 million
– Equity Awards are a Big Part of Comp – Equity awards represented about 1/2 of total compensation at the smallest companies in the study, and nearly 2/3rds at the largest. However, it’s good to be at the top of the pyramid – GCs at the largest companies were awarded more than 7x the amount in stock value as those who worked for companies with less than $1 billion in revenue.
– Pay Increases – Overall, GC pay rose 4% last year. The big winners were GCs of companies in the $1-5 billion range – they saw their comp increase by an average of 8.1%. Their counterparts at companies in the $5-15 billion range saw pay climb 3.3%, while those at the smallest companies surveyed received a 6.6% bump. GCs at the largest companies fared the worst – experiencing a decrease of 0.6% in compensation.
For data on broader in-house comp trends, check out this BarkerGilmore study. It covers both private & public companies and addresses comp trends for the GC, managing counsel and senior counsel.
Securities Fraud: Do Not Disrespect the Wu-Tang Clan
So, “Harper’s” magazine published the transcripts of the jury selection in Martin Shkreli’s securities fraud case. Among his other antics, Shkreli purchased the only copy of Wu-Tang Clan’s “Once Upon a Time in Shaolin” album for $2 million – and then contrived to manufacture a bizarre & convoluted beef with the Clan.
The transcripts reveal that these shenanigans didn’t sit too well with Juror #59:
Juror #59: Your Honor, totally he is guilty and in no way can I let him slide out of anything because…
The Court: Okay. Is that your attitude toward anyone charged with a crime who has not been proven guilty?
Juror #59: It’s my attitude toward his entire demeanor, what he has done to people.
The Court: All right. We are going to excuse you, sir.
Juror #59: And he disrespected the Wu-Tang Clan.
Future defendants are on notice – do not disrespect the Wu-Tang Clan.
Our New Practice Area: “Wu-Tang Clan”
As we’ve shown with our recent blogs on ICOs, blockchain & cryptocurrencies, we strive to keep up with the latest developments on the securities law and capital markets front. Along those lines, there’s an emerging player on the scene that we think merits its own practice area.
If you’ve been playing along with the home version of our game today, then by now you know that I’m talking about the Wu-Tang Clan.
Scoff if you want, but shortly after the Clan’s pivotal role in Martin Shkreli’s fraud trial, a “Wu-Tang Coin” ICO was launched with the stated purpose of purchasing the band’s “Once Upon a Time in Shaolin” album from Shkreli & releasing it to the public.
As if that weren’t enough, now “Rolling Stone” reports that band member Ghostface Killah has himself jumped in to the world of crypto-finance:
Ghostface Killah has cofounded a cryptocurrency company called Cream Capital, CNBC reports. The company is looking to raise $30 million during its initial coin offering (ICO).
Cream Capital takes its name from Wu-Tang Clan’s 1993 classic song “C.R.E.A.M.,” which stands for “Cash rules everything around me.” In the case of the company, Cream Capital Chief Executive Brett Westbrook told CNBC it has been granted the trademark for Crypto Rules Everything Around Me.
The ICO “Cream Dividend” tokens will be sold in November, which can then be exchanged for Ether. Ether is the value token of the Ethereum blockchain.
When it comes to acknowledging the Wu-Tang Clan’s prominence in finance & the capital markets, we concede that we’re a distant second to Dave Chappelle, whose classic “Wu-Tang Financial” sketch saw it all coming several years ago. No, I’m not going to link to it – the language is NSFW – but do yourself a favor and check it out on your own time.
If you put up a statue called “Fearless Girl” that’s intended to point a finger at Wall Street’s lack of gender diversity, you shouldn’t be surprised if people ask whether you’re “walking the walk.” That’s the position State Street finds itself in – and according to this recent Guardian article, it hasn’t lived up to its rhetoric:
As selfies with Fearless Girl shot across social media, State Street, one of America’s leading money managers, was quietly and consistently voting down gender equality proposals at some of the country’s largest corporations.
On a shareholder proposal calling for Alphabet, Google’s parent company, to disclose any pay disparities between men and women, State Street voted no. On the same proposal before Wells Fargo, State Street voted no.
According to SEC records seen by the Guardian, in 2017 alone State Street rejected shareholder proposals to tackle gender inequality at least a dozen times – including at Aetna, American Express, Bank of America, Express Scripts, JP Morgan Chase and MasterCard.
In State Street’s defense, when it announced its gender diversity initiative, it focused on diversity at the board level & said that it would give portfolio companies a year to get their acts together. So, State Street’s efforts are still a work in process – but the media’s decision to scrutinize its voting record on gender diversity shouldn’t come as a shock.
SEC Staff Comments: 2017 Trends
This EY memo surveys trends in Corp Fin comment letters during the year ended June 30, 2017. As this excerpt suggests, there aren’t a lot surprises when it comes to areas of the Staff’s focus:
– Non-GAAP financial measures topped our list of the most frequent topics in SEC staff comment letters for the year ended 30 June 2017.
– Emerging topics of SEC staff focus include how companies are applying the new revenue recognition standard as well as what they are disclosing about cyber risks and cyber incidents.
– The SEC staff also frequently comments on management’s discussion and analysis, segment reporting and income taxes.
The memo also shares some thoughts on best practices in responding to Staff comments:
– Responses to each comment should focus on the specific question(s) asked by the SEC staff, and those responses should cite authoritative literature wherever possible.
– Responses should address the registrant’s unique facts and circumstances. While it may be helpful to consider response letters from other registrants as a resource, registrants should not just repeat responses made by other registrants to similar comments.
– If revisions are being made to a filing as a result of a comment from the SEC staff, responses should indicate specifically where these revisions are being made. If additional disclosure will be included in a future filing, the registrant should consider providing the proposed language in its response letter to avoid an additional comment once the disclosure is filed.
– Companies should seek the input of all appropriate internal personnel and professional advisers (such as legal counsel and independent auditors) to determine whether they have responded to the comment letter in a complete and accurate manner. Waiting until a later round of comments to involve the necessary resources may delay or hinder a successful resolution.
Our November Eminders is Posted!
We have posted the November issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Here’s an interesting survey from Clermont Partners. Building on a recent book that contends GAAP reporting is no longer useful to investors, the survey asked 56 institutions with active (as opposed to passive) investment strategies 14 questions relating to the usefulness of GAAP information. Here are some of their responses:
– 74% of respondents said they rely on non-GAAP more than GAAP reporting
– 64% said they use non-GAAP 60% of the time or more when analyzing stocks as compared to GAAP
– 44% agreed that, over time, non-GAAP measures have become more important in evaluating a company’s financial performance, while 28% disagreed
– Only 36% agreed that GAAP paints a true picture of a company’s finances
The non-GAAP measures respondents most prefer are free cash flow, EBITDA or adjusted EBITDA, and adjusted net income or adjusted EPS. The survey asked for investor comments – and got an earful. Here’s a selection:
– “GAAP is rarely comparable and doesn’t show us the underlying trends in the business.”
– “GAAP means nothing to me.”
– “Cash flow is all that matters.”
Not all investors were this dismissive of GAAP. Here are some of their comments:
– “We look at GAAP. But for growth companies there are always adjustments that make sense.”
– “We look at both and blend together. We take GAAP and then back out truly non-recurring charges with adjustments to reflect reality.”
– “I start with GAAP and make small adjustments. I’ll ignore amortization of acquired intangibles if the company is good at R&D and buys long-lived assets. I’ll normalize the tax rate. I might look at maintenance capex instead of depreciation. I always leave SBC (stock-based compensbation) in as a real expense.”
I’m of two minds when it comes to GAAP v. non-GAAP. The capital markets lawyer in me thinks that GAAP numbers mean something important and are really indispensable to any financial analysis of a company. On the other hand, the M&A lawyer in me realizes that GAAP earnings mean nothing when it comes to how buyers and sellers approach valuation.
Maybe that’s why the investor comment that resonated most with me when it comes to GAAP v. non-GAAP was this one that essentially split the baby – “A large and persistent divergence between the two is a HUGE warning sign.”
ISS Updates “QualityScore” Ratings: Core Factors Increase to 21
Yesterday, as reflected in this press release, ISS announced methodology changes to QualityScore – with an increase from 6 to 21 of the core factors considered. There is a data verification period between November 13th-28th for the changes – and the new changes are effective December 4th. Among others, new factors include evaluation of independence of the audit, nomination & compensation committees; unequal voting rights; and vesting periods for option & restricted stock awards.
Audit Committees: Implementing New GAAP Standards
Here’s an excerpt from a recent speech by the SEC’s Deputy Chief Accountant, Sagar Teotia, about the role of audit committees in implementing new GAAP standards:
The process of implementing the new GAAP standards is a collaborative effort from different stakeholders, and the importance of the audit committee in promoting an environment for management’s successful implementation of the new GAAP standards cannot be overstated. Through its oversight function, audit committees play a key role in establishing the right “tone at the top” for a company. The tone at the top establishes the environment and culture within which financial reporting occurs, and is a key factor contributing to the integrity of the financial reporting process.
Audit committees should continue to set the tone for the adoption of the new GAAP standards. This should include actively monitoring the implementation efforts, including taking the time to understand, and assess the quality and status of implementation. Simply put, I believe the tone set by an audit committee can affect the quality of a company’s implementation, including judgments made by management, and, ultimately, the quality of information provided to investors.
The speech covers a lot of other ground when it comes to implementation of the new revenue recognition standards, as well as the new lease and credit losses standards that are just around the corner.
According to this WSJ article, a change in the SEC’s approach to enforcement may be on the way. Here’s an excerpt:
The Securities and Exchange Commission on Thursday signaled a pivot away from the prosecutorial approach to enforcement that the agency pursued after the financial crisis.
Steven Peikin, co-director of the SEC’s enforcement division, indicated the regulator would drop the “broken windows” strategy of pursuing many cases over even the smallest legal violations, and may also pull back from trying to make some companies admit to wrongdoing as a condition of settling with the SEC.
The SEC’s post-financial crisis “broken windows” approach to enforcement has been controversial – even among SEC Commissioners. As Broc blogged, Commissioner Piwowar sharply criticized the approach in a 2014 speech, where he contended that “if every rule is a priority, then no rule is a priority.”
On a related note, this Bloomberg article quotes Steve Peikin as saying that the SEC needs to better communicate the potential benefits of cooperation with the agency’s enforcement efforts:
The SEC should tell securities lawyers and their clients more about how to benefit from cooperating with the commission in an enforcement action, a top enforcement official said Oct. 26.
The Securities and Exchange Commission should be more specific about what a company or an individual did to merit cooperation credit or didn’t do if credit is denied, said Steven Peikin, a co-director of the SEC Enforcement Division. Enforcement targets that cooperate with investigators can receive perks such as reduced sanctions or even no action at all.
The framework for determining cooperation the SEC laid out in its 2001 report of investigation into Seaboard Corp., including self-reporting and remediation, is still in effect, Peikin said. The co-director, a former Sullivan & Cromwell LLP partner, appeared to sympathize with people who are still unsure about the exact benefits of cooperation, however. “I think we have room for improvement,” said Peikin at Securities Docket’s annual Securities Enforcement Forum in Washington.
On self-reporting, the SEC could do more to emphasize the “carrots” over the “sticks” in obtaining cooperation, former Enforcement directors said during the gathering.
At the risk of sounding like a cynic, I think I’ve seen this movie before – when Harvey Pitt replaced Arthur Levitt as SEC Chair in 2001, that era gave us the Seaboard 21(a) Report on cooperation that Steve referenced in his remarks – but it only lasted about 90 days; then Enron came along and ruined it for everybody.
Financials: New “FASB Credit Loss Standard” Handbook
If you’re one of the few companies that’s ahead of the curve on FASB’s new revenue recognition standard – you aren’t out of the woods yet. Two additional standards – dealing with leases and credit losses – are barreling down on companies like a locomotive. Fortunately, KPMG has provided some help in the form of this handbook on ASC Topic 326, Financial Instruments—Credit Losses.
While financial institutions will be most significantly impacted by the new standard, this excerpt says that it will affect virtually all businesses:
This is not just a standard for banks. All entities that engage in lending activities and invest in debt securities that are classified as available-for-sale or hold to maturity will be affected. Additionally, entities with trade receivables, reinsurance recoverables, and loans to equity method investees also will be affected by Topic 326. Topic 326 is expected to require management to make new judgments and calculations when measuring expected credit losses. This may require changes in policies, processes and internal controls.
Public companies are required to implement the new standard for interim and annual periods in fiscal years beginning after December 15, 2019.
Transcript: “Cybersecurity Due Diligence in M&A”
We have posted the transcript for our recent DealLawyers.com webcast: “Cybersecurity Due Diligence in M&A.”
There has been a lot of recent discussion about the merits of shareholder proposal reform. As this Davis Polk blog notes, the US Chamber of Commerce has submitted a proposal to tighten the eligibility criteria & other aspects of the shareholder proposal process – and SEC Chair Jay Clayton has expressed concern about “the cost[s] that the quiet shareholder, the ordinary shareholder, bear for idiosyncratic interests of others.”
In a recent meeting with Chair Clayton, the Council of Institutional Investors & other investor reps said that concerns about shareholder proposal “overload” are simply inaccurate. According to a series of FAQs provided by the CII, most companies don’t receive a single shareholder proposal:
On average, 13% of Russell 3000 companies received a shareholder proposal in a particular year between 2004 and 2017 according to the ISS database. In other words, the average Russell 3000 company can expect to receive a proposal once every 7.7 years. For companies that receive a proposal, the median number of proposals is one per year.
Large companies were far more likely to receive shareholder proposals. According to the FAQs, S&P 500 companies received 77% of the 852 proposals received by Russell 3000 companies. In contrast, only 3.7% of shareholder proposals were submitted at companies with a market cap under $1 billion.
Annual Meetings: Making Yours “Shareholder-Oriented”
In addition to the proposals submitted at your annual meeting, CII has some ideas about how you should conduct the meeting. Here’s a recent CII memo with some thoughts about how make your next meeting “shareholder-oriented.” Here’s an excerpt with some thoughts on conducting the meeting:
Rigid adherence to a brief and arbitrary meeting schedule (e.g. precisely one hour) may cut off responses to substantive questions, raising particular concern if the meeting begins with an extensive presentation from management, or if one general type of question appears to be favored and directors seem to sidestep other questions that are perhaps uncomfortable but pertinent.
Some shareholders attend meetings for the chance to interact on an informal basis with company leadership after the meeting’s formal conclusion. Company leaders, including directors in attendance, should welcome these opportunities for casual engagement by remaining for a limited period after the meeting has adjourned.
ISS Issues Draft Policies: Poison Pills, Director Compensation & Gender Pay
Yesterday, ISS released draft policy changes for comment in 13 areas spanning the globe (based on these survey results from constituents) – the deadline for comment is November 9th. It’s expected that ISS will release its final policies in late November (although burn rate thresholds & pay-for-performance quantitative concern thresholds are typically announced through updated FAQs in mid-December; here’s info about the ISS policy process).
These are the three main areas up for consideration in the US:
– For the director compensation draft policy, here’s how Wachtell Lipton describes it: “ISS states that median pay for non-employee directors has increased every year since 2012 and was approximately $211,000 in 2016. In response to alleged “extreme pay outliers,” ISS is proposing to recommend voting against or withholding votes from members of board committees responsible for setting non-employee director compensation when there is a “pattern” (over two or more consecutive years) of “excessive” non-employee director pay without a compelling rationale or other mitigating factors. Among other things, ISS is seeking feedback regarding the circumstances for which large non-employee director pay magnitude would merit support on an exceptional basis, e.g., one-time onboarding grants for new directors.”
– For the gender pay gap draft policy, here’s how Wachtell Lipton describes it: “ISS notes that there has been an increasing number of shareholder proposals requesting that companies report whether a gender pay gap exists, and if so, what measures will be taken to address the gap. ISS is proposing to vote case-by-case on requests for reports on a company’s pay data by gender, or a report on a company’s policies and goals to reduce any gender pay gap, taking into account the company’s current policies and disclosure related to its diversity and inclusion policies and practices, its compensation philosophy and its fair and equitable compensation practices. ISS will also take into account whether the company has been the subject of recent controversy or litigation related to gender pay gap issues and whether the company’s reporting regarding gender pay gap policies or initiatives is lagging its peers.”
– For the poison pills draft policy, here’s how Wachtell Lipton describes it: “ISS’s current policy provides that if a company maintains a long-term (>1 year) shareholder rights plan that has not been approved by shareholders, ISS will recommend voting against all nominees every year if the company’s board is classified. However, if the board is annually elected, ISS will recommend voting against the entire board once every three years.
ISS proposes changing its policy to recommend voting against all directors of such companies at every annual meeting. In addition, commitments to put a long-term rights plan to a vote the following year would no longer be considered a mitigating factor by ISS (but may still be relevant to individual shareholder voting decisions). ISS would also eliminate the exemption for 10-year rights plans adopted prior to November 2009, which would affect approximately 90 companies. ISS notes that short-term rights plans would continue to be assessed on a case-by-case basis, but states that the updated policy would focus more on the rationale for the rights plan’s adoption than on the company’s governance and track record.”
I’m not very good at coming up with code names for deals. When asked, I usually default to a color – Project Blue, Project Red, etc. I guess I’ve always thought that if colors were good enough for the “Reservoir Dogs” guys, then they were good enough for me.
This Intralinks blog listing 2016’s top deal code names shows that I’m not the only one who is bad at this stuff. The list is heavy on colors & birds (“Project Blue” is #1!), and transparently smarmy efforts to ingratiate the name-giver to the client (e.g., “Project Diamond”).
And then there’s “Project X”. . . Seriously? You had a choice and you picked Project X?
Creativity doesn’t seem to be a strong suit among the bankers (usually) & lawyers (sometimes) who come up with these names, but the blog points out that this shortcoming can cause real problems:
Overuse of the same, easily-guessed code names for M&A deals not only risks compromising the parties’ identities by hackers or eavesdroppers; it also increases the likelihood that confidential information will be sent to the wrong person. For junior bankers under pressure and working long hours on multiple deals, mistaking one Project Blue with another Project Blue could be a catastrophe. Sending confidential information, or mixing up buyer information across several data rooms, could result in the type of exposure no dealmaker wants.
Fortunately, there’s an alternative to this potentially hazardous lack of imagination. There are a whole bunch of random deal code name generators available online. I tried some & they churned out some good code names – I was particularly taken with the lyrical “Project Mountain Sky” – and not a single “Project Blue.”
IPOs: JOBS Act Leading to Underpricing?
This recent article from MarketWatch’s Francine McKenna flags a new study that contends that emerging growth companies’ ability to furnish less disclosure in IPOs is having an unintended consequence – underpricing of their offerings. Here’s an excerpt:
The Jumpstart Our Business Startups Act, or JOBS Act, is causing initial public offerings to leave cash on the table, according to new research, because fewer mandatory disclosures create wary investors that demand bigger post-IPO share price pops.
All three measures of underpricing—market-adjusted stock returns based on the offer price and the closing price on the day of the IPO, the closing price on the day after the IPO, and the closing price 30 trading days after the IPO—are larger for emerging growth companies, or EGCs, according to Mary E. Barth, professor of accounting at Stanford University, Wayne R. Landsman, professor of accounting at the University of North Carolina’s Kenan-Flagler Business School and Daniel J. Taylor, associate professor of accounting at the University of Pennsylvania’s Wharton School.
So why aren’t these companies complaining? The study says that’s because EGC executives are benefitting from lower levels of disclosure in other ways – including lower priced IPO equity awards & reduced comp disclosure.
D&O Insurance: Outlook for 2018
It’s getting to be renewal time for a lot of D&O policies, and this Woodruff Sawyer article reviews market conditions, claims trends and coverage issues. Here’s an excerpt on pricing expectations:
For most public companies, renewal pricing outcomes can be divided into two categories: the primary layer of the program; and, the excess and Side A layers of the program. Since fewer carriers have the appetite to write the primary layer of a D&O tower, pricing for the primary layer has held firmer. This is especially true for those companies that carriers regard as having particular markers for risk: larger market caps, challenging industries,existing or likely litigation, financial woes and other similar factors.
While the market for the primary layer has tightened, market for excess layers – including Side A – is highly competitive & often results in a year-over-year decrease in the total premium.
Last month, Congress passed the “Fair Access to Investment Research Act” – signed by the President into law a few weeks later – which requires the SEC to ease restrictions on broker-dealer research reports on ETFs and other investment company securities. The FAIR Act requires the SEC to expand an existing safe harbor for research reports that prevents them from being considered an “offer” under the Securities Act, and to limit SEC & FINRA filing requirements for those reports.
I know, I know – “yada, yada, yada” – but here’s the thing, the legislation has a unique provision designed to prod the SEC to act on the rulemaking required by the statute. This Davis Polk blog explains:
The bill includes a provision that one sponsor of the bill described as an effort to “hold[] the SEC accountable to follow Congress’ direction.” The bill directs the SEC to amend its rules, within 270 days of enactment, to implement the safe harbor in a manner consistent with specific parameters set forth in the bill. If the SEC fails to do so by the 270-day deadline, however, the bill provides for an “interim effectiveness” during which the expansions to the safe harbor would automatically be deemed to be in effect, “as if revised and implemented” in accordance with Congress’ directions.
Some members of Congress have not been happy about the SEC’s inability to adopt the roughly 12 trillion regs required under Dodd-Frank & the JOBS Act on a timely basis – and this is intended to prod the agency to act more quickly:
The interim effectiveness provision may spur the SEC to act more quickly to implement the FAIR Act in order to address the inevitable ambiguities contained in legislation—facilitating its implementation through their expertise in administering the securities laws. If this device is successful in forcing the SEC to accelerate its rulemaking efforts, look for Congress to employ it in future legislation.
Of course, while Congress is telling the SEC to speed up, the agency’s been getting a different message from the courts – the blog points out that the DC Circuit has invalidated recent SEC rulemaking “for failure to conduct sufficient analysis, including in terms of the cost-benefit analysis of new rules.”
SCOTUS: MD&A “Known Trends” Case Goes Away. . .
As Broc previously blogged, last March, the Supreme Court granted cert to a 2nd Circuit case involving whether MD&A’s “known trends” line-item disclosure requirements can give rise to 10b-5 liability. Now, it looks like resolution of that issue will have to wait for another day – this Hunton & Williams memo says that the parties to Leidos v. Indiana Public Retirement System have reached a settlement.
ICOs: Nasdaq-Listed Company to Take the Plunge
Steve Quinlivan recently blogged about a Nasdaq-listed issuer that’s considering an initial coin offering. Steve does his best to describe what the company’s proposing in plain English. See if you can figure it out – I’m admittedly not the sharpest knife in the drawer, but I have absolutely no idea.
Naturally, the company’s stock shot up 70% on the news. Resistance is futile.
