Over the past several months, media reports involving high profile sexual misconduct & abuse of power by politicians, celebrities, CEOs and other corporate leaders have brought the issue of sexual harassment to the top of the cultural agenda – and placed it prominently on the agenda of boards as well.
One of the biggest reasons that oversight of sexual harassment policies has become a priority for boards is that it’s also become a priority for shareholders. The recent experiences of the Weinstein Company, Wynn Resorts & others have demonstrated that high-profile allegations of sexual misconduct by executives can have a potentially devastating effect on shareholder value – and even threaten the viability of the business itself.
Reflecting rising investor concerns in this area, the Council of Institutional Investors has released a new report that provides boards with advice on how to mitigate the risk of sexual harassment. The report details practical steps that cover five key areas: personnel, board composition, policies and procedures, training and diversity.
Board Oversight: “Is It Just Me, Or Is It Getting Warm In Here?”
Investors aren’t just sharing friendly words of advice when it comes to board oversight of sex harassment & other corporate policies. This “Directors & Boards” article suggests that they’re increasingly seeking to hold directors accountable through fiduciary duty lawsuits alleging failures in oversight. Here’s the intro:
Directors and officers might want to start 2018 by doubling down on their oversight systems. Last year, boards and senior managers at several large corporations faced significant shareholder lawsuits over allegations they were not minding the store when their companies suffered high-profile traumas surrounding data breaches, sexual harassment and discrimination scandals or improper sales practices.
“What I’ve seen in these cases is there were a lot of red flags out there and the board just ignored them,” says Jorge Amador, an attorney representing shareholders in a case against Wells Fargo & Co. over phony customer accounts.
Of course, these oversight claims require plaintiffs to prevail under Delaware’s Caremark doctrine, which requires “bad faith” in the form of intentional dereliction of duty or conscious violations of law on the part of directors.
That’s a demanding standard. In fact, Delaware’s Supreme Court has said that Caremark may be “the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” Still, no less a figure than Chief Justice Leo Strine recently dissented from a Delaware Supreme Court decision dismissing a Caremark claim against Duke Energy’s board – and the article also notes recent landmark settlements of oversight claims by Home Depot & 21st Century Fox.
So, in today’s rather fraught environment, it pays for directors to remember that however remote the risk may appear – breakdowns in oversight could hit them squarely in the wallet.
Tune in tomorrow for the webcast – “The SEC’s New Cybersecurity Guidance” – to hear former senior Corp Fin staffers Meredith Cross of WilmerHale, Keith Higgins of Ropes & Gray and Dave Lynn of TheCorporateCounsel.net and Jenner & Block discuss the SEC’s recent guidance on cybersecurity disclosure.
Form DRS: Gets a “Check the Box”
Yesterday, the SEC posted its updated “Edgar Filer Manual.” The most notable change is the addition of “check the box” language to the cover page of Form DRS and DRS/A. Filers of draft registration statements will now be required to check a box to indicate their status as an “Emerging Growth Company” – and to indicate whether they are opting out of the extended transition period for complying with any new or revised financial accounting standards.
Working the “Weed Beat”: Nasdaq Lists Canadian Cannabis Company
So, I was just sitting around last Sunday when Broc shot me an email with this Torys memo on Nasdaq’s decision to list Cronos, a Canadian marijuana cultivator. He reminded me that I’ve been “covering the space” – and asked me if I wanted to blog about it.
Naturally, I said yes. After all, who would turn down the chance to be TheCorporateCounsel.net’s “weed beat” reporter? Anyway, the memo says that strong governance & the fact that the company’s operations were conducted solely in jurisdictions where marijuana has been legalized likely tipped the scales in favor of a listing. Here’s an excerpt:
The listing of shares of Cronos by Nasdaq demonstrates a willingness by the exchange to accept issuers with material interests in the production and sale of cannabis in jurisdictions in which such activities are legal. Cronos has no operations or activities in the U.S. Each of Cronos’ two wholly-owned LPs and three additional LPs in which it holds a minority interest operate in compliance with the Access to Cannabis for Medical Purposes Regulations (ACMPR).
Furthermore, Cronos’ international operations are located in jurisdictions where medicinal cannabis is legalized nationally—namely, Israel and Australia. In addition, Cronos’ CEO and industry commentators have cited Cronos’ extensive work in strengthening Cronos’ corporate governance as key to achieving the Nasdaq listing.
The emphasis on the legality of Cronos’ operations doesn’t bode well for the listing chances of U.S. cultivators of “the chronic” – particularly in light of the DOJ’s recent decision to end Obama Administration policies that sheltered marijuana producers whose activities complied with state laws.
In a milestone of sorts, the first Form S-1 for a coin offering was filed last week by a company called “The Praetorian Group.” I flipped through it, and it’s . . . interesting. Here’s a take on the filing from Bloomberg’s Matt Levine:
“The Praetorian Group filed what appears to be the first initial coin offering (ICO) registering tokens with the SEC,” reports Renaissance Capital. Here is the registration statement, and I am sorry to say that it is full of firsts. For instance, this is the first time I have seen this sort of disclaimer in a prospectus for a securities offering:
To the maximum extent permitted by the applicable laws, regulations and rules the Company and/or the Distributor shall not be liable for any indirect, special, incidental, consequential, or other losses of any kind, in tort, contract, tax or otherwise (including but not limited to loss of revenue, income or profits, and loss of use or data), arising out of or in connection with any acceptance of or reliance on this Prospectus or any part thereof by you.
Nope nope nope nope nope nope nope! That is not how a prospectus works! The way a prospectus works is, you write it, and your lawyers read it and make sure it’s right, and then you deliver it to investors so that they can rely on it. That’s the whole point. You don’t just hand the investors some random scribblings and say “here’s some stuff but definitely don’t rely on it.” Come on.
Yeah. Might draw a comment on that one. The prospectus goes on to disclaim any “representation, warranty or undertaking in relation to the truth, accuracy, and completeness of any of the information set out in this Prospectus” – which is another thing I’m sure the Staff will be totally cool with.
The registration statement’s also missing a few items – like signatures, exhibits, undertakings (basically all of Part II), for starters. Thanks to Hunton & Williams’ Scott Kimpel for tipping us off to this filing!
ICOs: SEC “Drops a Dime” to Thwart Sketchy Deals
You can’t accuse the SEC of not making use of all available technologies to protect investors – even if some of those technologies originated in the 19th century. Check out the excerpt from this BTC Manager article on how the SEC is using the telephone to put the kibosh on sketchy token offerings before they hit the street:
Well, counter-intuitive as it may seem, the agency is actually showing a preference for the good old telephone over other state-of-the-art technologies to ward off shady ICOs. Before we delve into the details, let’s first take a step back and revisit the fact that the Wall Street’s main regulator has issued multiple warnings time and again urging crypto enthusiasts to steer clear of legally sketchy ICOs no matter how compelling the propositions seem.
Jay Clayton, Chairperson at the SEC, even went as far as saying that crooks were busy harnessing blockchain and the ever-expanding crypto market to pull off serious scams that are as old as the market itself is. That is, to project an asset as the “next best thing” and then selling it once a good amount of “dumb money” pours in.
So how does the SEC use the telephone to deter the bad guys in the fast-growing realm of ICOs?
Apparently, the modus operandi is pretty simple. The folks over at SEC just pick up the telephone and call up the people behind individual ICOs. And believe it or not, the strategy has paid off. According to a key SEC official, over a dozen of cryptocurrency-related companies have abandoned their plans to raise fund from investors after they were contacted by the agency over the telephone.
Score one for us Luddites. I bet they even used a landline.
Transcript: “Auctions – The Art of the Non-Price Bid Sweetener”
We have posted the transcript for the recent DealLawyers.com webcast: “Auctions – The Art of the Non-Price Bid Sweetener.”
As Broc blogged several times last year (here’s the latest), “fix-it” proposals – shareholder proposals seeking changes to proxy access bylaws – were a hot topic last proxy season. This recent blog from Cooley’s Cydney Posner says that they’re front & center again in 2018.
After much back & forth, it appeared that by the end of last proxy season the no-action letter process had charted a course that would allow proponents to avoiding exclusion of fix-it proposals on the basis of substantial implementation. As this excerpt notes, fix-it proponents are back this year, & they’re following that course:
The SEC Staff took a uniform no-action position allowing exclusion of these fix-it proposals. But the proponents were persistent and, in 2017, submitted to H&R Block a different formulation of a fix-it proposal that requested only one change — elimination of the cap on shareholder aggregation to achieve the 3% eligibility threshold, as opposed to simply raising the cap to a higher number.
This time, the Staff rejected H&R Block’s no-action request. In essence, it appears that the Staff believes that a lower cap on aggregation could “substantially implement” a higher cap, but the removal of a cap entirely is a different animal that could not be substantially implemented by the lower cap. This proxy season, the proponents have latched onto—and even expanded—the new formulation and have continued to find success in preventing exclusion.
For example, in BorgWarner (2/9/18), John Chevedden submitted a proposal requesting elimination of the cap on aggregation of shareholders to satisfy the 3% minimum ownership threshold, as well as changing the minimum number of proxy-access candidates to two, if the board size is under 12, and three if it is over 12. (The proposal doesn’t address the 12-person board.) In this instance, the company’s existing aggregation cap was 25, and the existing number of directors that could be nominated through proxy access was the greater of 20% of directors in office or two.
Chevedden & Harrington Investments submitted a similar proposal to Alaska Airlines. In both cases, the Corp Fin Staff rejected arguments that the proposals could be excluded on the basis that they had been substantially implemented.
Shareholder Proposals: About Those Airline Seats. . .
Is there anybody who doesn’t find the airlines’ unceasing efforts to shrink the seats & leg room on planes absolutely infuriating? This recent blog from UCLA’s Stephen Bainbridge flags a shareholder proposal designed to put a stop to this practice.
The proposal – which was submitted to American, Delta & United Continental by an organization called “Flyers Rights Education Fund” – calls for the companies to report on the “regulatory risk and discriminatory effects of smaller cabin seat sizes on overweight, obese, and tall passengers.” It also calls for them to address “impact of smaller cabin seat sizes on the Company’s profit margin and stock price.”
So what are the chances of this resolution prevailing? Not good. American & United Continental have already filed no-action requests with the Staff seeking to exclude these proposals under the ordinary business exception – and the blog notes that the airlines’ arguments are likely a winner:
American’s letter states that it is relying on the exemption under Rule 14a-8(i)(7) that allows exclusion of proposals that deal “with a matter relating to the company’s ordinary business operations.” The letter relies on the SEC’s Exchange Act Release No. 34-40018 (5/21/98):
The SEC stated in the 1998 Release that the policy underlying the ordinary business exclusion is based on two considerations:
– First, whether a proposal relates to “tasks that are so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight;” and
-Second, whether a “proposal seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”
The Staff has consistently agreed that proposals relating to a company’s sale and marketing of its products or services, or seeking to dictate management’s day-to-day decisions regarding the selection of products or services offered, implicate a company’s ordinary business operations and may be excluded pursuant to Rule 14a-8(i)(7).
While he too bemoans the constant shrinking of airline seats, Prof. Bainbridge concludes that American Airlines’s argument is “clearly correct.”
Brother, Can You Spare $100 Billion?
Check out this Reuters article – it says that banks are “salivating” over the opportunity to lend $100 billion to fund Broadcom’s hostile takeover of Qualcomm. Here’s an excerpt with some of the details on what would be the largest syndicated loan of all time:
Broadcom’s $100 million loan package backing its proposed $121 billion acquisition of Qualcomm, is set to become the biggest-ever syndicated loan globally if the hostile deal goes ahead.
Twelve banks are providing the financing, which is on track to beat the prior record of $75 billion issued by Brazilian/Belgian brewer AB Inbev to finance its purchase of rival SAB Miller in 2015, according to Thomson Reuters LPC data.
How’s the pricing? Well, for the most expensive piece of the commitment – a proposed 5-year, $20 billion term loan – it’s 137.5 bps over LIBOR. Since the 12-month LIBOR rate is currently hovering around 2.5%, this means Broadcom’s borrowing $100 billion at about the same rate that you’d pay for a 5-year auto loan.
According to this MarketWatch article, the number of coin offerings relying on Reg D has risen rapidly since the SEC first issued guidance on coin offerings last July – while only a single Form D was filed during the first half of 2017, that number grew to 43 during the second half of the year. The pace continues to accelerate – already this year, nearly 40 Form Ds have been filed through February 20th.
While a heightened awareness of the need to stay “on-side” with the SEC probably accounts for a significant percentage of the filings, another factor may well be the existence of a “blueprint” in the form of a “Simple Agreement for Future Tokens” that was developed last Fall. Here’s an excerpt with some of the background:
In a whitepaper published in October, Marco Santori, an attorney at Cooley and an advisor to the International Monetary Fund, and Juan Batiz-Benet and Jesse Clayburgh of blockchain developer Protocol Labs, say that public token sales, or ICOs, may be “a powerful new tool for creating decentralized communities, kickstarting network effects, incentivizing participants, providing faster liquidity to investors, and forming capital for creators.” However, these boosters warn that many token sellers run a huge risk of the SEC shutting them down if they don’t follow all the securities laws to the letter.
Most token sales have shunned U.S. investors, out of fear by the promoters that their participation would bring the SEC calling.
That’s why the whitepaper from Santori, Benet and Clayburgh proposed a new approach to structuring these deals to meet the SEC’s requirements. Their effort has been successful. Most of the ICOs filed using Form D since mid-2017 — but not all and not KodakCoin — now use this approach, called a Simple Agreement for Future Tokens, or SAFT, as their legal framework.
If the SAFT concept rings a bell, that’s probably because it’s based on Y Combinator’s “Simple Agreement for Future Equity” – otherwise known as “SAFE” – which has become a popular template for startup financing. Don’t forget our upcoming webcast: “The Latest on ICOs/Token Deals“…
One of our members alerted me to an ongoing debate about the SAFT approach centering on the white paper’s position as to the status of “genuinely functional” tokens under the Securities Act. Check out this Cardozo Blockchain Project white paper.
More on “Insider Trading – It’s Worse Than You Think?”
In our last episode, we noted that a bunch of recent studies have concluded that everything is terrible & the markets are rigged. Well, it turns out that those studies might have understated the problem. According to this MarketWatch article, the VIX is fixed too:
One of the most popular measures of volatility is being manipulated, charges one individual who submitted a letter anonymously to the SEC and CFTC.
The letter makes the claim to regulators that fake quotes for the S&P 500 index SPX, +0.04% are skewing levels of the Cboe Volatility Index VIX, +1.73% which reflects bearish and bullish options bets 30-days in the future on the S&P 500 to gauge implied stock-market volatility (see excerpt from the letter below).
“The flaw allows trading firms with sophisticated algorithms to move the VIX up or down by simply posting quotes on S&P options and without needing to physically engage in any trading or deploying any capital. This market manipulation has led to multiple billions in profits effectively taken away from institutional and retail investors and cashed in by unethical electronic option market makers.”.
The CBOE says the whistleblower’s all wet* – but a follow-up article quotes former SEC Chair Harvey Pitt as saying that “it’s quite clear” that indexes like these can be manipulated.
* In other words, “ChiX Nix Vix Fix” – I know, I know. . . I’m sorry, but it was just laying there & I couldn’t resist doing that little riff on one of the most famous newspaper headlines of all time.
Our March Eminders is Posted!
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Whether there’s life after death is one of those great unanswerable questions. . .Well, I mean except for Section 162(m)’s performance-based comp provisions – which, despite their untimely demise last December, we can say with certainty are enjoying a robust afterlife in proxy disclosures.
Over on “The Advisors’ Blog,” Broc’s already noted that the plaintiffs’ bar is keeping a watchful eye on performance-based comp proxy disclosures in the wake of tax reform’s changes. But beyond that, some high-profile companies – like Disney & John Deere – have recently filed proxy statements asking shareholders to re-approve existing compensation plans in order to comply with Section 162(m)’s 5-year shareholder re-approval requirements for performance-based comp.
If performance-based comp’s deductibility is a goner, why do that? This Debevoise memo suggests one possible reason for this portion of 162(m)’s afterlife:
Grandfathered arrangements that rely on the performance-based exception must continue to comply with the formal procedures previously applicable to performance-based compensation. For example, if an executive had a contractual right as of November 2, 2017 to receive a performance-based award in the future, the performance criteria applicable to such award may need to be re-approved by shareholders if, when the award is granted, five years have passed since the last shareholder approval.
Many tax lawyers expect that the IRS may ultimately decide not to require shareholder reapproval for grandfathered awards – but it hasn’t issued transition rules yet, and some companies may have decided that including these proposals in their proxy statements is the prudent thing to do.
Transcript: “Audit Committees in Action – The Latest Developments”
We have posted the transcript for the recent webcast: “Audit Committees in Action – The Latest Developments.”
Enforcement Penalties: Uncle Sam’s No Longer Picking Up Part of the Tab
The new tax legislation makes it tougher to deduct payments made in connection with the resolution of government enforcement actions. Under prior law, Section 162(f) of the Internal Revenue Code allowed deductions for a fairly broad category of payments. This excerpt from a recent Sidley memo provides an overview of the new regime:
Section 13306 of the Act completely repeals the prior language of Code Section 162(f) and replaces it with a general prohibition of business expense deductions for any payments made to or at the direction of a government, a governmental entity or certain nongovernmental self-regulatory entities in connection with a violation of law or an investigation involving a potential violation of law.
However, taxpayers continue to be allowed deductions for payments that they can establish “constitute restitution(including remediation of property) for damage or harm” related to the violation or potential violation of law or that were made “to come into compliance with any law which was violated or otherwise involved” in an investigation.
Nevertheless, amounts paid to reimburse the costs of investigation or litigation are not deductible as restitution or otherwise. Code Section 162(f)(2)(B). Furthermore, as a prerequisite to establishing the right to the remaining allowable deductions, the court order or settlement agreement involved must identify the amounts paid as restitution or payments made to come into compliance with applicable law. Otherwise, no deductions are allowed regardless of the
nature of the payments.
The governmental entity or SRO involved in the action also has to file an information return with the IRS specifying the amounts that are deductive. The new provisions apply to proceedings involving all federal, state & local enforcement agencies, as well as non-governmental enforcement agencies, such as SROs.
This Cleary blog has more on this topic, together some advice on negotiating settlement agreements with the government in order to preserve deductibility. One interesting suggestion – companies should consider settling civil class actions early & voluntarily repaying victims for their loss and then arguing that the repayment also satisfies any separate disgorgement obligation to a government.
SEC Chair Jay Clayton has made invigorating the sluggish IPO market one of his top priorities. So far, the SEC’s most high-profile action on this front during his tenure has been to permit all companies – not just emerging growth companies – to make confidential filings of draft IPO registration statements.
Now, this WSJ article says that the SEC may take another step, and allow all companies, regardless of size, to “test the waters” before filing an IPO registration statement. The ability to “test the waters” was provided to EGCs as part of the JOBS Act – and this excerpt from Cydney Posner’s recent blog provides an overview of what it allows companies to do:
The testing the waters provisions in the JOBS Act significantly relaxed “gun-jumping” restrictions by permitting an EGC, and any person acting on its behalf, to engage in pre-filing communications with qualified institutional buyers and institutional accredited investors. This relaxation of the gun-jumping rules allows companies to reduce risk by gauging in advance investor interest in a potential offering.
Prior to the JOBS Act, only WKSIs could engage in similar testing-the-waters communications. “Test-the-waters” communications can be oral or written, made before or after filing a registration statement, in connection with an IPO or any other registered offering.However, the only permitted communications are those made to determine whether the specified investors might have an interest in a contemplated securities offering.
As Broc blogged at the time, allowing all companies to “test the waters” was one of a slew of recommendations aimed at improving the capital markets made by the Treasury Department last October – and you may want to check out that list for other potential “coming attractions.”
Here’s an article from MarketWatch’s Francine McKenna with more background on the SEC’s efforts to make life a little easier for IPO candidates.
Warren Buffett’s Annual Letter to Shareholders
A few days ago, Warren Buffett released his annual letter to shareholders. As usual, this went completely unnoticed by the financial press – barely 50,000 articles & blogs have been written on it to date – so I’m sure you’re hearing about this for the first time from me. There’s no need to thank me, it’s just part of the job.
Anyway, here’s a selection of some of the media reports on the Oracle of Omaha’s latest epistle:
Warren Buffett’s recent pronouncements aren’t limited to his annual letter. Berkshire Hathaway’s sitting on a pile of cash – $116 billion to be specific. Yesterday, Buffett told CNBC that Berkshire-Hathaway was more inclined to repurchase stock with its excess cash than to pay dividends.
He’s got a lot of company. Stock buybacks have long been corporate America’s favorite bit of financial engineering – and this ValueWalk article says that 2018 could be the biggest year for them ever. But despite their continuing popularity, criticism of buybacks appears to be on the rise. For instance, this Bloomberg article says that buybacks are a big contributor to the market’s recent volatility. Here’s an excerpt:
Some market watchers are adding corporate share repurchases to the list of reasons for last week’s turmoil, which already included rising interest rates, higher inflation, growing government debt, volatility-linked investment funds and Washington instability. More significantly, those pointing the finger at buybacks say continued corporate stock purchases — which, unlike some of those volatility funds, survived the brief market downturn — will make the next one far worse.
Regardless of their impact on the market, the optics of buybacks are increasingly bad – this Washington Post op-ed claims that when it comes to using the additional cash flowing in from tax reform, companies are planning to spend 30x as much on buybacks as on wage increases.
Last week, in Digital Realty Trust v. Somers (US Sup. Ct.; 2/18), the US Supreme Court resolved a split between the circuits & held that in order to qualify for “whistleblower” protection under Dodd-Frank, an employee must reach out to the SEC – just blowing the whistle to an employer isn’t enough.
This Holland & Hart memo says that the case is a “mixed bag” for employers. This excerpt explains:
On the one hand, the decision is good news for employers because the ruling narrows the scope of protections available under Dodd-Frank’s anti-retaliation provisions. Dodd-Frank contains multiple plaintiff-friendly provisions – including immediate access to federal court, a generous statute of limitations (at least six years), and the opportunity to recover double back pay. Yet these benefits are now only available to a, presumably, smaller number of potential plaintiffs who actually report to the SEC.
On other hand, there are many reasons for employers to be wary of the ruling. Rather than incentivize employees to report their suspected concerns internally, today’s decision heavily encourages potential whistleblowers to report their concerns directly to the SEC – before any adverse action occurs, but also before employers have had the chance to hear, investigate, and address their potential concerns. Indeed, when an internal report does arrive, it may be safest for employers to assume that the SEC already has that same report.
The Court’s decision applies only to whistleblower status under Dodd-Frank. Internal whistleblowers may still assert retaliation claims under Sarbanes-Oxley, which also provides significant economic downsides for companies that retaliate. We’re posting the flood of memos in our “Whistleblowers” Practice Area.
Time for BlackRock to “Stand & Deliver?”
BlackRock made a big splash last month when CEO Larry Fink called on companies to serve the greater good in addition to serving their bottom lines. Nice words – but now, this “Breaking Views” column calls on the world’s largest asset manager to back them up with its actions:
A day after the latest American mass shooting involving a military-style assault rifle, it is worth reviewing Fink’s words. BlackRock is the largest owner of shares in publicly traded manufacturers of what is arguably the most lethal consumer product of any kind. The firm’s funds hold 16 percent of Sturm Ruger, 12 percent of Vista Outdoor and around 11 percent of American Outdoor Brands, the parent of Smith & Wesson, according to Eikon.
BlackRock’s holdings are driven by its big indexing business, but it is not alone. Vanguard, which oversees $4.5 trillion of other people’s money, is the second-biggest owner of Sturm Ruger and a close third in the registers of AOB and Vista. Fidelity Management tops the roster at Vista with 15 percent, but doesn’t figure in the other two.
These increasingly engaged broad-brush investment firms, as well as more focused Wall Street advisers, could start with a simple thesis. Something common to most of the shooting horrors in recent years is the AR-15 class of semi-automatic weapons. In a country with as many firearms as people, eradicating murders, suicides and accidental deaths may never be possible. But reducing the lethality of those who would do harm is achievable by making these weapons – which were adapted from versions designed for military use on battlefields – harder to purchase or banning them outright, as some states have already done.
Denying the purveyors of assault rifles the financial means to produce and distribute them is a power that financial firms do possess. Many banks and brokers already avoid the gun industry, which scores low on most so-called ESG screens – for environmental, social and governance – in part because of the regular controversies surrounding the lethal misuse of their products.
Being pressured to weigh-in on one of the most controversial issues in American society is probably not what BlackRock had in mind when it announced its new emphasis on the need to serve the greater good – but my guess is that it’s going to get lots of input about what “the greater good” entails from here on out. Looks like the ball’s in your court, BlackRock.
Transcript: “How to Handle Post-Deal Activism”
We have posted the transcript for our recent DealLawyers.com webcast: “How to Handle Post-Deal Activism.”
In recent years, some prominent governance commentators have advocated that the SEC follow the lead of EU & UK regulators and eliminate mandated quarterly reporting. A recent study published in the March issue of “The Accounting Review” says that there’s empirical data supporting the idea that the SEC should “lose the 10-Qs.” Here’s an excerpt from a recent American Accounting Association press release on the article:
With regulatory reform a high priority for the Trump administration, a new study focuses on one possible target – and it’s a fat one – the half-century-old SEC rule mandating the filing of quarterly financial reports by public companies.
The EU and UK no longer require quarterly financials, and the question of whether the SEC should follow suit has evoked heated debate. While there has been plenty of theorizing about the subject, what has been absent until now is large-scale evidence of the advantages less frequent reporting offers to companies and their shareholders. The research challenge: How to compare the effect of reporting frequency when all U.S. companies have to file quarterly.
Now a study in “The Accounting Review,” published by the American Accounting Association, finds a way around this problem by analyzing evidence from periods when reporting-frequency mandates changed in the U.S., permitting before-and-after comparisons to be made.
While acknowledging that, yes, there may very well be advantages in increased reporting frequency – such as lower cost of capital and more information for investors – the study concludes, crucially, that shorter reporting intervals engender “managerial myopia” which finds expression in a “statistically and economically significant decline in investments” along with “a subsequent decline in operating efficiency and sales growth.”
Therefore, “our evidence…supports the recent decision by the EU and the UK to abandon requiring quarterly reporting for listed companies with an apparent intent to preventing short-termism and promoting long-term investments,” write the study’s authors, Rahul Vashishtha and Mohan Venkatachalam of Duke University’s Fuqua School of Business and Arthur G. Kraft of the Cass Business School of City University London.
The study says that prior to the reporting mandates, firms that reported results at longer intervals had greater annual sales, annual sales growth and return on assets than firms that reported more frequently. By contrast, in the period three to five years post-mandate, sales and sales growth were about the same for the two groups, while the difference in return on assets narrowed significantly.
Of course, one of the truisms of corporate governance research seems to be that for every study that says “white,” there’s another that says “black.” This MarketWatch article from last year suggests that the issue of reporting frequency is no exception.
DOJ’s New Policy Restricting Use of Agency Guidance
Late last year, Attorney General Sessions issued a memo announcing his intention to curb the practice of “rulemaking by guidance.” This King & Spalding memo says that the DOJ has acted to implement the AG’s directive. Here’s an excerpt summarizing the new policy:
On January 25, 2018, Associate Attorney General Rachel Brand issued a memorandum significantly restricting Department of Justice civil litigating units’ use of executive agency guidance documents in affirmative civil enforcement actions. The Brand Memo outlines new policies for cases in which an executive agency previously issued relevant non-binding guidance, including:
– Reinforcing the long-standing principle that guidance documents are just that—recommendations for regulated industries;
– Emphasizing that guidance does not bind regulated parties or create new legal obligations beyond the scope of existing statutes and regulations;
– Precluding the Department from “effectively convert[ing] agency guidance into binding rules”; and
– Preventing Department lawyers from using noncompliance with guidance to establish violations of law.
The Brand Memo’s potential impact is very broad, and it will influence any DOJ investigation that relies heavily on regulatory agencies’ non-binding interpretive guidance, but the King & Spalding memo suggests that it may have a particularly significant impact in the life sciences sector – where DOJ attorneys have long leveraged guidance from the DHS’s Office of the Inspector General and the FDA to support the government’s claims.
Nasdaq Proposes Changes to Shareholder Approval Rule
This Morrison & Foerster blog highlights a recent Nasdaq proposal that would tinker with the rules governing when listed companies would have to go to their shareholders for approval of new stock issuances. Here’s an excerpt summarizing the proposed changes:
The proposal would, among other things:
– Amend the measure of “market value” in connection with assessing whether a transaction is being completed at a discount from the closing bid price to the lower of: the closing price as reflected by Nasdaq, or the average closing price of the common stock for the five trading days preceding the definitive agreement date;
– Refer to the above price as the “Minimum Price,” and existing references to “book value” and “market value” used in Rule 5635(d) will be eliminated; and
– Eliminate the references to “book value” for purposes of the shareholder vote requirement.
For some Nasdaq companies, this is kind of a big deal. Currently, listed companies need shareholders to sign off on any financing transaction (other than a public offering) that would result in the issuance of 20% or more of their outstanding shares at a price less than the greater of book or market.
Changing the rules to eliminate the reference to book value and shake out some of the effects of market volatility will enhance companies’ ability to raise private money quickly – and doesn’t seem to do violence to shareholders’ interests either.
Wasn’t it was only yesterday that proxy access was one of the most hotly contested corporate governance issues? Now this Sidley memo says the game’s pretty much over – and proxy access has become mainstream:
As of the end of January 2018, 65% of S&P 500 companies have adopted proxy access. Through the collective efforts of large institutional investors, including public and private pension funds and other shareholders, shareholders are increasingly gaining the power to nominate a number of director candidates without undertaking the expense of a proxy solicitation. By obtaining proxy access (the ability to include shareholder nominees in the company’s own proxy materials), shareholders have yet another tool to influence board decisions.
Some of the 2017 developments noted in the memo suggest that not only is the concept of shareholder proxy access well-established, but investors and management are generally in accord on what it should look like:
– The continuing pace of proxy access bylaw adoptions and ongoing convergence toward standard key parameters (83% of companies that adopted proxy access in 2017 did so on the following terms: 3% for 3 years for up to 20% of the board (at least 2 directors) with a nominating group size limit of 20);
– Slightly increased average support (54% versus 51%) for shareholder proposals to adopt proxy access in 2017, but fewer proposals being voted on as more companies adopted proxy access in exchange for withdrawal of the proposals;
– The failure to pass of all shareholder proposals seeking specified revisions to existing proxy access provisions (so-called “fix-it” proposals) in 2017, despite favorable recommendations from ISS, which voting results suggest that many shareholders are satisfied with proxy access on market standard terms.
The memo also points out that Fidelity’s shift from opposing to supporting proxy access shareholder proposals may seal the fate of many companies that receive such a proposal in the future.
It seems fair to say that given current trends, proxy access may soon become ubiquitous. Of course, one big question remains – is anybody ever going to actually use it?
Cybersecurity: “I, For One, Welcome Our New Cyber Insurance Overlords”
This Cleary blog says that a group of corporate titans are joining forces to roll out an innovative new cyber insurance product that’s designed to reward good cybersecurity practices:
In response to the growing threat of malware and ransomware attacks and other cybersecurity threats facing businesses today, Apple, Cisco, Allianz and Aon announced a new holistic cyber risk management solution on February 5, 2018. The new product is designed to provide a comprehensive framework for companies to reduce cyber risk by leveraging the expertise of each of the partners. As cyber incidents often impose significant costs on companies that can be difficult to bear directly, cyber insurance can help provide some protection.
Companies interested in purchasing the new insurance product must first undergo a cyber resilience evaluation from Aon to determine their “cybersecurity posture.” Aon will also recommend ways for the company to improve their cybersecurity defenses. Companies that employ Cisco’s Ransomware Defense product and/or Apple devices such as iPhones, iPads and Mac computers, may then be eligible for an “enhanced cyber insurance offering” underwritten by Allianz Global Corporate & Specialty that provides what Apple describes as “market-leading policy coverage terms and conditions,” including lower deductibles, or in certain cases, no deductibles. Companies that purchase this insurance package will also have access to Cisco’s and Aon’s incident response teams in the event that they do suffer a cybersecurity incident.
The blog notes that providing incentives for good cybersecurity practices benefits both insurer and insured – and it won’t hurt Apple & Cisco’s bottom lines either.
There’s one other thing that caught my eye in the blog – the rather alarming statistic that 68% of U.S. businesses haven’t purchased any cyber insurance. Really? Hey, you guys – doesn’t anybody watch “Mr. Robot?”
Cybersecurity: The Board’s Role
While we’re on the subject of cybersecurity, this recent Deloitte memo addresses the board’s role in overseeing the company’s cyber risk management efforts. The memo lays out a model for how boards can develop strong oversight of cyber risks, and notes that this oversight function involves the many of the same risk management skills that directors apply to other areas of the company’s business. Here’s an excerpt:
Board members needn’t become cyber security specialists. But by bringing to bear their deep experience in risk management, they can push management to answer tough questions and identify potential weaknesses in an organization’s cybersecurity strategy and capabilities.
Knowing that every company will have to accept some risk, the board can help management focus its efforts on the highest risk areas, while preserving the company’s ability to innovate. Again, the question returns to the organization’s risk appetite, and the board’s ability to make sure the organization’s cyber security efforts align with agreed upon risk parameters.
