I was always one of those people who crammed a semester’s worth of studying into the night before the final exam. This Bloomberg accounting blog suggests that a lot of companies are going to find themselves in the same boat when it comes to implementation of FASB’s new revenue recognition standard:
The Financial Accounting Standards Board (FASB) issued ASU 2014-09 Revenue from Contracts with Customers declaring that the new standard would remove inconsistencies in revenue requirements, improve comparability of revenue, provide more useful information through improved disclosure requirements, and simplify the preparation of financial statements. You get the picture—all these wonderful benefits. It is only during implementation do the side effects become fully apparent. Most public companies are set to adopt the rules next year, however, many are only now realizing the numerous implementation issues.
“Most of the people today are struggling with readiness. A lot of people were not fast enough to get ready to adopt.” Jagan Reddy, senior vice president at Zuora Inc., told Bloomberg BNA staff correspondent Denise Lugo, when asked about the slow pace of implementation. “Another reason is companies want similar companies…to adopt first so they can use them as a guide.”
Despite the 2018 implementation date, the blog notes that Starbucks, Oracle & Apple have all recently announced that they won’t be implementing the new standard until 2019. MarketWatch’s Francine McKenna & her colleagues have been closely following the impact of the new standard. She notes that some companies can defer to 2019 because of the timing of their fiscal years. However, Francine points out that Apple’s an interesting example of the challenges that companies face – as this article notes, Apple originally planned to early adopt the new standard, but then delayed implementation one year to the latest possible date.
It turns out that there are some companies that stuck their necks out & early adopted the new revenue recognition standard. This recent blog from Steve Quinlivan reviews one recent early adopter’s fairly probing comment letter from the Staff, & has some tips for comments that companies that haven’t adopted should keep in mind for their 3rd quarter 10-Qs. Also see this Deloitte memo that analyzes revenue recognition disclosures in the 2nd quarter for a bunch of companies…
ESG: Building a “Sustainability Competent” Board
Boards are increasingly called upon to address a variety sustainability issues – including climate change, human rights & other environmental and social concerns that not long ago seemed pretty far afield from the business of running a public company. This Ceres report makes the business case for developing boards that are “sustainability competent,” and offers insight about how to accomplish this objective.
Here’s an excerpt from the executive summary addressing the business case for sustainability competence:
Where sustainability is material to a company, boards have a fiduciary responsibility to act. A key part of the fiduciary responsibility of boards is the duty of care, or the duty to adequately inform themselves of material issues prior to making business decisions. To discharge this responsibility, directors need to be able to understand and evaluate material risks facing the business. When a social or environmental force poses material risks, directors now need to consider those risks in decision-making in order to adequately discharge their fiduciary responsibility.
Investors are increasingly focusing on board sustainability competence. Investors are making connections between sustainability and materiality on one hand, and financial performance on the other. As a result, they are focusing on the critical role the board plays in ensuring the resilience of a company’s assets and its long-term business strategy. Consequently, investors are putting pressure on boards to show themselves as “competent” in environmental and social issues.
Your mileage may vary when it comes to legal arguments about what the fiduciary duty of care requires here, but there’s no doubt that sustainability is becoming a top priority for many investors.
The report calls for companies to take a variety of steps to build a sustainability competent board. These include integrating sustainability into the nominating process, educating directors on sustainability risks, & deepening engagement with experts and stakeholders on relevant sustainability topics.
When it comes to sustainability, most of the action among investors has come from institutions. This recent publication from the US SIF Foundation aims to change that – it provides a guide for retail investors to getting started in socially responsible investing.
IPOs: Are SPACs the Answer for Unicorns?
We’ve previously blogged about various aspects of the Unicorn phenomenon – $1 billion dollar tech companies that are reluctant to take the IPO plunge. How can these companies be coaxed into the public marketplace? This NYT DealBook article says somebody’s building an app – uh, I mean a SPAC – for that. Here’s an excerpt:
Last week, Chamath Palihapitiya, a brash entrepreneur who was an early Facebook employee, launched a public company known as a special purpose acquisition company, or a “blank check” company, with $600 million put up by investors. The intent is to merge with one of Silicon Valley’s unicorns, taking it public through a back door of sorts.
The idea is to remove “the process of going public that is true brain damage,” Mr. Palihapitiya said.
Unicorns may have the cash to defer going public, but it does create problems for them when it comes to retaining talent – at some point, employees realize that they can’t eat private company stock. By gobbling up Unicorns into a SPAC, the idea is that the entity will enable their management to avoid all of the headaches and distractions of the IPO process, and become public in a blink through a reverse merger.
Reverse mergers as a vehicle for going public don’t have the greatest track record – but most of the companies that have gone down that path weren’t in a position to attract the kind of attention from market participants that a hot tech property might. So, who knows? It might just be crazy enough to work.
We have posted the transcript for our popular webcast – “Non-GAAP Disclosures: Corp Fin Speaks” – featuring Mark Kronforst, the Chief Accountant of the SEC’s Division of Corporation Finance and Dave Lynn of TheCorporateCounsel.net and Jenner & Block…
Private Liquidity Programs: Key Considerations
We’ve previously blogged about the growth in liquidity programs for private companies electing to defer IPOs. PwC has pulled together this “White Paper” addressing key considerations for CEOs and CFOs of companies considering liquidity programs. Here’s an excerpt from the intro:
The rapidly growing nature of these secondary markets has led to many sellers and an increasing array of alternatives for those sellers to achieve liquidity. Despite being an established market, the information available to buyers and sellers is limited when compared to the market for publicly-traded stock and therefore the market is characterized by significant opacity as compared to public exchanges where US federal securities laws, disclosure requirements and investor rights are well understood.
Private companies understand the steps and potential impact of issuing equity to investors in a primary sale either privately or publicly as these transactions are customary and well-known (i.e., in a private preferred stock financing or an IPO). Sales of shares in a secondary market, on the other hand, introduce unique challenges that are not well understood. This publication outlines certain valuation, accounting, tax, regulatory, legal, and human resources related considerations that should be carefully considered by private companies whose shares are sold in a secondary market.
Human Capital Management Disclosure: The Next Big Thing?
In this 10-minute podcast, UAW Retiree Medical Benefits Trust’s Cambria Allen discusses the “Human Capital Management Coalition” – which is led by the UAW Retiree Medical Benefits Trust – and the Coalition’s recent petition for rulemaking to the SEC, including:
1. What is the “Human Capital Management Coalition”? And what is “human capital management disclosure”?
2. Why did those interested in this topic decide to submit a petition for rulemaking to the SEC (as opposed to other routes)?
3. What are the main goals of the petition?
4. Any surprises so far since submitting the petition?
5. What can folks do who want to support the petition?
Last week, Corp Fin tweaked a number of the Securities Act Rules CDIs to reflect the amendments to Rules 147 & 504, the repeal of Rule 505, & to make non-substantive changes that correct outdated references. It also gave the axe to several Reg D CDIs that do not directly relate to the SEC’s current rules.
Here’s the tally of CDIs that were substantively updated or withdrawn:
Section 257. Rules 503 and 503T– Filing of Notice of Sales
– CDI 257.08
Section 258. Rule 504 — Exemption for Limited Offerings and Sales of Securities Not Exceeding $5,000,000
– CDI 258.03
– CDI 258.04 (withdrawn)
– CDI 258.05
– CDI 258.06
Section 659. Rule 505 – Exemption for Limited Offers and Sales of Securities Not Exceeding $5,000,000
– CDI 659.01 (withdrawn)
Corp Fin also made non-substantive changes to 22 Securities Act Rules CDIs. These CDIs don’t have updated dates – but are now marked by an asterisk (*) to indicate that they’ve been modified.
Check out this blog from Cydney Posner for more details on the CDIs with substantive changes.
Transcript: “Secrets of the Corporate Secretary Department”
We have posted the transcript for our popular webcast: “Secrets of the Corporate Secretary Department.”
Tomorrow’s Webcast: “Cybersecurity Due Diligence in M&A”
Tune in tomorrow for the DealLawyers.com webcast – “Cybersecurity Due Diligence in M&A” – to hear Andrews Kurth Kenyon’s Jeff Dodd, Lowenstein Sandler’s Mary Hildebrand and Cooley’s Andy Lustig discuss how to approach cybersecurity due diligence, and how to address and mitigate cybersecurity risks in M&A transactions.
This guidance is huge. For example, I am reading the interpretive guidance on sampling – and it appears to be far more expansive than what I’ve heard consultants have been recommending. In fact, I immediately lengthened the time allotted for the “sampling” panel during our upcoming comprehensive “Pay Ratio & Proxy Disclosure Conference” given that the standard for using sampling is now basically “not unreasonable & not in bad faith.” Over on CompensationStandards.com, Mark Borges has blogged his initial analysis.
I think a lot more folks are going to be using sampling than before. And you will want to hear how to do it. Our “Pay Ratio” conference is just three weeks away!
So the interpretive release lays out the SEC’s views on the use of reasonable estimates, assumptions and methodologies – as well as the statistical sampling permitted by the rule. It also clarifies that companies may use appropriate existing internal records in determining whether to include non-US employees & in identifying the median employee – and provides guidance as to when widely-recognized tests may be used to determine whether workers are employees.
Corp Fin’s guidance on calculating pay ratios supplements the interpretive release. Topics addressed include:
– Ability of companies to combine the use of reasonable estimates with statistical sampling or other reasonable methodologies
– Examples of various sampling methods & the permissibility of using a combination of sampling methods
– Examples of situations where registrants may use reasonable estimates
– Examples of other reasonable methodologies & the permissibility of using a combination of reasonable methodologies
– Hypothetical examples of the use of reasonable estimates, statistical sampling & other reasonable methods
Finally, Corp Fin also updated the Reg S-K CDIs addressing pay ratio to reflect changes wrought by the new interpretive release:
– Revised CDI 128C.01 was updated to add a reference to the new interpretive release – which clarifies that CACMs can be formulated with internal records that reasonably reflect annual compensation, even if the records don’t include every pay element, such as widely distributed equity
– New CDI 128C.06 addressing the permissibility of referring to a pay ratio as an “estimate” was added
– Withdrawn CDI 128C.05, which addressed classification of a worker as an independent contractor v. an employee was withdrawn
Next Wednesday’s Webcast: “Pay Ratio Workshop – What You (Truly Really) Need to Do Now”
– Mark Borges, Principal, Compensia
– Ron Mueller, Partner, Gibson Dunn
– Dave Thomas, Partner, Wilson Sonsini
– Amy Wood, Partner, Cooley
Register Now: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.
– Broc Romanek
Last night, SEC Chair Jay Clayton issued a statement on cybersecurity disclosing a 2016 hack of the SEC’s Edgar system. Here’s an excerpt:
In August 2017, the Commission learned that an incident previously detected in 2016 may have provided the basis for illicit gain through trading. Specifically, a software vulnerability in the test filing component of our EDGAR system, which was patched promptly after discovery, was exploited and resulted in access to nonpublic information. We believe the intrusion did not result in unauthorized access to personally identifiable information, jeopardize the operations of the Commission, or result in systemic risk. Our investigation of this matter is ongoing, however, and we are coordinating with appropriate authorities.
The statement did not indicate how long hackers may have had access to nonpublic information. A few years back, Broc blogged about “When Will the SEC’s EDGAR Get Hacked? (Or Has It Already?)” – and noted that if Edgar was ever hacked, the SEC hopefully would let us know.
Edgar’s test filing system represents an attractive target for hackers. Test filings are routinely made by public companies in order to verify that the system will accept a live filing of their documents – but are not publicly available. An intruder able to access those materials would have an advance look at SEC filings in essentially final form.
A July 2017 GAO report on the SEC’s information security practices said that the agency had improved the security controls over its key financial systems. However, the report also noted that the SEC had not fully implemented 11 recommendations from a 2015 GAO audit. These recommendations included “consistently protecting its network boundaries from possible intrusions, identifying and authenticating users, authorizing access to resources, auditing and monitoring actions taken on its systems and network, or encrypting sensitive information while in transmission.”
Cybersecurity is a high priority item for the SEC, and this event – along with the Equifax fiasco – is likely to only increase the emphasis on cyber issues. So it’s worth reading Jay Clayton’s statement in its entirety. The disclosure of the intrusion was part of a much broader statement addressing the SEC’s efforts on cybersecurity – both internally, and in its regulatory & enforcement programs. Doug Chia at “The Conference Board” has blogged some thoughts on the implications of the hack – and on the SEC’s disclosure about it.
Governance: Want Less Litigation? Hire a Lawyer as CEO
This “Harvard Business Review” article says that if boards of companies operating in high-risk environments want to reduce litigation & manage it better, they should make their next CEO a lawyer:
We found that lawyer CEOs were not only associated with less litigation but, conditional on experiencing litigation, were also associated with better management of litigation. So companies run by lawyers, if sued, spent less on litigation and did better — they settled less often when sued and lost less often when cases went to court.
Before you dust off your resume & throw your hat in the ring for the next CEO opening, it turns out there’s a reason that lawyers represent less than one-tenth of S&P 1500 CEOs:
We found that CEOs with legal training were associated with higher firm value, but only in a subset of firms, specifically, in high-growth firms and firms with large amounts of litigation. Outside of this setting, however, the effect of CEOs with legal training on firm value was negative. So companies in, say, the pharmaceuticals and airlines industries performed better when run by lawyer CEOs, all else being equal, while companies in, say, printing and publishing performed worse.
The authors speculate that the difference has to do with lawyers’ risk averse nature – it’s a positive in companies that face a lot of regulatory & litigation risk, but a negative in other settings. So, don’t quit your day job just yet.
Financial Reporting: Accounting for Disasters
This pales in comparison to the devastating human toll that our nation and our neighbors have experienced in the unprecedented series of hurricanes, wildfires & earthquakes that we’ve seen over the past several weeks – but for public companies, there’s also a financial reckoning that has to be made.
This Deloitte memo highlights the financial reporting implications of disasters for entities reporting under U.S. GAAP – which can include accounting for asset impairments, income statement classification of losses, insurance recoveries, and additional exposure to environmental remediation liabilities.
According to this Bloomberg article, a lot more companies are disclosing shareholder activism as a risk factor in their SEC filings. Apparently, 65 companies cited “shareholder activism” as a risk factor in SEC filings during the first six months of 2017, more than five times the number that cited activism during the same period three years ago.
Why is risk factor disclosure on the rise? The article suggests that companies are becoming increasingly aware of the prevalence of activism and the potential downside of being a target. The market cap of the companies including activism risk factors ranges from $45 million to $27 billion – although most are small caps & only a few are at the upper end of the market cap range.
The article identifies a number of companies that had activism risk factors in their recent 10-K filings – including:
Another Bloomberg article says that corporate risk factor disclosure about cyber threats is also growing – or maybe “exploding” is a better word:
More public companies described “cybersecurity” as a risk in their financial disclosures in the first half of 2017 than in all of 2016, suggesting that board and C-suite fears over data breaches may be escalating. A Bloomberg BNA analysis found 436 companies cited “cybersecurity” as a risk factor in their Securities and Exchange Commission periodic filings in the first six months of 2017, compared to 403 companies in 2016 and 305 companies in 2015.
There are plenty of sample cybersecurity risk factors to look at – and they run the gamut from boilerplate to highly specific disclosure. Here are a few that I thought were fairly robust:
In addition to activism & cybersecurity, as we’ve blogged before, President Trump is turning up in a lot of “risk factors” sections of SEC filings. In fact, the President is named so frequently in filings that “there’s an app for that” – the “Trump Tracker.”
Here’s an excerpt from this Sentieo blog introducing its Trump Tracker tool:
Today, we are excited to introduce the Trump Tracker. It’s a bot that constantly scans new public financial documents for mentions of President Trump. These documents include all SEC filings, conference call transcripts, investor presentations, press releases, and more. The bot instantly surfaces new mentions of Trump as soon as they’re published, while intelligent queries automatically sort them into topics like Obamacare, Mexico, and NAFTA.
Anyone interested in following the administration’s impact on public companies can engage with the Trump Tracker by checking the dedicated website, following the @trumptrackerbot Twitter account, or signing up for a daily email alert on the site.
Last week, Vanguard released its 2017 proxy voting report – along with an open letter to public company boards from CEO Bill McNabb. The letter stresses Vanguard’s long-term perspective, and sets forth its governance priorities. Meanwhile, the proxy voting report makes it clear that when it comes to asserting those priorities, the world’s largest index fund complex is more willing to throw its weight around.
The message that Bill McNabb delivered in his letter is an increasingly familiar one – it’s time for companies to improve board gender diversity & climate change disclosure. The letter also stressed the importance of engagement:
Timely and substantive dialogue with companies is core to our investment stewardship approach. We see engagement as mutually beneficial: We convey Vanguard’s views and we hear companies’ perspectives, which adds context to our analysis.
Our funds’ votes on ballot measures – 171,000 discrete items in the past year alone — are an outcome of this process, not the starting point. As we analyze ballot items, particularly controversial ones, we often invite direct and open-ended dialogue with the company. We seek management’s and the board’s perspectives on the issues at hand, and we evaluate them against our principles and leading practices.
To understand the full picture, we often also engage with other investors, including activists and shareholder proponents. Our goal is that a fund’s ultimate voting decision does not come as a surprise. Our ability to make informed decisions depends on maintaining an ongoing exchange of ideas in a setting in which we can cover the intention and strategy behind the issues.
The proxy voting report demonstrates that Vanguard continues to ramp up its engagement efforts. In 2017, it engaged with 954 companies – a nearly 40% increase over the 685 companies that it engaged with in 2015.
Moreover, the report shows that Vanguard is willing to vote against management when companies aren’t responsive to its engagement efforts. For example, Vanguard voted for a shareholder resolution calling for a gender diversity policy at a Canadian company because it concluded that the company wasn’t responsive to its concerns about diversity. For the first time, it also supported several climate change proposals – including one at ExxonMobil.
But Vanguard isn’t just sending a message to public company boards – as this Wachtell memo notes, its actions send an equally strong one to activists calling for index funds to relinquish their vote in contested situations:
With respect to activist and academic-sponsored attacks on the major index funds’ ability to participate in contested situations, Vanguard’s commitment to prioritizing responsible and long-term oriented investment stewardship is clear, having refused to outsource voting decisions to proxy advisory firms, doubled their internal team’s size since 2015, developed an intensive sector-based approach to analysis, engagement and voting and accessed the investment talent across Vanguard’s Investment Management Group and the 30 other investment firms managing Vanguard’s active portfolios.
Vanguard has been criticized for not being as active when it comes to governance issues as its peers BlackRock & State Street, but after some prodding from its own investors, it appears that the once slumbering giant is now wide awake.
New SEC Commissioner Nominee: Robert Jackson
On Friday, President Trump nominated Columbia law prof. Robert Jackson to fill one of the two remaining vacancies on the SEC. Here’s the White House’s announcement of Jackson’s nomination. Jackson would fill a Democratic slot on the SEC & would definitely make the meetings more interesting – he’s a leading advocate of a rule mandating disclosure of corporate political spending. In the past, Jackson’s also crossed swords with the SEC over the agency’s FOIA compliance.
In addition to the nomination of a new Commissioner, the SEC recently announced a number of appointments to Chair Jay Clayton’s executive staff.
Our September Eminders is Posted!
We’ve posted the September issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
A few days ago, the United Kingdom proposed specific reforms as reflected in this 68-page response to its “Green Paper.” The reforms proposed relate to three specific areas: Executive pay, strengthening the employee, customer and supplier voice and corporate governance in large privately held businesses.
The proposal waters down some of the more controversial aspects of the Green Paper (eg. binding say-on-pay votes) – but the remaining proposals are quite astounding. Here’s the ones relating to executive pay:
1. Require listed companies to report pay-ratio information annually (the ratio of CEO pay to the average pay of the company’s UK workforce), including a narrative explaining changes to the ratio from year to year and “setting the ratio in the context of pay and conditions across the wider workforce.”
2. Provide a “clearer explanation in remuneration policies of a range of potential outcomes from complex, share-based incentive schemes.”
3. Provide specific steps listed companies should take when there is significant shareholder opposition to executive pay policies and awards (which might include, for example, provisions for companies to respond publicly to dissent within a certain time period, or to verify that dissent has been sufficiently addressed by putting the company’s existing or revised remuneration policy to a shareholder vote at the next annual meeting).
4. Increase the responsibility of comp committees for oversight of pay and incentives across the company and require these committees “to engage with the wider workforce to explain how executive remuneration aligns with wider company pay policy (using pay ratios to help explain the approach where appropriate).”
5. Extend the recommended vesting & post-vesting holding periods for executive equity awards from three to five years to encourage a longer term focus.
6. Invite the Investment Association to maintain a public register of listed companies that receive shareholder opposition of 20% or more on say on pay, along with “a record of what these companies say they are doing to address shareholder concerns.”
In 2015 the NYSE amended its policy with respect to material news releases. One of the amendments was to include advisory text in Section 202.06 of the Listed Companies Manual requesting that listed companies intending to release material news after the close of trading on the Exchange wait until the earlier of the publication of their security’s official closing price on the Exchange or fifteen minutes after the scheduled closing time on the Exchange. The reason for the change was that securities trade in other markets after the NYSE closes, and investor confusion arises if the trades in other markets are at prices different than NYSE trades being completed at the NYSE closing price.
Notwithstanding the addition of the advisory text, the NYSE has continued to experience situations where material news released shortly after 4:00 p.m. has caused significant investor confusion. Accordingly, the NYSE now proposes to amend Section 202.06 to prohibit listed companies from issuing material news after the official closing time for the NYSE’s trading session until the earlier of publication of such company’s official closing price on the Exchange or five minutes after the official closing time. The NYSE believes that designated market makers are able to complete the closing auctions for the securities assigned to the market maker in almost all cases within five minutes of the NYSE’s official closing time.
In the proposed rule, the NYSE continues to recommend that companies that intend to issue material news after the NYSE’s official closing time delay doing so until the earlier of publication of such company’s official closing price on the NYSE or fifteen minutes after the Exchange’s official closing time. The foregoing change is in addition to changes to NYSE rules related to dividend announcements, which the NYSE is currently seeking to delay to facilitate implementation of the new rules.
Happy Labor Day! “Office Space” Style
Enjoy the long weekend – assuming you have your TPS Reports done. If not, I think Lumberg wants to see you.
Here’s the results from our recent survey on board approval of the 10-K:
1. When it comes to approving the filing of the Form 10-K with the SEC, our company’s full board:
– Convenes telephonically to approve it – 48%
– Relies on the audit committee to convene telephonically to approve it – 48%
– Management already has the board’s power of attorney to sign the 10-K, so there’s no audit committee or board meeting to approve it – 5%
2. When our directors are given a chance to comment on a draft of the 10-K, we typically receive back:
– No substantive questions or comments – 21%
– 1-2 substantive questions or comments – 43%
– 3-5 substantive questions or comments – 21%
– More than 5 substantive questions or comments – 15%
Dual-Class Structures: Does the Market Already Have a Fix?
Liz recently blogged about the decision of major indices to exclude “dual-class” companies that offer minimal voting rights to public shareholders. The debate about dual-class companies continues to rage – but this recent study suggests that the market may already have a solution, in the form of investors’ demand for a “risk premium” for these stocks. Here’s the abstract:
Critics advocate eliminating dual class shares. We find that founding families control 89% of dual class firms, potentially confounding economic inferences regarding limited voting shares. To identify the impact of dual class structures on outside shareholders, we examine stock price returns; finding that dual-class family firms earn excess returns of 350 basis points more per year than the benchmark.
Institutional owners garner a disproportionate fraction of these returns by holding over 97% of their floated shares. Overall, we show that investors demand a risk premium for holding dual-class family firms, suggesting a market-driven resolution to concerns about limited voting shares.
If the study’s right, these above-market returns may go a long way to explaining why – despite their harrumphing – institutions continue to throw money into these stocks.
Meanwhile, this LA Times article notes that tech companies are not likely to bow to S&P’s new dual-class rules…
Nasdaq to Dual-Class Companies: “We’ve Got Your Back”
The major indices may have “unfriended” dual-class companies like Snap, but this “Institutional Investor” article says that Nasdaq remains happy to provide a home for them. Here’s an excerpt:
Nelson Griggs, head of global listings at the Nasdaq Stock Market, said Nasdaq supports companies that want to go public with a dual-class structure, as long as investors know what they’re getting into. Companies often use multiple share classes – each with different voting rights – to help founders and CEOs maintain control or as a tool to fend off activists. Technology and media companies have been among the biggest users of multiple share classes.
“In the U.S., if companies disclose that they have multiple share classes, then investors can make a decision on whether they want to be a financial owner,” said Griggs. “We think it’s in the best interests of companies to have that option.”
With fewer companies going public, new listings are hard to come by – and companies with dual-class structures represent 10% of Nasdaq’s listings. That’s up from 2% a decade ago. You do the math.
When it comes to changing auditors, it looks like the best advice comes from “Macbeth” – “’twere well it were done quickly.” This Fredrikson & Byron blog flags a new study that says timing matters when it comes to a decision to change auditors – and sooner is a lot better than later:
Companies thinking about changing their auditors should do so before the end of their second fiscal quarter, according to a recent study by researchers at the University of Notre Dame and Ohio University. Although there are legitimate reasons to change auditors having nothing to do with company malfeasance or auditor malpractice, turnover is rare so it can raise questions. In an interview with CFO Magazine, the study’s lead author says that a company announcing the dismissal of its auditor after the second fiscal quarter risks being “lumped in with the bad apples” that want to end the auditor’s engagement to cover up “nefarious” doings.
The study found that companies that dismiss auditors after the 2nd fiscal quarter have “markedly higher rates of future restatements, material weaknesses and delistings” compared to firms that make the change shortly after filing the prior year’s 10-K.
Pre-IPO Companies: Private Liquidity Programs
One reason that some promising companies are electing to defer IPOs may be the growth in private liquidity alternatives for their shareholders. This MoFo blog discusses the Nasdaq Private Market’s recent report on private liquidity programs conducted through its trading platform during the first half of 2017. Here’s an excerpt:
Nasdaq Private Market reports increased activity in private company liquidity programs. Companies that are choosing to stay private longer are using structured and controlled liquidity as a recruitment and retention tool, according to the Nasdaq report. In the first half of 2017, the Nasdaq Private Market Platform had 19 liquidity programs, with a total program volume of $733 million and 1,765 program participants.
62% of the programs were share buybacks and the remaining 38% of the programs were structured as third-party tender offers. These programs had an average size of $40 million. The report notes that most of the 19 programs were employee-focused, where 84% of eligible sellers were current and former employees.
While Nasdaq says that private liquidity programs are appealing to a broader range of companies, most of the companies that have implemented them this year are “unicorns” – with a median valuation of $1.4 billion.
Dividends: NYSE Delays New Timing Requirements
Following up on something we blogged about a few weeks ago, here’s news from Ning Chiu’s blog:
The NYSE has asked the SEC to delay the effectiveness of its recently approved rule requiring listed companies to provide notice to the Exchange at least 10 minutes before making a public announcement about a dividend or stock distribution.
On August 14, when the rule change was approved by the SEC that would require listed companies to provide the Exchange with advance notice, including outside of the hours in which the Exchange’s immediate release policy operates, many assumed that the rule was immediately effective since nothing in the rule filing indicated otherwise.
In its proposal to the SEC, NYSE states that it is asking for the delay to provide listed companies with additional time to prepare and for the Exchange’s new technology systems to provide the necessary support to Exchange staff in reviewing notifications. The Exchange indicates that it will provide reasonable advance notice of the new implementation date to listed companies by emailing a notice to them that will also be posted on nyse.com, and that the new implementation date will be no later than February 1, 2018.
Until then, the text of Rule 204.12 continues to state that notice should be given as soon as possible after declaration of the dividend or stock distribution and in any event, no later than simultaneously with the announcement to the news media.
Enjoy the long weekend – assuming you have your TPS Reports done. If not, I think Lumberg wants to see you.