Yesterday, the Senate held a confirmation hearing on Jay Clayton’s nomination to serve as SEC Chair. In his opening statement, Jay touched on some of his priorities – and improving the competitiveness of America’s capital markets is one of them:
For over 70 years, the U.S. capital markets have been the envy of the world. Our markets have allowed our businesses to grow and create jobs. Our markets have provided a broad cross-section of America the opportunity to invest in that growth, including through pension funds and other retirement assets. In recent years, our markets have faced growing competition from abroad. U.S. – listed IPOs by non-U.S. companies have slowed dramatically. More significantly, it is clear that our public capital markets are less attractive to business than in the past. As a result, investment opportunities for Main Street investors are more limited. Here, I see meaningful room for improvement.
He also expressed his commitment to “rooting out any fraud and shady practices in our financial system” – and pledged to show no favoritism to anyone.
This WSJ article on the hearing notes that Jay faced tough questions from Democratic Senators on potential conflicts of interest arising from his years in the trenches as a deal lawyer:
Mr. Clayton’s background as a top Wall Street lawyer at Sullivan & Cromwell was praised by many Republicans but attracted sharp questions from Sen. Elizabeth Warren and other Democrats. Ms. Warren said ethics restrictions would force Mr. Clayton to recuse himself on enforcement matters related to former clients, such as Goldman Sachs Group Inc. and Barclays PLC, as well as companies represented by his firm before the SEC.
In an ethics agreement with the SEC, Mr. Clayton wrote that he couldn’t vote for one year on matters that directly affect his former clients or involve Sullivan & Cromwell.
Ms. Warren said that could lead to a deadlocked commission on certain cases if the remaining commissioners are split along political lines. “Then major enforcement actions don’t go forward and serious wrongdoing may go unpunished,” she said.
Mr. Clayton denied that his recusal from a case would necessarily lead to a deadlocked commission and said most enforcement matters are decided unanimously by the commission.
Recusal issues could be important, given the existing vacancies at the SEC. As Broc blogged earlier this month, President Obama’s two nominees are unlikely to be re-nominated – and that could leave the SEC with only 3 Commissioners for an indefinite period.
Study: Governance & Nominating Committees
This EY study reviewed Fortune 100 governance & nominating committee charters and governance guidelines to see how these committees define their responsibilities & carry out their role in board governance, board effectiveness, director selection and board succession planning.
Here’s an excerpt on the study’s findings about the committee’s role in board governance:
The role and profile of the nominating and governance committee have expanded in recent years with the continuing rise in corporate-investor engagement and growing awareness of the need to address governance-related risks.
– Governance policies and practices. The committee is explicitly responsible for the board’s and company’s governance guidelines and policies (100% of reviewed committees). In some cases, committee responsibilities may extend to maintaining the company charter, bylaws and policies on ethics and compliance matters.
– Shareholder proposals and engagement. 48% reference oversight of stakeholder focus areas, such as political spending and environmental sustainability.
– Risk management. 15% are specifically charged with oversight of the company’s reputation, as well as governance and nonfinancial risks, or have responsibilities regarding enterprise management risk, such as reviewing the company’s ERM process, business continuity plans, and strategy for workplace and product safety.
Tips for Managing Your “Quiet Period”
This Westwicke Partners blog provides tips to companies for effectively managing the quarterly “quiet period” – the period prior to the release of financial statements when public companies generally refrain from communicating with investors & analysts. Here’s an excerpt addressing the duration of the quiet period:
Be consistent about the duration. If you use a two-week quiet period during one quarter, try to stick to the same time frame in subsequent periods. It’s a lot easier to defend management silence in your conversations with investors if you can point to a history of similar quiet periods. Why? Investors may try to read into quiet periods of differing lengths and get nervous if the period is seemingly longer than usual. Don’t let your silence create a kind of static that outsiders perceive as meaningful on the downside.
Other topics addressed include the need to keep the IR team fully-informed about quiet periods to avoid inadvertent slip-ups, and managing those communications that must take place during the quiet period. Also see the oodles of resources in our “Window Period Procedures” Practice Area…
Yesterday, the SEC adopted an amendment to Rule 15c6-1(a) mandating a T+2 settlement cycle. Here’s the 146-page adopting release. The amendment prohibits a broker-dealer from effecting – or entering – into a contract that provides for payment & delivery of securities later than 2 business days after the trade date – unless otherwise expressly agreed to by the parties at the time of the trade.
The settlement cycle for firm commitment underwritings is unaffected by the amendment.
By the way, the blog’s title isn’t a quote from the latest installment of the “Terminator” franchise – it comes from Acting Chair Mike Piwowar’s statement at the open Commission meeting. Commissioner Stein’s statement wasn’t as colorful, but was equally supportive.
As I previously blogged, the SEC approved NYSE & Nasdaq rules providing for a T+2 settlement cycle last month. Brokers will be required to comply with the new settlement cycle rules beginning on September 5th.
IPOs: Reg A+ Issuer Seeks NYSE MKT Listing
This blog from Steve Quinlivan notes that Myomo, a medical device company, has filed an offering statement with the SEC for a Reg A+ deal in which it discloses its intention to list on the NYSE MKT – the NYSE’s small cap market & the answer to the question “whatever became of the AMEX?”
This excerpt from the offering statement summarizes the hoops that a Reg A+ issuer needs to jump through to obtain an exchange listing:
We intend to apply to list our Common Stock on the NYSE MKT under the symbol “MYO.” Our Common Stock will not commence trading on the NYSE MKT until all of the following conditions are met: (i) the Offering is completed; and (ii) we have filed a post-qualification amendment to the Offering Statement and a registration statement on Form 8-A (“Form 8-A”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and such post-qualification amendment is qualified by the SEC and the Form 8-A has become effective.
Pursuant to applicable rules under Regulation A, the Form 8-A will not become effective until the SEC qualifies the post-qualification amendment. We intend to file the post-qualification amendment and request its qualification immediately prior to the termination of the Offering in order that the Form 8-A may become effective as soon as practicable. Even if we meet the minimum requirements for listing on the NYSE MKT, we may wait before terminating the offering and commencing the trading of our Common Stock on the NYSE MKT in order to raise additional proceeds. As a result, you may experience a delay between the closing of your purchase of shares of our Common Stock and the commencement of exchange trading of our Common Stock on the NYSE MKT.
The listing would be the NYSE’s first for a Reg A+ offering, but Myomo wouldn’t be the first Reg A+ issuer to be welcomed by an exchange. That honor belongs to Energy Hunter Resources, which was approved for listing on Nasdaq in December 2016. This article from TheStreet.com suggests more listings are on the way.
Of course, it’s one thing to get your shares approved for listing – it’s quite another to get your offering done, and these companies are still working on that. It’s still pretty hard sledding out there for a small cap.
Transcript: “Activist Profiles & Playbooks”
We have posted the transcript of our recent DealLawyers.com webcast: “Activist Profiles & Playbooks.”
This blog from “The Conference Board” reports the results of a recent study on the impact of gender diversity on boards. Here’s a summary of the conclusions:
Among the findings in the report, the authors concluded that the real value of adding women to boards came not from their gender per se, but from the fact that they were more likely to be outsiders. They were also more likely to be foreigners, have expertise in more diverse business issues and functions than their male counterparts, and to have risen through the ranks outside the traditional elite networks. The authors conclude that bringing these different perspectives can substantively improve the collective decision-making of a board.
The conclusions are based primarily on interviews with directors & stakeholders of French companies conducted after France instituted a gender quota system for public company boards.
Gender Quotas on Boards?
Did that last sentence catch you off-guard? Me too – but I’ve recently learned that board gender quotas are actually pretty common in Europe. These quotas have been implemented through legal mandates (Germany, France, Belgium, Iceland, & Italy) or through the establishment of voluntary goals (Austria, Finland, the Netherlands, Spain, Sweden, & the UK). The quotas range from 25 to 40% of the board.
This Harvard Business Review article reports that quotas are popular among directors in countries where they’ve been implemented, but despised among directors in countries where they haven’t. That most definitely includes the good ol’ US of A:
One male director said that, with regards to quotas; “I think it is dumb and destructive — demeaning to people who are only on the board because they are in a specific category.” Female directors also expressed doubts. “No one wants to be a second-class citizen,” said one, explaining that she would not want to be on a board that had been mandated to have a female member. “Quotas are just anathema in the U.S. — I don’t think we will ever see quotas here,” said another.
The willingness of European countries to force the issue through quotas has left the US as a laggard when it comes to the representation of women on boards. The article points out that women comprise only 18.7% of board members at S&P 500 companies. This figure hasn’t moved much in the last decade, and it pales in comparison to the figures in most of Europe.
“Just Vote No”: State Street’s Alternative to Quotas
Many people will likely agree with the sentiments expressed by US directors of both genders – there’s something about the word “quota” that’s deeply offensive to American ears. So what’s the alternative for getting more women on corporate boards? State Street Global Advisors has an idea of its own – it’s giving 3,500 US public companies a year to get their act together and make tangible progress on gender diversity at the board level.
State Street’s initiative includes prescriptive guidance intended to “drive greater board gender diversity through active dialogue and engagement with company and board leadership.” It’s also giving companies a potentially significant downside:
In the event that a company fails to take action to increase the number of women on its board, SSGA will use proxy voting power to influence change – voting against the chair of the board’s nominating and/or governance committee if necessary.
The 3,500 companies in which State Street invests represent $30 trillion in market value. Coupled with BlackRock’s decision to make gender diversity an engagement priority, this is an initiative that could well move the needle.
This Stanford study finds little inclination toward leniency among the American public or corporate boards for CEOs who engage in unethical or immoral behavior. As far as public sentiment goes, there’s strong support for throwing the book at these folks:
When presented with a series of generic scenario that are based on real situations reported in the press in which CEOs engage in potentially unethical or immoral behavior, many Americans are willing to dole out severe punishment. 45% believe that CEOs should be fired or worse (including sent to prison) for potentially unethical transgressions involving employees, customers, the board of directors, and shareholders. 25% believe that CEOs should not be fired but instead should lose compensation (in the form of reduced bonus or salary), 25% believe they should be reprimanded by the board, whereas 15% believe they should receive no punishment whatsoever.
So, the American public doesn’t have much patience with wayward CEOs. As it happens, corporate boards have less:
A comparison sample involving 38 real-life examples of CEOs who engage in behavior or actions that are highly analogous to the scenarios presented in this study shows a higher rate of termination than the public demands. Over half (58%) of these real-life scenarios resulted in the eventual termination of the CEO. In 40% of these cases, the board docked the CEO’s compensation through the elimination of bonus or forced forfeiture of unvested equity awards.
The study found that boards are most severe in punishing CEOs for financial misdeeds – in these situations, the CEO was terminated 100 percent of the time.
OMB Speaks on “2-for-1 Regulatory Cuts” Order
This blog from Steve Quinlivan notes that the OMB has issued guidance on President Trump’s executive order mandating two regulatory cuts for each new regulation adopted. In addition to confirming that the order doesn’t apply to the SEC & other “independent” agencies, the guidance addresses the mechanics by which agencies are to implement it. Here’s an excerpt:
In general, the guidance notes that executive departments and agencies (“agencies”) may comply with the EO by issuing two “deregulatory” actions for each new significant regulatory action that imposes costs. The savings of the two deregulatory actions are to fully offset the costs of the new significant regulatory action.
In addition, beginning immediately, agencies planning to issue one or more significant regulatory action on or before September 30, 2017, should for each such significant regulatory action:
– A reasonable period of time before the agency issues that action, identify two existing regulatory actions the agency plans to eliminate or propose for elimination on or before September 30, 2017; and
– Fully offset the total incremental cost of such new significant regulatory action as of September 30, 2017.
Sounds like Yul Brynner in “The Ten Commandments” – “So it shall be written. So it shall be done.”
What Motivates Insider Traders?
Here’s an interesting article from Andrew Snyder about what motivates insider traders – besides greed. Snyder notes that the infamous spy John Walker compared his espionage to insider trading, and suggests that the motivations for espionage & insider trading are similar. Here’s an excerpt :
Dr. David Charney, a Virginia-based psychiatrist and a consultant to the U.S. intelligence community, is an expert on the mind of the spy following his work for the defense of captured insider spies — most notably FBI moles, special agents Robert Hanssen and Earl Pitts.
In his white paper,“True Psychology of the Insider Spy”, Charney writes that most cases of insider spying originate from injuries to male pride and ego. Hence, he puts forward that the core psychology of the insider spy is an intolerable sense of personal failure as privately defined by that person.
Life’s adversities and major stressors (personal, professional, financial) pile on and become insurmountable for the potential insider spy during a decisive period usually in the six to 12 months before he crosses over the line into espionage. What’s pivotal, according to Charney, is how the potential insider spy manages the intolerable sense of personal failure.
Spanking brand new. By popular demand, this comprehensive “WKSI Handbook” covers the entire terrain, from communications issues, loss of WKSI status to waiver requests. This one is a real gem – 58 pages of practical guidance – and its posted in our “WKSIs” Practice Area.
Non-GAAP: Anticipating & Responding to SEC Comments
Like many of you, I’ve become pretty paranoid when I’m asked to review a client’s press release or presentation for compliance with Item 10(e) of S-K or Reg G. So, I thought this MoFo memo with practice points on anticipating & responding to Corp Fin Staff comments on non-GAAP information was a helpful resource. The memo is only 7 pages long, but it covers a lot of ground:
We look at common themes or areas of concern identified by the Staff in these comment letters, as well as responses given by registrants. We also highlight pronouncements by senior members of the Staff on the important “critical gatekeeper” role audit committee members play in ensuring credible and reliable financial reporting, including compliance with the Updated C&DIs. Finally, we look at industry initiatives aimed at improving the dialogue among management, audit committee members, external auditors and other stakeholders with respect to the use and disclosure of non-GAAP financial measures.
Silicon Valley: Innovative New Financing Technique – “Bank Loans”
This Bloomberg article discusses an innovative financing technique being tried out among tech start-ups. As VC investors pulled back somewhat during 2016, tech start-ups pioneered a new financing approach – borrowing money from a bank. Apparently, the process involves applying for a loan from a bank, which, if funded, requires the company to repay the principal amount of the loan, together with interest at a contractually prescribed rate. Personally, I’m skeptical that something like this will catch on.
Posted in our “Blockchain” Practice Area, this Cooley memo notes that this year’s proposed DGCL amendments would grant statutory authority for the use of “blockchain” or “distributed ledger” technology for the administration of corporate records. Last year, Broc blogged about a possible move by Delaware in this direction.
Blockchain technology allows for the creation of an “open ledger” shared among a network of participants, instead of relying on a single, central ledger. Information is stored in “blocks” that record all network transactions and permit the ownership and existence of assets to be independently validated. Advocates of the technology see great potential for using it to address the shortcomings of the current stock transfer and record-keeping process.
The amendments would allow a Delaware corporation to rely on the contents of a distributed ledger as its stock ledger. But the memo points out that the distributed ledger must meet several requirements:
As amended, Section 219(c) would define “stock ledger” to include “one or more records administered by or on behalf of the corporation.” As amended, Section 224 will provide that any records “administered by or on behalf of the corporation” may be “one or more distributed electronic networks or databases.”
Not just any ledger will suffice however. The amendments would require that the ledger:
– Be convertible into clearly legible paper form within a reasonable time;
– Be able to be used to prepare the list of stockholders specified in Section 219 as well as in Section 220, dealing with stockholder demands to inspect the corporations books and records;
– Records the information specified in Section 156 for consideration for partly paid shares, Section 159 for the transfer of shares for collateral security, Section 217(a) for pledged shares, and Section 218 for voting trusts; and
– Records transfers of stock as governed by Article 8 of the Delaware Uniform Commercial Code.
Board Trends: Directors are Older, But a Little More Diverse
This MoFo blog reviews a recent IRRC & ISS report on board refreshment trends at S&P 1500 companies. Here are some of the highlights:
– Board tenure continues to rise, with average and median director tenures of 8.7 years & 7 years, respectively.
– Directors are getting older, with the average age of directors reaching 62.5 years 2016 – was the highest recorded during the study period.
– More than 50% of S&P 1500 added at least one new director to their boards in 2015. From 2012 to 2016, the prevalence of “zero change” boards steadily decreased.
– From 2008 to 2016, women and persons aged 50 to 59 years old made up the majority of the incoming class of “new” directors.
– Women are gradually gaining ground. Among S&P companies the number of female directors increased from 11.9% (in 2008) to 17.8% (in 2016). In 2008, 33% of all boards were all male—however, this number dropped to 13.8% in 2016.
– Minority representation remains low, with minority directors occupying slightly more than 10% of all board seats. Larger cap companies typically had at least one minority director, but smaller cap companies in the group typically did not.
Transcript: “Hot Tabulation Issues for Your Annual Meeting”
We have posted the transcript for the recent webcast: “Hot Tabulation Issues for Your Annual Meeting.”
According to this Reuters article, the world’s largest asset manager has a message for boards – we expect you to act on climate change risk & gender diversity – and if you don’t, you may not be able to count on our vote.
BlackRock recently posted its 2017-2018 engagement priorities, and these issues are at the top of the list. When it comes to gender diversity, BlackRock’s clearly communicates its expectations – and the potential consequences for companies that disappoint them:
Over the coming year, we will engage companies to better understand their progress on improving gender balance in the boardroom. Diverse boards, including but not limited to diversity of expertise, experience, age, race and gender, make better decisions. If there is no progress within a reasonable time frame, we will hold nominating and/or governance committees accountable for an apparent lack of commitment to board effectiveness.
BlackRock’s message on climate change is equally forceful:
For directors of companies in sectors that are significantly exposed to climate risk, BlackRock expects the whole board to have demonstrable fluency in how climate risk affects the business and management’s approach to adapting and mitigating the risk. We have the same expectation of boards wherever a company faces a material, business-specific risk. We would assess this both through corporate disclosures and direct engagement with independent board members, if necessary.
BlackRock also makes a push for more and better disclosure of climate risks. As with board diversity, BlackRock indicates that it will use its vote to pressure companies who lag on addressing & disclosing climate change issues – and may vote against the re-election of certain directors it deems most responsible for board process and risk oversight.
BlackRock’s emphasis on climate change engagement responds to a now withdrawn shareholder proposal calling upon it to “walk the walk” on climate change. The proposal – which Broc blogged about last year – criticized BlackRock’s proxy voting record on climate change shareholder proposals & called on it to review its voting policies.
Activism: Has Chief Justice Strine Become “Wolfsbane”?
According to this CNBC article, Leo Strine – Delaware’s “secretly powerful” chief justice – says that hedge funds are “wolves” who damage ordinary investors. Here’s an excerpt:
Strine’s main argument is that the “current corporate governance system … gives the most voice and the most power to those whose perspectives and incentives are least aligned with that of ordinary Americans.”
That has allowed such investors to act and manipulate decisions by corporations that often are not in the long-term best interest of average shareholders, he said. He points to the “continuing creep toward direct stock market control of public corporations,” which he says bears no accountability toward human investors.
Strine’s ideas are laid out in an upcoming Yale Law Journal article, and are consistent with his prior writings expressing concern about whether financial intermediaries appropriately represent the interests of the people whose money they invest.
The Chief Justice’s hedge fund critics have responded to his most recent volley by saying that a justice should not be on the record “condemning a group of people who tend to litigate in his court and the lower Delaware courts,” and that he doesn’t offer much in terms of a fix for what he sees as a flawed system. None of these critics would agree to be quoted – “fearing retribution from Strine.”
Strine doesn’t condemn all hedge funds – his argument is a little more nuanced than that, and focuses on the need to take consider the impact of short-term activist strategies on the lives of the human beings institutions purport to represent. He also speaks well of an alternative approach that at least one leading hedge fund has already adopted:
Evidence suggests that hedge fund activism is perhaps most valuable when it involves a somewhat rougher form of relationship investing of the kind for which Warren Buffet is known. The activist may need to knock a bit loudly, but once let in, assumes the duties and economic consequences of becoming a genuine fiduciary with duties to other stockholders and of holding its position for a period of five to ten years, during which it is a constructive participant in helping the rest of the board and management improve a lagging company. Nelson Peltz and his Trian Fund Management might be thought of in this manner.
Chief Justice Strine’s an intimidating guy – but he’s hardly the first Delaware judge to use his position as a “bully pulpit.” Members of the Chancery Court have often written and spoken outside of the courtroom during their tenure – including current Vice Chancellor Travis Laster & former Chancellor William Allen. That’s just how they roll in Delaware. Other litigants don’t appear to have been too daunted by the scholarship of these “secretly powerful” figures.
This Perkins Coie memo reviews the 9th Circuit’s recent decision in Somers v. Digital Realty – which held held that employees who report securities law violations internally, but not to the SEC, are still protected as “whistleblowers” under Dodd-Frank. The ruling aligns the 9th Circuit with the 2nd Circuit and against the 5th Circuit – and the split may be heading for the Supreme Court.
This blog from Steve Quinlivan flags a recent Executive Order that could result in a major shake-up among federal agencies. Here’s an excerpt:
President Trump has issued an Executive Order directing the Director of the Office of Management and Budget (Director) to propose a plan to reorganize governmental functions and eliminate unnecessary agencies (as defined in section 551(1) of title 5, United States Code), components of agencies, and agency programs.
The Executive Order directs the head of each agency to submit to the Director a proposed plan to reorganize the agency, if appropriate, in order to improve the efficiency, effectiveness, and accountability of that agency. The submission must be made within 180 days of the date of the order.
The Executive Order contains a laundry list of factors to be considered by the Director in formulating a reorganization plan – including whether any agency functions would be better left to state or local governments or the private sector. It also requires the OMB’s director to invite public comment on improvements in the organization and functioning of the executive branch, and to consider those comments when formulating the proposed reorganization plan required by the order.
SEC Enforcement: Budget Cuts Looming
Last month, the House Financial Services Committee delivered a sharp rebuke to the SEC’s preliminary budget request – & signaled that the SEC’s recent priorities don’t align with those of House Republicans. Here’s an excerpt from the Committee’s memorandum addressing the request:
The Committee remains concerned that despite receiving significant annual appropriations increases, the SEC has neither met statutory deadlines for the issuance of rulemakings nor significantly improved its annual examination rates for investment advisers. Instead, the SEC has prioritized other objectives that are not central to its mission. For example, the SEC has expended thousands of man-hours and tens of millions of dollars in pursuit of Dodd-Frank mandates unrelated to the causes of the financial crisis while its capital formation objectives languish.
What “other objectives” that the agency has prioritized are likely to be on the budgetary chopping block? Bloomberg reports that the SEC’s Division of Enforcement is front & center, and notes a recently-imposed travel ban is likely the tip of the iceberg:
The measure is part of a series of cuts that the enforcement department – the division responsible for policing federal securities laws – is implementing as it braces for deep spending reductions in President Donald Trump’s budget proposal, according to two people with knowledge of the matter. In addition to the ban on non-essential travel, the department has also imposed a hiring freeze and curbed the use of outside contractors who assist SEC lawyers with cases.
Also, based on the Committee’s reaction to its request, the SEC can forget about a new HQ building.
Cybersecurity: Director Liability for Data Breaches
This Bass Berry memo reviews case law dealing with the potential liability of directors for data breaches. As this excerpt notes, there’s good news & bad news:
As a rising number of companies experience data breaches, director liability lawsuits have inevitably followed. Thus far, however, these suits have been uniformly unsuccessful, failing to move past the motion to dismiss stage. In 2016, despite a continued reluctance on the part of courts to permit these cases to move forward, plaintiffs persisted in pursuing such claims.
Despite their lack of success, the memo speculates that plaintiffs will continue to pursue similar derivative litigation in the hope that they can identify the right legal theory – or the right set of facts.
Snap launched its highly anticipated IPO earlier this month. The deal may be done, but questions about Snap’s no-vote stock remain. This blog from Jim Moloney & company at Gibson Dunn points out that Snap’s capital structure raises some important issues that have escaped most people’s attention. Here’s an excerpt:
The NYSE, NASDAQ, and other self-regulating organizations have rules requiring the submission of certain transactions to a shareholder vote, such as a change of control transactions or certain issuances of more than 19.9% of the Company’s outstanding shares. With most shareholders lacking any voting rights altogether, how Snap and other companies that may follow in their wake can cleanse such transactions via disinterested shareholder approval remains an open question.
Snap’s structure may also put it in a bit of a bind when it comes to the standard of review that courts will apply to major board decisions:
While the presence of non-voting shares does not itself preclude a review under the business judgment standard, it seems one practical effect of Snap’s voting structure is that it may serve to hamper the company’s ability to seek shareholder ratification from disinterested shareholders or other procedural safeguards (e.g., obtaining a “sterilized vote” – from a majority-of-the-minority) that could otherwise help shield the directors’ actions from heightened judicial scrutiny.
Snap: The Debate Over Voting Rights Continues
Meanwhile, the broader debate over Snap’s issuance of non-voting shares rages on. This Reuters article reports that Snap’s capital structure was a topic of discussion at a recent meeting of the SEC’s Investor Advisory Committee. In addition, the IAC has asked the agency to look into whether the non-voting status of Snap’s shares will reduce “public disclosure on executive pay or governance matters.” (Actually, anticipated pay & governance disclosures are spelled out in detail in the “Risk Factors” section of the prospectus – see page 40.)
On the heels of the IAC’s actions, the Council of Institutional Investors is reportedly lobbying the major indices to exclude Snap, because “they’re tapping public markets but giving public shareholders no say.”
I just have one simple question – “What did some of these institutions think they were buying?” Sure, the investment decisions & voting decisions at most institutions come from different sides of the house, but that only goes so far. The fact that many institutions were frothing at the mouth to buy non-voting shares from this company a couple of weeks ago really takes the wind out of the sails of their governance complaints.
Update: Several folks have pointed out that the CII is advocating on behalf of index funds. Those funds – unlike many of the institutions who bought in the deal – won’t have any choice but to buy the stock if Snap’s no-vote shares get included in a relevant index. That’s a fair point, and I shouldn’t have lumped them in with the others.
Conflict Minerals Case: Final Judgment’s on the Way
Cooley’s Cydney Posner blogs that it’s time to say “so long” to the conflict minerals case:
The parties to the conflict minerals case have filed in the D.C. District Court a “Joint Status Report,” which requests that the Court enter a final judgment in accordance with the decision of the Court of Appeals. As a result, it will be case closed for National Association of Manufacturers v. SEC, which decided that the requirement in the conflict minerals rule to disclose whether companies’ products were “not found to be DRC conflict free” violated companies’ First Amendment rights.
Once the final judgment is in hand, the rule’s fate rests with the SEC. Although the agency is reviewing the rule, for now, it’s business as usual in terms of annual conflict minerals disclosure requirements.
Here are the results from a recent survey on board minutes & auditors:
1. When it comes to board minutes, our company:
– Provides copies of board minutes to auditors upon request in electronic form only – 48%
– Provides copies of board minutes to auditors upon request in paper form only – 7%
– Provides copies of board minutes to auditors upon request in electronic and paper form – 13%
– Doesn’t provide copies of board minutes to auditors – but we do allow inspection of minutes onsite – 31%
– Doesn’t provide copies of board minutes to auditors – nor do we allow inspection of minutes onsite – 1%
2. Our auditors ask for copies or inspection of board minutes:
– Each quarter – 97%
– Once a year – 1%
– On irregular basis – 2%
– They never ask for board minutes – 0%
Revenue Recognition: New Disclosures Will Be a Challenge
Speaking of auditors, Deloitte provides this heads up on the disclosure requirements associated with the implementation of FASB’s new revenue recognition standard. For some companies, the new standard will require them to completely rework their income statements, but all companies will have to grapple with several new disclosure requirements:
The new standard will require entities to disclose much more information about revenue activities and related transactions than they do currently. Consequently, they will need time to implement and test appropriate processes, internal controls, and disclosure controls and procedures (including the identification of relevant personnel and information systems throughout the organization) for (1) data-gathering activities, (2) the identification of applicable disclosures on the basis of relevance and materiality, and (3) the preparation and review of disclosures, including the information that supports such disclosures.
Companies are going to need to be ready to address all of the new disclosure requirements in their first filing after implementation. Deloitte predicts that things could get messy:
The requirement to consider disclosures as part of preparing quarterly or year-end financial statements most likely will significantly affect an entity’s ability to meet reporting deadlines that are already tight (particularly for SEC filings). In addition, an entity may be unable to obtain the information it needs to satisfy the disclosure requirements (e.g., because of problems related to the collection, preparation, or review of data needed for disclosures), which could result in late filings and the identification of deficiencies in internal controls (e.g., material weaknesses).
New disclosure requirements that may prove challenging to implement include those relating to performance obligations, judgments & estimates, contract balances, and disaggregation of revenues.
The Time May be Ripe for a Debt Buyback
This O’Melveny memo says that the current climate of market uncertainty & the potential for interest rate increases makes this a good time for issuers to think about repurchasing some outstanding debt. This excerpt summarizes the available alternatives for debt buybacks:
Cash repurchases of debt generally can be structured as open-market or private repurchases, cash tender offers, or redemptions pursuant to the contractual terms of the governing indenture. These methods vary in terms of implementation time, cost, and the portion of a given debt series that can be repurchased at one time. The scale of repurchases and the structure used may also depend on restrictive covenants in the company’s indentures and other agreements, as well as the availability of operating losses to offset any taxable gains resulting from the repurchases.
The memo reviews the mechanics of each alternative & addresses the disclosure and tax aspects of a debt repurchase.
