Andrew Abramowitz has an interesting take on the potential for crowdfunding & new Regulation A to tilt the playing field in favor of issuers:
Traditional capital-raising involves spending an enormous amount of time with potential investors, explaining the business, responding to due diligence requests, etc. In addition, when there is an investor syndicate rather than just one investor, the different members of the syndicate may have different requests/concerns, so the process is like herding cats. In contrast, at least in theory, with crowdfunding and Regulation A, once the proper disclosure is prepared and posted for investor review, the investors make their choices, and if there’s enough interest, you just go ahead and close.
Of course, a potential crowdfunding investor can decide to ask detailed questions of the company and try to negotiate terms of the offering. However, the dynamic is different than the venture capital scenario if the questioning investor is proposing to invest, say, $1,000. The company may try to be responsive up to a point, but when the individual investments are in small increments, it’s easier for the company to maintain a take it or leave it attitude.
Time will tell whether there is enough investor interest for crowdfunding to be a workable alternative to traditional methods of fundraising. But if we get to a point where a company only needs to take a week or so to put together the necessary disclosure, rather than taking out a few months or more to negotiate with individual investors, crowdfunding could prove to be an attractive way to do things.
Speaking of crowdfunding’s potential to flip the script – check out VidAngel. This company reportedly raised over $6 million in the first part of its Reg A+ offering in just two days. It took a break to blue sky the deal in more states, reopened it to investors – and promptly raised another $4 million in three days. The deal’s done – but the entertaining video offering circular lives on!
Reg AB: Corp Fin Issues Guidance for ABS Issuers
Corp Fin recently issued 23-pages of guidance for asset-backed issuers to help them file on Edgar, which has undergone programming changes that relate to revised Regulation AB and new Exchange Act Rule 15Ga-2. Not gonna lie – I have no idea what anything I just wrote means, but anyway, God bless. . .
Joe Hall on Life as a Corporate Lawyer
Check out this 30-minute podcast with Joe Hall of Davis Polk in Manhattan, another born n’ bred big legal mind. With nearly 30 years of practice under his belt, Joe leads the corporate governance practice at Davis Polk – one of Broc’s favorite law firms – and has a wealth of capital markets experience, both on the issuer and the underwriter side.
Joe has left Davis Polk twice: once to go in-house for a few years and once to work for SEC Chair Bill Donaldson in DC, during the height of Sarbanes-Oxley rulemaking – but has always returned to what he feels is his true home, Davis Polk.
More recently, Joe has led his firm into the art of podcasting – launching the firm’s “Before the Board” podcast series. Check it out on iTunes & other platforms today!
This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
This blog from Covington & Burling’s Len Chazen argues that the migration of fixed income investors to dividend-paying common stocks during 2016 could result in these investors becoming an independent force to be reckoned with in shareholder activism. Here’s an excerpt:
Dividend-minded shareholders are a potential third force in the contest for influence between institutional investors who want the corporation to be managed to enhance long-term profitability, and shareholder activists who want the board to maximize the current price of the stock. As supporters of higher dividends these new shareholders are natural allies of the activists, but unlike the typical shareholder activist, they have a long term stake in the corporation and an interest in limiting stock buy backs and dividends to a level that does not impair the ability of the corporation to continue paying dividends in the future.
Governance Survey: Silicon Valley v. S&P 100
This Fenwick & West study surveys the landscape of Silicon Valley’s governance practices and compares them with those found at S&P 100 companies. Not surprisingly, the study found significant differences between Silicon Valley and Corporate America. Here are some highlights:
– Silicon Valley directors & executives owned larger average equity stakes in their companies than did their peers at S&P 100 (10.3% v. 2.8%).
– The total voting power of Silicon Valley directors & executives also skews higher than the S&P 100 (14.2% v. 4.8%)
– Silicon Valley companies have smaller boards (8.2 directors v. 12.4) & less frequent meetings (8.1 v. 8.9) than S&P 100 companies
– More insiders serve on Silicon Valley boards, but 52% of Silicon Valley boards have an independent chair as compared to only 18% of the S&P 100.
Consistent with other surveys, this study also found Silicon Valley boards to be significantly less gender diverse than their S&P 100 counterparts – 26% did not have a single woman director, while all S&P 100 companies had at least one. As in other surveys, however, this one indicates that there appear to be signs of improvement on the diversity front.
The study also addresses other governance metrics and tracks changes over time.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Issuing Shares Via Blockchain: Delaware Poised to Act
– Describing an Officer’s Duties 101
– Data Privacy: More Federal Agencies Join Enforcement Bandwagon
– Stats: Controlled Companies
– How Law Firms Should Strengthen Their Cybersecurity
Last week, the US Supreme Court officially removed stock tips from this year’s holiday gift list. In Salman v. United States, the Court unanimously affirmed that a tipper’s gift of inside information can satisfy the “personal benefit” requirement of Dirks v. SEC. The Court rejected the view of the 2nd Circuit’s 2014 decision in U.S. v. Newman, which required a “tangible benefit” in order to support an insider trading conviction. In his opinion, Justice Alito wrote that:
To the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends . . . we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.
This Sullivan & Cromwell memo notes that although Salman resolves uncertainties that Newman created about the personal benefit requirement, it leaves many unanswered questions:
Salman removes the uncertainty about insider-trading liability introduced by Newman, reaffirming the long-standing principle that a mere gift of information to “a trading relative or friend” is sufficient to constitute the requisite “personal benefit” to support liability for both the tipper and tippee. Yet Salman left unanswered important questions about the reach of liability, including:
(1) what sort of relationship is sufficient to meet the “relative or friend test”?
(2) where a tippee is not a “friend or relative,” what constitutes an exchange sufficient to constitute a non-pecuniary “personal benefit”? and
(3) what will constitute legally sufficient proof of knowledge of a “personal benefit” by remote, downstream tippees?
In late November, the UK government issued a “Green Paper” soliciting input on a variety of potential governance reforms. Proposals include pay ratio reporting, enhanced say on pay approval requirements, minimum holding periods for stock awards, & various alternatives for board level stakeholder input.
From an American perspective, the most provocative aspect of the proposals may be the decision to solicit input on whether corporate governance standards should be imposed on the UK’s largest privately held companies. The US hasn’t crossed that particular Rubicon yet – and it will be interesting to see the British reaction to it.
Transcript: “This Is It! M&A Nuggets”
We have posted the transcript for our recent DealLawyers.com webcast: “This Is It! M&A Nuggets.”
Getting them out the door before Keith Higgins’ imminent departure, Corp Fin dropped a whopping 35 new CDIs yesterday, covering a broad range of topics. Here’s the inventory:
– 5 new Exchange Act Forms CDIs: Form 20-F
– 2 new Securities Act Forms CDIs: F-Series Forms
– 7 new Exchange Act Rules CDIs: Rules 3a11-1 to 3b-19
Yesterday, the SEC announced that Enforcement Director Andrew Ceresney will leave the agency by the end of the year. The release notes that the SEC filed more than 2,850 enforcement actions & obtained more than $13.8 billion in monetary sanctions during his tenure. The SEC also charged over 3,300 companies & over 2,700 individuals – including many CEOs, CFOs, & other senior corporate officers. Stephanie Avakian will become the Acting Director of Enforcement.
This announcement is on the heels of the one about Keith Higgins’ pending departure. As Broc blogged a few weeks ago, this exodus of Senior SEC Staffers is normal when the Administration changes hands…
Earnings Calls: Salty CEOs Earn a PG-13 Rating
My language can be a little salty at times – & one of my phobias is letting a profanity slip out at a really inappropriate time. That’s why I took a particular interest in this CNBC piece about CEOs swearing during conference calls. Holy . . . uh. . . Cow – I thought the stats would be much worse!
Corp Fin recently issued a no-action letter to Morgan Stanley regarding the use of “conditional offers to buy” – or “COBs” – in connection with IPOs. COBs are intended to facilitate sales to retail investors by providing a way for them to commit to a deal without having to be available to their financial advisors during the period between pricing and the commencement of trading. This Cydney Posner blog reviews the mechanics of the COB process laid out in Morgan Stanley’s request.
COBs are not a new idea – and have been sanctioned in concept by Corp Fin since at least 1999’s Wit Capital no-action letter. What’s interesting about Morgan Stanley’s letter is that it lays out detailed procedures that are to be followed in using COBs as part of the offering process. The desire to obtain some comfort on those procedures may reflect Morgan Stanley’s past regulatory issues in this area – the bank was fined $5 million by FINRA in 2013 for shortcomings in its IPO procedures applicable to conditional offers & indications of interest.
Whistleblowers: SEC’s 2016 Annual Report
In the wake of its latest 8 figure whistleblower award, the SEC published its 2016 Annual Report to Congress addressing the whistleblower program. Kevin LaCroix at The D&O Diary recently blogged the highlights. These include:
65% of the award recipients were insiders of the entity on which they reported information of wrongdoing to the SEC. Of these insiders, approximately 80% raise their concerns internally or understood that their supervisor or compliance personnel were aware of the violations, before reporting the information to the SEC.
From FY 2012, the first full fiscal year the program was in operation, to FY 2016, the number of whistleblower tips has increased by more than 40 percent. Since the program incepted in August 2011, the agency has received a total of 18, 334 whistleblower tips. In FY 2016, the agency received 4,218, representing an increase of 295 over FY 2015, an increase of 7.5%.
What are the most common categories of whistleblower complaints? During fiscal 2016, corporate disclosures & financials led the pack (22%), followed by offering fraud (15%) and manipulation (11%). The type of violation reported has remained generally consistent over the past five years.
This blog from Keith Bishop directs some pointed criticism at the secretive nature of the whistleblower program.
Whistleblowing: What Does the Future Hold?
This blog from Dorsey & Whitney’s Brynn Vaaler speculates about the future of the SEC’s whistleblower program under the Trump Administration. While it’s too early to know what changes may be in store, some form of the program will likely survive:
Although the current whistleblower program has been criticized by conservative groups such as the U.S. Chamber of Commerce (in part because it does not require whistleblowers to give notice to their employer at the same time they give it to authorities), the program has relatively broad bi-partisan support and has given rise to a cottage industry of law firms specializing in representing whistleblowers.
Whistleblowing supporters include Rep. Jeb Hensarling (R-Texas), chair of the House Financial Services Committee and chief proponent of legislation that would unwind most of Dodd-Frank. Hensarling’s Financial Choice Act – which as Broc recently noted, could profoundly affect the SEC’s ability to adopt regulations – does not touch the existing legislative structure for SEC whistleblower awards. Similarly, although the Trump transition website calls for dismantling Dodd-Frank, it is silent on whistleblowing. As a result, the speculation is that whatever happens to Dodd-Frank, the SEC’s whistleblower program will survive in some form.
The SEC’s settlement with United Continental on Friday shows that it’s a very short trip from a violation of corporate policy to a books & records violation. The proceeding involved United’s decision to re-institute a non-profitable route from Newark Airport in order to benefit the former chair of the Port Authority.
The reinstitution of the route departed from United’s normal procedures and the requirements of its corporate ethics policy. The SEC’s order lays out its view of the legal implications of those departures:
Contrary to United’s Policies, the required written authorization of the Director – Ethics and Compliance Program or of the Board of Directors was not requested or obtained before initiating the South Carolina Route, and, thus, required records were not created or maintained. United thereby violated Section 13(b)(2)(A) of the Exchange Act. United also violated Section 13(b)(2)(B) by failing to devise and maintain a system of internal accounting controls that was sufficient to provide reasonable assurances that assets are used, and transactions are executed, only in accordance with management’s general or specific authorization, including in a manner consistent with United’s Policies.
This Steve Quinlivan blog has more details – & suggests that this proceeding marks the arrival of the “Domestic Corrupt Practices Act.”
“Dela-fornia” Corporations, Part II: Abstentions Won’t Protect A Director
I recently blogged about Keith Bishop’s discussion of the wide-ranging applicability of California’s corporate statute to foreign corporations. Keith recently blogged again on this topic – this time, he focused on Section 316 of the statute, which addresses director liability for unlawful loans & distributions. Here’s an excerpt:
Given the potential for personal liability, some directors, deciding that discretion is the better part of valor, may simply abstain in any vote to approve these actions. However, abstaining is neither valorous nor efficacious. Section 316(b) deems that a director who abstains from voting will be considered to have approved the action if he or she was present at the board or committee meeting at which any of the above actions was taken. To avoid the risk of liability under Section 316(a), a director must either not show up or vote against these actions.
Does this requirement apply to foreign corporations? For the most part, the answer is yes.
“Boardroom War Z”: CII & Canada Take Aim at “Zombie Directors”
As Broc blogged recently on the “Proxy Season Blog,” the Council of Institutional Investors & the Canadian Government have targeted “zombie directors” – directors who failed to achieve a majority vote, yet remain in office. Cooley’s Cydney Posner highlights the CII’s zombie director initiative at Russell 3000 companies, while this FinancialPost article describes proposed legislation that would mandate majority voting for directors of Canadian public companies.
In a press release describing its efforts to have the undead removed from boardrooms, the CII points out that directors who don’t receive majority shareholder support only rarely leave the board:
From 2013 to Oct. 26 2016, uncontested directors in the Russell 3000 did not win majority support 164 times at 104 companies. Total rejections amounted to 195, as 22 directors failed to obtain majority support more than once. Strikingly, out of these 195 rejections, only 36 directors stepped down from their boards as of Oct. 26, 2016. This represents a turnover rate of 18 percent.
Yesterday, the SEC announced that Chair Mary Jo White will leave her position when President Obama leaves office on Inauguration Day. Last week, Broc blogged that Mike Piwowar will almost certainly become interim Chair since he’s the sole sitting GOP Commissioner. Former Commissioner Paul Atkins is heading the financial regulatory transition team for the incoming Administration – and speculation about White’s possible successor has already begun…
Brexit: UK Parliament Must Okay EU Withdrawal
These memos in our “Europe” Practice Area address the recent UK High Court decision to require the UK government to seek approval of British Parliament before notifying the EU of its intention to withdraw. A few weeks ago, the High Court held that the government did not have the constitutional authority to notify the European Council of the UK’s decision to leave the EU without the prior approval of Parliament. The UK government has announced that it intends to appeal the judgment to the UK Supreme Court. That appeal will be heard in December, with a ruling expected in January…
Brexit: Topics for Audit Committees & Management
This Grant Thornton memo gives some advice to audit committees about the topics that they should discuss with management as a result of Brexit. These include:
– Does management have a strategic plan to manage risks and lessen negative effects? Has the organization done a thorough Brexit risk assessment? What hedging strategies are in place for foreign exchange exposure and how does Brexit affect those strategies? To what extent is the company exposed to debt denominated in pounds sterling?
– How will Brexit affect the carrying value of assets or business units exposed to the UK or EU?
– Will the company see significant translation gains and losses in terms of functional currency? Are foreign subsidiaries using the right functional currency?
– How will Brexit affect historical guidance? How will Brexit affect customers and suppliers and the company’s interactions with them? How will this affect existing guidance?
– What are the implications for communications? How and what does the company plan to communicate to stakeholders about the effect of Brexit – including investors, customers, vendors and employees?
– How will Brexit affect the company’s financial statements? For entities that have significant exposure, what should they expect to see in the June 30 quarter, and what might they see going forward?
The audit committee & management should also discuss what kind of additional regulatory compliance and reporting burdens might result from Brexit, as well as whether there are potential benefits – such as lower borrowing costs resulting from a delay in Fed interest rate increases.
This blog from Steve Quinlivan notes a recent settled SEC enforcement proceeding against PowerSecure International involving allegedly inadequate segment reporting. Here’s an excerpt:
According to the SEC, PowerSecure’s Form 10-K for the year ended December 31, 2015, outlined errors in prior period disclosures and revised its segment reporting disclosure to reflect information for the years ended 2012 to 2014 on a basis consistent with its 2015 reportable segments. In its 2015 filing, PowerSecure also concluded that its disclosure controls and procedures for that three year period were not effective due to a material weakness in its internal control over financial reporting that it identified in 2015 related to its misapplication of GAAP related to segment reporting.
Segment reporting has long been an area of intensive focus by Corp Fin. Determining the appropriate reportable segments is often a complex process involving a lot of judgment – & this means that staff comments often create some anxiety for a company’s accounting personnel.
In my own experience, I’ve seen a number of clients receive multiple, highly detailed comments probing how they determined their reportable segments. Responding to these comments often results in several rounds of follow-up comments – & has occasionally culminated in a Staff request for a conference call involving several Staff accountants & senior company officials. Those calls are fun. . .
This is another area where a regular review of peer company comments & responses can be a very valuable exercise. Comment letters often provide an early warning of the Staff’s interest in segment reporting practices within a particular industry & allow companies to see how their peers have responded to challenges to their own decisions about reportable segments.
For many years, I have been raising the possibility of climate change-related corporate and securities litigation. However, despite my best prognostication, the climate change-related corporate and securities lawsuits have basically failed to materialize – that is, until now. On November 7, 2016, investors filed a purported securities class action lawsuit in the Northern District of Texas against Exxon Mobil Corporation and certain of its directors and officers.
The lawsuit specifically references the company’s climate change-related disclosures, as well as the company’s valuation of its existing oil and gas reserves. One lawsuit doesn’t make a trend, and many of the lawsuit’s allegations relates specifically to Exxon Mobil and its particular disclosures. Nevertheless, the filing of the lawsuit raises the question whether there may be other climate change-related disclosure cases ahead.
Securities Class Actions: Are We Headed into a Perfect Storm?
Here’s an excerpt from this blog by Lane Powell’s Doug Greene:
Although I don’t know if we’re about to enter a period of quirky cases, like stock options backdating, I’m confident that we’re going to experience a storm of securities class actions caused by a convergence of factors: an increasing number of SEC whistleblower tips, a drumbeat for more aggressive securities regulation, a stock market poised for a drop, and an expanded group of plaintiffs’ firms that initiate securities class actions.
The first Schedule 14N! Back in July, Broc ran a poll asking when we’d see the first proxy access nominee – only 11% of responders thought it would happen this year. The other 89% were wrong – including the 24% who said ‘never’! Here’s the intro from this Gibson Dunn blog:
In what appears to be the first use of a company’s proxy access bylaw, GAMCO Asset Management filed today a Schedule 13D/A and a Schedule 14N announcing that it has used the proxy access bylaw at National Fuel Gas (NFG) to nominate a director candidate for election at NFG’s 2017 Annual Meeting. According to the 13D/A, GAMCO and its affiliates beneficially own in the aggregate approximately 7.81% of NFG’s Common Stock and yesterday delivered a letter to NFG nominating Lance A. Bakrow to the Board of Directors.
NFG amended its bylaws in March 2016 to include a proxy access bylaw & its terms are pretty typical:
The Bylaws provide that a shareholder, or a group of up to 20 shareholders, owning 3% or more of the Company’s outstanding Common Stock continuously for at least three years may nominate and include in the company’s proxy materials directors constituting up to 20% of the board, provided that the shareholders(s) and the nominee(s) satisfy the bylaw requirements. Here is NFG’s proxy access bylaw.
In this blog, Davis Polk’s Ning Chiu also lays out the circumstances…
Delaware Says “No” to Director’s Books & Records Request
Every now & again there’s a case that isn’t likely to have a big practical impact, but is worth noting just because it exists – and the Delaware Chancery Court’s recent decision in Bizarri v. Suburban Waste Services is that kind of case. Most corporate lawyers believe that directors have a virtually unlimited right to access books & records. As this blog from Francis Pileggi notes, it turns out that there are some limits after all:
This opinion provides a rare instance in which the court denies a director unfettered access to the books and records of a corporation on whose board he serves, but this case also involves somewhat extreme facts which are not often replicated.
The court found during trial that the director and stockholder, who was also a member and manager of an affiliated LLC, engaged in efforts to compete with and inflict reputational harm on the entities. The plaintiff’s actions in that regard were “driven by his intense hatred of the entities’ other two owners and principals.” Together with the familial relationship of the plaintiff with one of the entities’ main competitors, it makes the “prospect of the plaintiff misusing the books and records both real and troubling.”
There’s a strong presumption in Delaware that a director is entitled to “unfettered access” to books & records – and it’s up to the company to demonstrate an improper purpose. This is one of the rare cases where the company was able to meet that burden.
CEO Succession: Boards Pass Over Corporate “Fredos”
This Stanford study concludes that boards are pretty good about identifying which potential CEO candidates should be “passed over” – like Fredo in The Godfather:
Our data modestly suggests that corporate boards do a reasonable job of identifying CEO talent. Fewer than 30% of the executives passed over among large corporations are recruited by other firms as CEO. Most (over 70%) are not.
If an executive who is passed over has valuable skills that make him or her a viable CEO candidate, it is likely that another corporation would identify and hire that individual. Furthermore, candidates who are recruited to new firms after being passed over appear to perform worse (relative to benchmarks) than those who were selected at the original company.
I guess Fredo also is a good example of the potential dangers of a disgruntled senior executive.
This DLA Piper memo discusses the early returns from the DOJ’s pilot program to encourage FCPA self-reporting and cooperation, and identifies a new enforcement approach – “declinations with disgorgement.” Consistent with the previously disclosed terms of the program, companies avoiding prosecution have agreed to disgorge all profit realized from their violations. Two recent cases in which the DOJ has elected not to pursue FCPA prosecutions also had several other features in common:
In each instance the DOJ cited the fact that the company self-disclosed. But of seeming equal importance were the robustness of the companies’ internal investigations and the sweeping remediation undertaken. Rounding out the reasons for DOJ’s decision to bring no charges were the agreement to disgorge all profits, which each company agreed not to use for any tax deduction or to accept reimbursement from insurance or any other source, and the obligation to continue to fully cooperate.
The obligation to continue full cooperation includes providing “all known relevant facts about the individuals involved in or responsible for the misconduct,” who are expressly carved out of the declination and could still face prosecution.
SEC: Fix Compliance Program Fast to Avoid FCPA Monitor
This BakerHostetler memo shares some important advice from Kara Brockmeyer, Chief of the SEC’s FCPA Unit:
For a company that violated the FCPA, but wishes to avoid a monitor, the company should be making immediate improvements to its compliance program to prevent future violations so that at the end of the investigation it will be able to demonstrate a track record of having an effective program that is working to prevent violations.
Even a state of the art compliance program will not be effective in convincing the SEC not to impose a monitor if the program has been in place only two months. As Brockmeyer noted, “the late to the party company [in implementing effective compliance measures] is much more likely to get a monitor imposed.”
This November-December issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers – and includes articles on:
– Disclaimers & Limits on Claims Outside of the Contract
– Due Diligence: Patient Protection & Affordable Care Act Considerations
– FCC Licenses: The Forgotten Stepchildren of M&A
– Reverse Break-Up Fees: Move Along, Nothing to See Here
– The Takeaways: Two Chancery Decisions on Informed, Uncoerced Stockholder Approval
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
