Last week, ISS published the results of its most recent benchmark policy survey, and this year, respondents had quite a bit to say about poison pills. The survey is part of ISS’ annual global policy development process and was open to all interested parties to solicit broad feedback on areas of potential ISS policy change for 2025 and beyond. The survey’s results reflect responses from investors and non-investors. This latter group is comprised primarily of public companies & their advisors. Not surprisingly, the survey found that they differ when it comes to what’s acceptable when it comes to poison pills. Here are some of the highlights:
– When asked if the adoption by a board of a short-term poison pill to defend against an activist campaign was acceptable, 52% of investor respondents replied “generally, no”, while 65% of non-investor respondents replied “generally, yes”.
– When asked whether pre-revenue or other early-stage companies should be entitled to greater leeway than mature companies when adopting short-term poison pills, 56% of investors and 43% of non-investors said that such companies should be entitled to greater leeway on the adoption of a short-term poison pill, as long as “their governance structures and practices ensure accountability to shareholders.”
– When asked about whether a short-term poison pill trigger set by a board below 15 percent would be acceptable, the most common response among investor respondents was “No” (39%), while the largest number of non-investor respondents (38%) said “yes, the trigger level should be at board’s discretion.”
– When asked whether a “two-tier trigger threshold, with a higher trigger for passive investors (13G filers) would be considered a mitigating factor in light of a low trigger, 78% of non-investor respondents said “yes, it should prevent the pill from being triggered by a passive asset manager who has no intention of exercising control.” On the investor, while 41% agreed with the majority of non-investor respondents, 48% considered that “no, all investors can be harmed when a company erects defenses against activist investors whose campaigns can create value, so the lowest trigger is the relevant datapoint.”
Also, it turns out that investors like their pills to be “chewable.” The survey found that nearly 60% of investors found a qualifying offer clause in a pill to be important and a feature that should be included in every pill. A small majority (52%) of non-investors said that this feature was “sometimes important” depending on the trigger threshold and other pill terms.
Check out the latest edition of our “Timely Takes” Podcast featuring my interview with Remy Nshimiyimana and Oderah Nwaeze of Faegre Drinker regarding Delaware’s process for ratifying defective corporate acts. In this 10-minute podcast, Remy & Oderah covered the following topics:
– Overview of Delaware’s statutory procedure for ratifying defective corporate acts
– Examples of the types of defective acts that can be ratified under this statutory procedure
– Limitations on a corporation’s ability to ratify defective acts
– Shareholder approval requirements
– The Role of the Chancery Court
Our discussion was based on Faegre’s recent memo, “Ratification of Defective Corporate Acts: An Overview”, which members of TheCorporateCounsel.net can access in our “Delaware Law” Practice Area. If you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share, we’re all ears – just shoot me an email at john@thecorporatecounsel.net or send one to Meredith at mervine@ccrcorp.com.
Yesterday, the SEC announced a settled enforcement proceeding against DraftKings arising out of the use of its CEO’s social media accounts to disseminate material non-public information. This excerpt from the SEC’s press release announcing the proceeding lays out the factual background of the case:
The order finds that, on July 27, 2023, at 5:52 p.m., DraftKings’ public relations firm published a post on the personal X account of the DraftKings CEO. The post, according to the order, stated that the company continued to see “really strong growth” in states where it was already operating. DraftKings’ public relations firm posted a similar statement that same day on the CEO’s LinkedIn account. At the time of the posts, DraftKings had not yet disclosed its second quarter 2023 financial results, nor had it otherwise publicly disclosed certain information contained in the posts.
Shortly after the public relations firm published the posts, it removed both posts at the request of DraftKings. According to the order, even though Regulation FD required DraftKings to promptly disclose the information to all investors after it was selectively disclosed to some, DraftKings did not disclose the information to the public until seven days later when it announced its financial earnings for the second quarter of 2023.
The SEC’s cease and desist order says that publication of these social media posts violated the company’s social media and Reg FD policies, which prohibited the use of social networks to disseminate MNPI and barred the company’s authorized spokespersons from discussing financial or operational results or guidance during the pre-earnings release “quiet period” specified in its Reg FD policy.
In addition to consenting, on a neither admit nor deny basis, to an order to cease and desist from future violations of Section 13(a) of the Exchange Act and Regulation FD thereunder, the company agreed to pay a $200,000 civil penalty and comply with certain undertakings, including Reg FD training for employees who have corporate communications responsibilities.
Earlier this month, a divided SEC approved the PCAOB’s new audit quality control standard, QC 1000 – A Firm’s System of Quality Control. Over on The Audit Blog, Dan Goelzer has a recent post that says public companies are going to feel the impact of the new standard.
On the plus side, he suggests that audit quality may improve, and that audit committees may have more visibility into audit deficiencies and audit firm quality controls. Unfortunately, those benefits may be accompanied by some fairly significant costs, including higher audit fees and, as this excerpt explains, an increase in “CYA” behavior by auditors:
Auditing requires the exercise of judgment, and the line between permissible judgments that in hindsight appear flawed and auditing standard violations is not always clear. QC 1000 seems to assume that an audit deficiency identified by the PCAOB’s inspectors is evidence of a potential QC lapse. In turn, a QC breakdown potentially raises questions about whether the individuals responsible for the operation of the system properly performed their responsibilities.
As a result, firm leadership will have strong new personal incentives to avoid inspection deficiency findings. This could of course be viewed as one the benefits of QC 1000. But it could also create a dynamic under which auditing becomes more focused on the mechanics of compliance and documentation at the expense of a big-picture understanding of the company’s financial reporting risks and the exercise of judgment concerning how best to address those risks in the audit.
The blog also echoes concerns expressed by Commissioner Peirce that the compliance costs associated with the new standard may drive some audit firms out of the public company market, thus providing smaller public companies with fewer audit firms to choose from.
Last week, the SEC announced that it had obtained a judgment against one of the defendants in an insider trading case. But this isn’t just any insider trading case, because this one may involve the silliest piece of MNPI ever to result in illicit profits. Here’s an excerpt from the SEC’s litigation release on developments in SEC v. Watson:
On September 20, 2024, the Securities and Exchange Commission obtained a final judgment against defendant Oliver-Barret Lindsay, a Canadian citizen, whom the SEC previously charged with insider trading in advance of an announcement by Long Blockchain Company (formerly known as Long Island Iced Tea Co.) that it was going to “pivot” from its existing beverage business to blockchain technology, which caused the company’s stock price to soar.
The SEC’s complaint was filed on July 9, 2021, in federal district court in the Southern District of New York. The complaint alleged that Lindsay’s co-defendant Eric Watson, a Long Blockchain insider who had signed a confidentiality agreement not to disclose the company’s business plans, tipped Lindsay about Long Blockchain’s unannounced plans to pivot to blockchain technology. The complaint further alleged that Lindsay then tipped his friend and co-defendant, Gannon Giguiere, who purchased 35,000 shares of Long Blockchain stock within hours of receiving confidential information about Long Blockchain from Lindsay. According to the complaint, the company’s stock price skyrocketed after a press release was issued announcing its shift to blockchain technology. The complaint further alleged that within two hours of the announcement, Giguiere sold his shares for over $160,000 in illicit profits.
The SEC’s complaint provides more details. Apparently, the company announced that it was “shifting its primary corporate focus towards the exploration of and investment in opportunities that leverage the benefits of blockchain technology” compared to “the ready-to-drink segment of the beverage industry,” as well as changing its name to “Long Blockchain Corp.” in place of “Long Island Iced Tea Corp.”
That announcement was apparently enough to send the stock price skyrocketing by nearly 400% and to increase its trading volume by 1,000%. Seriously? C’mon, the idea that a microcap soft drink company could suddenly become 400% more valuable because it issues a press release announcing a pivot to “opportunities that leverage the blockchain” seems like it could only come from the mind of an underpants gnome.
Nevertheless, a lot of people seem to have bought into it, which makes complete sense if you proceed under the assumption that everyone in the market is as dumb as a bag of hammers. Unfortunately, cases like this one demonstrate that P.T. Barnum’s supposed statement that “there’s a sucker born every minute” frequently explains how markets work a lot better than the Efficient Market Hypothesis does.
Yesterday, the SEC announced settled enforcement proceedings against 23 entities and individuals arising out of late beneficial ownership reports (and yes, there are some very big names here). Two public companies were also charged for contributing to their insiders’ violations and failing to disclose the delinquent filings as required. Here’s an excerpt from the SEC’s press release announcing the proceedings:
The charges announced today stem from SEC enforcement initiatives focused on Schedules 13D and 13G reports and Forms 3, 4, and 5 that certain corporate insiders are required to file. Schedules 13D and 13G provide information about the holdings and intentions of investors who beneficially own more than five percent of any registered voting class of public company stock. Forms 3, 4, and 5 are reports used to provide information about public company stock transactions by corporate officers, directors, or certain investors who beneficially own more than 10 percent of the stock. These reporting requirements apply irrespective of whether the trades were profitable and regardless of a person’s reasons for the transactions. SEC staff used data analytics to identify the charged individuals and entities as filing required reports late.
Each of the parties consented, on a neither admit nor deny basis, to an order to cease and desist from future violations and to pay civil penalties. Those penalties ranged from $10,000 to $200,000 for the individuals involved in the proceedings and from $40,000 to $750,000 for the entities involved. The two public companies targeted by the SEC each paid a civil penalty of $200,000.
Earlier this year, Corp Fin Director Erik Gerding announced that compliance with beneficial ownership reporting requirements was one of the priorities for this year’s disclosure review program, and we’ve blogged about Staff comments targeting the timeliness of beneficial ownership filings. We’ve also seen at least one high-profile 13D enforcement proceeding prior to those announced yesterday. With that background, the SEC’s decision to conduct an enforcement sweep probably shouldn’t come as a surprise to anyone.
While we’re on the topic of potential consequences for violating Section 16 of the Exchange Act, did you ever wonder what would happen if somebody tried to dodge paying over short swing profits under Section 16(b)? Would you believe handcuffs? Here’s something Alan Dye recently posted on his Section16.net blog:
This is my fifth blog about Avalon Holdings v. Gentile, a long-running and bitterly fought action filed by David Lopez and Miriam Tauber against a Bahamian broker-dealer (MintBroker) and its sole owner (Guy Gentile, a resident of Puerto Rico) based on their high-frequency trading in the securities of two microcap companies, Avalon Holdings and New Concept Energy. Earlier this year, the district judge found the defendant’s liable to each company for short-swing profits of $6 million plus pre-judgment interest, currently amounting to a total of $16 million. In my blog about that decision, I noted that “recovering the amount of the judgment may not be easy, given that the Bahamian Securities Commission has forced MintBroker into liquidation proceedings.”
That prediction is proving to be true. The plaintiffs subpoenaed the defendants to produce records and provide testimony regarding their assets, but the defendants didn’t respond and didn’t show up for a hearing on the motion. The defendants’ counsel appeared, though, and told the judge that he hadn’t heard from Gentile since May and had no information regarding how to effect service on Gentile. After post-hearing attempts to serve Gentile did not elicit a response, the plaintiffs renewed their motion to compel and also submitted an application for a bench warrant for Gentile’s civil arrest for contempt of court.
Last week the judge granted the motion, in language that makes startlingly clear the consequences of failing to comply with a court’s order. The judge directed the U.S Marshals Service to effect service on Gentile in any U.S. district in which he may be found, and ordered that:
– the U.S. Marshall “will be permitted to use the minimum degree of non-deadly force necessary to arrest and detain Gentile and bring him before this Court, and will be permitted to enter any premises of Gentile’s if he is reasonably believed to be inside and if requested access to such premises is withheld” and
– “Gentile shall be incarcerated until he responds to Avalon’s post-judgment subpoenas or until further Order of this Court.”
Gentile may decide it’s not worth stepping foot in the U.S. ever again, but there is a big fee at stake for Lopez and Tauber, so I suspect collection efforts will continue.
According to Woodruff Sawyer’s recent report the D&O insurance market remains buyer friendly, but perhaps not quite to the extent that it has been in recent years. The report notes that D&O insurance premiums peaked in Q1 2021 at 4.7x Q1 2018 levels. In 2022, the market turned dramatically as new entrants drove pricing down, and by Q2 2024, premiums had dropped to 1.9x 2018 levels. This excerpt says that this downward trend in premiums is expected to continue in 2025, but companies may need to change carriers in order to realize additional savings:
Although we’re still in a soft D&O market, the rate of decline in premiums for both newly public and mature companies has decelerated and will likely continue to do so in 2025. Underwriter sentiment predicted the hard market in 2021; their response to whether rates will continue to go down today and moving forward should not be ignored. Over the last three years, fewer and fewer underwriters have predicted premiums would go down (40% in 2022, 30% in 2023, and 21% today).
Our own forecast is that all public companies will continue to have an option for D&O program cost savings—but more likely from new market entrants than their incumbent insurance carriers. Established carriers will work hard to keep rates at what they deem reasonable to avoid the dynamic of underpricing today only to then be forced into hard market pricing or leaving the D&O market altogether. In 2025, we’ll continue to see new carriers take more risk to build market share while established carriers will carefully defend their turf, all while keeping a watchful eye on claims trends.
There’s more good news – Woodruff Sawyer also says that most D&O buyers were able to renew policies in 2024 with flat or lower self-insured retentions, and that this trend is expected to hold for 2025 as well.
Providing appropriate oversight of the key risks that companies face is one of the board’s most important roles, and one that is made increasingly difficult by the challenges presented by artificial intelligence and other emerging technologies. This Skadden memo offers some guidance to help boards ensure that an appropriate oversight program is in place for AI-related risks.
The memo surveys the current regulatory landscape for AI and the risk management tools available to corporate boards, and offers up the following guiding principles for AI corporate governance:
– Understand the company’s AI risk profile. Boards should have a solid understanding of how AI is developed and deployed in their companies. Taking stock of a company’s risk profile can help boards identify the unique safety risks that AI tools may pose.
– Be informed about the company’s risk assessment approach. Boards should ask management whether an AI tool has been tested for safety, accuracy and fairness before deployment, and what role human oversight and human decision-making play in its use. Where the level of risk is high, boards should ask whether an AI system is the best approach, notwithstanding the benefits it may offer.
– Ensure the company has an AI governance framework. The board should ensure that the company has such a framework to manage AI risk, and then reviews it periodically to make sure it is being properly implemented and monitored, and to determine the role the board should have in this process.
– Conduct regular reviews. Given the rapid pace of technological and regulatory developments in the AI space, and the ongoing discovery of new risks from deploying AI, the board should consider implementing regular reviews of the company’s approach to AI, including whether new risks have been identified and how they are being addressed.
– Stay informed about sector-specific risks and regulations. Given how quickly the technology and its uses are evolving, boards should stay informed about sector-specific risks and regulations in their industry.
The memo points out that the specific AI-related risks that companies face, and their legal and regulatory obligations, differ across industries. Furthermore, the regulatory framework for AI is evolving rapidly and does always provide consistent approaches or guidance. Further complicating matters is the fact that the nature and extent of regulatory obligations also often depend on whether the company is the developer of an AI system or simply deploys it, and that line may be difficult to draw.
In our latest “Understanding Activism with John & J.T.” podcast, my co-host J.T. Ho and I were joined by Greg Taxin, Founder & Managing Member of Spotlight Advisors, to discuss the current environment for shareholder activism. Topics covered during this 34-minute podcast include:
– What motivates activists and how do companies know what activists are really seeking?
– How can board members most effectively participate in a company’s response to activism?
– What are the hard and soft costs involved in activism — for the company and the activist?
– How do different groups of investors respond to activism?
– What are the unique challenges presented by first-time activists?
– What are the most effective strategies for increasing retail voter turnout?
– What will be the major trends and challenges in shareholder activism over the next few years?
Our objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We’re continuing to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!
