With the liberalization of the communications rules for public offerings in recent decades, many folks may have assumed that concerns about “gun-jumping” have largely been relegated to the ash heap of history. Unfortunately, Pershing Square’s recent announcement that it is delaying the pricing of its IPO appears to provide an example of how companies can still stub their toes on the rules governing communications during the public offering process.
The company didn’t provide any reasons for delaying the IPO in its announcement, but it did reference a communication from Pershing Square’s CEO Bill Ackman to a handful of investors. That communication contained some information that doesn’t appear to have been in the company’s preliminary prospectus, and that, in some cases, is inconsistent with information in the preliminary prospectus. This excerpt from a free writing prospectus that the company filed last Thursday explains the situation and the problematic comments made in Ackman’s communication:
On July 24, 2024, the communication attached as Appendix A was sent to a limited number of strategic institutional and high net worth investors in Pershing Square Holdco, L.P., which owns 100% of the Company’s investment manager, Pershing Square Capital Management, L.P. (the “Manager”) by William A. Ackman, the Chief Executive Officer of the Manager and the Company. Mr. Ackman sent Appendix A as an internal communication to the investors in Pershing Square Holdco, L.P. and therefore did not believe that it would require public disclosure.
You should not consider the statements in the communication attached as Appendix A in making your investment decision with respect to the Offering, including, in particular:
– The statements regarding the absence of key man risk. See “Risk Factors—Reliance on the Manager Risk—Key Personnel Risk” in the Company’s preliminary prospectus.
– The statements regarding the post-Offering trading dynamics, including with respect to market demand, trading discounts or premiums or trading volume. Shares of closed-end investment companies frequently trade at a discount from their net asset value. See “Risk Factors—Investment and Market Discount Risk” in the Company’s preliminary prospectus.
– The statements regarding the Manager’s historical performance. See “Appendix A – Supplemental Performance Information of the Affiliated Funds” to the Company’s preliminary prospectus.
– The statements regarding indications of interest from investors and any investor’s rationale for participation or non-participation in the Offering. Indications of interest are not binding agreements or commitments to purchase. Any investor may determine to purchase more, less or no Common Shares in the Offering. In addition, the underwriters may determine to sell more, less or no Common Shares in the Offering to any investor.
– The statements regarding the Pershing Square Tontine Holdings, Ltd. IPO.
The Company specifically disclaims the statements made by Mr. Ackman.
The typical remedy for gun-jumping is an SEC-imposed “cooling off” period that delays the offering for a period of time in order to allow the impact of the communication on the market to dissipate. My guess is that’s what’s prompting the delay here.
Check out our latest “Timely Takes” Podcast featuring Orrick’s J.T. Ho & his monthly update on securities & governance developments. In this installment, J.T. reviews:
– SEC Reg Flex Agenda
– SEC 2024 Disclosure Review Priorities
– SEC Guidance on Effective Cooperation in Enforcement Investigations
– Proxy Voting Advice Rules Update
– AI Disclosures in SEC Filings
This month’s podcast includes a “bonus round” featuring J.T.’s commentary on recent cybersecurity disclosure guidance and on the first criminal verdict involving a Rule 10b5-1 plan.
As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email me and/or Meredith at john@thecorporatecounsel.net or mervine@ccrcorp.com.
It’s probably not an understatement to characterize many of the decisions issued by the SCOTUS in its recently completed term as “momentous” – but it may not have occurred to companies to think about the potential impact of some of those decisions when preparing risk factor disclosure for upcoming SEC filings. A recent Bryan Cave blog highlighting matters that companies should consider when preparing their second quarter 10-Q points out the potential risk factor implications of the Court’s decisions limiting the authority of federal agencies:
The recent Supreme Court term produced several landmark decisions affecting administrative agencies, including:
– Loper Bright Enterprises v. Raimondo – ending long-standing “Chevron” deference to administrative agency interpretations and requiring courts to exercise their judgment in deciding whether an agency has acted within its statutory authority, such as when determining the meaning of ambiguous statutes.
– Corner Post, Inc. v. Board of Governors, FRS – allowing “facial challenges” of regulations governed by the Administrative Procedure Act within six years after “injury” – even if more than six years after the regulation became effective and where the plaintiff was newly-created specifically to challenge the regulation.
– Ohio v. EPA – among other things, faulting EPA for failing to provide a “reasoned response” to certain comments viewed by the agency as not significant or pertinent when adopting final regulations under an arbitrary and capricious review.
The effect of these decisions will play out over time as litigation develops, with some commenters predicting “hundreds and hundreds of challenges to very old rules”. Companies that operate in regulated industries, as well as those that rely on established regulatory environments, should evaluate potential risks of future challenges to agency rules or interpretations – particularly by competitors that operate at a regulatory disadvantage. Note that some regulations may not be vulnerable under Corner Post because they governed by statutes with their own distinct limitations provisions.
The blog also recommends that companies consider the potential implications of elections in the United States and Europe when drafting risk factor disclosure. In addition to its commentary on risk factors, the blog also reminds companies of their disclosure obligations with respect to trading plans and the need to review director nomination bylaws in light of pending litigation in Delaware.
We’ve been covering the controversy surrounding the 2024 amendments to the DGCL over on the DealLawyers.com Blog, but the CII has recently submitted a letter to Del. Gov. John Carney urging him to veto the amendments, which the Delaware Legislature passed late last month, and I thought it was worth sharing with the readers of this blog.
One of the most controversial aspects of the amendments is new Section 122(18), which permits a board to agree to governance arrangements giving a stockholder veto powers over a range of corporate actions that traditionally have been solely within the ambit of the board’s authority. That provision is intended to address Vice Chancellor Laster’s decision invalidating such an arrangement in West Palm Beach Firefighters v. Moelis, (Del. Ch.; 2/24). This excerpt from the CII’s letter argues that Section 122(18) raises many of the same concerns for its members as dual class capital structures:
For CII and its members, we strongly believe that permitting stockholder agreements to contain the provisions at issue in the Moelis case as authorized by S.B. 313 would disadvantage long term investors. One of the core principles of corporate governance is the principle of one share, one vote. Currently, for a powerful founder to have full control rights — of the sorts granted to Mr. Moelis and authorized by S.B. 313 — a company generally must put these provisions into the certificate of incorporation and go public with a multi-class capital structure.
Because this is such an important protection for investors, both the New York Stock Exchange and the Nasdaq Stock Market prohibit companies traded on those exchanges from engaging in a “midstream” recapitalization that would create a new class of super-voting stock. However, it appears that under the provisions of S.B. 313, a company could instead go public with a single class capital structure and then, after the company is already public, confer comprehensive control rights by contract without any shareholder vote.
We believe many CII members and other long-term investors – whether they object to multi-class capital structures or not – would find very troubling this post-IPO transformation to a type of multi-class capital structure without a shareholder vote.
I think the CII raises a legitimate concern, but I also think that it overstates that concern when it points to the possibility of companies entering into such an agreement post-IPO. Despite the authority granted by Section 122(18), boards still owe fiduciary duties to their stockholders, and entering into such an agreement with an affiliated stockholder or one which has the effect of changing control of the company could subject the board’s decision to heightened scrutiny. My guess is that boards are going to proceed with caution when considering such a governance agreement post-IPO.
Despite the objections from the CII and others, all the reporting I’ve seen says that Gov. Carney is likely to sign the legislation. The changes that are being made to the DGCL are pretty seismic, and even if you’re not an M&A lawyer, you should definitely check out our DealLawyers.com webcast – “2024 DGCL Amendments: Implications & Unanswered Questions” – on Tuesday, July 23rd at 2 pm eastern.
Thank you to all our loyal blog readers who participated in our second anonymous poll to help us prepare for a game show featuring our SEC All-Stars as contestants at our Proxy Disclosure and Executive Compensation Conferences. In the interest of full disclosure, I pushed hard for a “Hunger Games” format for this thing but was outvoted by my more civilized colleagues who were set on a “Family Feud”-style competition. I never get to have any fun.
Anyway, we’re coming back to you again to seek your response to one of the securities law-adjacent questions we’ll be submitting to our contestants. In case you recently arrived from a distant galaxy and don’t know how Family Feud works, the contestants will need to identify the most popular answers that you provided in order to win fabulous prizes absolutely nothing! If you have a few seconds to spare, please type in a response to this anonymous poll. We’ll gather and rank responses by popularity. Responses will be hidden, so you’ll have to join day 1 of our Conferences (in San Francisco or virtually) to hear whether your response made the “most popular” list.
Speaking of our Conferences, our “early bird” deal for individual in-person registrations ($1,750, discounted from the regular $2,195 rate) ends July 26! We hope many of you decide to join us in San Francisco, but if traveling isn’t in the cards at that time, we also offer a virtual option (plus video replays & transcripts for both in-person and virtual attendees!) so you won’t miss out on the practical takeaways our speaker lineup will share. (Also check out our discounted rate options for groups of virtual attendees!)
You can register now by visiting our online store or by calling us at 800-737-1271.
Earlier this year, the NYSE submitted a proposed rule change to the SEC that would extend the period during which a SPAC that hasn’t completed a deSPAC can remain listed on the Exchange, if that SPAC has entered into a definitive agreement for its deSPAC. On Tuesday, the SEC issued a release instituting proceedings to determine whether or not to approval the rule proposal. While the SEC stressed that it hasn’t determined whether or not to approve the rule, this excerpt from the release suggests it’s heading toward a “thumbs down” of the NYSE’s proposal in its current form:
The Exchange has proposed a fundamental change to the well-established requirement that a SPAC’s Business Combination must be consummated within three years or face delisting, and is seeking to extend this time requirement to allow up to 42 months for a SPAC to complete its Business Combination if the SPAC has entered into a “definitive agreement” to consummate its Business Combination.20 In support of the proposed change, the Exchange states that once a definitive agreement is entered into, a SPAC “represents a significantly different investment” because more information will be available to investors about the operating asset the SPAC intends to own.
The three-year limit, however, was put in place to provide protection for public shareholders by restricting the time period a SPAC could retain shareholder funds without consummating a Business Combination. The Exchange does not address how the proposal would affect shareholder protection or why it is appropriate for a SPAC to retain shareholder funds past the current maximum time period of three years and how that would be consistent with the investor protection and public interest requirements of Section 6(b)(5) of the Act.
Accordingly, the Commission believes there are questions as to whether the proposal is consistent with Section 6(b)(5) of the Act and its requirements, among other things, that the rules of a national securities exchange be designed to protect investors and the public interest and whether the Exchange has provided an adequate basis for the Commission to conclude that the proposal would be consistent with Section 6(b)(5) of the Act.
The SEC also points out that the proposal to extend the listing raising concerns under the Investment Company Act, since the SEC noted in the adopting release for its SPAC disclosure rules that SPACs that hang around for an extended period with their assets invested primarily in securities start to look an awful lot like investment companies, and that this concern grows greater the longer it takes for a SPAC to complete a deSPAC deal.
According to this Arnold & Porter memo, the Newsom administration recently released proposed amendments to California’s climate disclosure legislation that would, among other things, delay implementation of the state’s climate disclosure regime for two years. This excerpt indicates that the problem is that finalizing implementing regulations by the original compliance date would be virtually impossible:
As enacted, Senate Bill 253 (SB 253), the Climate Corporate Accountability Act, required the California Air Resources Board (CARB) to develop and adopt new regulations to implement the requirements of the act by January 1, 2025, with Scope 1 and 2 emissions reporting to begin in 2026 and Scope 3 emissions reporting to begin in 2027. The Newsom administration’s proposal delays those deadlines by two years: CARB has until January 1, 2027 to adopt new regulations, with Scope 1 and 2 emissions reporting to begin in 2028 and Scope 3 emissions reporting to begin in 2029.
The new timeline would give CARB two additional years to undertake a robust rulemaking process to develop the implementing regulations. Please see our October 3, 2023 Advisory for our thoughts on what to look for in the CARB rulemaking process. Notably, CARB has not formally commenced SB 253 rulemaking and without this amendment would face a near-impossible deadline of finalizing implementing regulations by January 1, 2025.
Apparently, the Newsom administration’s amendments would also result in a two-year delay in the implementation of SB 253’s companion legislation, SB 261, which establishes the climate-related financial risk reporting requirements. That statute currently requires compliance starting on or before January 1, 2026, but the amendments would extend that compliance date to on or before January 1, 2028.
. . .SpongeBob SquarePants! Yes, I’m sorry to report that America’s favorite cartoon sponge has found himself in the crosshairs of California’s Attorney General for allegedly running afoul of the Golden State’s privacy laws. This excerpt from a WilmerHale blog explains:
On June 18, the California Attorney General (“AG”) and Los Angeles City Attorney announced a settlement with Tilting Point Media, the maker of a mobile app game called “SpongeBob: Krusty Cook-Off,” resolving allegations that Tilting Point violated the California Consumer Privacy Act (CCPA) and Children’s Online Privacy Protection Act (COPPA) by collecting and sharing children’s data without obtaining required parental consent (for users under the age of 13) or affirmative opt-in consent (for users between the ages of 13 and 16). Under the terms of the settlement, Tilting Point must pay a penalty of $500,000 and comply with a host of injunctive terms, including compliance with the CCPA and COPPA, appropriate use of age screens, and implementation of processes to ensure data minimization and the proper use of software development kits (SDKs).
The blog says that this is the third CCPA settlement that the AG has entered into this year, and that this is the first one to focus on children, which suggests that this may be an area of growing enforcement priority for the California AG. It says that the critical takeaway from this action is that companies processing data from users under 16 must have appropriate consents and authorizations.
For at least a generation, the idea that large public companies should be run by boards dominated by people with no experience in the business they’re running has been a cornerstone of our concept of good corporate governance. Even if you buy into that idea, I’ve always thought that there are good reasons for management representation on a public company’s board to consist of more than just the CEO. According to this recent Jenner & Block survey of non-independent directors on S&P 500 boards, at least some of those public companies seem feel the same way.
The survey identified 161 S&P 500 companies with more than one non-independent director as of March 25, 2024. That’s about 1/3rd of the S&P 500, but the question is – as Butch Cassidy put it – “Who are those guys?” Here’s what the survey had to say about that:
– Almost 20% of the S&P 500 has two non-independent directors while approximately 12% of the S&P 500 has three or more non-independent directors.
– Companies with multiple non-independent directors were split evenly between companies with solely multiple management directors and companies with one management director and one or more non-management non-independent directors. Approximately half of the 161 companies identified consisted solely of management directors while the other half consisted of one management director and other, non-independent directors.
– The most common combination of management directors was the CEO and executive chairman combination (48 companies), while the CEO-“second in command” combination was the second most common (27 companies).
– Non-independent directors who weren’t members of management consisted of a founder or co-founder (20 companies), a former CEO (26 companies), family members (15 companies had at least one family member on the board, and six companies had multiple family members on the board), and stockholder designees or former designees (eight companies). Rounding out the list were six companies with directors who weren’t independent due to related party transactions.
A group of business trade associations that include the Business Roundtable, the US Chamber of Commerce & the Investment Company Institute recently published a report titled “Investors and the Markets First: Reforms to Restore Confidence in the SEC,” which offers a series of proposed reforms to the SEC’s rulemaking process. The report contends that, over the past three years, the SEC has “undertaken an unprecedented and often unlawful rulemaking agenda that, without sound justification, will radically redesign the foundation of our capital markets. The majority of the proposed changes are non-investment–, non-investor–, and non-market–oriented changes that limit choice and flexibility.”
The report then identifies six specific sins that it claims that the SEC has committed when it comes to rulemaking, including ignoring its obligations under the Administrative Procedure Act, adopting final rules that differ drastically from proposals, and exceeding its statutory authority. The report recommends a variety of reforms to the rulemaking process, which are summarized in this excerpt from a Mayer Brown blog:
– Require the SEC to affirmatively conduct an analysis of all interrelated and interconnected rules for each proposed rule and then amend or repeal rules as necessary to account for such interconnectedness;
– Require the SEC to provide comment periods for proposals with a minimum of 60 days, calculated from the Federal Register publication date, unless there is an emergency;
– Require a third party to perform and publish for public comment no later than 90 days from the date of enactment a post-adoption cost impact assessment for each major rule the SEC has adopted in the past three years;
– Integrate and expand on the mission of several offices of the SEC, including, for example, the Office of the Advocate for Small Business Capital Formation; and
– Require the SEC to publish an annual report on the number of exemptions granted or exemptive rules adopted to promote capital formation and innovation and the actions the SEC has taken to promote financial security and review and adjudicate exemptive applications under the Investment Company Act of 1940 for relief in no more than 180 days.
Several of these reform proposals sound like they’re the equivalent of the “Paperwork Production Act of 2024,” and appear designed to simply throw sand in the gears of the rulemaking process. For their proponents, that may be more of a feature than a bug, but the proposals also ignore the problem of legislative gridlock, which I think is the real issue.
The simple truth is that Congress can’t get its act together to pass legislation, so whatever party controls the White House is going to use federal agency rulemaking to accomplish its legislative objectives. Until that’s addressed, rulemaking is going to be a highly partisan and sometimes ugly process, no matter what “reforms” are on the table.
