Check out the latest edition of our “Timely Takes” Podcast featuring my interview with Sidley’s Beth Berg, Paul Choi & Jim Ducayet on issues associated with earnings pre-releases. In this 19-minute podcast, Beth, Paul and Jim addressed the following topics:
– Legal issues that might compel an earnings pre-release
– Typical voluntary pre-release scenarios
– Key business and investor relations considerations
– Legal risks and compliance obligations around the pre-release decision
– Participants in the decision-making process
– Earnings pre-release “dos and don’ts”
Our discussion was based on Sidley’s recent memo, “Earnings Pre-Release Considerations”, which members of TheCorporateCounsel.net can access in our “Earnings Guidance” 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, I’m all ears – just shoot me an email at john@thecorporatecounsel.net.
Over on The10b-5 Daily, Lyle Roberts recently blogged about the Third Circuit’s decision in City of Warren Police & Fire v. Prudential Financial, (3rd. Cir.; 6/23). One aspect of the Court’s opinion addressed whether the defendants could be liable for comments of its CEO that were paraphrased in an analyst’s report. This excerpt discusses the Court’s analysis:
In its Janus decision, the Supreme Court held that for a person or entity to have “made” a false statement that can lead to Rule 10b-5 liability, that person or entity must have “ultimate authority over the statement, including its content and whether and how to communicate it.” The attribution of a statement “is strong evidence that a statement was made by – and only by – the party to whom it is attributed.” But how does this analytical framework apply to a paraphrased statement from a corporate officer contained in an analyst report?
The Third Circuit held, contrary to the district court’s decision, that the corporate officer could still be deemed a “maker” of the statement. Even though the statement was indirect (paraphrased) and contained in a non-corporate document (analyst report), the court found that “because the report attributed the statement to the [corporate officer] and the context of the statement indicates that he exercised control over its content and the decision to communicate it to the [analyst], the statement cannot, at least at the pleading stage, be considered to have been ‘made’ by [the analyst] for purposes of Rule 10b-5.” In other words, the corporate officer had “ultimate authority” to speak about the topic on behalf of the company, so he was still the “maker” of the statement even though it was republished by the analyst.
This decision illustrates the fine distinctions that courts sometimes draw in these cases. The Third Circuit held that a company could be liable for its CEO’s “paraphrased” statements in an analyst report, while in another recent decision the Fourth Circuit declined to impose liability on a company for the way that an analyst “characterized” a CEO’s comments. I’m not exactly sure what the distinction is between characterizing and paraphrasing, but it looks like it might matter.
To be fair, the two decisions aren’t necessarily inconsistent – the Fourth Circuit focused on the “falsity” of the CEO’s statements while the Third Circuit focused on whether the CEO could be regarded as the “maker” of the challenged statements – but they do show the kind of thicket companies and executives confront when dealing with cases alleging that a company is responsible for information in analyst’s reports.
Late-stage pre-IPO companies looking for financing alternatives may want to consider issuing convertible securities. This Cooley blog reviews “pre-IPO converts” and discusses the key considerations that companies thinking about issuing these securities should keep in mind. This excerpt provides an overview of the terms of a typical pre-IPO convert:
A pre-IPO convert is a debt instrument issued by a private company, typically as the last financing round before an IPO. While public company convertible bonds are fairly standardized debt securities, pre-IPO converts tend to have a variety of negotiable structures and features, which also make them more complex than a traditional equity financing or convertible note bridge round.
The key feature of a pre-IPO convert is that, upon some future date or event, such as 2-3 years after issuance or upon an IPO which meets certain size and liquidity criteria, the debt becomes convertible at the option of the noteholder (or, in some cases, is mandatorily converted) into shares and/or cash based on the stock price at the time of the conversion event. Until the conversion event or maturity, the convertible note (or “convert”) is effectively a straight debt instrument. Some pre-IPO converts may be redeemed by the company in cash in limited circumstances (typically at a substantial premium).
In addition, pre-IPO convert structures tend to provide for an increasing interest rate and decreasing conversion price as the time to IPO or other conversion event increases. Features, such as cash interest vs. PIK, incurrence covenants, information rights, boards seats, subsidiary guarantors, collateral, guaranteed minimum internal rate of returns, valuation cap, conversion price resets and registration rights are much more common in pre-IPO converts.
The blog goes on to discuss the type of investors who are typically interested in these securities, the pros and cons for investors in these transactions, and the key considerations in negotiating a pre-IPO convert. It also includes a chart comparing and contrasting the terms of public converts and pre-IPO converts.
Speaking of IPOs, according to a recent WSJ article, the long IPO drought may be coming to an end. In fact, this excerpt says that investors are so eager for new issues that the only thing that might hold the market back may be the reluctance of private companies to take the plunge:
In the past several weeks, the major barriers to a resurgence in initial public offerings have lifted. U.S. stocks are climbing toward new 52-week highs, volatility is down, inflation has eased and, perhaps most important, investors are making speculative bets again.
What will determine whether the IPO market returns to a roar is now more about whether stewards of private companies want to make the transition to public ownership.
“It’s supply crimping the IPO market, not demand,” said Daniel Burton-Morgan, head of Americas Equity Capital Markets Syndicate at Bank of America. “Does that mean post Labor Day we see a more normal IPO market? Maybe. Or it could take another quarter. But at this juncture, investor demand is not the issue.”
The article notes that there are some potentially big deals in the queue for the fall, but nobody expects the market to quickly return to the scorching demand for new issues experienced during 2020-2021.
When Delaware amended Section 102(b)(7) of the DGCL last year to permit charter amendments exculpating officers from damages liability for breaches of the duty of care, people wondered whether many companies would propose amendments during the 2023 proxy season and, more importantly, how stockholders would react to those proposals. This excerpt from a Weil memo on this year’s officer exculpation proposals provides some answers to those questions:
Between August 1, 2022, when the amendment to DGCL Section 102(b)(7) became effective and July 5, 2023, 279 Delaware corporations included a proposal in their proxy statement requesting stockholder approval for a charter amendment to adopt an exculpatory provision for officers. Stockholders approved such proposal at 221 (79.2%) companies and did not approve the proposals at 42 of the 279 companies (15.1%). The results of the votes at 17 companies remain outstanding at the time of this publication.
Generally, pursuant to Section 242 of the DGCL, a charter amendment requires the vote of a majority of the outstanding stock entitled to vote on the matter. For companies that require supermajority approval under their governing documents, the higher vote threshold proved to be a hurdle to stockholder approval. Specifically, 18 of the 42 proposals that failed required a supermajority vote, 13 of which would have passed had the Delaware default standard applied.
People also wondered how the proxy advisors would react to these proposals. The memo says that ISS generally supported them, while Glass Lewis usually opposed them. It says that as of July 5, 2023, ISS supported 80% of these officer exculpation proposals. Another interesting tidbit is that 38 of the 47 proposals that ISS recommended against passed anyway. The memo didn’t provide any hard data on Glass Lewis’s recommendations, but since Glass Lewis’s superpower appears to be opacity, that’s not a huge surprise.
A recent Wilson Sonsini blog provides another interesting data point for how officer exculpation proposals fared with investors this proxy season. The blog looked specifically at Silicon Valley 150 companies, and while it found that relatively few companies asked stockholders to approve officer exculpation charter amendments, those that did enjoyed a fairly high rate of success:
Of the 143 SV150 companies that are incorporated in Delaware, only nine companies, or approximately 6.3 percent, included an officer exculpation proposal in their proxy statement.[3] Of those nine proposals, five required the affirmative vote of a majority of the voting power of the outstanding stock entitled to vote on the proposal (the default voting requirement under the DGCL for an amendment to the charter), and four required the affirmative vote of a supermajority (generally, 66 2/3 percent) of the voting power of the outstanding stock entitled to vote on the proposal.
Seven of the nine proposals, or approximately 78 percent, passed. The failed proposals were comprised of two of the four proposals that required a supermajority vote and, although they both received significantly more affirmative votes than “against” votes, they failed to attain the affirmative vote of a supermajority of the voting power of the outstanding stock entitled to vote thereon.
The blog says that while only a handful of SV 150 companies asked their stockholders to approve officer exculpation amendments this year, the success those companies enjoyed will likely prompt a much larger number to take this step next year. Based on the data in Weil’s memo, I think that it’s probably going to be the case beyond Silicon Valley as well.
Last week, Dave blogged about the PCAOB’s rather dismal assessment of audit deficiencies. With the PCAOB’s Chair very publicly ripping auditors a new orifice about shortcomings in their performance, investors also must be up in arms about audit quality issues, right? Yeah, well, apparently not so much. According to Audit Analytics, the capital markets’ trusty “arbiters of materiality” continue to vote overwhelmingly in favor of auditor ratification proposals – and by “overwhelmingly,” I mean in proportions that rival Joseph Stalin’s performance at the Soviet polls. Here’s what Audit Analytics found:
Throughout the last four years, our analysis on shareholder votes reveals that, on average, nearly 98% of total votes are cast in favor of auditor ratification. Shareholder votes filed between January 1, 2020 and December 31, 2022, continued that trend for a fifth consecutive year. Votes against auditor ratification comprised nearly 2% of the total votes; abstained votes account for the remaining 0.4% of total shareholder votes cast.
Audit Analytics says that fewer than 5% of shareholder votes were cast against the auditor, 93% of the time for proposals made during 2020-2022, although the frequency of votes in which more than 5% were cast against ratification increased. It also highlights the handful of situations in which a high percentage of shareholders voted against ratification.
In remarks delivered to the Financial Stability Oversight Council on Friday, SEC Chair Gary Gensler addressed the status of the agency’s proposed climate change disclosure rules. He didn’t tip his hand as to the timing of any action by the SEC, but he did defend the agency’s authority to adopt rules mandating disclosures concerning the impact of climate change. Here’s an excerpt:
In response to the Great Depression and fraudulent practices of the time, President Roosevelt and Congress came together to enact the federal securities laws in which they established a basic bargain in our markets. Investors get to decide which risks to take, so long as public companies raising money from the public make what Roosevelt called “complete and truthful disclosure.”
The SEC was assigned an important role regarding that basic bargain and public disclosure. Under the securities laws, though, the SEC is merit neutral. Investors get to decide what investments they make and risks they take based upon those disclosures. The SEC focuses on the disclosures about, not the merits of, the investment.
The SEC has no role as to climate risk itself. But we do have an important role in helping to ensure that public companies make full, fair, and truthful disclosure about the material risks they face.
Already today, issuers are making climate risk disclosures, and investors are making investment decisions based on those disclosures. Indeed, a majority of the top thousand issuers by market cap already make such disclosures, including what’s known as Scope 1 and Scope 2 greenhouse emissions. Further, investors representing tens of trillions of dollars in assets are making decisions relying on those disclosures.
I’m not very good at reading tea leaves, so I’ll leave it to you to decide whether to there’s any significance to Chair Gensler’s decision not to refer to Scope 3 disclosures – the most controversial part of the SEC’s rule proposal – in his remarks. The closest he came to discussing the timing of Commission action on the proposal in his comments was when he said that the SEC was “considering carefully” the 15,000+ comments received on the proposal and that it would consider adjustments that the Staff and the Commissioners consider appropriate.
We’ll have the latest on climate disclosure practices & the status of the SEC’s climate disclosure rule proposals at our “Proxy Disclosure & 20th Annual Executive Compensation” Conferences, which take place September 20th – 22nd, as well as our “2nd Annual Practical ESG Conference,” which takes place on September 19th. The “2nd Annual Practical ESG Conference” can be conveniently bundled with the “Proxy Disclosure & 20th Annual Executive Compensation” Conferences. Register today to ensure that you don’t miss out on our panelists critical insights!
Chair Gensler’s remarks before the FSOC weren’t the only place where the SEC’s rulemaking power was defended last week. In fact, I couldn’t resist channeling my inner Eric Cartman this morning after reading the SEC’s spirited defense of its broad authority to adopt disclosure rules that begins on p. 97 of the Cybersecurity Disclosure Rules Adopting Release. Here’s an excerpt:
Disclosure to investors is a central pillar of the Federal securities laws. The Securities Act of 1933 “was designed to provide investors with full disclosure of material information concerning public offerings of securities.” In addition, the Securities Exchange Act of 1934 imposes “regular reporting requirements on companies whose stock is listed on national securities exchanges.” Together, the provisions of the Federal securities laws mandating release of information to the market—and authorizing the Commission to require additional disclosures—have prompted the Supreme Court to “repeatedly” describe “the fundamental purpose” of the securities laws as substituting “a philosophy of full disclosure for the philosophy of caveat emptor.”
This bedrock principle of “[d]isclosure, and not paternalistic withholding of accurate information, is the policy chosen and expressed by Congress.”362 Moreover, “[u]nderlying the adoption of extensive disclosure requirements was a legislative philosophy: ‘There cannot be honest markets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy.’”
The discussion goes on to identify specific statutory provisions granting the SEC broad disclosure authority, and also provides numerous examples of where the agency has exercised that authority.
The SEC’s claim to broad rulemaking authority has been challenged by conservatives in recent years, and I suspect that the arguments the agency makes in the 10 pages that it devotes to this topic in the release are likely to resurface in much expanded form in the lawsuits that are likely to arise challenging many of the rules on its current agenda.
Think long and hard before clicking “send” on an email or text message in which you’ve embedded an emoji, because this recent Foley blog says that if you opt to add this little bit of fun to your message, you might have just created a binding contract:
In this age of digital communication, it was only a matter of time before emojis found their way into legally binding documents. Emojis are now being used as a means of expression and communication in various spheres of life, including the discussion of contracts. In fact, a Canadian court recently ruled that a thumbs-up emoji counted as a contractual agreement (read more here).
Whether or not the sender meant “message received” or they were actually agreed to the contract terms, the recipient assumed the thumbs up was a green light to move forward, and the court agreed. Startup founders deal with contracts on a regular basis, from investors to vendors to outside service providers, and one wrong thumbs-up could potentially spell trouble.
The blog goes on to address the factors which might result in the creation of a binding contract through the use of an emoji, but a better alternative may be to just act like a grownup and steer clear of their use in any setting where creating a binding contract is even a remote possibility. Or, if you can’t bring yourself to do that, then at least use my man Shruggie here ¯\_(ツ)_/¯ as your default emoji option.
