Join us tomorrow at 2 pm Eastern for our CompensationStandards.com webcast, “More on Clawbacks: Action Items and Implementation Considerations” – to hear Compensia’s Mark Borges, Ropes & Gray’s Renata Ferrari, Gibson Dunn’s Ron Mueller and Davis Polk’s Kyoko Takahashi Lin continue their excellent discussion from our 20th Annual Executive Compensation Conference on complex decisions and open interpretive issues that unlucky companies faced with a restatement will need to tackle.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE which require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
We’re making this webcast available to members of TheCorporateCounsel.net as a bonus, but if you want to stay up to date on the latest developments on clawbacks, you need to become a CompensationStandards.com member if you aren’t already. We offer a no-risk trial for that site as well on the same terms that we provide for TheCorporateCounsel.net – and you can take advantage of that offer in exactly the same way!
Last week, Glass Lewis released the results of its inaugural Client Policy Survey, which reflects input on corporate governance, ESG and stewardship matters from more than 500 institutional investors, corporate issuers, corporate advisors, shareholder advocates and other stakeholders. This excerpt from the accompanying press release highlights some of the survey’s findings:
– Investors view financial results, excluding total shareholder return (TSR), and incentive payouts relative to TSR as the most important factors when reviewing executive pay-for-performance alignment.
– Overwhelmingly, respondents indicated that companies should set greenhouse gas (GHG) emissions targets. However, there was a split on exactly which companies should set targets — and exactly which types of targets they should set.
– More than 40% of investors would vote against boards that use plurality voting for uncontested director elections, and over two-thirds view the practice as problematic.
– Most investors believe all board-level roles should be considered when assessing whether directors’ commitments are overstretched.
The survey covers a lot of ground and includes responses addressing a variety of issues relating to board governance, director commitments, capital structure & voting rights, ESG & shareholder proposals, and executive compensation.
UCLA’s Stephen Bainbridge recently blogged about the major challenges and issues he sees facing public company boards over the next year or two. In his assessment, these include cybersecurity, risk management, shareholder activism and political risks. This excerpt addresses risk management:
Cybersecurity is a sufficiently important risk to deserve its own category. But the general problem of risk management remains an important part of what boards must do. Board-level systems designed to monitor and oversee mission-critical functions play a crucial role in showcasing the board’s fulfillment of its Caremark duties.
This was evident last year when the Delaware Court of Chancery allowed a Caremarkduty-of-oversight claim to advance against Boeing Company directors. The court’s decision was based on allegations of insufficient board involvement in safety matters and the absence of a dedicated committee with direct oversight responsibilities. Nevertheless, it’s worth noting that two subsequent cases, Hamrockand SolarWinds, have underscored the necessity of establishing bad faith rather than merely proving gross negligence for a Caremark claim to succeed.
By the way, Prof. Bainbridge is no fan of Caremark, and another one of his recent blogs summarizes his objections to it:
First, Caremark was wrong from the outset. Caremark’s unique procedural posture, which precluded any appeal, gave Chancellor Allen an opportunity to write “an opinion filled almost entirely with dicta” that “drastically expanded directors’ oversight liability.” In doing so, Allen misinterpreted binding Delaware Supreme Court precedent and ignored the important policy justifications underlying that precedent.
Second, Caremark was further mangled by subsequent decisions. The underlying fiduciary duty was changed from care to loyalty, with multiple adverse effects. In recent years, moreover, there has been a steady expansion of Caremark liability. Even though the risk of actual liability probably remains low, there is substantial risk that changing perceptions of that risk induces directors to take excessive precautions.
Join us tomorrow for the webcast – “SEC Enforcement: Priorites & Trends” – to hear Hunton Andrews Kurth’s Scott Kimpel, Locke Lord’s Allison O’Neil, and Quinn Emanuel’s Kurt Wolfe provide insights into the lessons learned from recent enforcement activities and insights into what the new year might hold.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE which require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
Some law firms have announced their own proprietary tools in the AI and software space recently — for example, Gunderson Dettmer announced a homegrown generative AI chat app for the firm’s attorneys, Cooley announced Cooley D+O, a software platform for D&O questionnaires, and Orrick recently announced The Observatory, an online platform meant to help you select technology that’s right for your organization.
These are certainly some interesting developments by firms working to lead here, but we still don’t have a great sense for what law firms and in-house legal departments are doing generally to leverage efficiencies from AI or other emerging technologies for legal tasks to stay up to date in this rapidly changing environment. To get some answers, we’ve put together a short, anonymous survey on how in-house teams and law firms are using technologies right now and what policies and oversight of AI they currently have in place. This is different from the many surveys on AI we’ve seen elsewhere focused on who it’s going to put out of a job or what industries it’s going to revolutionize. We hope this will give you current, practical & actionable insight. Please take a moment to participate!
If you are leading your team’s efforts to efficiently, safely & legally leverage AI, that would make a great podcast topic, and we’d love to hear about it.
LIBOR officially became an ex-parrot on June 30, 2023, and has been replaced by SOFR in most credit agreements. But this WilmerHale memo says that despite the fact that lenders and borrowers have known for some time that the transition away from LIBOR was coming, a surprising number of credit agreements still haven’t been amended to address the transition, and that this may prove to be a costly oversight:
Despite these preparations and legislative actions, there remains a contingent of corporate borrowers that have fallen (back) into the cracks. In many loan documents, LIBOR cessation results in a fallback to a rate based on the prime rate, also known as the base rate or reference rate, which, while based on the rate banks give to their best, most creditworthy corporate customers, has historically been more expensive than LIBOR.
Because the LIBOR Act is generally inapplicable for loan documents containing contractual fallback language that clearly specifies a replacement rate, the prime rate will become the controlling benchmark under these agreements. A recent estimate stated that approximately 8% of leveraged loans could fall back to the prime rate upon the cessation of LIBOR if action is not taken. Although public data on the topic is limited, the percentage of loans falling back to the prime rate in the venture debt and middle-market spaces is likely to be far higher.
The memo recommends that borrowers review the terms of their existing debt agreements to determine whether there are potential issues with the fallback pricing provisions of those agreements. Borrowers that identify potential issue should consult with counsel as to whether the LIBOR Act applies to their debt agreements and, if those agreements fallback pricing provisions are the prime or base rate, negotiate appropriate changes to a SOFR-based benchmark rate.
During the darkest days of the pandemic, convertible debt offerings were an attractive capital raising alternative, and as we blogged at the time, even large cap issuers that traditionally shied away from converts opted to take the plunge. While the convertible debt market remained pretty robust in 2020 & 2021, interest in converts petered out last year. However, a recent Institutional Investor article says that interest in convertible debt issuances has surged again in recent months:
The market for convertible bonds, the interest-paying securities that bondholders can choose to turn into common stock, is stirring again and attracting investors.
Convertible bonds typically mature in five years and are issued by less creditworthy companies — 76 percent of issuers don’t have a credit rating and most of the others have a BBB rating or lower from one of the major agencies, according to research by Calamos Investments. But higher interest rates are causing even the healthiest companies to use convertible bonds to raise capital. Through September of this year, companies across the globe sold $61 billion worth of convertible bonds and out of the $42 billion raised by U.S. companies, almost a third of them have investment grade ratings.
“That’s a bit of a change from the previous few years in that it was a much smaller percentage than before,” said David Hulme, managing director and portfolio manager at Advent Capital Management, which specializes in convertible bonds. “I think that’s been driven partially by a change in the way companies account for the issuance of convertibles.”
Back in 2020, companies were attracted to converts as an alternative to issuing equity during a period of downward pressure on stocks. This time, it looks like it’s the ability to mitigate the impact of the current interest rate environment along with depressed stock prices that’s making companies consider convertible debt issuances. Like Mark Twain supposedly said, history never repeats itself, but sometimes it rhymes.
On Wednesday, a panel of 5th Circuit judges rejected a challenge to Nasdaq’s board diversity rule. In Alliance for Fair Board Recruitment v. SEC, (5th. Cir.; 10/23), the Court was unpersuaded by the plaintiffs’ argument that the diversity rules violate the 1st and 14th Amendments to the U.S. Constitution and the SEC’s statutory obligations under the Exchange Act and the Administrative Procedure Act.
In order for the 1st & 14th Amendments to be implicated by Nasdaq’s rulemaking, the plaintiffs had to establish that the rules involved “state action.” The plaintiffs made two arguments in support of that position. The first was that Nasdaq was itself a governmental entity, and the second was that Nasdaq’s rules were attributable to the government, and that as a result constitutional constraints on its actions applied. As this excerpt from the opinion indicates, the Court wasn’t very impressed with the argument that Nasdaq should be regarded as a government entity:
Nasdaq is a private entity. It is a private limited liability company wholly owned by Nasdaq, Inc., a publicly traded corporation. Nasdaq’s board of directors is selected by its broker-dealer members and by Nasdaq, Inc., and companies wishing to list on Nasdaq do so by entering into contracts with Nasdaq. While Nasdaq must register with and is heavily regulated by the SEC, the Supreme Court has made clear that a private entity does not become a state actor merely by virtue of being regulated. “[T]he ‘being heavily regulated makes you a state actor’ theory of state action is entirely circular and would significantly endanger individual liberty and private enterprise.” Halleck, 139 S. Ct. at 1932.
The argument that Nasdaq’s rules were attributable to the government didn’t fare any better with the Court. It noted that in order for the actions of a regulated entity to be attributed to the government, there had to be a close nexus between the State and the challenged action. That nexus had been found to exist only in a few limited circumstances, “including, for example, (i) when the private entity performs a traditional, exclusive public function; (ii) when the government compels the private entity to take a particular action; or (iii) when the government acts jointly with the private entity.” The Court found that none of these circumstances were present in this case.
The Court also rejected claims that the SEC’s actions exceeded its authority under the Exchange Act and was arbitrary and capricious in approving Nasdaq’s diversity rule. One aspect of this part of the opinion that’s worth noting is that the Court specifically rejected a claim that the SEC lacked the authority to promulgate rules requiring disclosures that weren’t material to investors:
[A] disclosure rule can be “related to the purposes of [the Exchange Act],” 15 U.S.C. § 78f(b)(5), even if the SEC does not find that the disclosure rule is limited to information that would be “material” in the securities fraud context. The “fundamental purpose” of the Exchange Act is “implementing a philosophy of full disclosure,” Levinson, 485 U.S. at 230 (internal quotation marks and citation omitted)—not just the disclosure of information sufficient to state a securities fraud claim. Indeed, the Exchange Act gives the SEC “very broad discretion to promulgate rules governing corporate disclosure.”Nat. Res. Def. Council, Inc. v. SEC, 606 F.2d 1031, 1050 (D.C. Cir. 1979).
While the decision is a resounding win for Nasdaq and the SEC, it’s unlikely that this will be the last word on the case. As this Reuters article points out, the defendants drew a very favorable panel comprised entirely of Democratic appointed judges. If the plaintiffs appeal to the full 5th Circuit, the SEC & Nasdaq may well face a more hostile reception, because 12 of the 16 judges there were appointed by Republican presidents.
We’ve previously blogged about the Corporate Transparency Act, which requires non-exempt entities to disclose information about their beneficial owners to FinCEN. Well, the New York LLC Transparency Act, which is currently awaiting Gov. Hochul’s signature, could impose beneficial ownership disclosure obligations that go beyond those contemplated by the CTA. This excerpt from a BakerHostetler memo explains:
If it becomes law, the NYTA will require all LLCs formed or registered to do business in New York to disclose to the New York Department of State the same beneficial ownership information that such LLCs will need to disclose to the Financial Crimes Enforcement Network (FinCEN) under the CTA.
While both pieces of legislation have similar goals and impose similar disclosure obligations, they differ drastically in terms of the use and availability of the information submitted. Under the CTA, the beneficial ownership database is kept confidential and may be accessed only by law enforcement agencies and financial institutions in limited circumstances. But under the NYTA, the names and business addresses of the beneficial owners of LLCs will be made publicly available in a searchable database.
The New York Legislature passed this bill in June, and it’s been waiting on the Governor’s desk since then. The memo says that it is unclear whether she will sign it, but that if she vetoes it, the Legislature can override that action by a 2/3rds vote of both houses.
When I’m reduced to blogging about things like pending NY LLC transparency legislation, you know we’ve reached the end of a slow news week here at TheCorporateCounsel.net. Since that’s the case, I thought it might be fun to might close things out today by checking in with America’s most entrepreneurial hip-hop artists, The Wu-Tang Clan, to see whether they’re up to anything interesting on the business front.
That’s a dumb question to ask when it comes to The Wu-Tang Clan, because they’ve always got some interesting business deals going on. In recent years, the group’s entrepreneurial ventures have focused on digital assets, and I’ve blogged about things like Method Man’s NFT venture & Ghostface Killah’s ill-fated ICO deal. Now, however, it looks like the burgeoning legal cannabis market has caught the eye of at least a couple of Wu-Tang members.
According to this article, the Newark, NJ City Council has signed-off on Raekwon’s application to open a branch of his “Hashstoria” cannabis dispensary in the city, and Raekwon promises big things to potential customers:
When it’s complete, Hashstoria’s newest location in Newark will have “the finest greenery on the planet.” That’s the pledge from Raekwon, the Wu-Tang Clan rapper who is bringing a cannabis dispensary and smoking lounge to New Jersey’s largest city.
Raekwon previously posted a message on Instagram about the planning board’s approval of Hashstoria in Newark, saying that it will be a “culture-shifting endeavor” and it is “guaranteed to be the top tier consumption lounge / dispensary to hit the east coast period.”
Not to be outdone by his colleague, Method Man recently announced that his own cannabis-related venture would be expanding into New York State:
TICAL Official, the cannabis brand spearheaded by Wu-Tang Clan’s Method Man, has officially graced New York State’s adult-use cannabis shelves. Collaborating with Central Processors NY and Adirondack Hemp Company, the brand’s entrance into the market has been both highly anticipated and symbolically significant. Rapper, actor and entrepreneur, Method now hopes to bring a different kind of soothing relief with his TICAL Official cannabis brand to his home turf. The initial offering features Central Processors’s prerolls and edibles, with indications that the product line is set to expand over the subsequent months.
The potential upside of a vertical merger involving Method Man’s chronic brand and Raekwan’s smoke shops seem obvious enough to me that I expect that it won’t be too long before we add a conflict with FTC Chair Lina Khan & her antitrust enforcement team to the “Beefs” section of our “Wu-Tang Clan” Practice Area.
