A recent Wolters Kluwer/Above the Law survey of 275 legal professionals has some interesting conclusions about generative AI’s potential implications for the legal profession – including which lawyers and practice areas will be at the greatest risk of being rendered obsolete by AI in the coming years. Here are some of the key findings:
– 62% of respondents believe that effective use of generative AI will separate successful law firms from unsuccessful firms within the next five years.
– More than 80% of all respondents agree that generative AI will create transformative efficiencies for research and routine tasks.
– Respondents are less convinced that AI will transform high-level legal work: 31% agree that this will happen, while 50% disagree.
– More than two-thirds of respondents believe that document review lawyers and librarians or others involved in knowledge management and research are at risk of obsolescence because of generative AI.
When it comes to this final point, a Legal Dive article on the survey gets a little more specific on AI’s potential impact on law jobs:
Roughly 71% said generative AI could replace document review lawyers within the next decade, and 68% said they could see a similar impact on law librarians. Roughly 41% said paralegals could become obsolete in the next 10 years, with no other listed position cited by more than 26% of respondents.
Only 19% of survey respondents indicated that law firm associates were at risk of becoming obsolete, and only 2% said that law firm partners were likely to be replaced by generative AI. Some respondents weren’t as gloomy about AI’s impact on jobs as the overall numbers might suggest. The Legal Dive article cites one legal operations professional as saying that “[r]oles will evolve but not necessarily become obsolete” and quotes a law professor who said, in effect, that people who embrace the technology will do well, while those that can’t leverage AI will be at risk.
In terms of AI’s impact on specific practice areas, the survey found that corporate, trusts & estates, litigation, IP and tax are the areas most likely to be significantly affected by generative AI, while criminal/white collar law and environmental/energy law are expected to be affected the least.
The DOJ, Commerce (BIS) & Treasury (OFAC) recently issued guidance in the form of a “Compliance Note” regarding the voluntary self-disclosure to these agencies of violations of US sanctions and export control laws. A recent Hunton Andrews Kurth memo provides an overview of the Compliance Note, which lays out how timely, voluntary self-disclosure of potential violations can significantly mitigate civil or criminal liability.
For example, this excerpt from the memo discusses the position of the DOJ’s National Security Division on how voluntary self-disclosure can eliminate criminal penalties for violations:
The Compliance Note clarifies DOJ’s position that moving forward, where a company voluntarily self-discloses potentially criminal violations of US sanctions and export laws, fully cooperates, and timely and appropriately remediates the violations, NSD generally will not seek a guilty plea; rather, there will be a presumption that the company will receive a non-prosecution agreement and will not pay a criminal fine.
The memo notes that the presumption will not apply in cases with certain aggravating factors, such as pervasive criminal misconduct, concealment or involvement by upper management, repeated violations of national security laws, the export of particularly sensitive items or the export of material to end users who make the Nat Sec folks’ hair stand on end.
Reg A+ has become an increasingly popular way for small companies to access the public markets in recent years, but as Meredith blogged a few months ago, the growth in the number of Reg A offerings has been accompanied by compliance issues that have attracted the attention of the SEC’s Division of Enforcement. If you’d like to get up to speed on the SEC’s concerns about Reg A+ deals, check out this recent Goodwin memo, which highlights both recent enforcement actions and comment trends.
This excerpt addresses the Staff’s comments on potential “at-the-market offerings” which aren’t permitted under Reg A+ and which have also been the subject of enforcement proceedings:
Similar to the Enforcement Division proceedings noted above, a number of comments focused on whether Reg A+ issuers were conducting delayed offerings or offerings at other than a fixed price. As noted above, delayed offerings and at-the-market offerings are not permitted under Reg A+. One issuer argued that the offering was not an at-the-market offering because there was no existing trading market for the issuer’s securities. It is unclear if the Staff accepted this argument or one of the other arguments made by the issuer that the offering was not an at-the-market offering. We agree that an offering should not be considered an at-the-market offering if there is no “existing trading market.”
If you’ll permit me, I’d like to close this blog by noting sort of a personal milestone – this is my 1,000th blog on TheCorporateCounsel.net and it comes on the same week as I celebrated my 7th anniversary of joining the team here. I’d like to say thanks to each of you for reading these blogs over the years & for reaching out to share your own insights. I’ve had a lot of fun and hope to continue to hang around here for a few more years or until our generative AI overlords kick me out, whichever comes first.
Last Friday, Nasdaq filed a proposed rule with the SEC that would establish listing standards related to notification and disclosure of reverse stock splits. According to the filing, Nasdaq has seen a significant increase in reverse splits over the past two years, most of which involve small cap issuers trying to maintain the $1.00 minimum bid price required to keep their stock listed. These issuers typically don’t receive a lot of media or analyst coverage, and that seems to be driving Nasdaq’s push for notification & disclosure requirements. This excerpt from the rule proposal explains the reasons for it & provides a general overview of what would be required:
Nasdaq believes that the increase in companies effecting reverse stock splits warrants amendments to the listing rules to enhance the ability for market participants to accurately process these events, and thereby maintain fair and orderly markets. As such, Nasdaq is proposing amendments to its rules regarding notification and disclosure of reverse stock splits and regulatory halts.
Specifically, Nasdaq is proposing to adopt additional listing rules requiring a company conducting a reverse stock split to notify Nasdaq about certain details of the reverse stock split at least five (5) business days (no later than 12:00 p.m. ET) prior to the anticipated market effective date, and make public disclosure about the reverse stock split at least two (2) business days (no later than 12:00 p.m. ET) prior to the anticipated market effective date.
As part of the rule proposal, references to a reverse stock split currently contained in Listing Rule 5005(a)(44) would be deleted and new provisions added to set forth the timeframe and requirements for the new notification and disclosure requirements. The comment period for the proposal will expire 21 days after publication in the Federal Register, which hasn’t happened yet. Check out Cydney Posner’s blog for more details on the proposal.
What alternatives do companies have if they disagree with their auditors concerning an accounting issue? This recent blog from Perkins Coie’s Ben Dale – himself a recovering auditor – discusses some of the options. Here’s an excerpt:
AS 1301.22 states in relevant part: “The auditor should communicate to the audit committee any disagreements with management about matters, whether or not satisfactorily resolved, that … could be significant to the company’s financial statements or the auditor’s report.” Importantly, disagreements with management don’t include differences of opinion based on incomplete facts or preliminary information that are later resolved by the auditor after obtaining additional relevant facts or information prior to the issuance of the auditor’s report.
In the four years I worked as an auditor, I never saw a disagreement with management make it to the audit committee. Rather, they were kept within the management ranks for several days or weeks while the auditors and management performed additional procedures, reviewed all relevant information and sought resolution of their disagreement. Only if the disagreement persisted at the end of the audit after all efforts were made to resolve it, would it be elevated to the audit committee (assuming it was significant to the financials or audit report).
If a disagreement remains unresolved after escalation to the audit committee, the company or auditor could choose to seek advice directly from the SEC Staff. While the SEC Staff may provide interpretive guidance on issues arising under GAAP or certain securities regulations, they are highly unlikely to referee disputes between companies and auditors – and notably, communications with the SEC may not remain confidential.
The blog says that, ultimately, you could also go nuclear and fire the auditor, but that’s a “whole ‘nother bag of snakes.” As a practical matter, the big problem with a potential disagreement is that the issue typically arises when the clock is ticking on your next SEC filing. If the auditor won’t sign off on the financials in your 10-K or provide a consent for your registration statements, then you ultimately don’t have a lot of good alternatives except to see things their way – and that may be the biggest reason why these seldom even make it to the audit committee.
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.
