It’s no surprise that activist hedge funds have squealed like stuck pigs when it comes to the SEC’s reform proposals for Section 13(d) and swaps reporting. Shortening the time period in which they have to disclose a 5% stake in a public company, expanding the definition of what constitutes a 13D “group” and limiting the ability to use undisclosed swaps to mask equity stakes would all hit these folks right in the wallet. But a recent Institutional Investor article says activist hedge funds have another group on their side that’s causing quite a stir:
A new organization, which Institutional Investor has learned has at least one hedge fund backer, has enlisted dozens of academics to argue against the proposals, creating something of a firestorm of criticism. That effort is the brainchild of Frank Partnoy, a law and finance professor at the UC Berkeley School of Law, who decided the SEC’s new aggressiveness was a good reason to create a nonpartisan, nonprofit institute — he named it the International Institute of Law and Finance — that could influence policy by convincing other professors to sign on to comment letters that he, and his colleague Robert Bishop, would draft.
“There’s a gap in terms of academics connecting with policymakers,” says Partnoy, a highly regarded academic and prolific writer, whose work includes several nonacademic books, including F.I.A.S.C.O., his first-person takedown of the derivatives business in which he once toiled as a salesperson at Morgan Stanley. In part, that gap exists because there is no incentive for academics to get involved.
Wonky academic comments on proposed SEC rule changes typically fly under the radar. But Partnoy made them his mission. Now his work — in comment letters signed by himself, Bishop, and other academics — is taking some heat. In part, that’s because the financing of his institute, which pays Partnoy and Bishop for their letter writing, has been shrouded in secrecy.
The article says that the effort has been successful in recruiting other academics, with 85 adding their signatures to a comment letter opposing the swaps disclosure rules and 65 signing-on to one criticizing the proposed 13D amendments. But it’s also attracted controversy, with one former supporter alleging that the Institute “must be either a front for or supporter of hedge funds.” That’s a charge that Partnoy denies, noting that his financial backing is provided by a diverse group of individuals and institutions. The Institutional Investor article says that that group includes at least one very prominent hedge fund maven – Pershing Square CEO Bill Ackman.
Companies’ have been trying to recover some of their COVID-19-related losses by asserting claims under business interruption policies almost since the outset of the pandemic. Those efforts generally have been unsuccessful, and now, according to this Gibbons blog, you can add New Jersey to the list of states whose courts have said “no dice” to pandemic-related business interruption claims. This excerpt discusses the decision, and notes that, like other courts that have rejected similar claims, the NJ court did so based on the lack of physical losses:
In a recent decision, the New Jersey Appellate Division held that six businesses were not entitled to insurance coverage for losses sustained when they were forced to close or limit their operations as a result of Executive Orders (“EOs”) issued by Governor Phil Murphy to halt the spread of COVID-19. This ruling follows the general trend nationally in which courts have rejected claims by insureds for business interruption losses incurred due to government orders related to the spread of COVID-19.
The decision arose from the consolidated appeals of six businesses that reported losses as a result of the EOs and sued their insurance companies, alleging they improperly refused to cover the plaintiffs’ insurance claims for business losses sustained due to the issuance of the EOs.
All six suits were dismissed with prejudice at the trial level pursuant to Rule 4:6-2(e) for failure to state a claim, because the plaintiffs’ business losses were not related to any “direct physical loss of or damage to” covered properties as required by the terms of their insurance policies. The Appellate Division affirmed all six dismissals and further concluded that the losses were not covered under “their insurance policies’ civil authority clauses, which provided coverage for losses sustained from governmental actions forcing closure or limiting business operations under certain circumstances.”
Recently, I blogged about the SCOTUS’s decision to deny cert in a case challenging the constitutionality of the SEC’s “neither admit nor deny” settlement policy. On the heels of that decision, the 5th Circuit held last week that appellants who entered into a settlement with the SEC that included this language weren’t entitled to relief from the judgment confirming it. The appellants contended that the settlement was void to the extent that it incorporated the no-deny policy, which they claimed violated the First Amendment and denied them due process. Here’s an excerpt from the Jim Hamilton Blog’s discussion of the case:
The U.S. Court of Appeals for the Fifth Circuit affirmed the Texas District Court’s holding that the SEC’s 1972-initiated no-deny policy included in the defendants’ signed 2016 settlement agreement with the Commission did not void the judgment on constitutional grounds under Federal Civil Procedure Rules 60(b)(4) or (5). The court of appeals declared that Rule 60(b)(4) or (5) would void the settlement on due process or First Amendment grounds only if either the lower court did not properly have personal or subject matter jurisdiction over the defendants or the defendants were not provided actual notice of the case or an opportunity to be heard, all of which were proper and not contested by either party in 2016.
The 5th Circuit hasn’t exactly championed the SEC’s authority in recent months, so this result may look a little surprising. But the blog says that there may be another shoe yet to drop, because the two concurring judges said that the decision doesn’t address the policy’s merits, and that in light of the SEC’s current activism, it or another court may be “called upon in the near future to decide whether the policy remains or is struck down.”
After several years of increasingly bad news when it comes to D&O premiums, a recent NACD blog post by Marsh’s US D&O Product Lead Matthew McLellan says that things are looking up for companies looking to purchase coverage. Here’s the intro:
For the first time in four years, it is likely that an increasing number of public companies will, on average, experience a year-over-year decrease in their US directors’ and officers’ liability (D&O) insurance premiums in the second half of 2022. Material premium increases have become increasingly rare, and there is a dramatic return to competition in the marketplace as insurers look for new sources of revenue.
Despite a return to competition, the underwriting community remains focused on several risk areas including legal and regulatory trends; activist investors; environmental, social, and governance (ESG) issues; and other challenges that could lead to litigation. Companies should optimize opportunities, but also remain vigilant in their renewal preparations, and work with their brokers to carry out comprehensive reviews of policies and obtain the broadest coverage possible.
The blog goes on to discuss the risks that companies and insurers are confronting, which include stock market volatility, supply chain issues, inflation, heightened cyber threats, continuing high levels of shareholder litigation, and SEC proposals on climate & cybersecurity disclosure are likely to prompt greater regulatory scrutiny. In an environment where risks are increasing but premiums are at least temporarily easing, the blog suggests that companies should focus on optimizing the structure and coverage amounts provided by their D&O insurance programs.
Yesterday, the SEC announced that Jaime Lizárraga had been sworn in as an SEC commissioner to serve a term that expires on June 5, 2027. Commissioner Lizárraga fills the open Democratic seat created by Commissioner Lee’s recent departure. His inauguration follows on the heels of Mark Uyeda’s, who was sworn in on June 30, 2022 for a term expiring on June 5, 2023. Commissioner Uyeda fills the vacant Republican seat created when Commissioner Roisman left.
With the addition of Commissioner Lizárraga, the SEC has its full allotment of five commissioners, which is a place that it hasn’t been all that frequently in recent years.
With many companies filing their second quarter 10-Qs in the upcoming weeks, this Goodwin memo on updating risk factors in a 10-Q is particularly timely. The memo refers to what it characterizes as “better practices” when it comes to updating. This excerpt addresses whether companies that repeat their entire “Risk Factors” section should highlight changes to a particular risk factor:
If a company chooses to update its risk factor disclosure by restating the entire risk factor section from its Form 10-K report or a subsequent Form 10-Q report, we recommend that the company consider whether it would be better to highlight the changes in some manner that makes it more likely that the changes will come to the attention of readers. We believe that this is particularly relevant where the risk factor disclosure extends to several pages or more, which could have the unintended effect of making it difficult for readers to find and absorb the new disclosure about material changes.
Changes could be identified in various ways, such as in an introductory paragraph that refers readers to specific updated paragraphs, by use of footnotes, by use of bold text, or by use of symbols such as an asterisk at the beginning and end of each paragraph that contains changed or new text (which was the way the SEC’s EDGAR system marked changed text in the past).
Other topics addressed include whether to comply with Item 105 of S-K’s requirements (including a risk factors summary for Risk Factors sections exceeding 15 pages) in a 10-Q and issues associated with hypothetical risk factors. The memo also provides a bullet-point list of recent developments that might prompt companies to update risk factors disclosure in their upcoming 10-Q filings.
Cooley’s Cydney Posner recently blogged about on whether companies are making progress in efforts to improve the racial and ethnic diversity of their boards. She cites ISS data indicating that while progress has been made, companies still have a long way to go. Here’s an excerpt from Cydney’s blog on where things stand with the S&P 500:
ISS reports that, in 2022, all boards of companies in the S&P 500 had at least one director that identified as racially or ethnically diverse; in comparison, in 2020, 11% of boards in the S&P 500 had no racially or ethnically diverse directors. In addition, in 2022, 36% had three racially or ethnically diverse board members, compared to 22% in 2020. Similarly, in 2022, 31% had four racially or ethnically diverse board members, compared to only 7% in 2020—an increase of 24 percentage points. The percentage of board seats held by racially or ethnically diverse directors grew from 19% in 2020 to 23% in 2022.
There were, however, differences among different races and ethnicities. For example, persons identifying as Hispanic/Latin American constituted up 18.5% of the U.S. population (according to the April 1, 2020 census), but held only 4% of S&P 500 board seats in 2020 and only 5% in 2022. African-Americans held 9% in 2020 and 12% in 2022; Asians held 5% in 2020 and 6% in 2022.
Russell 3000 companies have also made some progress. The good news is that in 2020, 38% of Russell 3000 companies had no racial or ethnically diverse board members, but that only 10% lacked racial or ethnically diverse directors. The percentage of companies with two or more racially/ethnically diverse directors rose from 29% in 2020 to 55% in 2022 & the percentage of board seats held by racially or ethnically diverse directors grew from 11% in 2020 to 16% in 2022.
Despite this progress, ISS says that diversity efforts still have a long way to go if boards are to “reflect the diversity of their customer base or the demographics of the broader society in which they operate.” It also points out that the long-term trajectory of board diversity initiatives remains to be seen.
I’ve blogged several times about the Musk-Twitter goofiness over on DealLawyers.com. You folks have been spared so far – but your luck has just run out. That’s because the WSJ reported that a recently released comment letter indicates that the Staff questioned whether Musk’s post-signing tweet about his supposed concerns with the number of bot accounts that included the phrase ““[t]his deal cannot move forward” triggered a requirement to amend his 13D filing.
Personally, I think the headline – “SEC Broadens Inquiry Into Elon Musk’s Disclosures” is a little misleading. The Staff’s concerns here are pretty narrowly focused & I don’t think I’d say that the SEC is “broadening” its inquiry, but don’t take my word for it – here’s the response letter from Musk’s lawyers, so you can judge for yourself. In any event, this back & forth with the Staff is a reminder of the perils of negotiating on social media.
Last week, the SEC announced the filing of an insider trading enforcement proceeding with allegations that sounded very familiar:
The SEC’s complaint, filed in federal district court in the District of Columbia, alleges that in January 2020, NTRP invited Haywood to participate in a registered direct offering of shares. Before being told about the offering, Haywood expressly agreed not to trade on the material, nonpublic information he was about to receive. Notwithstanding this agreement, after receiving information about the offering, Haywood immediately sold more than 100,000 shares of NTRP stock. As alleged in the complaint, NTRP’s stock price dropped nearly 50 percent after the offering was announced. The complaint alleges that Haywood avoid losses of approximately $179,297.
Those allegations – trading after agreeing to keep information about a pending offering confidential – are exactly the same as those brought in the SEC’s complaint against Mark Cuban. That one didn’t go so well for the agency & it will be interesting to see if it fares better in this case.
Rule 14a-8(l) allows companies to decide whether or not to include information in its proxy statement about a proponent (name, address, and number of shares held), but should they? This Perkins Coie blog suggests a couple of reasons why companies should consider disclosing that information:
There is a growing trend of proposals that appear to try to drive votes through using buzzwords that are of interest to certain types of investors, such as greenwashing or diversity – but in fact may espouse views that are the opposite of what a casual reader might think the proposal says. Knowing the identity of the proponent may help investors to better understand the context of the proposal.
There can be other benefits to providing information about proponents as well. Investors might read a proposal from a proponent with 200 shares differently than one from a proponent with 20,000. They might also be interested to know when a proposal has been made by a representative that is in the business of submitting these proposals, and not by the shareholder themselves.
