Your mileage may vary when it comes to the arguments on the relative merits of stock repurchases, but there’s one thing that nobody’s arguing about – the amounts involved are huge & getting bigger all the time. According to S&P Global, buybacks by companies in the S&P 500 during the first quarter of 2022 were $281.0 billion. That’s a 4% increase over the record $270.1 billion expended during the 4th quarter of 2021. Furthermore, S&P said that over the 12-month period ending in March 2022, companies spent a record $985 billion on buybacks, up 97.2% from the prior12-month period’s $499 billion.
I’m generally agnostic about buybacks, but those numbers give me pause, because at their current rate, they suggest that our largest public companies can’t more productively deploy nearly $1 trillion of their assets per year in their own businesses. The magnitude of those numbers makes me wonder whether buybacks are a solution to a capital misallocation problem or whether they’re just evidence that our capital markets have a huge capital misallocation problem.
Dave recently blogged about some of the potential implications of the SCOTUS’s decision in West Virginia v. EPA for the SEC’s proposed climate disclosure rules. This Freshfields blog also addresses that issue, and suggests that the decision make create some significant challenges to the SEC moving forward:
The Court’s ruling may complicate the finalization, enactment and enforcement of the SEC’s proposed rule, which is contemplated to be adopted later this year. If the SEC’s proposed rule is adopted in its current or similar form, critics may challenge it under the major questions doctrine by citing the Supreme Court’s reasoning in West Virginia v. EPA, and, in doing so, arguing that the SEC is relying on ambiguous statutory text to claim a significant expansion of power in a subject matter in which it lacks expertise.
Some have argued that the SEC’s statutory authority is “relatively clear,” and draw a distinction between the EPA’s direct regulation of emissions from coal plants and the SEC’s efforts to enhance disclosure. A former SEC attorney speculated that, if a claim is brought, the SEC could argue that the applicable court rely on the “Chevron doctrine” rather than the major questions doctrine. The Chevron doctrine requires courts to accept an agency’s interpretation of an ambiguous law if it is “rational” and “reasonable.” Notably, there is no discussion of the Chevron doctrine in the Court’s opinion in West Virginia v. EPA; however, the dissent noted that courts can “circumvent a Chevron deference analysis altogether” by interpreting a statute as negating an agency’s claimed authority.
It isn’t just the SEC’s proposed climate change disclosure rules that may face a challenge based on West Virginia v. EPA. As this Dechert memo points out, the major questions doctrine may also come into play when “the SEC or other financial regulators seeking to regulate markets involving cryptocurrencies and other blockchain products,” or when agencies like the FTC seek to alter traditional understandings of antitrust and competition law.
Some very heavy hitters have argued that the SEC’s authority to promulgate these rules is pretty clear. Having read some arguments to the contrary, I’m less sanguine about the SEC’s chances in federal court if it adopts rules along the lines it has proposed. Regardless of the legal merits of their arguments, I think the proponents may have failed to “read the room”. The arguments advanced for the SEC’s authority to require climate disclosure appear to be premised on the view that this authority is virtually limitless, and that’s just not where the federal courts are right now when it comes to agency power.
Kevin LaCroix keeps close tabs on securities class action filings, and recently blogged on the “D&O Diary” about how the first half of 2022 is shaping up in comparison with prior years. This excerpt summarizes his findings:
The number of securities class action lawsuit filings in the first half of 2022 remained at the lower levels that prevailed last year and below the more elevated levels that prevailed during the period 2017-2020. Though the number of securities class action lawsuit filings in the year’s first six months is below the recent higher levels, the number of suits filed is still consistent with long-term averages. The difference in the number of filings so far this year and the elevated numbers during the recent period were both largely due to merger objection lawsuit filings patterns.
According to my tally, there were 103 federal court securities class action lawsuits filed in the first half of 2022. That first half number annualizes to a projected year-end total of 206, which would be slightly below the 211 federal court securities class action lawsuits filed in 2021 and well below the 319 federal court securities suits filed in 2020.
Kevin goes on to explain that while there’s still a booming business in federal court merger objection filings, most of these cases are not being filed as class actions, but as individual lawsuits. That’s why they don’t show up in the stats.
Rule 3-13 of Regulation S-X gives the SEC authority to waive certain financial statement requirements that public companies would otherwise have to comply with. Historically, many of the requests for Rule 3-13 waivers were submitted by companies engaging in acquisitions and related to the SEC’s rules regarding acquired company financial statements. The SEC amended those rules in 2020 to lessen the burden on acquiring entities. According to this Thomson Reuters report, that has resulted in a decline in waiver requests:
“We have seen a decline in our waiver letter process over the last two years. And I would say that this is directly related to the rulemaking that the division did, specifically CorpFin OCA related to 3-05, 3-14 and pro formas, and article 11. I mean, it really addressed our common waivers we’ve received,” CorpFin Chief Accountant Lindsay McCord said at the 40th annual SEC Financial Reporting Institute Conference hosted by the University of Southern California (USC) on June 2, 2022.
The article also discusses the Staff’s recent tweaks to the Rule 3-13 waiver process intended to make it more efficient.
According to a recent Fortune article, it looks like the idea of separating the roles of CEO and Board Chair is gaining more traction among public companies. Here’s an excerpt:
A growing share of companies are tapping independent directors to hold the chairman seat, according to a new survey from The Conference Board using data from ESGAUGE, and shared exclusively with Fortune. The percentage of S&P 500 companies that combine the board chair and CEO roles dropped from 49% in 2018 to 44% in 2022, while the percentage of companies with an independent board chair increased from 30% to 37% in that same time frame, according to the report.
Conventional wisdom says the more directors who are not affiliated with the company, the better because it decreases potential conflicts of interest and better positions boards to maintain objectivity when making executive decisions. These days, companies are even more inclined to separate CEO and board chair duties because of directors’ increased workloads.
The percentage of companies splitting the two roles seems to be heavily weighted toward small caps. The article says that 55% of companies with $50 billion or more in annual revenue have the same person serving as CEO and Chair, but only 25% of companies with annual revenue under $100 million combine the two positions. (h/t The Activist Investor)
Audit committees focus a lot of attention on the potential for financial fraud, but this Deloitte memo says that they need to devote greater attention to an emerging area of fraud risk – ESG fraud. Here’s an excerpt:
In preparation for expected new reporting requirements, many companies are in the process of developing more robust ESG-related disclosure controls and procedures as well as internal control over financial reporting (ICFR). Some companies are developing ESG-related metrics for financial reporting and for incorporation into incentive compensation.
Ahead of these possible rule changes, fraud risk in this area should be top of mind for audit committees and a focal point in fraud risk assessments overseen by the audit committee. Many companies are currently providing information to investors that is not governed by the same types of controls present in financial reporting processes.
As an example, companies may voluntarily provide information on carbon emissions that has not been gathered, tested, and reported under the kind of internal controls that typically are present with financial reporting. This may suggest a heightened opportunity for people within the organization to manipulate ESG-related information.
The memo notes that the increasing desire to link the achievement of ESG metrics to compensation is another factor that may elevate fraud risk. It points out that under the classic “fraud triangle” theory, the presence of three factors – financial pressure, opportunity, and rationalization – can create an elevated risk of fraud, and that ESG-related financial incentives can represent a source of financial pressure.
Lawrence has blogged about this issue – and related guidance – on PracticalESG.com. If you aren’t already a member of that site, sign up to take access curated, practical guidance on these risks. Our “100-Day Promise” makes this a “no-risk” situation: during the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
Most corporate officers assume that they aren’t personally liable for obligations incurred by the companies they serve. That’s usually the case, but a recent California case points out that there are some exceptions to that general rule. Last month, the California Court of Appeal held that a CEO/CFO could be personally liable for the company’s failure to pay wages. This excerpt from an Arnold & Porter memo on the case explains the Court’s reasoning:
In reaching this conclusion, the court analyzed California Labor Code section 558.1, which provides that “any employer or other person acting on behalf of an employer who violates, or causes to be violated” certain provisions of the Labor Code “may be held liable as the employer for such violation.” Section 558.1 defines a “person acting on behalf of an employer” as “a natural person who is an owner, director, officer, or managing agent of the employer.” The term “managing agent” includes corporate employees who exercise substantial independent authority and judgment in their corporate decision making and whose decisions ultimately determine corporate policies.
The memo says that the Court didn’t reach the issue of whether the CEO actually “caused” the violation, but notes that other courts interpreting the statute have held that the individual must either (1) have been personally involved in the alleged violation, or (2) had sufficient participation in the activities of the employer such that they may be deemed to have contributed to the violation.
I know you folks don’t come here for entertainment recommendations, but I think Bo Burnham’s 2021 Netflix special “Bo Burnham: Inside” is the most remarkable work of popular art to emerge from our shared pandemic experience. But how am I going to tie a Netflix comedy special into what this blog’s supposed to be about? Have a little faith in me – I pulled it off with Dragnet, didn’t I? We’ll get there (sort of), I promise.
Anyway, I was looking at some Form 1-A filings a few days ago and quickly found myself deep in a rabbit hole of offering circulars for deals that ran the gamut from the unusual, to the odd, to the downright creepy. As I poked around, it occurred to me there may just be a capital markets equivalent to the infamous Internet “Rule 34” – only a “Capital Markets Rule 34A+” would say, “if it exists, there’s a Reg A+ offering of it – no exceptions.”
I’ve already blogged about the folks at Hygenic Dress League, but that barely scratches the surface of the bizarre & wonderful mix of deals currently flying under the Reg A+ banner. Are you into collecting sneakers? Check. Want to hunt for treasure? Check. Have you always wanted to own racehorses? Check. Fine art? Check? Bored Ape Yacht Club NFTs? Check. Metaverse “real estate”? Check. Are you a little short on cash? Not a problem – LunaDNA will sell you shares in exchange for your immortal soul your “self-reported genomic, phenotypic, medical, health and related data.” (I mean, what could go wrong?)
It was as I tried to make sense of this vast mosaic of investment opportunities that I thought of Bo Burnham’s show – and some lyrics from his song “Welcome to the Internet” in particular:
Could I interest you in everything?
All of the time?
A little bit of everything
All of the time
Apathy’s a tragedy
And boredom is a crime
Anything and everything
All of the time
That’s a pretty good description of the universe of Reg A+ offerings. When you’re looking to kill some time, try a general EDGAR search for Form 1-A filings. Then make yourself comfortable, because you’ll probably be there for a while.
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.”
