This Woodruff Sawyer blog lays out 20 questions that a prospective director should ask before agreeing to join a corporate board. Each question is accompanied by an explanation of why it’s important. Here’s an example:
What skill sets are represented on the board?
A diversity of skills and experience among board members is one of the best ways to ensure that the board can address unexpected issues. Does the board you are considering have this? If everyone on a board has a similar background—everyone has a technical or finance background, for instance—the board is less likely to be able to proactively identify new risks or recognize innovative solutions and strategies.
Consider, too, the advantage of having at least one board member who has the skill set to be the director who will deal with difficult legal situations, such as an internal investigation or thorny litigation. A board that has no one capable of making independent legal judgments is a board that is at risk for blindly agreeing to do whatever outside counsel tells them to do.
I’ve previously blogged about some of the uncertainties involved in how to account for digital assets. In light of those uncertainties & Bitcoin’s volatility, it’s not surprising that companies with investments in Bitcoin or other digital assets might want to present non-GAAP financial data that backs out the impact of swings in the value of those assets on their financial results.
Yeah, well good luck with that, because the Corp Fin Staff apparently is having none of it. Here’s an excerpt from this Bloomberg Tax article detailing the back & forth between the Staff and MicroStrategy on that company’s unsuccessful efforts to back out Bitcoin from its non-GAAP income statement:
For the quarter ending Sept. 30, 2021, MicroStrategy reported a net loss of $36.1 million. Adding back in its share-based compensation expense and the impairment of its digital assets made the company’s unofficial, or non-GAAP, income flip to $18.6 million, its filing shows. MicroStrategy did not immediately respond to a request for comment.
The company told the SEC it used non-GAAP measures to give investors a fuller picture of its finances. If the company only showed declines in value, it would give “an incomplete assessment” of its Bitcoin holdings that would be “less meaningful to management or investors” in light of the company’s strategy to acquire and hold Bitcoin. “We further believe that the inclusion of bitcoin non-cash impairment losses may otherwise distract from our investors’ analysis of the operating results of our enterprise software analytics business,” the company wrote.
The SEC disagreed. In a letter dated Dec. 3, the market regulator told MicroStrategy it objected to the adjustment and told the company to remove it from future filings. In its Dec. 16 response, MicroStrategy said it would comply.
Speaking of Bitcoin, as a very bitter Cleveland Browns fan, I admit that this report brightened my day just a little.
On Friday, Corp Fin & IM announced that companies should no longer provide paper “courtesy copies” of filings unless the Staff requests them. This announcement is one of those things that really dates me – because I remember when what we called “courtesy packages” were absolutely de rigueur.
As I recall, there were always multiple courtesy packages for Securities Act filings – one for the legal reviewer, one for the accountant, and usually one for the branch chief – and they always included clean & marked copies of your filing, a copy of your comment response letter, and any new or revised exhibits.
Back in the paper filing days, you usually provided courtesy packages with each amendment to your registration statement in order to help expedite the review process. But in the days before Rule 430A*, they actually played a critical role in getting a registration statement declared effective before the market opened. That’s because you had to get the filing package into the reviewer’s hands as soon possible after you dropped the filing package off at the SEC file desk so that they could see the pricing information, verify any changes made in response to last minute comments, and declare your registration statement effective.
Over time, as the SEC moved from paper to electronic filings, I’d still offer to Fed Ex courtesy packages to the reviewer. The usual response was along the lines of “We aren’t supposed to ask for courtesy copies, but that would be really helpful.” Now, the Staff says you shouldn’t provide courtesy copies unless they ask for them. . . Jeez, am I really getting sentimental about courtesy packages! It sure looks like it.
*Yes, there really was a time before Rule 430A when you had to drop pricing information into a pre-effective amendment that you hand delivered to the SEC first thing in the morning on the day you wanted to start trading your IPO. But that was almost 35 years ago, which is why this particular old man called out William Butler Yeats – not Cormac McCarthy & the Coen Brothers – in the title of this blog.
The January – February issue of the Deal Lawyers newsletter was just posted and sent to the printer. Articles include:
– Delaware Supreme Court Upholds Advance Waiver of Statutory Appraisal Rights
– SPACs and the Implications for D&O Insurance
– Purchase Price Adjustments in Technology Deals
Remember that, as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers newsletter, we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers newsletter, anyone who has access to DealLawyers.com will be able to gain access to the newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers newsletter including how to access the issues online.
We’re kicking off 2022 in a big way, with three important webcasts for our members next week (thanks to each & every one of you for renewing)! Not only will these 60-minute programs deliver essential & practical info from “All-Star” lineups – if you attend the live program, you also can make the most of your time by requesting CLE credit. Join us at 2pm Eastern:
– Tuesday, January 11th for the program, “Universal Proxy: Preparing for the New Regime” – Goodwin Proctor’s Sean Donohue, Gibson Dunn & Crutcher’s Eduardo Gallardo, Sidley Austin’s Kai Liekefett and Hogan Lovells’ Tiffany Posil will discuss whether the SEC’s recent adoption of rules mandating the use of universal proxies will change the game when it comes to proxy contests and what companies should do in advance of the August 31, 2022 compliance date. We are making this DealLawyers.com webcast available as a bonus to members of TheCorporateCounsel.net.
– Wednesday, January 12th for the program, “Rule 10b5-1 & Buybacks: Practical Impacts of SEC’s Proposals” – Skadden’s Brian Breheny, Davis Polk’s Ning Chiu, WilmerHale’s Meredith Cross, Broadridge’s Keir Gumbs, and Morrison & Foerster & TheCorporateCounsel.net’s Dave Lynn will be highlighting significant aspects of the SEC’s recent proposals to amend the rules governing insider trading plans and corporate stock repurchases, including what companies can & should do before the SEC finalizes the amendments.
– Thursday, January 13th for the program, “ISS Forecast for the 2022 Proxy Season” – Davis Polk’s Ning Chiu and Gunster’s Bob Lamm will join Marc Goldstein of ISS to provide insight on ISS’s latest policy updates, how companies can help themselves with disclosures, and predictions for the biggest issues we’ll all be grappling with this proxy season.
In addition to these three webcasts next week, we have a number of other great programs lined up across our sites – and even more in the queue. If you’re a member, you are able (and encouraged) to attend programs on the sites you subscribe to, at no charge. If you’re not yet a member, subscribe now! The webcast cost for non-members is $595. If you haven’t done so already, you can renew or sign up by emailing sales@ccrcorp.com – or call us at 800.737.1271.
To get CLE credit for each of these webcasts, you just need to submit your state and license number for the applicable program, via the link on that webcast flyer page, and complete the prompts during the live program.
A company called Hygienic Dress League issued a press release earlier this week announcing that it was planning to raise capital through a Reg A+ offering. You’re probably thinking that there’s nothing particularly newsworthy about that, right? Well, check out this excerpt from the press release, which explains that while HDL is legally a corporation, it’s actually an art form:
Hygienic Dress League (HDL), a legally registered corporation as a new and original form of art, today announced they have filed an application with the Securities and Exchange Commission (“SEC”) for Regulation A+ exemption to issue securities. Today, HDL filed for a Tier 2 offering that, if approved, would allow for the issuance of up to $75 million of securities in a 12-month period. This would permit members of the public, subject to conditions, to participate in the offering. HDL believes this application is the first of its kind before the SEC.
Founded in 2007 in Detroit by Steve and Dorota Coy, husband and wife visual artists, HDL explores aspects of the human condition and contemporary society while challenging reality, truth, and belief systems through the framework of corporate activities. Thus far, HDL’s vision and exhibitions have manifested as TV commercials, public installations, fleeting out-of-home projections, and in augmented reality. HDL’s guerilla marketing and urban interventions have been experienced in 19 cities from nine countries across three continents.
At one point, the press release quotes one of HDL’s co-founders as saying that if the offering moves forward, “it will push the boundaries of art and finance, showing how the two merge and interact with each other. The goal is for people to ponder the nature of corporations, our concepts of value, and other seemingly permanent structures of our world.”
So, what is this new and original art form offering? NFTs, of course:
The first-of-its kind planned offering for participants will be for 600k non-fungible token (NFT) securities. Concurrently, HDL has begun minting NFTs representing “employees.” Each block of shares will come with its own unique NFT employee. After the planned offering, interested parties will be able to purchase certain HDL NFTs separately from NFT shares with the opportunity to sell them on open secondary markets.
I visited the SEC’s website and the only thing on file for HDL as of Thursday afternoon was a Form D for a $500K private placement. I suppose that, despite the press release, they made the filing for the Reg A offering confidentially. That’s a shame, because I’m dying to see this one. For now, we’re going to have to content ourselves with exploring the wonders of the company’s testing the waters website. As you’ll discover if you pay that site a visit, that’s not nothin’.
I do have one disclosure-related concern about this deal. I’m not sure that HDL can back up its claims to being a new and original form of art that’s pushing the boundaries of art & finance. That’s because anyone who read WeWork’s IPO registration statement or followed the bizarre aftermath of that aborted deal knows that that Adam & the gang were way ahead of HDL in turning a corporation into a piece of conceptual art.
Last September, Liz blogged about the SEC’s decision to solicit comments on proposed upgrades to the way filers accessed the EDGAR system & the way in which filer accounts are managed. The comment period expired on December 1, 2021, but it doesn’t look like changes to the EDGAR access process are imminent. That’s because on Wednesday, the SEC announced that Chair Gensler had “asked the staff to consider how the agency might address concerns articulated by commenters” on the proposed changes.
I checked out the SEC’s website, and commenters – many of whom are affiliated with third party filer support companies – expressed a number of concerns about the proposed changes. In particular, several commenters noted that the SEC’s proposal to alter the authentication scheme from an SEC-managed form-based login to the government-wide Login.gov single sign-on could cause significant problems for filers. This excerpt from DFIN’s letter is fairly representative of those concerns:
Our main concern relates to the use of Login.gov with multi-factor authentication. This approach is not an efficient option for system-to-system authentication, the most common submission method used by the majority of filers today. We recognize the Commission’s goal of providing additional security, however the proposed access through Login.gov will pose an added burden on filers as described herein.
We believe that eliminating the server-to-server submission process would introduce significant negative impacts to the reporting environment that healthy capital markets depend on, as well as significantly increase the burden to the SEC to support filers throughout the submission process.
Another common theme among the letters submitted to the SEC was a request to extend the comment period beyond its December 1, 2021 expiration date. While the SEC didn’t formally extend the deadline in its announcement, it did make it clear that the Staff “would seek additional information and engage in a dialogue regarding concerns raised by commenters, which may include consideration of further approaches to EDGAR access improvements.”
I’m sorry to disappoint those of you hoping to hear something from the SEC on its long-anticipated 13(d) reporting reform proposal, but today I’m blogging about a different set of beneficial ownership reporting rules. You probably should listen up anyway, because the proposed regs I’m talking about could be a big deal for a lot of public and private companies.
Last month, Treasury’s Financial Crimes Enforcement Network (FinCEN) proposed regulations on reporting of beneficial ownership information under the Corporate Transparency Act. These proposed regulations will create new federal filing requirements applicable to a wide range of entities (including operating companies, holding companies, LLCs and others). Here’s an excerpt from this Wilson Sonsini memo on the potential scope of the reporting requirement:
The proposed regulations would require every foreign or domestic legal entity that qualifies as a “reporting company” — FinCEN estimates that 25 million existing legal entities, plus an additional three million new legal entities each year, will meet the criteria—to file reports with FinCEN that identify the beneficial owners of the entity as well as the individuals who have filed to form or register the entity. Companies and individuals who fail to comply with or properly facilitate the reporting process (e.g., by providing inaccurate or incomplete information to reporting companies) may be subject to potential civil and criminal penalties, including potential imprisonment.
The memo provides plenty of additional details about the scope and operation of the proposed regulations, including what information is required to be reported and when filings must be made, and the exemptions that could apply to public reporting and large operating companies. The public comment period ends on February 8, 2022, and the memo says final regs are expected sometime this year.
Last May, I blogged about the rebound in stock buybacks during the 1st quarter of 2021. This S&P Global article says that among the S&P 500 at least, buybacks haven’t just rebounded – they’ve blasted off. According to the article, S&P 500 companies repurchased $234.6 billion of stock in the 3rd quarter. Not only does that that represents a 130% increase over the 3rd quarter of 2020, and an 18% increase over from the 2nd quarter of 2021, but it also shatters the old record for buybacks of $223 billion that was set during the 4th quarter of 2018. Here are some additional data points from the article:
– 309 companies reported buybacks of at least $5 million for the quarter, up from 294 in Q2 2021, and up from 190 in Q3 2020; 371 issues did some buybacks for the quarter, up from 360 in Q2 2020 and up from 290 in Q3 2020.
– Buybacks remained top heavy with the top 20 issues accounting for 53.8% of Q3 2021 buybacks, down from Q2 2021’s 55.7%, down from the dominating 77.4% in Q3 2020, and up from the pre-COVID historical average of 44.5%.
– For the 12-month September 2021 period, buybacks were $742.2 billion, a 21.8% increase from $609.4 billion in the 12-month June 2021 period, and up 30.0% from $570.8 billion in the 12-month September 2020 period.
The article also expects robust buyback activity among the S&P 500 to continue during the 4th quarter, as company use repurchases to fund equity comp plan obligations.
Over on The D&O Diary, Kevin LaCroix recently reported some good news for public companies – federal securities class action suits declined sharply last year. Here’s an excerpt with the numbers:
According to my tally, there were 210 federal court securities class action lawsuits filed in 2021, representing a 34% decline from the 320 federal court securities suit filings in 2020. (Please note that these figures reflect only federal court securities class action lawsuit filings; the filing numbers do not include state court securities class action lawsuit filings during the year.)
The 2021 securities suit filing numbers represents an even more dramatic decline compared to the annual average number of lawsuits filed during the 2017-2019 period, a period during which the number of securities lawsuits surged. The annual average number of securities suit filings during the 2017-2019 period was 405; the 210 securities suit filings in 2021 represents a decline of about 48% compared to the elevated annual average level of filings during that recent period.
Kevin says that the biggest factor in the decline in filings last year was the decline in the number of federal court merger objection class action lawsuits. Only 18 federal court merger objection class action lawsuits were filed in 2021, compared to 102 the prior year. He also cautions that the drop in merger objection filings doesn’t mean that those suits aren’t being filed, just that they’re not being filed as class actions. But even after backing out the effect of merger objection lawsuits, traditional securities class action filings during 2021 still dropped by 11.9% decline from 2020.
