When last we checked-in on The Wu-Tang Clan, the US Attorney for the EDNY had just announced the sale of the group’s “Once Upon a Time in Shaolin” album to an unidentified buyer. Now, the NYT reports that the details of that transaction have been made public. By now, it won’t come as any surprise for those of you who’ve been following our reporting on The Wu-Tang Clan that there’s a crypto connection:
PleasrDAO, which took possession of the album on Sept. 10 and is keeping it in a “vault” somewhere in New York City, has decided to come forward, to celebrate its trophy and announce its goal to ultimately, somehow, make the album more widely available for fans to hear — if, that is, it can convince RZA, the Wu-Tang’s leader, and his fellow producer Cilvaringz to allow it.
PleasrDAO’s Jamis Johnson described the purchase as appealing to the group’s interest in acquiring signature items of digital culture, as well as to a wider mission that it shares with many cryptocurrency champions: prying artistic creations from an exploitative, antiquated economic system and offering the promise of a fairer one. “This album at its inception was a kind of protest against rent-seeking middlemen, people who are taking a cut away from the artist,” Mr. Johnson said in a video interview from his apartment in Brooklyn. “Crypto very much shares that same ethos.”
Although “Once Upon a Time” predates the recent craze for NFTs — “nonfungible tokens,” or digital items created using blockchain computer code, preventing them from being duplicated and allowing their provenance to be tracked — the group’s goal of recapturing the value of artistic scarcity in the digital age has led it to become seen as a kind of precursor. “The album itself is kind of the O.G. NFT,” said Mr. Johnson, 34, who was proudly sporting a Wu-Tang T-shirt.
For those of you who aren’t Wikipedia userscrypto-savants like me, a DAO is a “decentralized autonomous organization,” which means “an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government. A DAO’s financial transaction record and program rules are maintained on a blockchain.” Yeah, that really didn’t clear things up for me – and neither did a visit to PleasrDAO’s website. But whatever they are, DAOs are definitely tres chic. That’s because the SEC issued a 21(a) report addressing the DAO structure in 2017, & as Dave recently blogged, the agency just brought an enforcement action against another DAO earlier this month.
Anyway, the New York Times says that PleasrDAO wants to release the album in some fashion to the public, but first they’ll need RZA & Cilveringz to sign-off on whatever they’re planning, because they inherited the contractual restrictions imposed on the original buyer, fraudster Martin Shkreli, which prohibit a public release of the album until 2103. Cilveringz is apparently game, but so far there’s no word from RZA, which means that the DAO’s plan to release the O.G. NFT that it acquired from the DOJ may be DOA.
We’re taking a break from blogging for the rest of the week. Happy Thanksgiving!
According to Cornerstone Research’s recent report on SEC enforcement activity, the number of actions against public companies declined during fiscal 2021. That marks the second year in a row that the number enforcement actions targeting public companies declined. Here are some of the highlights:
– The SEC filing 53 enforcement proceedings against public companies or their subsidiaries in fiscal 2021, nine fewer than in fiscal 2020 and the lowest level since fiscal 2014. The number of fiscal 2021 filings was 32% lower than the average over the past five fiscal years.
– Reporting and disclosure violations were the primary allegations in 51% of the cases filed during fiscal 2021. FCPA actions accounted for only 8% of the cases – the lowest level on record.
– The SEC noted cooperation in 58% of public company settlements in 2021, which is consistent with prior year averages. The median monetary settlement was $1 million, significantly below the $4 million median average for fiscal years 2012-2020.
– The number of settlements requiring admissions has declined from five in fiscal 2019 to two in fiscal 2020 and bottomed out at zero in fiscal 2021.
In evaluating the report’s conclusions, it’s worth noting – as the report points out – that a decline in enforcement actions against public companies is consistent with trends seen in prior years when there was a transition in SEC Chairs.
If you’re looking for a primer on how not to implement disclosure controls & procedures surrounding the disclosure of executive perks and stock pledges, be sure to check out this settled enforcement proceeding that the SEC announced yesterday. This excerpt from the SEC’s press release summarizes the proceeding:
The Securities and Exchange Commission today announced that Texas-based oilfield services company ProPetro Holding Corp. and its founder and former CEO Dale Redman have agreed to settle charges that they failed to properly disclose some of Redman’s executive perks and two stock pledges.
The SEC’s order finds that Redman caused ProPetro to incur $380,594 worth of personal and travel expenses unrelated to the performance of his duties as CEO. He also failed to disclose to company personnel that he had pledged all of his ProPetro stock in two private real estate transactions. During the same period, ProPetro failed to properly disclose $47,591 in additional, authorized perks it paid to Redman. As a result of these failures, the company issued public filings that included material misstatements regarding executive perks and stock ownership, and failed to accurately record Redman’s perks in its books and records.
While the defendants neither admitted nor denied the allegations made by the SEC, they consented to a C&D and the former CEO agreed to pay a $195,046 penalty. But in order to understand the alleged shortcomings in the company’s disclosure controls & procedures surrounding perks and pledges, you need to check out what the SEC claimed in its Order Instituting Proceedings. Highlights include:
– The CEO had a 50% ownership interest in a company that owned an airplane that he used for business travel. It sent invoices to the company for his flights, which the CEO initialed for approval and passed on to the accounts payable supervisor in the same manner as all other vendor invoices.
– Despite a policy prohibiting personal use of company credit cards, the CEO and his family made over $125,000 of personal charges that were not reimbursed and were not disclosed in the company’s proxy statement.
– The CEO pledged stock without obtaining prior board authorization, and subsequently obtained board approval of a negative pledge arrangement with another bank that prohibited him from disposing of the stock. He did not inform the board of the earlier pledge, nor did the company disclose either pledge in its proxy statements for several years.
How did all of this (and more) get missed? Part of the answer appears to be a lax approach to handling D&O questionnaires. Here are paragraphs 24 & 25 from the SEC’s Order:
24. On January 27, 2017, approximately one week after the close on the loan for his first ranch with its associated stock pledge, Redman completed his “D&O Questionnaire” for the disclosures in the company’s Form S-1 Registration Statement. Redman completed and signed the 2017 D&O Questionnaire, but left the line item for pledged shares blank. In 2018, Redman did not complete a D&O Questionnaire at all. On January 21, 2019, Redman completed the D&O Questionnaire but did not submit Schedule B, “Security Ownership and Recent Transactions in Company Securities,” which should have described his ProPetro equity ownership including his stock pledges.
25. Redman also did not identify in his D&O Questionnaires any of his personal trips on the Aviation Co. Learjet, the personal charges he made on the corporate credit card, or the additional perquisites authorized by the company. In his 2017 D&O Questionnaire, Redman included some perquisites for his company car, but failed to include any of the additional perquisites detailed above. In 2018, Redman failed to complete a D&O Questionnaire. On January 21, 2019, although Redman included some perquisites in his D&O Questionnaire, he did not disclose the personal air travel, any of the personal credit card charges reimbursed by the company that year or the various previously authorized perquisites detailed above.
The good news for the company was that the SEC lauded its cooperation. The bad news for the company’s executives was that in order to get that pat on the back, the board replaced them with an entirely new management team.
Last week, the SEC approved an amendment clarifying the definition of “votes cast” in Section 312.07 of the NYSE’s Listed Company Manual (Liz blogged about the proposal last month). The amendment eliminates a disparity that previously existed in the treatment of abstentions under the laws of many states and the NYSE’s treatment of them in determining whether a particular action has been authorized by a majority of the votes cast by shareholders. This excerpt from Arnold & Porter’s memo on the amendment explains the NYSE’s action and its consequences:
The NYSE has historically advised companies that abstentions should be treated as votes cast for purposes of Section 312.07, such that a proposal would be deemed approved only if the votes in favor exceed the aggregate of the votes cast against plus abstentions (i.e., giving abstentions the effect of a vote against). The corporate laws of many states, however, including Delaware, allow companies to specify in their governing documents that votes cast for purposes of a shareholder vote include yes and no votes (but not abstentions), such that a proposal succeeds if the votes in favor exceed the votes against. Consistent with those state laws, many public companies have bylaws indicating that abstentions are not treated as votes cast.
The NYSE has amended Section 312.07 to provide that a company must determine whether a proposal has been approved by a majority of the votes cast for purposes of Section 312.07 in accordance with its own governing documents and any applicable state law, which would permit a company to disregard abstentions if its governing documents and any applicable state law so provide. In its proposal, the NYSE noted that this is consistent with Nasdaq’s approach. The NYSE also noted that the amendment will help ensure that shareholders properly understand the implications of choosing to abstain on a proposal subject to approval under NYSE rules.
The rules requiring principles-based disclosure of material information about human capital management practices have been in place for a little over a year now, and this Gibson Dunn memo takes a look at what companies have been saying in response to the requirement. The firm surveyed 10-K filings from 451 members of the S&P 500, and found that disclosure practices varied pretty widely, “with no uniformity in their depth and breadth.” That makes disclosures difficult to compare, which is one reason why more prescriptive disclosure requirements are likely on the way.
Despite the challenges, the firm was able to group common areas of disclosure within a handful of categories: workforce composition and demographics; recruiting, training & succession; employee compensation; health & safety; culture & engagement; COVID-19; and HCM governance & organizational practices. This excerpt discusses diversity and inclusion disclosure practices, which was the most common type of workforce composition disclosure:
This was the most common type of disclosure, with 82% of companies including a qualitative discussion regarding the company’s commitment to diversity, equity, and inclusion. The depth of these disclosures varied, ranging from generic statements expressing the company’s support of diversity in the workforce to detailed examples of actions taken to support underrepresented groups and increase the diversity of the company’s workforce. Many companies also included a quantitative breakdown of the gender or racial representation of the company’s workforce: 41% included statistics on gender and 35% included statistics on race.
Most companies provided these statistics in relation to their workforce as a whole, while a subset (21%) included separate statistics for different classes of employees (e.g., managerial, vice president and above, etc.) and/or for their boards of directors. Some companies also included numerical goals for gender or racial representation—either in terms of overall representation, promotions, or hiring—even if they did not provide current workforce diversity statistics.
In addition to discussing the types of disclosures that companies made, the memo also looks at disclosure practices within specific industries, including finance, tech, manufacturing, travel, retail and others. It also looks at how companies formatted their disclosures, the comments the Staff provided, and makes some recommendations for actions companies should take going forward.
Many companies have been trying to come to grips with the business implications of complying with President Biden’s vaccine mandates. For public companies, those implications may well include disclosure of the potential material effects of those mandates in Exchange Act reports and Securities Act registration statements.
If you’re working on these issues, take a peek at this recent Bass Berry blog, which provides several examples of disclosures addressing issues surrounding vaccine mandates in the MD&A and Risk Factors sections and in forward-looking statements disclaimers. Here’s a sample pulled from one company’s MD&A discussion:
“Additionally, in September 2021 the President of the United States signed an executive order, and related guidance was published that, together, require certain COVID-19 precautions for federal contractors and their subcontractors, including mandatory COVID-19 vaccines for employees (subject to medical and religious exemptions). We are classified as a federal contractor due to a number of our agreements. In October 2021, we announced to our U.S. employees that the federal vaccine mandate would require all of our U.S. employees (subject to the exemptions described above) to be vaccinated by December 8, 2021. We continue to evaluate the potential impact of this executive order on our business. As a result of the federal vaccine mandate, we may experience constraints on our workforce and the workforce of our supply chain, which could require us to adapt our operations.”
By the way, if you’re looking for more info on all of the twists & turns surrounding employer testing and vaccination mandates, check out our “COVID-19 Issues” Practice Area.
The November-December issue of the Deal Lawyers newsletter was just posted and sent to the printer. Articles include:
– Fraud Claims in M&A No-Recourse Transaction: The Enduring Legacy of Abry Partners
– Buyer Beware: Affordable Care Act Penalties May Affect Deal Economics
– Litigation Funding: What Transactional Lawyers Should Know
– 21 Practical Tips for In-House Deal Lawyers
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.
Yesterday, the SEC announced a rule proposal that would update its electronic filing requirements to mandate the EDGAR submission of certain documents that filers still have the option to submit on paper. Here’s a copy of the 73-page proposing release and here’s a copy of the accompanying fact sheet. Want a statement from Gary Gensler? Okay, there’s one of those too.
The fact sheet says that the proposed rule changes are intended to promote more efficient storage, retrieval, and analysis of these filings, improve the SEC’s ability to track and process them, and modernize its records management process. According to the fact sheet, the rule would require the electronic submission of the following:
– Most of the documents that are currently permitted to be submitted electronically under Rule 101(b) of Regulation S-T, including filings on Form 6-K and filings made by multilateral development banks;
– The “glossy” annual report to security holders and certain foreign language documents, if submitted, in PDF format;
– Applications for orders under the Advisers Act;
– Confidential treatment requests for Form 13F filings; and
– Form ADV-NR (through the IARD system)
Form 11-K filers also would have to use iXBRL for financial statements included in those filings. Most of this stuff is a big yawn to corporate issuers, with the exception of the proposal to resurrect a filing requirement for the glossy annual report. As you may recall, the SEC effectively eliminated the longstanding requirement to furnish it with copies of glossy annual reports back in 2016. If this new proposal is adopted, companies will need to file a PDF of that document.
The most recent edition of the SEC’s Reg Flex agenda includes proposing rule amendments intended to “enhance issuer disclosures regarding cybersecurity risk governance, and in his September 2021 Senate Banking Committee testimony, SEC Chair Gary Gensler stated that he’d asked the Staff to “develop proposals for the Commission’s consideration on these potential disclosures.” So, it’s pretty clear that there’s cyber disclosure rulemaking on the horizon, but what form will the rule proposal take?
Last Friday, Commissioner Elad Roisman delivered a speech that suggests the debate may again be between those commissioners who favor principles-based rules and those who prefer a more prescriptive, line item-based approach. Not surprisingly, this excerpt from his speech indicates that Roisman’s squarely in the principles-based camp:
As some of you may have noticed, the Commission’s regulatory agenda includes possible regulatory action with regard to issuers, which could build on the Commission’s 2018 guidance. I have not seen any draft rule, so I cannot speak as to its nature or merits. But I will let you know some of the things that I would be looking for as I consider any additional rules in this area.
First, we need to define any new legal obligations clearly. Second, we need to make sure that these obligations do not create inconsistencies with requirements established by our sister government agencies. Third, we should recognize that some registrants have greater resources than others, and we should not try to set the resource requirements for an entity. And finally, because issuers’ businesses vary, the cybersecurity-related risks they face also will vary, and therefore a principles-based rule would likely work best.
My guess is that he’ll get buy-in from the other commissioners on the first three points, but given the reaction of the Democratic commissioners to prior principles-based proposals, I’m not very optimistic that Roisman will carry the day on his desire for a principles-based approach.
It sometimes can be a challenge for boards of private companies to determine the appropriate amount of D&O insurance coverage to purchase. If you find yourself advising one of those boards, this Woodruff Sawyer blog may be helpful. It sets forth five questions that private company boards should ask themselves when considering potential coverage limits. These questions are:
How Much D&O Insurance is Available for a Company at My Stage?
Who Are the Likely Plaintiffs in Potential D&O Litigation?
Are We in a Regulated Industry?
Are We Just Really Big?
Are We Going Public?
Woodruff Sawyer’s Priya Cherian Huskins offers up commentary on each of these questions. Here’s an excerpt with some of her thoughts on D&O insurance issues for sizeable private companies:
Difficult derivative suits with large settlements are a trend, making the purchase of at least substantial amounts of Side A D&O insurance an important purchase for large private companies. For more on this phenomenon, see my article on Five Types of Derivative Suits with Massive Settlements.
Finally, larger private companies are typically also companies that have (or are trying to recruit) independent directors, which is to say directors who have no financial sponsors like a private equity of venture capital firm.
Directors placed on boards to represent the interests of a PE or VC investor typically enjoy indemnification from that financial sponsor and can also receive insurance coverage through the financial sponsor’s insurance programs. The fact that independent directors do not have these backstops tends to drive an upgrade in a company’s own D&O insurance program, resulting in limits of at least $10 million to $20 million.
