Earlier this week, I blogged about the phenomenon of “remote-first” public companies that purportedly don’t have principal executive offices. Keith Bishop recently blogged that the location of a company’s principal executive offices can have some important real world implications – including determining whether the company is subject to California’s board gender diversity statute. Here’s an excerpt:
California’s new board gender quota law places great weight on the location of a corporation’s principal executive offices. The law applies to a publicly held foreign corporation when its principal executive offices, according to its Form 10-K, are located in California. Cal. Corp. Code § 301.3(a). The law also applies to a publicly held domestic corporations, but it is not clear whether it applies only when their principal executive offices are located in California.
Keith notes that the SEC doesn’t define the term “principal executive offices” for purposes of 10-K filings and provides some examples – in addition to our homeless issuers – of companies have taken a somewhat “flexible” approach to where their principal executive offices are located.
Most of us look at climate change disclosure obligations in the context of what the SEC now requires or what the agency will require in the future. This Winston & Strawn blog provides a reminder that other disclosure obligations may exist – and that alleged violations of them are being aggressively pursued by state AGs. The blog discusses litigation brought by Massachusetts against ExxonMobil alleging that it deceived consumers about the impact of climate change on its business. In addition, this excerpt lists some other pending actions by state AGs targeting climate-related disclosures:
– Connecticut. Attorney General William Tong sued Exxon under the Connecticut Unfair Trade Practices Act. This suit alleges: “ExxonMobil knew that continuing to burn fossil fuels would have a significant impact on the environment, public health and our economy,” yet ExxonMobil did not disclose that to the public.
– Delaware. Attorney General Kathleen Jennings filed a lawsuit against BP America Inc. and many other companies. The state asserts common law claims and a claim under Delaware’s Consumer Fraud Act. It alleges the defendants’ failures to disclose “their products’ known dangers—and simultaneous promotion of their unrestrained use—drove consumption, and thus greenhouse gas pollution, and thus the climate crisis.”
– District of Columbia. Attorney General Karl Racine filed a lawsuit against BP plc, Chevron, Royal Dutch Shell, and others. The suit similarly alleges these entities failed to disclose to consumers the role their products play in causing climate change.
– Minnesota. Attorney General Keith Ellison filed a complaint against ExxonMobil, the American Petroleum Institute, Koch Industries, and Exxon and Koch subsidiaries. It similarly accuses the defendants of insufficient disclosure and acts associated with climate change.
The blog also says that while most of the actions so far have targeted the oil & gas industry, state AGs are on record as having said that most U.S. companies have not adequately considered or disclosed climate-related financial risk. The blog says that they are eyeing tech companies and those in the agriculture sector as possible litigation targets.
While SPACs have been a hot property in the capital markets, it turns out that they’ve been a sure thing for short sellers too, or at least that’s what this excerpt from a recent Institutional Investor article says:
Even as the broader stock market hit a record in the first half of 2021, with the S&P 500 index gaining 15%, short sellers found what has seemed to be a surefire place to make money: special-purpose acquisition companies. Since SPACs began to soar last year, activist short sellers have set their sights on 22 of them. The vast majority of those — 16 — were the subject of short reports this year, according to Breakout Point, a Germany-based research firm and data provider.
The short sellers have an impressive record: One week after they unveiled their SPAC targets, the stocks fell 14.2% on average, Breakout Point said. And they kept falling. After one month, they were down 24.7% on average. Moreover, “SPACs are better performing” than other short targets over the past year and a half, Breakout Point’s Ivan Cosovic told Institutional Investor. Since 2020, the stocks of SPAC shorts have declined 17.5% on average year to date, while the average decline of all new activist shorts was 13.5%.
One notable exception to this string of short-seller wins: SPAC pioneer Virgin Galactic. The article says that the stock’s up 44% since a short report was issued on it in early June. I guess the lesson is that you shouldn’t bet against billionaires who want to be astronauts.
According to this excerpt from EY’s Global IPO Trends Report, despite the slowdown in SPAC IPOs due to the recent regulatory unpleasantness, there are plenty more deals to come:
– While SPAC formation frenzy has slowed from record levels, the lull caused by the SEC guidance is behind us and deals are being announced daily. SPAC activity is expected to remain steady over the next couple of months, picking up speed in Q3 2021 and toward the end of the year.
– There are nearly 300 SPACs on file that have not yet priced; indicating there are SPACs that are rushing to find suitable targets. High-quality target companies could have stronger bargaining power that will enable them to secure more favorable terms.
– With more scrutiny from the SEC, along with improved aftermarket performance, we can expect more quality SPAC deals being announced and executed, which is good news for investors.
More quality SPAC deals may be good news for investors, but I bet short sellers are still licking their chops at the prospect of the SPAC assembly line cranking up again.
BlackRock just issued its 2021 Stewardship Report and it’s an eye-opener, particularly when it comes to the giant asset manager’s support of shareholder proposals during the 2020-2021 proxy year. Here are some of the highlights:
– BlackRock supported 35% of shareholder proposals, compared to 17% the previous year. On ESG-related topics, BlackRock supported 64% of Environmental proposals, 35% of Social proposals, and 32% of Governance proposals. It cast at least one vote against management’s recommendations in 42% of this year’s meetings, compared to 39% last year.
– BlackRock voted against 10% of incumbent directors this year, up from 8.5% last year. Corporate governance concerns — including lack of board independence, insufficient diversity, and executive compensation — prompted most of the votes against directors’ elections, and other director-related proposals, globally. In the Americas, lack of board gender diversity was the most common reason for rejecting a director, accounting for 61% of negative votes. BlackRock withheld votes from 255 directors based on climate-related concerns.
– BlackRock voted against 5% of Say on Pay proposals in the Americas compared to 4% last year, and voted against 16% globally compared to 12% last year. BlackRock voted against 20 S&P 500 Say on Pay proposals, and 12 of these proposals failed to receive majority support.
The report covers BlackRock’s stewardship activities focusing on proxy voting for the period from July 1, 2020 to June 30, 2021. It also provides specific engagement case studies and addresses how BlackRock’s voting aligned with its engagement priorities – which include board quality and effectiveness, aligning incentives with value creation, climate and natural capital, strategy, purpose and financial resilience, and company impacts on people.
Efforts to have public companies’ adopt “Say on Climate” (SoC) proposals that would require an annual shareholder vote on their climate strategies have been a big issue during the 2021 proxy season – in fact, according to Glass Lewis, SoC proposals were arguably the “most dominant” issue this year. A recent Squarewell Partners study took a close look at SoC proposals and how they fared globally during this year’s proxy season. Here are some of the study’s key findings:
– As of June 2021, SquareWell is aware of 32 companies that have submitted (or will submit) a SoC proposal, either management- or shareholder sponsored. 23 companies have adopted, either voluntarily or following shareholder
pressure, the principle of a SoC vote and are subjecting their climate action plans to shareholder scrutiny.
– The approaches taken by companies that have adopted SoC vary to a great extent, with some companies putting their climate action plans as a one-off shareholder vote. The content of climate action plans are also heterogeneous
– some more in line with the objectives of the Paris Agreement than others. Unilever’s climate action plan was the most robust in terms of disclosure.
– Management-sponsored SoC proposals have been supported, on average, by more than 90% of shareholders. Only Glencore (UK), Atos (France), S&P (US), Total (France), and Royal Dutch Shell (US) have received over 10% dissent (including abstentions) on their climate action plans as of June 2021. Shareholder-sponsored SoC proposals have been less successful, except at Aena and Canadian Pacific Railway. TCI was the proponent in both cases.
The study notes that Institutional Shareholder Services (ISS) has been more supportive of both management- and shareholder-sponsored SoC votes than Glass Lewis, and that although the vote results suggest that shareholders are broadly supportive of the SoC concept, several asset managers and asset owners have voiced concerns with the campaign.
We’ve posted the transcript for our recent webcast “Cyber, Data & Social: Getting in Front of Governance.” Anyone involved in providing guidance in any of these emerging areas should check out this webcast. Melissa Krasnow of VLP Law Group, Lisa Beth Lentini Walker of Lumen Worldwide Endeavors, Sue Serna of Serna Social & Heidi Wachs of Stroz Friedberg/Aon addressed a wide array of topics, including:
– What the Board Needs to Know About Cyber, Data and Social
– Monitoring New Threats – Ransomware, Vendors and Widespread Attacks
– Social Media Oversight
– Keeping Your Incident Response Plan Current
– Director Liability issues, Including Cyber Liability and D&O Insurance
– Disclosure Issues
This Olshan blog addresses a topic I’ve been meaning to comment about for some time now. I’ve always thought that one of the most straightforward disclosure requirements in a registration statement is the direction on the cover page to disclose a company’s principal executive offices. Well, a pair of registration statements for recent IPOs suggest that this isn’t so straightforward anymore. This excerpt from the blog explains:
On the cover page of its Form S-1 IPO registration statement filed only a few months ago, Coinbase Global, Inc. indicated as follows with regard to the address and telephone number of its principal executive offices: “Address Not Applicable.” In a footnote, it further explained, “[W]e [are] a remote-first company. Accordingly, we do not maintain a headquarters.” An exhaustive search on EDGAR revealed that this was the first submission of its kind with only one similar filing on July 2 by Talkspace, Inc.
How can it be that a public company has no fixed address and/or phone number?1 Surely there must be some physical presence somewhere, even with the shift to work-from-home arrangements for many workers. Securities Exchange Act Rule 3b-7 defines “executive officer” as the company’s “president, any vice president … in charge of a principal business unit” or any other “officer” or “person” who “performs similar policy making functions.” Securities law commentators have suggested that the term “principal executive offices” would mean the place where the CEO and most other executive officers work most of the time. Given the SEC’s focus on accountability and enforcement, it seems puzzling that the SEC cleared this “end of the principal executive office” disclosure requirement.
Yeah, it’s puzzling to me too, but regardless of whether it’s technically permissible to not disclose an HQ on the cover page of an S-1, chances are we’re going to see more filings like this. That’s because there are a whole bunch of tech companies running around calling themselves “remote-first.” Oy vey . . .
Of course, the lack of an address is only the second weirdest thing about the cover page of Coinbase’s S-1. First prize goes to the cover page’s reference under the “copies to” caption to Satoshi Nakamoto, the pseudonym of the so-far anonymous creator of Bitcoin.
According to this recent Audit Analytics blog, the number of IPOs in which issuers disclose that their internal control over financial reporting is ineffective has risen sharply in recent years. In 2011, less than 5% of all IPOs disclosed ineffective ICFR, by 2018, that number had risen to nearly 25%. A related Audit Analytics report on IPO risk governance sheds some light on why investors may be more tolerant of IPO companies with significant control issues. At the risk of sounding like Ari Melber again, this excerpt suggests that it’s “All About The Benjamins”:
Having systems in place to assess internal controls over financial reporting and attest to the reliability of ICFR would seem to benefit investors, if only to signal that internal controls and accounting quality are a high priority for management. However, research surrounding this value proposition provides mixed results.
According to a 2016 study, firms that do not comply with SOX 404 at the time of IPO exhibit the least underpricing and exhibit the highest levels of post-IPO performance over the six- and twelve-month performance periods. Further, the researchers found that companies that were not SOX-compliant IPOs had substantially greater median buy and hold returns over the 24 months following the IPO.
The report did note that the companies achieving the highest buy & hold returns over the 24 months following the IPO were those that didn’t cite ICFR effectiveness issues.
Lockup agreements prohibiting insiders from selling for 180 days or more after an offering have long been a customary part of the IPO process. Last week, the WSJ published an article pointing out that the terms of its lockup arrangements were among some of the unusual features of Robinhood’s proposed IPO:
When Robinhood shares start trading at the end of this month, employees will be able to sell 15% of their holdings immediately, rather than after the traditional six-month lockup period, according to a regulatory filing. Three months later, they can sell another 15%. In the past 12 months, several companies have experimented with looser lockups. In September, data-warehousing company Snowflake Inc. said employees could sell as much as 25% of their vested stock after roughly three months. Then Airbnb Inc. said it would allow employees to sell up to 15% of their shares in the first seven trading days.
This Foley & Lardner blog notes that although the traditional 180 day lockup is still the standard, there is a clear trend toward companies structuring lockup periods with different durations for different parties. But the blog also points out that the trend toward looser lockups hasn’t extended to SPAC IPOs, which have accounted for the greatest share of IPO volume in recent periods. SPAC deals continue to customarily include lockups of a year or more.
