Everyone’s been speculating on whether & how the SEC’s universal proxy card rules will impact proxy contests. These rules are a big deal – but a recent memo from Schulte Roth & Zabel says that everyone can take a deep breath – at least for now. That’s because the fundamentals of early UPC activist campaigns have been pretty much the same as they were before the election mechanics changed.
The memo analyzes takeaways from the first 3 actual (and attempted) proxy contests under the new rules. Here’s an excerpt from the conclusion:
As noted above, the early proxy contests conducted under the universal proxy rules have seen companies and activists utilize strategies and themes that brought success prior to the UPC, with adjustments on the margin. At Argo and Aimco, the activists seemingly did not overreach on the size of their slates and attempted to take a surgical approach to board refreshment, including by largely targeting non-diverse men above the age of 65.
Contrary to the concerns that activists will now run campaigns “on the cheap,” the activists in both campaigns also apparently spent (or anticipated spending) a substantial amount of money when pursuing minority board representation—$1,000,000 in the case of L&B at Aimco and $750,000 in the case of CRM at Argo. In addition, at both Argo and Aimco, it seems, consistent with past experience, that ISS and Glass Lewis played meaningful parts in the outcome of each contest and that both used analytical frameworks that remained substantially unchanged from the pre-UPC era.
Finally, while we are still in the infancy of the universal proxy rules, the expected uptick in substantial activism has not yet come to fruition. Since the effectiveness of the universal proxy rules, the number of announced election contests, campaigns that have resulted in a board seat, and public settlement agreements are all at depressed levels relative to equivalent periods during the two prior years. For companies, it does not appear that the sky is falling. For shareholders, it does not appear that it’s open season. But, as the universal proxy rules age and the activism landscape settles around the UPC, we anticipate that the next two- to three-year period will reveal the true, immediate import of the mandatory use of universal proxy cards in certain director election contests.
In a couple of recently proposed rule changes posted for notice on the SEC website, Nasdaq has made immediately effective changes to modernize some of the provisions governing fees that the exchange charges companies.
The first set of amendments stems from a change to Nasdaq’s initial & all-inclusive annual fees that became effective at the beginning of this year. These January fee updates do the following:
(i) replace the tiered entry fee structure with a flat fee of $270,000 when a Company first lists a class of equity securities on the Nasdaq Global or Global Select Market;
(ii) modify the Exchange’s all-inclusive annual listing fees for all domestic and foreign companies listing equity securities covered by Listing Rules 5910 and 5920 on the Nasdaq Global Select, Global and Capital Markets;
(iii) replace the two-tier entry fee structure with a flat fee of $80,000 when an Acquisition Company, as defined in Nasdaq rules, first lists a class of equity securities on Nasdaq;
(iv) adopt an all-inclusive annual listing fee structure specific to Acquisition Companies listing on the Nasdaq Capital Market; and
(v) replace the current three-tier all-inclusive annual listing fee structure for all Acquisition Companies with a two-tier structure.
Nasdaq is now effecting clean-up amendments to Rules 5910 & 5210 – to delete expired & obsolete provisions that are no longer relevant in light of the simplified fee structure.
In addition to its updates to initial & annual listing fees, Nasdaq has also proposed an immediately effective update to increase the fees it charges companies seeking review of a delisting determination, public reprimand letter or written denial of an initial listing application. Here’s more detail:
Pursuant to Nasdaq Listing Rule 5815, companies may seek review of a determination by the Nasdaq’s Listing Qualifications Department (“LQ Staff”) to deny initial listing or delist a company’s securities or to issue a Public Reprimand Letter, by requesting a hearing before an independent Hearings Panel (the “Hearings Panel”). Listing Rule 5815(a)(3) provides that to request a hearing, the company must, within 15 calendar days of the date of the LQ Staff delisting determination, public reprimand letter, or written denial of an initial listing application, submit a hearing fee in the amount of $10,000.
Companies may also appeal a Hearings Panel decision to the Nasdaq Listing and Hearing Review Council (the “NLHRC”). Listing Rule 5820(a) requires a company seeking such an appeal to submit a fee of $10,000. Nasdaq last changed these fees in 2013.
Nasdaq now proposes to increase the fee for review by a Hearings Panel to $20,000 and the fee to appeal a Hearings Panel decision to the NLHRC to $15,000. Nasdaq is increasing the fees because the costs incurred in preparing for and conducting hearings and appeals have increased since the fees were last changed.
While the new fees aren’t exorbitant, they’re a big increase on a percentage basis. That might be a tough pill to swallow for companies that are already in a rough position. But you can’t blame Nasdaq for needing to bump up the rates – have you seen the price of eggs lately?!
Comments are due 21 days after publication of the proposal in the Federal Register – here’s the form.
The “Insider Trading Policies Handbook” also includes an updated Model Policy. All of our Handbooks are thoughtfully organized so that you can easily find a practical answer to whatever question is being thrown your way. We’ll continue to update these resources throughout the spring if & when more guidance becomes available.
If you aren’t already a member of TheCorporateCounsel.net with access to these resources, now is a great time to sign up. Email sales@ccrcorp.com or visit our membership center to start a no-risk trial. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
“Risk factor” season is coming to a close – but I can’t resist flagging this recent Cooley blog about whether the SEC’s 2020 “modernization” rules have made any dent in the length & specificity of this section of the annual report. The blog looks at Deloitte research on S&P 500 risk factors that was published at the end of last year – and hopefully, will be updated in the coming months to reflect this year’s reporting. Here were the key findings:
– The number of pages has not decreased over the two-year period, but continues to increase.
– The number of risk factors continues to increase.
– Most companies did not need to include a risk factor summary.
– Headings are being used, but they are often very generic.
– One-third of companies used a “general risk factors” heading during the past two years, contrary to the SEC’s advice.
– The number of standalone “climate” risk factors has soared – with about one-third of S&P 500 companies adding at least one.
These may not have been the results the SEC had in mind back when it adopt rules to encourage more succinct disclosures. But don’t blame the lawyers! It’s not that we aren’t trying. Put the blame where it’s due: the polycrisis. Nevertheless, Deloitte offers these suggestions for improvement:
– Integrate risk factor disclosure processes, including climate-related risk disclosures, with enterprise risk management (ERM) reporting processes.
– Use risk taxonomies from ERM program for headings.
Earlier this month, a flurry of IPOs successfully closed on an aggregate $1.17 billion in proceeds – according to this Reuters article – with several more companies waiting in the wings. This is great news for capital markets lawyers, coming off the slowest year in more than two decades in 2022.
A Pitchbook article from Friday has more stats – but isn’t quite as optimistic. The article says that there are a few reasons why deals are currently smaller & more difficult to come by:
– Macroeconomic volatility: With inflation, uncertainty about the future of interest rates and geopolitical turmoil, PE and VC firms aren’t willing to let their pre-IPO assets go amid the chaos.
– Firms can’t agree on valuations and pricing: It’s a buyer’s market, and the supply side is on strike. Asset managers don’t want to let go of their trophy assets—strong companies they’ve held in their portfolio for a long time and have helped scale—in an environment where they won’t get the biggest bang for their buck.
– The specter of recession: An impending and enduring recession is the most “vexing” ingredient for IPOs, Ethridge said. In a downturn, investors tend to stick with what they’re comfortable with: businesses with a balance sheet strong enough to survive, according to Kyle Walters, associate PE analyst at PitchBook. This also means they move away from riskier, higher-growth options in IPOs.
So, if you typically fill your plate with IPOs, can you count on a bounce-back later this year? Of course it is somewhat industry-dependent – this CNBC article shares a few that are looking more rosy. For the broader market dynamics, the folks that Pitchbook talked to were all over the map – with some predicting an uptick in late 2023 and others thinking it could be years away. They pointed to a few signs that will be necessary precursors to a hot market:
Whether it’s six months or six years, a few (or all) of the stars need to align for IPOs to round out their comeback story. For one thing, the macroeconomic environment needs to recover. There is a positive correlation between public stock market performance and public listings, so if stocks climb back up, so will IPO activity.
Also, buyers and sellers need to come to a pricing agreement. In short, sellers will have to make concessions, but this is unlikely.
“The buy-side is wearing the pants right now, and that will continue,” Ethridge said.
A final factor is for a game-changer company to come onto the scene. For example, a company goes public, prompting similar competitors to flock to the public market. Ethridge said he’s been eyeing a promising tech company for the role.
In recent commentary, Vanguard has reaffirmed its view that climate risks may be material to certain portfolio companies – and has articulated high-level expectations for how boards of those companies should go about overseeing those risks. Here’s an excerpt:
Vanguard-advised funds look for portfolio company boards to effectively oversee material risks, including material climate risks, and to disclose their approaches to oversight of these risks to shareholders so that the market can price in the associated risks and opportunities. We believe that boards have a responsibility to be aware of material risks and opportunities (including those associated with climate change) as they make informed, long-term decisions on behalf of company shareholders.
We believe that boards should consider the implications of both physical risks (such as severe weather events, rising sea levels, and temperature changes) and transition risks (such as regulatory changes and technological disruption) and plan for their impacts.
We believe that boards that are most effective in safeguarding long-term investors’ interests from material climate-related risks demonstrate:
• Relevant risk competence.
• Robust oversight and mitigation of material climate risks.
• Effective disclosure of material climate risks and attendant oversight practices.
The commentary goes on to describe each of these aspects of board effectiveness in more detail – and lists typical questions to prepare to answer in Investment Stewardship meetings (which may influence your board agendas as well). It also provides recommended TCFD disclosures in a handy chart.
This is the latest in a pretty regular flow of investment stewardship commentary that Vanguard has been providing on its “insights” page. I blogged a few weeks ago on the Proxy Season Blog about the asset manager’s approach to contested elections.
Warren Buffett’s annual letter to Berkshire Hathaway shareholders came out this weekend – along with the annual report. Like last year, the Oracle of Omaha doesn’t have a lot of groundbreaking new info to share about Berkshire. This WaPo article says it’s the shortest letter in 44 years!
On page 6, Buffett takes a swipe at buyback restrictions. He criticizes the urge of an “economic illiterate or a silver-tongued demagogue” to crudely paint repurchases by as always bad for business & society and preaches the benefits of buybacks to both selling & remaining shareholders.
What caught my eye even more were his strong words about GAAP on page 5, which he shares after providing the company’s non-GAAP “operating earnings” (this is defined as GAAP income exclusive of capital gains or losses from equity holdings and totaled a record $30.8 billion last year, whereas the GAAP figure was a $22.8 billion loss):
The GAAP earnings are 100% misleading when viewed quarterly or even annually. Capital gains, to be sure, have been hugely important to Berkshire over past decades, and we expect them to be meaningfully positive in future decades. But their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.
This is also a commentary on long-term versus short-term results, as Buffett is famously in the “patient, long-term” camp. In addition, Buffett says that non-GAAP adjustments shouldn’t be taken too far. A couple of pages after talking about operating earnings, he reiterates his longstanding complaints about phony metrics (see this 2017 MarketWatch article discussing how Buffett has taken issue with non-GAAP adjustments through the years). From page 7:
Finally, an important warning: Even the operating earnings figure that we favor can easily be manipulated by managers who wish to do so. Such tampering is often thought of as sophisticated by CEOs, directors and their advisors. Reporters and analysts embrace its existence as well. Beating “expectations” is heralded as a managerial triumph.
That activity is disgusting. It requires no talent to manipulate numbers: Only a deep desire to deceive is required. “Bold imaginative accounting,” as a CEO once described his deception to me, has become one of the shames of capitalism.
During the 58 years that Buffett has led Berkshire, he’s been well-regarded for this folksy, straight-shooting letter and approach to business. You get the sense he’s (still) frustrated with what feels like meddling by regulators in business decisions – not a unique view among execs! Unfortunately, as this part of the letter recognizes, fraudsters & profiteers have given the government & public plenty of reasons to be skeptical.
I blogged last month about a quest by the SEC’s Enforcement Division to obtain client names from a law firm – in order to investigate whether those clients were affected by & properly disclosed a cyber breach. The firm (Covington) has obviously been pushing back on that request.
Now, 83 heavy-hitter law firms have lined up behind Covington – as amici curiae in this 31-page brief to the DC District Court. Reuters reported on this development as well as a filing by Covington last week. The list of firms starts on page 28 – it includes Morrison & Foerster, Cravath, Debevoise, Kirkland, Latham and many other big names.
Reuters notes that a judge has scheduled a hearing for this case next month.
The SEC Enforcement Division’s “EPS Initiative” appears to be alive & well – by the looks of an “cease & desist” order from earlier this week – which resulted in a $4 million settlement (and a $75k penalty against the person who served as Chief Accounting Officer – and later, Chief Financial Officer – of the company in question). The claims were settled on a “neither admit nor deny” basis.
In the SEC’s telling, the internal controls & supporting documents for the bonus accruals left gaping holes that allowed for manipulation. Here’s an excerpt from the SEC’s order:
15. On October 7, 2015, during the closing process for the third quarter of 2015, Nash directed the accrual of $300,000 for the PB Bonus Plan, which had not yet been approved by Gentex’s Board of Directors. This journal entry was made without any supporting documentation. Additionally, Nash did not maintain documentation of any purported analysis that was required to be performed pursuant to Accounting Standards Codification (“ASC”) Topic 450, Contingencies, concerning the loss contingency associated with the PB Bonus Plan.
16. On October 8, 2015, Nash realized that the initial accrual of $300,000 would cause Gentex to miss the consensus EPS estimate of $0.27 for the third quarter of 2015. He directed a journal entry to reduce the $300,000 accrual to $100,000. The journal entry for the revised accrual was again made without any supporting documentation and Nash did not conduct any analysis that should have been performed pursuant to ASC 450-20 concerning the PB Bonus Plan.
17. In an October 9, 2015 email exchange with the CFO, the CFO asked Nash if he had reserved some money for the PB Bonus Plan. Nash responded, “100K. had [sic] 300K, but had to reduce in order to keep .27 per share.” The CFO replied, “[g]ood call. That puts in line with consensus, right?” to which Nash replied, “[y]es.”
There were other internal controls sins here too, according to the SEC – but I was surprised that this $200k accrual adjustment appears to be so central to the case. That doesn’t seem like a lot in the grand scheme of things, but the company would have missed consensus EPS estimates by one penny if the adjustment hadn’t been made – and the SEC’s data analytics tools were sensitive enough to pick up something fishy with the situation.
One moral of this story is that if the SEC comes knocking, you want to make sure to have documentation of your internal controls & accounting analysis instead of a conversation about managing EPS to the consensus number.
