The weekend edition of the NYT Dealbook took a deep dive into the SPAC revolution – and notes that we may start seeing a new type of blank-check entity called a SPARC (special purpose acquisition rights company). A SPARC is basically a SPAC that just gives investors a right to buy shares down the road when a merger target is announced, rather than putting money in up front. It also sounds like a character in a Dr. Seuss book. Anyway, all of this was a follow-on to the supposed troubles that Bill Ackman’s SPAC is facing, which John blogged about last week on DealLawyers.com. Here’s what John wrote:
The world’s largest SPAC, Pershing Square Tontine Holdings, has been named as a defendant in a shareholder derivative lawsuit filed by, among others, former SEC Commissioner Robert Jackson and Yale Law Prof. John Morley. In a nutshell, the complaint alleges that PSTH is an unregistered investment company, and that as a result, the goodies that flow to insiders under the typical SPAC structure – specifically, sponsor & director warrants – represent unlawful compensation under the Investment Company Act.
Much of the media appears to be reporting the story like its hair is on fire. Here’s an excerpt from the NY Times DealBook that makes it sound like this lawsuit could, if successful, result in “SPACmageddon”:
If the suit succeeds, it could make professional investors who have found SPACs attractive wary of potential legal challenges, chilling the market. Proving damages will be difficult because the Universal Music deal was scrapped. But more important, perhaps, the case attempts to address underlying issues about the motivations of some SPAC sponsors. And its analysis of the meaning of investing in securities — part of any M.&A. deal — raises existential questions about the purpose and treatment of SPACs in general.
I think that DealBook has a point about the difficulty of proving damages, but although I’m no 1940 Act guru, it seems to me that the plaintiff may have bigger problems than that. Here’s why – all of the allegations in the complaint seem to depend upon the court concluding that PSTH should be registered under the Investment Company Act. But the problem is that there’s an exemption from that statute that this SPAC & every other one has been structured to fit into. This Mayer Brown memo explains:
The structure of a SPAC’s trust account is designed to avoid the SPAC being classified as an “investment company” under the Investment Company Act of 1940, as amended (the “Investment Company Act”). Following its IPO, a SPAC is typically required to invest the IPO proceeds held in trust in either government securities or in money market funds that invest only in government securities.
By doing so, a SPAC may rely on Rule 3a-1 under the Investment Company Act, which excludes companies with no more than 45% of the value of its total assets consisting of, and no more than 45% of the issuer’s net income after taxes deriving from, securities (excluding government securities). There are also no-action letters in which the SEC Staff concurs with the view that securities in certain money market funds also can be excluded from these calculations.
The complaint says that “an Investment Company is an entity whose primary business is investing in securities. And investing in securities is basically the only thing that PSTH has ever done. From the time of its formation, PSTH has invested all of its assets in securities.” What kind of securities has it invested in? Again, here’s what the complaint says: “The Company’s agreement with its trustee specified the money was to be “invested only in U.S. Treasury obligations with a maturity of 180 days or less or in money market funds . . . which invest only in U.S. Treasury obligations.”
So, the complaint appears to allege that PSTH is an investment company because it – like every other SPAC – has invested the proceeds of IPO in exactly the type of securities that would permit it to rely on the exemption provided by Rule 3a-1 of the Investment Company Act. This excerpt from a CNBC article on the lawsuit makes it clear that this point wasn’t lost on Pershing Square:
A spokesperson at Pershing Square said the complaint bases its allegations, among other things, on the fact that PSTH owns or has owned U.S. Treasurys and money market funds that own Treasurys, as do all other SPACs while they are in the process of seeking an initial business combination. “PSTH has never held investment securities that would require it to be registered under the Act, and does not intend to do so in the future. We believe this litigation is totally without merit,” the spokesperson said.
Like I said, this isn’t my area of expertise, so there may well be depths to this complaint that I haven’t fathomed. After all, this just can’t be that simple, right? I mean, there are some pretty serious folks on the pleadings. Maybe this case will turn out to have some traction. If so, then it may well toss a rather large monkey wrench in the works of the increasingly troubled SPAC boom. But at this stage, I think the media should stop hyperventilating.
– Liz Dunshee
Last week, the SEC issued this notice that grants immediate effectiveness to a Nasdaq proposal that amends Listing Rule 5910 to modify the application fee for “Acquisition Companies” that list on the Nasdaq Global Market. The rule change reduces the initial application fee from $25k to $5k – in line with the fee charged to companies applying to list on the Nasdaq Capital Market.
Nasdaq says that this fee is used to offset the cost of conducting its regulatory review of the initial listing application – and that those reviews are less costly for Acquisition Companies because there is no underlying operating business and often no historical financials. At the NYSE, Acquisition Companies aren’t subject to the initial application fee, which is $25k for most companies.
The SEC is also seeking comments on the amendment, and may temporarily suspend the rule within 60 days if needed. If the SEC does that, it would then initiate proceedings on whether the rule should be approved or disapproved.
– Liz Dunshee
Last fall, the SEC settled an enforcement action with Fiat-Chrysler that arose out of allegedly misleading disclosures about its compliance with emissions standards. There may be more actions like this on the horizon, according to a recent Cooley blog. Here’s an excerpt, based on a July speech by then-Acting Enforcement Director Melissa Hodgman:
According to Hodgman, we should “expect to see ‘other cases like that, where there was a misstatement or something that wasn’t disclosed to investors that they needed to know to make [an] investment decision.’” In addition, she observed “that ‘like many of the other areas, I don’t think this is a different approach to enforcement or applying anything in a different way,’ adding that ‘our securities laws were written to evolve and [meet] the new products and the new environments in which we find ourselves.’”
September is often the busiest month of the year for enforcement actions. With the new Director and the ongoing work of the Division’s “ESG task force,” it will be interesting to see what happens in the coming weeks.
– Liz Dunshee
Despite the current focus on diversity at the board level and throughout organizations, “sexual orientation” isn’t captured by EEO-1 reports and the anti-discrimination laws of many states don’t extend employment protections to LGBTQ individuals. Now, this dimension of diversity is starting to get more attention.
Recent bills, including the “ESG Disclosure & Simplification Act” that was passed by the House earlier this summer would require SEC disclosure about workforce and/or board composition, including self-reported sexual orientation. Several big pension funds also include LGBTQ in their policy definitions of diversity. This Diligent memo explores the current stats for representation:
– The Human Rights Campaign Foundation’s 2018 report ”A Workplace Divided: Understanding the Climate for LGBTQ Workers Nationwide“ found that nearly half (46%) of LGBTQ workers in the United States were closeted in the workplace.
– Fewer than 0.3% of Fortune 500 board directors were openly LGBTI (the I being ‘intersex’) in 2020. LGBTQ+ workers are woefully underrepresented within corporate boards and executive committees; further, 358 Fortune 500 companies do not have a board diversity policy in place.
The memo outlines the typical benefits that having a diverse & inclusive group of decision-makers and employees can bring – including lower turnover and customer loyalty. Like other dimensions of diversity, boards can be intentional about adding LGBTQ individuals to their candidate lists and celebrating LGBTQ inclusivity. The memo recommends giving directors the benefit of D&I training versus “opting out” – so that they’re well-informed to consider strategic challenges & opportunities, and how the company’s policies affect outcomes. Also check out this KPMG podcast on the “rising interest in LGBTQ+ diversity in the boardroom.”
– Liz Dunshee
The SEC has announced the appointment of Sanjay Wadhwa as Deputy Director of the Division of Enforcement – effective immediately. Sanjay has served at the SEC since 2003. He’s moving into this role from the SEC’s New York Regional Office, where he co-led 150 Enforcement personnel as Senior Associate Director. He also previously served in additional roles in the Enforcement Division, including Deputy Chief of the Market Abuse Unit and Assistant Director in NYRO.
The press release also calls out Melissa Hodgman and Kelly Gibson for their leadership service during this transition and says they’ll continue to be instrumental advisers to Chair Gensler and the Division.
– Liz Dunshee
Last week, Robinhood announced (on its company blog) that it agreed to buy Say Technologies – the platform that makes it easier for retail shareholders to vote proxies and to ask earnings call questions in real-time. We’ll be watching the potential voting impact of this as we head into the next proxy season. But for now, let’s talk about earnings calls.
Tesla helped pave the trail for Say when it started using the technology for its earnings calls a couple years ago. Back in 2019 – which feels like forever ago – I wrote that Say claimed that retail investors are more likely to ask about products and less likely to care about your detailed financial results – a more entertaining experience for everyone, although possibly less informative for analysts who are honing financial models.
At the time, it didn’t seem like many people would actually find entertainment value in earnings calls, but now it’s 2021 and that’s what’s happening. I blogged a few months ago that a number of companies were courting retail participation in quarterly calls. They’ve had some success! AMC’s latest call was held on Say and yielded 4600 retail questions.
Robinhood and Say both want to make it easier for retail investors to participate as owners. In 2023, will the CEOs of big, established companies be answering questions about their corporate mascots? If I’ve taken one lesson to heart over the past two years, it’s that anything is possible. If you’re looking at using Say, your product development (and mascot) folks might end up with a bigger role in preparing for your quarterly calls.
– Liz Dunshee
This Axios article says that climate change has been getting more attention in S&P 500 companies’ Q2 earnings calls. The article cites to a few examples of companies that gave specific info about ESG activities:
– Qualcomm: “As part of our ongoing ESG efforts, we recently started purchasing 100% renewable solar energy for our San Diego headquarters.”
– Interpublic Group of Companies: “[We] announced an action plan that consists of 3 climate roles: committing to set a science-based target; sourcing 100% renewable electricity by 2030; and joining The Climate Pledge, co-founded by Amazon in Global Optimism.”
– Caterpillar: “Our 2020 sustainability report highlights 7 new environmental, social and governance goals we’ve set to achieve by 2030. … One of these goals is to ensure that 100% of Caterpillar’s new products through 2030 will be more sustainable than the previous generation.”
– Liz Dunshee
Lynn blogged a few months ago that the NYSE wanted FINRA to start taking the lead in setting the fee schedule that brokers use to get reimbursed for proxy distribution costs. The problem was, FINRA didn’t want the responsibility either, and nobody besides the NYSE was very enthused about a change.
Yesterday, the SEC issued this order to disapprove the proposed rule change. The order basically says the NYSE is doing too good of a job here, and it bears the burden of showing that a change to the status quo would still allow issuers’ interests to be continued to be fairly considered. Here’s an excerpt:
The Commission is not foreclosing the possibility that issuers’ interests could be adequately considered in a reimbursement rate-setting process that the Exchange does not lead; however, in the Notice and in its response to the Order Instituting Proceedings, the Exchange did not provide sufficient information in the record on this point. In particular, while the Exchange acknowledges that the impact of eliminating the reimbursement rate schedule from its rules would be that FINRA becomes the de facto lead SRO for rate setting, the Exchange does not articulate or provide any information to suggest how FINRA, notwithstanding its lack of regulatory relationships with issuers, could potentially consider issuers’ interests if FINRA were to become the industry standard-bearer. Nor does the Exchange identify any other existing mechanism through which the interests of issuers could be adequately considered if proposed updates to the rates were to be developed under a FINRA-led regime.
Approval of NYSE’s proposed elimination of its rate schedule therefore would do more than simply conform NYSE’s rules to those of other exchanges; it would result in NYSE’s relinquishment of an important market-wide regulatory function that it currently performs, and without there being evidence in the record of this filing of an available and equally viable alternative for that function.
Earlier this week, I wrote on our Proxy Season Blog about a different NYSE rule relating to proxy distribution costs that the SEC did approve, which may give some relief to companies that saw those costs skyrocket last year.
– Liz Dunshee
Yesterday, the SEC announced insider trading charges against the former head of biz dev at a mid-cap company that was acquired at a premium 5 years ago. The guy was smart enough to not trade in securities of the target company that employed him. Instead, he bought out-of-the-money options in a competitor that was cited by bankers on the deal as a “comparable company” – allegedly based on the confidential info about the deal, and allegedly because he (correctly) assumed that the competitor’s stock price would go up when the deal was announced.
There are some unique facts here, but in insider trading lingo, trading based on confidential info from an employer looks a lot like “misappropriation” – which the Supreme Court upheld as a theory of liability in 1997, in United States v. O’Hagan, and which is reflected in the language of Rules 10b5-1 and 10b5-2. And sure enough, that seems to be how the SEC is positioning the case. Here’s an excerpt from yesterday’s SEC complaint:
– On August 18, 2016, and in the course of Panuwat’s employment at Medivation, Panuwat received confidential, nonpublic information in an email from Medivation’s Chief Executive Officer (“CEO”) that Medivation would be imminently acquired by pharmaceutical giant Pfizer, Inc. (“Pfizer”).
– As an employee and agent of Medivation, Panuwat owed Medivation a duty of trust and confidence, including a duty to refrain from using Medivation’s proprietary information for his own personal gain.
– Nonetheless, within minutes of receiving this highly confidential news from Medivation’s CEO, Panuwat misappropriated Medivation’s confidential information by purchasing—from his work computer—out-of-the-money, short-term stock options in Incyte Corporation (“Incyte”), another mid-cap oncology-focused biopharmaceutical company whose value he anticipated would materially increase when the Medivation acquisition announcement became public. Panuwat did not inform anyone at Medivation about his Incyte trades.
The twist in this case is that the info wasn’t directly about the company whose securities were traded. That competitor company wasn’t part of the deal, but the SEC is claiming that the biz dev guy used material non-public info about the deal to guess what would happen to that other company’s stock when the deal was announced. People who are smarter and more familiar with insider trading case law than me probably have opinions on whether this is an open & shut case – so please email me if you know of some precedent! But for the moment I’m not making assumptions about how the court will come down on this. At any rate, though, the trade seems to have violated the company’s insider trading policy. Here’s what that document said, according to the complaint:
“During the course of your employment…with the Company, you may receive important information that is not yet publicly disseminated…about the Company. … Because of your access to this information, you may be in a position to profit financially by buying or selling or in some other way dealing in the Company’s securities…or the securities of another publicly traded company, including all significant collaborators, customers, partners, suppliers, or competitors of the Company. … For anyone to use such information to gain personal benefit…is illegal. …” (Emphasis added.)
Sometimes when you’re reviewing an insider trading policy, the client asks whether it’s really necessary to include the part about prohibiting transactions in the securities of other companies. These charges are a reminder that it is – because it shows the company is doing its part to prevent transactions that could be illegal, and hopefully it keeps your employees out of hot water too.
If you need to drive the point home, you also now have a brand new case to use as a scare tactic in your compliance trainings. The guy’s profits were only $107k, the company in question wasn’t part of the actual deal, and yet this activity still came to the attention of the Enforcement folks. They’re seeking penalties and a D&O bar – and defense costs probably aren’t cheap.
– Liz Dunshee
Anecdotally, there seems to be a perception among some folks that in-person board meetings yield better interaction & decision-making. But a recent OnBoard survey of nearly 300 directors & staff members says those assumptions could be misplaced. Here are some takeaways:
– The rapid shift to remote meetings created a lot of challenges, but 79% of respondents said their boards have improved effectiveness in the past 12 months, including 56% who said they have improved slightly and 23% who have seen significant improvements in effectiveness.
– A full two-thirds of survey respondents said board collaboration has improved since the shift to remote work and meetings, with 54% saying they have seen some improvement and 12% seeing a lot of improvement. On the flip side, that means that nearly a quarter of respondents said their board’s collaboration deteriorated at least a little since Covid-19 forced their meetings to shift to a virtual format.
– About half said their boards have spent more time discussing strategic issues over the past 12 months than prior to the pandemic, while 39% indicated they spend about the same amount of time discussing such issues.
– When asked to describe the effectiveness of their board’s governance in a virtual environment, 54% of survey respondents said they have achieved good governance under challenging conditions. Board administrators and staff were slightly more affirming, with nearly 60% of non-directors saying good governance had been achieved versus 53% of executive and non-executive directors.
Like many corporate governance issues, investors and advisors may have to get comfortable with the notion that “best practices” don’t deliver the same results for every board. This particular survey seems to support the notion that the “future of board meetings” will include some lessons learned from pandemic times.
– Liz Dunshee
