The reason I get so excited about the rising number of public companies is because it means more & more interesting businesses – and more & more great people – are joining our community. Not to mention, we all get to do more of the securities & corporate governance work we like.
So, who are the newest issuers? This site names 644 companies that have gone public so far this year – and this “IPO tracker” sorts 47 tech IPOs by type of offering (traditional IPO, direct listing, de-SPAC).
John blogged last week about Robinhood’s “non-lockup” – allowing up to 15% of shares held by employees, officers & directors to be sold immediately upon commencement of trading. Tulane Law prof Ann Lipton has now taken a deeper dive into what this could mean for Section 11 liability. Here’s an excerpt:
Section 11, of course, permits purchasers of registered securities to sue when the security’s price drops below the offering price, if the registration statement contains false or omitted information. Section 11 claims don’t require a showing of scienter, but there’s a catch: the plaintiff must be able to show that his or her shares were, in fact, issued pursuant to the defective registration statement; unregistered shares, or shares issued pursuant to some other registration statement, won’t qualify. Which means, if there’s a “mixed” pool of shares trading – some of which were issued on the defective registration statement, and some of which were not – an open-market purchaser will have trouble establishing that his or her shares were part of the registered group, which could bar Section 11 claims no matter how deceptive the registration statement may turn out to have been.
As I previously posted, this requirement has already created some havoc in the context of direct listings – and the Slack case, described in my blog post, has been pending before the Ninth Circuit basically forever – but most traditional IPOs require that pre-IPO shares be locked up at least for 180 days after the offering. The lockup means that at least for the first 180 days, all shares available to trade are registered shares, and anyone who buys in that period will be able to show that their shares were traceable to the registration statement. If there’s a problem with that registration statement, those early purchasers will be able to advance Section 11 claims.
Currently, the law isn’t clear on whether – or to what extent – Section 11 claims will be barred by the mixing of unregistered shares along with registered shares in an offering, or at what stage of litigation plaintiffs have to prove “traceability.” One reason Robinhood’s IPO is interesting is because it may give courts a chance to weigh in.
I blogged 3 years ago that it was getting difficult for CEOs to stay silent on hot social and political issues. Fast forward to today, and open letters have taken off as a mainstay of corporate political activism. Research suggests that they’re viewed as a somewhat “safe” way to respond to consumer & employee expectations without sacrificing shareholder value. But signs are emerging that investors and other stakeholders are starting to pay closer attention to follow-through.
Last year in particular, hundreds of companies vowed to combat systemic racism against Black Americans in the wake of George Floyd’s murder. It’s difficult to keep track of which companies made a commitment, what the commitment was, and whether they’ve followed through. Various “pledge trackers” sprung up in the fall, but they haven’t been maintained with real-time data.
One economist says that in the aggregate, companies pledged to put somewhere between $50 – 65 billion toward DEI efforts over a multi-year time frame. Now, he’s submitted an SEC rulemaking petition to urge that companies be required to disclose progress on their commitments. So far, he says, only $500 million has been spent. He argues it doesn’t matter whether investors care about this info, because compelling disclosure would be in the public interest and is within the Commission’s authority. That’s a bold position to take, in light of recent Commissioner statements about the SEC’s role and materiality.
Some investors do seem to care about racial equity commitments, though. We’ve been blogging throughout this proxy season about shareholder proposals requesting EEO-1 reports and racial equity audits. These proposals have become more common this year – and have been getting solid support. Shareholders seem to be moving from requesting simple demographics data to requesting data that allows them to understand & evaluate company efforts to promote equity. The level of support for these proposals, while typically below a majority at this point, implies that a sizable portion are starting to view the info as relevant.
The Commission hasn’t given any indication that it would take up this rulemaking petition, but the letter raises awareness of what could be an emerging disclosure risk. This DealBook column predicts that “strongly worded letters” are only going to become more common. With reputational risks & investor materiality assessments constantly evolving – and expectations that “ESG”-type commitments will be accurate – securities & corporate governance counsel should have a seat at the table when companies are crafting these high-minded statements. You want to ensure anything that’s released aligns with the company’s stated values and what it is actually doing & planning to do.
You may also want to start tracking your company’s follow-through, if you’re not doing that already – see this PracticalESG blog for ways to do that – and be prepared for inquiries like this one from Majority Action.
Last month, Lynn blogged that the SEC was nearing the $1 billion mark for lifetime awards under its whistleblower program. This Arnold & Porter memo says that FY 2021 will also set a record of its own: with more than 3 months left, the Commission has awarded $370 million, compared to the $175 million record from last year. The memo was published prior to the SEC’s latest announcements this week of a $5.3 million award and a $1 million award.
The memo delves in to how the whistleblower program works – and says that recent orders may show a willingness to grant more awards. There has also been a huge increase in the number of tips lately, which may lead to more investigations. The memo says that companies can prepare for the possibility of whistleblower activity by considering:
– Risk Assessments. Consider conducting risk assessments related to internal reporting structures to make sure that all reports—not just those going to an internal hotline—are captured, triaged, and investigated if appropriate. Use internal whistleblower information to get ahead of a potential problem with the regulators or law enforcement. Companies that are able to conduct thorough internal investigations showing a clear, robust response to an internal tip will be better able to effectively self-correct and have a defensible position if regulators or law enforcement get involved.
– Annual Training. Consider if annual training is appropriately robust and targeted to middle management to ensure that tips received outside of the employee hotline or formal reporting mechanisms are identified, logged, and triaged. This is particularly important given that 81% of SEC whistleblower awardees reported their concerns internally, including in many instances to their direct supervisor, before or at the same time as reporting to the Commission. If all tips are not identified and centrally reviewed, it is a lost opportunity for a company to self-correct an issue.
– Internal Reporting Mechanisms in a Post-Covid World. As more companies are pivoting back to an in-person workforce, consider a refresh on internal reporting mechanisms as well as related training. Record-breaking numbers of tips were reported to the SEC during the pandemic. This may have been because of a breakdown in internal reporting mechanisms for a remote workforce. Consider a fresh internal reporting campaign to refocus a returning workforce, whether it be full-time in the office, continuing remote, or some hybrid. The statistics show that the current mechanisms for internal reporting may not be effective anymore.
– Anti-Retaliation Policies and Training. Ensure that whistleblower anti-retaliation polices and training are up-to-date. Now is the time for companies to review anti-retaliation policies to ensure they are clear and concise. Annual training should be conducted to ensure that everyone understands what retaliation is and knows the steps that can and cannot be taken once someone reports internally or to the government. Zero tolerance policies that are advertised to the workforce can help employees get comfortable reporting internally rather than straight to the governmental authorities.
– Domestic and International Policies. Review and update both domestic and international policies. In light of the purported award in the PAC case, companies should be aware that whistleblower tips may arise from and with respect to any part of their business, including activity overseas. In FY 2020, 11% of whistleblower submissions to the Commission were submitted from non-US countries. Since the inception of the program, the SEC has received tips from whistleblowers in 130 countries. Properly and consistently implemented robust internal reporting mechanisms and whistleblower policies provides an additional safeguard for compliance with US and international laws and regulations.
The merger between the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) has now closed – and the combined organization will now be known as the Value Reporting Foundation. The deal is an effort to simplify the ESG reporting landscape by aligning disclosure tools from two of the major players. From the press release:
The Value Reporting Foundation is a global nonprofit organization that offers a comprehensive suite of resources designed to help businesses and investors develop a shared understanding of enterprise value — how it is created, preserved or eroded over time. The resources — including Integrated Thinking Principles, the Integrated Reporting Framework and SASB Standards — can be used alone or in combination, depending on business needs. These tools, already adopted in over 70 countries, comprise the 21st century market infrastructure needed to develop, manage and communicate strategy that creates long-term value and drives improved performance.
As I blogged last fall when this merger was announced, the VRF also intends to support other organizations such as the IFRS Foundation. There seems to be an acknowledgement that there are too many players in the “reporting framework” space right now. That makes it difficult for companies to determine what’s important to disclose and difficult for investors to compare disclosures.
The Value Reporting Foundation may have more global reach & influence than the IIRC or SASB had on their own – with SASB gaining a lot of acceptance in the US but not oversees, and the inverse being true for IIRC. Michael Bloomberg, who is the chair of the TCFD and who has been a SASB supporter since its early days, is also a Chair Emeritus of the new organization. It remains to be seen whether or how any of these standards will get adopted by national regulators.
All of the existing resources from the IIRC and SASB remain available on their websites for now – but you can also visit the new VRF website for more tools.
We’re regularly posting new podcasts for members! In this 25-minute episode, Dave Lynn and McKesson’s Jim Brashear take a deep dive in to the SEC’s new requirements for electronic signatures for SEC filings. Topics include:
Insider trading is always a juicy topic in the financial media. Once the spotlight is focused on trades that appear well-timed, Rule 10b5-1 technicalities are of limited use to companies and execs who want to reclaim the narrative – which is especially true when the “safe harbor” trades occur only days after adopting a trading plan. This Bloomberg article shows that those types of details are now getting picked up and scrutinized. Here’s an excerpt:
Short-term plans for stock trades are surprisingly prevalent, hinting at a significant gap in the agency’s surveillance, according to research from Stanford University and the Wharton Business School. The academics there reviewed 20,000 plans filed on paper by corporate leaders. About 38% of the plans call for trades within the same quarter, before earnings results were announced. About 82% have cooling-off periods of fewer than six months. The transactions consistently avoid large losses and foreshadow future price declines, according to the study.
I first blogged back in February about the Stanford research that Bloomberg is citing – the study was getting quite a bit of buzz and was cited by a handful of US Senators who were urging the SEC to take action. Fast-forward to now, and reforms to Rule 10b5-1 are looking more likely in light of SEC Chair Gary Gensler’s remarks earlier this month and the appearance of the rule on the Reg Flex Agenda.
One of the biggest changes that’s being evaluated is whether to propose adding a “cooling off” requirement to the safe harbor. Another potential change would be proposing disclosure about a plan’s adoption date on the Form 4 that’s filed to report the transactions under the plan. Right now, that info is only required on Form 144s, which see very little daylight since they’re typically submitted in paper format to the SEC. That was another big point of contention in the Stanford study.
Although it’s currently not baked into the rule, many companies already require insiders to observe a “cooling off” period when they adopt Rule 10b5-1 trading plans. The pause between the time the plan is adopted and the execution of the first trade functions as a “belt & suspenders” to ensure the insider doesn’t possess any material non-public info at the time the plan is adopted, which is one of the requirements to get safe harbor treatment. As we note in our “Rule 10b5-1 Trading Plans Handbook,” practice varies in terms of the length of this period – typical time frames are anywhere from two weeks, to 30, 60 or 90 days. Chair Gensler floated the idea that there should be a much longer pause than is common right now – as long as 4-6 months.
We’ve been posting memos about these potential reforms in our “Rule 10b5-1″ Practice Area – and we have an all-star webcast lined up on the topic next month, on Tuesday, July 20th at 2pm ET.
A member recently posted this question in our Q&A Forum (#10,761):
What do companies do to enforce their insider trading policies when employees accidentally trade during a blackout period?
John responded:
I’ve had this come up a few times. The first thing that needs to be done is to review the facts and circumstances surrounding the violation in order to assess its seriousness and to determine whether there’s a potential control issue. Then, there needs to be some kind of sanction, even if the violation was accidental and did not result in any violation of the law. In the case of minor violations, there’s usually been some sort of formal reprimand and additional training in the policy’s requirements.
The really key thing is that you need to enforce the policy in order to get any credit for it from the SEC and other regulators. There are discussions of issues associated with enforcement of insider trading policies throughout our Insider Trading Policies Handbook.
Earlier this week, the Supreme Court issued its long-awaited decision in Goldman Sachs Group v. Arkansas Teacher Retirement Systems, a securities fraud class action against Goldman Sachs. The litigation arose out of statements Goldman made before the 2008 financial crisis about its commitment to compliance and its ability to identify & prevent conflicts of interest.
A few years later – in the midst of the financial crisis – it came to light that Goldman didn’t fully comply with all laws, didn’t prevent all conflicts of interest, etc. (the bank paid $550 million in 2010 to settle SEC charges related to a subprime mortgage CDO, among other things). Goldman’s stock price dropped, and the lawsuit commenced.
The plaintiffs presented a 10b-5 “fraud on the market” theory that Goldman’s statements about its honesty & integrity had artificially inflated the stock price. Under this theory, anyone who bought shares was defrauded, because they suffered a loss after the truth came to light.
SCOTUS kind of disagreed – but it’s muddy. It’s not the home run that companies and D&O insurers were hoping for, because the Court held that the company has the burden of proof to present evidence that “severs the link” between the statements it made and the price drop. However, companies can offer all sorts of evidence as part of that effort, and lower courts can consider that “generic” statements are less likely to impact price.
In this Twitter thread, Tulane Law prof Ann Lipton predicts the courts may end up coming pretty close to examining the merits of plaintiffs’ “price drop” arguments at the class certification stage. It could get messy in trying to distinguish this type of analysis from the Halliburton I holding of a decade ago, which said that plaintiffs don’t have to prove “loss causation” in order to get class certification.
This Gibson Dunn memo summarizes the issues & the holding in more detail. Here’s an excerpt:
– Today’s decision is the first time the Supreme Court has discussed the “inflation-maintenance” theory of securities fraud, although the Court expressly noted that it was taking no view on the “validity” or “contours” of that theory. Under the inflation-maintenance theory, a misrepresentation causes a stock price to remain inflated by preventing inflation from dissipating from the price. The theory, which has become increasingly common in securities class actions, often depends on an inference that a negative disclosure about the company corrected an earlier misrepresentation, and that a drop in the stock price associated with the disclosure is equal to the amount of inflation maintained by the earlier misrepresentation.
– The Court’s decision suggests important limitations on the theory. The Court explained that the inference that the back-end price drop equals front-end inflation “starts to break down when there is a mismatch between the contents of the misrepresentation and the corrective disclosure,” and this occurs “when the earlier misrepresentation is generic . . . and the later corrective disclosure is specific.”
– The decision thus holds that defendants in securities class action suits may rebut the Basic presumption by arguing that the allegedly fraudulent statements are too generic to have impacted the price of the security, even if those arguments overlap with the ultimate merits of the case.
– The Court also clarified that its prior decisions in Basic and Erica P. John Fund, Inc. v. Halliburton Co., 563 U. S. 804, 813 (2011), established that securities-fraud defendants bear the ultimate burden of persuading the court that the Basic presumption does not apply. The Court’s decision thus underscores the importance of defendants offering factual and expert evidence at the class certification stage to rebut the Basic presumption.
We’ll see what happens here, but it sounds like this holding is unlikely to cut the plaintiffs’ bar off at the pass. With the “inflation maintenance” theory still kicking, aspirational statements may continue to land companies in court under the “everything is securities fraud” paradigm. Once you get there, you can claim the statements were “generic” and submit a lot of evidence to show why the class shouldn’t proceed.
A recent study from Duke Law prof Emily Strauss attempts to answer both of these queries. She first finds that event-based securities litigation – and the big settlements that often result from it – is being driven by institutional investors who piggyback on regulatory investigations into big companies. This Cooley blog summarizes the study and highlights some surprising stats:
In a conclusion that may seem counter-intuitive, the author found that regular securities cases, where shareholders are the primary victims, are almost 20 percentage points more likely to be dismissed (55%) than event-driven securities cases (36%). What’s more, the average shareholder settlement in event-driven securities litigation (where the misconduct most directly harms victims other than shareholders) is $24.3 million compared to $7.2 million for regular securities litigation where the primary victims are shareholders.
The author noted that these correlations “persist even when controlling for firm size, class period duration, court expertise, and indicia of merits of the lawsuit, such as institutional investors as lead plaintiffs, earnings restatements within the class period, and whether the complaint cited an SEC investigation.” In addition, defendant companies in event-driven securities cases are larger on average ($29.6 billion in total assets), compared to regular securities class actions on average ($8 billion in total assets).
And, almost 70% of event-driven securities cases were brought by pension funds and other institutional investors, compared with only 42% of regular securities litigation. That’s notable because “institutional investor lead plaintiffs are associated with lower dismissal probability and dramatically higher settlement values. They also generally appear to sue much larger firms.”
Professor Strauss suggests that mandatory ESG disclosures may dampen opportunities for this type of litigation. The logic is that companies would be more likely to disclose (and address) the underlying issues that lead to the types of incidents likely to set off the chain reaction of investigations, stock drops, and lawsuits – and shareholders would be better able to monitor them along the way. Others believe that additional ESG disclosure will just provide fodder for different types of opportunists, at least during the “transition phase.”
