Most of us can name a few folks whose influence, early in our career, affected the direction of our path. For me, one of those people was Bert Ranum. Bert was (and is) a wise counselor with a strong sense of business & interpersonal practicalities and a thorough knowledge of securities law. Bert’s clients – which included many smaller public companies in the life science space – were often dealing with unique legal issues, raising capital for R&D efforts, and doing whatever they could to get products to market and keep their business going. That was a whole lot more interesting to me than the churn of private equity acquisitions that many of my peers had been sucked into – although I know many people find those deals exciting for their own reasons.
In 2010, after nearly 30 years practicing in Minnesota, Bert picked up his practice and moved to Gainesville, Florida so that his wife – a scientist – could accept a long-awaited career opportunity with the university there. Bert stayed with our firm and wanted to start a Florida office to serve the local biotech community, as well as maintain his existing clients by traveling back to the Midwest on a monthly basis. It was just a few years later, when we weren’t seeing Bert as regularly, that my colleagues & I started to notice changes in his speech. In 2016, he was diagnosed with ALS.
Bert recently published a book called “Clinical Trial: An ALS Memoir of Science, Hope and Love” – which is an account of reestablishing his career in Florida in support of his wife, Laura, as well as his journey with ALS. By a miraculous coincidence, Laura is not just any scientist: she is one of the top in her field, worldwide, for studying neurological conditions – including, specifically, the genetic mutation that causes Bert’s ALS. Here’s Bert’s summary about that aspect of his book, from the Hennepin County Bar Association:
I may be the luckiest ALS patient alive, if you can call someone lucky with a disease that generally causes death three to five years after diagnosis. I’m lucky because my wife, Laura, is an internationally respected scientist who knows more about my particular disease than almost anyone in the world. Her connections resulted in my participation in a clinical trial at Johns Hopkins for a new drug targeting the specific genetic mutation that I have. That may be why I am doing well over five years from diagnosis, still walking, swimming, playing guitar badly, talking slowly and generally enjoying life. Or it may be the paleo diet that we started years ago, or the metformin that I’m taking based on Laura’s research, or the regular exercise we’re getting or the no stress lifestyle that I’ve adopted. I write about all this in the Memoir.
What also may be of interest to this crowd is that Bert’s book details:
– What it was like to take the Florida Bar Exam at age 51
– Overcoming the fear of “starting over”
– Putting your career goals second to support your spouse’s opportunity
– Negotiating a “package deal” with a spouse’s employer that includes introductions to the business community
– How to handle your ego when things don’t go as planned
Here’s one of the concluding passages from the book, and something I’m keeping in mind as we head into a new year:
When we first moved to Florida, I worked hard to be a successful lawyer and spent a fair amount of time worrying about billable hours, client relationships, and income. A significant part of my ego was based upon being a good and successful lawyer. ALS forced me to reevaluate that, and it crumbled quickly under examination.
As you often hear from people reflecting on a life well-lived, Bert notes that it’s the relationships – with his family most of all, but also with colleagues and friends – that have delivered a meaningful life.
That brings me back to the direction that my own path has taken so far. After a pretty enjoyable stint in private practice, I thought that what I’d enjoy most about joining TheCorporateCounsel.net would be sharing analysis of interesting securities & corporate governance issues (and I do enjoy that, because I’m a nerd). But I’ve learned over the past 5 years that it’s the ability to connect with all of the smart, funny and helpful people in our securities & corporate governance community that really make this gig enjoyable. It’s an honor to work with our fantastic CCRcorp team, and to gain insights from everyone who emails with comments, suggestions and – my favorite – personal anecdotes. Thank you to everyone who contributes to our sites and events, and thanks to Bert for alerting me to his book, the proceeds of which go to ALS research.
– Liz Dunshee
Programming note: This blog will be off tomorrow, returning in 2022. Happy New Year!
Last week, the SEC announced that electronic vehicle company Nikola had settled the Commission’s fraud proceedings against it for $125 million. The SEC is establishing a fund to distribute penalties to harmed investors. This is the company that is most well-known for its then-CEO tweeting a video of its truck prototype cruising at a high speed. Then, a short-seller published a report claiming that the truck was just rolling down a hill.
According to the 13-page order, the SEC is holding the company responsible for misleading statements by its founder and former CEO & Executive Chair, Trevor Milton. The company got some credit for its agreement to continuing to cooperate with the ongoing litigation against Milton. Here’s the company’s press release about the settlement – which emphasizes that the company neither admits nor denies the SEC’s findings and that it’s seeking reimbursement from Milton for costs & damages.
This “D&O Diary” blog from Kevin LaCroix recaps interesting takeaways from the settlement:
The most attention-grabbing aspect of this settlement is its size. This settlement involves some serious money, which obviously speaks to the seriousness of the allegations. There are several other interesting features of this settlement, as well.
The first is that the SEC alleged not only misrepresentations against Milton, but also alleged misrepresentations by Nikola itself, apart from those attributed to Milton. The second is that the SEC alleged that many of the misrepresentations were made in Tweets and in other social media communications. These allegations are a reminder that social media communications can be the source of securities law liability. In that regard, it is worth highlighting the fact that the among the allegations the SEC made was the allegation that Nikola had insufficient controls or procedures for monitoring Milton’s social media use, which underscores that, given the risk of securities law liability arising from social media use, companies have responsibility to control and manage their executives’ social media communications.
Another feature of this settlement that is interesting to me is that the settlement involves a company that became publicly traded during the same time frame as the alleged misconduct through a merger with a SPAC. The fact that the alleged misrepresentations were made both before and after the SPAC merger highlights the risks involved with communications by companies that are going to go public through a SPAC merger or that have just become public as a result of a SPAC merger. These risks draw attention to a misperception that may be widespread that the rules and best practices that apply in connection with traditional IPOs don’t apply to SPAC transactions; the allegations here underscore the danger with this misperception. The fact that the alleged misrepresentations continued after the merger highlight concerns that at least some companies that go public through a SPAC merger may not be ready for the burdens, responsibilities, and obligations that go with a public listing.
The statement in Nikola’s press release about its intent to try to seek recoupment from Milton for its costs and expenses is also interesting. This effort is a claim against a former director and officer of the company. Though it is a kind of D&O claim, it is not one that the typical D&O insurance policy would cover, as it would represent the prototypical “entity vs. insured” claim for which coverage is precluded under the policy.
By the same token, the $125 million that Nikola has agreed to pay in the settlement likely would not be covered under the company’s D&O insurance policy; most D&O insurance policies exclude from the definition of insured loss “fines, penalties, and matters deemed uninsurable under applicable law.” However, the company’s defense costs (as well those of Milton) potentially could be covered under the company’s D&O insurance program.
One final note about the settlement amount, and that is that the $125 million settlement is by far the largest amount the SEC has recovered in a SPAC-related enforcement action.
Kevin predicts that this may just be the beginning of the SEC flexing its enforcement power against companies that went public via a SPAC. This is in addition to the spate of private securities litigation against post-merger SPACs. In blogs here and here, Kevin wrote about complaints against two other post-SPAC EV manufacturers, just in the past week!
Dave blogged earlier this month about the SEC’s final rules under the Holding Foreign Companies Accountable Act – and last week, about the continued scrutiny of disclosures by China-based companies. Meanwhile, this CNN article reports that China is also planning to make it harder for their local companies to go public in other countries.
According to this Financial Times article, this regulatory intervention could cause US IPOs of China-based companies to drop off a cliff. US exchanges are looking to replace that absence with listings from other Asian countries, and that pipeline is growing.
The article identifies some Singapore- and India-based companies that could debut here – but predicts it will be an uphill battle to land anything on the scale of Chinese giants like Alibaba. As I blogged yesterday, the NYSE wants to offer more complimentary products & services in order to entice companies to list there and succeed.
A recent WSJ article reported that regulators worldwide – including the SEC & DOJ – are starting to take an interest in Binance, which is the world’s biggest cryptocurrency exchange (and fastest growing financial exchange in terms of users). The wrinkle is that the company denies having any head office or formal address that would subject it to local regulations. According to the article, the company also aspires to eventually go public here.
Although Binance’s CEO says that the company is setting up local offices in undisclosed locations to appease certain regulators, it wouldn’t be the first “fully remote” company to undertake an IPO. John blogged a few months ago about two companies that cleared registration with no headquarters identified on the Form S-1.
As more companies inevitably do this – and as the “homeless” companies get more mature – we’re probably going to start to see regulatory gaps. For example, Rule 14a-8(e)(2) says that shareholder proposals must be received at the “principal executive offices” – does this now mean the CEO’s home address? We’ll look forward to hearing from all the trailblazers out there – and eventually, maybe the SEC Staff – about how to handle these new puzzles.
I blogged earlier this month that Nasdaq’s annual listing fees are increasing January 1st. Now, the NYSE is following suit. The SEC posted this notice of a proposed NYSE rule change that would amend Chapter 9 of the Listed Company Manual to simplify & increase listing fees, as follows:
1. Initial Listing Fees – Replace the per share & one-time fee structure with a flat fee of $295k (which is the current maximum initial listing fee and what a “substantial majority” of recently listed issuers have paid). There would also be a corresponding amendment to apportion this fee, for issuers structured as an UPREIT. If approved, this change would be effective immediately.
2. Annual Listing Fees – Increase the fee from $0.00113 per share to $0.00117 per share and increase the minimum annual fee from $71k to $74k for the primary class of shares. If approved, this change would apply for the 2022 year.
3. SPAC Annual Listing Fees – Replace separate fees for common shares & warrants (which are subject to an aggregate annual limit of $85k) with a flat annual fee of $85k that would cover both common shares and warrants. The NYSE says that most Acquisition Companies currently pay the maximum annual fee of $85k, so this change would have minimal impact and would be easier to implement. If approved, this change would be effective immediately.
Comments are due 21 days after publication of the proposal in the Federal Register – here’s the form.
In addition to the proposed changes to NYSE listing fees, the SEC also posted notice of a proposed NYSE rule change to Section 907.00 of the Listed Company Manual. Companies that list on the Exchange after the rule is approved by the Commission will be eligible to sign up for an expanded list of “complimentary products & services” for 4 years after listing, which include:
– Market Intelligence – Replacing the current offering of “market surveillance,” in light of the fact that the NYSE’s contracted service providers now provide additional info to track investor views and how they change over time
– Web-hosting & Web-casting – Combining two separate services, since the NYSE’s service providers now aggregate them as a single option
– Board of Directors Platform
– Virtual Event Platform
– ESG Tools
– News Distribution Products & Services
If approved, the rule change also would give companies more flexibility to select different levels of services – subject to a maximum overall value of services used. Eligible new listings & eligible transfers with a global market cap of $400 million or more can get:
Products & services with a maximum combined value of approximately $125k annually, consisting of: (i) web-hosting & web-casting, (ii) news distribution, and (iii) a selection among market intelligence, market analytics, board of directors platform, virtual event platform, or ESG products & services.
Companies below a $400 million market cap are limited to:
(i) web-hosting & web-casting, (ii) market analytics, and (iii) news distribution.
The Exchange would extend its existing complimentary whistleblower hotline services from 24 to 48 months for all new listings.
For currently listed companies, the “Tier One” group – companies with more than 270 million shares outstanding – can get (i) web-hosting & web-casting, and (ii) a selection from the other services, up to an annual value of $75k. Tier Two is too complicated for this blog.
Comments are due 21 days after publication in the Federal Register – here’s the form.
This recent “SEC Institute” blog highlights an example disclosure (pg. 44) from a company that transitioned to sequential quarterly analysis in its MD&A. It’s worth bookmarking if you’re considering making this switch in the future, and your filing for Q1 could be a logical time to do it.
Looking ahead to your Form 10-K, members of our site should also flip through the transcript from our recent webcast, “MD&A and Financial Disclosures: What To Do Now.” Sonia Barros, Raquel Fox, Partner, Mark Kronforst, Dave Lynn, Partner and Lona Nallengara – all very accomplished former SEC Staffers and current practitioners – discussed what to do now that the mandatory compliance date has arrived for the SEC’s amended MD&A rules. Our 102-page “MD&A Handbook” is also a great resource as questions arise.
I recently recorded an illuminating conversation with Cas Sydorowitz – the Global Head of Georgeson – and Hannah Orowitz – the Senior Managing Director and Head of US ESG for Georgeson. In the 39-minute episode, we discuss:
1. Expectations for the 2022 AGM season in the US, particularly considering the surprises we saw during the 2021 proxy and annual meeting season
2. Early trends for shareholder proposals
3. Changes in voting behaviour of traditional investors – and what they are most likely to focus on
4. Whether the record-breaking level of negotiated proposals in the 2021 season is the ‘new normal’
5. How the new SEC guidance on Rule 14a-8 will impact shareholder proposals during the 2022 proxy season and beyond
6. What impact COP26 and the formation of the International Sustainability Standards Board may have on companies in 2022
7. Following COP26, there was a rapid uptake of asset managers signing The Net Zero Asset Managers Initiative, which includes BlackRock, Vanguard, States Street and at least 220 others. What might that mean for 2022?
8. Predictions for activism in 2022, in light of environmental issues playing a role in a successful proxy contest, and activists’ cooperation with NGO proponents (e.g., Ceres and As You Sow)
I’ve blogged a few times about the impact that retail investors could begin to have on proxy voting – here’s a write-up from last spring about how increasing retail involvement could make voting outcomes less predictable, particularly if they take on a “gaming” aspect akin to the meme-stock frenzy. Now, investors’ wait for an easy way to actually do this is over: the new “iconik” app will encourage users to crowdsource their voting power, along with offering commission-free trading. The app’s website includes this “voting agreement & revocable proxy,” along with this summary of what the founders hope to accomplish:
– On iconik, people run campaigns to help make changes at publicly traded companies. Campaigns can be about almost anything, from better corporate governance to increasing share value (and everything in-between).
– Simply purchase shares and delegate your voting rights to the campaign organizer. You will always own the shares, but now those voting rights are going towards something that matters.
Because fractional shares may not include voting rights, shareholders who want maximum voting power need to buy individual stocks. So, that could prevent this from taking off in force. But as I wrote a few months ago, many retail investors today feel like they’re more likely to vote and care about E&S issues. iconik’s CEO was inspired by the meme stock rally, and he’s banking on the possibility that retail investors are willing to sacrifice diversification for influence.
This DealBook article notes that the platform launched with two active campaigns. One is targeting Meta (Facebook) – to shut down hate speech on the platform. The other is going after JPMorgan Chase – to stop lending to fossil fuel companies.
iconik likely isn’t going to be the only game in town here when it comes to crowdsourcing voting activities. In late summer, I noted that Robinhood acquired Say Technologies, which appeared to be a play into the voting & engagement space. Stay tuned.
I blogged yesterday about the SEC’s proposed amendments to the Rule 10b5-1 safe harbor. Orrick’s JT Ho, Carolyn Frantz and Soo Hwang kindly provided this guest post to outline what steps companies should consider taking right now, in light of this proposal:
Earlier this week, the SEC proposed amendments – subject to a 45-day comment period – to add new conditions to the availability of an affirmative defense under Rule 10b5-1 and add new disclosure requirements regarding insider trading policies and procedures of issuers as well as the timing of stock option grants. Many of the proposed amendments, such as a statutory cooling-off period for 10b5-1 plans, were expected and aligned with the recommendations issued by the Investor Advisory Committee in September 2021.
However, the proposed amendments requiring that companies publicly disclose their “insider trading policies and procedures,” as well as the timing of stock option grants to directors and officers, were not as widely expected. We expect that companies will likely wait for the SEC’s final rules before formally modifying their 10b5-1 guidelines, though they would be well advised to brief their treasury departments and individuals using those plans about the potential changes now. Outside of 10b5-1-specific issues, however, we believe there are several steps companies should take now in advance of potential required disclosure, including:
• Reviewing and updating their insider trading policies;
• Creating or reviewing formal written insider trading procedures; and
• Reviewing stock option grant timing practices, or creating stock option grant timing policies.
Potential Updates to Insider Trading Policies
The SEC’s proposed amendments do not precisely specify what types of information about company insider trading policies would need to be disclosed, though indications are that significant detail will be expected. The proposed rule contemplates that companies would provide detailed information to allow investors to assess the sufficiency of insider trading policies and procedures. Elaborating, the SEC explained:
“For example investors may find useful, to the extent it is included in the issuer’s relevant policies and procedures, information on the issuer’s process for analyzing whether directors, officers, employees, or the issuer itself when conducting an open-market share repurchase have material nonpublic information; the issuer’s process for documenting such analyses and approving requests to purchase or sell its securities; or how the issuer enforces compliance with any such policies and procedures it may have. Furthermore, the disclosure under proposed Item 408 could address not only policies and procedures that apply to the purchase and sale of the registrant’s securities, but also other dispositions of the issuer’s securities where material nonpublic information could be misused such as, for example, through gifts of such securities.”
Given the complexity and importance of insider trading policies, we believe companies should begin reviewing their policies before they must be described in SEC filings. Aside from 10b5-1 plan related issues, we note several issues that, in our experience, may need to be updated in company insider trading policies:
• Preclearance procedures – upcoming public and investor scrutiny may result in companies wishing to adopt preclearance procedures, or expand the scope of individuals covered by them, and may also occasion a reevaluation of issues like the length of time after pre-clearance during which a trade may be made.
• Scope of insider trading definitions – Especially in light of the SEC’s recent insider trading complaint against an employee of a biopharmaceutical company for trading in the stock of a competing company about which the employee did not have direct information, many companies are updating their definitions of insider trading.
• Gifts – some insider trading policies do not have clear guidance for whether, and when, gifts are subject to the policy’s restrictions. The SEC’s proposed rule specially calls out gifts as an area for disclosure.
• Definition of material non-public information (“MNPI”) – insider trading policies often include lists of examples of MNPI. Companies have recently been updating these lists to include issues of growing significance, such as cybersecurity and certain sustainability matters.
Formalization of Insider Trading Procedures
In addition to disclosure about insider trading policies themselves, the SEC’s proposed rule contemplates required disclosure about insider trading procedures. Many companies do not today have formal written procedures for insider trading. We anticipate that many companies will wish to adopt such procedures well in advance of any disclosure requirement, to provide an opportunity for multi-stakeholder review and to ensure that the procedures work well in practice before they are revealed publicly. Such procedures could include: a discussion of the availability of the insider trading policy, the type and frequency of training about that policy, the process for determining whether a potential trader possesses MNPI, the process for creating documentation about preclearance and other decisions, the process for creating and enforcing special blackout periods, the process for reporting and investigating potential violations, and principles guiding the consequences for violations.
Stock Option Grant Timing
Under the proposed rules, companies would be required to disclose in a new table any option awards to named executive officers or directors that are made within a certain timeframe within the release of material nonpublic information such as an earnings announcement. Such disclosure will likely lead to even more scrutiny regarding the timing of option grants. Companies should begin considering their practices now, and determine whether to adopt a formal policy regarding the timing of stock option grants, if they do not already have one. Such policies can help address the potential shareholder claims that can arise when stock options are granted during closed windows or just prior to the release of MNPI.
