Last week, Bloomberg reported that the SEC was shelving its proposal to raise the Form 13F reporting threshold. If that’s true, it would come as a relief to the 2,238 people who penned letters to oppose the proposal – and disappoint all 24 who supported it.
As Lynn blogged and others pointed out, the higher threshold probably would made things more difficult for corporate folks involved in shareholder engagement. Keep an eye on future Reg Flex Agendas to see if this one comes back or just fades into oblivion.
Measuring “TCFD” Disclosures
According to this progress report from Climate Action 100+, 120 companies now have a board committee with express responsibility for oversight of climate risks and 59 companies now formally support the disclosure framework from the Task Force on Climate-related Financial Disclosures. The TCFD is a voluntary set of climate-related financial risk disclosures that is intended to help price climate risks – the task force is chaired by Mike Bloomberg.
As this Paul Weiss memo explains, although the TCFD’s recommendations were first published only three years ago, it’s one of the frameworks that’s become more popular. Late last week, TCFD issued its third annual status report to document progress. Here are a few of the key findings (for more benchmarking, also see this 15-page memo from Vigeo Eiris and Four Twenty Seven):
– Almost 60% of the 100 largest global public companies support the TCFD, report in line with the TCFD recommendations, or both
– The largest increase in disclosure was related to how companies identify, assess, and manage climate-related risk – but disclosure of the potential financial impact of climate change on businesses remains low
– Less than 1% of companies disclosed information on the resilience of their business strategy, taking into consideration different climate-related scenarios
– The most useful piece of info according to “expert users” is the impact of climate change on a company’s business & strategy – check out Appendix 5 beginning on pg 93 to see how these users ranked the usefulness of other information, which could help you prioritize your disclosure efforts
– Guidance on Risk Management Integration & Disclosure: aimed at companies interested in integrating climate-related risks into their existing risk management processes and disclosing information on their risk management processes in alignment with the Task Force’s recommendations
Putting Sustainability into Action: 10-Year Roadmap
Recently, Ceres launched a 10-year sustainability action plan for companies to consider as a framework for governance, disclosure and strategic actions – along with this micro-site that includes performance milestones for each category of action, and other resources.
Speaking of putting sustainability into action, Coca-Cola recently announced that they would be discussing the company’s approach to sustainability, diversity and inclusion during a webcast for investors on November 13th. They’ll discuss the company’s sustainability strategy and goals, response to COVID-19 and stance on racial equity, among other topics.
Following its open meeting yesterday, the SEC announced that it adopted amendments to simplify & harmonize the private offering framework. The Commission had proposed these rules in March following a concept release last summer. Here are highlights from the SEC’s Fact Sheet about what the amendments do:
– Establish a new integration framework that provides a general principle that looks to the particular facts and circumstances of two or more offerings – and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering. The amendments also provide 4 non-exclusive safe-harbors from integration.
– Increase the offering limits for Reg A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits
– Set clear and consistent rules governing certain offering communications, including permitting certain “test-the-waters” and “demo day” activities
– Harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions
As has become the norm, the amendments were adopted by a 3-2 vote, with Commissioners Hester Peirce and Elad Roisman saying the rules don’t go far enough, and Commissioners Allison Herren Lee and Caroline Crenshaw saying that the rules strip away investor protections and were adopted without adequate data. Here’s a link to all of the statements from the Commissioners and SEC Chair Jay Clayton.
The amendments will go effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register. Publication often takes about a month – so if that’s the case, that would put us in the February time frame for this new private offering regime.
New PPP “Loan Necessity Questionnaire” – 10 Days to Respond!
The Small Business Administration published a notice last week that it would release a new “loan necessity questionnaire” – Form 3509. If your company borrowed $2 million or more from the Paycheck Protection Program, you’ll need to complete the form to show the necessity of the borrowings – and it’ll be due within 10 business days of receiving it from your lender.
Although copies of the Form are popping up online, this Kaplan blog points out that the SBA website hasn’t posted an official version. This McDermott memo gives an overview of the information that borrowers will be expected to provide and suggests that they start collecting supporting documentation, given that the time frame for responding will be short.
Sustainability Reporting: XBRL Coming Soon?
PwC is working with SASB to translate its sustainability reporting standards into an XBRL taxonomy, according to this “Accounting Today” article – and the charge is being led by former SEC Chief Accountant Wes Bricker. The “Big 4” accounting firms definitely see an opportunity in ESG. As I blogged a couple of months ago on the Proxy Season Blog, they’re also working together to develop a set of common metrics for reporting.
Sure, common metrics and even XBRL could be helpful to investors, but I think the biggest opportunity here is to use this “alphabet soup” to create our very own, modern take on the “Mickey Mouse Club” song: S-A-S-B, X-B-R-L, E-S-G, M-O-U-S-E! Who’s with me?
Tomorrow’s the day everyone’s been waiting for: my son’s birthday. Also, Election Day. Lots of people think that if there’s a “Blue Wave,” it would accelerate the push for “stakeholder capitalism” – especially after a group of Democratic senators announced a working group on Friday to signal that the rights of workers and long-term, sustainable operations would be a priority if their party gets wins up & down the ballot.
That may well be the case, but I don’t think a Trump victory means that we’ll be able to write off ESG. Remember the aftermath of the 2016 election and the US withdrawal from the Paris Climate Agreement? It only moved ESG momentum from the government to the patchwork of private ordering – if anything, it seemed to energize investors and companies to push in that direction.
For example, BlackRock first urged companies to serve a “social purpose” in a January 2018 letter, which ignited interest in “long-termism” and “corporate purpose.” Then we had the BRT statement last year, which is still making waves. Last week, this As You Sow review catalogued shareholder proposals on the topic of whether companies are adopting plans to implement the ideals of the BRT’s “corporate purpose” statement. And we’ve all been drowning in the proliferation of ratings and disclosure standards over the last four years.
DOL Leaves “ESG Investing” on Life Support
Then again, this administration has done a thing or two to try to divert attention from ESG issues. On Friday, the Department of Labor published the final version of its rule to require private-sector retirement plans to prioritize “pecuniary factors” when making investment decisions (I blogged about the proposal on our Proxy Season Blog back in June). It doesn’t expressly limit the use of ESG-themed investments, as had been proposed – but the substance of the proposal remained largely intact. This “Plan Adviser” article gives more detail:
The final version does include some significant changes compared with the proposal, which will seemingly protect the use of ESG investing to some extent. Chief among these changes is the fact that the text of the final rule no longer refers explicitly to “ESG.” Rather, it presents a framework that emphasizes that retirement plan fiduciaries should only use “pecuniary” factors when assessing investments of any type—which is to say that they should only use factors that have a material, demonstrable impact on performance. In this sense, the rule does seem to leave ample room for the use of ESG-minded investments, presuming these types of investments are assessed in a purely economic manner and that their financial features make them prudent investments.
The preamble to the final rule, on the other hand, does speak directly to the ESG topic. The DOL and EBSA officials said the preamble seeks to help stakeholders understand how the pecuniary framework may apply to the assessment of ESG investments in practice.
Another important change emphasized by senior DOL and EBSA leaders is that the final rule does not explicitly prohibit the selection of a fund that uses ESG factors as a plan’s qualified default investment alternative (QDIA). Once again, the final rule requires that a fund being selected as the QDIA must be assessed using purely pecuniary factors that are directly material to its financial performance. Beyond this, the final rule does stipulate that a fund is not appropriate as a QDIA if its stated objectives include explicitly non-pecuniary factors—for example addressing climate change itself, rather than addressing climate change’s impact on the financial outcomes of investors.
Our November Eminders is Posted!
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Now that the threat of “cancel culture” is omnipresent, many of us spend a lot of time thinking about how to prevent or respond to current missteps. But today’s blunders are only part of the risk. According to this recent survey of 50 C-suite execs, only 8% felt comfortable that their company hasn’t previously engaged in practices that would be deemed unseemly under today’s ethics or standards – that broke down into 76% knowing of problematic practices or events, and 16% being unsure. Here’s an excerpt:
Executives might know what’s included in documented corporate histories, but not about matters that were not publicized or documented. Instances that, at the time were both legal and standard practices, but are now threats both in the courts of law and public opinion may be especially difficult for executives to get their arms around. Two acute examples of such practices are companies (or predecessor companies they acquired) that: 1) once owned, insured, or used slaves as assets for collateral and 2) participated in manufacturing or other industrial practices that contributed to the climate crisis.
Forty-two percent of respondents said they thought the broader public was aware of past actions by their company that conflict with today’s ethics or standards, but just as many were unsure. That more than four in 10 respondents don’t have a good grasp of the public’s awareness of their company history means too many companies haven’t done enough work to understand their own pasts or how their pasts are perceived by the public.
You can’t change the past – and ethics standards will likely keep evolving. But you can – and should – have a plan for addressing your history. According to the survey, only 26% of execs said they were “very prepared” to respond if problematic actions came to light, so there is room for improvement. In addition, there are differences in how executives and investors are viewing these threats. Here’s more detail on that:
• C-suite executives are far more concerned about the impact of unknown past racial injustices and somewhat more concerned about sex or gender discrimination than investors, who are significantly more concerned about past support for divisive social or political causes.
• Executives are more concerned about the damage that unseemly revelations may do to their brand equity. But investors are more concerned with the potential for media and customer backlash and lower valuations.
• More than half of investors surveyed would put specific contingencies on a deal after a problematic discovery was made and one in four would require the company to respond in writing to the claims. More significantly, 29 percent of investors said they would dismiss the investment opportunity outright.
• Among investors, 32 percent said they are very or somewhat unlikely to regain confidence in a company following the revelation of a past bad action – even if the company addressed the past action in ways the investors deemed appropriate.
IPO Governance Trends: Takeover Defenses Remain Common
According to the latest survey of IPO governance trends by Davis Polk, there’s been “widespread and generally increasing adoption” of takeover defenses at both controlled and non-controlled companies in advance of IPOs – even as seasoned public companies have been abandoning the same defenses due to shareholder pressure. The survey looked at the Top 46 “controlled company” IPOs and the Top 50 “non-controlled company” IPOs by deal size from April 1, 2018 through July 10, 2020. Here are some other findings:
– Exclusive Forum Provisions: The number of both controlled and non-controlled companies that adopted exclusive forum provisions (another governance attribute disfavored by some shareholder advocates) during the current survey period continued to grow from past survey periods. In the current survey, 91% of controlled companies and 98% of non-controlled companies adopted exclusive-forum provisions. These included both exclusive forum provisions addressing claims under the Securities Act of 1933 (the “’33 Act”) and exclusive forum provisions addressing other claims against the company. This is a substantial increase from the 14% and 26% of controlled and non-controlled companies, respectively,that adopted such provisions in our 2014 survey.
– Direct Listings: When we compared the one comparable direct listing during the current survey period (Slack Technologies, Inc.) to the non-controlled companies, we found similar governance provisions. Slack’s takeover defenses were identical to the vast majority of non-controlled companies, including a staggered board, prohibitions on shareholder action by written consent, shareholder ability to call a special meeting, the requirement of a super majority to amend the bylaws and plurality voting for uncontested director elections.
– Dual-Class Shares: Over 25% of controlled companies, and 28% of non-controlled companies, had a class of shares with unequal voting rights.
– Shareholder Written Consent: 9% of controlled companies and 12% of non-controlled companies permitted shareholder action by written consent. We’ve blogged on The Proxy Season Blog about how this is becoming a “hot topic.”
Check out the full 60-page survey for info on board & committee structure, advance notice bylaws, board & shareholder rights, equity awards, employment agreements, and more.
Direct Listings: CII Urges SEC to Deny Nasdaq Proposal
Last week, the CII sent this letter in response to the SEC’s request for comments on Nasdaq’s “primary direct listings” proposal. In line with the points raised in its September petition to stay the NYSE’s similar proposal, the Council urged the Commission to disapprove the proposal for two reasons:
1. It would compound problems shareholders face in tracing their share purchases to a registration statement (i.e., “proxy plumbing” issues)
2. It may lead to a decline in effective governance at public companies, by allowing companies to sidestep IPO governance checks (the letter looks at Palantir’s recent deal as an example)
These mid-year stats from Broadridge show what a watershed year it’s been for virtual shareholder meetings. Here’s some highlights:
– 1,494 VSMs hosted on Broadridge technology – 98% of those were virtual-only
– Average meeting attendance was 30 for small-caps, 37 for mid-caps and 122 for large-caps – higher if a shareholder proposal was being presented
– When it came to shareholder questions, 97% allowed live questions, 11% allowed pre-meeting questions, 5 questions were asked on average and one company somehow fielded 316
– Average duration was 34 minutes if a shareholder proposal was presented and 18 minutes if not
Check out this Skadden memo and other resources in our “Virtual Shareholder Meetings” Practice Area as you plan for the possibility of another virtual shareholder meeting in 2021. And don’t forget to tune into our October 29th webcast with CII’s Amy Borrus, Doug Chia of Soundboard Governance, Dorothy Flynn of Broadridge, Independent Inspector of Election Carl Hagberg and Bristol-Myers Squibb’s Kate Kelly to hear what you should be doing right now to prepare.
ISS Proposes Diversity and E&S Policy Changes: Comment By October 26th!
Yesterday, ISS announced a public comment period for proposed policy changes that would apply to annual meetings taking place on or after February 1, 2021. For the US, the proposed changes include:
– Board Diversity, Race and Ethnicity: Beginning in 2022, at companies where there are no identified racial or ethnically-diverse board members, the proposed ISS U.S. policy will be to recommend voting against the chair of the nominating committee (or other relevant directors on a case-by-case basis). Mitigating factors will be considered and the proposed coverage universe is all companies in the Russell 3000 and S&P 1500 indexes.
– Director Accountability: ISS policies globally will explicitly note that significant risk oversight failures related to environmental and social concerns may, on a case-by-case basis, trigger vote recommendations against board members.
– Shareholder Litigation Rights: ISS proposes modifications in the U.S. policy regarding management proposals to establish exclusive forums.
Submit comments to policy@issgovernance.com by 5 pm Eastern Time on Monday, October 26th. Unless otherwise specified in writing, all comments will be disclosed publicly upon release of final policies – which is expected during the first half of November.
COVID-19: Audit Committee Questions for the “New Normal”
COVID-19 disclosures remain a top area of focus for audit committees, according to this KPMG survey. Specifically, the uncertainty caused by the pandemic – along with expectations for companies to deliver forward-looking information and analysis – are leading to substantial discussion on disclosures about the pandemic’s effect on business, the preparation of forward-looking cash flow estimates, impairments, use of non-GAAP financial metrics and other topics.
This Deloitte memo suggests questions that audit committees should ask to ensure that disclosure is accurate and transparent. Here are a few:
– Is data from the 2008 financial crisis being used to benchmark the timing and pattern of recovery from the current pandemic? Has management carefully considered the differences between the two economic periods?
– What “new normal” conditions or future trends are included in the forecast assumptions?
– In considering the use of non-GAAP measures, has the company considered what costs might be part of the “new normal” and how certain non-GAAP adjustments may impact comparability in the future?
– Has the company reassessed its volatility assumption when valuing new stock awards in light recent market volatility?
– Has the company modified any significant contracts, particularly contracts with customers and leases?
Both memos note that audit committees are also focusing on reassessing or changing internal controls due to return-to-work plans, virtual working and cybersecurity – and that internal auditors are adjusting audit plans and activities to identify emerging risks posed by the pandemic. The KPMG survey says that audit committee members also indicated that they expect employee safety and diversity issues, as well as supply chain resilience and corporate reputation, to get significantly more attention from the board as a result of COVID-19 and recent protests against systemic racism.
This Stinson blog highlights things to think about for the upcoming proxy season – meeting format, issuer status, recent SEC guidance, and other developments. Here’s an excerpt explaining that very few changes will be needed to D&O questionnaires:
As noted in previous years, the Tax Cuts and Jobs Act eliminated the exception to IRC §162(m) for performance-based compensation, subject to a transition rule. We continue to urge caution in eliminating questions in directors’ and officers’ questionnaires related to §162(m) for compensation committee members unless it is clear the compensation committee is not required to administer any compensation arrangements under the transition rule. The same can be said for eliminating references to §162(m) in compensation committee charters.
In February 2020, the SEC approved a Nasdaq proposal to amend the definition of “Family Member” used in its corporate governance rules, which is incorporated into the definition of “Independent Director.” The definition will no longer include step-children and will include a carve out for domestic employees who share a director’s home. The issuer’s board must still affirmatively determine that no relationship exists that would interfere with a director’s ability to exercise independent judgment.
As Lynn recently blogged, companies may want to consider adding a “demographics” question in order to gather diversity info – but undertaking that kind of addition is less straightforward than it might seem at first blush. This Dorsey blog offers a sample question.
Misleading Disclosures: SEC Enforcement is Watching…Everything
Enforcement Division Director Stephanie Avakian recently gave this speech to recap actions over the past 3 years (also see the speech from SEC Chair Jay Clayton) – the walk down memory lane touched on these headline-grabbing allegations:
– Fraudulent accounting practices intended to misrepresent a company’s underlying financial condition, as in the Commission’s actions against Theranos, Hertz, and Penn West and their former executives
– Intentionally distorted non-GAAP metrics and key performance indicators, as in the Commission’s actions against Wells Fargo, Fiat Chrysler, Valeant, and Walgreens
– Misrepresentations or omissions in connection with risk factors, as in the Commission’s actions against Facebook and Mylan
– Materially misleading and incomplete disclosures, as in the Commission’s actions against Nissan and Volkswagen and their former executives
Stephanie acknowledged that the Division’s focus on financial fraud isn’t new – but she emphasized the expansion of the types of info that Enforcement is tracking. If her remarks had a theme song, it would be Rockwell’s “Somebody’s Watching Me” – and it’s a reminder to companies to watch all forms of disclosure. Here’s an excerpt:
Our focus on financial fraud and issuer disclosure cases resulted in some significant changes in how we approach identifying and investigating potential misconduct. Our proactive efforts to identify cases has employed a variety of research, approaches, internal and external tools, and other information sets. We routinely look at all public information about an issuer – statements made by a company or its officers, in filings, during investor presentations, in tweets or blog posts; related commentary by others including analysts, shorts, competitors, shareholders – to develop a deep understanding of the company’s reporting environment and industry. This is not a low cost investment, but it has provided substantial value in identifying potential financial fraud.
Further, in appropriate cases, we are employing strategies to streamline these investigations in an effort to substantially accelerate the pace of our investigations. This has come through a purposeful effort by our investigative teams to efficiently triage issues, increase staffing, make more targeted requests at the outset, substantively engage early with relevant parties, and leverage cooperation. We have already seen some success in our acceleration efforts and expect to see those successes continue in the near and long term.
This recap actually occurred before the flurry of enforcement activity that we saw a couple of weeks ago – so you can add those settlements to the tally. Also see this Davis Polk memo – noting that the speech signaled that the SEC may seek increased penalties in future insider trading cases, rather than disgorgement.
Corporate Governance: The “Acronym” Challenge
I love a good quiz – and this acronym challenge from Soundboard Governance is a fun one. Can you decipher the 40 selections from the corporate governance field’s “alphabet soup”? I got over 30 and called it a win.
Lynn blogged last week that the SEC’s amendments to modernize Items 101, 103 and 105 of Regulation S-K have now been published in the Federal Register. The effective date of the rules is Monday, November 9th – and in practice, that probably means that you need to comply for any filings made after 5:30 pm ET on Friday, November 6th, since those filings will have a Monday filing date. If you haven’t done so already, take a look at last year’s filing dates for your clients/your company to get a handle on exactly when you’ll need to incorporate these new requirements.
There’s been more back & forth in our Q&A Forum about the new rules (see Topic #10,435) – thanks to Bass Berry’s Jay Knight and Goodwin’s John Newell for keeping the conversation going. Jay noted that the Staff has informally said that early compliance with the modernization rules is not permitted, and shared that for Form 10-Ks filed after the effective date that contain more than 15 pages of risk factors, it may be acceptable to have the “forward-looking statement” section also serve as a risk factor summary, if it otherwise satisfies the requirements of Item 105. Many companies will try to keep their risk factors below 15 pages, in order to avoid that requirement altogether. Remember that our Q&A Forum is a good place to exchange ideas and ask questions about topics like this.
The SEC’s amendments to the definitions of “accredited investor” and “QIB” were also published in the Federal Register last week – those rules will go effective on December 8th.
Insider Trading: Pre-Clearance Duration
We recently received the following question from a member on our Q&A Forum (Topic #10,422):
How long does your pre-clearance last for execs?
A couple of members responded:
– At our company, it’s 2-3 days usually, they can request longer and we’ll revisit and extend after the first one expires.
– Our company is pretty conservative on compliance issues like this – but our pre-clearance just lasts for 24 hours.
I noted that our model insider trading policy – which is included in our “Insider Trading Policies” Handbook – suggests 5 business days as the amount of time that pre-clearance lasts, but it varies based on the company’s compliance culture and how common it is for there to be material non-public information that would affect the company’s stock. Periods of 24 hours or 2-3 days are both reasonable as well.
Last week, the Business Roundtable released these “Principles & Policies Addressing Climate Change” – a 16-page statement that declares the US should adopt a “market-based approach” to reduce emissions in line with the Paris Agreement. The BRT is careful to note that carbon should be priced only where it is environmentally and economically effective and administratively feasible, and in a way that continues to foster innovation & competitiveness. This Politico article summarizes the BRT’s positions. Here’s an excerpt:
A “market-based mechanism” is a broad term, and the Business Roundtable did not recommend any one particular design. It called for putting a price on carbon as a means to reduce emissions since “a clear price signal is the most important consideration for encouraging innovation, driving efficiency, and ensuring sustained environmental and economic effectiveness.”
Examples include direct taxation of carbon dioxide emissions as well as cap-and-trade schemes, such as legislation that passed the House in 2009 but fizzled in the Senate.
Any revenues that come from any market-based system should be used to support economic growth, reduce societal impact, and aid people and companies that are the most negatively affected, the goups said. And it should be linked with “at least a doubling of federal funding for research, development and demonstration of (greenhouse gas) reduction technologies.”
As this WaPo article notes, it’s looking like corporate interests may be more likely to claim a seat at the table the next time climate change legislation is considered, versus trying to kill those efforts outright, and that might help us all. However, the BRT’s principles envision reducing emissions by at least 80% from 2005 levels by 2050 and come at a time when the BRT is still drawing scrutiny of last year’s “stakeholder capitalism” pledge – the latest shot being this letter last week from Senator Elizabeth Warran (D-Mass.).
I suspect that a 30-year goal for reducing emissions is not what investors have in mind when they refer to “long-termism” – so if companies are hanging their hats on the BRT timeline, they probably also need to have some convincing talking points for engagements. As illustrated by this “open letter” issued last week by PRI, investors also continue to want companies to reflect climate-related risks in financial reporting.
Director Information Rights: The Latest “WeWork” Gift
We don’t get to blog much about The We Company since its IPO imploded, but their ongoing litigation recently brought us a nugget of corporate governance case law out of the Delaware Court of Chancery. In this opinion, Chancellor Bouchard decided as a matter of first impression that management cannot unilaterally preclude a director from obtaining the company’s privileged information.
The directors who were being kept in the dark here were members of a special committee formed last fall who were opposing the company’s motion to dismiss a complaint that the company filed in April against SoftBank, and they wanted privileged info that had been shared among company management, in-house counsel and outside counsel. The motion to dismiss was brought by a new committee consisting of two temporary directors, which was formed in May.
The info at issue isn’t the info that was shared between the new committee and its counsel, but between the company and its counsel – info about how the new committee was established, etc. Here’s the holding:
This decision holds, under basic principles of Delaware law, that directors of a Delaware corporation are presumptively entitled to obtain the corporation’s privileged information as a joint client of the corporation and any curtailment of that right cannot be imposed unilaterally by corporate management untethered from the oversight and ultimate authority of the corporation’s board of directors. Accordingly,the Special Committee is entitled to receive the privileged information of the Company it is has requested, which, to repeat, does not concern privileged communications between the New Committee and its own counsel.
This opinion is of interest because isolating director factions or underperforming directors through the use of special committees is one avenue that companies use to minimize those directors’ activities when they can’t otherwise be removed and won’t resign – but as this case emphasizes, director information rights must be honored. This blog from Frank Reynolds explains that there is a situation in which a board or committee can withhold privileged information – which exists when there’s sufficient adversity that the director could no longer have an expectation that they were a client of the board’s counsel. Here, the court found that management acted unilaterally – so the exception didn’t apply.
Venture Capital: New NVCA Forms Include Market Term Analysis
The National Venture Capital Association (NVCA) published on July 28, 2020 an updated suite of model venture capital financing documents that reflect the current events shaping the investment climate, and for the first time, embedded analysis of market terms directly in the NVCA’s model term sheet. Venture capital funds, professional investors, emerging companies and their respective advisors will benefit from the summary analysis contained in this article which highlights the most significant changes to the primary model financing documents.
The NVCA’s updates are timely because venture capital investing remains strong despite the challenges of 2020. Pitchbook reports 2,893 U.S. venture capital deals with an aggregate of $45.20B of capital raised as of the second quarter of 2020, representing approximately a 17% reduction in deal count and a 2% increase in aggregate dollars raised over the same period in 2019. Economic uncertainty looms in the market, as does the specter of increased governmental interest in foreign investments in certain emerging businesses.
As we covered in real-time yesterday at our “Executive Compensation Conference,” (archives will be available soon – and you can still register for on-demand viewing of those), after a high-drama “pause” last week, the Rule 14a-8 amendments are finally here. The Commissioners voted 3-2 to adopt the amendments – which include the first revisions to the submission threshold in over 20 years, and the first revisions to the resubmission threshold since 1954. For companies that focus on keeping proposals out of the proxy statement (not all companies, but many!), this is a big deal. Here are the highlights from the SEC’s Fact Sheet:
Submission Thresholds – amend Rule 14a-8(b) by:
– Replacing the current ownership threshold, which requires holding at least $2,000 or 1% of a company’s securities for at least one year, with three alternative thresholds that will require a shareholder to demonstrate continuous ownership of at least:
– $2,000 of the company’s securities for at least three years;
– $15,000 of the company’s securities for at least two years; or
– $25,000 of the company’s securities for at least one year.
– Prohibiting the aggregation of holdings for purposes of satisfying the amended ownership thresholds;
– Requiring that a shareholder who elects to use a representative for the purpose of submitting a shareholder proposal provide documentation to make clear that the representative is authorized to act on the shareholder’s behalf and to provide a meaningful degree of assurance as to the shareholder’s identity, role and interest in a proposal that is submitted for inclusion in a company’s proxy statement; and
– Requiring that each shareholder state that he or she is able to meet with the company, either in person or via teleconference, no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal, and provide contact information as well as specific business days and times that the shareholder is available to discuss the proposal with the company.
– Applying the one-proposal rule to “each person” rather than “each shareholder” who submits a proposal, such that a shareholder-proponent will not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. Likewise, a representative will not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative were to submit each proposal on behalf of different shareholders.
– Revising the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings from 3%, 6% and 10% for matters previously voted on once, twice or three or more times in the last five years, respectively, with thresholds of 5%, 15% and 25%, respectively. For example, a proposal would need to achieve support by at least 5% of the voting shareholders in its first submission in order to be eligible for resubmission in the following three years. Proposals submitted two and three times in the prior five years would need to achieve 15% and 25% support, respectively, in order to be eligible for resubmission in the following three years.
The amendments will be effective 60 days after publication in the Federal Register – but there’s an important transition period in that the final amendments will first apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022. The final rules also provide for a transition period with respect to the ownership thresholds that will allow shareholders meeting specified conditions to rely on the $2,000/one-year ownership threshold for proposals submitted for an annual or special meeting to be held prior to January 1, 2023.
We’ll be posting the inevitable flood of memos in our “Shareholder Proposals” Practice Area, and will continue to provide guidance on how practice evolves. One thing is already clear – investor groups aren’t happy. CII’s press release says that the amendments will “muzzle the voice of small investors” and lists several benefits of the current proposal process – asserting that it is a cost-effective way for shareholders to communicate with companies. ICCR’s press release takes it a step further, with this quote from Andy Behar of As You Sow:
“The SEC has intervened to disrupt a system that has worked with fairness and integrity for over 50 years,” said Andy Behar, CEO of As You Sow. “Companies have gained deep insight into potential material risks to their businesses, courtesy of their shareholder engagements. Investors have had a forum to raise their concerns, assisting companies to outperform. This is an ecosystem based on mutual respect and a common goal; helping companies be as good as they can be. The new SEC rules will not stop this relationship, they will simply force shareholders to escalate to litigation and other means. This will ultimately cost companies valuable time and resources.”
But Wait, There’s More! SEC Updates Whistleblower Awards Program
Yesterday, the SEC also tackled amendments to the rules governing its whistleblower program – another controversial proposal that was initially scheduled for a few weeks ago but postponed. The final amendments were adopted 3-2 and were accompanied by guidance from the SEC’s Office of the Whistleblower about the process for determining award amounts for eligible whistleblowers. This blog from Matt Kelly of Radical Compliance gives a good overview. Here’s an excerpt:
Among the changes: a presumption toward more generous awards at the lower end of the pay scale, restrictions on people who abuse the tipster process too often, and faster disposal of would-be tips that don’t meet the awards program criteria.
And the controversial idea to cap large awards at $30 million — technically killed, although the SEC’s two Democratic commissioners still objected that the agency could use other measures to achieve that same end of whittling down large awards.
A few years ago, Broc blogged about a “request for comment” on Guide 3 – the industry guide for banks and bank holding companies. That effort has now come to fruition as the SEC (unanimously!) adopted amendments on September 11th, which update & expand statistical disclosure requirements and move “Guide 3” requirements into Reg S-K. We’re posting memos in our “Financial Institutions” Practice Area.
Today is our “17th Annual Executive Compensation Conference” – Monday & Tuesday were our “Proxy Disclosure Conference.” For those who haven’t been attending the conferences – or for those who have and want to watch again – we ran a special tribute video yesterday to honor Marty Dunn. Marty was a legend in our community and is deeply missed.
You can still register online to get immediate access to these virtual events. Both conferences are paired together and they’ll also be archived for attendees until next August. That’s a huge value. Here’s more info:
– How to Attend: Once you register, you’ll receive a Registration Confirmation email from mvp@markeys.com. Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.
– How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on TheCorporateCounsel.net or CompensationStandards.com.
– How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
OTC: SEC Amends Information Requirements
Last week, the SEC closed the loop on a proposal from last year and adopted amendments to Rule 15c2-11 to modernize the type of information that needs to be available for broker-dealers to quote securities on the OTC markets. In keeping with the SEC’s current focus on outdated rules, this one was last amended about thirty years ago. Here’s an excerpt from the SEC’s fact sheet about the amendments (and here are statements from SEC Chair Jay Clayton & Commissioner Hester Peirce):
The amendments facilitate transparency of OTC issuer information by:
– Requiring to be current and publicly available certain specified documents and information regarding OTC issuers that a broker-dealer or qualified IDQS must obtain and review for the broker-dealer to commence a quoted market in an OTC issuer’s security (“information review requirement”);
The amendments provide greater investor protections when broker-dealers rely on the piggyback exception by:
– Providing a time-limited window of 18 months during which broker-dealers may quote the securities of “shell companies.”
The amendments reduce unnecessary burdens on broker-dealers by:
– Allowing broker-dealers to initiate a quoted market for a security if a qualified IDQS complies with the information review requirement and makes a publicly available determination of such compliance; and
– Providing new exceptions, without undermining the Rule’s important investor protections, for broker-dealers to:
– Quote actively traded securities of well-capitalized issuers;
– Quote securities issued in an underwritten offering if the broker-dealer is named as an underwriter in the registration statement or offering statement for the underwritten offering, and the broker-dealer that is the named underwriter quotes the security; and
– Rely on certain third-party publicly available determinations that the requirements of certain exceptions are met.
The rule will have a general compliance date that is 9 months after the effective date – and a compliance date that is 2 years after the effective date for the provisions that require a company’s financial info for the last 2 fiscal years to be current and publicly available.
How to Successfully Uplist
This blog from the Small Cap Institute points out that uplisting is a transformative event that is more than just a single transaction – it requires months of planning, and nearly perfect post-closing execution to assure investors that the company will be profitable investment. Here’s one tip for success:
Sell Stock to the Right Audience: Most companies that uplist have predominantly retail shareholder bases (i.e., their investors are mostly nonprofessional investors). Most companies that uplist also have stocks that trade less than $250,000 of stock per day. For reasons we cover in this piece about trading volume, most institutional investors are mathematically foreclosed from buying stocks that trade less than $250,000 per day, whether they like your company or not.
Unfortunately, due to either ignorance or disingenuous advice, myriad uplisted companies with daily trading volume less than $250,000 waste enormous amounts of time and money endlessly meeting around the country with institutional investors, who simply can’t buy their stock – and won’t.
