LIBOR officially became an ex-parrot on June 30, 2023, and has been replaced by SOFR in most credit agreements. But this WilmerHale memo says that despite the fact that lenders and borrowers have known for some time that the transition away from LIBOR was coming, a surprising number of credit agreements still haven’t been amended to address the transition, and that this may prove to be a costly oversight:

Despite these preparations and legislative actions, there remains a contingent of corporate borrowers that have fallen (back) into the cracks. In many loan documents, LIBOR cessation results in a fallback to a rate based on the prime rate, also known as the base rate or reference rate, which, while based on the rate banks give to their best, most creditworthy corporate customers, has historically been more expensive than LIBOR.

Because the LIBOR Act is generally inapplicable for loan documents containing contractual fallback language that clearly specifies a replacement rate, the prime rate will become the controlling benchmark under these agreements. A recent estimate stated that approximately 8% of leveraged loans could fall back to the prime rate upon the cessation of LIBOR if action is not taken. Although public data on the topic is limited, the percentage of loans falling back to the prime rate in the venture debt and middle-market spaces is likely to be far higher.

The memo recommends that borrowers review the terms of their existing debt agreements to determine whether there are potential issues with the fallback pricing provisions of those agreements. Borrowers that identify potential issue should consult with counsel as to whether the LIBOR Act applies to their debt agreements and, if those agreements fallback pricing provisions are the prime or base rate, negotiate appropriate changes to a SOFR-based benchmark rate.

– John Jenkins

During the darkest days of the pandemic, convertible debt offerings were an attractive capital raising alternative, and as we blogged at the time, even large cap issuers that traditionally shied away from converts opted to take the plunge. While the convertible debt market remained pretty robust in 2020 & 2021, interest in converts petered out last year. However, a recent Institutional Investor article says that interest in convertible debt issuances has surged again in recent months:

The market for convertible bonds, the interest-paying securities that bondholders can choose to turn into common stock, is stirring again and attracting investors.

Convertible bonds typically mature in five years and are issued by less creditworthy companies — 76 percent of issuers don’t have a credit rating and most of the others have a BBB rating or lower from one of the major agencies, according to research by Calamos Investments. But higher interest rates are causing even the healthiest companies to use convertible bonds to raise capital. Through September of this year, companies across the globe sold $61 billion worth of convertible bonds and out of the $42 billion raised by U.S. companies, almost a third of them have investment grade ratings.

“That’s a bit of a change from the previous few years in that it was a much smaller percentage than before,” said David Hulme, managing director and portfolio manager at Advent Capital Management, which specializes in convertible bonds. “I think that’s been driven partially by a change in the way companies account for the issuance of convertibles.”

Back in 2020, companies were attracted to converts as an alternative to issuing equity during a period of downward pressure on stocks. This time, it looks like it’s the ability to mitigate the impact of the current interest rate environment along with depressed stock prices that’s making companies consider convertible debt issuances. Like Mark Twain supposedly said, history never repeats itself, but sometimes it rhymes.

– John Jenkins

John & Orrick’s J.T. Ho recently recorded their latest monthly “Timely Takes” Podcast, and in it, J.T. highlights California’s recently adopted Assembly Bill 1305. This climate-related bill has gotten less attention than SB 253 and SB 261 — California’s two other climate bills approved in October — since it’s generally focused on the voluntary carbon markets and entities operating in California that market or sell voluntary carbon offsets. But, as detailed by this Orrick alert, it also “imposes various disclosure requirements on companies that make net zero, carbon neutrality, or similar claims, including through the use of voluntary carbon offsets.” “Claims” includes goals, and as we all know, that covers many companies whose businesses have nothing to do with the carbon markets!  And — get this — AB 1305 is effective on January 1, 2024. Yikes! That’s less than two short months from now.

The alert details what these covered companies need to disclose. Pay attention, since failures to comply can result in civil penalties, which accrue at a rate of up to $2,500 per day that information is not available or is inaccurate, for each violation, up to a maximum of $500,000.

If a company makes claims regarding the achievement of net zero emissions, carbon neutral claims or claims regarding reduction of greenhouse gas emissions:  Must publicly provide all information documenting how such a claim was determined to be accurate or actually accomplished, and how interim progress toward that goal is being measured, including:

– disclosure of independent third-party verification;
– identification of science-based targets; and
– disclosure of the relevant sector methodology.

This requirement only applies to companies that operate within or make claims within California.

If a company makes the claims described above and purchases or uses voluntary carbon offsets: In addition to the information described above, companies must publicly provide information regarding the applicable project and offsets, including:

– the offset registry or program;
– the offset project type;
– the specific protocol used; and
– whether there is independent third-party verification.

This requirement only applies to companies that operate within or purchase or use voluntary carbon offsets sold within California.

The podcast & alert detail some action items that covered companies need to add to their priority year-end to-do list to prepare for and draft this disclosure. When reviewing your goals for achievability and to confirm appropriate plans are in place, in addition to general greenwashing considerations and securities-related risk, J.T. recommends that companies consider the FTC’s Green Guides (including potential amendments) and state-level consumer protection & marketing laws.

– Meredith Ervine

PwC’s latest publication on non-GAAP measures summarizes the topics covered in recent non-GAAP comment letters, particularly focused on comment letters since the staff’s 2022 updates to non-GAAP C&DIs. But what caught my eye the most was this blurb related to earlier guidance:

In March 2020, the SEC staff issued disclosure guidance related to COVID-19, including how non-GAAP measures could be impacted by the pandemic and what companies should consider in their non-GAAP disclosures. One topic discussed was when a non-GAAP measure is reconciled back to a comparable GAAP measure that is still provisional in nature because the measure may be impacted by adjustments that may require additional information and analysis. The SEC staff has recently stated that this guidance is not specific to COVID-19 and should be applied to other situations that could impact a company’s non-GAAP measures as well. Companies should continue to consider this guidance.

With the ever-increasing geopolitical uncertainty companies continue to face, it’s not surprising that COVID-related guidance may still be applicable in other contexts. In the 2020 guidance, while the Staff stated that “the Division would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results,” it described the limited circumstances when that may be acceptable and explained the Staff’s expectations for contextual disclosure:

In addition, if a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures in reliance on the above position, it should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to the Board of Directors.  We remind companies that we do not believe it is appropriate for a company to present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company.  Rather we believe companies should use non-GAAP financial measures and performance metrics for the purpose of sharing with investors how management and the Board are analyzing the current and potential impact of COVID-19 on the company’s financial condition and operating results.

If a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, it should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.

– Meredith Ervine 

John & Orrick’s J.T. Ho took the Halloween theme to heart in their latest monthly “Timely Takes” Podcast on securities and governance hot topics recorded at the end of October. Some of J.T.’s updates are truly frightening, including his discussion of the recent climate legislation in California that I blogged about today with a compliance date that’s right around the corner. If you haven’t read that blog or listened to this podcast and you’re thinking “I’m not afraid”…you will be.

John and J.T. cover the following topics:

– New California Climate Legislation
– Amendments to Beneficial Ownership Reporting Rules
– IAC’s Recommendations on Human Capital Management Disclosure
– 5th Circuit Panel’s Decision Upholding Nasdaq’s Board Diversity Disclosure Rules
– NYSE Clawback Policy Affirmation Requirement

As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email us at mervine@ccrcorp.com or john@thecorporatecounsel.net.

Programming note: In observance of Veterans Day, we will not be publishing a blog tomorrow. We will be back on Monday!

– Meredith Ervine 

A lot has been written about President Biden’s sweeping Executive Order on AI and its significance, especially considering the roadblocks making federal AI legislation unlikely to be passed in the near term. Liz noted the importance of considering third-party risk and that it’s not a stretch to think this developing issue is on the SEC’s radar. Beyond that, I must admit that I had a hard time wrapping my head around what this means for public companies from the fact sheet — especially those that aren’t government contractors or AI/technology companies.

Thankfully, we’ve gathered numerous client alerts on the Executive Order in our “Artificial Intelligence” Practice Area and many of them have helpful explanations. In this alert, DLA Piper explains expected forthcoming regulatory changes as a result of the Executive Order and the short timeframe for these:

The EO requires the development (mostly within three to twelve months) of standards, practices, and even new regulation for the development and use of AI across most aspects of the economy and in significant regulated areas such as consumer finance, labor and employment, healthcare, education, national security, and others, as discussed more fully below.

Except for new reporting requirements for developers of large language models and computing clusters, most of the EO’s provisions do not immediately change regulatory requirements. The EO does, however, urge federal regulators and agencies to use their existing authority to stress test the security of AI systems, prevent harms such as discrimination, loss of employment, foreign threats to critical infrastructure, and talent vacuums. It makes clear that the resources and authority of the federal government will be focused on the safe, secure, and ethical use of AI in every major aspect of commerce and societal affairs. We anticipate that as these mandates are fulfilled, and guidelines, standards, and rules are developed over the next twelve months, significant new requirements will be forthcoming.

Also, this Goodwin alert explains the wide-ranging implications for government contractors and beyond and how the Executive Order will impact the many current and potential applications of AI:

The EO applies directly to federal government agencies and will significantly impact the way the government funds AI development and procures AI products and services; however, its impacts also will be felt by the private sector, including those companies providing services and supplying materials to the US government and throughout the federal procurement supply chain. The EO may ultimately create “de facto” standards and practices in the private sector given the size and influence of the US government as a customer to major technology companies, a funding source for and regulator of research and development, and payer in the healthcare space.

On the reporting front, this may be an important development to consider if you disclose AI-related risk factors or known trends/uncertainties or plan to do so in your next 10-K. To that end, this Intelligize blog from July discussed how certain companies addressed risks related to AI in their disclosures to date and links to those disclosures.

– Meredith Ervine 

Yesterday, Liz shared the update below in our Proxy Season Blog, which the SEC called out in this announcement:

Important news! Corp Fin has updated its “shareholder proposal no-actions page” to include a new form that companies and proponents are required to use for all 14a-8 no-action requests & supplemental correspondence that they submit to the Division. Previously, correspondence was submitted by email.

This form doesn’t transmit your no-action request or other submissions to the other party. Companies and proponents are still required to send their correspondence to the other party by mail or email (but remember that last year, email correspondence caused some bickering over whether procedural requirements had been satisfied). You need to check a box on the form to attest that you’ve sent the correspondence to the counterparty.

While the form doesn’t change the information that must be submitted, it does include a field to enter the company’s “anticipated proxy print date” right off the bat. Corp Fin’s landing page continues to include this reminder, which is repeated in part on the form:

Under Rule 14a-8(j), a company seeking to exclude a shareholder proposal must file its reasons with the Commission no later than 80 calendar days before it files its definitive proxy statement and form of proxy with the Commission. The staff will endeavor to respond to all requests within this time frame.

My understanding right now is that the Staff really is asking for the “print date” versus the “filing date” in this field, to help manage workflow. Many companies had to follow up last year to nudge the Staff for a response in time to print. But you should know that even though the Staff understands that the print date is typically prior to the date the proxy is filed with the SEC, they also notice if there’s a wide gap between the date you give them and the filing date, and they want companies to be forthcoming with accurate info.

The form also emphasizes that no-action responses represent “informal” advice:

The Division of Corporation Finance undertakes to aid those who must comply with Exchange Act Rule 14a-8 by offering informal advice and determining, generally, whether or not it may be appropriate in a particular matter to recommend enforcement action to the Commission. In connection with a shareholder proposal under Rule 14a-8, the Division’s staff considers the information furnished to it by the company in support of its intention to exclude the proposal from the company’s proxy materials, as well as any information furnished by the proponent or the proponent’s representative.

Although Rule 14a-8(k) does not require any communications from shareholders to the Commission’s staff, the staff will always consider information concerning alleged violations of the statutes and rules administered by the Commission, including arguments as to whether or not activities proposed to be taken would violate the statute or rule involved. The receipt by the staff of such information, however, should not be construed as changing the staff’s informal procedures and proxy review into a formal or adversarial procedure.

It is important to note that the staff’s no-action responses to Rule 14a-8(j) submissions reflect only informal views. The determinations reached by the staff in connection with these submissions do not and cannot adjudicate the merits of a company’s position with respect to the proposal. Only a court, such as a U.S. District Court, can decide whether a shareholder proposal can be excluded from a company’s proxy materials. Accordingly, a discretionary determination not to recommend or take Commission enforcement action does not preclude a proponent, or any shareholder of a company, from pursuing any rights he or she may have against the company in court should the company’s management omit the proposal from the company’s proxy materials.

We continue to post new items regularly on our Proxy Season Blog for TheCorporateCounsel.net members. Following that blog is an easy way to stay in-the-know on shareholder proposal & engagement trends – and key annual meeting issues. Members can sign up to get that blog pushed out to them via email whenever there is a new post. If you do not have access the Proxy Season Blog or all of the other great resources on TheCorporateCounsel.net, sign up today.

– Meredith Ervine 

The EU Green Deal includes multiple pieces of legislation aimed at making Europe the first carbon-neutral continent by 2050. The CSRD is a key element of this legislation that requires companies to make robust disclosures. The law contains extra-territorial provisions that impact in-scope companies headquartered outside of Europe. The CSRD carries hefty reporting obligations, and in-scope companies should be working toward compliance today to avoid a potential regulatory crisis in the future.

Members of PracticalESG.com can tune in at 10 am Eastern tomorrow for the webcast “Understanding the CSRD and its Impacts on US Companies” to hear Donato Calace, Senior Vice President, Datamaran, Jindrich Kloub, Partner, Wilson Sonsini, & Amanda Warschak, ESG Sustainability Director, Teradata, discuss the Corporate Sustainability Reporting Directive (CSRD) and its impact on US companies. This webcast will cover:

Members of PracticalESG.com are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Email sales@ccrcorp.com – or call us at 800.737.1271.

– Meredith Ervine

In a moment of prescience, last week, Liz wrote that this year’s CPA-Zicklin Index “will be published any day” and indeed it came out the very next day. As a reminder, the CPA-Zicklin Index, a collaboration between the Center for Political Accountability (CPA) and The Carol and Lawrence Zicklin Center for Business Ethics Research, has been benchmarking political spending since the Citizens United decision in 2010. As Liz noted, the Index expanded to cover Russell 1000 companies last year in addition to the S&P 500.

In this year’s Index, what stood out for me is just how far ahead the S&P 500 is from the remaining Russell 1000 companies. Here are some stats:

– 78% of S&P 500 companies fully or partially disclosed their political spending in 2023 or prohibited at least one type of spending; for Russell 1000 companies that do not belong to the S&P 500, levels of disclosure are low and prohibitions on types of political spending are limited

– 63% of the S&P 500 have board oversight of political spending; for Russell 1000 companies that do not belong to the S&P 500, that number is only 14%

But not all S&P 500 companies with board oversight cover all the bases. Some companies in the S&P 500 with board committee review of direct political contributions and expenditures still don’t have board committee review of spending through third-party groups, including payments to trade associations and other tax-exempt organizations. For purposes of the Index, that is particularly concerning since those organizations are not required to publicize their donors.

The summary also highlighted the over 10-point difference in scoring between companies who were formally engaged with a proposal and settled versus those that did not:

Of full S&P 500 companies, 234 have been formally engaged by shareholders with a resolution on the issue of corporate political spending disclosure and accountability since the 2004 proxy season. Of these companies, 158 have reached agreements with shareholders. For companies with an agreement, the average overall Index score is 78.6 percent, as compared to 67.5 percent for the 76 companies that were engaged but did not reach an agreement. The average score for the 262 companies that have no history of shareholder engagement is 43.3 percent.

– Meredith Ervine 

The Goodwin team that represented the issuer in the first IPO by a traditional venture-backed technology company in more than 18 months recently wrote an alert explaining why the company’s high vote/low vote capitalization structure — which is very common in venture-backed technology IPOs in the last decade — used the terms “Series” A common stock and “Series” B common stock rather than the more common references to “Class” A and B. The certificate of incorporation also included language clarifying that the high vote & low vote common stock were two separate series, not classes.

The alert states that the typical reference to classes, when series is really intended, “created the potential for ambiguity” in Delaware “about the rights granted to the high vote and low vote stock by virtue of Section 242(b)(2).” For example, in cases against Fox Corp. and Snap Inc., the plaintiffs — while they haven’t been successful in this argument — sought to take advantage of this ambiguity to argue that a separate class vote was required to approve a charter amendment for officer exculpation. The alert contends that these claims could have been avoided if the high vote/low vote stock had been labeled and structured as “series.” Here’s why:

Under DGCL Section 242(b)(2), post-adoption amendments to a company’s certificate of incorporation may require different threshold votes of its stockholders depending on whether the amendment affects multiple classes of stock or multiple series of stock. Under Section 242(b)(2), an amendment that changes the “powers, preferences or special rights” of a class of stock requires a vote of the affected class (voting separately) if that amendment is “adverse” to the class.

In contrast, an amendment that changes the powers, preferences, or special rights of a series within a class of stock requires a separate vote of the affected series only if that amendment is adverse AND the affected series is treated differently than other series. Said differently, if an amendment adversely affects two series of stock but affects both series in the same manner, the stockholder vote required to approve the amendment is a vote of the two series voting together on a combined basis.

Compare this to the treatment of classes. In the case of classes, if an amendment adversely affects two classes of stock, then each class is entitled to a separate class vote on the proposed amendment, even if the classes are affected in the same manner. Thus two separate votes are required rather than one combined vote.

Why does this matter? The net effect of a dual class common stock structure is that under Section 242(b)(2), the company’s low vote stockholders have a separate class vote (and resulting veto power) over a proposed charter amendment that adversely affects the low vote and high vote classes of common stock in the same manner. If the intent is to implement a dual series common stock structure, naming the high vote and low vote stock “Series A” and “Series B” will make it clear that the low vote stock does not have a veto right by virtue of Section 242(b)(2) on amendments that treat the low vote and high vote stock the same.

– Meredith Ervine