Last week, the Division of Corporation Finance named Tiffany Posil Chief of the Office of Mergers and Acquisitions. She succeeds Ted Yu, who recently was appointed to serve as Associate Director of the Division of Corporation Finance. Tiffany is currently a partner of Hogan Lovells, and previously worked for Corp Fin, where, among her other responsibilities, she was the primary drafter of the universal proxy rule proposal.
Tiffany should also be familar to many of our members. She participated in our “Universal Proxy: Preparing for the New Regime” webcast last year & has also authored an article on universal proxies for our Deal Lawyers Newsletter. Congratulations to Tiffany!
As you might have already guessed, I’m among those who are skeptical about claims that retail investors should be encouraged to become more involved in corporate governance, and that governance will be enhanced if they do. Some of the objections filed to AMC’s recent class action settlement filed by retail investors with the Chancery Court suggest that this skepticism may be well founded.
AMC was one of the companies to warmly embrace its meme stock “apes”, at least until it proved impossible for the company to get the quorum needed to approve a charter amendment to increase its authorized shares, which in turn inhibited its ability to raise additional capital. Since “meme stocks gotta meme”, AMC needed a fix for this problem. As Liz blogged earlier this year, the company found a solution through the creative use of blank check preferred stock. Of course, any solution to a corporate problem that’s labeled “creative” inevitably leads to class action litigation, and AMC’s fix was no exception. Last month, the company reached an agreement with the plaintiffs to settle that litigation, and that’s when the fun began.
AMC’s retail “apes” responded to the proposed settlement with an outpouring of outrage that was significant enough that the Chancery Court set up a procedure for them to submit their comments on the proposed settlement – which they did, in droves. However, while there were plenty of objections to the settlement, many didn’t inspire a lot of confidence. Here’s an excerpt from Tulane professor Ann Lipton’s recent blog on the objections:
While some of the letters inspire a lot of sympathy – many investors appear to have endured significant losses – a lot of the comments are, well, uninformed, to put it mildly. There are some fairly odd conspiracy theories floating around regarding AMC shares, and, in particular, something about an inflated share count and “synthetic” shares that are improperly voting. Many of the objecting shareholders buy into those theories. For example, in a report filed on May 17, the special master recommended against one shareholder’s attempt to intervene, which was predicated on the “synthetic share” theory.
Ann goes on to confront the fundamental question raised by the some of the more unhinged AMC objections:
So this is the elephant in the room: What does this tell us about the wisdom of encouraging greater retail involvement in corporate governance? While no doubt some retail shareholders are highly informed, many are not, and if AMC demonstrates anything, it’s that in some cases, the technological tools that enable retail shareholders to coordinate and share information may also cause the rapid spread of misinformation.
In other words, social media may have the same kind of implications for corporate governance that it has had for our political discourse. That’s a point that UCLA professor Stephen Bainbridge picks up on in this excerpt from his own blog on the AMC situation:
Many retail investors are deeply engaged with social media and increasingly exhibit the pathologies associated with social media. In the AMC Entertainment litigation, for example, one of the two lawsuits challenging the plan was filed by an individual Usbaldo Munoz. The AMC Apes have been viciously attacking Munoz. Things apparently got so bad that Munoz has now ghosted his own lawyers, leaving them without guidance as to how to proceed.
Oh, goodie! It’s nice to know that one possible outcome of the “rise of the retail investor” might be the establishment of a Q-Anon corporate governance division – “where we go one to a shareholders’ meeting, we go all.”
Check out the latest edition of our “Timely Takes” Podcast featuring my interview with Charles Glick, Chairman & CEO at Corporate Governance Partners, Inc., the makers of Foresight BoardOps. In this 15-minute podcast, Charles addressed the following topics:
– How can the chairperson ensure efficient decision-making during board and committee meetings?
– What strategies can be employed to handle conflicts or disagreements among directors?
– What should you consider when setting a board’s first-ever meeting agenda?
– How should you prioritize board agendas?
– What are some common mistakes when setting agendas?
My interview with Charles was based upon Foresight’s recent publication, A Brief Guide for Board and Committee Chairs, which members of TheCorporateCounsel.net can access in our “Board Meetings” Practice Area. If you have insights on a securities law, capital markets or corporate governance trend or development that you’d like to share, I’m all ears – just shoot me an email at john@thecorporatecounsel.net.
The May-June issue of “The Corporate Counsel” newsletter is in the mail. It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. This issue includes the following articles:
– SEC Adopts Amendments Requiring More Detailed Share Repurchase Disclosure
– What’s in a Name? Postponement, Adjournment and Recess of Stockholders’ Meetings
If you’re not already a subscriber, you can subscribe online to this essential resource or email sales @ccrcorp.com.
Mintz recently released a quantitative analysis of the SEC’s climate and ESG-focused comment letters issued from July 1, 2021 to March 31, 2023. The article categorizes the comments according to the nine topics identified by the SEC in its sample letter plus one additional topic — “greenwashing” — and considered the qualities of the reporting entities who received these letters to identify key characteristics. Here’s an excerpt from the summary:
Overall, a relatively limited number of these comment letters were issued by the SEC. Specifically, 104 reporting entities received comment letters echoing the topics in the SEC’s Sample Letter, and a further 167 reporting entities received a comment letter relating solely to greenwashing. It should also be noted that an overwhelming majority (86%) of the reporting entities receiving a letter solely concerning greenwashing were “Investment Entities” — funds, trusts, or other vehicles solely focused on investing in other companies or assets, rather than traditional companies.
And, while the SEC has continued to focus on the issue of greenwashing, most of the SEC comment letters concerning the climate change topics identified in the Sample Letter were issued either in September 2021 (when the Sample Letter was published) or in a second burst of activity from May–September 2022 — the SEC does not appear to have inquired about those topics since November 2022. Finally, it is also noteworthy that the reporting entities receiving a comment letter aligned with the topics identified in the Sample Letter were concentrated in the Energy & Transport or Manufacturing sectors — about two-thirds of the total.
The analysis found that once the SEC was sending a comment letter it took an “in for a penny, in for a pound” approach and covered a lot of ground in each.
Overall, it appears that the reporting entities that received questions corresponding to the topics identified in the Sample Letter were usually asked about a majority of those topics, and that Physical Effects, Capital Expenditures, Indirect Consequences, Compliance Costs, and Carbon Offsets were the most frequent climate change topics that were the subject of inquiry.
The findings on greenwashing seem to be the most surprising results of this analysis and possibly the most important as a takeaway, as the SEC’s comment letter focus with respect to climate change will eventually shift to the mandatory climate rules, if and when adopted.
But this analysis also revealed a consistent focus on issues pertaining to greenwashing — and the SEC’s inquiries into greenwashing, while concentrated on Investment Entities, were also spread among a number of Companies in a wide variety of industries. This focus by the SEC, despite the recent decline in the number of letters, may well persist.
In a recent opinion in New Enterprise Associates 14, L.P. v. Rich, (Del. Ch.; 5/23), Vice Chancellor Laster found a stockholder covenant not to sue for breach of the duty of loyalty—in the context of a sale of the company that triggered the drag-along provision in a stockholders’ agreement—partially enforceable. Here’s an excerpt from this Duane Morris blog discussing the opinion:
Conducting a deep-dive into the history and philosophical underpinnings of fiduciary law, the Court reasoned that specific, limited, and reasonable covenants not to sue are valid, but that Delaware abhors pre-dispute waivers of suit for intentional harms. The Court laid out a two-part test, sure to join the corporate practitioner’s lexicon of eponymous capital-t Tests swiftly:
“First, the provision must be narrowly tailored to address a specific transaction that otherwise would constitute a breach of fiduciary duty. The level of specificity must compare favorably with what would pass muster for advance authorization in a trust or agency agreement, advance renunciation of a corporate opportunity under Section 122(17), or advance ratification of an interested transaction like self-interested director compensation. If the provision is not sufficiently specific, then it is facially invalid.
. . .Next, the provision must survive close scrutiny for reasonableness. In this case, many of the non-exclusive factors suggested in Manti point to the provision being reasonable. Those factors include (i) a written contract formed through actual consent, (ii) a clear provision, (iii) knowledgeable stockholders who understood the provision’s implications, (iv) the Funds’ ability to reject the provision, and (v) the presence of bargained-for consideration.”
Emphasizing the placement of the convent in a stockholder-level agreement (versus the charter or bylaws) and that it only applied to a drag-along sale, which had to meet a list of eight criteria, VC Laster found the covenant to be enforceable, except to the extent it would relieve defendants of tort liability for intentional harm, which would be contrary to Delaware public policy. To make a successful public policy argument, the plaintiff must show bad faith.
This is neither here nor there, but the blog’s reference to VC Laster’s over-1,200-word footnote reminded me of Infinite Jest, the endnotes of which (fun fact!) have their own audio file on audible.com.
In late May, the SEC celebrated — by posting this video — the 90th birthday of the Securities Act! To commemorate this milestone year, I thought I’d highlight some of the fun, historical “stuff” posted on TheCorporateCounsel.net that I didn’t know was here until I joined as an Editor. If you’re a securities nerd or history buff — or both — I hope you enjoy!
I blogged yesterday about the anticipated timing for the most high-profile rulemaking on the SEC’s Spring 2023 Reg Flex Agenda. I also did a quick side-by-side comparison against the Fall 2022 Reg Flex Agenda to see whether there was anything new on the proposed list and noticed one notable rule that wasn’t in the earlier agenda — but has been on the SEC’s radar for quite some time.
As it turns out, Dave’s blog from mid-March on Dodd-Frank Act stragglers was prophetic. He suggested that the recent reminder of what it’s like to have major bank failures may renew focus on an unfinished piece of Dodd-Frank rulemaking, and here it is in the Reg Flex Agenda, slotted for April 2024.
Dave was referring to Section 956 of the Dodd-Frank Act, which directs multiple regulators to jointly prescribe regulations or guidelines for incentive-based compensation practices at covered financial institutions (specific types that have $1 billion or more in assets) and specifically prohibit any types or features of incentive-based compensation arrangements that encourage inappropriate risks by a covered financial institution:
(1) by providing an executive officer, employee, director, or principal shareholder of the covered financial institution with excessive compensation, fees, or benefits; or
(2) that could lead to material financial loss to the covered financial institution.
Under Section 956, a covered financial institution also must disclose to its appropriate regulator the structure of its incentive-based compensation arrangements sufficient to determine whether the structure provides excessive compensation, fees, or benefits or could lead to material financial loss to the institution.
As you might expect (or remember?), the SEC and six other regulators jointly proposed rules twice in the past. Dave’s blog has more details on the history here to refresh your memory.
In a recent blog, Goodwin reminds us that, for calendar year-end companies, the new disclosure regarding director and officer trading plans and arrangements adopted, modified or terminated on or after April 1, 2023 is required in the Form 10-Q for the quarter ended June 30, 2023. Earlier this year, Goodwin published an updated version of its Form 10-Q Checklist, including the new requirements. The blog also notes that SRCs have a little more time:
SRCs must comply with Item 408(a) for adoptions, modifications or terminations that occur on or after October 1, 2023 and provide this disclosure beginning with the periodic report that covers the quarter ending December 31, 2023. SRCs that have a December 31 fiscal year end will first include this disclosure for the fourth fiscal quarter of 2023 in their Form 10-K report for the year ended December 31, 2023.
Speaking of SRCs, Goodwin highlighted that public float day is coming up for companies with a December 31 fiscal year-end, which can have immediate implications for companies that newly qualify for SRC status as of the end of the second quarter:
A company that qualifies as a SRC as of the measurement date can elect to use some or all of the SRC disclosure accommodations in its next Form 10-Q report (i.e., the Form 10-Q report for its second fiscal quarter). If it does so, the company must check the SRC box on the cover page of the report. Beginning with the Form 10-Q report for the first fiscal quarter of the following year, the company must check the SRC box, even if it does not rely on the SRC scaled disclosure accommodations.
Of course, June 30th is a key date for filer status generally for public companies with a calendar year-end, and you’ll want to know your filer status sooner rather than later if there’s a chance it could change for next year.
The May-June issue of “The Corporate Counsel” newsletter is in the mail. It’s also available online to members of TheCorporateCounsel.net who subscribe to the electronic format. This issue includes the following articles:
– SEC Adopts Amendments Requiring More Detailed Share Repurchase Disclosure
– What’s in a Name? Postponement, Adjournment and Recess of Stockholders’ Meetings
If you’re not already a subscriber, you can subscribe online to this essential resource or email sales @ccrcorp.com.
