Yesterday, Corp Fin Director Bill Hinman & Senior Advisor for Digital Assets Valerie Szczepanik issued a statement announcing new Staff guidance on when tokens & other digital assets will be regarded as “securities” subject to SEC regulation. Here’s an excerpt:
As part of a continuing effort to assist those seeking to comply with the U.S. federal securities laws, FinHub is publishing a framework for analyzing whether a digital asset is offered and sold as an investment contract, and, therefore, is a security. The framework is not intended to be an exhaustive overview of the law, but rather, an analytical tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset.
Also, the Division of Corporation Finance is issuing a response to a no-action request, indicating that the Division will not recommend enforcement action to the Commission if the digital asset described in the request is offered or sold without registration under the U.S. federal securities laws.
The 13-page “Framework for ‘Investment Contract’ Analysis of Digital Assets” represents the most detailed guidance that the Staff has provided on the application of the Howey test to digital assets. It walks through each element of the Howey test and identifies key characteristics of a digital asset that influence the Staff’s views about whether that asset involves an “investment contract.”
The guidance in the Framework is likely to be helpful to issuers planning token offerings. But it’s unlikely to please the crypto-evangelists who seek a light touch – or even a “hands-off” approach – from the SEC. That’s because the Framework makes it very clear that the SEC will continue to apply the Howey test to digital assets with considerable rigor. As they say, if you don’t like it, write to Congress.
Digital Assets: So What About That “TurnKey Jet” No-Action Letter?
Bill Hinman’s statement referenced a new no-action letter – TurnKey Jet (4/3/19) – in which Corp Fin said it wouldn’t recommend an enforcement action against an issuer if it proceeded with a token offering without registration. This is pretty earth-shattering news, right? Yeah, not exactly. Don’t get me wrong – it’s certainly a landmark, but it’s also a fairly prosaic application of the Howey test to a deal involving the sale of fully-functional tokens structured in such a way as to squeeze out any profit potential associated with their ownership.
Corp Fin’s response letter walks through the key factors in its decision, some of which are highlighted in this excerpt from the request letter explaining why there’s no expectation of profit involved with the tokens:
It will not be technically possible to trade and transfer Tokens from the Platform in a non-Platform secondary market at a premium. Further, it will be economically impractical to trade Tokens within the Platform in a secondary market since TKJ will offer continuous, ongoing Token sales at one USD per Token which should cause the market price of Tokens not to exceed one USD per Token. These restrictions on transfer are indicative of the consumptive nature of the Tokens.
The TKJ Program memberships are non-equity memberships and will be non-transferable. The Consumers will represent that they are obtaining the TKJ memberships and Tokens for their own use and not as an investment or to profit. The TKJ memberships and Tokens will not be marketed to the public as investments. The funds that the Consumers prepay for the on-demand air charter services will be nonrefundable and will be immediately redeemable for air charter services, so no Consumer will have a reasonable expectation of profit.
Gosh, that kind of takes all the fun out of it, doesn’t it?
A New SEC Commissioner Nominee: Allison Lee
Earlier this week, the White House announced that President Trump had nominated Allison Lee to fill the vacant Democratic slot on the SEC. Allison previously served in the SEC’s Division of Enforcement & as Counsel to former Commissioner Kara Stein. This WSJ article says it is unclear when the Senate will hold her confirmation hearing. If she’s confirmed, the SEC will operate with a full slate of members – something that’s been unusual in recent years.
This ABA Journal piece talks about the ethics laws and how they may – or may not – apply to lawyers who write on blogs as ghostwriters. I am certainly not well-versed in the ethics laws – but ghostwriting blogs wouldn’t seem to be much different than the myriad of other writings that junior lawyers do on behalf of senior lawyers, without much recognition? Law firm memos, legal briefs, articles published in print publications. You name it.
I’m not saying that the practice of “not giving credit where perhaps credit is due” is a good one. I am just saying that it’s fairly rampant. And it can be a complex issue. For example, a junior lawyer writes the first draft of something – and then a senior lawyer makes heavy edits. Co-authors, right? Anyway, perhaps it all doesn’t matter that much…
Ghostwriting Blogs? Does It Matter?
I say that perhaps it doesn’t matter because most legal blogs still miss the mark. They read like law firm memos – impersonal & cold. So they don’t connect with readers (meaning they are less likely to be read – and if they are read, quickly forgotten). I’ve been giving advice for years about how to blog – here’s an excerpt from this piece I wrote over a decade ago (see pages 8-9):
A much bigger concern than coming up with stories is whether you can find your blogging “voice.” This is the concept of blogging content that is written in a style far-removed from the style used to draft sterile press releases. I’m not suggesting that you write “unprofessionally” either. Rather, it’s a bit more informal than what you do for official corporate communications.
You may be a good writer, but blogging is a different kind of writing – it requires dynamic content with an active voice and punchy prose, knowing when (and how) to use links, and more. If you can’t do this, I wouldn’t bother blogging because you won’t earn trust if you can’t connect with your audience by making it seem like it’s coming from you and not a soulless company. Look at other blogs and see the ones that you like best. And I think you will know what I mean…
Transcript: “Conduct of the Annual Meeting”
We have posted the transcript for our recent webcast: “Conduct of the Annual Meeting.”
Yesterday, Corp Fin issued guidance – in the form of this “announcement” – about the new rules & procedures for exhibits that contain immaterial, competitively harmful information. This guidance is in the wake of the new Fast Act rules (see this horde of memos) that permit companies to file redacted material contracts without applying for confidential treatment of the redacted information provided the redacted information (i) is not material and (ii) would be competitively harmful if publicly disclosed. Those rules become effective upon their publication in the Federal Register, which is expected today.
Here’s a few things to know:
1. Mark Exhibit Index, Provide Statement on Exhibit Cover & Use Brackets for Redaction – You must mark the exhibit index to indicate where redaction occurs, include a prominent statement on the exhibit cover and use brackets within the exhibit to show exactly where redaction occurred.
2. Corp Fin Will Check for Compliance With New Rules – Corp Fin intends to check for compliance with the new rules, using a separate chain of comments from the regular comment process. This includes Corp Fin’s review of the redacted information, which may lead to comments asking for substantiation of immateriality/competitive harm claims. Conclusion of the review process will result in Corp Fin sending a letter to that affect.
3. Edgar Will Only Reveal Bare-Bones of CT Review – Edgar will publicly reveal that Corp Fin initially made a confidential treatment inquiry – and then that its review has been closed. Corp Fin will not upload comments issued during its CT review onto Edgar – so these comments won’t be publicly available.
4. Your Registration Statement Won’t Be Declared Effective Until Exhibit Issues Resolved – As has been the case in the past, acceleration requests will be acted upon only after any comments relating to the redacted exhibits are resolved.
5. If You Have a Pending CTR, You Can Switch to New Rules – If you currently have a confidential treatment request pending, you may – but are not required – withdraw your pending CTR and rely on the new rules. If you don’t withdraw, Corp Fin will continue to process your CTR under the old rules.
6. You Can Still File CTRs Under the Old Rules – The new rules have not changed your ability to request confidential treatment under Rule 406 or Rule 24b-2. If you file a CTR under the old rules, Corp Fin will process them that way.
7. How to Get More Corp Fin Guidance – Here’s where you can send your questions to Corp Fin about this new rule: RedactedExhibits@sec.gov.
Glass Lewis Will Distribute Your Feedback: But It Will Cost Ya…
I blogged recently that Glass Lewis is piloting a new “Report Feedback Statement” that will allow companies & shareholder proponents to express how their opinion differs from what’s in Glass Lewis’ research. Glass Lewis has now published FAQs – and this Morrow Sodali memo highlights how much you’ll have to shell out for the service:
Companies and/or shareholder proponents do not have to be Glass Lewis clients in order to use the RFS service. However, both issuers and shareholder proponents must purchase the relevant annual meeting report (at a cost ranging from $750 to $5,000, depending on size of the issuer) and pay a $2,000 fee for the distribution of the RFS comments.
And if you’re going to participate, don’t forget to also check out the Glass Lewis “Etiquette Guide,” which clarifies that only publicly available & legally vetted info should be shared in the RFS. In addition, it instructs everyone to use the “appropriate level of decorum & civility” – ah, the times we live in…
March-April Issue of “The Corporate Counsel”
We recently mailed the March-April issue of “The Corporate Counsel” print newsletter (try a no-risk trial). The topics include:
1. Board Minutes: Best Practices for Everyone’s Least Favorite Task
– Why Do Minutes Matter?
– The Importance of Setting the Stage: Agendas & Board Materials
– Putting Pen to Paper: Drafting the Minutes
– Address Director Notes to Preserve Minutes as the Definitive Record
– What About the Corporate Secretary’s Notes and Draft Minutes?
– Five Key Takeaways About Your Board Minutes
2. Now, Therefore, It Is RESOLVED: Drafting Board Resolutions
Evelyn Davis was at the very first shareholder meeting I ever attended – at the then-new, post-merger Manufacturers Hanover Trust Company. A callow youth in the mid-1960s, I was pressed into duty because I was good at long-division. The only ‘calculators’ back then, other than human ones, were mechanical monsters that weighed about 75 pounds and made ear-shattering noises as they literally ‘spun their wheels’ to come up with percentages. “From the moment Evelyn Y. Davis grabbed the mike, in the old American Stock Exchange auditorium, I knew this was a business I wanted to stick close to.”
Davis had just begun to branch out from her first-career – and what a first impression she made on the audience. All of them were in their best business attire, as was the custom then. She was wearing a tight black sweater with a plunging neckline, a mini-skirt that was 10 or 11 inches long at most, black net stockings, thigh-high black boots, and a short chinchilla jacket.
Her opening remarks were to fawningly compliment the Chair – and to ask if she could come up on stage, sit on his lap, and give him “a big juicy kiss.” Our then Chairman, Jeff McNeill, was an incredibly strait-laced, old-school Southern Baptist, with a big old-fashioned Florida drawl – and when he recovered himself sufficiently to politely demur, she turned on him with a vengeance, peppering him with one question after another, never pausing to wait for the answer, which was her usual habit at all meetings. Her loud, sarcastic-sounding tone that she favored during the first half of her career. After a few minutes, people in the audience began to shout, “Sit down! Shut up! Go home!”
“You’re all just jealous of me” she yelled. The audience was totally stunned into silence – but I was totally hooked – on shareholder meetings that is.
Shaq Becomes a Director. Does It Matter?
Hat tip to Sempra Energy’s Lenin Lopez for pointing out this Form 8-K filed by Papa John to announce that NBA Hall-of-Famer Shaquille O’Neal has become a director for the company (here’s the press release). According to this article, Shaq will become much more than a director – he’ll become the face of the brand (with a marketing agreement) and owner of nine franchises in the company.
I’m only bothering to blog about this because old-timers may recall that Dr. J was often held up as the example of how some directors were overboarded. Since Dr. J had a successful private investment firm, he was perhaps targeted unfairly since many sat on too many boards back then. Since then, overboarding has become rare as attention to this issue has curbed it – and many athletes have had fruitful second careers and would be good fits for boards. Shaq certainly fits the mold as he has long had pursuits outside the basketball world, including even when he was playing. Just like LeBron does now. His new TV show – the “Million Dollar Mile” – looks like it will do okay…
A question in Shaq’s case is whether he could really be considered an “independent” director since he will be the face of the brand, etc. In it’s Form 8-K, the company notes that it doesn’t consider Shaq to be “independent” under Nasdaq’s listing standards…
A Farewell to Cooley’s Bill Godward
Over five years ago, I taped a podcast with Cooley’s Bill Godward. He was still going into the office at age 100. And he was amazing – so wonderful to hear stories of what practicing law was like 70 years ago. I’m sad to note that Bill has passed away at age 105 – here is a nice memoriam from Cooley…
Our April Eminders is Posted!
We have posted the April issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
I don’t know if law students still do this, but when I was in law school, there were certain volumes that we would pull from the library’s stacks, set down on their spines & watch automatically fall open to the page of a particularly well-read case. This wasn’t because the case in question involved issues of great legal interest – instead, it was because the case involved issues of great prurient or comedic interest (read the dissent).
Anyway, I think we may have a new addition to the pantheon from – of all places – the Delaware Chancery Court. Behold Winklevoss Capital Fund v. Shaw, (Del. Ch.; 3/19), a case that has touches of both prurience & comedy. It recounts the saga of America’s most unlikeable twins’ ill-fated investment in “Treats!” – “a print & digital magazine depicting nude and semi-nude photography of models and celebrities.” So, what could go wrong with an investment in online sleaze? It turns out that the answer is “plenty.”
While the opinion is far from pornographic, it will do nothing to enhance any remaining faith you might have in the future of humanity & you may hate yourself for reading it. In short, it’s kinda fun. Don’t take my word for it – Steven Davidoff Solomon (a.k.a. “The Deal Professor”) has been having a good time tweeting snippets from it.
Escheatment: “They’re Baaaack!”
Look, don’t shoot the messenger here, okay? But if you thought escheatment issues were in the rearview mirror after the courts slapped Delaware around for its thuggish aggressive approach to unclaimed property audits, it looks like you were mistaken. This Morris Nichols memo says that enforcement is back with a vengeance. Here’s the intro:
For those who thought the State of Delaware had gone out of the unclaimed property business—think again. After a 2017 overhaul of Delaware’s unclaimed property laws and an increased emphasis on voluntary compliance with those laws, Delaware is sending out dozens of “invitations” to companies to enter its’ Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program (the “VDA Program”). Ignoring this invitation guarantees that a company will get audited by the state.
Delaware is also beginning to review companies’ reporting histories and their annual unclaimed property filings for accuracy and completeness and is strictly enforcing timelines and deadlines for companies under audit. All of this is a signal to Delaware companies that, while voluntary compliance is preferred by the state, audit—with assessed interest and penalties—is a very real consequence and an alternative that Delaware can and will pursue.
The memo highlights a number of reasons why companies might want to take advantage of Delaware’s VDA program – including the waiver of interest and penalties, and the fact that VDAs can be resolved more quickly than an audit & without involving other states.
By the way, not everyone at the SEC is singing from the same hymnal when it comes to the new rules. Commission Jackson dissented from the SEC’s decision to adopt them, and issued a statement setting forth the reasons for his opposition.
Yesterday, in Lorenzo v. SEC, the US Supreme Court held – by a 6-2 vote – that dissemination of false statements with intent can fall within the scope of Rules 10b–5(a) & (c), even if the disseminator did not “make” the statements & consequently falls outside Rule 10b–5(b).
That’s a big win for the SEC – and a big loss for the securities defense bar. The decision is a retreat from the Court’s position in the Janus case, where it held that liability under Rule 10b-5(b) was limited to the “maker” of a false or misleading statement. As Broc subsequently blogged, the SEC responded to Janus by emphasizing its view that 10b-5(a) & (c) had a more expansive reach. The Lorenzo decision vindicates the SEC’s position. Here’s an excerpt from Justice Breyer’s opinion for the Court:
It would seem obvious that the words in these provisions are, as ordinarily used, sufficiently broad to include within their scope the dissemination of false or misleading information with the intent to defraud. By sending emails he understood to contain material untruths, Lorenzo “employ[ed]” a “device,” “scheme,” and “artifice to defraud” within the meaning of subsection (a) of the Rule, §10(b),and §17(a)(1). By the same conduct, he “engage[d] in a[n]act, practice, or course of business” that “operate[d] . . . as a fraud or deceit” under subsection (c) of the Rule.
Justices Thomas & Gorsuch dissented from the ruling, with Justice Thomas stating that the decision “eviscerates” Janus’s distinction between primary & secondary liability “by holding that a person who has not ‘made’ a fraudulent misstatement can nevertheless be primarily liable for it.” Justice Kavanaugh participated in the D.C. Circuit’s ruling on the case & recused himself from the Court’s deliberations. We’re posting memos in our “Securities Litigation” Practice Area.
Board Refreshment: What Do Companies Want From New Directors?
According to this Deloitte/Society for Corporate Governance Board Practices Survey, there are several characteristics that companies look for in new director candidates. This excerpt suggests that diversity – and specifically, gender diversity – tops the list:
94% said their boards are looking to increase board diversity. Of these, the majority (61%) said their boards are looking to increase gender diversity – far exceeding race and ethnicity (48%) and professional skills or experience (43%). Boards seeking to increase their diversity most commonly look to referrals from current directors (77%), suggesting that networking is still key to board succession, though search firms came in a close second (73%).
When it comes to professional experience, companies are most interested in directors who know the industry & those with leadership, accounting or tech backgrounds:
Specific industry experience topped the list. Also in the top 10: business leadership; accounting; digital or technology strategy (e.g., artificial intelligence, cryptocurrency, and social media); cyber; and IT (e.g., infrastructure, operations). While other types of professional experience, such as marketing and HR, may be overdue for board representation (and could contribute to diversity), they do not seem to be gaining traction as stand-alone recruitment priorities.
The survey covered 102 companies, the vast majority of which were either large or mid-caps, although a handful of small-cap companies were also included.
Board Refreshment: What Do They Get?
Okay, so now we know what companies say they want in a new board member – this recent EY survey on 2018’s class of new independent directors at Fortune 100 companies sheds some light on what they actually get. Here are some of the highlights:
– In 2018, 71% of the reviewed companies added at least one new nominee and 27% added two or more. This represents an increase from prior years when the levels were generally steady at around 56% and 21%, respectively.
– The areas of expertise most frequently cited in new nominations were: international business; corporate finance, accounting; and industry expertise. Around half of the new class was recognized for expertise in at least one of these categories. The next most common areas — technology; operations, manufacturing; and board service, corporate governance — were cited in 40% to 45% of new nominations.
– Women continued to represent around 40% of new nominees, contributing to a slight increase in overall board gender diversity; in 2018, 27% of existing independent directors were women, up from 25% in 2016.
Approximately half of 2018’s new class of directors consisted of the usual suspects – current & former CEOs, and that group was predominantly male. But when it came to non-CEO nominees, the genders were more balanced, and most of the new directors from non-corporate backgrounds were women.
Overall, the takeaway seems to be that Fortune 100 companies are adding new directors more frequently, and that those directors are increasingly younger & more female. While the characteristics & qualifications of new directors generally align with what companies say they’re looking for, it also looks like their fixation on former CEOs is working at cross-purposes with their diversity initiatives.
We’ve been following the saga of the “man bites dog” shareholder proposal asking Johnson & Johnson to adopt a bylaw mandating arbitration of securities claims. Last month, the Staff granted the company’s request to exclude the proposal from its proxy statement on the grounds that its implementation would violate applicable state law.
SEC Chair Jay Clayton weighed in with his own statement on this controversial topic, in which he at one point suggested that a court would be a “more appropriate venue to seek a binding determination of whether a shareholder proposal can be excluded.” Cooley’s Cydney Posner reports that the proponent seems to have taken his advice – because the dispute is now in the hands of a NJ federal court. This excerpt from her recent blog summarizes the proponent’s arguments:
The proponent argued that the proposal would not cause the company to violate federal law, because “the Federal Arbitration Act requires the enforcement of arbitration agreements, and Johnson & Johnson has been unable to identify any federal statute that ‘manifest[s] a clear intention to displace the Arbitration Act.’”
Nor, according to the proponent, would the proposal cause the company to violate NJ state law because “neither Johnson & Johnson nor the New Jersey Attorney General has identified any New Jersey statute or court decision that prohibits the enforcement of the arbitration agreements,” and, even if the NJ courts declined to enforce, that still would not mean that including the provision in the company’s bylaws would amount to a violation of NJ law.
That is, a “company does not ‘violate’ state law by entering into an arbitration agreement that happens to be unenforceable under the law of that state.” Finally, even if state law were shown to prohibit enforcement, it would be preempted by the Federal Arbitration Act and void. The proponent also stated that he intends to submit the “proposal again for the 2020 shareholder meeting, and it will continue submitting this proposal each year until the proposal is adopted by the shareholders.”
The proponent is seeking a declaratory judgment that J&J violated the securities laws by excluding the proposal, along with injunctive relief that would, among other things, require the company to include the proposal in supplemental proxy materials.
Audit Committees: PCAOB Promises More Communications
One of the perceived shortcomings of the PCAOB’s inspection process is that it sometimes reaches problematic conclusions about an accounting firm’s audit of a company without any input from the company itself. According to this recent annual “Staff Inspections Outlook for Audit Committees,” the PCAOB plans to increase its engagement with audit committees. Here’s an excerpt:
During 2019, we will provide an opportunity for audit committee chairs of certain companies whose audits are subject to inspection to engage in a dialogue with the inspections staff. The purpose of the audit committee dialogue is to provide further insight into our process and obtain their views. We expect to publish additional updates to audit committees regarding our inspections to provide observations from these interviews and our inspection findings.
The PCAOB went on to review its 2019 inspection priorities, and raised various topics – including sample questions – that audit committees might want to address with their auditors that relate to current issues of inspection focus.
Audit Committees: What If The PCAOB Calls?
So, what should you do if the PCAOB reaches out to your audit committee chair? This excerpt from a recent Stinson Leonard Street blog says you should watch your step:
We believe issuers should approach any such engagement cautiously, if at all. Perhaps the only circumstance for which this may be appropriate is upon assurance by the PCAOB that the inspection of the issuer is complete and final and no potential deficiencies were identified. Even then, issuers should consider whether there is any benefit to the dialogue. It is especially worth consideration because the PCAOB also announced it intends to publish additional updates to audit committees regarding its inspections including observations from these interviews and its inspection findings.
The blog points out that inspection findings can lead to restatements & potential liability for companies. Furthermore, issuers have no control over how the PCAOB will characterize the results of their engagement with the public. That means there is a risk that the audit committee chair or the company could be cast in a negative light.
The need to prepare for a possible phone call from the PCAOB may help address the chronic problem of audit committees sitting around with nothing to do, but if more assistance in keeping your committee busy is needed, check out this helpful list from PwC of 11,284 things that the audit committee should keep in mind for the end of the current fiscal quarter.
I recently stumbled upon Reg A filings for a bunch of fantasy football teams that are part of a national fantasy football league that’s supposed to kick-off this fall. Here’s the Form 1-A Offering Statement filed by the “Philadelphia Powderkegs” – and this excerpt from the filing tells you what they’re up to:
Philadelphia Powderkegs, Inc. is one of 12 Delaware corporations formed to represent teams (each a “Team” or collectively, “Teams”) in a national fantasy sports football league (“The Crown League”) which is to be operated by The Crown League, LLC, a Delaware limited liability company (“CRL”), the managing member and substantial owner of which is CrownThrown, Inc., a Delaware corporation (“CrownThrown”). CRL intends to launch the first publicly owned, professionally managed, national fantasy sports league.
CRL has two classes of membership interests: 49.992% of the membership and voting interests are controlled by the Class A members, all of which are held, in equal amounts, by us and the additional 11 companies that anticipate competing in The Crown League (in other words, each company Team will initially own 4.166% of the interests in CRL), and the remaining 50.008% of membership interests in CRL will be held by the Class B members of CRL, approximately 90% of which is currently held by CrownThrown.
Here are the other teams that filed Form 1-As with the SEC:
I instantly became a fan of the “Florida Mangos Wild” – do you see what they did there? According to the league’s fairly slick website, they also have a “franchise” representing New York, with the location of a 12th franchise to be determined.
Anyway, If you think this entire blog is just an excuse for me to brag about how my team – “Full Metal Jarvis” – won my fantasy football league’s championship this season, well. . . you’re right.
ESG: Banging the Drum for More Disclosure
This recent article from The Center for Executive Compensation reviews the multi-pronged efforts at requiring more disclosure from public companies on ESG issues. And as this excerpt points out, Congress may be getting into the game:
Rep. Maxine Waters (D-CA), Chair of the House Financial Services Committee published the Committee’s hearing schedule for March, and in addition to already-announced priorities, of particular note is a March 26 subcommittee hearing on “Building a Sustainable and Competitive Economy” which will focus on “proposals to improve environmental, social, and governance disclosures.”
The topic is not surprising given the increased interest in ESG information by both large investors — primarily the large index funds such as BlackRock, Vanguard and State Street — as well as the push for greater disclosures by investors with a specific advocacy bent. As we reported last month, a recent Morrow-Sodali study found that investors seek greater information on corporate culture, climate change and human capital metrics.
The memo also cites a recent WSJ report that says shareholder proposals asking companies to produce climate change disclosures are expected to jump to 75 or more in 2019 from 17 in 2018.
Our “Proxy Disclosure Conference”: Early Bird Ends April 5th
– The SEC All-Stars: A Frank Conversation
– Hedging Disclosures & More
– Section 162(m) Deductibility (Is There Really Any Grandfathering)
– Comp Issues: How to Handle PR & Employee Fallout
– The Top Compensation Consultants Speak
– Navigating ISS & Glass Lewis
– Clawbacks: #MeToo & More
– Director Pay Disclosures
– Proxy Disclosures: 20 Things You’ve Overlooked
– How to Handle Negative Proxy Advisor Recommendations
– Dealing with the Complexities of Perks
– The SEC All-Stars: The Bleeding Edge
– The Big Kahuna: Your Burning Questions Answered
– Hot Topics: 50 Practical Nuggets in 60 Minutes
According to this recent WSJ article, the SEC may issue a proposal to regulate ISS, Glass Lewis & the gang as soon as this spring. Here’s an excerpt:
The SEC is expected to propose the first U.S. rules on proxy-advice companies following an organized campaign by public companies that think proxy-advisory firms have too much sway over shareholder proposals. Lobbying and advocacy groups, including the U.S. Chamber of Commerce and the National Association of Manufacturers, and stock exchanges, such as the Nasdaq and the New York Stock Exchange, have mounted a well-funded offensive against the industry, which is dominated by two firms. The groups have purchased advertisements targeting proxy advisers, sponsored a Washington think-tank event and testified at multiple Senate committee hearings on the issue.
Corporations say the advisory firms—which make recommendations to shareholders on how to vote on corporate governance issues—have too much sway over corporate decision-making. Companies argue that they spend too much time and money fighting proposals they think would be detrimental to their overall performance.
Despite the astroturf advocacy on this issue by the “Main Street Investors Coalition,” an organization that seems to have been essentially a sock puppet for NAM & the Chamber, I’m not going to pretend that I’m sorry to see that proxy advisors may finally face some sort of SEC oversight.
There’s certainly a sizeable group of people who view proxy advisors as indispensable tools for promoting shareholder democracy & believe that they should remain free from oversight. Not me. I haven’t embraced the theology of shareholder supremacy & don’t take it as revealed truth that directors should prostrate themselves before the company’s “true owners” [sic]. I also don’t think that “good governance” means reflexively endorsing any proposal that reduces the board’s power and enhances the power of whatever amorphous mass of casino capitalists happens to be holding shares at any given instant.
Once you cut through the pious propaganda from one side about “shareowner democracy” and from the other about “the perils of short-termism,” this is ultimately a cynical struggle between two powerful factions for control over who has the final say at public companies. Proxy advisors have been effectively weaponized by the investor side of that struggle, & their use should be regulated just as management’s use of its own weapons are. After all, what’s sauce for the goose is sauce for the gander.
The SEC isn’t just focusing narrowly on proxy advisors. This recent speech by Commissioner Roisman indicates that it’s also focusing on how those recommendations are used by institutional investors and how those investors ensure they are using them responsibly.
Testing the Waters: Avoiding a General Solicitation Issue
This Locke Lord blog discusses a potential issue around “testing the waters” that not many have focused on – how to maximize a company’s flexibility to pursue private financing after it’s tested the waters & opted not to pursue a public financing. The biggest concern in this scenario is the possibility that testing the waters for the public deal might be regarded as a “general solicitation” for the private financing.
Fortunately, the blog says that this outcome can be avoided if the company takes a careful approach to how it tests the waters for the potential public deal. Here’s an excerpt:
Although the SEC does not appear to have addressed this question directly, our advice and prevailing market practice is that if the test-the-waters activity is properly structured an issuer can avoid its being a general solicitation. The key to avoiding a general solicitation is carefully selecting the investors with which the issuer will test-the-waters. If the test-the-waters activity does not involve a general solicitation, there should be no concern doing a subsequent private offering, either to the investors with which the waters were tested or other investors.
The blog points out that it typically shouldn’t be too difficult to plan a test-the-waters effort to avoid general solicitation – the investors contacted will all have to be institutions, and it’s likely either the company or its banker will have a preexisting substantive relationship with them.
Blockchain: ABA’s “Digital & Digitized Assets” White Paper
The ABA’s Business Law Section just published this 353-page white paper addressing jurisdictional issues relating to blockchain technology, cryptocurrencies & other digital assets. This excerpt from a recent Paul Hastings memo summarizes the contents:
The white paper tackles a number of topic areas relevant to the ever-changing cryptocurrency and digital asset landscape, including:
– Background information regarding digital assets and blockchain technologies, including associated trading platforms, security issues, and characteristics and features of digital assets and virtual currencies;
– Regulation by the Commodity Futures Trading Commission under the Commodity Exchange Act, including the CFTC’s approach to classifying and regulating virtual currencies and related derivatives;
– The SEC’s regulation under the Securities Act, the Securities Exchange Act, the Investment Company Act, and the Investment Advisers Act, including when the SEC classifies a digital asset as a “security;”
– The interplay, and sometimes tension, between SEC and CFTC regulations;
– FinCEN regulation of digital assets, including in relation to anti-money laundering and know-your-customer requirements;
– International regulation of digital assets and blockchain technology throughout Europe, Asia, Australia, and globally; and
– State law considerations, including state law licensing requirements and state-specific regulations.
On Wednesday, the SEC approved changes to the price requirements that companies must meet to qualify for exceptions under the NYSE’s shareholder approval rules. Broc blogged about the proposal last fall – noting that it would make NYSE rules more similar to previously-approved Nasdaq updates. Maybe that’s why the SEC received zero comments in five months. Among other things, the amendments:
– Change the definition of “market value,” for purposes of determining whether exceptions to the shareholder approval requirements under NYSE Sections 312.03(b) and (c) are met, by proposing to use the lower of the official closing price or five-day average closing price and, as a result, also remove the prohibition on an average price over a period of time being used as a measure of market value for purposes of Section 312.03
– Eliminate the requirement for shareholder approval under Sections 312.03(b) and (c) at a price that is less than book value but at least as great as market value
Shareholder Engagement: Tips for Director Involvement
In this 10-page memo, DLA Piper suggests ways to use your proxy statement as a shareholder engagement tool – as well as best practices for disclosing your shareholder engagement efforts. It notes that this type of disclosure is becoming a lot more common. That’s not too surprising since according to this “Director-Shareholder Engagement Guidebook” from Kingsdale Advisors, the vast majority of large companies are now involving directors in regular shareholder engagement – and of course they want to get credit for that.
The Guidebook highlights the benefits of involving directors in engagement efforts and responds to some common objections. And whether your directors already have relationships with shareholders or you’re still evaluating the pros & cons of a direct dialogue, it provides some tips to get the most “bang for your buck.” Here’s an excerpt:
Director-level engagement has to be convenient, otherwise boards and shareholders aren’t going to keep up with the expectations that have been set. Engaging shareholders does not necessarily mean traveling and sitting down for an hour or two. Ideally boards engage face-to-face annually, perhaps on the back of board meetings or institutional investor days, but follow-up may occur over the phone or in video-conferencing.
One of the most convenient set ups we have seen (for directors) is to invite shareholders in the day after a board meeting, when the directors are already prepared and gathered for a series of back-to-back meetings. We recommend invitations to shareholders for director-level meetings come from the corporate secretary, not the IRO. This will signal shareholder engagement is a board-level priority and the meeting will not cover the same topics that may have been previously covered with management.
Engagement should take place well before proxy season, not simply because there is time, but because you will have plenty of runway to address any governance issues that come up.
Transcript: “Earnouts – Nuts & Bolts”
We have posted the transcript for the recent DealLawyers.com webcast: “Earnouts – Nuts & Bolts.”