The staff completed its review of the company’s submission. Our response will be posted after 4:30 PM this afternoon in our 2019-2020 Shareholder Proposal No-Action Responses Chart, which is available on our website at https://www.sec.gov/divisions/corpfin/cf-noaction/14a-8.shtml. Copies of all correspondence relating to this submission will be made available at the same address after a short delay. If you have any questions, please call the Office of Chief Counsel in the Division of Corporation Finance at (202) 551-3520.
We also held a big webcast on this topic just yesterday – “Shareholder Proposals – What Now?” – with Corp Fin’s Chief Counsel David Fredrickson, Davis Polk’s Ning Chiu, Morrison & Foerster’s Marty Dunn and Gibson Dunn’s Beth Ising. If you missed it, the audio archive is already available – and the transcript should be coming a week or so after Thanksgiving.
“Say” Earnings Calls: Not Just For Retail Anymore!
We’ve blogged a couple of times about the “Say” platform that allows shareholders to submit questions during earnings calls, investor days, webinars and annual meetings. Originally, Say focused on increasing retail participation in these events – but it recently announced full access to its Q&A polling for institutional investors as well.
Say also announced that it would collaborate with “Just Capital” on a new type of “shareholder engagement” platform – quarterly calls that allow CEOs to speak with investors about ESG & “stakeholder” value. Last week, Paypal’s CEO broke ground as the first participant.
State “Securities Act” Litigation: Another One Bites the Dust
A few months ago, I blogged about a ’33 Act case being dismissed from state court in New York – offering some hope to companies who are worried about a deluge of state litigation due to the Supreme Court’s 2018 Cyan decision. This D&O Diary blog from Kevin LaCroix recounts another story of hope – this time, a recent dismissal in Connecticut. Here’s the takeaway:
These various dismissal motions rulings are of course themselves without precedential value and are subject to appeal. However, one can hope that these rulings may send a message that the plaintiffs should reconsider whatever perceived advantages they may think they have in proceeding in state court rather than federal court.
Unfortunately, despite these rulings, Cyan still creates significant risks for companies. This blog gives a real-life, recent example of a company facing a heap of lawsuits on the heels of its IPO. And because simultaneous state & federal securities lawsuits can’t be consolidated, it’s extra messy. Kevin notes that Congress could fix the problem by making a “simple” tweak to Section 22 of the ’33 Act that eliminates concurrent state court jurisdiction…
I’m very excited to announce that Lynn Jokela has joined us as an Associate Editor for our sites. Lynn has spent the last 11 years in the corporate secretary’s group of a Dow 30 company, following a stint in private practice and a prior career in finance & business. She brings tons of practical experience on all things “corporate & securities” and will be a fantastic addition to our team. Her email address is included in her bio if you want to drop her a line – and she’ll be blogging soon enough!
Transfer Agents: Market Share Leaders
A recent “Audit Analytics” blog highlights current market share leaders among transfer agents. Overall, not much has changed:
Since 2012, the market share for transfer agents engaged by active SEC registrants has remained fairly stagnant. This year proves to be no different; the same five transfer agents we have seen in the top for the past several years still reign. In fact, four of the five have managed to slightly increase their respective market share compared to last year’s results.
The exception, Wells Fargo Bank NA/TA, has shown an expected decrease in market share since our last analysis. As noted last year, Wells Fargo Bank sold its Shareowner Services to Equiniti Trust Co. (part of Equiniti Group plc). This may also explain the increase in market share for the non-top five transfer agents (Other), but only time will tell.
For more color on the industry players – and helpful new offerings by the top transfer agents – check out page 5 of the latest edition of Carl Hagberg’s “Shareholder Service Optimizer.” Carl notes that the market seems ripe for major comparison shopping…
Filing Fees: SEC Unveils New Template
Filing fees: they seem like such an easy task – until one of the 18 people involved in this “game of telephone” drops the ball on the required info. That’s why the SEC recently announced a new pre-populated “FedWire” template.
To make sure all necessary info is included – and avoid filing delays – the Commission is encouraging all companies to use the template when they submit info to their banks to initiate FedWire payments.
We’re very excited to have David Fredrickson – Corp Fin’s Chief Counsel – joining our other esteemed panelists on our webcast tomorrow: “Shareholder Proposals – What Now?” So tune in to hear David – along with Davis Polk’s Ning Chiu, Morrison & Foerster’s Marty Dunn and Gibson Dunn’s Beth Ising – discuss Corp Fin’s new approach for processing shareholder proposal no-action requests, what’s new due to Staff Legal Bulletin 14K and the potential impact of the SEC’s new 14a-8 rulemaking proposal. Don’t miss it!
“ESG” Funds: What’s in a Name?
Regular readers of this blog know that we write more than we want to about the rise of “responsible investing” – e.g. just yesterday. It’s not that we’re opposed to the trend, we just question how meaningful it is. Incidentally, that’s also what’s frustrating people who want it to grow faster.
But here’s the deal: investors want to feel good – but in the end, they also want their returns to match what they’d get by tracking a broad market index. The funds that meet those dual desires end up attracting the most cash, even though some of the “cleaner” funds have significantly outperformed the competition in recent years. This is America! It’s all about marketing.
That’s why, as this WSJ article points out, it’s pretty common for “sustainable funds” to invest in fossil fuel companies (the tagline of the article is that “8 of the 10 biggest US sustainable funds invest in oil & gas companies”). And if that still seems odd to you, the reconciling point is that they invest in the companies with the highest ESG ratings in their sectors – the “most sustainable” fossil fuel companies, if you will.
So when it comes to attracting ESG dollars, the key appears to be outperforming your industry peers – or producing the most information, as Doug Chia suggests. And the Journal explains why that’s unlikely to change any time soon:
Energy shares have often been among the few sectors to reliably produce gains—making them an important group for asset managers. That is especially true for asset managers whose products are aimed in part at institutional investors, which often have less room to miss their target returns. Also, an oil company that scores poorly on one element of ESG—say, the “E”—might do well on the other two elements, meriting its inclusion in a fund.
Transcript: “Sustainability Reporting – Small & Mid-Cap Perspectives”
We’ve posted the transcript for our recent webcast: “Sustainability Reporting – Small & Mid-Cap Perspectives.”
Recently, the “Governance & Accountability Institute” announced that 60% of the Russell 1000 are now publishing sustainability reports. The top half of that index aligns with the S&P 500 – where sustainability reporting has become mainstream – and 34% of the smaller companies have picked up the practice too. Here’s some other takeaways:
– Of the 60% of Russell 1000® companies that report, 72% were S&P 500® companies – and 28% were from the second half of companies in the index
– Of the 40% of Russell 1000® companies that do not report, 83% were the smaller half of companies by market cap – while only 17% of the non-reporters were S&P 500® companies
Like just about everything, this has become a political issue too. This Stinson blog reports that a right-wing org is asking the SEC to prohibit companies from making “materially false and misleading claims and statements related to global climate change.” Meanwhile, in the more mainstream world, the US Chamber is now focusing on sustainability disclosure – and has now released its own set of “best practices” for voluntary ESG reporting.
“Responsible Investors” Say ESG Isn’t a Fad
You have to wonder what’s driving sustainability reporting by smaller companies. They’re less likely than large companies to be doing it in response to proposals from “activist” shareholders. But there are also shareholders whose attention companies actually want to attract. A recent SquareWell Partners study says that providing ESG info is the “price of entry” for companies of all sizes that want to add big investors to their rosters – or keep them there. Here’s a few key findings:
– Nearly all of the top 50 asset managers (managing $50.6 trillion) are signatories to the UN “Principles of Responsible Investing” – committing to incorporate ESG factors into investment & ownership decisions
– Oddly, the Global Sustainable Investment Initiative reports “only” $30.7 trillion of sustainably invested assets last year – so it’s possible the PRI signatories aren’t following through on the principles
– One-third of the asset managers clearly disclose their approach to integrating ESG factors into fixed income;
– 64% of the asset managers are signatories to the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD);
– Close to 80% of the asset managers engage with portfolio companies on ESG issues;
– 68% of the asset managers use two or more ESG research and data providers;
– Only 20% of the asset managers have a low receptivity to activist demands; and
– A quarter of the asset managers have gone public with their discontent at portfolio companies since January 2018.
For even more on this topic, see Aon’s 28-page report on responsible investing trends. Also check out this recap from Cooley’s Cydney Posner about a recent meeting of the SEC’s Investor Advisory Committee – where reps from AllianceBernstein, Neuberger Berman, SSGA and Calvert discussed how they’re using ESG data for all their portfolios and (for the most part) called for the SEC to guide companies toward more standardized disclosure.
On the debt side, take a gander at this recent PepsiCo announcement about a $1 billion “green bonds” offering where the proceeds will be used to finance the company’s “UN Sustainable Development Goals.” This Moody’s alert says that green bond issues could top $250 billion this year – much higher than what was originally forecast – and walks through some of the global trends. To keep track of memos on this growing trend, we’ve added a new “sustainable finance” subsection to our “Debt Financings” Practice Area.
E&S Risk Factors on the Rise
This NACD blog analyzes the increasing prevalence of “E&S” risk factors. Here’s what’s trending on climate change:
Thirty percent of Russell 3000 companies discussed climate change as a risk in their 10-K statement, with only 3 percent of companies discussing climate change risk in the MD&A section. Predictably, the energy and mining sector had the most disclosure on climate change risk. Retail and consumer sector companies, which are not thought of traditionally for being exposed to climate change risk, also had a high rate of disclosure, citing damage to their supply chain and access to raw materials as risks.
Disclosures for every sector focused on the risk of regulatory and market responses to climate change, including legislative regulation of air emissions, caps, and carbon taxes. Other companies were more detailed in their discussion of climate change risk as it relates to their specific operations, such as Monster Beverage Co.’s 10-K, which states that, “In addition, public expectations for reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs, and may require us to make additional investments in facilities and equipment. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations.”
There’s been some back & forth over “who writes the rules” when it comes to dual-class shares: candidates for that job have included indexes, exchanges and institutional investors (whose objections to an extreme variation of this structure was one of many factors that played a role in the fall of WeWork). In a recent speech, the SEC’s “Investor Advocate” – Rick Fleming – even acknowledged that investors are part of the problem – but also called for heightened SEC disclosure requirements for dual-class shares and intervention from stock exchanges.
Now, CII is also moving the issue to the state level – via this letter to the Delaware State Bar Association. Here’s an excerpt (and here’s a Wilson Sonsini blog that responds to CII’s proposal):
A proposed new Section 212(f) of the DGCL is attached as Annex A to this letter. Pursuant to that language, no multi-class voting structure would be valid for more than seven years after an initial public offering (IPO), a shareholder adoption, or an extension approved by the vote of a majority of outstanding shares of each share class, voting separately, on a one-share, one-vote basis. Such a vote would also be required to adopt any new multi-class voting structure at a public company. The prohibition would not apply to charter language already existing as of a legacy date.
Non-GAAP: How to Avoid Staff Scrutiny
Last month, I blogged that this year’s “Top 10 List” for Corp Fin comments continues to include non-GAAP – no surprise there. This PwC memo highlights the 5 most common non-GAAP issues that draw Staff scrutiny:
1. GAAP measure not given enough prominence
2. Reconciliation between GAAP and non-GAAP measures is missing or does not start with the GAAP measure
3. Non-GAAP measure is not presented consistently between periods or the reason for changing a non-GAAP measure is not disclosed
4. Management’s explanation of why a non-GAAP measure is useful to investors is inconclusive
5. Use of an individually–tailored accounting principle (a company cannot make up its own GAAP)
We’ve blogged before about that last one – it’s a newer area of comment so there’s still some confusion about what it means. For those who subscribe to “The Corporate Counsel” print newsletter, we’ll take a deep dive into this topic in the forthcoming November-December Issue.
“Investors’ Exchange”: RIP
Three years ago, John blogged about a new national securities exchange, “IEX” – which was unique in that it wasn’t operated by Nasdaq or NYSE. Its run was short-lived – this WSJ article reports that it decided to exit the business after its only listed company went back to Nasdaq. But other new competitors remain optimistic – there are at least three hoping to break into the market next year…
In other “exchange” news, last week Nasdaq filed a rule change to modestly increase annual listing fees. Starting January 1st, fees for most equities will go up by about $1-$3k…
We’ve been covering the Administration’s gradual squeeze on regulatory guidance for some time (here’s our latest from April). As noted in this DLA Piper memo, President Trump signed two ‘Executive Orders’ recently that limit the practice of “regulation by guidance.” Here’s the “improved agency guidance” order that requires each agency to post its guidance documents on an indexed, searchable website after the OMB has issued implementing guidance about how to accomplish that (here’s a comprehensive Davis Polk memo on this order).
And here’s the “enforcement” order that seeks transparency and fairness in the use of agency guidance in civil administrative enforcement and adjudication. As this King & Spalding memo notes, there are a number of complex processes & exceptions in the orders that will require agencies to take a bit of time to promulgate new procedures.
The “improved agency guidance” order doesn’t apply to “independent regulatory agencies” – so the SEC isn’t required to comply with it. But pages 30-32 of this Davis Polk memo note that agencies like the SEC still might voluntarily comply with some – or all – of its directive. I’m not sure if the “enforcement” order applies to the SEC (but again, even if it doesn’t – the SEC may voluntarily comply with it) – if you can figure that out, let me know…
With 40 proxies filed under the new hedging disclosure rules, this FW Cook memo notes these stats:
– 100% have hedging policies in place
– 62% have hedging policies that cover directors and all employees
– 58% disclose policies that prohibit both transactions in company stock with a hedging function and derivative transactions generally
– 60% include their hedging disclosure only in the CD&A
I tend not to pay attention to the content that the SEC’s Office of Investor Education puts out because most of it seems targeted at people who think pro wrestling is real. These new short “educational” videos might prove my point (here’s the related press release)…
A member recently complained that the SEC seems to have changed how Edgar search results are displayed for “current & former names.” Here’s the note:
Have you noticed this change lately in Edgar search results? It used to be that when you ran a ‘historical name’ search, the search results would let you know both the former and current names. But no longer – now you only can see the most current company name on the ‘search results page.’ To get the full corporate history, you have to click into the issuer’s profile.
Take for example the “SPAC Thunder Bridge Acquisition, Ltd.” – when you search for this name in the “company search page,” you get a list that includes the correct company – but ONLY under their newly acquired name, which is “Repay.”
Then, only at the “Repay” landing page can you see the former name of the company. This was not the case before as you used to get the full corporate history with all of the former names on a ‘search results page’ without having to take a gamble on the new company’s name and its current profile. We’ve only noticed this change over the last few days. This change makes a difficult life that more difficult for those practitioners & researchers forced to conduct Edgar searches.
Corp Fin’s David Fredrickson Joins Next Thursday’s “Shareholder Proposals” Webcast
I’m excited to announce that David Fredrickson – Corp Fin’s Chief Counsel – has joined next Thursday’s webcast panel to discuss shareholder proposals. For the webcast – “Shareholder Proposals: What Now” – David joins Davis Polk’s Ning Chiu, Morrison & Foerster’s Marty Dunn and Gibson Dunn’s Beth Ising.
They will discuss Corp Fin’s new approach for processing shareholder proposal no-action requests, the expected impact of Staff Legal Bulletin 14K and the potential impact of the SEC’s new rulemaking proposals on shareholder proposals.
More on “Prohibited? Using the SEC’s Logo”
A while back, I blogged about how it was probably illegal to use the SEC’s logo without the agency’s permission – but that it’s often used online anyway. I didn’t know the law – I guessed that either federal agencies trademarked their logos with the Patent & Trademark Office (known around town here as the “PTO”) – or that a federal law just made it illegal. Keith Bishop of Allen Matkins did a little homework & found 15 U.S.C. Sec. 1017, which provides:
Whoever fraudulently or wrongfully affixes or impresses the seal of any department or agency of the United States, to or upon any certificate, instrument, commission, document, or paper or with knowledge of its fraudulent character, with wrongful or fraudulent intent, uses, buys, procures, sells, or transfers to another any such certificate, instrument, commission, document, or paper, to which or upon which said seal has been so fraudulently affixed or impressed, shall be fined under this title or imprisoned not more than five years, or both.
Neither Keith nor I know much about this area, but this statute appears to require fraud or wrongful conduct – and it doesn’t seem to make allowances for use online. Being a California guy, Keith also found that if a logo is implying government approval or connection, it could violate California Bus. & Prof. Code Sec. 1733.6…
Yesterday, ISS announced its new policy updates for next year. In addition to firming up its board diversity policy (which is effective for the upcoming proxy season), clarifying its policies on independent chair & share repurchase proposals and making a few other changes, the policy updates for the US create two distinct policies for newly public companies that address: (1) problematic governance provisions – e.g. supermajority voting for bylaw or charter amendments, classified boards and (2) multi-class capital structures with unequal voting rights.
The multi-class policy now includes a framework for addressing acceptable sunset requirements for problematic capital structures in newly public companies. ISS says that a number of considerations will be taken into account when assessing the reasonableness of a time-based sunset provision – but sunset periods beyond seven years from the date of the IPO will not be considered reasonable.
The Corp Fin logo is lost! Have you seen it? Back in the ‘aughts,’ I remember Corp Fin introducing its own logo. It looked pretty similar to the well-known SEC logo. However, I can’t recall that logo ever being used – and after scouring the Web, there’s no trace of this logo. Where has it gone? At the time, it wasn’t so strange since Enforcement had its own logo (many thanks to Bruce Carton of the “Securities Docket” for digging that one up) which I believe is not available anywhere on the Web except for the below:
SEC’s Enforcement: Do Stats Matter?
Every year, the SEC’s Enforcement Division releases stats about the number of actions it has brought, etc. – here’s the latest stats that were released last week (and here’s what the Enforcement co-Directors said about them). It’s good fodder for the media. But why does Enforcement do it? They’ve made this annual announcement well before our current “Big Data” era – when analytics drives so many corporate decisions.
I would argue that some of the motivation is driven by the fact that Congress requires some proof that its money is going to good use. The SEC is not self-funded – and the Senate & House Committees that oversee the SEC need something to hang their hat on. Of course, the stats can’t improve every year – at some point, they have to fall to earth. That’s when the SEC argues that quality is better than quantity – such an argument was made just last year.
Anyway, here’s a Debevoise & Plimpton memo covering the latest stats. And here’s a speech by SEC Commissioner Hester Peirce about them – this excerpt from the beginning is pretty funny:
It is hard to believe that 2019 is almost over. When I think back on the year, one defining theme is broken windows. Why is 2019 the “Year of the Broken Window”? I live in an condominium building with a lobby that has three sides of floor to ceiling windows. Three times this year, I have come down into the lobby to find one of these large windows broken. The first time was the routine, upset resident taking a soul-satisfying, hand-crushing whack at a window. The second two incidents though were a bit less commonplace.
One morning, I came down around 7 a.m. to find a van nose-first in the lobby. Rather than rounding the semicircular driveway in front of the building, the van headed straight into the lobby. Texting while driving? Medical emergency? Brake failure? I am not sure which, but I did feel bad for the driver, who, although apparently uninjured, was obviously unhappy. Misery loves company, however, and this driver got company. A couple months later, I once again came down in the morning to find a shattered window. No vehicle this time. It had already been cleared out of the lobby. From the condo rumor mill, I gleaned that an early morning car chase had ended with one of the vehicles in my building’s lobby.
A “whodunit”! We haven’t blogged about one of those in a while. You will recall that WeWork – the gift that keeps on giving to this blog – withdrew its IPO registration after facing much criticism when its S-1 became publicly available. One of the consequences of the failure of WeWork’s IPO to see daylight was that Corp Fin’s comment letters (& the company’s responses) would never be made public. Here’s the SEC filing history for WeWork – showing the progression from a draft confidential filing – to filing the S-1 – to filing a withdrawal request for the S-1 before it ever became effective. Note that the comment letters & responses are not posted there.
Apparently, the WSJ somehow got their hands on that file, which became the basis for this article that excerpts specific comments from Corp Fin’s comment letters to WeWork – and analyzes some of the company’s responses. Here’s the intro to that WSJ article:
Just weeks before WeWork expected its stock to begin trading publicly, the startup was still wrangling with the Securities and Exchange Commission over a controversial key financial metric and a litany of other concerns about its planned multibillion-dollar IPO.
On Sept. 11 — after the initial public offering prospectus had been public for nearly a month, and after the SEC had already made dozens of demands about the document—the regulator sent the shared-workspace company a list of 13 still-unresolved concerns, according to previously unpublished correspondence reviewed by The Wall Street Journal. The back-and-forth shows that WeWork was scrambling to clean up big problems as its IPO was crumbling. The timing was indicative of the chaotic management that gave investors pause and ultimately led the company to pull the offering and Chief Executive Adam Neumann to step down under pressure.
The WSJ article doesn’t note how they obtained this “previously unpublished correspondence.” So we have no idea how that happened. Here are some of the possibilities:
1. One of the investment banks? They also had a big loan deal going down & some commercial lenders are infamous for leaking. But still a long shot. Odds: 1000 to 1.
2. Some lawyer on the deal team? Not in a million years. That’s a career killer. Odds: 1 million to 1.
3. Someone at WeWork? It’s not in their best interest – but the place is dysfunctional. Odds: 4 to 1.
4. Someone at the SEC? The deal was such a turd burger & the prospectus so outrageous that perhaps the SEC wanted to have something in the public domain that could show it was doing its job. But I would fall off my chair if Corp Fin provided this file (given its policy of not posting comment letters until after a registration statement is declared effective) – unless it was told to do so by the SEC Chair, etc. But it is possible that someone high up wanted this stuff out there. Odds: 50 to 1.
5. Maybe the WSJ made a FOIA request to the SEC? This seems the most likely by far. Except FOIA requests typically take quite a while to process. Odds: 2 to 1.
At the end of the day, this isn’t an important development. Just something novel to note. Even if Corp Fin gave the comment letter file to the WSJ, I would argue that it has that discretion – it simply is making an exception to its own informal policy. And there really isn’t much of a policy reason to keep its comments hidden – even if the IPO never went off. The more transparency, the better…
Poll: Issuing 100 Comments on an IPO?
Back when I served in Corp Fin, I once issued a comment letter with over 100 comments in it on the legal side. It was a family majority-owned REIT IPO, a company that was rife of conflicts of interest – and the prospectus needed many more risk factors, etc. I felt a little guilty about issuing so many comments at the time – but not so much anymore.
In this anonymous poll, imagine you worked in Corp Fin – how would you feel if you issued 100 comments:
Transcript: “M&A in Aerospace, Defense & Government Services”
We have posted the transcript for our recent DealLawyers.com webcast: “M&A in Aerospace, Defense & Government Services.”
A while back, I ran our 1st annual contest for the cutest dog. It was so popular that the Internet almost broke with all the voting (just under 1k votes cast) – Skadden flexed their muscles and Hagen Ganem’s “Teddy” crushed the competition. And some members responded by emailing me with pictures of their dogs. So let’s do it again – the poll is at the bottom of this blog: