This Woodruff Sawyer blog reviews the issues surrounding hedging & pledging of company stock by insiders and discusses the unfavorable publicity & ongoing books and records litigation that Peloton has faced as a result of its CEO’s pledging of a significant amount of stock. For Woodruff Sawyer, the bottom line is that the best practice is to ban both insider hedging and insider pledging:
It’s uncommon to find a company that permits hedging of its shares by insiders. As discussed above, allowing hedging by insiders is frowned upon, which may be an understatement, and ISS views hedging by insiders as a failure of risk oversight by the board. Failure of risk oversight by a board could lead proxy advisory firms to a vote against or withhold election recommendations for directors. All said, specific to hedging by insiders, it’s best to prohibit it. Peloton’s decision to permit pledging should serve as a cautionary tale: Pledging by insiders is not an area of focus by third parties when share prices are high, but it can be fodder for investors, plaintiff attorneys, and the media if share prices drop significantly and insiders must respond to margin calls.
If a company permits pledging by insiders, there should be guardrails. Peloton reported certain guardrails in its proxy statements. Peloton stated that its insider trading policy administrators would have to authorize any pledges and that “an individual may only pledge up to 40% of the value of such individual’s vested and outstanding securities.” Taking that approach could become overly burdensome for the person(s) administering the insider trading policy since they would conceivably have to track individual shareholdings to ensure that pledged amounts did not go over the set threshold. This may not be worth the headache for some companies.
Quarterly earnings releases are a big event in the life of any public company, and Goodwin recently posted a couple of new resources to help companies navigate the issues that may arise. The first is a 23-page Earnings Release Compliance Checklist, which addresses topics ranging from the earnings release process and the typical contents of a release to the wide variety of specific securities law issues that may be implicated in a release. The second is a 16-page Earnings Release Review Guide, which walks through the federal securities laws implicated in each step of the earnings release process and offers guidance on how to review earnings releases and related materials for compliance with key requirements.
For more practical guidance on this topic, make sure to mark your calendar for November 16th, 2-3pm Eastern, for our webcast, “Dissecting the Quarterly Earnings Process” – with Goodwin’s Sean Donahue, O’Melveny’s Shelly Heyduk, and Cooley’s Reid Hooper. Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595.
Last week, in a blistering opinion, U.S. District Court Judge Ronnie Abrams took the SEC to task for its “neither admit nor deny” settlement policy. This excerpt provides a sense of the opinion’s tone & the judge’s concerns about the 1st Amendment implications of the SEC’s “gag orders”:
By preventing defendants from publicly defending themselves, or even criticizing the SEC’s handling of the case (thereby “creating the impression” that the Commission sanctioned them without basis), the Provision denies the public the opportunity to scrutinize the government’s enforcement practices. Indeed, the very people who are arguably “in the best position to know” of governmental abuse, Bd. of Cnty. Comm’rs v. Umbehr, 518 U.S. 668, 674 (1996)—that is, those who have been subjected to the SEC’s enforcement actions—are those who are muzzled by the Provision from speaking out. “Only one thing is left certain: the public will never know whether the S.E.C.’s charges are true.” Vitesse Semiconductor, 771 F. Supp. 2d at 309. While this “might be defensible if all that were involved was a private dispute between private parties,” id., here, the Provision is used by an agency of the federal government to shield itself from public view.
Citing New York Times v. Sullivan, Judge Abrams said that this is precisely the kind of societal harm that the 1st Amendment was intended to protect against: “The dominant purpose of the First Amendment was to prohibit the widespread practice of governmental suppression of embarrassing information . . . . Secrecy in government is fundamentally anti-democratic, perpetuating bureaucratic errors. Open debate and discussion of public issues are vital to our national health.”
Given this fire & brimstone, you might be surprised to learn that the judge approved the proposed settlement – although both parties requested that he do so. However, that highlights the larger issue of how the procedural posture of cases where the SEC’s settlement policy is challenged limits a court’s ability to address that policy. This Proskauer blog says that recent 2nd Circuit and 5th Circuit decisions illustrate that point:
Both decisions turned at least in part on the very narrow bases available for relief from a judgment under Federal Rule of Civil Procedure 60(b). And Novinger turned entirely on that ground. Two of the three judges concurred in the judgment affirming denial of relief, but expressly noted (in an opinion by Judge Edith Jones) that nothing in the court’s unanimous ruling “approves of or acquiesces in the SEC’s longstanding policy that conditions settlement of any enforcement action on parties’ giving up First Amendment rights.”
To the contrary, the two concurring judges opined that “[a] more effective prior restraint is hard to imagine.” The concurring judges also noted that a petition to review and revoke the SEC’s policy had been filed nearly four years ago, but the SEC has not yet responded to it. “Given the agency’s current activism, I think it will not be long before the courts are called on to fully consider this policy.”
The blog goes on to note that the SEC’s neither admit nor deny policy was attack in a different context, courts might well “take a different view of the relevant arguments.” Of course, be careful what you wish for – because the blog also points out SEC may be currently inclined to seek more admissions, rather than gag orders, as a condition of settlement.
According to a recent BDO survey of nearly 250 public company directors, 57% said that oversight of ESG matters falls to the Nominating and Governance Committee, while only 13% of directors surveyed said that their companies have a separate ESG Committee. This excerpt indicates that when it comes to having a standing ESG Committee, size matters – and that other standing board committees often find ESG issues ending up on their plate:
In 2021, more than one-third of directors (35%) said they planned to create an ESG-specific committee during the next three years. As of now, just 13% indicated they have done so. Boards with smaller market capitalization (81% of our survey respondents sit on at least one board with small or micro-sized stock shares) may not have the resources or incentives to create a separate ESG committee. By comparison, approximately 31% of the S&P 100 have a separate ESG committee of the board.
Whether or not a dedicated ESG committee exists, ESG factors touch various committees across the board. For example, we increasingly see the compensation committee getting involved in many more human capital matters beyond compensation packages for the CEO and executive team. In many cases, we see boards changing the names of their committees to reflect the expanding duties to consider employee needs more broadly.
Liz recently blogged about the SEC’s announcement of an April 13, 2023 deadline for the transition to electronic Form 144 filings. This Perkins Coie blog has some practical advice on what companies should be doing in advance of that deadline to prepare for electronic filings – whether or not they plan to continue to rely on brokerage firms to make Form 144 filings for their affiliates. This excerpt discusses the need to come up with filing procedures for your company, your affiliates and their brokers:
Come up with a plan for how to handle Form 144 filings so they don’t slip through the cracks:
– Will you try to mandate that your insiders’ brokers continue to make the Form 144 filings on behalf of your insiders?
– Do you want to take on the responsibility for filing these forms to ensure they get filed on time and correctly?
– Consider whether your existing insider trading policy currently requires your insiders to pre-clear all transactions, and if not, whether you should recommend adding that feature as a way to help your insiders remember to provide you with advance notice of any contemplated sales so that you can prepare and timely file the Form 144.
Whatever your plan is, communicate it to all relevant parties so everyone is on the same page before this new requirement kicks in six months from now
The blog also addresses a number of other topics, including the need to obtain EDGAR codes for some affiliates that may not already have them, and the need to communicate with your affiliates and their brokers about filing responsibilities.
Back in August, I blogged about an upcoming FASB proposal to tweak segment disclosures. Earlier this month, FASB issued its proposed ASU laying out the details of the changes it wants to make. This excerpt from FASB’s press release summarizes those proposed changes:
The amendments in the proposed ASU respond to feedback received from investors and other allocators and would improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The key amendments in the proposed ASU would:
1. Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss.
2. Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss.
3. Require that a public entity provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280, Segment Reporting, in interim periods.
4. Clarify that if the CODM uses more than one measure of a segment’s profit or loss, at least one of the reported segment profit or loss measures (or the single reported measure if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in a public entity’s consolidated financial statements.
5. Require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the proposed ASU and all existing segment disclosures in Topic 280.
The amendments would apply to all public companies that are required to report segment information. Fortunately, however, they would not change how those companies identify their operating segments, aggregate those operating segments, or apply the quantitative thresholds to determine reportable segments. FASB’s deadline for comments on the proposal is December 20, 2022.
Turbulent market conditions have made this a tough year for many public companies looking for additional financing. This Cooley blog explores two alternative methods of financing that may be attractive options for some of those companies – PIPEs and Registered Direct Offerings (RDOs). This excerpt discusses underwritten and non-underwritten RDOs:
Non-Underwritten RDOs. In non-underwritten RDOs, the issuer sells the securities directly to the investor in a share purchase agreement (SPA), just as in a PIPE. The primary differentiating factor relative to a PIPE is that the securities are sold pursuant to an effective registration statement, meaning that they are unrestricted and freely tradable out of the gate.
As a result, an RDO is conducted as a fully documented deal – a prospectus supplement, comfort letters and 10b-5 letters from multiple law firms all have the potential to increase legal and auditor costs, as compared to the relatively leaner PIPE. The RDO also requires having an effective registration statement or the ability to a file an automatically effective registration statement (i.e., be a well-known, seasoned issuer).
Underwritten RDOs. The primary difference between an underwritten and non-underwritten RDO is that the shares in an underwritten offering will settle through the banking syndicate instead of directly with third-party investors. The deal is marketed and conducted just like a non-underwritten RDO, with the banks wall-crossing investors and the shares being taken down off an effective S-3 shelf. But instead of the company contracting directly with investors through an SPA, the deal is papered on an underwriting agreement, with the banks purchasing the share block and settling onwards to their accounts.
The blog points out that although there are many similarities between PIPEs and RDOs, the advantage of the latter is the issuer’s ability to avoid the illiquidity discount associated with a PIPE by issuing registered shares to RDO investors.
Now that the Twitter case is over, we can all turn our attention to the things in Delaware corporate law that really matter to us. Francis Pileggi recently provided a reminder about one of them:
The Delaware Court of Chancery prefers “stockholder” as the term uniformly used in the Delaware General Corporation Law for those owning a corporation, though in the past, especially prior to the 2010 DGCL amendments, there were inconsistent references–and court decisions in the past have not always been scrupulous in observing the distinction. See generally In Re Adams Golf Shareholder Litigation, C.A. No. 7354-VCL, transcript (Del. Ch. Oct. 3, 2012) (yes, that’s 10 years ago.)
Does this matter? Well, kind of, I suppose. But I think we lawyers all have a tendency to get a little goofy about this type of thing. For example, I used to have a partner who would absolutely freak out when he saw accountants use the term “common stock” in an Ohio corporation’s financial statements (we’re a “common shares” jurisdiction).
Once, my former colleague was so flummoxed by an accounting firm’s repeated sloppiness in this area that he wrote a letter to the partner at the firm correcting him. This has gone down in firm lore as the “red birds/blue birds” letter. That’s because, in explaining the distinction between common stock and common shares to the accountant, he said something like “there are red birds and blue birds, but although they are both birds, red birds aren’t blue birds, and blue birds aren’t red birds.”
We were subsequently working on an IPO in another city with an accountant from this same firm. One of the other lawyers made a comment about common stock and common shares, and the accountant made the correction and then smiled and said something about how only lawyers care. He then said “Oh, you know there’s this letter that’s been passed around our firm for years that some crazy lawyer wrote about red birds not being blue birds. . .” I didn’t have the heart to tell my colleague of his notoriety among multiple offices of a Big 4 accounting firm.
I had been collecting various cryptocurrency-related updates for this blog, but then Bloomberg’s Matt Levine wrote a 40,000-word essay for the latest issue of Businessweek that says it all – and then some. This is only the second time in Businessweek’s 93-year history that a single author has written the entire issue, so kudos to Matt, who is one of my favorite opinion columnists and lunch valuation analysts.
Matt’s article pretty much nails why – even if you’re not a “crypto enthusiast” – you’ll still learn a lot by keeping up with the happenings. And for capital markets lawyers, much of it will even be useful! Here’s an excerpt that explains why:
I don’t have strong feelings either way about the value of crypto. I like finance. I think it’s interesting. And if you like finance—if you like understanding the structures that people build to organize economic reality—crypto is amazing. It’s a laboratory for financial intuitions. In the past 14 years, crypto has built a whole financial system from scratch. Crypto constantly reinvented or rediscovered things that finance had been doing for centuries. Sometimes it found new and better ways to do things.
Often it found worse ways, heading down dead ends that traditional finance tried decades ago, with hilarious results.
Often it hit on more or less the same solutions that traditional finance figured out, but with new names and new explanations. You can look at some crypto thing and figure out which traditional finance thing it replicates. If you do that, you can learn something about the crypto financial system—you can, for instance, make an informed guess about how the crypto thing might go wrong—but you can also learn something about the traditional financial system: The crypto replication gives you a new insight into the financial original.
Matt walks through how this asset class came about, the similarities & differences from traditional finance, and shares predictions about where it could be going. He shares an important reminder on DAOs that the members will be treated like general partners if the entity isn’t incorporated – i.e., liable for its debts.
The essay doesn’t delve too far into securities regulation issues – if you’re practicing in this area, that’s what our “Crypto Financings” & “Blockchain” Practice Areas are for. Another Bloomberg article reported this week that SEC enforcement activity is making both retail and professional investors feel more likely to “invest” in cryptocurrency, so there could be more work coming for securities lawyers on all sides of this:
Almost 60% of the 564 respondents to the latest MLIV Pulse survey indicated they viewed the recent spate of legal action in crypto as a positive sign for the asset class, whose trademark volatility has all but dissipated in recent months. Major interventions include the US regulatory investigations of bankrupt crypto firms Three Arrows Capital and Celsius Network, as well as an SEC probe into Yuga Labs, the creators of the Bored Ape collection of nonfungible tokens, or NFTs.
Like Matt, I don’t have strong feelings about the value of crypto. I find it puzzling in many ways, but also fascinating and informative from several angles: finance, securities regulation, and sociologically. And if people are going to be out there using this ecosystem, I do think there have to be some rules and guidance around it. Thankfully, there are very bright securities lawyers out there who are navigating this – a few of them just spoke on our recent webcast.
In full disclosure, I own a nominal amount of crypto. Because I’m writing about it, I wanted to see how it worked to get into the system and to buy a web3 domain name. I found it confusing and complicated, I don’t even know if I accomplished my goal, and I don’t expect to ever see that money in dollar form again. But if the target audience right now is gamers and people who enjoy internet hype, financial engineering and gambling, that’s…not me. I’m just a 40-something professional who needs a type of currency that can buy snacks for my kids.
Regardless of where you stand on cryptocurrency, we can probably all agree that companies that hold these digital assets need to be able to properly value them on their balance sheets, and that it is probably something more than “0” and maybe also different than the current trading value, which is difficult to predict.
Some companies have treated digital assets as indefinite-lived intangibles. At a meeting earlier this month, the FASB reached a different (tentative) conclusion on how to account for digital assets, which is part of its project on this topic. Here’s an excerpt from the notes on “tentative Board decisions”:
The Board decided to require an entity to:
1. Measure crypto assets at fair value, using the guidance in Topic 820, Fair Value Measurement.
2. Recognize increases and decreases in fair value in comprehensive income each reporting period.
3. Recognize certain costs incurred to acquire crypto assets, such as commissions, as an expense (unless the entity follows specialized industry measurement guidance that requires otherwise).
The Board also considered:
1. Various measurement alternatives for crypto assets with inactive markets and decided not to pursue those alternatives.
2. Whether to provide implementation guidance relative to the application of fair value measurement of crypto assets and decided not to provide additional measurement guidance as part of this project.
3. Whether there should be a difference for private companies for the measurement of crypto assets and decided that the measurement and recognition requirements should be the same for all entities.
The Board will consider presentation, disclosure, and transition at a future meeting.
