It’s getting hard to keep up with all of the crypto collapses that have followed the FTX implosion, but apparently BlockFi filed for bankruptcy yesterday. The part of the petition that caught my eye is that the SEC is one of the largest creditors! As reported in this Bloomberg article, and shown on page 8 of the petition, the Commission has a $30 million unsecured claim relating to a $100 million settlement that BlockFi agreed to with the agency and state regulators earlier this year.
BlockFi’s attempt to discharge this debt may not do the industry any favors with SEC Chair Gary Gensler – who was profiled by the NYT last week as the “Crypto Nemesis” – but at this point, maybe there’s nothing to lose. Here’s an excerpt from that article:
Much of Mr. Gensler’s agenda may ultimately hinge on the ruling in the Ripple suit, which the S.E.C. filed in December 2020. Before the filing, Ripple’s signature token, XRP, was the third most valuable cryptocurrency; it has dropped down the rankings since the S.E.C. labeled it a security.
The outcome will also draw attention in Congress, where a slate of crypto-related bills was introduced this year. When Mr. Gensler testified in front of the Senate Banking Committee in September, he was grilled by Republican senators, who said the S.E.C. was offering insufficient legal guidance to crypto companies that wanted to comply with federal law.
“Not liking the answer from the S.E.C.,” he shot back, “doesn’t mean there isn’t guidance.”
Since we’re still in the middle of this meltdown, it’s hard to say whether the SEC’s regulatory stance and enforcement approach is having the desired outcome of protecting investors, or if the market will just take care of it by wiping out the industry. The fines lose some of their punch if they aren’t paid, and lots of crypto holders are losing everything anyway.
If you’ve been busy with secondary offerings, you’re not alone. Over the weekend, Bloomberg reported:
While initial public offerings have largely vanished, share sales have been surging. Since the start of November there have been $24 billion in additional stock sales globally, on track for the biggest monthly haul since August when almost $25 billion was raised, data compiled by Bloomberg show.
The article says not to take this as a signal that IPOs will return in force – and also notes that secondary-offering volumes are still down 65% from a year ago. But as my grandpa always said, “you’ve gotta make hay while the sun shines.” And right now, this is the hay to be made.
Make sure to keep our “Secondary Offerings Handbook” ready for any questions that arise when you work on these offerings. It covers the entire terrain, from the basics to how to deal with selling shareholders, and it’s posted along with other practical guidance in our “Secondary Offerings” Practice Area. If you’re not already a member with access to these resources (and our Q&A forum), email sales@ccrcorp.com.
If your Thanksgiving break was anything like mine, turkey & football were followed by a heavy helping of cinema. One of my favorite genres, at least before today, was “corporate scandal.” But if you’re at a company that finds itself the subject of one of those films, your IR team best get their messaging in order.
A recent study says that when these movies hit the box office, the stock market impact can be very real – even though they simply resurface drama that everyone already knew about. If you’re into horror, here’s a finding from the study:
Our empirical results demonstrate that the release of scandal re-exposing movies, as a special form of stale information reiteration (regarding past corporate scandals), also triggers prominent stock market reactions. However, unlike the findings of Gilbert et al. (2012) and Tetlock (2011), both of which show that the changes in stock prices caused by stale information reverse over the course of a day to a week subsequently, our findings align more closely with Huberman and Regev (2001), showing that scandal re-exposing movies induce a permanent discount in stock valuation.
Permanent discounts! Yikes. My first instinct here was to blame “cancel culture,” but guess what? Many of the films in the sample date back to the ’90s and 2000s. You can see the full sample on page 35 of the study. At this point, there’s probably no additional harm in using it as a “watch list”…right?
Last week, the SEC announced its Strategic Plan for fiscal years 2022 – 2026. As Dave previewed in August when the draft plan was issued, the 16-page Strategic Plan focuses on three goals to advance the SEC’s mission:
1. Protect the investing public against fraud, manipulation, and misconduct;
2. Develop and implement a robust regulatory framework that keeps pace with evolving markets, business models, and technologies; and
3. Support a skilled workforce that is diverse, equitable, and inclusive and is fully equipped to advance agency objectives.
When it comes to protecting investors, the Strategic Plan says that the SEC will do this through rulemaking as well as enforcement & examination. It also articulates this goal:
Modernize design, delivery, and content of disclosures so investors, including in particular retail investors, can access consistent, comparable, and material information to make informed investment decisions.
The markets have begun to embrace the necessity of providing a greater level of disclosure to investors. From time to time, the SEC must update its disclosure framework to reflect investor demand. Today, investors increasingly seek information related to, among other things, issuers’ climate risks, cybersecurity hygiene policies, and their most important asset: their people. In order to catch up to that reality, the agency should continue to update the disclosure framework to address these areas of investor demand, as well as continue to take concrete steps to modernize the systems that support the disclosure framework, to make public disclosures easier to access and analyze and thus more decision-useful to investors.
Goal #2 – the regulatory framework – includes this sub-goal:
Update existing SEC rules and approaches to reflect evolving technologies, business models, and capital markets.
The ongoing movement of assets into private or unregulated markets, the continual creation of new financial instruments and technologies, and the challenges of increased globalization all require the agency to rapidly update and evolve.
To do so, the SEC must enhance transparency in private markets and modify rules to ensure that core regulatory principles apply in all appropriate contexts. To maintain the integrity of the markets, the SEC needs to develop specific regulations to ensure investors remain informed and protected via a broad-based disclosure frameworks.
The agency must also continue to focus on supervising global entities appropriately. Inherent in the interplay with international markets is the challenge of protecting sensitive information when coordinating with other regulators. Consistent data protection policies are essential for this effort.
Throughout the Strategic Plan, there’s an emphasis on using technology & data, and the SEC’s evolution to meet new market issues. Here’s the 4-year Strategic Plan published by former SEC Chair Jay Clayton in 2018, which shared a few similar themes.
In developing the Strategic Plan that it released last week, the SEC took into account information gathered from many sources – including Congress and congressional committees, investors, businesses, academics, other stakeholders, comments to rule proposals, and more. It also considered input from SEC roundtables and advisory committee meetings. On that note, the Investor Advisory Committee continues to be an active group, and the SEC has announced another upcoming public meeting on December 8th.
The agenda includes a panel discussion on corporate tax transparency. Here’s more detail:
This panel will focus on the potential benefits to investors of greater tax transparency, including country-by-country tax reporting. New regulations require companies to provide this information to tax authorities, but investors currently do not have access to this information. Given financial, reputational and regulatory risks of a company’s tax practices, investors need more information to be able to evaluate the scope of tax risks facing multinational companies. The speakers will provide an overview of the existing requirements, emerging investor expectations and new transparency requirements in other jurisdictions, and provide insight on how regulators and standard-setters might address the existing information gaps.
We’re taking a few days off for the holiday and our blogs will return on Monday. In the past, we’ve left you with recipe tips and cookbook recommendations to improve your Turkey Day, but I’ve got to admit that I’ve been struggling a little to come up with something for this Thanksgiving.
My daughter and son-in-law are hosting this year, and I was thinking about what to do with today’s blog last night as I was going over the shopping list with her. When she pointed to a very large bag of potatoes that it appears I’ll be in charge of peeling tomorrow, I decided that this year, it might be nice to provide our readers with a little music to accompany their Thanksgiving Day food prep.
We’re still all reeling from Dave’s bombshell revelation about his lack of fondness for the Fab Four, so I’m trying to make this selection non-controversial. With that objective in mind, what better musical accompaniment to Thanksgiving Day celery chopping & potato mashing could there be than Thelonious Monk’s “Stuffy Turkey”?
Happy Thanksgiving from everyone here at TheCorporateCounsel.net – and as always, thanks for reading!
When it comes to ESG disclosure, it’s become apparent that a lot of folks at the SEC don’t seem to approach the materiality concept in the traditional way. A recent speech by a senior Division of Enforcement official emphasized that point. Here’s an excerpt from a CFO Dive article on her remarks:
The Securities Exchange Commission (SEC) will look beyond the figures that underlie net income when determining whether a company is in compliance with the agency’s proposed climate risk disclosure rule, an SEC enforcement official said Tuesday. “If the company has really put a lot of emphasis in its marketing around, for example, what it’s doing in the climate space, those are ways that I think it can become material even if you don’t necessarily see that translate to the bottom line,” according to Carolyn Welshhans, associate director of the SEC’s Enforcement Division.
“Something can be material to a company — for example specific to that company’s business or its operations — not just as financial statements,” Welshhans said at Securities Enforcement Forum 2022 after noting that her comments did not necessarily reflect the view of the agency. “It’s not just quantitative — it’s not just ‘does something impact the bottom line.’”
The idea that financial materiality involves both quantitative and qualitative considerations is something that the Staff has made clear since at least the time that SAB 99 was issued. But I think there needs to be some connection to a statement’s impact on a reasonable investor, and I’m not sure that the example of ESG-related puffery around a marketing campaign makes that connection. That kind of position risks unmooring materiality entirely from financial considerations, which I think will ultimately undermine the SEC’s credibility as a financial regulator.
On the other hand, who cares what I think? This is where we are, and companies need to act accordingly when it comes to ESG disclosure. I think the article’s quote from Kelly Gibson of Morgan Lewis, who previously led the SEC’s Climate & ESG Task Force, sums up the way companies should approach ESG-related statements in the current environment:
“If you’re making a statement about ESG [environmental, social and governance performance], the SEC is going to consider it to be material. . . I know that’s a blanket generalization, but at least from what I’m seeing that’s not a point to argue with the SEC.”
Liz recently blogged about how the director onboarding process is evolving. This article from Nasdaq’s Center for Board Excellence focuses on a discrete aspect of the onboarding process – welcoming diverse directors to the board. One of the realities about adding new directors with different backgrounds and life experiences is that their addition will alter the board’s group dynamics.
That’s a feature of a more diverse board, not a bug, but the article points out that it creates challenges that need to be addressed in order to ensure the board works well together while welcoming new members with different experiences and expertise. This excerpt discusses ways to teach the culture of the boardroom to new directors:
One suggested action is to appoint existing directors to act as a mentor for new directors—a practice already in place at Zoom. According to Janet Napolitano, Former Secretary of Homeland Security and Board Member of Zoom, the company also “arranged a comprehensive series of meetings with different leaders throughout the company to help me understand the company’s organization and various functions.” She found that a lengthy session on how financial information was presented to the board was most useful.
Joanna Coles, Board Member of Sonos, Snap, The Original Bark Company, and Density, explained that for established boards, it may be useful for new directors to talk to other board members and the executive leadership team, while for new boards, it may be useful to understand the skills and strengths of the other board members and where one can be useful. Moreover, for boards with newly appointed members from underrepresented communities, Joanna Coles advised that they onboard two candidates together. She shared, “This is very effective and takes the attention from the diversity, giving them support with each other to ensure they aren’t talked over.”
Other topics covered by the article include how to build consensus among board members on the purpose of board diversity initiatives, how to create space for new perspectives on the board, and how to develop a pipeline of diverse board talent.
Some commenters on the newly implemented universal proxy rules have predicted that the ability to use a single proxy card and the potential to run a proxy contest a lot more cheaply than in the past may attract non-traditional players to enter the fray. This recent blog from Jim McRitchie announcing a forum on using the UPC process to advance board nominees focusing on ESG issues suggests that prediction may soon come to pass – and Jim appears to have a target in mind:
Amazon is an example. If it can be done at an affordable price at Amazon, we can run candidates at many other companies. Engine No. 1’s campaign at Exxon Mobil made history. Yet, they ran industry experts, not directors aimed at converting XOM to a CSR company. I would run a candidate(s) at Amazon concerned with worker rights… as well as other ESG concerns. At the very least, we should start looking for potential candidates.
Jim goes on to say that “We need to move beyond filing 20+ proposals at Amazon and other companies facing a plethora of issues. We need board candidates who share our concerns and to anticipate, rather than just react to issues as they arise. Otherwise, we will continue fighting the symptoms of undemocratic corporate governance.” Stay tuned. This is likely to be a very interesting proxy season.
Ever since Delaware amended its corporate statute to permit charter amendments exculpating certain officers from damages liability for certain duty of care breaches, companies and their advisors have been anxious to see how ISS & Glass Lewis would react. Glass Lewis became the first firm to definitively address this issue when it issued its 2023 Policy Guidelines last week. Is Glass Lewis on board? Not really:
Under Section 102(b)(7), a corporation must affirmatively elect to include an exculpation provision in its certificate of incorporation. We will closely evaluate proposals to adopt officer exculpation provisions on a case-by-case basis. We will generally recommend voting against such proposals eliminating monetary liability for breaches of the duty of care for certain corporate officers, unless compelling rationale for the adoption is provided by the board, and the provisions are reasonable.
I guess that’s not a definitive no, but I wouldn’t get your hopes up if I were you.
