May 4, 2020

Elon Musk’s Big Week: “What an Eccentric Performance!”

I think it’s fair to say that America’s favorite James Bond villain had quite a week. It started on Tuesday, when Tesla dropped this little disclosure tidbit in a Form 10-K/A:

Tesla determined not to renew its directors and officers liability insurance policy for the 2019-2020 year due to disproportionately high premiums quoted by insurance companies. Instead, Elon Musk agreed with Tesla to personally provide coverage substantially equivalent to such a policy for a one-year period, and the other members of the Board are third-party beneficiaries thereof. The Board concluded that because such arrangement is governed by a binding agreement with Tesla as to which Mr. Musk does not have unilateral discretion to perform, and is intended to replace an ordinary course insurance policy, it would not impair the independent judgment of the other members of the Board.

There are obviously no issues with this little cost-saving move, right? Elon followed that up on Wednesday with an earnings call featuring an expletive-laden tirade against “fascist” Covid-19 stay-at-home orders.

Musk’s grand finale came in the form of a bizarre Friday tweetstorm that started with a tweet to the effect that he was selling almost all of his possessions. Elon then provided some eyebrow-raising investment advice – “Tesla stock price too high imo.”  He segued into excerpts from “The Star Spangled Banner,” then came a little “Braveheart” riff, followed by a brief bit of existential musing. He wrapped things up with by letting us know that “my gf @Grimezsz is mad at me.”

Girlfriend’s mad, huh? Well, she must be a Tesla shareholder. The company’s stock price plummeted 10% after the tweetstorm. Isn’t there supposed to be somebody responsible for pre-clearing Elon’s potentially market-moving tweets? Yeah, well we told you that wasn’t going to work.

So, that was the week that was. It’s really a shame that Elon Musk is an immigrant & isn’t allowed to channel his energies into a run for president like literally every other billionaire egomaniac in America. Overall, I think King Arthur put it best in “Monty Python & The Holy Grail”  – “What an eccentric performance!”

“Funding Secured”: Tesla Can’t Shake Lawsuit Over Last Batch of Musk’s Tweets

I know some of you may be scratching your heads about the Tesla board’s willingness to sign-off on the company’s – ahem – “unorthodox” D&O liability protection arrangements. After Friday’s tweetstorm, many of those directors also may be second-guessing that decision – if for no other reason that they’re all still knee deep in the mess Elon created the last time that he let loose on social media.

That’s because a California federal judge recently refused to dismiss a lawsuit filed against Tesla, its board & Musk arising out of his August 2018 tweetstorm. This excerpt from a recent Shearman & Sterling blog on the case has the details:

Defendants moved to dismiss for on several grounds, including that the tweets were merely aspirational and not factual, that they were made by the CEO in his individual capacity and not on behalf of the Company, and that the complaint failed to adequately allege scienter. The Court disagreed. First, the Court opined that even statements of opinion could be misleading if they conveyed facts, which the tweets allegedly did by referencing a specific price of $420 and by identifying specific financial and legal advisors. The Court also found that the complaint had adequately alleged that a reasonable investor would read the tweets as statements of facts based on the affirmative nature of the statements and subsequent exchanges on Twitter confirming those statements.

Second, the Court found that the CEO’s statements from his personal Twitter account were made within the scope of his authority, relying on the fact the CEO co-founded the Company, was on its Board, and that the Company had notified its investors in 2013 that additional information regarding the Company could be found on the CEO’s and Company’s Twitter accounts.

Finally, contemporaneous correspondence that allegedly showed that the CEO was aware of significant hurdles to the transaction and that he harbored animosity against short-sellers, as well as the swift settlement reached with the SEC within a few days of the SEC’s complaint, in the eyes if the court, all supported an inference of scienter sufficient to survive the motion.

Meanwhile, Elon’s not faring any better in Delaware, where back in February, Vice Chancellor Slights denied the Tesla defendants’ motion for summary judgment in the fiduciary duty lawsuit arising out of Tesla’s acquisition of SolarCity, a company in which Musk owned a 21% stake. The Tesla directors settled out – so Elon finds himself the last man standing as the case heads to trial.

PPP Loans: Tax Deduction? If They’re Forgiven, Forget It

One of the things that makes the Payroll Protection Program so attractive is that if a borrower spend its loan proceeds properly (on items such as payroll, rent and utilities), the loan will be forgiven. Furthermore, Section 1106(i) of the CARES Act, provides that the forgiven loans are excluded from gross income, which means that the borrower receives the loan amount (without a repayment obligation) entirely tax-free.

But what about the tax deduction that would ordinarily apply to those business expenditures made in order to obtain loan forgiveness? According to this recent memo from my colleagues at Calfee, there’s a limit to Uncle Sam’s generosity:

The question arises because Section 265 of the Internal Revenue Code provides that a taxpayer cannot take tax deductions, even if otherwise allowable, if the deductions are allocable to income that is exempt from tax. The general purpose of Section 265 is to prevent taxpayers from enjoying a “double” tax benefit (i.e., tax-exempt income generating tax deductions).

In Notice 2020-32, released today, the IRS clarifies that Section 265 does in fact apply to PPP loans and prevents taxpayers from deducting expenses that lead to forgiveness under the CARES Act. This interpretation will have the effect of negating much (if not all) of the tax benefit Congress provided with the exclusion under Section 1106(i). Given the larger goal of Congress to inject cash into struggling businesses, this result had some wondering (before today) whether the IRS would apply Section 265 to PPP loan forgiveness.

John Jenkins

May 1, 2020

Another Caremark Claim Survives Motion to Dismiss

Last fall, John blogged about a Caremark claim surviving a motion to dismiss.  This was a big deal because at the time it was the second case in a year that the Delaware courts declined to dismiss at the pleading stage following decades of routinely doing so.  Now, earlier this week the Delaware Court of Chancery issued a 41-page opinion in Hughes v. Hu and declined to dismiss another Caremark claim.

In the most recent case, Vice Chancellor Laster held that the plaintiff adequately pled that the director defendants, who served on the company’s audit committee, breached their fiduciary duties by failing to oversee the company’s financial statements and related party transactions.  The plaintiff alleged that the directors’ failures led to the company’s need to restate its financial statements, thereby causing the company harm.

Steve Quinlivan’s blog provides a nice summary, here’s an excerpt:

The Court found the allegations in this case support inferences that the board members did not make a good faith effort to do their jobs. The Audit Committee only met when spurred by the requirements of the federal securities laws. Their abbreviated meetings suggest that they devoted patently inadequate time to their work. Their pattern of behavior indicates that they followed management blindly, even after management had demonstrated an inability to report accurately about related-party transactions.

For instance, documents that the Company produced indicated that the Audit Committee never met for longer than one hour and typically only once per year. Each time they purported to cover multiple agenda items that included a review of the Company’s financial performance in addition to reviewing its related-party transactions. On at least two occasions, they missed important issues that they then had to address through action by written consent. According to the Court, the plaintiff was entitled to the inference that the board was not fulfilling its oversight duties.

Last fall, John wondered whether Caremark was becoming a more viable theory of liability or the board’s conduct in recent cases was just more egregious.  It’s still early…we’ll see if any other pleading-stage dismissals show up in 2020 to form more of a pattern.

The facts in Hughes seem pretty egregious and the Court’s opinion says the defendants face a substantial likelihood of liability under Caremark.  But, as Steve Quinlivan notes at the end of his blog, the Court hasn’t found any of the defendants liable for the actions alleged in the complaint.

PCAOB Wants Comments on CAM Requirements

The PCAOB wants comments on experiences so far with the new CAM disclosure requirement. Comments are encouraged from all interested stakeholders and should be submitted by June 15, 2020.  Information on the comment process can be found on this PCAOB Request for Comment.  The Comment Request includes a list of questions for consideration and asks commenters to provide data, evidence or other specific examples to support comments.

The PCAOB says it’s conducting an interim analysis to understand how auditors responded to the CAM requirements, how investors are using CAM disclosures and audit committee and preparer experiences.  From there, the PCAOB will consider whether additional guidance or other steps may be appropriate.  The PCAOB plans to report its interim review findings toward the end of the year.

Speaking of CAMs, according to a recent Audit Analytics’ blog, so far disclosure of the audit committee’s role regarding CAMs isn’t too prevalent.  The blog says the firm reviewed 770 S&P 1500 proxy statement disclosures filed between July 1, 2019 and March 31, 2020 to look for disclosures about the audit committee’s role with CAMs.

Of course, the new disclosure requirement relating to CAMs requires auditors to share any CAMs with the audit committee as part of the draft auditor report, but the audit committee doesn’t need to approve or determine CAMs.  So, even though there’s been a trend of expanding audit committee disclosure, audit committees wouldn’t necessarily need to say much about how they’re engaging in the new disclosure requirement – although the blog does say we’ll probably see more of this disclosure as time goes on.  Here’s some of their findings:

In the first quarter 2020, they found slightly over 6% of S&P 1500 proxy statements filed included CAMs in audit committee disclosure – the majority of which included mention in the audit committee report of the proxy

Of proxy statements that included audit committee disclosure of CAMs, 61% were from the S&P 500 – although, overall most companies haven’t included this disclosure in proxy statements

When disclosure is included in the proxy statement, it often identifies the audit committee’s role as either reviewing the CAMs, discussing CAMs with the independent auditor or both

Our May Eminders is Posted!

We have posted the May issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!

Lynn Jokela

April 30, 2020

Mining Company Property Disclosure Rules: Corp Fin Issues 3 New CDIs

Yesterday, Corp Fin issued 3 new CDIs arising out of the new mining company property disclosure rules – Broc blogged about the rules when they were adopted in 2018.  The CDIs address when companies need to comply with the new rules and also incorporation of such disclosure by reference to an annual report.  Here they are:

Question 155.01

Question: For purposes of filing an Exchange Act annual report, when must a registrant engaged in mining operations comply with the new mining property disclosure rules set forth in Subpart 1300 of Regulation S-K?

Answer: A registrant engaged in mining operations must comply with Subpart 1300’s disclosure rules beginning with its Exchange Act annual report for the first fiscal year beginning on or after January 1, 2021. Until then, staff will not object if the company relies on the guidance provided in Guide 7 and by the Division of Corporation Finance staff for the purpose of filing an Exchange Act annual report. [April 29, 2020]

Question 155.02

Question: For purposes of filing a Securities Act registration statement, may the registrant satisfy its obligation to include mining property disclosure pursuant to Subpart 1300 of Regulation S-K by incorporating such disclosure by reference to its Exchange Act annual report for the appropriate period, even if such annual report was not required to comply with the new mining property disclosure rules in Subpart 1300 of Regulation S-K?

Answer: Yes. Until annual financial statements for the first fiscal year beginning on or after January 1, 2021 are required to be included in the registration statement, the staff will not object if a Securities Act registration statement incorporates by reference disclosure prepared in accordance with Guide 7 from an Exchange Act annual report for the appropriate period filed by a registrant engaged in mining operations if otherwise permitted to do so by the Commission’s rules on incorporation by reference. See, e.g., Securities Act Rule 411 (17 CFR 230.411), which provides that information must not be incorporated by reference in any case where such incorporation would render the disclosure incomplete, unclear, or confusing. [April 29, 2020]

Question 155.03

Question: For purposes of filing an Exchange Act or Securities Act registration statement that does not incorporate by reference mining property disclosure from a registrant’s Exchange Act annual report, when must a registrant engaged in mining operations comply with the new mining property disclosure rules set forth in Subpart 1300 of Regulation S-K?

Answer: An Exchange Act or Securities Act registration statement that does not incorporate by reference mining property disclosure from an Exchange Act annual report filed by a registrant engaged in mining operations must comply with the new mining property disclosure rules set forth in Subpart 1300 of Regulation S-K on or after the first day of the first fiscal year beginning on or after January 1, 2021. For example, a calendar year-end company would be required to comply with the new mining property disclosure rules when filing an Exchange Act registration statement or a Securities Act registration statement that does not incorporate by reference disclosure from a registrant’s Exchange Act annual report on or after January 1, 2021, while a registrant with a June 30th fiscal year-end would be required to comply with the new mining property disclosure rules when filing an Exchange Act registration statement or a Securities Act registration statement that does not incorporate by reference disclosure from a registrant’s Exchange Act annual report on or after July 1, 2021. [April 29, 2020]

Covid-19: Going Concern Uncertainties

A recent Audit Analytics blog says that going concern uncertainties will likely see an uptick due to fallout from Covid-19 but so far anyway, it hasn’t been significant.  Here’s an excerpt of the most current information from Audit Analytics:

As of April 20, 2020, there have been 16 audit opinions on annual reports for SEC filers that have cited the COVID-19 pandemic as a contributing factor to substantial doubt about a company’s ability to continue as a going concern for the next twelve months.  Of those going concern opinions, 11 are repeat going concerns.

For the five companies with new going concerns for fiscal year 2019, the impacts of the COVID-19 pandemic are expected to have a material adverse effect on results of operations, cash flows, and liquidity. However, three of these companies had certain pre-existing uncertainties prior to the pandemic – such as debt covenant obligations, recurring operating losses and negative operating cash flows – so it’s not surprising that impacts from the coronavirus would contribute additional uncertainty, resulting in substantial doubt about their ability to continue as a going concern.

No doubt Covid-19 will likely impact going concern issues for companies already dealing with financial challenges.  And given the current economic environment, it seems the numbers are sure to change as the Covid-19 impact will be felt by companies in other industries that historically haven’t experienced going concern issues.

Former Chief Justice Strine Joins Wachtell, Lipton, Rosen & Katz

It was a just a couple of weeks ago that I blogged about Former Delaware Chief Justice Strine’s latest call for another “new deal.”  He’s on the move – earlier this week Wachtell Lipton announced that he’s joined the firm and the NYTimes DealBook column carried the news too.  Here’s an excerpt from the firm’s announcement:

Explaining his decision to join Wachtell Lipton, Mr. Strine said: “As a judge, I thought the importance of corporations in our society could not be measured by their stock price, and that it was critical to our nation’s well-being that powerful businesses treat their workers and consumers well, support the communities in which they operate, and focus on environmentally responsible, sustainable wealth creation.” Noting that “for more than two generations, Wachtell Lipton has been a consistent voice on behalf of that viewpoint and has embedded it in how it treats its people, and how it assists clients,” Mr. Strine concluded that the Firm would be “a great institution for me to help to put into practical application principles I believe are vital to our economy working for everyone.”

– Lynn Jokela

April 29, 2020

Data Breach Affects Disaster Loan Applicants

We’ve blogged before about data breaches…and if there wasn’t already enough negative press about the SBA relief program, last week various news outlets reported – and here’s a blog from Taft’s Privacy and Data Security team – that the SBA experienced a recent data breach affecting businesses that applied for the Disaster Loan Program (not the Paycheck Protection Program).

The SBA announced that nearly 8,000 business owners’ information may have been exposed to unauthorized users last month.  SBA has reportedly addressed the issue but business owners who applied for relief through the Disaster Loan Program are encouraged to check their accounts and review their credit reports.

For a reminder about the prevalence of cyberattacks exploiting the current Covid-19 crisis and the increased work-from-home arrangements, this Data Privacy Monitor blog discusses that and what can be done to help guard against cyberattacks – helpful reminders to hopefully prevent falling into a mess like the SBA and end up needing to send breach alerts to customers.

Beyond Force Majeure: Tips for Entering New Tech Agreements During Covid-19

Many companies have been dealing with what to do about existing contracts during Covid-19, while many are also continuing to enter into new agreements.  A new contract can present an opportunity to mitigate risks from the continued uncertainty everybody faces.  A recent Perkins Coie memo outlines tips for negotiating new contracts during Covid-19 relating to provisions typically found in technology agreements.  Here’s an excerpt:

Addendums: Consider including an addendum that contains terms and conditions that apply during the pandemic with an understanding that the pandemic-specific provisions preempt the terms and conditions in the main body of the agreement during the pandemic – the addendum can specify criteria that must be satisfied before the addendum can expire

Acceptance of Goods, Risk of Loss, Transfer of Title: Travel restrictions and stay-at-home orders may prevent inspection and acceptance of goods per the contract’s standard terms, which can then affect risk of loss, transfer of title and payment provisions so parties should consider alternatives such as relying on remote video or data measurements, permitting partial payment upon delivery or through use of buyer-funded escrows that could be released once inspection and acceptance occurs

Service Levels: Service providers may need to negotiate for more flexible service levels to accommodate bandwidth demands to regulate service usage – considerations could include temporary elimination of non-critical service features, throttle bandwidth, limitations on hours of operation, and service credits for service interruption

Other provisions addressed in the memo relate to ADR, limitations of liability, suspension, delivery terms, milestones, change orders, disclaimers, termination, health & safety, transition services, governing law, business continuity, confidentiality & reporting obligations, reps & warranties and insurance.

Podcasts: More “Women Governance Gurus” With Courtney Kamlet & Liz

Liz continues to team up with Courtney Kamlet of Vontier to interview leaders in the corporate governance field about their career paths – and what they see on the horizon. Check out the latest episodes:

– Liz Dunshee, Managing Editor,

– Dannette Smith, Secretary to the Board and Senior Deputy General Counsel at UnitedHealth Group

– Alane Barnes – VP, General Counsel and Corporate Secretary at BioCryst Pharmaceuticals

– Lynn Jokela

April 28, 2020

BlackRock’s Catching Flack From all Sides

When you’re the largest asset manager, any statements garner a lot of attention.  Take for example, Larry Fink’s January letter to CEOs.  A lot of media outlets reported on it, we blogged about it as did many others.  Now, BlackRock, in its role assisting the Federal Reserve in administering some of the CARES Act relief programs, has arrows coming at it from all directions.

First, as discussed in this NYT article, a group of conservative leaning senators sent a letter to Fed Chairman Powell voicing concerns that BlackRock might avoid funding energy and transportation companies due to BlackRock’s own climate-related investment policies.  This was followed by a letter from senators on the other side of the aisle requesting the underlying investment guidelines provided to BlackRock for use in managing the Fed’s programs and warning about use of federal funds “to help sustain industries that may drive a future climate crisis.”

But, there were more arrows sent BlackRock’s way.  Here’s a post from the Federalist about a letter sent to BlackRock’s CEO from representatives of several conservative-leaning organizations, asking BlackRock to reconsider its plan to operate under a stakeholder model rather than supporting a shareholder primacy model.  The letter goes on by urging BlackRock to stand against “unnecessary and harmful ESG shareholder proposals.”  Coming at it from the other side, as part of an Earth Day event held last week – organized by a group named “BlackRock’s Big Problem” – the event flyer asked participants to call BlackRock to request it follow through on its climate commitment that BlackRock’s CEO made in his letter earlier this year.

BlackRock recently issued its 2020 Engagement Priorities and I blogged about it on our “Proxy Season Blog”.  There was a fair amount of focus on environmental risks and opportunities in that report.  No doubt though, by the end of the 2020 proxy season, somebody will likely have gripes about whatever BlackRock does.  It seems when you’re the largest asset manager, you’re a big target and everybody wants the influence you carry on their side.

California Board Diversity Law Withstands Legal Challenge

You may remember back when California’s board gender diversity law (SB 826) went into effect, then California Governor Jerry Brown reportedly said his chief concern was possible legal challenges.

Well, a couple of suits were filed and one of them was recently dismissed.  The plaintiff was seeking a permanent injunction preventing enforcement of the California law by saying it was unconstitutional under the 14th Amendment.  Last week, a federal judge in California dismissed the case on the basis of lack of standing.  See Cydney Posner’s Cooley blog for more on this story.   And, stay tuned – it looks like this case will carry on as the plaintiff filed an appeal – see this blog post from Keith Bishop.

Earlier this year, California issued a report on the status of compliance with the new law through December 2019.  The report said that of the 330 companies that filed the required disclosure statement, 282 reported compliance with the state’s board gender diversity requirement.  Note that the 330 companies that filed the required disclosure statement represent slightly more than half of the impacted companies (meaning they are publicly held with principle executive offices in California).

Even with California companies seemingly increasing board diversity, the law isn’t out of the woods yet as the appeal in the case has been filed and there’s another suit challenging California’s law that’s ongoing in California State Court – Broc blogged about that back when it was first filed.

ESG Ratings: Morningstar & Sustainalytics Join Up

Liz blogged a little over a year ago about the crowded ESG ratings field.  In case you missed it, last week, two firms joined forces when Morningstar announced it would acquire Sustainalytics.  Morningstar already owned about 40% of Sustainalytics and now it’s buying the remaining 60% when the transaction closes later this year.

The combination should be a boost for Sustainalytics – Morningstar is a much larger organization and is spread across more markets.  Like other deals, time will tell exactly how it shakes out…it’s expected that Morningstar will complete the integration of Sustainalytics data across its various products but anecdotally, my understanding is that Morningstar has everything it needs from Sustainalytics through the firms’ longstanding relationship.

If anything, Morningstar will now compete more directly with MSCI so there may be some investors who switch to Morningstar/Sustainalytics – although, surprisingly, a lot of investors already switch between MSCI and Sustainalytics and apparently some do so fairly often.

– Lynn Jokela

April 27, 2020

Careful Opening the Window

As many companies are releasing first quarter earnings and dealing with challenges related to earnings guidance, the next question to tackle might be whether to reopen the trading window.  Most companies typically reopen the trading window within a day or two after issuing the earnings release.  But, as this Bryan Cave blog points out, this time around some companies might want to think twice about that.

It might be fine for a lot of companies to go ahead as usual and open the window but with continued uncertainty and rapid change, the blog says some companies may want to pause.  Here’s the crux of the blog’s message:

Insiders who have access to daily information about demand, the supply chain, pricing and other information may be better able to assess the trend of the business, and may therefore be better able to predict how well the company will be able to withstand and bounce back from the pandemic.  Although this daily information might not ordinarily be deemed material nonpublic information for insider trading purposes, in the current environment and with the benefit of hindsight, the SEC could take a different position.

SEC Covid-19 Market Monitoring Group

In a press release last Friday, the SEC announced that it formed an internal, cross-divisional Covid-19 Market Monitoring Group.  The announcement says the group is temporary and the purpose is to assist the Commission, including its various divisions and offices, in actions related to the effects of Covid-19 on markets, issuers and investors as well as responding to requests for information, analysis and assistance from other regulators and public sector partners.

The group will be chaired by S.P. Kothari, the SEC’s Chief Economist and Director of the Division of Economic and Risk Analysis and assisted by Jeffrey Dinwoodie, Chief Counsel and Senior Policy Advisor for Market and Activities-Based Risk in the Office of the Chairman.  The announcement also includes a list representatives from across the SEC that will participate in the efforts of the Market Monitoring Group.

SEC Goes Remote & Virtual Like the Rest of Us

If you’re wondering how the SEC is getting all of its work done these days, they’re working remote like a lot of people and seem to be adapting.  A while ago, the SEC set up a webpage that gives general information about its operations during Covid-19.

The SEC’s recent open meeting, during which it approved offering rules for business development companies, was held virtually, although it’s not clear when they might do this again.  For that meeting, the audio was played live through access on the SEC website (here’s the audio archive) and Bloomberg Law reported that apparently Chairman Clayton participated in the meeting from his office at SEC headquarters while Commissioner Allison Lee participated from her home kitchen.  The SEC reportedly held “several dry runs” to prepare – an all too familiar exercise for many of us.

Meanwhile, this Notice for an upcoming meeting of the Small Business Capital Formation Advisory Committee says that it will be conducted via videoconference following the same format used for an ad-hoc meeting held earlier this month.  The Committee has an archived webcast from the April ad-hoc meeting available on the SEC’s website.

– Lynn Jokela

April 24, 2020

PPP Loans: You Got Your Money – Should You Give It Back?

Well, you can’t say we didn’t warn you – a number of Paycheck Protection Program loan recipients are receiving  heavy duty blowback from the media & politicians about whether they’re entitled to the loans they received. If your client finds itself in this position, it may well be asking – “should we give the money back?”

That question may be even more pressing in light of new FAQ #31 that the SBA issued yesterday morning, which addresses the certification of need that’s required in order to access the funding. The FAQ says that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”

As this Stinson memo points out, that guidance is – like almost everything the SBA has said about this program – as clear as mud:

As has become typical of the PPP, every attempt at clarification also raises new uncertainties. What is the threshold for “substantial market value”? Does a public company that would currently be unable to raise equity capital on favorable terms really have “access to capital markets” in a meaningful way? Should any debt financing be considered “significantly detrimental” to a business as compared to equity capital in light of the additional cash load it places on the borrower? If a borrower has undrawn but committed capital under its current financing facilities, can it still make the good faith certification required by the PPP application?

The memo says that in light of the very specific certifications and representations required of the applicant in its loan application, these questions should be considered with great care – and companies that aren’t comfortable with their answers should withdraw loan applications or repay loans that have already been received.

PPP Loans: Beware False Claims Act Whistleblowers

Companies that are thinking about repaying their loans ought to make their decisions prior to May 7th, because as this Bryan Cave blog points out, FAQ #31 provides a safe harbor for companies that repay their loans by that date.  The blog also addresses the liabilities that companies may face if they received a PPP loan to which they weren’t entitled – and the risk that employees may blow the whistle:

In addition to the risk of governmental regulatory or enforcement action, impacted companies and lenders may face other litigation and reputation risk. Companies may wish to consider whether their employees may believe that other sources of funding were available and may raise those concerns internally and externally as purported whistleblowers, possibly resulting in assertion of False Claims Act claims.

Of course, one of the fun things about the False Claims Act is that it provides for treble damages. The blog says that companies may also face reputational scrutiny and adverse impact on business performance, particularly if Treasury & the SBA publish borrower information – which the Fed has already announced that it will do under its CARES Act lending programs.

Public Offerings: Doing a Deal in a Blackout Period

Speaking of public companies with access to the capital markets, stop me if you’ve heard this, but those markets are kind of turbulent right now.  That means its essential for companies that need capital to be able to quickly access the market when a financing window opens.  Unfortunately, some companies now find themselves in a “blackout period” pending the release of their first quarter results.  This Davis Polk memo says that while that may complicate things, there’s no prohibition on a company accessing the capital markets during a blackout period, and it may be possible for a company to complete an offering if:

– Management has enough information about the current (or recently ended) quarter to be able to predict with a fair degree of confidence what the company’s reported results are likely to be;

– Management has a good track record of being able to judge its anticipated results at similar points in the information-gathering and reporting cycle;

– Management’s expectations for the quarter, and future periods, are either (i) at least in line with “the market’s” expectations as well as with management’s own previously announced guidance (if any) – or (ii) if management’s expectations are not so in line, the company and its underwriters conclude that the deviation is not material or the company is willing to “pre-release” its current expectations prior to the earnings release; and

– Management’s analysis of the going-forward impact on the company’s business of COVID-19 is sufficiently developed that disclosure can be made at the time of the offering that will be in line with what is disclosed when the 10-K, 20-F, 10-Q, 6-K or other filing is made.

The memo notes that as a result of the Covid-19 crisis, it may be difficult for management to forecast the company’s results beyond the current quarter. In situations like this, companies sometimes decide to withdraw previously issued guidance and not issue new guidance. But the memo stresses that withdrawing guidance is not a substitute for disclosure of underlying trends and uncertainties that could affect financial and operational performance.

The memo also walks through an analysis of the various matters that should be considered in addressing each of the factors identified above, as well as other matters such as the need to update disclosures of risk factors & known trends, potential selective disclosure issues, and reputational and legal risks. By the way, if you’re representing a client that’s considering an offering during a blackout period, I highly recommend that you take a look at the transcript from our 2017 webcast, “Flash Numbers in Offerings.”

John Jenkins

April 23, 2020

Virtual Shareholder Meetings: Survey of Q&A Trends

With so many companies moving to virtual meetings, one of the issues that’s become front & center is how shareholder Q&A sessions should be handled. This Bass Berry blog provides some insight into how companies have addressed that issue. The authors surveyed Fortune 100 public companies that filed their proxy statements after March 1, including those that opted for a virtual meeting after filing definitive materials. Of the companies surveyed:

– 6% are permitting stockholders to submit questions only in advance.
– 58% are permitting stockholders to submit questions only at the meeting.
– 32% are permitting stockholders to submit questions both in advance and at the meeting.
– 4% do not clearly address their Q&A in the proxy materials the style of their Q&A sessions couldn’t be determined.

The survey found a few outliers. One company chose to limit in-person attendance to a handful of officers and employees who will deliver proxy votes. Shareholders were encouraged to present questions to financial journalists listed in the company’s annual report, who will choose questions that they consider the most interesting and important. The survey doesn’t identify the company, and I want to respect its privacy as well – so all I can tell you is that its initials are “Berkshire Hathaway.”

The survey identified two other companies that are not permitting live Q&A. One required shareholders to submit questions up to three days in advance, while the other is requiring stockholders to submit their questions in advance only through a portal on the company’s website.

I haven’t seen any survey data on how companies that are holding virtual meetings are dealing with shareholder proposals, but I can tell you that the folks at ValueEdge Advisors are not happy with the way AT&T has chosen to handle them at its virtual meeting.

Listing Standards: NYSE Joins Nasdaq in Providing Relief From Price-Based Standards

Earlier this week, I blogged about Nasdaq’s rule change providing extended compliance periods for companies that fail to meet its minimum bid price & global market cap continued listing standards. On Tuesday, the NYSE received the SEC’s sign-off on a rule change providing similar relief to its listed companies.  This excerpt from a recent Locke Lord blog provides the details:

NYSE-listed companies now have additional time to cure a deficiency if their stock has closed under $1.00 for 30 consecutive trading days. Now, days between April 21, 2020 and June 30, 2020 will not be counted toward the normal 6-month compliance period. Compliance periods will recommence on July 1, 2020 from the point at which they were suspended on April 21.

Listed companies will also have additional time if their average global market capitalization has fallen under $50 million for 30 consecutive trading days at a time when their stockholders’ equity is also under $50 million. These companies would normally have a maximum 18 months to cure the deficiency. These compliance periods are similarly suspended until July 1, 2020.

The exchanges have cut listed companies a lot of slack during the current market turmoil, but the news for troubled companies isn’t all good on the listing front. The blog also notes that Nasdaq adopted rules on the same day that actually shorten compliance periods for particularly distressed companies.

Jackpot! Whistleblower Hits for $27 Million

Well, in the midst of this colossal mess, I guess it’s nice to know that somebody had a good month. Last Thursday, the SEC announced that it had awarded a whistleblower who alerted it to misconduct a whopping $27 million. The SEC’s order lauded the whistleblower’s efforts to “repeatedly and strenuously” raise concerns about the misconduct internally.  The SEC followed this up with a $5 million whistleblower award earlier this week. When it rains, it pours.

John Jenkins

April 22, 2020

SEC & PCAOB Officials Issue Joint Statement on “Emerging Market” Risks

Yesterday, SEC Chair Jay Clayton and a group of senior SEC & PCAOB officials issued a joint statement warning about the risks posed by “emerging market” investments.  While the statement addresses all emerging markets, it focuses on the 500 lb. gorilla of those markets – China. Here’s an excerpt from the introduction:

Over the past several decades, the portfolios of U.S. investors have become increasingly exposed to companies that are based in emerging markets or that otherwise have significant operations in emerging markets. This exposure includes investments in both U.S. issuers and foreign private issuers (“FPIs”) that are based in emerging markets or have significant operations in emerging markets. During this time, China has grown to be the largest emerging market economy and the world’s second largest economy.

The SEC’s mission is threefold: protect our investors, preserve market integrity and facilitate capital formation. Ensuring that investors and other market participants have access to high-quality, reliable disclosure, including financial reporting, is at the core of our efforts to promote each of those objectives. This commitment to high-quality disclosure standards—including meaningful, principled oversight and enforcement—has long been a focus of the SEC and, since its inception, the PCAOB.

Our ability to promote and enforce these standards in emerging markets is limited and is significantly dependent on the actions of local authorities—which, in turn, are constrained by national policy considerations in those countries. As a result, in many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse, in comparison to U.S. domestic companies. This significant asymmetry holds true even though disclosures, price quotes and other investor-oriented information often are presented in substantially the same form as for U.S. domestic companies.

The statement details risks and related considerations specific to “issuers, auditors, index providers & financial professionals.” These include concerns about the quality of financial information, the PCAOB’s continuing inability to inspect workpapers in China, the limited ability of U.S. authorities to bring enforcement actions in emerging markets, the limited rights & remedies available to shareholders, and the failure of passive investment strategies to account for these risks.

The statement also addresses concerns about disclosure, and emphasizes the importance of robust risk factor disclosure for companies with operations in emerging markets:

In light of both the significance and company-specific nature of the risks discussed in this statement, we expect issuers to present these risks prominently, in plain English and discuss them with specificity. Issuers based in emerging markets should consider providing a U.S. domestic investor-oriented comparative discussion of matters such as (1) how the company has met the applicable financial reporting and disclosure obligations, including those related to DCP and ICFR and (2) regulatory enforcement and investor-oriented remedies, including as a practical matter, in the event of a material disclosure violation or fraud or other financial misconduct more generally.

The statement was issued jointly by Chair Clayton, PCAOB Chair Bill Dunkhe, SEC Chief Accountant Sagar Teotia, and the Directors of Corp Fin & IM. With that kind of firepower mustered behind the statement, I think it’s fair to say that they aren’t fooling around here. Public companies based in China or with significant operations there should take a hard look at their risk factor disclosures, because it seems likely that they will be scrutinized closely by the Staff the next time their filings are pulled for review.

Covid-19 Crisis: Companies Adopt Emergency Bylaws to Ensure Board Operations

With all of the disruptions resulting from the Covid-19 pandemic, many companies are looking at board and management continuity issues, and some companies have opted to adopt an emergency bylaw to help address these issues. This recent Simpson Thacher memo discusses Section 110 of the DGCL, which allows companies to adopt emergency bylaws and sets forth what may be included in them.  Among other things, these bylaws may permit companies to expand the class of persons who may call a board or committee meeting, and relax notice and quorum requirements for such a meeting.

Yesterday, Mastercard filed an Item 5.03 8-k announcing that its board had adopted an emergency bylaw, which provides that:

– a Board or committee meeting may be called by any director or officer by any feasible means, and notice of the meeting may be provided only to the directors that can be feasibly reached and by any feasible means; and

– the director(s) in attendance at the meeting shall constitute a quorum and may appoint one or more of the present directors to any standing or temporary committee as they deem necessary and appropriate

Mastercard isn’t the only company that has adopted an emergency bylaw in recent weeks. John Bean Technologies also adopted a similar provision, and other companies have long had emergency provisions in their own bylaws (see this Jack In The Box filing from 2005).  If your bylaws don’t contain an emergency provision, now may be a good time to consider adopting one.

Transcript: “Activist Profiles & Playbooks”

We have posted the transcript for the recent webcast: “Activist Profiles & Playbooks.”

John Jenkins

April 21, 2020

Covid-19 Crisis: What About ICFR?

The Covid-19 crisis has created a number of challenges for public companies, and one of the potentially most significant is maintaining appropriate internal control over financial reporting. Crisis-related ICFR issues include managing newly remote workforces, the novel and often unfamiliar financial reporting issues created by the crisis, and – for companies receiving government assistance – the need to implement restrictions on executive comp, share repurchases and dividends, among other things.

This Hunton Andrews Kurth memo reviews the legal framework applicable to these issues, and offers insights on how to address them. Here’s an excerpt:

We recommend that companies begin to assess their existing disclosure and internal controls by taking stock of what has changed in the current financial reporting environment. Unique or novel accounting issues should be carefully analyzed, and expert advice sought when internal resources are insufficient.

Potential and actual disruptions to a company’s supply chain, customer base, operations, processes and workforce should be weighed when evaluating the operating effectiveness of legacy controls. As part of this process, companies should also assess any potential deficiencies in review-type internal controls and the ability of individuals to perform control duties in light of shelter-in-place orders and other company specific remote-work protocols.

Based on this assessment, companies should determine whether existing controls are sufficient to prepare financial statements and disclosure documents at the reasonable assurance level. If a legacy control cannot be performed as previously designed, companies should determine what new controls may be necessary to reduce the risk of errors and fraud. In doing so, they should ensure that any changes in design address both the original risks of material misstatement as well as any new risks. We anticipate regular dialogue with counsel, the auditors and audit committees on these topics.

The memo also says that public companies, particularly those receiving government assistance, should expect heightened scrutiny from the “media, putative whistleblowers, agency inspectors general, consumer watchdog groups, members of Congress and other political figures.” In this environment, the best way for companies to protect themselves is by maintaining a robust control environment and responding nimbly to changes in business circumstances that may require adjustments to those controls.

Covid-19 Crisis: Chart of Governmental Actions

If you represent a client with operations in multiple states, Faegre Drinker’s interactive chart of the various federal, state and local government orders associated with the Covid-19 crisis is a really handy resource. If you click on an individual state, you’ll be taken to a page that contains links to that state’s legislative and executive orders relating to Covid-19, as well as to orders issued by major municipalities within that state. It appears to be updated on a daily basis, so you’ll probably want to bookmark it.

Transcript: “The Top Compensation Consultants Speak”

We have posted the transcript for the recent webcast: “The Top Compensation Consultants Speak.”

John Jenkins