Here are results from our recent survey on COVID-related adjustments to insider trading policies:
1. Who owns/administers your company’s insider trading policy (e.g., sets window open/close dates, determines employees subject to window periods, provides pre-clearance for transactions, etc.)?
– Corporate secretary department – 77%
– Ethics & compliance office or similar function – 11%
– Corporate stock plan department – 1%
– Combination of 1 or more of the above – 11%
2. Has your company made changes to the policy as a result of Covid-19?
– Yes, it covers more employees – 2%
– Yes, we’ve instituted an event-specific closed window period – 10%
– No – 88%
3. Has your company issued more frequent communication about the policy during the Covid-19 pandemic?
– Yes – 22%
– No – 78%
4. If you’ve issued more frequent communication about the policy, how frequent?
– Once – 67%
– Twice so far – 28%
– More often – 5%
5. If you haven’t issued more frequent communication, are you planning to do so and if so when?
– No – 69%
– Yes, within the next month – 2%
– Haven’t decided yet, will depend upon ongoing developments – 29%
As a reminder, we’ve previously posted the transcript from our webcast for members, “Insider Trading Policies & Rule 10b5-1 Plans.” We’re keeping an eye out on further SEC developments with insider trading policies – stay tuned!
Please also take a moment to participate anonymously in these surveys:
Here’s something John recently wrote on our free DealLawyers.com blog:
The question of the legality of a dividend or repurchase under Delaware law is one that often arises in leveraged recaps and other transactions involving large distributions to shareholders. The answer usually depends on whether the company has sufficient “surplus” within the meaning of Section 154 of the DGCL. The Delaware Supreme Court has held that what matters in the surplus calculation is the present value of the company’s assets & liabilities, not what’s reflected on the balance sheet. Since that’s the case, valuations are often used to determine the amount of available surplus.
While that’s a pretty common practice, there’s not a lot of Delaware case law on how the board’s valuation decisions will be assessed. That’s kind of disconcerting, particularly since directors face the prospect of personal liability for unlawful dividends or stock repurchases. Fortunately, the Chancery Court’s recent decision in In re The Chemours Company Derivative Litigation, (Del. Ch.; 11/21), provides some guidance to boards engaging in this process. Here’s an excerpt from this Faegre Drinker memo on the decision:
In this case, the board approved both dividends and stock repurchases at a time when the company also faced legacy contingent environmental liabilities that conceivably could render Chemours insolvent.
The court deferred to the board’s determination that there was sufficient surplus to permit these transactions, even though the board looked beyond GAAP-metrics to evaluate its contingent liabilities. The court held that it “will defer to the Board’s surplus calculation ‘so long as [the directors] evaluate assets and liabilities in good faith, on the basis of acceptable data, by methods that they reasonably believe reflect present values, and arrive at a determination of the surplus that is not so far off the mark as to constitute actual or constructive fraud.” This standard is consistent with the court’s prior guidance that the DGCL “does not require any particular method of calculating surplus, but simply prescribes factors,” total assets and total liabilities, “that any such calculation must include.”
As for reliance on experts, the court held that, under the DGCL, utilization of and good faith reliance on experts “fully protects” directors from personal liability arising from their surplus calculation. In reaching this conclusion, the court rejected the argument that the directors were required to second-guess the GAAP-based reserves calculated by the experts — an analysis that permitted the board to significantly reduce the size of these liabilities on Chemours’ balance sheet.
The memo goes on to provide some thoughts on the key takeaways from the decision, including the need for the board to carefully compile and review accurate data on assets & liabilities, and to retain an expert in any situation where the calculation of surplus may be an issue.
We continue to share daily posts about career issues and board matters on our “Mentor Blog” – which is available to TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Time to Refresh Your Compliance Training
– C-Suite Executives Want More Effective & More Diverse Directors
– Supply Chains: How to Manage Cyber Risk
– PCAOB 2020 Inspection Reports for the Big 4+ Are Out!
– Books & Records Demands: A Primer for Boards
The ongoing regulatory push and pull over digital tokens just took another strange turn. On Wednesday, the SEC announced that it had instituted administrative proceedings under Section 12(j) of the 1934 Act to halt the effectiveness of a Form 10 filed to register two tokens under Section 12(g) of the 1934 Act. The Form 10 that is the subject of the proceeding is one of a bizarre group of filings made by American CryptoFed DAO LLC.
As you may recall, Form 10 is a registration statement form that an issuer can use to, among other things, voluntarily register a class of equity securities under Section 12(g) of the 1934 Act, and it goes effective by lapse of time after 60 days. As with other registration statements, the Staff in Corp Fin reviews Form 10 registration statements; however, unlike 1933 Act registration statements such as Form S-1, the rules governing Form 10 do not provide for a “delaying amendment” that will delay the effectiveness of the registration statement until the Staff acts to accelerate the effectiveness. As a result, the Staff will typically request that an issuer withdraw the Form 10 prior to going effective and then refile the Form 10 when the issuer responds to the Staff’s comments.
American CryptoFed made a series of filings with the SEC beginning in mid-September 2021. It filed the Form 10 and a Form S-1, as well as several free writing prospectuses. The registration statements purport to register two digital tokens issued by American CryptoFed – called the “Ducat” and “Locke” tokens. Both registrations statements state the nonsensical notion that the issuer is registering the tokens with the SEC as utility tokens, not as securities. The Form 10 also addresses how the issuer intends, upon effectiveness of the Form 10, to distribute one of the tokens to a variety of entities through a registration statement on Form S-8. The disclosure in the Form 10 opens with the statement:
American CryptoFed DAO, LLC (“CryptoFed”) agrees with commissioner Hester M. Peirce of U.S. Securities and Exchange Commission (SEC) that the SEC is a “disclosure regulator, rather than a more interventionist merit regulator.” “The SEC’s Division of Corporation Finance may examine a company’s registration statement to determine whether it complies with our disclosure requirements. But the SEC does not evaluate the merits of offerings, nor do we determine if the securities offered are “good” investments.” [footnotes omitted]
According to the SEC’s order, the Corp Fin Staff spoke with the issuer about the Form 10 on October 4, advising the issuer that there were serious deficiencies with the filings. On October 6, 2021, American CryptoFed filed a document that purported to be an amended Form 10, consisting of a cover page and several paragraphs asserting that the Ducat and Locke tokens were not securities. “Bedbug” letters on the Form 10 and the Form S-1 were sent on October 8. The Form 10 was not withdrawn, and as a result it would have gone effective on Monday, November 15 absent the Commission’s action. The SEC notes in the order instituting the Section 12(j) proceedings that because the Form S-1 contains a delaying amendment, the Commission was not instituting proceedings with respect to that registration statement.
The SEC alleges that the Form 10 fails to contain many of the disclosures required by the form (such as financial statements, MD&A, description of business, description of securities, beneficial ownership), and included materially misleading information concerning the issuer’s intended distribution of the Locke token using Form S-8.
The effectiveness of the Form 10 is stayed pending the proceedings, and the case will be assigned for a hearing by an SEC administrative law judge.
The SEC announced that its Small Business Advisory Committee will meet on November 16 and it will “explore ways to foster entrepreneurship and capital access in rural and under-resourced areas.” The agenda for the meeting notes that the Committee will host several presentations and panel discussions on capital access issues, as well as programs that could be used by those in rural and under-resourced areas.
The Committee will also get a demo of the SEC’s new Capital Raising digital hub, which is designed to “help users narrow down their options for how to raise capital based on their expressed needs.” I always say that one day the robots will come for my job, and perhaps this new digital hub is the first step.
The bizarre American CryptoFed filings and the Small Business Advisory Committee’s agenda for next week’s meeting got me thinking about the multitude of challenges that some issuers face when seeking to raise capital. I am co-teaching a course on 1933 Act exemptions called “Beyond the IPO” at Georgetown Law this semester, and trying to explain the exempt offering landscape to law students one night a week for thirteen weeks is a good reminder of just how complex the system can be for someone who is not steeped in the finer points of the securities laws.
Those of us who have been at this for a while can sometimes take it for granted that we have a good understanding of the inner workings of the SEC, while others who are either advisers or issuers that do not live and breathe this stuff can often see the SEC as a “black box” and the capital-raising regulations as a maze of traps for the unwary. It has always been this concern – the fact that sometimes the knowledge and understanding of the intricacies of the securities laws and the operation of the SEC can be held by a select few, while others face more challenges in navigating the system – that has driven me to try to freely share all of the knowledge and experience that I have gained, through this site in particular, and through other publications, public speaking, professional organizations and teaching. I believe that is the least I can do to try to promote fair access to capital while acknowledging the difficult task that the SEC has in maintaining an effective regulatory approach that protects investors while promoting capital formation.
On this Veteran’s Day, it is important to honor the service of military veterans who have made many sacrifices to protect us and our way of life. I am so grateful for their service to our country and I am glad that we have this holiday to remind us of their contributions.
An important element in honoring our veterans is considering the contributions they make to our economy and society after the conclusion of their military service. Some veterans elect to continue their public service in positions as first responders or in government roles, while others enter the private sector. As such, military veterans make up a critically important part of our workforce in this country.
With the SEC’s recent amendments to Item 101 of Regulation S-K requiring disclosure about human capital resources, we now have a glimpse into how companies support their employees who are military veterans. Many companies disclose that they have internal employee resource or inclusion groups that are dedicated to military veterans. The groups are often dedicated to supporting the attraction, development and retention of talent, provide professional and leadership opportunities, and support community and business efforts within the company. Some companies, such as JPMorgan Chase & Co., actually provide statistics on the percentage of its worldwide employees that are military veterans (3%). We will likely see this type of disclosure continue to evolve over time, as companies consider how to effectively describe their workforce and how that workforce is developed and supported.
Today, let’s not forget to show our gratitude to our nation’s veterans for all of the important work that they do in the military and when they go on to become our colleagues in the workforce.
Yesterday, the SEC posted a notice indicating that it will consider two rulemaking actions at an open meeting next Wednesday. The Commission will consider whether to adopt amendments to the proxy rules relating to the use of universal proxy cards, and will consider whether to propose amendments to the proxy rules governing proxy voting advice by the proxy advisory firms.
The universal proxy rulemaking has been dragging on for quite some time. The rule changes were originally proposed in 2016, and then the comment period was reopened in April of this year. The rules regarding proxy voting advice were on a much faster track (although they were a long time in coming), given that they were proposed in 2019, adopted in 2020, and then subject to reconsideration this year.
With these actions now on the calendar, it seems that the SEC rulemaking floodgates are starting to open, and we should no doubt see quite a bit of activity in the coming months.
In the latest Deep Dive with Dave podcast, I speak with David Hamm from Summit Materials about a podcast he has recently launched, Conversations with GCs.
As we have previously reported, over the past few months companies across a wide range industries have been receiving comments from the Corp Fin Staff that are focused on climate change disclosure. In September, the Staff published a sample comment letter highlighting its comments on climate change disclosure. Now that companies have had a chance to respond to the initial round of comments and the Staff has had time to consider those responses, we are now seeing round 2 of the climate change comment letters.
Comments in the first round of letters asked questions focusing on a company’s materiality analysis with respect to information about climate change, harkening back to the SEC’s 2010 climate change disclosure guidance. In round 2, the Staff is generally digging deeper into a company’s materiality analysis, asking for additional details on the company’s determination that disclosure of climate change matters was not material. In some cases, the follow-up comments request more quantitative information from companies in support of the materiality determination. Some companies and practitioners have been surprised by this approach, noting that the Staff has in the past been more deferential to a company’s conclusions as to materiality.
It is obvious from these round 2 comment letters that the Staff is not going to “let it go” when it comes to climate change, and additional work will be necessary to justify for the Staff why climate-related disclosure was not included in the periodic reports that the Staff has reviewed. Areas of focus in the round 2 comments letters appear to be:
More information concerning disclosure decisions with respect to specific transition risks related to climate change that are relevant to a company’s business and operations;
Considerations made in determining whether to disclose the direct and indirect consequences of climate-related regulations or business trends;
The existence (or nonexistence) of material capital expenditures for climate-related purposes, and how that materiality decision was made;
Consideration of the impact of weather-related events on a company’s results of operations and financial condition; and
The quantification of material compliance costs associated with climate change.
We expect that with climate change disclosure rules just around the corner, the Staff has an incentive to continue to press for more information through the comment process. The round 2 comment letters that we have seen appear to be focusing mostly on asking for additional information and analysis, rather than requesting specific disclosures in the future, or seeking amendments to prior periodic reports.
