I blogged earlier this summer about a bill in the House that would require disclosure in SEC filings about tax havens & loopholes. Another bill introduced in both the House and the Senate is also aiming to amend the Exchange Act to require more detailed info about state, federal & foreign taxes paid.
This Cooley blog says that investors are split on whether “tax planning” is a good thing. The “shareholder primacy” model says that companies need to return as much money as possible to shareholders. Yet several investors signed on to support this lawmaking effort, because they’re starting to think that minimizing taxes creates reputational, customer & employee risks to individual businesses – as well as systemic risks that affect entire portfolios.
Similarly, a recent ISS ESG report suggests that a paradigm shift – from a focus on “tax burden” to a focus on “tax impact” – may be underway. Here are their views:
– Funding the Covid-19 recovery has led to a revived global debate about tax policy and rates, with 130 countries agreeing on a global minimum tax rate.
– Corporate tax avoidance is a major ESG issue, but disclosure on responsible tax practices is noticeable by its absence.
– Responsible investors are increasingly taking into account the implications of fair taxation for social issues such as global inequality, particularly given an increased focus on outcomes-based investing and stakeholder capitalism.
It seems unlikely that you’ll have to start filing a “tax report” with the SEC in the near-term – if ever. But with society’s “eat the rich” sentiments and at least some investors saying they want companies to proactively consider ESG issues, boards should probably add “public backlash” to the list of risks they consider during tax planning conversations. Also see this Accounting Today article, which predicts that a “global minimum tax” is getting more likely.
Tune in tomorrow for the webcast – “Newly Public: Building Reporting & Governance Functions” – to hear Dave Bell of Fenwick, Jared Brandman of National Vision, Courtney Kamlet of Vontier and Trâm Phi of DocuSign discuss lessons learned from their experience successfully managing the process of going through the IPO and creating processes from scratch.
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Last week, the “Alliance for Fair Board Recruitment” – a non-profit opponent of affirmative action which has also challenged California’s board diversity statutes and whose president, Edward Blum, also founded the “Students for Fair Admissions” organization that sued Harvard over allegedly discriminatory admissions processes – filed a Petition to challenge the SEC’s approval of Nasdaq’s new requirement that listed companies eventually must add at least one woman and one person from an underrepresented community to their board, or explain why they haven’t done so. In its press release announcing the move, AFBR says:
The Nasdaq rule will compel many of our nation’s largest publicly traded corporations to illegally discriminate on the basis of gender, race, and sexual orientation in selecting directors.
As AFFBR explained in a comment submitted to the SEC, Nasdaq’s discriminate-or-explain rule also exceeds its role and the authority granted by federal securities law and also violates core Bill of Rights guarantees against compelled speech and discrimination based on sex and race by stereotyping all people of the same skin color or sex as being alike and interchangeable.
Constitutional law isn’t my specialty, so here’s a CNN recap of where courts have come down on previous challenges that could be viewed as similar. This blog from Keith Bishop looks at the procedural details of AFBR’s Petition, including why it filed its claim in the federal court of appeals instead of a district court.
This clearly isn’t Blum’s first rodeo. Courts haven’t agreed with him yet, but he’s attempting to take the Harvard case to the Supreme Court. For now, Nasdaq-listed companies should still plan to comply with the exchange’s matrix disclosure requirement next year and the initial phase of the “comply or explain” board composition requirement by the following year.
The weekend edition of the NYT Dealbook took a deep dive into the SPAC revolution – and notes that we may start seeing a new type of blank-check entity called a SPARC (special purpose acquisition rights company). A SPARC is basically a SPAC that just gives investors a right to buy shares down the road when a merger target is announced, rather than putting money in up front. It also sounds like a character in a Dr. Seuss book. Anyway, all of this was a follow-on to the supposed troubles that Bill Ackman’s SPAC is facing, which John blogged about last week on DealLawyers.com. Here’s what John wrote:
The world’s largest SPAC, Pershing Square Tontine Holdings, has been named as a defendant in a shareholder derivative lawsuit filed by, among others, former SEC Commissioner Robert Jackson and Yale Law Prof. John Morley. In a nutshell, the complaint alleges that PSTH is an unregistered investment company, and that as a result, the goodies that flow to insiders under the typical SPAC structure – specifically, sponsor & director warrants – represent unlawful compensation under the Investment Company Act.
Much of the media appears to be reporting the story like its hair is on fire. Here’s an excerpt from the NY Times DealBook that makes it sound like this lawsuit could, if successful, result in “SPACmageddon”:
If the suit succeeds, it could make professional investors who have found SPACs attractive wary of potential legal challenges, chilling the market. Proving damages will be difficult because the Universal Music deal was scrapped. But more important, perhaps, the case attempts to address underlying issues about the motivations of some SPAC sponsors. And its analysis of the meaning of investing in securities — part of any M.&A. deal — raises existential questions about the purpose and treatment of SPACs in general.
I think that DealBook has a point about the difficulty of proving damages, but although I’m no 1940 Act guru, it seems to me that the plaintiff may have bigger problems than that. Here’s why – all of the allegations in the complaint seem to depend upon the court concluding that PSTH should be registered under the Investment Company Act. But the problem is that there’s an exemption from that statute that this SPAC & every other one has been structured to fit into. This Mayer Brown memo explains:
The structure of a SPAC’s trust account is designed to avoid the SPAC being classified as an “investment company” under the Investment Company Act of 1940, as amended (the “Investment Company Act”). Following its IPO, a SPAC is typically required to invest the IPO proceeds held in trust in either government securities or in money market funds that invest only in government securities.
By doing so, a SPAC may rely on Rule 3a-1 under the Investment Company Act, which excludes companies with no more than 45% of the value of its total assets consisting of, and no more than 45% of the issuer’s net income after taxes deriving from, securities (excluding government securities). There are also no-action letters in which the SEC Staff concurs with the view that securities in certain money market funds also can be excluded from these calculations.
The complaint says that “an Investment Company is an entity whose primary business is investing in securities. And investing in securities is basically the only thing that PSTH has ever done. From the time of its formation, PSTH has invested all of its assets in securities.” What kind of securities has it invested in? Again, here’s what the complaint says: “The Company’s agreement with its trustee specified the money was to be “invested only in U.S. Treasury obligations with a maturity of 180 days or less or in money market funds . . . which invest only in U.S. Treasury obligations.”
So, the complaint appears to allege that PSTH is an investment company because it – like every other SPAC – has invested the proceeds of IPO in exactly the type of securities that would permit it to rely on the exemption provided by Rule 3a-1 of the Investment Company Act. This excerpt from a CNBC article on the lawsuit makes it clear that this point wasn’t lost on Pershing Square:
A spokesperson at Pershing Square said the complaint bases its allegations, among other things, on the fact that PSTH owns or has owned U.S. Treasurys and money market funds that own Treasurys, as do all other SPACs while they are in the process of seeking an initial business combination. “PSTH has never held investment securities that would require it to be registered under the Act, and does not intend to do so in the future. We believe this litigation is totally without merit,” the spokesperson said.
Like I said, this isn’t my area of expertise, so there may well be depths to this complaint that I haven’t fathomed. After all, this just can’t be that simple, right? I mean, there are some pretty serious folks on the pleadings. Maybe this case will turn out to have some traction. If so, then it may well toss a rather large monkey wrench in the works of the increasingly troubled SPAC boom. But at this stage, I think the media should stop hyperventilating.
Last week, the SEC issued this notice that grants immediate effectiveness to a Nasdaq proposal that amends Listing Rule 5910 to modify the application fee for “Acquisition Companies” that list on the Nasdaq Global Market. The rule change reduces the initial application fee from $25k to $5k – in line with the fee charged to companies applying to list on the Nasdaq Capital Market.
Nasdaq says that this fee is used to offset the cost of conducting its regulatory review of the initial listing application – and that those reviews are less costly for Acquisition Companies because there is no underlying operating business and often no historical financials. At the NYSE, Acquisition Companies aren’t subject to the initial application fee, which is $25k for most companies.
The SEC is also seeking comments on the amendment, and may temporarily suspend the rule within 60 days if needed. If the SEC does that, it would then initiate proceedings on whether the rule should be approved or disapproved.
Last fall, the SEC settled an enforcement action with Fiat-Chrysler that arose out of allegedly misleading disclosures about its compliance with emissions standards. There may be more actions like this on the horizon, according to a recent Cooley blog. Here’s an excerpt, based on a July speech by then-Acting Enforcement Director Melissa Hodgman:
According to Hodgman, we should “expect to see ‘other cases like that, where there was a misstatement or something that wasn’t disclosed to investors that they needed to know to make [an] investment decision.’” In addition, she observed “that ‘like many of the other areas, I don’t think this is a different approach to enforcement or applying anything in a different way,’ adding that ‘our securities laws were written to evolve and [meet] the new products and the new environments in which we find ourselves.’”
September is often the busiest month of the year for enforcement actions. With the new Director and the ongoing work of the Division’s “ESG task force,” it will be interesting to see what happens in the coming weeks.
Despite the current focus on diversity at the board level and throughout organizations, “sexual orientation” isn’t captured by EEO-1 reports and the anti-discrimination laws of many states don’t extend employment protections to LGBTQ individuals. Now, this dimension of diversity is starting to get more attention.
Recent bills, including the “ESG Disclosure & Simplification Act” that was passed by the House earlier this summer would require SEC disclosure about workforce and/or board composition, including self-reported sexual orientation. Several big pension funds also include LGBTQ in their policy definitions of diversity. This Diligent memo explores the current stats for representation:
– Fewer than 0.3% of Fortune 500 board directors were openly LGBTI (the I being ‘intersex’) in 2020. LGBTQ+ workers are woefully underrepresented within corporate boards and executive committees; further, 358 Fortune 500 companies do not have a board diversity policy in place.
The memo outlines the typical benefits that having a diverse & inclusive group of decision-makers and employees can bring – including lower turnover and customer loyalty. Like other dimensions of diversity, boards can be intentional about adding LGBTQ individuals to their candidate lists and celebrating LGBTQ inclusivity. The memo recommends giving directors the benefit of D&I training versus “opting out” – so that they’re well-informed to consider strategic challenges & opportunities, and how the company’s policies affect outcomes. Also check out this KPMG podcast on the “rising interest in LGBTQ+ diversity in the boardroom.”
The SEC has announced the appointment of Sanjay Wadhwa as Deputy Director of the Division of Enforcement – effective immediately. Sanjay has served at the SEC since 2003. He’s moving into this role from the SEC’s New York Regional Office, where he co-led 150 Enforcement personnel as Senior Associate Director. He also previously served in additional roles in the Enforcement Division, including Deputy Chief of the Market Abuse Unit and Assistant Director in NYRO.
The press release also calls out Melissa Hodgman and Kelly Gibson for their leadership service during this transition and says they’ll continue to be instrumental advisers to Chair Gensler and the Division.
Last week, Robinhood announced (on its company blog) that it agreed to buy Say Technologies – the platform that makes it easier for retail shareholders to vote proxies and to ask earnings call questions in real-time. We’ll be watching the potential voting impact of this as we head into the next proxy season. But for now, let’s talk about earnings calls.
Tesla helped pave the trail for Say when it started using the technology for its earnings calls a couple years ago. Back in 2019 – which feels like forever ago – I wrote that Say claimed that retail investors are more likely to ask about products and less likely to care about your detailed financial results – a more entertaining experience for everyone, although possibly less informative for analysts who are honing financial models.
At the time, it didn’t seem like many people would actually find entertainment value in earnings calls, but now it’s 2021 and that’s what’s happening. I blogged a few months ago that a number of companies were courting retail participation in quarterly calls. They’ve had some success! AMC’s latest call was held on Say and yielded 4600 retail questions.
Robinhood and Say both want to make it easier for retail investors to participate as owners. In 2023, will the CEOs of big, established companies be answering questions about their corporate mascots? If I’ve taken one lesson to heart over the past two years, it’s that anything is possible. If you’re looking at using Say, your product development (and mascot) folks might end up with a bigger role in preparing for your quarterly calls.
This Axios article says that climate change has been getting more attention in S&P 500 companies’ Q2 earnings calls. The article cites to a few examples of companies that gave specific info about ESG activities:
– Qualcomm: “As part of our ongoing ESG efforts, we recently started purchasing 100% renewable solar energy for our San Diego headquarters.”
– Interpublic Group of Companies: “[We] announced an action plan that consists of 3 climate roles: committing to set a science-based target; sourcing 100% renewable electricity by 2030; and joining The Climate Pledge, co-founded by Amazon in Global Optimism.”
– Caterpillar: “Our 2020 sustainability report highlights 7 new environmental, social and governance goals we’ve set to achieve by 2030. … One of these goals is to ensure that 100% of Caterpillar’s new products through 2030 will be more sustainable than the previous generation.”
