One skill that gets mentioned as an area of improvement for boards relates to IT or cyber expertise. Perceived shortcomings in any board risk oversight responsibility can often come with consequences – in connection with losses from Greensill Capital and Archegos, the recent resignation of the risk committee chair of Credit Suisse is one example. A recent Bloomberg article discusses board oversight of cyber risk and notes some boards have been adding “cyber experts” while others say boards need cyber literacy.
In terms of approach for providing cyber risk oversight, each board will decide what’s appropriate given the company’s particular facts and circumstances. When it comes to board cyber literacy, boards frequently rely on management to help the board stay up to date about cyber risks, while the article said some boards are turning to cyber consultants for help. The article includes a reminder from the head of Accenture Security that cyber literacy is a two-way street and management’s role shouldn’t be overlooked:
Boosting cyber literacy isn’t just about directors learning the language of security but ensuring that chief information security officers can explain their work. ‘We have to ensure the CISO can communicate effectively at the board level, not in bits and bytes.’
A 2019 report from University of California, Berkeley and Booz Allen Hamilton based on interviews with directors about beliefs, practices and aspirations relating to cybersecurity oversight recognizes the tension around the need for board cyber expertise. The report suggests boards re-assess decisions relating to cybersecurity oversight on a regular basis to take account of changes in internal and external risks. At the time of the study, a majority of directors interviewed leaned toward distributed cyber expertise among board members. The report provides these considerations for boards that might be leaning toward an “everyone” or a “cyber-expert” approach:
Leans “Everyone”
– Ensure adequate training and education is defined, used, and kept up-to-date
– Engage external third-party expertise for specialized knowledge, and most importantly to prevent group-think traps
– Amplify accountability for cyber oversight in subset groups (likely committees)
Leans “Cyber-Expert”
– Seek out specific board members who offer deep specialized knowledge of cyber (e.g., crisis management, technology, and threat landscape)
– Prioritize full board discussion of cyber oversight over committee delegation
– Engage external subject-matter experts to test and enhance internal expertise
Dr. Jessica Wachter Named SEC Chief Economist and Director of DERA
Earlier this week, the SEC announced that Dr. Jessica Wachter has been appointed as the agency’s Chief Economist and Director of the Division of Economic and Risk Analysis (DERA). Since 2003, Dr. Wachter has been a professor at the Wharton School and holds the Dr. Bruce I. Jacobs Chair of Quantitative Finance and is a Research Associate with the National Bureau of Economic Research. Dr. Wachter is recognized as one of the leading academic researchers on financial markets. In this role, Dr. Wachter will lead DERA as it provides economic analysis to support decision-making at the SEC.
For those looking for a resource to help audit committees evaluate the company’s external auditor, the Center for Audit Quality recently released an updated version of its external auditor assessment tool. Audit committees of course meet regularly with the company’s external auditor and engage in informal assessment of the auditor throughout the year. But, when it’s time for the audit committee to conduct a more formal annual assessment, CAQ’s assessment tool can be used as a guide.
For audit committee’s looking for input about factors to consider when assessing the auditor, the guide offers a good starting point. CAQ’s assessment tool includes sample questions to help the committee assess the external auditor and then also discuss as part of its annual evaluation of the auditor. Questions cover topics relating to, among other things, the engagement team skill and responsiveness, engagement team succession, workload, audit plan and risks, scope and cost considerations, audit quality, interaction with the external auditor and auditor independence, objectivity and professional skepticism.
When assessing the external auditor, CAQ suggests the audit committee also seek input from management. To help with this process, the assessment tool includes a sample rating form for members of management to complete. The rating form solicits feedback to a variety of factors relating to the external auditor’s quality of service provided, sufficiency of resources, communication, objectivity, etc.
Back at the end of March, Liz blogged about introduction of a resolution calling for repeal of last year’s Rule 14a-8 amendments under the Congressional Review Act (CRA). Although the resolution has been introduced, a Congressional webpage for the resolution shows the Senate Committee on Banking, Housing & Urban Affairs hasn’t taken any action on the bill since it was introduced.
The lack of action on the resolution may be partially what led about 200 investor advocates to reportedly write to every member of Congress urging support of the CRA resolution to nullify the shareholder proposal rule amendments. It’s unclear whether this investor campaign will have any impact and move the resolution forward. Among those that want the amendments nullified there’s a sense of urgency because time is limited for the Senate to act without the threat of a filibuster.
The CRA’s “fast track” procedures for the Senate to act and approve the resolution nullifying the amendments can be complicated but the folks at the GW Regulatory Studies Center provided some insight to help explain:
There is a deadline as far as the Senate still having access to its “fast-track” authority (which makes the resolution filibuster proof). This is referred to as the Senate action period.
As of yesterday, there were about 10 Senate session days left until that deadline. The calculation is somewhat bothersome, but it’s essentially the 75th day of session in the Senate for this Congress. After this date, the Senate could theoretically still vote on it, but it would be subject to all of the usual delay tactics (the filibuster) and would be unlikely to get through.
10-K/A: Covid-19 Factors into 2020 Stats
A recent Audit Analytics blog reviews reasons behind companies filing amended Form 10-Ks last year. When compared to 2019, 2020 saw an uptick in amended 10-Ks – up 34% and Audit Analytics attributes this increase to the impact of the Covid-19 pandemic on regulatory filings and annual meeting schedules. In fact, the pandemic factored into the frequency of the top 2 reasons for filing 10-K/As in 2020.
As it has been for the last 7 years, the most common reason for filing a 10-K/A was a need to include Part III information due to an inability of companies to get their definitive proxy materials on file within 120 days of the fiscal year end. In 2020, almost 9% of these filings specifically referenced Covid-19 as the reason for their delayed proxy filing or postponed annual meeting. The next most common reason for filing a 10-K/A was to include disclosure related to the 45-day filing extension first granted by the SEC back in March of last year in response to the pandemic. Here are the top 5 reasons companies filed 10-K/As last year:
– Part III information – 48.2%
– Covid-19 extension – 8.9%
– Exhibits & signatures – 7.9%
– Auditor’s Report – 6.7%
– Subsidiary financial statements – 5.6%
Transcript: “The Top Compensation Consultants Speak”
We’ve posted the transcript for our recent CompensationStandards.com webcast: “The Top Compensation Consultants Speak.” Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Marc Ullman of Meridian Compensation Partners shared their thoughts on:
– Key Issues & Considerations for Compensation Committees Now
– Human Capital Management Topics Compensation Committees are Discussing Now
– Setting Goals Under Uncertain Circumstances
– Balancing Internal Needs with External Pressures
– Using a ‘Resiliency Scorecard’ During COVID-19 & Beyond
A forthcoming academic article in the Duke Law Journal asserts that well-timed gifts of stock by insiders continue to be widespread – a phenomenon John blogged about a few years ago. The data continues to suggest that this could result from a combination of gifting based on MNPI as well as backdating.
What’s the big deal? Well, although charitable organizations benefit greatly from insider stock gifts, the logic goes that when the donations are made just before disclosure that causes a drop in stock price, insiders personally benefit from “inflated” charitable tax deductions and reputational accolades while avoiding the loss in value. Similar to conventional insider trading, it creates an uneven playing field and undermines public trust in the market.
The study also suggests that large investors engage in this “insider giving.” It doesn’t provide a clear definition for this group – although the authors discuss controlling shareholders, venture capitalists and activist hedge funds. Here’s an excerpt:
We find that large shareholders’ gifts are suspiciously well timed. Stock prices rise abnormally about 6% during the one-year period before the gift date and they fall abnormally by about 4% during the one year after the gift date, meaning that large shareholders tend to find the perfect day on which to give.
These results are almost certainly not the result of luck. To the contrary, our research lets us identify information leakage as the most important cause of these results: executives seem to provide large shareholders with material non-public information, who then use it to time gifts.
The study’s authors believe that problematic “insider giving” thrives due to lax reporting & enforcement. To curb potential misdeeds, they say that the SEC should make gifts subject to the same 2-day reporting requirement that applies to purchases & sales. They suggest a couple of potential alternatives such as potential exceptions for “small” gifts or applying the 2-day reporting requirement to gifts made to charities controlled by the donor or that otherwise raise red flags and then a 5-day window for most other gifts.
This would definitely make things harder for those of us in compliance. An inadvertent miss of a short reporting window can be embarrassing and draw unwanted attention – right when you’re also working to make the filing. The authors also contend that stricter reporting requirements wouldn’t chill legitimate stock gifts, but insiders and charities might feel differently.
Our “Insider Trading Policies Handbook” urges caution when considering whether an insider can gift shares at a time when they possess MNPI. We recommend dealing expressly with that in your policy so that you don’t end up having to make difficult case-by-case decisions about whether gifts are permitted. If transactions are collapsed in a way that makes it look like an insider has benefited, at the very least the company could suffer negative publicity. And studies like this could draw even more attention to the issue.
10b5-1 Plan Primer – With Design Tips!
John blogged last week about Rule 10b5-1 plans – the House of Representatives passed proposed legislation calling for the SEC to study potential revisions to the rule. With calls for more transparency on 10b5-1 plans, a new WilmerHale memo (pg. 24) provides a primer on the technical requirements for 10b5-1 plans, then includes a couple of plan design suggestions for directors and officers who might consider entering into a plan:
– Keep selling formulas simple, this can help minimize the need for clarification or changes later that could constitute amendments
– Keep investor relations considerations in mind that could arise with frequent plan sales or from use of a plan that could result in a single large sale that’s triggered by the company hitting a significant milestone or from market volatility that’s unrelated to company news
The process for putting a 10b5-1 plan in place varies from company to company, including whether plans require review and approval, whether insiders are required to use 10b5-1 trading plans when conducting transactions involving company securities, length of cooling off periods, etc. The report includes survey data (co-sponsored by Deloitte Consulting and NASPP) about these and other 10b5-1 trading plan practices, here are some of the results:
98% require plans to be reviewed (or reviewed and approved)
10% require insiders to use plans
79% require a cooling-off period between plan adoption and commencement of trading – the most common waiting period being 1 – 3 months (45%) followed by the next open window period/fiscal quarter (32%)
For more on Rule 10b5-1 Plans, check out our “Rule 10b5-1 Trading Plans Handbook” – it covers the basics of the rule and includes common Q&As that crop up every so often. The handbook is available online for free to members of TheCorporatecounsel.net, you’ll find a list of all of our handbooks by clicking on “Handbooks” in the blue bar at the top of the home page.
Our May E-Minders is Posted
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Proxy distribution costs can be a pretty big line-item for corporate secretary departments (or sometimes treasury departments), and a recent rule proposal that could affect them has been flying under the radar. For anyone who hasn’t been tasked with fielding questions about invoices relating to proxy distribution, count your blessings. The invoices include a myriad of charges with the proxy distribution service provider including a key to help explain the fees, with some being fee maximums established by the NYSE.
Last December, in a rulemaking proposal submitted to the SEC, NYSE indicated that it wants out of the business of setting the proxy distribution fee schedule and instead wants FINRA to take on that responsibility.
The portion of proxy distribution fees established by the NYSE haven’t changed since 2013. Still, questions about the invoices seem to arise nearly every year and among other things, distribution related costs like postage rates, mail class delivery, the number of packages, not to mention the weight of your annual meeting materials can change. Although the maximum fees established by the NYSE have remained stable, depending on what happens with the NYSE’s proposal, the fees established by NYSE could be on the verge of changing too.
As it turns out, FINRA doesn’t want the responsibility either. The SEC has instituted proceedings to determine whether to approve or disapprove the NYSE proposal and for now responsibility still sits with the NYSE. Various organizations have submitted comment letters on the proposed rulemaking, with some noting how this proposed change could impact issuers. Here are a few notable letters:
The comment period on the proposed rulemaking closed last week, although for anyone wanting to weigh in on this hot potato, the SEC typically welcomes comments even late in the process.
Tweaks to NYSE Related Party Transaction Rule
A few weeks ago, I blogged about amendments the NYSE Listed Company Manual relating to shareholder approval requirements. While that blog focused on amendments relating to equity issuances in private placement transactions, the amendments also tweaked NYSE Listed Company Manual Section 314.00, which requires related party transactions to be approved by an independent board committee. The tweaks to Section 314.00 are important to note before they completely slip under the radar.
Over the years, many have interpreted the NYSE Rule about related parties as being consistent with the disclosure requirement in Reg S-K Item 404. As amended, NYSE Section 314.00 clarifies that for purposes of this rule, the term “related party transaction” refers to transactions required to be disclosed pursuant to Item 404 – but without regard to the transaction value threshold of that provision. The amended rule also requires “prior” review of related party transactions to make sure they’re not inconsistent with interests of the company and its shareholders.
So does the removal of the $120,000 threshold from this rule mean that NYSE-listed companies need to have their audit committee (or whichever independent body of the board that reviews related party transactions) review and approve nearly all potential related party transaction regardless of dollar value? Maybe not. This Davis Polk memo explains how you might be able to get comfortable without it:
The revisions raise the question of whether the audit committee should review and approve even de minimis transactions involving directors, officers and other related parties. Because Item 404 specifies that the related party must have a “material interest” in the transaction—in addition to the transaction value threshold of $120,000—we believe companies may conclude that for many small transactions, there is no such material interest and so prior audit committee approval is not necessary. Depending on the relevant industry and a company’s ordinary business operations, companies may wish to review the types of transactions they regularly engage in with related parties in order to ensure continuing compliance with NYSE’s rules.
For companies that take a more conservative approach to pre-approval, it’s probably worth revisiting your related party transaction policy to consider whether to expand the list of pre-approved transactions. If some common arrangements are omitted only because of their low dollar amount, you would want to consider adding those.
Tomorrow’s Webcast: “The Leveraged ESOP as an Exit Alternative”
Tune in tomorrow for the DealLawyers.com webcast – “The Leveraged ESOP as an Exit Alternative” – to hear Shawn Ely of Lazear Capital Partners, Steve Goodman of Lynch, Cox, Gilman & Goodman and Steve Karzmer of Calfee, Halter & Griswold discuss benefits and structuring, financing and operational issues to take into account with leveraged ESOP transactions.
We will apply for CLE credit in all applicable states for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
No registration is necessary – and there is no cost – for this webcast for DealLawyers.com members. If you are not a member, sign-up now to access the programs. You can sign up online, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
Yesterday, the SEC announced enforcement proceedings against eight companies for alleged disclosure deficiencies in Form 12b-25 filings. Here’s an excerpt from the SEC’s press release:
Public companies are required to file the SEC’s Form 12b-25 “Notification of Late Filing,” commonly known as “Form NT,” when “not timely” filing a Form 10-Q or Form 10-K and seeking additional days to file their reports. Companies must disclose on the Form NT why their quarterly or annual report could not be filed on time, as well as any anticipated, significant changes in results of operations from the corresponding period for the last fiscal year.
The SEC orders find that each of the companies announced restatements or corrections to financial reporting within 4-14 days of their Form NT filings despite failing to provide details disclosing that anticipated restatements or corrections were among the principal reasons for their late filings. The orders also find that the companies failed to disclose on Form NT, as required, that management anticipated a significant change in quarterly income or revenue.
Without admitting or denying the SEC’s allegations, each company consented to C&D enjoining them from future violations of Section 13(a) of the Exchange Act & Rule 12b-25, and agreed to pay penalties ranging from $25,000 to $50,000.
It’s been a while, but these aren’t the first enforcement actions targeting 12b-25 filings. In 2003, the SEC brought an enforcement action against Spiegel for alleged shenanigans surrounding a Form 12b-25 filing, and it subsequently brought a separate action against the company’s former audit committee chair arising out of the same allegations. In 2005, the SEC brought an enforcement action against FFP Marketing (and the two employees responsible for preparing the filing) for deficient 12b-25 disclosure.
In the SEC’s press release, acting Enforcement Director Melissa Hodgman said that these actions were the latest in which the SEC used data analytics to identify difficult to detect disclosure issues. That’s something we blogged about last fall, when the SEC announced the first actions under its “EPS Initiative.”
Insider Trading Policies: Who Should be Subject to Your Blackout Period?
One of the questions that members frequently ask is which employees should be subject to a quarterly blackout period under an insider trading policies. There’s no “one size fits all” answer to that question, but this excerpt from WilmerHale’s new 2021 IPO Report (p. 22) provides a good summary of the reasons why some companies might answer this question differently than others:
Companies that have a relatively small number of employees or that have a corporate culture of broadly sharing information often apply these blackout periods to all employees. Many young public companies adopt this approach, particularly if they have only one principal facility and their employees have fairly open access to company information.
More established companies with large numbers of employees, multiple facilities and more restricted access to sensitive information typically apply blackout periods only to designated employees, such as management, finance, accounting and legal staff. Similarly, the company must decide which employees will be subject to the other provisions of the policy.
The memo cites surveys sponsored by our colleagues at NASPP & Deloitte concerning the scope of blackout period restrictions. The surveys, which were taken in 2014, 2017 & 2020, indicate that blackout prohibitions apply almost universally to Section 16 officers, directors, other members of senior management & employees with access to financial information or MNPI. However, only around 60% of those policies apply to middle management, and less than 50% apply to all exempt employees.
Securities transactions by companies & insiders are under increasing scrutiny from investors, regulators, and even Congress. Be sure to check out our July 20th webcast on “Insider Trading Policies & Rule 10b5-1 Plans” for insights on the latest developments from our panel of experts!
A Fond Farewell to Anne Triola
After more than 20 years of service, our webmaster, Anne Triola, is retiring today. Anne has handled posting of an often overwhelming volume of material on a daily basis, not to mention coding webcast transcripts, creating new practice areas, and performing 1,001 other tasks without which these sites would simply shut down. She’s always juggled the demands of multiple editors with good humor, great efficiency, and quiet competence.
Anne, thank you for everything. We will miss you, and we wish you and your husband a happy and healthy retirement. Bon voyage!
The Q&A process at last year’s virtual annual meetings didn’t get rave reviews from investors. Companies say they’re better prepared this year, but I’d still suggest you take a look at this article in “The Shareholder Service Optimizer,” which provides some helpful tips on handling the Q&A process.
The article makes several suggestions, starting with including language in your proxy materials prominently welcoming & soliciting shareholder questions, and carefully explaining exactly how they can be submitted and how they will be answered. Here’s an excerpt about what you should do next:
A very good step-two: Invite shareholders to submit questions in advance, via an e-mail to your Investor Relations site. Some institutional investors have pooh-poohed this, as leading to cherry-picked questions and canned answers. But this is the easiest way, by far, for all concerned – and we have found this to be a very good indicator of the issues that are on the minds of the savviest and most interested shareholders.
It’s also a quick and easy way to “get the Q&A ball rolling…and it provides excellent opportunities to have the questions answered by the best-qualified person…which conveys a welcome “openness” to shareholder questions, helps to showcase the management team as a whole and adds much needed variety to the webcast. But this should definitely NOT be the only way you allow questions to be asked.
The article includes a number of other practical suggestions to improve your Q&A period, and concludes by advising companies to commit – up-front – to answering all shareholder questions asked, prior to and during the meeting, and then to promptly post the answers on the investor page of the company’s website.
Shareholder proposals were another aspect of last year’s virtual annual meetings that didn’t always go smoothly, and this recent blog from Soundboard Governance’s Doug Chia provides some advice to companies about what not to do when dealing with a shareholder proponent at a virtual meeting. This excerpt discusses how companies have muzzled proponents by limiting their ability to talk about their proposal:
This leads me to the stories about issuers’ placing strict substantive limits on presenting shareholder proposals at VSMs. These instances involve issuers dictating what proponents can say:
(1) Requiring the proponent to provide a very short written statement (e.g., 100 words), to be read by management at the meeting in lieu of the proponent speaking in their own voice by phone or audio recording.
(2) Requiring proponent to stick to a prepared script provided by the company, based on the proposal and supporting statement in the proxy statement.
(3) Limiting the proponent to only the exact words of the proposal and supporting statement as printed in the proxy statement… and citing the SEC rules as the source of this limitation.
The blog acknowledges that abuses like these were outliers, particularly among large cap companies. But actions like this also risk alienating investors & making the company a corporate governance poster child – and while companies may not be seeking a governance “gold star” for their virtual meetings, they also don’t want to stand out from the pack in a negative fashion.
SEC Enforcement Chief Resigns
Last night, the SEC announced that Enforcement Director Alex Oh was resigning from the position that she was appointed to last week. This NYT article provides some background on her decision. Melissa Hodgman, who served as acting Director prior to Alex Oh’s appointment, will return to that role.
Last week, Liz blogged that the SPAC bubble was leaking. This week, S&P Global declared that the bubble has popped – and that SPACs have gone the way of tulips & dotcoms:
Even for a financial mania, SPACs didn’t last long. These highly speculative schemes have whipsawed from nowhere to everywhere and now back to nowhere – all in a matter of months. Live fast, die young.
Our obituary for the short-but-colorful life of special purpose acquisition companies (SPACs) is a bit facetious, of course. But there’s no denying, to use a metaphor favored by cynical Wall Streeters who have seen this sort of thing before, that the SPAC bubble is no longer being pumped up like it had been. Why the deflation? SPAC saturation.
In Q1, an average of more than 90 new US-listed blank-check companies each month successfully raised money from investors, according to S&P Global Market Intelligence. So far in April, the rate of issuance has plunged about 80%, with the full-month total tracking to just 14, our data indicates.
The article notes that instead of investors, the group that’s looking most closely at SPACs right now seems to be the SEC – and that’s a pretty clear signal “that a boom has gone bust.” That may be true when it comes to IPOs, but there’s a whole lot of money sloshing around in SPACs that are desperately chasing de-SPAC deals, so it’s likely that there’s another chapter in the SPAC boom story that has yet to be written.
NFTs: Playboy Hits the Jackpot
I really wasn’t planning to blog about “non-fungible tokens,” or NFTs, which in case you haven’t heard are the latest grift gift from the Blockchain crowd. As befits my grumpy boomer persona, I’m as dubious about the merits of NFTs as I am about the merits of crypto. But then I saw some news that made me think that if I were a little less jaded about innovations like these – and the prospects of certain adult-oriented SPACs – I’d have a few more dollars in the bank.
A few months ago, I blogged about how Playboy Enterprises was looking to merge with a SPAC. I dismissed Playboy’s business prospects as being out of step with the zeitgeist & the transaction as perhaps representing “peak SPAC.” As usual though, I was the one who was out of step. According to CNBC, Playboy’s stock is up over 80% this month alone & 173% since February. Why? Apparently dirty pictures & NFTs are a match made in heaven:
These days, announcing a new investment in a legacy media business is enough to draw a raised eyebrow. That is, of course, unless the company is reinvented nude magazine publisher Playboy — now PLBY Group — whose stock has surged more than 80% this month due in large part to excitement over how it can take advantage of the hot NFT market.
And Playboy certainly has unique offerings. “Look, we have an unbelievable archive, 68 years. It is the 5,000 pieces of art we have, it’s covers, it’s photography. It is so deep and rich in what’s in there,” CEO Ben Kohn said on the company’s earnings call last month.
Playboy, which went private in 2011 amid declining ad sales from its eponymous nude magazine, rejoined the public markets in February with a management laser-focused on modernizing a company once known for its leading market share of pubescent closets.
Yeah, I did not see that one coming. But I kind of saw this one coming – the Jim Hamilton blog recently flagged a petition for proposed rulemaking calling for the SEC to clarify the status of NFTs & NFT platforms under the federal securities laws. The petition was submitted by Arkonis Capital, and is a pretty sophisticated piece of work. If you’re working in this area, it’s definitely worth reading.
NFTs: Your Wu-Tang Clan Update
Since they’ve never been ones to sleep on a trend, I’m sure it will come as no surprise to regular readers of this blog that America’s most entrepreneurial hip-hop artists have already launched their own NFTs. This article from The Observer has the details on the Wu-Tang Clan’s move into the world of non-fungible tokens:
Within the music and recording industry, gimmicks are essential to keeping the wheel of capital and cultural production churning. In other words, gimmicks are nothing to be ashamed about because they tend to be extremely effective: back in March of 2014, the legendary rappers of the Wu-Tang Clan announced that they’d only be selling a single copy of their forthcoming album, Once Upon a Time in Shaolin.
The album eventually sold for around $2 million to the notorious “pharma bro” Martin Shkreli, but the stunt had proven that novel ways of selling music were still to be discovered. Now, that new frontier has arrived: recently, the Wu-Tang Clan announced that they’d be selling 36 copies of a 400 page coffee table book about their legacy in the form of NFTs, or non-fungible tokens.
Before you decide to turn to Ghostface Killah or RZA for investment advice, I would caution you that not all of their business ventures turn out to be as lucrative as Once Upon a Time in Shaolin. As for me, I’ve learned my lesson from Playboy & have given up on conventional investment strategies. I’m cashing in my 401(k) and putting it all in Dogecoin.
The rise of non-financial priorities in corporate governance and the focus on corporate purpose has attracted a lot of attention in recent years. Some have dismissed the increasing corporate emphasis on “stakeholder” interests & ESG issues as “woke capitalism,” which one pundit recently defined as the belief that “businesses ought to obey orders from the progressive elite, regardless of how thin its connection to any company may be.”
I’ll be the first to admit that some of this stuff is downright silly, but I don’t think this phenomenon can be tossed aside with a talk radio sound bite like “woke capitalism.” It seems to me that there’s something deeper going on, and that the recent Super League fiasco provides some insight into what that might be.
In case you’ve been living under a rock, last week, some of Europe’s wealthiest & most successful soccer teams decided to strike out on their own with an exclusive, multi-national “Super League.” While it was announced with great fanfare, the Super League imploded almost immediately. Fans, players, coaches, and even governments all expressed outrage over the attempted greed grab. The reaction appears to have caught the league’s organizers & financial backers by surprise. It shouldn’t have, and this excerpt from a recent Axios newsletter explains why:
A small group of 12 ultra-elite soccer clubs had access to the finest strategy, polling and public relations advice that money can buy. The deal they unveiled on Sunday night was years in the making. But they and their advisers missed something big — that society as a whole is now willing to forego wealth if it means more equality.
– Brexit made almost everybody in Britain worse off, for instance — but it also hit the rich London cosmopolitans and bankers the hardest.
– The Fed is openly embracing the prospect of higher inflation — something that erodes wealth and hits rich savers, while inflating away the debts of the poor.
The article sums up the current zeitgeist by stating that “when the source of a company’s profits is manifestly unfair, those profits are more likely than at any time in decades to be facing existential threats.” If you buy that conclusion, then business leaders aren’t falling in line with progressive elites – they’re just “reading the room.” Many appear to have decided that society’s decades-long embrace of “winner take all” capitalism is coming to an end, and that their companies need to think & act differently in order to continue to prosper in a more egalitarian environment.
Of course, so far this new attitude among business leaders hasn’t extended to their own compensation, but perhaps we can hope for a “Super League moment” there in the not too distant future as well.
#MeToo: Impact on CEO Employment Contracts
Speaking of executive comp, the Conflict of Interest Blog recently flagged a new study reviewing the impact of the #MeToo movement on the terms of executive employment agreements. This excerpt from the study’s abstract indicates that the growing public outcry about sexual misconduct has prompted companies to take a more aggressive approach when it comes to “for cause” termination provisions:
In the wake of MeToo, we find a significant and growing rise in the prevalence of contracts that allow companies to terminate CEOs without severance pay in response to harassment, discrimination, and violations of company policy. We discuss the implications of these “MeToo termination rights” for corporate governance, executive contracting, and gender equity. We conclude that our results offer promising evidence of increased corporate control of CEO behavior and greater accountability for sex-based misconduct in the wake of the MeToo movement.
The study reviewed over 400 CEO contracts and found that publicly traded companies are reserving greater discretion to terminate executives for sex-based misconduct in statistically significant numbers. The authors say that by “insisting on expanded contractual definitions of ’cause’ to terminate, these companies are signaling to CEOs that such behavior will not be tolerated, while ensuring that corporate boards are reducing the costs of penalizing wayward CEOs.”
The authors also suggest that the changes resulting from the #MeToo movement prove that the terms of CEO employment agreements aren’t immune from “exogenous shocks,” which gives some reason to believe that hopes for a Super League moment in executive comp may not be in vain.
PPP Loans: Seeking Forgiveness? If You’re a Gov Contractor, Think Twice!
For most companies, the decision to seek forgiveness of a PPP loan is the proverbial “no-brainer” – but this Hunton Andrews Kurth memo says that’s not necessarily the case if the borrower is a government contractor. Here’s an excerpt:
For government contractors, however, the rules are very different. If a government contractor received a PPP loan and thereafter obtains forgiveness of that loan, it is required to credit the amount of the forgiveness back to the government. For the reasons set forth below, a government contractor should carefully consider whether seeking forgiveness of a PPP loan makes good business sense. In some cases, government contractors might be worse off financially if they obtain forgiveness of that PPP loan than if they simply pay it back.
The problem is that the federal acquisition regulations make it clear that a contractor that has already received payment for contract costs cannot also receive PPP Loan forgiveness funds for those identical costs. The memo notes that this isn’t just an academic issue – the DOJ is aggressively prosecuting fraud in PPP loans, and while this issue hasn’t yet come up, there’s no reason that it couldn’t. What’s more, there are also potential issues under the False Claims Act that need to be taken into account.
PPP loans have pretty borrower-friendly terms, so although each company’s situation is different, for some government contractors, the economics of simply repaying the loan in accordance with its terms may be more favorable that seeking forgiveness.
On March 2, 2021, the Secretary of State designated various entities affiliated with Russia’s government, including the FSB, as parties subject to Executive Order 13382 for “having engaged, or attempted to engage, in activities or transactions that have materially contributed to, or pose a risk of materially contributing to, the proliferation of weapons of mass destruction.” This designation was prompted by the poisoning of dissident Alexander Navalny, and may result in some public companies that do business in Russia being required to provide the disclosure and accompanying “Iran Notice” filing contemplated by Section 13(r) of the Exchange Act.
This Bryan Cave blog reviews the scope & implications of the new sanctions designations, including the potential disclosure obligations for public companies with business in Russia:
Importantly, the additional sanctions designations pursuant to EO 13382 may trigger reporting to the SEC pursuant to Section 13(r)(1)(D) of the ’34 Act. Although Section 13(r)(1) of the ’34 Act is typically associated with the sanctions against Iran, some of the reporting triggers are broader than just transactions involving Iran. Among the broader triggers are any transactions or dealings knowingly conducted with “any person the property and interests in property of which are blocked pursuant to Executive Order No. 13382.”
Based on this, parties that engage in transactions with any of the parties now blocked pursuant to EO 13382 in connection with the Navalny poisoning must be cognizant of these reporting requirements if the party is an issuer or the affiliate of an issuer required to report on a periodic basis to the SEC.
There are a number of Russian entities subject to the sanctions, but the big kahuna is the FSB. As this Hogan Lovells memo notes, the FSB plays a prominent role in licensing the importation of IT and other encryption products into Russia. Notification to or approval by the FSB may be necessary for a variety of technology products, including “laptops and smartphones, connected cars, medical devices, software, or any other items that make use of ordinary commercial encryption.”
OFAC updated General License No. 1B to confirm United States persons may continue to interact with the FSB for purposes of qualifying their products for importation and distribution in Russia, but that license doesn’t include an exemption from providing the disclosure required by Section 13(r) of the Exchange Act or from filing the accompanying Iran Notice with any annual or quarterly report.
10b5-1 Plans: CII Calls for Mandatory Disclosure in Form 4s & 5s
One of the items included in the batch of Rule 144 amendments that the SEC proposed last December was a provision that would add a check box to Forms 4 and 5 to provide filers the option of disclosing that their sales or purchases were made pursuant to a Rule 10b5-1 plan. Last month, the CII submitted a comment letter on the proposal calling for that disclosure to be made mandatory. Here’s an excerpt:
We, however, would respectfully request that this provision be revised to require: (1) “Form 4 and Form 5 to indicate via a check box whether their reported transactions were made pursuant to Rule 10b5-1(c) rather than provide it as an option for the filer[;]” and (2) disclosure of the adoption date of the respective Rule 10b5-1 plan on the forms.
Our requested revision is consistent with our long-standing belief that providing greater transparency of Rule 10b5-1 transactions would provide useful information to investors and other market participants.
Don’t be surprised if this recommendation gets some traction. The CII’s comments come on the heels of other recent calls for more transparency about 10b5-1 plans – as well as proposed legislation passed by the House of Representatives last week that would direct the SEC to “study and report on possible revisions to limit the ability of issuers of securities and issuer insiders to adopt Rule 10b5-1 trading plans.”
Hertz: Who’s the Sucker Now?
Last summer I made fun of the “suckers” who were buying Hertz common stock while the company was in bankruptcy and after it disclosed that it would take a miracle for equity holders to realize any recovery. Well guess what? The bankruptcy process launched a bidding war, and now the equity’s in the money. Here’s an excerpt from this WSJ story on the deal:
Hertz proposed in a chapter 11 exit plan on Wednesday that current stockholders receive warrants to purchase up to 4% of the restructured business, the first time the company has said it is worth enough to distribute some value to its owners. The shareholder distribution would amount to a recovery of 60 to 70 cents per share, a “material return to equity,” Hertz lawyer Thomas Lauria said during a court hearing Wednesday.
If approved by the U.S. Bankruptcy Court in Wilmington, Del., that outcome would make Hertz a relative rarity in corporate bankruptcies, in which equity ranks behind debt and most often is wiped out.
In my defense, Hertz stock was trading at over $5 per share last June, so it was a sucker bet at that price – although this deal could still be topped, and there might even be more money on the table for the stockholders.
The retail segment of shareholders had been holding steady around 30% the last couple of years, well below the 85% levels of the 1960s, before the dawn of huge asset managers. But now we’re in the age of stonks – and no-fee trading platforms. Although some are noticing that retail trading is slowing, there’s no denying that the number of retail accounts has swelled in the last year. Kris Veaco wrote me last week to say that it’s the fastest growing group of investors – some proxy intermediaries have noticed an uptick of 50% in email accounts compared to last year!
As I’ve noted a couple of times on our Proxy Season Blog, companies need to anticipate higher proxy distribution costs if they’ve seen a jump in retail holders. You may also need to brace yourselves for less predictable voting outcomes – especially with TD Ameritrade’s elimination of broker discretionary voting.
But there’s also an opportunity here – retail investors can be long-term, loyal supporters of management, and may also be enthusiastic participants in capital raises. This NYT article reports that some companies are rolling out the red carpet to welcome them – even changing the earnings release process to allow for more interaction with individuals. Here’s an excerpt (also see this Axios article):
After CarParts.com reported its quarterly results last month, executives at the company, which sells replacement auto parts, did what many of their ilk do: They held a conference call with Wall Street analysts, fielding questions about inventory levels, profit margins and corporate strategy.
Roughly 30 minutes later, the same executives were on Clubhouse, hosting an entirely different kind of audience. Their 2,000 or so guests had gathered at the buzzy online meeting spot to learn about the company. Their questions were far more straightforward. How did the business work? Why was CarParts.com able to offer lower prices than brick-and-mortar rivals? Were CarParts.com shares worth buying?
CarParts.com isn’t the only company to do this – Restaurant Brands International also invited “customers & guests” to discuss Q4 earnings with its leaders on Clubhouse, and other companies are using podcasts and YouTube to reach the retail audience. Tesla has also been using the interactive “Say” platform for earnings calls for a while now – I blogged a couple of years ago about the impact that was having on the Q&A portion of the call.
The thought of extra conversations with different groups of investors makes me a little skittish – but as long as execs comply with Reg FD, it seems like it’s probably fine to do. Please correct me if you disagree!
New Director of SEC Enforcement: Alex Oh
Yesterday, the SEC announced that Alex Oh has been appointed Director of the Division of Enforcement. Alex was most recently a partner at Paul, Weiss – where she co-chaired the firm’s Anti-Corruption & FCPA Practice Group and had an extensive pro bono practice. She also has prior experience as an AUSA in the Criminal Division of the U.S. Attorney’s Office for the Southern District of New York, where she was a member of the Securities & Commodities Fraud Task Force and the Major Crimes Unit.
PracticalESG.com: Thank You – And More Trees!
I want to give a huge “thank you” to those of you who subscribed to our new practicalESG.com blog on its very first day – we are so excited to begin this journey with you.
Our Earth Day launch offer of planting a tree for the first 422 subscribers was way more popular than we anticipated! We actually ran out of the allotted trees.
So we got more. Now, the first 1000 subscribers will have a tree planted on their behalf! Click here for your subscription and tree.
