AMC needs those additional 25 million shares its CEO was lobbying for because it’s been taking advantage of its skyrocketing stock price to issue plenty of new stock. It raised over $500 million in an ATM offering launched last Thursday, and more than $1.2 billion over the last month. If you’re scratching your head about why anybody would buy newly issued stock at these valuations, well, according to this excerpt from the risk factors section of AMC’s pro supp, the company’s kind of wondering the same thing:
We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last. Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.
That sounds a lot like the disclosure Hertz put in the pro supp for its aborted offering last summer, and in the end, the retail investors who bought into that company did okay. But what are the odds for AMC’s new investors? According to analysts, they’re not real good – even after the capital raise, one analyst said that AMC’s stock would need to drop by 85% in order to appropriately reflect its intrinsic value.
You can certainly understand why AMC would want to use the opportunity created by the current craziness to raise additional capital, and that’s not an unprecedented step for a company in its position to take. But GameStop and the other similarly situated companies haven’t accompanied their opportunistic financings with aggressive efforts to promote their stock to retail investors at prices they acknowledge to be sky high.
That seems to me to be a very risky approach. If AMC’s valuation tumbles back to earth while it’s sitting on a pile of fresh cash or a nicely cleaned-up balance sheet, my guess is that there will be plenty of activist hedge funds attracted to it not by free popcorn, but by the smell of blood in the water.
Last month, Lynn blogged about calls for changes to Rule 10b5-1, and it now looks like potential changes are officially in the works. In remarks to the WSJ’s CFO Network Summit yesterday, SEC Chair Gary Gensler said that 10b5-1 plans had led to “real cracks in our insider trading regime” and announced that he had asked the Staff to provide recommendations on how the SEC might “freshen up” Rule 10b5-1. Gensler detailed a number of specific areas of concern in his remarks. These include:
– The lack of a mandatory “cooling off period” between the time a 10b5-1 plan is adopted and the first trade, which he said might be perceived by some bad actors as a “loophole” to participate in insider trading. Gensler noted that the idea of a cooling off period of between 4 to 6 months had received bipartisan support and should be explored further.
– The ability of insiders to cancel 10b5-1 plans at any time, which allows them to exit a plan while they’re in possession of MNPI.
– The lack of mandatory disclosure requirements regarding the adoption, modification, and terms of Rule 10b5‑1 plans.
– The absence of limits on the number of 10b5-1 plans that insiders can adopt. The ability to adopt multiple plans and cancel them may lead the. With the ability to enter into multiple plans, and potentially to cancel them, Gensler says insiders might have the mistaken belief that they a “free option” to select the most favorable plan to sell under.
Gensler also indicated that the Staff will look into other possible reforms to the rule, “including the intersection with share buybacks.” None of the specific areas of concern that the Chair identified in his remarks comes as any great surprise, and all involve actions that run contrary to consensus “best practices” for 10b5-1 plans. In fact, since Jay Clayton touched on many of these concerns about 10b5-1 plans in a November 2019 speech, this may be one of those rare areas where we might have reason to hope that proposed rule changes might actually receive bipartisan support among the commissioners.
If you’ve been reading my blogs for a while, then you know that the institutional investor-led crusade against dual-class IPO structures has long been one of my favorite hobby horses. I didn’t think there was any way that I could have been less sympathetic to institutional investors’ “buy first, whine later” approach to dual-class IPOs – that is, until I saw the disastrous Deliveroo IPO unfold across the pond.
This article from FT.com indicates that one of the reasons that the offering tanked is that investors balked at its dual-class structure. Of course, a dual-class structure is novel in London, and it was also far from the only bit of hair on that deal, but some of the City’s biggest investors nevertheless cited it as one of the reasons they refused to sign-on. I say good for them – and what’s stopping U.S. institutions from doing the same?
In responding to a question like this, institutions frequently point to supposedly insurmountable “collective action problems” around this issue, or they cite the plight of the poor index funds, which have no choice but to buy stocks included in the relevant indices. But I think there’s evidence to suggest that if an IPO truly raises significant governance concerns, institutions are willing to walk away from it. I also think that whatever its merits when it comes to aftermarket purchases, the point about index funds doesn’t carry much weight when it comes to pushing back against dual-class IPOs, because index funds don’t buy IPOs.
All that leads me to believe that complaints about dual-class IPOs aren’t about “good governance” – whatever that means. Instead, they’re tactical. They’re designed to ensure that investors who provide fresh capital at the time of the IPO or afterward ultimately have the upper hand at public companies.
There’s nothing wrong with that objective, but I don’t believe there’s anything wrong with founders using their leverage to push back against it. There’s no reason for the exchanges, the SEC, Congress or the Delaware legislature to intervene. Institutions have all the tools they need to fight this fight on their own. In fact, they have trillions of them.
We’ve blogged a few times about the SEC’s use of data analytics in enforcement. This Troutman Pepper memo says that the SEC is increasingly data-driven in its approach to identifying potential enforcement targets for enforcement actions. This excerpt highlights some specific areas where the SEC’s data analytics tools are being brought to bear:
Recent enforcement actions suggest that the SEC is targeting quarterly public filings. Quarterly reports are not subject to the same accounting oversight as annual reports. Recent cases highlighted by the agency as examples of data-based enforcement actions suggest that the SEC’s focus with data-based investigations is on quarterly reports and other areas where manipulation may be more likely to occur.
Reading between the lines of the press releases surrounding recent enforcement actions and other SEC commentary, it appears that the targets for these new enforcement initiatives are relatively small manipulations to figures that can have an outsized effect by causing a company to meet analysts’ EPS expectations or attain other quarterly results that, while not necessarily material in and of themselves, can have a significant impact on analyst and investor expectations or outlooks.
The memo says that the takeaway from recent enforcement actions a recurring pattern of meeting or barely exceeding EPS estimates may attract the SEC’s attention, particularly if that performance seems to be driven by “a single category that may register as an outlier against a company’s previous filings.” That kind of targeting suggests that the SEC’s data analytics tools are allowing it to zero in on previously hard-to-detect violations that in the past would have required significant resources to identify.
Apparently, public companies aren’t the only entities that prefer the occasional Friday news dump when it comes to controversial announcements. At approximately 4:00 pm eastern time on Friday, the SEC announced that it had removed PCAOB Chair William Duhnke and had designated Duane DesParte to serve as acting Chair. At the same time, the SEC announced that it was seeking candidates to replace all five current members of the PCAOB board. This article by Politico’s Kellie Mejdrich provides an overview of the politics behind the shakeup. Here’s an excerpt:
The sudden firing followed mounting pressure from [Senators] Warren, Sanders and several left-leaning groups who in recent weeks called on SEC Chair Gary Gensler to replace the entire board leading the PCAOB. The progressives warned that the agency, which was established after the Enron and WorldCom accounting scandals to inspect public company audits, was failing to crack down on corporate wrongdoing and was captured by industry.
Warren said Duhnke’s removal was “absolutely the right move” and she signaled that she would push for a bigger shakeup. The SEC, which is also responsible for hiring the PCAOB’s leaders, may grant her wish. The agency said it would seek candidates for all five of the regulator’s board positions, even as three of its members who serve five-year terms remain in place.
Over on the Radical Compliance blog, Matt Kelly reviews Duhnke’s “tumultuous and controversial” tenure as Chair of the PCAOB and provides some thoughts about what the changes are likely to mean for auditors and compliance professionals.
The SEC’s action prompted a dissenting statement from commissioners Peirce & Roisman, who said that the SEC acted in an “unprecedented manner that is unmoored from any practical standard that could be meaningfully applied in the future.” Mindful of the fact that under the leadership of Jay Clayton, the SEC took similar action to replace all incumbent PCAOB board members in 2017, the dissenting commissioners said that action was distinguishable, since most of the board members who were replaced at that time were serving after their terms had expired.
The dissenters didn’t mention the fact that the SEC’s 2017 action was also unprecedented. As the WSJ noted at the time, it represented the first time that PCAOB directors who desired a second term had ever been denied that opportunity by the SEC. That action was followed up by the SEC’s controversial decision to deny board member Kathleen Hamm a second term in 2019.
In light of the history here, the dissenters sound a bit like Captain Renault from Casablanca. C’mon guys, the PCAOB has been a political football for some time now, and what’s sauce for the goose is sauce for the gander.
A few weeks ago, I blogged about efforts to come up with a fix for the accounting issues associated with SPAC warrants identified in the joint statement from Corp Fin leadership. According to this White & Case memo, discussions between the accounting firms active in the SPAC market and the Staff have resulted in a consensus on how to structure SPAC warrants to permit them to be classified as equity & not as liabilities for financial reporting purposes.
The memo walks through the steps necessary to achieve equity treatment for pre-IPO SPACs, and this excerpt addresses the alternatives available to post-IPO SPACs to address their outstanding warrants:
SPACs that have completed their IPOs need to consider, in connection with their initial business combinations, whether to amend their warrant agreements to implement the changes to classify their warrants as equity instruments after the consummation of the business combination.
If the post-business combination company will only have a single class of common stock, the tender offer provision described above will not preclude equity classification because it would only be triggered when there is a change in control. In that case, only the private placement warrants would need to be addressed. If the post-business combination company will have a dual class structure (e.g., where certain former owners of the target company receive super-voting stock in the business combination), then the public warrants also will need to be addressed.
There are three approaches to be considered:
– Accept liability treatment for the warrants on a going forward basis;
– Seek the approval of warrantholders to amend the warrant agreement concurrently with the solicitation of approval of the SPAC’s stockholders for the business combination; or
– Rely on the “warrant table,” if applicable, or a tender/exchange offer after the consummation of the business combination, to “redeem” or repurchase some or all of the then-outstanding SPAC warrants.
The memo says that if the parties desire to amend the warrant agreement, they will need to review that agreement’s amendment provisions in order to determine whether the holders of public warrants or private placement warrants need to approve the proposed changes.
We’ve posted the transcript for our recent webcast: “Capital Markets 2021.” If your practice involves capital markets transactions, you’ll want to check this out. Panelists Katherine Blair of Manatt, Sophia Hudson of Kirkland & Ellis, and Jay Knight of Bass Berry & Sims participated in an in-depth discussion of a number of topics, including:
– The State of the Capital Markets
– The SPAC Phenomenon
– Equity Financing Alternatives for Public Companies
– Debt Financing Alternatives: Investment-Grade/Non-Investment-Grade Issuers
– Recent Offering/Issue Trends
This Equilar blog shares the result of the latest Gender Diversity Index. Progress on that aspect of representation has accelerated over the past several years. Check out these stats, collected as of March 31st:
– 24.3% of all board seats in the Russell 3000 were occupied by women – The percentage of women in board seats rose 3.4% from Q4 2020 and 10.5% from one year ago.
– For the first time, the percentage of boards with zero women has dropped below 5%.
– Seventy boards had gender parity in Q1 2021, which was one fewer than the previous quarter but 10 more than in Q1 2020.
– There were 256 Russell 3000 boards with at least 40% women in Q1 2021, or 8.8% of the index, in comparison to just 6.5% of boards (189) with at least 40% women a year earlier in Q1 2020. This is nearly four times the number of boards with at least 40% women compared to four years ago.
– In California, which has the highest number of boards of any state by a long stretch (489), just one lacked a woman (0.2%). Overall, the state of California has seen a gradual uptick in the percentage of women directors since its board gender diversity statute went into effect (17% in 2018 to 28% in 2021).
The blog points out that women held only 15% of board seats at the end of 2016, when Equilar’s Gender Diversity Index was first published. At that time, even 20% representation seemed like a stretch, in light of minuscule gains in prior years. State laws, investor pressure and shifts in public opinion have led to big advancements since then.
However, these nudges aren’t standalone solutions. Parity is still a distant possibility in light of the fact that only 41% of new board seats are going to women, especially because board turnover is infrequent.
The GDPR turned 3 last week. This BBC article takes a look at the biggest fines so far, and what led to them. The inclusion of a couple US companies shows that if you’re doing a lot of business in Europe, you need to be extra vigilant on data privacy & cybersecurity.
This 20-page memo from Baker Hostetler takes a deep dive into data security and incident response plans. It gives 14 key takeaways on the front page that are worth checking out. Since we’re on the topic of GDPR today, I’ll highlight the EU regulatory update from page 13. Here are a few nuggets:
– Timing Is (Still) Everything – Much of the focus on GDPR’s notice obligations has been on the 72-hour deadline for notifying a data protection authority (DPA). While some DPAs accept delays accompanied by explanations, others take a much narrower view of the permissible bases for extending the deadline. In particular, the Dutch DPA has taken a hard stance that the need to further investigate the incident and its effects is not a sufficient reason for delayed notice. Several other DPAs, including in Ireland and Sweden, fined companies for failing to notify within the 72-hour deadline. Companies subject to the GDPR should be prepared to move quickly to make an initial, timely notification that may require follow-up once a more complete analysis is ready.
– Data Controller Responsibility – DPAs tend to have the greatest interest and assess the largest fines in incidents where the DPA finds fault with the company’s responsibility for EU personal data, particularly where there are repeat data breaches. In particular, DPAs have assessed how companies — identify and respond to data breaches, implement and maintain organizational and technical measures to safeguard personal data, assess third-party vendors, conduct data protection-related risk assessments, and document data breaches.
– Mitigating Circumstances – DPA enforcement actions in 2020 drew particular attention to a number of mitigating factors in determining fines, and we expect these to be of continuing relevance this year – financial hardship, actions taken to minimize harm to individuals, cooperation with the DPA, appropriate notice to the regulator and individuals, other fines already imposed for the same incident, and absence of prior violations.
The memo also predicts that enforcement will expand during 2021 because more countries are implementing data breach notification procedures. But, since DPAs are just as overworked as the rest of us, they seem less likely to follow up on incidents that involved a small number of individuals or less-sensitive personal data, or companies without a significant EU footprint. Here’s a checklist for compliance for US companies.
