CEO succession has been near the top of business news cycles lately – last week’s news about Jeff Bezos stepping down as Amazon’s CEO certainly played a part. One key board responsibility relates to CEO succession planning. Investors expect boards to have a plan and when the need arises – to appoint a new CEO in due course. As boards need to deal with views of multiple stakeholders, one dilemma is what board should say to investors and a SquareWell Partners report says it found only 20% of companies that have appointed a new CEO since January 2019 provided comprehensive disclosure of their succession planning process.
Some companies aren’t in a position like Amazon – where the company’s announcement named Andy Jassy as incoming CEO. Jassy reportedly previously described himself as Bezos’ shadow – and the announcement also said Bezos will transition to executive chairman. To underscore the importance of CEO succession planning, the SquareWell report cites research that found companies that are unprepared to appoint a successor in a timely manner lose on average $1.8 billion in shareholder value. The report notes, when it comes to succession planning, it’s understandable that companies may want to hold their cards close to the vest, but investors want reassurance that boards are ready to act. Here’s an excerpt about succession planning disclosure that can help reassure investors:
There might be a misunderstanding that investors expect to learn the names of potential successors or to micromanage the choice of the next leader while what they actually want is to see evidence that the board is fulfilling its fiduciary duty and is ready to ensure a smooth transition for all scenarios.
Companies taking succession planning seriously should allow different executives to gain experience in engaging with investors. Investor focus should be on the frequency of the review of the succession plans and asking boards how they ensure that the pipeline of potential candidates and the successor profile are always aligned with the evolution of the company’s strategy. Investors could also question the company’s leadership development programs to understand how the leaders of tomorrow are being groomed. The quality of the board’s answers to these questions should reveal how prepared the board really is to face the next CEO transition.
For a look at trends in Russell 3000 and S&P 500 succession practices, Heidrick & Struggles and The Conference Board recently issued their “2020 CEO Succession Practices” report. The report discusses trends, the Covid-19 impact on succession planning and predicts that if company performance continues to be unsteady, it’s likely more boards will face the need to navigate a leadership change sooner than they might have anticipated. And for more practical insights about CEO succession planning, check out the transcript from our webcast “CEO Succession Planning in the Crisis Era” – there you’ll find tips about disclosure issues and steps boards and advisors can take now!
Form 10-K Considerations & Reminders
With calendar year Form 10-K filings coming along, a recent Gibson Dunn memo walks through substantive and technical considerations to keep in mind when preparing 2020 Form 10-Ks. The memo covers recent amendments to Reg S-K, disclosure considerations in light of Covid-19, amendments to MD&A & financial disclosure rules and other considerations in light of recent and upcoming changes at the SEC. The memo includes a fairly extensive discussion of the new human capital disclosures and among other things, reminds companies to be mindful of what they’ve said about composition of their workforce in their CEO pay ratio disclosures. Here are a few other considerations, check out the complete 25-page memo for more:
KPIs: The SEC’s Interpretive Release issued in January 2020 was a reminder that companies must disclose key variables and other qualitative and quantitative factors that management uses to manage the business and that would be peculiar and necessary for investors to understand and evaluate the company’s performance, including non-financial and financial metrics. The memo reminds companies that if changes are made to the method by which they calculate or present the metric from one period to another or otherwise, the company should disclose, to the extent material, the differences between periods, the reasons for the changes and the effect of the changes. Changes may necessitate recasting the prior period’s presentation to help ensure the comparison is not misleading.
Covid-19 Impact on Risk Factors: It is important that the COVID-19 risk factor disclosure be appropriately tailored to the facts and circumstances of the particular company, whether due to (i) risks that directly impact the company’s business, (ii) risks impacting the company’s suppliers or customers, or (iii) ancillary risks, including a decline in the capital markets, a recession, a decline in employee relations or performance, governmental regulations, an inability to complete transactions, and litigation. The SEC has reiterated that risk factors should not use hypotheticals to address events that are actually impacting the company’s operations and brought enforcement actions against certain companies for portraying realized risks as hypothetical.[11] Accordingly, companies should be specific in providing examples of risks that have already manifested themselves.
Disclosure Controls and Procedures: In light of the substantial number of changes to the Form 10-K requirements and disclosure guidance, it is important for personnel and counsel to consider the manner in which the company’s disclosure controls and procedures are addressing the changes. It is also important that the disclosure committee and audit committee are briefed on the changes and the company’s approach to addressing them.
Transcript: “Glass Lewis Dialogue: Forecast for the 2021 Proxy Season”
We’ve posted the transcript for our recent webcast: “Glass Lewis Dialogue: Forecast for the 2021 Proxy Season” – it covered these topics:
– Proxy Season Review Highlights
– Policy Guideline Updates
– Board Diversity
– ESG Reporting
– Compensation
For those diving in to drafting a company’s proxy statement, check it out for insight into what Glass Lewis and the firm’s investor clients will want to see in this year’s disclosures.
A recent Olshan blog discussing what activists might expect from a Gary Gensler led SEC raised the possibility that Section 13(d) reform just might find its way on to the SEC’s agenda. This excerpt explains these efforts might garner bipartisan support:
At the CFTC, Mr. Gensler demonstrated an ability to balance progressive political pressures with competing industry interests. Should he take a similarly pragmatic approach if confirmed to lead the SEC, one of the areas where a coalition can be brokered between different interest groups is reform of Section 13(d) of the Exchange Act. Adopted in 1968 as part of the Williams Act, Section 13(d) instituted a rigorous beneficial ownership disclosure regime that requires stockholders to promptly notify issuers if they accumulate significant stock positions.
Ever since, corporations and their advisors have agitated for increasingly stringent investor reporting obligations. Likewise, progressives skeptical of hedge funds and activism in general have also trained their sights on parts of Section 13(d). As a testament to the appeal of this sentiment to both the business community and progressives, legislation (the “Brokaw Act”) was introduced in the Senate in 2017 to intensify oversight of activist hedge funds through Section 13(d) reform by Senator Tammy Baldwin (D-WI) and former Senator David Perdue (R-GA), each a member of the peripheral wing of their respective party.
The blog suggests that in addition to potentially shortening the reporting window, the SEC’s efforts could include expanding the definition of “beneficial ownership” to include derivative instruments that are not subject to settlement in the underlying security.
Rule 10b5-1 Plans: Glass Lewis Offers Up “Best Practices”
Rule 10b5-1 plans are one of the “great divides” between those of us who are lawyers for public companies and literally everyone else who follows public company issues. Most of us are borderline paranoid about crossing the t’s & dotting the i’s to make sure these plans provide the protection they’re supposed to provide (we even have an 87-page handbook devoted to that!). Most of them think these plans are a total scam – and point to the windfalls reaped by execs at Pfizer & Moderna for trades under 10b5-1 plans that seemed particularly well-timed to coincide with positive Covid-19 vaccine news.
That divide is one reason why I was kind of surprised by a recent Glass Lewis blog offering up some thoughts on “best practices” for 10b5-1 plans. These include typical suggestions like “cooling off” periods & public disclosure – but as this excerpt notes, the ultimate goal of these and other best practices is to provide transparency about the plan and its implications:
Other forms of best practice include avoiding the use of multiple, overlapping plans, avoiding short-term plans (most plans are six months to two years) and avoiding making changes to existing plans. All of these best practices help simplify the flow of publicly available information and present a clear way for insider trading rules to be followed. They help to avoid situations where executives are put into the spotlight, as was the case for Pfizer and Moderna – and ensure that when things do go public, the market has the information it needs to put things in context.
Now, since the blog’s title is “Operation Warp Pay,” I expected this discussion of best practices to be followed by a smackdown of the trading by the execs of these pharma companies. Surprisingly, that wasn’t the case. While the media reaction to Pfizer & Moderna’s 10b5-1 trading plans suggest that more could have been done on the transparency front, Glass Lewis concludes that the trades were essentially benign examples of lawful transactions under Rule 10b5-1.
Market Mania: History Doesn’t Repeat Itself, But It Often Rhymes
Have you ever heard of the Piggly Wiggly short squeeze? This FT.com article tells the story of the last time individual investors & Wall Street went toe-to-toe over a stock. It happened nearly a century ago, but it shows that Mark Twain was right when he said that “history doesn’t repeat itself, but it often rhymes.” (In case FT puts this behind their pay wall, this Of Dollars & Data blog also recounts the tale).
Also, check out Bruce Brumberg’s interview with former SEC enforcement lawyer John Reed Stark for a discussion of some of the legal issues involved in last week’s shenanigans.
According to an SBA press release, the agency has forgiven over $100 billion in PPP loans as of January 12, 2021, and has approved forgiveness for nearly 85% of the applications that it has received. That’s great, but what should you do if your client is in the other 15%? This Dorsey & Whitney memo says that a borrower’s only recourse is the SBA appeals process, and this excerpt says that it should expect an uphill battle:
The only appeal process allowed by law is set out in the SBA regulations found at 13 CFR § 134.1204, et seq. The decision on the appeal will be made by an administrative law judge (ALJ) who will review the petition filed by the borrower, the response of the SBA, and the “record,” that is the documentation submitted by the borrower and the SBA. However, in order to obtain a reversal of the denial of loan forgiveness, the borrower must convince the ALJ that “the SBA loan review decision was based on clear error of fact or law.” 13 CFR § 134.1212.
That is very difficult to prove because courts have ruled that “clear error of fact or law” means that “although there is evidence to support [the decision], the [administrative law judge] . . . is left with the definite and firm conviction that a mistake has been committed.” Concrete Pipe & Prods. of California, Inc. v. Constr. Laborers Pension Tr. for S. California, 508 U.S. 602, 622, 113 S. Ct. 2264, 124 L. Ed. 2d 539 (1993); see also, PGBA, LLC v. United States, 389 F.3d 1219, 1224 (Fed. Cir. 2004). All of that means that thorough preparation and diligent prosecution of the appeal is absolutely necessary.
The memo reviews the appeals process, including deadlines and the matters that must be addressed in an appeal petition. The most important part of the process to keep in mind is that deadlines are very tight – an appeal must be perfected within 30 days of the SBA’s final decision on forgiveness, and it is applied rigidly. That means that even if a company expects that its forgiveness application will be approved, it needs to prepare to move quickly in case it receives an unpleasant surprise.
PPP Loans: Unforgiven? You May Be Eligible for a Tax Credit
If your client is not successful in obtaining loan forgiveness from the SBA, all is not lost! The IRS says that it may be eligible for a consolation prize in the form of a tax credit:
Under section 206(c) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, an employer that is eligible for the employee retention credit (ERC) can claim the ERC even if the employer has received a Small Business Interruption Loan under the Paycheck Protection Program (PPP). The eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.
If you received a PPP loan and included wages paid in the 2nd and/or 3rd quarter of 2020 as payroll costs in support of an application to obtain forgiveness of the loan (rather than claiming ERC for those wages), and your request for forgiveness was denied, you can claim the ERC related to those qualified wages on your 4th quarter 2020 Form 941, Employer’s Quarterly Federal Tax Return.
This recent “Accounting Today” article provides additional details on the tax credit, which is limited to the 4th quarter of 2020.
PPP Loans: Fraudulent? Now You’re REALLY Unforgiven
The DOJ recently announced its first civil fraud settlement associated with a PPP loan. The case involved a company called Slidebelts & its CEO Brigham Taylor, and centered on allegations that the company falsely represented that wasn’t bankrupt on PPP loan applications. Here’s an excerpt from this Troutman Pepper memo that describes the terms of the settlement:
The settlement agreement states that Slidebelts and Taylor are liable to the United States for nearly $4.2 million in damages and penalties for violating the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the False Claims Act. Because of the compromised financial condition of Slidebelts and Taylor, DOJ agreed to accept a settlement amount of $100,000 in exchange for releasing Slidebelts and Taylor from liability for these civil claims. The settlement agreement did not, however, release Slidebelts and Taylor from any liability under the Internal Revenue Code, criminal liability, or any other administrative liability or enforcement right not specifically released in the agreement.
The memo points out that DOJ can seek maximum penalties of approximately $2 million per violation under FIRREA and $23,000 per violation, plus triple damages, under the FCA. What’s more, both incentivize whistleblower actions. That means that borrowers need to monitor compliance closely and ensure that their internal reporting system addresses potential violations of PPP loan requirements.
Whenever a new disclosure requirement becomes effective, one of the first things people ask is – “what are other companies doing to comply with it?” This Willis Towers Watson memo provides some insight into that by reviewing the content of early 10-K filings containing human capital management disclosure. The memo’s analysis breaks down the disclosures into two categories – descriptions of human capital resources & initiatives and disclosure of data reflecting human capital metrics. Here’s an excerpt on what companies are saying about their resources & initiatives:
Most companies included the descriptions “employee development and training” and “diversity initiatives and strategies.” This is not surprising given the societal focus on these issues during 2020. A cursory review of larger companies in our sample indicates these disclosures were leveraged from existing public statements, such as proxies and environmental, social and governance (ESG) reports.
Among the companies disclosing diversity initiatives and strategies as descriptions, two thirds enhanced their disclosure with representation metrics. Only a handful of companies disclosed concrete gender and racial diversity goals (e.g., increase the representation of both women and ethnically diverse talent by at least one percentage point year over year). We expect that more companies will continue to enhance their internal reporting processes and develop and publicize actual goals in these areas; therefore, an uptick in their prevalence as metrics disclosed in future filings is likely.
Almost every disclosure also included at least one human capital metric. Workforce profiles were the most common of these, with the total number of employees disclosed being most prevalent metric. Information about the total number of employees appeared in 94% of filings. That isn’t surprising, since that kind of disclosure was previously required in 10-K filings.
What is a little surprising is that this was the only metric to appear in a majority of the 10-K filings reviewed. Gender representation and diversity & inclusion were the next most popular metrics, and appeared in 44% and 38% of filings, respectively. Other metrics discussed in some filings included union representation, training, and employee turnover or retention rates.
Human Capital Management Disclosure: What Do Investors Want?
As companies work through how to comply with the SEC’s new “principles based” human capital disclosure requirement, they also may want to consider this recent FEI article, which says that investors are looking for companies to address three things:
As we approach the Q4 2020 earnings cycle and 2021 proxy season, investors will be focused on three specific aspects of HCM: 1) employee health and safety amid the precipitous increase in COVID-19 cases; 2) diversity and inclusion given a spate of decrees, proposals and actions by the State of California, ISS, NASDAQ, Business Roundtable and OneTen; and 3) training and development amid the acceleration of Industry 4.0, IoT, digital, and automation.
The article recommends specific actions that companies should take in preparing to satisfy their new disclosure obligations. These include ensuring that a board committee (typically the Comp Committee or a dedicated ESG Committee, if one exists) oversees human capital management, evaluating its processes & systems for monitoring and updating publicly disclosed human capital metrics, and assessing whether those metrics are still the most relevant for managing the business and changing or updating them as needed.
Audit Committees: Financial Reporting Disclosure & Control Tips
Just in time for everybody’s upcoming round of audit committee meetings, here’s a Weil memo with 21 tips for audit committees drawn from recent SEC rule changes, guidance, enforcement cases and Staff comment letters. Now, you might be tempted to write off a memo promising “tips” as likely to be pretty facile, but that would be a big mistake with this one – it’s a 21-page deep dive that’s definitely worth spending some time with on your own & sharing with your audit committee.
During the initial lockdown last spring, my wife & I became enamored with bird watching. We hung several different feeders in our back yard and spent a lot of time on our porch watching all sorts of cool birds. Yes, we party hard here in the Cleveland suburbs!
Anyway, we’ve attracted a real menagerie. We’ve kept the feeding going during the winter & have seen some new arrivals, all of which were more than welcome – that is, until the European starlings showed up. I’ve quickly learned to hate these guys. They travel in large flocks, poop everywhere and bully all the other birds off the feeders. We’re trying to get rid of them, but it looks like it’s going to take some effort.
Nobody invited the starlings to the party, and now they’re why the other birds can’t have nice things. Their presence at our bird feeders made me think of last week’s stock market shenanigans involving GameStop, AMC and a handful of other “stonks.” My annoyance at this situation is similar to my annoyance with the starlings in my back yard. After all, nobody invited people who treat the stock market like a casino to the party, and they’re a big reason why a lot of companies & stakeholders can’t have nice things.
The only thing is, like a lot of other people, I’m not exactly sure who the starlings are in this scenario. Are they the “Eat the Rich” crowd from Reddit – or are they the billion dollar hedge funds that publicly paraded their short positions & ended up being taken down by the Internet’s sans-culottes? Maybe the starlings are the trading apps, the clunky way Wall Street clears trades, or even Donald Trump supporters? Perhaps the answer is “all of the above.”
It’s going to take me a while to sort this out in my own head. Based on the recent joint statement that the SEC commissioners issued on the situation, it looks like it’s going to take the agency some time as well. This whole thing is far from simple – check out this NYT article to get a sense of the challenges that the SEC faces here. So for now, I guess all we can do is just sit back & enjoy the memes and the free chicken tenders.
SEC Makes Some Interesting Appointments
The SEC announced yesterday that HLS professor John Coates has been appointed to serve as Acting Director of Corp Fin. It’s an interesting appointment – the head of Corp Fin has traditionally been a practitioner, while Coates is a long-time academic. Of course, he’s also a former Wachtell M&A lawyer, so it’s not like he doesn’t know his way around a deal.
The SEC also announced the appointment of Satyam Khanna as Senior Policy Advisor for Climate and ESG. Khanna previously served as counsel to former commissioner Robert Jackson. In his new role, Khanna will “advise the agency on environmental, social, and governance matters and advance related new initiatives across its offices and divisions.” His appointment is another signal that ESG issues and rulemaking projects are likely to feature prominently on the SEC’s agenda.
Transcript: “Streamlined MD&A and Financial Disclosures – Early Considerations”
We have posted the transcript for the recent webcast – “Streamlined MD&A and Financial Disclosures: Early Considerations.”
Last week, the World Economic Forum announced that 61 companies signed-on the organization’s “Stakeholder Capitalism Metrics,” a set of ESG metrics and disclosures that measure long-term enterprise value creation for corporate stakeholders. The metrics are intended to serve as “a set of universal, comparable disclosures focused on people, planet, prosperity and governance that companies can report on, regardless of industry or region.” This excerpt from the WEF’s announcement provides more details:
The Stakeholder Capitalism Metrics, drawn from existing voluntary standards, offer a core set of 21 universal, comparable disclosures focused on people, planet, prosperity and principles of governance that are considered most critical for business, society and the planet, and that companies can report on regardless of industry or region. They strengthen the ability of companies and investors to benchmark progress on sustainability matters, thereby improving decision-making and enhancing transparency and accountability regarding the shared and sustainable value companies create.
The Stakeholder Capitalism Metrics document is 97 pages long, and contains plenty of the kind of pious, self-congratulatory corporate gobbledygook you’d expect to find in something like this. However, the core metrics are summarized in a three page chart beginning on page 8 of the document – and a review of that chart should give you a pretty good handle on them.
Companies that have signed on to the core metrics include Dow, Unilever, Nestlé, Bank of America, Credit Suisse, Sony & all of the Big 4 accounting firms (which helped develop the metrics). The signatories have committed to reflect the core metrics in their corporate reporting and to publicly support the effort to develop uniform ESG metrics.
We’ve previously blogged about the growing demand among investors and other constituencies for standardized sustainability disclosures, and this announcement represents a milestone in that process. Now, we’ll have to see what these disclosures look like and whether the WEF’s metrics continue to gain traction.
Tomorrow’s Webcast: “Shareholder Proponents Speak: 14a-8 Fallout & Other Initiatives”
Tune in tomorrow for the webcast – “Shareholder Proponents Speak: 14a-8 Fallout & Other Initiatives” – to hear As You Sow’s Andy Behar, Trillium Asset Management’s Jonas Kron, CorpGov.net’s Jim McRitchie, and the NYC Comptroller’s Yumi Narita discuss what changes they expect in light of the recent changes to Rule 14a-8 and other initiatives on the horizon.
Our February E-Minders is Posted
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With ESG gaining most of its momentum relatively recently, it’s not too surprising that the executive careers of many directors didn’t include a strong focus on sustainable operations metrics. Now, though, there’s a risk that investors could start to view that as a skill gap. Here’s an excerpt from a study published last week that’s making the rounds:
NYU Stern’s Center for Sustainable Business undertook a deeper dive and analyzed the individual credentials of the 1188 Fortune 100 board directors based on Bloomberg and company bios in 2019 (see box 1 on methodology),and found that 29% of (1188) directors had relevant ESG credentials. 29% seems like a decent showing, until we drill deeper and find that most of the experience is under the S; 21% of board members have relevant S experience, against 6% each for E and G (numbers are higher than 29% as some members had more than one credential).
The “S” credentials were clustered around workplace diversity (5%) and healthcare issues (generally through board memberships with medical facilities).
An issue of growing materiality, cyber/telecom security, had just eight board members with expertise. There were very few directors who had experience with ethics,transparency, corruption, and other material good governance issues. The third largest category across E, S & G and the largest in the G category was accounting oversight (G) at 2.6%. U.S. boards are required to have a least one board member with audit/finance background and most boards have at least two with that background. However, we only included board members with exhibited leadership in this area, such as being a trustee of the International Financial Reporting Standards Board or a member of the Federal Accounting Standards Advisory Board. The second largest area of expertise (1.0%) under the G was experience with regulatory bodies such the SEC or FCC.
Two areas of material importance to most companies and to investors, climate and water,had just five and two board members with relevant experience, respectively, across all1188 Fortune 100 board members. In general, there is very little director expertise for the “E,” with all nine categories at approximately 1%.
The study has shocking numbers but loses some credibility due to the way it’s measuring “relevant credentials” – as noted in this Cooley blog. But the fact that the data is out there – and investors’ growing interest in disclosure about the board’s role in ESG oversight – does suggest that there could be a benefit to examining and enhancing board sustainability credentials (through education and/or recruitment), and tying skills disclosure to “ESG” experience. For more thoughts on how expectations are evolving, see this Morrow Sodali memo on the future of the board.
NYSE: Annual Compliance Reminders
The NYSE has sent its “annual compliance letter” to remind listed companies of their obligations. The letter reminds listed companies that in response to market and economic effects of the pandemic, the NYSE has provided relief to listed companies from certain shareholder approval requirements. The NYSE is seeking to enact this relief as a permanent change to its shareholder approval rules – John blogged recently that the SEC is soliciting public comment on the proposed rule change.
The NYSE annual compliance letter is a good resource to have on hand – all the NYSE email and telephone number contact information is provided and the letter explains when and how listed companies should contact the exchange for various matters.
SEC Enforcement: Melissa Hodgman Named Acting Director
The SEC announced last week that Melissa Hodgman has been named as Acting Director of the agency’s Enforcement Division. Melissa was previously serving as Associate Director in the Enforcement Division and began working in the Division in 2008. Prior to joining the SEC, she was in private practice with Milbank, Tweed, Hadley and McCloy.
I was hoping to punt coverage of the amateur trading insanity to John’s blog rotation next week, but it seems notable that the SEC’s Acting Chair Allison Herren Lee – along with Pete Driscoll, Director of the Division of Examinations, and Christian Sabella, Acting Director of the Division of Trading and Markets – issued this joint statement yesterday to say they’re on the case. Of course, the statement doesn’t name names, but it’s hard to think it’s referring to anything other than the out-of-this-world trading of GameStop and a few other companies, which has been the subject of at least 10 WSJ articles, an Elon Musk tweet and a Vox explainer in the past 24-48 hours.
GameStop’s stock triggered at least nine trading halts on Monday, according to Bloomberg News. It closed yesterday at $347.51, down slightly from its opening price but still more than a 1740% increase over the high-teens closing price of earlier this month. And while the company isn’t in passive index funds that track to the S&P 500, it is included in some retail exchange traded funds, so the trading is impacting more than just the company itself. Don’t worry, “All is well!”
My favorite coverage so far has been from Matt Levine – here’s an excerpt from yesterday’s “Money Stuff” column:
You know who has a weird job right now? George Sherman. GameStop’s executives and board of directors don’t seem to have said much recently. What could they say? “Huh, nice that the stock’s up.” One important thing to remember is that while you and I and Reddit and Elon Musk can all treat GameStop’s stock as an absurd gambling token, a toy adrift on market sentiment far from any economic reality, it is still the stock of a company. The company’s executives still come to work each day and have to figure out what this all means. Does the price signal sent by the capital markets tell them something about how they should invest and what their hurdle rate for new projects should be? (Lol no.) Should they keep doing the stock buyback that they still have authorized? (Lol no.)
Should they sell a ton of stock to all these redditors who want it so badly? Yes, of course, absolutely, I said so on Monday, but it’s tricky. For one thing if they sell stock at the top they will surely get sued. For another thing, even at these prices, you want something sensible to do with the money; you can’t be like “we’re gonna sell a billion dollars of stock because we can, and use the money to pay ourselves bonuses and open some stores I guess?” Also, though, what is happening with their stock is a strange and for all anyone knows delicate piece of magic, and it’s very possible that filing to sell more stock would mess it up.[3] For technical reasons (more shares for short sellers to borrow), for fundamental reasons (dilution?), for anti-establishment resentment reasons (“ahh Wall Street is taking advantage of this rally for its own ends”) or for general emotional reasons (“man even GameStop is a seller at these prices”). I would not be especially surprised if GameStop announced a stock offering and the stock fell all the way back to, you know what I am not going to type a number here, but let’s just say a normal price.
GameStop actually does have a $100 million ATM offering going right now, under a Form S-3ASR that it filed in early December – or at least, it did have an ATM offering going at some point in the recent past, and it hasn’t reported whether all of that stock has been sold. If there’s still room under the program, theoretically it could hit the market at these wild valuations.
That could be a little more doable than, say, filing a pro supp right now and including disclosure that anyone who buys in the offering is nuts. Hertz tried that last summer when it was in bankruptcy and also trading at weirdly high values, and then quickly suspended the offering when the SEC Staff raised questions. Any other fast moves to capitalize on this could not only open the company up to potential shareholder litigation, but also leave it holding a big bag of cash that looks pretty attractive to activists if and when the stock falls back to Earth.
It’s hard to say which company will next catch the eye of the Reddit YOLO crowd – there are a few contenders already, which the SEC is probably watching. If these speculative frenzies continue, it can’t hurt to be prepared for the questions you’ll inevitably get as counsel. As a starting point, check out these MoFo FAQs on at-the-market offerings and Regulation M – and the other resources in our “Equity Offerings” Practice Area.
Avoid a “Semi-Hack”: Change Your URLs
Last week, as reported in the Financial Times, Intel released its earnings about 12 minutes earlier than planned due to some people getting early access to an infographic that described the quarterly results. Kudos to the company for acting quickly to address the issue – they were scheduled to put everything out right after market close, but instead reported at about 3:48 p.m.
As Byrne Hobart notes, what actually caused people to have early access to the infographic in this case was that they realized the URL for each quarter’s earnings followed a sequential pattern, and the infographic was posted live to that page before earnings were officially released:
Intel had an infographic for their Q3 earnings, in a file that ended with “Q3_2020_Infographic.pdf” and had a URL with a sequential numbering scheme. Q4’s earnings presentation had the same file naming scheme, so it was easy to guess.
This kind of thing happens from time to time, and it’s an interesting edge case in US securities law. Technically, the information wasn’t misappropriated; no one at Intel violated a duty to keep it confidential in exchange for some consideration from a trader. But in practice, the technicality matters less than appearances. Because it looks like insider trading, and fits the broad definition of hacking, trading based on the possession of this infographic is a poor risk-reward even if it turns out to be legal.
I personally love sequential URLs for their convenience. But I guess whatever technical securities law questions this type of scenario might raise, the practical takeaway is that the convenience isn’t worth it when it comes to posting material non-public information. Either keep your files gated until go-time, or change your URLs to gobbledygook.
– Innovations in Transactional Law: Finding the Next Opportunities for Efficiency
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According to Edelman’s 2021 Trust Barometer, we are experiencing a “rampant infodemic” of misinformation and widespread mistrust of societal institutions around the world. Poor information hygiene has left us unable to agree on or accomplish much of anything – including fighting the pandemic. Business has emerged as the most ethical, competent and trusted institution – with 61% of people globally and 54% of US respondents trusting business, compared to lower numbers for governments, NGOs and the media.
Few people would’ve predicted that a majority of Americans would trust big business when we were emerging from the financial crisis a dozen years ago, but here we are. Maybe we can attribute some of these results to the increased focus on “stakeholders” during the last couple of years, or maybe people are just desperate for someone to step up. But with great power comes great responsibility. According to the survey (also see this WSJ article):
– 86% of people expect CEOs to publicly speak out on social challenges like the pandemic impact, job automation, societal issues and local community issues
– 68% think that CEOs should step in when the government doesn’t fix societal problems
– Only 31% of people think brands are living up to expectations of doing an excellent job in helping the country overcome challenges
I blogged a couple of weeks ago on our Mentor Blog about the CLO’s role in CEO “activism” – and it looks like that’s likely to grow in importance. We also have memos on corporate political activism in our “ESG” Practice Area to help you navigate these expectations.
An earlier report from Edelman also looked at the role that executive pay can play in building trust, especially among institutional investors. I blogged last month on CompensationStandards.com that having a CEO pay ratio in line with those of peers and linking executive pay to ESG performance now impact trust “a great deal.”
Paul Munter Named SEC’s Acting Chief Accountant
Last Friday, the SEC announced that Paul Munter will become the agency’s Acting Chief Accountant, effective upon Sagar Teotia’s previously-announced departure from the Commission in February. Sagar had served as Chief Accountant since 2019 – and Paul has served as the SEC’s Deputy Chief Accountant since 2019.
Tune in tomorrow for the webcast – Conflict Minerals & Resource Extraction: Latest Developments – to hear our own Dave Lynn of Morrison & Foerster, Lawrence Heim of Responsible Business Alliance/Responsible Minerals Initiatives, Michael Littenberg of Ropes & Gray and Christine Robinson of Deloitte discuss what you should be considering as you prepare this year’s Form SD, and if you’re a resource extraction issuer, hear how to plan for the payments disclosure required under the SEC’s new rules to implement Exchange Act Section 13(q).
Larry Fink is sending his annual letter to CEOs this morning. It’s a little later than usual and I’ve been feeling like I was waiting for Moses to come down from the mountain. Based on the signals that BlackRock sent with the Stewardship Expectations it released in December (which, as I blogged on our Proxy Season Blog, said the asset manager would put more companies “on watch” for climate risks), it’s not too surprising that the letter urges companies to disclose their “net zero” business plan and to explain how their board oversees that strategy. But if anyone had any doubts that BlackRock wants that information, this letter should lay those to rest. Here are the high points (also see this NYT DealBook article):
– We are asking companies to disclose a plan for how their business model will be compatible with a net zero economy – that is, one where global warming is limited to well below 2ºC, consistent with a global aspiration of net zero greenhouse gas emissions by 2050.
– We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.
– We strongly support moving to a single global standard, which will enable investors to make more informed decisions about how to achieve durable long-term returns.
– Because better sustainability disclosures are in companies’ as well as investors’ own interests, I urge companies to move quickly to issue them rather than waiting for regulators to impose them. (While the world moves towards a single standard, BlackRock continues to endorse TCFD- and SASB-aligned reporting.)
– In addition, TCFD should be embraced by large private companies and public debt issuers
– As you issue sustainability reports, we ask that your disclosures on talent strategy fully reflect your long-term plans to improve diversity, equity, and inclusion, as appropriate by region.
The letter says the lines are blurring between “E” & “S” issues – for example, climate change has a disproportionate impact on low-income communities. So improved data and disclosure are all the more important to understand the interdependence between these topics.
Mr. Fink is also bullish on sustainability investments. In his letter to clients that was also released today, he explained that they’ll be publishing a temperature alignment metric for their funds, implementing a “heightened-scrutiny model” in active portfolios (including potential divestments), launching more sustainability investment products, and “using stewardship to ensure that the companies our clients are invested in are both mitigating climate risk and considering the opportunities presented by the net zero transition.”
NYC Pension Funds to Divest $4 Billion From Fossil Fuels
BlackRock isn’t the only investor focused on climate change. We’ve been blogging about divestments over on the Proxy Season Blog (including pressure on BlackRock). Yesterday, NYC Comptroller Scott Stringer announced that two of the City’s pension funds had voted to divest their portfolios of $4 billion from fossil fuel companies. Here’s an excerpt:
The New York City Employees’ Retirement System (NYCERS) and New York City Teachers’ Retirement System (TRS) voted to approve divestments today and the New York City Board of Education Retirement System (BERS) is expected to move forward on a divestment vote imminently. Securities were identified based on demonstrated risk from fossil fuel reserves and business activity, and the trustees will continue to evaluate risk in their portfolios to determine additional actions as warranted. The names of companies and the final scope of the divestment will be released following the sale of all targeted securities, which will be completed in a prudent manner to achieve best execution. The divestment is expected to be complete within the original five year timeline. The announcement by the Mayor, Comptroller, and Trustees follows an extensive and thorough fiduciary process to prudently assess the portfolio’s exposure to fossil fuel stranded asset risk and industry decline and other financial risks stemming from climate change.
In January 2018, the trustees announced a goal to divest from fossil fuel reserve owners within five years, consistent with fiduciary duty. The Systems retained independent investment consultants who conducted investment analyses showing the risks posed by fossil fuel companies and the prudent nature of the divestment actions adopted by the Boards.
In September 2018, the Mayor and Comptroller also jointly announced a goal of doubling the pension funds’ investments in climate solutions from 1% to 2%, or about $4 billion within 3 years. Climate solutions include renewable energy, climate infrastructure, green real estate, and other investments that will help achieve the goals of the Paris Climate Agreement. The City is on track to achieve this goal.
Tomorrow’s Webcast: “Alan Dye on the Latest Section 16 Developments”
Tune in tomorrow for the Section16.net webcast – “Alan Dye on the Latest Section 16 Developments.” This is our annual co-hosted program with the NASPP, in which Barbara Baksa interviews Alan about practical tips for refining your Section 16 procedures and avoiding pitfalls. Section16.net members can submit questions in advance to adye@Section16.net.
