Earlier this year, I blogged about the possibility that the use of direct listings instead of traditional IPOs might allow companies to avoid the Section 11 claims that so often accompany IPOs. This Orrick memo says that a recent California federal court decision suggests that this hope may be misplaced:
On April 21, 2020, Judge Susan Illston of the U.S. District Court for the Northern District of California denied defendants’ motion to dismiss a securities class action complaint brought by a shareholder of Slack Technologies, Inc. following the company’s 2019 direct listing. Pirani v. Slack Technologies, Inc. , No. 19-cv-05857-SI (N.D. Cal. Apr. 21, 2020).
Rejecting defendants’ argument that the plaintiff lacked standing to pursue claims under Section 11 of the Securities Act, the court held, in a matter of apparent first impression, that in the unique situation of a direct listing in which shares registered under the Securities Act become publicly tradeable on the same day that unregistered shares become publicly tradeable, a plaintiff does not lack standing to sue under Section 11 even though the plaintiff cannot show that her shares were registered.
The memo goes on to summarize the judge’s reasoning, which appears to be based almost entirely on policy considerations underlying Section 11. We’re posting memos in our “Securities Act Liability” Practice Area.
“No Respect at All”: Are Dual Class Companies Undervalued?
Dual class companies are the Rodney Dangerfield of corporate governance – “No respect. . .I’m tellin’ ya, I don’t get no respect at all!” It’s hard to find any love for them among investor advocates, who’ve made “one share, one vote” a central underpinning of their good governance creed. But does their zeal for this revealed truth result in the undervaluation of dual class companies? That’s the conclusion of a recent study by a Cambridge University law prof. Here’s the abstract:
Dual-class stock enables a company’s controller to retain voting control of a corporation while holding a disproportionately lower level of the corporation’s cash-flow rights. Dual-class stock has led a tortured life in the US. Between institutional investor derision and the exclusion or restriction of dual-class stock from certain indices, one may assume that dual-class structure must be harmful to outside stockholders.
However, in this article, the existing empirical evidence on US dual-class stock will be reassessed by contrasting studies that use different measures of performance. It will be shown that although dual-class firms are generally valued less than similar one-share, one-vote firms, they perform as well as, and, in many cases, outperform, such firms from the perspective of operating performance and stock returns. When it comes to dual-class stock, more than meets the eye, and a presumption that dual-class stock is harmful for outside stockholders should not guide policy formulation.
The study argues that the market discounts dual-class stock to protect itself against the potential that the downsides of the structure will outweigh the benefits, but that those downsides seldom emerge. As a result, outside stockholders are not harmed by dual-class stock. Instead, they invest in dual-class stock at a discounted price which organically protects them against the potential for future abuses, and that, if anything, discounts dual-class stock too much.
Capital Markets: Time to Dust-Off the Alternative Equity Offering Playbook?
In times like these, many public companies that otherwise might be good candidates for a traditional equity offering may need to look at alternative strategies. That means ATMs, PIPEs, registered directs, and even equity lines are on the table for companies that haven’t previously considered them. If you haven’t done one of those deals since the last time the world ended, you should take a look at this Proskauer memo on alternative equity offerings. It provides a detailed overview of each of these alternative equity financing options.
If you’re considering tapping the capital markets, be sure not to miss our upcoming webcast – “Capital Raising in Turbulent Times” – which will address the current state of the new issues market for debt and equity, and explore financing and liability management alternatives.
Yesterday, I blogged about the bind that some Delaware companies find themselves in when it comes to switching their annual meetings from a physical location to a virtual only meeting. The problem stems from the fact that public companies that first gave notice of their annual meeting after the date of Gov. Carney’s April 7th order providing relief from DGCL notice requirements for such a switch aren’t eligible to rely on it.
That means that these companies can’t be certain that merely complying with the SEC’s guidance on providing notice of a change to a virtual meeting will be compliant with the DGCL’s notice requirements. Many are concerned about their ability to provide the formal notice of a change required by the DGCL in a timely manner.
Help for these companies may be on the way in the form of proposed 2020 amendments to the DGCL recently endorsed by the Corporate Law Section of the Delaware Bar. While the legislature needs to act on the proposal, Section 4 of the proposed legislation would amend Section 110 of the DGCL to provide the board of a public company with the authority during an emergency to:
Notify stockholders of any postponement or a change of the place of the meeting (or a change to hold the meeting solely by means of remote communication) solely by a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to § 13, § 14 or § 15(d) of [the Exchange Act] and such rules and regulations.
Section 23 of the proposed legislation would make this authority retroactive to January 1, 2020 “with respect to any emergency condition occurring on or after such date and with respect to any action contemplated by Section 4 of this Act and taken on or after such date by or on behalf of the corporation with respect to a meeting of stockholders held . . . during the pendency of such condition.”
I’m told that the Delaware Bar is seeking immediate consideration of these emergency amendments, but that the legislature has not yet reconvened from its Covid-19 imposed hiatus.
Nasdaq Temporarily Eases Approval Requirements for Covid-19 Share Issuances
Earlier this week, the SEC approved a temporary Nasdaq rule that would provide listed companies with a temporary exception from certain shareholder approval requirements through June 30, 2020 in order to streamline issuers’ access to capital. Here’s an excerpt from Nasdaq’s issuer alert summarizing the rule:
The exception is limited to circumstances where the delay in securing shareholder approval would:
– Have a material adverse impact on the company’s ability to maintain operations under its pre COVID-19 business plan;
– Result in workforce reductions;
– Adversely impact the company’s ability to undertake new initiatives in response to COVID-19; or
– Seriously jeopardize the financial viability of the enterprise.
In order to rely on the exception, among other requirements, the company would also have to demonstrate to Nasdaq that the need for the transaction is due to circumstances related to COVID-19 and that the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company.
No prior approval of the exception by Nasdaq is required if the maximum issuance of common stock (or securities convertible into common stock) issuable in the transaction is less than 25% of the total shares outstanding and less than 25% of the voting power outstanding before the transaction; and the maximum discount to the Minimum Price at which shares could be issued is 15% (the “Safe Harbor Provision”).
Companies that fit within this Safe Harbor Provision must notify Nasdaq as promptly as possible, and at least two days before issuing shares, but aren’t required to wait required 15 calendar days after filing the listing of additional shares notification. If a transaction falls outside of the Safe Harbor Provision, Nasdaq must approve the company’s reliance on the exception before the company can issue any securities in the transaction. Here’s a Nasdaq FAQ on the rule as well as its supplemental instructions to listed companies.
PPP Loans: Borrowers Get Another Week to Decide to Whether to “Hold’em or Fold’em”
In the latest chapter of the Paycheck Protection Program saga, the SBA issued FAQ #43, which extends the deadline for borrowers to take advantage of the safe harbor for repayment of PPP loans from May 7th to May 14th. The SBA says that it will provide additional guidance on the PPP’s need certification requirement prior to that deadline. Yeah, sure, that should clear things up. . .
A number of companies have transitioned to virtual annual meetings as a result of the Covid-19 crisis, and according to the CII’s recent letter to the SEC’s Investor Advisory Committee, it has been kind of a bumpy ride from an investor perspective. Companies that are looking for ways to make their own virtual meetings more investor friendly should take a look at the CII’s letter. Here’s an excerpt summarizing some of the anecdotal concerns that the CII has heard from investors about the virtual meeting process:
– Shareholders struggling to log in for meetings.
– Inability to ask questions in some cases if the shareholder has voted in advance by proxy. We understand that one virtual meeting platform provides that for a beneficial owner to ask questions, the record holder must transfer a legal proxy to the beneficial owner. This would require the record holder to withdraw its vote if it already had voted before executing the required legal proxy because the voting would transfer to the beneficial holder. These rules unnecessarily hamper the ability of beneficial owners to participate in meetings, even at companies that use effective technology and rules for participation by shareholders who get into the meeting.
– Shareholders unable to ask questions during the meeting. In some cases, questions are limited to those that can be submitted in writing in advance, which interferes with the potential for interplay between meeting content and questions or comments.
– Lack of transparency on questions asked by shareholders, making it possible that company officials cherry-pick questions to which to respond. This obviously is an issue if time limits for a meeting prevent responses to all questions. At one large company at which shareholder questions went unanswered, we understand the company provided only 10 minutes for Q&A.
– Conflicting channels for shareholder participation, with shareholder resolution proponents required to be on a line that is different than that used for general shareholder Q&A.
– At least one company prohibiting a shareholder proponent from speaking on behalf of their proposal.
– Snafus with control numbers not working to permit shareholders to log into a meeting.
The CII acknowledges that some of these problems may be attributable in part to the speed with which many companies have shifted to virtual-only meetings, but it is concerned about the precedents that may be set this year.
Virtual Annual Meetings: Delaware’s Relief Order Leaves Some Companies Uncovered
Last month, I blogged about Delaware Gov. John Carney’s order permitting public companies that had previously noticed physical annual meetings to switch to virtual annual meetings simply by complying with the SEC’s guidance, without the need to provide further notice under applicable provisions of the DGCL. That order was extremely helpful for companies covered by it, but it turns out that a number of companies weren’t – and some of them find themselves in a bind.
As this Morris Nichols memo points out, the order only applies to companies that provided notice of a physical meeting prior to the April 7th date of the order. Companies that first mailed their proxy materials after that date apparently are not covered by it. One of our members recently posted a comment in our Q&A forum about a tragic situation that’s compounding the problems companies that aren’t covered by the order face:
This is really unfortunate. I understand that Broadridge is struggling right now to get materials mailed to shareholders. If reports are to be believed, they had an outbreak at a warehouse in NY resulting in several deaths. Their staffing levels have been drastically reduced as they are trying to comply with social distancing efforts. And they are notifying clients of delays in mailings of material and fulfilling requests for hard copy materials. Requiring notices of changes to a virtual meeting format (rather than just press release/SEC filing) will only compound the problem.
One workaround that’s been suggested to handle mailing delays resulting from the critical need to prioritize worker safety is to bypass Broadridge and mail any new notice to record holders only. Since only those holders are entitled to receive notice under state law, it seems to me that this may be a viable solution for companies that don’t have large numbers of record holders.
On the other hand, many of the orders issued by other states permitting deviations from statutory practice due to Covid-19 are prospective in nature, while Delaware’s applied only to actions taken prior to the order. Perhaps Delaware’s order could be revised to take the same approach?
Virtual Annual Meetings: Doug Chia’s Attending Them So You Don’t Have To. . .
Soundboard Governance’s Doug Chia attended Wells Fargo’s virtual annual meeting and posted a detailed summary that’s a must read for anyone considering going virtual this year. His write-up provides plenty of insights into how the meeting was conducted – including commentary on the virtual meeting platform, the manner in which the Q&A was conducted, and how shareholder proposals were presented.
Doug’s attending other meetings and posting similar summaries (here’s one about Berkshire Hathaway’s meeting that he posted earlier this week), so stay tuned.
Yesterday, the Staff issued four FAQs addressing issues arising under the SEC’s exemptive order extending filing deadlines for companies impacted by the Covid-19 crisis. The FAQs offer guidance on the disclosures required by companies seeking to avail themselves of the relief provided by the order, as well as the implications of reliance on the order for S-3 issuers. Here’s one that deals with a company’s eligibility to file a new Form S-3 during the extension period:
3. Question: Is a registrant relying on the COVID-19 Order to delay a required filing eligible to file a new Form S-3 registration statement between the original due date of a filing and the extended due date, and will the staff accelerate the effectiveness of registration statements that do not contain all required information?
Answer: Between the original due date of a required filing and the due date as extended by the COVID-19 Order, a registrant may file a new Form S-3 registration statement even if the registrant has not filed the required periodic report prior to the filing of the registration statement. The staff will consider the registrant to be current and timely in its Exchange Act reporting if the Form 8-K disclosing reliance on the COVID-19 Order is properly furnished. The registrant will no longer be considered current and timely, and will lose eligibility to file new registration statements on Form S-3, if it fails to file the required report by the due date as extended by the COVID-19 Order. Registrants with compelling and well-documented facts may contact the staff to discuss their specific capital raising needs. However, registrants relying on the COVID-19 Order should note that the staff will be unlikely to accelerate the effective date of a Form S-3 until such time as any information required to be included in the Form S-3 is filed. [May 4, 2020]
If you’re wondering why the Staff issued this guidance in the form of “FAQs” instead of the more customary CDIs, the FAQs say that it has to do with the “unique circumstances” of the Covid-19 crisis that prompted the issuance of the exemptive order in the first place.
Covid-19 Litigation: It’s Not What You’ve Said, It’s What You’re Going to Say
Over on the D&O Discourse blog, Doug Greene shares some thoughts about whether we’ll see a wave of Covid-19 crisis-based disclosure litigation. He thinks that what you said before the economy hit the wall probably won’t get you into trouble, but what you say going forward just might. This excerpt explains his reasoning:
Why don’t I think there will be a wave based on the economic downturn over the past two months? Everyone is in the same boat, so it’s difficult for plaintiffs to identify and prove that any particular company’s disclosures or governance problems caused economic harm. And plaintiffs need to choose extra-wisely, because many judges would be offended by accusations of fraud and poor oversight over problems caused by a pandemic – it would feel opportunistic.
But going forward, disclosure and governance will be judged far differently – almost in the polar-opposite way. Moving forward, judges will have no patience for companies whose disclosures are not careful or boards whose oversight fails to meet the moment. The legal standards governing disclosure and governance litigation are judged from inferences drawn in context by judges who are themselves living the context. They will be critical of disclosures that feel exaggerated and governance that feels lax. Company-specific stock drops and governance failures will be easy for the plaintiffs’ bar to spot in the coming months and years.
The blog goes on to provide some insights about how companies can best position themselves to defend both securities class action lawsuits & shareholder derivative actions based on disclosures and alleged governance lapses associated with the Covid-19 crisis.
Conflict Minerals: Form SD Due June 1 – No Covid-19 Relief
This Skadden memo provides a reminder that the SEC’s exemptive order providing extended filing deadlines relief doesn’t apply to your Form SD filing:
As a reminder, conflict minerals disclosures on Forms SD are required to be filed with the Securities and Exchange Commission (SEC) no later than June 1, 2020. This remains true despite the impact of COVID-19, given that Forms SD are not covered by the SEC’s order allowing public companies to delay certain reports in light of the pandemic.
I think it’s fair to say that America’s favorite James Bond villain had quite a week. It started on Tuesday, when Tesla dropped this little disclosure tidbit in a Form 10-K/A:
Tesla determined not to renew its directors and officers liability insurance policy for the 2019-2020 year due to disproportionately high premiums quoted by insurance companies. Instead, Elon Musk agreed with Tesla to personally provide coverage substantially equivalent to such a policy for a one-year period, and the other members of the Board are third-party beneficiaries thereof. The Board concluded that because such arrangement is governed by a binding agreement with Tesla as to which Mr. Musk does not have unilateral discretion to perform, and is intended to replace an ordinary course insurance policy, it would not impair the independent judgment of the other members of the Board.
There are obviously no issues with this little cost-saving move, right? Elon followed that up on Wednesday with an earnings call featuring an expletive-laden tirade against “fascist” Covid-19 stay-at-home orders.
Musk’s grand finale came in the form of a bizarre Friday tweetstorm that started with a tweet to the effect that he was selling almost all of his possessions. Elon then provided some eyebrow-raising investment advice – “Tesla stock price too high imo.” He segued into excerpts from “The Star Spangled Banner,” then came a little “Braveheart” riff, followed by a brief bit of existential musing. He wrapped things up with by letting us know that “my gf @Grimezsz is mad at me.”
Girlfriend’s mad, huh? Well, she must be a Tesla shareholder. The company’s stock price plummeted 10% after the tweetstorm. Isn’t there supposed to be somebody responsible for pre-clearing Elon’s potentially market-moving tweets? Yeah, well we told you that wasn’t going to work.
So, that was the week that was. It’s really a shame that Elon Musk is an immigrant & isn’t allowed to channel his energies into a run for president like literally every other billionaire egomaniac in America. Overall, I think King Arthur put it best in “Monty Python & The Holy Grail” – “What an eccentric performance!”
“Funding Secured”: Tesla Can’t Shake Lawsuit Over Last Batch of Musk’s Tweets
I know some of you may be scratching your heads about the Tesla board’s willingness to sign-off on the company’s – ahem – “unorthodox” D&O liability protection arrangements. After Friday’s tweetstorm, many of those directors also may be second-guessing that decision – if for no other reason that they’re all still knee deep in the mess Elon created the last time that he let loose on social media.
That’s because a California federal judge recently refused to dismiss a lawsuit filed against Tesla, its board & Musk arising out of his August 2018 tweetstorm. This excerpt from a recent Shearman & Sterling blog on the case has the details:
Defendants moved to dismiss for on several grounds, including that the tweets were merely aspirational and not factual, that they were made by the CEO in his individual capacity and not on behalf of the Company, and that the complaint failed to adequately allege scienter. The Court disagreed. First, the Court opined that even statements of opinion could be misleading if they conveyed facts, which the tweets allegedly did by referencing a specific price of $420 and by identifying specific financial and legal advisors. The Court also found that the complaint had adequately alleged that a reasonable investor would read the tweets as statements of facts based on the affirmative nature of the statements and subsequent exchanges on Twitter confirming those statements.
Second, the Court found that the CEO’s statements from his personal Twitter account were made within the scope of his authority, relying on the fact the CEO co-founded the Company, was on its Board, and that the Company had notified its investors in 2013 that additional information regarding the Company could be found on the CEO’s and Company’s Twitter accounts.
Finally, contemporaneous correspondence that allegedly showed that the CEO was aware of significant hurdles to the transaction and that he harbored animosity against short-sellers, as well as the swift settlement reached with the SEC within a few days of the SEC’s complaint, in the eyes if the court, all supported an inference of scienter sufficient to survive the motion.
Meanwhile, Elon’s not faring any better in Delaware, where back in February, Vice Chancellor Slights denied the Tesla defendants’ motion for summary judgment in the fiduciary duty lawsuit arising out of Tesla’s acquisition of SolarCity, a company in which Musk owned a 21% stake. The Tesla directors settled out – so Elon finds himself the last man standing as the case heads to trial.
PPP Loans: Tax Deduction? If They’re Forgiven, Forget It
One of the things that makes the Payroll Protection Program so attractive is that if a borrower spend its loan proceeds properly (on items such as payroll, rent and utilities), the loan will be forgiven. Furthermore, Section 1106(i) of the CARES Act, provides that the forgiven loans are excluded from gross income, which means that the borrower receives the loan amount (without a repayment obligation) entirely tax-free.
But what about the tax deduction that would ordinarily apply to those business expenditures made in order to obtain loan forgiveness? According to this recent memo from my colleagues at Calfee, there’s a limit to Uncle Sam’s generosity:
The question arises because Section 265 of the Internal Revenue Code provides that a taxpayer cannot take tax deductions, even if otherwise allowable, if the deductions are allocable to income that is exempt from tax. The general purpose of Section 265 is to prevent taxpayers from enjoying a “double” tax benefit (i.e., tax-exempt income generating tax deductions).
In Notice 2020-32, released today, the IRS clarifies that Section 265 does in fact apply to PPP loans and prevents taxpayers from deducting expenses that lead to forgiveness under the CARES Act. This interpretation will have the effect of negating much (if not all) of the tax benefit Congress provided with the exclusion under Section 1106(i). Given the larger goal of Congress to inject cash into struggling businesses, this result had some wondering (before today) whether the IRS would apply Section 265 to PPP loan forgiveness.
Last fall, John blogged about a Caremark claim surviving a motion to dismiss. This was a big deal because at the time it was the second case in a year that the Delaware courts declined to dismiss at the pleading stage following decades of routinely doing so. Now, earlier this week the Delaware Court of Chancery issued a 41-page opinion in Hughes v. Hu and declined to dismiss another Caremark claim.
In the most recent case, Vice Chancellor Laster held that the plaintiff adequately pled that the director defendants, who served on the company’s audit committee, breached their fiduciary duties by failing to oversee the company’s financial statements and related party transactions. The plaintiff alleged that the directors’ failures led to the company’s need to restate its financial statements, thereby causing the company harm.
The Court found the allegations in this case support inferences that the board members did not make a good faith effort to do their jobs. The Audit Committee only met when spurred by the requirements of the federal securities laws. Their abbreviated meetings suggest that they devoted patently inadequate time to their work. Their pattern of behavior indicates that they followed management blindly, even after management had demonstrated an inability to report accurately about related-party transactions.
For instance, documents that the Company produced indicated that the Audit Committee never met for longer than one hour and typically only once per year. Each time they purported to cover multiple agenda items that included a review of the Company’s financial performance in addition to reviewing its related-party transactions. On at least two occasions, they missed important issues that they then had to address through action by written consent. According to the Court, the plaintiff was entitled to the inference that the board was not fulfilling its oversight duties.
Last fall, John wondered whether Caremark was becoming a more viable theory of liability or the board’s conduct in recent cases was just more egregious. It’s still early…we’ll see if any other pleading-stage dismissals show up in 2020 to form more of a pattern.
The facts in Hughes seem pretty egregious and the Court’s opinion says the defendants face a substantial likelihood of liability under Caremark. But, as Steve Quinlivan notes at the end of his blog, the Court hasn’t found any of the defendants liable for the actions alleged in the complaint.
PCAOB Wants Comments on CAM Requirements
The PCAOB wants comments on experiences so far with the new CAM disclosure requirement. Comments are encouraged from all interested stakeholders and should be submitted by June 15, 2020. Information on the comment process can be found on this PCAOB Request for Comment. The Comment Request includes a list of questions for consideration and asks commenters to provide data, evidence or other specific examples to support comments.
The PCAOB says it’s conducting an interim analysis to understand how auditors responded to the CAM requirements, how investors are using CAM disclosures and audit committee and preparer experiences. From there, the PCAOB will consider whether additional guidance or other steps may be appropriate. The PCAOB plans to report its interim review findings toward the end of the year.
Speaking of CAMs, according to a recent Audit Analytics’ blog, so far disclosure of the audit committee’s role regarding CAMs isn’t too prevalent. The blog says the firm reviewed 770 S&P 1500 proxy statement disclosures filed between July 1, 2019 and March 31, 2020 to look for disclosures about the audit committee’s role with CAMs.
Of course, the new disclosure requirement relating to CAMs requires auditors to share any CAMs with the audit committee as part of the draft auditor report, but the audit committee doesn’t need to approve or determine CAMs. So, even though there’s been a trend of expanding audit committee disclosure, audit committees wouldn’t necessarily need to say much about how they’re engaging in the new disclosure requirement – although the blog does say we’ll probably see more of this disclosure as time goes on. Here’s some of their findings:
In the first quarter 2020, they found slightly over 6% of S&P 1500 proxy statements filed included CAMs in audit committee disclosure – the majority of which included mention in the audit committee report of the proxy
Of proxy statements that included audit committee disclosure of CAMs, 61% were from the S&P 500 – although, overall most companies haven’t included this disclosure in proxy statements
When disclosure is included in the proxy statement, it often identifies the audit committee’s role as either reviewing the CAMs, discussing CAMs with the independent auditor or both
Our May Eminders is Posted!
We have posted the May issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!
Yesterday, Corp Fin issued 3 new CDIs arising out of the new mining company property disclosure rules – Broc blogged about the rules when they were adopted in 2018. The CDIs address when companies need to comply with the new rules and also incorporation of such disclosure by reference to an annual report. Here they are:
Question 155.01
Question: For purposes of filing an Exchange Act annual report, when must a registrant engaged in mining operations comply with the new mining property disclosure rules set forth in Subpart 1300 of Regulation S-K?
Answer:A registrant engaged in mining operations must comply with Subpart 1300’s disclosure rules beginning with its Exchange Act annual report for the first fiscal year beginning on or after January 1, 2021. Until then, staff will not object if the company relies on the guidance provided in Guide 7 and by the Division of Corporation Finance staff for the purpose of filing an Exchange Act annual report. [April 29, 2020]
Question 155.02
Question:For purposes of filing a Securities Act registration statement, may the registrant satisfy its obligation to include mining property disclosure pursuant to Subpart 1300 of Regulation S-K by incorporating such disclosure by reference to its Exchange Act annual report for the appropriate period, even if such annual report was not required to comply with the new mining property disclosure rules in Subpart 1300 of Regulation S-K?
Answer: Yes. Until annual financial statements for the first fiscal year beginning on or after January 1, 2021 are required to be included in the registration statement, the staff will not object if a Securities Act registration statement incorporates by reference disclosure prepared in accordance with Guide 7 from an Exchange Act annual report for the appropriate period filed by a registrant engaged in mining operations if otherwise permitted to do so by the Commission’s rules on incorporation by reference. See, e.g., Securities Act Rule 411 (17 CFR 230.411), which provides that information must not be incorporated by reference in any case where such incorporation would render the disclosure incomplete, unclear, or confusing. [April 29, 2020]
Question 155.03
Question: For purposes of filing an Exchange Act or Securities Act registration statement that does not incorporate by reference mining property disclosure from a registrant’s Exchange Act annual report, when must a registrant engaged in mining operations comply with the new mining property disclosure rules set forth in Subpart 1300 of Regulation S-K?
Answer:An Exchange Act or Securities Act registration statement that does not incorporate by reference mining property disclosure from an Exchange Act annual report filed by a registrant engaged in mining operations must comply with the new mining property disclosure rules set forth in Subpart 1300 of Regulation S-K on or after the first day of the first fiscal year beginning on or after January 1, 2021. For example, a calendar year-end company would be required to comply with the new mining property disclosure rules when filing an Exchange Act registration statement or a Securities Act registration statement that does not incorporate by reference disclosure from a registrant’s Exchange Act annual report on or after January 1, 2021, while a registrant with a June 30th fiscal year-end would be required to comply with the new mining property disclosure rules when filing an Exchange Act registration statement or a Securities Act registration statement that does not incorporate by reference disclosure from a registrant’s Exchange Act annual report on or after July 1, 2021. [April 29, 2020]
Covid-19: Going Concern Uncertainties
A recent Audit Analytics blog says that going concern uncertainties will likely see an uptick due to fallout from Covid-19 but so far anyway, it hasn’t been significant. Here’s an excerpt of the most current information from Audit Analytics:
As of April 20, 2020, there have been 16 audit opinions on annual reports for SEC filers that have cited the COVID-19 pandemic as a contributing factor to substantial doubt about a company’s ability to continue as a going concern for the next twelve months. Of those going concern opinions, 11 are repeat going concerns.
For the five companies with new going concerns for fiscal year 2019, the impacts of the COVID-19 pandemic are expected to have a material adverse effect on results of operations, cash flows, and liquidity. However, three of these companies had certain pre-existing uncertainties prior to the pandemic – such as debt covenant obligations, recurring operating losses and negative operating cash flows – so it’s not surprising that impacts from the coronavirus would contribute additional uncertainty, resulting in substantial doubt about their ability to continue as a going concern.
No doubt Covid-19 will likely impact going concern issues for companies already dealing with financial challenges. And given the current economic environment, it seems the numbers are sure to change as the Covid-19 impact will be felt by companies in other industries that historically haven’t experienced going concern issues.
Former Chief Justice Strine Joins Wachtell, Lipton, Rosen & Katz
It was a just a couple of weeks ago that I blogged about Former Delaware Chief Justice Strine’s latest call for another “new deal.” He’s on the move – earlier this week Wachtell Lipton announced that he’s joined the firm and the NYTimes DealBook column carried the news too. Here’s an excerpt from the firm’s announcement:
Explaining his decision to join Wachtell Lipton, Mr. Strine said: “As a judge, I thought the importance of corporations in our society could not be measured by their stock price, and that it was critical to our nation’s well-being that powerful businesses treat their workers and consumers well, support the communities in which they operate, and focus on environmentally responsible, sustainable wealth creation.” Noting that “for more than two generations, Wachtell Lipton has been a consistent voice on behalf of that viewpoint and has embedded it in how it treats its people, and how it assists clients,” Mr. Strine concluded that the Firm would be “a great institution for me to help to put into practical application principles I believe are vital to our economy working for everyone.”
We’ve blogged before about data breaches…and if there wasn’t already enough negative press about the SBA relief program, last week various news outlets reported – and here’s a blog from Taft’s Privacy and Data Security team – that the SBA experienced a recent data breach affecting businesses that applied for the Disaster Loan Program (not the Paycheck Protection Program).
The SBA announced that nearly 8,000 business owners’ information may have been exposed to unauthorized users last month. SBA has reportedly addressed the issue but business owners who applied for relief through the Disaster Loan Program are encouraged to check their accounts and review their credit reports.
For a reminder about the prevalence of cyberattacks exploiting the current Covid-19 crisis and the increased work-from-home arrangements, this Data Privacy Monitor blog discusses that and what can be done to help guard against cyberattacks – helpful reminders to hopefully prevent falling into a mess like the SBA and end up needing to send breach alerts to customers.
Beyond Force Majeure: Tips for Entering New Tech Agreements During Covid-19
Many companies have been dealing with what to do about existing contracts during Covid-19, while many are also continuing to enter into new agreements. A new contract can present an opportunity to mitigate risks from the continued uncertainty everybody faces. A recent Perkins Coie memo outlines tips for negotiating new contracts during Covid-19 relating to provisions typically found in technology agreements. Here’s an excerpt:
Addendums: Consider including an addendum that contains terms and conditions that apply during the pandemic with an understanding that the pandemic-specific provisions preempt the terms and conditions in the main body of the agreement during the pandemic – the addendum can specify criteria that must be satisfied before the addendum can expire
Acceptance of Goods, Risk of Loss, Transfer of Title: Travel restrictions and stay-at-home orders may prevent inspection and acceptance of goods per the contract’s standard terms, which can then affect risk of loss, transfer of title and payment provisions so parties should consider alternatives such as relying on remote video or data measurements, permitting partial payment upon delivery or through use of buyer-funded escrows that could be released once inspection and acceptance occurs
Service Levels: Service providers may need to negotiate for more flexible service levels to accommodate bandwidth demands to regulate service usage – considerations could include temporary elimination of non-critical service features, throttle bandwidth, limitations on hours of operation, and service credits for service interruption
Other provisions addressed in the memo relate to ADR, limitations of liability, suspension, delivery terms, milestones, change orders, disclaimers, termination, health & safety, transition services, governing law, business continuity, confidentiality & reporting obligations, reps & warranties and insurance.
Podcasts: More “Women Governance Gurus” With Courtney Kamlet & Liz
Liz continues to team up with Courtney Kamlet of Vontier to interview leaders in the corporate governance field about their career paths – and what they see on the horizon. Check out the latest episodes:
When you’re the largest asset manager, any statements garner a lot of attention. Take for example, Larry Fink’s January letter to CEOs. A lot of media outlets reported on it, we blogged about it as did many others. Now, BlackRock, in its role assisting the Federal Reserve in administering some of the CARES Act relief programs, has arrows coming at it from all directions.
First, as discussed in this NYT article, a group of conservative leaning senators sent a letter to Fed Chairman Powell voicing concerns that BlackRock might avoid funding energy and transportation companies due to BlackRock’s own climate-related investment policies. This was followed by a letter from senators on the other side of the aisle requesting the underlying investment guidelines provided to BlackRock for use in managing the Fed’s programs and warning about use of federal funds “to help sustain industries that may drive a future climate crisis.”
But, there were more arrows sent BlackRock’s way. Here’s a post from the Federalist about a letter sent to BlackRock’s CEO from representatives of several conservative-leaning organizations, asking BlackRock to reconsider its plan to operate under a stakeholder model rather than supporting a shareholder primacy model. The letter goes on by urging BlackRock to stand against “unnecessary and harmful ESG shareholder proposals.” Coming at it from the other side, as part of an Earth Day event held last week – organized by a group named “BlackRock’s Big Problem” – the event flyer asked participants to call BlackRock to request it follow through on its climate commitment that BlackRock’s CEO made in his letter earlier this year.
BlackRock recently issued its 2020 Engagement Priorities and I blogged about it on our “Proxy Season Blog”. There was a fair amount of focus on environmental risks and opportunities in that report. No doubt though, by the end of the 2020 proxy season, somebody will likely have gripes about whatever BlackRock does. It seems when you’re the largest asset manager, you’re a big target and everybody wants the influence you carry on their side.
California Board Diversity Law Withstands Legal Challenge
You may remember back when California’s board gender diversity law (SB 826) went into effect, then California Governor Jerry Brown reportedly said his chief concern was possible legal challenges.
Well, a couple of suits were filed and one of them was recently dismissed. The plaintiff was seeking a permanent injunction preventing enforcement of the California law by saying it was unconstitutional under the 14th Amendment. Last week, a federal judge in California dismissed the case on the basis of lack of standing. See Cydney Posner’s Cooley blog for more on this story. And, stay tuned – it looks like this case will carry on as the plaintiff filed an appeal – see this blog post from Keith Bishop.
Earlier this year, California issued a report on the status of compliance with the new law through December 2019. The report said that of the 330 companies that filed the required disclosure statement, 282 reported compliance with the state’s board gender diversity requirement. Note that the 330 companies that filed the required disclosure statement represent slightly more than half of the impacted companies (meaning they are publicly held with principle executive offices in California).
Even with California companies seemingly increasing board diversity, the law isn’t out of the woods yet as the appeal in the case has been filed and there’s another suit challenging California’s law that’s ongoing in California State Court – Broc blogged about that back when it was first filed.
ESG Ratings: Morningstar & Sustainalytics Join Up
Liz blogged a little over a year ago about the crowded ESG ratings field. In case you missed it, last week, two firms joined forces when Morningstar announced it would acquire Sustainalytics. Morningstar already owned about 40% of Sustainalytics and now it’s buying the remaining 60% when the transaction closes later this year.
The combination should be a boost for Sustainalytics – Morningstar is a much larger organization and is spread across more markets. Like other deals, time will tell exactly how it shakes out…it’s expected that Morningstar will complete the integration of Sustainalytics data across its various products but anecdotally, my understanding is that Morningstar has everything it needs from Sustainalytics through the firms’ longstanding relationship.
If anything, Morningstar will now compete more directly with MSCI so there may be some investors who switch to Morningstar/Sustainalytics – although, surprisingly, a lot of investors already switch between MSCI and Sustainalytics and apparently some do so fairly often.
As many companies are releasing first quarter earnings and dealing with challenges related to earnings guidance, the next question to tackle might be whether to reopen the trading window. Most companies typically reopen the trading window within a day or two after issuing the earnings release. But, as this Bryan Cave blog points out, this time around some companies might want to think twice about that.
It might be fine for a lot of companies to go ahead as usual and open the window but with continued uncertainty and rapid change, the blog says some companies may want to pause. Here’s the crux of the blog’s message:
Insiders who have access to daily information about demand, the supply chain, pricing and other information may be better able to assess the trend of the business, and may therefore be better able to predict how well the company will be able to withstand and bounce back from the pandemic. Although this daily information might not ordinarily be deemed material nonpublic information for insider trading purposes, in the current environment and with the benefit of hindsight, the SEC could take a different position.
SEC Covid-19 Market Monitoring Group
In a press release last Friday, the SEC announced that it formed an internal, cross-divisional Covid-19 Market Monitoring Group. The announcement says the group is temporary and the purpose is to assist the Commission, including its various divisions and offices, in actions related to the effects of Covid-19 on markets, issuers and investors as well as responding to requests for information, analysis and assistance from other regulators and public sector partners.
The group will be chaired by S.P. Kothari, the SEC’s Chief Economist and Director of the Division of Economic and Risk Analysis and assisted by Jeffrey Dinwoodie, Chief Counsel and Senior Policy Advisor for Market and Activities-Based Risk in the Office of the Chairman. The announcement also includes a list representatives from across the SEC that will participate in the efforts of the Market Monitoring Group.
SEC Goes Remote & Virtual Like the Rest of Us
If you’re wondering how the SEC is getting all of its work done these days, they’re working remote like a lot of people and seem to be adapting. A while ago, the SEC set up a webpage that gives general information about its operations during Covid-19.
The SEC’s recent open meeting, during which it approved offering rules for business development companies, was held virtually, although it’s not clear when they might do this again. For that meeting, the audio was played live through access on the SEC website (here’s the audio archive) and Bloomberg Law reported that apparently Chairman Clayton participated in the meeting from his office at SEC headquarters while Commissioner Allison Lee participated from her home kitchen. The SEC reportedly held “several dry runs” to prepare – an all too familiar exercise for many of us.
Meanwhile, this Notice for an upcoming meeting of the Small Business Capital Formation Advisory Committee says that it will be conducted via videoconference following the same format used for an ad-hoc meeting held earlier this month. The Committee has an archived webcast from the April ad-hoc meeting available on the SEC’s website.
