That was fast. On Friday, Reuters and other sources reported that the SEC rejected the NYSE’s proposed rule change that would have permitted companies to sell newly issued primary shares via a direct listing – which had been submitted the week before.
Broc just blogged last week about the proposal being somewhat controversial. We aren’t sure what aspect of it prompted the rejection – but it’s not uncommon for these types of things to go through a few iterations and this Wilson Sonsini memo speculates that perhaps additional SEC rulemaking is necessary to make primary listings possible. The NYSE says it’s continuing to work with the SEC on a “direct listing product” – so it’s probably not the last we’ll hear of this path to going public.
Direct Listings: Nasdaq’s “Resale” Rule Extended to Its Global & Capital Markets
Last week, the SEC approved this recent Nasdaq proposal that will allow “resale” direct listings on the Nasdaq Global Market and the Nasdaq Capital Market – an extension of an already-existing rule that allows these types of direct listings on the Nasdaq Global Select Market.
This Wilson Sonsini memo summarizes the final rule – and explains how the valuation parameters for companies listing shares on Nasdaq’s Global and Capital Markets differ slightly from what applies to the Nasdaq Global Select Market.
Nasdaq Proposal: Excluding Restricted Shares from “Publicly Held” Calculation
The exchanges have been busy. A couple weeks ago, Nasdaq filed this rule proposal that would require listed companies to provide Nasdaq with info about the number of their non-affiliate shares that are subject to trading restrictions – e.g. due to lockups or standstills, private offering restrictions, etc. – if the exchange observes unusual trading activity that implies limited liquidity.
Under the proposed rule, Nasdaq could also halt trading in connection with the request and could require companies with inadequate “unrestricted public float” to adopt a plan to increase the number of unrestricted shares. Nasdaq already has a similar rule for initial listings, but this would extend the concept to continued listing rules.
The SEC posted the rule for comment last week, so we likely won’t know for at least a couple of months whether this rule will be approved in current form or at all.
Last week, the NYSE proposed a rule change to allow listed companies to sell newly issued primary shares on its own behalf directly into the opening trade. As noted in this Davis Polk memo, this change could make the direct listing route more attractive to companies that need to raise capital, although it is an open question whether companies will be able to achieve the desired pricing & distribution of shares in a way comparable to that done in a traditional underwritten IPO.
Some are worried about the investor protection issues raised when the traditional IPO process is not utilized – but others note that there are a number of misconceptions about direct listings, including that a direct listing is even a “capital-raising” activity (see more from this Fenwick & West piece). We’re posting memos in our “Direct Listings” Practice Area – and here are some media pieces:
This “Financial Times” article reveals how being a whistleblower can ruin your career. Here’s an excerpt:
These individuals worked for four of the most renowned names in the business world: EY, Deloitte,
KPMG and PwC. They are among 20 former employees from the Big Four accounting firms who
have spoken to the Financial Times about their experience of harassment, bullying and
discrimination in the workplace over the course of a year’s investigation into how these firms treat
whistleblowers within their ranks.
The FT identified a disturbingly common pattern in terms of how complainants were treated: most
initially felt ignored, then isolated and were eventually pushed out. Legal clauses aimed at silencing
them swiftly followed; nine of those interviewed said they were pressured into signing restrictive
non-disclosure agreements. Others were asked to sign but resisted.
Not too long after I blogged about how nothing much happens at open Commission meetings, an interesting thing happened – the SEC Chair cited “fishy” comment letters submitted by alleged retail investors ahead of the agency’s proxy advisor rulemaking. This Bloomberg article broke the story by contacting the purported authors of the comment letters. Here’s the intro of the article:
When Securities and Exchange Commission Chairman Jay Clayton handed a policy win to corporate executives this month, he pointed to a surprising source of support: a mailbag full of encouragement from ordinary Americans. To hear Clayton tell it, these folks are really focused on the intricacies of the corporate shareholder-voting process. “Some of the letters that struck me the most,” he said at a commission meeting in Washington, “came from long-term Main Street investors, including an Army veteran and a Marine veteran, a police officer, a retired teacher, a public servant, a single mom, a couple of retirees who saved for retirement.” Each bolstered Clayton’s case for limiting the power of dissenting shareholders.
But a close look at the seven letters Clayton highlighted, and about two dozen others submitted to the SEC by supposedly regular people, shows they are the product of a misleading — and laughably clumsy — public relations campaign by corporate interests.
The two Bloomberg reporters called up the folks listed as the authors of the letters – and the article details a number of responses indicating that the letters were not genuine. The submission of fake letters on rulemakings is more common than you would think (see this old WSJ article) – but it’s not typical that an agency head is touting them publicly (see this article)…
How Much Diligence Should the SEC Chair Conduct Before Touting a Comment Letter?
My answer is “at least some.” An inspection of these letters pretty quickly reveals clues that something is not right. Consider the excerpt from this Matt Levine column:
What is particularly bad here is that “at least 20” of the fake letters contain “an out-of-context phrase inserted into the SEC’s mailing address”: If you’re writing a letter to the SEC, you put the SEC’s address at the top just for old time’s sake (of course you don’t mail it, you just submit it online), and for some reason the person mass-writing these letters inserted the phrase “A Coalition of Growth Companies” into the address that he or she cut and pasted into all the fake letters. Oops!
Matt’s suggested solution to this issue is noted in his column:
The obvious solution here is to explicitly allow fictional comment letters. Of course the SEC already allows fictional comment letters, in the sense that it doesn’t seem to do any identity checking, and we have talked before about how lots of comment letters are blatantly fictitious. Many fictitious comment letters seem to be submitted for the sake of numbers: It is nice to say “a hundred ordinary investors wrote in to support this,” or whatever, but that’s rarely true and should not be taken seriously. But other fictitious letters are like these letters; they are submitted for the sake of their argument, and for a certain ordinary-investor flavor that comes from a talented writer of fiction trying to channel what he thinks an ordinary investor would actually feel and say. Why not let those fiction writers practice openly?
Why not submit a letter from like the Coalition of Giant Company CEOs saying “as CEOs, we like this rule, but we also think it’s in the interests of ordinary investors, and to give you a sense of that here’s what we imagine an 83-year-old Army veteran might hypothetically have to say about it.” And then you write the fake letter, and the SEC can say “we too can easily imagine that an elderly veteran might say ‘how disgusted I am that my financial investments are being used as a political pawn,’” etc. etc. etc., it loses almost none of its rhetorical effect for being fake. Just admit that it’s all fake!
For anyone out there who enjoys “creative writing,” maybe you could get into writing fictional comments to regulatory proposals. I doubt it’s a lucrative gig – but maybe it could be? Provide your anonymous input in this poll:
Recently, the SEC published its latest Reg Flex Agenda – both the “Active” agenda and the “Long-Term Actions” agenda (combined, they are also known as the “Unified Agenda”). When it comes to rulemaking that might be proposed over the next year, it was interesting to see that clawbacks made the list! But pay-for-performance did not. The near-term agenda includes:
1. Auditor independence (April ’20)
2. Clawbacks (September ’20; this would be a second proposal – the first one was back in ’15)
3. Earnings releases/quarterly reports (September ’20; the SEC “requested comments” in January – the next step would be an actual rule proposal)
4. Accredited investor definition (September ’20…though Bloomberg reported that a proposal could be coming soon).
Two years ago, the Reg Flex Agenda was changed so that it came in two flavors: “Existing Proposed & Final Rule Stages” (together known as “Active”) – and “Long-Term Actions.” That has now been slightly changed so that there are three categories – “Pre-Rule Stage” (only one item in this category); “Proposed Rule Stage”; and “Final Rule Stage” – in the “Active” bucket.
Note that there have been a number of proposals issued by the SEC in recent months and those are listed under the “Proposed Rule Stage” rather than the “Final Rule Stage” like other proposed rulemakings – perhaps because the comment periods for those more recent proposals are still open…
SEC’s OCA Issues SAB 119 on Credit Losses
Recently, the SEC’s Office of Chief Accountant issued Staff Accounting Bulletin #119 about credit losses to update existing Staff guidance regarding methodologies and supporting documentation for measuring credit losses, in light of the recent FASB standard on credit losses (ASU 2016-13, codified at ASC Topic 326). Hat tip to Maynard Cooper’s Bob Dow for alerting us to this development…
Cap’n Cashbags: Wage Cuts Across the Board (Except Me)
A member recently said this about my “Cap’n Cashbags” videos: “I will say this for you – you have a singular cinematic style. The Cap’n Cashbags films are a unique combination of post-World War I German Expressionism & mid-1970s “Superfriends” cartoons.”
In this 25-second video, Cap’n Cashbags is just hanging out with his fellow CEO pals who serve on his board’s compensation committee – talking about wage cuts for all workers (except himself):
We just posted the transcript for our recent webcast – “Shareholder Proposals: What Now” – that featured Corp Fin’s David Fredrickson, Davis Polk’s Ning Chiu, Morrison & Foerster’s Marty Dunn and Gibson Dunn’s Beth Ising. Check it out!
ISS Posts Preliminary Updates to Its Compensation Policies!
As noted in this Davis Polk blog, ISS recently released its “preliminary” updates to its compensation policies – which consists of 8 FAQs. Check out the Davis Polk blog for some analysis…
Our December Eminders is Posted!
We have posted the December issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
This is the hardest blog I’ve written in my 17 years of blogging. My love letter to you. After pouring my heart & soul into our community for 17 years, I’m heeding the many signs that it’s time for a change. My last day in this job will be the end of this month.
So as hard as it is to leave y’all, I know in my ‘heart of hearts’ that it’s time to go. And that change starts with a nice, long break before I decide where my journey takes me next. The next few months are what I’m calling my “Epic Time of Yes.”
What will I miss the most? You. I will miss the daily dialogue – mainly by email – with so many of you. I cherish our friendship, our kinship, our love for securities law & corporate governance. I’m hesitant to name any names because there are many hundreds I would mention specifically. I hope we stay in touch. Either via LinkedIn or my gmail account (broc.romanek@).
I want to thank Jesse Brill for believing in me (his family owns the company; not me). Back in 2002, he hired someone who didn’t realize he had the skill set he apparently had. Until a year ago, I was responsible for our marketing, led our strategic direction, engaged in quiet sales efforts & participated in many other behind-the-scenes functions that helped make this job so enjoyable. Of course, the “in-front-of-the scenes” stuff was fabulously rewarding too. In this job, I have worn so many hats – journalist, event planner, publisher and of course, corporate lawyer – that whenever I filled out a form that asked for my occupation, I always paused before deciding which label to assign to myself.
I particularly like to cultivate creativity. I’m proactive in the way that I accomplish that – and I’m happy to share if you’re ever curious about how you can do so too. I recently received what I consider the kindest compliment – that I have a knack for building community. That’s the motto upon which I built the websites for this company from the first day I arrived. I’m proud of the innovations that I have brought to our events – I employed novel ways to make conferences not only bearable, but enjoyable. I think my “Blue Justice League” – a business casual game – is still ahead of its time. And I have heard nothing but rave reviews about the practical way I’ve put together our treatises, handbooks, checklists & paperbacks. Not to mention the sheer number of pages I’ve drafted for those things. Throw in the crazy total of blogs, podcasts, webcasts. The statistics are staggering.
Of course, I couldn’t have done it without the assistance & inspiration of our wonderful team. Dave Lynn and Alan Dye have been invaluable, both as colleagues and friends. Randi Morrison, Julie Hoffman, Linda DeMelis and Susan O’Reilly before they left us. The founder of course, Jesse Brill (and his son Nathan) – and his cohort Mike Gettelman. Barbara Baksa, Mark Borges and Mike Melbinger.
And in our HQ, too many to name – but I will give props to the ones that have been around the longest: Karen, Adam, Mike, Serge, Jacob, Denise, Sun Mi, Raychelle, Ron, Brian and Albert. I have sent more emails to Anne Triola than anyone in the world, our terrific webmaster – I’ll be visiting her in Seattle soon enough. And I will sorely miss the delightful Nona who does our typesetting.
Knowing that I am leaving Liz and John has been the hardest part of this difficult decision. They say good managers hire people that are smarter than they are. I certainly got that right. Working with them the past few years has been truly special. You are in good hands.
Anyway, after my extended holiday, I’m sure I will be wide-eyed & primed for a new adventure. I’m not sure yet whether that will be something that falls within our community – it might, it might not. Luckily, my wife & I recently cut our last tuition check so I’m in no rush to figure that out. I know that I bring passion and a yeoman’s effort to whatever I put my mind to – so hopefully I’ll find a situation that can help bring out the best in me.
In every end, there is a new beginning. Namaste.
“If Not For You”
I’m into all sorts of music. I like to think that I live through “theme songs” that I hear in my head each day. Today’s theme song is George Harrison’s “If Not For You” (written by Bob Dylan). Here’s an excerpt:
If not for you
Babe, I couldn’t even find the door
I couldn’t even see the floor
I’d be sad and blue, if not for you
If not for you
Babe, the night would see me wide awake
The day would surely have to break
It would not be new, if not for you
If not for you, my sky would fall
Rain would gather, too
Without your love I’d be nowhere at all
I’d be lost, if not for you
Happy Thanksgiving! I hope everybody gets a break from work, avoids travel nightmares & gets a chance to spend some time with family and friends over the holiday. Now, I’m going to speak bluntly – when it comes to cooking your turkey, I think most of you are doing it wrong. See that Norman Rockwell bird to the left? Chances are, you’re preparing yours the same way Mr. & Mrs. “Freedom from Want” did in 1942, and like theirs, I’d wager yours looks great, but tastes pretty mediocre.
I do most of the cooking in our house, which my wife thinks is only fair considering that I do most of the eating. I’ve been cooking Thanksgiving dinners for decades, and for most of that time, my turkey was a crapshoot. Usually, it turned out okay, but sometimes, it ended up so dry that you needed to drown it in about half a gallon of gravy in order to choke it down.
I read all sorts of tips about how to cook the turkey, and finally got so befuddled that I ended up with a bird in the oven that looked like it was wearing a tin foil hat to protect against gubmint mind control rays and that had so many meat thermometers sticking out of various parts that it looked like it was on life support in a poultry ICU. Meanwhile, I was spending Thanksgiving Day hanging around the kitchen adjusting the oven temp & basting the thing every 15 minutes for 3+ hours, while everybody else was drinking Christmas Ale & watching football.
This was sub-optimal & I kept thinking that there had to be a better way. A few years ago, I finally stumbled upon it. No, it’s not the deep fried thing. I’ve had deep fried turkey, and it tastes like chicken wings. I like chicken wings, but not for Thanksgiving. Also, I’m not comfortable with what seems to be about a 1-in-4 chance of having flames engulf everything I own that goes along with deep frying a turkey.
Anyway, here’s the big reveal – if you spatchcock your turkey, you will achieve true Thanksgiving bliss. What’s “spatchcocking” a turkey all about? It’s simple really, you butterfly the bird by cutting out the backbone with poultry shears, and then flip it over and press down on it until the wishbone breaks. Then season it & toss it breast side up into a preheated oven – or do as I do, and throw it onto your grill – and prepare to be amazed.
The first thing you’re going to notice about this method is how fast it is. I cooked an 18 lb. turkey on my “Big Green Egg” grill last year & it took just about 80 minutes at 400 degrees. For those of you for whom my description of spending an afternoon with a baster in hand struck a cord, that may sound absurd – but no kidding, it really is that fast.
The other thing is that the bird turns out really juicy with nice, crispy skin. Because it’s flattened out, it cooks more evenly and you don’t end up drying out the white meat in order to avoid poisoning the folks who like dark meat. The backbone also will help you make a richer stock for your gravy, if you’re so inclined.
So, if you want to simplify cooking Thanksgiving dinner & end up with a much better result, give this method a try. Here’s the recipe from the “Serious Eats” website that I use (although I find a 400 degree temperature works better on my grill). Finally, regardless of how you how you cook your bird (or your Tofurky), have a great holiday!
Anybody interested in a little C-suite soap opera today? I’ve recently stumbled across a number of studies addressing various aspects of the CEO-CFO relationship, and since it’s a slow news day, I thought it might be kind of fun to blog about a couple of them. The first item is a recent study that found that younger CFOs may deter earnings management activities by older CEOs, which in turn results in lower audit fees. Here’s an excerpt:
CEO-CFO career heterogeneity suggests that younger non-CEO executives have different career concerns and career goals with the pre-retirement CEOs. Therefore, younger non-CEO executives are less likely to be cooperative with pre-retirement CEOs on earnings management behavior. We find a negative and significant association between audit fees and CEO-CFO career heterogeneity.
The results suggest that auditors perceive CEO-CFO career heterogeneity as a favorable factor of firms’ internal governance and therefore may decrease audit risks. Further, we find that firm’s financial performance, as well as the corporate governance, moderates the relationship between audit fees and CEO-CFO career heterogeneity.
So, if you want to lower the risk of your audit & the size of your fees, hire a millennial CFO to keep a lid on your boomer CEO’s desire to live a little dangerously.
Audit Fees: The Cost of Conflict Between CEOs & CFOs
On the other hand, you also need to make sure your CEO & CFO get along, because if they don’t, another study says you’re likely to pay higher audit fees. Here’s an excerpt from that one:
We investigate the relation between audit fees and differences in CEO and CFO personality traits. Audit fees should reflect engagement risk associated with a client. This risk is likely influenced by the client’s top management team’s personalities and how they differ. For example, top management teams that experience more disagreement about key strategic decisions may pose higher risks to auditors. We proxy for CEO-CFO conflict by using differences in CEO and CFO “Big Five” personality traits. We examine whether these personality differences help explain audit fees after controlling for other determinants of audit fees in the literature.
We find that CEO-CFO personality differences are positively associated with audit fees, consistent with auditors assessing risk from conflicting personalities in the C-suite.
The study does say that the effect of a personality clash between the CEO & the CFO on audit fees can be mitigated by the number of years they’ve worked together, the company’s corporate governance practices & the tenure of its auditor.
But before you decide to send your CEO & CFO to couples therapy, it turns out that a little personality conflict isn’t always a bad thing. As I blogged over on DealLawyers.com, another recent study says that the winning combination for M&A appears to be a visionary, upbeat CEO paired with a CFO who’s always reading to pour cold water on the CEO’s fever dreams.
November – December Issue: Deal Lawyers Print Newsletter
This November-December issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers – and includes articles on:
– How the Type of Buyer May Affect the Target’s Remedies in a Public M&A Deal
– The Risks of Not Strictly Complying with a “No Shop” Clause
– When Passive Investors Drift into Activist Status
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
Yesterday, Corp Fin unveiled its “Shareholder Proposal No-Action Responses Chart” – and posted the first “informal” no-action response under its new process for Rule 14a-8. DLA Piper’s Sanjay Shirodkar shared this Staff email that accompanied the response:
The staff completed its review of the company’s submission. Our response will be posted after 4:30 PM this afternoon in our 2019-2020 Shareholder Proposal No-Action Responses Chart, which is available on our website at https://www.sec.gov/divisions/corpfin/cf-noaction/14a-8.shtml. Copies of all correspondence relating to this submission will be made available at the same address after a short delay. If you have any questions, please call the Office of Chief Counsel in the Division of Corporation Finance at (202) 551-3520.
We also held a big webcast on this topic just yesterday – “Shareholder Proposals – What Now?” – with Corp Fin’s Chief Counsel David Fredrickson, Davis Polk’s Ning Chiu, Morrison & Foerster’s Marty Dunn and Gibson Dunn’s Beth Ising. If you missed it, the audio archive is already available – and the transcript should be coming a week or so after Thanksgiving.
“Say” Earnings Calls: Not Just For Retail Anymore!
We’ve blogged a couple of times about the “Say” platform that allows shareholders to submit questions during earnings calls, investor days, webinars and annual meetings. Originally, Say focused on increasing retail participation in these events – but it recently announced full access to its Q&A polling for institutional investors as well.
Say also announced that it would collaborate with “Just Capital” on a new type of “shareholder engagement” platform – quarterly calls that allow CEOs to speak with investors about ESG & “stakeholder” value. Last week, Paypal’s CEO broke ground as the first participant.
State “Securities Act” Litigation: Another One Bites the Dust
A few months ago, I blogged about a ’33 Act case being dismissed from state court in New York – offering some hope to companies who are worried about a deluge of state litigation due to the Supreme Court’s 2018 Cyan decision. This D&O Diary blog from Kevin LaCroix recounts another story of hope – this time, a recent dismissal in Connecticut. Here’s the takeaway:
These various dismissal motions rulings are of course themselves without precedential value and are subject to appeal. However, one can hope that these rulings may send a message that the plaintiffs should reconsider whatever perceived advantages they may think they have in proceeding in state court rather than federal court.
Unfortunately, despite these rulings, Cyan still creates significant risks for companies. This blog gives a real-life, recent example of a company facing a heap of lawsuits on the heels of its IPO. And because simultaneous state & federal securities lawsuits can’t be consolidated, it’s extra messy. Kevin notes that Congress could fix the problem by making a “simple” tweak to Section 22 of the ’33 Act that eliminates concurrent state court jurisdiction…
I’m very excited to announce that Lynn Jokela has joined us as an Associate Editor for our sites. Lynn has spent the last 11 years in the corporate secretary’s group of a Dow 30 company, following a stint in private practice and a prior career in finance & business. She brings tons of practical experience on all things “corporate & securities” and will be a fantastic addition to our team. Her email address is included in her bio if you want to drop her a line – and she’ll be blogging soon enough!
Transfer Agents: Market Share Leaders
A recent “Audit Analytics” blog highlights current market share leaders among transfer agents. Overall, not much has changed:
Since 2012, the market share for transfer agents engaged by active SEC registrants has remained fairly stagnant. This year proves to be no different; the same five transfer agents we have seen in the top for the past several years still reign. In fact, four of the five have managed to slightly increase their respective market share compared to last year’s results.
The exception, Wells Fargo Bank NA/TA, has shown an expected decrease in market share since our last analysis. As noted last year, Wells Fargo Bank sold its Shareowner Services to Equiniti Trust Co. (part of Equiniti Group plc). This may also explain the increase in market share for the non-top five transfer agents (Other), but only time will tell.
For more color on the industry players – and helpful new offerings by the top transfer agents – check out page 5 of the latest edition of Carl Hagberg’s “Shareholder Service Optimizer.” Carl notes that the market seems ripe for major comparison shopping…
Filing Fees: SEC Unveils New Template
Filing fees: they seem like such an easy task – until one of the 18 people involved in this “game of telephone” drops the ball on the required info. That’s why the SEC recently announced a new pre-populated “FedWire” template.
To make sure all necessary info is included – and avoid filing delays – the Commission is encouraging all companies to use the template when they submit info to their banks to initiate FedWire payments.
