Well, you can’t say we didn’t warn you – a number of Paycheck Protection Program loan recipients are receiving heavy duty blowback from the media & politicians about whether they’re entitled to the loans they received. If your client finds itself in this position, it may well be asking – “should we give the money back?”
That question may be even more pressing in light of new FAQ #31 that the SBA issued yesterday morning, which addresses the certification of need that’s required in order to access the funding. The FAQ says that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”
As this Stinson memo points out, that guidance is – like almost everything the SBA has said about this program – as clear as mud:
As has become typical of the PPP, every attempt at clarification also raises new uncertainties. What is the threshold for “substantial market value”? Does a public company that would currently be unable to raise equity capital on favorable terms really have “access to capital markets” in a meaningful way? Should any debt financing be considered “significantly detrimental” to a business as compared to equity capital in light of the additional cash load it places on the borrower? If a borrower has undrawn but committed capital under its current financing facilities, can it still make the good faith certification required by the PPP application?
The memo says that in light of the very specific certifications and representations required of the applicant in its loan application, these questions should be considered with great care – and companies that aren’t comfortable with their answers should withdraw loan applications or repay loans that have already been received.
PPP Loans: Beware False Claims Act Whistleblowers
Companies that are thinking about repaying their loans ought to make their decisions prior to May 7th, because as this Bryan Cave blog points out, FAQ #31 provides a safe harbor for companies that repay their loans by that date. The blog also addresses the liabilities that companies may face if they received a PPP loan to which they weren’t entitled – and the risk that employees may blow the whistle:
In addition to the risk of governmental regulatory or enforcement action, impacted companies and lenders may face other litigation and reputation risk. Companies may wish to consider whether their employees may believe that other sources of funding were available and may raise those concerns internally and externally as purported whistleblowers, possibly resulting in assertion of False Claims Act claims.
Of course, one of the fun things about the False Claims Act is that it provides for treble damages. The blog says that companies may also face reputational scrutiny and adverse impact on business performance, particularly if Treasury & the SBA publish borrower information – which the Fed has already announced that it will do under its CARES Act lending programs.
Public Offerings: Doing a Deal in a Blackout Period
Speaking of public companies with access to the capital markets, stop me if you’ve heard this, but those markets are kind of turbulent right now. That means its essential for companies that need capital to be able to quickly access the market when a financing window opens. Unfortunately, some companies now find themselves in a “blackout period” pending the release of their first quarter results. This Davis Polk memo says that while that may complicate things, there’s no prohibition on a company accessing the capital markets during a blackout period, and it may be possible for a company to complete an offering if:
– Management has enough information about the current (or recently ended) quarter to be able to predict with a fair degree of confidence what the company’s reported results are likely to be;
– Management has a good track record of being able to judge its anticipated results at similar points in the information-gathering and reporting cycle;
– Management’s expectations for the quarter, and future periods, are either (i) at least in line with “the market’s” expectations as well as with management’s own previously announced guidance (if any) – or (ii) if management’s expectations are not so in line, the company and its underwriters conclude that the deviation is not material or the company is willing to “pre-release” its current expectations prior to the earnings release; and
– Management’s analysis of the going-forward impact on the company’s business of COVID-19 is sufficiently developed that disclosure can be made at the time of the offering that will be in line with what is disclosed when the 10-K, 20-F, 10-Q, 6-K or other filing is made.
The memo notes that as a result of the Covid-19 crisis, it may be difficult for management to forecast the company’s results beyond the current quarter. In situations like this, companies sometimes decide to withdraw previously issued guidance and not issue new guidance. But the memo stresses that withdrawing guidance is not a substitute for disclosure of underlying trends and uncertainties that could affect financial and operational performance.
The memo also walks through an analysis of the various matters that should be considered in addressing each of the factors identified above, as well as other matters such as the need to update disclosures of risk factors & known trends, potential selective disclosure issues, and reputational and legal risks. By the way, if you’re representing a client that’s considering an offering during a blackout period, I highly recommend that you take a look at the transcript from our 2017 webcast, “Flash Numbers in Offerings.”
With so many companies moving to virtual meetings, one of the issues that’s become front & center is how shareholder Q&A sessions should be handled. This Bass Berry blog provides some insight into how companies have addressed that issue. The authors surveyed Fortune 100 public companies that filed their proxy statements after March 1, including those that opted for a virtual meeting after filing definitive materials. Of the companies surveyed:
– 6% are permitting stockholders to submit questions only in advance.
– 58% are permitting stockholders to submit questions only at the meeting.
– 32% are permitting stockholders to submit questions both in advance and at the meeting.
– 4% do not clearly address their Q&A in the proxy materials the style of their Q&A sessions couldn’t be determined.
The survey found a few outliers. One company chose to limit in-person attendance to a handful of officers and employees who will deliver proxy votes. Shareholders were encouraged to present questions to financial journalists listed in the company’s annual report, who will choose questions that they consider the most interesting and important. The survey doesn’t identify the company, and I want to respect its privacy as well – so all I can tell you is that its initials are “Berkshire Hathaway.”
The survey identified two other companies that are not permitting live Q&A. One required shareholders to submit questions up to three days in advance, while the other is requiring stockholders to submit their questions in advance only through a portal on the company’s website.
I haven’t seen any survey data on how companies that are holding virtual meetings are dealing with shareholder proposals, but I can tell you that the folks at ValueEdge Advisors are not happy with the way AT&T has chosen to handle them at its virtual meeting.
Listing Standards: NYSE Joins Nasdaq in Providing Relief From Price-Based Standards
Earlier this week, I blogged about Nasdaq’s rule change providing extended compliance periods for companies that fail to meet its minimum bid price & global market cap continued listing standards. On Tuesday, the NYSE received the SEC’s sign-off on a rule change providing similar relief to its listed companies. This excerpt from a recent Locke Lord blog provides the details:
NYSE-listed companies now have additional time to cure a deficiency if their stock has closed under $1.00 for 30 consecutive trading days. Now, days between April 21, 2020 and June 30, 2020 will not be counted toward the normal 6-month compliance period. Compliance periods will recommence on July 1, 2020 from the point at which they were suspended on April 21.
Listed companies will also have additional time if their average global market capitalization has fallen under $50 million for 30 consecutive trading days at a time when their stockholders’ equity is also under $50 million. These companies would normally have a maximum 18 months to cure the deficiency. These compliance periods are similarly suspended until July 1, 2020.
The exchanges have cut listed companies a lot of slack during the current market turmoil, but the news for troubled companies isn’t all good on the listing front. The blog also notes that Nasdaq adopted rules on the same day that actually shorten compliance periods for particularly distressed companies.
Jackpot! Whistleblower Hits for $27 Million
Well, in the midst of this colossal mess, I guess it’s nice to know that somebody had a good month. Last Thursday, the SEC announced that it had awarded a whistleblower who alerted it to misconduct a whopping $27 million. The SEC’s order lauded the whistleblower’s efforts to “repeatedly and strenuously” raise concerns about the misconduct internally. The SEC followed this up with a $5 million whistleblower award earlier this week. When it rains, it pours.
Yesterday, SEC Chair Jay Clayton and a group of senior SEC & PCAOB officials issued a joint statement warning about the risks posed by “emerging market” investments. While the statement addresses all emerging markets, it focuses on the 500 lb. gorilla of those markets – China. Here’s an excerpt from the introduction:
Over the past several decades, the portfolios of U.S. investors have become increasingly exposed to companies that are based in emerging markets or that otherwise have significant operations in emerging markets. This exposure includes investments in both U.S. issuers and foreign private issuers (“FPIs”) that are based in emerging markets or have significant operations in emerging markets. During this time, China has grown to be the largest emerging market economy and the world’s second largest economy.
The SEC’s mission is threefold: protect our investors, preserve market integrity and facilitate capital formation. Ensuring that investors and other market participants have access to high-quality, reliable disclosure, including financial reporting, is at the core of our efforts to promote each of those objectives. This commitment to high-quality disclosure standards—including meaningful, principled oversight and enforcement—has long been a focus of the SEC and, since its inception, the PCAOB.
Our ability to promote and enforce these standards in emerging markets is limited and is significantly dependent on the actions of local authorities—which, in turn, are constrained by national policy considerations in those countries. As a result, in many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse, in comparison to U.S. domestic companies. This significant asymmetry holds true even though disclosures, price quotes and other investor-oriented information often are presented in substantially the same form as for U.S. domestic companies.
The statement details risks and related considerations specific to “issuers, auditors, index providers & financial professionals.” These include concerns about the quality of financial information, the PCAOB’s continuing inability to inspect workpapers in China, the limited ability of U.S. authorities to bring enforcement actions in emerging markets, the limited rights & remedies available to shareholders, and the failure of passive investment strategies to account for these risks.
The statement also addresses concerns about disclosure, and emphasizes the importance of robust risk factor disclosure for companies with operations in emerging markets:
In light of both the significance and company-specific nature of the risks discussed in this statement, we expect issuers to present these risks prominently, in plain English and discuss them with specificity. Issuers based in emerging markets should consider providing a U.S. domestic investor-oriented comparative discussion of matters such as (1) how the company has met the applicable financial reporting and disclosure obligations, including those related to DCP and ICFR and (2) regulatory enforcement and investor-oriented remedies, including as a practical matter, in the event of a material disclosure violation or fraud or other financial misconduct more generally.
The statement was issued jointly by Chair Clayton, PCAOB Chair Bill Dunkhe, SEC Chief Accountant Sagar Teotia, and the Directors of Corp Fin & IM. With that kind of firepower mustered behind the statement, I think it’s fair to say that they aren’t fooling around here. Public companies based in China or with significant operations there should take a hard look at their risk factor disclosures, because it seems likely that they will be scrutinized closely by the Staff the next time their filings are pulled for review.
Covid-19 Crisis: Companies Adopt Emergency Bylaws to Ensure Board Operations
With all of the disruptions resulting from the Covid-19 pandemic, many companies are looking at board and management continuity issues, and some companies have opted to adopt an emergency bylaw to help address these issues. This recent Simpson Thacher memo discusses Section 110 of the DGCL, which allows companies to adopt emergency bylaws and sets forth what may be included in them. Among other things, these bylaws may permit companies to expand the class of persons who may call a board or committee meeting, and relax notice and quorum requirements for such a meeting.
Yesterday, Mastercard filed an Item 5.03 8-k announcing that its board had adopted an emergency bylaw, which provides that:
– a Board or committee meeting may be called by any director or officer by any feasible means, and notice of the meeting may be provided only to the directors that can be feasibly reached and by any feasible means; and
– the director(s) in attendance at the meeting shall constitute a quorum and may appoint one or more of the present directors to any standing or temporary committee as they deem necessary and appropriate
Mastercard isn’t the only company that has adopted an emergency bylaw in recent weeks. John Bean Technologies also adopted a similar provision, and other companies have long had emergency provisions in their own bylaws (see this Jack In The Box filing from 2005). If your bylaws don’t contain an emergency provision, now may be a good time to consider adopting one.
Transcript: “Activist Profiles & Playbooks”
We have posted the transcript for the recent DealLawyers.com webcast: “Activist Profiles & Playbooks.”
The Covid-19 crisis has created a number of challenges for public companies, and one of the potentially most significant is maintaining appropriate internal control over financial reporting. Crisis-related ICFR issues include managing newly remote workforces, the novel and often unfamiliar financial reporting issues created by the crisis, and – for companies receiving government assistance – the need to implement restrictions on executive comp, share repurchases and dividends, among other things.
This Hunton Andrews Kurth memo reviews the legal framework applicable to these issues, and offers insights on how to address them. Here’s an excerpt:
We recommend that companies begin to assess their existing disclosure and internal controls by taking stock of what has changed in the current financial reporting environment. Unique or novel accounting issues should be carefully analyzed, and expert advice sought when internal resources are insufficient.
Potential and actual disruptions to a company’s supply chain, customer base, operations, processes and workforce should be weighed when evaluating the operating effectiveness of legacy controls. As part of this process, companies should also assess any potential deficiencies in review-type internal controls and the ability of individuals to perform control duties in light of shelter-in-place orders and other company specific remote-work protocols.
Based on this assessment, companies should determine whether existing controls are sufficient to prepare financial statements and disclosure documents at the reasonable assurance level. If a legacy control cannot be performed as previously designed, companies should determine what new controls may be necessary to reduce the risk of errors and fraud. In doing so, they should ensure that any changes in design address both the original risks of material misstatement as well as any new risks. We anticipate regular dialogue with counsel, the auditors and audit committees on these topics.
The memo also says that public companies, particularly those receiving government assistance, should expect heightened scrutiny from the “media, putative whistleblowers, agency inspectors general, consumer watchdog groups, members of Congress and other political figures.” In this environment, the best way for companies to protect themselves is by maintaining a robust control environment and responding nimbly to changes in business circumstances that may require adjustments to those controls.
Covid-19 Crisis: Chart of Governmental Actions
If you represent a client with operations in multiple states, Faegre Drinker’s interactive chart of the various federal, state and local government orders associated with the Covid-19 crisis is a really handy resource. If you click on an individual state, you’ll be taken to a page that contains links to that state’s legislative and executive orders relating to Covid-19, as well as to orders issued by major municipalities within that state. It appears to be updated on a daily basis, so you’ll probably want to bookmark it.
Transcript: “The Top Compensation Consultants Speak”
We have posted the transcript for the recent CompensationStandards.com webcast: “The Top Compensation Consultants Speak.”
Management teams and their advisors always have plenty to think about when preparing for any quarter’s financial reporting, but when it comes to this one, well. . . like they say on “Rick & Morty” – “Wubba lubba dub dub!” If you’re waist deep in this process, you should take a look at this Weil memo, which provides in-depth checklists addressing issues to think about when preparing this quarter’s earnings release & Form 10-Q. Here’s an excerpt:
At the risk of stating the painfully obvious, the just-completed quarter has not been “normal” for public companies by any stretch of the imagination. As they turn from addressing complex operational matters and mitigation efforts to disclosure decision-making, corporate management, audit committees and boards are grappling with such questions as: Should the earnings release and conference call be delayed to give the company more time to come to grips with any number of novel or complex accounting issues generated by the “perfect storm” of the COVID-19 pandemic, global economic turmoil, and the rapid-fire pace of federal and state legislative and regulatory responses?
If it has not already done so, should the company withdraw or otherwise modify earnings guidance made early in Q1? What is the impact on the company of the Coronavirus Aid Relief and Economic Security Act (CARES Act) and its regulatory progeny? Will the company need to recognize impairments? And finally, given the uncertainty about when and how the economy will reopen and whether certain industries will undergo lasting structural change, the ultimate question: what insight can be given into what the future may hold for the company?
The checklists addresses these and other disclosure issues and includes a discussion of the relevant SEC and/or staff-level disclosure guidance that has been provided during the Covid-19 crisis. The checklists identify key action items and conclude with suggestions about “what to do now” in navigating this quarter’s disclosure challenges.
Listing Standards: Nasdaq Provides Temporary Relief from Price-Based Standards
On Friday, the SEC approved an immediately effective Nasdaq rule change that would allow listed companies more time to return to compliance with price-based continued listing standards, which relate to the minimum bid price and market value of publicly held shares. Here’s an excerpt from this Steve Quinlivan blog with a summary of the rule:
Under the approved rule Nasdaq will permit companies that are out of compliance with the Price-based Requirements additional time to regain compliance by tolling the compliance periods through and including June 30, 2020. However, throughout the tolling period, Nasdaq will continue to monitor these requirements and companies will continue to be notified about new instances of non-compliance with the Price-based Requirements in accordance with existing Nasdaq rules. Companies that are notified about non-compliance are required by Nasdaq rules to make a public announcement disclosing receipt of the notification by filing a Form 8-K, where required by SEC rules, or by issuing a press release.
Starting on July 1, 2020, companies will receive the balance of any pending compliance period in effect at the start of the tolling period to come back into compliance with the applicable requirement. Similarly, companies that were in the delisting hearings process would return to that process at the same stage they were in when the tolling period began. Companies that are newly identified as non-compliant during the tolling period will have 180 days to regain compliance, beginning on July 1, 2020.
According to this Reuters article, the NYSE has proposed to provide similar relief from its own price-based continued listing standards, but its initial proposal was rejected. The Exchange was reportedly “in talks” with the SEC about the rule proposal, but that was two weeks ago – and I haven’t seen anything more on this since then.
Cheat Sheet: Covid-19 Quick Reference
I’m a sucker for “cheat sheets” that I can use to get up to speed quickly & fake my way through a conference call, and Simpson Thacher’s 37-page “Covid-19 Quick Reference Guide” fits the bill when it comes to the Covid-19 crisis. It provides a bullet-point overview of securities, corporate, M&A, commercial finance and other considerations associated with the crisis, and also provides an overview of the CARES Act and other governmental responses.
Last fall, John blogged about “stakeholder governance” and the business judgment rule and noted that in Delaware, the business judgment rule provides protection for directors who conclude in good faith that considering the interests of other stakeholders may be helpful in maximizing long-term shareholder value. A recent memo from Wachtell Lipton says boards will need to understand Covid-19 related risks not only to the company but also to its various stakeholders. The memo also serves as a good reminder that despite all of the challenges from Covid-19, boards should fulfill their oversight responsibility as best they can and know the business judgment rule will be applied to board decisions.
The memo discusses director oversight along with management’s role in handling the day-to-day operations, including concerns relating to external obligations, including debt and regulatory requirements, liquidity, compensation and strategic threats and opportunities. Here’s an excerpt:
The decisions facing companies at this time are terribly difficult and painful. It will be crucial for the board and the management team to maintain an atmosphere of respect and shared concern in order to promote effective decision-making in this period of great stress. The board should be careful to resist any temptation to usurp the role of management in running the company’s day-to-day business and addressing the challenges resulting from the COVID-19 pandemic. Corporate America finds itself now in uncharted territory, and the ramifications of the crisis and the nationwide response are unknowable factors. While there may be substantial second-guessing once the COVID-19 crisis is past, directors should take comfort that the business judgment rule applies to board decisions regardless of how they appear in hindsight. The board is called to fulfill its oversight role to the best of its ability. Directors who act on an informed basis, in good faith, and in the honest belief that their decisions are in the company’s best interests will continue to have the protection of the business judgment rule.
Rulemaking Petition Seeks to Allow Electronic Signatures Under Reg S-T
In what could be a big step forward for the SEC, a rulemaking petition from Wilson Sonsini, Fenwick & West and Cooley asks the SEC to amend rules under Reg S-T that would permit companies to obtain electronic signatures for documents filed with the SEC. The rulemaking petition acknowledges the Staff’s recent statement providing flexibility regarding manual signatures during the current crisis and then encourages the SEC to go further.
In this day and age, electronic signatures seem to be more the norm and routing manual signatures to hold in a dusty, over-crowded file cabinet somewhere seems somewhat archaic – this change would be a nice improvement for many. Here’s an excerpt from the petition:
We acknowledge the Staff Statement: Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns (March 24, 2020) (the “Staff Statement”) and appreciate the added flexibility it provides regarding manual signatures in the current extraordinary environment. We believe, however, and many of our clients have also informed us, that obtaining and retaining manual signatures in compliance with the Staff Statement remains a significant logistical burden. We and many of our clients believe the Staff Statement could be of greater effectiveness to registrants, with no compromise to the integrity of the document signing process, if registrants were permitted to use existing, proven electronic signature processes with respect to filing documents with the Commission.
Improvements in electronic signature software technology make it possible to confirm (with at least equal confidence to the collection of manual signatures) who has signed a document and when it was signed (and, indeed, far better accuracy as to the timing of execution), and make recordkeeping and storage of such signatures seamless and secure.
More Women on Boards Helps Ensure Consumer Safety
It’s been well documented and we’ve blogged about studies showing how increased board gender diversity may lead to better ESG and business performance. A recent abstract describes an academic study that looked at the influence female directors had on product recall decisions. The study found that as boards add female directors, product recall decisions change. The abstract says as boards add female directors, “firms make faster recall decisions for the most serious defects that are high in severity and dangerous for customers, highlighting the increased stakeholder responsiveness from adding female directors.”
This blog from Lehigh University provides further discussion of the study. Some basic stats cited in the blog include:
Compared to firms with all-male boards, firms with female directors announced high-severity product recalls 28 days sooner
The number of women on boards also impacted high-severity recall outcomes – only boards that had at least 2 female directors improved timeliness of severe product recalls and when there were 3, recall decisions moved along even more quickly
For low severity recalls – where executives have greater discretion, boards with female directors announced 120% more recalls compared to firms with no women directors
Yesterday’s NYT DealBook high-lighted notable business leaders who are advising President Trump on reopening the economy. The column notes many of those business leaders are members of, or represent industry groups that are members of, the Business Roundtable and the BRT recently published its “principles for reopening the economy.”
Last summer, Broc blogged about the BRT statement on shareholder primacy and a commitment to all stakeholders and that statement still generates a lot of press and commentary today. I’m not sure the BRT will get as much press this time around as it did last summer but the BRT principles are encouraging as they provide a framework for planning and preparing a coordinated response to the current crisis.
The BRT principles’ bottom line is that reopening the economy requires careful planning, that should begin now and activity restrictions should be lifted gradually as guided by public health officials. As the effects of Covid-19 persist, without taking sides on to restrict or not to restrict, hopefully the BRT principles and framework help give some order to a recovery process that mitigates health, safety and economic problems as each seem at risk of escalating even further if not handled appropriately.
BRT endorsed the following principles:
Safety first – A recovery strategy must give Americans confidence that they can safely return to work and public spaces
Coordination – BRT encourages state and federal coordination for protecting public health and safety
The BRT says that it will be preparing a more detailed document outlining approaches to a safe recovery and revitalization and it will focus on the following issues:
– Federal guidelines helping to define public health criteria used to inform local decisions about lifting activity restrictions as well as guidelines that outline appropriate safety measures.
– Access to critical resources and supplies like testing and virus monitoring, supplies, therapeutics and vaccines.
– Vital worker and community needs including safe schools, childcare, transportation and restoration of comprehensive healthcare services.
BRT included 5 exhibits outlining its framework to address these issues. The exhibits show how federal guidelines and states can coordinate their approach to lifting restrictions, considerations that should be taken into account for determining when and where to lift restrictions, how federal guidelines should define risk levels that guide the level of activity restrictions, examples of measures state and local authorities can take to implement federal guidelines and how the measures vary by federally defined risk levels.
Covid-19 Oversight: Does the Board need a Special Committee?
No doubt most boards are dealing with unprecedented challenges related to the Covid-19 pandemic. Some boards might currently have a risk committee positioned to provide oversight of Covid-19 related issues while others might not. As directors are likely stretched for time just like everyone else – some boards are reportedly holding weekly or bi-weekly calls – a recent blog from Hunton Andrews Kurth takes a look at whether the board should create a special committee to oversee the company’s Covid-19 response.
A lot of factors will play into whether a company should designate a special committee to oversee the company’s pandemic response, including the structure of current board committees, director availability, director experience/expertise, existing committee oversight responsibilities, among other things. Here’s an excerpt from the blog:
Establishment of a Special Oversight Committee may give the board and the company a better opportunity to get the benefit of board members who collectively are best suited to exercise oversight in this unique set of circumstances. Such a committee could be composed of those board members who are in the best position to participate in conference calls frequently and on short notice.
Use of a Special Committee also would enable the board to select a group of committee members whose combined experience and expertise best qualify them to address the special challenges that the pandemic presents for the company.
In addition, the combination of more frequent board meetings and the establishment of such a committee would provide an excellent framework for providing high quality company oversight as well as a demonstrable record of such oversight, which record may be important in years to come as corporations deal with the fallout of the pandemic.
March-April Issue of “The Corporate Counsel”
We recently mailed the March-April issue of “The Corporate Counsel” print newsletter (try a no-risk trial). The topics include:
1. A Disclosure Framework for the Coronavirus
– The SEC Weighs In
2. Coronavirus Disclosure Considerations
3. Executives in Trouble: Is Disclosure of Uncharged Conduct Required?
– Other Potential Disclosure Considerations
4. “Test the Waters for All” Means WKSIs, Too!
– What WKSIs Can Do Under Rule 163
– The “Test the Waters” Rule 163B Alternative
– Mix & Match? Rule 163B is Non-Exclusive
– Conclusion: WKSIs Should Keep Rule 163B in Mind
Rhonda Brauer has provided a couple of guest blogs, here’s her most recent post. We’re grateful for her work this time that takes a look at where investors are turning their attention during the Covid-19 pandemic:
Recently, we have seen a number of investor-organized responses to the COVID-19 pandemic, which will likely refine investor agendas as we move forward.
As Lynn recently blogged, there will likely be increased calls for tying ESG metrics to executive pay and for more sensitivity to and limits on pay given the harsh impact on the larger workforce. Two notable additional examples of investor focus are:
First, a global coalition of institutional investors – public pensions, asset managers and faith-based funds – recently called on companies to step up to support their workers, communities, and businesses, as well as the markets, to help respond to the crisis. The coalition, organized by Domini Impact Investments, the Interfaith Center on Corporate Responsibility (ICCR) and the New York City Comptroller’s Office, has grown to over 250 investors representing over $6 trillion in assets under management, with more investors still signing on. Companies are asked, among other things, to:
Provide paid leave for all their workers,
Prioritize health & safety for their workers and communities,
Maintain employment for their workers, to enable an eventual resumption of operations more quickly,
Maintain supplier & customer relationships to help stabilize the economy, protect communities, and ensure stable supply chains, and
Exercise financial prudence & responsibility, particularly in such areas as share repurchases and executive compensation.
Companies should expect further calls from investors and investor-led organizations, such as PRI, to prioritize COVID-19-related issues in their ESG policies and engagements.
Second, as we begin to understand where the funds are flowing from the $2 trillion CARES Act rescue package, it seems inevitable that investors will increase focus on transparency in corporate political spending. Among others, Bruce Freed, president and co-founder of the Center for Political Accountability, has already asked, “Will we ever know whether undisclosed political contributions influenced which companies benefited most from the legislation?” He pointed to the relationship between One Nation, a 501(c)(4) group, and the Senate Leadership Fund (a so-called “527 Super-PAC”), closely associated with Senate Majority Leader Mitch McConnell, and evidence — through political spending reports and voluntary disclosures — of corporate money flowing through One Nation to this Fund. Such relationships, he said, feed fears that contributions could improperly influence who benefits from legislation. Freed believes that “it’s critically important that an increasing number of publicly owned companies … embrace… corporate political disclosure.”
Companies should be prepared for even more shareholder resolutions on political disclosures and more investor pressure to disclose all of their political spending, particularly those corporate funds channeled into so-called “dark money” vehicles: trade associations and 501(c)(4)s (organizations originally designed to promote social welfare and cause-related activities, to help educate the public), as well as the 527 Super-PACs that enable corporations to advocate indirectly for and against political candidates.
Additional Insight on Investor Stewardship & Covid-19
SquareWell Partners recently issued a report providing additional insight from asset managers about how they will fulfill their stewardship responsibilities given the continued uncertainty resulting from the Covid-19 pandemic. The report summarizes information based on feedback from 20 asset managers representing about $7.2 trillion in managed assets. They want to know more about what the board’s doing…here’s some of what they said:
– Most investors are prepared to deal with the current disruption and defer to regulatory guidance about the format for annual meetings – with a preference that companies revert back to a hybrid meeting format after the uncertainty subsides
– Investors expect communication from companies about the impact of recent events either through public disclosures or direct contact with management teams and would appreciate more information about how the board is overseeing the situation
– In terms of executive pay, investors expect boards to focus on more critical business issues and investors aren’t going to place additional importance on pay but note that there will be societal pressure to demonstrate restraint and manage reputational risk
California AG: No Delay in Enforcing CCPA
A few weeks ago, I blogged about the latest round of changes to the California Consumer Privacy Act. Some had requested a delay in enforcement of the CCPA due to ongoing need to focus on Covid-19 related concerns. This blog from Taft says that the California Attorney General provided an answer to the delayed enforcement request, and in short it’s “No”. As noted in the blog, there is some question about the exact start date for enforcing the CCPA – although it sounds like practitioners should plan on July 1.
Last week, John blogged about what companies are going to do about guidance when issuing first quarter earnings. As a follow-on to that, Bass Berry & Sims surveyed initial disclosures in earnings releases for off-calendar year-end companies furnished on or after March 16, 2020 to see how companies handled earnings guidance in light of Covid-19. The findings say a majority of companies withdrew or suspended guidance. Here’s an excerpt:
67% (22 companies) either withdrew their existing guidance (in full or in part) or suspended their practice of providing quarterly guidance
The companies that provided either updated guidance or new quarterly guidance generally did so with a significantly greater gap between the high and low range of their guidance compared to prior disclosures
The survey highlights what the firm has been hearing from its clients—the unfolding COVID-19 pandemic and the resulting economic turmoil make it difficult to predict what the future will look like. As reflected in the survey results above, there will be many public companies that elect to suspend or withdraw guidance as a result of the tremendous economic uncertainty arising from COVID-19, but approaches will differ, and there will continue to be some public companies (albeit, potentially, a minority) that elect to continue to provide guidance during these uncertain times. Ultimately, the determination of whether to continue to provide guidance will require judgment and be very fact-specific (depending on, among other things, the industry of the public company and how COVID-19 has impacted such industry).
The blog discussing survey findings also includes links to notable disclosures – one being a company that made projections based on three recovery scenarios along with qualitative and quantitative assumptions about what such recoveries would look like for three of the company’s four operating segments.
Social distancing and stay-at-home orders resulting from Covid-19 will make this quarter’s earnings calls different for many companies – for most it will be difficult, if not impossible, to gather executives in one place for the call. Companies will likely need to put more effort into earnings call prep sessions with additional time devoted to logistical considerations to help ensure the calls go smoothly. With earnings kicking off this week, one resource that might help is this ICR blog that offers practical considerations and tips. Some of the considerations include:
– Pre-record opening, prepared remarks – some companies likely already pre-record opening, prepared remarks, but if not, it’s suggested that companies do so
– Evaluate whether technology like video capabilities will be helpful for Q&A
– Evaluate whether to hold a live Q&A session, ICR suggests companies do so, but if not:
Consider posting anticipated Q&As on the company website next to webcast link or earnings release
Have management speak to questions and provide key messages related to those questions as part of the call
Let listeners know that the company won’t be holding an interactive Q&A session at the beginning of the prepared remarks and that topics the company believes will be of further interest will be posted to its website
– Most conference call providers will have limited operators available right now, which could cause long wait times likely frustrating investors dialing in to the call. ICR provides options to help reduce risk of delays, one being not to include dial-in information in the advisory release and including only the webcast link. With this option, companies would email the dial-in information separately to sell-side analysts that would allow them to ask questions during the call.
– In any event, ICR recommends avoiding “internet-based” phones due to increased internet activity that can reduce call quality. Most analysts will be working remotely, so consider sending the release or presentation in an email ahead of the call.
– Last, consider reporting later than usual to give the company more insight into critical areas that investors will focus on, the blog also outlines considerations for current quarter reporting, including the current state of operations, financial liquidity/balance sheet/capital allocation and guidance.
Covid-19: Anticipated Enforcement Trends
As the Covid-19 crisis continues, it’s still early to know how enforcement activity will really play out, but this Gibson Dunn memo reviews early enforcement activity, as well as previous post-disaster enforcement activity, as possible indicators for areas where regulator activity might pick up.
The SEC has reminded us more than once that it remains “laser-focused” on enforcement efforts – Chairman Clayton and Corp Fin Director Hinman, included mention of this in their joint statement last week and the recent statement from the Co-Directors of the Enforcement Division serves as another reminder. The SEC’s website for individual investors, Investor.gov, also recently sent an Alert warning investors to be aware of current investment frauds, including Covid-19 related scams. So what should companies be on the lookout for?
If past activity serves as an indicator, the memo says distributions from government assistance programs like the CARES Act will dominate much of the enforcement agenda for the next decade. The memo also covers enforcement actions in the U.K., EU and Asia.
Areas where the memo says increased enforcement activity is likely: insider-trading, state-level focus on consumer protection and price-gauging and expansion of state regulatory powers, and False Claims Act enforcement. With increased government spending, the memo says its important for companies to document communications with, and decisions by, government contractors to help reduce False Claims Act exposure after the crisis.
And, if a company receives an internal whistleblower report, the memo reminds companies to respond thoroughly. This Gibson Dunn memo addresses whistleblower claims in particular, and says companies should anticipate an onslaught of whistleblower claims. The memo reviews steps companies can take to prepare and reiterates the importance of making sure a whistleblower action plan reflects current operations and to then stick to the action plan by following it to a tee.
When Delaware Chief Justice Leo Strine retired last fall, Liz blogged about his proposal that would recommit to “New Deal” concepts focused on workers’ rights and a reformed shareholder voting/proposal process. Last Friday, Chief Justice Strine, along with Dorothy Lund of the University of Southern California Gould School of Law, published an essay in DealBook that again calls for a “21st-century New Deal.”
The essay echoes Chief Justice Strine’s earlier comments, but the current pandemic offers a new backdrop for delivering the pitch. Here’s an excerpt:
Recently, the Business Roundtable and leading institutional investors have responded to growing inequality and economic insecurity by calling for greater respect toward all corporate stakeholders, not just stockholders. But what does it say about whether rhetoric is enough that, in the national emergency we are facing, American workers and taxpayers, not institutional investors or top corporate managers, are bearing the brunt of the harm? We are again paying the price for a corporate governance system that lacks focus on financial soundness, sustainable wealth creation and the fair treatment of workers.
Instead of just rhetoric, consider regulatory action to encourage corporations and institutional investors to make the best interests of American workers, consumers, communities and the environment an end goal of corporate governance, as important as serving stockholders. Public and large private companies receiving bailouts or pandemic-related subsidies could be required to become public benefit corporations under state law, and others could be given positive incentives to do the same. Institutional investors and socially important companies could be required to disclose to the public how much weight they give to issues like worker pay and safety, environmental responsibility and maintaining a strong balance sheet.
The essay emphasizes the need to invest in infrastructure, innovation and worker training and says progressive approaches like a financial transaction tax, a graduated capital gains tax and an end to the carried interest loophole for hedge funds can pay for these essential investments fairly. These measures are integral to corporate governance reform because they encourage sustainable investing and put a damper on imprudent speculation.
Covid-19 & Stakeholder Interest Impact on the Future of Buybacks
As the economic fallout from the Covid-19 pandemic continues, many are wondering when or if buybacks will pick up again. This MarketsInsider article cites Sanford Bernstein analysts as saying buybacks may not return for several years.
Companies accepting help from CARES Act stimulus programs will be restricted from buying back their stock and others want or need to conserve cash. But, the article high-lights what might be the “most intriguing factor fueling buybacks’ demise is the social stigma against them.” As noted in the article, buybacks and dividends could “become ‘socially unacceptable’ as calls increase to shift focus from shareholders to stakeholders.” The article says we should anticipate a broad decline in buyback activity but it won’t all disappear.
Public pressure to keep stakeholder interests top of mind is also high-lighted in this NY Times article recognizing that companies are receiving criticism for cutting jobs rather than investor payouts. Chief Justice Strine and Professor Lund in their DealBook essay also recognize that families are encouraged to save for a rainy day but many companies didn’t do the same and instead used cash for dividends and stock buybacks. Given nearly all companies are dealing with this unprecedented crisis, time will tell whether the economic effects from the pandemic coupled with focus on stakeholder interests have struck a lasting damaging blow to buyback programs.
Corp Fin Provides Temporary Relief for Form 144 Paper Filings
Yes, Forms 144 are still required but you can email them, for a while. Friday afternoon, Corp Fin issued an announcement providing temporary relief for Form 144 paper filings in light of the ongoing health and safety concerns from Covid-19. The relief allows Forms 144 filed in paper under Rules 101(b)(4) or 101(c)(6) of Reg S-T to be submitted by email provided a PDF of the complete Form 144 is attached to the email. Filers choosing to do so should direct the email to PaperForms144@SEC.gov.
The relief is available for those who submit Forms 144 from April 10, 2020 through June 30, 2020.
For those worried about a manual signature on Forms 144 submitted via email, the Staff won’t recommend enforcement action if the filer includes a typed form of signature. If you can’t get a manual signature on the Forms 144, besides providing a typed form of signature, you’ll want to ensure:
– the signatory retains a manually signed signature page or other document authenticating, acknowledging, or otherwise adopting his or her signature that appears in typed form within the electronic submission and provides such document, as promptly as practicable, upon request by Division or other Commission staff;
– such document indicates the date and time when the signature was executed; and
– the filer or submitter (with the exception of natural persons) establishes and maintains policies and procedures governing this process.
For those wanting to continue with regular mail, the announcement says you can still do so, there just may be processing delays.
