Rick Fleming, the SEC’s Investor Advocate, recently lambasted companies with dual-class capital structures, referring them to as a “festering wound” that, if left unchecked, could “metastasize” and threaten the “entire system of our public markets.” C’mon Rick, we won’t get anywhere if you keep pulling your punches – let people know how you really feel. . .
Notwithstanding his rhetorical flourishes, Mr. Fleming deserves credit for being willing to acknowledge that investors are a big part of the problem:
We need to acknowledge that investors themselves have engaged in their own race to the bottom when it comes to corporate accountability to shareholders. Investors, and particularly late-stage venture capital investors with deep pockets, have been willing to pay astronomical sums while ceding astonishing amounts of control to founders. This means that other investors, in order to deploy their own capital, must agree to terms that were once unthinkable, including low-vote or no-vote shares. The end result is a wave of companies with weak corporate governance.
But after making this acknowledgment, he immediately retreated to the customary fallback position – we need government intervention on dual-class stock because there’s an insurmountable collective action problem here: “Investors, acting in their own self-interest (or according to their investment mandates), may be inclined to invest in companies with weak corporate governance even though they know that these companies will ultimately harm the broader capital formation ecosystem.”
Are late round & IPO investors just too greedy & short-sighted to be trusted to get this right? Could be. I mean, they’re sure greedy. But on the other hand, it’s possible that their indifference reflects the fact that many institutional investors don’t think dual-class structures pose the kind of existential threat to the market that people like Mr. Fleming do. Who knows? Some may even believe that the jury’s still out on whether dual-class structures are a problem at all.
Oddly enough, the WeWork fiasco may undermine the argument for outside intervention in IPO capital structures. WeWork indicates that there is a point when governance problems are egregious enough to provoke IPO investors to collectively say “no thanks” – no matter how much sizzle the deal supposedly has. The fallout from the busted deal also suggests that even VC enablers are capable of learning their lesson when it comes to ceding so much control to founders.
I don’t want to push this too far – WeWork turned out to be such a mess that nobody really deserves to be patted on the back for having the sense to walk away. But if the argument for intervention on dual class structures is based on the premise that investors won’t act collectively to draw the line on governance problems, WeWork suggests that isn’t the case, and that the reasons why they don’t normally take collective action on this issue may have to do with things other than greed & short-sightedness.
Testing the Waters: Managing & Disclosing Indications of Interest
The post-JOBS Act ability to “test the waters” prior to filing a registration statement has made soliciting non-binding indications of interest from institutional investors a fairly common practice for IPO issuers. But while companies may obtain those indications of interest, this Olshan blog points out that there are still many issues that companies need to consider when it comes to planning the solicitation process & disclosing indications of interest.
In particular, this excerpt points out that offering participants still need to navigate the statutory restrictions on “offers” & “sales” under the Securities Act:
In view of these restrictions on premature “offers” and “sales,” the SEC has periodically requested issuers, through staff comment letters, to explain how and when they received the indications of interest, especially from new unaffiliated investors, and disclose any written communications or agreements that accept the investments or indications of interest. The SEC has also asked issuers to disclose the number of potential indicated investors the issuer communicated with on the topic.
As a result, issuers should note that any pre-IPO meetings or oral communications with potential new investors—where an investor indicates an interest in purchasing shares—must be conducted in the context of “testing-the-waters” activities pursuant to Section 5(d) of the Securities Act. An underwriter should generally be able to seek non-binding indications of interest from prospective investors (including the number of shares they may seek to purchase at various price ranges) as long as the underwriters do not solicit actual orders and an investor is not otherwise asked to commit to purchase any particular securities.
Similarly, when the issuer or underwriter engages a potential investor in any written communications (as defined in Rule 405 under the Securities Act), they may also need to provide them to SEC staff, who will verify whether the issuer violated Section 5.
Oops! Canadian Fund Overlooks $2.5 Billion in Securities in 13F Filing
I’ve always thought that 13F filings were far and away the most useless documents required to be filed with the SEC. But they’re even more useless if the filer neglects to include 20% of its reportable holdings. This is from The Financial Post:
One of Canada’s largest pension funds “inadvertently omitted” all of its Canadian holdings from a recent disclosure it made to the U.S. Securities and Exchange Commission, failing to include about US$2.46 billion in investments.
British Columbia Investment Management Corporation made the omission in February, when it submitted its disclosures for the three months ending on Dec. 31, 2018. The pension fund, which has $145.6 billion in assets under management, failed to disclose holdings in 98 companies, primarily across Canada’s energy, banking and mining sectors. The Canadian holdings accounted for more than 20 per cent of its total disclosed investments.
Apparently, this isn’t the first time that BCI has messed up its 13F filings. The Post article says that in October 2015, it filed 16 amendments to 13F filings dating back to 2010.
The comment period on the SEC’s proposal to amend Items 101, 103 & 105 of Regulation S-K recently expired. In the proposing release, the SEC laid out some controversial changes to current rules, including a “principles based” approach to Item 101 & a “human capital resources” disclosure requirement. In light of the contentious nature of these proposals, I thought a stroll through the comment letters might be interesting – and I was right.
But so was a new entrant into the governance debate – I guess I’ll call this one “Big Yoga“. “Yoga Burn Challenge” CEO Zoe Bray-Cotton submitted a comment letter focusing on human capital issues. Her comments are thoughtful & serve as a reminder that these issues matter to a broader segment of society than just those of us who earn a living dealing with securities regulation. But what really made her letter stand out from the crowd was the fact that she cited us – well, actually, ME! – in it:
I also refer to the following articles published by TheCorporateCounsel.net website:
1. Board Gender Diversity: Good for Business
2. Gender Quotas on Boards?
3. “Just Vote No”: State Street’s Alternative to Quotas
Those were all in this blog that I wrote a couple of years ago. Anyway, she plugged me, so I will plug her. Go check out the Yoga Burn Challenge – and tell Ms. Bray-Cotton that I sent you.
Data Security: CalPERS Directors Keep Losing Their Devices
Here’s a goofy one for you – it seems that some members of the CalPERS board have a real problem hanging on to their devices. Here’s an excerpt from a recent Sacramento Bee article:
CalPERS board member Margaret Brown has reported losing two state-issued iPhones and an iPad since she was elected to her seat overseeing the $380 billion pension fund two years ago, according to device records. Brown’s losses of the devices, while representing relatively minor security risks for the California Public Employees’ Retirement System, stand out compared to other board members’ handling of their devices, according to records CalPERS provided under the Public Records Act.
In the last five years, three other board members among the 20 officials listed in the records reported losing one iPad each. Former Board President Priya Mathur reported losing an iPad Air 2 in 2018, and the device wasn’t found, according to the records. Board members Theresa Taylor and Ramón Rubalcava each lost one iPad, neither of which appear to have been returned, according to the records.
But there’s no need for CalPERS participants to worry about their personal data being compromised. That’s because experts quoted in the article said that “only an extremely sophisticated hacker could access information on the iPads with the protections CalPERS has in place.” Whew! Good thing there are so few extremely sophisticated hackers out there.
I guess I shouldn’t be too hard on these folks. After all, my youngest son lost 2 smart phones on consecutive college spring breaks (we were not amused). On the other hand, it’s probably fair to expect directors of a public institution to be a little more responsible than a frat boy. I don’t know if there will ever be a Hall of Fame for institutional investors, but if there is, the slogan “for thee but not for me” should be carved in stone over the entrance to it.
EDGAR: Why Are iXBRL Filings Sometimes So Clunky to Download?
Several members have pointed out – in emails & in our ”Q&A Forum” (eg #10032) – that some iXBRL filings take forever to load. According to the SEC Office of Structured Disclosure’s Inline XBRL page, that shouldn’t be the case if you’ve got an up-to-date browser:
Viewing Inline XBRL filings is simple and does not require any specialized software because the Commission has incorporated an Inline XBRL Viewer into the Commission’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
Anyone using a recent standard internet browser can view an Inline XBRL filing on EDGAR. (Recent standard internet browsers are ones that fully support HTML 5 and JavaScript, such as Chrome 68 and later, Firefox 60 and later, Safari IOS 11 and later, Microsoft Edge Windows 10, and Internet Explorer 11.)
Personally, I found that when I used the old computer that I was issued when I first joined TheCorporateCounsel.net team, iXBRL filings took forever to load. However, they uploaded fairly quickly on the new computer that my law firm issued to me, so I chalked it up to outdated hardware/software. However, others seem to have had problems on new computers/browsers as well. Does anybody know if there’s a fix that people may be overlooking?
Yesterday, the SEC issued two controversial rule proposals that, if adopted, would significantly modify the proxy disclosure & solicitation process. There’s a lot to cover, so I’m going to do these one at a time. First, the SEC announced a rule proposal that would impose disclosure & other obligations on proxy advisors. The proposed rules would:
– Amend Exchange Act Rule 14a-1(l), which defines the terms “solicit” and “solicitation,” to specify the circumstances when a person who furnishes proxy voting advice will be deemed to be engaged in a solicitation subject to the proxy rules.
– Revise Rule 14a-2(b) to condition certain exemptions relied upon by proxy advisors on their compliance with three new requirements. In order to avoid complying with the full range of rules applicable to proxy solicitations, proxy advisors would have to disclose material conflicts of interest in their proxy voting advice, provide the company with an opportunity to review and comment on their advice before it is issued; and, if requested by the company, include in their voting advice a hyperlink directing the recipient of the advice to a written statement that sets forth the company’s position on the advice.
– Modify Rule 14a-9 to include examples of when failing to disclose certain information in the proxy voting advice could be considered misleading within the meaning of the rule.
The SEC was sharply divided on this proposal & its companion – both of which were approved by a 3-2 vote. Commissioner Jackson issued a statement on his decision to dissent from the proposal, which he characterized as limiting the ability of investors to “hold corporate insiders accountable.” Fellow Democratic Commissioner Allison Herren Lee issued a statement in which she said that both proposals would “suppress the exercise of shareholder rights.”
In contrast, Republican Commissioner Eliad Roisman issued his own statement in support of the proposal, which he said would help fiduciaries “receive more accurate, transparent, and complete information when they make their voting decisions.”
When Caesar crossed the Rubicon with his legions in 49 BC, he knew that he was taking a fateful step and reportedly exclaimed “Alea iacta est!” – “The die is cast!” Maybe I’m being a little dramatic, but it sure feels like there’s an element of that sentiment in the SEC’s action. While Commissioner Clayton issued a statement in which he stressed that the proposal is just that – a proposal – it seems inevitable that the regulatory ground is about to shift in a significant way.
But Wait! There’s More! SEC Proposes to Tighten Shareholder Proposal Thresholds
Because one highly controversial proposal wasn’t enough, the SEC also announced a rule proposal yesterday that would make it more difficult for shareholders to submit & resubmit proposals for inclusion in a company’s proxy statement. The rule proposal would, among other things:
– Amend Rule 14a-8(b) to replace the current $2,000/1% ownership for at least 1 year threshold with 3 alternative thresholds for submission: continuous ownership of at least $2,000 of the company’s securities for at least 3 years; at least $15,000 of the company’s securities for at least 2 years; or at least $25,000 of the company’s securities for at least 1 year.
– Amend Rule 14a-8(c) to apply the one-proposal rule to “each person” rather than “each shareholder,” which would effectively prohibit a shareholder-proponent from submitting one proposal in their own name and simultaneously submit another proposal in a representative capacity. Representatives would also be prohibited from submitting multiple proposals, even if the representative were to submit each proposal on behalf of different shareholders.
– Amend Rule 14a-8(i) to increase the current thresholds of 3%, 6% and 10% for resubmission of matters voted on once, twice or three or more times in the last five years to 5%, 15% and 25%, respectively. A new provision would also be added permitting exclusion of a proposal that’s received 25% approval on its most recent submission if it has been voted on 3 times in the last 5 years and both received less than 50% of the votes cast and experienced at least a 10% decline in support.
Other proposed changes to Rule 14a-8(b) would subject shareholders using representatives to enhanced documentation requirements with respect to the authority of those agents, and require shareholder-proponents to express a willingness to meet with the company and provide contact & availability information.
I’ve already noted the reaction of individual SEC commissioners to these two proposals, but outside commenters had plenty to say as well. For instance, the CII decried the proposals as apparently “intended to limit shareholders’ voice at public companies in which they invest,” while the U.S. Chamber of Commerce hailed them for ensuring that “investors will have access to transparent and unconflicted proxy advice as well as improv[ing] the proxy submission process.”
Audit Reports: New CAM Disclosure Req’t Shines Light on Material Weakness
Check out this recent “FEI Daily” commentary on the impact of the new CAM disclosure requirement on one company:
In a stark example of how the new “critical audit matters” (CAM) rule is training a spotlight on companies’ internal controls, Stitch Fix Inc. is expanding its internal information-technology controls after identifying weaknesses in how the online service reported financial performance. The issue, related to outsourced information-technology service providers, was flagged by the San Francisco company’s independent auditor in October. The Public Company Accounting Oversight Board began requiring independent auditors to disclose significant challenges in reviewing public companies’ financial statements under the CAM rule this year.
– Excluded Shareholder Proposals. Some of the most notable policy changes respond to the SEC’s recent guidance on the shareholder proposal no-action process. Glass Lewis now says that if the SEC declines to state a view on whether a shareholder proposal should be excluded, then it will likely recommend that shareholders vote against the members of the governance committee unless that proposal appears in the proxy statement.
If the SEC verbally permits a company to exclude a proposal and doesn’t provide a written record, Glass Lewis says that the company will have to provide some disclosure about the no-action position. Companies that don’t provide this disclosure will also face a negative recommendation on the members of their governance committee.
– Committee Performance & Disclosure. Several revisions relate to the codification of circumstances under which Glass Lewis will recommend against chairs of the audit, governance, and comp committees. Audit committee chairs will earn a thumbs down if fees paid to the company’s external auditor aren’t disclosed.
Governance committee chairs will get dinged when either director attendance information isn’t disclosed or when a director attended less than 75% of board and committee meetings and the proxy doesn’t provide enough details as to why. Comp committee chairs will earn Glass Lewis’s wrath if they adopt a time period for holding a “say-on-pay” vote that differs from the one approved by shareholders.
– Exclusive Forum Bylaws & Supermajority Provisions. Glass Lewis has tweaked its guidelines to clarify that it may not recommend against the governance committee chair in situations where it determines that an exclusive forum bylaw has been “narrowly crafted to suit the unique circumstances facing the company.” Glass Lewis has also codified its position that it will recommend voting against proposals to eliminate supermajority provisions at controlled companies, because these protect minority shareholders.
– Gender Pay Equity. Glass Lewis clarified that it will review on a case-by-case basis proposals that request that companies disclose their median gender pay ratios. It will generally vote against those proposals if the company has provided sufficient information concerning its diversity initiatives & concerning how it is ensuring that women and men are paid equally for equal work.
Other changes include defining situations where Glass Lewis reports on post-fiscal year end compensation decisions & setting expectations for disclosure of mid-year adjustments to short-term incentive plans. Glass Lewis also says that it has “enhanced” its discussion of excessively broad “change in control” provisions in employment agreements.
Whistleblowers: SEC Enforcement Says Protections Aren’t Just for Employees
Typically, when we think about whistleblowers, most of us probably picture disgruntled current or former company employees. Yesterday, the SEC’s Division of Enforcement provided a reminder that while that’s often the case, others can qualify as whistleblowers too. As this excerpt from the SEC’s press release announcing enforcement proceedings against Collector’s Café & its CEO demonstrates, investors are also eligible for protection as whistleblowers:
The Securities and Exchange Commission today filed an amended complaint against online auction portal Collectors Café and its CEO Mykalai Kontilai to add allegations that they unlawfully sought to prohibit their investors from reporting misconduct to the SEC and other governmental agencies. The SEC previously charged Collectors Café and Kontilai with a fraudulent $23 million securities offering based on false statements to investors, and alleged that Kontilai misappropriated over $6 million of investor proceeds.
The SEC had previously brought securities fraud charges against the defendants, and its amended complaint alleges that the defendants tried to resolve investor allegations of wrongdoing by conditioning the return of their money on agreements barring investors from dropping a dime on them to law enforcement, including the SEC.
The SEC’s complaint alleges that this conduct violated the SEC’s whistleblower protection rules – and just to make absolutely certain that they waived a red flag in front of the SEC bull, the complaint alleges that these defendants sued two investors that it believed breached one of these agreements.
Non-GAAP: Is It a Non-GAAP Number or Something Else?
Here’s a really helpful SEC Institute blog that reviews the sometimes murky distinction between non-GAAP financial measures subject to Reg G’s requirements & operating measures that are outside the scope of the rule. It also provides some guidance as to how to go about determining what category a particular metric falls into.
The SCOTUS’s 2017 Kokesh decision limited the SEC’s ability to use one of its favorite enforcement remedies when the Court unanimously held that SEC disgorgement claims were subject to a 5-year statute of limitations. Now, this Reuters article says that the SCOTUS has agreed to hear a new case that could remove disgorgement entirely from the SEC’s arsenal. Here’s an excerpt:
The U.S. Supreme Court on Friday agreed to hear a challenge to the ability of the Securities and Exchange Commission to recover ill-gotten profits obtained through misconduct in a case from California that could weaken the agency’s enforcement power.
The nine justices agreed to hear an appeal by California couple Charles Liu and Xin Wang contesting a 2016 civil action brought against them by the SEC. The SEC won a court ruling in 2017 requiring Liu and Wang to disgorge almost $27 million, the same amount they raised from foreign investors to build a never-completed cancer treatment center.
Part of the SEC’s civil enforcement arsenal, disgorgement requires defendants to hand over to the U.S. government money obtained from a fraudulent scheme. The SEC has said it generally passes on disgorged funds to the original investors although it was not required to do so in this particular instance. In fiscal year 2018, the agency returned $794 million to harmed investors.
Whether the SEC actually has the ability to seek disgorgement is an issue that the Kokesh Court specifically raised in footnote 3 of Justice Sotomayor’s opinion:
Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context. The sole question presented in this case is whether disgorgement, as applied in SEC enforcement actions, is subject to § 2462’s limitations period.
It looks like the SCOTUS’s invitation to litigate this issue has been accepted. Here’s the cert petition & the Court’s order granting it. A decision in the case is expected by June 2020.
Boardroom Diversity: Where Do African-Americans Stand?
Efforts to enhance board diversity in recent years have focused primarily on increasing the number of women who serve as directors. Those efforts have slowly paid off and women now are represented on every S&P 500 board. But this Black Enterprise article says that African-Americans still have a long way to go when it comes to boardroom representation:
There are 322 black corporate directors at 307 companies versus 308 at 316 corporations last year. Our editorial research team also discovered that 187 S&P 500 companies or 37%, did not have a single black board member in 2019—a 2 percentage point improvement from 2018.
Boardroom Diversity: Progress on Racial Diversity Impeded by Slow Turnover
The news isn’t all bad when it comes to the inclusion of African-American & other minority board members. Spencer-Stuart’s 2019 Board Index says that progress on racial & ethnic diversity is being made – but that slow turnover is impeding that progress. Here’s an excerpt:
Boards are also focused on racial/ethnic diversity. Just under one in four new S&P 500 directors (23%) are minorities (defined as African-American/Black, Asian or Hispanic/Latino). Minority women represent 10% of the incoming class, up slightly from 9% last year. Minority men represent 13% of the new directors, an increase from 10% last year but still down from 14% two years ago.
While women and minority men constitute more than half of the new directors, continued low boardroom turnover remains a persistent impediment to meaningful year-over-year change in the overall composition of S&P 500 boards. As a result, in spite of the record number of female directors, representation of women increased incrementally to 26% of all directors, up from 24% in 2018 and 16% in 2009.
The report says that “slight” progress is being made in minority representation at the top 200 S&P 500 companies. Today, 19% of all directors of the top 200 companies are male or female minorities, up from 17% last year and 15% in 2009.
The gloves are off. Yesterday, ISS announced that it had filed this lawsuit against the SEC – which challenges the Commission-level guidance that was issued back in August. As Broc blogged earlier this week, CII had already sent a couple of comment letters to the SEC to complain about that guidance. This lawsuit also comes on the heels of the SEC announcing that it will hold an open Commission meeting next week to propose rule changes for proxy advisors.
These are the ISS allegations (also see this Cooley blog – and this Twitter thread from Wharton Prof David Zaring that speculates this case may be used as part of the bigger picture pushback on regulatory guidance that we’ve been seeing):
– The guidance exceeds the SEC’s statutory authority under Section 14(a) of The Securities Exchange Act of 1934 and is contrary to the plain language of the statute; the provision of proxy advice is not a proxy solicitation and cannot be regulated as such
– The guidance is procedurally improper because it is a substantive rule that the SEC failed to promulgate pursuant to the notice-and-comment procedures of the Administrative Procedure Act
– The guidance is arbitrary and capricious because, even though it marks a significant change in the regulatory regime applicable to proxy advice, the SEC has denied that it is changing its position at all. The agency has thus flouted the basic requirement of reasoned decision-making that it at least display awareness that it is changing its position
Director Survey: “Collegiality” & “ESG” Can Go Too Far
PWC is out with its annual survey of 700 directors. The main theme is that “collegiality” remains highly valued and important – but it can go too far if it keeps directors from speaking up or pursuing necessary refreshments. Here’s the key findings:
– 49% of directors (privately) say that one or more colleagues should be replaced (a record number)
– 43% of directors say it’s difficult to voice a dissenting view in the boardroom
– 72% of boards are conducting performance assessments (up from 49% in 2016) – but most focus on adding expertise or diversity, rather than counseling or not re-nominating underperforming incumbents
The survey also says that some directors are growing weary of diversity & ESG attention:
– After years of steadily climbing, the number of directors saying board diversity is “very important” fell by 10%
– 83% of directors say they don’t support state law diversity mandates – but around half say they support policies of including diverse candidates in recruitment slates
– 56% of directors say that investors devote to much attention to E&S issues (however, part of the frustration is that there’s still a lot of confusion among directors about what issues fall into this category)
– An increasing number of directors say that the board has a role in corporate culture (but still not as much as upper & middle management)
See this HBR article for a take on working with the “5 archetypes” of director approaches to ESG – the deniers, the hardheaded, the superficial, the complacent, and the true believers.
Our November Eminders is Posted!
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This 91-page report from EY – and the related 7-page summary – say that Corp Fin issued 34% fewer comment letters last year. While that was partially due to the long-lasting government shutdown, it follows a 25% drop in the prior year – so there appears to be a trend. Not surprisingly, revenue recognition & non-GAAP were the most frequent comment topics. Here’s the full top 10 (see the report for example comments in each category):
1. Revenue recognition
2. Non-GAAP financial measures
3. MD&A (in order of frequency: (1) results of operations (20%), (2) critical accounting policies and estimates (10%), (3) liquidity matters (8%), (4) business overview (6%) and (5) contractual obligations (2%) – many companies received MD&A comments in more than one category)
4. Fair value measurements (including comments on fair value measurements under Accounting Standards Codification 820 – as well as fair value estimates, such as those related to revenue recognition, stock compensation and goodwill impairment analyses)
5. Intangible assets and goodwill
6. Income taxes
7. State sponsors of terrorism
8. Segment reporting
9. Acquisitions and business combinations
10. Signatures/exhibits/agreements (new to this year’s “Top 10”)
Foreign Nations Might Be Delaware’s New Competition
While you may think of Nevada – or even federal law – as Delaware’s primary competitor in the “corporate law” space, a forthcoming law review article says that non-US jurisdictions are the real threat. Here’s an excerpt:
While Delaware continues to dominate the market with 48.1% of US-listed companies, foreign nations now account for 13.4% of incorporations – more than double the 5.5% of US-listed companies incorporated in Nevada, which has been identified as the only other state besides Delaware actively vying to draw corporations that physically operate outside of its borders.
As this Article will show, offshore incorporation havens in recent decades have built sophisticated legal infrastructures that enable them to compete with Delaware. For one, they have attracted a network of elite foreign lawyers who help lawmakers in these jurisdictions draft “cutting edge” corporate law statutes. These lawmakers also rely heavily on incorporation fees for government revenues, allowing them to credibly commit to retaining laws that are attractive to the private sector.
Because the population of offshore incorporation havens tends to be a fraction of even sparsely populated states in the United States (for instance, as of 2019, the population of the Cayman Islands is 59,613 compared to 961,939 in Delaware and 2,998,039 in Nevada), these jurisdictions can enact legislation swiftly in response to private sector demand. They also do not confront the type of democratic accountability facing large nation states (or large states like New York or California), in part because they specialize in producing laws for corporations that do not physically operate within their territories.
Delaware’s judicial system is often pointed to as a competitive advantage over other states. These jurisdictions compete not by carbon copying Delaware’s judiciary, but rather by offering dispute resolution for a functionally similar to modern commercial arbitration. Like arbitration, courts in offshore incorporation havens swiftly resolve disputes without juries. Judges serving in these courts, like arbitrators, are credentialed business law jurists including partners at major international law firms who fly in from overseas to preside over cases ad hoc. Many legal proceedings take place in secret, and full-length opinions are frequently unpublished or available only to insiders.
I’m admittedly biased due to interning in Wilmington for a Delaware Justice back in the day, but isn’t transparency & predictability still a pretty big advantage? I guess if you can opt out of derivative suits & fiduciary duties, which is the case with many of these incorporation havens, that may matter less.
Last night, the SEC posted this Sunshine Act notice to announce it will hold an open meeting next Tuesday, November 5th to propose rule changes for proxy advisors & shareholder proposal thresholds – here’s the agenda. My blog yesterday included an excerpt from an FT article about what may be in the proposals. Check that out for a possible preview.
We’ll be covering this, along with the SEC’s recent Rule 14a-8 proposal during our upcoming webcast – “Shareholder Proposals: What Now” – on Thursday, November 21st. In that program, Davis Polk’s Ning Chiu, Morrison & Foerster’s Marty Dunn and Gibson Dunn’s Beth Ising will also be discussing Corp Fin’s new approach for processing shareholder proposal no-action requests and the expected impact of Staff Legal Bulletin No. 14K.
SEC Starts Posting “Edgar Is Down” Notices
Just last week, Broc blogged his frustration about how the SEC wasn’t posting “Edgar is down” notices as we thought they would be doing. Yesterday afternoon, the SEC posted their first one:
EDGAR System Technical Difficulties
The EDGAR system is experiencing technical issues, which may impact filers’ ability to make submissions to EDGAR. Our technical staff is working to resolve the issues. We apologize for any inconvenience caused. Please note that updates regarding the resolution of this issue will be posted on this site. Once the outage has been resolved, we will work with filers who are impacted to resolve any impact from the inability to file.
Update – For those Issuers who are unable to furnish or file an Item 2.02 Report on Form 8-K to meet the requirements of paragraph (b)(1) of Item 2.02, but are unable to do so because of these difficulties, the staff will adjust the receipt date of such report so that it will be deemed furnished or filed at the time the Issuer first attempted to submit such report.
Update – The technical issue has been resolved. EDGAR is operating normally. Filers who attempted to file but were unable to do so as a result of the outage should submit their filing as soon as possible, and contact Filer Support at 202 551-8900, or email EDGARFilingCorrections@sec.gov. Please provide the CIK, accession number of the impacted filing.
TCFD: Real-World Disclosures
A few months ago, I blogged about the “TCFD Implementation Guide” – it has annotated mock disclosures that show how companies could present climate-related financial info. Now, SASB and the Climate Disclosure Standards Board (CDSB) are back with this 50-page “Good Practice Handbook.”
The Handbook teases out specific examples of effective reporting from companies around the world. It focuses on the 4 core TCFD elements of governance, strategy, risk management, and metrics & targets.
Although we haven’t yet seen a Sunshine Act notice from the SEC, the Financial Times is reporting that the SEC could propose new rules for proxy advisors & shareholder proposal thresholds as soon as next Tuesday. For now, here’s what’s being reported as part of the proposal:
– Proxy advisors would be required to give companies two chances to review proxy voting materials before they are sent to shareholders
– Shareholder proposal resubmission threshold would increase to 6% approval in year one, 15% in year two and 30% in year three – if a shareholder proposal doesn’t hit those thresholds, companies would be able to exclude proposals on the same subject matter for the next three years
These things are always very speculative – both the substance & timing could change, and nothing’s certain till we see the proposal. The FT article emphasizes that too:
The Commission is expected to vote to put the changes out for comment on November 5, according to the people, who cautioned that the plans and the timing were still in flux and could change before the vote next month.
If the proposal is issued, you can bet we’ll be covering it in our upcoming webcast – “Shareholder Proposals: What Now” – on Thursday, November 21st. In that program, Davis Polk’s Ning Chiu, Morrison & Foerster’s Marty Dunn and Gibson Dunn’s Beth Ising will also be discussing Corp Fin’s new approach for processing shareholder proposal no-action requests and the expected impact of Staff Legal Bulletin 14K.
“Harmonization” of Private Offerings: NASAA Comments on SEC’s Concept Release
Right now, a “requirement” for relying on the Reg D private placement exemption is to file a Form D within 15 days of the date that securities are first sold under the exemption. “Requirement” is in quotes because filing a Form D isn’t a condition to the availability of the federal exemption – but it could disqualify the company from using the exemption in the future, and some state enforcement agencies say that a delinquent Form D kills the preemption the company would otherwise enjoy from state law registration requirements.
So it’s interesting that in its recent comment letter to the SEC’s “Concept Release on Harmonization of Securities Offering Exemptions,” the North American Securities Administrators Association – otherwise known as NASAA, the organization that represents state securities regulators – is recommending an amendment to Regulation D that would require pre-issuance as well as post-closing Form D filings. This Allen Matkins blog gives more details (and here are all the comments the SEC has received so far):
NASAA argues that a pre-issuance filing requirement will “alert regulators that the offering is forthcoming and to provide an opportunity for regulators to investigate the offering if any information in the Form D raises concern”. Form D was originally presented as a tool to “collect empirical data which will provide a basis for further action by the Commission either in terms of amending existing rules and regulations or proposing new ones”. It has evolved, however, into an enforcement tool for securities regulators. See “Is Form D Afflicted With Mission Creep?“
NASAA is also recommending amendments to the definition of “accredited investor” that would raise individual net worth & income requirements, and preserving Rule 504 in its current form. Our “Reg D Handbook” covers all the ins & outs of the current exemption – including the current Form D filing requirements and related “Blue Sky” impact.
“Climate-Change Accounting”: Not Adding Up?
Last week, as this WSJ article reports, Exxon began defending itself in New York state court about whether it improperly accounted for the cost of climate change regulations (they were also sued in Massachusetts). The NY suit was brought under New York’s sweeping Martin Act and arises out of a 4-year investigation – so of course there’s some controversy. According to the article, Exxon has denied wrongdoing – and said a reasonable investor wouldn’t expect to know these details. But then there’s this unrelated Reuters article about how investors want more transparent “climate-change accounting” so they can better understand & price risks. Here’s an excerpt:
Using a broad measure, global sustainable investment reached $30.1 trillion across the world’s five major markets at the end of 2018, according to the Global Sustainable Investment Review. This equates to between a quarter and half of all assets under management, due to varying estimates of that figure.
Condon said most investors were still more focused on returns than wider sustainability criteria but were becoming concerned that companies may expose them to possible future climate-related financial losses.
To try to price risk, the world’s biggest financial service providers are investing in companies which provide ESG-related data. This year alone, Moody’s bought Vigeo Eiris and Four Twenty Seven, MSCI bought Carbon Delta and the London Stock Exchange bought Beyond Ratings. S&P acquired Trucost in 2016. Independent climate risk advisors Engaged Tracking say they attracted two-thirds of their clients in the past year. All six companies provide data, assessments and consulting on the climate exposure of companies or bonds.
To reiterate, these investors weren’t reacting to Exxon’s disclosure specifically, or its court case. And we obviously don’t know what’ll happen there. But if there’s a scale weighing the pros & cons of a more standard disclosure framework for environmental costs & risks, the specter of this type of litigation – and investor appetite – seem to drop in on the “pro” side…
When I first saw this announcement from the SEC’s Enforcement Division about an emergency action to halt an unregistered ICO, I brushed it off as a takedown of yet another fraudulent “crypto” company. But this column from Bloomberg’s Matt Levine points out that this one is different.
In Matt’s words, the company here was doing the “best-practices-y thing” that had been blessed by several law firms. Its offering was structured as a “Simple Agreement for Future Tokens” – as John blogged last year, that’s an approach – based on the popular “SAFE” template for startup financing – that was starting to take off for Reg D token deals. Matt’s explanation of how it works:
1. Sell something—call it a “pre-token”—to accredited investors (institutions, venture capitalists, etc.) to raise money to build your platform. Concede that the pre-token is a security.
2. When the platform is built, it will run on a token, a cryptocurrency that can be used for transactions on the platform and that is not a security.
3. At some point — at or after the launch of the platform — the pre-token (the security) flips into the token (the non-security), and all the people who bought pre-tokens to finance the platform now have tokens to use on it. (Or to sell to people who will use them.)
This seems to honor the intention of securities law—you’re not selling speculative investments to retail investors to fund the development of a new business—while also honoring the intention of the ICO: Your platform is financed (indirectly, eventually) by the people who use it; the people putting up the money do so not in exchange for a share of the profits but for the ability to participate in the platform itself. In this model the pre-token will be called something like a “Token Purchase Agreement” or “Simple Agreement for Future Tokens”: It’s a security wrapper for the eventual utility token.
Unfortunately, the SEC’s complaint took issue with the fact that when the “pre-tokens” here were scheduled to flip into tokens, there would be no established ecosystem for them to trade as currency. Which would seem to be an obvious side-effect of financing a new form of cryptocurrency?
We’re not really sure what to make of this yet – there were some reports that early investors in this offering were flipping their tokens right away, which would be a problem in the SEC’s view. Matt also suggests that maybe the SEC would be more amenable if the pre-tokens didn’t flip until the ecosystem is running robustly. But probably not. John blogged recently on “The Mentor Blog” about how to do a Reg A token offering. So perhaps anyone considering an ICO should take a look at that…
“Reg D” ICOs: What’s the Harm in Trying?
This MarketWatch article notes there’s been a steep drop-off in the number of Reg D token offerings this year. If the Enforcement Division taking issue with a SAFT isn’t enough to put companies off that approach, keep in mind that the remedies in these actions go beyond just halting the current offering:
Until September 30, 2019, SEC enforcement actions in the crypto industry conveyed a consistent message: most crypto is a security, and if a token issuer does not follow the registration requirements of the 1933 Act, the issuer would face significant consequences in the form of substantial penalties, a mandated rescission offer to US investors, a requirement to register the tokens under Section 12(g) of the 1934 Act, and bad actor disqualifications preventing the issuer from future Regulation A and Regulation D offerings.
That’s the intro from this Wilson Sonsini memo – but it does note a recent “aberration” on the remedies front:
On September 30, the SEC announced a settlement with Block.one that did none of these things. Despite finding that Block.one issued tokens that were securities in the United States without complying with registration requirements of the 1933 Act, the SEC: imposed a financial penalty on Block.one that was minor in the context of the total size of Block.one’s capital raise; did not require Block.one to make a rescission offer to investors; did not require Block.one to register its tokens under the 1934 Act; and did not impose bad actor disqualifications under Regulation A and Regulation D.
And, as discussed below, the Block.one Settlement Order omitted any mention of key factual information necessary to support the SEC’s conclusion that the tokens were in fact securities. Equally surprising, the SEC did not address, in any respect, whether new tokens issued being used on a blockchain supported by Block.one are securities, and the SEC took no action (and offered no discussion) with respect to the issuance of those tokens.
What are we all to make from these mixed messages? This Eversheds Sutherland memo says that the most we can take away is that the SEC is evaluating facts in settlement proceedings on a case-by-case basis. If you’re doing an unregistered token offering right now, go document some good facts!
We just wrapped up “Lynn, Borges & Romanek’s 2020 Executive Compensation Disclosure Treatise” — and it’s been sent to the printers. This Edition includes updates to disclosure examples, info about the evolving link between ESG topics & executive pay, and a brand new chapter on hedging policy disclosure. All of the chapters have been posted in our “Treatise Portal” on CompensationStandards.com.
How to Order a Hard-Copy: Remember that a hard copy of the 2020 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately. Act now to ensure delivery of this 1710-page comprehensive Treatise as soon as it’s done being printed. Here’s the “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.
