Big institutional holders seldom have trouble getting management’s ear – but traditionally, retail investors who weren’t willing to play the gadfly game could usually count on a polite brush-off from the IR department. Now, it looks like that situation may be changing. Broc recently blogged about SAY, a New York-based tech startup that provided a platform for retail investors to vote on questions to ask Elon Musk during a recent Tesla earnings call. But SAY’s not the only entity that’s trying to help retail investors be heard on matters that concern them. Check out ‘Stake’ – which aims to pair retail investors with a small group of socially responsible investment funds that will serve as “Champions” for their issues.
Stake provides a platform for retail shareholders to identify specific “Asks” that they want addressed by the companies in which they invest. Once an ‘Ask’ gets a critical mass of support, this excerpt from Stake’s website lays out what happens next:
When an Ask reaches its support goal, one of Stake’s Champions will take that Ask directly to company management, advocating on behalf of all those that supported the Ask. Our Champions are experts at persuading companies to improve their social and environmental impact, and they are already connected to the corporate decision-makers. Stake is a tool like none before. By connecting you with a professional Champion, your voice reaches the boardroom.
Investors who supported the specific “Ask” receive progress updates on the company’s response to it. Stake’s founders are themselves climate change activists & companies have implemented a number of the Asks that Stake’s allied funds championed.
I know it’s easy to be skeptical of efforts like these – and I have my doubts about how much traction Stake’s going to be able to get. But I’m also reminded that it only took David one stone to take down Goliath, & these folks have the potential to muster a lot more firepower than that.
Tomorrow’s Webcast: “Conduct of the Annual Meeting”
Tune in tomorrow for the webcast – “Conduct of the Annual Meeting” – to hear Nu Skin Enterprises’ Greg Belliston, The Brink Company’s Lindsay Blackwood, Foot Locker’s Sheilagh Clarke, Carl Hagberg of the “Shareholder Service Optimizer” and General Motors’ Rick Hansen talk about how to best prepare for your annual shareholders meeting.
Annual Reporting: Don’t Forget to Check On Your Filer Status!
This Akin Gump blog reminds companies to check on their filing status while they’re preparing to file their Form 10-K – many more companies may qualify as “smaller reporting companies” this year due to the SEC’s recent rule changes. Here’s an excerpt:
As public companies prepare to file their annual reports on Form 10-K for the year ended December 31, 2018, they should consider whether they qualify for smaller reporting company status under the recently amended definition of smaller reporting company, which became effective on September 10, 2018, and the related CDIs updated by Staff of the Division of Corporation Finance on November 7, 2018.
The amended SRC definition raises the threshold to allow more companies to qualify as an SRC and benefit from the election to use the scaled disclosure accommodations available to SRCs. SRCs may choose compliance with either the SRC scaled disclosure requirements or the larger company disclosure requirements on an item-by-item or “a la carte” basis for each filing as long as disclosures are provided consistently and permit investors to make period-to-period comparisons.
The blog also reminds companies thinking about taking advantage of scaled disclosure that, to the extent an SRC scaled item requirement is more rigorous than the same larger company item requirement, SRCs are required to comply with the more rigorous disclosure.
Lyft finally dropped the Form S-1 for its much anticipated IPO on Friday. The filing fundamentally changed humanity forever – or at least that’s the impression you’d get from reading Lyft’s overheated nuclear jargon-bomb of a prospectus. If you think I’m being unfair, check out this lofty description of the culture & values of a company that owes a healthy chunk of its business to ferrying around drunk people:
Our core values are Be Yourself, Uplift Others and Make it Happen. Our team members, who uphold our values and live our mission every day, are at the forefront of cultivating and spreading this culture across the drivers, riders and communities we serve. This continuous interaction across the entire Lyft community creates a virtuous cycle which further reinforces our culture and fuels our growth.
Look, I worked on a lot of IPOs back in the day, and I plead guilty to helping draft a lot of meaningless gibberish about companies doing things like “proactively leveraging synergies” in prospectus summaries with silly captions like “Our Strategic Vision” & “Our Competitive Advantage.” But this thing reads like a parody of a tech company prospectus – starting with the pink cover page & culminating in a founders’ letter accompanied by an assortment of photos & quotes from photogenic millennials whose lives have been transformed by one-click access to an unlicensed cab. Toss in the nearly $1 billion loss for the most recent year, and you’ve got truly state of the art stuff.
And maybe the biggest inside joke is that many people – including EU regulators – think ride share businesses like Lyft aren’t tech companies at all. Instead, they essentially view them as ‘gypsy cab’ apps. What’s more, in reading Lyft’s filing, you get the impression that its biggest market opportunity lies in the rapidly growing demographic of people who are too poor to buy their own cars. How do you spin that positively? You do it like this:
We believe that the world is at the beginning of a shift away from car ownership to Transportation-as-a-Service, or TaaS. Lyft is at the forefront of this massive societal change. Our ridesharing marketplace connects drivers with riders and we estimate it is available to over 95% of the U.S. population, as well as in select cities in Canada. In 2018, almost half of our riders reported that they use their cars less because of Lyft, and 22% reported that owning a car has become less important. As this evolution continues, we believe there is a massive opportunity for us to improve the lives of our riders by connecting them to more affordable and convenient transportation options
Of course, since the Lyft folks are working 24/7 to bring humanity into “the broad, sunlit uplands” of TaaS (not to be confused with TASS), management can’t afford to be distracted by the demands of public shareholders. Perhaps that’s why Lyft not only has a dual class capital structure, but also a staggered board, blank check preferred, and a prohibition on shareholder written consent actions, just to name some of its antitakeover protections. The CII has already weighed-in with the customary objections.
Personally, I couldn’t care less if Lyft wants to offer the public low vote stock – if you don’t like it, don’t buy it. But I’m looking forward to the post-closing pearl clutching about these provisions by the governance side of the house of the same institutions whose portfolio managers would likely stampede over their own children to get shares allocated to them in the deal.
If you’re looking for more of a deep dive into Lyft’s proposed IPO, check out this MarketWatch.com article.
Dual Class Companies: Are “Coattails” the Answer?
Lyft’s just the latest high profile IPO to include a dual class capital structure. There’s been a lot of sound & fury about public companies with these structures – and we’ve blogged about quite a bit of it. But this recent study claims that our neighbors to the north are the source of an idea for moving forward on this issue. Here’s the abstract:
The debate over whether dual class of shares increases or decreases share value, should be prohibited or not, should be subjected to mandatory sunset provisions, and so on has been heating up over the last few years. This paper reviews the pros and cons of dual class of shares in light of more recent empirical results of (mostly) American studies. The paper surveys the evolution of dual-class companies in the Canadian context and makes a number of recommendations to enhance the usefulness of this type of capital structure and protect the rights of minority shareholders.
The paper comes out against time-based sunset clauses but supports the obligation for dual-class companies to adopt a “coattail” provision, as is the case in Canada, which provision ensures that all shareholders will have to be offered the same price and conditions should the controlling shareholder decide to sell its controlling stake in the company. The paper also recommends that separate tallies of vote results be made public for each class of shares and that a third of board members be elected by shareholders with “inferior” voting rights.
Now, I hate to disabuse North America’s designated driver of its notion that “coattails” are a Canadian invention, but the there’s lots of precedent for this south of the border as well – and it goes back decades. You need look no further than my all-time favorite deal for evidence of this.
In the Cleveland Indians’ 1998 initial public offering, the company’s charter included a provision that generally prohibited the transfer of the high-vote shares held by then-owner Dick Jacobs other than as part of a transaction in which the low vote shares received the same consideration as the high-vote shares. And you can take my word for it – we weren’t innovators. In fact, we shamelessly stole that language from charter documents filed in several precedent transactions.
The SEC’s limited track record in litigation involving whether tokens are securities has been pretty good – but there was one recent blemish. In December, a California federal court denied the SEC’s motion for a preliminary injunction against Blockvest’s proposed token offering, holding that the agency had not provided enough information to deem the token a security. Here’s an excerpt from John Reed Stark’s blog describing the court’s decision:
On February 14, 2019, in a stunning and extraordinary reversal from his November decision, Judge Curiel sent shockwaves through the ICO industry. Specifically, Judge Curiel granted the SEC’s bid for a preliminary injunction against Blockvest after the SEC asked him to reconsider, based upon, “a [now] prima facie showing of Blockvest’s past securities violation and newly developed evidence which supported the conclusion that there is a reasonable likelihood of future violations.”
I love that we have a lot of avid readers in our community. Here’s a “Best Books of 2018″ list from Bob Lamm. And when it comes to reading goals, Nina Flax of Mayer Brown has it covered with her latest “list” installment (here’s the last one):
Now that we’re well into the new year, I’m sure we are all making progress on our resolutions. Some of my lofty ideas include watching less mind-numbing TV, increasing my practice of “single-tasking”, actually exercising ever, eating more healthy food, etc. One also includes reading more books for pleasure.
This is actually a hard one for me, because it seems so accomplishable and yet… On the one hand, I love to read books. On the other hand, I read so much for work my eyes are tired. In between the two ends of my reading spectrum thoughts, if I find a book I like, I read and read and read – and will stay awake sometimes all night (literally), which leads to more tired eyes, not wanting to read… I completely appreciate this is a silly problem. And so, I am trying to break through the cycle and focus on reading in a more mindful way, by both picking up AND putting down a book more often. Plus, if I accomplish this goal, by sheer lack of time I will also likely accomplish my watching less mind-numbing TV goal. Yay for my one stone!
So, for my first list of the year, I have created simply a list of non-work books I would like to read in 2019.
Bad Blood
The Girl Who Smiled Beads: A Story of War and What Comes After
Here’s Looking at Euclid: From Counting Ants to Games of Chance – An Awe-Inspiring Journey Through the World of Numbers
Tubes: A Journey to the Center of the Internet
Ghost Fleet: A Novel of the Next World War
On Being Blue: A Philosophical Inquiry
What a Fish Knows: The Inner Lives of Our Underwater Cousins
Mapping the Heavens: The Radical Scientific Ideas That Reveal the Cosmos
The Path Between the Seas: The Creation of the Panama Canal, 1870-1914
Tigana
The Sword of Shannara (which will inevitably lead to the other two)
The Queen’s Poisoner (which will inevitably lead to the other five, but not the prequels)
I also have on my list re-reading a few books – Siddhartha, Peony and Animal Farm. I must admit that I purposely wrote this so that I will feel like you all are holding me accountable and I may actually accomplish this goal! To leave you all with a quote from someone I knew as a child, “Each year you should take a long walk, make a new friend and read a good book.” Here’s to 2019 being great.
Audits: Radical Change on the Horizon?
This article from a Harvard Law School Fellow analogizes problems with the “independent auditor” framework to climate change – there are issues that may well bring down the entire system, but we’re lacking a short-term incentive to fix them. Here’s what he identifies as destabilizing trends that audit committees need to watch:
1. Big 4 Breakup – The UK is continuing to discuss a breakup in light of the Enron-like failure of Carillion – and audit chairs may want to watch these developments carefully when they consider whether to retain or replace current auditors. Not surprisingly, auditors are opposed to spinning off non-audit services – but say they’re open to a market share cap. This blog argues that the break-up proposals are impractical.
2. Obsolete Measures – More stakeholders are asking whether boards in general, and audit committees in particular, are accessories to a process that is growing obsolete by looking at wrong or incomplete indicators – e.g. ignoring the value of intangible assets and metrics that measure long-term performance
3. Changes to Reporting – As enhanced audit reports (CAMs) and integrated reporting spread, board audit committees may find value in monitoring how pace-setting companies handle the new disclosure techniques. They may even urge their companies and auditors to run tests to see how they might be adapted. Advantages could come in the form of higher confidence among investors, with the prospect of a lower cost of capital, and better internal management of multiplying risks that fall outside the bounds of conventional accounting standards. See this 5-minute CAQ video on how audit chairs are approaching CAM disclosures…
Our March Eminders is Posted!
We have posted the March issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Note from Broc: One last casualty of the shutdown: PLI’s “SEC Spleaks” got moved to April from its traditional February date because they were afraid of a possible second shutdown and they would have no speakers. The ASECA dinner was moved too.
In Morrow Sodali’s latest institutional investor survey, 85% of respondents said that climate change was their most important engagement topic (up 31% from last year) – although when it comes to disclosure, they’re more focused on getting human capital details. Maybe this result isn’t too surprising given that the 46 global survey participants are all signatories to the UN’s Principles for Responsible Investment – but their combined $33 trillion of assets under management is nothing to sneeze at (and yes, the “Big 4” US institutional investors – BlackRock, Vanguard, State Street & Fidelity – are all PRI signatories).
When it comes to voting, the survey says that governance policies & practices are by far the most important factor. Also, some investors are more willing these days to nuance their voting decisions based on information gained in engagements, but some continue to rigidly adhere to stated policies. So you just have to know who you’re dealing with. And be aware that the cost to nuanced decision-making is a greater demand for transparency and director involvement in engagements (87% said that director involvement helps their evaluation of a company’s culture, purpose & reputational risks). Here’s a few other hot topics that will continue to impact board meetings, engagements and disclosure (also see this “Harvard Law” blog):
– Board composition & competence – skills & qualifications are the most important factor in evaluating directors, with diversity lagging behind
– Executive pay – pay-for-performance, rigor of performance targets and the inclusion of long-term performance targets are all important, and investors are beginning to engage collectively on this topic
– Human capital management and corporate culture – including succession planning to prepare for the risk of abrupt executive departures that could result from a scandal
Audit Committees: Tech’s Impact on Financial Reporting
Tech disruption is coming to an audit near you. Whether it’s turning to tech firms for the “data gathering” phase of the audit, or ensuring that automated financial record-keeping and reporting is accurate – which are both increasingly common according to this WSJ article – audit committees need to oversee the related financial reporting risks. Fortunately, the “Center for Audit Quality” has released a tool for audit committees that explains the impact of emerging technologies on the oversight framework. In addition to identifying other helpful resources, the CAQ’s tool contains suggested questions for a number of key tasks.
Large-Cap Directors: Bad News for Small-Caps?
If the director recruitment industry is any indication, experienced large-cap directors are in high demand. And for good reason – they’ve likely had first-hand involvement with a variety of board, management & shareholder situations. But since small-caps tend to have more retail shareholders, fewer resources and different types of business issues, that large company experience could be a double-edged sword.
In this blog, Adam Epstein covers six potential “negatives” – and makes it clear that impressive credentials don’t negate the need to find the right fit and remain attuned to director & board performance. Here’s an excerpt:
– Form over substance: If a large-cap company is akin to an aircraft carrier, many small-caps are more like speedboats. The former takes dozens of people and extended periods of time to change speed or course, while the latter can take one or two people and happen in a matter of seconds. When you try and operate a speedboat the same way as an aircraft carrier, it’s pretty easy to hit other stuff… or sink. Every small-cap investor has a story about a portfolio company that sunk – or came needlessly close to it – because a newly-appointed board member from the large-cap world unconsciously redirected the board’s attention away from key existential threats to never-ending boardroom box-checking.
– Misplaced emphasis on proxy advisors: Large-cap companies are typically more than 80 percent owned by large institutional investors. Those investors, in turn, can place a high degree of emphasis upon third-party advisors that educate institutional investors how they should consider voting on various annual proxy proposals. These so-called proxy advisors (e.g., ISS, Glass Lewis, etc.), can be highly impactful on board appointments and director compensation, among other things, and large-cap board members can get transfixed upon remaining within the good graces of ISS, et al. Regrettably, many large-cap emigres assume that their small-cap colleagues should be equally concerned about proxy advisors, despite the fact that many small-caps are majority owned and traded by retail (i.e., nonprofessional) investors who don’t care one iota about what any proxy advisor says… about anything. The result isn’t pretty, because when small-cap boards lose primary focus on strategy, innovation, culture, and capital formation, and instead become enamored with proxy advisors, bad things tend to happen.
– Corporate finance disasters: Large-cap companies rarely need to access the equity capital markets, and when they do it’s almost always from a position of strength and leverage – strong balance sheets and extremely liquid stocks. On the other hand, many small-caps are serial capital raisers, and often transact financings from positions of weakness and vulnerability – everyone knows they are running out of money and their stock is illiquid. Here’s the rub: when I was an institutional investor, many of our portfolio companies either waited too long to raise “must have” capital, or they turned down “market terms” all because a large-cap board member noisily applied big company corporate finance sensibilities to a marketplace they didn’t understand – at all. This problem is exacerbated by the fact that “other” board members are often overly deferential to the new board member who operated, governed or advised famous companies. Just because someone works on an Indy 500 pit crew, doesn’t mean they are the best person to change the brakes on your Lexus.
Here are results from our recent survey on board fees for CEO searches (the sample size was small, FYI):
1. During our most recent CEO search, we paid a search-related fee to the directors who led the search:
– Yes – 7%
– No – 57%
– We haven’t conducted a CEO search – 36%
2. For those paid the search-related fee, the total amount paid to each director was:
– $25,000 or more – 0%
– $15,000-$25,000 – 50%
– $5,000-$15,000 – 0%
– Less than $5,000 – 50%
3. For those paid the search-related fee, the fee was structured as:
– Per-meeting & per-interview fee – 0%
– Periodic additional retainer – 0%
– Additional “committee” fee – 100%
4. For those paid the search-related fee, the fee was based on:
– Compensation consultant survey & recommendation – 50%
– Informal estimate of extra time commitment – 50%
Please take a moment to participate anonymously in these surveys:
This 28-page survey from Allen & Overy and Willis Towers Watson summarizes the most common D&O concerns – not too surprising that cyber threats now top the list, but less expected is the fact that health & safety is now in the top five – as well as the coverage issues that are most important to directors and officers. These are their top policy priorities:
1. D&O policy and/or company indemnification is able to respond to claims in all jurisdictions
2. How claims against D&Os will be controlled and settled
3. Broad definition of who is insured
4. Clear and easy-to-follow policy terms
5. Whether there is cover for the cost of advice at the early stages of an investigation
Cyber Insurance: Standalone Policies Gain Steam
This PartnerRe/Advisen survey of cyber insurance trends reports that for the last couple years, companies have been shifting from endorsements to standalone policies – in order to get higher dedicated limits and expanded business interruption coverage. In fact, as also noted in this Allianz survey, “BI” coverage was the most sought-after type of protection – displacing data breach from its long-standing spot at the top of cyber-protection priority lists. It’s also helpful to know that many more small- and mid-sized companies are hopping on the cyber insurance bandwagon.
Here we go again. Elon Musk can’t quit Twitter – which means the SEC can’t quit Elon. It was only last October that the Tesla CEO settled with the SEC on allegations of securities fraud, after a series of surprising “going private” tweets. Part of the settlement required Musk to get internal pre-approval of tweets that could contain material info about the company. But, as Broc and others predicted, it was a pretty tall order to think a mere mortal could stand between Elon and his social media.
Last week, Elon tweeted some production stats without getting that internal pre-approval. The SEC responded yesterday with this motion – asking the federal district court in Manhattan to hold Musk in contempt for violating the court-approved settlement. The motion is worth reading – it includes Tesla’s “Senior Executives Communications Policy” as well as a look into how the policy was being applied, and an excerpt from Musk’s December interview with “60 Minutes” Lesley Stahl in which Musk essentially thumbed his nose at the SEC.
It is not surprising that the SEC felt compelled to ask for Musk to be found in contempt, said Charles Elson of the University of Delaware. “They have to react. From an agency standpoint, if you show outright contempt towards the agency and they do nothing, how are they ever going to enforce the law?,” he said.
The SEC could ask the judge to increase the $20 million fine Musk has already paid or move to punish the company’s board if they don’t rein him in, said Adam Epstein, a corporate-governance advisor. But SEC is not likely to ask that Musk be removed from the company altogether, as it initially did last year, he said. “He has a pattern and practice of tweeting in an inflammatory fashion for years,” Epstein said. “He probably knows that the government is not going from Defcon 5 to Defcon 1 to remove him from the company, because that would be the worst possible outcome for investors. He’s clearly created more value than he’s hurt shareholders by his tweeting.”
As this ‘Journal of Accountancy’ article explains, Corp Fin clarified in 2016 that non-GAAP measures that substitute individually-tailored recognition & measurement methods for those of GAAP could violate Rule 100(b) of Regulation G (see CDI 100.04). Head scratching ensued – even at the Big 4 – because nobody knew the meaning of “individually tailored.” But the article reports that at the most recent AICPA conference, Patrick Gilmore (a Corp Fin Deputy Chief Accountant) provided these questions to guide the assessment:
– Does the adjustment shift GAAP from an accrual basis of accounting to a cash or modified basis of accounting? For example, Gilmore said using cash receipts or billings as a proxy for revenue for a subscription-based business that recognizes revenue over time would provide a profitability measure that would be determined on a mixed basis of accounting and would be an individually tailored accounting principle.
– Does the adjustment add in transactions that are also reportable in the company’s financial statements? As an example, Gilmore said adjusting from the guidance for determining whether a company is a principal or an agent could result in presenting transactions that don’t qualify as your own under GAAP and may be an individually tailored accounting principle.
– Does the adjustment reflect parts, but not all, of an accounting concept? For example, Gilmore said adjusting income tax effects for cash taxes but not for temporary or permanent differences may be an individually tailored accounting principle.
– Does the adjustment render the measure inconsistent with the economics of a transaction or an agreement? As an example, Gilmore cited some companies that earn revenue from operating leases, but also from sales-type leases or financing leases. “They will adjust revenue for the sales-type or financing leases as if they were operating leases, thus ignoring some of the economics of the lease agreements that they have,” he said.
Would Your Investors Support An Activist?
This recent “Trust Barometer” from the Edelman communications firm has lots of intel about what’s driving investment decisions – based on responses from 500 chief investment officers, PMs and buy-side analysts. This CFO.com article recaps the declining level of trust in business and suggests that companies with higher trust levels, gained via accurate & transparent reporting, experience steadier (and better) share prices.
But what most caught my eye were the investors’ views on activism – especially since this WSJ article reports that there were a record number of activist campaigns last year, and Broc recently blogged that mutual funds are increasingly willing to employ activist tactics:
– 87% of investors are more open to taking an activists approach to investing
– 92% will support a “reputable” activist if they believe change is necessary at the company
– 87% think companies are unprepared for activist campaigns
This “Tech IPO Pipeline” from CB Insights shows that the SEC still has some work to do if it wants to make public offerings as attractive as private funding or an M&A deal. Maybe the SEC’s recent “testing the waters” proposal will help…but this article says it may be more of a market issue, with money migrating to private markets at an unusual rate. Here’s a summary of the pipeline report from Mayer Brown’s blog:
In 2013, the median time between first funding and IPO for U.S. VC-backed tech companies was 6.9 years compared to 10.1 years for tech companies that went public in 2018. In 2018, tech companies raised, on average, $239 million before undertaking their IPOs, which is almost 1.4x the amount raised in 2017, and over 3.7x as much as 2012 figures.
The mega-round financing trend, wherein companies raise over $100 million per round, was also prevalent in the tech-sector, with almost 120 mega-round financings completed in 2018. Tech-focused private equity firms continue to acquire majority stakes in tech companies that are nearing liquidity opportunities, whether IPOs or M&A exits. However, M&A exits continue to replace IPOs.
Pre-IPO Governance: Institutional Investor View
In this interview, Bob McCormick of PJT Camberview points out that it’s not just private equity and VC investors who are funding large pre-IPO companies – institutional investors are also involved. He asked Donna Anderson of T. Rowe Price how much they care about pre-IPO governance, and here’s what she said:
Our approach is to be consistent: we have principles we believe in, whether companies are public or private. For example, our public voting policy is to oppose certain key board members for any company that is controlled by means of dual class stock with differentiated voting rights. We accompany these votes with an explanation to the company as to why we have concerns with that structure for the long-term. Any features we oppose on the public side, we would not tend to consent to them on the private side either.
But it’s really not about applying a rules-based framework. These private companies are looking to their early investors to be their partners, and that’s the attitude we take. It’s about helping them along the journey, helping them find a governance structure that might be appropriate for them today vs. five or ten years from now. Our role in this is not to be the cops on the beat – it’s a consultative relationship. We’re helping to prepare them, if going public is in their plans, for what that will look like in the world of public shareholders, proxy advisors, votes and shareholder rights.
Pre-IPO Governance: When Do Changes Happen?
When it comes to the pre-IPO governance journey, this survey from Stanford’s Rock Center for Corporate Governance says that most companies start transitioning to public company “best practices” about 2-3 years before they go public. Here’s seven examples of how corporate governance practices evolve from startup through IPO:
1. Companies typically add their first independent director to the board 3 years prior to IPO. This occurs around the same time the company first becomes serious about developing a corporate governance system.
2. On average, companies add 3 independent directors prior to IPO. This number varies widely across companies.
3. 53% of companies go public with founder-CEOs. Companies who bring in a non-founder CEO do so 5 years before the IPO, on average. But most companies say that those leaders were hired to scale the company, not necessarily take it public.
4. CFOs are more likely than CEOs to be brought on as part of the IPO process – typically 3 years before going public. Many companies also transition from a regional auditor to a Big Four accounting firm.
5. An internal GC is the “least necessary” governance feature – many companies rely on external counsel.
6. Executive compensation doesn’t change as companies approach the IPO – and KPIs are common – but it becomes more formalized with financial targets afterwards.
7. Only 12% of founders & CEOs believe the quality of governance impacts IPO pricing – but most agree that having a high-quality governance system is required by institutional investors and the SEC.
I remember a time when you didn’t even know which political party that a particular SEC Commissioner was from. It didn’t matter because the SEC’s mission of investor protection was politically colorblind. I still believe that many SEC Commissioners operate with that same philosophy. Although that gets harder & harder to accomplish these days when the backgrounds of most SEC Commissioners seem to be former staffers of the Senate Banking Committee.
Anyway, this Reuters article entitled “Republican frustrations grow as SEC chair proves frequent ally of Democrats” angered me because I still believe that the SEC’s primary mission should be investor protection. And that it shouldn’t be a political football. The SEC is intended to be an independent agency. But without self-funding, that can be difficult to avoid sometimes…
Interpretive Guidance: From the Staff or Commission?
Meanwhile, the debate about whether the SEC should communicate its views with Commission-level guidance – not Staff-level guidance – continues with this recent speech from SEC Commissioner Hester Peirce (and some people even want less Commission-level guidance; remember when former Commissioner Piwowar suggested shorter adopting releases). This debate has a partisan tinge to it as some GOP members of Congress have been harping on this issue for more than a decade.
I’m not a big fan of Commission-level guidance. Most Commissioners don’t have the depth of experience in securities laws matters that senior SEC Staffers do – and they certainly don’t have the same level of resources. There are only so many hours in the day. And for what it’s worth, I think a lot more Staff guidance gets run past the Commissioners than ever before – which should make this topic a non-issue. I could be wrong but I believe non-controversial CDIs go out without Commission input, but more significant guidance – like Staff Legal Bulletins & things like conflict minerals guidance – almost certainly get run past the Commissioners (or at least the Chair) before they are issued by the Staff. There isn’t any formal vote; I think it’s more an informational thing…
Broc Tales: “Career Advice”
After over two years of Reg FD-related blogging on my “Broc Tales Blog,” the latest batch of stories come in the form of a dialogue between John & me about how to best manage your career. Some of the topics we tackle include:
1. Be Willing to Adapt
2. Be Ready at All Times
3. Be Prepared for Lifelong Learning
4. Set Regular Goals
5. Push Yourself (& Be Mindful When You Do)
6. Don’t Be Afraid to be a Trailblazer
7. Save Cash
8. Be Responsive
9. Hang Out With Good People
10. Hang Out With Good People (Online)
A few weeks ago, Liz blogged about a Senate bill from two Democrats that would allow companies to repurchase shares only if they pay their workers well (see this MarketWatch article for the potential consequences). Now Republican Senator Marco Rubio has released a report that calls for ending the tax advantages that buybacks enjoy over dividends (see this article). So there is a bipartisan push to limit stock repurchases, although with far different approaches to doing so…
Here’s a press release from CII about its views on buybacks – essentially warning Congress against regulation and urging better disclosure from companies about the rationale for their buybacks…
ISS Bribery Scandal: Conviction for Former Georgeson Employee
A long while back, I blogged about an ex-Georgeson solicitor who bribed an ISS employee to get confidential voting information. As noted in this Goodwin alert (scroll down), that person has been convicted and is now facing up to 20 years in prison…
Yikes. I could see how there’s a grey area in there, which is scary with all the client entertainment that goes on at all types of firms. Hopefully, the prosecutors won’t pursue the max sentence…
D&O Cyber Lawsuits Continue
Recently, Melissa Krasnow of VLP Law Group sent over this article describing how many D&O cyber lawsuits were filed after the EU’s GDPR went into effect on May 25th. Melissa also sent this recent decision to allow the federal securities law class action cyber lawsuit to proceed against Equifax and its former CEO.
Before disclosing the data breach to the public for the first time, Equifax’s former CEO said, in a presentation that is available on YouTube: “when you have the size database we have, it’s very attractive for others to try to get into our database, so it is a huge priority for as you might guess. [Data fraud] is my number one worry, obviously.”
Melissa anticipates that the trend of D&O cyber lawsuits will continue and more lawsuits will be filed due to:
– Cyber events that occur
– Existing and evolving privacy and cybersecurity regulation and enforcement in the US, Canada, EU and globally
– Interest of plaintiffs attorneys in pursuing these lawsuits
– Settlement of some of these lawsuits (which has occurred in certain lawsuits)
– Blind spots/shortcomings regarding how certain organizations and their executives and directors address privacy and cybersecurity (including lack of awareness/information regarding these lawsuits)
With this proposal, the SEC seeks to allow all companies to benefit from all the changes that the JOBS Act gave EGCs. Some of the JOBS Act benefits had already been widely available, as Corp Fin opened up the confidential filing process to all companies two years ago. If this proposal is adopted, the “testing-the-waters” part of the JOBS Act will also be extended to a broader range of companies. There’s a 60-day comment period.
Nasdaq Clarifies “Direct Listing” Rule Change
Recently, John blogged about high-profile companies starting to use the “direct listing” route to go public rather than the traditional IPO path. This type of offering was facilitated by the NYSE changing its rules last year to permit a direct listing.
As noted in this Steve Quinlivan blog, Nasdaq recently filed an immediately effective rule proposal with the SEC that clarifies how the process works for direct listings on that exchange without an IPO. Over the years, there have been a handful of direct listings on Nasdaq…
Internal Controls: Some EGCs Might Get Their 404(b) Exemptions Extended
Here’s the intro from this blog by Cooley’s Cydney Posner:
A bipartisan group of senators has introduced a new bill, the ‘Fostering Innovation Act of 2019’ (S. 452), that would amend SOX to provide a temporary exemption from the auditor attestation requirements of Section 404(b) for low-revenue issuers, such as biotechs. The bill is designed to help those EGCs that will lose their exemptions from SOX 404(b) five years after their IPOs, but still do not report much revenue. For those companies, proponents contend, the auditor attestation requirement is time-consuming and expensive, diverting capital from other critical uses, such as R&D.
According to the press release, the bill would provide “a very narrow fix that temporarily extends the Sarbanes-Oxley Section 404(b) exemption for an additional five years for a small subset of EGCs with annual average revenue of less than $50 million and less than $700 million in public float.”
