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.”
This CNBC article describes how Tesla recently used a new plaform – called “Say” – for retail shareholders to ask questions during an earnings call. It reminds me of “Moxy Vote,” which went belly up in 2012. Here’s a 2011 podcast that I taped with Moxy Vote’s CEO.
Here’s the intro from the CNBC article (also see this blog from Jim McRitchie for an overall look at this market):
Tesla Chief Executive Office Elon Musk speaks at his company’s factory in Fremont, California. Tesla opened its fourth quarter conference call on Wednesday by fielding questions submitted through a mobile app by some of its mom and pop investors. It’s was a far less contentious call than the one last May, when CEO Elon Musk sparred with professional Wall Street analysts over their questions about Tesla’s production issues and cash burn rate. Musk lashed out at one analyst who asked about Tesla’s capital requirements, saying “Boring, bonehead questions are not cool.” He later apologized.
Earnings conference calls normally feature a polite repartee between company executives and research analysts and are seldom open to questions from news reporters (CNBC’s Phil LeBeau did slip in a question during the October call) much less ordinary investors. But Musk’s conference calls in recent quarters have been a little higher-octane. The call in May featured a surprising guest in the form of a 20-something YouTuber and small Tesla shareholder named Galileo Russell, who was allowed to pepper Musk with questions.
Russell, whose YouTube channel is a grass roots forum for Tesla shareholders, teamed up with a tech startup called Say that is backed by hedge fund manager Steve Cohen’s private Point72 Ventures. Say is a mobile app that aims to give individual shareholders more power in voting on company issues and communicating with companies as shareholders.
Say was the app gathering the questions submitted to Musk on Wednesday. Musk and other executives on the call ended up answering four of them, including one about how a recession could affect demand (Musk said he still sees orders of 500,000 for Model 3 in a recession environment), the time-line for self-driving features (Musk said they’re working on traffic light technology and navigating complex parking lots), batteries (wouldn’t comment on product development), and Tesla semi and Model Y (Musk says they might unveil the Tesla pickup truck this summer).
Musk has had to shore up his shareholder relations after sending everyone into a frenzy last year by casually tweeting that he was considering taking Tesla private. He paid $20 million to settle with the SEC over that tweet. The questions submitted for Wednesday’s call represented a tiny sliver of Tesla’s 171 million shares outstanding. Musk didn’t directly answer one about reputation issues. But on the Say app, where people were voting on which questions they wanted asked, it was the most popular one going into Wednesday’s call.
So How Does “SAY” Work?
According to this set of FAQs on SAY’s site, shareholders get verified by linking their brokerage account and confirming they own company stock. Then, they can submit as many as 3 questions. Shareholders can also “vote” in support of questions raised by other shareholders on the SAY platform. SAY’s site displays how many votes each question receives – as well as the total number of shares that those votes represent.
Today’s Webcast: “Audit Committees in Action – The Latest Developments”
Tune in today for the webcast — “Audit Committees in Action: The Latest Developments” — to hear Deloitte’s Consuelo Hitchcock, EY’s Josh Jones and Gibson Dunn’s Mike Scanlon catch us up on a host of new SEC, FASB & PCAOB developments that impact how audit committees operate — and more.
Last week, Corp Fin issued new CDIs addressing board diversity disclosure issues. Now, Rep. Greg Meeks (D-NY) & Sen. Bob Menendez (D-NJ) have introduced legislation that would require companies to disclose self-identified demographic info about their board & executive officers. Here’s an excerpt from a recent Weil blog summarizing the proposed legislation:
The bill, which garnered the support of the Council for Institutional Investors and the U.S. Chamber of Commerce, would require public companies to disclose annually in their proxy statements data on the racial, ethnic, and gender composition, as well as veteran status, of its board of directors, director nominees and executive officers based on voluntary self-identification. Moreover, disclosure regarding the adoption of any board policy, plan or strategy to promote racial, ethnic, and gender diversity would be required.
The bill would also require the SEC’s Office of Minority and Women Inclusion to publish best practices for corporate reporting on diversity. Rep. Meeks introduced the same legislation during the last Congress, but it went nowhere. With Democrats controlling the House & support from the CII & the U.S. Chamber of Commerce, perhaps it will get more traction this time around.
Board Gender Diversity: Will Supply Meet Demand?
Recently, Liz wrote on “The Mentor Blog” that assuming current board composition, California’s board gender diversity statute will require Golden State companies to find over 1000 women directors by the end of 2021.
A recent study on the market’s reaction to the statute suggests that there is some concern among investors that there won’t be enough qualified female director candidates to meet that demand – and this concern has implications for companies located in & outside of California. Here’s an excerpt from the study’s abstract:
On September 30, 2018, California became the first U.S. state to introduce a mandatory board gender quota applicable to all firms headquartered in the state. Using a large sample of publicly-listed firms headquartered in the U.S., we find that the introduction of the quota is associated with significantly negative announcement returns to California-headquartered firms. Consistent with the quota imposing frictions, this effect is larger for firms requiring more female directors to comply with the quota.
According to the study, California headquartered companies had a 0.47% lower return on the first day after the quota announcement than a control group of matched on size and industry. It says that this effect is larger for companies needing to add more female directors to comply with the quota and for those with low corporate governance standards – results that are consistent with the theory that smaller companies and those with poor governance could have a hard time recruiting qualified women candidates.
The study also identified negative “spillover” effects on returns for companies headquartered outside California. These were concentrated among companies in industries where California-based companies need to recruit a lot of female directors to comply with the law. Companies headquartered in “blue” states were also negatively affected – perhaps due to perceptions that they were more likely to become subject to a board gender quota than those based in “red” states.
Europe’s experience with a female quota requirement for boards suggests that companies may want to expand their search to some less traditional sectors – such as women working in leadership positions in government, non-profits & academia.
January-February Issue of “The Corporate Counsel”
We recently mailed the January-February issue of “The Corporate Counsel” print newsletter (try a no-risk trial). The topics include:
– Tone Deaf at the Top: Now It’s Your Problem When an Executive Messes Up
1. Is There an Insider Trading Problem?
2. An Unusually-Timed Form 4 Attracts Attention
3. Beware of the Potential for Shareholder Derivative Suits
4. There Are Disclosure Issues Everywhere
5. Sanctions & Remedial Steps
– Reg A Gets an Upgrade: Opening the Exemption to Reporting Issuers
– Annual Season Items
– Non-GAAP: “Equal or Greater” Prominence Applies to Your Earnings Release
– Form S-3 is Sometimes a “Come as You Were” Party
The Roman poet Juvenal famously asked “quis custodiet ipsos custodies” – “Who watches the watchers?” When it comes to public company gatekeepers, SEC Enforcement’s answer is “we do.” That’s clearly the message sent by the insider trading complaint that the SEC filed yesterday against a former Apple lawyer who, among other things, was responsible for overseeing compliance with the company’s insider trading program! Yes, the person responsible for insider trading compliance is alleged to have engaged in illegal insider trading!
Here’s an excerpt from the SEC’s press release that lays out the agency’s allegations:
The SEC’s complaint alleges that Gene Daniel Levoff, an attorney who previously served as Apple’s global head of corporate law and corporate secretary, received confidential information about Apple’s quarterly earnings announcements in his role on a committee of senior executives who reviewed the company’s draft earnings materials prior to their public dissemination.
Using this confidential information, Levoff traded Apple securities ahead of three quarterly earnings announcements in 2015 and 2016 and made approximately $382,000 in combined profits and losses avoided. The SEC’s complaint alleges that Levoff was responsible for securities laws compliance at Apple, including compliance with insider trading laws. As part of his responsibilities, Levoff reviewed and approved the company’s insider trading policy and notified employees of their obligations under the insider trading policy around quarterly earnings announcements.
Parallel criminal charges were also filed. Obviously, it’s up to the SEC to prove the conduct it alleges here, but this seems as good a time as any to remind you of Broc’s recent advice to anyone thinking about dabbling in insider trading – don’t do it!
In the interest of full disclosure, I confess that I’m nowhere near as erudite as the first sentence of this blog would suggest. Truth be told, I remembered the English version of the “who watches the watchers” quote from the “Watchmen” movie – and then I just got all of that Juvenal stuff by Googling it.
SEC’s Peirce Says “Lighten Up” On Howey For The Crypto
The Howey test considers “investment contracts” to be securities if they involve an investment of money in a common enterprise with an expectation of profit to be derived “solely from the efforts of others.” The SEC’s position has been that many token deals fit squarely within the definition of an “investment contract.” But in a recent speech, SEC Commissioner Hester Peirce suggested that the agency should take more flexible approach when it comes to applying the Howey test to digital assets:
While the application of the Howey test seems generally to make sense in this space, we need to tread carefully. Token offerings do not always map perfectly onto traditional securities offerings. For example, as a recent report from Coin Center noted, the decentralized nature of token offerings can mean that the capital raised through token sales may not be truly owned or controlled by a company. Functions traditionally completed by people designated as “issuers” or “promoters” under securities laws—which, importantly, bestow those roles with certain responsibilities and potential liabilities—may be performed by a number of unaffiliated people, or by no one at all.
Commissioner Peirce pointed out that since some token environments aren’t centralized & contemplate important roles for individuals “through mining, providing development services, or other tasks,” the SEC must avoid casting “the Howey net so wide that it swallows the “efforts of others” prong entirely.”
She expressed concern that some apparently legitimate projects may be made untenable by the federal securities laws, and also observed that regulators “ought not to assume that absent the application of the securities laws to the world of tokens, there would never be any order.” Well folks, they don’t call her “Crypto Mom” for nothin’!
At-the-Market Offerings: Hot! Hot! Hot!
Given how volatile the stock market was last year, it probably shouldn’t come as a big surprise that “at-the-market” offerings had a gangbuster year. This Bloomberg Law blog has the details:
An impressive 202 ATM offerings announced in 2018 were projected to raise a total of $31.75 billion, the largest amount in the last ten years. The average deal size for an ATM offering announced in 2018 was $157 million. To put things in perspective, 274 IPOs were priced in 2018 and raised $64.74 billion. Looking at industry distribution for ATM offerings in 2018, 52 percent were announced by companies in the Consumer, Non-Cyclical sector and 27 percent came from the Financial sector.
The two largest ATM offerings announced in 2018 were by: MPLX LP (announced on March 13, in the Energy sector and projected to raise $1.74 billion) and Annaly Capital Management Inc. (announced on January 3, in the Financial sector and projected to raise $1.50 billion).
ATMs were pretty popular shortly after the financial crisis, but fell out of fashion. The blog says that over the last 5 years, use of this financing tool has rebounded – along with market jitters.
Everybody knows that with the SEC operating with a skeleton crew for over a month, Corp Fin has a pretty deep hole to dig itself out of. This ‘Audit Analytics’ blog gives you a sense of just how far behind the shutdown has put the Staff. For example, here’s what the blog has to say about comment letters:
According to their Plan of Operations during Lapse in Appropriations, the Commission had an extremely limited number of staff members available to respond to emergency situations. There were 4,436 employees on-board prior to the shutdown, with roughly 110 expected to be retained because they were engaged in law enforcement activities and about 175 employees to be retained to protect life or property.
Having such a limited staff meant an even more limited scope of operations. While most SEC filings – annual, quarterly, and 8-Ks – continued as usual, there were two places, in particular, that were affected by the shutdown; namely, comment letters and IPOs. During the shutdown, the SEC staff did not review corporate filings and did not issue any comment letters. To help gain a sense of how many letters are typically processed during this time, we looked at the same period of the shutdown last year (December 21, 2017 to January 25th, 2018); there were over 300 comment letters dated during this time.
What about IPOs? The blog cites a WSJ article for the proposition that there were no IPOs this January, compared with 17 during the first month of last year. According to this report from NBC News, the SEC had 40 IPOs in process at the time of the shutdown.
“Faster Than a Speeding Bullet”: 10b5-1 Legislation Flies Through House!
Remember last month, when Liz blogged about the introduction of bipartisan legislation that would require the SEC to study whether Rule 10b5-1 should be amended to add more procedural restrictions for trading plans? According to this article from the Center for Executive Compensation, the bill has flown through the House & may be on the fast track in the Senate as well:
At the end of last week, the House of Representatives approved, on a 413-3 vote, a bipartisan bill which would require the SEC to conduct an in-depth study of 10b5-1 executive stock trading plans. (A Rule 10b5-1 stock trading plan allows an individual with access to material, nonpublic information to execute sales or purchases of company stock in accordance with a pre-determined schedule, creating an affirmative defense to potential violations of company rules or federal securities laws regarding insider trading.)
The bill now moves to the Senate, where it appears Democrats are eager to move the bill and are working to create the same bipartisan atmosphere as in the House. In the past, the Senate has staunchly refused to take up any bill that does not exhibit a strong path to bipartisan adoption – especially those addressing governance and compensation issues.
The article says that the House’s overwhelming approval of the bill puts it on a path which could lead to Senate action. If the bill does pass, it won’t mean any changes in 10b5-1 right away, but the results of the study it would mandate could provide a blueprint for potential changes.
Transcript: “12 Tricks to Help You During Proxy Season”
We have posted the transcript for our recent webcast: “12 Tricks to Help You During Proxy Season.”
Last month, I blogged about Johnson & Johnson’s unusual request to exclude a shareholder proposal that would have required arbitration of all federal securities law claims brought against the company. Yesterday, Corp Fin granted the company’s no-action request & permitted it to exclude the proposal from its proxy materials. The company is a New Jersey corporation, and sought to exclude the proposal on the grounds that its implementation would violate applicable state law.
New Jersey’s AG submitted a letter supporting that position – and this excerpt from the Corp Fin’s response letter indicates that it was dispositive:
When parties in a rule 14a-8(i)(2) matter have differing views about the application of state law, we consider authoritative views expressed by state officials. Here, the Attorney General of the State of New Jersey, the state’s chief legal officer, wrote a letter to the Division stating that “the Proposal, if adopted, would cause Johnson & Johnson to violate New Jersey state law.” We view this submission as a legally authoritative statement that we are not in a position to question.
Since the permissibility of mandatory arbitration bylaws is a “hot potato” political issue, the issuance of the no-action letter was accompanied by a lengthy statement from SEC Chair Jay Clayton clarifying exactly what the Staff was – and wasn’t – saying. In particular, he noted that Corp Fin was not addressing the permissibility of the proposed bylaw under federal law:
The staff of the Division of Corporation Finance explicitly noted that it was not expressing a view as to whether the proposal, if implemented, would cause the company to violate federal law. Since 2012, when this issue was last presented to staff in the Division of Corporation Finance in the context of a shareholder proposal, federal case law regarding mandatory arbitration has continued to evolve. Further, I am not aware of any circumstances where the Commission has weighed in on the legality of mandatory shareholder arbitration in the context of federal securities law.
Jay Clayton went on to say that he agreed with the Staff’s approach & would expect it to take a similar approach if the issue arose again. He also reiterated his prior statements to the effect that any policy decision should be made by the SEC in a measured and deliberative manner. The Staff earns some style points for the way it finessed the mandatory arbitration issue here – but credit New Jersey’s AG with a big-time assist.
The Weed Beat: Banking on Cannabis
As of the end of 2018, medical marijuana has been legalized in 33 states and its recreational use has been legalized in 10 states – but if you’re in the legal cannabis business, just try & take your money to the bank. Perhaps because Canada experienced a communist revolution shortly after it legalized marijuana, the drug remains illegal under U.S. federal law. That makes banks very skittish about getting anywhere near these businesses.
This Davis Polk memo reviews the current uncertainties that banks face when dealing with the cannabis industry and reviews 2 pieces of proposed legislation – the SAFE Act and the STATES Act – that would clarify the regulatory framework & make it easier for these businesses to establish banking relationships. This excerpt from the intro summarizes what the proposed statutes are intended to accomplish:
Neither bill would federally legalize cannabis or deschedule cannabis from Schedule 1 of the Controlled Substances Act (CSA). Instead, the bills would permit depository institutions, in the case of the SAFE Act, or financial institutions, in the case of the STATES Act, to provide financial services to cannabis-related businesses (CRBs) that comply with state laws regulating legalized cannabis-related activity. Both bills would benefit from changes that would take into account a broader range of financial services or the realities of possible diligence in the financial sector.
The feds aren’t the only ones trying to make cannabis companies more bankable – check out this recent blog from Keith Bishop about proposed California legislation that would permit the state to charter limited purpose “cannabis banks.”
Tomorrow’s Webcast: “Earnouts – Nuts & Bolts”
Tune in tomorrow for the DealLawyers.com webcast – “Earnouts: Nuts & Bolts” – to hear Pepper Hamilton’s Michael Friedman, Cravath’s Aaron Gruber, Fredrikson & Byron’s Sean Kearney and K&L Gates’ Jessica Pearlman – discuss the nuts & bolts of earnouts, and how to prevent this popular tool for bridging valuation gaps from becoming a post-closing albatross for your deal.
Effective shareholder engagement is becoming more essential every year. So, it’s helpful to find examples of companies that do it well & can provide insights into what investors regard as “best practices.” This recent “Corporate Secretary” article spotlights Hewlett Packard Enterprise’s efforts – which earned the company the award for “best shareholder engagement” at the magazine’s 2018 Corporate Governance Awards. Here’s an excerpt on the role directors play in HPE’s engagement efforts:
Directors have traditionally been averse to taking part in meetings with shareholders, but best practice now requires their involvement at some level. HPE’s engagement includes a three-month off-season board outreach program comprising one-on-one, on-site meetings between shareholders and directors.
During fiscal 2018, the company broadened these efforts to holders of more than 60 percent of HPE’s stock. Combined with the participation of investor advisory firms, the program engaged directly with holders or advisers of more than 55 percent of its common stock.
HPE is keen on providing direct shareholder access to the board so investors can hear directors’ thinking, and vice versa, without a management filter. The company’s engagement program includes the board chair, committee chairs and other directors that shareholders have a specific interest in meeting.
Engagement efforts extend to semi-annual customer meetings, in which directors often participate in panel discussions. Directors also frequently attend the company’s annual investor day presentation.
Conference Calls: Anatomy of a “Non-Answer”
One of the more interesting – and awkward – aspects of an earnings conference call occurs when an executive declines to answer an analyst’s question. This recent study reviewed situations in which company officials expressly declined to answer a question, and reached some interesting conclusions about when corporate officials were more – and less – likely to be forthcoming. Here’s an excerpt from the abstract:
Using our measure, about 11% of questions elicit non-answers, a rate that is stable over time and similar across industries. Consistent with extant theory, we find firms are less willing to disclose when competition is more intense, but more willing to disclose prior to raising capital. An important feature of our measure is that it yields several observations for each firm-quarter, which allows us to examine disclosure choice within a call as a function of properties of the question.
We find product-related questions are associated with non-answers, and this association is stronger when competition is more intense, suggesting product-related information has higher proprietary cost. While firms are more forthcoming prior to raising capital, the within-call analyses for future-performance-related questions shows firms are less likely to answer future-performance-related questions shortly before equity or debt offerings when legal liability is higher.
These results probably don’t come as a big surprise – and may even provide some comfort to lawyers that their guidance about the hazards of hyping future results when raising capital have been taken to heart.
But the study’s results suggest that the Securities Act’s liability scheme is a double-edged sword when it comes to corporate communications. Companies thinking about a deal are more willing to share historical information with the market – but more reticent to comment about the future.
Tomorrow’s Webcast: “How to Use Cryptocurrency as Compensation”
Tune in tomorrow for the CompensationStandards.com webcast — “How to Use Cryptocurrency as Compensation” — to hear Perkins Coie’s Wendy Moore and Morrison & Forester’s Ali Nardali and Fredo Silva discuss the groundswell in the use of cryptocurrency as compensation among private companies — and the legal framework that applies.
