This blog by Steve Quinlivan gives us the latest about Corp Fin comments on revenue recognition disclosures under the FASB’s new standard – these comments were sent to Ford & Alphabet…
Tune in tomorrow for the DealLawyers.com webcast – “Activist Profiles & Playbooks” – to hear Jason Alexander of Okapi Partners, Tom Johnson of Abernathy MacGregor and Damien Park of Spotlight Advisors identify who the activists are – and what makes them tick.
SEC Approves NYSE’s “Proxy Submission” Change
Just in time for the heart of the proxy season, the SEC has approved the NYSE’s rule change – eliminating the duty of listed companies to deliver a hard copy of their proxy materials to the NYSE. Instead, the NYSE will rely on the company’s materials filed with the SEC.
As Broc blogged several times last year (here’s the latest), “fix-it” proposals – shareholder proposals seeking changes to proxy access bylaws – were a hot topic last proxy season. This recent blog from Cooley’s Cydney Posner says that they’re front & center again in 2018.
After much back & forth, it appeared that by the end of last proxy season the no-action letter process had charted a course that would allow proponents to avoiding exclusion of fix-it proposals on the basis of substantial implementation. As this excerpt notes, fix-it proponents are back this year, & they’re following that course:
The SEC Staff took a uniform no-action position allowing exclusion of these fix-it proposals. But the proponents were persistent and, in 2017, submitted to H&R Block a different formulation of a fix-it proposal that requested only one change — elimination of the cap on shareholder aggregation to achieve the 3% eligibility threshold, as opposed to simply raising the cap to a higher number.
This time, the Staff rejected H&R Block’s no-action request. In essence, it appears that the Staff believes that a lower cap on aggregation could “substantially implement” a higher cap, but the removal of a cap entirely is a different animal that could not be substantially implemented by the lower cap. This proxy season, the proponents have latched onto—and even expanded—the new formulation and have continued to find success in preventing exclusion.
For example, in BorgWarner (2/9/18), John Chevedden submitted a proposal requesting elimination of the cap on aggregation of shareholders to satisfy the 3% minimum ownership threshold, as well as changing the minimum number of proxy-access candidates to two, if the board size is under 12, and three if it is over 12. (The proposal doesn’t address the 12-person board.) In this instance, the company’s existing aggregation cap was 25, and the existing number of directors that could be nominated through proxy access was the greater of 20% of directors in office or two.
Chevedden & Harrington Investments submitted a similar proposal to Alaska Airlines. In both cases, the Corp Fin Staff rejected arguments that the proposals could be excluded on the basis that they had been substantially implemented.
Shareholder Proposals: About Those Airline Seats. . .
Is there anybody who doesn’t find the airlines’ unceasing efforts to shrink the seats & leg room on planes absolutely infuriating? This recent blog from UCLA’s Stephen Bainbridge flags a shareholder proposal designed to put a stop to this practice.
The proposal – which was submitted to American, Delta & United Continental by an organization called “Flyers Rights Education Fund” – calls for the companies to report on the “regulatory risk and discriminatory effects of smaller cabin seat sizes on overweight, obese, and tall passengers.” It also calls for them to address “impact of smaller cabin seat sizes on the Company’s profit margin and stock price.”
So what are the chances of this resolution prevailing? Not good. American & United Continental have already filed no-action requests with the Staff seeking to exclude these proposals under the ordinary business exception – and the blog notes that the airlines’ arguments are likely a winner:
American’s letter states that it is relying on the exemption under Rule 14a-8(i)(7) that allows exclusion of proposals that deal “with a matter relating to the company’s ordinary business operations.” The letter relies on the SEC’s Exchange Act Release No. 34-40018 (5/21/98):
The SEC stated in the 1998 Release that the policy underlying the ordinary business exclusion is based on two considerations:
– First, whether a proposal relates to “tasks that are so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight;” and
-Second, whether a “proposal seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”
The Staff has consistently agreed that proposals relating to a company’s sale and marketing of its products or services, or seeking to dictate management’s day-to-day decisions regarding the selection of products or services offered, implicate a company’s ordinary business operations and may be excluded pursuant to Rule 14a-8(i)(7).
While he too bemoans the constant shrinking of airline seats, Prof. Bainbridge concludes that American Airlines’s argument is “clearly correct.”
Brother, Can You Spare $100 Billion?
Check out this Reuters article – it says that banks are “salivating” over the opportunity to lend $100 billion to fund Broadcom’s hostile takeover of Qualcomm. Here’s an excerpt with some of the details on what would be the largest syndicated loan of all time:
Broadcom’s $100 million loan package backing its proposed $121 billion acquisition of Qualcomm, is set to become the biggest-ever syndicated loan globally if the hostile deal goes ahead.
Twelve banks are providing the financing, which is on track to beat the prior record of $75 billion issued by Brazilian/Belgian brewer AB Inbev to finance its purchase of rival SAB Miller in 2015, according to Thomson Reuters LPC data.
How’s the pricing? Well, for the most expensive piece of the commitment – a proposed 5-year, $20 billion term loan – it’s 137.5 bps over LIBOR. Since the 12-month LIBOR rate is currently hovering around 2.5%, this means Broadcom’s borrowing $100 billion at about the same rate that you’d pay for a 5-year auto loan.
According to this MarketWatch article, the number of coin offerings relying on Reg D has risen rapidly since the SEC first issued guidance on coin offerings last July – while only a single Form D was filed during the first half of 2017, that number grew to 43 during the second half of the year. The pace continues to accelerate – already this year, nearly 40 Form Ds have been filed through February 20th.
While a heightened awareness of the need to stay “on-side” with the SEC probably accounts for a significant percentage of the filings, another factor may well be the existence of a “blueprint” in the form of a “Simple Agreement for Future Tokens” that was developed last Fall. Here’s an excerpt with some of the background:
In a whitepaper published in October, Marco Santori, an attorney at Cooley and an advisor to the International Monetary Fund, and Juan Batiz-Benet and Jesse Clayburgh of blockchain developer Protocol Labs, say that public token sales, or ICOs, may be “a powerful new tool for creating decentralized communities, kickstarting network effects, incentivizing participants, providing faster liquidity to investors, and forming capital for creators.” However, these boosters warn that many token sellers run a huge risk of the SEC shutting them down if they don’t follow all the securities laws to the letter.
Most token sales have shunned U.S. investors, out of fear by the promoters that their participation would bring the SEC calling.
That’s why the whitepaper from Santori, Benet and Clayburgh proposed a new approach to structuring these deals to meet the SEC’s requirements. Their effort has been successful. Most of the ICOs filed using Form D since mid-2017 — but not all and not KodakCoin — now use this approach, called a Simple Agreement for Future Tokens, or SAFT, as their legal framework.
If the SAFT concept rings a bell, that’s probably because it’s based on Y Combinator’s “Simple Agreement for Future Equity” – otherwise known as “SAFE” – which has become a popular template for startup financing. Don’t forget our upcoming webcast: “The Latest on ICOs/Token Deals“…
One of our members alerted me to an ongoing debate about the SAFT approach centering on the white paper’s position as to the status of “genuinely functional” tokens under the Securities Act. Check out this Cardozo Blockchain Project white paper.
More on “Insider Trading – It’s Worse Than You Think?”
In our last episode, we noted that a bunch of recent studies have concluded that everything is terrible & the markets are rigged. Well, it turns out that those studies might have understated the problem. According to this MarketWatch article, the VIX is fixed too:
One of the most popular measures of volatility is being manipulated, charges one individual who submitted a letter anonymously to the SEC and CFTC.
The letter makes the claim to regulators that fake quotes for the S&P 500 index SPX, +0.04% are skewing levels of the Cboe Volatility Index VIX, +1.73% which reflects bearish and bullish options bets 30-days in the future on the S&P 500 to gauge implied stock-market volatility (see excerpt from the letter below).
“The flaw allows trading firms with sophisticated algorithms to move the VIX up or down by simply posting quotes on S&P options and without needing to physically engage in any trading or deploying any capital. This market manipulation has led to multiple billions in profits effectively taken away from institutional and retail investors and cashed in by unethical electronic option market makers.”.
The CBOE says the whistleblower’s all wet* – but a follow-up article quotes former SEC Chair Harvey Pitt as saying that “it’s quite clear” that indexes like these can be manipulated.
* In other words, “ChiX Nix Vix Fix” – I know, I know. . . I’m sorry, but it was just laying there & I couldn’t resist doing that little riff on one of the most famous newspaper headlines of all time.
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!
Whether there’s life after death is one of those great unanswerable questions. . .Well, I mean except for Section 162(m)’s performance-based comp provisions – which, despite their untimely demise last December, we can say with certainty are enjoying a robust afterlife in proxy disclosures.
Over on “The Advisors’ Blog,” Broc’s already noted that the plaintiffs’ bar is keeping a watchful eye on performance-based comp proxy disclosures in the wake of tax reform’s changes. But beyond that, some high-profile companies – like Disney & John Deere – have recently filed proxy statements asking shareholders to re-approve existing compensation plans in order to comply with Section 162(m)’s 5-year shareholder re-approval requirements for performance-based comp.
If performance-based comp’s deductibility is a goner, why do that? This Debevoise memo suggests one possible reason for this portion of 162(m)’s afterlife:
Grandfathered arrangements that rely on the performance-based exception must continue to comply with the formal procedures previously applicable to performance-based compensation. For example, if an executive had a contractual right as of November 2, 2017 to receive a performance-based award in the future, the performance criteria applicable to such award may need to be re-approved by shareholders if, when the award is granted, five years have passed since the last shareholder approval.
Many tax lawyers expect that the IRS may ultimately decide not to require shareholder reapproval for grandfathered awards – but it hasn’t issued transition rules yet, and some companies may have decided that including these proposals in their proxy statements is the prudent thing to do.
Transcript: “Audit Committees in Action – The Latest Developments”
We have posted the transcript for the recent webcast: “Audit Committees in Action – The Latest Developments.”
Enforcement Penalties: Uncle Sam’s No Longer Picking Up Part of the Tab
The new tax legislation makes it tougher to deduct payments made in connection with the resolution of government enforcement actions. Under prior law, Section 162(f) of the Internal Revenue Code allowed deductions for a fairly broad category of payments. This excerpt from a recent Sidley memo provides an overview of the new regime:
Section 13306 of the Act completely repeals the prior language of Code Section 162(f) and replaces it with a general prohibition of business expense deductions for any payments made to or at the direction of a government, a governmental entity or certain nongovernmental self-regulatory entities in connection with a violation of law or an investigation involving a potential violation of law.
However, taxpayers continue to be allowed deductions for payments that they can establish “constitute restitution(including remediation of property) for damage or harm” related to the violation or potential violation of law or that were made “to come into compliance with any law which was violated or otherwise involved” in an investigation.
Nevertheless, amounts paid to reimburse the costs of investigation or litigation are not deductible as restitution or otherwise. Code Section 162(f)(2)(B). Furthermore, as a prerequisite to establishing the right to the remaining allowable deductions, the court order or settlement agreement involved must identify the amounts paid as restitution or payments made to come into compliance with applicable law. Otherwise, no deductions are allowed regardless of the
nature of the payments.
The governmental entity or SRO involved in the action also has to file an information return with the IRS specifying the amounts that are deductive. The new provisions apply to proceedings involving all federal, state & local enforcement agencies, as well as non-governmental enforcement agencies, such as SROs.
This Cleary blog has more on this topic, together some advice on negotiating settlement agreements with the government in order to preserve deductibility. One interesting suggestion – companies should consider settling civil class actions early & voluntarily repaying victims for their loss and then arguing that the repayment also satisfies any separate disgorgement obligation to a government.
SEC Chair Jay Clayton has made invigorating the sluggish IPO market one of his top priorities. So far, the SEC’s most high-profile action on this front during his tenure has been to permit all companies – not just emerging growth companies – to make confidential filings of draft IPO registration statements.
Now, this WSJ article says that the SEC may take another step, and allow all companies, regardless of size, to “test the waters” before filing an IPO registration statement. The ability to “test the waters” was provided to EGCs as part of the JOBS Act – and this excerpt from Cydney Posner’s recent blog provides an overview of what it allows companies to do:
The testing the waters provisions in the JOBS Act significantly relaxed “gun-jumping” restrictions by permitting an EGC, and any person acting on its behalf, to engage in pre-filing communications with qualified institutional buyers and institutional accredited investors. This relaxation of the gun-jumping rules allows companies to reduce risk by gauging in advance investor interest in a potential offering.
Prior to the JOBS Act, only WKSIs could engage in similar testing-the-waters communications. “Test-the-waters” communications can be oral or written, made before or after filing a registration statement, in connection with an IPO or any other registered offering.However, the only permitted communications are those made to determine whether the specified investors might have an interest in a contemplated securities offering.
As Broc blogged at the time, allowing all companies to “test the waters” was one of a slew of recommendations aimed at improving the capital markets made by the Treasury Department last October – and you may want to check out that list for other potential “coming attractions.”
Here’s an article from MarketWatch’s Francine McKenna with more background on the SEC’s efforts to make life a little easier for IPO candidates.
Warren Buffett’s Annual Letter to Shareholders
A few days ago, Warren Buffett released his annual letter to shareholders. As usual, this went completely unnoticed by the financial press – barely 50,000 articles & blogs have been written on it to date – so I’m sure you’re hearing about this for the first time from me. There’s no need to thank me, it’s just part of the job.
Anyway, here’s a selection of some of the media reports on the Oracle of Omaha’s latest epistle:
Warren Buffett’s recent pronouncements aren’t limited to his annual letter. Berkshire Hathaway’s sitting on a pile of cash – $116 billion to be specific. Yesterday, Buffett told CNBC that Berkshire-Hathaway was more inclined to repurchase stock with its excess cash than to pay dividends.
He’s got a lot of company. Stock buybacks have long been corporate America’s favorite bit of financial engineering – and this ValueWalk article says that 2018 could be the biggest year for them ever. But despite their continuing popularity, criticism of buybacks appears to be on the rise. For instance, this Bloomberg article says that buybacks are a big contributor to the market’s recent volatility. Here’s an excerpt:
Some market watchers are adding corporate share repurchases to the list of reasons for last week’s turmoil, which already included rising interest rates, higher inflation, growing government debt, volatility-linked investment funds and Washington instability. More significantly, those pointing the finger at buybacks say continued corporate stock purchases — which, unlike some of those volatility funds, survived the brief market downturn — will make the next one far worse.
Regardless of their impact on the market, the optics of buybacks are increasingly bad – this Washington Post op-ed claims that when it comes to using the additional cash flowing in from tax reform, companies are planning to spend 30x as much on buybacks as on wage increases.
Last week, in Digital Realty Trust v. Somers (US Sup. Ct.; 2/18), the US Supreme Court resolved a split between the circuits & held that in order to qualify for “whistleblower” protection under Dodd-Frank, an employee must reach out to the SEC – just blowing the whistle to an employer isn’t enough.
This Holland & Hart memo says that the case is a “mixed bag” for employers. This excerpt explains:
On the one hand, the decision is good news for employers because the ruling narrows the scope of protections available under Dodd-Frank’s anti-retaliation provisions. Dodd-Frank contains multiple plaintiff-friendly provisions – including immediate access to federal court, a generous statute of limitations (at least six years), and the opportunity to recover double back pay. Yet these benefits are now only available to a, presumably, smaller number of potential plaintiffs who actually report to the SEC.
On other hand, there are many reasons for employers to be wary of the ruling. Rather than incentivize employees to report their suspected concerns internally, today’s decision heavily encourages potential whistleblowers to report their concerns directly to the SEC – before any adverse action occurs, but also before employers have had the chance to hear, investigate, and address their potential concerns. Indeed, when an internal report does arrive, it may be safest for employers to assume that the SEC already has that same report.
The Court’s decision applies only to whistleblower status under Dodd-Frank. Internal whistleblowers may still assert retaliation claims under Sarbanes-Oxley, which also provides significant economic downsides for companies that retaliate. We’re posting the flood of memos in our “Whistleblowers” Practice Area.
Time for BlackRock to “Stand & Deliver?”
BlackRock made a big splash last month when CEO Larry Fink called on companies to serve the greater good in addition to serving their bottom lines. Nice words – but now, this “Breaking Views” column calls on the world’s largest asset manager to back them up with its actions:
A day after the latest American mass shooting involving a military-style assault rifle, it is worth reviewing Fink’s words. BlackRock is the largest owner of shares in publicly traded manufacturers of what is arguably the most lethal consumer product of any kind. The firm’s funds hold 16 percent of Sturm Ruger, 12 percent of Vista Outdoor and around 11 percent of American Outdoor Brands, the parent of Smith & Wesson, according to Eikon.
BlackRock’s holdings are driven by its big indexing business, but it is not alone. Vanguard, which oversees $4.5 trillion of other people’s money, is the second-biggest owner of Sturm Ruger and a close third in the registers of AOB and Vista. Fidelity Management tops the roster at Vista with 15 percent, but doesn’t figure in the other two.
These increasingly engaged broad-brush investment firms, as well as more focused Wall Street advisers, could start with a simple thesis. Something common to most of the shooting horrors in recent years is the AR-15 class of semi-automatic weapons. In a country with as many firearms as people, eradicating murders, suicides and accidental deaths may never be possible. But reducing the lethality of those who would do harm is achievable by making these weapons – which were adapted from versions designed for military use on battlefields – harder to purchase or banning them outright, as some states have already done.
Denying the purveyors of assault rifles the financial means to produce and distribute them is a power that financial firms do possess. Many banks and brokers already avoid the gun industry, which scores low on most so-called ESG screens – for environmental, social and governance – in part because of the regular controversies surrounding the lethal misuse of their products.
Being pressured to weigh-in on one of the most controversial issues in American society is probably not what BlackRock had in mind when it announced its new emphasis on the need to serve the greater good – but my guess is that it’s going to get lots of input about what “the greater good” entails from here on out. Looks like the ball’s in your court, BlackRock.
Transcript: “How to Handle Post-Deal Activism”
We have posted the transcript for our recent DealLawyers.com webcast: “How to Handle Post-Deal Activism.”
Well, not quite. But we’re going to the “Wayback Machine” to remember this shareholder proposal from 1990 submitted by John Jennings “JJ” Crapo to the Bank of Boston. Corp Fin allowed the proposal to be excluded. And it was a humdinger. The proposal asked the company to allow any shareholder – who met the Rule 14a-8 ownership threshold – to place one or more director nominees on the ballot. So it was ahead of its time on the topic of proxy access. Albeit with a lower ownership threshold than anyone could imagine.
But the real joy with this thing is found in the “Supporting Statement.” It rambles quite a bit, with a little bit of everything in there for everyone. Annual medical and “emotional” fitness evaluations for each director. A question whether the board’s priest provides it with chaplaincy services. A push to have Desmond Tutu, Mother Theresa and Lech Walesa sit on boards.
Given the pervasiveness of mindfulness these days – for which I am a big proponent – my favorite is this excerpt from the “Supporting Statement”:
I do think of my relations, Godparents, former teachers, pastors, and friends and neighbors usually daily three to four hours. Friends, neighbors, and co-workers are more important than Family.
Thanks to Intelligize for making it easy to find this gem – and for their permission to post the no-action letter!
10-K Summaries: Not All the Rage
Tina Bacce & her colleagues at Troutman Sanders recently reviewed how many companies have taken advantage of Item 16 to the Form 10-K – the new item that “permits” inclusion of a summary in a Form 10-K. They looked at the Form 10-Ks containing Item 16 filed to date – all for Fortune 500 companies – and only two included a summary:
– Pfizer’s summary – it really is “Pfizer at a Glance” and consisted of a table of data that you might see in an annual report.
– 3M’s summary – appears to just call the hyperlinked table of contents a “summary.”
Don’t expect this “trend” to accelerate…
Was This “Interim Final” Rule More Final Than Interim?
Speaking of Item 16 of Form 10-K, Keith Bishop covers an interesting topic in this blog – did the SEC go to “final” for it’s Item 16 rulemaking already…
Despite a dose of drama when the SEC cancelled its open Commission meeting, the SEC released its 24-page interpretive release on cybersecurity disclosures in the early afternoon yesterday by seritim.
Here’s a statement by SEC Chair Clayton that indicates that Corp Fin will be reviewing disclosures to help decide whether further guidance – or rulemaking! – is necessary. And these statements by Commissioner Jackson & Commissioner Stein are a bit critical of the new guidance.
We’ll be posting the inevitable flood of memos about the guidance in our “Cybersecurity” Practice Area. I’m sure many will analyze the “duty to update” discussion in the guidance…
Our Coming “Cybersecurity” Webcast: Meredith, Keith & Dave!
Join us on Wednesday, March 14th for the webcast – “The SEC’s New Cybersecurity Guidance” – to hear WilmerHale’s Meredith Cross, Ropes & Gray’s Keith Higgins and Jenner & Block’s Dave Lynn discuss the SEC’s brand new cybersecurity guidance.
When is the SEC Required to Hold an Open Commission Meeting?
So the SEC approved this interpretive guidance by seritim rather than in the open Commission meeting context. Which really doesn’t matter – except the sudden cancellation of the open meeting made it feel like the guidance wasn’t coming out. The cancellation was probably related to another matter on the open meeting agenda – some liquidity rules that most of us luckily don’t care about. Read more in this blog about why the SEC isn’t required to hold an open meeting to approve rules or guidance…
Poll: Did Release of Cybersecurity Guidance Have More Drama Than the Olympics?
Just 90 minutes before the meeting was supposed to start, the SEC posted a simple note saying today’s open Commission meeting – which would have given us interpretive guidance on cybersecurity disclosure – has been cancelled. A few hours later, the SEC’s interpretive guidance was posted. I’ll be blogging about it manana…
I blogged a few weeks ago about BlackRock’s desire for a quota of two women on every board. I’m glad that BlackRock is advocating for two women on every board – but I’m sad that an investor has to advocate for such a thing as quotas at all. There should be more than two women on every board – but ideally it should happen naturally, just as gender diversity has happened in so many professions over the past 40 years or so. We’ll get there – but unfortunately it’s pretty clear that it won’t happen “naturally” as progress is moving at a glacial pace.
Anyway, Allen Matkins’ Keith Bishop told me about this bill recently introduced in California that would require at least three women on a board when the authorized number of directors is six or more. This bill would apply to public companies with their principal places of business in California, to the exclusion of the law of the state of incorporation…
The SEC’s Home Page Redesign: Mobile Friendly
As someone who studies site design (yes, I design all of our sites), I am always curious when the SEC redesigns its home page. It’s only been 2 years since the last redesign – and the prior redesign was four years before that.
The new design of the SEC’s home page is particularly suited for viewing by mobile devices. Since studies show that a majority of online traffic comes through mobile devices, it’s logical that the SEC would go this route. I changed the design of this site’s home page so it was optimal for mobile – and many folks weren’t happy so I reversed course & went back to the old design!
The SEC’s redesigned home page continues to cater to retail investors – as well as tout the new Chair’s objectives that he discussed in his first speech a few months ago. For those of us that rely on the SEC’s rules, regulations & guidance, the tabs at the top continue to be of the utmost importance…
Just Announced! The “Section 16 Forums”
In response to those doing Section 16 work who have told us that they want to network with those similarly-situated, we are holding two “Section 16 Forums.” Hosted by Alan, these are one-day events for all Section 16 practitioners – not just beginners.
