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Lest you think that the summer is a quiet time for those of us in the wacky world of securities and corporate governance, think again.  Here’s some of what’s going on:

Legislation

On July 30, the House Financial Services Committee passed 11 bills and sent them to the full House. One of the bills would authorize the SEC to revise the reporting period for 13F disclosures from quarterly to monthly, change the time period to submit such reports, and expand the list of items to be disclosed to include certain derivatives.  The issuer and investment communities support these moves, and House passage seems likely, but the Senate is another matter altogether.

Another bill would impact family offices in a number of ways, including limiting the use of the family office exemption from registration as an investment adviser with the SEC to offices with $750 million or less in assets under management; requiring family offices with more than $750 million of assets under management to register with the SEC as “exempt reporting advisers”; and preventing persons who are barred or subject to final orders for conduct constituting fraud, manipulation, or deceit from being associated with a family office. Continue Reading Summer Doldrums? Not So Much!

Remind me again, what’s Section 162(m)?

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In general, Section 162(m) of the Internal Revenue Code provides that a publicly held corporation shall not be allowed a deduction for any “applicable employee remuneration” to any “covered employee” that exceeds $1,000,000.  Applicable employee remuneration generally means compensation for services performed.  Though the definition has changed over time, “covered employee” originally captured a company’s CEO as of the last day of the taxable year, as well as the next three most highly compensated officers.

Insert the TCJA

The Tax Cuts and Jobs Act of 2017 (the “TCJA”) took the first stab at widening the net used to determine who is a “covered employee.”  Specifically, the definition was expanded to include any person who served as CEO or CFO during the taxable year, in addition to the next three most highly compensated officers.  Additionally, the definition was expanded to include any individual who was a “covered employee” for any taxable year beginning after December 31, 2016.  The TCJA also made other notable changes to Section 162(m), including the elimination of an exception for qualified “performance-based compensation” approved by stockholders.  The practical effect of this was to eliminate the need for stockholder votes to approve plans providing for “performance-based” compensation, because the compensation in question would be non-deductible whether or not it was performance-based. Continue Reading Run for “Covered!” The American Rescue Plan Act casts a wider net on Section 162(m) “Covered Employees”

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Popular cryptocurrency exchange Coinbase went public on Nasdaq on April 14 using a direct listing. The company achieved a huge valuation (more than $100 billion) in this offering. While it’s too early to tell whether Coinbase’s stock price will hold up over time, the initial success of this offering is impressive. This continues a string of successful direct listing offerings by large technology companies such as Slack, Spotify, Palantir and Asana, all of which utilized this process to become public companies. What is a direct listing and how is it better (or worse) than a traditional IPO? More importantly, should you use a direct listing to take your company public? (Spoiler alert:  maybe not).

Direct listing is a somewhat rare process in which a company achieves public company status without using traditional underwritten IPO sales efforts. Historically, only the company’s existing shareholders were allowed to sell shares in a direct listing. The company would not receive any of the proceeds of the offering as it would not be allowed to issue new shares, and accordingly all funds would go directly to the selling shareholders. On December 22, 2020, however, the SEC approved a rule change proposed by the NYSE that allows a company to conduct a primary offering through a direct listing under certain circumstances. Nasdaq later submitted a similar proposal which is currently under SEC review but which should be approved, as it is substantially similar to the NYSE proposal. This should fuel even more interest in direct listings going forward. Continue Reading Direct Listings – A viable IPO alternative?

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In the last several days, the SEC has engaged in a skirmish, and possibly an opening battle, against SPACs.  A recap follows.

The first shot was fired on March 31, when the Staff of the SEC’s Division of Corporation Finance and the Office of Chief Accountant issued separate public statements about a number of risks and challenges associated with taking private companies public via “deSPAC” transactions.

The CorpFin statement covered a lot of territory, pointing out the following pitfalls, among others, facing companies that go public via a deSPAC.  These pitfalls reflect that such companies are subject to rules governing shell companies that do not apply to companies going public through conventional IPOs.

  • Financial statements for the target must be filed with an 8-K report within four business days of the completion of the business combination.  The usual 71-day extension for such financial statements is not available.
  • The combined company will not be eligible to incorporate Exchange Act reports or proxy or information statements until three years after the completion of the business combination.
  • The combined company will not be eligible to use Form S-8 for the registration of securities issuable under compensation and benefit plans until at least 60 calendar days after the combined company has filed current Form 10 information. (This information is customarily included in a “Super 8-K” filed within four business days after closing of the deSPAC transaction.)
  • For three years following the completion of the deSPAC transaction, the company will be unable to use some streamlined procedures for offerings and other filings, such as using a free-writing prospectus.

The statement also reminds companies that public issuers are required to maintain accurate books and records as well as internal control on financial reporting – both areas that have been the basis for enforcement actions by the SEC. Continue Reading Caveat Everybody — The SEC Takes Aim at SPACs

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I have long been a champion of shareholder engagement.  Since as far back as the 1980s, I have believed that companies and investors alike greatly benefit from engagement; I even advocated for engagement by individual directors – a view that generated some strong adverse commentary from those in the corporate community who disagreed with me.  It’s therefore extremely gratifying to me that what was a rare and often disparaged occurrence has become the norm.  Even prestigious law firms that referred to director-investor meetings as “corporate governance run amok” now embrace the practice.

I also admit that, despite my disagreement with the principles behind say on pay votes, such votes have had the very positive unintended consequence of making engagement commonplace.  In fact, there is so much engagement going on that some investors can’t find the time to meet with the companies they own.

So far, so good.

However, I believe that things may be going too far.  I refer, specifically, to the new movement to have a “say on climate” vote at every public company’s annual meeting (or, as the corporate community increasingly refers to it, the annual general meeting, or AGM – as opposed to an annual “specific” meeting, I suppose).  The vote would be similar to the say on pay vote – advisory, non-binding, and so on.  I have not yet heard anything about a second advisory vote to determine how often a say on climate vote would need to be taken, but I would not be surprised to learn that it’s under consideration somewhere. Continue Reading Say what???

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The SEC recently increased the funding limits for several types of exempt offerings. The increases were fairly substantial, and we believe they may create increased opportunities to raise external financing. Smaller companies in particular should be aware of these increases, as they may provide increased access to capital.

The new funding limits were included in a Final Rule entitled “Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets,” issued by the SEC on November 2, 2020. The SEC also issued an explanatory Press Release which contains a helpful Fact Sheet regarding the Final Rule and the new funding limits. The purpose of the Final Rule was to harmonize and bring some consistency to the somewhat complex system of securities offerings that are exempt from registration with the SEC. This system is a critical component of the capital raising process, and for many smaller companies these exempt offerings are the only methods available for external capital raising. This Final Rule became effective on March 15, 2021.

This Final Rule impacted three exemptions from registration that are widely used, especially by smaller companies:  Regulation Crowdfunding, Regulation A (commonly known as “Regulation A+”) and Rule 504 of Regulation D.  The major changes are as follows: Continue Reading Show me the money: Increased funding limits for exempt offerings may increase access to capital

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Environmental, Social and Governance considerations (ESG) are expected to play an increasing role in equity pay determinations for executive officers. About 50 percent of S&P 500 companies used ESG metrics in cash-based, short-term incentive compensation plans during 2020. Conversely, only about 4 percent of S&P 500 companies used ESG metrics in long-term equity incentive plans. This should change beginning with 2021 awards due to anticipated SEC-required disclosure of ESG business risks. ISS, Glass Lewis and large investors (e.g., BlackRock, Vanguard) have made calls for more ESG disclosure. Banks increasingly view ESG risks as credit risks. In addition, national media outlets have made the case for executive pay to tie with ESG goals.

In recent years equity awards made to executive officers have been tied to achieving company performance goals. But these performance evaluations are usually linked to relative total shareholder return or financial metrics such as EPS or return on invested capital. As the tide shifts to include ESG metrics, the question now asked is, “how do we set equity awards for executives to help our company attain its ESG goals?” Continue Reading ESG Considerations for Equity Incentive Plans

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My apologies to those of you who thought I would expound on the corporate governance implications of Madonna’s early oeuvre; but I want to write about materiality, and I’m a sucker for a catchy title.

Those of us who spend our waking (and many sleeping) hours thinking about disclosure know that materiality is the linchpin of disclosure; if something is material, you at least have to consider disclosing it – though of course, probability and other factors can impact that decision.  We also know that there are any number of judicial interpretations of what is and is not material.  However, it seems to me that we are approaching a tipping point in how materiality may impact disclosures.

Take, for example, the position of SEC Commissioner Elad Roisman, who has stated, in effect, that there is no need for SEC rules explicitly requiring disclosures concerning climate change and other ESG matters, because existing rules already require disclosure of anything that is material to a company.  (For example, see his keynote address to the 2020 National Conference of the Society for Corporate Governance.)  I have been a member of the Society for many years, and I have heard many of my fellow members express similar views.  However, if that is the case, taking that view to its logical extreme, why have any specific disclosure requirements at all?  Why not just say “tell us what’s material”? Continue Reading Living in a material world

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In 1729, the great satirist, Jonathan Swift, penned an essay called “A Modest Proposal.”  The essay suggested that rather than allowing poor, starving children to be a burden on society, they should be fattened up and eaten.

How does this relate to corporate governance, you ask?  Well, here goes.  Anyone who has ever had children or spent any time around children knows that at some point most rug rats become incessant and indefatigable interrogators, their favorite question being “why?”  “Why do I have to eat vegetables?” [Because they’re good for you.] “Why?” [Because if you don’t eat vegetables you won’t grow to be big and strong] “Why?” [Because vegetables have vitamins and minerals that you need] “Why?”  And so on.  These wee tads are never satisfied with any answers, regardless of their logic or compelling authority; thus, responses like “Because I’m your father and I make the rules” go unheeded.  The “whys” just keep on coming, ad nauseam (literally). Continue Reading A Modest Proposal II: Don’t eat children; put them on boards instead!

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First, Broc Romanek

I don’t often write about the people I’ve come across in the course of my absurdly long career, but there are some exceptions.  One exception was a December 2019 post in which I noted that Broc Romanek had retired from thecorporatecounsel.net.  At the time, I predicted (probably because I hoped it would be true) that we hadn’t heard the last of him.  I am thrilled to report that my prediction has come true, as Broc has recently launched ZippyPoint.com, his latest and no doubt greatest achievement.

Why “ZippyPoint”?  Well, why not?  It’s punchy and catchy.  The fact that the name has nothing whatsoever to do with securities law or corporate governance makes it all the more endearing (though the website is all about securities law and corporate governance).  It’s also typical of Broc’s great and weird sense of humor. Continue Reading Ups and Downs