April 2013

Regulations continue to be burden on public companiesAlthough you may have missed the fireworks and the parade, we celebrated the one year anniversary of the JOBS Act on April 5th.  Of course you wouldn’t have been alone if you missed the big celebration because, unfortunately, despite the initial hype surrounding the JOBS Act, not much has happened.  The media has chastised the JOBS Act for not fulfilling its early promise.  Most of the innovative provisions of the JOBS Act remain unimplemented by the SEC such as the relaxation of the ban on general solicitation on private offerings, crowd funding, and the improvement to Regulation A.  But even Title I (generally referred to as the “IPO on Ramp”), which was effective over a year ago, hasn’t had much effect.  In fact, IPOs, according to Jay Ritter at the University of Florida, have actually decreased for the so-called emerging growth companies.

How can this be?  While there can be numerous factors for why IPOs continue to remain elusive (costs of regulation and a poor economy are the top factors), other factors such as a rising stock market and pent up demand for IPOs should be compelling companies to go public.  Or is it possible that the cost of regulation that has been piled on since the fall of Enron trump everything else?

When Congress passed Title I of the JOBS Act, Congress recognized that public companies have been facing increased burdens for being public.  Although the causal relationship was suspect at best, Congress determined that over regulation was responsible for the severe drop off in IPOs from the 1990s through the 2000s.  While I might suggest that the dotcom bubble bursting may have played a part in the decrease in IPOs, I would agree that the unrelenting regulation that has come out of Congress over the past decade (Sarbanes-Oxley, Dodd-Frank) as well as rulemaking from the SEC itself (executive compensation disclosures) must have had some effect.

As a reminder, Title I of the JOBS Act, among other things, reduces executive compensation disclosures.  Specifically, emerging growth companies (companies with less than $1 billion in revenues) are exempt from holding “Say-on-Pay” and “Say-on-Golden Parachutes” votes, disclosing the two controversial executive compensation pay ratios required under Dodd-Frank, and providing a Compensation Discussion and Analysis (CD&A). Other executive compensation disclosure is also shortened by reducing the number of named executive officers, reducing disclosure from three to two years, and eliminating certain compensation tables.  In other words, Title I of the JOBS Act was designed to address over regulation of executive compensation for public companies.

While this was a great start by Congress, companies haven’t taken advantage of Title I because Continue Reading Executive compensation disclosure is too great a burden for issuers

Director Pay Practices

Since 2007, executive compensation practices of public companies have been at the forefront of activist shareholders’ and shareholder rights groups’ agendas. Mandatory say-on-pay proposals, enhanced executive compensation disclosure, compensation committee and compensation consultant independence rules are just a few of the recent significant changes to the laws and regulations applicable to public companies in the U.S. Moreover, as we reported in prior blogs, some countries have gone as far as making say-on-pay proposals binding on public companies. In fact, just this year, Switzerland amended its constitution to require binding shareholder say-on-pay votes and other executive compensation limitations for its public companies (also check out Broc Romanek’s blog for a collection of articles related to this topic). However, while public company executives have been in the crosshairs, little attention, if any, has been given to compensation of public company directors.

But that may change as a result of certain director pay practices highlighted by a recent NY Times Deal Book article by Steven Davidoff. The article focuses on two current proxy fights involving hedge funds attempting to get their proposed nominees elected to the boards of Hess Corporation and Agrium Inc. In the first case, the nominating hedge fund is proposing to pay a $30,000 bonus to any of its nominees who ultimately win a seat on the Hess board. Additionally, each such nominee would be eligible to earn a performance bonus based on share performance relative to its peer group. Based on the performance award formula, the maximum potential payout could be as much as $9 million if Hess outperforms its peer group by 300% over a three-year measuring period.

The second case is potentially even more lucrative for the director nominees. In addition to a $50,000 bonus each nominee would receive if elected,  they would also receive 2.6% of Jana Partners’ net profit based on the stock closing price on September 27, 2012. Director nominees not elected would still receive 1.8% of the net profit during that same period. Considering Jana’s total investment in Agrium is over $1 billion, the earning potential could be significant. However, based on the results of the Agrium annual meeting held on April 9, it appears that none of these Jana nominees were elected to the Agrium board this time around.

These arrangements pose some interesting questions from a corporate governance standpoint. Historically, directors Continue Reading Will director compensation be the next target?

NetFlix Posting Causes SEC to Give GuidanceThe SEC tiptoed into the twenty-first century as the agency validated the use of social media sites in certain situations for disclosure of information by publicly traded companies. This social media disclosure is subject to some constraints, but it is a positive move for public companies, shareholders and potential investors who are social media users. 

The SEC demonstrated its resistance to the disclosure of information in a social media post at the end of 2012. As I discussed in a prior blog post, the SEC informed Netflix, Inc. and its CEO, Reed Hastings, that it might institute actions against them for violations of Regulation FD in connection with some information that Mr. Hastings had posted on his personal Facebook page. This Facebook post congratulated a Netflix marketing team for achieving a positive performance metric. The post was short and very specific, and it did not contain any other references or information. Netflix did not issue a press release and did not file a Form 8-K or any other disclosure document at that time regarding the information contained in this Facebook post. The company also did not post any information related to Mr. Hastings’ Facebook post on its website or on its corporate Facebook page. 

The SEC alleged that Mr. Hastings’ Facebook post may have violated Regulation FD, which generally requires a company to disclose material information to all investors at the same time, so that no investor is disadvantaged by learning about such information later. At the time of the post, Mr. Hastings had over 200,000 Facebook friends. His post was also picked up and published in blogs and news outlets. Mr. Hastings and Netflix expressed the view that the language contained in Mr. Hastings’ post was not selective disclosure because of the wide distribution of this information both through Mr. Hastings’ Facebook network and the republishing of this information by other social media and news outlets. They also took the position that the information disclosed was not material. Netflix eventually disclosed these events and the possible SEC actions in a Form 8-K filed on December 5, 2012, and Mr. Hastings commented on them on his personal Facebook page. 

The SEC then conducted an investigation of Mr. Hastings’ actions and their impact on Netflix and its investors. The results of this investigation were made public in Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934:  Netflix, Inc., and Reed Hastings, Release No. 69279 (April 2, 2013) and a related SEC press release. In a somewhat surprising move, the SEC Continue Reading SEC relaxes restrictions on social media postings (but Regulation FD still applies)

Dell going private transaction shines light on risksSo you are set on taking your company private.  Well, before you put your plans in motion, there are a lot of risks and potential consequences to consider along with the benefits.  At the moment, no one knows this better than Michael Dell, CEO of Dell Inc.  

Back in February 2013, Mr. Dell and his financial partner, Silver Lake Management LLC, entered into a merger agreement with Dell that would make Dell a private company.  The merger was valued at $13.65 per share, with a deal value of $24.4 billion.  The deal would keep CEO Michael Dell and others in his investment group in charge of the company. 

The driving force behind the deal is the perceived need to restructure Dell due to fundamental changes in the computer industry.  Consumers are focusing more on tablets and smartphones, which is hurting Dell’s core computer business.  The thought is that the company needs a couple years to restructure and that being a private company would allow the restructuring to occur without so directly impacting the price of the stock.  Since most investors these days have shorter time horizons and less patience for restructuring, this looked like a smart move. 

As negotiations progressed and the deal was announced, however, the door was opened for other offers because Dell was in play.  This is one of the uncertainties involved with a going private transaction and makes this type of deal more risky.  In particular, there is the risk that the initial group loses control of the bidding process and gets out bid. 

Here, despite initial thoughts that no other parties would top the Silver Lake bid, two additional bids that are arguably superior have surfaced and make the outcome uncertain.  One of these bids is lead by investor Carl Icahn and the other is lead by Blackstone.  Both bids were deemed by Dell’s special committee to be potentially Continue Reading Dell shines a light on the risks of going private

We wanted to thank all of our followers and readers in helping make The Securities Edge so successful.  This week marks the second anniversary of our blog (including our run on the Gunster Blog)!  Each month we see increasing traffic, which tells us that we must be doing something right, but as always, please give us your feedback.  We are always looking for ways to improve.  Thanks again and we are looking forward to our third year!