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It’s time for my annual posting on my 10 favorite books of the prior year.  In last year’s version, I said that 2020 was an “annus horribilis” – the term used by Queen Elizabeth following the death of Princess Diana.  Well, I don’t know how to say “2021 may have been even worse” in Latin, but being someone who searches for the bright side (possibly even when there isn’t one), I will say that I continue to be grateful for books.  I read voraciously, constantly, no matter how bogged down with work or other things I may be.  Books take me away from the world — not always to a better place, but even a negative distraction is a distraction.

So here goes.  Remember that my top 10 are all books that I read in 2021, not just books I read that were published in 2021. Continue Reading Another Year, Another Top Ten List

I suppose I should be getting tired of writing about enforcement actions involving nondisclosure of perquisites (for example, see here), and that you’re getting tired of reading about them.  However, the topic is hard to resist, whether due to schadenfreude (look it up) or other factors.

The most recent such enforcement action, announced in late November, told a story similar to those told before – a CEO who used corporate aircraft for personal travel, used corporate credit cards for personal expenses, and so on, resulting in a failure to disclose more than $425,000 in “perks” over a two-year period.  The CEO also pledged all of his company stock in violation of a shareholders agreement that required the prior written consent of the company, but that’s another story.  Suffice it to say that the company and the CEO were hit with a variety of charges, including a failure to maintain accurate books and records.

If this elicits yawns or eye-rolling that we’ve seen this movie before, so be it.  However, there is a twist.  Specifically, the SEC’s report noted that the CEO did not disclose the relevant information in his questionnaires – and in some cases had not completed a questionnaire at all.  I don’t recall the SEC focusing on the lowly D&O questionnaire in the past.  Anyone who has pulled his or her hair out trying to get a director or officer to complete a questionnaire is now smiling and saying “Ha!  It serves him right!”  (The same goes for all those directors and officers who complete every questionnaire by saying “please fill it out for me” or “no change from last year” regardless of whether there are changes.) Continue Reading Another perquisites enforcement action…with a twist or three

I’ve been known to make some weird connections in this blog, so if you’re wondering what’s with the title of this posting, read on.

Some years ago, my wife and I took a fabulous trip to Egypt.  One of the many fascinating things and people we learned about was Hatshepsut, a Pharaoh who ruled Egypt from 1479 to 1458 BC, or thereabouts.  She’s been called Queen Hatshepsut, but technically that’s not correct, because she was literally a Pharaoh – a title that our guides told us was an exclusively male title for which there was no female equivalent.

Hatshepsut is believed to have been a very successful leader, opening trade routes and creating a boom in the construction of many grand temples and so on – something one of our guides referred to as an “edifice complex.”  However, after her death, her son, Pharaoh Tutmosis III, and possibly his son (to say nothing of the patriarchy) sought to eradicate her existence.  Her name was removed from records and many of her statues and images were defaced or destroyed.

But enough ancient history. Continue Reading Why Is the SEC Like Pharaoh Tutmosis III?

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The Nasdaq Stock Market has developed a reputation for being the hip securities exchange, technologically and otherwise.  In many ways, it deserves this reputation.  For example:

  • In 1991, Nasdaq became the world’s first electronic stock market.
  • In 1992, it joined with the London Stock Exchange to form the first intercontinental linkage of capital markets.
  • In 1998, using the slogan “the stock market for the next hundred years,” Nasdaq became the first U.S. stock market to trade online.
  • In 2016, Adena Friedman was promoted to chief executive officer, becoming the first woman to run a major exchange in the U.S.

So it is not particularly surprising that, once again, in August 2021, Nasdaq took center stage and became the first major stock exchange to adopt a board diversity rule for its listed companies.

WHY THIS RULE?  WHY NOW?

The answer to the first question is clear. Notwithstanding widespread acknowledgement by corporate America that board diversity leads to greater innovation, smarter decision-making, and improvements to the bottom line, actual board diversity remains elusive.  As of 2020, only 20.9% of Fortune 500 board seats were held by White women, and a mere 5.7% were held by Black and Latina women; and while 2021 saw gains of 300% in new directors who are Black and 200% gains in Latino directors, 80% of all Fortune 500 board members are White, and 70% are male.[1]  So even though the new rule will not create “instant” diversity, it will create measurable board diversity goals, forcing companies that have given lip service to diversity to act – or to disclose that they have failed to act.

Why now?  Personally, I ask, “Why not before?”  The answers to those questions, however, are beyond the scope of this blog.  For this moment, I am cautiously optimistic that Nasdaq’s new diversity rule can be a catalyst for meaningful change that leads to the bona fide board diversity that corporate America has been incapable of accomplishing thus far. Continue Reading Nasdaq’s Board Diversity Rule: The “Hip” Exchange Does It Again

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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)?

Image by Gerd Altmann from Pixabay

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