It’s well known that COVID-19 provided an unanticipated shock to the economy as a consequence of what economist Paul Krugman termed the “economic equivalent of a medically induced coma.” As a result, many companies were compelled to disclose historic performance that was, to put it mildly, at odds with their expectations of a few months prior, with little insight about the shape of future performance. In this paper, The Spread of COVID-19 Disclosure, from the Corporate Governance Research Initiative at the Stanford Graduate School of Business and the Rock Center for Corporate Governance at Stanford University, the authors looked at how companies responded to this situation, examining the levels of transparency that companies provided in the “widely uncertain” setting of COVID-19.
In late November last year, the NYSE filed with the SEC a proposed rule change that would have allowed companies going public to raise capital through a primary direct listing. Under current NYSE rules, only secondary sales are permitted in a direct listing. As a result, thus far, companies that have embarked on direct listings have looked more like well-heeled unicorns, where the company was not necessarily in need of additional capital. The new proposal seemed to be a potential game changer for the traditional underwritten IPO. (See this PubCo post.) However, as reported by CNBC and Reuters, a little over a week later, the SEC rejected the NYSE’s proposal, and it was removed from the NYSE website, causing a lot of speculation about the nature of the SEC’s objection and whether the proposal could be resurrected. At the time, an NYSE spokesperson confirmed to CNBC that the proposal had been rejected, but said that the NYSE remained “‘committed to evolving the direct listing product…This sort of action is not unusual in the filing process and we will continue to work with the SEC on this initiative.’” (See this PubCo post.) The NYSE did persevere, and the proposal was refiled in December with some clarifications and corrections. But then—silence. In January and February, the NYSE had four meetings with SEC staff, including folks in Chair Clayton’s office, presumably to make the case for the proposal. A number of public comment letters, of divided opinion, were submitted. Apparently, the SEC remained unconvinced, designating a longer period to decide, and then in late March, issued an Order instituting proceedings to determine whether to approve or disapprove the proposed rule change. Undaunted, the NYSE is giving it another go and has just filed Amendment No. 2. Will it be enough to convince the SEC?
For those interested in a summary and update of the SEC’s and its staff’s targeted relief to address COVID-19, you may want to look at this updated statement issued today by SEC Chair Jay Clayton and the Directors of Corp Fin, Investment Management and Trading and Markets. The statement summarizes the current temporary relief and indicates the staff’s views on whether the relief should be extended or otherwise adjusted: “It is clear that the need for certain relief remains, such as relief to ensure continued remote operations and to provide flexibility in light of continued market volatility. Other forms of current relief, however, are unlikely to be extended.”
In March and April, the Corp Fin staff issued three statements providing temporary relief to address various logistical issues and other complications resulting from the COVID-19-related shutdowns. The relief related to authentication document retention requirements under Rule 302(b) of Reg S-T, submission of Forms 144 in paper and submission of a variety of other paper forms outside of Form 144. In two cases, the staff statements had provided relief only through June 30. Unfortunately, that turned out to be much too optimistic. Today, the staff extended the time frames for all three statements for an indeterminate period. The new statements can be found here, here and here. In each case, the temporary relief applies “until the staff provides public notice that it no longer will be in effect; that notice will be published at least two weeks before the announced termination date.”
A couple of days ago, Sagar Teotia, SEC Chief Accountant, issued a Statement on the Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19. The Statement, issued in advance of the close of the second quarter, follows on Teotia’s earlier Statement, issued in April, in which Teotia addressed, among other topics, estimates and judgments as well as temporary relief provided under the CARES Act for banks and other financial institutions. (See this PubCo post.) In this new Statement, Teotia again addresses estimates and judgments, as well as disclosure controls and procedures and internal control over financial reporting, going-concern issues, engagement by the Office of Chief Accountant with FASB, the PCAOB and international standard setters and OCA’s engagement with audit committees.
Yesterday, the staff of Corp Fin issued Disclosure Guidance: Topic No. 9A, which supplements CF Topic No. 9 with additional views of the staff regarding disclosures related to operations, liquidity and capital resources that companies should consider as a consequence of business and market disruptions resulting from COVID-19. You might recall that, in March, the staff issued CF Topic No. 9, which offered the staff’s views regarding disclosure considerations, trading on material inside information and reporting financial results in the context of COVID-19 and related uncertainties. (See this PubCo post.) As with the original guidance, the new supplemental guidance includes a valuable series of questions designed to help companies assess, and to stimulate effective disclosure regarding, the impact of COVID-19, in advance of the close of the June quarter. As always these days, the guidance makes clear that it represents only the views of the staff, is not binding and has no legal force or effect.
I can think of only one public company that is currently a Delaware Public Benefit Corporation. That’s Laureate Education, which initially filed with the SEC in 2015 and went effective in 2017. (See this PubCo post.) Now, finally, we have a second company that has filed for its IPO as a PBC—Lemonade, Inc., which declares on the cover page of its prospectus that it is incorporated in Delaware as a PBC as a demonstration of its “long-term commitment to make insurance a public good.” It’s been quite a long dry spell since the PBC legislation was signed into law in 2013. In the last few years, however, we have witnessed intensifying investor focus on sustainability as a strategy (see, for example, this PubCo post), as well as swelling numbers of companies declaring their commitments to all stakeholders, as reflected, for example, in the Business Roundtable’s adoption of a new Statement on the Purpose of a Corporation (see this PubCo post) and the World Economic Forum’s Stakeholder Principles in the COVID Era (see this PubCo post). What’s more, new legislation just passed by the House in Delaware will, if ultimately signed into law, make it easier to slip in and out of PBC status. [Update: This bill was signed into law on July 16.] Will these trends toward sustainability and stakeholder capitalism, together with the Delaware legislation, fuel a renewed interest in the PBC for public companies and expecting-to-become public companies? Will Lemonade open the floodgates?
Perhaps during the shutdown, when you’re watching more TV than you might like to admit, you’ve seen some new commercials a bit like this: a happy face-masked employee on the line or in a lab displaying all the sanitizing and other pandemic-related safety precautions that the company is taking to protect the employee’s work environment. Cut to the employee at home with giggling youngsters, illustrating the importance of safety measures at work to protect family at home. Or a company emphasizing the value of its employees in keeping the country moving forward or its employees in lab coats that persevere to find a cure no matter what. Or a shot of employees performing the essential service of implementing safety measures for customers. What’s the point? To drive home that a company that recognizes the value of its employees and manifests such concern for their safety and welfare is a company worth buying from. This new emphasis on employee welfare as a corporate selling point may have been sparked by COVID-19 but, at another level, it may well reflect broader concerns that have been marinating for a while—about the essential value of previously overlooked elements of the workforce, about physical risk allocation, about economic inequity and, to some extent, even about social justice.
How to address some of these concerns related to the workforce—particularly economic inequity—is the subject of a new paper co-authored by former Delaware Chief Justice Leo Strine, “Toward Fair Gainsharing and a Quality Workplace for Employees: How a Reconceived Compensation Committee Might Help Make Corporations More Responsible Employers and Restore Faith in American Capitalism.” The goal is to reimagine the compensation committee so that it becomes the board committee “most deeply engaged in all aspects of the company’s relationship with its workforce,” from retaining and motivating the workforce to achieve the company’s business objectives, to overseeing that the company fulfills its obligations as a responsible employer and, most of all, to positioning the company to “restore fair gainsharing.”
In his annual letter to CEOs in January, CEO Laurence Fink announced that BlackRock was putting “sustainability at the center of [its] investment approach,” and made clear that companies needed to step up their games when it comes to sustainability disclosure. (See this PubCo post.) Even in the aftermath of the COVID-19 outbreak, both BlackRock and State Street have issued statements indicating their intention to continue to center their stewardship on the demand for additional disclosure on key ESG and sustainability issues such as climate change risk and human capital management. For those seeking to improve their ESG reporting, a managing director of consultant Protiviti offers a number of recommendations in this Forbes article.