As has been widely reported, there has been a phenomenal increase in the volume of SPAC transactions as an alternative approach to becoming a public company. According to Bloomberg, around “300 SPACs launched on U.S. exchanges in the first quarter, raising almost $100 billion. That total was more than all of last year.” In this statement, Corp Fin Acting Director John Coates discusses liability risks potentially arising out of SPAC and de-SPAC transactions, that is, the transactions in which a private operating company undertakes a business combination with a SPAC, ultimately becoming a public operating company. The essence of his message is: why should a SPAC be treated differently from a traditional IPO?
In December 2020, the NYSE proposed to relax the requirements for shareholder approval of related-party equity issuances and bring them into closer alignment with the comparable Nasdaq rules by amending Sections 312.03, 312.04 and 314.00 of the NYSE Listed Company Manual. The amendments were intended to provide more flexibility to raise capital and included modifications that were similar to the temporary waiver in effect during the COVID-19 crisis. (See this PubCo post and this PubCo post.) In observing the impact of that temporary waiver at that time, the NYSE indicated that it had seen “that a significant number of companies have benefited from the flexibility provided by the waiver and has not observed any significant problems associated with companies’ completion of transactions permitted by the waiver.” (For a description of the original proposal, see this PubCo post.) The NYSE subsequently amended the proposal, and the SEC has just approved the proposal, as amended, on an accelerated basis.
In BlackRock Investment Stewardship’s recent commentary, BIS observed that ESG-related metrics have increasingly been incorporated as performance measures in companies’ incentive plans. BIS cited a recent study from the GECN Group, which showed that 67% of companies in the study used ESG measures (but only 56% in the U.S. alone) and that COVID-19 had accelerated the incorporation of ESG factors into incentive plans. Importantly, however, BIS cautioned that, to the extent that companies included sustainability metrics in their incentive plans, they should “be material and aligned with a company’s long-term strategy. It is important that companies using sustainability performance metrics explain carefully the connection between what is being measured and rewarded alongside business goals and long-term performance. Failure to do so may leave companies vulnerable to reputational risks and undermine their sustainability efforts.” How do companies determine which sustainability objectives are most material for them, and how do they transform those goals into measures for purposes of incentive compensation? This new article from consultant Semler Brossy offers some advice. What is the overarching message? “Move carefully, but move.”
According to the staff of the SEC’s Office of the Chief Accountant, in “just the first two months of 2021, both the number of new SPACs and amount of capital raised by those SPACs have been reported to already match approximately three-fourths of all such activity last year.” And there was quite a bit of SPAC activity last year. In light of the incredible volume of SPAC deals, on Wednesday, the staffs of Corp Fin and the OCA issued special guidance for SPACs. These statements address shell company, financial reporting, accounting, internal control, governance and auditor considerations in connection with a de-SPAC transaction, that is, a transaction in which a private operating company undertakes a business combination with a SPAC, ultimately becoming a public operating company. Both staffs seem to question whether the timing and other circumstances of de-SPAC transactions mean that the private operating company targets may not be fully equipped for what comes next and want stakeholders to carefully consider whether each of these private targets, in the words of OCA, has “a clear, comprehensive plan to be prepared to be a public company.” Corp Fin also wants all those who are clamoring for SPACs to be aware of all restrictions, impediments and other potential hiccups that come with the package. Could they possibly be trying to put the kibosh on SPAC fever? According to Reuters, analysts think the SEC is “worried about how much due diligence is performed by SPACs before acquiring assets, and about disclosures to investors.”
A new piece in the NYT, “Corporations, Vocal About Racial Justice, Go Quiet on Voting Rights,” starts off this way: “As Black Lives Matter protesters filled the streets last summer, many of the country’s largest corporations expressed solidarity and pledged support for racial justice. But now, with lawmakers around the country advancing restrictive voting rights bills that would have a disproportionate impact on Black voters, corporate America has gone quiet.” The author is talking about new voting laws just passed in Georgia and the reluctance, with some exceptions, of the largest corporations to say anything or do anything—beyond anodyne statements of support for voting rights in general—that might pressure the state to back down, as major corporations did when several states passed their infamous transgender bathroom bills and many companies threatened to move business out of those states. As the NYT observed, the “muted response—coming from companies that last year promised to support social justice—infuriated activists, who are now calling for boycotts.” Last night, the NYT reported that two of the largest corporations in Georgia have abruptly reversed course and issued statements in opposition to the voting bills after a large group of prominent Black business leaders called on companies “to publicly oppose a wave of similarly restrictive voting bills that Republicans are advancing in almost every state.” In an interview with the WSJ, one of those business leaders emphasized that this “is a nonpartisan issue, this is a moral issue.” This battle is expected to continue as other states enact similar legislation, not to mention potential fights over guns, immigration and climate, to name a few. How do companies navigate the terrain of political activity and public scrutiny while staying true to their core values? In this new report, “Under a Microscope: A New Era of Scrutiny for Corporate Political Activity,” The Conference Board attempts to address this complicated issue.
There has been a lot of speculation about the extent to which Congress would take advantage of the Congressional Review Act to dispense with some of the “midnight regulations” adopted during the prior administration. (See this PubCo post.) We may finally be getting some insight into that question. Senator Sherrod Brown has now introduced a joint resolution providing for congressional disapproval of the SEC’s new(ish) shareholder proposal amendments, which were the subject of strong dissents from the Democratic SEC Commissioners when they were adopted in September 2020. The resolution simply provides that Congress disapproves the rule and, as a result, the rule will have no force or effect. As reported by Bloomberg, Brown stated that “[b]y raising eligibility and resubmission thresholds for shareholder proposals, the rules take away an important tool to push for better corporate governance, increase transparency, and address the gender pay gap….Congress must repeal the rule, and we need to find ways to increase shareholder participation and to make executives more accountable.” As reported by Reuters, the National Association of Manufacturers described the resolution as “heavy-handed” and stated that it “does not believe the CRA is the appropriate mechanism for review of the SEC’s rule to modernize the proxy process […] and looks forward to engaging with the SEC to defend the vital reforms included within it.” Will the resolution win the necessary support?
Although an audit firm might not be the first place you’d look for advice on board behavioral psychology, here’s an exception: a really interesting article from PwC about board dynamics and psychological biases that can impede boards from optimal performance and decision-making. The article identifies four common biases—authority bias, groupthink, status quo bias and confirmation bias—and provides clues for recognizing when your board might be afflicted with any of these problems, along with tips to address them. Well worth a read!
SEC issues form amendments related to disclosure and submissions under the Holding Foreign Companies Accountable Act
In December 2020, the Holding Foreign Companies Accountable Act was signed into law. As you may recall, the HFCAA amends SOX to impose certain requirements on a public company identified by the SEC as a company that files in its periodic reports financial statements audited by a registered public accounting firm with a branch or office located in a foreign jurisdiction and that the PCAOB is “unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.” The HFCAA imposes requirements on SEC-identified issuers, under SEC rules that the HFCAA requires the SEC to adopt within 90 days after enactment, to submit certain documentation to the SEC establishing that the company is not owned or controlled by a governmental entity in the foreign jurisdiction. In addition, the law imposes certain disclosure requirements on foreign issuers that have been “identified” by the SEC. (See this PubCo post.) Yesterday, the SEC announced that it has adopted interim final amendments to Forms 20-F, 40-F, 10-K, and N-CSR to implement the submission and disclosure requirements of the HFCAA. The interim final amendments will become effective 30 days after publication in the Federal Register, and comments are due by the same date.
Succession—it’s not just a great TV show. (And when does the new season start?) As this article in Corporate Board Member contends, selecting the next CEO “is often the single most important decision a board will make, yet between a quarter and a third of companies don’t have a succession plan in place—and even those who do often get it wrong.” Survey data in this post from Russell Reynolds Associates revealed that, even in the face of the pandemic, over 60% of responding directors “stated that their board had not reviewed or updated the succession plan for the CEO and other key executives in light of the health risks posed by the COVID-19 crisis.” Moreover, 70% of the largest companies (annual revenue of $10 billion and over) had not reviewed the CEO succession plan. The post reports that the need to replace a poor CEO selection has been estimated to lead “to a loss of $1.7 billion in shareholder value in addition to a loss of organizational confidence and momentum.” Not a good look. Why does this happen? According to an article from PwC, it’s often because “just having the conversation is difficult.”
On Friday, the SEC’s Asset Management Advisory Committee met to discuss various matters, including possible recommendations to the SEC regarding—what else?—ESG. The latest version of subcommittee draft recommendations do not advocate a change from the current materiality disclosure requirements. Rather, they support adoption of mandatory standards to guide those materiality requirements, standards that take a “parsimonious” approach with a limited number of material metrics by industry—not exactly the “comprehensive” direction that the SEC appears to be headed, at least at the moment. Although the recommendations address investment product disclosure, the focus at the meeting was primarily on company ESG disclosure as the necessary predicate to investment product disclosure. Accordingly, the Committee heard from a panel of issuer representatives, who expressed a variety of views, but on the whole, appeared to advocate a cautious approach.