Harvard Prof Sues NYTimes

Yesterday, Professor Lawrence Lessig joined the parade of famous people who have sued the New York Times, over the years, for an almost inexhaustible list of alleged defamations.  This particular lawsuit is interesting in two different ways.

First, the defamation is characterized as being based upon “clickbait.”  This is the practice that, in today’s world, people click through news posted on media and all they look at is limited to the electronic headline.  Putting aside the substance of the underlying claim, the practical effect of finding liability here will put pressure on the way in which media sets headlines both electronically and, likely, in traditional type formats. 

Anyone who has attempted to write a headline that fits into the allotted space knows that it is not always possible to capture the nuance of the situation in five or eight words; sometimes, you actually have to read what follows.

The second aspect of the case is substantive:  the claim is that, notwithstanding Lessig’s efforts to set the record straight, the Times missed the point that in fact Lessig was not endorsing the actions of MIT in accepting donations from Jeffrey Epstein (a wealthy and convicted sex offender who killed himself while in prison facing sex trafficking charges).  It may be that Lessig’s efforts will be complicated by the fact that he seemingly, and admittedly, changed his view of the propriety of MIT’s actions, over time. 

Not surprisingly, the Times promises a vigorous defense, particularly since Lessig’s prior complaint to the Times was carefully reviewed by “senior editors” and rejected.  Stay tuned.

Proxy Season: Hot Topics

The usual question put to C suite executives and directors, in an effort to jumpstart a panel or an interview, is:  “What keeps you up at night?”  That list for the upcoming proxy season seems to include the following:  management of personnel (which includes compensation, diversity, and culture); “ESG” which is the current buzz word for “environment, sustainability and governance,” with an emphasis on climate change; actions by the SEC concerning shareholder proposals and reining in proxy advisory companies; implications of the much-discussed Business Roundtable statement suggesting that corporations owe duties to employees and broader society, and not just to shareholders. 

An expert panel convened on January 14 by the New England Chapter of the National Association of Corporate Directors provided interesting perspectives; that panel included representatives of firms which advise directors, a representative of Glass Lewis (a proxy advisory firm), and an investment manager.  Interestingly, the panel did not seem to include any actual directors affected by these topics.

One noted development is the transformation of the compensation committee, which used to be concerned almost exclusively with fixing the pay of the CEO.  Now that committee is being repurposed, emphasizing employees below the CEO level, human resource policies concerning harassment, diversity, pay parity, succession below the CEO level, and how to approach the “five generations” now in the workforce.  These committees have been renamed by at least 20% of the surveyed public companies, and 40% of such committees already have been repurposed in the above manner.

Finally, the SEC has proposed two rules (comment period in each ends February 4):  the first would tighten access to inclusion of shareholder proposals in proxy statements (no surprise: opposed by investors); and, a controversial regulation of proxy advisors, requiring conflicts disclosure and affording companies the opportunity to review and comment on advisory reports prior to their release.

When the mandatory say-on-pay votes for shareholders in public companies was launched by the SEC pursuant to Congressional mandate, I considered this development unimportant.  After all, the votes are advisory only and are not nuanced:  your shareholders vote in favor of or opposed to your executive compensation, period.  Seems that I underestimated the use to which that vote would be put by proxy advisors; the Glass Lewis representative on the panel, noting that the average approval rate is approximately 96%, said that it inquires of companies where investor approval of compensation is less than 80% (a percentage which you might think would be deemed robust).

Insider Trading Re-booted

The Second Circuit on Monday made insider trading a lot more risky by permitting the government to assert a criminal complaint against a tipper without showing that the tipper received personal benefit by reason of providing the tip.

Over the past couple of decades, the courts had grafted a requirement to show some benefit to the tipper in order to create liability when relying on the ’34 Act, setting off a series of confusing cases wherein the effort to define the requisite benefit became increasingly esoteric– receipt of money was easy, but what about gifts, or situations where benefits were inherent in close personal relationships.

The Second Circuit permitted a conviction to stand without even addressing the question of personal benefit by utilizing a different statute, Section 1348 of Title 18, which addresses securities fraud in general. See US v Blaszczak.

Note that neither the ’34 Act nor the text of Title 18 mentions the words “tipper” or “tipee” or “tipping.” There is a House bill that would address tipping directly, although it is too early to tell if anything will pass Congress and whether any such Act would adopt or reject the “benefits” requirement.

Homeopathic Drug Regulation

Somewhat below the radar screen, in late October the FDA has changed the ground rules concerning manufacture and distribution of homeopathic drugs.

Refusing to endorse the then-status quo policy by issuing an official regulation, the FDA stated that the current policy does not reflect the “current thinking” of the Agency as it is inconsistent with the Agency’s “risk-based approach to enforcement generally.”  This “new” approach apparently requires premarket approval from the FDA.  The current Agency thinking appears to be that homeopathic drugs continue to have certain related health issues.  The FDA also warned that consumers opting for homeopathic products were likely bypassing “medical products that have been scientifically proven to be safe and effective.”

This is a complex area.  The FDA is receiving comments on its current position until January 23, 2020.  Those interested in further detail will need a deep dive; one good place to start is reading the Federal Register FDA announcements during the last week of this past October.

Proxy Access

Earlier this month, the SEC proposed amendments affecting the process by which shareholder proposals are evaluated for inclusion in public company proxy statements.

In the proposed amendments, the SEC has maintained the $2,000 minimum ownership requirement, but shareholders seeking a place in the proxy process must have held those shares for at least a three year period so as to demonstrate a long-term investment in the company.  Further, the requirements for affirmative shareholder votes for re-submission of defeated shareholder proposals have been increased in a sliding scale of between 5% and 25% prior support before resubmission is permitted.

Comments to the SEC can be made until in early January.  The import of these changes appears related to an attempt to bar shareholder proposals propounded by small shareholders who take a stock position just for the purpose of exerting policy pressure on the issuer, divorced from any true interest in the shareholder’s economic stake.

Trends in Executive Comp

It is boom time, particularly in the tech sector, and CEO compensation is climbing.  Comp consultants are in their heyday.  Twenty-five years ago, comp consultants were hired by management; today they are hired by boards of directors to figure out what to pay the C-suite.

At last Tuesday morning’s breakfast meeting of National Association of Corporate Directors/New England, an expert panel discussed the factors that enter into fixing CEO comp.  Needless to say, there were no pat answers.  However, certain themes emerged.

First, what are you aiming for?  What does the company need?  Is it all about the price of the stock?  To what degree does ESG enter into the equation?

Second, you are after all dealing with people.  Before getting embroiled in the metrics, what about the personality, and the goals and passions, of the CEO?

The experts guiding the discussion wanted to focus on current compensation (base salary and target bonus) and then long-term incentives, and whether those incentives should be tied to performance or longevity.  The answer, not surprisingly, is that each category needs to be filled to some degree.  There was also an expression of fear with respect to explaining to proxy advisors what the public company board was doing.  There was an undercurrent that if you did your job you could explain it to ISS, and a counter undercurrent that sometimes ISS didn’t listen.

One significant consideration:  it is very expensive to hire a new CEO, someone who is making a lateral move is likely to be seeking a step-up in salary.  There is a balance to be struck between paying for the performance you are getting and paying more for an unknown level of performance.

I’ve Been Thinking

Don’t normally post about international or domestic politics, but over the last week or so I found striking similarities between the political pressures in China and in the United States. My comments are not designed to be partisan (those thoughts are not the subject matter of any of my posts).

I start with a post by George Friedman, a noted political scientist and commentator whose viewpoint fairly can be summarized (at least by me) as “geography is history and does not change.” At risk of collapsing too much data into this restatement, I believe he sees the history of China since it was opened to the West in mid-19th century as a tension between the internationally oriented trading areas on the coast and the left-behind inland areas. One suggestive factoid: when Mao wanted to seize the country he had to leave the coast, take the great march inland, and find his army in the hinterlands.

Today’s on-line mid-day NBC News had an interesting piece on US politics; seems our US equivalent of this dynamic is not all about the coasts so much as those US areas with robust international airline contacts. NBC divides the country based on international orientation of airports, and those areas with substantial international exposure (many but not all are along the coasts) are trending Democratic and those airports in non-international areas (different from “rural areas”) are trending the other way.

Without drawing any conclusions about American elections or Chinese policy, I was struck by what seems to be a common socio-political dynamic: areas of a country end up with different outlooks and sensibilities depending on exposure to non-domestic exposure, and these differences appear to have significant rather than merely interesting political ramifications. This seems logical when you think about it, but never thought about it that way before, and sorting the US polity by airport analysis I thought was fascinating.

Blog posts don’t have the space for deep dives, but those interested might take a look for themselves.

SEC Initiatives for 2020

On Monday of this week the SEC addressed its enforcement initiatives for the coming year. No major changes, but things to note:

The Commission lacks staff to police all issues, including cyber issues. It expects all companies to have a cyber policy in place to warn the public of the risk and to make disclosures if there is an incident. (They noted their prosecution of Yahoo, which suffered wholesale data breaches.) This was in reply to a question as to whether the SEC would hold boards accountable, but does not really resolve that issue one way or another. Later it was noted that in 70% of its cases, the SEC in fact names individuals as well as the companies involved.

The SEC also sent yet another signal warning about coin offerings as involving securities, and thus a need for disclosure and for either an exemption from registration or undertaking such a registration.

A couple of interesting insights into SEC operations:

Lack of money for staff, and the disruption of the government shutdown, limits SEC cyber focus to larger companies, number of breaches which were not disclosed properly, and whether some other government agency (or country government) is already taking action.

The SEC is struggling under a learning curve to keep up with the increasing sophistication of matters requiring attention, particularly since crimes develop quickly and are effected electronically. But they note one positive fall-out of the staff shortage of people and resources: the SEC claims it is learning how to work more efficiently to cover its policing beat.

M&A Litigation Goes Federal

It used to be routine for law firms to file litigation against parties to M&A transactions, alleging among other things inadequate disclosure of material facts and unfair compensation to equity holders of the acquired party.  Many of these suits were lacking in substance and, of course, many ended up in Delaware State Courts by definition.  A “settlement” between plaintiffs’ attorneys and the companies would result in the provision of some additional disclosure, typically of little value to target shareholders, and the only cash compensation would come by way of the extraction of legal fees in favor of plaintiffs’ counsel. 

Companies were relatively anxious to enter into these settlements, paying small sums of money in exchange for a judgment which protected them from future substantive litigation based on actual corporate improprieties.  In a way, merger partners were purchasing future anti-litigation insurance for short dollars.

The Delaware Supreme Court, in a widely reported 2016 decision, put a clamp on this practice by noting in fact that many of these settlements were useless to shareholders and, therefore, not worthy of compensation of lawyers.

Lawyers, being ingenious, have started to bring these claims in Federal Court.  Federal judges, spread all through the United States, do not have experience with such matters.  They do not necessarily follow the Delaware lead.  There has been an incredible proliferation in Federal litigation of this sort.  Many transactions were challenged in multiple jurisdictions.  One law firm was reported, through approximately the end of September, 2019, as having filed 163 complaints in Federal District Courts opposing mergers, alleging inadequate disclosure in all but one of these filings.

One might expect that Federal Courts will end up where Delaware ended up for the same reasons of administration of justice.  However, no one has a fix on the timeline.

Easier IPOs

Today the SEC announced an amendment, effective in about two months, of regulations that will allow all companies to “test the waters” for an IPO without risking violation of the Securities Act. The original regulation allowed emerging companies (as defined) to speak to certain qualified investors (large and sophisticated, as defined) to test the market by asking potential investors as to their level of interest in an IPO that was going to be filed or had just recently been filed. Absent this regulation, such contact in most instances violated Section 5 of the ’33 Act as a solicitation of investment without an effective Registration Statement. The purpose was to jump-start investment in emerging companies.

The expanded regulation makes this “testing the waters” approach open to all companies regardless of size or stage of development, again designed to foster greater use of the Federal securities registration system. Why now?

You no doubt have observed that many large and successful companies, indeed some unicorns, have remained privately held. And, helped by registration relaxation under the ’34 Act, these companies could grow, have many shareholders, permit some trading of their securities, all without ever having to become subject to Federal registration and disclosure and governance control under any Federal law. This resulted in a decline in IPOs. This decline was thought to be to the detriment of the regulated trading markets. The SEC has taken this new action in order to increase “the likelihood of successful public securities offerings,” according to SEC Chair Jay Clayton.