SEC Changes OTC Rules

Yesterday, the SEC made significant changes to the standards brokers must meet in order to quote stock OTC.

These changes are detailed by amending SEC Rule 15c2-11; here are the important take-aways, bottom-line: more information is needed before a broker is allowed to deal in OTC stock (those securities not benefited by the disclosures required by listing on the recognized trading platforms); many OTC stocks have not provided this kind of information for a long time; some may not have the resources or the interest in complying.

These changes may thus make it impossible for investors to purchase OTC securities in certain companies. But those potentially most impacted are the current owners of OTC shares which now the brokers cannot list. Owners may be stuck as investors unless they can sell their shares on a negotiated one-off with a known buyer.

To soften the blow: there is a nine-month phase-in; companies can apply to the SEC for relief (not clear what the criteria are); the SEC may permit establishment of a so-called expert market where OTC shares without requisite filed information under 15c2-11 may be traded by (undefined) sophisticated or professional traders.

Interestingly, the SEC has been pushing to democratize access to the initial private sale of company shares by breaking down the two-tier system that permitted the smart and wealthy to buy while excluding the Main Street investors; and now, on the OTC resale side, they are suggesting institution of a two-tier model. How all this sorts out will be something to behold.

D&O Costs Spike

COVID keeps impacting markets in unanticipated ways. Most recent reports are a sharp upwards spike in director D&O insurance premiums. Some brokers report average increases in the US as between 60% and 74%.

Drivers: risk of litigation based on COVID, and increased risk of bankruptcy generally (D&O traditionally has covered directors even when companies are before the Bankruptcy Courts).

Companies which are financially weak may find that their insurers may also alter coverage to exclude claims heard in bankruptcy; the details of this exclusion are not clear to me.

COVID comes on top of other market dynamics which tend to increase risk and thus premiums: increased class action litigation, with new foci such as cyber breach and failures of corporate culture.

Future of Working Remote

Those of you who have ventured into downtown Boston have described the experience as a trip into emptiness; one of my partners remarked that you could hear crickets on the streets. Many people reading this post are working entirely or mostly remotely, and everyone says (vaguely) that this is a permanent thing. But what does that mean?

Enter a current study by Harvard Business School, which tries to put a metric to the generalization. Short answer is they estimate that 16% of the US workforce will work remotely at least two days a week once the “new normal” arrives.

Predictably, the higher the sophistication of the job and thus of the worker, the more likely this result. At present, that cohort is able to work remotely and has found reasonable levels of efficiency– no startling news here. Somehow, I find the Harvard projection very modest, as I would expect a much greater shift away from central offices, but that perception may be colored by personal experience and the currency of the pandemic threat.

Impact on real estate markets is not difficult to guess. Combined with new emphasis on space efficiency in office design (fewer square feet per employee) and reduced need for file storage (going electronic), remote working will mean empty city offices. Theoretically. No doubt there will be industry variables; hard to imagine life sciences being remote without labs for a simple example.

Personal reports from New York, again anecdotal, suggest a major permanent shift. Will executive functions be driven to the home or at least to the suburban areas and out of the urban core due to future concerns about COVID 19 and similar fears? I know of several people moving out of NYC to the “Island” on a permanent basis. I have a client presently looking for office space in Manhattan and per the broker the choice in size, location and price point is staggeringly large. Today, someone told me they bought a house in Maine as a permanent non-Boston work locale.

Lastly, query the impact on a trend for executive employment becoming materially remote on economic disparity. Many lower end jobs support working in the city cores, which are also generally accessible to lower income employees. You can make your own intuitive assumptions about maintenance and cleaning workers, building receptionists and parking garage attendants, waiters and cooks in restaurants, other city-based support trades (think about dry cleaners, hair salons, shoe repairs, eye glass stores to name a few such trades practiced in close proximity to my downtown office). Not so easy to relocate the folks who staff these functions to the Westons and Shaker Heights and Hamptons, even if the base need for these functions remains to some degree.

COVID Goes to Court

As I sit at my computer writing this post, I have at my side a single-spaced 187 page document listing in very brief summary all identified US court cases relating to COVID 19 — 1,522 of them. This data grows daily and is formally updated by our service provider every two weeks.

While intuitively this is not surprising, given the vast impact of COVID on society, business and politics, nonetheless a perusal of this list is elucidating as to the imagination of lawyers and the myriad interests of people and businesses which have been revealed and harmed by the pandemic. Clearly no blog post can give a comprehensive overview, but below are some selective items that provide insight.

Misrepresentations and fraud are alleged about efficacy of hand sanitizers, drugs, testing services, masks and PPE, and stocks touted in companies allegedly possessing anti-virus drugs or devices.

Persons with disability claim discrimination by reason of mask protocols, including for example a class action on behalf of the hearing impaired who cannot shop in stores where masks muffle words and cover lips.

Wrongful death against medical organizations and practitioners, cruise ship lines, nursing homes, and against the Republic of China for causing, failing to control or hiding facts about COVID.

Employment claims for improper firings and unsafe work standards.

Shareholder suits against companies for falsely claiming a COVID cure or for publishing optimistic projections in the face of COVID.

Suits for price gouging, breach of contract wrongfully (based on excuse of force majeure).

Suits against schools over tuition, testing, opening, not opening.

Suits against persons and companies for negligence in spreading COVID.

Suits to collect debts and rents not paid with COVID as the asserted defense.

Claims against insurance companies for failing to pay for losses due to COVID in a myriad of instances.

Constitutional challenges against orders to wear masks on the part of governments, based on impingement of free speech.

As if the above cases were not both expectable and depressing enough, I note that many court systems are running remotely, slowly, even barely. While court backlog and resolution of these cases are not the most pernicious fallouts of the pandemic, you can add these difficulties to the massive list of difficulties that will face the “new abnormal” — oh, excuse me please, the “new normal.”

Corporate Law: To Whom Do Boards Answer?

Today’s Wall Street Journal carries an op-ed by the two senior directors of the Harvard Program on Corporate Governance, which is both fascinating as to how corporations are managed and vital to an understanding of the job of a corporate director.

Simple (if simplistic) history: when I started practice many moons ago, it was quite clear that the role of the corporation was to profit shareholders by all legal means. Society recently has offered different goals, and ESG values have permeated corporate governance discussions. One year ago, the Business Round Table issued a famous Statement by over 180 major CEOs redefining the stakeholders to whom corporations owed duties to include employees, citizens, society.

So Professor Julian Bebchuk, chair of the Program, has attempted to survey the 180 companies signed on to the Statement. He found almost none of the companies responding had cleared the Statement with their Boards, and there is little reflection in amended company statements to support replacement of shareholders as the recipients of corporate benefits.

Interesting points: since the Statement calls for a fundamental shift in the role of the corporation (to whom do they answer?), the failure to get Board approval proves there will be no meaningful change; evidence on the ground proves that no changes are occurring.

The legal issues also are important: is it even possible to have ESG unless it can be convincingly argued that in the particular case it will add to shareholder returns? Most major companies are subject to Delaware law which is quite clear that primary duty is to shareholders. If you want to make societal goals primary, there is a wholly different mode of incorporation called a Public Benefits Corporation with its own set of statutes. This implies that a company formed under the General Corporations Act is not permitted to adopt a strategy unless it is believed by the board to ultimately profit shareholders.

Can ESG be saved by an assertion that at some point a corporation doing the right thing for society will surely be favored and be profitable and free from loss of customers and loss of good will? Need boards make specific findings in such a case, with assumptions and time lines? Do all beneficiaries of ESG realistically qualify to be part of an argument leading to shareholder value? Why does Professor Bebchuk suggest that perhaps ESG for the sake of stakeholders other than the equity is legally problematic (as well as not being pursued by its putative proponents)?

LIBOR Revisited

Seems we have been awaiting the death of LIBOR for years, and this benchmark measure of applicable interest rates in loans formally expires at the end of 2021. Of course, credit facilities entered into today quite often extend beyond that date; how is interest to be calculated per an agreement entered into today but relating to a period after LIBOR is gone?

Historically there have been two approaches per the US Commission dealing with this per the Fed: kick the decision down the time line (“amendment”) to see what makes sense nearer the end, or fix the replacement rate now (“hardwired”). The former provides flexibility but also will cause a mechanical crunch near the last date; the latter makes life easier but is indeed hard-wired.

In June the Committee stopped recommending the amendment approach, opting for hardwired present decision making. There is also the option to kick in the new measure before LIBOR dies.

The new available metrics are still up in the air, however. Variants of something called SOFR are being discussed; the details are beyond our scope and today possibly arcane to all but those involved in syndicated loans. But for those who are doing smaller loans with maturities that implicate the death of LIBOR, I offer the following suggestion (which is music to the ears of lawyers): better consult with your attorney.

Corporate Political Spending

In days of pandemic, social unrest, global warming, ESG and demands for social justice, companies are finely attuned to their public relations image. Both through direct advertising and the usual output during proxy season, companies try to find the right thing to say in meeting public expectations on key issues.

A recent survey from the Center for Political Accountability examined corporate political spending through so-called “527 non-profit organizations” and found that the money does not always support professed corporate policies. This may be a reflection of lack of rigor in supervising the donations for compliance; hopefully, it is not a conscious effort to divert attention from what a company actually intends to support by putting forth false statements of belief.

Some recent academic suggestions, that boards conduct scenario playing to evaluate risk and consider mitigation responses in cases of failure to put their money where their PR indicates, seem too granular (boards should obey the maxim of “noses in, hands out” of company business). But, given reputational risk in the current environment, it does seem to me that as part of risk management a board should inquire about the mechanism that management applies to monitor political spends for consistency with public policy.

Work at Home: Tax Impact

I thought I had read something about every aspect of COVID’s tax impact on businesses and individuals, until the morning’s receipt of a tax alert from my own firm’s inside CPA firm. Consider this a shameless plug for going to the DuaneMorris website and then follow the obvious path to our COVID posts. However, here is a teaser :

First, say a company has a home office in Boston but all its employees for a long time are working from home in five other states. Where is the employee taxed? Where is the employer taxed; does the employer need to register as doing business (not likely) or to pay taxes (big question) in each state where an employee’s home sits?

The bad news is there is no uniform rule and you must look at the laws and waivers granted by each state; a dozen states including Massachusetts have provided written waivers and guidance which means conversely you are on your own in the other 38.

A gross generalization for Massachusetts: employees sitting at home in other states will not affect income tax apportionment for employers. Mass employers should continue to withhold for employees who normally work in the Commonwealth but now work at home elsewhere; further, rules are relaxed for business withholding obligations for telecommuters.

The above is general and as of today. Stay in contact with your CPA for personal and business advice; confirm your adviser has promised proactive communication, as laws and practices change.

It is usual for blog sites, as mine, to state that nothing here is formal legal advice, and for this subject that warning is doubly important.

Opening America: Discussion

This is my first post in over four months. There is so much “writing” out there, so many alerts and zoom conferences and reports, that it seemed to me that the last thing anyone needed was another talking head.

I am posting this blog based on a conversation this morning conducted by the New England Chapter of the National Association of Corporate Directors, which addressed factors that will bear on the nature and timing of the opening of American business, and indeed on the shape of future business and society.

Much that was covered was not novel: the acceleration of remote modes of business, the decline of brick and mortar and office space, the difficulties of workers of all levels in dealing with the present situation and the upcoming transitions.

But I did want to share a few comments that I found to be enormously telling, and here they are.

First, the pandemic is accompanied by an awakening of pervasive institutionalized prejudice. As the workforce is re-imagined and as delivery of services to customers is altered, there is a need to examine old practices to see if they included implicit bias and to make sure replacement modalities do not perpetuate that bias. This may fall in the category of never wasting a crisis.

Specifically, as an example, hiring often will be done on-line, including via interviews. Mechanics are needed to avoid bias. Interviewing for white collar jobs often was done at certain colleges which, on examination, have an ethnic mix that makes it unlikely to find diverse candidates; one presenter said, in effect, we just aren’t going to go there in the future.

Another example: delivery of services requires concern for the front-line service providers. To protect them they have been told to stay out of COVID hot spots. But many such hot spots are densely populated poorer areas, and additionally poorer areas lack basic infrastucture that service delivery would enhance; there has been no reason to offer improvements where basis services do not yet exist. The result is systemic failure to provide support services to certain populations, doubling down on resulting prejudice and poverty.

Another speaker hit the same general dynamic of societal inequality in a different way, noting that government policies applied during COVID are likely to have a net societal effect that increases the economic disparity in America at the very time that there is growing demand to identify and shrink that disparity; governmental and business policies need to be sought to counter this trend.

These comments lead to a call to action by business which is more human-centric. They lead to many foci coming to the forefront of business practices today: greater scheduling flexibility for workers under stress or with children needing care; accommodations in collections of loans, mortgages or bills for purchases; rethinking hiring patterns and delivery patterns with a conscious effort to alleviate economic disparity and poor treatment of labor as well as of diverse consumer groups.

Corporate charity, down to funding things as basic as food, has begun to be reallocated and is presumed will remain more socially conscious. Companies employing office workers are stockpiling protective gear and reconfiguring space. HR departments will need to allocate resources to mental health issues, as the lasting psychological effects of the pandemic will almost surely outlast the virus itself.

It is true that executives who are asked to speak, and are willing to speak, at programs such as I have described will tend to be articulate and view themselves as sensitive to the joint lessons of the pandemic and the social unrest in America. Put another way, business persons of a less enlightened viewpoint are likely to avoid articulating social views that are out of tune with the empathetic thread of much current business discussion.

But as Americans slowly, ever so slowly meander back to the euphemistic “new normal,” working different hours using more technology and meeting in person far less as everyone hopefully predicts, at least some business leaders are seeing the emergence from COVID as an opening to meet the challenges that have converged on us with sharper focus: discrimination, inclusion, economic justice,environmental issues personal stress, injury to children, and more human-sensitive approaches to labor and to consumers.

So on this day, which opened with our newspapers unsettling us with news that a couple of hundred thousand Google employees would be remote for what amounts to almost another entire year, perhaps there is an opportunity for business to plan a newly configured and improved future.

As one speaker noted: “Chance favors the prepared mind.”

Sole Discretion in Delaware Contracts

Sometimes, in order to give yourself a complete “free pass” in making a decision under a contract, you will provide that you may reach that decision “in the party’s sole discretion, with or without cause.”  Does that work?

Circumstances vary based on the facts, and the treatment of such language in a contract, for example for the sale of goods, may face a different standard from that applied to individuals in a joint business relationship.

In the recent Skye Mineral case, the Delaware Court of Chancery determined that a provision relied upon by a member of a limited liability company, permitting a decision which by the terms of the LLC agreement could be made in such party’s “sole discretion,” does not really mean what it says.

Parties engaged in a joint enterprise owe fiduciary duties in certain circumstances.  In partnerships particularly, the obligation is high.  Limited liability companies are often thought to be analogous to partnerships.  The situation in corporations is more muddied, and while in Massachusetts fellow shareholders in closely held corporations often are found to have various fiduciary duties to each other, the rulings in Delaware can fairly be said to be not quite so clear.

In Skye Mineral, the Court held that “sole discretion” language did not waive fiduciary duties of loyalty.  In order to waive those fiduciary duties, the document must specifically waive all “fiduciary duties, including duties of loyalty.”

Reference is made to my immediately prior post concerning “Contracts and Virus.”  These two post, taken together, make it clear that “boilerplate” contract language does not constitute good drafting.  I suggest recipients of this post take a look at their present form documents; is it time for a careful review?