Recent investigations share findings that over 130 US Federal judges presided over cases in which they had a financial conflict of interest since 2010.  In a 422-4 vote this week, the House passed a bipartisan bill that would require US federal judges to share their financial disclosure reports publicly.

Under this bill designed, which is modelled on the Stop Trading on Congressional Knowledge Act of 2012 (the “STOCK Act”), which makes insider trading for members of Congress illegal, US Federal judges must now:

  • disclose stock trades worth over $1,000 within 45 days; and
  • publish securities transactions reports online within 90 days of filing.

The bill also requires the creation of an online database containing information (without redactions) related to US Federal judges’ financial disclosures. The database must be available for download, complete with sorting and searching capabilities.  It is unclear whether the legislation will be enacted.

In their dataset and working paper, titled The Rise of Dual-Class Stock IPOs, Dhruv Aggarwal, Ofer Eldar, Yael Hochberg, and Lubomir P. Litov, find that the rise in the number of dual-class IPOs is tied to the increase in bargaining power of founders. In recent years, before 2019, the public markets saw a decrease in public companies but an increase in the number of companies electing to go public using a dual-class stock structure, especially companies in the technology sector, including, for example, Google, Facebook, and Snap. Additionally, almost half of IPOs in recent years raised financing through VC investment. To analyze the changing public markets, the authors review a full sample of IPOs completed from 1994-2019, for a total of 5,760 IPOs, 614 of which are dual-class IPOs. Notably, they identify a range of dual-class structures: those controlled by founders, parent and holding companies, directors and officers (non-founders), and VC firms. They compute the wedge, or the difference between voting and economic rights, for different controllers in these structures in order to explore different motivations for dual-class structures.

They identify possible trends that may have contributed to the rise of dual-class firms in recent years: VC firms being more tolerant of founders control, cloud industries allowing firms to require less capital, and the increase in the number of foreign issuer IPOs that tend to be founder-controlled. The results of their model show that the greater the bargaining power of the founder, the more likely the IPO will be dual-class. The availability of VC financing increases founders’ bargaining power—one standard deviation increase in VC individual financing (total investment) of $5.62 billion is associated with a 3.1% higher probability of founder control and a one standard deviation increase in individual dry powder (capital available) of $30.4 billion is associated with a 2.9% increase in the probability of founder control. Therefore, founders having more bargaining power may contribute to VC firms becoming more tolerant of their control. In reviewing trends over time, there were increases in foreign- and US founder-controlled dual-class stock structures, but this increase was stronger for foreign issuers. Meanwhile, cloud industries have also seen a dramatic increase in founder-controlled IPOs during these time periods. Through examining the costs of doing business, their results point to a decreased need for capital as a result of cloud computing contributing to the weaker bargaining position of VC investors.

In summary, these findings demonstrate the rise of dual-class structures is primarily due to founder-controlled firms in software and service industries and in foreign issuers. The most salient factor in predicting whether an issuer will choose a dual-class structure is the amount of private financing available.

The US Securities and Exchange Commission (the “SEC”) proposed changes to the proxy solicitation rules on November 17, 2021. This Mayer Brown Legal Update discusses the proposed changes that would rescind certain new rules adopted by the SEC in July 2020, which apply to proxy voting advice produced and disseminated by proxy advisory firms, otherwise known as proxy voting advisory businesses (“PVABs”).

Two pieces of legislation aimed at imposing additional regulations on special purpose acquisition companies (“SPACs”) were recently introduced in the US House of Representatives.  H.R. 5910, the “Holding SPACs Accountable Act of 2021,” sponsored by Rep. Michael San Nicolas (D-GU), and H.R. 5913, the “Protecting Investors from Excessive SPACs Fees Act of 2021,” sponsored by Rep. Brad Sherman (D-CA), were both introduced on November 9, 2021 and subsequently referred to the House Committee on Financial Services (the “Committee”).  On November 16, after a full committee markup, H.R. 5910 and H.R. 5913 passed the Committee and were ordered reported by a vote of 27-23 and 29-23, respectively.

H.R. 5910 proposes to amend the securities laws to exclude all SPACs from the safe harbor for forward-looking statements (the “Safe Harbor”).  Currently, only forward-looking statements made in connection with the offering of securities by a blank check company are excluded from the Safe Harbor.  The Securities Act of 1933 (the “Securities Act”) defines a blank check company as “a development stage company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person” that issues “penny stock.”  The House bill would amend Section 27A of the Securities Act and Section 21E of the Exchange Act to replace the term “blank check company” with “a development stage company that has no specific business plan or purpose or has indicated that its business plan is to acquire or merge with an unidentified company, entity, or person.”  Without reference to issuing penny stocks, H.R. 5910 would exclude all SPACs from the Safe Harbor, not just SPACs issuing penny stock.

In May 2021, the Committee circulated a draft version of H.R. 5910 in advance of its hearing, entitled “Going Public: SPACs, Direct Listings, Public Offerings, and the Need for Investor Protections.”

H.R. 5913 proposes to amend the Investment Advisers Act of 1940 (the “‘40 Act”) and the Exchange Act, to prevent investment advisers, as defined by the ‘40 Act, and brokers and registered representatives of brokers, as defined by Exchange Act, from recommending SPAC securities to a non-accredited investor unless the SPAC’s promote or other economic compensation is less than 5% or the SPAC makes certain disclosures mandated by the Securities and Exchange Commission (the “Commission”).  The legislation would compel the Commission to promulgate a rule requiring the disclosure by SPACs of compensation arrangements, such as a promote, granted to the sponsor of the SPAC when the arrangement would lead to dilutive effects affecting investors in the SPAC.  The dilutive effects of the awards of promotes have been widely criticized.

In April 2021, the first SPAC-focused legislation introduced, S. 1405, the “Sponsor Promote and Compensation (SPAC) Act,” attempted to address the issue of dilutive effects of the compensation structures of SPACs through enhanced disclosure and transparency. The Senate bill was referred to the Committee on Banking, Housing, and Urban Affairs in April, but has not advanced since.

SEC Chair Gary Gensler testified for the second time as Chair before the Committee in early October. In his prepared remarks, due to certain fees and potential conflicts inherent within SPAC structures, Chair Gensler asked the Staff of the Commission for recommendations relating to enhancing disclosures by SPACs so investors can better understand the associated costs and risks. When questioned about timing a proposed rule, Chair Gensler mentioned he had received preliminary recommendations on enhanced SPAC disclosure but was not prepared to confirm a timeframe.

In her opening statement during the November 16 full committee markup, Committee Chairwoman, Rep. Maxine Waters (D-CA), highlighted that “SPACs…can go public and avoid key IPO requirements,” which, she continued, exposes retail investors to “real risks.”  As SPACs continue to search for initial business combination targets, we expect regulatory and legislative efforts to try to address these and other perceived issues associated with the popular IPO alternative.

On November 17, 2021, the US Securities and Exchange Commission (SEC) adopted mandatory universal proxy rules that will apply for all contested director elections. Under the final rules, each universal proxy card must list all management and dissident nominees for director, enabling shareholders voting by proxy to pick and choose among the different slates of candidates, similar to the manner in which they would be able to vote for directors in person at a contested shareholders meeting. At the same time, the SEC also made changes to proxy cards and proxy statement disclosure requirements regarding voting standards and certain voting options applicable to all director elections. The amendments will apply to shareholders meetings held after August 31, 2022. This Mayer Brown Legal Update summarizes the amendments and notes practical considerations for companies.

December 8, 2021 Webinar | Hosted by Intelligize
1:00pm – 2:00pm EST
Register here.

It is once again time to prepare for proxy and annual report season. Companies will have to weigh various considerations this upcoming proxy season, including the objectives of new leadership at the US Securities and Exchange Commission, reporting obligations relating to human capital and environmental, social and governance (ESG) matters, and, of course, discussing in various contexts the ongoing effects of the COVID-19 pandemic in a company’s filings.

During this session, Mayer Brown partners, Jennifer Carlson and Christina Thomas, Mayer Brown counsel, Laura Richman, and Georgeson Managing Director of Business Development & Corporate Strategy, Brigid Rosati, will discuss issues impacting the 2022 proxy season. Topics will include, among others:

  • Shareholder Proposals
  • ESG matters
  • Human Capital Management
  • Board Diversity
  • Virtual Meetings
  • Say-on-Pay
  • Compensation Disclosures
  • Director and Officer Questionnaires
  • Risk Factors
  • Management’s Discussion and Analysis
  • Electronic Signature on SEC filings

This LexisNexis practice note examines some of the issues most commonly raised in Securities and Exchange Commission (SEC) staff comment letters on registration statements filed for IPOs. It is intended to guide you, as counsel to an IPO company, in assisting your client in efficiently navigating the SEC comment and review process. This piece discusses comments that apply to IPO prospectuses generally, including comments on plain English principles and expert consent requirements, and comments on specific sections of a prospectus, including the risk factors, management’s discussion and analysis of financial condition and results of operations, and others. It provides excerpts from, and links to, representative SEC comment letters, and offers drafting and other tips to help issuers avoid receiving these types of comments or, failing that, anticipate and respond effectively to the SEC’s concerns.

Read the full article here.

On November 1, 2021, the President’s Working Group on Financial Markets (PWG) released its much-anticipated Report on Stablecoins. The Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency joined the PWG in issuing the report, which provides an overview of how stablecoins are created and operate, discusses the risks they present (including regulatory gaps), and makes a series of recommendations for addressing these risks. In this Mayer Brown Legal Update, we summarize key aspects of the report and look ahead to key questions and next steps for the regulation of stablecoins.

November 17, 2021 | Webinar hosted by IFR
12:30pm – 2:00pm EDT
Register here.

Mayer Brown is proud to sponsor this year’s 2021 US ECM Roundtable, hosted by the International Financing Review (IFR). This year’s virtual event brings together a panel of senior industry professionals to evaluate the current state of play within the market.

The Roundtable, SPACs at a Crossroads, will be moderated by IFR’s US Editor, Stephen Lacey. Panelists will examine questions including:

  • How have SPAC IPO terms changed over time? What are the implications of “Bring Your Own Buyer” and back-end funding/redemptions for a merger?
  • Where does the SEC stand on its new accounting treatment for SPAC warrants? Is the accounting treatment fair? What are the implications, if any, on SPAC funding?
  • What are the plaintiffs alleging in the recent spate of lawsuits against certain SPACs? Is there merit to their claims? If the litigants prevail, what will the implications be?
  • Why are SPAC investors redeeming and how frequently? Is there precedent for PIPE investors to backtrack on commitments?

Panelists

  • Amanda Abrams, FinTech Masala
  • Craig DeDomenico, Stifel, Nicolaus & Co.
  • Don Duffy, ICR Strategic Communications & Advisory
  • Matthew Perkal, Brigade Capital Management
  • Anna Pinedo, Mayer Brown
  • Eric Roddy, William Blair & Co.
  • Moderator: Stephen Lacey, IFR

On November 3, 2021, the staff of the Division of Corporation Finance (the “Staff”) of the US Securities and Exchange Commission issued Staff Legal Bulletin No. 14L (“SLB 14L”). SLB 14L reverses course on Staff positions taken since 2017 with respect to the ordinary business grounds for exclusion of shareholder proposals from company proxy statements and the economic relevance grounds for exclusion.
SLB 14L also addresses the use of emails in the shareholder proposal process.

In addition to providing further detail on SLB 14L’s changes, this Legal Update also discusses practical considerations for companies, including how the policies in SLB 14L will make it more difficult for companies to exclude environmental, social and governance proposals from their proxy statements.