Public Companies

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Thursday, March 7, 2019
1:00 p.m. – 2:00 p.m. ET

During this webcast, we will review the overall areas of focus identified by the SEC Staff for public companies, the disclosure issues that members of the SEC Staff have highlighted as important for upcoming annual reports on Form 10-K and Form 20-F, and discuss the particular hot button issues for life sciences companies.

During our session, partners Anna Pinedo and David Bakst, and Polia Nair (Ernst & Young) will focus on:

  • SEC comments letter trends;
  • Brexit, Libor and cyber disclosures;
  • Recent accounting pronouncements;
  • Milestones and collaboration and license agreement related disclosures;
  • Revenue recognition and contingent consideration;
  • Other MD&A disclosures.

To register, please click here.

In a recent paper titled “The battle of social media platforms: The use of Twitter, YouTube and Instagram in corporate communication,” author Pawel Bilinski analyzes whether using social media channels helps investors interpret earnings information.

The study focuses on companies that are included in the FTSE 100 index and, within that, on earnings announcements only.  In the period from January 2015 to April 2018, 64% of the FTSE 100 companies used Twitter to communicate earnings news.  Use of social media is more common among consumer and retail companies.  Most companies used Twitter, with usage of Instagram and YouTube being considerably lower.  The author considered whether use of social media strengthened the impact of earnings news.  Companies using Twitter had higher earnings responses.  Retail ownership increases in companies that communicate through social media.  A higher number of Twitter and YouTube Posts leads to more positive price reaction.  Social media communication is seen by investors as signaling a commitment to greater transparency.  The authors also considered whether higher press coverage for companies reduces the usefulness of social media posts, but found that Twitter postings lead to incrementally higher price reactions.  Finally, the study suggests that posts help align investor expectations about a company’s prospects.  Research analysts also have a more positive reaction to such posts.  By contrast, YouTube and Instagram usage appears to have little to no effect on investors’ ability to interpret earnings news.  All of this suggests that greater attention may need to be devoted to social media as part of a public company’s communications policy.

In a recent paper titled “Damage Control: Changes in Disclosure Tone After Financial Misconduct,” authors Rebecca L. Files, Alex Holcomb, Gerald S. Martin, and Paul Mason assess how companies change the tone of their required disclosures in order to mitigate the effect of financial misconduct. In evaluating tone, the study focuses on the percentage of negative, litigious, and uncertain words in corporate disclosures of 232 companies that were sanctioned by the US Securities and Exchange Commission or the Department of Justice. Following a review of disclosures, the authors found a substantial increase in the use of additional negative words in the periods during which the companies were facing regulatory inquiries or investigations and in the period following the announcement of an enforcement action. The authors also found that companies ultimately subject to an SEC or DOJ order generally used more negative words in their disclosures during the investigative phase. The authors posit that drafters of disclosure modify disclosure preemptively ahead of bad news in part as damage control. The paper also finds some evidence that increasing the use of negative language in disclosures mitigates lost reputation during the enforcement process.

In a recent paper titled, “Public or Private Venture Capital?” author Darren M. Ibrahim compares the relative benefits associated with reliance on private capital to fund start-ups and emerging companies with “public” venture capital in the form of securities exchanges like the London Alternative Investment Market, or AIM. The author looks at three such venture exchanges, the AIM, the German Neuer Markt, or NM, and Hong King’s Growth Enterprise Market, or GEM. The author did not use the Toronto Venture Stock Exchange because most of the listed companies are not technology-based companies. None of the three exchanges examined has proven as successful an approach to funding emerging companies as has the US venture capital model. The paper notes that in connection with investing in earlier stage companies, there are information asymmetry issues as well as agency costs. The author notes that, in part, the failures of each such exchange may be attributed to the manner in which these exchanges addressed information asymmetries and agency issues. In the case of the exchanges, corporate and securities law requirements were relied upon. In the US venture model, VCs rely on private contractual arrangements and staged financings to reduce asymmetries. Over time, the US venture model has proven to be more effective in funding successful growth companies. Proponents of capital markets reforms regularly recommend that US policymakers consider venture exchanges despite the lack of success of venture exchanges outside the United States. See full report here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3266756

On January 10, 2019, the staff of NYSE Regulation released its annual memorandum detailing important rules and policies applicable to listed companies. The memorandum provides helpful reminders for issuers (noting important rule differences for domestic and foreign private issuers) with securities listed on the NYSE and also highlights new compliance items. In particular, as previously announced, the memorandum notes that NYSE-listed companies are now required to provide notice to the NYSE at least ten minutes before making any public announcement with respect to a dividend or stock distribution, including when the notice is outside of NYSE trading hours. Additionally, NYSE-listed companies are now no longer required to provide physical copies of proxy materials to the NYSE if such proxy materials are publicly filed with the Securities and Exchange Commission (“SEC”) on EDGAR. The memorandum also provides important reminders specific to foreign private issuers, including with respect to semi-annual reporting. NYSE-listed foreign private issuers are required to submit a Form 6-K to the SEC containing semi-annual unaudited financial information no later than six months following the end of the company’s second fiscal quarter. The memorandum also includes the latest NYSE staff contact information for purposes of complying with notification requirements and contacting the NYSE in the event material news is released. A copy of the full memorandum can be obtained by clicking here.

A comfort letter is a letter delivered by an issuer’s independent accountants to the underwriters or initial purchasers that provides certain assurances with respect to financial information included in a registration statement, prospectus or offering memorandum used for a securities offering. Underwriting agreements and purchase agreements typically require the delivery of one or more comfort letters, in form and substance reasonably acceptable to the underwriters, initial purchasers or their counsel, as a condition to closing the securities offering. Comfort letters assist underwriters in establishing a due diligence defense under Section 11 of the Securities Act and in creating a record of their reasonable investigation of the issuer and its financial condition to ensure there are no material misstatements or omissions in the offering document.

In this Lexis Practice Advisor® Top 10 Practice Tips, we provide 10 practice points that can help you, as counsel to underwriters or initial purchasers, skillfully navigate the task of reviewing and negotiating comfort letters.

In connection with securities offerings, the underwriters or placement agents generally negotiate a lock-up agreement with the issuer, as well as with the issuer’s directors, officers, and, in the case of initial public offerings, control persons. The lock-up agreements provide the underwriters or placement agents with some assurance that new issuer securities will not be sold immediately following the proposed offering the sale of which might disrupt the trading market for the offered securities.

In this Lexis Practice Advisor® Top 10 Practice Tips, we provide 10 practice points to consider in drafting and negotiating lock-up agreements.

On December 18, 2018 the Commission published a Request for Comment on Earnings Releases and Quarterly Reports (the “Request”), which solicits public comment on both earnings releases and the frequency of periodic reporting. In the Request, the Commission notes that it is seeking to reduce administrative and other burdens for U.S. public companies without compromising investor protection.

To learn more, read our Legal Update.

The Securities and Exchange Commission adopted final rules requiring public companies (other than foreign private issuers and certain fund issuers) to disclose in proxy statements their policies regarding hedging transactions in the company’s securities by directors and employees.  The Commission was required by Section 955 of the Dodd-Frank Act to adopt such rules.

The Commission’s fact sheet notes that new Item 407(i) of Regulation S-K will require a company to describe any practices or policies it has adopted regarding the ability of its employees (including officers) or directors to purchase securities or other financial instruments, or otherwise engage in transactions, that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities granted as compensation, or held directly or indirectly by the employee or director.

The final rule text has not been released yet.