Securities Mosaic® Blogwatch
September 17, 2021
SEC Chair Goes to the Hill: A Laundry List of Projects
by Tom Gorman

Chair Gensler testified on Capitol Hill earlier this week, outlining key initiatives he is exploring. The list of projects that Mr. Gensler is implementing is long and daunting. The day after his testimony the Chair appeared on CNBC where he reiterated a number of the projects mentioned in his testimony (here). He also suggested that the Commission needs a budget increase and more staff.

The projects identified by Chair Gensler included:

Market structure: The staff has been requested to look at five market structure projects. For the treasury market the staff has been asked to work with colleagues at the Department of the Treasury and the Federal Reserve on how to enhance resiliency and competition. He also requested that the staff reconsider some initiatives on Treasury trading platforms and to evaluate leveling the playing field by making sure that firms who are significant traders in the market are registered as dealers with the SEC.

Non-treasury fixed income market: Staff has been requested to consider how to improve efficiency and transparency in the fixed income markets – corporate bonds and municipal bonds.

Equity markets: Three projects are on tap here: 1) greater competition and efficiency; 2) how to address conflicts; and 3) ensure a level playing field.

Security-based swaps: Most of the projects here are in progress. The agency is currently implementing new rules here. Shortly, new post-trade transparency rules will go into effect. The Commission also has to finish the rules for registration and regulation of security-based swaps execution facilities. Finally, the staff has been asked to consider the implementation of new Exchange Act Section 10B which is concerned with disclosure of positions in the area.

Crypto: In this area the agency has several projects underway that may need Congressional assistance: the offer and sale of tokens; crypto trading and lending platforms; stable value coins; investment vehicles providing exposure to crypto assets or crypto derivatives; and custody of crypto assets. The Commission is also working with the CFTC in areas where the two overlap. In addition, the agency is reaching out to to the Federal Reserve, Department of Treasury and Office of the Comptroller. He is also encouraging platforms to come in and meet with the agency.

Predictive data analytics: Analytics are a key part of the transformative time in which we live, notes Chair Gensler. Advances here could inadvertently reflect historical biases from various data sets. The Commission just published a request for comment on digital engagement practices.

Issuer disclosure: The staff has been asked to develop proposals keyed to disclosure around climate risk, human capital, and cybersecurity.

SPACs, China and 10b-51 plans: Initially, the staff is developing recommendations to enhance disclosure around SPACs. Second, while Congress passed legislation last year regarding foreign entity disclosure, the agency is working to enhance disclosures regarding Chinese firms. There was no mention of requiring that Chinese firms comply with the SOX requirements regarding inspection of audit work papers. Finally, the agency is examining how to tighten the rules around the use of 10b-5-1 plans.

Funds and investment management: One project focuses on accountability for funds which, for example, label themselves as green or sustainable or with similar phrases. A second centers on private funds and conflicts of interest where enhanced disclosure may be key. Finally, Chair Gensler believes that the agency needs to build greater resiliency for money market funds and open-ended funds.

Enforcement and examinations. Despite all the projects, Enforcement continues to be the cop on the beat. At the same time Examinations is the ‘eyes and ears of the Commission.”

The list of projects underway is clearly long and ambitious. It is also incomplete, not mentioning topics like gamification and payment for order flow. Nevertheless, Chair Gensler is clearly engaging in a very ambitious list of projects.

September 17, 2021
Cadwalader Discusses FTC’s About Face on Debt for Hart-Scott-Rodino Purposes
by Joel Mitnick and Ngoc Hulbig

In a recent blog post, the Acting Director of the Federal Trade Commission Bureau of Competition announced the reversal of the Federal Trade Commission’s (“FTC”) decades-long position regarding the treatment of debt repayment when determining whether a premerger notification filing under the Hart-Scott-Rodino (“HSR”) Act is required. Effective September 27, 2021, companies and individuals that do not file HSR based on excluding retired debt from the transaction value may face enforcement action. Perhaps even more concerning, the FTC also cast doubt in general on whether HSR practitioners may rely on past informal guidance from the FTC’s Premerger Notification Office (“PNO”), stating that “[t]hese informal interpretations are not reviewed or authorized by the Commission, and do not carry the force of law.” This is just the latest in a string of destabilizing blows to the framework of the HSR program, potentially raising the costs of doing mergers for both the parties and the government.

Background Information

Under the HSR Act, parties may not close transactions that meet certain dollar thresholds (adjusted annually) before filing a notification with the FTC and the Antitrust Division of the U.S. Department of Justice (“DOJ”) and then observing a mandatory waiting period (typically 30 days) during which the agencies review the deal. The first test requires that the value of the voting securities, noncorporate interests or assets being acquired meets a minimum “size of transaction” threshold of $50 million (adjusted to $92 million for 2021). Transactions valued at or below this threshold are not reportable. If a transaction meets the “size of transaction” threshold, but is valued at or below $200 million (adjusted to $368 million for 2021), then a second “size of parties” test must be met. If both the “size of transaction” and “size of parties” tests are met, or if the transaction value is greater than $200 million (as adjusted), then the parties must make an HSR filing under the HSR Act unless an exemption applies.

The question of whether a particular transaction is reportable is complex and often cannot be resolved through reference to the HSR Act and its implementing regulations (the “HSR Rules”) alone. When parties are unsure how the HSR Act and Rules apply to their transaction, they may contact PNO staff on a “no names” basis for guidance. The PNO fields “hundreds of inquiries each week, and thousands every year, asking for interpretations of the HSR statute and rules.” Some informal interpretations with broad applicability are selected by staff for inclusion in the FTC’s searchable database to be used as “a reference tool [by those] with similar questions.” Although the PNO always has cautioned that its informal guidance does not constitute legal advice, parties and HSR practitioners counseling clients generally have been able to rely on interpretations included in the FTC’s database, often contacting staff only to confirm that the FTC’s position on a particular issue is consistent with the most recently published interpretations.

Reversal with Regard to Treatment of Debt Payoffs

In determining the transaction value of an equity acquisition, the FTC historically has not included amounts used to retire debt of the target company. So, for example, the $100 million acquisition of a target carrying $25 million in debt would be valued at $75 million and would not require an HSR filing. This makes sense as the repayment of the $25 million in debt does not flow to the sellers and thus is not treated as part of the consideration received in exchange for the sellers’ stock. The FTC now has reversed its longstanding position, stating that, starting September 27, 2021, “the Bureau will begin to recommend enforcement action for companies that fail to file when retirement of debt is part of the consideration for the deal.” The about-face with regard to debt payoffs appears to stem from a concern that parties are “sidestepping the law” by structuring deals to have the target take on debt before the acquisition so that the value of the debt retired by the acquiring party can be excluded from the transaction value. However, this scenario already would be prohibited by HSR Rule 801.90 as a “device for avoidance,” so it is unclear why the FTC deemed it necessary to reverse course on the treatment of debt payoffs.

The Acting Director’s blog post refers readers to another FTC webpage for more details regarding the policy change. On this page, the FTC acknowledges that “not all debt retired as part of a proposed transaction is consideration,” and narrows the debt that must be included in calculating the HSR transaction value to any full or partial retirement of debt “where selling shareholder(s) benefit from the retirement of that debt.” No guidance is given, however, as to what types of debt would and would not be included in the transaction value for HSR Act purposes.

Based on the Acting Director’s blog post, it is reasonable to assume that the transaction value should include debt owed to or guaranteed by shareholders of the target (or affiliates or parent entities of either the target or the entity selling the shares) and debt incurred by the target to make distributions to selling shareholders (e.g., in leveraged recapitalizations). In addition, parties likely should include debt that was incurred recently or outside of the “ordinary course.” Without additional guidance from the FTC, the only type of debt parties may feel comfortable excluding from the transaction value may be long-term debt owed to unrelated third parties that has not been guaranteed by a selling shareholder or its parents/affiliates. Otherwise, with HSR compliance missteps potentially resulting in fines of up to $43,792 per day, merging parties can fully mitigate risk only by including all other debt into consideration, resulting in more filings to staff that already is overwhelmed with a record number of HSR notifications.

Risky to Rely on Informal Interpretations?

Along with the HSR Act and Rules, the FTC’s database of prior interpretations is an invaluable resource for HSR practitioners and the antitrust community. The FTC always has made clear that its informal advice does not have the force of law, but its interpretations generally represent the current thinking of PNO staff, who field thousands of requests for guidance on a “no names” basis in a given year. The published informal interpretations are an integral part of the HSR program, providing predictability and clarity for parties when determining their filing obligations and reducing the volume of questions to the PNO when recent informal guidance has been published for fact situations analogous to proposed transactions.

In her recent blog post, however, the Acting Director suggested that reliance on the informal interpretations provided by PNO staff “outside of the formal rules” may be misplaced, going so far as to rebuke those that rely on the FTC’s prior interpretations “as a substitute or supplement for their own legal analysis.” Stating the FTC’s concern that some of the informal guidance “may not reflect modern market realities or the policy position of the Commission,” the Acting Director stated that the FTC is “reviewing the voluminous log of informal interpretations to determine the best path forward.” It is unclear what that path forward will entail, but it appears to be part of the FTC’s broader effort to revise its guidance to the public, including updating the HSR Rules (as we previously discussed in connection with the Advance Notice of Proposed Rulemaking announced in September 2020). It also is unclear whether the Acting Director’s rebuke means that parties who directly solicit advice from PNO staff should not rely on staff’s response, which, while specific to the facts of their transaction, still would be informal, “not reviewed or authorized by the Commission” and “not carry the force of law.”

We hope that parties and HSR practitioners do not lose the ability to seek informal guidance from PNO staff, who are steeped in and are experts on HSR nuances, either directly by email or indirectly by reference to interpretations published on the FTC’s website. Losing the informal interpretation program, or effectively gutting it, will make the HSR process less certain for potential filers and less efficient for the agencies which will have to handle even more HSR filings.

Key Takeaways

  • Proposed transactions involving debt payoffs should be evaluated carefully to determine reportability under the HSR Act. The FTC will begin enforcing its new interpretation relating to the retirement of debt for deals closing on or after September 27, 2021. In the absence of additional guidance from the FTC, parties should consider including in the HSR “size of transaction” all debt other than long term-debt to third parties unrelated to the selling shareholders or their parents and affiliates.
  • Reliance on informal interpretations may not shield parties from scrutiny or enforcement in proposed deals presenting analogous facts. Until the FTC has completed its review of the informal interpretation program and determined “the best path forward,” parties may wish to err on the side of filing, even where prior guidance might indicate that their transaction is not reportable or exempt.

Taken together with other recent FTC actions, these latest announcements may be further evidence of the HSR framework’s “death by a thousand cuts” as recently warned by Republican FTC Commissioner Christine S. Wilson. The “temporary” and “brief” suspension in February of the granting of requests for early termination of the waiting period for transactions that raise no substantive concerns still continues. At the time, the agencies cited to the “unprecedented volume” of merger filings as one of the reasons for the suspension. Again citing to a “tidal wave of merger filings,” the FTC announced in early August that for deals it cannot fully investigate within the timeframes designated in the HSR Act, it will send form letters alerting merging parties that its investigations remain open, and that parties choosing to close those transactions do so at their own risk. Now, the FTC’s about-face on the treatment of debt payoffs and its disavowal of the value of its own informal interpretations will inevitably lead to more HSR filings, increasing the burden on its already overwhelmed staff, and also inject further uncertainty into the HSR review process, increasing costs to merging parties and their customers.

This post comes to us from Cadwalader, Wickersham & Taft LLP. It is based on the firm’s memorandum, “One-Two Punch: FTC Does About-Face on Treatment of Debt for HSR Purposes and Casts Doubt on Informal Interpretation Program,” dated September 14, 2021, and available here.

September 17, 2021
The Jobs Act Did Not Raise IPO Underpricing
by Omri Even-Tov, Panos N. Patatoukas and Young S. Yoon

The JOBS Act was signed into law on April 5, 2012, with the objective of improving access to the public capital market for growth companies. Title I of the JOBS Act amended the Securities Act and the Exchange Act and has been widely recognized as the most significant relaxation of securities regulation in decades. Title I of the JOBS Act includes provisions designed to “de-risk” and “de-burden” the IPO process for emerging growth companies (EGCs) — issuers with pre-IPO revenues of less than $1 billion. The de-risking provisions are intended to enhance the ability to conduct a successful registered offering and to facilitate capital formation at a lower cost. The de-burdening provisions also allow EGCs to scale back disclosures in their IPO filings, delay auditor attestation on internal controls, and adopt new or revised GAAP standards using private company effective dates.

While the goal of the JOBS Act was to ease access to capital, studies have found evidence of an increase in IPO underpricing and higher cost of equity capital for EGC issuers. Using a novel design, we find that changes in overall IPO market conditions explain the apparent increase in IPO underpricing. In fact, EGC issuers that take advantage of the accounting disclosure relief afforded by the JOBS Act raise capital at higher pre-IPO valuation multiples. These reduced-accounting disclosure EGCs have more speculative valuation profiles and lower institutional ownership and are more likely to destroy long-term shareholder value in the IPO aftermarket. Indeed, the evidence shows that nearly two-thirds of reduced-accounting EGCs underperformed the market portfolio in the first three years after going public.

A key implication is that individual investors attracted to lottery-type stocks may have been disproportionately exposed to shareholder value destruction post-JOBS Act. Our evidence is relevant for informing the SEC’s efforts to facilitate capital formation while protecting the interests of Main Street investors. The evidence is especially relevant considering the SEC’s rule extending EGC accommodations to non-EGC issuers (SEC Release, No. 33-10699). Under this rule, effective December 3, 2019, all initial registrants can test the waters with certain institutional investors prior to filing a registration statement. This rule gained support for its potential to increase the number of offerings and investment opportunities without raising significant investor protection concerns (SEC Public Statement, 9/26/2019).

We do not dispute that enhancing the ability to conduct a successful registered offering would ultimately provide more opportunities to invest in public companies. Yet, our evidence highlights that regulators should balance the benefits of increasing the number of IPO registrants against the costs of enabling speculative issuers to go public with reduced financial disclosures. With respect to investor protection in the IPO aftermarket, the quality of IPOs is as important, if not more important, than the quantity.

Our evidence calls attention to the risks for Main Street investors of targeting IPO stocks with speculative valuation profiles. While we find evidence that institutional investors use publicly available information to avoid the worst-performing IPO stocks, individual investors tend to ignore firm fundamentals when investing in IPO stocks.

This post comes to us from professors Omri Even-Tov and Panos N. Patatoukas and from Young S. Yoon, a PhD candidate, at the University of California, Berkeley’s Haas School of Business. It is based on their recent paper, “The Jobs Act Did Not Raise IPO Underpricing,” available here.

September 17, 2021
Vermont’s Fossil Fuel Suit Underscores Climate-Change Pressures Faced by U.S. Companies
by David Anders, David Silk, Jeffrey Wintner, John Savarese, Sabastian Niles, William Savitt, Wachtell Lipton

Companies in the United States and elsewhere continue to face extreme pressure to respond to climate change, with respect to both business operations and disclosures. In the most recent U.S. development on this front, the State of Vermont yesterday brought civil claims against a series of energy companies under its state consumer protection statute, alleging deceptive acts and unfair practices in connection with their marketing, sales and other operations in and outside of the state. Stopping short of seeking restitution for environmental degradation or a ban on the sale of fossil fuels, the suit seeks disgorgement of funds obtained as a result of the alleged violation of Vermont’s consumer protection law as well as substantial civil penalties. These suits are yet another reminder that regulators continue to take aggressive positions on issues related to climate change, making it all the more important that companies carefully consider how best to address those issues.

The core allegation of the suit is that the defendants misled the public about the impact of fossil fuels by advertising that their products are better for the environment than others, while omitting to disclose that their products continue to contribute to greenhouse gas emissions and climate change. With an explicit reference to the language of cigarette marketing, the suit also alleges that the defendants mislead consumers by using “green,” “clean” and similar terminology. Vermont alleges that recent “greenwashing” campaigns by these companies falsely portray the companies as responsible stewards of the environment. Notably, the state alleges that at least one of these companies admits in a sustainability report that its publicly disclosed net-zero emissions targets are not reflected in its operating plans and budgets.

 

Oil and gas companies have faced similar accusations before. The post-trial dismissal by the court of a suit brought by New York State against ExxonMobil demonstrates that it may not be easy for states to establish a legal basis for these kinds of climate-related claims. Litigation has also been brought in a range of overseas jurisdictions concerning climate-related disclosures, including “net zero” commitments by oil and gas companies. However, it is also clear that energy companies will not face these pressures alone. The SEC, FTC, state attorneys general, sustainability-linked organizations and others are likely to press greenwashing and other charges on a number of fronts (whether grounded in securities laws, consumer protection, tort, nuisance, trespass or other theories) over a wide variety of industries and businesses that seek to portray themselves as environmentally friendly or otherwise sustainable. Moreover, increased disclosure on this topic, whether driven by regulatory change or investor pressure, will likely increase the scope of legal and investor inquiries probing the credibility and bases for such disclosures.

This civil suit by Vermont, which is part of a larger pattern of actions brought by cities, states and other organizations, underscores the need for companies to carefully evaluate the disclosures they include in their consumer marketing, as well as their ESG/sustainability reports, and implement appropriate internal controls with respect to such disclosures. As companies consider those questions, they should focus in particular on inconsistencies between their public statements and their internal reports and studies that may create potential reputational and/or legal exposure. Proposals to make public commitments to, for example, environmental improvements, carbon neutrality, elimination of waste, ethical or humane treatment of animals, and similar sustainability claims should be scrutinized with care to ensure that both internal and external stakeholders understand the scope of—and whether the company’s actions are consistent with—the proposed commitment.

The Vermont suit also underscores the determination in some quarters to continue to try to fashion a legal theory on which to pin legal liability for climate change on corporate actors. In addition to securities laws theories along the lines advanced unsuccessfully by New York State, other jurisdictions have sought to recover on “public nuisance” or similar grounds. Although the oil and gas companies have had some success against these claims, including the Second Circuit’s dismissal of New York City’s “public nuisance” claim on the grounds that the federal Clean Air Act displaces state tort law, a significant number of similar cases remain pending in other courts around the country.

Moreover, State attorneys general and other plaintiffs frequently try to adapt their legal theories until they find one that sticks. Indeed, the Vermont lawsuit appears to be an attempt to avoid the Second Circuit decision by seeking disgorgement for allegedly misleading disclosures rather than damages for public nuisance arising from pollution. The development and deployment of these kinds of creative legal claims is unlikely to subside and hence companies would be well-advised to pressure-test their public statements in these areas to safeguard against reputational risk and potential future litigation.

September 17, 2021
Why CEO Option Compensation Can be a Bad Option for Shareholders: Evidence from Major Customer Relationships
by Claire Liu, Jared Stanfield, Ronald Masulis

Option compensation is an important component of executive pay in the United States. By providing convex payoffs, option-based compensation is viewed as a standard mechanism to reduce manager risk aversion and align manager and shareholder interests by encouraging value-enhancing risk taking. In aligning manager-shareholder interests, chief executive officer (CEO) stock option compensation can also intensify conflicts of interests with other key stakeholders by encouraging potentially excessive firm risk taking (see, e.g., John and John, 1993; Opler and Titman, 1994; Kuang and Qin, 2013; Akins et al., 2019). In this study, we take a novel approach to further our understanding of the effects of these conflicts of interest by studying the impact of competitive shocks to important product market relationships and executive option compensation.

Generating sales and preserving valuable product market relationships, such as with major customers, is arguably one of the most crucial factors for a firm’s success. In the United States, nearly half of public firms depend on at least one large customer for a substantial portion of their sales, i.e., representing at least 10% of sales (Ellis, Fee, and Thomas, 2012). It is also common for firms to make relationship-specific investments (RSI) in their major customer relationships, and the health of these valuable trading relationships can significantly affect firm value. As a result, suppliers that depend on an important customer commonly state that the loss of a major customer would negatively impact their firm. For example, Scientific Atlanta Inc., a cable and telecommunications equipment manufacturer, states in its 2005 Form 10-K filing: “A failure to maintain our relationships with customers that make significant purchases of our products and services could harm our business and results of operations. A decline in revenue from one of our key customers or the loss of a key customer could have a material adverse effect on our business and results of operations.” Networking server and storage manufacturer Qlogic Corp. states in its 2005 10-K filing: “Any such reduction, delay or loss of [major customer] purchases could have a material adverse effect on our business, financial condition or results of operations.”

 

Surprisingly, the existing academic literature provides little evidence on whether boards of directors consider their major customers in making CEO compensation decisions. From a customer’s perspective, supplier reliability is critically important to the value of the ongoing customer-supplier relationship. As supplier risk taking increases, customers face heightened uncertainty about supplier reliability, including product quality, the ability to service products, and the timeliness of deliveries. Anecdotal evidence suggests that customers take active steps to evaluate the financial risks of supplier firms, which could weaken their suppliers’ reliability. For example, Dell Technologies states that “[w]e consistently evaluate the financial health of our supplier base,” and Verizon Communications states that any supplier-induced disruptions “could increase our costs, decrease our operating efficiencies and have a material adverse effect on our business, results of operations and financial condition.”

The above anecdotal examples illustrate how CEO risk-taking incentives, of which stock option compensation is a major component, can lead to less stable and less reliable customer relationships. We hypothesize that CEO risk-taking incentives from stock option compensation can reduce the value of important customer relationships, leading boards to decrease CEO option compensation to lower their risk-taking incentives. Empirically, we expect that the existence of major customers to affect a board’s choice of CEO option compensation contracts. Thus, boards of supplier firms with major customer relationships are on average predicted to adopt lower option-based compensation to reduce CEO risk-taking incentives than firms without a major customer.

To test the above hypothesis, we exploit U.S. tariff reductions of at least 2.5 times larger than its industry’s median tariff change that occur in different manufacturing industries at different points in time as exogenous shocks to existing customer-supplier relationships over the 1992-2015 sample period. We find novel evidence that this negative shock to the bargaining power of suppliers relative to large customers has a first-order negative effect on the proportion of a supplier CEO’s option-based compensation. Our main option compensation measures are Pct Option and Flow Vega from new annual option grants to CEOs. Pct Option is the portion of CEO compensation composed of stock options, which is calculated from the Black-Scholes value of a CEO’s stock options as a fraction of annual total compensation. Flow Vega is the dollar sensitivity of CEO wealth changes relative to firm risk changes, which is calculated as inflation-adjusted dollar change in a CEO’s new options granted during the current year for a 1% change in the annualized standard deviation of the firm’s daily stock returns. As demonstrated in Figure 1 below, we find that following large tariff reductions, firms with major customers experience greater reductions in CEO option compensation and risk-taking incentives (measured by Pct Option and Flow Vega) relative to firms without a large customer. Further, results from our difference-in-differences regressions, where we match firms with and without a large customer on industry, a variety of firm characteristics and calendar time, suggest that firms with major customers reduce the proportion of annual CEO compensation awarded in the form of stock options by an average of 22.6% compared to firms without major customers.

Our empirical results also provide evidence that CEO option compensation significantly affects the strength of a firm’s relationships with its preexisting major customers. Following tariff reductions, higher CEO option-based compensation and risk-taking incentives lead to significantly lower growth in sales to a firm’s major customers and a higher probability of relationship termination. Following a tariff reduction, a 1 standard deviation rise in a supplier CEO’s Flow Vega from new option grants leads to a 7% decline in sales growth to its major customer. It also leads to a 5.2% rise in the termination probability of the major customer relationship, relative to an unconditional probability of relationship termination of 16%, which raises the relationship termination probability by one-third. We also show that this rise in the termination probability adversely impacts a supplier’s overall performance. Economically, we find that conditional on the existence of large customers, a 1% increase in the fraction of CEO option-based compensation is predicted to reduce a supplier’s Tobin’s Q by about 2%-3%. Our main empirical results above remain robust to a number of alternative methodologies and additional robustness analysis.

The negative relation between major customer bargaining power and supplier CEO option compensation also exhibits significant cross-sectional differences based on customer and supplier characteristics. Our results are stronger for suppliers more likely to lose valuable major customers, such as firms with higher leverage, a higher probability of financial distress, or facing larger impacts of tariff cuts. The results are also stronger for firms that face greater costs of losing valuable major customers, such as firms with greater asset specificity or product differentiation. These findings suggest that suppliers significantly reduce CEO option compensation, especially when they expect to experience the greatest impacts from tariff cuts.

Our study sheds new light on the importance of customer-supplier relationships on firm value and performance, as well as on optimal CEO compensation policy. Our findings support the view proposed by Williamson (1979) that firms modify their major governance mechanisms to bond their actions to reassure important stakeholders. These results suggest that when making governance decisions, firms can face serious implicit or explicit constraints imposed by important stakeholders. Finally, our results help explain the inconclusive findings on the option-performance link in the academic literature. We show that despite option compensation’s benefits in reducing managerial risk-aversion, it can intensify conflicts of interests between shareholders and important stakeholders with debt-like claims such as large customers or bondholders. Overall, we provide the first evidence that the presence of a large commercial contract measurably affects CEO compensation contracts.

The complete paper is available for download here.

Fig. 1. Option compensation surrounding tariff reductions by firm type.

Panel A: Median proportion of option compensation surrounding tariff reductions

Panel B: Median Flow Vega (in $000s) surrounding tariff reductions

September 17, 2021
SEC Whistleblowers: New $110 Million Award Pushes Total Payouts Over $1 Billion
by Liz Dunshee

Lynn predicted several months ago that this would be the year that the SEC would surpass the $1 billion mark for lifetime awards under its whistleblower program. That happened on Wednesday, when the SEC announced its second-highest award in the history of the program – $110 million! – along with a $4 million award.

The SEC’s press release recaps how many payouts there have been since the whistleblower program started – and where the money comes from:

The SEC has awarded approximately $1 billion to 207 individuals since issuing its first award in 2012. All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards. Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action. Whistleblower awards can range from 10-30% of the money collected when the monetary sanctions exceed $1 million.

This Compliance Week article says that over $500 million has been awarded this fiscal year alone, on top of $175 in fiscal 2020! The Commission is on a roll, and as this Arnold & Porter memo explains, Chair Gensler has signaled that he may unwind the limitations on whistleblower awards that were put in place during the prior administration. I blogged when those rules were adopted that they were somewhat controversial.

The biggest award ever happened in October last year, in the amount of $114 million. Of course, we never know for sure who these payments are made to or what allegations are involved, but the order says that the big winner here contributed significant independent information that raised a strong inference of securities law violations, and suffered significant hardships because of it. I blogged earlier this year about what companies can do to prepare for the possibility of a whistleblower.

Liz Dunshee

September 17, 2021
Transcript: “Newly Public – Building Reporting & Governance Functions”
by Liz Dunshee

The transcript from our recent webcast – “Newly Public: Building Reporting & Governance Functions” – is now available to our members. This webcast was full of practical tips for anyone preparing for or recently emerging from an IPO – or considering a move to a company that’s preparing to go public. Fenwick’s Dave Bell, National Vision’s Jared Brandman, Vontier’s Courtney Kamlet and DocuSign’s Trâm Phi discussed:

1. IPO Backstories

2. Why Advance IPO Planning is Required

3. Identifying Responsibilities

4. Setting Cost Expectations

5. Engaging Service Providers

6. Setting Timetables

7. Establishing Director Relationships & Expectations

8. Determining Your Disclosure Style

9. Cultural Transition

10. How Outside Counsel & Peers Can Help

Liz Dunshee

View today's posts

9/17/2021 posts

SEC Actions Blog: SEC Chair Goes to the Hill: A Laundry List of Projects
CLS Blue Sky Blog: Cadwalader Discusses FTC’s About Face on Debt for Hart-Scott-Rodino Purposes
CLS Blue Sky Blog: The Jobs Act Did Not Raise IPO Underpricing
The Harvard Law School Forum on Corporate Governance: Vermont’s Fossil Fuel Suit Underscores Climate-Change Pressures Faced by U.S. Companies
The Harvard Law School Forum on Corporate Governance: Why CEO Option Compensation Can be a Bad Option for Shareholders: Evidence from Major Customer Relationships
CorporateCounsel.net Blog: SEC Whistleblowers: New $110 Million Award Pushes Total Payouts Over $1 Billion
CorporateCounsel.net Blog: Transcript: “Newly Public – Building Reporting & Governance Functions”

Blog posts are subject to copyrights held by the authors and are republished here with permission. Views expressed are those of the authors alone. Infringement Notification.