Securities Mosaic® Blogwatch
February 8, 2021
Game Over: How Best to Regulate Betting on Wall Street
by John C. Coffee, Jr.

What a difference a week makes! Almost two weeks ago, the frenzied discussion of GameStop assumed that a proletarian revolution was in progress, that the masses had organized themselves through Reddit and Robinhood, and that they were marching on the bastions of the evil short sellers, who had long held these serfs in subjugation. “Investors of the World Unite! You have nothing to lose but your chains,” proclaimed the zealots on WallStreetBets. A week later, it was clear that the revolution had failed. GameStop had fallen from well over $400 a share to the low $60s on Thursday — much closer to its $20 price as of January 1, 2021. If you are rational, you now must recognize that it was a bubble. Lastly, the financial winners in this uprising were largely hedge funds — hardly a sign that the common man has toppled the power structure of Wall Street.[1]

To be sure, the short sellers were also bloodied, and Melvin Capital barely survived. One lesson, then, is that the financial masses can now pull off a reasonably effective short squeeze. Just as the British Redcoats learned at Bunker Hill that it was costly to march into massed American fire, so must short sellers in the future learn to limit the size of their positions when they are battling the financial rebels of today. Social media can turn out the rebels much faster than Paul Revere ever did.

Both sides will persist in their mythic interpretations of what happened in this rebellion. The establishment will say that there was manipulation of GameStop’s stock price through Reddit, while the wounded rebel veterans will blame everything on the short sellers, plus the treachery of Robinhood (the alleged Benedict Arnold of this story). All that is certain is that there was extraordinary market instability — and that it could happen again. How likely is another pitched battle in the short-term? Here, it is obvious that the true believers in GameStop who held on to its stock for the long ride down from the stratosphere to the cellar have suffered enormous financial pain. Sadly, pain is a great educator. Now, the rational retail investor knows that momentum trading works only if you get off the roller coaster in time.

So what should regulators do? My starting point is that regulators cannot ignore the new and extreme market volatility that is attributable to developments in social media, the appearance of trading apps that enable retail investors to trade faster than they can think, and, most of all, low interest rates. But that does not mean that the currently fashionable theories that there was market manipulation or that short sellers dominated the market stand up under closer analysis. My own view is that an army of privates, all firmly and fiercely convinced of the correctness of their opinion, cannot “manipulate” the market. Legally, manipulation implies seeking to move the market to an artificial price that is not the natural intersection of supply and demand. Historically, manipulation has been almost impossible to prove, and the only evidence that can credibly demonstrate it is evidence of collusion. Collusion among retail shareholders is almost meaningless, and hardly resembles the classic case of a sinister manipulator pulling strings like a master puppeteer. Nor does Robinhood, negligent as it may have been for some time, strike me as the villain. If your clearing broker does in fact demand extraordinary levels of collateral, you have no choice but to restrict trading. The same thing happened in the silver market when its price began to bubble: Trading limits were imposed from a level above that of the broker (brokers, of course, want trading and will not impose restraints unless forced to do so).

In this light, the key first step for the SEC is to establish the facts: What really happened? For example, given the high short interest in GameStop, can the SEC find indications of “naked shorting” — that is, the selling of stock that the trader neither owned nor borrowed. This is basically unlawful, but the rules on “naked shorting” have imprecise exemptions,[2] and I doubt that they can be effectively enforced. If true, a better rule might be needed. Similarly, can the SEC find examples of truly fraudulent statements on WallStreetBets? Of course, many predicted that GameStop “would go to the moon.” But that is a statement of an opinion. Statements of opinion are not fraudulent, and the First Amendment gives the SEC little room to crack down on non-fraudulent conduct by ordinary investors.

Last week, my very talented colleague, Joshua Mitts, wrote that there was an “Urgent Need” for “SEC Rulemaking on Social Media and Market Manipulation.” Professor Mitts may prove to be the finest mind of his generation in law and finance, but I doubt that rules in this area can really solve the problem of extraordinary volatility.

Where then should we begin? The simple reality is that the Federal Reserve has given us a world of near-zero interest rates for the near-term. This means “free money” for the speculative trader, and that may be the greater force that underlies and supports the rebels of Reddit. The logical response would be to reduce margin (and thus limit the credit that the broker may advance to its client in order to make trading somewhat more costly for speculative traders). Given the certainty of opposition to rules that make trading more costly, any such rule needs to be narrowly framed. I would submit that such a rule should focus on practices that resemble “day trading.” That is essentially what the rebels of Reddit have been doing. Because all the evidence suggests that day traders lose money systematically, such a rule protects the subject population (somewhat paternalistically, I admit) as it restrains excess volatility. That is two birds with one stone.

A legal strategy will not fly unless it is balanced. Thus, short sellers need also to be addressed, and again the strategy must be to raise the costs of taking very large positions. Short sellers do not need margin (because they are selling, not buying), but, in order to chill an activity that is destabilizing, they could be required to post deposits on a scaled basis with the exchange, market maker — or, hell, somebody. I will leave the specifics here to the SEC (if they are willing to consider a new idea). This rule would be intended to deter short selling on a shoe string, because that is where the danger of default and instability is most likely.

But what do we do about social media? Here, I would start with the fact that many of the most vocal critics on social media held securities licenses (they were registered representatives or more). Such persons are (or should be) subject to Regulation Best Interest, a fairly weak new rule that governs recommendations by brokers. In my view, a broker saying on social media that GameStop is “headed to the moon” is making a securities recommendation that is not in compliance with (or should not be in compliance with an amended) “Regulation B.I.” For one thing, Regulation B.I. requires adequate due diligence. This is a much narrower (and more constitutional) theory than one that attempts to chill all statements on social media. Professionals can be regulated constitutionally, but attempts to control the speech of all retail investors is dangerously overbroad. Finally, FINRA, which is not formally a governmental agency, can take actions that might be constitutionally more questionable for an agency such as the SEC.

Other measures can be considered. For example, FINRA is concerned about Robinhood’s super-fast trading on its new app. Problematic as this is, I have a concern: If we want to slow trading, why not adopt a rule that all calls to a broker must be made on a rotary telephone? Boy, that would work to slow trading. Problems with technology are not best remedied by outlawing new technology.

Bottom Line: The SEC should be cautious about trying to regulate all of social media or defining manipulation broadly. Closing the market for 30 days in the subject stock (as Senator Elizabeth Warren has recommended) seems particularly dangerous, because it might create panic as we approach the point at which the rule might be triggered. But the SEC can regulate professionals, and it can compensate for an “interest-free” marketplace by tinkering with its margin rules. These options, plus tightening the definition of “naked short sales” to require that the short seller have actually borrowed the shares, are the realistic tools on which to focus.


[1]  See Juliet Chung, “GameStop Turmoil Produced Huge Gains for Hedge Funds,” The Wall Street Journal, February 4, 2021, at page 1.

[2]  There has been long-standing controversy over the extent and impact of naked short selling. This area is now governed by Regulation SHO, which requires only that the short seller determine that it is able to borrow the stock to be shorted without difficulty. This invites a good deal of wishful thinking. Critics believe that naked short selling creates “phantom stock.” If the SEC were to examine closely the short selling that occurred in the GameStop episode, it might find that Regulation SHO needs some tightening. For an overview of the debate, see Alexis Brown, In Pursuit of the Naked Short, 5 NYU J. Law & Bus. 1 (2009).

This post comes to us from Professor John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia University Law School and Director of its Center on Corporate Governance.

February 8, 2021
Orrick Discusses SEC’s Recent Whistleblower Program Amendments
by Mike Delikat, Renee B. Phillips and Michael Disotell

On January 13, 2021, prominent whistleblower attorney and a principal architect of the Dodd-Frank Act whistleblower program, Jordan A. Thomas, filed a complaint against the U.S. Securities and Exchange Commission (“SEC” or “Commission”) seeking a declaratory judgment that certain provisions of the SEC’s recent whistleblower program amendments are invalid and cannot be enforced. Specifically, the complaint challenges the SEC’s “clarification” of its authority to limit the size and number of certain whistleblower awards.

Under Dodd-Frank, the Commission pays a monetary award to a whistleblower that provides information to the SEC that leads to an enforcement action in an amount equal to but not less than 10% and not more than 30% of the monetary sanctions imposed by the SEC. Under Rule 21-F6, the agency calculates whistleblower awards in that 10-30% range by assigning an award percentage based on an array of positive and negative factors. The SEC then issues an award by multiplying the award percentage by the total monetary sanctions that the SEC collected.

Under the whistleblower program, awards in a single enforcement action as high as $114 million have been paid. Thomas states that his clients have received some of the largest whistleblower awards in history, with three of his clients’ cases involving monetary sanctions in excess of $100 million.

The SEC voiced concerns in 2018 that excessively large awards could deplete the Investor Protection Fund. As a result, the SEC originally proposed a revised Rule 21F-6 in 2018 that would have expressly provided the Commission with the ability to make downward adjustments in connection with large awards where the monetary sanctions equaled or exceeded $100 million as long as the award payout did not fall below $30 million. However, the SEC ultimately scrapped the proposed rule and instead clarified in the new rules that it has always had the authority and discretion to consider the total dollar payout when applying the award criteria and adjust downward for large awards as reasonably necessary.

In addition, under the prior Rule 21F-3, the SEC would pay awards based on amounts collected in “related actions” and defined “related action” as a “judicial or administrative action that is brought by [specified agencies or self-regulatory organizations], and . . . based on the same original information that the whistleblower voluntarily provided to the Commission.” The SEC’s recent amendments revised Rule 21F-3 to award information provided in a “related action” “only if the Commission finds . . . that its whistleblower program has the more direct or relevant connection to the action.” Further, the Final Rule 21F-3 prevents whistleblowers from receiving an award if they have already been granted an award by another agency or if they have been denied an award by another agency’s whistleblower program.

According to Mr. Thomas’s complaint, the previous rules encouraged whistleblowers to come forward by guaranteeing that those individuals who acted properly would be awarded accordingly and would not have their awards unfairly and arbitrarily diminished. In his complaint, he argues that this “clarification” to Rule 21F-6 is unlawful under the Administrative Procedure Act (“APA”) for at least five reasons: (1) the Final Rule was not a “logical outgrowth” of the proposed rule; (2) the SEC enacted the rule without acknowledging that it was changing its position; (3) the SEC failed to weigh the costs and benefits of the Final Rule; (4) the SEC adopted the rule without providing a reasoned explanation and despite the harms it will cause the whistleblower program; and (5) the SEC had no statutory authority to enact the rule. Furthermore, the complaint alleges the amendments to Rule 21F-3 are unlawful under the APA because (1) the SEC had no statutory authority to enact the changes and (2) the SEC adopted the rule without providing a reasoned explanation and despite the harms it will cause the whistleblower program.

As the complaint asserts, “[T]he potential for large monetary awards is the primary motivation for individuals to blow the whistle to law enforcement and regulatory authorities” and the challenged rule amendments “turn[] the Commission into a kind of casino that aggressively courts high-rollers with the promise of large jackpots but reserves the right to lower their winnings if those winnings get ‘too large.’” Further, the complaint surmises that would-be whistleblowers may weigh the costs and benefits of the revised whistleblower program and choose not to report possible securities violations to the SEC if they are worried their awards may be adjusted downwards or denied outright under the related action rules, ultimately reducing the number of individuals who report.

Certainly, for the whistleblower bar, significant contingent legal fees are at stake. The complaint notes that Thomas currently has nine whistleblower clients awaiting a final determination of entitlement to an award from the SEC, and that given the monetary sanctions collected, his clients collectively are eligible for awards of more than $300 million. On each of these potential awards, Thomas’ firm will receive a contingency fee, and Plaintiff Thomas will receive incentive compensation for recovering the award on behalf of his client.

This is the first action attacking the Final Rule and no doubt will be met with a vigorous defense by the SEC. We will monitor the progress of this action and questions of standing (i.e., whether lawyers that represent whistleblowers have standing to challenge this Final Rule) and whether the Final Rule passes muster under the APA.

This post comes to us from Orrick, Herrington & Sutcliffe LLP. It is based on the firm’s memorandum, “How Much is Too Much? Whistleblower Bar Challenges the SEC’s Recent Whistleblower Program Amendments,” dated January 13, 2021, and available here

February 8, 2021
The Future of the Virtual Board Room
by Andrew Lepczyk, Barton Edgerton, NACD

Since the beginning of the COVID-19–induced lockdowns, there has been no shortage of experts forecasting drastic shifts in the way that work gets done—including the work of the board. In the second half of the year, NACD surveyed 749 directors to better understand the impact of COVID-19 on corporate governance. Although there were initial challenges in adapting to a virtual working environment, directors were able to continue to govern effectively. Directors reported major shifts in the role that digital technology played in corporate governance, suggesting that the virtual setting for board meetings will be more popular following the pandemic. This increased adoption could show up first in committee meetings in the near term, but long term, it has the potential for increasing adoption for full-board meetings as directors become more comfortable with the technology.

Most of these changes are due to the abrupt shift to working remotely, sparked by the pandemic, and the relatively seamless ability for directors, and society as a whole, to adapt to these new circumstances. Recent survey data from NACD confirms this effect in corporate governance, suggesting that the adaptation of working remotely is here to stay.


Directors Adapted Quickly To The Virtual Environment

In the beginning of the COVID-19 pandemic, boards saw abrupt change in their board operations with no way to go back. This proved to be a challenge, with technological preparedness being a weakness of many organizations. According to the survey, 36 percent of respondents listed their organization’s
digital competency as a weakness as opposed to a strength, and 27 percent described their organization’s technology infrastructure as a weakness. [1]

But despite this baseline expectation, many directors were surprised by their ability to adapt and adapt quickly. While NACD learned from conversations with directors that in the beginning of the lockdown many boards and IT teams were nervous about the rollout of virtual board work, directors adjusted to the changing circumstances.

Technology Creates Biggest Challenges For Directors

During the pandemic, directors reported that the challenges posed by the virtual environment were largely operational in nature and can be addressed through technology that makes virtual meetings more efficient. When asked what the top three overall challenges were for boards in responding to the COVID-19 pandemic, 47 percent of directors responded with “ensuring that virtual board meetings were as effective as in-person meetings.” [2] Improvements in the efficiency of virtual meetings may ultimately lead to their wider adoption.

Digging deeper, we find that 72 percent of directors responded that it was a challenge losing nonverbal communication between directors, while 30 percent responded that it was tough facilitating questions and answers. On the other hand, just under 14 percent said that background noise was a challenge, and only 19 percent said keeping directors attentive throughout the whole meeting was difficult. [3]

This shows that the biggest problems can be fixed. With better communication platforms, the lack of nonverbal communication can be mitigated, if not completely resolved. Furthermore, the challenges of a virtual environment which were outside of the board leader’s control were not significantly problematic—the real challenges were operational issues that can be solved through better technology. There is a case to be made that with better technology, there will be better communication and less-challenging virtual board meetings.

Despite these challenges, boards were still effective. The technology worked well enough that directors’ efforts were not significantly hindered by having to meet in a virtual setting. Ninety-four percent of respondents said that they were able to govern effectively in the new environment, demonstrating that the shift to virtual meetings did not interfere with the board’s ability to perform their duties. [4] This would suggest that—despite a number of setbacks and the inability to meet in person—directors were able to adapt and felt able to govern effectively. On the other hand, only 41 percent of respondents agreed that virtual meetings are as effective as in-person meetings; 50 percent of respondents disagreed. [5]

These seemingly contradictory data suggest that while the meetings were effective in helping directors to get their work done, ultimately, directors felt that they were not as productive as they could have been. It could also mean that directors are overestimating the value of in-person meetings, and that virtual meetings are satisfactory in helping directors to govern effectively. This points to a conclusion: while the technical issues that disrupt the facilitation of the meetings makes them less effective than they could be, the meetings are still “good enough”—or perhaps virtual meetings work better for some aspects of corporate governance than they do for other aspects.

Even though directors felt that virtual meetings weren’t as effective, they acknowledge that digital communication is here to stay, as evidenced by the 90 percent who answered that they think digital board engagement will be a helpful tool for board operations moving forward. We feel that this paradox could be remedied or even eliminated by increased innovation in digital technology.

Virtual Meetings To Be A Greater Force In The Future

NACD surveyed directors about whether or not their board plans to utilize virtual meetings following the crisis, and the results show that virtual meetings will have more staying power at the committee level than at the full-board level, at least initially. Sixty-five percent of directors expect at least 20 percent of future board meetings to be virtual, and 13 percent expect at least 60 percent of board meetings to be virtual. [6]

Percentage of Virtual Meetings Post Crisis

These findings show how much of a shift to virtual board work we might expect to see in the future. Even if just 1 in every 10 boards holds a majority of their meetings virtually, it would lead to a drastic shift in board operations. Seventy-six percent of respondents say that they expect that at least 20 percent of committee meetings will be virtual in the future, with 30 percent saying that at least 60 percent of committee meetings will be virtual. [7]

Furthermore, in a May 2020 COVID-19 Pulse Survey, NACD found that 54 percent of responding directors thought that the changing way in which work gets done would be one of the key influences that most impact the post-recovery period, and 32 percent said that the acceleration in digital technology would be yet another. [8]

Directors foresee that virtual meetings will be more common at the committee level than they will be at the full-board level. As with full-board meetings, even a modest change in the frequency of virtual committee meetings would likely make them a factor in the boardroom for years to come.

While the extent to which virtual board meetings will become an accepted and effective tool for corporate governance is unknown, future board meetings are likely to feature more virtual communication. NACD survey data showed that directors were able to adapt in real time to changes in digital communication; that the challenges posed by digital technology that directors face now can likely be remedied with better platforms; and that committee work will see more virtual meetings, which may influence the frequency of virtual full-board meetings.

The pathway forward to greater adoption of virtual communication methods may first chart its way through committee meetings, where the technology will first be introduced and then tweaked so that it becomes more conducive to efficient meetings. From there, full boards, which are largely made up of those same committee members, could apply this efficiency to their meetings, as well.

Every board will not stay virtual following the crisis; however, the trends point toward greater adoption, both in the near term and in the longer term.



NACD, from the upcoming American Board Practices and Oversight Report (Arlington, VA: NACD, 2021), p. 7.(go back)


Ibid., p. 8.(go back)


NACD, from the upcoming American Board Practices and Oversight Report (Arlington, VA: NACD, 2021), p. 8.(go back)


NACD, from the upcoming American Board Practices and Oversight Report (Arlington, VA: NACD, 2021), p. 4.(go back)


NACD, from the upcoming American Board Practices and Oversight Report (Arlington, VA: NACD, 2021), p. 9.(go back)


NACD, from the upcoming American Board Practices and Oversight Report (Arlington, VA: NACD, 2021), p. 14.(go back)


Ibid., p. 14.(go back)


Barton Edgerton, “Strategy, Workforce Issues Top Director Concerns Post-Crisis, Survey Finds,” NACD BoardTalk (blog), June 9, 2020.(go back)
February 8, 2021
This Week In Securities Litigation (Week of Feb. 7, 2021)
by Tom Gorman

Kelly Gibson was named Acting Deputy Director, Division of Enforcement last week. Ms. Gibson has served as a member of the staff for 13 years, holding positions which included Director of the Philadelphia Regional Office. The announcement followed the earlier statement that Satyam Khanna was named as a Senior Policy Advisor for Climate and ESC in the Office of the Acting Chair. Mr. Khanna was most recently a resident fellow at NYU Law School’s Institute for Corporate Governance and finance. Previously, he served on the Presidential transition committee.

Be careful, be safe this week


Comments: The Commission issued a release seeking comments on potential money market reform options highlighted in the President’s Working Group Report (here).

Securities Class Actions

Cornerstone Research published its annual Securities Class Action Filings Report, Year in Review (here). Last year 334 securities class actions were filed. That included 100 Federal M&A filings, 33 Federal Section 11 and State 1933 Act cases and 201 other federal filings. This is the lowest total number of actions filed since 2016 when 288 cases were initiated. In contract, in 2019 a total of 427 actions were filed while in 2018 there were 420 filings and in 2017 412 cases were brought.

The complaints filed were based largely on Exchange Act Rule 10b -5. Last year 85% of the complaints alleged violations of that Rule while Securities Act Section 11 violations were asserted in about 16% of the cases and Section 12(a) claims in about 7%. Those percentages for each section are roughly comparable to those over each of the four prior years.

The primary claim asserted in the complaints filed in 2020 centered on misrepresentations in financial documents. Approximately 90% of the federal actions filed asserted this claim. The next largest group of claims was 43% which were based on assertions of false forward-looking statements followed by 27% based on alleged accounting violations. Again, the percentages were comparable to those in recent years.

SEC Enforcement – Litigated Actions

Financial fraud: SEC v. Revolutionary Concepts, Inc., Civil Action No. 1:18-cv-01832 (N.D. GA.) is a previously filed action in which the Commission prevailed on summary judgment against former V.P. Solomon RC a/k/a Richard M. Carter. The complaint alleged that several transactions touted as having a positive impact on the company in press releases were in fact shams. The Court concluded that Defendants had violated Securities Act Section 17(a) and Exchange Act Section 10(b) by making false statements about the deals and not informing investors that none of the transactions were arms-length. The Court also found that Mr. Ali failed to comply with his reporting requirements under Exchange Act Section 16(a) regarding the 18 million shares of the firm he controls. Accordingly, summary judgment was entered in favor of the Commission. The Court entered a final judgment against Mr. Ali on January 22, 2021. The Court’s order enjoined Defendant from future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 16(a). The Court also imposed a ten-year officer and director bar and a ten-year penny stock bar against the former executive. Mr. Ali was ordered to pay a civil penalty of $107,500. See Lit. Rel. No. 25019 (Jan. 29, 2021).

SEC Enforcement – Filed and Settled Actions

The Commission filed 2 new civil injunctive actions and 1 administrative proceedings last week, excluding 12j, tag-along proceedings and other similar matters.

False statements: SEC v. GPB Capital Holdings, LLC, Civil Action No. 1:21-cv-00583 (E.D.N.Y. Filed Feb. 4, 2021) is an action which names as defendants: The firm, a registered investment adviser; Ascendant Capital, LLC, a placement agent for GPB Capital; Ascendant Alternative Strategies, LLC, a registered broker-dealer; David Gentile, the founder, owner and CEO of GPB Capital; Jeffry Schneider, a minority owner of AAS and the sole owner and CEO of Ascendant Capital; and Jeffrey Lash, the managing partner of GPB Capital. The firm is an asset manager that serves as general partner and fund manager for several funds. It invests primarily in automotive retail, waste management and healthcare interests. Since 2013 it has raised over $1.7 billion for at least five limited partnership funds from about 17,000 investors, 4,000 of whom are seniors. While the firm projected success, claiming to consistently have an annualized 8% return and stressing its special distributions, the assertions were an “illusion,” according to the complaint. The fraud continued for 4 years with investors in the dark. The complaint claims that investor did not receive audited financial statements, made false statements and failed to disclose conflicts of interests. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 12(g) and 21F and Advisers Act Sections 206(1), (2) and (4). The case is pending. A parallel criminal action was filed by the U.S. Attorney for the Eastern District of New York. U.S. v. Gentile, No. 21-cr-54 (E.D.N.Y. Unsealed Feb. 4, 2021).

Insider trading: SEC v. CR Intrinsic Investors, Civil Action No. 12-cv-8466 (S.D.N.Y.) is a previously filed action in which a final judgment was entered against Defendant Mathew Martoma, a former portfolio manager at CR Intrinsic. The complaint alleged that Mr. Martoma obtained inside information regarding clinical trial results for a drug being jointly developed by two firms. He then caused several hedge funds to trade based on the inside information which was about negative trial results. The firms avoided losses of over $275 million. Mr. Martoma was previously convicted on criminal charges based on the same conduct. He was sentenced to serve 9 years in prison. The Court entered a permanent injunction based on consent prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 25022 (Feb. 3, 2021).

Financial fraud: SEC v. Premier Holding Corp., Civil Action No. 1:17-cv-09485 (S.D.N.Y.) is a previously filed action which names as defendants the company, a provider of energy services, Randall Letcavage, its CEO and Joseph Greenblatt, a CPA who provided accounting services for the company. The complaint alleges that the firm and its CEO arranged a series of apparently important transactions designed to feign activity at the company to mislead investors. One key transaction involved the inflation of the value of its largest tangible asset, an unsecured promissory note with a face value of $5 million. Mr. Greenblatt is alleged to have assisted the scheme. The complaint alleged violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The Court entered a final judgment on January 20, 2021against the company and its CEO. The judgments imposed permanent injunctions based on each of the sections cited in the complaint, except the judgment as to the company was not based on Exchange Act Section 13(b)(5). The judgments also require the two Defendants to pay, on a joint and several basis, disgorgement and prejudgment interest totaling $8,691,500 and a $1 million penalty as to each. Bars were imposed on Mr. Letcavage prohibiting him from being an officer or director or participating in a penny stock offering. See Lit. Rel. No. 25021 (Feb. 2, 2021).

Financial fraud/false statements: In the Matter of Joseph Jackson, Adm. Proceeding No. 3-20217 (Feb. 2, 2021) is a proceeding which names as respondents Mr. Jackson and Colm Callan, respectively, the CEO and CFO of WageWorks, Inc. In 2016 and 2017 Respondents made misleading statements regarding $3.6 million of revenue in 2016 from the firm’s largest client. As a result, the revenue was recorded. The statements were false. A restatement followed. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings each Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. Mr. Jackson also agreed to reimburse the firm $1,029,740. He will also pay a penalty of $5,000 that will be transferred to the Treasury. Mr. Callan will reimburse the firm a total of $157,590. He will pay a penalty of $100,000 which will also be transferred to the Treasury.

Offering fraud – crypto: SEC v. Krstic, Civil Action No. 21-Civ. 0529 (E.D.N.Y. Filed Feb. 1, 2021) is an action which names as defendants Kristijan Krstic a/k/a Felix Logan, the founder and CFO of Start Options and control person of Bitcoiin2Gen; John DeMarr, formerly a private detective and a primary promoter of Start Options and Bitcoiin2Gn; and Robin Enos and attorney who resigned his license when faced a with disciplinary hearing. Over a period of several months, beginning in late 2017, Defendants raised about $11.4 million from over 460 investors using Start Operations and Bitcoiin2Gen. The offerings purported to be ICOs but in fact were shams. A large portion of the proceeds were misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The action is pending. See Lit. Rel. No. 25020 (Feb. 1, 2020). A parallel criminal case was filed by the U.S. Attorney for the Eastern District of New York. U.S. v. DeMarr, No. 21-mj-128 (E.D.N.Y. Unsealed Feb. 1, 2021).

Hong Kong

MOU: The Securities and Futures Commission of Hong Kong announce an MOU on February 3, 2021 on Cross-boundary Wealth Management Connect Pilot Scheme in Guangdong-Hong Kong-Macao Greater Bay Area with the People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, the State Administration of Foreign Exchange, the Hong Kong Monetary Authority and the Monetary Authority of Macao. The agreement is designed to provide a framework for exchanging supervisory information and enforcement cooperation as well as investor protection (here).


Statement: The Monetary Authority of Singapore and the Singapore Exchange Regulation issued a statement advising the investing public to be on “heightened alert to the risks related to trading in securities incited by online discussion forums and social media chat groups” on February 2, 2021 (here).

February 8, 2021
Succession Planning: Reassuring Investors with Disclosure
by Lynn Jokela

CEO succession has been near the top of business news cycles lately – last week’s news about Jeff Bezos stepping down as Amazon’s CEO certainly played a part. One key board responsibility relates to CEO succession planning and investors expect boards to have a plan and when the need arises, to appoint a new CEO in due course. As boards need to deal with views of multiple stakeholders, one dilemma is what board should say to investors and a SquareWell Partners report says it found only 20% of companies that have appointed a new CEO since January 2019 provided comprehensive disclosure of their succession planning process.

Some companies though aren’t in a position like Amazon where the company’s announcement named Andy Jassy as incoming CEO – Jassy reportedly previously described himself as Bezos’ shadow – and the announcement also said Bezos will transition to executive chairman. To underscore the importance of CEO succession planning, the report cites research that found companies that are unprepared to appoint a successor in a timely manner lose on average $1.8 billion in shareholder value. The report notes, when it comes to succession planning, it’s understandable that companies may want to hold their cards close to the vest, but investors want reassurance that boards are ready to act. Here’s an excerpt about succession planning disclosure that can help reassure investors:

There might be a misunderstanding that investors expect to learn the names of potential successors or to micromanage the choice of the next leader while what they actually want is to see evidence that the board is fulfilling its fiduciary duty and is ready to ensure a smooth transition for all scenarios.

Companies taking succession planning seriously should allow different executives to gain experience in engaging with investors. Investor focus should be on the frequency of the review of the succession plans and asking boards how they ensure that the pipeline of potential candidates and the successor profile are always aligned with the evolution of the company’s strategy. Investors could also question the company’s leadership development programs to understand how the leaders of tomorrow are being groomed. The quality of the board’s answers to these questions should reveal how prepared the board really is to face the next CEO transition.

For a look at trends in Russell 3000 and S&P 500 succession practices, Heidrick & Struggles and The Conference Board recently issued their “2020 CEO Succession Practices” report. The report discusses trends, the Covid-19 impact on succession planning and predicts that if company performance continues to be unsteady, it’s likely more boards will face the need to navigate a leadership change sooner than they might have anticipated.  And for more practical insights about CEO succession planning, check out the transcript from our webcast “CEO Succession Planning in the Crisis Era” – there you’ll find tips about disclosure issues and steps boards and advisors can take now!

Form 10-K Considerations & Reminders

With calendar year Form 10-K filings coming along, a recent Gibson Dunn memo walks through substantive and technical considerations to keep in mind when preparing 2020 Form 10-Ks. The memo covers recent amendments to Reg S-K, disclosure considerations in light of Covid-19, amendments to MD&A & financial disclosure rules and other considerations in light of recent and upcoming changes at the SEC. The memo includes a fairly extensive discussion of the new human capital disclosures and among other things, reminds companies to be mindful of what they’ve said about composition of their workforce in their CEO pay ratio disclosures. Here are a few other considerations, check out the complete 25-page memo for more:

KPIs: The SEC’s Interpretive Release issued in January 2020 was a reminder that companies must disclose key variables and other qualitative and quantitative factors that management uses to manage the business and that would be peculiar and necessary for investors to understand and evaluate the company’s performance, including non-financial and financial metrics. The memo reminds companies that if changes are made to the method by which they calculate or present the metric from one period to another or otherwise, the company should disclose, to the extent material, the differences between periods, the reasons for the changes and the effect of the changes. Changes may necessitate recasting the prior period’s presentation to help ensure the comparison is not misleading.

Covid-19 Impact on Risk Factors: It is important that the COVID-19 risk factor disclosure be appropriately tailored to the facts and circumstances of the particular company, whether due to (i) risks that directly impact the company’s business, (ii) risks impacting the company’s suppliers or customers, or (iii) ancillary risks, including a decline in the capital markets, a recession, a decline in employee relations or performance, governmental regulations, an inability to complete transactions, and litigation. The SEC has reiterated that risk factors should not use hypotheticals to address events that are actually impacting the company’s operations and brought enforcement actions against certain companies for portraying realized risks as hypothetical.[11] Accordingly, companies should be specific in providing examples of risks that have already manifested themselves.

Disclosure Controls and Procedures: In light of the substantial number of changes to the Form 10-K requirements and disclosure guidance, it is important for personnel and counsel to consider the manner in which the company’s disclosure controls and procedures are addressing the changes. It is also important that the disclosure committee and audit committee are briefed on the changes and the company’s approach to addressing them.

Transcript: “Glass Lewis Dialogue: Forecast for the 2021 Proxy Season”

We’ve posted the transcript for our recent webcast: “Glass Lewis Dialogue: Forecast for the 2021 Proxy Season” – it covered these topics:

– Proxy Season Review Highlights

– Policy Guideline Updates

– Board Diversity

– ESG Reporting

– Compensation

For those diving in to drafting a company’s proxy statement, check it out for insight into what Glass Lewis and the firm’s investor clients will want to see in this year’s disclosures.

– Lynn Jokela

February 8, 2021
ESG Disclosures
by Carmen Lu, David Silk, Sabastian Niles, Wachtell Lipton

Earlier this week, the U.S. Securities and Exchange Commission (SEC) announced the appointment of Satyam Khanna as its Senior Policy Advisor for Climate and ESG. Mr. Khanna will advise the agency on environmental, social, and governance matters and advance related new initiatives across the SEC’s offices and divisions. In addition to prior positions with the SEC, including as counsel to former SEC Commissioner Robert J. Jackson Jr., Mr. Khanna previously served with the Financial Stability Oversight Council at the U.S. Treasury Department and as an advisor to Principles for Responsible Investment (PRI). This latest appointment, together with the Biden Administration’s executive order issued last week aimed at tackling the climate crisis, indicate a clear shift towards greater regulatory focus and oversight on climate change and other ESG matters.

In the past, the SEC has declined calls to implement ESG-specific disclosures, preferring to rely on traditional materiality formulations as the benchmark for disclosures. In the absence of regulatory directives, investors, asset managers and companies have pushed forward with voluntary ESG disclosure frameworks in an effort to generate comparable, decision-useful data that can be used to measure companies’ ESG risks, progress and performance. It now appears that U.S. regulators will consider playing a more central role in disclosure practices: the Biden Administration’s executive order stated that “[t]he Federal Government must drive assessment, disclosure, and mitigation of climate pollution and climate-related risks in every sector of our economy.” Similarly, acting SEC chair Allison Herren Lee has supported a disclosure regime that would ensure that financial institutions produce standardized disclosure of their exposure to climate risks, and it is widely expected that incoming SEC chair Gary Gensler will support ESG-related rulemaking. The SEC’s Investor Advisory Committee (some of whose former members are now in the Biden Administration) also last year recommended that the SEC focus on updating reporting requirements to include “material, decision-useful ESG factors,” highlighting investor need for such information in connection with investment and voting decisions, the benefits of direct disclosure by issuers, the need to level the playing field between issuers and opportunities to promote the flow of capital to the U.S. markets and domestic issuers of all sizes. The SEC’s Asset Management Advisory Committee has also been considering ESG-related matters and potential recommendations.


Across the Atlantic, U.K. and EU regulators have continued to ramp up disclosure requirements. Last week, the United Kingdom’s Department for Work and Pensions announced that beginning October 2021, pension funds with over £5 billion under management will be required to publish reports in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The EU’s Sustainable Finance Disclosure Regulation, which requires banks, asset managers and certain other financial market participants to make disclosures on the integration of sustainability risks into investment decisions, will come into force in March. The European Commission is also reviewing the scope of its Non-Financial Reporting Directive which requires certain large companies to disclose their policies on ESG matters including environmental protection, social responsibility and board diversity. The U.K. Government’s independent, global and comprehensive review on the economics of biodiversity commissioned by the

U.K. Treasury—the Dasgupta Review—has also now been published and will accelerate focus on biodiversity-related matters, including as to financial disclosures, capital allocation and accounting and economic theories.

While it remains to be seen what policies and strategies the SEC and other federal regulators will pursue with respect to ESG—and if U.S. regulators will adopt the paths taken by their counterparts in the U.K. and EU—it is evident that the need for standardized, comparable and assurable data, particularly on climate- related risks, has become ever more urgent. The ongoing convergence among the different ESG disclosure frameworks will likely continue to accelerate into 2021. In the meantime, we expect to see continued increase in disclosure by U.S. companies in accordance with Sustainability Accounting Standards Board (SASB) and TCFD recommendations, as well as some early adoption of the Stakeholder Capitalism Metrics released by the World Economic Forum.

February 8, 2021
SEC Issues Guidance in Light of Ongoing Surge in SPAC IPOs
by Atif Azher, Daniel Webb, Elizabeth Cooper, Mark Brod, Michael Wolfson, William Brentani, Simpson Thacher

Last year, in particular the second half of the year, saw a vibrant market for initial public offerings (“IPOs”) of special purpose acquisition companies (“SPACs”). Coming out of this surge in SPAC offerings, the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff”) published new disclosure guidance on December 22, 2020. [1] With the publication of this guidance, the Staff sought to remind SPAC sponsors, underwriters and other market participants of key concerns they have noted in their comment letters for SPAC filings in connection with IPOs and business combination transactions.

This guidance is particularly focused on the potential conflict of interest between a SPAC’s public shareholders, on the one hand, and a SPAC’s sponsor, directors, officers and their affiliates (the “insiders”), on the other hand. The insiders’ economic interests in the SPAC often differ from the economic interests of public shareholders in a number of important ways. As the Staff notes, this difference may lead to conflicts of interest, in particular as the insiders evaluate potential targets for the SPAC’s initial business combination.

The Staff notes that, unlike in the traditional IPO process where a private operating company’s securities are valued through market-based price discovery, the SPAC insiders are solely responsible for deciding how to value potential targets. While this is often cited as a reason why SPACs provide greater certainty for private companies considering a traditional IPO, the Staff points out that this can lead to potential conflicts of interest and risks for the public shareholders of the SPAC. Therefore, the Staff repeatedly emphasizes the importance of clear disclosure regarding these potential conflicts of interest and the nature of the insiders’ economic interests in the SPAC.


The Staff’s guidance on disclosure considerations for SPACs related to potential conflicts of interest is summarized below.

Disclosure Considerations—Initial Public Offerings

The guidance on potential conflicts of interest in the context of the initial public offering of a SPAC is divided into five categories: (1) insiders’ competing fiduciary or contractual obligations to other entities, (2) the specified timeframe to complete an initial business combination, (3) deferred underwriter compensation, (4) economic terms of the insiders’ investments in the SPAC and other financial incentives and (5) insider control of the SPAC and the terms of any securities of the SPAC that insiders purchase in a private placement. The Staff’s concerns on each topic are summarized below.

The Staff’s concerns on insiders’ competing fiduciary or contractual obligations to other entities include:

  • Ensuring that potential conflicts of interest impacting the insiders’ ability to evaluate and present a potential initial business combination are clearly described, including how these conflicts will be addressed; and
  • Disclosing whether a SPAC may pursue a business combination with a target in which an insider has an interest and if so, how such potential conflict of interest will be considered.

The Staff’s concerns on the specified timeframe to complete an initial business combination include:

  • Properly describing the financial incentives of the insiders and how they differ from the public shareholders, particularly in respect of any losses the insiders will bear if the initial business combination is not completed within the required timeframe;
  • Disclosing the amount of control the insiders will have over approving the initial business combination;
  • Covering whether and how a SPAC may amend its governing instruments to facilitate the completion of an initial business combination, including whether insiders have sufficient voting power to approve or significantly influence such amendments;
  • Describing whether and how a SPAC may extend the initial business combination deadline and whether public shareholders will have redemption rights in connection therewith; and
  • Providing balanced disclosure about insiders’ prior SPAC experience.

The Staff’s concerns on deferred underwriter compensation include:

  • Ensuring adequate disclosure of (i) any additional services the IPO underwriters may provide to the SPAC in pursuit of its initial business combination, including identifying potential targets, providing financial advisory services, acting as a placement agent in a private offering or underwriting or arranging debt financing, (ii) whether payment for these additional services will be conditioned upon the completion of the business combination and (iii) any conflict of interest the underwriters may have in providing such services.

The Staff’s concerns on the economic terms of the insiders’ investments in the SPAC and other financial incentives include:

  • Clearly describing the securities owned by, or being concurrently offered to, insiders and the prices of such securities in comparison to the public offering price in the SPAC’s IPO;
  • Stating, among other conflicts, that if the SPAC fails to complete a business combination within the required timeframe, the insiders may incur a substantial or total loss on their investment; and
  • Disclosing compensation to insiders, including whether such compensation will be contingent on the completion of the initial business combination and quantifying all known amounts.

The Staff’s concerns on insider control of the SPAC and the terms of private placements include:

  • Ensuring the terms of securities, including any convertible debt, held by the insiders are clearly disclosed; in particular how they differ from the terms of the securities offered in the SPAC’s IPO and the resulting risks to the public shareholders;
  • Covering any private placements being made in connection with the SPAC’s IPO and how the terms of those securities compare to those being offered in such IPO, as well as whether any insiders are participating in such financing; and
  • Disclosing any forward purchase agreements, including any dilutive impact and whether such agreements are irrevocable.

Disclosure Considerations—Business Combination Transactions

The guidance on potential conflicts of interest in the context of the initial business combination transaction of a SPAC is divided into three categories: (1) any additional financing needed to complete the initial business combination, (2) the evaluation of potential targets and (3) other services provided by the IPO underwriters and deferred underwriting compensation. The Staff’s concerns on each topic are summarized below.

The Staff’s concerns on additional financing needed to complete the initial business combination include:

  • Ensuring that any additional funding is described, including the price and terms of any securities to be issued, how any securities issued compare to the securities offered in the SPAC’s IPO and if any insiders are purchasing such securities; and
  • Describing the material terms of any convertible securities and any material impact they may have on the beneficial ownership of the combined company.

The Staff’s concerns on the evaluation of potential targets include:

  • Detailed disclosure of the process of selecting a business combination target, including the evaluation and decision-making process, why the target was selected over other potential targets, as well as the material terms of the acquisition, the amount and nature of the consideration and negotiations on the consideration;
  • Covering the factors considered by the SPAC’s board of directors in approving the transaction, including evaluation of potential conflicts of interest;
  • Describing any conflicts of interest of insiders related to the potential transaction, any policies related thereto and any waivers of such policies, as well as any insider interests in the target;
  • Providing detailed information on how insiders will benefit from the transaction, including quantifying material compensation, returns on initial investments and continuing relationships with the combined company; and
  • Showing the ownership interest the insiders will hold in the combined company, including through the exercise of warrants and conversion of convertible debt.

The Staff’s concerns on other services provided by the IPO underwriters and deferred underwriting compensation include:

  • Disclosing the fees underwriters will receive upon completion of the initial business combination; and
  • Describing additional services the underwriters expect to provide and the compensation for such services, including whether such compensation is conditioned on the completion of the initial business combination and whether the deferred underwriting commission may create a conflict of interest.

Implications for SPAC Sponsors

While this guidance does not create any new obligations or modify existing disclosure obligations, it does summarize a number of Staff concerns that have been reflected in previous SEC comment letters. As SPAC sponsors are normally quite keen to have their registration statements reviewed as expeditiously as possible, SPAC sponsors will need to consider their proposed SPAC structures and registration statements in light of the new guidance. As some serial SPAC sponsors have used similar structures and disclosures in each of the IPOs of their SPACs, they will need to revisit their precedent documentation to ensure it addresses the Staff’s guidance to avoid unexpected delays in the SEC review process. In addition, some SPAC sponsors and underwriters have started to make innovations to the traditional SPAC structure to reduce some of the conflicts of interest between SPAC sponsors and public shareholders. As SPACs come under increasing pressure to consummate their initial business combination as they approach the end of their investment period, they will also need to take stock of the Staff’s guidance to ensure that any proxy statement/registration statement related to the initial business combination adequately discloses the conflicts of interest of concern to the Staff.



Special Purpose Acquisition Companies, Division of Corporation Finance, Securities and Exchange Commission, CF Disclosure Guidance: Topic No. 11, December 22, 2020, available here: back)
February 8, 2021
New Human Capital Disclosure Requirements
by Margaret Engel, Compensation Advisory Partners

Effective November 9, 2020, the Securities Exchange Commission (SEC) issued final rules that modernized the requirements of Regulation S-K applicable to disclosure of the description of the business (Item 101), legal proceedings (Item 103) and risk factors (Item

105). The new rules require companies to greatly expand their human capital management disclosure using a principles-based approach. Relatively few aspects of the rules are prescriptive, giving companies wide latitude to tailor disclosure. Given this latitude, we anticipate that companies will struggle when deciding what human capital disclosure should be included in their 10-Ks. CAP has reviewed early disclosures to provide some guidance to calendar year end companies on the topics that early human capital disclosures address and how much detail companies have typically provided.

Compensation Advisory Partners (CAP) provides a summary of the amendments of Regulation S-K related to human capital disclosure below. We also reviewed a sample of human capital disclosures made by early filers with fiscal years ending before December 31, 2020. Insights gleaned from our review will be helpful to calendar year companies who will soon be crafting their own human capital disclosure for the first time early in 2021.


Summary of Revisions to Item 101(c)(2)(ii)

The final rules amend Item 101(c) (Description of Business) to include a description of a registrant’s human capital resources to the extent the disclosure is material to an understanding of the business as a whole, except that, if the information is material to a particular reportable segment, that segment should be identified. The SEC also describes its rationale for the principles-based approach it advocates which may be helpful to registrants as they expand their description of their businesses to cover the human capital disclosure. The final rules are designed to provide investors with information on material aspects of a business’ operations, financial condition and prospects that reflect how management and the board of directors manage the business and assess its performance.


Amended Text of Item 101(c)(2)(ii):

Provide “A description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).


Prior to this amendment, required disclosure related to human capital was limited to the registrant’s number of employees. Clearly, a broad mandate to disclose material measures or objectives related to human capital and used to manage the business substantially raises the bar for corporate disclosure.

The new rules are also creating some concern and confusion for companies trying to comply with the amendments for the first time. For example, the SEC declined to define human capital management, instead taking the position that it was likely to evolve over time. In addition, input received during the public comment period prior to the release of the final rules makes it clear that companies are concerned that potential metrics are not standardized or defined in any way, making comparative assessments very difficult.

What We Are Seeing

To date, only a limited number of well-known companies have issued human capital disclosure. Nevertheless, certain trends are developing. To date, examples of more robust disclosure are running to 1,000—1,500 words. Wells Fargo is among the leaders with voluntary disclosure provided in its proxy statement prior to the implementation of final rules of almost 6,800 words. Less detailed disclosure is provided by other companies, usually in about 300—500 words.

One company offered limited information on the number of employees in only 63 words. We can only conclude that they believe that the human capital metrics and objectives used in their business are not material to their business results.

Most companies publish their human capital disclosure in the Description of the Business found at the beginning of 10-Ks. A few companies—QUALCOMM and Visa, for example—provide a few paragraphs on human capital in the 10-K and refer the reader to a much longer discussion in their proxy statement or documents posted to company websites

Popular topics commonly addressed include:

  • Facts about the make-up of the work force, including total number of employees, number or percentage in each major geography, breakdowns by type of employee, including full-time, part-time and seasonal, as well as management, administrative, engineering, skilled trades and hourly workers whether union or non-union;
  • A statement of company culture and identification of core values;
  • Description of governance and oversight of human capital initiatives by the board of directors, senior management and, in some cases, various councils or advisory groups composed of employees;
  • Initiatives and statistics relating to diversity and inclusion;
  • An overview of total rewards, with greater emphasis on all-employee programs, such as retirement and welfare benefits or a commitment to living wages;
  • Discussion of talent development and training;
  • Recruiting and retention practices;
  • Use of employee engagement surveys;
  • Pay equity; and
  • Health and safety initiatives and metrics.

Note that the companies that we reviewed generally do not address all of these topics. Instead, most companies chose the 3 to 6 topics from this menu that they see as most relevant to their industry and business strategy.

Quite clearly, human capital management disclosure will be highly individualized and it will be difficult—if not impossible—to make comparisons between companies, even direct competitors operating in the same space.

CAP’s Assessment

As a review of the examples provided above makes clear, most disclosures to date depend heavily on a qualitative description of core values, programs and practices. Very few companies are disclosing actual objectives and/or metrics used to manage the business. Examples of specific metrics or objectives are limited to the following among the companies reviewed here:

  • Tyson Foods discloses that increasing its employee retention rate is a goal but does not disclose numerical objectives. Actual results (i.e., a 1% increase) are disclosed. (See “Diversity and Inclusion” in the complete publication.)
  • Visa stands out by disclosing that it recently established goals to increase the number of employees from underrepresented groups at the vice president level and above in the U.S. by 50 percent in three years and to increase the number of employees from underrepresented groups in the U.S. by 50 percent in five years. (See “Diversity and Inclusion” in the complete publication.)
  • Wells Fargo discloses the adjusted pay gap between (1) women and men and (2) people of color and their white peers (both are more than 99 cents for every $1) and reports that the unadjusted pay gap is higher than the company would like them to be. (See “Annual Pay Equity Review” in the complete publication.)
  • Both Broadcom and QUALCOMM reported metrics on voluntary attrition that were lower than a technology industry benchmark survey published by Aon. (See “Talent Development” in the complete publication.)
  • Jacobs Engineering and Tyson Foods both reported their recordable incident rates, citing OSHA benchmarks. Tyson Foods further disclosed a goal of a 10% annual reduction in recordable incidents. (See “Health and Safety” in the complete publication.)
  • TE Connectivity lists key talent metrics but provides no data. (See “Other” in the complete publication.)

Surprisingly, we did not see companies disclose productivity metrics—for example, revenue per employee, growth in sales relative to growth in compensation costs, or compensation costs as a percentage of revenue.

We think this indicates that human capital management will change over time. Consulting firms, data analytics shops and government will publish more information on benchmarks. Human capital metrics will become more standardized. This will allow for more robust disclosure as companies try to find better measurements of the ROI on human capital and link it to financial metrics important to shareholders and the investment community at large.

The complete publication, including footnotes, is available here.

February 8, 2021
Private Equity – Year in Review and 2021 Outlook
by Andrew Nussbaum, Igor Kirman, Jodi Schwartz, Katherine Chasmar, Nicholas Demmo, Steven Cohen, Wachtell Lipton

2020 was a tale of two halves: during the first half of the year, global private equity deal volume fell precipitously, declining more than 20% relative to the same period in 2019; in the second half of the year, private equity dealmaking roared back to life, ending the year at approximately $582 billion, its highest level since 2007, as private equity firms acquired and invested in companies and businesses in record numbers even as the global Covid-19 pandemic continued to wreak havoc on the broader economy.

We review below some of the key themes that drove private equity deal activity in 2020 and our expectations for 2021.

Pandemic Takes a Toll. As we describe in our recent memo, Mergers and Acquisitions—2021, the Covid-19 pandemic took a toll on pending M&A transactions in the first half of 2020. Private equity was no exception to this trend, with private equity buyers alleging violations of interim operating covenants and pointing to “material adverse effect” clauses in transaction agreements as justification to call off deals or renegotiate. In May 2020, Sycamore Partners and L Brands announced that they had mutually agreed to terminate a deal signed earlier in the year in which Sycamore would pay $525 million for a majority stake in Victoria’s Secret, after Sycamore had sued alleging breaches of interim operating covenants, among other things. That same month, Carlyle and Singapore sovereign wealth fund GIC announced that they would abandon their deal, entered into in December 2019, to acquire a 20% stake in American Express Global Business Travel. In other cases, deals survived, but the terms were recut. For example, after Advent International signaled that it wanted out of its agreement to acquire Forescout Technologies for $1.9 billion struck in February 2020, the parties ultimately agreed to proceed with the transaction at a reduced price of $1.6 billion.


However, private equity sponsors still remained some of the most active dealmakers during this period, with private equity backed buyouts accounting for approximately 17% of overall M&A activity—the highest percentage since the first half of 2007—as private equity investors seized opportunities created by the unprecedented volatility and dislocation in markets. At the same time, private equity sponsors focused their efforts on strengthening existing portfolio companies, particularly those in industries such as hospitality, retail, travel and energy that have been hardest hit by the pandemic, and reassessing eventual exit strategies and timelines. During this period of acute uncertainty and volatility, private equity sponsors deserve credit for being creative, flexible and nimble, and for providing an important source of liquidity to companies facing challenging circumstances.

Rebound in Second Half. After a slowdown in the early months of the pandemic, private equity dealmaking activity surged in the second half of 2020, ending the year with the highest aggregate dollar volume of deals since 2007 and the highest number of deals struck since records began in 1980.

Sponsors have always demonstrated an aptitude for adapting quickly to new circumstances, eschewing a one-size-fits-all approach and structuring deals of different shapes and sizes to fit the times. This penchant for innovation was on full display in 2020: private equity investors deployed capital in a variety of ways, going beyond traditional buyouts to pursue other value-creating opportunities, such as finding exits through SPAC transactions, making strategic investments in public companies, executing add-on acquisitions as part of “buy and build” or “roll up” strategies, acquiring businesses from companies seeking to divest non-core assets in carveout transactions, providing rescue financing and making minority and growth investments. We discuss some of these trends in greater detail below.

Embracing SPACs. This past year saw the spectacular rise of the next generation of the special purpose acquisition company (“SPAC”), with private equity playing a leading role. (See our prior memo on SPACs here.) Last year, SPACs raised a total of $83.4 billion of capital in 248 IPOs, surpassing the previous record, set in 2019, of $13.6 billion raised in 59 IPOs. SPACs also dominated the IPO market, accounting for approximately 50% of IPO volume in 2020, as compared with 14% in 2007, the prior peak. A number of large, well-regarded private equity firms have sponsored SPACs, including Apollo and TPG, as a means to diversify their investment strategies beyond traditional buyout funds and acquire attractive assets that may not fit within the requirements of existing vehicles. Private equity funds have also looked to SPACs as a means to monetize their investments in portfolio companies. For example, in September 2020, Advantage Solutions—a company backed by CVC Capital, Bain Capital and Leonard Green & Partners— withdrew its plans for an IPO, more than three years after its initial registration statement filing, in favor of a transaction with a SPAC formed by Centerview Capital that valued the company at approximately $5.2 billion, including debt. Other notable SPAC transactions in 2020 involved MultiPlan, a company sponsored by Hellman & Friedman, merging with a SPAC backed by Churchill Capital in a deal worth $11 billion, and the announced combination between United Wholesale Mortgage and a SPAC backed by Gores Group in a deal worth $16 billion, the largest SPAC transaction to date. We expect that private equity funds will remain important players in the SPAC landscape, both in their capacity as sponsors of SPAC vehicles and as sellers looking for an alternate path to liquidity.

This is not to say that traditional IPOs have fallen out of favor—private equity sponsors logged more than $74.5 billion in exit value, measured in terms of a company’s pre-money valuation at the time of the IPO, across 22 IPOs of portfolio companies acquired via buyout as of December 10, 2020, the highest annual value in at least a decade. As long as the capital markets continue their unabated rise, IPOs will remain an attractive exit route.

PIPEs Are Back. Just as there was a notable uptick in private investment in public equity (“PIPE”) transactions during the financial crisis of 2007-2009, the market turbulence and economic disruption caused by the pandemic brought PIPE transactions prominently back into the picture. There were approximately 120 PIPE transactions involving NYSE- and Nasdaq-listed companies announced in 2020, with an aggregate value of $36 billion, including Silver Lake’s $1 billion investment in Twitter, Apollo and Silver Lake’s $1.2 billion investment in Expedia and KKR’s

$500 million investment in US Foods. PIPEs have also played a role in the SPAC boom, with SPACs commonly seeking committed financing for a business combination in the form of a PIPE announced simultaneously with the announcement of the business combination. For example, the recently announced merger agreement between fintech startup Social Finance (SoFi) and a SPAC sponsored by investment firm Social Capital, pursuant to which SoFi will become publicly listed on the NYSE, was supported by a $1.2 billion PIPE led by Chamath Palihapitiya, Social Capital’s founder and CEO. We anticipate that PIPEs will remain a feature of the dealmaking landscape in 2021, as private equity sponsors, among others, offer companies looking to shore up their balance sheets an important source of liquidity as an alternative to more traditional sources of funding.

The Effects of Near-Zero Interest Rates (Present, Future…and Past). To many observers, the early months of the Covid-19 pandemic signaled a time of reckoning for highly leveraged portfolio companies facing the worst economic downturn since the Great Depression. Instead, the Federal Reserve’s zero-interest- rate policy and direct purchases of corporate debt gave private equity funds and (many of) their portfolio companies a lifeline by facilitating continued access to cheap credit. A second-half surge in high-yield bond issuances and buyouts at historically high multiples (albeit off Covid-impacted numbers) was another byproduct of the Fed’s largesse, and, given the central bank’s stay-the-course guidance through 2023, 2021 bodes more of the same.

But perhaps the most interesting financing “development” in 2020 was the harvesting of the fruits of the last decade of yield-chasing by lenders and bondholders. Lack of financial covenants, flexibility in earnings measures, expanded debt accordions and large investment baskets (including for separately financeable unrestricted subsidiaries) permitted many sponsored entities to weather (hopefully) short-term revenue and earnings declines without needing to seek accommodations from existing creditors. More spectacularly, the institutionalization of some of the tools pioneered in 2009 to address the illiquidity of the Great Financial Crisis—notably, non-ratable loan purchases by borrowers and less-than-unanimous vote requirements for issuance of priming debt—permitted private equity sponsors to engineer financing transactions with requisite lender majorities where such consent was necessary to address Covid-19  hits  to  liquidity. While litigation continues with respect to a number of these transactions, the leading case, regarding Serta Simmons Bedding, suggests that a decade of loose money has left sponsors well positioned relative to their creditors, even in the most challenging of times.

Rise of Tech. Private equity firms continue to make significant inroads into the technology sector, which comprised its highest ever percentage of overall U.S. private equity deal activity in 2020. This trend is not new, but the pandemic has bolstered the appeal of tech (and software in particular), with digital transformation accelerating across industries and consumers relying, more than ever before, on tech- enabled platforms and services to shop, work, learn and be entertained from home. Of particular note is the pending $10.2 billion acquisition of real estate software company RealPage by Thoma Bravo, a transaction involving an approximately $7.4 billion equity commitment from a single private equity firm, among the largest in recent financial sponsor history. The interest in tech is also evident in the success of tech-focused private equity fundraising—certain well-known managers that specialize in tech buyout deals closed large funds around the year-end mark, including Thoma Bravo, which raised $22.8 billion across three vehicles focused on technology and software investments, and Silver Lake, which raised $20 billion for its sixth flagship fund, the largest-ever tech-focused vehicle by a private equity firm.

Spotlight on Growth and Venture. Over the past decade, the private equity industry’s involvement in late-stage venture and growth equity deals—once the province of venture capital firms—has increased considerably. This trend was on display in 2020, with private equity firms participating in more than 800 venture capital transactions with an aggregate value around $48 billion in the first three quarters of 2020. Notable transactions included Silver Lake’s $3 billion investment in autonomous driving technology company Waymo and KKR’s participation in the latest funding round in Epic Games, the creator of video game sensation Fortnite, valuing the company at $17.3 billion. While venture and growth deals lack some of the important characteristics of traditional private equity deals—for example, investors in emerging companies are generally unable to exert the level of control seen in buyouts—we expect that private equity funds will continue to pursue these opportunities on a selective basis.

ESG Continues to Gain Ground. Consistent with the growing trend among investors and asset managers to incorporate environmental, social and governance (“ESG”) factors into their investment programs, private equity firms have continued to make inroads into ESG through the formation of dedicated “impact” funds, participation in global responsible investing standards and use of new metrics and methods in managing portfolio companies. Sponsors face many of the same challenges as public companies emanating from the lack of standardization and clearly adopted definitions of the goals of, and appropriate metrics to measure, ESG or “sustainable investment,” as well as pressure from investors to prioritize ESG. As the broader market becomes more sophisticated in operationalizing ESG, so too will the private equity industry.

Fundraising Drops, but Significant Dry Powder Remains. Global private equity fundraising in 2020 dropped approximately 19% relative to 2019, due in part to the challenges of securing new commitments from investors amid travel and other restrictions. But with private equity funds sitting on an estimated $1.7 trillion of dry powder, capital supply is robust. As private equity funds put money to work for their investors in 2021, we expect to continue to see fierce competition for assets, high valuation multiples and a wide range of deal structures.

Portfolio Company Incentive Compensation Plans and the Pandemic. The early months of the pandemic saw the potential for portfolio company management teams, like public company management teams, to fail to achieve short- and long- term incentive compensation plan performance targets. Although that prediction has come true for many portfolio company 2020 annual bonus plans—for instance, those based on achieving certain EBITDA targets—the most likely impact of the pandemic will be felt through the postponement of a liquidation event, and should not require wholesale reductions in multiple on invested capital targets or resets of option exercise prices. We also do not expect material changes to the standard private equity “liquidation event” formula for portfolio company long-term incentive compensation plans.

A Cautionary Tale for Public Company Directors in Leveraged Buyouts. A recent decision in the Southern District of New York, In re Nine West LBO Securities Litigation, is worth noting with respect to leveraged transactions. In Nine West, the court declined to grant a motion to dismiss, finding that the business judgment rule would not shield directors who allegedly acted recklessly in failing to conduct a reasonable investigation into the company’s post-sale solvency, taking into account plans for a post-closing carve-out and additional debt incurrence. The court also found that the target’s directors could, if the facts alleged are ultimately proven, be held liable for aiding and abetting breaches of fiduciary duties by the company’s new directors, as they could be charged with actual or constructive knowledge that the new board members would carry out post-sale transactions that would leave the company insolvent. The decision suggests that, in the leveraged buyout context, when exercising the board’s traditional duty to obtain the highest value reasonably available in a sale of the company, directors should be mindful of the post-sale solvency of the company, to the extent contemplated post-closing transactions that may jeopardize the ongoing viability of the corporation are known to the target board.

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Private equity dealmaking bounced back and finished strong in 2020. And yet, as we enter 2021, there is considerable uncertainty regarding the Covid-19 recovery, the future performance of the equity markets and broader economy, and the tax and regulatory environment applicable to private equity. While we expect private equity deal volume to remain strong in 2021, as private equity investors look to put their hefty capital stockpile to work, we believe that the landscape will reward financial sponsors that exhibit both caution and creativity, taking care to manage their existing portfolio companies in the context of the ongoing market disruption stemming from the pandemic and its resulting business impacts, while at the same time seizing on value-creating opportunities using creative deal structures.

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