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Kodak Releases Special Committee Report – Details Failures in Corporate Governance Practices

We previously blogged about the myriad issues arising in connection with the botched announcement by Kodak of a potential $765 million loan from the federal government as part of its coronavirus response measures, as well as insider stock transactions preceding and immediately following the announcement.  Kodak’s board formed a special committee to conduct an internal investigation.  Akin Gump, retained by the special committee to conduct the investigation, last week delivered its report of over 70 pages of factual findings and legal analysis, concluding that there were no violations of law or company policy, but identifying corporate governance issues requiring attention and remediation.  The company has posted the report on its website.

As we previously blogged, on July 27 the internal public relations team at Kodak released an alert to local media that Kodak would be making a big announcement the following day concerning a major initiative between Kodak and the federal government.  Stories immediately started circulating on social media and the websites of local network affiliates. Kodak then contacted the recipients of the advisory to tell them it was meant only as background and was not intended for publication.  The formal announcement followed before the market open on July 28 when Kodak and the U.S. International Development Finance Corp (DFC) jointly announced a ”letter of interest” contemplating a $765 million loan to Kodak to launch a new pharmaceutical business. Although the press release made clear that this was only a letter of interest and the loan was subject

SEC stays approval of NYSE rule changes allowing primary capital raises by issuers in direct listings

On August 26, 2020, pursuant to delegated authority by the Commission, the SEC’s Division of Trading and Markets approved changes to NYSE listing rules to allow companies to raise capital in connection with a direct listing on the NYSE without a firm commitment offering.   Currently, the NYSE has discretion to approve direct listings at the time of effectiveness of a company’s initial registration statement under the Securities Act of 1933 filed solely for the purpose of allowing existing shareholders to sell their shares without a firm commitment offering (a “selling shareholder direct listing”).  Under the new rules, the NYSE would be permitted to approve a direct listing by a company that sells shares itself in the opening auction on the first day of trading on the NYSE (a “primary direct listing”) in addition to, or instead of, a selling shareholder direct listing.

On August 31, 2020, the SEC notified the NYSE that the rule changes have been stayed following receipt of notice, reportedly by the Council of Institutional Investors (CII), that CII plans to submit a petition for review by the full Commission of the delegated approval by the Division of Trading and Markets.

The CII had commented on the rule proposal expressing concern about, among other things, the potential for reduced liability under technical principles under Section 11 of the Securities Act of 1933 due to challenges in tracing shares back to the registration statement.  The SEC staff had considered those concerns, but had noted

Troubles Mount for Embattled Eastman Kodak

A proposed class action has been filed against Eastman Kodak alleging securities fraud in connection with certain events surrounding the government’s possible $765 million pharmaceutical development loan to Kodak.  The plaintiff seeks to represent a class of shareholders who may have purchased Kodak stock between July 27 – when early word of a possible government-Kodak initiative was released – and August 7 – when the company announced the formation of an independent committee of the board of directors to conduct an internal investigation of the events surrounding the possible government loan.

Between those dates, the company released a flurry of information, Senator Elizabeth Warren sent a letter to the SEC seeking an SEC investigation, the U.S. government tweeted that the loan would be halted pending resolution of wrongdoing allegations and there was extraordinary stock activity.  During that time, Kodak stock rose as high as $60 per share, up from about $2 per share the prior week.

The troubles seem to stem from an advisory sent by Kodak to media outlets in Rochester, New York, Kodak’s hometown, on Monday, July 27.  According to media reports, local reporters tweeted information on July 27 about an initiative between Kodak and the U.S. government in response to the coronavirus pandemic.  Those were followed by posted news stories on the websites of the local ABC and CBS affiliates.  Some of those tweets and stories were deleted when Kodak reached out to advise them that the advisory information was only for “background” and not publication. 

SEC amends proxy rules to address proxy voting advisors and issues guidance for investment advisers on use of automated voting platforms

On Wednesday, the SEC adopted amendments to the proxy solicitation rules  relating to proxy voting advisors and issued new supplemental guidance relating to the proxy voting responsibilities of investment advisers when using automated voting.

We have prepared a client alert describing the amendments and guidance in more detail.  The following is a brief summary.

The proxy rule amendments effected three principal changes:

  • They codify the SEC’s previous interpretation that proxy voting advice produced by “proxy voting advice businesses” (PVABs or proxy advisory firms), such as ISS and Glass Lewis, generally constitutes a “solicitation” for purposes of Rule 14a-1(l) of the Securities Exchange Act of 1934.
  • In order for PVABs to avoid the information and filing requirements of the proxy rules, PVABs must:
    • Disclose material conflicts of interest to their clients as well as any policies and procedures used to identify, and steps taken to address, any material conflicts.
    • Establish and publicly disclose policies and procedures reasonably designed to allow registrants that are the subject of the PVABs’ voting advice to be able to access that advice prior to or at the same time as the advice is disseminated to the advisory firms’ clients.
    • Adopt and publicly disclose policies and procedures reasonably designed to ensure the PVABs provide their clients with a mechanism by which they can reasonably be expected to become aware of any written responses by registrants to such voting advice, in a timely manner before the shareholder meeting or other action.
  • Third, the amended

Dodd-Frank’s 10th Anniversary: Mandatory Rulemaking Provisions Still Pending

This week marked the 10th anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law on July 21, 2020.  At various virtual events celebrating the milestone, including a webinar co-sponsored by advocacy group Better Markets and George Washington University Law School’s Business and Finance Law Program, creators Chris Dodd and Barney Frank, as well as former President Barack Obama, Elizabeth Warren and Maxine Waters, among others, shared their insights and memories, as well as views on the Dodd-Frank Act’s role in strengthening banks, which arguably helped them withstand the COVID-19 storm.

The SEC website page on implementing the Dodd-Frank Act shows that to date, the SEC has adopted final rules for 67 mandatory rulemaking provisions of the Dodd-Frank Act.  Here is what remains outstanding:

  • Executive Compensation: 4 proposed
    • Section 953(a): Pay vs. performance disclosure (proposed rules issued April 29, 2015 that continue to be characterized as a Long-Term Action on SEC’s recently released Spring 2020 Reg-Flex Agenda)
    • Section 954: Recovery of executive compensation (proposed rules issued July 1, 2015 and listed in the short term “proposed rule stage” of the Spring 2020 Reg-Flex Agenda)
    • Section 956(a):  Compensation structure reporting at certain financial institutions (jointly proposed rules issued May 6, 2016 that continue to be characterized as a Long-Term Action on SEC’s recently released Spring 2020 Reg-Flex Agenda)
    • Section 956(b): Prohibition on certain compensation arrangements at certain financial institutions (jointly proposed rules

COVID-19 Business Risk Management: Addressing Supply Chain Risks

As public companies continue to manage vulnerabilities attendant to the global pandemic and its widespread economic consequences, counter-party risk assessments and careful management of those risks can be critical.  We previously blogged about a series of ongoing posts from our restructuring and special situations team relating to general and customer counter-party risk management during this time.  Most recently, the team provided its assessment of managing supply chain risks.

Our special situations team explores the need for vigilance with respect to the health and resilience of a company’s supply chain, especially for critical suppliers and those for which replacements are limited or nonexistent.  The team discusses some of the insolvency law issues attendant to suppliers and supply agreements; it also provides several risk mitigation strategies to help ensure continuity of supply and reasonableness of ongoing counter-party terms and conditions.  The team recommends companies engage in a fulsome assessment of all suppliers; consider supply chain diversification; and establish contingency plans for any suppliers who seem at risk.   The importance of knowing a company’s leverage and using it appropriately is discussed, as are practical issues pertaining to supplier possession of a company’s inventory or equipment.

While a company cannot control all of what is happening to its customers and suppliers, it can be fully cognizant of its counter-party risk assessments and implement strategies where appropriate to mitigate those risks.  When it comes time to report results for the quarter and the year, companies who have taken the time to take

SEC Issues More COVID-19 Disclosure Guidance as Quarter End Approaches

On June 23, 2019, both the Division of Corporation Finance and the Office of the Chief Accountant issued additional statements to public companies and their stakeholders about the importance of “high-quality” financial reporting and the need for focused analysis and disclosures in the context of the principles-based disclosure system.

The Division of Corporation Finance issued CF Disclosure Guidance Topic No. 9A, a supplement to Topic No. 9 issued near the close of the first quarter of this year (see our prior blog post on Topic No. 9 here).  The new guidance states that the Division is monitoring how companies are addressing COVID-19 related disclosures and encourages public companies to provide meaningful disclosures of the current and expected impact of COVID-19 through the eyes of management.  The key topics covered by the guidance are the effects of the pandemic on a company’s operations, liquidity and capital resources; the short and long-term impact of any federal relief received under the CARES Act; and the company’s ability to continue as a going concern.

The staff acknowledges that companies are making many operational changes as a result of the pandemic – from converting to telework to modifying supply chain and customer contracts, and now converting to the return to the workplace and business reopenings.  The guidance says that companies need to consider whether any or all of those changes “would be material to an investment or voting decision” and disclose accordingly.  The staff takes a similar tack with respect to the

COVID-19 Business Risk Management: Addressing Counter-Party Risk

June 11, 2020

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As public companies continue to manage vulnerabilities attendant to the global pandemic and its widespread economic consequences, counter-party risk assessments and careful management of those risks can be critical.  In a series of ongoing posts to our Retail Law blog, our restructuring and special situations team provides a useful paradigm for analysis and action.  The points made in this series are equally applicable to companies in many other industries.

Our special situations team discusses the importance of getting the finance and legal functions of the business on the same page as the sourcing and sales functions.  As they point out, to be effective with mitigation, all parts of the business need to quickly align in terms of identifying the level of risk each counterparty poses to the business (and how that counterparty’s inability to pay or deliver goods/services will impact the overall business).  In doing so, companies will be better able to allocate scarce resources to counterparties that pose the greatest degree of near-term risk while carefully watching future performance through the same filtered lens.  To help think about the analysis, the team has created a Heat Grid for Triaging Counter-Party Risk that can serve as a one-page resource.

Companies should look both at their customers and their suppliers in assessing risk and addressing mitigation measures.  The point is to be intentional about better assessing particular customer or supplier risk, putting processes in place

Frustrations Emerge Over Lack of Clear ESG Disclosure Standards Among Patchwork of Providers

Fallout from the COVID-19 pandemic appears to be sharpening some investors’ focus on ESG (Environmental, Social or Governance) matters, as evidenced by the SEC Investor Advisory Committee’s recent recommendation that the SEC mandate disclosure of “material, decision-useful, ESG factors” as relevant to each company.

The desire for more clarity around ESG disclosure is understandable.  More than a dozen non-profit and for-profit ESG data providers have emerged in this complex, booming market, according to a May 28, 2020 webinar of the Sustainability Accounting Standards Board and the Society for Corporate Governance.  The data providers generally fall into four distinct groups:  (1) providers who publish guidance for voluntary ESG disclosure, often with company feedback; (2) providers who request data from companies using questionnaires and then based on the answers issue reports or ESG ratings; (3) providers who compile publicly available ESG data about companies and issue ESG ratings based only on that publicly available information; and (4) providers who create assessments of companies based on public and/or private information to sell to investors.

Under the current patchwork, a public company can be the subject of an ESG assessment without knowledge that it occurred or an opportunity to give input or correct misperceptions, particularly in situations where the company has very limited ESG disclosures because ESG issues were not deemed material and not required to be disclosed under SEC rules.  For public companies trying to navigate the maze of ESG issues and disclosures, frustration can easily emerge.  The different ESG assessment

PPP Loan Recipients: And Now Liability Risks under the False Claims Act?

Borrowers under the Paycheck Protection Program (“PPP”), particularly those public companies who received more than $2 million, are juggling a lot these days.  Watching the ever shifting positions of the SBA with respect to eligibility, carefully applying loan proceeds, properly applying for loan forgiveness, preparing for SBA loan reviews, coordinating with existing lenders and other stakeholders, making required current and quarterly disclosures, and attending to liquidity and business continuation risks would seem too much for most mortals.  Now, those who monitor and advise with respect to fraud risk warn that an emerging significant risk to PPP loan recipients is the False Claims Act (FCA) – and more particularly, being the target of a private whistleblower who initiates a qui tam suit alleging fraud in connection with a PPP loan.

In a recent two-part series, we explored issues related to PPP loans and the FCA and provided guidance on mitigating fraud allegation risks.  The FCA imposes civil liability on individuals and companies that defraud the federal government.  In addition, many states also have their own FCA laws.  The FCA provides for the recovery of the funds fraudulently obtained, damages up to triple the amount of those funds, and potentially high monetary penalties for each false claim submitted.  The aggregate potential liability far exceeds the amount initially received from the government.  And because this is a civil liability, the standard for proving fraud under the FCA is significantly less than under a criminal statute.  The standard under the FCA is

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