Weinberg & Company

BEST PRACTICE Newsletter – December 2021

By December 16, 2021 No Comments

New Guidance for “Spring-loaded” Stock Awards –

Companies that issue stock compensation to executives right before a material event that has the potential to increase its stock price are now subject to new SEC guidance. Up until now, the SEC has scrutinized, but has not taken enforcement actions against these “spring-loaded” awards. But that’s about to change.

Spring-loaded awards are share-based compensation arrangements where a company grants stock options or other awards shortly before it announces market-moving information such as an earnings release with better-than-expected results or the disclosure of a significant transaction.

In its press release announcing new guidance, the SEC said, “As companies measure compensation actually paid to executives, they must consider the impact that the material nonpublic information will have upon release. Companies should not grant spring-loaded awards under any mistaken belief that they do not have to reflect any of the additional value conveyed to the recipients from the anticipated announcement of material information when recognizing compensation cost for the awards.”

Spring-loaded stock awards came into public scrutiny in 2020 after Eastman Kodak Company issued shares to executives just one day prior to announcing that it had been approved for a $765 million government-backed loan to manufacture drugs that protect against COVID-19. Kodak shares rose from $2.65 to $33.20 after the public announcement, leading to a congressional probe and putting a halt on the loan approval.

The resulting guidance came in a November 24 memo which focuses more on the valuation of the stock awards and less on timing, noting that if a company wants to grant stock awards to its executives prior to a positive, material financial event, it has to value the awarded shares based on what that anticipated stock price increase might be, and not on the pre-announcement share price.

The memo provides comprehensive guidance for both publicly traded companies as well a soon-to-be publicly traded companies.

Stock Buybacks Hit Another Record

Stock repurchases among S&P 500 companies hit a record of $234.5 billion in Q3 2021 and are expected to reach $236 billion in the fourth quarter, according to preliminary data from the S&P Dow Indices. This increased activity comes as Congress debates a massive legislative bill that currently includes the imposition of an excise tax on stock buybacks.

The Wall Street Journal is reporting that stock repurchases have contributed to the 2021 market rally leading to a record rise in stock indexes in 2021. The S&P 500 alone is up about 25% this year, and experienced 67 record closes.

Stock repurchases among S&P 500 companies have risen with each quarter of 2021, starting with $178.1 billion in Q1 and $198.8 billion in Q2.

S&P 500 stock buybacks had plunged in 2020 when uncertainty over the pandemic forced companies to conserve cash. Stock buybacks fell sharply from $199 billion in Q1 2020 to $89 billion in Q2 2020.

As Best Practice reported in its September 2021 issue, stock buybacks have come under scrutiny from some members of Congress who wanted companies to use cash to reinvest in their businesses rather than support stock prices.

To curtail buybacks, Democrat Senators Sherrod Brown (OH) and Ron Wyden (OR) introduced the Stock Buyback Accountability Act which if passed would have imposed a 2% excise tax on the value of any corporate securities purchased by the company.

Since then, a new version, included in the $2 trillion Build Back Better Bill that passed in the House in November, calls for a 1% tax on the net value of a company’s stock buyback. That bill now awaits a vote in the Senate.

Robust IPO Market Sparks CFO Turnover

Gender Diversity Increases

Thanks to a robust IPO/SPAC market and increased activity in private equity transactions, competition for CFO talent is intense, resulting in a higher turnover rate than in the previous two years.

A 2021 survey of CFOs at S&P 500 companies conducted by executive search firm Russell Reynolds Associates revealed that a larger number of CFOs spent 2021 looking for more lucrative job opportunities than they did in the prior two years– mirroring a trend found among lower-ranked workers.

“Many CFOs are moving to smaller companies, underscoring the wealth of opportunities with newly-public or soon-to-IPO companies,” said the survey.

The highest CFO turnover rate was in the Consumer/Retail sector, which experienced a 29% turnover rate in 2021, followed by the Industrials sector, which experienced a 26% turnover rate.

These two sectors “have had to pivot dramatically due to COVID-19-induced issues such as supply chain disruption and local regulations imposing new operational restrictions. In just the last year, consumer/retail turnover nearly doubled, suggesting the disruptions are far from over.”

During the first 10 months of 2021 when the survey was conducted, S&P 500 companies reported 78 CFO transitions, representing a 16% turnover rate across all sectors. More were expected by year end. Major reasons cited for the turnovers included CFOs being lured by new openings created by SPAC acquisitions, and the rise in stock prices which allowed many CFOs to retire on the gains.

In light of intense competition for external hires, the survey found that companies are filling CFO positions by promoting from within where possible. Women benefited greatly from the turnovers, “comprising 33% of new CFO appointments in 2021, almost double last year’s rate,” reported the survey.

697 Companies Charged with SEC Violations

Fueled in large part by the SEC’s whistleblower program, the regulatory agency filed 697 enforcement actions against companies in fiscal year 2021.

Of the 697 actions filed, 434 were new enforcement actions, a seven percent increase over the prior year, according to the SEC press release. ”Seventy percent of these new or ‘stand-alone’ actions involved at least one individual defendant or respondent. The new actions spanned the entire securities waterfront, including against emerging threats in the crypto and SPAC spaces,” said the SEC.

Another 120 actions were against new issuers who were delinquent in making required SEC filings and 143 were “follow-on” administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders.

The regulatory agency also reported that in FY 2021, it also obtained judgments and orders for nearly $2.4 billion in disgorgement, and more than $1.4 billion in penalties, the latter a 33% increase from 2020.

Whistleblowers had a record year, with the SEC awarding a total of $564 million to 108 whistleblowers. With the close of FY 2021, the whistleblower program surpassed $1 billion in awards over the life of the program which was created by Congress in July 2010 as part of the Dodd-Frank Act.

The SEC said that it filed enforcement actions across new areas, including a number of first-of-their-kind actions, including:

·    Involving securities using decentralized finance, or “DeFi,” technology;

·    Charging securities law violations on the “dark web”;

·    Enforcing a key rule on the duties of municipal advisors;

·    Involving Regulation Crowdfunding;

·    Charging an alternative data provider with securities fraud;

·    Involving failures to timely file and deliver Forms CRS.