ADT Inc. 10-Q

ITEM 1A. RISK FACTORS. Our significant business risks are described in Part I, Item 1A “Risk Factors” in our 2023 Annual Report and in our other filings with the SEC. The risk factors described in our filings with the SEC and other information may not describe every risk facing the Company. There have been no material changes in our risk factors from those disclosed in our 2023 Annual Report, except as discussed below: While we are no longer a “controlled company,” we may continue to rely on exemptions from certain NYSE corporate governance requirements during a one-year transition period. Our Common Stock is listed on the New York Stock Exchange (the “NYSE”). Prior to March 19, 2024, Apollo controlled more than 50% of the combined voting power of the Company with respect to the election of directors, and we were considered a “controlled company” for the purposes of NYSE rules and corporate governance standards. While we were a “controlled company” under NYSE rules, we availed ourselves of applicable “controlled company” exemptions, which exempted us from certain requirements, including the requirements that we have a majority of independent directors on our Board of Directors and that the Compensation Committee of our Board of Directors (the “Compensation Committee”) and Nominating and Corporate Governance Committee of our Board of Directors (the “Nominating and Corporate Governance Committee”) be comprised entirely of independent directors. On March 19, 2024, following a registered secondary offering of the Company’s Common Stock by certain Apollo affiliates (and the Company’s concurrent repurchase from the underwriters of 15 million shares of Common Stock that were the subject of the offering), including the exercise of the underwriters’ overallotment option which closed on that date, Apollo’s combined voting power with respect to the election of directors fell to 49.5%, and we ceased to be a controlled company as of that date. Under NYSE rules, a company that ceases to be a controlled company must comply with the independent board committee requirements as they relate to the nominating and corporate governance and compensation committees on the following phase-in schedule: (i) at least one independent committee member at the time the company ceases to be a controlled company; (ii) at least a majority of independent committee members within 90 days of the date the company ceases to be a controlled company; and (iii) all independent committee members within one year of the date the company ceases to be a controlled company. Additionally, the NYSE rules provide a 12-month phase-in period from the date a company ceases to be a controlled company to comply with the majority independent board requirement. As of the date of this report, we have two independent committee members on each of the Nominating and Corporate Governance and the Compensation Committees of the Board, our Audit Committee is comprised entirely of independent directors and we are in compliance with the phase-in requirements described above. Until we are fully subject to these requirements, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE. Apollo continues to exert significant influence over us, and its interests may conflict with our interests and the interests of other stockholders. While we are no longer a “controlled company,” Apollo continues to be able to exert significant influence over us and as of June 30, 2024 had the right to, among other things, nominate 50% of our directors pursuant to the Amended and Restated Stockholders Agreement, dated December 14, 2018, (the “Stockholders Agreement”) between the Company and Ultimate Parent and the Co-Investors (as defined therein). The interests of Apollo and its affiliates, including funds affiliated with Apollo, could conflict with or differ from our interests or the interests of our other stockholders. For example, the concentration of ownership held by funds affiliated with Apollo could (i) delay, defer, or prevent a change in control of our company, (ii) impede a merger, takeover, or other business combination which may otherwise be favorable for us or that another stockholder may otherwise view favorably or (iii) cause us to enter into transactions or agreements that are not in the best interests of all stockholders. Additionally, Apollo and its affiliates are in the business of making investments in companies and may, from time to time, acquire and hold interests in or provide advice to businesses that compete directly or indirectly with us, or are suppliers or customers of ours. Apollo and its affiliates may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. Any such investment may increase the 42 potential for the conflicts of interest discussed in this risk factor. So long as funds affiliated with Apollo continue to directly or indirectly own a significant amount of our equity, even if such amount is less than 50%, Apollo and its affiliates will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions. In addition, we are party to the Stockholders Agreement with Ultimate Parent and the Co-Investor. The Stockholders Agreement specifies that we will not take certain significant actions without the prior consent of Ultimate Parent, including, among other things, hiring or terminating any Executive Officer of our company, designating any new Executive Officer of our company, entering into certain merger, consolidation or other “change of control” transactions or changing the size of our Board. The Stockholders Agreement also specifies that Ultimate Parent has the right to nominate individuals for election to our Board and that we are, to the fullest extent permitted by applicable law, required to nominate and recommend that each such individual be elected as a director, and the right to designate a member to each committee of our Board. Relatedly, our amended and restated Bylaws (the “Bylaws”) provide that Ultimate Parent and the Co-Investor have the right, subject to certain conditions, to have their representatives appointed to serve on committees of our Board. Recently, stockholders agreements and bylaw provisions of this nature have been challenged on the basis that they conflict with the Delaware General Corporate Law (“DGCL”). Following the recent decision from the Court of Chancery of the State of Delaware in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company holding that certain of those types of provisions are invalid under the DGCL, the Board received two demands from purported stockholders requesting that the Board take all action necessary to amend the Stockholders Agreement and the Bylaws to comply with the DGCL. Absent such changes, the purported stockholders threatened to take further action, including possibly commencing litigation. On July 17, 2024, the Governor of Delaware signed into law certain amendments to the DGCL, which became effective August 1, designed to address concerns following the Moelis decision (the “DGCL Amendments”). Among other things, the DGCL Amendments provide that even outside of its certificate of incorporation, a corporation can enter into agreements giving stockholders consent rights or specifying that the corporation, stockholders, or directors will take certain actions or will refrain from taking certain actions. The DGCL Amendments state that they do not apply to or affect any civil action or proceeding completed or pending on or before August 1, in which case the provisions of the DGCL predating the DGCL Amendments apply. As of the latest practicable time prior to filing this Quarterly Report on Form 10-Q, the Company is not aware of any such suit having been filed against the Company, but it is possible that any such suit may not yet be publicly available on the court docket.