On Friday, Corp Fin Director Keith Higgins delivered this speech on Regulation D in an effort to correct any misperceptions out there. For starters, since the general solicitation were relaxed six months ago, 900 new offerings have been conducted, raising more than $10 billion in new capital (but that pales in comparison to 9200 offerings resulting in the sale of $233 billion over the same period in the prior year). Here is a recap of the speech’s main points from Stinson’s Steve Quinlivan’s blog:
1. Reasonable Steps to Verify – Some believe that the reluctance of issuers to use the new Rule 506(c) exemption is because the rule requires that the issuer take “reasonable steps to verify” the accredited investor status of a purchaser. It’s not true that the rule requires that an accredited investor produce his or her tax returns or brokerage statements in all circumstances. There are actually two paths for complying with the rule’s verification requirement. Issuers can rely on one of the four non-exclusive verification methods for a natural person that, if used, would be deemed to satisfy the verification requirement. The other method, however, is the principles-based verification method in which the issuer would look at the particular facts and circumstances to determine the steps that would be reasonable to verify that someone is indeed an accredited investor.
When using the principle-based verification method consider:
– How much information about the prospective purchaser does the issuer already have? The more information the issuer has indicating that the person is an accredited investor, the fewer verification steps that it may have to take to comply with the rule’s requirement.
– How did the issuer find the prospective investor? A person that the issuer located through publicly-accessible and widely-disseminated means of solicitation may need to undergo a greater level of verification scrutiny than a person who may have been pre-screened as an accredited investor by a reasonably reliable third party.
– Are the terms of the offering such that only a person who is truly an accredited investor could participate? The ability of a purchaser to satisfy a minimum investment amount requirement that is sufficiently high such that only accredited investors, using their own cash, could reasonably be expected to meet it is relevant in deciding what other steps are needed to verify accredited investor status.
The SEC has had recent inquiries asking whether the staff would provide guidance – presumably on a case-by-case basis – confirming that a specified principles-based verification method constitutes “reasonable steps” for purposes of the rule’s requirement. Mr. Higgins noted the notion of the staff reviewing and approving specific verification methods seems somewhat contrary to the very purpose of a principles-based rule and he is not yet convinced of the need for this type of staff involvement. According to Mr. Higgins, while the staff may not be in a position at this point to provide guidance on what constitutes “reasonable steps” under particular circumstances, he believes the staff will not be quick to second guess decisions that issuers and their advisers make in good faith that appear to be reasonable under the circumstances.
2. Definition of “General Solicitation” – Mr. Higgins noted another commonly-heard criticism is that the definition of a “general solicitation” is too vague, creating so much uncertainty about whether a particular communication or activity is a form of general solicitation that issuers have adopted a very cautious mindset about the new Rule 506(c) exemption. He stated some may even be under the erroneous impression that the Commission has broadened the definition so that activities such as “venture fairs” and “demo days” are now prohibited. The truth of the matter is that the recent rulemaking has not changed any notions of what constitutes a general solicitation.
3. “Overhang” of the 2013 Regulation D Proposal – Mr. Higgins observed that he cannot predict what the Commission will ultimately do on the pending Regulation D rule proposal, but he spoke to a fear the staff has heard expressed that the proposed requirements and penalties might be applied retroactively to offerings conducted before the adoption of the proposal. He pointed to comments of SEC Chair White where she stated that issuers are not expected to comply with any aspect of the rule proposal until such time as the Commission approves a final rule and such rule becomes effective. Ms. White also expressed her expectation that the Commission will consider the need for transitional guidance for ongoing offerings that commenced before the effective date of any final rules, as it did when it adopted Rule 506(c) last summer.
Shareholder Proposals: Commissioner Gallagher Wants Can of Worms Re-Opened
In this speech, SEC Commissioner Gallagher – while discussing the continued federalization of corporate governance – highlighted what he believes are shortcomings of the current shareholder proposal process. Not a new concept, Gallagher pushes for a higher ownership bar – so that only institutional investors can submit proposals – and a longer holding period. He has beefs with other part of the process too (egs. “proposals by proxy,” false & misleading statements, ability to submit same proposals year after year). [Here’s my 90-second video on Corp Fin’s role in the process.]
While many of these ideas might be appealing to corporate factions, the reality is that no area is more challenging to change than the shareholder proposal rule. The fixes are not as easy as some might think (eg. does it matter whose idea it is if a large slice of shareholders support it? how many years is reasonable for a new idea to take hold with a broader shareholder population? the answer certainly is more than one). The last time Rule 14a-8 was revised was in 1998 – and the battle over those changes was intense with a record number of comments at the time. And that was before the true Internet and social media era. Nowadays, I can’t fathom how many comments would be received by the SEC on a proposal (eg. Bebchuk’s mere petition on political contribution disclosures has received over 600k comments).
Of course, controversy is no reason not to tackle a project – but it is a reality that must be confronted. Is this where you want to spend Corp Fin to spend a considerable amount of resources over a period of probably more than several years? Particularly when disclosure reform is not gonna be easy. Too many big projects get started and go nowhere fast. Remember proxy plumbing. Sometimes I feel like we are on a merry-go-round:
Chief Justice Strine’s Take: Dueling Interests of Management & Shareholders
Lot of people are talking about this new 54-page essay by Delaware Chief Justice Leo Strine about “Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologysts of Corporate Law.” It’s intended to “find some common ground between these dueling camps” of corporate manager and shareholder advocates. It’s chock full of analysis of the Bebchuk v. Lipton debate, although Marty is not mentioned except in the footnotes. And there are many Lipton footnotes…
Meanwhile, Berkshire Hathaway Vice Chair – Warren Buffett’s partner – has weighed in on the state of corporate governance in this Stanford article…
In this 20-second video, Cap’n Cashbags – a CEO – just hanging out with his fellow CEO pals who serve on his board’s compensation committee – talks about enhancing his pay package:
How Stock Price Relates to Annual Meetings: Location, Location, Location
Here’s an odd WSJ article – describing a study finding a relationship between stock performance and the location of annual meetings (ie. companies holding their meetings far from home tend to post a 6-month stock performance that trails other companies by anywhere from 3% to nearly 12% and to post weak results in their next quarterly earnings reports). Don’t forget my 80-second video entitled “Annual Shareholder Meetings: Far-Flung Locations? Why?“…
Our “Q&A Forum”: The Big 8000!
In our “Q&A Forum,” we have blown by query #8000 (although the “real” number is much higher since many of the queries have others piggy-backed on them). I know this is patting ourselves on the back, but it’s over 13 years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been well over 25,000 questions answered.
You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis and that any answers don’t contain legal advice.
The hits keep on coming! In this 2-minute video, find out 32 great ways that Prudential Financial (Peggy Foran & her team) enhances the usability of its 2014 proxy statement (with Addison’s help). In particular, check out this infographic about the company’s value creation model – part of its commitment to integrated reporting:
The video above doesn’t address the online version of the proxy statement – which is worth a video on its own!
Exclusive Forum Bylaws: An Illinois Court Weighs In
In this transcript ruling, an Illinois state court dismissed an action brought by purported stockholders of Beam Inc. challenging Beam’s proposed acquisition by Suntory Holdings Limited. The Illinois court ruled that the action was barred by a bylaw adopted by Beam’s board of directors selecting Delaware as the exclusive forum for resolution of certain disputes involving the internal affairs of the corporation. The Illinois court relied heavily on the Delaware Court of Chancery’s decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp., wherein then-Chancellor Strine upheld similar exclusive forum bylaws adopted by the boards of Chevron and FedEx. The Illinois court factually distinguished Galaviz v. Berg, a California federal court case that refused to honor an exclusive forum bylaw adopted by Oracle, but also stated that the Boilermakers decision is “simply more persuasive analytically.”
Courts in New York and Louisiana have also dismissed stockholder actions in reliance on exclusive-bylaws in favor of Delaware.
Transcript: “The Top Compensation Consultants Speak”
We have posted the transcript for the recent CompensationStandards.com webcast: “The Top Compensation Consultants Speak.”
Thanks to Intelligize, here are the most common risk factors during ’13 based on their research looking through both ’34 Act and ’33 Act filings last year:
1. Failure to Compete Successfully
2. Trading Market May Not Develop/Potential Share Price Volatility
3. Dependence on Management Team
4. Difficulty Raising Capital/Insufficient Funding
5. General Economic/Consumer Spending Conditions
6. Failure to Protect Intellectual Property Rights
7. Negative Impact of Changes in Regulations/Policies
8. Dividends May Never Be Paid
9. Principal Shareholders/Management Will Have Significant Control
10. Anti-Takeover Provisions May Prevent a Merger/Acquisition
Here are some runner-ups:
– History of Losses/No Revenue
– Operational Disruptions
– Potential/Current Litigation/Claims
– Dilution in Ownership Due to Future Share Issuances/Conversions
– Failure to Maintain Effective Internal Controls
– Failure to Manage Growth / Expansion Costs
– Integration Challenges from Merger/Acquisition
Too Many Risk Factors vs. Potential Liability: Where Is The Line?
Recently, I blogged – on my “Proxy Season Blog” – about “Will Corp Fin Start Objecting to Too Many 10-Q Risk Factors?” Meanwhile, Doug Greene of Lane & Powell ran this excellent blog on limiting your liability by improving the quality of your safe harbor warnings. I picked his brain by asking: “Now that disclosure reform is being discussed, some investors are complaining about too many risk factors – and I guess perhaps a safe harbor disclaimer that is too much kitchen sink would also be a complaint. How does a company attempt to manage its risk to litigation if only a handful of risk factors is allowed? Think investors want more than just killing the boilerplate.”
Doug responded:
The tension between curtailing risk factors and making them more meaningful is difficult. But it’s possible to harmonize the two goals, and the solution may even be the same: a sharper focus on the company’s real risks and more straightforward descriptions. The problem then becomes how to design and implement a better system for disclosing risks. Companies know their real risks and can plainly describe them, but should we leave them to do it or continue to provide a complex set of instructions? I think that companies, overall, would get it right under a streamlined system.
Dramatic readings are all the rage on YouTube. So to illustrate the silliness of some of the more common risk factors, one of the series on CorporateAffairs.tv features a variety of folks joining together to dramatically read a risk factor. Here are two of them:
To deal with space constraints on voting instruction forms, Broadridge’s Independent Steering Committee recently approved these updated VIF guidelines, updating the original guidelines I blogged about before.
Under the revised guidelines, if Broadridge receives a VIF from a company that has too much language to neatly fit, they will inform the company within 24 hours – and then the company has 3 choices:
1. Direct Broadridge to follow the guidelines about how to pare back the text
2. Submit revised edited language so that it meets the space requirements
3. Request Broadridge to use the lengthy text as originally provided – a Custom VIF – with an extra processing cost incurred
Broadridge Rolls Out More Proxy Cards/VIFs with QR Codes: Mobile Voting Growing Fast for Retail Holders
Recently, Broadridge posted its stats for the ’13 proxy season. Last proxy season, Broadridge rolled out the use of QR codes on proxy card and VIFs, with each QR code being personalized (meaning embedded in the code is the personalized and secure Control Number that is associated with the account’s position). Last year, a handful of companies participated in the pilot – about 1,000 investors used it out of about 1.1 million notices mailed with QR codes printed on them. This proxy season, the number of pilot companies was closer to two dozen.
QR codes appear to be a natural extension of Broadridge’s Mobile ProxyVote since scanning a QR code with a mobile device brings the investor directly to the agenda to vote. Mobile ProxyVote is a version of ProxyVote that is gaining in popularity with about 826,000 accounts voted this proxy season – twice as many as last year. Mobile voting represented about 8% of all positions voted via Broadridge’s Internet platforms for retail shareholders.
Recently, Forbes ran this article entitled “The Broad Reach Of Broadridge, The Most Important Financial Firm You’ve Never Heard Of.”
More on our “Proxy Season Blog”
I continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Shareholder Proposals: “Enhanced” Confidential Voting Policies & Interim Vote Tallies
– 2013 Foxhole of the Year Winner
– Shareholder Proposals: DTC Changes Its Participant List
– Recap: SEC’s Proxy Advisors Roundtable
– The Role of Shareholder Proposals: Ending Apartheid
– Icahn Tweets Intention to Submit Shareholder Proposal at Apple
In this 2-minute video, find out 21 great ways that General Electric enhances the usability of its 2014 proxy statement (with Addison’s help):
In his blog, Mark Borges has written an extensive 2-part analysis of GE’s proxy statement. And if you missed it, here’s a 2-minute video on the 18 cool things in Coke’s proxy…
Delaware’s New Chancellor: Andy Bouchard
Yesterday, as noted in this article, the Delaware Governor tapped Andy Bouchard to serve as the Chancellor of the Court of Chancery, succeeding Leo Strine in that position. Andy is the managing partner of Bouchard, Margules & Friedlander, a firm he and former Vice Chancellor Stephen Lamb founded in 1996 as a litigation boutique after serving a decade at Skadden. Here’s a BusinessWeek article. Andy will be the 21st Chancellor once confirmed by the Senate…
Transcript: “M&A Litigation: The View from Both Sides”
We have posted the transcript for the recent DealLawyers.com webcast: “M&A Litigation: The View from Both Sides.”
Over the last few weeks, there has been a sudden influx of groups issuing guidelines on shareholder engagement practices. A few weeks ago, I blogged about the new SDX protocol – and now we have a group of three documents from The Conference Board Governance Center:
Here’s my Final Four: Michigan over Virginia in the Final; Wisconsin & Kansas round it out. Just love this GIF of Ben McLemore dancing in the locker room last year…
Our “Shareholder Engagement Checklists”
Some good stuff in those new documents. And we do have a lot of good practical stuff in our own “Shareholder Engagement Checklists”:
Yesterday morning, I got this press release announcing that ISS had been sold by MSCI to Vestar Capital Partners to the tune of $364 million. Drats! Fooled again by a rumor in the mass media as I had blogged last week about another likely purchaser due to a WSJ article.
The transaction is expected to close in the second quarter. ISS will operate independently and the current ISS executive team will remain in place. Here’s a Reuters’ article…
CII’s Letter on Interim Vote Tallies
Concerns about who gets to see interim vote tallies continues. Here is CII’s recent letter to the SEC on the topic. And here is my 4-minute video entitled “Broadridge’s Interim Vote Tally Policies”…
Transcript: “The SEC Staff on International Issues”
We have posted the transcript of the recent webcast: “The SEC Staff on International Issues.”
As noted in its Form 8-K, Hologic is the 2nd company holding its annual meeting in 2014 to fail to gain majority support for its say-on-pay with only 34% voting in favor (down from 65% last year).
With 74 say-on-pay failures in ’13 – more than most folks predicted in last year’s poll – what will this year bring? Please take part in this anonymous poll:
survey services
March-April Issue: Deal Lawyers Print Newsletter
This March-April Issue of the Deal Lawyers print newsletter includes:
– A History Lesson: The SEC’s Office of Mergers & Acquisitions
– A Look Back: Regulation M-A & The “Five-Business” Day Rule
– Still Risky Business: Unlicensed M&A Advisors After the Six Lawyers Letter
– The Board’s Evolving Role in Shareholder Communications
– When You’re Selling the Company, Are You Selling the Attorney-Client Privilege Too?
– “Dual Track” Structure Remains Useful to Strategic Acquirors: Even After DGCL Section 251(h)
If you’re not yet a subscriber, try a 2014 no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Shareholder Proposals: Chevedden Wins Another Lawsuit!
Last week, I blogged about how John Chevedden had won two lawsuits involving his shareholder proposals over the past week. Make that now three – as John has won this “proposal by proxy” decision in a lawsuit filed by Chipotle in a federal district court in Colorado…
John is included in this 1-minute video explaining who “shareholder proponents” are:
