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Monthly Archives: August 2012

August 31, 2012

Delaware Supreme Court Affirms Damages and Fee Award in Southern Peru

Here are two items that I posted on my DealLawyers.com Blog this week: Earlier this week, the Delaware Supreme Court affirmed Chancellor Strine’s decision from last year in Southern Peru. Justice Berger filed a brief partial dissent disagreeing with the Chancellor’s attorney’s fee analysis. Here’s analysis from Richards Layton (we are posting memos in our “Minority Shareholders” Practice Area) – and here’s a piece by Alison Frankel.

Corp Fin Issues No-Action Letter on Day-20 Pricing in Tender Offers

Here’s news from Gibson Dunn’s “Securities Monitor Blog“:

The SEC’s Division of Corporation Finance recently granted no-action relief to Sonic Automotive, Inc., allowing Sonic to utilize “Day 20″ pricing in its recent exchange offer wherein the company offered to exchange common stock and cash for its outstanding convertible debt securities.

The exchange offer employed a VWAP formula pricing mechanism with the final price becoming fixed and publicly announced at 4:30 p.m. on the same day the offer was scheduled to expire at midnight. In addition, the exchange offer incorporated a fixed minimum and maximum purchase price where the company agreed to extend the offer by two business days should the formula result in a purchase price at the maximum amount specified.

Interestingly, it appears that counsel sought and obtained no-action relief during the pendency of the exchange offer. Thus, it seems the 20-day pricing issue may have caught the Staff’s attention during its review. The letter serves as a steady reminder to issuers regarding the need for early consideration of whether to seek no-action relief and consulting with outside counsel before utilizing “Day 20″ pricing in a tender offer. We have previously discussed the Staff’s position regarding “Day 20″ pricing.

Dodd-Frank: SEC Issues Financial Literacy Study

Yesterday, the SEC issued this financial literacy study as required under Section 917 of Dodd-Frank. Here’s an excerpt from the press release:

The study identifies investor perceptions and preferences regarding a variety of investment disclosures. The study shows that investors prefer to receive investment disclosures before investing, rather than after, as occurs with many investment products purchased today. The study identifies information that investors find useful and relevant in helping them make informed investment decisions. This includes information about fees, investment objectives, performance, strategy, and risks of an investment product, as well as the professional background, disciplinary history, and conflicts of interest of a financial professional. Investors also favor investment disclosures presented in a visual format, using bullets, charts, and graphs.

Here’s a depressing analysis of the study, courtesy of New York Magazine…

- Broc Romanek

August 30, 2012

SEC Proposes Rule 506/144A Changes Including Removing General Solicitation Ban

Yesterday, the SEC voted – 4-1 (Commissioner Aguilar dissented) – to propose a rule to eliminate the general solicitation and general advertising ban for offerings conducted under Reg D’s Rule 506 and Rule 144A. This rulemaking was required by Section 201(a) of the JOBS Act, which did not provide much flexibility for the agency. There is a short 30-day comment period. Here’s the press release – and here’s the proposing release (we’re posting memos in our “Regulation D” Practice Area).

As expected, the proposed rule doesn’t mandate a specific verification method (nor list a series of acceptable ones) – companies would have the flexibility to determine what are reasonable steps based on the facts and circumstances (egs. nature of the purchaser, type of information known about the purchaser, and type of the offering). Meredith Cross noted that the SEC would form a multi-divisional task force to gauge what steps companies are taking to verify accredited investor status.

During the open Commission meeting, some Commissioners noted they wished this proposal had come out sooner and in the form of an interim final rule (Paredes and Gallager). Essentially, a vote “against” the process leading to the proposal. The need for speed for these Commissioners astonishes me given the importance of what we are talking about. During her remarks, Chair Schapiro noted that just over $1 trillion was raised in exempt offerings during 2011, comparable to the amount raised in registered offerings during the same period. I don’t think 30 days worth of commenting will kill the capital markets. After all, the mission of the SEC is about investor protection. At least, the last time I looked…

Tune in on Wednesday, September 5th for the webcast – “JOBS Act Update: Where Are We Now” – that will cover this proposal, as well as analyze evolving market practices and all the latest from the SEC on the JOBS Act. The program features Corp Fin Deputy Director Lona Nallengara, Wilson Sonsini’s Steve Bochner, Latham & Watkin’s Joel Trotter, Davis Polk’s Michael Kaplan and Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net.

SEC Posts Draft Taxonomy for Form SD

Yesterday, the RiskFin Staff posted draft Form SD taxonomy related to disclosure of payments by resource extraction companies. Comments are due by Halloween – and can be provided via this input form by including “Draft Form SD Taxonomy” in the “General subject matter” section.

California Rules Facebook’s Instagram Acquisition is “Fair”

Keith Bishop gives us the news that the result of California Department of Corporations ‘s fairness hearing yesterday regarding Facebook’s purchase of Instagram was favorable for the social media giant.

- Broc Romanek

August 29, 2012

IPO Process Overhaul: Chair Schapiro Responds to Rep. Issa

Related to this WSJ article, here’s news from Cydney Posner of Cooley: The Wall Street Journal has posted SEC Chair Mary Schapiro’s response letter to the inquiry from Darrell Issa, Chair of the House Committee on Oversight and Government Reform. [Broc's note: The WSJ's link to the letter is now dead.]

You may recall that Chair Issa’s letter was prompted by concerns over the Facebook IPO and asked a number of questions regarding IPO pricing mechanisms, communications and other matters, with a view toward revamping the IPO process. Chair Schapiro indicates in her letter that the staff is monitoring the impact of the JOBS Act and that she has previously asked the staff to review the offering communications rules and to consider issuance of a concept release. She noted that “[e]nsuring that our communications rules facilitate, not hinder, the ability of an issuer to communicate with all investors is an important aspect of the staffs review of these rules.” However, not surprisingly, she seemed to detect a few more benefits in the current system than did Chair Issa.

SEC: Today’s Open Commission Meeting Could Be Interesting

As Dave blogged last week, the SEC pushed back consideration of changes to Rule 506 and general solicitation in the wake of a highly publicized fracas of whether the new rules should be proposed first or instead adopted as interim final rules. The open Commission meeting to consider these changes is today. Cooler heads seemed to have prevailed and the rules appear that they will be proposed first.

Here’s a short WSJ opinion piece penned by Corp Fin Director Meredith Cross from earlier this week, defending the decision to first propose the rules. Heavy duty politics continue to place pressure on the SEC, during a time when the agency is adjusting to new demands placed upon it by the courts (as well as others including the Office of Information and Regulatory Affairs as noted in this WaPo article). Not a good mix.

Tune in next Wednesday for our webcast – “JOBS Act Update: Where Are We Now” – to discuss the results of this open meeting, plus much more about what the SEC has done lately – and what is becoming standard market practice – under the JOBS Act.

More on our “Proxy Season Blog”

We 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:

- Proxy Advisor Regulation: European Style
- It Was Written in The Stars – Not the Merger Agreement
- The Future of Private Ordering of Proxy Access
- Exclusive Forum Provisions Update
- Mid-Season Proxy Season Update: UK and US

- Broc Romanek

August 28, 2012

Dave & Marty on Specialized Disclosures and Van Morrison

In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:

- Conflict mineral disclosure rules
- Disclosure of payments by resource extraction issuers
- Favorite Van Morrison song

Say-on-Pay: Now 57 Failures

I’ve added two more companies to our failed say-on-pay list for 2012 on CompensationStandards.com as Applied Micro Circuits and Iconix Brand Group have failed during the past week or so. We are now at 57 companies in ’12 that have failed to garner major support. Hat tip to Karla Bos of ING Funds for keeping me updated.

Survey: ISS & Glass Lewis Experiences

Ahead of our panel – “How to Work with the Proxy Advisors: Navigating the Say-on-Pay Minefield” – during our “Say-on-Pay Workshop: 9th Annual Executive Compensation Conference” on October 9th, Pearl Meyer & Ptrs is conducting this brief survey about your experience with proxy advisors during the past year. Please participate.

Register Now: Only six weeks until our action-packed pair of executive pay conferences – register now.

- Broc Romanek

August 27, 2012

SEC Staff’s FAQs: Research Analysts and Underwriters

On Thursday, the SEC’s Division of Trading and Markets issued this set of 14 FAQs about research analysts and underwriters. As noted in this memo, the FAQs are consistent with positions announced by the Staff at various conferences, but do contain some new information, and provide a helpful written statement of SEC staff positions on several important matters.

Facebook’s California Fairness Hearing

The mass media has studiously covered the steady drop in Facebook’s stock price – including the recent expiration of lock-ups last week (also see Robert White’s blog regarding the lock-up lessons learned) – but only Keith Bishop has followed Facebook’s request for a fairness hearing before the California Department of Corporations for its acquisition of Instagram. Check out Keith’s program guide to the fairness hearing.

ISS Extends Policy Survey Period Til This Friday

ISS has extended its survey period through this Friday, August 31, and will be followed by an open comment period in October after which ISS will publish its draft policies. Unless specifically requested by the submitter, feedback received during the October open comment period will be made available publicly via ISS’ online Policy Gateway.

- Broc Romanek

August 24, 2012

The State of Cybersecurity Disclosure: Is Congressional Action Next?

It is now going on a year since the SEC issued CF Disclosure Guidance: Topic No. 2, Cybersecurity, and since that time I have been interested in seeing how the Staff has followed up on the guidance in the course of the 10-K review process. It turns out that much like after the Commission issued its interpretive release on climate change disclosures back in 2010, there hasn’t been a huge uptick in the number of comments directed at the topic. The Staff has said that the main focus of comments in this area has been on situations where there has been some reported breach, and the Staff is thus particularly interested in seeing specific disclosure about that breach and the related risk or MD&A disclosure. Given this focus, there have not been many instances that I have come across where the Staff is just fishing for cybersecurity disclosures, or commenting specifically on the sometimes vague or generalized risk factors that many issuers have now added.

It seems that perhaps Congress isn’t too satisfied with the SEC’ cybersecurity disclosure efforts, because a provision in the cybersecurity bill that stalled in Congress before the August recess addresses the SEC’s guidance and implementation efforts in a “sense of Congress” statement. Notably, Section 415 of S. 3414 observes that information security risks and related events that are material to investors should be disclosed, and to this end the SEC (not later than 1 year from enactment) should evaluate existing guidance, including CF Disclosure Guidance: Topic No. 2, to determine whether the guidance should be updated or issued as an interpretive release. Under the Senate bill, the SEC would also have to provide an annual report to Congress describing the types of security risks and related events disclosed by issuers in the prior year, whether the Staff required additional information of issuers, any awareness efforts undertaken by the SEC , and any enforcement actions relating to disclosure requirements for information security risks.

Could a new “Form CS” be too far behind?

Digging into Form SD

It is not too often that a new Exchange Act form comes along, so the first thing I turned to in the conflict minerals and payments by resource extraction issuers adopting releases was the Form SD appearing at the back. Because the SEC adopted the rules in two separate releases, you have to look at both to get the full picture of Form SD, because it is pulling double duty for both conflict mineral disclosure and disclosure of payments by resource extraction issuers (technically, the conflict minerals release adopted Form SD and then the other release amended it). Here are some of my own questions and answers about Form SD:

Does the Form SD reference Regulation S-K?
No, the SEC opted to have all of the disclosure requirements resident in Form SD itself, rather than adopting separate Regulation S-K items or amending Item 601 of Regulation S-K with respect to the exhibits. In this regard, Form SD is similar to Form 8-K, which for the most part includes the disclosure requirements directly in the items of the form.

Who signs Form SD?
General Instruction F to Form SD provides that the report “must be signed by the registrant on behalf of the registrant by an executive officer.” The form is not specific as to which executive officer must sign.

What exhibits are required with Form SD?
A Conflict Minerals Report (if required) and a Resource Extraction Issuer Disclosure Report are required to be filed with Form SD.

Are certifications required with the Form SD?
No certifications are required to be filed with Form SD.

What if the deadline for Form SD falls on a Saturday, Sunday or holiday on which the SEC is not open for business?
General Instruction B.2. of Form SD provides that, in this situation, the deadline for the form will be the next business day.

Does the Form SD have to filed on EDGAR?
Yes, and the Resource Extraction Issuer Disclosure Report must be tagged using XBRL.

Is the Form SD deemed “furnished” or “filed”?
The Form SD is deemed “filed.”

What if the DC Circuit vacates either the conflict minerals rules or the payments by resource extraction issuers rules, would Form SD still be valid?
Both releases include the language: “If any provision of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application. Moreover, if any portion of Form SD not related to resource extraction disclosure is held invalid, such invalidity shall not affect the use of the form for purposes of disclosure pursuant to [Section 13(q) or Section 13(p)].”

The Second Deal Cube Tourney: Round One; 8th Match

As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:

- Large Ocean Ship
- Pillsbury Dough Boy
- Pink Shopping Bag
- House Shaped w/ Old Car & Offshore Drilling Rig

Online Surveys & Market Research

- Dave Lynn

August 23, 2012

Here Comes Form SD: The SEC Adopts Conflict Mineral Rules

At yesterday’s Open Meeting, a divided Commission adopted the conflict mineral disclosure rules required by Section 1502 of the Dodd-Frank Act. The final rules are described in a fact sheet and the adopting release including the final rules has already been posted (we’re posting memos in our “Conflict Minerals” Practice Area). The general contours of the final rules are similar to the proposed rules and are consistent with the statutory direction from the Dodd-Frank Act, however the Commission did make some notable adjustments in the final rules in response to comments, including:

1. The conflict mineral disclosures (including, if necessary, the Conflict Minerals Report) won’t be channeled into the existing periodic reporting regime (i.e. Form 10-K) as was proposed, and will rather now be provided in a new Form SD, with “SD” standing for “specialized disclosure.” (The SEC has been referring to the Dodd-Frank mine safety, conflict minerals and resource extraction disclosure provisions collectively as “specialized corporate disclosure.”)

2. The Form SD will be deemed “filed,” but there won’t be any separate CEO/CFO certifications involved. At the Open Meeting, the Staff downplayed the “furnished” versus “filed” distinction which wasn’t adopted with respect to the conflict mineral disclosures.

3. A new outcome is contemplated under the rules, at least on a temporary basis – “DRC Conflict Undeterminable.” For a two-year period (four years for smaller reporting companies), if an issuer is unable to determine whether the minerals in its products originated in the covered countries (the Democratic Republic of the Congo and adjoining countries) or finance or benefited armed groups in those countries, then the company provides specified disclosures in the Conflict Minerals Report but doesn’t have to obtain an independent private sector audit.

4. The SEC has made a number of accommodations in the case of minerals that come from recycled or scrap sources.

5. The SEC provided useful guidance in interpreting the term “contracting to manufacture,” by specifically carving out situations where a company is not deemed to have influence over the manufacturing of the product.

Application of conflict mineral disclosure rules to companies seems pretty complicated, however check out the flowchart on page 33 of the adopting release – it does a nice job of laying out the various disclosure outcomes. Also, as companies are considering whether these rules apply to them, it is important to consider the lack of any di minimis standard in the statute or rule, and just how ubiquitous the four minerals (tantalum, tin, gold or tungsten) in products and manufacturing processes. All public reporting companies, including foreign issuers and smaller reporting companies, will be subject to the rules, and whether any disclosure will be required at all turns on whether the minerals are “necessary to the functionality or production” of a product that the subject company manufactured or contracted to be manufactured.

There was a lot of discussion at the Open Meeting about the costs involved with compliance, with estimates in the range of $3 billion to $4 billion!

Companies must comply with the final rule for the calendar year beginning January 1, 2013, with the first reports due May 31, 2014. All conflict mineral reporting will be on a calendar year basis and the Form SD will be required annually on May 31st.

More Form SD: The SEC Also Adopts Resource Extraction Payment Rules

The SEC also adopted the final rules requiring disclosure of payments by resource extraction issuers as directed by Section 1504 of the Dodd-Frank Act. The final rules are described in a fact sheet and the adopting release including the final rules has already been posted. This rulemaking was also a source of contention for the Commission (albeit a much smaller Commission, because two Commissioners were recused), and in the end the SEC did make a few tweaks to the proposals in response to commenters. Like the conflict minerals disclosures, the required disclosures about payments be resource extraction issuers are filed on Form SD (rather than on Form 10-K as proposed), in an exhibit that is electronically tagged using XBRL. These rules likewise apply to domestic and foreign issuers, as well as smaller reporting companies (and include payments made by a subsidiary or another entity that the issuer controls). A de minimis threshold for disclosure was established at $100,000, rather than based on some notion of materiality as some had hoped.

Resource extraction issuers will need to comply with these new rules for fiscal years ending after September 30, 2013. For the first report, the SEC has said that most resource extraction issuers can provide a partial report disclosing only those payments made after September 30, 2013, and then thereafter reports covering the full fiscal year will be required no later than 150 days after the end of the fiscal year.

The Second Deal Cube Tourney: Round One; 7th Match

As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:

- Fancy Single Malt Whiskey Bottle
- Gnomes
- House
- Standard w/ Tender Offer Announcement

Online Surveys & Market Research


- Dave Lynn

August 22, 2012

SEC Delays Consideration of JOBS Act Rules

Yesterday, the SEC removed from today’s Open Meeting agenda the consideration of rules to eliminate the prohibition against general solicitation and general advertising in offerings conducted pursuant to Rule 506 of Regulation D and Rule 144A, as mandated by Section 201(a) of the JOBS Act. In a separate notice, the SEC indicates that it will now consider whether to propose rule changes under Title II of the JOBS Act on Wednesday, August 29th. The new notice clarifies that the changes to Rules 506 and 144A will be proposed, rather than published as interim final rules. I would expect that, given all of the fireworks over the last couple of weeks, there will be a short comment period with the expectation of moving to final rules relatively quickly, perhaps by the end of the year.

Remaining on the calendar for today’s Open Meeting, unfortunately, are the final rules implementing the conflict minerals and resource extraction disclosure provisions of Dodd-Frank.

Payday at the SEC: The First Dodd-Frank Whistleblower Award

The SEC announced that it has paid its first financial award to a whistleblower who provided “documents and other significant information that allowed the SEC’s investigation to move at an accelerated pace and prevent the fraud from ensnaring additional victims.” The anonymous whistleblower will receive at least $50,000 (30% of the amount collected by the SEC), and the award will continue to go up as the SEC is able to collect more in disgorgement and penalties in the case. This first whistleblower award comes a year after the SEC’s whistleblower rules under the Dodd-Frank Act were effective.

The Second Deal Cube Tourney: Round One; 6th Match

As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:

- Gatorade Bottle (Lemon Lime)
- Friendly Monster
- Tuxedo
- Octogan

Online Surveys & Market Research

- Dave Lynn

August 21, 2012

Beware of EDGAR Glitch Holding Up “Duplicative” Filings

I have been hearing from the financial printers for a while now about an odd automated EDGAR screening criteria which looks to see whether a registration statement filing is “duplicative” of another registration statement filing that the issuer has made, and sometimes when duplication is detected, the new filing is suspended until someone at the SEC can override the suspension and allow the filing to be accepted and disseminated. As this recent Weil Gotshal & Manges LLP alert notes, this process can be particularly problematic when an issuer is renewing its automatic shelf registration statement (which must be done periodically because the SEC’s rules provide that the registration statement expires every three years), because the delay in acceptance of the purportedly duplicative filing can mean a delay in the effectiveness of the automatic shelf registration statement, which can of course wreak havoc on the marketing and pricing of a transaction taking place around the time of the shelf filing.

When filings are made during ordinary business hours this is usually not a big problem, because the printers can work with the Staff to override the suspension. However, if the issuer is filing outside of the SEC’s hours (e.g., at night or first thing in the morning) in anticipation of a transaction with tight timing, there is a risk that the Staff might not be reachable to do the manual override. The Weil alert notes that the Corp Fin EDGAR Staff may be reached in the morning beginning at 7:30 am to address this issue, but in any event it seems best to avoid the potential disruption altogether by filing the new shelf registration statement when there is plenty of time to deal with EDGAR’s peculiarities.

We understand that the Staff in Corp Fin is aware of this issue and is looking into fixing the glitch with respect to automatic shelf registration statements, although it is not clear at this point when and if a repair will be implemented.

All Eyes on the Commission Tomorrow for Dodd-Frank and JOBS Rulemaking

If you had told me last winter that the SEC’s consideration of final rules implementing the Dodd-Frank Act conflict minerals provision would have been overshadowed by a debate about the removal of the general solicitation ban in Rule 506 offerings, I would have never believed you. But that is where we find ourselves as the Commission is set to consider tomorrow final rules for the remaining “specialized corporate disclosure” provisions of the Dodd-Frank Act, along with what at this point would appear to be proposed rules to implement Title II of the JOBS Act. I don’t want to get anywhere near the “debate” that is ongoing about the timing of the SEC’s JOBS Act rulemaking and in particular the implementation of Title II, but suffice it to say that whatever happens tomorrow will give us plenty to talk about on our upcoming webcast “JOBS Act Update: Where Are We Now” which will take place on Wednesday, September 5th from 2:00 – 3:00 pm eastern.

The Second Deal Cube Tourney: Round One; 5th Match

As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:

- Wrigley Field
- Ye Olde Medicine Bottle
- Yellow Telephone
- Submarine

Online Surveys & Market Research

- Dave Lynn

August 20, 2012

IRRC and GMI Ratings Study Looks at Director Election Outcomes

A recent study by the Investor Responsibility Research Center Institute and GMI Ratings found that only five percent of corporate directors receiving majority withhold votes are removed from boards, however approximately fifty percent are unseated at companies with majority voting standards. The study looks at the causes of withhold/against votes for directors, finding that fifty percent of withhold votes are attributable to corporate specific issues, and more than seventy-five percent of withhold votes can be attributed to six main factors: (1) poison pill adoption without shareholder approval; (2) failed attendance; (3) related party transactions; (4) overboarding; (5) company-specific compensation concerns; and (6) discontent regarding board oversight of a company’s affairs. The remaining portion are very much situational, where the circumstances leading to discontent with directors vary widely.

Our New “Related Party Transactions Disclosures Handbook”

Spanking brand new. Posted in our “Related Party Disclosures” Practice Area, this comprehensive “Related Party Transactions Disclosures Handbook” provides a heap of practical guidance about how to navigate under Item 404 of Regulation S-K. This one is a real gem – 63 pages of practical guidance…

The Second Deal Cube Tourney: Round One; 4th Match

As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:

- Crib, High Chair and Changing Table
- Takeout Cup
- Coffin
- Standard

Online Surveys & Market Research

- Dave Lynn