Yesterday, Corp Fin issued a grab bag of new CFIs addressing beneficial ownership reporting, the proxy rules, Regulation Crowdfunding & the tender offer rules. Here are links to the CFIs, along with a brief description of what’s addressed in them:
Exchange Act Sections 13(d) & 13(g)
Section 105. Rule 13d-3 — Determination of Beneficial Ownership
New Question 105.08 – Cash-based total return equity swap (TRS) generally does not result in beneficial ownership of reference securities or plan or scheme to evade reporting.
New Question 105.09 – When a TRS swap will result in beneficial ownership of reference securities.
New Question 105.10 – Mental state required for a “plan or scheme” to evade reporting & application to a TRS.
Section 110. Schedule 13D
New Question 110.09 – Disclosure of identity of investors in an entity filing a 13D.
New Question 110.10 – Reporting obligations for general partners of a 13D reporting person that is a general or limited partnership.
Proxy Rules and Schedules 14A/14C
Section 155. Item 4
New Question 155.02 – Status of investors in an entity conducting a proxy contest as “participants” in a solicitation.
New Question 104.03 – Circumstances under which an issuer may use a widely disseminated press release to “publish, send, or give” the disclosure required by Rule 13e-4(d) to security holders.
New Question 131.04 – Circumstances under which a bidder may use a widely disseminated press release to “publish, send, or give” the disclosure required by Rule 14d-6 to security holders.
One of the things that we’ve all speculated about when it comes to the SEC’s semiannual reporting proposal is whether large cap companies would elect to move to semiannual reporting. While most issuers have remained mum about their intentions, one mega cap company recently went public about its plans to move to semiannual reporting. In a LinkedIn post, Prof. Ann Lipton flagged a recent comment letter submitted by Eli Lilly on the SEC’s proposal in which the pharmaceutical giant voiced its support and said that it currently intends to opt in if the rule is adopted.
Lilly says that it will supplement its semiannual reports with voluntary quarterly earnings releases, and that as a result, its decision will have a minimal impact on its investors. This excerpt explains Lilly’s position:
Lilly believes that the proposal will not meaningfully diminish the financial information available to our investors. In line with current market practice, Lilly initially and broadly disseminates its quarterly financial results through an earnings release. As a general matter, our earnings release contains all material information related to the applicable quarter. Subsequent to our earnings release, we file our quarterly report on Form 10-Q. Given this practice, we receive few inquiries from investors and other stakeholders about information available exclusively in our Form 10-Q filings.
If adopted, Lilly anticipates continuing to furnish quarterly earnings releases containing financial and operational metrics relied upon by investors to make informed and timely decisions. This is consistent with our longstanding practice and investor expectations. In combination with ongoing Form 8-K disclosure obligations, we believe that our investors and the public at large would continue to be well-informed with decision-useful information.
It appears that Lilly may not be the only member of Big Pharma that will move to semiannual reporting if the SEC approves the rule proposal. Check out this comment letter from a group of pharmaceutical companies that include not only Eli Lilly, but also Bristol Myers Squibb, Gilead Sciences, Johnson & Johnson, Merck and Pfizer. That letter says that “If the proposal is adopted, some of our Companies currently anticipate electing semiannual reporting on Form 10-S while continuing to furnish voluntary quarterly earnings releases to keep investors informed.”
It should be noted that Lilly and other commenters supporting the proposal are vastly outnumbered. In fact, if you judge solely on the comments submitted, allowing a semiannual reporting option looks to be less popular than wet socks. According to Prof. Tzachi Zach’s comment tracker, 99% of the 11,997 comments submitted to date oppose the proposal. Only 62 letters voice full-throated support for the proposal, while 67 offer conditional support. If you think that Prof. Zach got to that 99% number by including “astroturfed” form letters, you’re wrong – he excluded almost 60,000 of those letters from the count.
In addition to a distinguished group of expert practitioners, senior staff members from the SEC’s Division of Corporation Finance will also participate on the panels for both webcasts. Luna Bloom, Associate Director (Legal and Regulatory Policy), will participate in the filer status webcast, and Valian Afshar, Chief, Office of Rulemaking, and Ted Yu, Associate Director (Specialized Policy and Disclosure), will join us for the registration reform webcast.
Current members of The Corporate Counsel have access to this webcast with their subscription. Non-members can register here for complimentary access. We will apply for CLE credit in all applicable states (with the exception of SC and NE which require advance notice) for both of these one-hour webcasts.
By the way, if you’re a member of TheCorporateCounsel.net and you missed last month’s program on the SEC’s semiannual reporting proposal, you can always access a replay of that webcast and review the transcript. You can also pick up one hour of on-demand CLE credit for listening if you haven’t already. Not a member? We can fix that – try a no-risk trial now. Sign up online or contact our sales team at Sales@CCRcorp.com or by phone at 800-737-1271.
Yesterday, the SEC announced that its Small Business Capital Formation Advisory Committee will meet on Tuesday, July 21st at 10:00 am Eastern. Here’s the agenda for the meeting, which, as this overview from the SEC’s press release indicates, will continue the discussion about how to encourage more IPOs that began at the Committee’s last meeting:
Building upon ideas generated during the prior committee meeting, members will continue exploring ways to encourage more companies to go and stay public. The committee will consider ways to modernize the IPO process and potential regulatory reforms, including certain recently proposed SEC rulemakings aimed at reducing regulatory friction and facilitating capital formation in the public securities markets.
To facilitate discussion and deepen the committee’s understanding of the regulatory landscape, members will hear from SEC staff in the Division of Corporation Finance who will provide an overview of recent relevant rulemakings. Members will also hear from Daniel Zinn, General Counsel and Chief of Staff, OTC Markets Group, and Sue Washer, biotechnology consultant and former CEO of Applied Genetic Technologies Corporation, who will share their experiences and views on ways to further support small public company capital formation.
The meeting will be open to the public and will be live streamed on SEC.gov.
This Foley blog reviews a NACD chapter meeting with senior PCAOB officials during which the auditor inspection process was addressed. Topics addressed included how an inspection works, the QC 1000 audit standard, the PCAOB’s ongoing assessment of the use of AI tools by auditors.
The blog also highlights the fact that the while the results of a PCAOB inspection are shared with auditors, they won’t be shared with audit clients unless the directors ask questions about them. This excerpt from the blog shares some specific questions relating to PCAOB inspections and “hot button” issues at the PCAOB that it recommends boards ask their auditors to address:
– Was our company’s audit reviewed this past cycle as part of your firm’s annual inspection? What areas, and any findings? And if not us, were there findings on your firm’s audits of other companies in our industry?
– What is the auditor doing with AI on our audit? Under what controls? How are those AI-assisted judgments documented?
– What are we doing with AI? How is our own finance team’s use of it weighed in the audit’s risk review? Are we ahead of, even with, or behind our peers?
– Where does the accounting firm stand on QC1000? What is changing, and what gaps should we watch?
– Of the PCAOB’s usual problem areas, revenue, impairment, internal controls, deal accounting, which apply to us this cycle? And what is the firm doing about them?
The blog also says that CFOs and legal teams should be asking about AI-related issues as well, because the auditor’s use of AI and their own will be judged together.
Here’s the latest edition of our “Understanding Activism” podcast. This time around, Cleary’s J.T. Ho and I were joined by Joshua Black, Editor in Chief of Diligent Market Intelligence, to discuss Diligent’s recent activism publications. Topics in this 23-minute podcast include:
– Identification of the most prolific activists this proxy season.
– How to evaluate and weigh activist rankings.
– The dominance of settlements over proxy fights.
– The shift toward financial versus operational activism.
– The rise of digital campaigning by activists.
– Regional divergence in activism trends, especially Japan versus Europe.
– The increase in “sell the company” activism.
– The growth and evolution of short activism.
– Key takeaways from data on activism challenging M&A deals.
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We continue to record new podcasts, and they’re full of practical and engaging insights from true experts – so stay tuned!
We’ve all been blogging quite a bit about prediction markets in recent months. Many of those blogs have discussed the need for public companies to consider addressing issues associated with prediction markets in their insider trading policies. However, this BCLP blog says that recent enforcement actions highlight the need for companies to take into account the implications of prediction markets on other corporate policies & controls and procedures. Here’s an excerpt:
Even though wagers or participation in prediction markets may not necessarily involve trading in traditional securities, federal authorities view them as potentially implicating anti-fraud and related statutes – with focus on the use of material nonpublic or confidential information.
Companies should consider updating their controls and procedures, which were likely developed before the emergence of events contracts. Careful drafting will be important, including defined terms, scope of trading restrictions, and oversight for internal reporting, compliance and enforcement.
Codes of Conduct. Key areas of focus could include:
– Reviewing prohibitions on use of confidential information for personal gain – whether they capture new types of trading or betting.
– Consider expressly addressing prediction markets, as well as prohibiting betting or trading based on confidential information.
– Potential application of policies relating to conflicts of interest and reputational risk.
Insider Trading Policies.
– Consider addressing trading based on confidential information that may not involve securities, such as event-based contracts or otherwise not involving company stock.
– Consider whether to reference or include relevant provisions of the Code of Conduct in such policies.
– Any discussion of Rule 10b5-1 plans may need to be revised as it may not be clear how the Rule could work, if at all, for prediction market contracts.
Education.
Many employees may not recognize the relevance of compliance rules to prediction markets given the wide proliferation of betting on political, sporting and other public events.
– Consider whether to address these concerns in training materials, including examples of problematic event-based trades.
– Consider whether to address them in employee certifications.
The blog also points out that these issues may also be relevant to private companies and non-profits, since they often aren’t related to traditional transactions in securities. These enterprises would be prudent to undertake similar reviews of their own controls and procedures, codes of conduct, and policies relating to confidentiality, conflicts of interest or reputational risk, as well as codes of conduct.
This kind of feels like it might be looked back on as the moment when the AI craze officially “jumped the shark,” but for what it’s worth, here’s the latest out of Delaware, via this Spotlight Delaware article:
A Delaware committee that has been studying the business uses of artificial intelligence proposed legislation earlier this month to temporarily ease state regulations on companies deploying the fast-growing technology.
The proposed legislation would create a testing ground for companies to use what are called AI agents to autonomously complete business tasks typically done by humans. The AI agents would oversee whole business operations under the umbrella of a new kind of entity, called an Artificial Intelligence Company, or AIC.
Supporters say the resulting regulatory “sandbox” would allow Delaware to test how autonomous AI businesses operate, and provide lawmakers with key data to develop rules governing their use within the state’s prominent corporate franchise.
The legislation is likely to be introduced in the General Assembly next year.
The proposal is intended to help shield the owners of an AIC from liability for AI agents doing, well, AI agent stuff. Over on The Business Law Prof Blog, Ann Lipton questions whether this kind of entity would actually provide the intended liability protection. My concern is more fundamental – why would anyone want to create a legal entity designed to protect the owners of Skynet from liability?
Check out our latest “Timely Takes” podcast featuring Cleary’s J.T. Ho & his monthly update on securities & governance developments. In this installment, J.T. reviews:
As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email me and/or Meredith at john@thecorporatecounsel.net or mervine@ccrcorp.com.
The SEC recently issued its latest Reg Flex Agenda and boy, is there a lot! The list includes two items that are in the pre-rule stage, and a whopping 36 that are in the proposed rule stage. Everyone knows about the semiannual reporting, filer status, and registration reform proposals that the SEC has already put forward, but here are some other coming attractions that hare reached the proposed rule stage that you might find interesting:
Of course, the dates tied to these items are aspirational and signify general timeframes versus precise dates. As we always caution, while the Reg Flex Agenda provides insight into the SEC’s current rulemaking priorities, it isn’t a definitive guide for anyone trying to predict SEC rulemaking for purposes of specific board agendas, budget and workflow.
