E-Minders April 2018
In This Issue:
E-Minders is our monthly e-mail newsletter containing the latest developments and practical guidance for corporate & securities law practitioners.
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Shortly after his confirmation, SEC Chair Jay Clayton promised that the agency was "open for business." This recent memo from Orrick's Ed Batts says that Corp Fin seems committed to making that slogan a reality. This excerpt summarizes some notable efforts to streamline the Staff's processes:
- The most significant development is the dramatic shift in receptiveness for waivers for audited financial statements where the production may be burdensome but not clearly material to investors. Such waivers are being granted specifically with respect to financial statements in cases of marginal significance tests or where fully audited financials would involve significant cost but not necessarily provide substantial incremental useful information.
- In addition, the Staff continue to emphasize eligibility for all filers (and not just "emerging growth companies" under the JOBS Act) to take advantage of confidential preliminary registration statements for IPOs as well as follow-on offerings occurring within one year of IPO.
- The number of Staff comments issued upon review of registration statements have declined significantly, in an effort toward a speedier path to encourage use of public markets.
In mid-March, the SEC posted its updated "Edgar Filer Manual. "The most notable change is the addition of "check the box" language to the cover page of Form DRS and DRS/A. Filers of draft registration statements will now be required to check a box to indicate their status as an "Emerging Growth Company" - and to indicate whether they are opting out of the extended transition period for complying with any new or revised financial accounting standards.
In a milestone of sorts, the first Form S-1 for a coin offering was filed last week by a company called "The Praetorian Group." I flipped through it, and it's . . . interesting. Here's a take on the filing from Bloomberg's Matt Levine:
"The Praetorian Group filed what appears to be the first initial coin offering (ICO) registering tokens with the SEC," reports Renaissance Capital. Here is the registration statement, and I am sorry to say that it is full of firsts. For instance, this is the first time I have seen this sort of disclaimer in a prospectus for a securities offering:
To the maximum extent permitted by the applicable laws, regulations and rules the Company and/or the Distributor shall not be liable for any indirect, special, incidental, consequential, or other losses of any kind, in tort, contract, tax or otherwise (including but not limited to loss of revenue, income or profits, and loss of use or data), arising out of or in connection with any acceptance of or reliance on this Prospectus or any part thereof by you.
Nope nope nope nope nope nope nope! That is not how a prospectus works! The way a prospectus works is, you write it, and your lawyers read it and make sure it's right, and then you deliver it to investors so that they can rely on it. That's the whole point. You don't just hand the investors some random scribblings and say "here's some stuff but definitely don't rely on it." Come on.
Yeah. Might draw a comment on that one. The prospectus goes on to disclaim any "representation, warranty or undertaking in relation to the truth, accuracy, and completeness of any of the information set out in this Prospectus" - which is another thing I'm sure the Staff will be totally cool with.
The registration statement's also missing a few items - like signatures, exhibits, undertakings (basically all of Part II), for starters. Thanks to Hunton & Williams' Scott Kimpel for tipping us off to this filing!
You can't accuse the SEC of not making use of all available technologies to protect investors - even if some of those technologies originated in the 19th century. Check out the excerpt from this BTC Manager article on how the SEC is using the telephone to put the kibosh on sketchy token offerings before they hit the street:
Well, counter-intuitive as it may seem, the agency is actually showing a preference for the good old telephone over other state-of-the-art technologies to ward off shady ICOs. Before we delve into the details, let's first take a step back and revisit the fact that the Wall Street's main regulator has issued multiple warnings time and again urging crypto enthusiasts to steer clear of legally sketchy ICOs no matter how compelling the propositions seem.
Jay Clayton, Chairperson at the SEC, even went as far as saying that crooks were busy harnessing blockchain and the ever-expanding crypto market to pull off serious scams that are as old as the market itself is. That is, to project an asset as the "next best thing" and then selling it once a good amount of "dumb money" pours in.
So how does the SEC use the telephone to deter the bad guys in the fast-growing realm of ICOs?
Apparently, the modus operandi is pretty simple. The folks over at SEC just pick up the telephone and call up the people behind individual ICOs. And believe it or not, the strategy has paid off. According to a key SEC official, over a dozen of cryptocurrency-related companies have abandoned their plans to raise fund from investors after they were contacted by the agency over the telephone.
Score one for us Luddites. We bet they even used a landline.
In early March, the SEC's Enforcement Division and Division of Trading and Markets issued a joint statement over cryptocurrency exchanges. The statement is the latest effort by the SEC to address potentially fraudulent or manipulative behavior in the burgeoning market for ICOs and token deals - it's both an informational document for investors using online trading platforms and a warning to operators of those platforms that the SEC is scrutinizing their activities. We're posting memos about this in our "Blockchain" Practice Area...
Each year some public pension funds and other institutional shareholders voluntarily file with a Notice of Exempt Solicitation with the SEC under Exchange Act Rule 14a-6(g). This rule requires a person who owns more than $5 million of a company's securities and who conducts an exempt solicitation of the company's shareholders (in which the person does not seek to have proxies granted to them) to file with the SEC all written materials used in the solicitation. However, these funds also file these Notices, which appear on Edgar as "PX14A6G" filings, typically to respond to a company's statement in opposition to a shareholder proposal included in the proxy statement or to otherwise encourage (but not solicit proxies from) shareholders to vote a specific way on shareholder proposals, say on pay proposals and in "vote no" campaigns.
In a new twist, this week John Chevedden (the most prolific individual shareholder proponent given that he submits them in his own name and by using "proposal by proxy" to submit proposals for other shareholders) filed his first "Notice of Exempt Solicitation." Chevedden's Notice addresses a proposal included in the AES Corp. proxy materials to ratify the company's existing 25% special meeting ownership threshold. The SEC staff previously concurred that AES could exclude from its proxy materials Chevedden's shareholder proposal requesting a 10% special meeting threshold pursuant to Rule 14a-8(i)(9) because the company's ratification proposal and the shareholder proposal conflicted. See The AES Corp. (avail. Dec. 19, 2017).
Recently, we've blogged about CII's angst over Corp Fin's recent no-action decision allowing AES Corp to exclude a shareholder proposal on the threshold required for investors to call a special meeting.
More requests to exclude special meeting proposals such as the one in AES Corp have come in, and the Division's approach remains essentially the same, recently though with a significant twist. In a letter to Capital One (2/21/18), the Division agreed that the company, which proposed to ratify its existing special meeting bylaw, could omit a shareholder proposal to lower the threshold to call a shareholder meeting from 25 percent to 10 percent, provided that the company's proxy statement discloses:
- that the company
has omitted a shareholder proposal to lower the ownership threshold for calling
a special meeting,
The Division based its conditions on Rule 14a-9, suggesting that it believes a proxy statement with a ratification proposal that does not provide the required context in which shareholders are being asked to vote for ratification would be materially misleading.
As noted in this press release, corporate lobbying disclosure remains a top shareholder proposal topic. A coalition of more than 70 investors have filed proposals at 50 companies asking for lobbying reports that include federal and state lobbying payments, payments to trade associations used for lobbying and payments to any tax-exempt organization that writes and endorses model legislation.
And as reflected in this no-action response to Citi, Corp Fin doesn't seem to be interpreting its "economic relevance/(i)(5)" guidance under Staff Legal Bulletin #14I to allow exclusion of these proposals...
As Broc blogged several times last year (here's the latest), "fix-it" proposals - shareholder proposals seeking changes to proxy access bylaws - were a hot topic last proxy season. This recent blog from Cooley's Cydney Posner says that they're front & center again in 2018.
After much back & forth, it appeared that by the end of last proxy season the no-action letter process had charted a course that would allow proponents to avoiding exclusion of fix-it proposals on the basis of substantial implementation. As this excerpt notes, fix-it proponents are back this year - & they're following that course:
The SEC Staff took a uniform no-action position allowing exclusion of these fix-it proposals. But the proponents were persistent and, in 2017, submitted to H&R Block a different formulation of a fix-it proposal that requested only one change - elimination of the cap on shareholder aggregation to achieve the 3% eligibility threshold, as opposed to simply raising the cap to a higher number.
This time, the Staff rejected H&R Block's no-action request. In essence, it appears that the Staff believes that a lower cap on aggregation could "substantially implement" a higher cap, but the removal of a cap entirely is a different animal that could not be substantially implemented by the lower cap. This proxy season, the proponents have latched onto-and even expanded-the new formulation and have continued to find success in preventing exclusion.
For example, in BorgWarner (2/9/18), John Chevedden submitted a proposal requesting elimination of the cap on aggregation of shareholders to satisfy the 3% minimum ownership threshold, as well as changing the minimum number of proxy-access candidates to two, if the board size is under 12, and three if it is over 12. (The proposal doesn't address the 12-person board.) In this instance, the company's existing aggregation cap was 25, and the existing number of directors that could be nominated through proxy access was the greater of 20% of directors in office or two.
Chevedden & Harrington Investments submitted a similar proposal to Alaska Airlines. In both cases, the Corp Fin Staff rejected arguments that the proposals could be excluded on the basis that they had been substantially implemented.
During this proxy season, we've blogged a few times about the campaign to stop companies from holding virtual-only annual meetings. As noted in this blog, some companies decided to heed the campaign and announced that they would hold a hybrid meeting instead of a virtual-only.
And this blog announced that the nuns would participate as proponents in the campaign, urging in their shareholder proposals that the topic of virtual-only meetings has become so important as a governance topic that it should no longer be considered "ordinary business" under Rule 14a-8(i)(7). Corp Fin has now issued a response to one of these no-action letter requests - this one to Comcast - and has determined that the topic is still "ordinary business." And so Comcast can exclude the shareholder proposal...
As noted in the memos posted in our "Rule 701" Practice Area, the SEC recently brought an enforcement case to enforce the $5 million limit in that rule. Here's the intro from this Steve Quinlivan blog:
Subject to its limits, Rule 701 permits non-reporting companies to grant employees equity without registration under the Securities Act of 1933. One component of Rule 701 requires certain disclosure materials to be delivered to employees if the aggregate sales price or amount of securities sold during any consecutive 12-month period exceeds $5 million. Rule 701 provides that for options to purchase securities, the aggregate sales price is determined when an option grant is made (without regard to when the option becomes exercisable).
In a settled enforcement action, the SEC alleged Credit Karma, which the SEC describes as a "pre-IPO internet-based financial technology company headquartered in San Francisco, California", blew through the $5 million disclosure limit. Specifically, the SEC alleged "From October 2014 to September 2015, Credit Karma issued approximately $13.8 million in stock options to its employees " and "failed to comply with the disclosure requirements of Rule 701, even though senior executives were aware of Rule 701".
Over the past several months, media reports involving high profile sexual misconduct & abuse of power by politicians, celebrities, CEOs and other corporate leaders have brought the issue of sexual harassment to the top of the cultural agenda - and placed it prominently on the agenda of boards as well.
We're posting resources for this emerging area in our "Board Duties" Practice Area - including our own checklist on board oversight of sexual harassment policies. It's seven pages - check it out!
One of the biggest reasons that oversight of sexual harassment policies has become a priority for boards is that it's also become a priority for shareholders. The recent experiences of the Weinstein Company, Wynn Resorts & others have demonstrated that high-profile allegations of sexual misconduct by executives can have a potentially devastating effect on shareholder value - and even threaten the viability of the business itself.
Reflecting rising investor concerns in this area, the Council of Institutional Investors has released a new report that provides boards with advice on how to mitigate the risk of sexual harassment. The report details practical steps that cover five key areas: personnel, board composition, policies and procedures, training and diversity.
Below is Part 4 of a collection of memories from members about working at the printers (here's Part 1; Part 2; and Part 3). Please keep them coming and we will only blog them if you give me permission - you can determine whether you want attribution or anonymity:
- Chris Chaffin notes: I started at Vinson & Elkins in Houston in 1995 right as the markets started picking up again. The "Corporate & Securities" section seemed perpetually understaffed so we were thrown right into the fire as first-years. The Spring of my first year, I started dating my eventual wife of now 19 years. After our first date, I told her "I don't know when I will see you again" which she didn't understand. I meant of course "well, I'm always at the printer, so I don't know."
I was then stuck at the printer and talking about it with one of the salesmen and he suggested that he could order in some really nice food at the printer and I should invite her to dine at the printer. So, I called her up and invited her to a "private" dinner in the corner of the Bowne dining room. Bowne brought in some really nice Italian food with sumptuous desserts and we had a "dinner date" right there at the printer. The rest is history - three beautiful children and we still laugh about our early date at the printer.
- My first night at the printer in 1987 spent proofing, correcting, redrafting, etc. For dinner, I was given a credit card and told to enjoy at the Old Homestead downtown. When I returned, the invoice was examined and it was determined that I had not eaten (or spent) enough, and lobster tails, shrimps and steaks were summarily ordered in. In those days, that was the norm.
- My favorite printer moment was a particularly protracted filing (several days shuttling between the printer and a downtown hotel) - one evening upon submission of hundreds of pages of changes, with time to kill until the turnaround would be complete - traveling uptown to the Beacon Theatre to catch one of the performances of the Allman Brothers during their annual run in March, and thence returning to the Printer to complete the proofing and filing of the documents by morning. All-in-all, a very satisfactory experience.
- In 1986, I was a first year associate at a large prestigious law firm and sent to the printer in Houston for a large bond deal. They had just converted to the computer typesetting and were busy bragging to the attorneys and bankers about how great their system was. About 3 AM, we received what we hoped was the final draft of the indenture to put into the filing package. Turns out that their fancy new system had dropped every "y" in the document. They were horrified. Eventually it was fixed and we had to re-slug a long document. At least I got a few good meals and tickets to the NBA Finals out of it.
- Kent Shafer of Miller Canfield: When I was a kid, I worked part time proofreading for the printer on the next block, which did calendars, advertising fliers, and so on. It was a hot, filthy, noisy place - linotype machines clacking, ink on the floor, and acrid smoke in the air. Shortly after joining our firm, a senior partner dispatched me to "the printer" in New York (Pandick). Having worked at a printer before, I thought I knew what to expect. I was wrong. I will always remember being shown into that elegant, mahogany filled room, with a cheerful fire burning in the fireplace, and being served coffee in a china cup by a uniformed waitress wearing a white apron.
- Tax Reform's Impact on Private Equity & M&A
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We continue to post new items daily on our blog - "The Mentor 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:
- Who Administers Political Spending Policies?
We continue to post new items daily on our blog - "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: Trends
Comment Letters to the SEC - Having Fun: For a diversion from your billables, probably the next best thing to reading this blog is perusing the comments submitted to the SEC on various rulemakings. It isn't too hard to find some written from the couch. For example, in this comment letter, there are harsh words for the SEC from the Mayor of Forest Hills Borough, Pennsylvania (assuming it's not an impersonation which might be easy to accomplish).
By the way, we do have a nifty checklist about how to craft an effective comment letter to the SEC from Jay Knight of Bass Berry posted in our "Checklists Library." Please contact me if you would like to contribute a checklist. They are very popular...
Roger Schwall Retires: In Corp Fin, long-time Assistant Director of Office of Natural Resources (AD4) Roger Schwall has retired.
Among other new additions, during the last month we have:
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