March 18, 2008

Spring Cleaning for Some Corp Fin Rules: No E-Proxy for Business Combinations

Yesterday, the SEC posted a “technical amendments” release correcting several rules and forms – including some adopted or amended many moons ago. The SEC can make these sorts of immediately effective corrections without going through the whole notice and comment process when they are conforming the rules to the express intent of the Commission, fixing typos and cross-references, and making other types of “technical” changes.

Among the clarifications in this release are some fixes to the language in the e-proxy requirements (Exchange Act Rules 14a-3(a)(3) and 14a-16(m)) which clarify that the notice and access model regarding internet availability of proxy materials is not available with respect to business combination transactions, which is now expressly defined to include transactions covered by Securities Act Rule 165 and transactions involving cash consideration for which disclosure under Item 14 of Schedule 14A is required. While the SEC had intended that business combination transactions for cash consideration be excluded from the application of the e-proxy rules, the final rules did not specifically include the necessary language referencing cash transactions for which Item 14 disclosure is required. The SEC also fixed the language of Rules 14b-1 and 14b-2 to refer to the correct legends (Legends 1 and 3, rather than Legends 1 and 2) in the part of those rules addressing the legends that are not required in the Notice of Internet Availability of Proxy Materials.

The SEC also adopted changes to the tender offer rules and related forms to correct several cross references, to reflect the repeal of the Public Utility Holding Company Act, to fix some typos and to correct cross references to Rule 10b-13, which was redesignated as Rule 14e-5 with the adoption of Regulation M-A. In addition, the titles referencing “Regulation 13D” have been changed to “Regulation 13D-G,” the number of copies of Form CB was reduced, references to paper submissions of Schedule 14D-9 have been eliminated, and references to the SEC’s new address have been added to some rules and forms.

The technical amendments release also contemplates shifting the authority to grant exemptions from the issuer tender offer rules and to determine the applicability of the issuer tender offer rules from the Division of Trading and Markets to Corp Fin.

SEC Proposes Anti-Fraud Rule for Naked Short Selling

Naked short selling – when a short seller fails to borrow or arrange to borrow securities for delivery to buyers within the T+3 settlement cycle – has proven to be an intractable problem and the bane of some smaller public companies that claim to be under “attack” by naked short sellers. The SEC sought to directly address concerns about abusive naked short selling with the adoption of Regulation SHO (effective in 2005), by establishing a uniform “locate” requirement – where before executing a short sale order a broker-dealer must have a reasonable grounds to believe that the subject security can be borrowed so that it can be delivered on time – and “close out” requirements that force participants to close-out open failures to deliver for certain securities. In connection with adoption of Reg. SHO, the SEC Staff notably expressed the view that “[n]aked short selling is not necessarily a violation of the federal securities laws or the Commission’s rules. Indeed, in certain circumstances, naked short selling contributes to market liquidity.”

But apparently even with all of those efforts, the SEC continues to perceive problems with abusive naked short selling (as opposed to “good” naked short selling). Last fall, the SEC adopted amendments to Reg. SHO’s close-out requirements, grandfathering provisions and options market maker exception to address lingering concerns. Earlier this month, the SEC proposed a new rule to target the practice. In the proposing release that was posted yesterday for this new anti-fraud rule – Rule 10b-21 – the SEC cites continuing Enforcement actions (see, e.g., Sandell Asset Management Corp.) as part of the reason for taking yet another stab at abusive naked shorts.

With proposed Rule 10b-21, the SEC seeks to “highlight” something that it acknowledges is already illegal under Section 10(b) and Rule 10b-5 – it would be unlawful for a short seller to intentionally deceive a broker-dealer, clearing agency participant or purchaser regarding its intention or ability to deliver the security on the date delivery is due when the short seller in fact fails to deliver the security on or before the date delivery is due. The proposed rule would cover situations where a short seller misrepresents its ability to locate the security in time for delivery, as well as situations where the short seller causes the broker-dealer to mark its order to sell the security as “long” when the seller knows or recklessly disregards that it is not “deemed to own” the security being sold. While targeted at naked short sellers (typically funds that do this sort of thing for a living), the rule would also apply to broker-dealers trading for their own account, and broker-dealers could be liable for aiding and abetting a customer’s fraud under the proposed rule.

The SEC is seeking comment on the proposed rule for 60 days following publication in the Federal Register.

Say-on-Pay: Popular with CFOs?

BDO Seidman recently conducted a survey of the opinions of 100 CFOs at leading technology companies located throughout the U.S., and found that a majority of those CFOs thought that shareholders should have a say on executive compensation plans. Not surprisingly, two-thirds of the CFOs also indicated that the compensation plans at their companies have been impacted by such regulatory developments as FAS 123R and Section 409A. Despite these changes, however, over 80 percent of the CFOs surveyed felt that there was little impact on the ability to attract and retain talent – and they cited restricted stock and stock option grants as the most effective tools for recruiting employees in the technology industry.

The CFOs that BDO surveyed also expressed support for Sarbanes-Oxley Section 404, with a majority indicating that it has led to improved processes while not curtailing risk-taking by companies.

– Dave Lynn