May 13, 2009

SEC Open Meeting on Shareholder Access Scheduled for May 20

The SEC has announced that it will consider “whether to propose changes to the federal proxy rules to facilitate director nominations by shareholders” at an Open Meeting scheduled for next Wednesday, May 20. As Chairman Schapiro had promised, the SEC is moving forward quickly with its corporate governance agenda, with more proposals likely to follow in the next few months.

It is still hard to believe that the access debate has been going on for nearly 70 years. The debate originally kicked off with a Staff study in the early 1940’s that resulted in the solicitation of comments on a proposal to revise the proxy rules to provide that “minority stockholders be given an opportunity to use the management’s proxy materials in support of their own nominees for directorships.” Today, the SEC has thousands upon thousands of comment letters, as well as roundtables and other commentary, to draw upon resulting from the 2003 “universal” access approach and the 2007 Rule 14a-8 approach. I think that this remains one area where both sides are dug in, so we will still likely see fierce opposition to pretty much any proposal that the SEC puts forward.

Revised CDI Gives More Leeway on Selling Shareholder Disclosure

As Broc mentioned in the blog last month, the Staff recently updated a number of CDIs. Among the revised CDIs was Securities Act Rules CDI Question 220.04, which deals with how registration statements for secondary offerings should be revised to reflect the substitution or addition of selling shareholders. While the adoption of Rule 430B back in 2005 provided much more flexibility for issuers to deal with changes in the selling shareholder table, there remain situations where issuers do not meet the requirements for Rule 430B (i.e., when the issuer is not eligible for primary offerings under General Instruction I.B.1 of Form S-3).

The prior iteration of CDI Question 220.04 carried over some old concepts from a predecessor Telephone Interpretation and provided that issuers ineligible to rely on Rule 430B were required file a post-effective amendment (rather than a prospectus supplement) in order to add or substitute any selling shareholders, except that a prospectus supplement could be used to reflect donative transfers or de minimis transfers for value (e.g., less than 1% of outstanding) from a previously identified selling shareholder.

In the revised version of the CDI, the Staff notes that an issuer not eligible to rely on Rule 430B when the registration statement is initially filed must still file a post-effective amendment to add selling shareholders to a registration statement related to a specific transaction that was completed prior to the filing of the resale registration statement. However, the Staff now says that a prospectus supplement can be used to update the selling shareholder table to reflect any transfer from a previously identified selling shareholder, so long as the new selling shareholder’s securities were acquired or received from a selling shareholder previously named in the resale registration statement, and the aggregate number of securities or dollar amount registered has not changed.

The revision to this CDI provides significantly more flexibility for issuers that are not eligible to use a shelf for primary offerings to update the selling shareholder information in the prospectus for the type of normal course transfers that happen all of the time. By avoiding the filing of post-effective amendments, issuers are not faced with potential delays in the completion of secondary sales during the waiting period before the Staff declares the filng effective.

Staff Guidance on Dealing with Preliminary Earnings Estimates

Situations sometimes arise where an issuer may feel compelled to put out preliminary earnings numbers, which may at the time of issuance represent estimates of the potential results. In new Form 8-K CDI Question 106.07, that Staff notes that when an issuer reports “preliminary” earnings and results of operations for a completed quarterly period, the issuer must comply with all of the requirements of Item 2.02 of Form 8-K, even when those preliminary results may be estimates.

Further, while not discussed in the CDI, it should be noted that when the issuer provides the “final” earnings numbers, a separate Item 2.02 of Form 8-K obligation would be triggered. Instruction 1 to Item 2.02 specifies that the requirements of Item 2.02 are triggered by disclosure of material non-public information regarding a completed fiscal year or quarter, and that the release of any additional or updated material non-public information regarding a completed fiscal period would trigger an additional Item 2.02 Form 8-K.

– Dave Lynn