September 15, 2011

New Form of Corp Fin Guidance: If It Walks Like a Duck & Talks Like a Duck…

Yesterday, Corp Fin issued an entirely new form of guidance entitled “CF Disclosure Guidance: Topic No. 1 “Staff Observations in the Review of Forms 8-K Filed to Report Reverse Mergers and Similar Transactions.” It looks similar to a Staff Legal Bulletin in format – but the type of guidance is a bit different because it essentially provides helpful hints on how to prepare disclosure in fairly narrow circumstances. In comparison, the SLBs tend to deal more with “legal issues.”

Although this “Staff Observation” – maybe that will be the shorthand reference to these? – is merely informal guidance and not blessed by the Commission, it likely is somewhat of a higher level of guidance than CDIs because of the format (eg. one tip is the “Supplementary Information” section). It appears that this will be an ongoing form of guidance since the Staff bothered to label this as “No. 1.”

You may recall Dave wrote two great pieces in The Corporate Counsel back in ’08 (March-April and May-June issues) explaining all the various flavors of informal guidance that Corp Fin offers. At one point, there was a Staff movement afoot to begin consolidating these forms of guidance – but Corp Fin recently issued this WKSI Waiver Statement and now we have this new form of guidance…

Proxy Access: Is the Court’s Decision “Final” and the SEC’s Shareholder Proposal Stay Lifted?

When the SEC decided last week to not appeal the adverse proxy access decision by the US Court of Appeals for the District of Columbia Circuit, the SEC’s statement noted that the court’s decision was likely to be finalized on September 13th. That finalization is significant because – as noted in the SEC’s statement: “Accordingly, absent further Commission action, Rule 14a-8 will go into effect and a notice of the effective date of the amendments will be published.” In other words, the stay on shareholder proposals regarding access would be lifted. As I flew across the country yesterday, I fielded numerous member queries asking if this indeed has happened – and to my knowledge, it has not yet. I’ll let you know when I hear differently…

New California Law: Time to Consider Charter Provisions to Exempt Preferred Stock Preferences

Recent amendments to California Corporations Code Section 500 et seq. look like they will have broad application to companies doing business in California as a result of Section 2115 for pseudo-California corporations. John Tishler of Sheppard Mullin notes “there is a “sleeper” in here allowing California corporations – and presumably foreign corporation subject to Section 2115 – to include language in the articles of incorporation permitting distributions (that is, dividends in cash or property, repurchases and redemptions of shares) without regard to preferences of senior series of preferred stock. Presumably, such language could also be included in the certificate of designation for a newly authorized series of preferred stock.

We speculate it will become market standard to include that waiver language, since preferred stock protective provisions will generally do a better job protecting preferred holders than Section 500. Although AB 571 is not effective until January 1st, we are recommending that companies now adopt or amend their charters or authorize new series of preferred stock consider including language permitting distributions without regard to preferred stock preferences.”

Here’s an excerpt from this Sheppard Mullin memo:

Recently, California Governor Jerry Brown signed Assembly Bill No. 571, which simplifies restrictions on dividends, repurchases and redemptions of shares. The restrictions are set forth in Sections 500 to 509 of the California Corporations Code, and are commonly referred to collectively as “Section 500.” These provisions are designed to protect the interests of creditors and senior equity holders against transactions that might undermine their seniority in the capital structure. Section 500 applies to companies incorporated in California and to companies incorporated elsewhere but deemed subject to the same restrictions by virtue of satisfying the requirements of Section 2115 of the California Corporations Code for “pseudo-California corporations.” Section 500 uses the term “distributions” to encompass dividends of cash or property (other than shares of the corporation) and repurchases and redemptions of shares.

Section 500 has served as a trap for the unwary, a significant impediment to the ability to effect many transactions that do not intuitively threaten the interests of creditors or senior equity holders, a substantial risk for directors who face personal and potential criminal liability for distributions made in violation of Section 500, and a source of frustration to lawyers and clients who struggled to explain, apply and perform the financial gymnastics required under Section 500. In extreme cases, companies incorporated in California have had to reincorporate in other jurisdictions prior to effecting a transaction because the transaction would otherwise be prohibited under Section 500.

The changes to Section 500 create an opportunity for issuers of preferred stock (e.g., companies receiving venture capital in its most common form) to exempt the preferences of classes or series of preferred stock from the application of Section 500. This would have the potential to improve companies’ flexibility to undertake various actions that would otherwise require unanimous consent of holders of a class or series of preferred stock.

– Broc Romanek