December 9, 2011

A Big Deal: Corp Fin Limits Confidential Submissions by Foreign Private Issuers

Historically, Corp Fin has allowed foreign private issuers (FPIs) to submit initial drafts of registration statements – for their IPO or other first-time filings – on a “draft” confidential basis. Yesterday, Corp Fin released this new policy that notes its position is being changed, effective immediately. Yes, immediately – there is language in the new policy that addresses those FPIs that have already filed and what it means for their amendments.

Here’s analysis from Alex Cohen of Latham & Watkins:

Under the new policy, FPIs that are only listing securities in the United States – as opposed to FPIs that are listed or concurrently listing outside the United States – will in most cases no longer be able to submit confidentially. So, to take an example, a Chinese company doing an IPO on Nasdaq only will from now on likely have to file its F-1 registration statement publicly on EDGAR, and will not be able to submit initial rounds of the F-1 on a confidential basis.

According to the new policy, confidential submission is still allowed under the following circumstances:

– Foreign government that is registering its debt securities;
– FPI that is listed or is concurrently listing its securities on a non-U.S. securities exchange;
– FPI that is being privatized by a foreign government; or
– FPI that can “demonstrate that the public filing of an initial registration statement would conflict with the law of an applicable foreign jurisdiction.”

Under certain circumstances, Corp Fin may request a non-US issuer to publicly file its registration statement even though it would otherwise fall within the new policy. Also note that shell companies, blank check companies and “issuers with no or substantially no business operations” will also not be permitted to use confidential submission.

How does this affect ongoing deals? Let’s say you are currently in the middle of the confidential submission process but don’t meet the new policy — e.g., you are working on a Form F-1 for an FPI listing only in the United States. In that case, the SEC Staff will require the next draft of the F-1 to be filed publicly on EDGAR.

As for my thoughts, I suspect this new policy operating in conjunction with the new reverse merger limitations will limit the number of ‘not ready for prime time’ companies seeking to access the U.S. markets (and may disproportionately affect companies from certain countries). I imagine some foreign companies typically have more substantial comments and revisions in response to SEC comments than a comparable US company. Multiple rounds of F-1/As with heavy revisions to the financials will probably not instill potential IPO investors with a lot of confidence and, also, comment letters would eventually become public – whereas, I am not sure they did before with a confidential review. Extensive comments probably don’t look good in the eyes of creditors even if a FPI decided to withdraw its registration statement which I think quite a few of the foreign confidential filers eventually do.

So this change in Staff’s prior policy, which allowed FPIs to get ready for an IPO without publicly revealing their plans until they were ready to solicit, may affect whether non-US issuers decide to list their shares in the United States…

A Delicate Situation: Stock Buybacks and Meeting Executive Pay Targets

With a down market and companies sitting on boatloads of cash, many are already think stock repurchases as noted in this recent NY Times article entitled “As Layoffs Rise, Stock Buybacks Consume Cash.” As intimated by the title of this article, buyback programs likely will be subject to more scrutiny than in the past. In particular, the purpose the buyback may be called into question – is there a relationship to achievement of an executive compensation target? The optics of a buyback are important these days.

Here’s an excerpt from the NY Times article to consider:

The principle behind buybacks is simple. With fewer shares in circulation, earnings per share can rise smartly even if the company’s underlying growth is lackluster. In many cases, like that of the medical device maker Zimmer Holdings, executives are able to meet goals for profit growth and earn bigger bonuses despite poor stock performance.

“It’s clear there’s a conflict of interest,” said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “Unless earnings per share are adjusted to reflect the buyback, then to base a bonus on raw earnings per share is problematic. It doesn’t purely reflect performance.” In addition, executives, who are often large shareholders, stand to benefit from even a small, short-term jump in stock prices.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for 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:

– Post-Proxy Access Decision: Which Way Forward? Part II
– Delaware: Settlement of Multi-Forum Litigation & Fee Negotiations
– Avoid Monoculture. Travel. Read Widely. Let Experience be Your Compass.
– Oil & Gas: SEC Doubts Ability to Book PUDs Beyond 5 Years
– Post-Proxy Access Decision: Which Way Forward?

– Broc Romanek