September 9, 2016

Form 10-K Summaries: Will You Take the Plunge?

In June, the SEC adopted rules under the FAST Act permitting companies to include an optional summary page in their Form 10-Ks. As noted in this blog, Broc wasn’t all that excited since companies were permitted to voluntarily include summaries before this forced rulemaking. Anyway, this recent blog from the “SEC Institute” points out that for some companies, the decision about whether to include this summary may come down to a matter of disclosure philosophy:

To simplify a bit, some companies adopt a very “compliance” based philosophy for disclosure. In this model companies disclose what the SEC requires to be disclosed and essentially nothing more. This can be done in a fairly mechanical fashion and is usually very simple and direct, if not almost terse. At the other end of a disclosure spectrum some companies adopt a more “communications” based philosophy where they disclose more than the bare bones requirements in an effort to tell a more complete “story” of how their company operates.

What do these different approaches look like?  To help answer that question, the blog compares the 10-Ks of two companies:

Here is a very well done example for Golden Enterprises of the compliance approach. Golden makes snack foods and does a simple, direct presentation.

Here is another well done example of a company (Square) that uses a more communications oriented approach. Square is a payment processor and supports businesses in many ways.

Companies that treat their Exchange Act filings as a communications tool often opt to disclose more in those filings than is technically required. It’s worth noting that some companies were including summaries in their 10-Ks long before the FAST Act – and the use of summaries in proxy statements has become widespread in recent years.  These efforts reflect a desire to make filings more user friendly – and indicate that an increasing number of companies are taking a communications oriented approach to their filings.  If that’s right, then the inclusion of 10-K summaries may well become a major trend over the next few years.

Here We Go Again(?) The GM Case & Bank Debt as a “Security”

This Kramer Levin memo describes a recent bankruptcy court decision in GM’s preference litigation that may call bank debt’s status as a “non-security” into question. Most people believe that this issue was put to rest long ago – and that ordinary course commercial bank lending does not involve the issuance of a “security.” The GM opinion suggests that this may not be the case – at least under bankruptcy law.

The status of GM’s bank debt became an issue because of defenses to preference claims raised by the company’s term lenders.  The viability of those defenses turned on whether the payments in question were made pursuant to a “security contract.” In arguing that a security contract was involved, the defendants pointed to several factors, including the registration and active trading of interests in the term loans. That was enough to persuade the court that this was a live issue – at least for purposes of a motion to dismiss.

While GM involves only bankruptcy law, the case could be a very big deal if it leads to rethinking bank debt’s status under the securities laws – the memo notes:

If bank loans are securities for general securities law purposes, then a borrower could not “issue” bank loans except through a public offering, a Rule 144A offering or other private placement. Bank loans are syndicated without any of the documentation or approvals required for securities issuance. Worse, the agent bank routinely knows more about the borrower, under its confidentiality agreement, than the syndicate members to whom it sells the loan. Selling syndicate members have access to confidential data rooms and therefore may know more than outside buyers do. Thus if a bank loan is a security, every syndicating agent and every selling member of the syndicate courts liability under Section 10(b) and Rule 10b-5.

Some have suggested that concerns about the GM opinion may be overstated.  As one of our members recently observed: “This case is getting a lot of play but I think it may overstate the risk.  As you know, the SEC has considered syndicated loans to be securities for the purposes of the ’40 Act for almost 30 years.”

The New “Investors’ Exchange”: Should Companies Care?

This Sidley memo notes that after much back & forth, the Investors’ Exchange is up and running:

On September 2, 2016, the Investors’ Exchange, LLC (IEX) commenced full operations as a registered national securities exchange. After receiving over 400 comment letters during the SEC’s review and a spirited debate on equity market structure, the SEC approved IEX’s application to become a national securities exchange on June 17, 2016. As highlighted in the widely read book Flash Boys, by Michael Lewis, IEX employs a speed bump or delay on market participants accessing liquidity on IEX (IEX access delay).

The IEX had to adopt listing standards to get SEC approval – but it isn’t a “listing exchange” at present. The IEX’s purpose is to address the advantage provided to high frequency traders through their ability to access information milliseconds faster than other market participants on existing trading platforms. The Exchange’s CEO said that IEX “can help issuers improve their experience with the markets as well” – and the Exchange has promoted itself to public companies. For example, in this interview, IEX’s Chief Marketing Officer touted the benefits for public companies. Essentially, the pitch is that IEX is seeking to appeal to “buy & hold” investors, who are the kind of investors that companies want – and that its model will provide lower volatility and improved transparency.

John Jenkins