December 7, 2017

Tax Reform: The “Deferred Tax Assets” Sleeper

This blog from Bass Berry’s Jay Knight flags a “sleeper issue” arising out of the lower corporate rates in the tax bill recently passed by the Senate & House – and if you’ve got deferred tax assets on your balance sheet, it just might cause you a few sleepless nights. Here’s the skinny:

At a high level, deferred tax assets are reported as assets on the balance sheet and represent the decrease in taxes expected to be paid in the future because of net operating loss (NOL) and tax credit carryforwards and because of future reversals of temporary differences in the bases of assets and liabilities as measured by enacted tax laws and their bases as reported in the financial statements. NOL and tax credit carryforwards result in reductions to future tax liabilities, and many of these attributes can expire if not utilized within certain periods. If a company believes it is more likely than not that some portion or all of the deferred tax asset will not be realized, a valuation allowance must be recognized.

By “recognized,” of course, Jay means “run through your income statement.” He highlights some disclosure from a major financial institution about the income statement impact of the UK’s rollback of corporate rates in 2013 – and suggests flagging this issue to your audit committee and reviewing your disclosures.

Do You Need an 8-K for the “Deferred Tax Assets” Sleeper?

Another thing to keep in mind is the possibility of tripping an 8-K requirement.  For instance, if your deferred tax asset is impaired, you may need to consider whether an Item 2.06 Form 8-K is required. See this one, for example…

Release of “After-Hours” Info: SEC Approves NYSE Rule

On Monday, the SEC approved an NYSE rule limiting listed companies’ ability to issue material news releases shortly after the close of the market.  Here’s an excerpt from this Ning Chiu blog summarizing the new rule:

A listed company must not issue material news after the NYSE closes trading until the earlier of (a) publication of the company’s official closing price on the Exchange or (b) five minutes after the Exchange’s official closing time.  The NYSE amended its initial rule filing to make clear that the one exception to this revised requirement would be to permit companies to still publicly disclose material information following a nonintentional disclosure, if needed to comply with Regulation FD.

Trading on the Exchange ends at the Exchange’s official closing time of 4pm Eastern, or 1pm Eastern on certain days.  The designated market maker, after close, facilitates the close of trading in an auction.  Because there is trading of company securities on other exchanges and non-exchange venues even after the Exchange closes, there can be a significant price difference if a company issues news immediately after 4pm Eastern but before the closing auction on the Exchange is completed, leading to investor confusion.

In approving the rule change, the SEC noted that the price difference could increase market disruption and reduce investor confidence in trading on the Exchange, given that orders cannot be cancelled or modified to take into account the material news though the Exchange closing price may not yet have been established by the closing auction process.  At the same time, however, the Commission recognizes that Section 202.05 of the Listed Company Manual requires a company to release quickly any news or information that might be expected to materially affect the market for its securities.

SCOTUS: Can State Courts Still Hear ’33 Act Claims?

Last week, the Supreme Court heard oral arguments in Cyan, Inc. v. Beaver County, which raises the issue of whether SLUSA strips state courts of jurisdiction over Securities Act claims. This recent blog from Lyle Roberts at “The 10b-5 Daily” reviews the arguments. Here’s an excerpt summarizing the legal background:

Congress passed the Private Securities Litigation Reform Act (PSLRA) to protect corporate defendants from meritless securities class actions. The PSLRA, however, only applied to federal cases. To evade the PSLRA’s impact, plaintiffs began filing securities class actions in state court, usually based on state law causes of action.

Congress passed SLUSA to close this loophole. Due to unclear drafting, however, there has been confusion in the lower courts over whether SLUSA also makes federal court the sole venue for class actions alleging Securities Act claims (which historically enjoyed concurrent jurisdiction in state or federal court).

The parties have put forward three competing interpretations of SLUSA. The petitioners say that SLUSA divests state courts of jurisdiction, the respondents say that it doesn’t – and the Solicitor General says that you can file in state court, but that cases can be removed to federal court.

We’ve previously blogged about the growing popularity among plaintiffs of state courts as a forum for Securities Act litigation – and about some of the steps that public companies have taken in response.

John Jenkins