May 30, 2019

Reg Flex Agenda: Proxy Advisors & Rule 14a-8 in the Spotlight

Last week, the SEC published its latest Reg Flex Agenda, and it looks like the Commissioners may wade into some pretty controversial areas in the near future – including proposing rules relating to proxy advisory firms & shareholder proposals.  This excerpt from a recent Gibson Dunn blog highlights the significant additions to the agenda:

Notably, the Reg Flex Agenda for the first time now identifies the following four rulemaking projects as among those that the SEC expects to address over the coming year:
– Proposing rule amendments regarding the thresholds for shareholder proposals under Rule 14a‑8;
– Proposing rule amendments to address certain advisors’ reliance on the proxy solicitation exemptions in Rule 14a-2(b);
– Proposing rule amendments to modernize and simplify disclosures regarding Management’s Discussion & Analysis (MD&A), Selected Financial Data and Supplementary Financial Information; and
– Proposing rule amendments to Securities Act Rule 701, the exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements, and Form S-8, the registration statement for compensatory offerings by reporting companies (previously listed as a longer term project.).

The blog says that the SEC is generally expected to propose increases in the ownership & resubmission thresholds under Rule 14a-8. What the SEC is going to propose about the ability of proxy advisors to continue rely on exemptions from proxy solicitation rules is less clear – but some commenters have called for the SEC to reconsider those exemptions as part of a broader initiative to regulate the proxy advisory industry.

Potential changes to the shareholder proposal regime & the possible regulation of proxy advisors are likely to garner the most attention from the media, but my guess is that most of us will take an equal or greater interest in what the SEC proposes to do with MD&A, Rule 701 & Form S-8.

NYSE Proposes to Tweak Equity Compensation Plan Rules

Under NYSE rules, equity compensation plans are generally subject to shareholder approval.  However,  plans that allow participants to buy shares at a price equal to their “fair market value” are excluded from that requirement.  Last week, the NYSE filed a proposed rule change with the SEC that would codify its long-standing practice for determining fair market value for purposes of this exclusion.  This excerpt from a recent Steve Quinlivan blog summarizes the proposed change:

For purposes of the above exclusion from the definition of equity compensation plan, the Exchange has always interpreted “current fair market value” as requiring that the price used be the most recent official closing price on the Exchange. For the avoidance of doubt, the Exchange now proposes to include in Section 303A.08 text specifying how the fair market value of the issuer’s common stock should be calculated for this purpose. “Fair market value” will be defined as the most recent official closing price on the Exchange, as reported to the Consolidated Tape, at the time of the issuance of the securities.

The blog says that this means if the securities are issued after the close on a Tuesday, then Tuesday’s official closing price will be used. If they are issued at any time between the time of Monday’s close and Tuesday’s close, then Monday’s official closing price will be used.

Nasdaq Proposes to Tighten Initial Listing Standards

Since we’re on the topic of amendments to stock exchange rules, I confess that I somehow overlooked proposed rule changes that Nasdaq originally filed in March. In any event, Nasdaq wants to tighten its original listing standards and help assure adequate liquidity for listed securities. Here’s an excerpt from the proposal explaining what it’s proposing to do:

– First, Nasdaq proposes to revise its initial listing criteria to exclude restricted securities from the Exchange’s calculations of a company’s publicly held shares, market value of publicly held shares and round lot holders (“Initial Liquidity Calculations”). To do so, Nasdaq proposes to add three new definitions to define “restricted securities”, “unrestricted publicly held shares” and “unrestricted securities” and proposes to amend the definition of “round lot holder”.

– Second, Nasdaq proposes to impose a new requirement that at least 50% of a company’s round lot holders must each hold shares with a market value of at least $2,500.

– Third, Nasdaq proposes to adopt a new listing rule requiring a minimum average daily trading volume for securities trading over-the-counter (“OTC”) at the time of their listing.

No changes to continued listing standards are being proposed. I don’t feel too bad about missing this rule proposal when it was initially filed, because the SEC just extended the comment period to July 8th.

John Jenkins