March 13, 2020

SEC Amends “Accelerated Filer” & “Large Accelerated Filer” Definitions

Yesterday, the SEC adopted amendments to the definitions of “Accelerated Filer” and “Large Accelerated Filer.”  Here’s the 210-page adopting release.  The most notable result of this action is that smaller reporting companies with less than $100 million in revenues will no longer have to provide auditor attestations of their Sarbanes-Oxley Section 404 reports. This excerpt from the SEC’s press release summarizing the changes says that the amendments will:

– Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller reporting company and had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. Business development companies will be excluded in analogous circumstances.

– Increase the transition thresholds for an accelerated and a large accelerated filer becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million;

– Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status; and

– Add a check box to the cover pages of annual reports on Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is included in the filing.

The need for relief from SOX 404 was a controversial topic, and as usual these days, the vote was along partisan lines.  Republican Chair Jay Clayton and Commissioner Hester Peirce submitted statements in support of the rule, while Democratic Commissioner Allison Herren Lee filed a statement in dissent.

Two commissioners also provided some colorful social media commentary on the vote. Allison Lee tweeted: “There must be a limit to the number of times we can credibly assert to investors that we act in their best interests by making policy choices they directly oppose.”  For some reason, Hester Peirce tweeted a photo of a cherry cobbler with “404” baked into it (your guess is as good as mine, folks).

Disclosure: What If Your CEO Is Diagnosed With the Coronavirus?

The COVID-19 outbreak creates plenty of disclosure issues about its potential impact on a company’s business and financial condition. But there’s another one lurking in the background – what if the CEO becomes ill?  Unfortunately, based on what we know about the virus, that doesn’t seem to be an unlikely outcome for at least a few companies, so it probably makes sense to start thinking about that particular issue now.

If you’re inclined to do that, check out this recent blog from UCLA’s Stephen Bainbridge on this topic. The blog acknowledges that it may be prudent for the CEO to disclose this information to the board and shareholders, but says that the existence of a legal obligation to do is another matter. A lot may depend on what you’ve previously said – for example, have you singled out the potential loss of the CEO as a risk factor in prior disclosure?  This excerpt says that in the absence of this or another disclosure trigger, there may not be a legal obligation to disclose the illness:

Even if the CEO’s health is material, a company could only be held liable for disclosing that information if there was a duty to disclose it. This is because, under the securities laws, “[s]ilence, absent a duty to disclose, is not misleading ….” Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988). Hence, for example, if the company put out a press release containing misleading information about the CEO’s health, it would have a duty to correct that statement. But simply remaining silent about the CEO’s health should not result in liability, because there is no SEC rule requiring disclosure or any caselaw imposing a duty to disclose such information.

Having said all that, there are some academics who think there should be such a duty, although they recognize that the law has not yet imposed such a duty.

Prof. Bainbridge cites the academic literature supporting the imposition of a duty to disclose a CEO’s significant health problem, but as someone who wasn’t on law review, I take great pleasure in omitting the citations from my blog. After all, it’s been a tough week, and – to quote Kevin Bacon’s character in the movie Diner – “it’s a smile.”

Thinking About a Buyback? Here’s Some Reassurance

If your board is thinking about stock buybacks in response to the ongoing market turmoil, this brief Davis Polk memo has some words of reassurance for your directors. The memo walks through a number of complex issues about buybacks that boards are currently dealing with.

While these issues aren’t amenable to short answers, the memo notes that in making decisions about them, “a Board that acts without any conflict, is well-informed, and goes through a proper process in deliberating to reach a decision, will be protected by the business judgment rule.”  If your company is thinking about a buyback, be sure to check out our “Stock Buybacks Handbook” and the other resources in our “Stock Repurchases” Practice Area.

John Jenkins