November 25, 2020

SEC Proposes Amendments to Form S-8 & Rule 701

Yesterday, the SEC continued its active year by announcing proposed changes to Form S-8 and Rule 701. The amendments suggested by the 156-page proposing release are responsive to comments that the Commission received on its 2018 concept release. Here are the highlights from the SEC’s Fact Sheet (we’ll be posting memos in our “Form S-8” and “Rule 701” Practice Areas):

With respect to Rule 701, the proposed amendments would:

• Revise the additional disclosure requirements for Rule 701 exempt transactions exceeding $10 million;

• Revise the time at which such disclosure is required to be delivered for derivative securities that do not involve a decision by the recipient to exercise or convert in specified circumstances where such derivative securities are granted to new hires;

• Raise two of the three alternative regulatory ceilings that cap the overall amount of securities that a non-reporting issuer may sell pursuant to the exemption during any consecutive 12-month period; and

• Make the exemption available for offers and sales of securities under a written compensatory benefit plan established by the issuer’s subsidiaries, whether or not majority-owned.

With respect to Form S-8, the proposed amendments would:

• Implement improvements and clarifications to simplify registration on the form, including:

o Clarifying the ability to add multiple plans to a single Form S-8;

o Clarifying the ability to allocate securities among multiple incentive plans on a single Form S-8; and

o Permitting the addition of securities or classes of securities by automatically effective post-effective amendment.

• Implement improvements to simplify share counting and fee payments on the form, including:

o Requiring the registration of an aggregate offering amount of securities for defined contribution plans;

o Implementing a new fee payment method for registration of offers and sales pursuant to defined contribution plans; and

o Conforming Form S-8 instructions with current IRS plan review practices.

• Revise Item 1(f) of Form S-8 to eliminate the requirement to describe the tax effects of plan participation on the issuer.

With respect to both Rule 701 and Form S-8, the proposals would:

• Extend consultant and advisor eligibility to entities meeting specified ownership criteria designed to link the securities to the performance of services; and

• Expand eligibility for former employees to specified post-termination grants and former employees of acquired entities.

There’s More! SEC Proposes Temporary Expansion of Compensatory Offerings to Gig Workers

The SEC saved the more interesting – and controversial – part of its “compensatory offering” modernization for an entirely separate proposal – which would, for a temporary five-year period and subject to a number of conditions, permit companies to provide equity compensation to gig workers who provide services (not goods) to the company (or as the SEC calls them, “platform workers”). Commissioners Hester Peirce & Elad Roisman issued a statement in support of the proposal. Commissioners Allison Herren Lee & Caroline Crenshaw dissented – and they were careful to point out that they did support the other proposal.

Here’s the highlights from the SEC’s Fact Sheet:

Under the amendments, an issuer would be able to use the Rule 701 exemption to offer and sell its securities on a compensatory basis to platform workers who, pursuant to a written contract or agreement, provide bona fide services by means of an internet-based platform or other widespread, technology-based marketplace platform or system provided by the issuer if:

• the issuer operates and controls the platform;

• the issuance of securities to participating platform workers is pursuant to a compensatory arrangement, as evidenced by a written compensation plan, contract, or agreement;

• no more than 15% of the value of compensation received by a participating worker from the issuer for services provided by means of the platform during a 12-month period, and no more than $75,000 of such compensation received from the issuer during a 36-month period, shall consist of securities, with such value determined at the time the securities are granted;

• the amount and terms of any securities issued to a platform worker may not be subject to individual bargaining or the worker’s ability to elect between payment in securities or cash; and

• the issuer must take reasonable steps to prohibit the transfer of the securities issued to a platform worker pursuant to this exemption, other than a transfer to the issuer or by operation of law.

The proposed amendments would also permit an Exchange Act reporting company to make registered securities offerings to its platform workers using Form S-8. The same conditions proposed for Rule 701 issuances would apply to issuances to platform workers on Form S-8, except for the proposed transferability restriction.

The proposed amendments would not permit the issuance of securities for platform worker activities relating to the sale or transfer of permanent ownership of discrete, tangible goods. Depending on the results of the initial expanded use of Rule 701 and Form S-8, if adopted, the Commission could consider expanding eligibility to other activities, such as selling goods or other non-service providing activities in the future.

The proposed amendments would require companies that sell securities to gig workers to furnish information to the SEC at 6-month intervals, to help the Commission decide whether the rule changes should expire, be extended or be made permanent.

Both proposals will be subject to a 60-day comment period following their publication in the Federal Register. Time will tell whether the next SEC Chair will carry either of these proposals across the finish line.

Glass Lewis ’21 Voting Guidelines: Diversity and E&S Phase-Ins

Also yesterday, Glass Lewis announced the publication of its 2021 Voting Guidelines. The biggest changes are that Glass Lewis is expanding its board gender diversity policy to vote against nominating chairs if there are fewer than two female directors, beginning in 2022 (they already recommend against the nominating chairs of all-male boards) – and they’re phasing in additional scrutiny of the descriptions of board-level E&S oversight.

As always, the first few pages of the Guidelines summarize the policy changes. Here’s a few highlights:

Board Gender Diversity: Beginning in 2021, we will note as a concern boards consisting of fewer than two female directors. Our voting recommendations in 2021 will be based on our current requirement of at least one female board member; but, beginning with shareholder meetings held after January 1, 2022, we will generally recommend voting against the nominating committee chair of a board with fewer than two female directors. For boards with six or fewer total members, our existing voting policy requiring a minimum of one female director will remain in place.

Disclosure of Director Diversity & Skills: Beginning with the 2021 proxy season, our reports for companies in the S&P 500 index will include an assessment of company disclosure in the proxy statement relating to board diversity, skills and the director nomination process.

Board Refreshment: Beginning in 2021, we will note as a potential concern instances where the average tenure of non-executive directors is 10 years or more and no new independent directors have joined the board in the past five years. We will not be making voting recommendations solely on this basis in 2021; however, insufficient board refreshment may be a contributing factor in our recommendations when additional board-related concerns have been identified.

E&S Oversight: Beginning in 2021, Glass Lewis will note as a concern when boards of companies in the S&P 500 index do not provide clear disclosure concerning the board-level oversight afforded to environmental and/or social issues. Beginning with shareholder meetings held after January 1, 2022, we will generally recommend voting against the governance chair of a company in the aforementioned index who fails to provide explicit disclosure concerning the board’s role in overseeing these issues. While we believe that it is important that these issues are overseen at the board level and that shareholders are afforded meaningful disclosure of these oversight responsibilities, we believe that companies should determine the best structure for this oversight for themselves.

SPACs: We have added a new section detailing our approach to common issues associated with special purpose acquisition companies (“SPACs”), including our generally favorable view of proposals seeking to extend business combination deadlines, as well as our approach to determining the independence of board members at a post-combination entity who previously served as executives of the SPAC. Absent any evidence of an employment relationship or continuing material financial interest in the combined entity, we will generally consider such directors to be independent.

Glass Lewis also made several clarifying amendments – including that their standard policy on virtual shareholder meetings is now in effect, and they expect robust disclosure about the ability of shareholders to participate in the meeting.

We’ll be posting memos in our “Proxy Advisors” Practice Area – and you should also mark your calendar for our January 14th webcast, which is a dialogue with Courteney Keatinge, Senior Director of ESG Research at Glass Lewis. Members of can access that webcast for free – if you’re not a member, you can try a no-risk trial.

Liz Dunshee