Last week’s stay put a pause on the requirement to disclose Rule 10b5-1 plans that companies adopt to effect stock buybacks, but it doesn’t affect the requirements to disclose Rule 10b5-1 plans adopted by directors & officers. Those requirements stem from a separate rule that is already in effect (you can visit our “Rule 10b5-1 Plans” Practice Area for lots of practical guidance on what to do).
A recent Form 8-K and WSJ article underscore that plan disclosures get attention and should be handled with care. Here’s an excerpt:
Dimon, the chief executive, intends to sell one million of his current 8.6 million shares “for financial diversification and tax-planning purposes,” the bank said Friday in a filing.
After years of accumulating shares and using his buying as a signal of his belief in the bank, the shift to paring back is likely to raise questions about how much longer the 67-year-old Dimon intends to stay at the helm and whether he is beginning to contemplate the next steps.
This particular article is reporting on Jamie Dimon’s Rule 10b5-1 plan to sell 12% of his current holdings in JPMorgan Chase beginning in 2024. It notes that the company’s stock price dropped by 3.6% on the day the plan was announced. But it also is careful to point out:
But the bank said Friday that his planned stock sale wasn’t a change in his direction. And there are other signs that he isn’t dumping stock because of a change of heart.
He could sell all one million shares today, as it is currently an open window for JPMorgan executives. Instead, he set up a plan to sell them starting in the coming year at predetermined intervals or prices, showing he isn’t rushing for the exit. Such plans are common for executives. He will still own $1 billion in stock after the sales.
Obviously, not every plan adoption will be headline news like this one, which the company voluntarily reported on Form 8-K in advance of the required quarterly disclosure. But you also can’t count on every media outlet explaining the nuance of planned trading like an experienced WSJ reporter, or the market understanding those nuances.
So, keep in mind that as you prepare for the usual flurry of year-end transactions and look ahead to your Form 10-K, insider ownership reporting will be more sensitive than ever. Investors may read into the cumulative number of shares that an insider plans to sell, even if the shares are being “trickled out” over a long time period and may not have drawn as much attention if each trade was simply reported separately on a Form 4. And if you haven’t already done so, don’t forget to freshen up your internal controls to ensure that you properly report these plans in the first place.
If you haven’t renewed your Section16.net membership for 2024, now is the time! You don’t want to miss Alan Dye’s take on the latest developments, which he’ll be sharing in his annual webcast on that site on January 24th. Contact info@ccrcorp.com if you have questions about your renewal or sales@ccrcorp.com if you want to begin a new membership.
This is wild, and hopefully not a sign of things to come:
In a move that may set a record for hacking chutzpah, a cyber ransom gang has filed a complaint with the SEC reporting that a company they hacked had failed to report the incident to the SEC within the time required by the agency’s new cybersecurity disclosure guidelines. The gang apparently filed the complaint after the hacked company failed to respond to the hackers’ ransom demand. The hacking incident and the SEC report were first reported in a November 15, 2023 post on the DataBreaches.net site, and further detailed in a November 15, 2023 post on the BleepingComputer.com site.
That’s from this D&O Diary blog, and Kevin LaCroix goes on to detail why the new SEC rule isn’t the “golden ticket” that these hackers thought it was:
First, the hackers alleged that MeridianLink violated the cybersecurity disclosure guidelines by failing to make the requisite disclosure under Item 1.05 of Form 8-K within the stipulate four business days. However, the cybersecurity incident current report disclosure obligation of Item 1.05 does not go into effect until December 18, 2023, and the current reporting obligation does not go into effect for smaller reporting companies until June 15, 2024. (For further detail about the effective dates of the new cybersecurity disclosure rules, refer here.)
Second, even if the disclosure requirement were otherwise in effect, it may or may not have been triggered here. The new rules state that the cyber incident reporting is “due four business days after a registrant determines that a cybersecurity incident is material.” (Companies cannot “unreasonably delay” the determination that they need to disclose an incident.)
While the hackers in their SEC complaint described the incident as constituting a “significant breach,” MeridianLink’s description of the incident in its statement to DataBreaches.net stated that the company had “identified no evidence of unauthorized access to our production platforms, and the incident has cause minimal business interruption.” MeridianLink may well contend that it has made no determination that the incident was “material,” and therefor that the four-day reporting period was not even triggered.
Does it matter whether the hackers understand securities laws? Kevin points out that for companies that want to avoid public attention & regulatory scrutiny, the specter of enforcement & litigation could give hackers additional leverage for their extortion schemes. As the many resources in our “Cybersecurity” Practice Area explain, the SEC rules don’t require reporting immaterial incidents (or attempted incidents). Nevertheless, I guess we now have to worry about the bad guys beating us to the punch in reporting their crimes.
Yesterday, ISS Governance announced the launch of its open comment period on proposed changes to its benchmark voting policies. During this open comment period, ISS Governance gathers views from stakeholders on its proposed voting policy changes for 2024 (and beyond). The comment period runs through 5:00 p.m. Eastern time on November 30, 2023.
Notably, ISS Governance does not solicit comments for any policy changes in the US market. I honestly cannot remember a time when ISS did not propose changes to its benchmark voting policies for the US market, so this seems like something to be truly thankful for this holiday season!
I must admit, I have always loved Thanksgiving. I have so many fond memories of the holiday, like waking up early and smelling Thanksgiving dinner cooking, playing in piles of leaves with my friends as a kid, traveling around town on a crisp Thanksgiving morning to visit local friends, eating two Thanksgiving dinners at my parent’s house and my in-laws’ house (and then being overcome by a “food coma” on a couch somewhere), watching my son play football at Baltimore’s M&T Bank Stadium for his high school Turkey Bowl and watching my dearly departed pug try to steal the Thanksgiving turkey off the table, to name just a few. Thanksgiving is that unique American secular holiday steeped in tradition where, for the most part, we take a moment to stop and appreciate things for just a moment. I can recall only a handful of times where I had to attend to work matters on Thanksgiving, which is a testament to how important the holiday is to all of us.
This has been one heck of year, so getting some downtime to reflect is welcome. A couple weeks ago, I moderated a panel at PLI’s 55th Annual Institute on Securities Regulation titled “The Year in Review: What Just Happened?” During the panel, we delved into several key SEC developments over the course of the last year, as well as the topic of generative AI. That discussion got me thinking that we actually have a number of things to be thankful for tomorrow in the securities and governance world, and here are my top 5:
1. We made it through the first year of pay versus performance disclosure. This time last year, many people were freaking out about the daunting task of calculating and drafting the new pay versus performance disclosure that the SEC required in 2022, and it was indeed a painful process. But now most issuers have that first year under their belt and, with the benefit of some additional Staff interpretations and comments, they can either “rinse and repeat” or make some incremental improvements to the pay versus performance disclosure in upcoming proxy statements. Note that the Staff issued some new and revised Regulation S-K CDIs regarding pay versus performance disclosure yesterday! More on those to come.
2. We are almost at the clawback policy finish line. Next Friday is the deadline for companies to adopt a clawback policy that complies with exchange listing standards, thus bringing to an end over a dozen years of buildup as to what sort of Dodd-Frank Act clawback the SEC and the exchanges would require. Obviously, the SEC ended up deciding to go with the most extreme approach to implementing the Dodd-Frank Act directive, but at least it is over!
3. The share repurchase disclosure requirements are not as bad as they could have been. The share repurchase disclosure requirements that the SEC adopted this past summer did not end up being as bad as what the SEC had proposed, moving from a daily reporting scheme to the quarterly reporting of daily repurchase data. Admittedly, it is still going to be a lot of extra work for no perceivable benefit, but at least we did not end up with something akin to Section 16 reporting for share repurchases. Further, the clock is ticking for the SEC to address the Fifth Circuit’s decision finding fault with the share repurchase disclosure rules, and it remains to be seen how that will all play out.
4. At least we have some rules around cybersecurity disclosure. The SEC’s cybersecurity disclosure rules were pretty much inevitable, but at least we have some concrete rules to work with now rather than regulation by interpretive guidance and enforcement. Next month, the current reporting of material cybersecurity incidents kicks in, and in upcoming Form 10-Ks issuers will be providing the periodic disclosure about cybersecurity risk management, strategy and governance. If you want to utilize your holiday downtime to get a jump on the drafting of that disclosure, be sure to check out our July-August 2023 issue of The Corporate Executive.
5. We made it through another year without mandatory SEC climate disclosure. As originally contemplated in the proposing release for the climate disclosure rules, large accelerated filers would have been gearing up to provide the first phase of mandatory climate disclosure in their Form 10-Ks for 2023, including Scope 1 and 2 GHG emissions data and extensive narrative disclosure about climate risks and governance. As we all know, that did not end up happening, so we remain in a holding pattern as to when final rules will be adopted and what the compliance timetable will look like for those final rules.
As for me, I am going to enjoy the next few days of holiday downtime and I hope you can too. I wish you all a happy Thanksgiving!
The Staff’s CDIs just keep on coming, with a new batch released yesterday. The Staff delves into some highly technical topics in this latest round of new CDIs, addressing the inclusion of securities in the filing fee exhibit and hyperlinking to Inline XBRL exhibits. Here is what the Staff said:
Question: A well-known seasoned issuer registers securities on an automatic shelf registration statement and elects to defer payment of filing fees pursuant to Rule 456(b). The issuer subsequently files a prospectus supplement in connection with a pay-as-you-go deferred fee payment under Rules 456(b) and 457(r) that includes the required filing fee exhibit. Must the filing fee exhibit’s Table 1 list all the securities listed in the initial filing of the related registration statement or is Table 1 permitted to list only the securities being offered by the prospectus supplement as to which the fees are being paid?
Answer: Table 1 must include the securities for which a deferred fee is being paid in the “Fees to Be Paid” lines. The issuer does not need to repeat previously included rows reflecting the registration of classes of securities in an indeterminate amount in reliance on Rule 457(r) in either the “fees to be paid” or “fees previously paid” lines. In addition, the issuer need not include in the “fees previously paid” line securities for which the issuer previously paid a fee that are part of (i) the same offering as those for which the issuer is paying a deferred fee; or (ii) any prior offering. [Nov. 20, 2023]
Question: Item 601(a)(2) of Regulation S-K provides that an exhibit index does not need to include a hyperlink to an exhibit that is filed in XBRL. Does this exception apply to exhibits that are filed in Inline XBRL?
Answer: No. Item 601(a)(2)’s reference to exhibits filed in XBRL refers to exhibits that are filed in unconverted code, which is only machine-readable. See Release No. 33-10322 (Mar. 1, 2017). An exhibit that is tagged in Inline XBRL is not filed in unconverted code. [Nov. 20, 2023]
With respect to the second new CDI, an example of such an exhibit is the upcoming share repurchase exhibit, which will be required to be tagged using Inline XBRL.
Will we get more CDIs during this holiday week? Only time will tell.
The Corp Fin Staff’s CDIs are such an integral part of our practice today, but I realize that many practicing today may not really know where they came from. Well, come sit by the fire my friends and let your intrepid blogger tell you a little story about the birth of the CDIs.
Now, for the purpose of storytelling, our main character in this tale is yours truly, but in fact many, many folks from the Corp Fin Staff contributed to the birth of the CDIs. If you have been following my work for some time, you have no doubt gleaned that one of my credos is “share the knowledge,” and I developed that sensibility from my earliest days of practicing at the SEC, before the dawn of the Internet.
I noticed as a junior Corp Fin examiner sitting behind my metal desk and staring at my OS/2 powered PC with a giant tube monitor that a small cabal of practitioners seemed to hold all of the knowledge of what the Corp Fin Staff was thinking and what interpretations the Staff had taken over the years, so much so that they knew more than me about the Staff’s interpretive positions on important issues. Against this backdrop, I developed a keen appreciation for The Corporate Counsel newsletter, because Jesse Brill and Mike Gettelman did a fantastic job of chronicling (and sometimes extracting) the Staff’s important interpretive positions and communicating them to the world. In these formative years, I vowed to myself that I would one day try to improve this persistent information disparity, if for no better reason to prevent future Staffers from being schooled by knowledgeable practitioners that were hoarding the secrets of the temple.
Now, thankfully, the Office of Chief Counsel at the SEC kept quite good records of the interpretive positions that it had taken over time – I remember my awe when first discovering the wall of black binders that held records of interpretive positions taken by Office of Chief Counsel Staffers over decades of telephone calls. This was basically the securities law nerd’s equivalent of the Holy Grail. In a move that was very helpful to the Staff, a compilation of key interpretations was created and called the telephone interpretations manual, and that was available internally so that everyone could see the grand mosaic of the Staff’s interpretive work and factor that into filing reviews. Over the years, copy of the telephone interpretations manual had found its way out into the world (as such things are wont to do), thus contributing to the overall information asymmetry problem.
Enter now my old friend and mentor Marty Dunn, as well as several others serving in senior Corp Fin positions at the time. It was decided that the compilation of telephone interpretations would be made public, based on the rationale that providing these interpretive positions might reduce the number of telephone calls that came into Corp Fin. As Marty would always say, the public release of the telephone interpretations had the exact opposite effect, with more calls flooding in to ask questions about the answers provided in the interpretations!
When I returned to the SEC from my stint in private practice in the early 2000s, one of the projects that the Office of Chief Counsel was tasked with was reimagining the publicly available telephone interpretations. The thought was to transform many of the telephone interpretations into a question-and-answer format, as well as make the interpretations easier to update over time. We came up with the new name as a more descriptive way of identifying the interpretations, after many proposed names were rejected by Marty because the acronym sounded stupid (Marty had a thing about acronyms). I am forever grateful for the Staff’s hard work in reimagining those old telephone interpretations, and I think we collectively came up with a great system for communicating the Staff’s views that has withstood the test of time!
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The revised CDI is most definitely a proxy season classic. Question 126.03 addresses the very important topic of counting the “10 calendar day” period specified in Rule 14a-6 for the purpose of determining when a definitive proxy statement can be filed after filing a preliminary proxy statement. The importance of determining the tolling of the 10-calendar day period in Rule 14a-6 cannot be understated, because the Corp Fin Staff will not call a registrant to indicate that the Staff does not plan to review a preliminary proxy statement, so the registrant must wait the full 10 calendar days before filing and mailing a definitive proxy statement. In the revised CDI below, the Staff clarifies that the explanation of the 10 calendar day period in the interpretation assumes that the preliminary proxy statement is submitted before 5:30 eastern time and thus receives an EDGAR filing date for the date that the preliminary proxy statement was submitted:
Question 126.03
Question: How are “days” counted for purposes of the “10 calendar day” period in Rule 14a-6?
Answer: For purposes of calculating the “10 calendar day” period in Rule 14a-6, the date of filing is day one pursuant to Rule 14a-6(k). For example, if the preliminary proxy statement is filed on Friday, October 20, 2023, then Sunday, October 29, 2023, would be day ten for purposes of Rule 14a-6. The registrant may send the definitive proxy statement to security holders starting at 12:01 a.m. on October 30, 2023. The foregoing assumes that the preliminary proxy statement is submitted on or before 5:30 p.m. Eastern Time on October 20, 2023. If the filing is submitted after 5:30 p.m., the 10-day period does not start until the next business day, which would be Monday, October 23, 2023. See Rule 13(a)(2) of Regulation S-T. [November 17, 2023]
The Staff’s Friday Compliance and Disclosure Interpretation update also included three new universal proxy CDIs. The new Rule 14a-19 CDIs are as follows:
Question 139.07
Question: Rule 14a-19(e) mandates that each soliciting party in a non-exempt director election contest include all director nominees of all soliciting parties on each universal proxy card. As a result, in a contested director election, each soliciting party’s universal proxy card will include more nominees than director seats up for election. Rule 14a-19(e)(6) mandates that a universal proxy card prominently disclose the maximum number of director nominees for whom a shareholder may grant authority to vote. Rule 14a-19(e)(7) requires that a universal proxy card prominently disclose the treatment and effect of a proxy executed in a manner that grants authority to vote “for” the election of more nominees than the number of director seats up for election (an “overvoted proxy card”) or fewer nominees than the number of director seats up for election (an “undervoted proxy card”). Can a soliciting party use discretionary authority to vote the shares represented by overvoted proxy cards in accordance with that party’s voting recommendation for the director election?
Answer: No. Rule 14a-4(e) provides that where a person solicited specifies on a proxy card “a choice with respect to any matter to be acted upon, the shares will be voted in accordance with the specifications so made.” When a shareholder has specified its choice(s) for the election of directors with an overvoted proxy card, the shares represented by an overvoted proxy card cannot as a practical matter be voted in accordance with the shareholder’s specifications. Because the shareholder has specified its choice(s) for the election of directors with an overvoted proxy card, a soliciting party cannot rely on discretionary authority pursuant to Rule 14a-4(b)(1) to vote the shares represented by an overvoted proxy card on the election of directors. Although the shares represented by an overvoted proxy card cannot be voted on the election of directors, such shares can be voted on other matters included on the proxy card for which there is no overvote and can be counted for purposes of determining a quorum. The treatment and effect of the corresponding voting instruction form (“VIF”) should be the same as that disclosed on a universal proxy card pursuant to Rule 14a-19(e)(7). The staff understands that some intermediaries will contact shareholders or beneficial owners to seek a correction of an overvoted proxy card or VIF before the meeting date. The interpretive position described in this CDI does not prohibit this helpful practice. [November 17, 2023]
Question 139.08
Question: Can a soliciting party use discretionary authority to vote the shares represented by undervoted proxy cards for the remaining director seats up for election in accordance with that party’s voting recommendation?
Answer: No. A shareholder has specified its choice(s) for the election of directors with an undervoted proxy card, and the shares represented by an undervoted proxy card can be voted in accordance with the shareholder’s specifications. See Rule 14a-4(e). Because the shareholder has specified its choice(s) for the election of directors with an undervoted proxy card, a soliciting party cannot rely on discretionary authority pursuant to Rule 14a-4(b)(1) to vote the shares represented by an undervoted proxy card for the remaining director seats up for election. The treatment and effect of the corresponding VIF should be the same as that disclosed on a universal proxy card pursuant to Rule 14a-19(e)(7). [November 17, 2023]
Question 139.09
Question: Can a soliciting party use discretionary authority to vote the shares represented by a signed but unmarked proxy card in accordance with that party’s voting recommendations?
Answer: Yes. Because the shareholder has not specified any choices, the soliciting party can use discretionary authority in this manner and as permitted by Rule 14a-4(b)(1). Rule 14a-4(b)(1) states that “[a] proxy may confer discretionary authority with respect to matters as to which a choice is not specified by the security holder,” so long as the form of proxy states in bold-faced type how the proxy holder will vote where no choice is specified. Note that Rule 14a-19(e)(7) requires that a universal proxy card prominently disclose the treatment and effect of a proxy executed in a manner that does not grant authority to vote with respect to any nominees. The treatment and effect of the corresponding VIF should be the same as that disclosed on a universal proxy card pursuant to Rule 14a-19(e)(7). [November 17, 2023]
In the gift that keeps on giving, the Staff also issued two new CDIs on Friday that address the content of solicitations before furnishing a proxy statement under Rule 14a-12 and when a proposal “involves” another matter within the meaning of Note A to Schedule 14A when information about the other matter that is called for by Schedule 14A is material to a security holder’s voting decision on the proposal presented. The two new CDIs are as follows:
Question 132.03
Question: Rule 14a-12 permits solicitations before the furnishing of a proxy statement, provided that, among other things, written soliciting material includes the required participant information or a prominent legend advising shareholders where they can find that information. See Rule 14a-12(a)(1)(i). Can a soliciting party satisfy Rule 14a-12(a)(1)(i) through a legend that only includes a general reference to filings made by the soliciting party or the participants (e.g., a legend that refers shareholders to the prior year annual report on Form 10-K and proxy statement for participant information)?
Answer: No. Rule 14a-12(a)(1)(i) requires a soliciting party to disclose the “identity of the participants in the solicitation…and a description of their direct or indirect interests, by security holdings or otherwise, or a prominent legend in clear, plain language advising security holders where they can obtain that information.” The availability of participant information allows shareholders evaluating soliciting materials to understand the interests of those soliciting the shareholders at the time when the solicitations occur, including before the shareholders receive a proxy statement. When the Commission amended Rule 14a-12 to expand the ability to solicit before furnishing a proxy statement, the Commission cited the legend information as one of the safeguards to protect against misleading solicitations and maintain the integrity of the solicitation process. See Section II.C.1. in Release No. 34-42055 (Oct. 22, 1999). General references in the legend to filings made or to be made by the soliciting party or participants do not sufficiently advise shareholders where they can obtain the required participant information. Instead, the legend should:
– clearly identify the specific filing(s) where participant information appears (including by filing date);
– clearly describe the specific locations of the participant information in such filings, whether by reference to the relevant section headings, captions or otherwise; and
– include active hyperlinks to the referenced filings, when possible.
Soliciting parties also are reminded that participants’ direct and indirect interests in the solicitation are not limited to such participants’ security holdings. [November 17, 2023]
Question 151.02
Question: A registrant closes the acquisition of another company in a transaction in which security holder approval is not required. A portion of the consideration paid in the acquisition consists of convertible securities that, at the holder’s option, can be converted into shares of the registrant’s common stock or, at the registrant’s option, cash. Following the acquisition, the registrant files a proxy statement to solicit security holder approval for the authorization of additional shares of common stock that it could issue upon the conversion of the securities issued in connection with the acquisition. Would the solicitation of security holder approval for the authorization of the additional shares of common stock “involve” the acquisition for purposes of Note A of Schedule 14A?
Answer: A proposal “involves” another matter within the meaning of Note A when information about the other matter that is called for by Schedule 14A is material to a security holder’s voting decision on the proposal presented. The determination as to whether there is a substantial likelihood that a reasonable security holder would consider the information important in making a voting decision on a proposal ultimately depends on all the relevant facts and circumstances.
The authorization of additional shares of common stock is an integral part of the acquisition because it is necessary for the registrant to meet its obligation under the convertible securities issued as consideration for the acquisition. Therefore, the proposal to authorize additional shares of common stock “involves” the acquisition. In such circumstances, the registrant would have to include in the proxy statement information about the acquisition called for by Schedule 14A, unless such information has already been disclosed or sufficient time has passed so that the registrant’s historical filings fully reflect the acquisition. [November 17, 2023]
It is always helpful to get new and revised guidance from the Corp Fin Staff, but it is particularly helpful to receive the guidance when you are tasked with writing a securities law blog during the short week of Thanksgiving! As a result, I am particularly thankful for these new and revised CDIs!