Let’s say you’ve filed a registration statement & one of your directors – we’ll call him “David Dennison,” for absolutely no reason in particular – signed the document through an attorney-in-fact. Is there a possibility that the now famous “he didn’t sign it” defense could call into question the validity of David’s signature?
This Olshan blog says that if you’ve properly complied with the requirements applicable to powers of attorney, there’s no reason to be troubled by the fact that one or more signatories executed the registration statement through an attorney-in-fact:
Proper powers of attorney should cover the specific filing being made by the company and any and all amendments to that filing, as well as all other documents in connection with the filing. The power of attorney, though electronically filed with a typed conformed signature in the document, should be manually executed by the officer or director and the original should be saved for at least five years.
If the power of attorney is in the Signatures section in Part II of the registration statement (with an appropriate reference thereto in the exhibits index), the manually executed original should be saved for five years, and all amendments to the registration statement manually signed by the attorney-in-fact on behalf of the officer or director should likewise be saved.
There are many valid business reasons to utilize a power of attorney and there is no legal reason why a corporate officer or director should not be deemed to have signed a registration statement in reliance upon a valid power of attorney.
Of course, if David subsequently says that the registration statement is “fake news,” that might be another kettle of fish. . .
Should You File That Shelf Now or Later?
Check out this Bass Berry blog if you’re trying to decide whether you should file a shelf S-3 now or wait until you’re planning to do a deal. For non-WKSI’s, the answer is usually easy – since your S-3 won’t automatically go effective, you can’t be sure that you won’t be delayed when you need it unless you get it on file & effective now.
The answer for a WKSI issuer is a little more complicated – and the blog lays out the pros & cons. Here’s an excerpt addressing one of the big reasons that even a WKSI might want to get a registration statement on file before a deal is imminent:
Given the fact that filing a registration statement has the potential to trigger financial statement filing requirements (such as the potential need to file retrospectively revised financials in connection with a change in business segments, the occurrence of discontinued operations, or probable or completed significant acquisitions or dispositions), filing a registration statement on a clear day at a time when such filing does not trigger financial statement filing requirements may prove beneficial in comparison to waiting to file a registration statement at the time of a future public offering when such financial statement filing requirements could be triggered.
Cons include the need to incur the costs associated with registration and the potential adverse effect on the stock price due to the perception that the company is signaling the market that a deal is coming.
Our June Eminders is Posted!
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While accounting departments throughout the nation may be pulling their hair out in an effort to get ready for FASB’s new lease accounting standard, this FEI article says that Wall Street analysts don’t seem to care very much about the new standard. Here’s an excerpt:
Despite the increasing drumbeat of concern regarding implementation of new lease accounting rules from financial preparers, there is palpable ambivalence from at least one major consumer of the new disclosures: Wall Street research analysts. Few, if any, analysts have questioned financial executives about their lease plans during the Q&A sessions of recent earning calls, where a majority of the accounting discussions revolved around revenue recognition issues.
And even once implementation begins in earnest as the 2019 deadline grows nearer, equity analysts admit they see fewer ramifications on their buy/sell decisions and models. “Revenue recognition affects all companies, while with leasing you may have some very specific industries and companies that are impacted significantly. From an equity analysis perspective we expect the lease accounting changes to be less complex,” says Zhen Deng, a senior analyst with CFR.”
This must be very encouraging news for those of you who just spent part of your holiday weekend dealing with some aspect of preparing for the new standard. As a colleague once said to me when a merger agreement I worked all weekend on got tossed into the garbage because the seller decided not to move forward, “Hey, at least it’s appreciated.”
Sell-Side Analysts: Still “Lake Wobegon U” Grads?
Speaking of securities analysts, remember former SEC Chair Arthur Levitt’s famous crack about them? “I worry that investors are being influenced too much by analysts whose evaluations read like they graduated from the Lake Woebegon [sic] School of Securities Analysis – the one that boasts that all its securities are above average.”
Levitt made those comments in a 1999 speech – and despite all of the water that’s gone under the bridge since then, this Marketwatch article says that Lake Wobegon U is still cranking out securities analysts:
There are no companies in the benchmark S&P 500 with majority “sell,” or equivalent, ratings among analysts. For the S&P 500, there are actually 505 stocks because five of the companies in the index have two classes of common stocks. Among the 505 stocks, analysts have majority buy ratings on 266.
For example, there are still 47 analysts who cover Amazon.com Inc. AMZN, -0.12% and 45 rate the stock “buy.”
There’s exactly one S&P 500 stock for which 50% of analysts rate the shares a sell: News Corp.’s class B shares NWS, +0.00% But it turns out that only two analysts cover the class B shares, while 13 analysts cover the class A shares NWSA, -0.06% For class A, four of the analysts rate the shares a buy, with eight neutral ratings and one sell rating.
The article says the same thing that many were saying back in the ’90s – read these reports for the valuable information they provide on companies & industries, but don’t rely on them for recommendations.
A member points out that it should be “Lake Wobegon,” and not – as Arthur Levitt & I originally spelled it – “Lake Woebegon.” I’ve learned my lesson, and that’s the last time I’ll ever rely on a former SEC Chair for spelling advice!
Analysts: From Russia with Guts
So is there any place where analysts call ’em as they see ’em? It turns out that the answer is yes, and it’s in the unlikeliest of places – Vladimir Putin’s Russia. This “FT Alphaville” blog tells the story of a brave man named Alex Fak, who until recently served as the head of research at Russia’s Sberbank. Here’s an excerpt:
Fak – who worked at the FT on a three-month fellowship in 2004 – was asked to resign after publishing a report that opined state gas monopoly Gazprom was ignoring its bottom line and benefiting its top contractors, including companies owned by Putin’s friends.
“Gazprom’s investment program,” which is seeing it spend $93.4bn on mega-projects like the Power of Siberia gas pipeline to China, Nord Stream-2 to Germany, and Turkish Stream, Fak and Anna Kotelkina wrote, “can best be understood as a way to employ the company’s entrenched contractors at the expense of shareholders.”
Fak went on to argue that Gazprom had abandoned other, cheaper capex projects that would have limited contractors’ ability to profit. If Gazprom were to be reformed after a recent government reshuffle and broken up into its components, Fak estimated, it would be worth $185bn – three times its current share price.
The blog says that Fak’s not the first analyst to be punished by a Russian bank for calling out inefficient state companies whose CEOs are “well connected.” Would a U.S. bank do the same? With all the Lake Wobegon U grads out there, it seems unlikely that we’ll ever know.
Broc recently blogged about the rough sledding that GE experienced when it went to shareholders for ratification of its appointment of KPMG – “no” votes represented more than 35% of the votes cast on the proposal at this year’s annual meeting. However, this “Audit Analytics” blog says that the GE result didn’t even manage to crack the ‘Top 3’ no-vote getters for the three years ended December 31, 2017.
For the record, the blog says that the biggest (almost) losers were:
In 2017, 15 companies received more than 20% of votes against ratification. In addition to Planet Fitness, Consolidated-Tomoka Land and Kulicke & Soffa Industries, each received more than 36% of votes against auditor ratification.
Auditor Ratification: So What Happened Next?
I’m sure you’re curious about what our biggest (almost) losers did in response to their high percentage of ‘no’ votes on auditor ratification proposals. I checked the SEC’s Edgar, and the short answer is – nothing. There were no changes in audit firms in response to the votes. In fact, neither of the other two companies referenced by Audit Analytics as having received more than 36% ‘no’ votes in 2017 changed audit firms either.
Of course, these are non-binding votes, because otherwise they’d violate Sarbanes-Oxley’s requirement that the audit committee call the shots on independent auditors. Still, a big no vote sends a pretty strong message – but I guess the bottom line is that “a win’s a win.”
UK shareholders don’t appear as reluctant to pull the plug on auditors as their counterparts here in the US. In fact, this article says nearly 80% of the shareholders of SIG plc, a British construction supplier & FTSE 250 component, voted against the ratification of its auditor – and the firm was fired that same day.
Fake SEC Filings: Rockwell Medical’s Alternative Realities
Last week, Liz sent an email to Broc & me asking if we’d been following the “dueling 8-Ks” from Rockwell Medical. I’d glanced at Matt Levine’s column about it, but it was when she characterized the situation as a “fake filing, but from the inside” that I realized we needed to say something about it here.
If there’s one thing we love on this blog, it’s “fake SEC filings.” But as Liz pointed out, this fake filing is a little different. This excerpt from Matt Levine’s second column about this company’s competing realities summarizes the situation:
We talked yesterday about the mysterious doings at Rockwell Medical Inc., where the universe has split into two alternate realities, in one of which (which I called RMTI-A) the board of directors has fired the chief executive officer, and in the other one (which I called RMTI-B) it absolutely has not, and in fact the directors are themselves in trouble for doing some unspecified bad things. Both sides raced to file dueling 8-Ks explaining their side of the story, leaving investors to try to figure out who is really in charge, the CEO or the board.
Here’s RMTI-A’s Form 8-K – and here’s the RMTI-B’s Form 8-K. This is a strange brew even in a “post-truth” era – but believe it or not, the plot got even thicker. That’s because the company’s largest shareholder amended its 13D to disclose a letter supporting the board’s decision to fire the CEO – and calling for the scalp of the CFO, who the letter claims helped the CEO make his 8-K filing.
The board of RMTI-A then formally terminated the CFO and issued a press release updating shareholders about the week’s festivities. The whole mess has apparently ended up in the lap of some poor state judge in Michigan – who promptly sent both sides to their respective corners & gave them 21 days to try to work things out.
Most of the attention on the Dodd-Frank reform bill that President Trump signed last Friday has focused on the law’s impact on financial institutions – but this Duane Morris blog points out that there’s something in the new law for other companies as well. In particular, the legislation expands the class of companies that are eligible to use Reg A+ to include already public companies. This excerpt explains:
The President today signed the “Economic Growth, Regulatory Relief and Consumer Protection Act.” Most of the bill is centered around easing some Dodd-Frank restrictions as they apply to smaller banks. But buried in Section 508, called “Improving Access to Capital,” Congress adopted a major change to Regulation A+.
Previously, the Reg A+ rules required, in Section 251(b)(2), that a company cannot use Reg A+ if it is subject to the SEC reporting requirements under Section 13 or 15(d) of the Securities Exchange Act immediately prior to the offering. This includes, for example, every company listed on a national exchange such as Nasdaq or the NYSE and many companies that trade over-the-counter. The new law reverses that and orders the SEC to change the rules to permit reporting companies to utilize Reg A+.
Along the same lines, the new statute also provides that companies can satisfy their Reg A+ periodic reporting obligations through the filing of the Exchange Act reports mandated for other reporting companies.
Stinson Leonard Street’s Steve Qunilivan also points out that there’s good news for private companies too – the new law relaxes some of the requirements under Rule 701:
Section 507 of the bill directs the SEC to increase Rule 701’s threshold for providing additional disclosures to employees from aggregate sales of $5,000,000 during any 12-month period to $10,000,000. In addition, the threshold is to be inflation adjusted every five years.
Reg A+’s expansion may turn out to be bigger news than you might think. A lot of questions have been raised about the efficacy of the JOBS Act’s efforts to rejuvenate Reg A – but this recent study reviews experience under the new regime & suggests that those efforts appear to be working. Here’s an except:
Not only has the use of Regulation A grown exponentially, but the exemption may now rival or even surpass its previously more popular predecessor, Regulation D’s Rule 506. Regulation A+ is an example of Congress using its legislative powers to take something that was structurally flawed and problematic and making it into a regulation that, while still having some flaws, now appears to be more appealing to emerging growth and start-up companies.
But the study also says that success has brought its own problems:
By the same token, Regulation A+ is not an unqualified success. The considerable increase in the use of Regulation A has surfaced potential problems such as the increased exposure of this option to “lay” investors; i.e. investors with modest income, modest net worth, and little to no financial sophistication. While these are the investors that Regulation A actively seeks, there are concerns about how issuers, regulators and the market as a whole will react if/when these investors suffer significant losses in this private equity startup company space.
SEC Commissioner Nominees: Another Senate Banking Staffer?
Want to become an SEC Commissioner? You’d better have the Senate Banking Committee on your resume. According to this WSJ article, the Committee’s chief counsel, Elad Roisman, may be the choice to fill the slot of departing Commissioner Mike Piwowar:
The White House is considering nominating a top aide to the Senate Banking Committee chairman for a GOP opening on the Securities and Exchange Commission, according to people familiar with the matter. Elad Roisman, the chief counsel to the banking panel led by Mike Crapo (R., Idaho), is a top contender to succeed Michael Piwowar at the top U.S. markets regulator, these people said. Mr. Piwowar plans to leave the SEC by July.
The article points out that Roisman – who’s only 37 years old – would join a long list of former Banking Committee staffers who have gone on to serve as SEC Commissioners – including Piwowar and current SEC commissioners Kara Stein & Hester Peirce. The logic being – if you work for the Senate Banking Committee, your Senate confirmation hearings are likely to be smooth…
This “Audit Analytics” blog reviews its recent survey of 17 years of auditor opinions containing “going concern” qualifications. Not surprisingly, going concern opinions peaked in 2009 – a total of 3,551 were issued for financial statements covering that year. But since then, they’ve been on a steady decline, with only 1,970 issued for 2016 financials.
That seems like good news, but it’s complicated by the fact that attrition played a large role in the decline between 2015 and 2016. However, the number of first time going concerns is estimated to be 467, which would be the 6th consecutive year in which that number was under 600.
The survey’s most troubling conclusion is that once a company finds itself slapped with a going concern opinion,it’s becoming increasingly difficult for them to dig out from under it:
The number of companies that improved well enough to shed their going concern status is tied for the second lowest population of companies that recovered during the 16 years analyzed. This very low number of improving companies indicates that many companies with going concerns are still experiencing difficulties and are unable to improve enough to rid the going concern status.
Crowdfunding: More Bang for Your Buck
One of the problems with crowdfunding under Regulation CF is that you don’t get a lot of bang for your buck – issuers can only raise $1 million per year. But this recent blog from Andrew Abramowitz highlights a potential workaround for companies looking to raise more money – a simultaneous Regulation CF & Rule 506(c) offering. Here’s an excerpt:
One might think that a way to do this would be to conduct a traditional private placement under Rule 506(b), which has no dollar limit, alongside the Regulation CF offering. However, this is a poor fit because of so-called “integration” issues. Regulation CF permits general solicitation, subject to limits, while Rule 506(b) by definition prohibits the “blast-it-out” approach, so efforts to spread the word on the Regulation CF offering could be deemed to be improper promotion of the Rule 506(b) offering.
A better fit would be another exemption arising out of the JOBS Act: a Rule 506(c) offering to all accredited investors, with no dollar limitation, which can be offered through the same portals that are required for Regulation CF offerings. Because general solicitation is permitted under both exemptions, there is not the same integration issue as with Rule 506(b).
By combining Regulation CF and Rule 506(c) in an offering via a web portal, companies can raise essentially any amount needed. The portal would steer non-accredited investors to the Regulation CF bucket, and accredited investors would invest under Rule 506(c). This allows companies to allow for small increment investments in situations where it doesn’t want to limit its shareholder base to accredited investors, while not being constrained meaningfully by the offering dollar limit.
Companies opting for this approach need to pay close attention to the respective rules for each exemption – particularly those imposing restrictions on communications outside the portal during a Regulation CF offering.
Yahoo! & Loss Contingencies: The Shoe That Didn’t Drop
As a follow-up to last month’s blog about the Yahoo! enforcement proceeding, here’s a recent memo from Locke Lord’s Stan Keller discussing an issue that the SEC didn’t raise in the Yahoo! case:
The SEC’s Yahoo enforcement action did not address the failure of Yahoo’s financial statements to include disclosure (and possibly an accrual) under Accounting Standards Codification 450-20 for the potential loss contingencies resulting from the 2014 data breach. Not much imagination typically is required to foresee the potential for significant liabilities arising from a massive cyberbreach and therefore the importance of considering the financial statement implications of that breach among other required disclosures.
Stan contrasts the Yahoo! proceeding with the SEC’s 2017 enforcement action against General Motors – where ASC 450 was specifically referenced. In both cases, the loss contingencies involved unasserted claims that, under ASC 450-20, required an assessment concerning whether claims were “probable” and, if so, whether a material loss was “reasonably possible.” If this test is met, disclosure is required, and the estimated range of loss must be quantified if an estimate can be made. Any loss that is probable and can be estimated must also be accrued as a charge to the income statement.
The SEC may not have brought ASC 450 up in the Yahoo! case, but let’s face it – that seems to have been a pretty target rich environment, so we probably shouldn’t read too much into that. Companies considering disclosure issues around data breaches would be smart to keep ASC 450’s requirements in mind.
I’ve been impressed by the FTC’s use of its “Competition Matters” blog to provide antitrust guidance – and I’ve wondered why the SEC was so. . . well. . . “stodgy” in its approach to this kind of thing. Then this press release with the headline “The SEC Has an Opportunity You Won’t Want to Miss: Act Now!” hit my inbox with the following news (also see this WSJ article):
Check out the SEC’s Office of Investor Education and Advocacy’s mock initial coin offering (ICO) website that touts an all too good to be true investment opportunity. But please don’t expect the SEC to fly you anywhere exotic—because the offer isn’t real.
The SEC set up a website, HoweyCoins.com, that mimics a bogus coin offering to educate investors about what to look for before they invest in a scam. Anyone who clicks on “Buy Coins Now” will be led instead to investor education tools and tips from the SEC and other financial regulators.
So I clicked on the link, and I’ve got to say it’s about the most out-of-character thing I’ve ever seen the SEC do – right down to having the Chief Counsel of the SEC’s “Office of Investor Education & Advocacy” portray HoweyCoins.com’s fraudster-in-chief.
I don’t know that I’d put this on the same level with Andy Kaufman’s stuff when it comes to performance art, but it’s pretty good for government work!
“The Crypto Deals. . . Have Lots of Fraud. . . Deep in the Heart of Texas”
The SEC’s fraud warnings about coin deals seem pretty timely. For instance, this Jones Day memo says that Texas blue sky regulators went hunting for fraud in crypto deals – and found a whole bunch of it. Here’s the intro:
As the price of bitcoin rose to unprecedented levels in 2017, regulators began focusing more enforcement resources on cryptocurrency offerings, both at the federal and state levels. At the state level, the Texas State Securities Board (“TSSB”) has led the way. In late 2017, the TSSB quietly launched an investigation into cryptocurrency offerings being made to Texas investors.
The TSSB announced the results of that investigation last month, indicating that it had found widespread fraud in cryptocurrency offerings. As a result of that investigation, the TSSB has brought nine enforcement actions over a span of less than six months. Given the growing investment in cryptocurrencies, we expect to see continued use of enforcement actions by the TSSB and other state regulators as one of the principal tools to regulate this growing market.
We’ve previously blogged about how the blue sky cops are on the crypto beat – and The Lone Star State’s experience suggests that bad guys are not in short supply.
ICOs: Are They or Aren’t They?
The SEC didn’t come up with the name “HoweyCoins.com” out of thin air. Ever since it issued its 21(a) Report on ICOs last summer, the SEC has made it clear that it thinks tokens are “securities” under the “Howey test.” Now, John Reed Stark reports that the first court test of this position is underway in a federal district court in Brooklyn. The issue is being contested in the context of a criminal proceeding in which the defendant has filed a motion to dismiss based on, among other things, an argument that the tokens he sold were not securities. The SEC has also brought civil charges in the case.
Oral arguments on the motion to dismiss were held last week – and the blog provides a link to the transcript. As for the outcome, John says it’s a slam dunk: “The SEC and DOJ will win. Easily. Quickly. Handily.”
We’ve previously blogged on “The Mentor Blog” about the growth in 3rd party litigation finance. Now, Kevin LaCroix blogs that legislation introduced by Senate Republicans would mandate disclosure of these financing arrangements. Here’s an excerpt summarizing the bill:
On May 10, 2018, U.S. Senator Chuck Grassley, the Chairman of the Senate Judiciary Committee introduced The Litigation Funding Transparency Act of 2018, which would require the disclosure of litigation funding in class and multidistrict litigation in federal courts. The draft bill is co-sponsored by Senators Thom Tillis and John Cornyn.
The bill has two operative provisions, one applicable to class action litigation and the other applicable to multidistrict litigation. The gist of the bill is that it would require class counsel and counsel for a party asserting a claim in a multidistrict lawsuit to disclose to the court and all other parties “the identity of any commercial enterprise … that has a right to receive payment that is contingent on the receipt of monetary relief … by settlement, judgment, or otherwise.”
The legislation also would require counsel to “produce for inspection or copying … any agreement creating the contingent right.” The mandated disclosure must take place not later than the later of ten days after execution of the agreement or the time of service of the action.
The Senate Judiciary Committee’s press release announcing the bill’s introduction notes that “third party litigation funding is estimated to be a multi-billion dollar industry but is largely unregulated and subject to little oversight, fueling concerns that such agreements create conflicts of interest and distort the civil justice system.” The proposed legislation is intended to promote transparency & improve oversight by establishing a uniform disclosure rule that would apply to all class actions and MDL proceedings in federal courts.
GDPR Enforcement: How Will It Work for US Companies?
A lot of companies with European operations have been gearing up to comply with the EU’s new “General Data Protection Regulation” or “GDPR.” Some U.S. companies are undoubtedly asking, “so if we don’t comply, what’s the EU going to do?”
This Womble Bond Dickinson memo says that the answer depends on the particular circumstances of each company. Here’s an excerpt:
– For US companies with a physical establishment in the EU – the GDPR can be enforced directly against them by EU regulators.
– For US companies subject to the GDPR that lack a physical presence in the EU – a local EU representative must be appointed unless an exemption in Article 27 applies. This EU representative may be held liable for non-compliance of overseas entities, although the contract with the representative may shift liability back to the US company.
– For US companies with no EU physical location or local representative – EU regulators will have to rely on US cooperation or international law to punish GDPR noncompliance.
Transcript: “The Latest on ICOs/Token Deals”
We have posted the transcript for our recent webcast: “The Latest on ICOs/Token Deals.”
Companies on the receiving end of enforcement proceedings involving multiple agencies or jurisdictions have long complained about “piling on” – the government’s assessment of penalties without considering those that have already been imposed by other authorities for the same conduct. This Paul Weiss memo says that Deputy AG Rod Rosenstein announced last week that the DOJ has adopted a new policy designed to address these concerns. Here’s an excerpt with some of the details:
In a speech announcing the new policy, DAG Rosenstein referred to the “piling on” of fines and penalties by multiple regulators and law enforcement agencies “in relation to investigations of the same misconduct.” DAG Rosenstein noted that the “aim” of the new policy “is to enhance relationships with our law enforcement partners in the United States and abroad, while avoiding unfair duplicative penalties.”
Specifically, the new policy requires DOJ attorneys to “coordinate with one another to avoid the unnecessary imposition of duplicative fines, penalties and/or forfeiture against [a] company,” and further instructs DOJ personnel to “endeavor, as appropriate, to . . . consider the amount of fines, penalties and/or forfeiture paid to federal, state, local or foreign law enforcement authorities that are seeking to resolve a case with a company for the same misconduct.”
The memo points out that the DOJ has left itself a lot of “wiggle room” under the policy. Among other things, the policy does not describe the extent to which parties will be given “credit” for fines paid to other regulators, and allows for consideration of subjective criteria, such as the “egregiousness of a company’s misconduct,” which could have an impact on its practical application. We’re posting memos in our “White Collar Crime” Practice Area.
IPOs: CII Asks Companies to Stop “Dual Class” Tempting Investors
We’ve previously blogged about investor – and CII – disdain for dual class capital structures. Last month, the CII sent letters to two prospective IPO candidates – Vrio and Pivotal Software – requesting them to reconsider going public with a dual class structure, or to at least adopt a “sunset” provision for that structure.
The circumstances of the two companies are a little different, but this excerpt from the CII’s letter to Pivotal Software gets to the gist of its concerns:
As long-term investors, we believe a decision by Pivotal Software to go public with the dual-class structure will undermine confidence of public shareholders in the company. Independent boards accountable to owners should be empowered to actively oversee management and make course corrections when appropriate.
Disenfranchised public shareholders have no ability to influence management or the board when the company encounters performance challenges, as most companies do at some point, and especially where management is accountable only to itself and the board that it appoints. For these reasons, we are particularly concerned about the process of electing directors, the unequal voting structure, and the lack of a reasonable time-based sunset provision.
Fair enough – the CII is doing its job and raising legitimate points. But in the current environment, if I were a controlling shareholder of either company, my response would likely be along the lines of “if you don’t like our capital structure, then don’t buy our stock.”
Frankly, if this is an issue that really matters to the institutions that are sitting on the biggest pile of money in the world, a strategy that relies on appeals to the “better angels of our nature” & pleas for regulatory intervention seems a little pathetic. Money talks, and this is an issue that institutions need to vote on with their wallets. Unless, of course, it really doesn’t matter that much to them.
A member points out that the CII has been sending letters like these to prospective IPO companies with dual class structures for quite some time – and copies are available on its website.
Tune in tomorrow for the DealLawyers.com webcast – “M&A Stories: Practical Guidance (Enjoyably Digested)” – to hear Cleary Gottlieb’s Glenn McGrory, Sullivan & Cromwell’s Melissa Sawyer and Haynes and Boone’s Kristina Trauger share M&A “war stories” designed to both educate and entertain. The stories include:
1. Let It Go – how sometimes when you can’t seem to repair a deal after a lot of effort, maybe helping the client be disciplined and walk away actually is the right outcome
2. Déjà Vu, All Over Again – the central truth about the high-yield debt market: companies often plan to merely dip their toes in the debt market only to find, over time, that they have plunged deeper than expected
3. Knowing What the Other Side Doesn’t Know – how a seller figured out what an inexperienced buyer didn’t understand about financing and how it almost killed but ultimately saved the deal.
4. Just the Facts – how sometimes issues that seem like major obstacles in a deal can be resolved dispassionately just by taking a deeper dive into the facts and narrowing the field of the unknown
5. End Goal in Mind – for any type of deal, keep in mind the client’s ultimate objective
6. When Timing Matters, So Does Trust– how last minute issues can scupper deal announcements – and how trust between deal teams can facilitate quick solutions to allow the deals to proceed
7. Dealmakers are Architects in Four Dimensions – how solutions to complex issues in deals require non-linear, creative thinking under pressure
8. Expect the Unexpected – it’s common for clients to imagine a transaction playing out in a certain manner, only to have market conditions steer them in a new direction. So it’s vital for deal lawyers to stay nimble and be ready to quickly pivot, as needed
9. They’ll Never Be the Winner – the hazards of trying to figure out (and plan for) who you think will win an auction, only to have an unexpected contender (and its own particular issues) prevail
10. The Secret’s Not Out– the extreme measures parties take to protect the confidentiality of secret formulae in consumer product transactions
It’s been over a decade since Corp Fin started issuing CDIs to replace its main source of “informal” interpretations – the “Telephone Interpretation Manual.” Oddly, after all these years, some of the “Phone Interps” still haven’t been replaced. That’s finally changing. On Friday, Corp Fin issued 45 new CDIs to replace the interps in the Telephone Interpretation Manual and the March 1999 Supplement that relate to the proxy rules & Schedules 14A/14C. The Staff says it’s in the process of updating other proxy interps – so we can expect more CDIs to come.
Thirty-five of the new CDIs simply reiterate the guidance provided in the Manual & March 1999 Supplement – four make technical changes – and these six CDIs reflect substantive changes (here’s a redline from Cleary):
Question 124.01: Rule 14a-4(b)(1) states that a proxy may confer discretionary authority with respect to matters as to which a choice has not been 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. If action is to be taken with respect to the election of directors and the persons solicited have cumulative voting rights, can a soliciting party cumulate votes among director nominees by simply indicating this in bold-faced type on the proxy card?
Answer: Yes, as long as state law grants the proxy holder the authority to exercise discretion to cumulate votes and does not require separate security holder approval with respect to cumulative voting. [May 11, 2018]
Question 124.07: The Division has permitted registrants to avoid filing proxy materials in preliminary form despite receipt of adequate advance notification of a non-Rule 14a-8 matter as long as the registrant disclosed in its proxy statement the nature of the matter and how the registrant intends to exercise discretionary authority if the matter was actually represented for a vote at the meeting. See Section IV.D of Release No. 34-40018 (May 21, 1998). Can a registrant rely on this position if it cannot properly exercise discretionary authority on the matter in accordance with Rule 14a-4(c)(2)?
Answer: No. [May 11, 2018]
Question 126.02: Is a registrant required to file a preliminary proxy statement in connection with a proposed corporate name change to be submitted for security holder approval at the annual meeting?
Answer: No. As set forth in Release No. 34-25217 (Dec. 21, 1987), the underlying purpose of the exclusions from the preliminary proxy filing requirement is “to relieve registrants and the Commission of unnecessary administrative burdens and preparation and processing costs associated with the filing and processing of proxy material that is currently subject to selective review procedures, but ordinarily is not selected for review in preliminary form.” Consistent with this purpose, a change in the registrant’s name, by itself, does not require the filing of a preliminary proxy statement. [May 11, 2018]
Question 151.01: A registrant solicits its security holders to approve the authorization of additional common stock for issuance in a public offering. While the registrant could use the cash proceeds from the public offering as consideration for a recently announced acquisition of another company, it has alternative means for fully financing the acquisition (such as available credit under an executed credit agreement in the full amount of the acquisition consideration) and may choose to use those alternative financing means instead. Would the proposal to authorize additional common stock “involve” the acquisition for purposes of Note A of Schedule 14A?
Answer: No. Raising proceeds through a sale of common stock is not an integral part of the acquisition transaction because at the time the acquisition consideration is payable, the registrant has other means of fully financing the acquisition. The proposal would therefore not involve the acquisition and Note A would not apply. By contrast, if the cash proceeds from the public offering are expected to be used to pay any material portion of the consideration for the acquisition, then Note A would apply. [May 11, 2018]
Question 161.03: If a registrant is required to disclose the New Plan Benefits Table called for under Item 10(a)(2) of Schedule 14A, should it list in the table all of the individuals and groups for which award and benefit information is required, even if the amount to be reported is “0”?
Answer: Yes. Alternatively, the registrant can choose to identify any individual or group for which the award and benefit information to be reported is “0” through narrative disclosure that accompanies the New Plan Benefits Table. [May 11, 2018]
Question 163.01: Does a proxy statement seeking security holder approval for the elimination of preemptive rights from a security involve a modification of that security for purposes of Item 12 of Schedule 14A?
Answer: Yes. Accordingly, financial and other information would be required in the proxy statement to the extent required by Item13 of Schedule 14A. [May 11, 2018]
Of course, I can remember – pre-Internet – when it was hard to get a copy of the telephone interps. It was originally drafted to be an internal resource for Corp Fin. Some law firms obtained a copy – when Corp Fin Staffers left the Division or perhaps through a FOIA request – but it wasn’t widely available (or even known) before the late ’90s when it was posted on the SEC’s site…
The Latest Reg Flex Agenda: A Few New Items
Here’s some news from this Ropes & Gray memo written by Keith Higgins:
The Spring 2018 unified regulatory agenda – the so-called “Reg Flex” agenda – came out on May 9th (current / long-term). Although most of the items on the Corporation Finance agenda remain the same, there were a few new items added to the list that bear mention.
Added to the “proposed rule stage” was a rulemaking on “Business, Financial and Management Disclosure Required by Regulation S-K,” which previously had been on the long-term actions agenda. Other than to say that the proposal would be to “modernize” the disclosure requirements, the agenda doesn’t provide any insight into the areas that might be covered. This topic is a continuation of the Division’s Disclosure Effectiveness initiative and suggests that change may be in the offing that goes beyond the modest proposals that were included in the proposed rulemaking to implement the FAST Act report.
Also at the proposed rule stage is a rulemaking on “Filing Fee Processing.” The description of this project suggests that the Division will propose a rule to make the fee-related information on various Commission filings structured data. Doing so should allow the Commission to better track filing fees, particularly when they are transferred in connection with unused fees in Securities Act registrations. It is unlikely that any substantive changes will come out of this project.
The third new item on the list is a topic that Director Bill Hinman hinted at in his recent appearance before a subcommittee of the House Financial Services Committee – “Extending the Testing the Waters Provisions to Non-Emerging Growth Companies.” Testing the waters, which allows emerging growth companies to have discussions about an offering with qualified institutional buyers and institutional accredited investors, has been an increasingly popular provision of the JOBS Act. It makes every bit of sense to extend this concept to all companies that might be interested in undertaking a registered securities offering. And given the sophisticated audience with whom these discussions may be had, there would be no adverse impact on investor protection.
Added to the “final rule stage” list is the proposal on “Disclosure of Hedging by Employees, Officers and Directors.” This rulemaking, which was initially proposed in February 2015 to implement Section 955 of the Dodd-Frank Act, had been on the long-term list last fall. It is interesting that the Chairman has chosen to add this rulemaking to the list. On the one hand, it is a relatively innocuous proposal that does not call for any burdensome level of disclosure. On the other hand, however, because the proxy advisory firms and institutional investors have taken an interest in hedging by insiders, many companies have already made voluntary disclosure of their hedging policies as a matter of good corporate governance. As a result, adoption of the rule is unlikely to have any meaningful impact, although it will allow the Commission to check this one off the Dodd-Frank mandate list.
We’ve previously blogged about legislators’ efforts to pin-down SEC Chair Jay Clayton’s views on whether the agency would permit corporate bylaws compelling investors to arbitrate securities fraud claims. Last month, Rep. Carolyn Maloney & 25 other Democratic lawmakers became the latest to take a crack at Clayton – asking him to reaffirm that “forced arbitration provisions in the corporate governance documents of public companies harms the public interest and violates the anti-waiver provisions of the federal securities laws.”
That didn’t happen. Instead, last week, she received this letter from the Chair in response. Here’s what he said would be the SEC’s approach if an IPO company sought to include such a provision in its charter:
It is my view that if we are presented with this issue in the context of a registered IPO of a U.S. company, I would expect that any decision would involve Commission action (and not be made through delegated authority) and that the Commission would give the issue full consideration in a measured and deliberative manner. Such a review would take into account various considerations, including developments in applicable law and any other relevant considerations. I have reiterated these views and sought to appropriately frame this issue and my preference for such a process in my public statements.
He added that he had “not formed a definitive view” on whether mandatory arbitration is appropriate in the context of an IPO for a U.S. company, but that the issue is “not a priority” for him. Well, Rep. Maloney, it was a good try. Also see this Kevin LaCroix blog…
D&O Insurance: Do You Have What You Need?
Ahead of our upcoming webcast on D&O insurance, this Simpson Thacher memo reviews the key provisions of a D&O policy in order to help companies assess whether they have the coverages that they need. Here’s an excerpt on the complexities of coverage for SEC & other governmental investigations:
Courts continue to uphold D&O insurers’ declination of coverage for investigations by the SEC and other government investigations that do not target a specific director or officer but seek documents and interviews without specifying the alleged wrongdoing that is the focus of the investigation. Such investigations may not constitute a “Claim” under a D&O policy. Thus, there may be no coverage for the costs of complying with subpoenas and other investigative efforts.
Certain D&O policies offer provisions that afford at least some coverage. For example, policies will provide “Pre-Claim” coverage or “Noticed Investigations” coverage. Essentially, if an investigation does not constitute a Claim but later develops into a Claim, coverage will relate back to the point at which the investigation began, subject to certain limitations. Thus, the policyholder can keep track of its costs in connection with an investigation and if it turns into a Claim, those costs may be covered.
Some D&O policies provide coverage for complying with SEC subpoenas and other similar investigations, e.g., in the form of “Inquiry Coverage,” which may reimburse the insured for certain costs associated with preparing and accompanying directors, officers or other covered individuals who are called in for an interview by a government agency pursuing an investigation.
Legal Proceedings Disclosure: What If You’re the Plaintiff?
Most securities lawyers are accustomed to thinking about disclosure of legal proceedings from the perspective of a defendant. This “SEC Institute” blog “flips the script” by discussing how ASC 450 & Item 103 of S-K apply when you’re a plaintiff in a lawsuit. This excerpt reviews Item 103’s requirements:
The language “material pending legal proceedings” does not limit the disclosure to just defendant actions. And, to reinforce this conclusion, the SEC has issued the following Compliance and Disclosure Interpretation:
Section 205. Item 103 — Legal Proceedings
205.01 The bank subsidiary of a one bank holding company initiates a lawsuit to collect a debt that exceeds 10% of the current assets of the bank and its holding company parent. Due to the unusual size of the debt, Item 103 requires disclosure of the lawsuit, even though the collection of debts is a normal incident of the bank’s business. [July 3, 2008]
This CDI also illustrates the application of the 10% disclosure threshold and an interesting interpretation about normal course of business issues. And, it clearly shows that Legal Proceedings disclosure should include material lawsuits in which the company is a plaintiff as well as a defendant.
