Following up on this week’s theme of “why you need to pay attention to things you thought you could ignore,” this Locke Lord blog explains why the “public company” exemption for the Corporate Transparency Act isn’t enough to insulate public companies from having to conduct a compliance review and install new internal controls. Here’s an excerpt:
There is also an exemption from the filing requirement for subsidiaries of public companies (and other exempt companies), but that exemption only applies to wholly owned or controlled subsidiaries. Any subsidiaries or investment entities of public companies that do not meet the wholly owned or controlled test do not qualify for this subsidiary exemption although they may qualify for one of the other statutory exemptions.
The blog walks through detailed considerations and offers these compliance pointers as we move forward in this brave new world:
As public companies form new entities, enter into joint ventures, exit or dissolve joint ventures and make investments, they may find themselves, the joint venture or one of their affiliates subject to a reporting requirement under the CTA. Those could include M&A transactions, venture capital, vendor or supplier investments, and internal corporate restructurings (other than solely among wholly owned/controlled subsidiaries).
Also remember that, if you, as a lawyer, are overseeing entity formation filings, you are a “company applicant” who needs to register with FinCEN! And guess what, your paralegals and mailroom folks might be too. John wrote about that insanity earlier this month.
– Liz Dunshee
If you brush up against accounting issues as you’re reviewing disclosures (and most of us do), check out this 9-minute podcast where John interviews Olga Usvyatsky about recent comments from the Corp Fin Staff on impairment charges.
Olga is a former VP of Research of Audit Analytics where she led the development of new data sets used by investors, regulators, and academics. She also is the author of the “Deep Quarry” newsletter, and an article in the newsletter on recent Corp Fin staff comments on impairment charges provides the basis for this podcast. If you’re connected with Olga on social media or subscribe to her newsletter, you know she has a keen ability to notice accounting issues and explain what they mean to businesses. John & Olga discuss:
1. An overview of GAAP’s “Impairment” concept
2. The Staff’s recent impairment comment to Kraft Heinz & the company’s response
3. Issues typically raised in Staff comments on impairment charges and disclosure
4. Guidance on minimizing the risk of impairment comments and on responding to those comments
If you’d like to join John or Meredith for a podcast to share insights on a securities law, capital markets or corporate governance topic, please reach out to them at john@thecorporatecounsel.net or mervine@ccrcorp.com.
– Liz Dunshee
If you don’t work with SPACs, you may be thinking that you can ignore the SPAC rule changes that the SEC adopted last week. Sadly, that is not the case. In his dissenting statement, Commissioner Uyeda cautioned that the part of the adopting release that provides guidance on “investment company” determinations is broadly applicable. Here’s an excerpt:
All types of issuers – not just SPACs – should pay heed to this guidance because the framework for investment company status determinations could have implications for an operating company that temporarily derives income from investment securities. Would a pharmaceutical company that takes more than 12 or 18 months to bring a drug to market suddenly find itself primarily engaged in the business of investing in securities? While targeted at SPACs, the knock-on effects of this guidance could raise serious legal and compliance issues across a wide array of issuers. Part of the Commission’s obligation under the Administrative Procedure Act requires that an administrative agency provide due notice of what is being proposed. With respect to this guidance, that did not occur.
Commissioner Uyeda included an addendum to his statement that further criticizes the guidance. In particular, he takes issue with using an arbitrary 12- or 18-month timeframe as a factor in whether SPACs that have not completed a business combination need to register as investment companies. He makes this prediction, which doesn’t seem too far-fetched (especially for SPACs that hold “investment securities”):
As a practical matter, when faced with such strong language, issuers and their legal counsels will need to weigh the risk that the bright line duration limits set forth in the guidance will be used as a basis to bring enforcement actions.
– Liz Dunshee
Last week’s SPAC rules also enhance the disclosure requirements that apply to projections. In addition to new Item 1609 of Regulation S-K that applies specifically to de-SPAC disclosures, Item 10(b) of Regulation S-K has been expanded to address concerns about prominence and non-GAAP financial measures for all companies. This Latham blog summarizes the change:
Amendments to the SEC’s guidance in S-K Item 10(b) state that any projections that are not based on historical financial results or operational history must be “clearly distinguished” from projections that are based on historical financial results or operational history. Projections based on historical financial results or operational history must give equal or greater prominence to the historical measures or operational history. Presentation of projections that include a non-GAAP financial measure should include a clear definition or explanation of the measure, a description of the GAAP financial measure to which it is most closely related, and an explanation why the non-GAAP financial measure was used instead of a GAAP measure.
The amendments also clarify that the Item 10(b) guidelines also apply to projections of future economic performance of persons other than the registrant, such as the target company in a business combination transaction, that are included in the registrant’s filings.
– Liz Dunshee
Tune in today at 2pm Eastern for the webcast – “The Latest: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia and CompensationStandards.com, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Goodwin Procter and TheCorporateCounsel.net, and Ron Mueller of Gibson Dunn discuss the latest guidance on how to improve your executive & director pay disclosure – including pay-versus-performance disclosure and clawbacks – to improve voting outcomes and protect your board. Understand what to expect for the upcoming proxy season, so that you can prepare your directors and C-suite – and handle the challenges that 2024 will throw your way.
We are making this CompensationStandards.com webcast available on TheCorporateCounsel.net as a bonus to members – it will air on both sites. And because there is so much to cover, we have allotted extra time for this program! It’s scheduled to run for 90 minutes.
If you attend the live version of this 90-minute program, CLE credit will be available in most states. You just need to fill out this form to submit your state and license number and complete the prompts during the program. All credits are pending state approval.
Members of TheCorporateCounsel.net and CompensationStandards.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
– Liz Dunshee
BlackRock Investment Stewardship has unveiled its Global Principles and U.S. Proxy Voting Guidelines for 2024 annual meetings. The 21-page Principles give a comprehensive view of BIS’s stance on 7 key themes that impact companies worldwide – ranging from board responsibilities, to shareholder protections, to sustainability.
The Voting Guidelines get more specific on how BlackRock’s perspectives on these themes apply to specific ballot items & topics in different markets. Overall, the U.S. Voting Guidelines didn’t change too much. While BlackRock seems to have backed off some of its more controversial positions, it still encourages disclosure and strong governance practices. Here are a few updates worth noting:
● CEO & Management Succession Planning – The guidelines now say that where there is significant concern regarding the board’s succession planning efforts, BlackRock may vote against members of the responsible committee, or the most relevant director. (See Meredith’s blog from earlier this month about trends in “succession planning” disclosure…)
● Committee Leadership – Where boards have adopted corporate governance guidelines about committee leadership and/or membership rotation, BIS appreciates clear disclosure of those policies.
● ISSB Standards – Recognizing that the TCFD framework has been absorbed by the International Sustainability Standards Board (ISSB) standards, BIS encourages disclosures on governance, strategy, risk management, and metrics & targets that are aligned with IFRS S1 and S2. BIS understands that companies may phase in ISSB reporting over several years and that some companies use different reporting standards.
● Climate Disclosures – BlackRock continues to seek to understand companies’ strategies for managing material climate risks & opportunities under various scenarios. BIS emphasizes that it is not dictating strategy, which is the role of the board & management, and that it can be challenging for companies to predict the impact of climate issues on their business. But it notes that this is a structural shift in the global economy that may affect regulations, technology & consumer preferences, which be material for many companies.
● Key Stakeholders and HCM – While BlackRock continues to encourage disclosure on DEI approaches, workforce demographics, and natural capital issues, it no longer indicates that it will vote against directors if it determines that a company is not appropriately considering their key stakeholders or if a company’s disclosures or practices fall short relative to market peers on human capital management.
● Shareholder Proposals – A new section says that when assessing shareholder proposals, BIS evaluates each proposal based on merit and long-term financial value creation. BIS does not support proposals that it believes would result in over-reaching into the basic business decisions of the company. In addition, BIS believes it’s helpful for companies to disclose the names of the proponent or organization that has submitted or advised on the proposal. BIS may support shareholder proposals when they are focused on a material business risk that the company has not adequately addressed, if the proposal is reasonable and not unduly prescriptive.
● Responsiveness – Alternatively, or in addition, BIS may vote against the election of one or more directors if, in its assessment, the board has not responded sufficiently or with an appropriate sense of urgency to a shareholder proposal. BIS may also support a proposal if management is on track, but it believes that voting in favor might accelerate efforts to address a material risk.
Most of the other changes are clarifications & what the more cynical among us would call “refined corporate-speak” around ESG/sustainability, BIS’s focus on long-term financial value, and its voting authority. A new 15-page spotlight from BIS – with input from the BlackRock Investment Institute – underscores the asset manager’s focus on “financial resilience” in the face of big geopolitical & economic changes, AI disruption, demographic changes, and the worldwide transition to a low-carbon economy. If you’re engaging with BlackRock this year, expect questions on these topics.
– Liz Dunshee
In addition to updating its Global Principles and Voting Guidelines, BlackRock Investment Stewardship has also refreshed its Engagement Priorities. Here’s the bottom line, according to BIS:
BIS’ Engagement Priorities for 2024 are consistent with those from prior years as they continue to reflect the corporate governance norms, that in our view, drive long-term financial value. There are no material changes in our approach to engaging companies on these themes.
We do note however, that the macroeconomic and geopolitical backdrop companies are operating in has changed. This new economic regime is shaped by powerful structural forces that we believe may drive divergent performance across economies, sectors, and companies. Amid these shifts, we are particularly interested in learning from investee companies about how they are adapting to strengthen their financial resilience.
In our Viewpoint, Financial resilience in a new economic regime, we highlight the structural shifts that we believe are shaping this new regime and discuss how companies are adapting to manage risks and harness opportunities spurred by it.
The Investment Stewardship team provides more detail on engagement priorities – including how it discusses these topics with companies – in its 7 thematic commentaries:
1. Board Quality & Effectiveness
2. Strategy, Purpose, & Financial Resilience
3. Incentives Aligned with Financial Value Creation
4. Climate
5. Natural Capital
6. Human Capital Management
7. Companies’ Human Rights Impact
– Liz Dunshee
If you were following Dave’s dispatches last week from the Northwestern Securities Regulation Institute, you know that the week was both informative & eventful. I always find it energizing to catch up with friends & fellow practitioners who come from across the country to geek out together over securities law. When you throw in a flash flood and a SPAC release, there is definitely a lot of bonding.
One thing that made this year extra special was that our editorial team for TheCorporateCounsel.net was there in force! If we didn’t catch you at this conference, let’s connect at the next one – the Proxy Disclosure & Executive Compensation Conferences will be here before we know it!
– Liz Dunshee
It’s hard to believe that 7 years have passed since the SEC issued its report declaring that digital assets were “securities” and former Chair Jay Clayton cautioned investors to be wary of unregistered offerings of tokens (or “ICOs,” as they were called back then). This WSJ article calls the SEC’s fight with the crypto industry the agency’s “forever war.” They might be right! The saga isn’t showing signs of wrapping up anytime soon.
Later this month, a judge will hear the Commission’s most-watched crypto case – against Coinbase. The SEC recently shot down the crypto exchange’s rulemaking petition (despite disagreement from Commissioners Peirce & Uyeda). The SEC’s letter reiterates the view that the existing securities law framework will work just fine for digital assets and coming up with a special framework is not a regulatory priority at this time:
The Commission disagrees with the Petition’s assertion that application of existing securities statutes and regulations to crypto asset securities, issuers of those securities, and intermediaries in the trading, settlement, and custody of those securities is unworkable.
Although the formal letter denying the petition was brief, the supporting statement from SEC Chair Gary Gensler was not. Here’s an excerpt:
Existing laws and regulations already apply to the crypto securities markets.
There is nothing about the crypto securities markets that suggests that investors and issuers are less deserving of the protections of our securities laws. Congress could have said in 1933 or in 1934 that the securities laws applied only to stocks and bonds. Instead, Congress included a long list of 30-plus items in the definition of a security, including the term “investment contract.”
As articulated in the famous Supreme Court decision, SEC v. W.J. Howey Co., an investment contract exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. The Howey Court said that the definition of an investment contract “embodies a flexible, rather than a static, principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” This test has been reaffirmed by the Supreme Court numerous times—the Court cited Howey as recently as 2019.
But wait, there’s more. The Coinbase hearing will follow a recent court victory for the SEC in its case against a token issuer – Terraform – in which the Commission alleged that token sales violated Section 5 of the Securities Act. The company’s defense turned on whether the tokens were “securities” – and the case is going to a civil trial after US District Judge Jed Rakoff issued this 71-page opinion in late December. Judge Rakoff applied the “Howey test” to UST, LUNA, wLUNA, and MIR and found they passed “with flying colors.” Here’s an excerpt (see this Coingeek article for more commentary):
Defendants’ first argument in effect asks this Court to cast aside decades of settled law of the Supreme Court and the Second Circuit. In the seminal decision of SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), the Supreme Court held in no uncertain terms that “an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” Id. at 298-99, 66 S.Ct. 1100. Defendants urge this Court to scrap that definition, deeming it “dicta” that is the product of statutory interpretation of a bygone era. The Court declines defendants’ invitation. Howey’s definition of “investment contract” was and remains a binding statement of the law, not dicta. And even if, in some conceivable reality, the Supreme Court intended the definition to be dicta, that is of no moment because the Second Circuit has likewise adopted the Howey test as the law. See, e.g., Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir. 1994).
There is no genuine dispute that the elements of the Howey test — “(i) investment of money (ii) in a common enterprise (iii) with profits to be derived solely from the efforts of others” (id.) — have been met for UST, LUNA, wLUNA, and MIR.
The WSJ article says it’s unlikely we’ll see a resolution this year to the Coinbase litigation or the bigger question of whether & how SEC regulations apply to digital assets. There are very bright & experienced lawyers on both sides of the SEC’s battle to regulate crypto, and it looks like they’re all digging in for a long fight.
– Liz Dunshee
Someone once told me that if you can understand Rule 144, you can conquer anything. It’s such a complex rule that we have an entire “Q&A Forum” dedicated to it! This 13-page Cleary memo can help you get your bearings, though. It walks through the various terminology and regulations that apply to resales of restricted & control securities – and has a handy one-page flow chart at the end for navigating Rule 144. It’s worth a bookmark!
– Liz Dunshee
