Last week, the SEC posted this notice & request for comment for a proposed NYSE rule change that would amend Section 102.01 of the NYSE Listed Company Manual, which sets forth the minimum stockholder and trading volume initial listing requirements for companies seeking to list under the “domestic” initial listing standards.

A note included in Section 102.01B (under the heading “Calculations under the Distribution Criteria”) provides that, when considering a listing application from a company organized under the laws of Canada, Mexico or the United States (“North America”), the Exchange will include all North American holders and North American trading volume in applying the minimum stockholder and trading volume requirements of Section 102.01A. Notwithstanding the foregoing, the note included in Section 102.01B also provides that, in connection with the listing of any issuer from outside North America, the Exchange will have the discretion, but will not be required, to consider holders and trading volume in the company’s home country market or primary trading market outside the United States in determining whether a company is qualified for listing under Section 102.01, provided such market is a regulated stock exchange.

The Exchange proposes to amend the note in Section 102.01B under the heading “Calculations under the Distribution Criteria” to provide that, when considering a listing application from a company regardless of whether the company is domestic or foreign, the Exchange will include all holders on a global basis and worldwide trading volume in applying the minimum stockholder and trading volume requirements of Section 102.01A. As the discretion provided with respect to the inclusion of non-U.S. holders and trading volume in the current rule would no longer be relevant if there was no geographic limitation on the inclusion of holders or trading volume in meeting the standards, the Exchange proposes to delete from the note the discussion of how that discretion is currently applied.

This is a highly technical change, but NYSE says it will make a difference to non-U.S. companies conducting their initial public offerings in the United States … and NYSE’s ability to compete with Nasdaq:

It has been the Exchange’s experience in recent years that non-U.S. companies conducting their initial public offerings in the United States will often seek to sell a significant portion of the offering in the company’s home market rather than in the United States. Such companies and their underwriters have sometimes had difficulty placing shares with a sufficient number of investors in North America to meet the Exchange’s domestic distribution standards and, in some instances, companies have been unable to list on the Exchange because of the restrictions imposed by the current NYSE rule.

In some cases, this means that these companies are lost to the U.S. capital markets, but in other cases these companies are able to list on the Nasdaq Stock Market (“Nasdaq”), as Nasdaq’s distribution requirements do not include a limitation comparable to that included in the NYSE’s rule. The Exchange believes that the proposed rule change will enable it to compete more effectively for the listing of non-U.S. companies, as the rule change would remove a significant competitive disadvantage faced by the Exchange in competing with Nasdaq for the listing of these companies.

In addition to the competitive benefits described above, the Exchange believes that the current rule reflects an understanding of the functioning of the trading market for non-U.S. companies that is inconsistent with the current reality. … Given the ease of transfer of securities between different countries in the contemporary securities markets, there is no reason why the holders of a listed company’s securities outside of North America cannot be active real time participants in the trading market in the United States and that foreign holders should be viewed as less valuable as a source of liquidity in that market.

– Meredith Ervine 

In the latest Timely Takes Podcast, I speak with Paul Hodgson, Senior Advisor to ESG data analytics firm ESGAUGE (and freelance writer and researcher for ICCR and Ceres), to review data on S&P 500 governance trends during the 2024 proxy season. During this 22-minute podcast, we discuss:

– Trends in the use of mandatory director retirement policies at S&P 500 companies

– How the S&P 500 is considering diversity in director recruitment

– Trends in board leadership

– Demand for new directors with current or former CEO experience

– Meredith Ervine 

Last week, the SEC announced settled charges against Keurig Dr Pepper Inc. for allegedly inaccurate statements about the recyclability of its K-Cup pods. Keurig agreed to pay $1.5 million in civil penalties.

According to the SEC’s order, in annual reports for fiscal years 2019 and 2020, Keurig stated that its testing with recycling facilities “validate[d] that [K-Cup pods] can be effectively recycled.” But Keurig did not disclose that two of the largest recycling companies in the United States had expressed significant concerns to Keurig regarding the commercial feasibility of curbside recycling of K-Cup pods at that time and indicated that they did not presently intend to accept them for recycling.

In fiscal year 2019, sales of K-Cup pods comprised a significant percentage of net sales of Keurig’s coffee systems business segment, and research earlier conducted by a Keurig subsidiary indicated that environmental concerns were a significant factor that certain consumers considered, among others, when deciding whether to purchase a Keurig brewing system.

In her dissent, Commissioner Peirce says:

The Commission both misreads Keurig’s statement and overreacts to its own misreading. The pods were recyclable: Keurig chose a type of plastic that was recyclable and ran tests to show that the pods could be recycled. That claim is all Keurig’s statements reasonably should be read to say. Branding Keurig’s Forms 10-K as incomplete or inaccurate because Keurig did not also disclose that two recycling companies “did not presently intend to accept pods” for “commercial feasibility” reasons misreads Keurig’s statement that the pods could be recycled as an implicit assertion that the pods would be recycled.

This reading, however, places far too much weight on the word “effectively.” In the Commission’s view, the pods cannot be “effectively” recycled because two recycling companies were uninclined to accept them for curbside recycling.

She also points out that the order doesn’t claim Keurig’s statements were material and says the charges — brought only under Section 13(a) and Rule 13a-1, which require the filing of “complete and accurate” annual reports — were somewhat unique:

[T]he Order nowhere states that [the statements] were material. The closest the Order comes to addressing materiality is a statement that “sales of pods comprised a significant percentage of net sales of Keurig’s coffee systems business segment” in 2019, which appears in the same paragraph with the statement that “[c]onsumer research conducted by Keurig Green Mountain in 2016 indicated that, for certain consumers, environmental concerns were a significant factor, among others, considered when deciding whether to purchase a Keurig brewing system.” … That some consumers thought, among other factors, about environmental factors does not mean that the recyclability of pods was material to investors.

Rarely does the Commission bring standalone Section 13(a) and Rule 13a-1 charges. Telling to me is the absence of other charges—such as charges under Exchange Act Section 10(b) and Rule 10b-5, Securities Act Section 17(a), or even under Exchange Act Rule 12b-20, which requires issuers to add to their statements or reports such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading. I do not believe that Keurig’s recyclability statements support such charges because I do not think that they are false or misleading, which means there is no basis for Section 13(a) and Rule 13a-1 charges either.

That doesn’t mean this enforcement action is a one-off event. It’s somewhat reminiscent of charges against Fiat-Chrysler under Exchange Act Section 13(a) and Rule 12b-20. And it probably won’t be the last of its kind. WilmerHale’s Keeping Current blog says:

Notwithstanding Peirce’s dissent, the SEC’s action highlights the importance of ensuring disclosures are complete and not misleading due to the omission of adverse information known to the company. While this is the case for all disclosures and is nothing new, the context in which this action arises serves as an important reminder of the SEC’s continued focus on environmental and social disclosures and the agency’s willingness to look outside of SEC filings [e.g., sustainability reports] for additional context surrounding such disclosures.

– Meredith Ervine 

This timing is interesting. Remember the SEC Division of Enforcement’s “Climate and ESG Task Force” focused on identifying material gaps or misstatements in companies’ ESG disclosures? Apparently, that task force is no more. As reported by Bloomberg:

The Securities and Exchange Commission shut down its Enforcement Division’s Climate and ESG Task Force within the past few months, an agency spokesperson told Bloomberg Law Thursday.

The agency launched the group in March 2021 under then-Acting SEC Chair Allison Lee with nearly two dozen staffers, who helped on the task force as they continued other jobs. SEC Chair Gary Gensler continued the group when he arrived at the agency in April 2021. The group went on to help with cases against Bank of New York Mellon Corp., Goldman Sachs Group Inc., Brazilian miner Vale SA and others.

That doesn’t mean that enforcement related to ESG misstatements isn’t still high on the Division’s watch list (clearly). The agency’s spokesperson also said that “the strategy has been effective, and the expertise developed by the task force now resides across the Division.”

– Meredith Ervine 

In their latest “Understanding Activism with John & J.T.” podcast, John and his co-host J.T. Ho were joined by Dan Scorpio, head of M&A and Activism for H/Advisors Abernathy, to discuss what to do – and not do – when an activist comes knocking. Topics covered during this 22-minute podcast include:

– Why companies need more than good results to respond effectively to activism
– Why management teams shouldn’t assume an activist’s message won’t resonate with shareholders
– Common mistakes companies make in responding to activism and what they should do instead
– How universal proxy has changed proxy fights and overall strategies
– The role of social and digital media in making the case to retail investors
– Strategies for engaging index funds and other “passive” investors
– What makes an effective internal and external team for responding to activism
– The importance of offering solutions instead of attacking activists

John and J.T.’s objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. I think you’ll find these podcasts filled with practical and engaging insights from true experts – so stay tuned!

– Meredith Ervine

Yesterday, the SEC posted a settlement of an administrative action relating to a bribery scandal that has been the topic of shareholder derivative litigation and DOJ enforcement (with the politician who was involved now serving a 20-year prison sentence). In its bite at the apple, the Commission’s enforcement claims were based on:

– False & misleading statements – that the company acted properly and ethically with respect to its political contributions

– Failing to disclose related-party transactions – because the company made payments to a 501(c)(4) that, while appearing independent on paper, was controlled by company executives

– Inadequate disclosure controls & procedures – the company’s accounting records did not correctly describe the payments as illegal or reflect them as related party transactions

The company settled the SEC’s claims for $100 million. While this situation was egregious, it’s a reminder that if “crisis communications” aren’t accurate, they can end up deepening the crisis – a violation of “Dave’s First Law of Holes.” Check out my blog from last year about reducing risks associated with corporate political spending.

– Liz Dunshee

I shared a few trends last month about newly filed insider trading policies. This Gibson Dunn blog adds observations from the 49 S&P 500 companies that were required to comply with the new “Exhibit 19” requirement as of June 30th (remember that for calendar-year companies, the new exhibit is first required with the Form 10-K to be filed in spring 2025). Here are 12 key takeaways:

1. Who’s Subject to the Policy: In addition to covering all company directors & personnel, and their family members, 82% expressly state that they apply to legal entities whose transactions are controlled or influenced by company personnel.

2. Gifts: 61% prohibit gifts when an insider as MNPI and/or apply the blackout & pre-clearance restrictions to gifts, and 8% restrict gifts only if the donor has reason to believe the donee will sell while the donor has MNPI. Of the policies that do not apply gift restrictions to all employees, a majority restrict gifts only for certain covered persons that are subject to additional restrictions, such as blackout periods and/or pre-clearance procedures.

3. Options: 69% exempt exercises of options when there is no associated sale on the market; however, exercises of options where there is a sale of some or a portion of shares delivered upon exercise (e.g., cashless broker exercise) are typically treated like any other sale.

4. Other Equity Awards: 59% exempt vesting and settlement of equity awards, such as RSUs and restricted stock, and 51% of the policies specifically provide that withholding of shares for tax purposes (i.e., net share settlement) is exempt.

5. Shadow Trading: 82% prohibit trading in the securities of another company when the person is aware of MNPI about such company that was learned in the course of or as a result of the covered person’s employment or relationship with the company. The remainder of the policies apply the prohibition more broadly to trading in the securities of another company while aware of MNPI about that company, without specifically addressing how the information was learned.

6. Who’s Subject to Blackouts/Windows: 88% subject directors, executive officers and a designated subset of employees to regular quarterly blackout periods, with a few policies applying two different blackout periods to different groups of employees.

7. Blackout Dates: The start date of the quarterly blackout periods ranges from quarter end to four weeks or more prior to quarter end. Under almost half of the policies (45%), the quarterly blackout periods start approximately two weeks prior to quarter end, 14% start the blackout periods three to four weeks prior to quarter end, and 18% start four weeks or more prior to quarter end. A significant majority of the policies (76%) end the quarterly blackout periods one to two full trading days after the release of earnings, with more policies ending after one trading day (51%) than two trading days (24%).

8. Pre-Clearance: For 65% of the policies, the preclearance persons are a subset of the persons subject to blackout periods, while for a minority of the policies (29%), they are the same as the persons subject to the blackout periods.

9. Other Prohibited/Discouraged Transactions: All of the policies prohibit or otherwise restrict certain types of transactions regardless of whether they involve actual insider trading. The most common prohibitions addressed: hedging transactions (96%);[8] speculative transactions (96%); pledging securities as collateral for a loan (90%); and trading on margin or holding securities in margin accounts (82%). A significant majority of the policies do not specifically address standing or limit orders or short-term trading, but of the ones that do, a significant majority take the approach of discouraging such transactions rather than strictly prohibiting them. Even where standing or limit orders are not strictly prohibited, some policies require that such orders be cancelled if the person becomes aware of MNPI (or prior to the start of a blackout period, if applicable).

10. Rule 10b5-1 Plans: All of the policies address the availability of Rule 10b5-1 plans. 71% describe the specified conditions under the SEC rules for a plan to qualify as a Rule 10b5-1 plan, although some do so in a more streamlined manner than others. Of these policies, a majority include Rule 10b5-1 plan requirements within the body of the policy, a minority do so in an appendix and one company filed the plan guidelines as a separate exhibit. 29% do not describe the specified conditions under Rule 10b5-1, but provide a general statement regarding the affirmative defense and refer covered persons to the officer administering the policy.

11. Company Transactions: Item 408(b) of Regulation S-K requires a public company to disclose whether it has adopted insider trading policies and procedures governing transactions in company securities by the company itself, and, if so, to file the policies and procedures, or if not, to explain why. Of the 23 S&P 500 companies subject to Item 408(b) that filed a Form 10-K and proxy statement prior to June 30, 2024, 78% did not address insider trading policies or procedures governing companies’ transactions in their own securities. Of the ones that did, most included a brief sentence or two about the company’s policy of complying with applicable laws in trading in its own securities. Only one company in our surveyed group filed a company repurchase policy as a separate exhibit.

12. Exhibit Filing: 88% of the companies filed only a single insider trading policy and no other related policies or documents (even where they referenced other related policies in their insider trading policy).

The blog notes that it’s still appropriate for specific provisions to vary from company to company. But when it comes to key policy terms that your insiders might ask about, it helps to understand “what’s market.” Make sure to check out our “Insider Trading” Practice Area for additional practical guidance.

This topic is also on the agenda at our “2024 Proxy Disclosure & Executive Compensation Conferences” – which are less than a month away! We’ll be sharing reminders for your next Form 10-K as well as practice pointers & trends. If you can’t make it to the Conferences in person, we also offer a virtual option. Register today by visiting our online store or by calling us at 800-737-1271.

– Liz Dunshee

Earlier this year, the SEC prevailed on a “shadow trading” theory in SEC v. Panuwat. Although the outcome of that case was obviously fact-specific, many companies are considering the verdict as they continue to refine their insider trading policies & trainings.

Some folks were also holding out hope that the court would reconsider its verdict. Alas, it doesn’t appear that will happen, since the judge has now denied the defendant’s request for a new trial, which was premised in part on whether the jury should have been instructed that the SEC’s case was based on a new theory of liability. Bonnie Eslinger from Law360 recaps:

The relative rarity of the SEC enforcement action was not relevant to the jury’s determination, and framing it as such would have been prejudicial, Judge Orrick said. That’s why, he added, no one at trial was allowed to say the enforcement action as brought without fair notice, or characterize it as “unique,” “novel,” “highly unusual” or other such descriptors.

The SEC brought the case under a misappropriation theory of insider trading, not traditional insider trading, and the jury was told the difference, the judge said.

“That the jury found in the SEC’s favor is not a function of any prejudice arising from use of the term ‘insider trading’ throughout the trial, but rather a function of the jury finding that Panuwat misappropriated information for his own personal profit, in violation of the securities laws,” Judge Orrick wrote.

The former executive was fined $321k. The judge noted that the civil penalty would function as an appropriate deterrent to the defendant and others, and that the verdict wouldn’t “permanently damage his career” because it didn’t include a D&O bar.

– Liz Dunshee

The SEC Regulations Committee of the Center for Audit Quality recently posted these highlights from its June 2024 meeting with the SEC Staff. The discussion included this reminder about non-GAAP measures in earnings releases:

The Committee has observed recent staff comments on measures that are calculated in accordance with a company’s debt covenant indicating that a company should limit its discussion of these measures to the liquidity section of a filing (e.g., Form 10-K or Form 10-Q) and that these measures should not be discussed in a company’s earnings release.

The staff noted that it looks to Question 102.09 in the C&DIs on Non-GAAP Financial Measures which addresses the disclosures of material debt covenants. Disclosure of a covenant measure in an earnings release is not objectionable if it is clear that the information regarding the covenant is being presented only because it is material to the company’s financial condition or liquidity and is similar to the disclosure presented as part of the liquidity and capital resources section of the company’s MD&A.

However, if these disclosures appear to present the covenant measure as an indicator of performance rather than liquidity (e.g., highlighting it in the earnings release, comparing it to prior period results, and analyzing it like measures of the company’s performance), and that measure does not comply with the non-GAAP rules and regulations, the staff will comment and will likely object.

The meeting also covered:

– Staff feedback on cybersecurity annual disclosures (10-Ks) and incident reporting (8-Ks) since the new rules went into effect

– Regulation S-K C&DI 128D.18 – Stock and option awards subject to a dual vesting structure

– Applicability of S-X Rules 3-09, 4-08(g), 10-01(b)(1) and 8-03(b)(3) to investments accounted for under the Proportional Amortization Method

– Applicability of the non-GAAP rules to the presentation of more than one measure of a segment’s profit or loss

– Inventory Valuation Allowance

– Applicability of S-X Rule 3-01(c) [Rule 8-08, for SRCs] if the registrant has not been in existence for two full fiscal years preceding the most recently completed fiscal year

– Liz Dunshee

Don’t forget! Accelerated 13G reporting deadlines go into effect at the end of this month and will affect all categories of investors that use Schedule 13G to report their greater-than-5% beneficial ownership. Recent SEC comments show that the SEC is monitoring ownership filings. This Barnes & Thornburg memo summarizes how the rules are changing (also see this Skadden memo). Here are the key points:

1. Initial Filing Due Dates

– Qualified Institutional Investors (Rule 13d-1(b)(2)) – Within 45 calendar days after end of calendar quarter in which beneficial ownership exceeds 5% as of last day of such quarter; or within 5 business days after end of month in which beneficial ownership exceeds 10% as of last day of such month.

– Passive Investors (Rule 13d-1(c)) – Within 5 business days after acquiring more than 5% beneficial ownership.

– Exempt Investors (Rule 13d-1(d)) – Within 45 calendar days after end of calendar quarter in which beneficial ownership exceeds 5% as of last day of such quarter.

2. Interim Amendment Due Dates

– Qualified Institutional Investors (Rule 13d-2(c)) – Within 5 business days after end of month in which beneficial ownership exceeds 10% as of last day of such month; and thereafter, within 5 business days after end of month in which beneficial ownership increased or decreased by more than 5% of class as of last day of such month.

– Passive Investors (Rule 13d-2(d)) – Within 2 business days after acquiring more than 10% beneficial ownership; and thereafter, within 2 business days after increasing or decreasing beneficial ownership by more than 5% of class.

3. Quarterly Amendments for All Filers (Rule 13d-2(b)) – Due within 45 calendar days after end of calendar quarter if, as of the end of that calendar quarter, there are any material changes in the information reported in prior Schedule 13G.

For the quarterly amendments, the memo notes that if an investor that filed a Schedule 13G before September 30, 2024 concludes that a “material” change to its existing disclosure has occurred as of September 30, 2024, the investor will have to file a Schedule 13G amendment not later than November 14, 2024. While the SEC hasn’t expressly defined what will constitute a “material” change, it has pointed towards the “reasonable investor” test and Rule 13d-2(a) as instructive. Rule 13d-2(a) deems the acquisition or disposition of beneficial ownership of 1% or more of a covered class as a material change in the Schedule 13D amendment context.

Check out the transcript from our January webcast – and our “Schedule 13D & 13G” Practice Area – for additional practical guidance on the new rules and how to comply.

– Liz Dunshee