Yesterday, the SEC proposed amendments to Rule 3-10 & Rule 3-16 of Regulation S-X, which address the financial information about subsidiary issuers, guarantors & affiliate pledgors required in registered debt offerings. Here’s the 213-page proposing release.
According to the SEC’s press release, the proposed changes are intended to “simplify and streamline the financial disclosure requirements” applicable to registered debt offerings for guarantors and issuers of guaranteed securities, as well as for affiliates whose securities collateralize a registrant’s securities. Highlights of the proposed amendments to Rule 3-10 include:
– replacing the condition that a subsidiary issuer or guarantor be 100% owned by the parent company with a condition that it be consolidated in the parent company’s consolidated financial statements;
– replacing the requirement to provide condensed consolidating financial information, as specified in existing Rule 3-10, with certain financial and non-financial disclosures;
– permitting the proposed disclosures to be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in the registration statement prior to the first sale of securities;
– requiring the proposed disclosures to be included in the footnotes to the parent’s financial statements beginning with the annual report for the first fiscal year during which sales of the debt securities were made.
In addition, the obligation to provide the required disclosures would terminate when the issuers and guarantors no longer had an Exchange Act reporting obligation with respect to the securities – instead of terminating only when the securities were no longer outstanding, as provided under current rules.
– replacing the requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with financial and non-financial disclosures about the affiliates & the collateral arrangement as a supplement to the consolidated financials for the entity issuing the collateralized security;
– permitting the proposed disclosures to be located in filings in the same manner as the proposed guarantor disclosures under Rule 3-10; and
– replacing the existing requirement to provide disclosure only when pledged securities meet a numerical threshold relative to the securities registered with a requirement to provide the proposed disclosures in all cases, unless they are immaterial to holders of the collateralized security.
By reducing the compliance burdens associated with existing financial statement requirements for these entities, the SEC hopes to encourage issuers to register debt offerings, & thus provide investors with greater protections than they receive in unregistered offerings.
The Weed Beat: Doing Business with Cannabis Companies
With the DOJ’s reversal of the Obama Administration’s policy that provided federal tolerance of any cannabis business conducted in compliance with state law, the risks of doing business with these companies have become a greater concern. This Perkins Coie memo provides an overview of those risks & some tips on how companies can protect themselves. Here’s an excerpt with some questions companies considering such a business relationship should ask themselves:
– To what extent will the cannabis-related activities occur in a jurisdiction where cannabis is legal? So long as key federal concerns, such as violent crime, are not in question, federal prosecutors are unlikely to seek charges against companies that are only indirectly involved in the cannabis industry in states that have legalized the substance.
Indeed, cannabis-related activities that are otherwise legal in such jurisdictions do not involve “victims,” and are unlikely to be viewed as “serious” by USDOJ. An important corollary to this consideration is that the company directly involved in the cannabis industry should fully comply with the drug laws of the states in which it operates. The due diligence factors listed below become even more significant if the cannabis-related activities will occur outside of a jurisdiction where cannabis is legal.
– What is the level of support and involvement that your company is contemplating with the company undertaking cannabis-related activities? Will your company merely invest in or provide passive support to the company that is directly involved in the cannabis industry, or will your company take a predominant role in managing the other company (e.g., through seats on the corporate board)? The more significant your company’s role will be in managing the cannabis-related activities, the greater the perceived culpability of your company for those activities in the eyes of a federal prosecutor.
The memo also points out that companies should be particularly wary of involvement in the financial aspects of the company involved in the cannabis business – there’s a risk that the feds might characterize that activity as money laundering.
– Finders & Unregistered Broker-Dealers
– Governance Perils Involved in Financing Transactions by Emerging Companies
– Impact of the European GDPR on M&A
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
According to this “Compliance Week” article, the new audit report standard’s requirement to disclose auditor tenure in audit reports may result in audit committees devoting more attention to tenure-related issues. This excerpt explains why:
There are plenty of public companies that have engaged the same audit firm for decades, according to the latest study. The average tenure for the first 21 companies listed in the Dow 30 is 66 years, the study says. Analysis from Audit Analytics shows nearly 20 companies have had the same audit firm for 100 years or longer – and nearly 200 have had the same firm performing the audit for 50 years or longer. More than 850 companies have engaged the same firm for at least 20 years or longer.
That puts the onus on audit committees to determine whether the company is benefiting or not from a longstanding relationship with the firm. And the new disclosure puts it front and center before investors, which may serve to heighten pressure on audit committees, says Kevin Caulfield, managing director at Navigant Consulting. “Because it’s disclosed now, it’s a chance for audit committees to take that second look to think about are we still getting quality audits from this auditor,” he says.
The article goes on to note that while audit committees must be sensitive to the potential risks associated with long-tenured auditors, they should also consider the benefits associated with having an auditor that is well-acquainted with the company & its operations, systems & processes.
Risk Management: “It’s a Mad, Mad, Mad, Mad World”
Did you know there’s a theory that we’re all just living in a computer simulation – a video game – being played by some super-advanced alien intelligence? If so, then I think that some alien teenager grabbed the controller in 2016 & has been messing with us ever since.
I believe that I can even pinpoint the date that the kid grabbed the joystick: Sunday, June 19, 2016. That’s when Cleveland overcame a 3-1 Golden State lead to win the NBA Championship. That was followed by the Chicago Cubs winning the World Series (against the Indians, no less), and then the 2016 election. . .
It’s been a little more than 2 years, and it looks like the alien kid is still calling the shots (Nick Foles? The Washington Capitals?). Since that’s the case, corporate boards would be smart to take the advice in this EY memo and factor today’s volatile geopolitical environment into their risk management oversight efforts. Here’s an excerpt:
Rising geopolitical tensions and increasing electoral share for populist parties are a concern for businesses. With policy becoming harder to predict, many executives see policy uncertainty, geopolitical tensions, and changes in trade policy and protectionism as key risks to their business.
At the same time, business leaders are optimistic about the near-term US outlook – in part because of deregulation and the passage of US tax reform. In fact, the recent Borders vs. Barriers report from EY, Zurich Insurance and the Atlantic Council indicates that despite concerns about policies restricting their ability to transport goods and raise capital, global CFOs are overwhelmingly bullish on investing in the US – and 71% expect continued improvement in the US business environment in the next one to three years.
These dynamics underscore the need for companies to proactively address strategic opportunities and risks stemming from geopolitical and regulatory changes. For the board to provide effective oversight in this area, it is imperative that directors understand the geopolitical and regulatory landscape and how relevant developments are identified and evaluated within their strategy-setting process and Enterprise Risk Management (ERM) framework. Boards should also consider whether they have access to the right information and expertise to effectively oversee this space.
How to Deal With Leaks
This recent “Corporate Secretary” article by Iridium Partners’ CEO Oliver Schutzman reviews the leak of Saudi Aramco’s financial information to Bloomberg, and uses that as jumping off point for a general discussion on dealing with leaks. Here are some of the article’s “golden rules” for responding to a leak:
– Have a leak strategy in place. Regularly reviewed and updated, the strategy should sit alongside procedures for handling a crisis or operational disaster and should receive the same senior-level investment and attention.
– When a leak occurs, do not embark on a witch hunt to find the leaker. Instead, put all energy and efforts into executing the leak strategy.
– Don’t hide behind ‘no comment’ if there is truth to the leak. Acknowledge it and state the facts. This may be unpalatable and painful. It may involve criminality or unsavory behavior. If this is the case, confess errors and present the measures and consequences taken to ensure prevention going forward. Only by dealing with the substance of a leak can a company regain the initiative
Companies should act to address any shortcomings exposed, & then take back control of the narrative. All actions should be taken with complete transparency.
In a recent speech, the SEC’s Deputy Chief Accountant – Sagar Teotia – reminded companies that the clock is ticking on finalizing disclosures relating to the impact of tax reform. As you’ll recall, the OCA gave everyone a holiday gift last December by issuing Staff Accounting Bulletin No. 118.
At the risk of oversimplifying, SAB 118 permits companies to assess, record provisional amounts & ultimately finalize disclosure of the financial impact of tax reform over a “measurement period” of up to one year from the date of the legislation’s enactment. However, this excerpt from the Deputy Chief Accountant’s speech clarifies that SAB 118 does not allow companies to defer reporting of tax reform’s impact:
Let me clarify a point about the measurement period and the expectation to be acting in good faith. SAB 118 states that the measurement period ends when an entity has obtained, prepared, and analyzed the information that was needed in order to complete the accounting required under ASC 740 and in no cases should the measurement period extend beyond one year from the enactment date. This should not be interpreted as a window to put pencils down until we are close to one year from the enactment date to get started on the accounting. Instead, entities should continue to keep moving in good faith to complete the accounting.
The measurement period ends when an entity has completed the process necessary to finalize its assessment of tax reform’s impact – and for certain income tax effects, that could be well before the one year mark.
Diversity: CalPERS Board Diversity Update
CalPERS recently provided this update on its efforts to improve board diversity among its portfolio companies. Among its other actions, CalPERS:
– Engaged more than 500 U.S. companies in the Russell 3000 Index regarding the lack of diversity on their boards;
– Adopted a “Board Diversity & Inclusion” voting enhancement to hold directors accountable at engaged companies that fail to improve diversity on their boards or diversity & inclusion disclosures;
– Withheld votes against 271 directors at 85 companies & ran proxy solicitations at two targeted companies where diversity proposals were filed by other investors.
Future actions under consideration include development of enhanced key performance indicators (KPIs) for diversity & inclusion. The KPIs will enable CalPERS to move beyond assessing whether a company has a dimension of board diversity to a more granular assessment of whether it has a level of board diversity that reflects each company’s business, workforce, customer base, and society in general.
CalPERS also intends to use the data provided by these enhanced key performance indicators to identify US companies lacking in diversity and file majority vote proposals & vote against board chairs, Nominating & Governance Committee members, and long-tenured directors at those companies.
Our “Q&A Forum”: The Big 9500!
In our “Q&A Forum,” we have blown by query #9500 (although the “real” number is much higher since many of the queries have others piggy-backed on them). I know this is patting ourselves on the back – but it’s over 15 years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been well over 30,000 questions answered.
You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis & that any answers don’t contain legal advice.
As you can see from our list of SEC perks cases (posted in our “Perks” Practice Area on CompensationStandards.com), the SEC has averaged one perks enforcement case per year for the past dozen years. That’s why it’s so surprising that the SEC has now brought two perks cases in one week. Coincidence or a theme?
In this new case against Energy XXI, the CEO & board were charged with hiding more than $10 million in personal loans that the CEO obtained from company vendors and a candidate for the company’s board. The company wasn’t charged, interestingly. Here’s a blog about last week’s case.
The list of perks in para 56 of this complaint raises a couple of interesting issues. Is a bar stocked with cigars and liquor – on company premises for use in entertaining customers – necessarily a perk? You might ask what is a “Denny Crane” room? (Hint: TV show “Boston Legal” – that’s the character played by William Shatner). Come learn what you need to know as Mark Borges & Alan Dye lead a panel devoted just to perks at our upcoming “Proxy Disclosure Conference” – to be held September 25-26 in San Diego and via Live Nationwide Video Webcast.
We’ve blogged about how difficult it’s been for public companies to implement FASB’s new(ish) revenue recognition standard. According to this Deloitte survey, private companies aren’t faring much better. They have to implement the new standard this January – and 47% are either in the early stages of implementation or haven’t started at all. Only 25% are on pace to actually hit the compliance deadline. And just because these companies are privately-held, doesn’t mean they won’t have to explain the impact of the new standard to their boards, audit committees, banks and investors.
Transcript: “D&O Insurance Today”
We have posted the transcript for our recent webcast: “D&O Insurance Today.”
At its open meeting yesterday, the SEC voted to issue a 36-page concept release that seeks input on expanding and simplifying Form S-8 & Rule 701. Among other points, the release asks whether:
– Rule 701 & Form S-8 accommodations should extend to “gig economy” relationships – and what parameters should apply
– Form S-8 requirements should be revised to ease compliance issues that arise when plan sales exceed the number of shares registered
– The SEC should permit all of a company’s plans to be registered on a single registration statement
– Companies would benefit from a “pay-as-you-go” or periodic fee structure for Form S-8
– Rule 701 should be extended to reporting companies – eliminating the need for Form S-8
– The SEC should amend the disclosure content & timing requirements of Rule 701(e)
This blog from Cooley’s Cydney Posner notes that much of the discussion at the open meeting and in the concept release relates to whether or not liberalizing the equity compensation rules would create incentives for companies to “go public and stay public” (here’s Commissioner Stein’s statement and here’s Commissioner Peirce’s statement).
SEC Raises Rule 701 Disclosure Threshold
Yesterday, the SEC announced that it had unanimously approved an amendment to Rule 701(e). Non-reporting companies that issue equity compensation won’t have to provide financial statements, risk factors and other disclosures to participants until they’ve sold an aggregate of $10 million in securities during a 12-month period. Previously, that threshold was $5 million.
As John blogged a couple months ago, this amendment was a result of the “Economic Growth, Regulatory Relief & Consumer Protection Act.” The amendment will become effective immediately upon publication in the Federal Register – and companies that have already started an offering in the current 12-month period will be able to apply the new threshold.
House Passes “Jobs Act 3.0”
The “Jobs & Investor Confidence Act of 2018” has now passed the House – by a vote of 406-4 – according to this announcement from the House Financial Services Committee. Among other things, the 32 pieces of legislation that comprise the bill would:
– Require the SEC to analyze the costs & benefits of the use of Form 10-Q by emerging growth companies and consider the use of alternative formats for quarterly reporting for EGCs.
– Direct the SEC to consider amendments to Rule 10b5-1 that would, among other things: limit insiders’ ability to use overlapping plans, establish a mandatory delay between the adoption of the plan and execution of the first trade, limit the frequency of plan amendments, require companies and insiders to file plans and amendments with the SEC, and impose board oversight requirements.
– Require companies with multi-class share structures to make certain proxy statement disclosures about shareholders’ voting power.
– Allow emerging growth companies with less than $50 million average annual gross revenue to opt out of auditor attestation requirements beyond the typical 5-year period.
– Amend the definition of “accredited investor” to include people with education or job experience that would allow them to evaluate investments.
– Expand to all public companies the “testing the waters” and confidential submission process for registration statements in an IPO or a follow-on offering within one year of an IPO.
– Allow venture exchanges to register with the SEC, as a trading venue for small & emerging companies.
– Direct the SEC & FINRA to study the direct and indirect costs for small & medium-sized companies to undertake public offerings.
Here’s something I blogged yesterday on CompensationStandards.com: This Forbes op-ed notes that a few “pace-setting companies” now link executive bonuses to diversity objectives – and makes the case for more companies to follow suit. Here’s an excerpt:
If an objective is important, then the company should ensure (1) its employees know about it and (2) that their performance in meeting this goal will be measured along with the company’s other core values and targets. Fostering greater diversity and preventing harassment and discrimination is more than simply the right thing to do on a broader societal level. Indeed, a business case exists for these initiatives. According to research by McKinsey & Company, achieving these goals correlates with concrete financial improvement.
At Alphabet, a recent shareholder proposal to link executive pay to diversity received about 9% of the vote. The company’s statement in opposition (pg. 66) noted that the CEO receives a base salary of only $1 per year and isn’t paid based on performance – so it argued that a rule like this would have little impact. And at Nike, a similar proposal was withdrawn after the company agreed to meet quarterly to discuss diversity.
Restatements: 17-Year Low
Recently, Audit Analytics released its annual report on restatement trends: “2017 Financial Restatements: A Seventeen Year Comparison.” The aggregate number of restatements fell to 553 last year – the lowest in 17 years. The number of restatements was about 18% lower than in 2016 – and as we blogged at the time on “The Mentor Blog” – that was a previous low. Here’s an interesting detail from Cydney Posner’s blog (also see this Compliance Week article):
The review distinguishes between “reissuance restatements” (meaning that, as the title suggests, the financials are withdrawn and cannot be relied on—necessitating the filing of an 8-K — and new financials are issued) and “revision restatements” (where the errors are just corrected and explanatory notes included). It’s not hard to guess which type of restatement is preferred by most companies; not surprisingly, the report indicates that around 77% of restatements were of the “revision” persuasion. Reissuance restatements have declined each year for the past 10 years. The number of revision restatements has also declined. And 168 restatements had no impact on earnings.
FYI: Conference Hotel Nearly Sold Out
As always happens this time of year, our Conference Hotel – the San Diego Marriott Marquis – is nearly sold out. Reserve your room online or by calling 877.622.3056. Be sure to mention the NASPP conference or Executive Compensation Conference or Proxy Disclosure Conference. If you have any difficulty securing a room, please contact us at 925.685.9271.
This Locke Lord memo highlights that all 50 states now have data breach notification laws, and several states have recently amended their laws (including Delaware). Most states require companies to notify the state attorney general or regulator of a breach, in addition to the affected individuals – and a growing number outline how companies should handle data security. Meanwhile, This D&O Diary blog & NYT article discuss California’s new “GDPR-like” privacy law, to take effect in 2020 – which also heightens liability exposure for companies.
And for public companies, there’s a really important corollary to these laws, which often gets lost in the shuffle – information from state notices can find its way to the market even if you don’t file a Form 8-K. SEC Commissioner Robert Jackson has noted that this presents an arbitrage opportunity – and may weigh in favor of proactive, voluntary disclosure.
See our “Cybersecurity” Practice Area for the latest info – including this handy chart from Perkins Coie and this Cleary Gottlieb memo for key US & EU notice requirements. And as I previously blogged on “The Mentor Blog,” Reed Smith also has an app to help parse state law notice requirements…
Cybersecurity Committees: On the Rise
This Kral Ussery memo summarizes the growing trend of standalone cybersecurity committees. Although most companies still assign cybersecurity oversight to the audit committee due to that committee’s involvement with SEC disclosure, audit committees have growing workloads and cybersecurity is an increasingly demanding topic. The memo identifies ten companies that have standing cybersecurity committees – five of which were created in the last year.
Tomorrow’s Webcast: “Retaining Key Employees in a Deal”
Tune in tomorrow for the DealLawyers.com webcast – “Retaining Key Employees in a Deal” to hear Morgan Lewis’ Jeanie Cogill, Andrews Kurth Kenyon’s Tony Eppert, & Proskauer’s Josh Miller discuss the latest developments on compensation strategies to retain key employees in M&A transactions.
Tune in tomorrow for the webcast – “Insider Trading Policies & Rule 10b5-1 Plans” – to hear Weil Gotshal’s Howard Dicker, Hogan Lovells’ Alan Dye, Dorsey & Whitney’s Cam Hoang and Cooley’s Nancy Wojtas talk about the nuts & bolts – and the latest developments – for insider trading policies and Rule 10b5-1 plans. We recently updated our “Insider Trading Policies Handbook” – which includes a model policy.
2. Issuing a concept release on Rule 701 & Form S-8
3. Proposing changes to Rule 3-10 & Rule 3-16 of Regulation S-X (there was a request for comment on this back in 2015).
Jobs Act 3.0: Coming Soon?
According to this statement, the House Financial Services Committee has approved eight bills as part of “Jobs Act 3.0.” This Steve Quinlivan blog calls out that six of the bills were sponsored by Democrats – and it doesn’t sound like legislation will happen any time soon…
Here’s the third “list” installment from Nina Flax of Mayer Brown (here’s the last one):
1. Email – With three subparts to this item on my list:
a. I enjoy being in a client service industry (and have been since high school, when I worked in a clothing store during my free time, and through college, when I worked at a shoe store in the Durham mall). Getting emails from my clients lets me provide that service – and I feel accomplished when I am able to respond promptly. Also, the emails are like never ending text chats with friends.
b. I can put voices and tones to the communications, understand the questions beneath the questions, anticipate issues based on the communications, update my task lists, etc. They allow me to hone and improve the service I am providing.
c. Email can be so efficient. Which is not a knock against calls or meetings at all, but if you can accomplish communicating a point/resolving an issue quickly through email, it feels like such a separate accomplishment (in addition to just the back & forth/accomplishment of responding from point “a”).
2. Travel – Despite my desire to not be away from my son, it is always exciting to be face-to-face, to present at seminars, to socialize with clients. I love interacting with people – particularly in person. In writing this post, I quickly took an online personality test. It scored me as having a slight preference for extraversion over introversion!
My husband knows that sometimes I come home at the end of long days of calls and want nothing more than to not talk, but I also frequently call him or my parents from the car on my drive to or from work too… Actually, I am always on a phone call when driving. I’m going to say it is also efficient in addition to satisfying my extraversion.
3. Practice Breadth – I get to do so many different things touching so many different industries and jurisdictions and interacting with so many different people. Despite being a partner, I am constantly learning on the job. I do not have any projects that are the same. I do not have two clients that are the same. I do not have any days that are the same. Everything is always different! I love the diversity in private practice.
4. There Is No Break; It Never Ends – Translation: I never get bored! I wholeheartedly disagree with Karl Lagerfeld – I don’t think that work is making a living out of being bored. I’m on “Team Voltaire”: All kinds of jobs are good except the kind that bores you. Or “Team Metallica”: Boredom comes from a boring mind. Or “Team Carlyle”: I’ve got a great ambition to die of exhaustion rather than boredom. Or “Team Chung”: I’m terrified of being bored and not learning. (Side note: I hate the word “bored,” particularly in children’s books.) There is always something to do, even right after a deal closes. There is always something to learn, because the law or the industry changes.
These are my Yangs to my Yins! I truly believe there are pros and cons to everything. But right now there are only pros to eating Oreos for me.
SEC’s OM&A: Walk Down Memory Lane
Mauri Osheroff – who until a few years ago was Corp Fin’s Associate Director who oversaw the Office of Mergers & Acquisitions – was reading the transcript of our DealLawyers.com webcast with the Chiefs of OM&A from the past three decades. Mauri noted that the original office was called “Tender Offers and Small Issues” – they processed tender offers and Reg A offerings. Go figure. We don’t know when Reg A offerings dropped out of the picture.
The Office Chief back then was the legendary Ruth Appleton. Here’s Ruth’s obit, which details her SEC career and the obstacles she faced as a professional woman…
Poll: CEOs Have Too Much Time on Their Hands?
I recently got this astute note from a member: “There never seems a month that goes by that I don’t a survey be published relating to ‘what directors think’ or ‘what CEOs think.’ Who is completing these surveys – do they have time on their hands, do they get cash for completing, etc?”
Recently, Brink Dickerson of Troutman Sanders informed us that companies with meaningful operations in Argentina need to take note of the recent designation of Argentina as a “highly inflationary economy.” Under ASC #830, this may trigger additional footnote disclosure in the financials (regarding the inflation and the company’s exposure, revenue, costs, and possible impairment triggers relating to Argentina) and could require MD&A and risk factor disclosure as well. See this memo…
The SEC’s release does provide some eye-popping data. As a result of the program, the SEC has received over 22,000 tips and ordered payouts over $266 million. That is a lot of tips and a great deal of money. For some perspective, the SEC’s budget authority for 2018 is $1.652 billion. Thus $266 million is equivalent to about 16% of the SEC’s 2018 budget authority. Here in California, this $266 million represents 8.5 times the amounts appropriated by the California legislature for support of the California Department of Business Oversight’s investment program.
Sights & Sounds: Section 16 Forums
Here’s a one-minute video recapping our recent “Section 16 Forums.” They were very successful – but a lot of work. So we have no plans to hold additional Forums at this time. As a result, our “Section 16 Bootcamp” now consists of the 14 videos we have posted on demand and a copy of the “Section 16 Tales” paperback (described at our recent Forums as the “Section 16 Bible”) at a price of $295. If you know of someone new to Section 16, send them to the “Section 16 Bootcamp” today.
