Recently, the SEC adopted technical amendments for self-executing provisions of the JOBS Act – mostly relating to EGCs. This Davis Polk memo highlights that the EGC revenue cap has been raised for $1.07 billion – adjusted for inflation. And as noted in this blog by Steve Quinlivan, many of the ’33 Act and ’34 Act forms have been tweaked. Here’s an excerpt:
Broadly speaking the cover page has been revised to include a “check the box” item to indicate that the person filing the report is an “emerging growth company” and an additional box to check as follows: “If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.”
– There were 742 EGC filers (or 38%) that have common equity securities listed on a U.S. national securities exchange. These EGC filers represented 15% of the 4,797 exchange-listed companies – and approximately 1% of total market capitalization of exchange-listed companies.
– Many EGC filers that were not exchange-listed had limited operations. Approximately 50% of the non-listed EGC filers reported zero revenue in their
most recent filing with audited financial statements and 23% of non-listed EGCs that filed periodic reports disclosed that they were shell companies.
– Approximately 51% of EGC filers, including 74% of those that were not exchange-listed, received an explanatory paragraph in their most recent auditor’s
report expressing substantial doubt about the company’s ability to continue as a going concern.
– Among the 1,951 EGC filers, 1,262 provided a management report on internal control over financial reporting in their most recent annual filing. Of those 1,262
companies, approximately 47% reported material weaknesses.
– Approximately 96% of EGC filers were audited by accounting firms that also audited issuers that are not EGC filers, including 39% of EGC filers that were
audited by firms that provided audit reports for more than 100 issuers and were required to be inspected on an annual basis by the PCAOB.
Conflict Minerals: Final Judgment Entered
Here’s the intro from this Cooley blog by Cydney Posner:
Today, the D.C. District Court entered final judgment in National Association of Manufacturers v. SEC, holding that Section 1502 of Dodd-Frank and Rule 13p-1 and Form SD, Conflict Minerals, violate the First Amendment to the extent that the statute and the rule require regulated entities to report to the SEC and to state on their websites that any of their products “have not been found to be ‘DRC conflict free.’” In addition, pursuant to the APA, the Court held the rule unlawful and set it aside but only to the extent that it requires regulated entities to report to the SEC and to state on their websites that any of their products “have not been found to be ‘DRC conflict free.’”
It is now up to the SEC to determine whether and how to revise the existing rules or whether to let stand, at least for the meantime, the Corp Fin guidance that was issued in 2014 and is currently in effect. That guidance requires companies to make the mandated filing on a timely basis without including a statement as to the conflict-free status of the products that could be deemed to violate the First Amendment.
Try Our Quick Surveys!
We have these three new “Quick Surveys” for you to participate in – all responses are anonymous:
Recently, we had this query posted in our “Q&A Forum” (#8989): “I have heard that the SEC’s BlueLinx/Health Net orders in the context of protecting whistleblowers may lead to stockholder demand letters where companies have objectionable language in their filed severance and other agreements; anyone aware of whether this is the case, and if so, what companies are doing in response?”
John responded: “You heard right. Here’s a Jones Day memo discussing this. It looks like the plaintiffs’ bar is just getting started, and I haven’t seen anything as to how companies are responding.” Which leads us to tomorrow’s webcast…
Tomorrow’s Webcast: “Whistleblowers – What Companies Should Be Doing Now”
Tune in tomorrow for the webcast – “Whistleblowers: What Companies Should Be Doing Now” – to hear Margaret Cassidy of Cassidy Law, Sean McKessy of Phillips & Cohen (& former Chief, SEC’s Office of the Whistleblower, Division of Enforcement) and Baker & McKenzie’s Joan Meyer discuss what you need to be doing now in the wake of the latest SEC – and other regulator – actions in the whistleblower arena.
Our April Eminders is Posted!
We have posted the April issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Before the election, I received this note from a member in reaction to my blog about Senator Elizabeth Warren’s letter to President Obama about political contribution disclosure rulemaking:
I was surprised to read Senator Warren’s letter asking President Obama to exercise his authority under 17 CFR 200.10, because everything in the CFR was adopted by the Commission and how could the Commission give authority to someone outside the agency. It seemed odd to me. But lo and behold, I looked at the Exchange Act and there is no mention of the President’s authority to appoint the Chair, only the authority to appoint the Commissioners. I know you have written about Reorg Plan No 10 of 1950 in the past, which every SEC geek needs to know. As the litigators say, my memory is refreshed. And boy, that was some nasty letter. One needs skin like an alligator to survive inside the Beltway.
So the President’s authority to appoint a Chair among the SEC Commissioners is granted by Section 3 of the Reorganization Plan No. 10 (which itself was created pursuant to the Reorganization Act of 1949).
Think about that. Before 1950, the SEC Chair was selected by the other Commissioners! There must have been some serious campaigning among the Commissioners on occasion to be selected Chair. If that were still the rule today, they’d probably draw straws – and the one who picked the short one would be Chair. Who wants the constant criticism from Congress and the media?
It’s true that the SEC Chair’s authority is far greater than the other Commissioners (review the transcript of our webcast on this topic to learn more) – but they wouldn’t be doing it for the money. Last time I checked, the SEC Chair got paid only $5k more than the other Commissioners. Definitely not worth the added scrutiny & hassle!
The Battle to Become the First SEC Chair!
Thanks to Paul Dudek – now at Latham & Watkins – for help with the above. This also comes from Paul:
The biography of Ferdinand Pecora – known as “The Hellhound of Wall Street” – describes the contentious behind the scenes lobbying in connection with the selection of the first SEC Chair. Pecora was the Chief Counsel of the Senate Committee that investigated the 1929 Crash, while Kennedy was shenanigans that contributed to the Crash.
President Franklin Roosevelt had given instructions to the Commissioners that they select Joe Kennedy as Chair – but Pecora lobbied his fellow Commissioners to override the President’s decision for himself to serve in that role. James Landis, another initial Commissioner, engaged in shuttle diplomacy between Kennedy and Pecora as they sat in separate rooms during a delay in their swearing-in ceremony. And Landis eventually got Pecora to acquiesce to FDR’s choice.
SEC Chair Clayton? Senate Banking Committee to Act Next Week
This WSJ article notes that the Senate Banking Committee will meet on Tuesday to bless Jay Clayton’s nomination to be SEC Chair. Then a full Senate confirmation is the next step – which probably will happen in late April…
It’s all about the “index.” A few weeks ago, John blogged about the debate over the dual class voting structure of Snap. This Vox article is entitled “Snap offered shareholders a terrible deal. Lots of people signed up anyway.”
Some folks wrote to me in response, noting that many investors were not clambering to buy the IPO shares. As John noted in an update to his blog, the bigger issue for investors – particularly the heavily indexed managers – is that once these shares wind up in indexes, they will be forced to hold them whether they want to – or not.
This point is eloquently made in these remarks by CII Executive Director Ken Bertsch before a SEC Investor Advisory Committee recently – also see this letter from CII to Snap…
Podcast: Ken Bertsch on Dual Class Voting Structures
In this 13-minute podcast, Ken Bertsch – Executive Director of the Council of Institutional Investors – discusses Snap’s IPO & more, including:
– How – and why – has CII opposed Snap’s dual class voting structure?
– How has CII (& other investor groups) responded to calls for shareholder proposal reform?
– How has it been moving back to Washington DC?
This podcast is also posted as part of my “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
Bloomberg BNA is reporting that the State Department has launched a new review of “how best to support responsible sourcing of conflict minerals,” which will continue through April 28. Although it’s not known whether the SEC is involved in the State Department’s efforts, BNA suggests that the review “could help determine the next step in a potential rethink” of the SEC conflict minerals rule.
And here’s a Cooley blog about a group of Senate Democrats who sent a letter to the SEC’s Inspector General about whether Chair Piwowar had the authority to resolicit comment on the pay ratio and conflict minerals rulemakings…
Here’s the news from this WSJ article by Andrew Ackerman about the US Supreme Court granting certiorari to a case that might impact liability for “known trends and uncertainties” disclosure:
The U.S. Supreme Court on Monday agreed to consider whether publicly traded companies can be sued for securities fraud by third parties for omitting “known trends or uncertainties” in filings to shareholders. The announcement is likely welcome news for corporate defendants that have lamented a 2016 ruling by a federal appellate court in New York, which found that companies can be sued for fraud by third parties for such alleged disclosure shortcomings.
At issue are Securities and Exchange Commission antifraud rules, which allow investors and other private entities to sue public companies for statements or omissions that are “material” and “misleading.” Historically that right wasn’t extended to a management’s discussion of known trends and uncertainties until a ruling last year by the 2nd U.S. Circuit Court of Appeals in New York. That appellate court’s decision conflicts with precedents set by at least two additional circuit courts, which have held companies aren’t liable to private litigants for the contents of such “forward-looking statements.”
The high court said it would consider the matter in the fall of 2017, giving the justices a platform to potentially end or limit private lawsuits in these cases. The appeal was brought by a company called Leidos Holdings Inc., a Reston, Va.-based national security and engineering company formerly known as SAIC, which was sued by the Indiana Public Retirement System and two other state public pension funds. The funds allege SAIC in 2011 omitted material information about a kickback and overbilling scheme involving the firm’s former employees and New York City.
The U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association, a Wall Street industry group, urged the high court to consider the case last year, saying the second circuit court’s ruling will extend “a state of confusion over how…companies disclose forward-looking information.” To avoid lawsuits, companies will err on the side of disclosing a flood of “essentially useless” information they might otherwise omit, the industry groups said in their filing, which sided with Leidos. A decision expected by the end of June 2018.
Here’s a blurb from Sullivan & Cromwell about the case:
Earlier today, the U.S. Supreme Court granted certiorari in Leidos, Inc. v. Indiana Public Retirement System, No. 16-581. This appeal, which likely will not be decided until the first half of 2018, at the earliest, presents the question of whether non-disclosure of “known trends or uncertainties” under Item 303 of Regulation S-K may give rise to private liability for securities fraud under Section 10(b) of the Securities Exchange Act of 1934. The U.S. Supreme Court will address a split between the Second Circuit, which has held that, under some circumstances, non-disclosure under Item 303 of Regulation S-K could give rise to private securities fraud liability, and the Third and Ninth Circuits, which held that such non-disclosure does not create a private securities fraud claim. Although the Supreme Court’s decision will not affect the obligation of registrants to comply with Item 303, it may have a significant impact on their potential exposure to securities fraud claims.
Texas: Proposed Bill Would Burden Proxy Advisors & Activists
Here’s the intro from this memo by Olshan’s Steve Wolosky, Andrew Freedman & Ron Berenblat:
The Legislature of the State of Texas has proposed a new bill that would require certain investors in publicly traded companies headquartered in Texas and proxy advisory firms making recommendations with respect to publicly traded Texas-based companies to comply with a set of austere disclosure requirements. The proposed “Bring Business to Texas and Fairness in Disclosure Act” (the “Texas Act”) is purportedly intended to “foster and promote the immediate and full disclosure of the individual ownership of persons who are activist investors” and “prohibit discrimination by a proxy advisory firm.”
The unduly burdensome, excessive and inequitable scope of the proposed disclosure requirements is like nothing we have ever seen proposed by any state. If the Texas Act is adopted, it could have a chilling effect on shareholder activism and proxy advisory work with respect to public companies that have a specified presence in Texas, which, in turn, would help entrench management and the Boards of underperforming Texas-based companies.
Conflict Minerals: Comments So Far
A few months ago, SEC Acting Chair Piwowar requested comment on reconsidering the SEC’s 2014 guidance on conflict minerals. The comment deadline is now passed – and here’s the comments received so far. Note that the Wildlife Conservation Society has gotten over 10,000 folks to submit a form letter supporting the rule…
Here’s some analysis of these comment letters from Elm Sustainability Partners’ Lawrence Heim – and here’s some more analysis, including this excerpt:
Just over 12,000 comments were submitted to the SEC in response to Acting Chairman Piwowar’s request for comments. More than 11,700 of those comments were form letters and just over half of the remaining 300 were submitted by concerned citizens. Approximately 130 comments were submitted by company representatives, industry groups, Congolese society, NGOs and investors. In our view, opinion reflected in the 130 was split relatively evenly for and against the rule. We noted that several of the comments against the rule cited erroneous and outdated information, specifically concerning costs of rule implementation.
Back in early February, the SEC’s Acting Chair – Mike Piwowar issued a statement directing the Corp Fin Staff to revisit the pay ratio rule & requested public comment about any challenges in complying with the rule. Comments were due within 45 days – so the deadline has now passed.
Here’s the list of comments received so far. Beyond a short form letter in favor of the rule (that was received over 3k times), there are several hundred comment letters. Most of these are short letters from individuals, also expressing an interest in keeping the rule. Overall, this new request for comment has resulted in a response that is a mere fraction of the 287k comment letters that the SEC received on it’s rule proposal.
Let’s dig down into these new comment letters. Only a handful of these letters are from companies explaining the challenges. But there are a few, like these:
Early Bird Rates – Act by This Friday, March 31st: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by March 31st to take advantage of the 30% discount.
In this 33-minute podcast, Brian Lane & Jim Moloney talk about their SEC days, including:
1. How did you wind up being a securities lawyer?
2. What was your career path within the SEC?
3. What is one of your fondest memories in Corp Fin?
4. What is one of the more strange things about working at the SEC?
5. What would you consider to be one of the bigger things that have changed at the SEC since you left?
This podcast is also posted as part of my “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
The Last Greedy Executive?
In case anyone out there is worried that we have seen the last of greedy executives, check out this recent US District Court-SDNY opinion by Judge Jed Rakoff. You cannot read this first paragraph of the case without taking an interest!
Why would the executives (and former principals) of a paddle-board division of a sports and recreation company cause the company to make a one-time $60,500 purchase of one million stickers that the executives themselves immediately attempted to repurchase from the company for approximately $4 million?
The answer is that they thereby hoped to stick the company with a $10 million “earnout” payment to the executives, thus netting themselves a cool $6 million. Thanks, however, to the age-old doctrine of good faith and fair dealing, and similar legal protections, in the end it is these executives who are stuck.
Transcript: “Pay Ratio – The Top Compensation Consultants Speak”
We have posted the transcript for our recent CompensationStandards.com webcast: “Pay Ratio: The Top Compensation Consultants Speak.”
Yesterday, the Senate held a confirmation hearing on Jay Clayton’s nomination to serve as SEC Chair. In his opening statement, Jay touched on some of his priorities – and improving the competitiveness of America’s capital markets is one of them:
For over 70 years, the U.S. capital markets have been the envy of the world. Our markets have allowed our businesses to grow and create jobs. Our markets have provided a broad cross-section of America the opportunity to invest in that growth, including through pension funds and other retirement assets. In recent years, our markets have faced growing competition from abroad. U.S. – listed IPOs by non-U.S. companies have slowed dramatically. More significantly, it is clear that our public capital markets are less attractive to business than in the past. As a result, investment opportunities for Main Street investors are more limited. Here, I see meaningful room for improvement.
He also expressed his commitment to “rooting out any fraud and shady practices in our financial system” – and pledged to show no favoritism to anyone.
This WSJ article on the hearing notes that Jay faced tough questions from Democratic Senators on potential conflicts of interest arising from his years in the trenches as a deal lawyer:
Mr. Clayton’s background as a top Wall Street lawyer at Sullivan & Cromwell was praised by many Republicans but attracted sharp questions from Sen. Elizabeth Warren and other Democrats. Ms. Warren said ethics restrictions would force Mr. Clayton to recuse himself on enforcement matters related to former clients, such as Goldman Sachs Group Inc. and Barclays PLC, as well as companies represented by his firm before the SEC.
In an ethics agreement with the SEC, Mr. Clayton wrote that he couldn’t vote for one year on matters that directly affect his former clients or involve Sullivan & Cromwell.
Ms. Warren said that could lead to a deadlocked commission on certain cases if the remaining commissioners are split along political lines. “Then major enforcement actions don’t go forward and serious wrongdoing may go unpunished,” she said.
Mr. Clayton denied that his recusal from a case would necessarily lead to a deadlocked commission and said most enforcement matters are decided unanimously by the commission.
Recusal issues could be important, given the existing vacancies at the SEC. As Broc blogged earlier this month, President Obama’s two nominees are unlikely to be re-nominated – and that could leave the SEC with only 3 Commissioners for an indefinite period.
Study: Governance & Nominating Committees
This EY study reviewed Fortune 100 governance & nominating committee charters and governance guidelines to see how these committees define their responsibilities & carry out their role in board governance, board effectiveness, director selection and board succession planning.
Here’s an excerpt on the study’s findings about the committee’s role in board governance:
The role and profile of the nominating and governance committee have expanded in recent years with the continuing rise in corporate-investor engagement and growing awareness of the need to address governance-related risks.
– Governance policies and practices. The committee is explicitly responsible for the board’s and company’s governance guidelines and policies (100% of reviewed committees). In some cases, committee responsibilities may extend to maintaining the company charter, bylaws and policies on ethics and compliance matters.
– Shareholder proposals and engagement. 48% reference oversight of stakeholder focus areas, such as political spending and environmental sustainability.
– Risk management. 15% are specifically charged with oversight of the company’s reputation, as well as governance and nonfinancial risks, or have responsibilities regarding enterprise management risk, such as reviewing the company’s ERM process, business continuity plans, and strategy for workplace and product safety.
Tips for Managing Your “Quiet Period”
This Westwicke Partners blog provides tips to companies for effectively managing the quarterly “quiet period” – the period prior to the release of financial statements when public companies generally refrain from communicating with investors & analysts. Here’s an excerpt addressing the duration of the quiet period:
Be consistent about the duration. If you use a two-week quiet period during one quarter, try to stick to the same time frame in subsequent periods. It’s a lot easier to defend management silence in your conversations with investors if you can point to a history of similar quiet periods. Why? Investors may try to read into quiet periods of differing lengths and get nervous if the period is seemingly longer than usual. Don’t let your silence create a kind of static that outsiders perceive as meaningful on the downside.
Other topics addressed include the need to keep the IR team fully-informed about quiet periods to avoid inadvertent slip-ups, and managing those communications that must take place during the quiet period. Also see the oodles of resources in our “Window Period Procedures” Practice Area…
Yesterday, the SEC adopted an amendment to Rule 15c6-1(a) mandating a T+2 settlement cycle. Here’s the 146-page adopting release. The amendment prohibits a broker-dealer from effecting – or entering – into a contract that provides for payment & delivery of securities later than 2 business days after the trade date – unless otherwise expressly agreed to by the parties at the time of the trade.
The settlement cycle for firm commitment underwritings is unaffected by the amendment.
By the way, the blog’s title isn’t a quote from the latest installment of the “Terminator” franchise – it comes from Acting Chair Mike Piwowar’s statement at the open Commission meeting. Commissioner Stein’s statement wasn’t as colorful, but was equally supportive.
As I previously blogged, the SEC approved NYSE & Nasdaq rules providing for a T+2 settlement cycle last month. Brokers will be required to comply with the new settlement cycle rules beginning on September 5th.
IPOs: Reg A+ Issuer Seeks NYSE MKT Listing
This blog from Steve Quinlivan notes that Myomo, a medical device company, has filed an offering statement with the SEC for a Reg A+ deal in which it discloses its intention to list on the NYSE MKT – the NYSE’s small cap market & the answer to the question “whatever became of the AMEX?”
This excerpt from the offering statement summarizes the hoops that a Reg A+ issuer needs to jump through to obtain an exchange listing:
We intend to apply to list our Common Stock on the NYSE MKT under the symbol “MYO.” Our Common Stock will not commence trading on the NYSE MKT until all of the following conditions are met: (i) the Offering is completed; and (ii) we have filed a post-qualification amendment to the Offering Statement and a registration statement on Form 8-A (“Form 8-A”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and such post-qualification amendment is qualified by the SEC and the Form 8-A has become effective.
Pursuant to applicable rules under Regulation A, the Form 8-A will not become effective until the SEC qualifies the post-qualification amendment. We intend to file the post-qualification amendment and request its qualification immediately prior to the termination of the Offering in order that the Form 8-A may become effective as soon as practicable. Even if we meet the minimum requirements for listing on the NYSE MKT, we may wait before terminating the offering and commencing the trading of our Common Stock on the NYSE MKT in order to raise additional proceeds. As a result, you may experience a delay between the closing of your purchase of shares of our Common Stock and the commencement of exchange trading of our Common Stock on the NYSE MKT.
The listing would be the NYSE’s first for a Reg A+ offering, but Myomo wouldn’t be the first Reg A+ issuer to be welcomed by an exchange. That honor belongs to Energy Hunter Resources, which was approved for listing on Nasdaq in December 2016. This article from TheStreet.com suggests more listings are on the way.
Of course, it’s one thing to get your shares approved for listing – it’s quite another to get your offering done, and these companies are still working on that. It’s still pretty hard sledding out there for a small cap.
Transcript: “Activist Profiles & Playbooks”
We have posted the transcript of our recent DealLawyers.com webcast: “Activist Profiles & Playbooks.”
This blog from “The Conference Board” reports the results of a recent study on the impact of gender diversity on boards. Here’s a summary of the conclusions:
Among the findings in the report, the authors concluded that the real value of adding women to boards came not from their gender per se, but from the fact that they were more likely to be outsiders. They were also more likely to be foreigners, have expertise in more diverse business issues and functions than their male counterparts, and to have risen through the ranks outside the traditional elite networks. The authors conclude that bringing these different perspectives can substantively improve the collective decision-making of a board.
The conclusions are based primarily on interviews with directors & stakeholders of French companies conducted after France instituted a gender quota system for public company boards.
Gender Quotas on Boards?
Did that last sentence catch you off-guard? Me too – but I’ve recently learned that board gender quotas are actually pretty common in Europe. These quotas have been implemented through legal mandates (Germany, France, Belgium, Iceland, & Italy) or through the establishment of voluntary goals (Austria, Finland, the Netherlands, Spain, Sweden, & the UK). The quotas range from 25 to 40% of the board.
This Harvard Business Review article reports that quotas are popular among directors in countries where they’ve been implemented, but despised among directors in countries where they haven’t. That most definitely includes the good ol’ US of A:
One male director said that, with regards to quotas; “I think it is dumb and destructive — demeaning to people who are only on the board because they are in a specific category.” Female directors also expressed doubts. “No one wants to be a second-class citizen,” said one, explaining that she would not want to be on a board that had been mandated to have a female member. “Quotas are just anathema in the U.S. — I don’t think we will ever see quotas here,” said another.
The willingness of European countries to force the issue through quotas has left the US as a laggard when it comes to the representation of women on boards. The article points out that women comprise only 18.7% of board members at S&P 500 companies. This figure hasn’t moved much in the last decade, and it pales in comparison to the figures in most of Europe.
“Just Vote No”: State Street’s Alternative to Quotas
Many people will likely agree with the sentiments expressed by US directors of both genders – there’s something about the word “quota” that’s deeply offensive to American ears. So what’s the alternative for getting more women on corporate boards? State Street Global Advisors has an idea of its own – it’s giving 3,500 US public companies a year to get their act together and make tangible progress on gender diversity at the board level.
State Street’s initiative includes prescriptive guidance intended to “drive greater board gender diversity through active dialogue and engagement with company and board leadership.” It’s also giving companies a potentially significant downside:
In the event that a company fails to take action to increase the number of women on its board, SSGA will use proxy voting power to influence change – voting against the chair of the board’s nominating and/or governance committee if necessary.
The 3,500 companies in which State Street invests represent $30 trillion in market value. Coupled with BlackRock’s decision to make gender diversity an engagement priority, this is an initiative that could well move the needle.
