Yesterday, the SEC posted this notice & request for comment on a proposed Nasdaq rule change that would amend Listing Rules 5405 and 5505 to:
– Require that a company listing on the Nasdaq Global Market or Nasdaq Capital Market in connection with an IPO satisfy the applicable minimum Market Value of Unrestricted Publicly Held Shares (“MVUPHS”) requirement solely from the proceeds of the offering; and
– Make similar changes affecting companies that uplist to Nasdaq from the OTC market in conjunction with a public offering.
The notice explains the rationale for the proposal:
Nasdaq Listing Rules require a company to have a minimum Market Value of Unrestricted Publicly Held Shares. For initial listing on the Nasdaq Global Market, a company must have a minimum MVUPHS of $8 million under the Income Standard, $18 million under the Equity Standard, and $20 million under either the Market Value or Total Assets/Total Revenue Standards. For initial listing on the Nasdaq Capital Market, a company must have a minimum MVUPHS of $5 million under the Net Income Standard, and $15 million under either the Equity or Market Value of Listed Securities Standards.
Unrestricted Publicly Held Shares are shares that are not held by an officer, director or 10% shareholder of the company and which are not subject to resale restrictions of any kind. In the case of a company listing in conjunction with a public offering, previously issued shares registered for resale (“Resale Shares”), and not held by an officer, director or 10% shareholder of the company, are counted as Unrestricted Publicly Held Shares in addition to the shares being sold in the offering. . . .
Nasdaq has observed that the securities of companies that meet the applicable MVUPHS requirement by including Resale Shares have experienced higher volatility on the date of listing than those of similarly situated companies that meet the requirement with only the proceeds from the offering. Nasdaq believes that the Resale Shares may not contribute to liquidity to the same degree as the shares sold in the public offering.
The latest Issue of the Deal Lawyers newsletter was just sent to the printer. It is also available now online to members of DealLawyers.com who subscribe to the electronic format. This issue includes the following articles:
– 2024 Survey of Trends and Key Components of CVRs in Life Sciences Public M&A Deals
– Comment Letter Trends: Contested Election Disclosures for the 2024 Proxy Season
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
Programming Note: We are now entering end-of-year mode! With the holidays just around the corner, our blogging will be more limited the next few weeks. We will be back in full force in January. Happy holidays, everyone!
Last week, Gibson Dunn released this survey of annual report cybersecurity disclosures by S&P 100 companies. The report notes that there is significant variation among the disclosures — at least partially reflecting necessary variability due to differences in company size & complexity, nature & scope of activities, industry, regulation, sensitivity of data and risk profile. Since disclosure in this area requires a special balancing act of providing investors decision-useful information and not revealing sensitive data that could be exploited, the Gibson Dunn team expects these disclosures will continue to change with the evolving cyber threat landscape and as disclosure practices converge.
To that end, the data in the report may be useful to consider as you decide whether and how to ‘tune-up’ your 10-K cyber disclosures for your next annual report filing. Here is the executive overview from the report describing the key disclosure trends:
– Materiality. The phrasing used by companies for this disclosure requirement varies widely. Specifically, in response to the requirement to describe whether any risks from cybersecurity threats have materially affected or are reasonably likely to materially affect the company, the largest group of companies (40%) include disclosure in Item 1C largely tracking Item 106(b)(2) language (at times, subject to various qualifiers); 38% vary their disclosure from the Item 106(b)(2) requirement in how they address the forward-looking risks; and 22% of companies do not include disclosure specifically responsive to Item 106(b)(2) directly in Item 1C, although a substantial majority of these companies cross-reference to a discussion in Item 1A “Risk Factors.”
– Board Oversight. Most companies delegate specific responsibility for cybersecurity risk oversight to a board committee and describe the process by which such committee is informed about such risks. Ultimately, however, the majority of surveyed companies report that the full board is responsible for enterprise-wide risk oversight, which includes cybersecurity.
– Cybersecurity Program. Companies commonly reference their program alignment with one or more external frameworks or standards, with the National Institute of Standards and Technology (NIST) Cybersecurity Framework being cited most often. Companies also frequently discuss specific administrative and technical components of their cybersecurity programs, as well as their high-level approach to responding to cybersecurity incidents.
– Assessors, Consultants, Auditors or Other Third Parties. As required by Item 106(b)(1)(ii), nearly all companies discuss retention of assessors, consultants, auditors or other third parties, as part of their processes for oversight, identification, and management of material risks from cybersecurity threats.
– Risks Associated with Third-Party Service Providers and Vendors. In line with the requirements of Item 106(b)(1)(iii), all companies outline processes for overseeing risks associated with third-party service providers and vendors.
– Drafting Considerations. Most companies organize their disclosure into two sections, generally tracking the organization of Item 106, with one section dedicated to cybersecurity risk management and strategy and another section focused on cybersecurity governance. Companies typically include disclosures responsive to the requirement to address material impacts of cybersecurity risks, threats, and incidents in the section on risk management and strategy.
The average length of disclosure among surveyed companies is 980 words, with the shortest disclosure at 368 words and the longest disclosure at 2,023 words. The average disclosure runs about a page and a half.
And don’t forget to take a look at your disclosures outside of Item 106 of Reg. S-K. The SEC enforcement actions targeting cybersecurity disclosures in the wake of an incident are continuing to roll in — with a new cease-and-desist order posted just this week focused on allegations of misleading hypothetical risk factor disclosure and omissions of material information (for example, failing to include that the accessed customer data included customer PII).
Last week, as expected from oral arguments (and for the second time this term!), SCOTUS dismissed cert as “improvidently granted” in NVIDIA Corp. v. E. Ohman J:or Fonder AB. Full disclosure, this may have happened more than twice this term, but I’m aware of these two instances because both could have impacted the way we draft risk factors and cautionary disclaimers. Here’s more from the D&O Diary:
At the outset of the current U.S. Supreme Court term, corporate and securities law observers and commentators were excited that the Court had agreed to take up two securities law cases that had significant potential to provide insights about securities lawsuit pleading standards and processes. However, as noted here, in November, the court dismissed the Facebook Cambridge Analytica case, one of the two cases the Court was to take up this term. Now, in a terse, one-line December 11, 2024, order, the Court dismissed the Nvidia case, the second of the two cases it had agreed to take up, meaning that instead of addressing two securities law cases this term, it will now not consider any securities cases.
… A dismissal on these grounds means that the Court has decided that it should not have agreed to review the case. A dismissal of this type typically occurs when the Court realizes, upon further examination, that the case does not meet the criteria for Supreme Court review or that there was some procedural or substantive issue that makes the case unsuitable for their consideration.
What is the practical implication of this outcome? Continued uncertainty.
The Supreme Court’s dismissal of the case also means that the Court now will not weigh in on the interesting and important issues that the case presented. The question of what a plaintiff relying on internal documents in support of a securities law claim must plead is a recurring one. The question of the extent to which a plaintiff can rely on expert witness testimony to support the sufficiency of a securities law claim also is recurring. The lower courts must now deal with these questions without Supreme Court guidance on the issue, and in that regard must deal with the split in the circuit on these issues that Nvidia has cited in support of its petition for the writ of certiorari.
The split in the circuits, usually of such significant concern to the Supreme Court, is a particularly noteworthy concern with respect to these questions; Nvidia had argued in its petition for the writ that the positions of the Second and Ninth Circuits on these issues diverge, meaning that, with diverging positions in the two Circuits with the greatest volume of securities litigation activity, resulting in potentially diverging case outcomes.
Last week, the SEC announced settled enforcement proceedings against Cantor Fitzgerald for its alleged role in causing two SPACs that it controlled to make misleading statements to investors about the status of their discussions with potential acquisition targets ahead of their initial public offerings (IPOs). This excerpt from the agency’s press release summarizes the allegations:
The SEC’s order finds that Cantor Fitzgerald caused the SPACs in their SEC filings to deny having had contact or substantive discussions with potential business combination targets prior to their IPOs. However, the Order finds that at the time of each SPAC’s IPO, Cantor Fitzgerald personnel, acting on behalf of the SPACs, had already commenced negotiations with a small group of potential target companies for the SPACs, including with View and Satellogic, the companies with which the SPACs eventually merged.
Without admitting or denying the SEC’s allegations, Cantor Fitzgerald agreed to a cease & desist order and a civil money penalty of $6.75 million.
What makes this proceeding interesting isn’t really the allegations themselves, but a dissenting statement issued by Commissioner Uyeda covering several SPAC-related enforcement actions. In that statement, the Commissioner argues that SPACs are different than operating companies in ways that matter to deciding when preliminary merger negotiations should be regarded as “material”:
The U.S. Supreme Court in Basic v. Levinson adopted the probability/magnitude test for assessing the materiality of preliminary merger negotiations. The Second Circuit case cited by Basic for this test involved a small corporation that would be merged out of existence. For this corporation, the Second Circuit stated, and Basic agreed, that its merger was “the most important event that can occur in [its] life, to-wit, its death” and accordingly, information about the merger “can become material” before there is an agreement on the acquisition price and structure.
Unlike the corporation discussed in Basic, each SPAC respondent’s stated purpose was to acquire a target company. The SPAC’s “death” is planned for and sought after from the time the SPAC is formed. Given this distinction, the probability/magnitude test, as applied to information concerning a SPAC’s preliminary merger negotiations, should result in such information not becoming material until a time much closer to the SPAC and target company reaching a binding agreement on the acquisition price and structure. Any discussions prior to such time, even if they are “substantive,” are part of the day-to-day operations of a SPAC.
With the upcoming change in administrations, my guess is that Commissioner Uyeda’s views on this topic may be more influential – and that today’s dissenting statement could well become tomorrow’s policy.
Yesterday, ISS announced updates to its benchmark voting policies that will apply to shareholder meetings taking place on or after February 1, 2025. As previewed when the proposed changes were released for comment, the updates are pretty light. Here are the highlights from the executive summary with the updated policy language from the updates document following each topic:
– Poison Pills – Updates the policy to increase transparency of the factors considered in the case-by-case evaluation of poison pills.
Vote case-by-case on nominees if the board adopts an initial short-term pill (with a term of one year or less) without shareholder approval, taking into consideration:
▪ The trigger threshold and other terms of the pill;
▪ The disclosed rationale for the adoption;
▪ The context in which the pill was adopted, (e.g., factors such as the company’s size and stage of development, sudden changes in its market capitalization, and extraordinary industry-wide or macroeconomic events);
▪ A commitment to put any renewal to a shareholder vote;
▪ The company’s overall track record on corporate governance and responsiveness to shareholders; and
▪ Other factors as relevant.
– SPAC Extensions – Updates the policy to codify current policy application to recommend support for extension requests of up to one year from the original termination date.
Generally support requests to extend the termination date by up to one year from the SPAC’s original termination date (inclusive of any built-in extension options, and accounting for prior extension requests).
Other factors that may be considered include: any added incentives, business combination status, other amendment terms, and, if applicable, use of money in the trust fund to pay excise taxes on redeemed shares.
– Natural Capital – Terminology update to replace the reference to “General Environmental Proposals” by the updated reference of “Natural Capital-Related and/or Community Impact Assessment Proposals”.
Vote case-by-case on requests for reports on policies and/or the potential (community) social and/or environmental impact of company operations, considering where relevant:
▪ Alignment of current disclosure of applicable policies, metrics, risk assessment report(s) and risk management procedures with relevant, broadly accepted reporting frameworks;
▪ The impact of regulatory non-compliance, litigation, remediation, or reputational loss that may be associated with failure to manage the company’s operations in question, including the management of relevant community and stakeholder relations;
▪ The nature, purpose, and scope of the company’s operations in the specific region(s);
▪ The degree to which company policies and procedures are consistent with industry norms; and
▪ The scope of the resolution.
Mark your calendars now for our upcoming webcast scheduled for Wednesday, January 22, 2025 at 2 pm Eastern, “ISS Policy Updates and Key Issues for 2025.” Marc Goldstein, ISS’s Head of US Research, will share insights with the corporate community. Davis Polk’s Ning Chiu and Jasper Street Partners’ Rob Main will join Marc to provide color commentary.
As John shared last week, the 5th Circuit held that the SEC exceeded its authority when it approved Nasdaq’s board diversity rule in Alliance for Fair Board Recruitment v. SEC (5th Cir.; 12/24) — applying a narrow interpretation of the scope of the authority granted by the Exchange Act. On the Business Law Prof Blog, Tulane Law Prof Ann Lipton comments on the potentially broader implications of this narrow reading:
[W]hile there surely are those who approach things differently – I’d argue the mainstream view today is that the meta purpose of the securities laws is to ensure that investors have sufficient information to accurately price securities (according to risk/return), with the broader goal of ensuring efficient capital allocation throughout the economy. We want investors to give money to useful and productive businesses, and not to businesses that will set resources on fire, and the securities laws facilitate that. (Here are two cites; there are countless more)
Fraud prevention suggests a much narrower scope for SEC disclosure regulation than does regulation for accuracy in pricing.
So, it’s not surprising that the Fifth Circuit went from there to hold that the diversity disclosure rule does not serve the narrow purpose of preventing fraud. At one point, it went so far as to suggest the rule might be barred even if it provided financially useful information to investors:
“Moreover, SEC may have asked the wrong question. SEC considered evidence respecting the effects of diversity on firm performance. See JA9. But it is not clear what firm performance has to do with the Exchange Act. Of course, investors generally like it when firms make more money, but Congress did not pass the Exchange Act for the purpose of maximizing shareholder wealth. It passed the Act to protect investors from fraud, manipulation, speculation, and anticompetitive exchange behavior. Firm performance has little to do with those objectives.”
Ann says she expected this broad rhetoric suggesting a “dramatic curtailment of all securities disclosure requirements” to be applied to the climate rules (in the event of a decision striking them down) resulting in “spillover effects to other, more traditional securities disclosure rules, which would damage the entire system.” “How ironic,” she continues, “that the Fifth Circuit did that anyway with the diversity rules – only it did so, as far as I can see, quite intentionally, in what looks like the first step in a project to pare back the securities laws across the board.”
It seems that the securities laws may be in for a dramatic shift in the coming years — not just because of the incoming administration.
As this Goodwin alert notes, Nasdaq-listed companies, which are once again in the same boat as NYSE-listed companies with respect to board diversity & related disclosures, will need to deal with some immediate practical implications of the Fifth Circuit’s decision. For example:
Proxy Statement Board Diversity Disclosure. Because the Nasdaq diversity rules no longer apply to proxy and information statements filed by Nasdaq-listed companies, these companies will not need to include the board diversity matrix specified by Nasdaq Rule 5606. Further, Nasdaq Rule 5605(f) will no longer require companies to have the specified numbers of diverse directors or explain why they do not.
Nominating Committee Disclosure. Disclosure about board diversity will therefore need to be tailored to the specific facts and priorities relevant to each company. At a minimum, proxy and information statements must be revised to eliminate any statements that Nasdaq rules require any board diversity disclosure or diverse board membership.
If there have been any changes to how the nominating committee considers diversity in identifying nominees for director or in its policies regarding the consideration of diversity, companies should review the disclosure required by Item 407(c) of Regulation S-K about the nominating committee of the board of directors and its director nomination process. In addition, any disclosure that relates to the Nasdaq diversity rules should be revised as necessary to reflect the Fifth Circuit order. . . .
Director and Officer Questionnaires. Director and officer questionnaires used by Nasdaq-listed companies for the 2024 proxy season are likely to require revisions to reflect the Fifth Circuit order, even if a company chooses to continue to disclose board diversity information in a format similar to the format that had been required by Rule 5606. At a minimum, director and officer questionnaires used by Nasdaq-listed companies should be revised to eliminate any statements that any questions related to director diversity are necessary to support the diversity disclosure and director diversity requirements of former Nasdaq rules.
That said, there’s no “one-size-fits-all” approach to board diversity disclosures. Despite the legal fate of Nasdaq’s Board Diversity Matrix listing standards and California’s board diversity statute, board diversity disclosures will continue to be an important focus area for many public companies for a whole host of reasons — even beyond the numerous reports about the benefits of board diversity:
– Many institutional investors have bright-line rules about expected diversity in boards of portfolio companies and may vote against the chair of the nominating and corporate governance committee if their diversity standards are not met. In many cases, investors have heightened their diversity standards by increasing the number of diverse directors they expect over time and/or moving away from static gender diversity targets but referencing a percentage of the total board. (See this Covington memo for a roundup of proxy voting guidelines on board diversity and related disclosure.)
– The proxy advisors have policies on board diversity, and these – together with institutional investor policies – impact director support levels.
– Item 407(c)(2)(vi) of Regulation S-K still requires proxy disclosure of whether, and — if so, how — a nominating committee considers diversity in identifying director nominees, and, if the nominating committee (or the board) has a policy with regard to the consideration of diversity in identifying director nominees, disclosure about how the policy is implemented — as well as how the nominating committee (or the board) assesses the effectiveness of the policy.
– For companies looking to go public, Goldman Sachs will only take a company public in the US or Western Europe if it has at least two diverse board members (increased from one in 2021).
On the other hand, some companies have been on the receiving end of shareholder proposals and lawsuits from groups that oppose DEI initiatives. That means, before making any moves to strip content from their proxy statements and D&O questionnaires, Nasdaq-listed companies really need to consider all “individually relevant” factors and thoughtfully decide how to handle board diversity disclosures going forward.
On December 11, the Department of Justice, on behalf of the Financial Crimes Enforcement Network (FinCEN), filed a motion in the U.S. District Court for the Eastern District of Texas requesting that the court stay its preliminary injunction pending the government’s appeal to the Fifth Circuit Court of Appeals. The district court ordered the plaintiffs to respond to that stay motion by December 16.
In the meantime, on December 13, the government also filed a motion in the Fifth Circuit asking that court to stay the district court’s order pending appeal or, in the alternative, to narrow the scope of the court’s injunction to cover only the members of plaintiff National Federation of Independent Business (NFIB) rather than every reporting entity in the country. . . .
The government requested a ruling from the Fifth Circuit “no later than December 27, 2024, to ensure that regulated entities can be made aware of their obligation to comply before January 1, 2025.” The Fifth Circuit set a briefing schedule calling for a response from the plaintiffs by December 17 and a reply from the government by December 19.
What does this mean for entities subject to the CTA?
[G]iven the possibility of the district court’s order being stayed pending appeal, reporting entities’ legal obligations are subject to change on short notice. Either the district court or the Fifth Circuit could grant the government’s stay request before the end of the year. If the Fifth Circuit denies the government’s stay request, the government could request that relief from the Supreme Court. If the district court’s order is stayed pending appeal, the CTA’s beneficial ownership information (BOI) Reporting Rule will become enforceable again. If the district court’s order is narrowed to cover only the plaintiffs and members of the NFIB, the plaintiffs and NFIB’s approximately 300,000 members will receive the benefits of the preliminary injunction, but the law would become effective with respect to all other reporting entities.
The government’s stay applications in the district court and Fifth Circuit signal that if it succeeds in winning a stay of the district court’s order by December 27, there is a possibility that the government might try to enforce the January 1, 2025 reporting deadline for companies created or registered to do business in the United States before January 1, 2024. It also remains possible that FinCEN will extend that deadline.
One of the benefits of the new requirement to file insider trading policies as 10-K exhibits is that we now have significantly more data on “what’s market” with respect to key policy terms. Previously, any benchmarking exercise was challenging due to limited available data — while some companies voluntarily chose to post their insider trading policies on their websites, many did not.
While insider trading policies, in particular, should really be tailored to the particular circumstances of any given company to be most effective, benchmarking is nonetheless helpful — especially to ensure that your policies and practices aren’t an outlier from your peers. The latest survey of insider trading policies recently filed by 50 public companies, including 25 Fortune 100 companies and 25 mid-cap companies, is now out from the team at White & Case, and it lays out the data in a readily understandable way using a number of charts to show the frequency of various approaches to key policy terms. For example, here are some stats on when quarterly “blackout periods” start and end, and who is subject to those periods and preclearance procedures:
– For the start of blackout periods, the majority of companies used two weeks before quarter end (55%), with three to four weeks before quarter end being the next most prevalent (22%). Notably, 8% of companies used five to six weeks before quarter end!
– For the end of quarterly blackout periods, the majority of companies used one full trading day after earnings are released (54%), and many companies used two full trading days after earnings are released (40%). Here, I was surprised to see that two companies left this to “company discretion.”
– The folks subject to the blackout periods were most commonly (86%) limited to directors, Section 16 officers/executive officers and other designated employees who have access to financial information. 14% of companies included all employees.
– The insiders subject to preclearance procedures usually aligned with the list subject to a company’s quarterly blackout periods, but not always. 86% limited preclearance requirements to directors, Section 16 officers/executive officers and other designated employees who have access to financial information. 4% imposed them on all employees, and 8% limited them to directors and Section 16 officers only. One company did not include preclearance procedures.
