Corporate Finance Law Blog : Corporate Finance Lawyer & Attorney : Davis Wright Tremaine Law Firm

From the SEC's proposed rule release issued today.

"We are proposing amendments to our rules to enhance the compensation and corporate governance disclosures registrants are required to make about: their overall compensation policies and their impact on risk taking; stock and option awards of executives and directors; director and nominee qualifications and legal proceedings; company leadership structure; the board's role in the risk management process; and potential conflicts of interest of compensation consultants that advise companies. The proposed amendments to our disclosure rules would be applicable to proxy and information statements, annual reports and registration statements under the Securities Exchange Act of 1934, and registration statements under the Securities Act of 1933 as well as the Investment Company Act of 1940. We are also proposing amendments to transfer from Forms 10-Q and 10-K to Form 8-K the requirement to disclose shareholder voting results. In addition, we are proposing amendments to our proxy rules to clarify the manner in which they operate and address issues that have arisen in the proxy solicitation process."

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By Garry J. Schnell
05.21.09

The use of online social media, such as blogs, Twitter, Facebook and electronic shareholder forums, as a means to interact with the public is becoming more accepted and prevalent in the business community. While online social media provides many benefits, there are potential pitfalls to its use, including federal securities law violations, disclosure of confidential information, and various tort claims, such as invasion of privacy or defamation.

Just like Web sites, online social media can benefit public companies in several areas including advertising, marketing and investor relations. In addition to company-sponsored blogs, employees may also have an interest in, or are already using, online social media to discuss a variety of information from product development to financial or personnel issues. Besides other legal issues and pitfalls, public companies developing a social media policy should consider compliance with Securities and Exchange Commission (SEC) regulations. In particular, Regulation FD (Fair Disclosure) prohibits the selective disclosure of material information.

In August 2008, the SEC issued guidance that primarily addresses (1) when information posted on a company Web site is “public” for purposes of Regulation FD and (2) company liability for information on Web sites. For the first time, the SEC recognized that companies may post information, and have that information be considered “disseminated,” without having to place the same information on a newswire, or file (or furnish) it on a Form 8-K. The SEC guidance also discussed the use of “interactive web-site features,” such as the online social media discussed in this advisory, as a means to disseminate information to the public.

 

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See here.

"Section 7001 of the Act amends EESA Section 111(e) to require any TARP recipient to "permit a separate shareholder vote to approve the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the Commission," during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding. The Act does not specify an effective date for this provision. In his letter dated February 20, 2009 to Chairman Schapiro, Chairman Dodd stated his view that this provision became effective on February 17, 2009 and applies to preliminary or definitive proxy statements (other than definitive proxy statements which relate to preliminary proxy statements filed on or before February 17, 2009) filed with the Commission after February 17, 2009."

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Mandates use of interactive data format for public company financial statements

By Andrew H. Abramowitz and Marcus J. Williams

On Jan. 30, 2009, the Securities and Exchange Commission (SEC) issued final rules regarding the provision of financial statements by public companies in an interactive data format known as XBRL. The rules will be phased in over the next three years, based on the market capitalization of a given registrant. Some commentators have expressed concern about the costs associated with the required use of the XBRL format, but the SEC believes that, over time, the process will lead to increased automation and decreased costs.

Following is an overview of XRBL: what it is, who must use it, when it will be phased in, rules relating to its use and a brief comment on practical considerations. Continue reading...

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See here.

"The SEC’s Division of Corporation Finance provides the following guidance for filers, especially new filers and Form D filers.  This guidance does not change any existing rules or create any new ones.

Until March 15, 2009, Form D filers may submit their filings in either paper or electronic form.  Beginning March 16, 2009, Form D filers must:

• Make all Form D filings electronically on EDGAR; and
   
• Amend their Form D filings if they are conducting continuing offerings of securities and they have not made a Form D filing within the previous year. 

Because the new annual amendment and electronic filing requirements will affect many filers that have not filed using EDGAR in the past, we expect requests for EDGAR access codes to increase.  To avoid a delay in receiving EDGAR access codes, new EDGAR filers may wish to request EDGAR access codes well in advance of a filing deadline.

Filers with an annual amendment requirement may submit paper or electronic Form D filings before the March 16 deadline, and may wish to do so to avoid potential delays around that date.  After March 16, the amendment must be electronic.

We strive to respond promptly to requests for EDGAR access codes.  Given the potential filing volume during March, requests for EDGAR access codes may take longer than usual.  To avoid unnecessary delays, we suggest that filers secure EDGAR access codes well in advance of their electronic filing deadline.  Filers who have submitted only paper filings should use the “Convert Paper Only Filer to Electronic Filer” process outlined in the EDGAR Filer Manual."

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In November of this year, the SEC updated its Compliance and Disclosure Interpretations ("C&DIs").  Credit to the deallawyers.com blog (http://www.deallawyers.com/blog/)" for pointing out this helpful snippet:

"239.13 An acquiring company may seek a commitment from management and principal security holders of a target company to vote in favor of a business combination transaction, frequently referred to as a “lock-up agreement.” The execution of a lock-up agreement may constitute an investment decision under the Securities Act. If so, the offer and sale of the acquiror’s securities would be made to persons who entered into those agreements before the business combination is presented to non-affiliated security holders for their vote.

Recognizing the legitimate business reasons for seeking lock-up agreements in the course of business combination transactions, the staff has not objected to the registration of offers and sales where lock-up agreements have been signed in the following circumstances:

 

• the lock-up agreements involve only executive officers, directors, affiliates, founders and their family members, and holders of 5% or more of the voting equity securities of the company being acquired; 
• the persons signing the lock-up agreements collectively own less than 100% of the voting equity of the target; and 
• votes will be solicited from shareholders of the company being acquired who have not signed the agreements and would be ineligible to purchase in a private offering.

Where, however, the persons entering into the lock-up agreements also deliver written consents approving the business combination transaction, the staff has objected to the subsequent registration of the exchange on Form S-4 for any of the shareholders because offers and sales have already been made and completed privately, and once begun privately, the transaction must end privately. [Nov. 26, 2008]"

 

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 "On October 3, 2008, the President signed the Emergency Economic Stabilization Act of 2008 (EESA), which established the Troubled Asset Relief Program (TARP). The United States Department of Treasury is responsible for establishing and administering the TARP. As part of the TARP, Treasury established the Capital Purchase Program (CPP) to provide funding to eligible financial institutions. To participate, a financial institution that receives preliminary approval for the CPP must enter into an agreement to issue certain securities to the Treasury. For additional information regarding the EESA, the TARP, and the requirements for participation in the CPP, seehttp://www.treasury.gov/initiatives/eesa/."

More here.

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Based on the facts presented, the Division will not object if Facebook, Inc. does not comply with the registration requirements of Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act") with respect to restricted stock units granted and to be granted pursuant to the Company's 2005 Stock Plan in the manner and subject to the terms and conditions set forth in your letter. This position will remain in effect until the earlier of (1) the date that Facebook, Inc. otherwise becomes subject to Exchange Act registration or reporting requirements with respect to any other class of its securities, or (2) the date of a Change of Control (as defined in your letter).

More here.

 

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"We have concluded that it is necessary to impose enhanced delivery requirements on sales of all equity securities, by adding and making immediately effective a temporary rule to Regulation SHO, Rule 204T. The temporary rule imposes a penalty on any participant of a registered clearing agency, and any broker-dealer from which it receives trades for clearance and settlement, for having a fail to deliver position at a registered clearing agency in any equity security."

For more, read here.

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By Stuart C. Campbell and Michele L. Buck-Romero
[September 2008]

On Sept. 15, 2008, the amendments to Form D adopted earlier this year by the Securities and Exchange Commission (SEC) became effective.  Pursuant to these amendments, issuers now have the option of filing Form D electronically.  Electronic filing becomes mandatory on March 16, 2009.  During this six-month electronic filing "phase in" period, issuers may file either the revised Form D (referred to simply as “Form D”) or Temporary Form D (the old Form D with some revisions). Both forms may be found at www.sec.gov/info/smallbus/cfformd.htm.

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On August 27, 2008, the Securities and Exchange Commission ("SEC") adopted significant changes to the rules regulating cross border tender offers.  The final rules largely follow the changes proposed in May of this year, including:

 

• changing the measurement date, from 30 days prior to commencement of the tender offer to 60 days before announcement or 30 days after announcement, of U.S. ownership for purposes of  determining eligibility for Tier 1 or Tier 2 cross-border rules exemptions;
• providing relief to bidders that are unable to use the 60/30 day measurement dates;
• amending the Tier 1 and Tier 2 exemptions in connection with going private transactions and multiple foreign tender offers done contemporaneously with US offers;
• relaxing rules regarding withdrawal of tender offers; and

making other changes that the SEC hopes have the effect of better ensuring that tender offers and similar transactions by foreign companies will be made available to U.S. shareholders.  When combined with earlier rule changes and amendments with respect to such things as the use of international accounting standards and amendments to the Rule 12g3-2(b) registration exemption, the SEC continues on its quest to make the US capital markets friendlier and easier for foreign companies.

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"The Securities and Exchange Commission today voted to publish for public comment a proposed Roadmap that could lead to the use of International Financial Reporting Standards (IFRS) by U.S. issuers beginning in 2014. Currently, U.S. issuers use U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Commission would make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors. The proposed multi-year plan sets out several milestones that, if achieved, could lead to the use of IFRS by U.S. issuers in their filings with the Commission."

See also the full release, the New York Times coverage, and the Wall Street Journal coverage.

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"In this facial challenge, appellants contend that Title I of the Sarbanes-Oxley Act of 2002 (“the Act”), 15 U.S.C. §§ 7211-19, violates the Appointments Clause of the Constitution and separation of powers because it does not permit adequate Presidential control of the Public Company Accounting Oversight Board (the "Board")."

"We hold, first, that the Act does not encroach upon the Appointment power because, in view of the Commission’s comprehensive control of the Board, Board members are subject to direction and supervision of the Commission and thus are inferior officers not required to be appointed by the President.  Second, we hold that the for-cause limitations on the Commission’s power to remove Board members and the President’s power to remove Commissioners do not strip the President of sufficient power to influence the Board and thus do not contravene separation of powers, as that principle embraces independent agencies like the Commission and their exercise of broad authority over their subordinates.  Accordingly, we affirm the grant of summary judgment to the Board and the United States."

 http://pacer.cadc.uscourts.gov/common/opinions/200808/07-5127-1134687.pdf

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The SEC has issued interpretive guidance on the use of company web sites under the Exchange Act and the antifraud provisions of the federal securities law.

You can find the guidance here. 

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The Financial Industry Regulatory Authority, Inc. (“FINRA”) (f/k/a National Association of Securities Dealers, Inc. ) has filed with the Securities and Exchange Commission a proposed rule change to adopt a new FINRA Rule which would require a member that engages in a private placement of unregistered securities issued by the member or a control entity to (1) make certain disclosures to investors in a private placement memorandum (“PPM”), (2) file the PPM with FINRA, and (3) commit that at least 85 percent of the offering proceeds will be used for the business purposes identified in the PPM.

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February 27, 2008

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By Greg K. Hitchcock

The U.S. Supreme Court ruled last week that a participant may sue for losses to his 401(k) account caused by the employer's failure to carry out investment instructions. Based on prior court rulings, many practitioners thought participants had no cash remedy for such breaches by plan fiduciaries and could only force fiduciaries to carry out the terms of the plan. The ruling in LaRue v. Dewolff, Boberg & Associates, Inc. clarifies that an individual participant may bring a claim for money damages for breach of fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA), though several key questions remain unanswered.

In light of this ruling, employers should review investment plan procedures so they can be confident that employee investment instructions are well documented and properly handled. Summary plan descriptions and other investment information should be reviewed to determine if employees are obligated to review investment summaries to be sure their investment instructions have been implemented. In addition, fiduciaries for plans will want to review their fiduciary insurance and indemnification rights to be sure they are adequately covered for potential claims. Continue reading...

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February 21, 2008

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By Stuart C. Campbell and Michele L. Buck-Romero

On Feb. 6, 2008, the Securities and Exchange Commission (SEC) issued a final rule adopting revisions to Form D effective Sept. 15, 2008, and requiring electronic filing of Form D as of March 16, 2009. Any company issuing securities pursuant to an exemption from registration under Regulation D should be aware of this new rule. The rule amendments are intended to ease the burdens of complying with Form D, facilitate electronic filing, improve and update Form D information requirements, and increase the public’s access to Form D information.

Under the Securities Act of 1933, an offer to sell securities must either be registered with the SEC or fall within an exemption from the registration requirements, such as the offering exemptions under Rules 504, 505 and 506 of Regulation D. A company relying upon a Regulation D exemption currently must file a Form D with the SEC in paper format no later than 15 days after the first sale of securities in the offering. Form D serves as the official notice of an exempt offering under Regulation D and includes basic information about the issuer and the offering. Continue reading...

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Hot off the press.  The SEC has issued a final rule mandating the electronic filing of Forms D.   

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By Kenneth Mitchell-Phillips

The Supreme Court, in what's considered to be the most important securities fraud case in years, has placed significant obstacles in the way of securities litigation plaintiffs attempting to hold third-party defendants liable for broad "scheme liability" for their tangential roles in corporate fraud. The decision came through the Stoneridge Investment Partners v. Scientific-Atlanta Inc. and Motorola Inc. case, in which investor groups sued the cable operator Charter Communications and its suppliers for a deceptive arrangement that gave the company's books the illusion of an additional $17 million in revenue.

By a 5-3 vote, the Court said that because investors victimized by Charter did not rely on any statements or omissions made by the vendors Scientific-Atlanta and Motorola, the vendors could not be held liable under Section 10(b) of the Securities Exchange Act of 1934. As a result of the decision, plaintiffs must be able to show that they relied, in making their decision to acquire or hold stock, on the deceptive behind-the-scenes behavior of these financial institutions, often called secondary actors. However, if their behavior that was never communicated to the marketplace, then the court will not hold that their actions induced reliance. According to Justice Anthony M. Kennedy, who wrote for the majority, "Without such a limitation on the concept of reliance, potential liability would reach the whole marketplace in which the issuing company does business."

The Courts decision is considered to be an end to the concept of "scheme liability" and a major victory for investment banks, accountants and vendors, and even lawyers who have become targets of class-action lawsuits accusing them of having engaged in a fraudulent scheme with a company that actually issued the stock.

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January 16, 2008

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SEC staff stresses better analysis and use of “plain English”

By Ryan York and Matt Larson

On Oct. 9, 2007, Securities and Exchange Commission (SEC) staff released additional guidance on Compensation Disclosure & Analysis (CD&A) disclosures that will affect many public companies as they prepare 2008 annual reports and proxy statements. We want to remind those affected by the guidance that the SEC expects registrants to incorporate it in 2008.

All companies that have a class of securities registered under Securities Exchange Act Section 12, or that are required to file reports under Exchange Act Section 15(d), are affected. We remind you to be certain that CD&A disclosures in your annual report and proxy include better analysis, are written in “plain English” and meet the SEC staff's disclosure standards for performance targets, benchmarks and change-in-control agreements.

We recommend that you review the SEC's Oct. 9, 2007 guidance (available at http://www.sec.gov/divisions/corpfin/guidance/execcompdisclosure.htm) as well as Item 402(b) of Regulation S-K well in advance of this year's deadlines for filing your annual report and distributing your proxy statement. Continue reading...

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January 15, 2008

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SEC simplifies reporting requirements for certain plans

By Marcus Williams

Effective Dec. 7, 2007 the U.S. Securities & Exchange Commission (SEC) adopted a rule making it easier for larger private companies to use certain types of compensatory stock option plans. The rule exempts such plans of qualifying non-reporting companies from Exchange Act registration.

The exemption under the SEC’s new Rule 12h-1(f) affects private companies with more than $10 million in assets that have a class of equity securities, with stock options treated as a separate class, held by more than 500 persons. The rule also will impact certain subsidiaries of public companies.

Qualifying companies with stock option plans may reduce their compliance burden by ensuring their plans are properly structured. Qualifying companies that would like to establish stock option plans now have a clear path to doing so with greatly reduced regulatory obligations. Continue reading...

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Shorter holding periods, fewer restrictions on shareholder resales

By Marcus Williams

On Feb. 15, 2008, newly adopted amendments to Securities Act Rule 144, which governs private resales of restricted securities between qualified institutional buyers, will go into effect, allowing institutional shareholders of both public and private companies to resell shares without registration. The amendments to Rule 144 were adopted in order to simplify compliance with the rule and to further facilitate resales, in order to promote efficiency of the capital markets. The amendments apply both to affiliate and non-affiliate shareholders, albeit in slightly different ways. Following are the most important aspects of the amendments. Continue reading...

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 By Kenneth Mitchell-Phillips

The U.S. Securities and Exchange Commission (SEC) has made a new years resolution: clamp down on Insider Trading in 2008. This, in response to a critical report of the SEC conducted by the Government Accountability Office which acts as the investigative arm of Congress. Essentially, the SEC will provide closer scrutinize to lower-level regulators that police brokerages and stock exchanges like the New York Stock Exchange and Nasdaq. These regulators known as self-regulatory organizations (SRO's) typically conduct internal audits themselves to curb insider trading, but now the SEC will make better use of their audits by improving their computer systems so as to make more use of referrals and advisories that it gets from SRO's on possible insider trading problems and other potential misconduct.

There was an upsurge in Insider Trading cases in 2007 which caused one senior SEC official to state, "insider trading appeared to be "rampant" among Wall Street professionals". The New York Times also noted that much of the rise in Insider Trading involved "pillow-talk" cases...insider-trading between husbands and wives.

 

 

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By Kenneth Mitchell-Phillips

Smaller reporting companies should have an easier time complying with reporting requirements from the Securities and Exchange Commission (the "SEC") in 2008. Prior to the new year, the SEC revised the rules governing eligibility to register offerings under the Securities Act using a short-form registration statement on Form S-3 or Form F-3. The result is certain domestic and foreign private issuers will be able to conduct primary securities offerings on these forms without regard to the size of their market capitalization. Essentially, the amendments should allow more companies to benefit from the greater flexibility in accessing the public securities market afforded by Form S-3 and Form F-3. The full text of the SEC’s adopting Release (Release No: 33-8878) concerning the amendments is available on the SEC website, www.sec.gov.

 

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By Brian Buckham

The Securities and Exchange Commission voted on November 28 to adopt amendments to the federal proxy rules under the Securities Exchange Act of 1934 to facilitate the use of electronic shareholder forums.  The amendments will clarify that participation in an electronic shareholder forum, which could potentially constitute a solicitation subject to the current proxy rules, will be exempt from most of the proxy rules if the conditions to the exemption are satisfied. In summary:

• Any participant in an electronic shareholder forum will be able to rely on the new exemption so long as his or her communications occur more than 60 days prior to the date announced by the company for its annual or special meeting of shareholders, and the communicating party does not solicit proxy authority while relying on the exemption. A participant in an electronic shareholder forum will be eligible to solicit proxy authority after the date that the exemption is no longer available, provided that the solicitation is conducted in accordance with Regulation 14A.
   
• Where the company announces a meeting of shareholders less than 60 days before the meeting date, the solicitation could not occur more than two days following the company's announcement.

In addition, the amendments provide that a shareholder, company, or third party acting on behalf of a shareholder or a company, that establishes, maintains or operates an electronic shareholder forum will not be liable under the federal securities laws for any statement or information provided by another person participating in the forum.  The text of the SEC's press release is available here: http://sec.gov/news/press/2007/2007-247.htm.

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The SEC has adopted a rule that would "explicitly permit exclusion of proposals that would set up a procedure for shareholders to nominate directors."  The language of the rule will apparently specify "that a company may exclude a proposal "[i]f the proposal relates to a nomination or an election for membership on the company's board of directors or analogous governing body or a procedure for such nomination or election.""  The text of the final rule is not yet available.

The text of the speech by by the SEC's staff before the Commission at their meeting regarding the proposal is available here.

 

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At yesterday’s open meeting, the SEC adopted significant changes to Rule 144 and Rule 145. The amendments were adopted largely as proposed and will be effective 60 days after publication in the Federal Register (www.sec.gov/news/press/2007/2007-233.htm).

Among other changes, the amendments to Rule 144 will:

• shorten the holding period for restricted securities of reporting companies to six months; and 
• allow non-affiliates of reporting companies to freely resell restricted securities after satisfying a six-month holding period and allow non-affiliates of non-reporting companies to freely resell restricted securities after satisfying a 12-month holding period.

The amendments to Rule 145 will: 

• eliminate the presumptive underwriter provision, except with respect to transactions involving blank check or shell companies; and
• revise the resale provisions of Rule 145(d).

All of these changes should make capital raising and acquisition transactions easier and less costly.

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In case you missed it, there has been quite a bit written about Stoneridge Investment Partners, LLC, v. Scientific-Atlanta, Inc.; Motorola, Inc., an Eighth Circuit Court of Appeals case which held that two vendors to a public company could not be liable under Section 10(b) of the Securities Exchange Act of 1934 .

The case was argued before the United States Supreme Court today.  You can view the transcript of the arguments before the Court today here.

 

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The SEC issued its "Staff Observations in the Review of Executive Compensation Disclosure" today.  This guidance grows out of the SEC's review of the executive compensation disclosures of 350 public companies, and gives a summary of the types of comments the SEC gave on various companies' compensation disclosures, and why it gave those comments.  John W. White, the Director of the SEC's Division of Corporation Finance, also gave a speech today in which he discussed CD&A disclosures.  You can view a text of the speech here.

Highlights of the staff observations on CD&A include, among other things:

• Focus on the how and why of decisions that were made;
• Emphasize material items, and de-emphasize immaterial items;
• Spend less time explaining mechanical procedures and lengthy statements on philosophy and more on how key decisions were made; flip the order--explain how the analysis resulted in the decisions made;
• Presentation matters--consider the order in which items are presented and how they are presented; and
• Consider adding tables that aren't required if they elucidate material issues.

 The SEC guidance is helpful and worth reading.

Continue Reading...

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The SEC has issued proposed rules regarding the exemption of compensatory employee stock options from registration under Section 12(g) of the Securities Exchange Act of 1934.  

Under Exchange Act Section 12(g), an issuer with more than 500 holders of record of a class of securities and assets in excess of $10 million at the end of its most recent fiscal year must register that class of equity security (see SEC Release No. 34-37157 (May 1, 1996)), unless an exemption is available.  Stock options issued to employees are considered a separate class of security for this purpose.  There is currently no exemption available for employee stock options, and issuers with more than 500 optionees that meet the assets test instead have been relying on the SEC no-action action letter process.

The SEC has proposed an exemption from Exchange Act Section 12(g) registration for:  (i) private, non-reporting issuers for compensatory employee stock option options issued under employee stock option plans, and (ii) compensatory employee stock options of issuers that have registered under Exchange Act Section 12 the class of equity security underlying those options.

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The SEC has issued compliance and disclosure interpretations, updated as of August 8, under Items 402 (Executive Compensation) and 404 (Transactions with Related Persons).  You can view the 402 guidance here.  You can view the 404 guidance here.

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The SEC has proposed and is seeking public comment on substantial revisions to Regulation D. The purpose of the revisions is to provide additional flexibility for issuers and to clarify and improve the application of the rules. The rules would, among other things:

• Create a new exemption from registration under the Securities Act of 1933 for sales to “large accredited investors” (the definition of “large accredited investors” is based on the definition of “accredited investor”, but with higher and somewhat different dollar-amount thresholds ; limited advertising would be permitted but each purchaser would have to meet the definition of large accredited investor);
• Revise the term accredited investor to clarify it and reflect developments since its adoption (including set it to adjust for inflation);
• Shorten the integration safe harbor to 90 days; and
• Apply uniform disqualification (bad actor) provisions to all offerings under Regulation D (as opposed to just Rule 505 currently).

View the proposed rule.

 

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 These rules can be accessed here.

 

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