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Going Public Without an IPO: New NYSE Rules that Expand Options for Direct Listings Create Opportunity and Raise Questions

On February 2, 2018, the Securities and Exchange Commission approved a change to the New York Stock Exchange’s (Exchange) listing rules that permit companies to use “direct listings” to list their shares on the Exchange based on having a minimum independent valuation of $250 million and without having completed an underwritten initial public offering (IPO) or having their shares first traded on a private market.  Direct listing will continue to be at the NYSE’s discretion and require that the company have an effective resale registration statement on file with the SEC for at least some amount of its outstanding shares. Direct listings provide an option by which private companies can accomplish three goals without requiring an IPO: (a) make their shares a more attractive currency for merger and acquisition activity, (b) provide greater liquidity for existing shareholders, and (c) increase the value of their shares and employee stock options. The SEC approval comes in the wake of recent commentary by SEC Chairman Jay Clayton that he believes more IPOs are needed, noting they are generally beneficial to the retail investor community to the extent they provide investors with more investment alternatives, more opportunities to invest, and greater liquidity.

The revised NYSE listing rules went into effective on February 2, 2018.  The revised rules are Section 102.01B of the NYSE Listed Company Manual, which can be found here, and NYSE Rules 15, 104 and 123D, which can be found here.  The SEC’s Adopting Release can be found here.  The NYSE proposal, as amended, can be found here.

Background

Companies have traditionally listed on the Exchange in connection with a firm-commitment underwritten IPO, a transfer from another market, or a spin-off. However, since 2008, under Section 102.01B of the NYSE Listed Company Manual, the Exchange has had the discretion, on a case-by-case basis, to allow companies that have not previously had their common equity securities registered under the Exchange Act, but which have sold common equity securities in a private placement and traded in a private market to list their common equity securities o...Read More

Federal Court Rejects Section 16(b) “Short-Swing Profits” Claim Challenging Share Withholding To Satisfy Taxes

A federal court in Oklahoma today issued a precedent-setting decision in favor of Gibson Dunn client WPX Energy, Inc., in Olagues v. Muncrief, No. 17-cv-153 (N.D. Okla. Jan. 26, 2018), ECF No. 42.  In the decision, the court held that pre-approved tax withholding dispositions made in connection with the vesting of equity grants are exempt from Section 16(b)’s prohibition on short-swing profits under Exchange Act Rule 16b-3(e)—even when an employee otherwise subject to the short-swing trading restrictions purchased the company’s shares during the six-month period preceding or following the tax withholding disposition.  This is the first time that a federal court has substantively addressed these types of short-swing trading claims, which have been serially raised by a small group of investors—first in the form of litigation demands and then, absent a payout to the investors, in litigation—during the last sixteen months.  A number of companies have refused the investors’ settlement demands, which has resulted in Section 16(b) cases against the companies’ executives in federal courts in California, Colorado, Delaware, Florida, Massachusetts, North Carolina, Ohio, Oklahoma, Tennessee, Texas, and Washington state. 

In Olagues v. Muncrief, the plaintiff alleged that dispositions of shares that WPX Energy performed on behalf of two covered officers to settle the officers’ tax withholding obligations associated with the vesting of restricted stock units constituted “sales” that could be matched with the officers’ unrelated open-market stock purchases, thereby resulting in short-swing profits in violation of Section 16(b).  In June 2017, the court dismissed the plaintiff’s claims as procedurally improper because the plaintiff had filed his complaint pro se and was not entitled to pursue Section 16(b) claims on behalf of the company in a pro se capacity.  Slip Op. at 5.  The plaintiff subsequently retained counsel and filed an amended complaint.  Id.  The defendants moved to dismiss the amended complaint, arguing that the tax withholding dispositions could not be “matched” with the officers’ open-market purchases because, among other reasons, the tax withholding dispositions were exempt from Section 16(b)’s prohibition on short-swing profits under Exchange Act Rule 16b-3(e).

The court today granted judgment in the defendants’ favor, holding that “plaintiff cannot show that defendants violated §16(b)” because “the tax withholding transactions are exempt [from coverage under Section 16(b)] and cannot be used to show that a prohibited short-swing transaction occurred.”  Id. at 14.   The court explained that under SEC Rule 16b-3, transactions with the issuer—including withholding t...Read More

Potential SEC Shutdown Coming - Where to Call Should the Lights Go Out
This morning the SEC posted an update regarding the potential for a government shut-down in the days and weeks ahead providing information on the Commission's operating plan during any such shut-down. 

The post indicates the Commission will remain open for a few days into any government shut-down.  While this news provides a glimmer of hope that registrants with '33 Act filings in progress, or urgent questions on interpretive matters can obtain some guidance from the Staff, the assistance may be short-lived.  Should the SEC eventually shut-down, a list of phone numbers for emergency personnel is provided via the link in the SEC's posting below.

SEC Operating Status

Should there be a federal government shutdown after January 19, the SEC will remain open for a limited number of days, fully staffed and focused on the agency's mission.

Any changes to the SEC's operational status will be announced here. In the event that the SEC does shut down, we will pursue the agency's plan for operating during a shutdown. As that plan contemplates, we are currently making preparations for a potential shutdown with a focus on the market integrity and investor protection components of our mission.

Technical Points To Remember When Preparing Your Form 10-K

With all of the substantive issues impacting disclosures in companies’ upcoming annual reports, there are a few technical points reporting companies should bear in mind when preparing their annual report.  Note that some of these issues are easy to miss given that they are not yet reflected in the official PDF of Form 10-K.

Addition of Item 16 (Form 10-K Summary).  In 2016, the U.S. Securities and Exchange Commission (the “SEC”) adopted an interim final rule that amended Part IV of Form 10-K to add new Item 16.  This item provides that “a registrant may, at its option, include a summary in its Form 10-K.”  While the SEC’s interim final rule shows what Item 16 will look like, the PDF of Form 10-K included in the SEC’s official forms list still does not include Item 16.  Interestingly, this PDF of Form 10-K—which is hosted on the SEC’s website, but is not directly linked from the SEC’s official forms list—has been updated to include Item 16 (but not the next item in our list).  Even if a company chooses not to include a Form 10-K summary, pursuant to Exchange Act Rule 12b-13, the company should include the item number and caption (i.e., “Item 16.  Form 10-K Summary”) in Part IV and state that the item is not applicable.  In addition, companies should remember to revise the table of contents to include new Item 16.

Edits to Form 10-K Cover Page to Address Items Related to Emerging Growth Companies.  As discussed in our blog post (available here), in April 2017, the SEC adopted technical amendments to conform certain rules and forms to self-executing provisions of the Jumpstart Our Business Startups Act related to emerging growth companies (“EGCs”).  The SEC’s adopting release is available here.  The amendments modified the cover page of Form 10-K, along with the cover pages of various other forms including Form 10-Q, to include two additional checkboxes.  The first checkbox allows the compa...Read More

SEC Staff Provides Important Guidance for Disclosure and Accounting Implications of the Tax Cuts and Jobs Act- Practical Considerations for Reporting Companies

On December 22, 2017, the Securities and Exchange Commission’s Office of the Chief Accountant and Division of Corporation Finance (“Staff”) issued important guidance that provides significant relief and helpful answers on some of the accounting and disclosure issues raised by the comprehensive tax act, commonly called the Tax Cut and Jobs Act,[1] that was signed into law on that same date (the “Tax Act”).  The Staff’s guidance is contained in two pronouncements:  (1) Staff Accounting Bulletin No. 118 (“SAB 118”), which essentially allows companies to take a reasonable period of time to assess, measure and record the effects of the Tax Act, and (2) Compliance and Disclosure Interpretation 110.02 (“CDI 110.02”) under Exchange Act Form 8-K, which confirms that the accounting implications of the Tax Act will generally not trigger impairment reporting under Form 8-K.

A statement jointly issued by Chairman Jay Clayton, Commissioner Kara Stein, and Commissioner Michael Piwowar,[2] available here, indicates the guidance “reflects the approach taken in similar situations where legislative changes could significantly affect financial reporting.”  In a  press release available here, Chief Accountant Wes Bricker stated that “[a]llowing entities to take a reasonable period to measure and recognize the effects of the [Tax] Act, while requiring robust disclosures to investors during that period, is a responsible step that promotes the provision of relevant, timely, and decision-useful information to investors.”  

Staff Accounting Bulletin No. 118

SAB 118, available here, expresses the Staff’s views on how the standard on accounting for income taxes (Financial Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”))[3] should be applied in the context of the Ta...Read More

PCAOB Offers Guidance To Auditors Regarding Implementation of FASB’s Revenue Recognition Standard

The Public Company Accounting Oversight Board (the “PCAOB”) recently released Staff Audit Practice Alert No. 15 (the “Practice Alert”), titled “Matters Related to Auditing Revenue From Contracts With Customers.”  The Practice Alert provides guidance for auditors related to the Financial Accounting Standards Board’s 2014 Accounting Standard Update titled “Revenue from Contracts with Customers”  (Topic 606) (the “Revenue Recognition Standard”), which goes into effect for annual reporting periods beginning after December 15, 2017.  The Practice Alert is available here, and the Revenue Recognition Standard is available here.  While the Practice Alert is directed at auditors, it sheds light on what companies can expect from their independent auditors as companies prepare for and implement the new Revenue Recognition Standard.  Given the importance of revenue as one of the most important measures that investors use to assess a company’s financial performance, we expect that there will be a keen focus on implementation of this standard by independent auditors.

  • Expect Auditors to Seek a Better Understanding of Contractual Arrangements.  A key theme of the Practice Alert is that an independent auditor will need a deep understanding of the contractual arrangements entered into by a company to help ensure that the Revenue Recognition Standard is being implemented properly.  The Practice Alert contains a number of steps for auditors to use in gaining this in-depth understanding of contractual arrangements, including obtaining information about how management develops revenue-related estimates.  The Practice Alert also focuses on specific procedures the auditor should consider in interim reviews to help accelerate an understanding of the contractual arrangements.  It is foreseeable that the level of understanding outlined in the Practice Alert could mean the auditor will need additional time with management and with company systems.  Companies can prepare for this more extensive interaction by making sure that documentation regarding contractual arrangements and the intersections with the new standard are in order and that relevant personnel are prepared for inquiries from the auditor about the company’s key products and services and key provisions of contractual arrangements. 
  • Expect Auditors to Closely Review New Controls and Changes to Controls to Implement the New Standard.  The Practice Alert also highlights a number of areas for auditors to focus in reviewing internal controls over financial reporting, which will be particularly important during the transition to the Revenue Recognition Standard.  Among other things, the Pr...Read More
SEC Approves New PCAOB Auditor Reporting Standard

On October 23, 2017, the Securities and Exchange Commission (the “Commission”) approved the Public Company Accounting Oversight Board’s (the “PCAOB”) new standard requiring significant enhancements to the auditor’s report on an issuer's financial statements, including the communication of critical audit matters (“CAMs”).  The Commission’s order approving the new standard and related amendments to other auditing standards is available here; the PCAOB’s previous release approving the standard and related amendments is available here; and our June 2, 2017 client alert discussing the PCAOB’s standard is available here.

As discussed in our client alert, the new standard dramatically alters the audit reporting model for public companies.  Specifically, the standard requires the disclosure of CAMs identified by the auditor during the course of the audit.  A CAM is defined as any matter arising from the audit that was communicated or required to be communicated to the audit committee and that relates to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective, or complex auditor judgment.  Additionally, the standard requires new disclosures regarding auditor tenure, independence, and responsibilities.

The Commission’s order approving the standard acknowledges a number of concerns raised by issuers and other stakeholders in the rulemaking process, including the following:

 

  • Potential for Increased Litigation.  Concerns have been expressed that the additional disclosure requirements imposed by the new standard may give rise to increased litigation.  In a statement commenting on the adoption of the new standard (available Read More
Corp Fin Clarifies Non-GAAP Guidance in the Business Combination Context

On October 17, 2017, the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff”) issued one new Compliance & Disclosure Interpretation (“C&DI”) and revised an existing C&DI addressing the disclosure of forward-looking financial measures in the business combination context.  These two C&DIs seek to clarify the Staff’s position as to when:

  • certain forecasts or projections shared in a business combination are not deemed non-GAAP financial measures; and
  • a GAAP reconciliation of such information is appropriate. 

The new and revised C&DIs are available here.

By way of background, Regulation G and Item 10(e) of Regulation S-K do not apply to non-GAAP financial measures included in disclosures relating to a proposed business combination transaction that are subject to the SEC’s communications rules applicable to business combination transactions (i.e., Securities Act Rule 425, and Exchange Act Rules 14a-12, 14d-2(b)(2), and 14d-9(a)(2)).  These rules basically cover the early communications filed on the date of first use before a final disclosure document is filed (e.g., definitive proxy statement, registration statement/prospectus, tender offer or solicitation/recommendation statement).  For more information on the topic, see “Conditions for Use of Non-GAAP Financial Measures” adopting release, available here.

Historically, parties to a business combination transaction have disclosed projections or forecasts for Rule  10b-5 cleansing purposes, to comply with line-item SEC disclosure requirements (e.g., Item 1015 of Regulation M-A), as well as to satisfy disclosure duties under applicable state law.  However, the practice of providing a full-blown reconciliation of the non-GAAP financial measures found within those forecasts has been somewhat mixed.  As a result, the Staff is now updating their interpretive guidance on this topic in order to facilitate greater consistency and compliance with the applicable rules. 

New C&DI Question 101.01 makes clear the financial measures included in forecasts are not non-GAAP financial measures so long as the forecasts are: 

Securities and Exchange Commission Releases Public Statement on Cybersecurity

On Wednesday, September 20, 2017, Chairman Jay Clayton of the U.S. Securities and Exchange Commission (the “Commission”) released a public statement addressing cybersecurity risks.

Chairman Clayton’s statement is part of an ongoing effort to communicate the Commission’s approach to cybersecurity in connection with the May 2017 assessments of the Commission’s internal cybersecurity and of its approach to cybersecurity as a regulatory agency.

The statement addressed the Commission’s collection and use of data, the Commission’s management of internal cybersecurity risks, incorporation of cybersecurity considerations in the Commission’s regulatory approach with respect to disclosures and its supervisory programs, coordination by the Commission with other government entities, and enforcement by the Commission of federal securities laws.

The most noteworthy portion of the statement was the revelation by Chairman Clayton that the Commission had discovered in August 2017 that a cyberattack, previously detected in 2016, may have provided the basis for illicit gain through trading.  According to Chairman Clayton, a vulnerability in the EDGAR test filing system had allowed individuals to access nonpublic information.  It is not believed that any personally identifiable information was obtained through the exploitation of the vulnerability, but the Commission continues to investigate the matter.

The Commission has emphasized in recent months that it utilizes trading data and other information in identifying risks, detecting fraud, and enforcing securities laws (for our blog post regarding recent related comments by the SEC’s Acting Director and Acting Chief Economist, see here).  Wednesday’s revelation serves as a reminder that the Commission’s role in collecting and maintaining sensitive nonpublic information may make it a particularly attractive target for cyberattacks.  While the particular vulnerability in EDGAR was patched promptly after discovery, the Commission’s investigation is ongoing and cyberattacks will continue to present an ongoing threat not only to companies, but also to the Commission itself.

Chairman Clayton’s statement went on to describe in detail the ways in which the Commission manages cybersecurity risks internally and ways in which cybersecurity considerations inform the Commission’s regulatory approach.  ...Read More

NYSE Delays Implementation of Rule Change on Dividend-Related Announcements
As a follow-up to our prior blog, the New York Stock Exchange (“NYSE”) is delaying implementation of its rule change on notifications to the NYSE about announcements outside of market hours related to dividends or stock distributions.  Companies should continue to comply with the current rule (summarized here) and follow their existing practices until the implementation date for the new rule, which will likely be in February 2018.  The NYSE plans to provide companies with updated information prior to the date when they will be required to begin complying.

As a result of the rule change, companies will have to notify the NYSE at least ten minutes in advance of an announcement related to a dividend or stock distribution made at any time, including outside market hours.  Although the rule change was approved by the Securities and Exchange Commission (“SEC”) on Monday, August 14 and took effect immediately, the NYSE staff has advised orally that it is delaying implementation of the rule change. 

The NYSE filed a proposal (available here) seeking SEC approval of the delay on August 22nd.  According to the proposal, the NYSE plans to implement the rule change no later than February 1, 2018.  The purpose of the delay is to allow listed companies time to change their internal procedures and to give the NYSE more time to put in place technology and processes to facilitate staff review of dividend notifications
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