Securities Regulation and Corporate Governance

:

Home
SEC Grants No-Action Letter Allowing for 5-Business Day Debt Tender Offers

Today, January 23, 2015, the Division of Corporation Finance (the “Staff”) granted a no-action letter that was submitted on behalf of a consortium of law firms, including Gibson Dunn, whereby the Staff agreed to not recommend Enforcement action when a debt tender offer is held open for as short as 5 business days. This letter builds upon an evolving line of no-action letters granted over the past three decades that have addressed not only the overall duration of debt tender offers (typically the rules require a minimum of 20 business days), but also formula pricing mechanisms (that allow a final price to be announced several days prior to expiration). Following an extensive dialogue with members of the bar and numerous market participants, including issuers, investment banks and institutional investors that began several years ago, the Staff is now opening up the relief that it previously limited to “investment grade” debt securities. Under the no-action letter, “non-investment” grade debt securities are now eligible to be purchased on an expedited basis. In order to take full advantage of this relief, issuers will need to disseminate their offers in a widespread manner and on an immediate basis. This should enable more security holders to quickly learn about the offer and permit holders to receive the tender consideration in a shorter timeframe. In addition, the abbreviated offering period will allow more issuers to better price their tender offers with less risk posed by fluctuating interest rates and other timing and market concerns related to the offer.

Previously, the Staff limited “abbreviated” debt tender offers (i.e., seven to ten calendar days) to “all-cash” offers seeking to purchase investment grade debt securities where the offering materials were disseminated in hard copy by expedited means such as overnight delivery. The relief granted today enables issuers to conduct their offers for both investment grade and non-investment grade debt securities on a similarly short time-frame (i.e., five business days) so long as the offer is open to “any and all” of a series of non-convertible debt securities and the issuer widely disseminates its offer notice to investors and provides them with immediate access to the offering materials. More importantly, the letter opens up the door to five business day exchange offers, provided that the offer is exempt from the ’33 Act registration requirements and the securities sought are “Qualified Debt Securities.” This term is generally defined as “non-convertible debt se...Read More

SEC Ceases To Issue No-Action Letters on Conflicting Shareholder Proposals

Today the Securities and Exchange Commission (“SEC”) staff announced that it will no longer express views on the application of Rule 14a-8(i)(9), one of the bases for excluding shareholder proposals from company proxy materials, during the current proxy season.  The staff’s announcement is a result of today’s announcement by SEC Chair Mary Jo White that she has directed the staff of Division of Corporation Finance to review the rule and report to the Commission on its review. 

Today’s announcements arise from an appeal of the SEC staff’s decision on December 1, 2014 to grant a no-action letter to Whole Foods, permitting it to exclude a proxy access shareholder proposal from its 2015 proxy materials because it would conflict with a company-sponsored proxy access bylaw amendment to be voted on at the same meeting.  Chair White’s announcement cited recent “questions that have arisen about the proper scope and application of Rule 14a-8(i)(9).” For example, last week the Council of Institutional Investors sent a letter to the SEC staff asking that it “alter” its interpretation of Rule 14a-8(i)(9), which it argued is “overly broad and inconsistent with the purpose of the Rule.”

SEC Rule 14a-8(i)(9) states that one basis for a company to exclude a shareholder proposal is if the shareholder proposal “directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting.”  As a result of today’s announcements, the SEC staff today issued a letter to Whole Foods indicating that it has reconsidered its position and will “express no view concerning whether Whole Foods may exclude the proposal under rule 14a-8(i)(9).”  There are currently approximately 49 shareholder proposal no-action requests pending before the SEC staff that raise Rule 14a-8(i)(9) as a basis for excluding the proposal from the company’s proxy materials, 41 of which assert Rule 14a-8(i)(9) as the only basis for exclusion.


SEC Proposes Amendments to Exchange Act Rules to Implement JOBS Act’s Liberalized 12(g) Registration and Deregistration Thresholds

On December 17, 2014, the SEC proposed amendments to revise the rules that govern the thresholds for registration and deregistration under Exchange Act Section 12(g).  These amendments would change Exchange Act Rules 3b-4, 12g-1, 12g-2, 12g-3, 12g-4, 12g5-1 and 12h-3, as well as Securities Act Rule 405, to further implement the JOBS Act mandate that was partially reflected in the text of Exchange Act Section 12(g) upon the JOBS Act’s passage.

Exchange Act Section 12(g) requires an issuer to register its securities under the Exchange Act (and consequently requires an issuer to file periodic Exchange Act reports) upon crossing certain asset and shareholder base thresholds.  This prospective regulatory burden limits privately-held companies’ practical ability to raise capital.  The JOBS Act liberalized Exchange Act Section 12(g)’s requirements to permit private companies to build larger shareholder bases without triggering the Exchange Act’s registration and reporting requirements.

Before the JOBS Act, Exchange Act Section 12(g)(1) and the SEC’s rules pursuant thereto required an issuer to register a class of equity security if, at the end of the issuer’s fiscal year, the issuer had total assets exceeding $10 million and the class of equity security was held of record by 500 or more persons.  The issuer could later deregister the class of equity security once (A) held by less than 300 persons or (B) held by less than 500 persons if the issuer’s total assets were no greater than $10 million at the end of each of its last three fiscal years.

Since adoption of the JOBS Act, Exchange Act Section 12(g)(1) has required an issuer to register a class of equity security if, at the end of the issuer’s fiscal year, the issuer had total assets exceeding $10 million and the class of equity security was held of record by either (A) 2,000 or more persons or (B) 500 or more persons who are not accredited investors.  The issuer can later deregister the equity security once held of record by less than 300 persons.  The post-JOBS Act Section 12(g)(1) provides a separate standard for banks and bank holding companies:  Such an issuer must register a class of equity security if, at the end of the issuer’s fiscal year, the issuer had total assets exceeding $10 million and the class of equity security was held of record by 2,000 or more persons.  A bank or bank holding company may deregister the class of equity security once held of record by less than 1,200 persons. 

In both its pre- and post- JOBS Act formulations, the Exchange Act Section 12(g) shareholder base threshold turns on the number of holders “of record”—that is, the number of persons or ...Read More

SEC Delays Action Date for Internal Pay Ratio Final Rules

In its most recently published regulatory rulemaking agenda, the SEC delayed its final action date for issuing rules to implement the internal pay ratio disclosure requirement in Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  The rulemaking agenda previously provided that the SEC intended to issue final rules no later than October 2014, but now has rolled that date back to October 2015.  The rulemaking agenda sets forth the SEC’s rulemaking priorities for the coming year, but does not establish deadlines and may not even reflect the order in which rulemaking will be undertaken, meaning that the Commission could still adopt final internal pay ratio rules prior to October 2015.  Based on the proposed internal pay ratio rules, the final rules are projected to apply to the first full year following the effective date, meaning that if final rules become effective in 2015, the rules would first apply to 2016 compensation and the internal pay ratio disclosures would need to be included in companies’ 2017 proxy statements.  However, the Commission could revise these provisions in its final rules to require earlier or allow for a later compliance date.  The SEC likewise extended the final action dates for proposing rules under the other compensation-related provisions of the Dodd-Frank Act dealing with clawbacks, pay-for-performance disclosure, and director and employee hedging disclosure from October 2014 to October 2015.

As discussed in our earlier blog post, available here, on September 18, 2013 the SEC issued the proposed internal pay ratio rules, which would require companies to disclose in their SEC filings the median of annual total compensation of all employees other than the CEO (or any equivalent position), the annual total compensation of the CEO (or any equivalent position) and the ratio of those two amounts.  The proposed rules have been met with over 126,000 comment letters to date, many of which are form letters in support of the proposed rules.  Critics of the proposed rules have expressed concerns regarding the cost of compliance as well as the lack of economic benefit and potentially misleading nature of the required disclosures.     

ISS TO LAUNCH NEW “QUICKSCORE 3.0”
Last week, proxy advisory firm Institutional Shareholder Services Inc. (“ISS”) released information about the updated version of its corporate governance benchmarking tool, ISS Governance QuickScore 3.0 (“QuickScore 3.0”), which will launch on November 24, 2014.  Companies should take certain actions now and in early November to prepare for the launch of new QuickScore 3.0, as discussed below.  


QuickScore 3.0 includes both new data points and updates to existing data points for U.S. companies.  ISS is expected to release the details of these changes later this week, but below is a summary of the changes we have been able to determine based on the preliminary information released by ISS.


New Factors


QuickScore 3.0 will add several new data points for U.S. companies:

  • Board Action Reducing Shareholder Rights:  whether, based on ISS’s review, the board “recently took action that materially reduces shareholder rights;”  

  • Annual Board Performance Evaluation:  whether the company discloses a policy requiring an annual performance evaluation of the board;

  • Sunset Provision on Unequal Voting Structure:  whether, for companies with unequal voting rights, there is a sunset provision on the company’s unequal voting structure; and
  • Controlling Shareholder:  whether a company has a controlling shareholder.


Updated Factors

In addition, QuickScore 3.0 includes updates to several existing data points for U.S. companies, as described below.

  • Gender Diversity:  While the existing data point in the Board Structure category  on the number and percentage of women on the board carries no weight, it now will be a weighted factor that will impact a company’s QuickS...Read More
SEC Approves PCAOB’s New And Amended Standards On Related Party Transactions And Significant Unusual Transactions

Earlier this week the SEC approved, without amendment, the PCAOB’s new auditing standards that expand audit procedures required to be performed with respect to three important areas:  (1) related party transactions; (2) significant unusual transactions; and (3) a company’s financial relationships and transactions with its executive officers (including executive compensation).  The standards also expand the required communications that an auditor must make to the audit committee related to these three areas and amend the standard governing management representations that the auditor is required to periodically obtain.  See SEC Release No. 34-73396, Order Granting Approval of PCAOB’s Proposed Rules on Auditing Standard No. 18, Related Parties, Amendments to Certain PCAOB Auditing Standards Regarding Significant Unusual Transactions (October 21, 2014), available at http://www.sec.gov/rules/pcaob.shtml.     

Notably, the SEC retained the PCAOB’s proposed effective date, and as a result, the new and amended standards will become effective for audits of financial statements for fiscal years beginning on and after December 15, 2014.    

As noted in our blog about the PCAOB’s adoption of the new standard, available here, there are several steps companies should consider taking in light of the new standards, including:

  • In view of the expansion of procedures auditors must perform on related party transactions, companies should focus on ensuring that appropriate authorizations and approvals are in place and documented for these transactions.
  • Audit committees should be briefed about the expanded set of communications they can anticipate receiving from the auditor concerning related party transactions and significant unusual transactions.  In this regard, we anticipate that auditors will communicate with audit committees about compensation arrangements.  Companies will want to consider whether the compensation committee (or its chair) also should be part of those discussions.
  • Companies should review related party transaction policies to evaluate whether any changes should be made in light of the new standard, including whether the responsibility for overseeing such policy should be shifted to the audit committee if not already the case.
  • Companies should be prepared to address the expanded set of required management representations about related party transactions and significant unusual transactions.

Read More

ISS Provides Additional Information on New Proxy Voting “Scorecard” Approach for Evaluating Equity Compensation Plan Proposals at 2015 Shareholder Meetings

Today, proxy advisory firm Institutional Shareholder Services Inc. (“ISS”) provided additional information on its plans to implement a new “scorecard” approach to evaluating equity compensation plan proposals at U.S. shareholder meetings and requested comments on its proposed policy change.  This is one of two significant proposals ISS announced today that would impact U.S. companies for the 2015 proxy season, with the other proposed policy change relating to voting recommendations on independent chair proposals (which we discuss here).  Companies considering seeking shareholder approval of equity plans at shareholder meetings in 2015 should consider these proposed changes now to the extent they want ISS to recommend votes “For” the equity plan.

Current ISS Approach to Equity Plan Proposals

ISS’s current approach uses a series of “pass/fail” tests.  Specifically, ISS will recommend votes “Against” an equity plan if the total cost of the company’s equity plans including the proposed new plan is “unreasonable,” if the company’s three-year burn-rate exceeds the applicable burn rate cap determined by ISS, if the company has a pay-for-performance “misalignment” or if the plan includes certain disfavored features (e.g., if the plan permits repricing or includes a liberal change of control definition). 

Companies seeking shareholder approval of a new equity plan or an amendment to an existing plan can often independently determine compliance with each of these factors except for cost.  ISS evaluates the cost of a company’s plans using its proprietary shareholder value transfer (SVT) measure. ISS describes SVT as assessing “the amount of shareholders’ equity flowing out of the company to employees and directors.” ISS considers the SVT for a company’s plans to be reasonable if it falls below the company-specific allowable cap as determined by ISS using benchmark SVT levels for each industry.  Thus, companies often engage the consulting side of ISS to determine the SVT of their plans and the number of additional shares that ISS would support for the new or amended equity plan.

New ISS Approach to Equity Plan Proposals

ISS previously announced its intention to implement a new “scorecard” approach to evaluating equity plan proposals at U.S. shareholder meetings.  Today ISS provided more insights with the publication of its proposed new Equity Plans policy, which details ISS’s new Equity Plan Scorecard (“EPSC”...Read More

ISS Announces Proposed Changes to Proxy Voting Policy on Independent Chair Shareholder Proposals Voted on at 2015 Shareholder Meetings

Today, the proxy advisory firm Institutional Shareholder Services Inc. (“ISS”) announced proposed changes to its voting policy on independent chair shareholder proposals and opened the comment period until October 29, 2014, to solicit feedback on the changes.  This is one of two significant proposals ISS announced today that would impact U.S. companies for the 2015 proxy season. 

Currently, ISS generally recommends a vote “For” proposals requesting that the chair of a company’s board be independent unless the company satisfies specific criteria that include:  (1) having a designated lead director with certain duties specified by ISS; (2) not exhibiting “sustained poor total shareholder return (TSR) performance” over one- and three-year periods; and (3) not having any governance issues that ISS considers “problematic.”

ISS proposed two major changes to this policy:  (1) adding new governance, board leadership, and performance factors to the current list of criteria it considers in evaluating independent chair proposals; and (2) looking at all of the criteria “in a holistic manner” so that companies would no longer need to satisfy all of the criteria in the voting policy in order for ISS to recommend “Against” the shareholder proposal.  Specifically:

  • ISS is considering adding the following new criteria to its policy:  (1) the absence/presence of an executive chair; (2) recent board and executive leadership transitions at the company; (3) director/CEO tenure; and (4) evaluation of a longer, five-year TSR performance period rather than the one- and three-year periods that are currently used.  In announcing the proposed changes, ISS specifically mentioned the first one—presence of an executive chair—as cause for concern, citing a study that (according to ISS) found that retaining a former CEO in the role of executive chair “may prevent new CEOs from making performance gains by dampening their ability to make strategic changes at the company.”  ISS also expressed concern about whether a lead independent director can act as “an effective counterbalance to both a CEO and an executive chair.”  ISS did not address how the other factors it listed may affect its evaluation.  

 

  • ISS proposes to now review all of the criteria in the voting policy “in a more holistic manner.”  Under its current methodology, ISS will recommend votes “Against” an independent chair shareholder proposal only if a company satisfies all of ISS’s criteria.  Under the proposed approach, ISS indicated that any one factor that may previously have resulted in a “For” or “Against” recommendation could be mitigated, either positively or negatively, by other criteria.  While the proposed change appears to give ISS g...Read More
ISS Releases Survey for 2015 Policy Updates

Institutional Shareholder Services Inc. (“ISS”), the most influential proxy advisory firm, today launched its 10th annual global policy survey.  Each year, ISS solicits comments in connection with its review of its proxy voting policies. At the end of this process, in November 2014, ISS will announce its updated proxy voting policies applicable to 2015 shareholders’ meetings. 

Results from the policy survey that ISS posted on its website today will be used by ISS to inform its voting policy review.  The survey includes questions on a variety of topics involving Say-on-Pay and equity plan approvals, voting recommendations on directors and the selection of auditors, and other governance topics, including the following:

  • What relationship should exist between setting performance-based compensation goals and the value of performance-based compensation awards?
  • Is there is an absolute magnitude of CEO compensation that causes concern regardless of company performance, and if so, how should that pay magnitude be determined?
  • How should disclosures regarding changes made to a company’s current or future compensation program be considered in ISS’s pay-for-performance evaluation, which examines a company’s compensation program based on compensation paid in the prior fiscal year?
  • When is it appropriate for companies to use quantitative environmental and social performance goals, and what alternatives might be acceptable?
  • In the context of ISS’s stated intention to implement a “balanced scorecard” for evaluating equity plans, how should ISS weigh factors such as plan cost, plan features, and company practices?  What other factors should be considered?
  • How and under what circumstances should directors be held accountable for adopting bylaw amendments that restrict shareholder rights without obtaining shareholder approval of the amendments?
  • How do investors consider gender diversity when evaluating boards?
  • What factors should be considered when evaluating a board’s role in risk oversight?
  • Read More
House Financial Services Committee Approves Eight Bills Affecting Securities Regulation

Earlier this summer, on May 22, 2014, the Financial Services Committee of the House of Representatives approved eight bills relating to issuer disclosures, public and private capital raising, the liquidity of restricted securities and SEC regulations generally.  These bills, if enacted into law, would incrementally ease the many burdens imposed by the current securities regulatory regime.

The Disclosure Modernization and Simplification Act and the Small Business Investment Company Advisers Relief Act were both unanimously approved, while the other bills were generally approved by fairly narrow margins.

No corresponding bills are currently scheduled to be taken up in the Senate Banking Committee.

Disclosure

The Disclosure Modernization and Simplification Act (H.R. 4569) would require the SEC to:

  • permit issuers to include a summary page in their annual reports on Form 10-K;
  • revise Regulation S-K to further scale back or eliminate disclosure requirements for smaller issuers, including emerging growth companies, accelerated filers and smaller reporting companies; and
  • eliminate duplicative, overlapping, outdated and unnecessary requirements. 

In addition, the bill would require the SEC to conduct another study of Regulation S-K, to issue a report of its findings and recommendations to Congress and to propose rules to implement its recommendations.  The study would be required to determine how to modernize and simplify Regulation S-K to reduce the costs and burdens of compliance on issuers, eliminate boilerplate language and static requirements, evaluate methods of information delivery and presentation, and explore methods to discourage repetition and the disclosure of immaterial information. 

H.R. 4569 directs the SEC to ensure that all material information continues to be provided to investors, and to preserve the completeness and comparability of information across registrants.  The Committee approved the bill by a vote of 56-0.

Advisers to Small Business Investment Companies

The Small Business Investment Company (SBIC) Advisers Relief Act (H.R. 4200) would ensure that an investment adviser that relies on either the venture capital fund adviser exemption or the private fund adviser exemption from registration under Section 203A of the Investment Adviser’s Act of 1940 will not be required to register if it also acts as an investment adviser to one or more SBICs.  The bill would also preempt any state registration require...Read More

1 - 10 Next
Current thoughts on development and trends in securities regulation, corporate governance and executive compensation published by Gibson Dunn.
 

 Topics

 
 

 Useful Links

 
 

 Editors

 

© Copyright 2014 Gibson, Dunn & Crutcher LLP.
Attorney Advertising. Prior results do not guarantee a similar outcome. All information provided on this site is for informational purposes only, does not constitute legal advice, is not confidential, and does not create an attorney-client relationship. Statements and content posted to this site do not represent the opinion of Gibson Dunn & Crutcher LLP ("Gibson Dunn"). Gibson Dunn makes no representations as to the accuracy, completeness, currentness, suitability, or validity of any information on this site and will not be liable for any errors or omissions therein, nor for any losses, injuries, or damages arising from its display or use.