|SEC Proposes Rules Regarding Clawbacks|
The Securities and Exchange Commission (the “SEC”) today voted, 3-2, to issue proposed rules implementing the mandate in Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that the SEC require national securities exchanges and associations to adopt a listing standard that requires listed companies to adopt and enforce a clawback policy.
This summary is based on information provided at the SEC's open meeting and therefore may not reflect nuances that appear in the official text of the proposals. The proposing release is available here. The proposed rules will be subject to a 60-day comment period following publication in the Federal Register.
SEC Chair Mary Jo White and Commissioners Kara Stein and Luis Aguilar voted to propose the rules and Commissioners Daniel Gallagher and Michael Piwowar dissented. Statements made by the Commissioners today regarding the proposal are on the SEC website and available here.
Section 954 of the Dodd-Frank Act mandates that the SEC adopt rules requiring national securities exchanges and associations to establish listing standards that require listed companies to develop and implement a policy providing that, in the event of a financial restatement due to material noncompliance with financial reporting standards, the listed company will recover any incentive-based compensation that is more than what would have been paid but for the financial reporting error.
The SEC’s proposed new Rule 10D-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), directs the exchanges and associations to adopt listing standards that would require each listed company to adopt, comply with and disclose a compensation recovery policy that complies with the following parameters:
- If during the last completed fiscal year, the company was required to prepare an accounting restatement to correct a material error, the company would be required to seek recovery from current and former “executive officers” who received “excess incentive-based compensation” during the three fiscal years preceding the date of the restatement;
- “Executive officers” would include all Section 16 office...Read More
|SEC Publishes Interpretations regarding “Regulation A+”|
On June 23, 2015, the Staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) published several new Compliance and Disclosure Interpretations (“Interpretations”) relating to rules and forms under the Securities Act of 1933, as amended (the “Securities Act”). These Interpretations address questions and considerations relating to “Regulation A+”, which was adopted by the SEC on March 25, and became effective last Friday, June 19.
Gibson Dunn’s client alert regarding the adoption of Regulation A+ is available at the following link: (http://www.gibsondunn.com/publications/pages/SEC-Adopts-Final-Rules-Implementing-Regulation-A-Offering-Exemption--up-to-$50Million.aspx)
The key Interpretations are summarized below:
- Confidential Filings. If an issuer elects to have its offering statement reviewed confidentially by the Staff, and at the time it first files its offering statement makes public on EDGARLink all prior draft offering statements, it need not refile such drafts as an exhibit to the publicly filed Form 1–A. It will be required, however, to file any non-public correspondence as an exhibit to its public offering statement (Question 182.01).
- Confidential Treatment Requests. If an issuer elects to have its offering statement reviewed confidentially by the Staff, and submits correspondence relating to that offering statement, it may request confidential treatment of information in its correspondence pursuant to Rule 83 under the Securities Act, in a manner similar to the review process in a typical registered offering. When the issuer subsequently makes its public filing of the offering statement and files any correspondence relating to the review in accordance with the requirements of Regulation A+, it would redact the confidential information from the filed correspondence exhibit, include the required legends and redaction markings and submit a request to the SEC for confidential treatment in accordance with Securities Act Rule 406. The SEC will act on the confidential treatment request prior to qualifying the offering statement (Question 182.02).
- Principal Place of Business. An issuer will be considered to have its “principal place of business” in the United States or Canada for Regulation A+ eligibility purposes if the issuer’s activities are primarily directed, controlled and coordinated from those countries (i.e., the issuer’s headquarters are located within the United Stat...Read More
|New Investor Guide on Engaging With Public Companies and Others on ESG Issues|
On May 28, 2015, BlackRock and Ceres released a guide for investors on engaging with public companies, asset managers and policymakers on environmental, social and governance (“ESG”) sustainability matters. The guide, titled “21st Century Engagement: Investor Strategies for Incorporating ESG Considerations into Corporate Interactions,” includes sections written by BlackRock and Ceres as well as AFL-CIO, California Public Employees Retirement System (“CalPERS”), California State Teachers Retirement System (“CalSTRS”), Council of Institutional Investors (“CII”), International Corporate Governance Network (“ICGN”), the Office of New York City Comptroller, New York State Common Retirement Fund, North Carolina Department of State Treasurer, PGGM, State Board of Administration of Florida, TIAA-CREF, T. Rowe Price and UAW Retiree Medical Benefits Trust.
The topics addressed in the guide include engaging with boards of directors, how to prepare and submit shareholder proposals, how to write effective letters, engaging with asset managers and government agencies, launching “vote no” campaigns, collaborating with other investors to promote sustainability initiatives, and when investors should consider divestment as opposed to further engagement. The guide also includes a section co-authored by representatives of Cornerstone Capital Group and the Sustainability Accounting Standards Board that proposes ESG-related questions institutional investors and analysts should ask companies in specific industries. Industries covered include: Oil, Gas and Mining; Banking and Finance; Insurance; Information Technology; Electric Utilities; Apparel and Retail; Transport; Food and Beverage; and Healthcare and Pharmaceuticals.
|NASDAQ Issues FAQ Relaxing Historical Position on Net Share Settled Convertible Securities|
In a change that we believe has gotten little attention to date, in March 2015 NASDAQ updated its publicly available “Frequently Asked Questions” relating to the application of NASDAQ’s shareholder approval rules to net share settled convertible securities issued in private placements.
Under NASDAQ Rule 5635(d), shareholder approval is required prior to the issuance by a NASDAQ listed company of securities in connection with a transaction other than a public offering involving, among other things, the sale, issuance or potential issuance by an issuer of common stock (or securities convertible into or exercisable for common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of the book or market value of the stock (the “20% Rule”).
The 20% Rule frequently is in play in private offerings of convertible securities by smaller NASDAQ listed companies. However, because the conversion price of convertible securities is often at a premium to the greater of the book or market price of the underlying stock (particularly in Rule 144A offerings, where a conversion premium of at least 10% to market is required), the 20% Rule often is not an issue for physically settled convertible securities. This has not been the case, however, for net share settled convertible securities (whether mandatory net share settled or flexible net share settled), which NASDAQ has treated differently from physically settled convertible securities. NASDAQ historically has viewed both types of net share settled convertible securities as being issued with a conversion price below the greater of the book or market value of the underlying stock because of the ability of the issuer to settle conversions in whole or in part in cash (effectively treating the cash payment as a return of principal and reducing the conversion price). This NASDAQ position has often resulted in the 20% Rule being applicable to an offering for smaller companies issuing net share settled convert...Read More
|SEC Proposes Rules On "Pay Versus Performance" Disclosures |
To Our Clients and Friends:
On April 29, 2015, the Securities and Exchange Commission ("SEC" or "Commission") voted, 3-2, to issue proposed rules implementing the pay-versus-performance disclosure requirement in Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). In summary, the proposed rules would require proxy statements or information statements setting forth executive compensation disclosure to include (1) a new compensation table setting forth for each of the five most recently completed fiscal years, the "executive compensation actually paid" (as defined in the proposed rules), total compensation as disclosed in the Summary Compensation Table, total shareholder return (TSR), and peer group TSR, and (2) based on the information set forth in the new table, a clear description of the relationship between executive compensation actually paid to the company's named executive officers and the company's TSR, and a comparison of the company's TSR and the TSR of a peer group chosen by the company.
Statements made by the SEC Commissioners during the open meeting regarding the proposed rules are available here, and the SEC's proposing release is available here. The comment period for the proposed rules will expire 60 days after the proposed rules are published in the Federal Register. Set forth below is a summary of the proposed rules, highlights from the Commissioners' statements, and considerations for companies.
Summary of the Proposed Rules
New Tabular Disclosure under Item 402(v) of Regulation S-K. Section 953(a) of the Dodd-Frank Act instructs the Commission to adopt rules requiring companies to provide "a clear description of … information that shows the relationship between executive compensation actually paid and the financial performance of the issuer." To address this mandate, proposed Item 402(v) would require companies to include a new table (in the format set forth below...Read More
|SEC Votes Unanimously to Overhaul and Expand Regulation A; “Regulation A+” to Serve as an Exemption for Offerings up to $50 Million|
The Securities and Exchange Commission (SEC) voted unanimously on March 25, 2015 to expand significantly the ability of certain issuers to raise capital in transactions exempt from the registration requirements of the Securities Act of 1933. This new regime, commonly referred to as “Regulation A+,” is intended to create additional opportunities for companies to raise capital without having to comply with the more burdensome aspects of the traditional registration process. The adopting release, including text of the final rules, is available at https://www.sec.gov/rules/final/2015/33-9741.pdf.
The rules adopted by the SEC, as discussed by the Commissioners and SEC staff at the open Commission meeting, are similar to the rules initially proposed in December 2013, with some modifications. Significant aspects of Regulation A+ as adopted include:
- Offering limits / Two tier system. Issuers will be able to choose between two “tiers” of offering sizes under Regulation A+. Issuers electing to sell securities under Tier 1 will be limited to raising $20 million within a 12-month period, while those electing to sell under Tier 2 will be limited to $50 million within a 12-month period.
- Selling stockholders. Selling stockholders will be permitted in Regulation A+ offerings, and securities sold by selling stockholders will count towards the $20 million Tier 1 and $50 million Tier 2 annual limits. However, in an issuer’s first Regulation A+ offering or any subsequent Regulation A+ offering within twelve months of such first offering, securities sold by selling stockholders, whether or not affiliates, may not in the aggregate constitute more than 30% of the aggregate offering amount with respect to any such offering. In addition, at no time may aggregate sales by affiliates in any 12-month period under Regulation A+ be more than $6 million in the case of Tier 1 offerings or more than $15 million in the case of the Tier 2 offerings.
- Ineligible issuers. Regulation A+ will be limited to companies organized in and with their principal place of business in the United States or Canada. Companies that are not eligible to use the Regulation A+ exemption include reporting companies subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), companies that have failed to comply with their Regulation A+ reporting obligations at any time within the past two years, blank check companies, investment companies registered or required to be registered under the Investment Company Act of 1940...Read More
|Another SEC Sweep? – More Enforcement Actions for Failure to Update 13D Disclosures – This Time In Connection With Going Private Transactions|
Last Friday, the SEC announced that it had settled a string of 21C administrative proceedings brought against eight officers, directors, and shareholders of public companies for their failure to report plans and actions leading up to planned going private transactions. The SEC press release can be found here. In doing so, the SEC sent another strong reminder to those that beneficially own more than 5% of the equity securities of a public company to keep their 13D disclosures current.
The respondents included a lottery equipment holding company, the owners of a living trust, and the CEO of a Chinese technical services firm. According to the SEC, the respondents in each of these cases failed to report various plans and activities with respect to the anticipated going private transactions, including when the parties: (i) determined the form of the going private transaction; (ii) obtained waivers from preferred shareholders; (iii) assisted in arriving at shareholder vote projections; (iv) informed management of their plans to take the company private; and (v) recruited shareholders to execute on the proposals. In one case the respondents were charged for failure to report owning securities in the company that was going private. In another case, the respondents reported their transactions months or years later. The proceedings resulted in cease-and-desist orders as well as the imposition of civil monetary penalties ranging from $15,000 to $75,000 per respondent.
Generally, under Section 13(d), any person who acquires beneficial ownership of more than 5% of a registered class of equity securities must disclose certain information about the acquisition within ten calendar days. Item 4 of Schedule 13D requires that filers also “describe any plans or proposals which the reporting person may have which relate to or would result in . . . an extraordinary corporate transaction, such as a merger, reorganization or liquidation” or a going private transaction (emphasis added). Further, under Section13d-2(a), holders must file amendments to their 13D disclosures “promptly” if there are any material changes to the information disclosed in the schedule.
In its press release announcing the settlements, the SEC emphasized that amendments to beneficial ownership reports cannot be evaded by using boilerplate disclosure language. Andrew J. Ceresney, the Director of the Division of Enforcement, noted that, “stale generic disclosures that simply reserve the right to engage in certain corporate transactions ...Read More
|ISS Issues Guidance on Proxy Access Voting Policy and Other Key Policies|
On February 19, 2015, Institutional Shareholder Services (“ISS”) issued FAQs (available here) clarifying its policy on proxy access proposals as well as other key issues, including omission of shareholder proposals from company proxy materials in the absence of no-action relief from the Securities and Exchange Commission (“SEC”) staff, exclusive forum bylaws, and other bylaw amendments adopted without shareholder approval.
1. Proxy Access. Under the approach announced in the FAQs, ISS generally will support both shareholder and company proposals that provide for proxy access with the following features:
ISS will review any other restrictions on proxy access for reasonableness, and generally will oppose proposals with more restrictive features than those described above. If a company decides to submit two proxy access proposals for a shareholder vote—its own proposal and a shareholder proposal—ISS will review each proposal under its new policy.
- a maximum ownership threshold of no more than 3%
- a maximum ownership period of no more than three years for each member of the group of nominating shareholders;
- “minimal or no” limits on the number of shareholders that can form a nominating group; and
- a general cap on nominees at 25% of the board.
This approach provides more specific guidance than the policy ISS applied in prior years, which took a case-by-case approach that involved consideration of factors including ownership thresholds and duration, as well as company-specific considerations.
|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.
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