Securities Regulation and Corporate Governance


ISS Releases Survey for 2017 Policy Updates

Institutional Shareholder Services (“ISS”) today launched its annual global policy survey.  Each year, ISS solicits comments in connection with the review of its proxy voting policies.  At the end of this process, in November 2016, ISS will announce its updated proxy voting policies applicable to 2017 shareholders’ meetings. ISS will publish the results from the policy survey and use them to inform its voting policy review. 

The survey includes questions on several governance and compensation matters relevant to U.S. companies, as follows:      

  • Pay-for-performance analysis.  ISS applies a quantitative screen as the first step in evaluating say-on-pay proposals.  Currently, this screen is based on TSR (total shareholder return), relative to a peer group over a three-year period, and on an absolute basis over a five-year period.  The survey asks whether ISS should incorporate additional financial metrics into the quantitative screen as a better way of assessing the alignment between pay and performance, and what metrics to include, such as measures tied to revenue, earnings, return (such as return on assets or return on equity), cash flow, economic profit or other benchmarks.


  • Board refreshment.  The survey asks about factors involving director tenure that may be viewed as raising concerns about a board’s refreshment and nominating process, including the absence of new directors who were appointed in recent years, “lengthy” tenure (which the survey describes as average tenure of more than ten or 15 years, a “high proportion” of directors with long tenure (which the survey describes as three-quarters of the board with service of ten years or more).  ISS has previously solicited comment on whether it should revise its voting policies on director elections to take into account director tenure, but has not yet done so.


  • “Overboarding” of executive chairs.  The survey asks whether executive chairs—that is, separate chairs who are not independent, but are not the company CEO—should be subject to the same limit on outside board service as public company CEOs or the higher limit applicable to other directors.  Under current ISS policies, public company CEOs (and other executives) are subject to a lower limit than other directors: two outside boards in addition to their own.  Other directors are subject to a total...Read More
Schedule 13G “Passive” Investor Status – When Being A Little Active Is Still Passive!
On Thursday, July 14, 2016, the Staff in the Division of Corporation Finance posted a new C&DI on Section 13(d) that provides stockholders (and issuers) with some helpful insights, and perhaps greater clarity, on when significant stockholders can engage in a dialogue with management and still remain on Schedule 13G.  As many practitioners know, Schedule 13G (the “short form” for reporting beneficial ownership of equity positions of 5% or more) often requires an affirmative certification from the reporting person(s) that the securities were not acquired, and are not held, with the purpose or effect of changing or influencing control of the issuer.   This is commonly referred to as the “passive” investor certification which is set forth at the end of Schedule 13G, directly above the signature line. 


In short, to report beneficial ownership on Schedule 13G the reporting person(s) must be “passive” (i.e., not active) with respect to any intent or attempt to exercise control over the issuer.  The only exception to this passive investor certification is for security holders who are either “grandfathered” or have acquired their securities gradually (i.e., those that acquired securities before the class of equity was registered with the SEC or have accumulated their stake slowly over time – less than 2% in any twelve-month period).  See Rule 13d-1(d) and Section 13(d)(6)(B) of the Exchange Act.  Of course, the certification (when required in order to report on 13G) begs the question of whether certain activities, such as submitting a 14a-8 shareholder proposal to management, lobbying for improved corporate governance measures or even pushing for increased share buybacks or dividends would (by itself) trigger a 13G amendment obligation and thus cause the reporting person(s) to have to report their ownership on Schedule 13D (the longer, more onerous, disclosure form and reporting regime) going forward.  

The new guidance posted on Thursday makes clear that certain limited activities, such as engaging management or the board in discussions regarding specified corporate governance topics including removal of a staggered board, majority voting standards for the election of directors, and/or elimination of poison pill rights plans, alone, would not cause the loss of 13G eligibility, so long as the purpose of the discussions is to improve corporate governance generally.  In a similar vein, discussions regarding executive compensation or matters of social or public inter...Read More

SEC Proposes Amendments to Update and Simplify Disclosure Requirements As Part of Overall Disclosure Effectiveness Review

At its July 13, 2016 open meeting, the Securities and Exchange Commission (the “Commission”) voted to propose amendments to certain disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded in light of subsequent changes to Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (“GAAP”), International Financial Reporting Standards (“IFRS”), and technology.  The release approved by the Commission (the “Proposing Release”) is part of the disclosure effectiveness review being conducted by the Commission’s staff (the “Staff”).  It is also part of the Commission’s work to implement the Fixing America’s Surface Transportation (FAST) Act, which, among other things, requires the Commission to eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated, or unnecessary.

At the meeting, the Commissioners and Staff focused on the principles used to approach the proposed amendments (the “Proposed Rules”), leaving discussion of the actual amendments for the Proposing Release, which is available here.  Below is a summary of the approaches taken by the Staff in the Proposing Release and examples of amendments that fall under those approaches.   

  • Redundant or Duplicative Requirements (Requirements that require substantially the same disclosures as GAAP, IFRS, or other Commission disclosure requirements). 
    • The Proposed Rules would delete these requirements in light of requirements elsewhere.
      • Examples:  The existing requirements proposed for deletion include provisions of Regulation S-X related to, among other things, foreign currency, consolidation, obligations, income tax disclosures, related parties, contingencies and earnings per share.  A complete table of the proposed amendments in this area begins on page 23 of the Proposing Release.
  • Overlapping RequirementsRead More
NASDAQ Proposes Disclosure of Third-Party Compensation for Directors and Nominees
NASDAQ has proposed changes to its listing standards to require disclosure of third-party compensation arrangements for directors and nominees.  After withdrawing an initial proposal on this subject, NASDAQ has revised the proposal, and it has been published in the Federal Register for public comment.  Comments are due on or before April 26, 2016.  The proposal is available here, and a redline showing proposed changes to the rule text begins on page 21 of the document.  

Under amendments NASDAQ is proposing to Rule 5250(b), NASDAQ companies would have to disclose all agreements and arrangements between any director, or director nominee, and any third party that provide for compensation or other payments in connection with the individual’s candidacy or service as a director.  The proposed rule would be construed broadly to apply to both compensation and other forms of payment, such as health insurance.  The disclosure requirement would not apply to reimbursement of expenses incurred in connection with serving as a nominee.  The proposal also addresses the following aspects of the proposed disclosure requirement:
  • Timing of disclosure.  The proposed rule would require disclosure of third-party compensation “either” on a company’s website or in the proxy statement for the next annual meeting.  Accordingly, where companies appoint directors during the year, it does not appear that waiting until the next proxy statement to disclose the compensation would comply with the rule.  Instead, companies could comply by including the material terms of a third-party compensation arrangement in the Form 8-K disclosure announcing the appointment.  Form 8-K requires disclosure of “any arrangement or understanding between [a] new director and any other persons, naming such persons, pursuant to which such director was selected as a director.”  If a company opts to make the initial disclosure on its website, the proposed rule is silent on the time frame for doing so.  After the initial disclosure, a third-party compensation arrangement “is subject to the continuous disclosure requirements of the proposed rule on an annual basis.”  The disclosure requirement ceases to apply upon the earlier of the director’s departure from the board or one year after termination of the ...Read More
When the Tail Wags the Unicorn: SEC Chair Voices Concerns About Pre-IPO Investments

On March 31, SEC Chair Mary Jo White gave a keynote address at Stanford University in which she discussed some of the SEC’s emerging priorities with respect to pre-IPO stage companies, private capital markets and fintech.  According to Chair White, the SEC is paying particular attention to the risks of fraud and investor confusion that can arise when companies choose to stay private longer. 

The federal securities laws historically have subjected private securities markets to reduced levels of regulation, so long as these markets are largely restricted to sophisticated investors—i.e., angel investors, venture capital firms and private equity firms—who are deemed to understand the risk that many of their investments may lose money, and quickly, along the way to a successful moonshot.  Chair White is concerned that this risk can be compounded by market pressures to show high valuations (particularly “unicorn” valuations of $1 billion), akin to the pressures faced by public companies to meet market expectations and projections.  In her view, the risk of loss from an overinflated valuation is ultimately borne not just by the sophisticated venture capital or sophisticated institutional investors, but also employees, retail investors and other deserving startups.  To mitigate the risk, Chair White suggested that large private companies consider, as appropriate, implementing enhanced governance structures and controls and adding to their boards outsiders with public company experience and regulatory, financial and industry expertise. 

As pre-IPO companies have stayed private longer, both primary and secondary markets for equity securities of pre-IPO companies have expanded significantly.  Chair White noted that the SEC is monitoring these markets for, among other things, disclosure and transparency issues, liquidity issues, unregistered broker-dealer activity, undisclosed compensation, conflict of interest issues, and fraudulent offers of pooled investment vehicles purporting to hold pre-IPO stock.  Chair White also voiced concerns regarding the use of derivative structures, which can be used to transfer the economic interest in a pre-IPO company without transacting in its stock.  Among other things, the SEC is concerned that use of these derivative structures may amplify any valuation errors.  Chair White stated that the SEC is relying on financial advisers to serve as gatekeepers with respect to the private securities markets. 

Chair White also reported that the SEC is monitoring the new methods of capital-raising created under the JOBS Act including:  Rule 506(c) (permitting general solicitation in Regulation D private placements), Regulation A+ (permitting offerings of up to $50 million in 12 ...Read More

FASB Modifies Accounting Rules for Stock-Based Compensation

On March 30, 2016, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2016-09, which amends ASC Topic 718, Compensation-Stock Compensation, to require changes to several areas of employee share-based payment accounting.  

In an effort to simplify share-based reporting, among other things, the update revises requirements in the following areas: 

  • Minimum Statutory Withholding: The new standard permits share-based withholding up to the maximum statutory tax rates, whereas currently an employer may only withhold up to the minimum statutory tax rate without causing the award to be classified as a liability.
  • Accounting for Income Taxes – The revised standard will require recording the tax effects of share-based payments at settlement or expiration on the income statement, whereas ASC 718 previously provided for tax benefits in excess of compensation cost and tax deficiencies to be reported in equity to the extent of any previous excess benefits, and then to the income statement.  Under the new rule excess tax benefits are also to be classified with other operating income tax cash flows as an operating activity.
  • Forfeitures – Whereas accruals of compensation cost are currently based on the number of awards that are expected to vest, the revised standard allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur.
  • Intrinsic Value Accounting for Private Entities:  Under the update, nonpublic entities will be permitted to make a one-time accounting policy election to switch from measuring all liability-classified awards at fair value to intrinsic value.

Read More

SEC Files Fraud Charges Against Public Biotechnology Company and its Officers for Alleged Materially Misleading FDA-Related Disclosures

On March 29, 2016, the SEC announced that it had filed fraud charges in U.S. federal court against AVEO Pharmaceuticals, Inc. (“AVEO”), a Massachusetts-based biotechnology company, and three of its former executives. The complaint alleges that AVEO and its former Chief Executive Officer, Chief Financial Officer and Chief Medical Officer violated the antifraud provisions of the federal securities laws by misleading investors about the company’s communications with the FDA during the approval process for tivozanib, AVEO’s leading product candidate being developed as a treatment for kidney cancer.

According to the complaint, the FDA raised concerns to AVEO in a May 2012 pre-NDA, or New Drug Application, meeting related to the survival rates of patients receiving tivozanib during AVEO’s first clinical trial of tivozanib relative to patients receiving the other compound, sorafenib, being used as a comparator in the trial. An NDA is the formal process by which a company seeks FDA approval of a new pharmaceutical for commercialization. In the pre-NDA meeting, FDA staff recommended that AVEO conduct a second clinical trial. The SEC alleged in its complaint that, for more than eleven months following the FDA’s recommendation of a second clinical trial, AVEO and the officers named in the complaint concealed from investors the extent of the FDA’s concerns about tivozanib and its recommendation that the company conduct a second clinical trial. Among other charges, the SEC alleged that: 

  • AVEO raised approximately $53 million in a public stock offering following the filing of the NDA, but failed to disclose in its offering materials the extent of the FDA’s concerns about tivozanib and its recommendation that the company conduct a second clinical trial.  
  • AVEO’s CEO and CFO knowingly approved and certified a press release and public filings that omitted information regarding the FDA’s recommendation of a second clinical trial, and suggested that data from “additional analyses” would satisfy the FDA’s concerns about survival rates among patients receiving tivozanib in the first clinical trial.  
  • AVEO’s CFO made statements at investor conferences suggesting that the FDA had only requested an explanation of the patient survival results from the first clinical trial, and omitted information about the FDA’s recommendation of a second clinical trial.  
  • AVEO filed a number of Exchange Act filings with the SEC which noted the FDA’s concerns about patient survival rates,...Read More
New SEC Staff Guidance on Describing Shareholder Proposals on Proxy Cards

On March 22, 2016, the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff”) issued a new Compliance and Disclosure Interpretation (C&DI) regarding how Rule 14a-8 shareholder proposals should be described on issuer proxy cards in compliance with Rule 14a-4(a)(3) of the Securities Exchange Act of 1934.  This C&DI was issued in response to complaints the Staff received from shareholder proponents about the lack of specificity on some companies’ proxy cards.

Rule 14a-4(a)(3) requires that the form of proxy “identify clearly and impartially each separate matter intended to be acted upon.”  The new C&DI states that, as a result, proxy cards “should clearly identify and describe the specific action on which shareholders will be asked to vote,” regardless of whether it is a company or shareholder proposal.

The C&DI then provides practical examples of the types of generic descriptions that the Staff will view as not satisfying the requirements of Rule 14a-4(a)(3).  Under the C&DI, the Staff would not view it as appropriate to describe:

  • a company proposal to amend a company’s certificate of incorporation to increase the authorized number of shares as “a proposal to amend our certificate of incorporation;” 

  • a shareholder proposal asking that the bylaws be amended to allow holders of 10% of a company’s common stock to call special meetings as “a shareholder proposal on special meetings;” or

  • a shareholder proposal in the following generic manners:  “a shareholder proposal on executive compensation,” “a shareholder proposal on the environment,” “a shareholder proposal, if properly presented” or “Shareholder proposal #3.”

The CD&I does not indicate that a shareholder proponent’s title or description of its own proposal is necessarily determinative of how that proposal should be identified on the company’s proxy card.  For example, if a shareholder captions her proposal as “Proposal on Special Meetings,” that description presumably still may not satisfy Rule 14a-4(a)(3).  Thus, a company remains ultimately responsible for determining how a shareholder proposal is described on the company’s proxy card. 

Because the Staff’s interpretation was based on Rule 14a-4, it applies only to how proposals are addressed on a company’s proxy card.  Nevertheless, we would expect the Staff to hold similar views in interpreting the requirement under Rule 14a-16(d)(6) ...Read More

One More Time! SEC Seeks to Re-Adopt Resource Extraction Disclosure Rules

On December 11, 2015, the Securities and Exchange Commission voted to propose a new rule implementing Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  That provision directs the SEC to promulgate rules requiring “resource extraction issuer[s]” (i.e., issuers that extract natural resources) to disclose payments they make to the U.S. government or foreign governments for the commercial development of oil, natural gas, or minerals.  The SEC’s latest action follows a ruling by a federal district court in Massachusetts directing the SEC to expedite its promulgation of a new rule implementing Section 1504. 

This is the SEC’s second attempt to adopt a rule implementing that Section.  The SEC’s prior rule, which was adopted in August 2012, was later vacated in 2013 by the U.S. District Court for the District of Columbia on the ground that it was arbitrary and capricious in two respects.  First, the court determined that the SEC had incorrectly construed Dodd-Frank as requiring that the agency make each issuer’s reports available to the public; and, second, the SEC had failed to provide a reasonable explanation for its refusal to provide an exemption for companies operating in countries that prohibit the disclosures.  Gibson Dunn represented the plaintiffs in that case. 

Today’s proposed rule again seeks to require resource extraction issuers to publicly file an annual report that would disclose the issuer’s payments to the U.S. and foreign governments.  And, like the first rule, the new proposed rule contains no exemptions for countries that prohibit the disclosures.  The SEC made clear, however, that it would consider exemptions on a case-by-case basis under its existing authority under the Securities Exchange Act of 1934. 

Based on the SEC’s statements today, we note the following additional points:

  • The proposed rule requires project-level reporting, where the term project is defined as the operational activities governed by a single contract, license, lease, concession or similar legal agreement and that form the basis for payment liabilities.
  • Under the proposed rule, resource extraction issuers would have to file an annual report that includes information regarding, among other things, the total amounts of payments to a government for each project, the total amount of payments to each government in the aggregate; the...Read More
“FAST” Act Legislation Enacted -- Potentially Significant Impact on Capital Markets

On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act, known as the “FAST Act.”  This five-year transportation bill also includes a number of provisions related to securities laws and capital-raising measures. The key securities law provisions of the FAST Act are summarized as follows:

Reforming Access for Investments in Startup Enterprises:

  • Codifies as new Section 4(a)(7) of the Securities Act the so-called “Section 4(a)(1½) exemption.”
  • Effective immediately, Section 4(a)(7) exempts from registration any resale transaction that meets certain conditions, including, among others, no general solicitation, participation only by accredited investors, no offering by the issuer, provision of certain basic financial and other information (for issuers that are neither subject to nor exempt from Exchange Act reporting requirements) and the securities must be of a class of securities that have been outstanding for more than 90 days. 
  • Facilitates the creation of a secondary market in securities of private companies, by clarifying the rules of the road for market participants.
  • Securities sold under Section 4(a)(7) will be “covered securities” under the Securities Act and thus will be exempt from certain aspects of state “blue sky” regulation.
  • Securities acquired in transactions exempt from Registration under the new Section 4(a)(7) will be deemed “restricted securities” within the meaning of Rule 144.
  • Use of 4(a)(7) is subject to “bad actor” disqualifications, similar to those under the current Regulation D regime.

Improving Access to Capital for Emerging Growth Companies:

  • Effective immediately, emerging growth companies under the JOBS Act (“EGCs”) may publicly file confidential submissions with the SEC only 15 days before a roadshow (reduced from 21).
  • An issuer that was an EGC when it confidentially submitted a draft registration statement to the SEC or publicly filed for its IPO, but subsequently falls out of EGC status, will continue to be treated as an EGC for one year or until consummation of its IPO, whichever is earlier.  This grace period, applicable to former EGCs, is effective immediately.
  • EGC Form S-1 or Form F-1 registration statements may omit Regulation S-X financial information for historical periods otherwise required as of the time of filing or confidential submission if all required information is provided to investors at the time a preliminary prospectus is distributed and the registrant reasonably believes that the omitted historical information will not be required at...Read More
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