Securities Regulation and Corporate Governance


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)[1], the 20% Rule often is not an issue for physically settled convertible securities.[2] This has not been the case, however, for net share settled convertible securities (whether mandatory net share settled or flexible net share settled)[3], 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

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:

  • 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. 
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. 

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. 

Read More
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.     

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
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