Securities Regulation and Corporate Governance


New Twist for Old Shareholder Proposal Tactic

Each year some public pension funds and other institutional shareholders voluntarily file with the U.S. Securities and Exchange Commission (SEC) a Notice of Exempt Solicitation under Exchange Act Rule 14a-6(g).  This rule requires a person who owns more than $5 million of a company’s securities and who conducts an exempt solicitation of the company’s shareholders (in which the person does not seek to have proxies granted to them) to file with the SEC all written materials used in the solicitation.  However, these funds also file these Notices, which appear on EDGAR as “PX14A6G” filings, typically to respond to a company’s statement in opposition to a shareholder proposal included in the proxy statement or to otherwise encourage (but not solicit proxies from) shareholders to vote a specific way on shareholder proposals, say on pay proposals and in “vote no” campaigns. 

In a new twist, this week John Chevedden (the most prolific individual shareholder proponent given that he submits them in his own name and by using “proposal by proxy” to submit proposals for other shareholders) filed his first Notice of Exempt Solicitation.  Chevedden’s Notice addresses a proposal included in the AES Corp. proxy materials to ratify the company’s existing 25% special meeting ownership threshold.  The SEC staff previously concurred that AES could exclude from its proxy materials Chevedden’s shareholder proposal requesting a 10% special meeting threshold pursuant to Rule 14a-8(i)(9) because the company’s ratification proposal and the shareholder proposal conflicted.  See The AES Corp. (avail. Dec. 19, 2017). 

Chevedden’s filing consists of a “Shareholder Memo” to AES shareholders that criticizes the AES special meeting ratification proposal, includes a link to the SEC no-action letter concurring with the exclusion of Chevedden’s proposal, and urges shareholders to vote “against” the AES ratification proposal.  Chevedden’s Notice is available here.  (Chevedden subsequently filed a similar, but lengthier, notice at CF Industries Holdings, Inc. even before the company filed its definitive proxy statement, which is available here.)

Chevedden likely does not own more than $5 million in AES stock.  In fact, his broker letter provided to AES states that he owned “no fewer than” 250 AES shares as of October 13, 2017.  (Assuming he owned 250 shares, the value of those shares based on the closing price on that date was less than $2,900.)  However, the SEC has not to date restricted shareholders owning less than $5 million of a company’s stock from making...

S&P 500 Pay Ratio Disclosures: Emerging Trends

As the 2018 proxy season is now gaining full speed, the first group of the required CEO-to-median employee pay ratio disclosures have made their eagerly-awaited debut.  Gibson Dunn has been tracking all required pay ratio disclosures by S&P 500 and Fortune 100 companies and, while still early, there are a number of key observations and emerging trends from the filings to date.

Background.  In August 2015, the SEC adopted final rules implementing Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The rules, set forth in Item 402(u) of Regulation S-K, require pay ratio disclosures for fiscal years beginning on or after January 1, 2017. The central components of the required disclosure are (1) the median employee’s annual total compensation, (2) the CEO’s annual total compensation, (3) the ratio of these two figures, and (4) additional narrative disclosure addressing topics such as the date and method used to identify the company’s median compensated employee. Generally, the rules permit the use of several exemptions and adjustments to the pay ratio calculation in order to reduce compliance costs for companies. In addition, as emphasized in the SEC’s September guidance, the new rules grant reporting companies wide flexibility on the method used for identifying the median employee.

Emerging Trends and Data as of March 9, 2018

Overview.  As of March 9, 2018, 61 S&P 500 companies have reported required pay ratios, most commonly in a definitive proxy statement.  The average pay ratio among these companies is 204:1, ranging from a high of 935-to-1 to a low of 12-to-1.

Location in the Filing.  The majority of disclosures (or 77%) have appeared in proxy statements after the tabular disclosure required by Item 402 of Regulation S-K for named executive officer compensation (the “Compensation Tables”).  Most of the rest of the disclosures have appeared in the CD&A, among the Compensation Tables or between those two sections.  The specific location of the disclosure may depend on the organization of a company’s proxy statement sections, as well as other factors such as the visibility a company intends for the disclosure and its desire to separate the disclosure from other sections (such as the say-on-pay proposal).

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

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

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


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

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

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

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

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

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

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

SEC Operating Status

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

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

Technical Points To Remember When Preparing Your Form 10-K

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

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

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

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

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

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

Staff Accounting Bulletin No. 118

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

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

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

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

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

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

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


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

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

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

The new and revised C&DIs are available here.

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

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

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

  • provide...
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