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The Changes Keep Coming: SEC Updates C&DIs and NYSE Updates Rules for Revised “Smaller Reporting Company” Definition

On November 7, 2018, the Staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff") released four updated, and withdrew six, Compliance and Disclosure Interpretations (“C&DIs") in light of the June 2018 amendments to the definition of a smaller reporting company (“SRC").  We summarized the amendments to the SRC definition in our previous blog post here.

The updated C&DIs provide guidance regarding the implementation of the revised definition.  Similarly, the New York Stock Exchange (“NYSE") has proposed corresponding changes to Section 303A.00 of the Listed Company Manual to scale several of the NYSE listing requirements based on the revised definition of SRC. A summary of the new guidance and proposed rule changes follows.

Regulation S-K

Question 102.01

In this C&DI, the Staff confirmed that a company can be both a “smaller reporting company" and an “accelerated filer".  For example, if an issuer qualifies as both a SRC and an accelerated filer, such issuer may use the scaled disclosure requirements available to SRCs in its annual report on Form 10-K, but as an accelerated filer, must comply with the accelerated filer deadline and include the Sarbanes-Oxley Section 404 auditor attestation report. 

Question 102.02

This C&DI clarifies when a reporting company that initially fails to qualify as a SRC may subsequently be eligible for SRC status, assuming that its revenues or public float have sufficiently declined on the annual determination date (for example, in the case of a reporting company with a December 31 fiscal year that failed to meet the amended SRC definition criteria as of June 30, 2018 or thereafter ceases to qualify as a SRC as of a subsequent annual determination date).  For these reporting companies to qualify as a SRC, on the last day of the second fiscal quarter of the applicable year, the reporting company must either (1) have a public float of less than $200 million, or (2)(a) “for any threshold that it previously exceeded, [the reporting company] is below the subsequent annual determination threshold (public float of less than $560 million and annual revenues of less than $80 million)" and (b) “for any threshold that it previously met, it remains below the initial determination threshold (public float of less than $700 million or no public float and annual revenues of le...

Desktop Calendar of SEC Deadlines for 2019 Now Available

November is a good time to confirm plans for SEC reporting and capital markets transactions in the next year. To assist public companies in keeping track of the various filing deadlines, we have prepared a desktop reference calendar that sets forth filing deadlines for many SEC reports. To assist companies with planning capital markets transactions, including IPOs, our calendar also provides the staleness dates for 2019 (i.e., the last date financial statements may be used in a prospectus or proxy statement without being updated).

You can download a PDF of the 2019 SEC Filing Deadlines calendar at the link below.

Gibson Dunn SEC Filing Deadline and Staleness Calendar 2019.pdf

Gibson Dunn provides a range of other helpful resources on our website, from a guidebook for companies considering their initial public offering to illustrative timelines for securities offerings by existing public companies. For access to these and other resources and publications, please see Gibson Dunn's Capital Markets Practice Center.

For more information about current developments and trends in securities regulation, corporate governance and executive compensation, sign up for Gibson Dunn's Securities Regulation and Corporate Governance Monitor.  

 

Commonsense Principles 2.0 Released

On October 18, 2018, the Commonsense Principles 2.0 (the “Principles 2.0") were released.  They are an update to the Commonsense Principles of Corporate Governance (the “Previous Principles") developed in 2016 by a group of 13 business and investment leaders, including representatives of Berkshire Hathaway, BlackRock and State Street and the chief executive officers of several large public companies, available here, and discussed in a previous client alert.

An Open Letter accompanying the Principles 2.0 observes that in recent years, a number of other groups have issued their own statements on corporate governance, including the Investor Stewardship Group and Business Roundtable.  These statements, which are aimed in part at addressing “unhealthy short-termism," are also part of a broader effort to foster engagement among companies, boards and investors.  The signatories to the Principles 2.0 express their hope that ultimately, the many sets of corporate governance principles currently in circulation can be harmonized and consolidated, and reflect the combined views of companies and investors.  The 21 signatories to the Principles 2.0 include representatives of additional public companies and institutional investors such as AT&T, Coca-Cola, IBM, Johnson &...

ISS Proposes and Opens Comment Period on Board Diversity and Pay-for-Performance Policy Changes

On October 18, 2018, Institutional Shareholder Services (“ISS") announced a proposed U.S. proxy voting policy change to address board gender diversity.  In particular, ISS is seeking comment on its proposal to recommend negative votes for certain directors on boards that lack gender diversity.  ISS is also seeking comment on a proposed change to one of the metrics used to assess company performance as part of its pay-for-performance model.  

The proposed U.S. policy updates are available here and are summarized below.  Comments on the proposed changes can be submitted via e-mail to policy@issgovernance.com until 5 p.m. ET on November 1, 2018.  ISS will take the comments into account as part of its policy review and expects to release its final 2019 U.S. benchmark policy/proxy voting guidelines updates in the middle of November 2018.  It is important to note that ISS's final 2019 proxy voting policies, which will apply to shareholder meetings held on or after February 1, 2019, likely will reflect additional changes beyond these on which ISS has solicited comments. 

Proposed Board Diversity Policy Change

Under the proposal, ISS policy would state that, effective for meetings of public companies in the Russell 3000 and S&P 1500 held on or after February 1, 2020, ISS would generally recommend votes “against" (or “withhold" from) nominating committee chairs at companies when there are no female directors on the board.  Other directors responsible for the board nomination process could also be impacted on a case-by-case basis.  ISS would take into account certain mitigating factors under the proposed policy, including “a firm commitment [disclosed by the company] to appoint at least one female director to the board in the near term (before the next annual general meeting)" and “the presence of at least one female director on the board at the immediately preceding annual meeting." 

By way of background, beginning in 2018, ISS proxy research reports began noting whether a company's board lacked gender diversity; however, no adverse recommendations were issued to companies based on that situation.  As part of its annual process for reviewing and updating its benchmark policies that guide its proxy voting recommendations for the coming year, ISS is soliciting comments on this proposed policy change.  Among other things, ISS is seeking comment on whether other mitigating factors should be considered by ISS and what circumstances should ISS consider when evaluating whether to recommend “against" directors other than the chair of the nominating committee.  

ISS's proposed policy r...

The SEC Adopts Strategic Plan for 2018-2022

​On June 19, 2018, the Securities and Exchange Commission (the “SEC") published a draft strategic plan outlining the SEC's priorities through 2022 (the “Plan Draft"). As previously reported, the Plan Draft comprised three broad goals: focusing on retail investors, increasing innovation, and strengthening performance.

After seeking public comment on the Plan Draft until July 25, 2018, the SEC ultimately published the final strategic plan (the “Final Plan") on October 11, 2018. The Final Plan is an exact replica of the Plan Draft, save for the redaction of four names from Chairman Jay Clayton's “Message from the Chairman" in lieu of a general thank you to his fellow Commissioners. The change was likely precipitated by the departure of Commissioner Michael Piwowar in July and the subsequent appointment of Commissioner Elad Roisman to the SEC in September. While the Plan Draft also included a statement that the Commissioners hoped to “gain the benefit of additional outside perspectives" through the public review and comment process, the SEC ultimately stuck to its guns and adopted the Plan Draft in its entirety.

The Final Plan's first broad goal is to focus on the long-term interests of “Main Street" investors through five initiatives. First, the SEC intends to educate itself on the breadth of investment participation so as to better tailor its resources to the reality of modern capital markets. Armed with this knowledge, the SEC's subsequent mission is to enhance outreach and education in a way that reflects the diversity of modern investors and businesses. Additionally, the SEC plans to expand efforts in enforcement and deterrence of securities manipulation, fraud, and abuse, while also modernizing EDGAR and information delivery to make it easier for investors to acquire, and filers to disseminate, key information. Lastly, the SEC hopes to increase investment opportunities by expanding the amount of SEC-registered and exchange-listed companies in play.

The second goal for the SEC in the coming years is to stay abreast of technological innovation, particularly with an eye toward globalization. By continually learning and adapting, the SEC aims to make sure it remains an effective regulator. Moreover, the SEC intends to be self-reflective and self-critical when it comes to its current rules and procedures with the help of public feedback. While addressing the increase in cybersecurity risks for market participants, the SEC aspires to ...

Nasdaq Amends 20% Private Placement Shareholder Approval Rule

On September 26, 2018, the SEC approved a significant change to the price tests used in Nasdaq's 20% private placement shareholder approval rule, Nasdaq Rule 5635(d) (the “Private Placement Shareholder Approval Rule"), effective immediately. Rule 5635(d) is the Nasdaq shareholder approval rule that is often implicated in PIPE transactions (private investments in public equity) and other private offerings, including many private offerings involving convertible securities or warrants.  

Prior to the recent rule change, the Private Placement Shareholder Approval Rule exempted from shareholder approval offerings priced at or above the greater of book or market value per share.  The book value concept now has been eliminated from the rule, and the market value concept has been revised to incorporate a five-day average concept and to use the last closing price, instead of the consolidating closing bid price.  

Generally speaking, under the amended rule, a private offering involving a 20% or greater issuance will not require shareholder approval if the offering price is greater than or equal to the lesser of: (i) the last closing price immediately preceding the signing of a binding agreement and (ii) the average closing price of the common stock on Nasdaq for the five trading days immediately preceding the signing of the binding agreement. The amended rule also reflects certain other clean up and conforming changes.  

As was the case previously, in addition to applying to private offerings, the Private Placement Shareholder Approval Rule applies to certain SEC-registered offerings that Nasdaq does not consider to be “public offerings" under its interpretive material (e.g., many registered direct offerings). Note that the Rule 5635(d) amendments do not affect the other requirements to obtain shareholder approval under Rule 5635 in connection with certain acquisitions, in connection with a change of control or in connection with equity compensation. 

As amended, Rule 5635(d) now reads in its entirety as follows: 

 (d) Transactions other than Public Offerings

(1) For purposes of this Rule 5635(d):

(A) "Minimum Price" means a price that is the lower of: (i) the closing price (as reflected on Nasdaq.com) immediately preceding the signing of the binding agreement; or (ii) the average closing price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the binding agreement.

(B) "20% Issuance" means a transaction, other than a public offering as defined in IM-5635-3, involving the sale, issuance or potential issuance by the Company of common stock (or securities convertible into or exercisable for common stock), which alone or together with sales by officers, directors or Substantial ...

California Requires Public Companies Headquartered in California to Have Minimum Number of Women Directors on Board

​On September 30, 2018, Governor Jerry Brown signed SB 826 into law (effective January 1, 2019), requiring a minimum number of female directors on the boards of publicly traded corporations with principal executive offices in California. Under this new Section 301.3 to the California Corporation Code, the location of a corporation's principal executive office will be determined by the corporations' Annual Report on Form 10-K, and publicly traded corporation means any “corporation with outstanding shares listed on a major United States stock exchange."

A corporation covered by the law must have at least one female member on its board of directors by December 31, 2019, and additional female members by 2021 depending on the size of the board.  If the corporation has a board of directors with:

  • four members or less, no additional female directors are required
  • five members, the board must have at least two female directors by December 31, 2021, and
  • six or more members, at least three female directors are required to be in place by December 31, 2021. 

The California Secretary of State can impose fines of $100,000 for a first violation and $300,000 for subsequent violations.  Each board seat not filled by a female director for at least a portion of each year will count as a violation.  The Secretary of State can also impose fines of $100,000 for failure to comply with annual reporting requirements regarding board composition.  Specific provisions regarding the form and timing of these reporting requirements will be established by regulation.

As California Governor Brown acknowledged in his signing statement, this new law has “potential flaws that indeed may provide fatal to its ultimate implementation" and will likely be subject to challenge.  Potential challengers argue that the law violates the commerce clause and the equal protection clause of the US Constitution.  Internal affairs of a corporation, including the governance of a corporation, are generally governed by the law of the state in which it is incorporated, not where it is physically located.  California would bear the burden in showing a compelling interest in regulating the internal affairs of foreign corporations as it relates to its local interests if forced to defend the law against a commerce clause challenge.  More broadly, commentators have noted that a mandate based on gender classification at private organizations such as corporations could run afoul of the equal protection clause o...

Proposed Legislation Would Require Public Companies to Significantly Expand Their Climate-Related Disclosures

Proposed Legislation Would Require Public Companies to Significantly Expand Their  Climate-Related Disclosures

On September 24, 2018, U.S. Senator Elizabeth Warren (D-MA), along with seven co-sponsors, introduced bill S.3481, the Climate Risk Disclosure Act of 2018 (the “Bill").

If enacted, the Bill would require public companies to disclose a substantial amount of new information about their exposure to climate-related risks. The disclosure would be intended to provide more qualitative and quantitative information about the financial risks that result from both exposure to climate change and climate change mitigation and adaptation. The text of the Bill contends “many sectors of the economy of the United States are exposed to multiple channels of climate-related risk," “companies have a duty to disclose financial risks that climate change presents," and the Securities and Exchange Commission (the “SEC") “has a duty to promote a risk-informed securities market." The Bill is available here and its status in Congress can be tracked here.

The Bill would amend the Securities Exchange Act of 1934 (the “Exchange Act") to include a subsection entitled “Disclosures Relating to Climate Change." The new subsection would direct the SEC to issue final rules requiring any issuer required to file an annual report pursuant to Section 13(a) or 15(d) of the Exchange Act to disclose in its annual reports information regarding:

(A) the identification of, the evaluation of potential financial impacts of, and any risk-management strategies relating to…physical risks posed to the covered issuer by climate change and transition risks posed to the covered issuer by climate change; and

(B) a description of any established corporate governance process and structures to identify, assess, and manage climate-related risks.

The Bill defines "physical risks" as financial risks to long-lived fixed assets, locations, operations, or value chains that result from exposure to physical climate-related effects, including: (i) increased average global temperatures; (ii) increased severity and frequency of extreme weather events; (iii) increased flooding; (iv) sea level rise; (v) ocean acidification; (vi) increased frequency of wildfires; (vii)  decreased arability of farmland; and (viii) decreased availability of fresh water. And the Bill defines "transition risks" as financial risks that are attributable to climate change mitigation and adaptation, including e...

SEC Division of Corporation Finance Provides Interpretive Relief on New Disclosure Requirement

On September 25, 2018, the Division of Corporation Finance of the Securities and Exchange Commission (the "Staff") issued a new Compliance and Disclosure Interpretation ("C&DI") providing transition guidance and relief on reporting requirements under the disclosure update and simplification rules adopted on August 17, 2018 (the "Final Rules"). As discussed in our recent post (available here), the Final Rules become effective 30 days from publication in the Federal Register, but do not indicate whether the amendments should be applied to periodic reports covering periods ending on or after the effective date or to all periodic reports filed after the effective date.  (As of the date of this posting, the Final Rules have still not been published in the Federal Register.)  The timing is significant because the Final Rules require companies' quarterly reports on Form 10-Q to include a new statement of changes in stockholders' equity and to disclose the amount of dividends per share for each class of shares with respect to the interim period. 

The Staff's new interpretation set forth in Question 105.09 of the Exchange Act Forms C&DIs (available here) explains that the amendments are effective for all filings made after the effective date, but advises that, with respect to the new requirement to present changes in stockholders' equity and dividends per share in quarterly reports on Form 10-Q, the Staff would not object to issuers waiting to apply this requirement to interim periods beginning after the effectiveness of the Final Rules. As such, December 31 fiscal year companies may omit the new disclosure about changes in shareholders' equity from the third quarter 2018 10-Q. 

In its entirety, CD&I 105.09 and stated the following:

Question: On August 17, 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The amendments will become effective 30 days after publication in the Federal Register. Among the amendments is the requirement to present the changes in shareholders' equity in the interim financial statements (either i...

SEC Division of Corporation Finance Provides Interpretive Relief on New Disclosure Requirement

 

On September 25, 2018, the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff") issued a new Compliance and Disclosure Interpretation (“C&DI") providing transition guidance and relief on reporting requirements under the disclosure update and simplification rules adopted on August 17th, 2018 (the “Final Rules"). As discussed in our recent post (available here), the Final Rules become effective 30 days from publication in the Federal Register, but do not indicate whether the amendments should be applied to periodic reports covering periods ending on or after the effective date or to all periodic reports filed after the effective date. ( As of the date of this posting, the Final Rules have still not been published in the Federal Register.)  The timing is significant because the Final Rules require companies' quarterly reports on Form 10-Q to include a new statement of changes in stockholders' equity and to disclose the amount of dividends per share for each class of shares with respect to the interim period. 

The Staff's new interpretation set forth in Question 105.09 of the Exchange Act Forms C&DIs (available here) explains that the amendments are effective for all filings made after the effective date, but advises that, with respect to the new requirement to present changes in stockholders' equity and dividends per share in quarterly reports on Form 10-Q, the Staff would not object to issuers waiting to apply this requirement to reporting periods beginning after the effectiveness of the Final Rules. As such, December 31 fiscal year companies may omit the new disclosure about changes in shareholders' equity from the third quarter 2018 10-Q. 

In its entirety, CD&I 105.09 and stated the following:

Question: On August 17, 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The amendments will become effective 30 days after publication in the Federal Register. Among the amendments is the requirement to present the changes in shareholders' equity in the interim financial statements (either in a separate statement o...

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