Securities Regulation and Corporate Governance


SEC Staff provides additional disclosure guidance related to COVID-19 impact

​Due to the ongoing assessment of the impact of COVID-19 on companies' operations, liquidity and capital resources and overall economic and market conditions, companies should take special care in preparing for their quarterly reporting. To aid in this effort, the staff (the “Staff") of the Securities and Exchange Commission (“SEC") has posted a new set of questions that companies should consider in evaluating whether certain disclosures should be included in their earnings release and, in light of its potential materiality, in the management discussion and analysis (“MD&A") included in the periodic reports (e.g., the Form 10-Q for second quarter 2020).

On June 23, 2020, the Division of Corporation Finance of the SEC issued disclosure guidance in the form of CF Disclosure Guidance: Topic No. 9A (“Topic 9A") providing additional views regarding operations, liquidity, and capital resources disclosures that companies should consider with respect to business and market disruptions related to COVID-19. This complements CF Disclosure Guidance: Topic No. 9 (“Topic 9") published on March 25, 2020 (which was addressed on our previous post, available here).

Separately, on June 23, 2020, the SEC Chief Accountant issued a Statement on the Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19, highlighting the Office of the Chief Accountant's recent work to promote high-quality financial reporting, and its engagement with the Financial Accounting Standards Board, the Public Company Accounting Oversight Board, the International Accounting Standards Board, the International Organization of Securities Commissions, the International Federation of Accountants, and the Public Interest Oversight Board. This complements the Chief Accountant's previous Statement on the Im...

Key Considerations for Issuers and Auditors Regarding Going-Concern Analysis

Issuers in the United States and their auditors have related, but distinct, obligations to evaluate on a periodic basis whether there is substantial doubt about the issuer's ability to continue as a going concern.  In normal times, this evaluation, conducted with an appropriate level of diligence, results as to almost all major public companies in the conclusion that there is no substantial doubt about the entity's ability to meet its obligations in the months to come. 

But these are not normal times.  As the COVID-19 crisis takes an ever-greater toll on the American economy, and as multiple well-known companies declare bankruptcy, the going-concern assessment has taken on new relevance for issuers, auditors, and others in the financial-reporting community.  As a result, the number of issuer filings that contain a going-concern disclosure appears to have substantially increased. 

In our recent client alert, we review some of the significant considerations that apply to the going-concern analysis from both the issuer's and the auditor's perspectives.

Summary of Issues

  • Financial Accounting Standards Board (“FASB") accounting standards and Public Company Accounting Oversight Board (“PCAOB") auditing standards both require an assessment of whether there is substantial doubt about the issuer's ability to continue as a going concern, including evaluating concrete management plans to address the circumstances giving rise to the reasonable doubt.  The auditor is required to make an independent assessment, not simply evaluate manag...
SEC Adopts Final Rules to Improve Disclosures Relating to Acquisitions and Dispositions of Businesses

​On May 21, 2020, the Securities and Exchange Commission (“SEC") announced (available here) that it had adopted amendments to its rules and forms to improve and modernize required financial disclosures relating to acquisitions and dispositions of businesses.  The amendments were first proposed on May 3, 2019 (see related post here) and will become effective on January 1, 2021.  To provide more immediate benefits to investors, registrants and the market more generally, the SEC has announced that voluntary compliance will be permitted in advance of the effective date, provided that a registrant applies the final amendments in their entirety from the date of such voluntary compliance. 

The amendments (SEC Final Rule available here) seek to (1) assist registrants in making more meaningful determinations of whether a subsidiary or an acquired or disposed business is significant, and (2) improve the financial disclosure requirements applicable to acquisitions and dispositions of businesses, including real estate operations and investment companies.

The final amendments modify Regulation S-X, the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940.  Key changes are as follows:

Changes​ to Significance Tests under Rule 1-02(w)

  • Effective only in the context of acquisitions or dispositions, the “Investment Test" has been revised to compare the registrant's investments in and advances to the acquired or disposed business against the aggregate worldwide market value of the registrant's voting and non-voting common equity (when available). Aggregate worldwide market value is calculated by multiplying the aggregate number of shares of voting and non-voting common equity the registrant has outstanding by the price at which such common equity was last sold, or the average of the bid and asked prices of such common equity, in the principal market for such common equity.  For the purpose of the Investment Test, a registrant should use the average of aggregate worldwide market value calculated daily for the last five trading days of the registrant's most recently completed month ending prior to the earlier of the registrant's announcement date or agreement date of the acquisition or disposition.  Registrants should continue to apply the Investment Test in effect prior to the amendments in other contexts or in situations where the registrant does not have an aggr...
Nasdaq Provides Temporary Exemption from Certain Shareholder Approval Requirements in Response to COVID-19

On May 4, 2020, the SEC announced (available here) that it has immediately approved proposed rule changes by The Nasdaq Stock Market LLC (“Nasdaq") that provide listed companies with a temporary exception from certain shareholder approval requirements under the Nasdaq Rules (the “Rules") through and including June 30, 2020 (available here). 

By way of background, Nasdaq Listing Rule 5635(d) requires shareholder approval prior to issuance of shares of common stock (or securities convertible into or exercisable for common stock ) representing 20% or more of the outstanding common stock or voting power in a transaction other than a public offering (a “20% Issuance") at a price that is less than the Minimum Price (which is the lower of (i) the Nasdaq Official Closing Price reflected on immediately before the signing of the applicable binding agreement; and (ii) the average Nasdaq Official Closing Price of the common stock reflected on for the five trading days immediately before the signing of the applicable binding agreement).  In addition, Nasdaq Listing Rule 5635(c) requires shareholder approval prior to the issuance of securities when a stock option or purchase plan pursuant to which stock may be acquired by officers, directors, employees, or consultants is to be established or amended. Nasdaq has historically interpreted this rule to require shareholder approval for certain sales to officers, directors, employees or consultants when such issuances could be considered a form of equity compensation. 

Under the temporary rule changes (covering certain transactions where a binding agreement is entered into on or before June 30 as described below), the requirement for shareholder approval of a 20% Issuance and the requirement for shareholder approval if officers, directors, employees or consultants participate in a 20% Issuance are temporarily lifted under the rule changes, subject to certain conditions.  Nasdaq proposed these changes to exempt companies from the above requirements in response to the unprecedented economic uncertainty and resulting market declines related to the COVID-19 pandemic in order to streamline listed companies' access to capital. The exemption from the application of the equity compensation rules is intended to accommodate investor requests that a company's senior management put their personal capital at risk along with outside investors. 

The exemptions are available only in situations where the need for the transaction is due to circumstances related to COVID-19 and where a delay caused by securing shareholder approval would (i) have a material adverse impact on the company's ability to maintain operations under its pre-COVID-19 business plan; (ii) result in ...

SEC Releases COVID-19 FAQs to Provide Guidance on Disclosure Requirements and Form S-3

The SEC Division of Corporation Finance staff (the “Staff") has released a list of FAQs on COVID-19 for registrants (available here) that provides guidance on required disclosures under the SEC's COVID-19 Order and the application of such order to Form S-3 filings.  The FAQs and responses provided by the Staff as of May 5, 2020 are summarized below—please follow the link above to read the full text of the FAQs.

COVID-19 Order Questions:

1. What disclosure is required under the COVID-19 Order (Release No. 34-88465 (March 25, 2020), available here)? 

To take advantage of the extended filing deadline under the COVID-19 Order that provides conditional regulatory relief for certain filing obligations, a registrant must disclose on Form 8-K or Form 6-K (i) that it is relying on the COVID-19 Order; (ii) an explanation why the registrant could not file the form, schedule or report on a timely basis; (iii) the estimated date the form, schedule or report will be filed; and (iv) a company-specific risk factor or factors explaining the impact of COVID-19 on the registrant's business, if material. In circumstances in which the late filing is a result of an inability to obtain a required opinion, report or certification from a third party, such as the company's outside auditor, a statement from such third party is also required.

Form S-3 Questions:

1. May a registrant continue to conduct takedowns using an already-effective registration statement while relying on the COVID-19 Order for a periodic report, including a Form 10-K?

A registrant may continue to conduct takedowns if the prospectus complies with Section 10(a) of the Securities Act.  The COVID-19 Order does not exempt or delay compliance with requirements under the Securities Act.  Registrants will therefore need to consider the application of Section 10(a)(3) of the Securities Act, which requires that when a prospectus is used more than nine months after the effective date of a registration statement, the information therein shall be of a date not more than 16 months prior to such use, except to the extent such information cannot be furnished without unreasonable effort or expense.  Registrants will also need to evaluate whether facts or events have arisen since the effective date of the registration statement that constitute a “fundamental change" requiring an update to the registration statement.

2. With respect to an effective Form S-3, when must a registrant reassess its eligibility to remain o...

Now Available: COVID-19 Resources for Public Companies

Recognizing that public companies continue to be inundated with developing disclosure and governance requirements due to the COVID-19 pandemic, Gibson Dunn has created a list (with hyperlinks) of recent publications, releases, guidance, updates, and other useful resources from the SEC, PCAOB, NYSE, Nasdaq, proxy advisory firms, institutional investors, various state governors, and other relevant entities.  This list will be updated as new resources are released.  The most current version can be accessed by clicking here or the “COVID-19 Resources for Public Companies.pdf” link in the upper right corner of the main page of the Securities Regulation and Corporate Governance Monitor.​


NYSE and Nasdaq Propose Temporary Waivers of Certain Market Capitalization and Trading Price Listing Requirements

​In light of the market downturn and similar to action taken in the Great Recession, the NYSE and Nasdaq have proposed temporary waivers of certain market capitalization and trading price listing requirements.

The New York Stock Exchange

On April 3, 2020, the New York Stock Exchange (“NYSE") filed a proposal (available here) with the Securities and Exchange Commission (“SEC") requesting a suspension of the minimum $50 million market capitalization requirement under Section 802.01B (available here) of the NYSE Listed Company Manual (the “Listing Manual") and the $1.00 trading price requirement under Section 802.01C (available here) of the Listing Manual.  

The suspensions were proposed in response to the unusually high number of listed companies that may fall below (or have already fallen below) such requirements due to the unprecedented declines in the United States and global equities markets caused by the recent outbreak of the novel coronavirus (COVID-19) pandemic.  The proposed suspensions are in addition to the ongoing temporary suspension of the $15 million market capitalization standard of Section 802.01B of the Listing Manual (available here) through and including June 30, 2020, approved by the SEC on March 20, 2020 (available here), and also in addition to the temporary waiver of certain shareholder approval requirements for private placements (as previously discussed in our post here).

NYSE noted that its proposed waiver of the $1.00 trading price requirement is identical to the waiver implemented during the financial crisis in 2009.  Once approved, the suspensions will apply through and including June 30, 2020.

The Nasdaq Stock Market LLC

On April 17, 2020, the SEC announced (available here) that it has immediately approved proposed rule changes by The Nasdaq Stock Market LLC (“Nasdaq") that permit a longer period of time for companies to regain compliance with the bid price ...

PCAOB Update – PCAOB Seeks Input on CAMs and Comments on Emerging Markets

​Over the past several days, the PCAOB has taken a number of steps to make clear that it remains active during the COVID-19 crisis. For example, after issuing only one settled enforcement order during the first three months of 2020, the PCAOB has issued two settled orders in the past week. Both concerned smaller firms, but they serve to demonstrate that the Board is still carrying out its enforcement mandate.

Two other recent actions by the PCAOB also are worth highlighting: on April 17, the PCAOB requested comment from stakeholders on the implementation of its critical audit matters (CAM) standard,[1] and on April 21, PCAOB Chairman William Duhnke, together with SEC Chairman Jay Clayton and other SEC leadership, issued a statement concerning emerging market risks.[2]   We review both of these developments below.

SEC Chairman and Division of Corporation Finance Director Issue Joint Statement on COVID-19 Disclosures

​​​On April 8, 2020, Securities and Exchange Commission (“SEC") Chairman Jay Clayton and Division of Corporation Finance Director Bill Hinman issued a joint statement, available here (the “Statement") stressing the importance of COVID-19 disclosures (particularly forward-looking disclosures), and urging companies to provide as much information as is practicable regarding their current financial and operational status, as well as operational and financial planning. The Statement notes that the COVID-19 pandemic has shifted the global economic landscape and that the SEC recognizes that workers and businesses are facing profound challenges. 

The Statement stresses the importance of using upcoming earnings announcements and quarterly SEC filings to inform investors and the markets on how companies are responding to and mitigating the impacts of COVID-19 on their businesses in order to provide the public with information to both support the future economic recovery and promote informed investment decisions.  As a result, the Statement urges public companies to provide robust and meaningful disclosure, including reports that include forward-looking information.  In particular, the Statement expresses the following views on COVID-19 related disclosure:

  • Company disclosure should reflect the current state of affairs and outlook and plans for addressing the effects of COVID-19.  The Statement requests that companies provide as much information as is practicable regarding their current status (operational...
NYSE Provides Temporary Waiver of Certain Shareholder Approval Requirements for Private Placements

On April 6, 2020, the Securities and Exchange Commission (“SEC") announced (available here) that it has immediately approved the New York Stock Exchange's (“NYSE") proposed rule changes that temporarily waive certain shareholder approval requirements relating to private investments in public equity (PIPEs). The rule changes were proposed in light of the unprecedented disruption caused by COVID-19 and will apply through June 30, 2020. While these temporary waivers to Section 312.03 of the NYSE Listed Company Manual (the “Listing Manual") (available here) provide companies added flexibility in conducting PIPEs more quickly, companies must still obtain shareholder approval if required under any other applicable rule, including the equity compensation requirements of Section 303A.08 or the change of control requirements of Section 312.03(d) of the Listing Manual. For more information, please see our recent client alert (available here) discussing key considerations for PIPE transactions.

Section 312.03(b) – Issuance to a Related Party

Section 312.03(b) generally requires shareholder approval for any issuance of voting stock to a “Related Party," including the company's directors, officers or substantial security holders, if the number of shares of common stock to be issued or, if convertible, the number of shares of common stock into which the securities may be converted exceeds (i) 1% of the number of shares of common stock outstanding or (ii) 1% of the voting power outstanding before the issuance. There is a limited exception to this rule for cash sales of up to 5% of the company's outstanding stock to a substantial security holder at a price equal to at least the “Minimum Price" requirement set forth in Section 312.04(i). Minimum Price is defined as “a price that is the lower of: (i) the Official Closing Price immediately preceding the signing of the binding agreement; or (ii) the average Official Closing Price for the five trading days immediately preceding the signing of the binding agreement."

The new rule change waives, subject to certain conditions, shareholder approval requirements for cash tran...

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Current thoughts on development and trends in securities regulation, corporate governance and executive compensation published by Gibson Dunn.

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