|SEC To Propose Shareholder Proposal and Proxy Advisory Firm Rule Amendments|
On May 22, 2019 the SEC released its Spring 2019 Regulatory Flexibility Agenda (Reg Flex Agenda), available here. The Reg Flex Agenda identifies rulemaking projects that the SEC expects to address, and classifies those projects as being either in the “Proposed & Final Rule Stages," which reflects those that the SEC expects to propose over the coming year, and “Long-Term Actions," which includes those that the SEC is more likely to address over a longer timeframe.
Notably, the Reg Flex Agenda for the first time now identifies the following four rulemaking projects as among those that the SEC expects to address over the coming year:
- Proposing rule amendments regarding the thresholds for shareholder proposals under Rule 14a‑8;
- Proposing rule amendments to address certain advisors' reliance on the proxy solicitation exemptions in Rule 14a-2(b);
- Proposing rule amendments to modernize and simplify disclosures regarding Management's Discussion & Analysis (MD&A), Selected Financial Data and Supplementary Financial Information; and
- Proposing rule amendments to Securities Act Rule 701, the exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements, and Form S-8, the registration statement for compensatory offerings by reporting companies (previously listed as a longer term project.).
As is typical, the SEC did not provide any additional guidance for these items, but it is generally expected that the SEC rule proposals will include increasing the ownership and resubmission thresholds for Rule 14a-8 shareholder proposals. The SEC's current ownership thresholds are (i) a holding period of one year and (ii) ownership of at least $2,000 in market value of a company's shares. The SEC's current resubmission thresholds allow a company...
|Proposed Rule Changes Receive Mixed Reaction from SEC Commissioners Due to Impact on Auditor Attestation Requirement|
On May 9, 2019, the Securities and Exchange Commission announced (available here) proposed changes to the accelerated filer and large accelerated filer definitions.. The proposed rules (available here) are intended to promote capital formation for smaller reporting issuers by modifying the types of issuers that are categorized as accelerated and large accelerated filers. While the proposed changes would result in more lenient filing deadlines for some issuers, a potentially more significant impact is that, by increasing the number of non-accelerated filers, the changes would increase the number of issuers that are exempt from the requirement to have an auditor attest to management's assessment of internal control over financial reporting (ICFR).
The proposed amendments would:
(1) exclude from the accelerated and large accelerated filer definitions an issuer that (a) is eligible to be a smaller reporting company, and (b) had an annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available;
(2) increase the transition thresholds for accelerated and large accelerated filers becoming non-accelerated filers from $50 million to $60 million;
(3) increase the transition thresholds for exiting large accelerated filer status from $500 million to $560 million; and
(4) add a revenue test to the transition thresholds for existing both accelerated and large accelerated filer status.
As a result of the proposed amendments, smaller reporting companies with less than $100 million in revenues would not be required to obtain an attestation of their assessment of ICFR from an independent outside auditor. Such issuers would still be required to establish, maintain, and assess the effectiveness of their ICFR, though. The proposed amendments would also not change other key protections from the Sarbanes-Oxley Act of 2002, such as independent audit committee requirements and the CEO and CFO certifications of financial reports.
In a public statement of dissent (available here), Commissioner Robert J. Jackson Jr. argued that the proposal to roll back the requirement that auditors attest to the adequacy of certain companies' internal controls had “no apparent basis in evidence," alleging that the analysis of the costs of attestation was based on data over a decade old. He also criticized the proposal for not attempting to assess the investor-protection benefits of gatekeepers in the market.
|SEC Tweaks Revised Form 8-K and 10-Q Cover Pages|
As a result of amendments adopted by the Securities and Exchange Commission (SEC) on March 20, 2019 (available here, and discussed in our client alert available here), several SEC form cover pages were changed, effective May 2, 2019, including: Form 10-K, Form 10-Q, Form 8-K, Form 20-F, and Form 40-F.
Just prior to the May 2 effective date, the SEC released updated PDFs of these forms on its website (available here). To the surprise of most practitioners, the Form 8-K and Form 10-Q cover pages originally published by the SEC included the newly required information about securities registered pursuant to Section 12(b) of the Exchange Act at or near the bottom of the cover pages, which differed from where the Section 12(b) information has historically been included in the Form 10-K.
In the past day or two, the SEC revised the Form 8-K and Form 10-Q cover pages to bring them into closer alignment with the organization of the Form 10-K cover page. Specifically:
- In the Form 8-K, the table showing the “Title of each class," “Trading Symbol(s)," and “Name of each exchange on which registered" appears immediately after the checkbox for “Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))"; and
- In the Form 10-Q, the table showing the “Title of each class," “Trading Symbol(s)," and “Name of each exchange on which registered" appears immediately after the line “(Former name, former address and former fiscal year, if changed since last report)."
Links to commonly used forms are provided below for your convenience:
|SEC Proposes to Improve Disclosures Relating to Acquisitions and Dispositions of Businesses |
On May 3, 2019, the Securities and Exchange Commission announced (available here) proposed changes to existing disclosure requirements in connection with acquisitions and dispositions of businesses. The proposed rules (available here) are intended to: (1) improve financial disclosures regarding the acquisition and disposition of businesses, (2) facilitate more timely access to capital, and (3) reduce the complexity and compliance costs related to such disclosures.
The proposed rules, if adopted, would represent a modest but welcome change for registrants that are involved in M&A activity. A registrant is required to file financial statements of the target business and pro forma financials of the registrant if the acquisition is deemed “significant" under one of three tests set forth in Rule 1-02(w) of Regulation S-X: an investment test, an asset test and an income test. At times, these tests have resulted in a technical requirement to prepare and file financial statements of an acquired business even when the acquisition may not be material under other applicable analysis, such as when there is an anomaly in financial results in a particular year. Registrants have also struggled with providing three years of audited financial statements for target businesses that are not subject to SEC reporting requirements. Although the Staff has frequently granted waivers that alleviate this burden on a showing of cause, the proposed rules would significantly reduce the circumstances in which the time-consuming and uncertain waiver request process is undertaken. The proposed amendments to the significance tests are intended to reflect more accurately the relative significance to the registrant of the acquired business.
The following is a summary of some of the key changes proposed by the SEC:
Proposed Changes to Significance Tests
- Revise the “Investment Test" under Rule 1-02(w) to compare the investment in, and advances to, the acquired business against the aggregate worldwide market value of the registrant's voting and non-voting common equity, including shares held by affiliates, measured as of the last day of the registrant's most recent fiscal year, as opposed to the existing carrying value of the registrant's total assets (unless the registrant has no such equity value (such as a pre-IPO registrant), in which case the existing asset-based test would continue to apply);
- revise the “Income Test" under Rule 1-02(w) to add a new revenue component and t...
|SEC Streamlines Procedure for Confidential Treatment Extensions|
On April 16, 2019, the Division of Corporation Finance (the “Division") of the Securities and Exchange Commission (“SEC") announced streamlined procedures for confidential treatment extensions for material contracts where the Division has previously granted confidential treatment (available here). These procedures were announced in light of the recently adopted redacted exhibit rules that permit registrants to redact confidential information from certain exhibits without filing a confidential treatment request (for more on the redacted exhibit rules, see our related prior client alert and blog post). Under the SEC's rules, a registrant that has previously obtained a confidential treatment order for a material contract must file an extension application under Securities Act Rule 406 or Exchange Act Rule 24b-2 to continue to protect such confidential information from public release prior to the expiration of the existing order. Of note, a registrant cannot use the SEC's recently adopted redacted exhibit rules to refile a redacted material contract that was granted confidential treatment under the old rules, but instead must rely on the confidential treatment extension process.
To streamline the extension process, the Division has developed a non-exclusive new short form application (available here) that applies only to contracts where a confidential treatment order has previously been granted. The short form application, which is a one page document that should be emailed to CTExtensions@sec.gov, requires an applicant to affirm that the most recently considered application for a confidential treatment order continues to be true, complete and accurate and to indicate its request to extend the order for either three, five or 10 years. An applicant generally is not required to refile the unredacted material contract or provide supporting analysis; however, if the application reduces the redactions in the contract, it must publicly file the revised redacted version of the contract when it submits the short form application.
If the Division grants t...
|SEC Issues Guidance Relating to New Rules and Procedures for Redacting Confidential Information |
On April 1, 2019, the Division of Corporation Finance (the “Division") of the Securities and Exchange Commission (the “SEC") issued guidance relating to the recently adopted rules and procedures that permit registrants to redact confidential information from certain exhibits without filing a confidential treatment request (available here). The guidance provides additional information on the Division's process for reviewing redacted information and certain matters relating to the transition to the new rules and procedures.
As discussed in our prior client alert (available here), the SEC adopted final rules on March 20, 2019 to modernize and simplify disclosure requirements (the “Final Rules"). As part of the Final Rules, Item 601(b) of Regulation S-K was amended to permit registrants to file redacted material contracts and plans of acquisition, reorganization, arrangement, liquidation, or succession without applying for confidential treatment of the redacted information provided the redacted information (i) is not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed. Under the new rules and procedures, registrants must identify where information has been omitted from a filed exhibit by (1) marking the exhibit index to indicate that portions of the exhibit have been omitted, (2) including a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both not material and would likely cause competitive harm to the registrant if publicly disclosed, and (3) indicating with brackets where the information has been omitted from the filed version of the exhibit. These amendments to Item 601(b) became effective on April 2, 2019.
This aspect of the Final Rules has received significant attention since its adoption. On March 26, 2019, Commissioner Robert J. Jackson Jr. issued a dissent to the Final Rules (available here), criticizing the provisions that permit registrants to redact confidential information without filing a...
|SEC Proposes Offering Reforms for BDCs and Registered Closed-End Funds|
The Securities and Exchange Commission (the “Commission") on March 20 proposed rule amendments (collectively, the “Proposal") to improve access to capital and facilitate investor communications by business development companies (“BDCs") and registered closed-end funds (collectively, the “affected funds").
Under the Proposal, the affected funds could avail themselves of certain registration, communications, and offering processes currently available to operating companies. Certain of these processes have been in effect since Securities Offering Reform took effect in 2005. At the time, the Commission excluded all investment companies, including the affected funds, from the reforms.
Among other changes, the Proposal includes:
- Shelf Offering Process and New Short-Form Registration Statement
- Certain affected funds would be able to use a shelf registration process. A short-form registration statement would generally be available to an affected fund if it meets certain filing and reporting history requirements and has a public float of $75 million or more, similar to the current standard for operating companies. Funds using short-form registration statements would be required to include certain prospectus disclosure in their annual reports, as well as disclosure regarding material unresolved staff comments. Affected funds wou...
|SEC Continues to Modernize and Simplify Disclosure Requirements|
On March 20, 2019, the Securities and Exchange Commission (SEC) adopted amendments (available here) to modernize and simplify disclosure requirements for public companies, investment advisors, and investment companies (the Final Rules). The Final Rules form part of the SEC's ongoing efforts to simplify disclosure requirements. The Final Rules are largely consistent with the proposed amendments outlined in the SEC's October 11, 2017 proposing release (available here, and discussed in our client alert available here).
Among other things, the Final Rules:
- increase flexibility with respect to the discussion of historical periods in MD&A disclosure;
- permit redaction of certain immaterial information from material contracts without submitting an application for confidential treatment; and
- permit omission of schedules and attachments to exhibits provided that they do not contain material information.
The Final Rules relating to the redaction of confidential information in certain exhibits will become effective upon publication in the Federal Register. The remainder of the Final Rules will become effective 30 days after they are published in the Federal Register (with a few exceptions).
In light of these changes, registrants should take a fresh look at the disclosure in their Exchange Act reports, starting with the first quarter Form 10-Q. Registrants should review and update their compliance checklists.
We discuss the Final Rules in greater detail in our client alert (available here).
Our thanks to David Korvin in Washington D.C., Rob Kelley in New York and Jordan Rex in Houston for their assistance in preparing this summary and the related client alert.
|NYSE Amends Shareholder Approval Rule|
On March 20, 2019, the SEC approved changes to the NYSE's shareholder approval rule. The changes amend the price requirements that companies must meet to qualify for exceptions to the shareholder approval requirements under NYSE's rule 312.03(b) (related party issuances) and 312.03(c) (the 20% rule). The NYSE changes are comparable to changes made to Nasdaq's 20% shareholder approval rule in September 2018. Our prior post on the Nasdaq amendment can be found here.
The new rules replace the concept of “market value" with a “Minimum Price" for purposes of determining whether exceptions to the shareholder approval requirements apply. The Minimum Price is defined as the lower of (i) the official closing price on the NYSE as reported immediately preceding the signing of a binding agreement to issue securities, and (ii) the average of the official closing price for the five trading days immediately preceding the signing of a binding agreement to issue securities.
The NYSE amendment also eliminates the prior requirement that the price paid be no less than book value per share to qualify for the shareholder approval exceptions in Sections 312.03(b) and (c). The book value requirement has now been eliminated, leaving in place the requirement that price be at least equal to the Minimum Price. Note that all other requirements for shareholder approval under NYSE's rules remain unchanged.
A link to the NYSE rule 312.03 and 312.04 as amended can be found here.
A link to the SEC release approving the rule change can be found here.
A link to Nasdaq Rule 5635 as amended can be found here.
A special thank you to Blessing Havana and Eric Scarazzo in the New York office for their assistance with this post.
|SEC Proposes Long-Awaited Expansion of “Test-the-Waters” to All Issuers - Use With Caution|
On February 19, 2019, the Securities and Exchange Commission (the “SEC") proposed a new rule that would allow all issuers to engage in “testing the waters." Specifically, the SEC proposed an exemption (the “Proposed Rule") to certain provisions of Section 5 of the Securities Act of 1933 (the “Securities Act") commonly referred to as “gun-jumping" provisions. This exemption would permit any issuer or authorized person (e.g., an underwriter) to engage in oral or written communications with potential investors that the issuer reasonably believes are qualified institutional buyers (“QIBs") or institutional accredited investors (“IAIs"). Currently, this exemption to the gun-jumping provisions is only available to emerging growth companies (“EGCs"). The SEC believes that the Proposed Rule may “help issuers better assess the demand for and valuation of their securities," which may in turn “enhance the ability of issuers to conduct successful offerings and lower their cost of capital." This goal is consistent with the SEC's overall effort to increase the number of public companies and reduce the regulatory burden of capital raising.
The SEC'S press release announcing the Proposed Rule is available here, and the proposing release is available here.
EGCs have been permitted to provide information through test-the-waters communications since adoption of the JOBS Act in 2012, which dramatically changed the way in which IPOs and certain other securities offerings are conducted. The Proposed Rule would expand this option to all issuers, including larger companies planning an IPO or seasoned public companies that do not have a shelf registration statement on file, and would also extend to investment companies (including registered investment companies and business development companies). It may be particularly attractive to issuers who are interested in assessing market interest for their securities prior to creating any market disruption by publicly filing a registration statement that could signal a coming offering or investing considerable resources into conducting a formal roadshow against an uncertain market backdrop.
If approved, the Proposed Rule would permit all issuers to provide information to QIBs and IAIs (but only QIBs and IAIs). The Proposed Rule would not require that the issuer file such information or communication with the SEC or include any special legend on the communicatio...
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