Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

On March 12, 2020, the Securities and Exchange Commission adopted long-awaited amendments to the accelerated filer and large accelerated filer definitions with the stated goal of “reduc[ing] unnecessary burdens for certain smaller issuers while maintaining investor protections.” The final rules closely track the initially proposed version of the rules which were released following the split vote of the Commissioners in May 2019.

The final rules:

  • Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller reporting company (“SRC”) and that has annual revenue of less than $100 million in the most recent fiscal year for which audited financial statements are available (“SRC revenue test”);
  • Exempt issuers meeting the SRC revenue test from the requirements applicable to an accelerated or large accelerated filer including, most notably, the required auditor attestation of management’s assessment of internal controls over financial reporting (“ICFR”);
  • Include a specific provision excluding business development companies from the accelerated and large accelerated filer definitions;
  • Add a new check box to annual filings on Form 10-K, 20-F and 40-F to indicate the inclusion of an auditor attestation over ICFR;
  • Increase the public float transition threshold for accelerated and large accelerated filers to become a non-accelerated filer from $50 million to $60 million;
  • Increase the exit threshold in the large accelerated filer transition provision from $500 million to $560 million in public float; and
  • Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status.

Relief from SOX 404(b) for certain SRCs and BDCs

In June 2018, the Commission adopted amendments to the SRC definition (as discussed here) to expand the number of issuers that qualify for scaled disclosure accommodations thereunder by increasing the applicable thresholds under the “public float test” (from less than $75 million to less than $250 million) and the “revenue test” (to include issuers with annual revenues of less than $100 million if they have no public float or a public float of less than $700 million). In conjunction with these amendments, the Commission also revised the accelerated filer and large accelerated filer definitions in Rule 12b-2 to remove the condition that, for an issuer to be an accelerated filer or a large accelerated filer, it must not be eligible to use the SRC accommodations. One result of these amendments is that issuers can now be categorized as both SRCs and accelerated or large accelerated filers. The expansion of the SRC accommodations in 2018 did not, however, extend similar relief to SRCs from the requirement to have an independent auditor attest to, and report on, management’s assessment of the effectiveness of the issuer’s under SOX Section 404(b).

The Commission’s newest amendments exclude from the definitions of accelerated filer and large accelerated an issuer that is eligible to be an SRC and has annual revenue of less than $100 million in the most recent fiscal year thereby meeting the SRC revenue test. The most notable effect of the amendments would be that an issuer that is eligible to be an SRC and that meets the SRC revenue test would not be subject to the requirements of SOX Section 404(b). The amendments also allow business development companies (“BDCs”) to qualify for this exclusion if they meet the requirements of the SRC revenue test using their annual investment income as the measure of annual revenue, although BDCs would continue to be ineligible for the other scaled disclosures available to SRCs.

The final rules release highlights that that the ICFR auditor attestation requirement is disproportionally costly to small and low-revenue issuers and notes the Commission’s expectation that reducing these costs would have a more beneficial impact on small an low-revenue issuers than it would for other issuers. In addition, the final rules cite the following as additional factors supporting relief from the SOX 404(b):

  • Low-revenue SRCs may be less susceptible to certain misstatements, such as those related to revenue recognition.
  • Issuers with revenues of less than $100 million have lower restatement rates than those for higher-revenue issuers and are likely have less complex financial systems and controls.
  • Applicable issuers’ financial statements may be less critical to assessing their valuation.

Modifications to Applicable Forms (Form 10-K, Form 20-F, Form 40-F)

The final amendments include a requirement for an issuer to prominently disclose in its filing whether an ICFR auditor attestation is included. As such, upon effectiveness of the final rules, a new check box will be added to the cover pages of Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is included in an annual report filing. Once issuers are required to tag the cover page disclosure data using Inline XBRL, they will also be required to tag this cover page check box disclosure pursuant to Item 406 of Regulation S-T.

Increase to Public Float Transition Threshold for Accelerated and Large Accelerated Filers

The new rules also revise the transition threshold for becoming a non-accelerated filer from $50 million to $60 million and provide a transition threshold for leaving the large accelerated filer status from $500 million to $560 million reflecting the Commission’s belief that the prior thresholds were too low and result in more issuers than intended being classified as an accelerated or large accelerated filer. Additionally, the SRC revenue test will be added to the public float transition thresholds for accelerated and large accelerated filer such that an issuer’s annual revenues will factor into determining whether an accelerated filer could become a non-accelerated filer, or whether a large accelerated filer could become an accelerated or non-accelerated filer.

Transition Guidance

The final amendments become effective 30 days after they are published in the Federal Register and will apply to an annual report filing due on or after the effective date. However, even if an annual report is for a fiscal year ending before the effective date, the issuer may apply the new rules to determine its status as a non-accelerated, accelerated, or large accelerated filer. As such, an issuer that determines it is eligible to be a non-accelerated filer under the final amendments will not be subject to the ICFR auditor attestation requirement for its annual report due and submitted after the effective date of the amendments and may comply with the filing deadlines that apply, and other accommodations available, to non-accelerated filers.

FASB has issued an Accounting Standards Update (ASU) that provides temporary optional guidance to ease the potential burden in accounting for reference rate reform.  Reference rate reform is the process of migrating away from LIBOR and other interbank offered rates to new reference rates.

FASB stakeholders raised certain operational challenges likely to arise in accounting for contract modifications and hedge accounting because of reference rate reform. Some of those challenges relate to the significant volume of contracts and other arrangements, such as debt agreements, lease agreements, and derivative instruments, which will be modified to replace references to discontinued rates with references to replacement rates.

The amendments in the ASU provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The amendments in the ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and are retained through the end of the hedging relationship.

The SEC published guidance to assist public companies, investment companies, shareholders, and other market participants affected by COVID-19 with their upcoming annual shareholder meetings.  The guidance is designed to facilitate the ability of companies to hold these meetings, including through the use of technology, and engage with shareholders while complying with the federal securities laws.

Changing the Date, Time, or Location of an Annual Meeting

According to the guidance, the staff understands that some issuers are contemplating possible changes in the date, time, or location of their annual meetings due to the difficulties arising from COVID-19.  In light of these difficulties, the staff will take the position that an issuer that has already mailed and filed its definitive proxy materials can notify shareholders of a change in the date, time, or location of its annual meeting without mailing additional soliciting materials or amending its proxy materials if it:

  • issues a press release announcing such change;
  • files the announcement as definitive additional soliciting material on EDGAR; and
  • takes all reasonable steps necessary to inform other intermediaries in the proxy process (such as any proxy service provider) and other relevant market participants (such as the appropriate national securities exchanges) of such change.

The SEC expects issuers to take these actions promptly after making a decision to change the date, time, or location of the meeting and sufficiently in advance of the meeting so the market is alerted to the change in a timely manner.  To the extent that issuers have not yet mailed and filed their definitive proxy materials, they should consider whether to include disclosures regarding the possibility that the date, time, or location of the annual meeting will change due to COVID-19.  Such determination should be made based on each issuer’s particular facts and circumstances and the reasonable likelihood of such a change.

“Virtual” Shareholder Meetings

COVID-19 has generated increased interest in virtual shareholders’ meetings where permitted by state law.  According to the SEC, to the extent an issuer plans to conduct a “virtual” or “hybrid” meeting, the staff expects the issuer to notify its shareholders, intermediaries in the proxy process, and other market participants of such plans in a timely manner and disclose clear directions as to the logistical details of the “virtual” or “hybrid” meeting, including how shareholders can remotely access, participate in, and vote at such meeting.  For issuers that have not yet filed and delivered their definitive proxy materials, such disclosures should be in the definitive proxy statement and other soliciting materials.  Issuers that have already filed and mailed their definitive proxy materials would not need to mail additional soliciting materials (including new proxy cards) solely for the purpose of switching to a “virtual” or “hybrid” meeting if they follow the steps described above for announcing a change in the meeting date, time, or location.

Presentation of Shareholder Proposals

Exchange Act Rule 14a-8(h) requires shareholder proponents, or their representatives, to appear and present their proposals at the annual meeting.  In light of the possible difficulties for shareholder proponents to attend annual meetings in person to present their proposals, the staff encourages issuers, to the extent feasible under state law, to provide shareholder proponents or their representatives with the ability to present their proposals through alternative means, such as by phone, during the 2020 proxy season.

Furthermore, to the extent a shareholder proponent or representative is not able to attend the annual meeting and present the proposal due to the inability to travel or other hardships related to COVID-19, the staff would consider this to be “good cause” under Rule 14a-8(h) should issuers assert Rule 14a-8(h)(3) as a basis to exclude a proposal submitted by the shareholder proponent for any meetings held in the following two calendar years.

The FTC recently released the following information.  Due to the developing COVID-19 coronavirus pandemic, and consistent with guidance from the Office of Personnel Management, the Premerger Notification Office (PNO) will implement a temporary e-filing system. During this emergency, all filings must be submitted via this system, and all hard copy and DVD submissions will be suspended. Key facts are as follows:

  • The PNO will be open to accept hard copy and DVD Hart-Scott-Rodino filings until Friday March 13, 2020 at 5:00 p.m.
  • The PNO will not accept any filings on Monday, March 16, 2020.
  • Beginning at 8:30 am on Tuesday, March 17, 2020, the PNO will accept HSR filings only via the temporary e-filing system.
  • The system will involve uploading documents to a secure Accellion file-transfer platform using the same file formats as specified for DVD filings on the Style Sheet for Hart-Scott-Rodino Filings.
  • While this temporary system is in place, early termination will not be granted for any filing.
  • The Department of Justice will implement the same procedures.

You can find further information on the electronic filing procedures here.

 

The SEC has adopted amendments to the accelerated filer and large accelerated filer definitions. The amendments exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller reporting company and that had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. As a result of the amendments, issuers that had annual revenues of less than $100 million will not be required to have their management’s assessment of the effectiveness of internal control over financial reporting (“ICFR”) attested to, and reported on, by an independent auditor. Such issuers will remain obligated, among other things, to establish and maintain ICFR and have management assess the effectiveness of ICFR.

The amendments add a check box to the cover pages of Forms 10-K, 20-F, and 40-F to indicate whether an internal control over financial reporting auditor attestation is included in the filing.

The amendments also increase the transition thresholds for accelerated and large accelerated filers becoming non-accelerated filers from $50 million to $60 million, and for exiting large accelerated filer status from $500 million to $560 million. Further, the amendments add a revenue test to the transition thresholds for exiting from both accelerated and large accelerated filer status.

ISS has launched a new specialty Climate Voting Policy. Other specialty voting policies maintained by ISS include SRI, Sustainability, Faith-Based, Taft-Hartley, and Public Fund policies.

According to ISS, five key topical pillars undergird the Climate Voting Policy:

  • Sector-specific materiality using ISS’ Carbon Risk Classification (CRR).
  • Disclosure signals based on climate disclosure indicators aligned with TCFD disclosure requirements.
  • Norms violations, based on any violations of globally recognized climate norms.
  • Current climate performance signals, such as greenhouse gas (GHG) emission intensity, following GHG Protocol’s carbon accounting methodology for Scope 1-3 GHG emissions.
  • Future climate performance signals, drawing from ISS’ Carbon Risk Ratings (CRR).

The Climate Voting Policy coverage universe will initially span approximately 3700 companies globally, across more than 20 capital market main indices, including: the U.S. (S&P 500 & Russell 1000); U.K. (FTSE 100); Germany (DAX 30); Australia (ASX 200); France (CAC 40); OMX Copenhagen 20; OMX Stockholm 30; and the STOXX Europe 600.  ISS plans to expand the coverage universe over time.

The SEC announced that it is providing conditional regulatory relief for certain publicly traded company filing obligations under the federal securities laws.  The impacts of the coronavirus may present challenges for certain companies that are required to provide information to trading markets, shareholders, and the SEC. These companies may include U.S. companies located in the affected areas, as well as companies with operations in those regions.

To address potential compliance issues, the Commission has issued an Order that, subject to certain conditions, provides publicly traded companies with an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020.

In connection with the Order, the Commission staff will take the following positions with respect to certain obligations under the Securities Act and the Exchange Act:

  • For purposes of eligibility to use Form S-3 (and for well-known seasoned issuer status, which is based in part on Form S-3 eligibility), a company relying on the exemptive Order will be considered current and timely in its Exchange Act filing requirements if it was current and timely as of the first day of the relief period and it files any report due during the relief period within 45 days of the filing deadline for the report.
  • For purposes of the Form S-8 eligibility requirements and the current public information eligibility requirements of Rule 144(c), a company relying on the exemptive Order will be considered current in its Exchange Act filing requirements if it was current as of the first day of the relief period and it files any report due during the relief period within 45 days of the filing deadline for the report.
  • Companies that receive an extension on filing Exchange Act annual reports or quarterly reports pursuant to the Order will be considered to have a due date 45 days after the filing deadline for the report. As such, those companies will be permitted to rely on Rule 12b-25 if they are unable to file the required reports on or before the extended due date.

The Order applies to registrants (as defined in Exchange Act Rule 12b-2) subject to the reporting requirements of Exchange Act Section 13(a) or 15(d), and any person required to make any filings with respect to such a registrant.  Such persons are exempt from any requirement to file or furnish materials with the Commission under Exchange Act Sections 13(a), 13(f), 13(g), 14(a), 14(c), 14(f), 15(d) and Regulations 13A, Regulation 13D-G (except for those provisions mandating the filing of Schedule 13D or amendments to Schedule 13D), 14A, 14C and 15D, and Exchange Act Rules 13f-1, and 14f-1, where the conditions below are satisfied.

The conditions to be satisfied are:

  • The registrant or any person required to make any filings with respect to such a registrant is unable to meet a filing deadline due to circumstances related to COVID-19;
  • Any registrant relying on the Order furnishes to the Commission a Form 8-K or, if eligible, a Form 6-K by the later of March 1 or the original filing deadline of the report stating:
    • that it is relying on the Order;
    • a brief description of the reasons why, it could not file such report, schedule or form on a timely basis;
    • the estimated date by which the report, schedule, or form is expected to be filed;
    • if appropriate, a risk factor explaining, if material, the impact of COVID-19 on
    • its business; and
    • if the reason the subject report cannot be filed timely relates to the inability of any person, other than the registrant, to furnish any required opinion, report or certification, the Form 8-K or Form 6-K shall have attached as an exhibit a statement signed by such person stating the specific reasons why such person is unable to furnish the required opinion, report or certification on or before the date such report must be filed.
  • The registrant or any person required to make any filings with respect to such a registrant files with the Commission any report, schedule, or form required to be filed no later than 45 days after the original due date; and
  • In any report, schedule or form filed by the applicable deadline pursuant to the immediately preceding bullet point, the registrant or any person required to make any filings with respect to such a registrant must disclose that it is relying on the Order and state the reasons why it could not file such report, schedule or form on a timely basis.

The Order also provides that a registrant or any other person is exempt from the requirements of the Exchange Act and the rules thereunder to furnish proxy statements, annual reports, and other soliciting materials, as applicable (the “Soliciting Materials”), and the requirements of the Exchange Act and the rules thereunder to furnish information statements and annual reports, as applicable (the “Information Materials”), where the conditions below are satisfied.

The conditions to be satisfied are:

  • The registrant’s security holder has a mailing address located in an area where, as a result of COVID-19, the common carrier has suspended delivery service of the type or class customarily used by the registrant or other person making the solicitation; and
  • The registrant or other person making a solicitation has made a good faith effort to furnish the Soliciting Materials to the security holder, as required by the rules applicable to the particular method of delivering Soliciting Materials to the security holder, or, in the case of Information Materials, the registrant has made a good faith effort to furnish the Information Materials to the security holder in accordance with the rules applicable to Information Materials.

The Delaware Court of Chancery considered a number of issues in Skye Mineral Investors, LLC et al v DXS Capital (U.S.) Limited et al.  The dispute was among members of a Delaware limited liability company, Skye Mineral Partners, LLC (“SMP”). SMP’s majority members alleged that its minority members orchestrated a scheme wrongfully to divest SMP of its lone asset, a wholly owned operating subsidiary, CS Mining, LLC (“CSM”), by driving CSM into bankruptcy and then buying its assets at a steep discount in an auction sale conducted under Section 363 of the United States Bankruptcy Code.

Among other things, the Plaintiffs claimed the minority members of SMP intentionally used their blocking rights to cause harm to SMP in a manner that was not exculpated by the clear terms of SMP’s constitutive documents.

The Defendants countered noting that the LLC Agreement provided that “except as otherwise specifically provided in this Agreement, all votes, approvals, or consents of a Member may be given or withheld, conditioned or delayed, as such Member may determine in such Member’s sole and absolute discretion.”  According to Defendants, the “sole discretion” language was an unambiguous waiver of any “Member-level fiduciary duty.”

The Court rejected the Defendants’ argument.  According to the Court, if the SMP Agreement’s drafters wished to exempt members from the fiduciary duty of loyalty, they could do so only with express disclaimer language, not “by implication.” In the Complaint, the Plaintiffs alleged member fiduciaries took a “bad faith action to injure [SMP] for [their] own personal advantage.” The Court stated this allegation implicates the “core aspect of the duty of loyalty,” which the “sole discretion” language cannot “coyly” eliminate. Citing precedent, the Court stated “To the extent that an Agreement purports to insulate a [fiduciary] from liability even for acts of bad faith . . . it should do so in the most painstakingly clear terms.” The Court added the day may come when the Court must decide whether to enforce express language that “permits a [fiduciary]—by its unmistakable terms—to exercise its discretion in bad faith,” but that day had not arrived.

The Court made the ruling on a motion to dismiss and has not found any Defendant liable.

Shawn Severson is the owner and manager of EnergyTech Investor, LLC.  Between August 2015 and March 2018, UQM Technologies, Inc., or UQM, retained Severson, through EnergyTech Investor and another firm, to provide investor relations services and advice in exchange for a monthly fee. During this time, Severson provided various services to UQM that included, among other things, assisting with press releases, communicating with investors, and preparing written materials.

From December 2015 until April 2016, Severson published a series of newsletters about UQM. Severson posted these newsletters on EnergyTech Investor’s web site and distributed them through EnergyTech Investor’s social media accounts and email lists. Each of the newsletters contained several pages of positive content about UQM’s products, sales, and business prospects, as well as a full page of data concerning UQM’s stock performance, which prominently featured the phrase “consensus recommendation” followed with “buy” in bold text.

In the newsletters published during that time frame, Severson described EnergyTech Investor as an “independent research and publishing organization,” and included a disclosure that stated, “In some instances, we may be compensated by Companies mentioned in the report.” Severson failed to disclose that he was, in fact, being compensated by UQM, or the amount of his compensation. Of the compensation Severson received from UQM, $5,300 was attributable to his creation and distribution of these electronic newsletters.

In a settled enforcement action the SEC found Severson violated Section 17(b) of the Securities Act, which prohibits publishing, giving publicity to, or circulating “any notice, circular, advertisement . . . or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer . . . without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.”

Severson did not admit or deny the SEC findings in the related SEC order.

The SEC announced charges against alcohol producer Diageo plc for failing to make required disclosures of known trends relating to the shipments of unneeded products by its North American subsidiary to distributors. Diageo agreed to pay $5 million to settle the action. Diageo did not admit or deny the findings in the SEC order.

According to the SEC’s order, employees at Diageo North America (DNA), Diageo’s largest and most profitable subsidiary, pressured distributors to buy products in excess of demand in order to meet internal sales targets in the face of declining market conditions. The resulting increase in shipments enabled Diageo to meet performance targets and to report higher growth in key performance indicators that were closely followed by investors and analysts. The order finds that Diageo failed to disclose the trends that resulted from shipping products in excess of demand, the positive impact the overshipping had on sales and profits, and the negative impact that the unnecessary increase in inventory would have on future growth. The order further finds that investors were instead left with the misleading impression that Diageo and DNA were able to achieve growth in certain key performance indicators through normal customer demand for Diageo’s products.

DNA’s practice of overshipping relative to demand also involved the use of extraordinary sales practices. For example, under its contracts with distributors, DNA had the right to terminate the relationship if distributors failed to meet certain depletion targets. When distributors told DNA that they would not meet their targets, DNA agreed to waive its termination clauses if distributors would purchase additional unneeded innovation products. Other examples included DNA waiving penalty payments distributors were contractually required to pay to DNA for failing to meet targets if the distributors agreed to purchase unneeded innovation products.

By early fiscal 2015, inventory levels at some distributors were so high that they were resisting additional purchases. For these distributors, the purchase of unneeded inventory from DNA had become unsustainable. In response, DNA prepared and Diageo approved a plan to reduce inventory levels at certain DNA distributors. This would be achieved principally through a reductions in sales, a process known as “destocking.” The plan, to take effect beginning in fiscal 2016, would reduce distributor inventory over a period of years in an amount that would have been material if it occurred in a single reporting period.

DNA, as part of a series of proposals to alter its relationship with distributors, negotiated new contracts with its main distributors, to take effect in fiscal 2016, which provided for a reduction in inventory levels and which required the distributors to make additional payments to DNA. One effect of those additional payments was to mitigate the lost revenue arising out of the inventory reduction provisions.