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

The SEC has adopted amendments to its rules to simplify disclosures in filings with the SEC.  The amendments eliminate certain:

  • Redundant and duplicative requirements, which require substantially similar disclosures as GAAP, International Financial Reporting Standards (IFRS), or other Commission disclosure requirements.
  • Overlapping requirements, which are related to, but not the same as GAAP, IFRS, or other Commission disclosure requirements.
  • Outdated requirements, which have become obsolete because of the passage of time or changes in the regulatory, business, or technological environment.
  • Superseded requirements, which are inconsistent with recent legislation, more recently updated Commission disclosure requirements, or more recently updated GAAP.

The amendments contain a mind-numbing level of detail, particularly with respect to the accounting rules in Regulation S-X.  However, set forth below are the basic changes that will affect typical disclosures made in the body of Form 10-Ks, proxy statements and registration statements outside of the financial statements.

Description of Business.  The amendments revise Item 101 of Regulation S-K to eliminate required disclosures in the business description regarding:

  • Financial information about segments.
  • Research and development spending.
  • Financial information about geographic areas, such as revenues from external customers in the issuers country of domicile and foreign countries, but where material must be covered in the MD&A.
  • Risks attendant to the foreign operations and any dependence on one or more of the registrant’s segments upon such foreign operations, but where material should be covered in risk factors.

Internet Address.  Disclosure of the issuer’s internet address is now mandatory if the issuer has one.  Previously the rule “encouraged” disclosure.

Public Reference Room:  The amendments eliminate required disclosures for registration statements about SEC filings being available in the public reference room at the SEC’s headquarters.

Trading Markets and Dividends.  The identification of trading markets for equity securities must now be accompanied by the trading symbols for such securities.  Disclosure of high and low trading prices for each quarter in the last two full fiscal years and interim periods is no longer required.  In addition, the dividend history for the previous two fiscal years and interim periods is also eliminated.  Restrictions on ability to pay dividends has now been consolidated into Regulation S-X, so if included in the financial statements such restrictions no longer need to be disclosed in the body of the Form 10-K or other applicable filing.

Ratio of Earnings to Fixed Charges.  The required disclosure of the ratio of earnings to fixed charged and the related exhibit requirement have been deleted.

Some merger agreements are starting to include representations and warranties regarding the absence of allegations of sexual harassment against senior officials. Some examples follow.

Brookfield Asset Management’s acquisition of Forest City Realty

To the Knowledge of the Company, in the last five (5) years, no allegations of sexual harassment have been made to the Company against any individual in his or her capacity as an employee of the Company or Forest City Employer, LLC at a level of Senior Vice President or above.

Del Frisco’s Restaurant Group, Inc.’s acquisition of Barteca Holdings, LLC

Except as set forth on Schedule 2.12(j), none of the Barteca Entities is party to a settlement agreement with a current or former officer, employee or independent contractor of any Barteca Entity resolving allegations of sexual harassment by either (i) an officer of any Barteca Entity or (ii) an employee of any Barteca Entity. There are no, and since January 1, 2015 there have not been any Actions pending or, to the Company’s Knowledge, threatened, against the Company, in each case, involving allegations of sexual harassment by (A) any member of the Senior Management Team or (B) any employee of the Barteca Entities in a managerial or executive position.

Genuine Parts Company Spin-off/Merger with Essendant Inc.

To the knowledge of GPC, in the last five (5) years, no allegations of sexual harassment have been made against any current SpinCo Business Employee who is (i) an executive officer or (ii) at the level of Senior Vice President or above.

AMC Networks Inc. acquisition of RLJ Entertainment, Inc.

To the Company’s Knowledge, in the last ten (10) years, (i) no allegations of sexual harassment have been made against any officer of the Company or any of its Subsidiaries, and (ii) the Company and its Subsidiaries have not entered into any settlement agreements related to allegations of sexual harassment or misconduct by an officer of the Company or any of its Subsidiaries.

 

We recently noted a shareholder proponent had been making aggressive use of Notices of Exempt Solicitation on EDGAR.

Exchange Act Rule 14a-6(g)(1) requires that any person who engages in a solicitation pursuant to Exchange Act Rule 14a-2(b)(1) and beneficially owns over $5 million of the class of securities that is the subject of the solicitation to furnish or mail to the Commission a statement containing the information specified in the Notice of Exempt Solicitation (Exchange Act Rule 14a-103) no later than three days after the date the written solicitation is first sent or given to any security holder.

The SEC has provided two new Compliance and Disclosure Interpretations on exempt solicitations. In new CD&I 126.06, the SEC confirms that a Notice of Exempt Solicitation may be provided on a voluntary basis. Thus filers of a Notice do not have to own $5 million of the relevant securities. However, the Notice must specifically state it is being provided on a voluntary basis.

New CD&I 126.07 provides all of the information required by Rule 14a-103 must be presented in the submission before any written soliciting materials (including any logo or other graphics used by the soliciting party) are presented. Rule 14a-103 requires the name of the registrant and the name and address of the person making the solicitation be presented. To the extent that the notice itself is being used as a means of solicitation, the failure to present Rule 14a-103 information in this manner may, depending upon the particular facts and circumstances, be misleading within the meaning of Exchange Act Rule 14a-9.

In 2010, the SEC issued a concept release seeking public comment on whether the U.S. proxy system as a whole operates with the accuracy, reliability, transparency, accountability, and integrity that shareholders and companies should expect. In light of the many changes in our markets, technology, and how companies operate since then, SEC Chairman Jay Clayton issued a statement noting SEC staff will host a roundtable this fall to hear from investors, issuers, and other market participants about whether the SEC’s proxy rules should be refined.

The statement said SEC staff will announce the roundtable agenda items shortly. As they develop that agenda, Chairman Jay Clayton has requested that staff consider certain topics, highlights of which are noted below.

Voting Process: Potential topics include the potential for over-voting and under-voting of securities by broker-dealers and practical difficulties in confirming whether an investor’s shares have been voted in accordance with the investor’s instructions.

Retail Shareholder Participation: Potential topics include reasons for the relatively low retail vote participation and how existing rules or market practices affect the ability of individuals who invest in the public markets through investment vehicles such as mutual funds and pension funds to participate in the governance of public companies in which they have an interest.

Shareholder Proposals:  Potential topics include whether the current thresholds for minimum ownership (e.g., shares held and length of time) to submit a proposal to be included in the company’s proxy statement appropriately consider the interests of all shareholders.

Proxy Advisory Firms:  Potential topics include whether various factors, including legal requirements, have resulted in investment advisers to funds and other clients relying on proxy advisory firms for information aggregation and voting recommendations to a greater extent than they should and whether issuers are being given an appropriate opportunity to raise concerns if they disagree with a proxy advisory firm’s recommendations.

ISS has launched its annual global policy survey which often foreshadows changes to its voting guidelines. As in 2017, this year’s survey is being conducted in two parts, starting with a high-level ISS Governance Principles Survey covering a small number of global high-profile governance topics. The second part of the survey is the ISS Policy Application Survey, a more expansive and detailed set of questions, broken down by region.

Highlights of the Governance Principles Survey include:

Auditor Ratification.  The survey notes in a number of developed markets around the world, investors and regulatory bodies have started to focus on additional indicators of audit quality and auditor independence. Auditor ratification, appointment, disclosure and rotation requirements differ widely by market, but nonetheless ISS would like to assess investor and other market participants’ views in this area. The survey solicits views on what other audit-related factors could be considered in evaluation of the independence and performance of the external auditor.

Director Accountability and Track Records.  The survey notes some institutional investors are interested in tracking individual directors who have been involved in controversies with respect to one or more of their past or present directorships, particularly where concerns have been raised about shortfalls in oversight. Where identified, such concerns about oversight shortfalls may trigger negative recommendations under current ISS policy for directors who held boardroom leadership roles or served on committees with direct responsibility for overseeing the activities that triggered the controversy.  The survey solicits views regarding whether a negative ISS vote recommendation regarding a director oversight failure resulting in a negative vote recommendation should be noted in the proxy research of other companies where that director serves on the board.

Gender Diversity on Boards.  The survey notes that last year ISS asked respondents if they considered it problematic if there are zero female directors on a public company board.  ISS is revisiting the same questions that were asked in last year’s policy survey with respect to gender diversity on boards to identify changes, if any, in investor and non-investor views on this topic.

One-Share, One-Vote Principle.  Some companies have accessed public capital markets with significant differential voting rights. ISS is considering whether to provide in the future an adjusted analysis of shareholder vote results to show what the results would have been if all votes had been counted under the one-share, one-vote principle.

Previously, the Bats BZX Exchange, Inc. filed a proposed rule change with the Commission, seeking to list and trade shares of the Winklevoss Bitcoin Trust. The SEC Division of Trading and Markets disapproved the proposed rule change. BZX then filed a petition seeking review of the disapproval. The Commission granted BZX’s Petition for Review, seeking public comment. The Commission issued a 96 page order that set aside the previous disapproval, but the order also disapproved BZX’s proposed rule change.

Among other things, the Commission noted:

  • The record does not support BZX’s assertion that that bitcoin and bitcoin markets, including the Gemini Exchange, are uniquely resistant to manipulation.
  • The record does not support BZX’s assertion that “traditional means” of identifying and deterring fraud and manipulation are sufficient to meet the requirements of Exchange Act.
  • Where a listing exchange fails to establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient, the listing exchange must enter into a surveillance-sharing agreement with a regulated market of significant size.

Commissioner Hester M. Peirce registered her dissent. She noted the disapproval order demonstrates a skeptical view of innovation, which may have an adverse effect on investor protection, efficiency, competition, and capital formation well beyond the particular product. She believes the disapproval order’s broad interpretation of the Commission’s statutory mandate signals that the Commission reserves for itself the authority to judge when an innovation is ripe enough, respectable enough, or regulated enough to be worthy of the securities markets. By suggesting that bitcoin, as a novel financial product based on a novel technology that is traded on a non-traditional market, cannot be the basis of an ETP, she believes the Commission signals an aversion to innovation that may convince entrepreneurs that they should take their ingenuity to other sectors of our economy, or to foreign markets, where their talents will be welcomed with more enthusiasm.

We have noted an aggressive use of exempt solicitations by a shareholder proponent following the annual meeting when the solicitation is complete or making preemptive strikes before the proxy is published. You can find an example here.  We are not publishing more of the filing so that we do not aide the proponent in his efforts.

Who knows what will be next.

Query whether the exempt solicitation rules were meant to give proponents a year-round soap box to further their agenda.

For those of you who still have time or can tweak your second quarter 10-Q, we have noticed these recent comments on revenue recognition:

Netflix, Inc.

Please provide us with your analysis regarding payments made to partners. Describe in detail the nature of these payments and further clarify when payments are classified as marketing expenses and when payments are recognized as a reduction in revenue. Refer to ASC 606-10-32-25 and 26.

GreenSky, Inc.

Please explain to us the process by which interchange fees are earned and explain Greensky’s role in the payment processing system. Tell us whether a portion of the interchange fee received by the company is remitted to a third party. If so, tell us whether revenue from these fees is presented net or gross of the amounts remitted to the third party and explain how you arrived at that determination.

Social Reality, Inc.

Your disclosures on pages 13 and 15 suggest that you did not adopt ASC 606 as of January 1, 2018. If true, please refer to ASC 606-10-65-1(a) and tell us why you did not adopt during the first quarter of 2018. If you adopted ASC 606 as of January 1, 2018, please refer to Rule 10-01(a)(5) of Regulation S-X and revise your filing to provide the disclosures required by ASC 606-10-50.

Iterum Therapeutics Ltd.

Please tell us whether the adoption of ASC 606 on January 1, 2018 impacted your accounting for grant awards and revise your disclosure accordingly. In your response, please explain how you considered the guidance in ASC 606-10-05-4 in determining the appropriate accounting for such awards.

At an open meeting on July 18th, the SEC agreed to issue a concept release exploring modifications and modernization of Rule 701 and Form S-8 for certain offerings for employees, in conjunction with its increase to the threshold for expanded disclosure required under Rule 701(e) as mandated by Congress.

Rule 701 and Form S-8 are alternating methods for a company to offer or sell securities to its own employees. Rule 701 provides an exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements while Form S-8 provides the means by which a public company registers certain compensatory offerings.

Among the interesting modifications to Rule 701 contemplated by the release, the staff is seeking specific comment on the following topics:

  • Expanding Rule 701 to allow use by public companies;
  • Modifying the timing and methods of providing the enhanced disclosures required under Rule 701(e) if an offering exceeds the newly revised $10 million threshold and the consequences of not providing such information within the timeframe specified by the rule;
  • Modifying the type and frequency of financial statement required to be provided under Rule 701(e) and whether alternate presentations should be permitted;
  • Modifying timing requirements for enhanced disclosure under Rule 701(e) and whether the current standard requiring disclosure “a reasonable period of time before the date of sale” should be further clarified or modified;
  • Modifying Rule 701 and Rule 701(e) to address when and what type of disclosure should be provided in connection with grants of restricted stock units (RSUs); and
  • Increasing availability of Rule 701 for securities issued to non-traditional workers receiving compensation for sale of goods or services rendered through the use of Internet “platforms” such as, for example, those offering ride-sharing, food delivery, household repairs, dog-sitting, and tech support or hand-made craft objects or lodging (referred to as “gig economy” relationships).

The staff is also seeking comment on a number of topics with respect to use of Form S-8 including:

  • Eliminating Form S-8, allowing public companies to rely on Rule 701, and providing resale of restricted or control shares issued under employee benefits plans via Form S-3;
  • Simplifying requirements for Form S-8 including whether a specific amount of shares should be required to be disclosed, how additional shares may be added to Form S-8, and implementing a “pay-as-you-go” fee structure; and
  • Expanding availability of Form S-8 for securities issued to participants in “gig economy” relationships with the Company and whether such increased availability should match any similar changes to Rule 701.

 

Rule 701 under the Securities Act of 1933 provides an exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements. The exemption covers securities offered or sold under a plan or agreement between a non-reporting company and the company’s employees, officers, directors, partners, trustees, consultants, and advisors.

The Economic Growth, Regulatory Relief, and Consumer Protection Act requires the SEC to amend Rule 701(e) to increase from $5 million to $10 million the aggregate sales price or amount of securities sold during any consecutive 12-month period in excess of which the issuer is required to deliver additional disclosures to investors. The SEC has taken formal action to amend Rule 701(e) in the manner prescribed by the statute.

As amended, Rule 701(e) will otherwise continue to operate in the same manner as it currently does. Specifically, the additional disclosures required by Rule 701(e) will not be required for sales up to $10 million in the 12-month period. If aggregate sales during that period exceed $10 million, however, the issuer must deliver those additional disclosures a reasonable period of time before the date of sale to all investors in the 12-month period. Issuers that have commenced an offering in the current 12-month period will be able to apply the new $10 million disclosure threshold immediately upon effectiveness of the amendment.

The new rule is effective upon publication in the Federal Register.