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

Just as proxy season gets into full swing, the SEC has helpfully approved a modification to the NYSE’s rules regarding physical delivery of proxy material to the Exchange. As we explained here, the now-approved rule provides:

  • Listed companies will not be required to provide proxy materials to the NYSE in physical form, or otherwise notify the NYSE, provided the proxy materials are included in an SEC filing available under Schedule 14A on the SEC’s EDGAR filing system.
  • Any listed company whose proxy materials are available on EDGAR but not filed pursuant to Schedule 14A under the Act will be required to provide the NYSE information sufficient to identify such filing by designated means not later than the date on which such material is sent, or given, to any security holders.
  • Any listed company whose proxy materials are not included in their entirety (together with proxy card) in an SEC filing available on EDGAR will continue to be required to provide three physical copies of any proxy material not available on EDGAR to the NYSE not later than the date on which such material is sent, or given, to any security holders.

Ford and Alphabet have received SEC comments on their initial disclosures under FASB’s new revenue recognition standard. Both required more than one round to clear.

Ford

Initial comments received by Ford were:

— In the penultimate paragraph on page 6, you state under the new revenue standard that for certain vehicle sales where revenue was previously deferred, such as vehicles subject to a guaranteed resale value recognized as a lease and transactions in which a Ford-owned entity delivered vehicles, revenue is now recognized when vehicles are shipped. Please explain to us in greater detail the nature and terms of such contracts and provide us with the basis for your accounting conclusions under ASC 606 and under legacy US GAAP. As part of your response, please tell us how contracts with vehicle sales subject to a guaranteed resale value differ from transactions with guaranteed repurchase obligations which continue to be accounted for as operating leases under ASC 606 (page 11).

— We note your presentation of disaggregated revenue by major source on page 10. With respect to the disclosure requirements of ASC 606-10-50-5, please tell us how you considered the guidance in paragraphs ASC 606-10-55-89 through 55-91 in selecting the appropriate categories to use to disaggregate revenue.

— You present “vehicles, parts, and accessories” as a major source of revenue. Please explain to us why the aggregation of revenue from “parts and accessories” with revenue from “vehicles” is appropriate pursuant to ASC 606-10-50-5. We note from your disclosures that parts and accessories appear to be subject to return from customers, whereas this does not appear to be the case for vehicles. It also appears these categories may have other different characteristics, such as type of good, pricing and dollar magnitude of contribution to margins.

— Please tell us how you considered and complied with the disclosures requirement outlined in ASC 606-10-50-12(b) with respect to significant payment terms.

The follow-on letter received by Ford was especially interesting, indicating the need to make sure public statements do not contradict disclosures made in the financial statements:

— We have reviewed your response to prior comment 2. We note you provide other information outside your financial statements regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from your contracts with customers, including but not limited to:

Monthly sales reports which include unit sales by brand, by vehicle type, and between retail and fleet sales. These reports also include a discussion of underlying trends for key vehicles and some information on transaction prices.

A Strategic Update given on October 3, 2017 which includes a discussion of plans to shift allocation of capital from cars to SUVs and trucks and to expand electric vehicles revenue opportunities.

An earnings call on July 26, 2017 which includes a discussion of the strong performance of commercial vehicles as well as consumers moving away from passenger cars and into utilities and trucks and your increasing investments in these areas as a result.

Given the information cited above, it appears other information about your automotive segment’s revenue (beyond geographical information) is used by the company and users of your financial statements to evaluate your financial performance or to make resource allocation decisions. In this regard, please tell us how you considered the presentation and use of such information pursuant to ASC 606-10-55-90(c) when determining the appropriate disaggregated revenue categories that depict how the nature, amount, timing and uncertainty of cash flows are affected by economic factors and in the context of meeting the overall disclosure objective of ASC 606-10-50-1.

Alphabet

The initial Alphabet comment letter can be found here, and the follow-on comment letter can be found here.

The initial comments received were:

–We note that you generally report revenue from ads placed on Google Network Members’ properties on a gross basis. Please help us understand, and revise future filings as appropriate, if there are any circumstances in which you report revenue on a gross basis but you do not have the sole ability to monetize the advertising inventory. If such situations exist, please provide us with a specific and comprehensive discussion of how you determined that you are the principal in these arrangements. Reference ASC 606-10- 55-36 through 55-40.

— Please provide us your analysis of principal versus agent considerations for digital content if revenue recognized is material. In this regard, tell us if revenue from sales of books, movies, music and other items made through Google Play is recognized on a gross or net basis. Reference ASC 606-10-55-36 through 55-40. In addition, to the extent that revenue recognized is material, please provide the disclosures required by ASC 606-10- 50-12(c) as applicable.

— With a view towards future disclosure, please tell us how you determined when to recognize revenue for items included within Other Revenues. Reference ASC 606-10- 50-18 and 50-19.

— Please tell us how you selected categories to present disaggregated revenue information. In this regard, we note your products, various properties and various ways customers may purchase advertising. We also note your disclosure on page 33 regarding how your results are impacted by increases in mobile searches and growth in YouTube revenue. Please tell us why you believe your current disclosures meet the objective of depicting how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Reference ASC 606-10-50-5.

— We note that certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration and estimated based on the expected amount to be provided to customers. We also note that you have certain obligations for refunds. To the extent that these amounts are material and your estimates involve significant judgments, please revise your disclosure in future filings to explain how you determine the methods, assumptions and estimates used. Reference ASC 606-10-50-20.

The recent decisions by the Delaware Supreme Court regarding appraisal rights decisions in DFC and Dell provide that the appraisal statute requires that the trial judge must consider “all relevant factors,” and that no presumption in favor of transaction price obtains. Where, however, the transaction price represents an unhindered, informed, and competitive market valuation, the trial judge must give particular and serious consideration to transaction price as evidence of fair value. Where information necessary for participants in the market to make a bid is widely disseminated, and where the terms of the transaction are not structurally prohibitive or unduly limiting to such market participation, the trial court in its determination of fair value must take into consideration the transaction price as set by the market. In the recent Delaware case In re Appraisal of AOL Inc. Vice Chancellor Glasscock referred to transactions compliant with such conditions by the shorthand “Dell Compliant.”

According to the Vice Chancellor, the AOL transaction was not Dell Compliant. One reason was the statements made by AOL’s CEO, who negotiated the deal, signaled to potential market participants that the deal was “done,” and that they need not bother making an offer.  Specifically, the following exchange occurred during an interview on CNBC:

Interviewer: It’s trading slightly above the premium right now. you didn’t shop this to anybody else?

CEO: No, I’m committed to doing the deal with Verizon and I think that as we chose each other because that’s the path we’re on. I gave the team at Verizon my word that, you know, [w]e’re in a place where this deal is going to happen and we’re excited about it.

I imagine executives of acquired companies will now be advised by counsel to avoid such statements. It also seems that appraisal petitioners will now try to cast lots of statements made by executives as casting doubt on whether or not a transaction is Dell Compliant.

In the end, after lengthy analysis, the Court relied on a DCF analysis that resulted in a fair value of $48.70 per share. The Court used the $50 deal price as a “check” on the analysis.  The Court noted the deal price may contain synergies that have been shared with the seller in the deal but that are not properly included in fair value.

The Delaware Supreme Court found the failure to disclose the Chairman of the Board’s dissent to a tender offer in a Schedule 14D-9 to be material in Appel v. Berkman.  The case arose from Diamond Resorts International’s board of directors recommendation to its stockholders that they sell their shares to a private equity buyer for cash in a two-step merger transaction involving a front-end tender offer followed by a back-end merger.

The Court noted the Schedule 14D-9 included a detailed recitation of the background leading to the merger, and the reasons for and against it. But notably absent from that recitation was that the company’s founder, largest stockholder, and still Chairman, Stephen J. Cloobeck, had abstained from supporting the procession of the merger discussions, and from ultimately approving the deal, because:

he was disappointed with the price and the Company’s management for not having run the business in a manner that would command a higher price, and that in his view, it was not the right time to sell the Company.

The Court of Chancery held that the complaint challenging the merger should be dismissed because the stockholders’ acceptance of the first step tender offer was fully informed, rejecting the plaintiffs’ argument that the omission of the Chairman’s reasons for abstaining rendered the proxy statement materially misleading.

According to the Delaware Supreme Court, the defendants’ argument that the reasons for a dissenting or abstaining board member’s vote can never be material is incorrect. The Court reasoned that because Delaware law gives important effect to an informed stockholder decision, Delaware law also requires that the disclosures the board makes to stockholders contain the material facts and not describe events in a materially misleading way.  Here, the founder and Chairman’s views regarding the wisdom of selling the company were ones that reasonable stockholders would have found material in deciding whether to vote for the merger or seek appraisal, and the failure to disclose them rendered the facts that were disclosed misleadingly incomplete. Therefore, the Delaware Supreme Court reversed the order dismissing the plaintiffs’ claims.

The Court noted its decision in no way implies that the reason for a particular director’s dissent or abstention will always be material. Rather, the Court noted that it adheres to the contextual approach that has long been Delaware law, which requires an examination of whether a fact— which can include the fact that a director shared with the board particular reasons for his position on an important transaction—would materially affect the mix of information, or whether the disclosure is required to make sure that other disclosures do not present a materially misleading picture.

Nasdaq has proposed to amend its rule regarding shareholder approval for certain securities issuances. Currently the rule requires shareholder approval for security issuances for less than the greater of book or market value (other than in the context of a public offering) if either:

  • the issuance equals 20% of the outstanding stock or voting power or
  • if a smaller issuance coupled with sales by the officers, directors or substantial security holders meets the 20% threshold.

Currently the rule defines “market value” as the closing bid price. Market participants often express to Nasdaq their concern that bid price may not be transparent to companies and investors and does not always reflect an actual price at which a security has traded. Generally speaking, the price of an executed trade is viewed as a more reliable indicator of value than a bid quotation; and the more shares executed, the more reliable the price is considered.  Accordingly, Nasdaq proposes to modify the measure of market value from the closing bid price to the lower of:

  • the closing price (as reflected on Nasdaq.com); or
  • 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.

Nasdaq also proposes to eliminate the requirement for shareholder approval of issuances at a price less than book value but greater than market value. Nasdaq believes book value is an accounting measure and its calculation is based on the historic cost of assets, not their current value. As such, market participants have indicated, and Nasdaq agrees, that book value is not an appropriate measure of whether a transaction is dilutive or should otherwise require shareholder approval. Nasdaq has also observed that when the market price is below the book value, the rule becomes a trap for the unwary. In that regard, Nasdaq believes the existing book value test can appear arbitrary and have a disproportionate impact on companies in certain industries and at certain times.

 

Institutional Shareholder Services Inc., or ISS, announced the launch of Environmental & Social QualityScore, a new component of ISS’ corporate profiling and scoring solution for institutional investors.

ISS believes E&S QualityScore represents a data driven approach to measuring the quality of corporate disclosures on environmental and social issues, including sustainability governance, and to identify key disclosure omissions. Expectations regarding disclosure practices are defined by industry groups, based on the specific environmental and social risks identified in industry and multi-stakeholder initiatives and reflected in authoritative standards and recommendations from groups such as the Global Reporting Initiative, the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures.

The launch covers an initial set of 1,500 companies across industries ISS views as being most exposed to E&S risks, including: Energy, Materials, Capital Goods, Transportation, Automobiles & Components, and Consumer Durables & Apparel. An additional 3,500 companies spanning 18 industries will be added later in 2018, bringing the total coverage universe to more than 5,000 companies, globally.

 

The SEC has approved a rule change to the NYSE listing standards to facilitate the listing of an issuer without conduction an IPO. According to the NYSE, the rule change is necessary to compete for listings that might otherwise by listed on NASDAQ.

As revised, the NYSE will, on a case by case basis, exercise discretion to list companies whose stock is not previously registered under the Exchange Act, when the company is listed upon effectiveness of a registration statement registering only the resale of shares sold by the company in earlier private placements.

In exercising discretion, the NYSE will determine that the company has met the $100,000,000 aggregate market value of publicly-held shares requirement based on a combination of:

  • an independent third-party valuation (a “Valuation”) of the company and
  • the most recent trading price for the company’s common stock in a trading system for unregistered securities operated by a national securities exchange or a registered broker-dealer (a “Private Placement Market”).

The Exchange will attribute a market value of publicly held shares to the company equal to the lesser of:

  • the value calculable based on the Valuation and
  • the value calculable based on the most recent trading price in a Private Placement Market.

However, if there is no recent trading in a Private Placement Market, the NYSE will determine that the company has met its market-value of publicly-held shares requirement if the company provides a Valuation evidencing a market value of publicly-held shares of at least $250,000,000.

Any Valuation used must be provided by an entity that has significant experience and demonstrable competence in the provision of such valuations. The Valuation must be of a recent date as of the time of the approval of the company for listing and the evaluator must have considered, among other factors, the annual financial statements required to be included in the registration statement, along with financial statements for any completed fiscal quarters subsequent to the end of the last year of audited financials included in the registration statement.

A valuation agent will not be deemed to be independent if:

  • At the time it provides such valuation, the valuation agent or any affiliated person or persons beneficially own in the aggregate as of the date of the valuation, more than 5% of the class of securities to be listed, including any right to receive any such securities exercisable within 60 days.
  • The valuation agent or any affiliated entity has provided any investment banking services to the listing applicant within the 12 months preceding the date of the valuation. “Investment banking services” includes acting as an underwriter in an offering for the issuer; acting as a financial adviser in a merger or acquisition; providing venture capital, equity lines of credit, PIPEs (private investment, public equity transactions), or similar investments; serving as placement agent for the issuer; or acting as a member of a selling group in a securities underwriting.
  • The valuation agent or any affiliated entity has been engaged to provide investment banking services to the listing applicant in connection with the proposed listing or any related financings or other related transactions.

Public companies with fiscal quarters ended December 31, 2017, but not fiscal year ends, are beginning to make disclosures showing the effects of the Tax Cuts and Jobs Act in recently filed Form 10-Qs in accordance with SAB 118. Some may find these disclosures as a useful starting point for drafting Form 10-K disclosures. Examples follow.

Fair Isaac

Financial Statements

The effective income tax rate was 19.6% and (32.3)% during the quarters ended December 31, 2017 and 2016, respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the full fiscal year. The effective tax rate in any quarter can also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

The effective tax rate for the three months ended December 31, 2017 was significantly impacted by recording the impact of the Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017 by the U.S. government. The Tax Act makes broad and complex changes to the U.S. tax code that will affect our fiscal year ended September 30, 2018, including, but not limited to, (1) reducing the U.S. federal corporate tax rate and (2) requiring a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries that is payable over eight years.

The Tax Act reduces the federal corporate tax rate to 21.0% effective January 1, 2018. In accordance with Section 15 of the Internal Revenue Code, we will utilize a blended rate of 24.5% for our fiscal 2018 tax year, by applying a prorated percentage of the number of days prior to and subsequent to the January 1, 2018 effective date. We recorded provisional charges for the re-measurement of the deferred tax assets of $5.6 million to our income tax expense related to long-term deferred tax assets and $1.3 million related to short-term deferred tax assets during the quarter ended December 31, 2017.

The Deemed Repatriation Transition Tax (the “Transition Tax”) is a tax on previously untaxed accumulated earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We are able to make a reasonable estimate and recorded a provisional Transition Tax obligation of $4.9 million.

On December 22, 2017, the SEC issued Staff Accounting Bulletin (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Tax Act. While we are able to make reasonable estimates of the impact of the reduction in corporate rate and the deemed repatriation transition tax, the final impact of the Tax Act may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the I.R.S., and actions we may take. We are continuing to gather additional information to determine the final impact.

MD&A

The effective income tax rate was 19.6% and (32.3)% during the quarters ended December 31, 2017 and 2016, respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the full fiscal year. The effective tax rate in any quarter can also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution. The effective tax rate for the three months ended December 31, 2017 was significantly impacted by recording the impact of the Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017 by the U.S. government. Among other provisions, the Tax Act reduces the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective January 1, 2018, and imposes a deemed repatriation tax on previously untaxed accumulated earnings and profits (“E&P”) of foreign subsidiaries. We remeasured our deferred tax assets using a blended rate of 24.5% — by applying a pro-rated percentage of the number of days before and after the January 1, 2018 effective date — and recorded provisional charges for the remeasurement of the deferred tax assets of $5.6 million to our income tax expense related to long-term deferred tax assets and $1.3 million related to short-term deferred tax assets during the quarter ended December 31, 2017. We also recorded a provisional charge of $4.9 million to our income tax expense for the deemed repatriation transition tax. While we are able to make reasonable estimates of the impact of the reduction in corporate rate and the deemed repatriation transition tax, the final impact of the Tax Act may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the I.R.S., and actions we may take. We are continuing to gather additional information to determine the final impact.

Ethan Allen Interiors

Fiancial Statements

On December 22, 2017 H.R. 1, originally known as the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective  January 1, 2018. The Company will compute its income tax expense for the  June 30, 2018 fiscal year using a blended Federal Tax Rate of 28%. The 21% Federal Tax Rate will apply to fiscal years ending  June 30, 2019 and each year thereafter.

The 28% Federal Tax Rate will apply to earnings reported for the full 2018 fiscal year. Accordingly, first quarter income previously subject to tax at the 35% Federal Tax Rate will benefit from the 28% Federal Tax Rate. The Company must re-measure its net deferred tax assets and liabilities using the Federal Tax Rate that will apply when these amounts are expected to reverse. The effect of the re-measurement is reflected entirely in the interim period that includes the enactment date and is allocated directly to income tax expense from continuing operations.

In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.

As of December 31, 2017, the Company can determine a reasonable estimate for certain effects of tax reform and is recording that estimate as a provisional amount. The provisional remeasurement of the deferred tax assets and liabilities resulted in a $2.6 million discrete tax benefit which lowered the effective tax rate by 14.6% in the quarter and 8.8% fiscal year to date. The provisional remeasurement amount is anticipated to change as data becomes available allowing more accurate scheduling of the deferred tax assets and liabilities primarily related to depreciable assets, inventory, employee compensation and commissions. Following is a reconciliation of income tax expense (benefit) computed by applying the federal statutory income tax rate to income before taxes to actual tax expense (benefit):

[Table Omitted]

We are still in the process of evaluating the income tax effect of the Tax Act on the executive compensation limitations that will be effective for our fiscal year 2019.

MD&A

Income tax expense year-to-date totaled $6.8 million compared to $12.9 million. Our effective tax rate was 23.5% in the period compared to 36.7%. The effective tax rate for the current year-to-date period was dramatically lower due to the Tax Act. The effective tax rate for the current fiscal year primarily includes tax expense on that fiscal year’s net income, the tax benefit lost on the cancelation of stock options and tax and interest expense on uncertain tax positions, partially offset by tax benefit from the re-measurement of deferred tax assets and liabilities and the vesting of restricted stock units. The effective tax rate for the prior fiscal year primarily includes tax expense on that fiscal year’s net income, and tax and interest expense on uncertain tax positions, partially offset by the reversal and recognition of some uncertain tax positions. See Note 3, Income Taxes, for further information.

Oshkosh

Financial Statements

The Company recorded income tax expense of $4.7 million for the three months ended December 31, 2017, or 7.8% of pre-tax income, compared to $5.2 million, or 21.8% of pre-tax income, for the three months ended December 31, 2016. Results for the three months ended December 31, 2017 were favorably impacted by $10.3 million of net discrete tax benefits, including a $3.3 million benefit related to share-based compensation tax deductions, and a $6.5 million net benefit related to new tax legislation in the United States. Results for the three months ended December 31, 2016 were favorably impacted by $2.8 million of discrete tax benefits, including $2.1 million of tax benefits related to the release of valuation allowances on deferred tax assets for state net operating loss carryforwards and $0.7 million related to the release of valuation allowances on deferred taxes on federal capital loss carryforwards.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law by President Trump. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result of the Tax Reform Act, the Company recorded a tax benefit of $23.9 million due to a remeasurement of deferred tax assets and liabilities and a tax charge of $17.4 million due to the transition tax on deemed repatriation of deferred foreign income, in the three months ended December 31, 2017. Both of the tax benefit and the tax charge represent provisional amounts and the Company’s current best estimates. Any adjustments recorded to the provisional amounts through the first quarter of fiscal 2019 will be included in income from operations as an adjustment to tax expense. The provisional amounts incorporate assumptions made based upon the Company’s current interpretation of the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance.

Because of the complexity of the new Global Intangible Low-Taxed Income (GILTI) tax rules, the Company continues to evaluate this provision of the Tax Reform Act and the application of ASC 740, Income Taxes. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only the Company’s current structure and estimated future results of global operations, but also its intent and ability to modify its structure. The Company’s currently in the process of analyzing its structure and, as a result, is not yet able to reasonably estimate the effect of this provision of the Tax Reform Act. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements and has not made a policy decision regarding whether to record deferred tax on GILTI.

MD&A

The Company recorded income tax expense of $4.7 million in the first quarter of fiscal 2018, or 7.8% of pre-tax income, compared to $5.2 million, or 21.8% of pre-tax income, in the first quarter of fiscal 2017. Results for the first quarter of fiscal 2018 were favorably impacted by discrete tax benefits of $10.3 million, primarily due to favorable share-based compensation tax benefits of $3.3 million and a $6.5 million net benefit related to the implementation of new tax legislation in the United States. Results for the first quarter of fiscal 2017 were favorably impacted by $2.8 million of discrete tax benefits, largely related to state tax matters.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law by President Trump. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018, repealing the deduction for domestic production activities, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. As a result of the Tax Reform Act, the Company recorded a tax benefit of $23.9 million due to a remeasurement of deferred tax assets and liabilities and a tax charge of $17.4 million due to the transition tax on deemed repatriation of deferred foreign income in first quarter of fiscal 2018. Both of the tax benefit and the tax charge represent provisional amounts and the Company’s current best estimates. Any adjustments recorded to the provisional amounts through the first quarter of fiscal 2019 will be included in income from operations as an adjustment to tax expense. The provisional amounts incorporate assumptions made based upon the Company’s current interpretation of the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance. As a result of tax reform, the Company anticipates that its effective tax rate, prior to discrete tax benefits, will be approximately 24.5% in fiscal 2018. Longer term, once the full effect of the lower statutory tax rate begins to impact the Company, the Company anticipates that its effective tax rate, prior to discrete tax benefits, will range between 22% and 24%. This estimate reflects the repeal of the deduction for domestic production activities and other items of the Tax Reform Act that are less beneficial.

Commvault Systems

Financial Statements

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of the Act; however, as described below, it has made a reasonable estimate of the effects on existing deferred tax balances. These amounts are provisional and subject to change. The most significant impact of the legislation for the Company was a $24,300 reduction of the value of the Company’s net deferred tax assets (which represent future tax benefits) as a result of lowering the U.S. corporate income tax rate from 35% to 21%. The Act also includes a requirement to pay a one-time transition tax on the cumulative value of earnings and profits that were previously not repatriated for U.S. income tax purposes. The Company has not made sufficient progress on the transition tax analysis to reasonably estimate the effects, and therefore, has not recorded provisional amounts. However, based on analysis to date the one-time transition tax is not expected to be material. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.

MD&A

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, we have not completed the accounting for the tax effects of enactment of the Act; however, as described below, we have made a reasonable estimate of the effects on existing deferred tax balances. These amounts are provisional and subject to change. The most significant impact of the legislation for the Company was a $24.3 million reduction of the value of net deferred tax assets (which represent future tax benefits) as a result of lowering the U.S. corporate income tax rate from 35% to 21%. The Act also includes a requirement to pay a one-time transition tax on the cumulative value of earnings and profits that were previously not repatriated for U.S. income tax purposes. We have not made sufficient progress on the transition tax analysis to reasonably estimate the effects, and therefore, have not recorded provisional amounts. However, based on analysis to date the one-time transition tax is not expected to be material. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.

The SEC Office of Minority and Women Inclusion, or OMWI, invited entities regulated by the SEC to submit a Diversity Assessment Report.

Entities regulated by the SEC include broker-dealers, investment advisers, investment companies (mutual funds), transfer agents, municipal advisors, private fund advisers, clearing agencies, nationally recognized statistical rating organizations, national securities exchanges and other self-regulatory organizations such as FINRA.

Conducting self-assessments and providing diversity assessment information to OMWI are voluntary.

 

SEC Chair Clayton delivered the following remarks at a conference of securities professionals:

“My first message is simple and a bit stern. Market professionals, especially gatekeepers, need to act responsibly and hold themselves to high standards. To be blunt, from what I have seen recently, particularly in the initial coin offering (“ICO”) space, they can do better.

Our securities laws – and 80 plus years of practice – assume that securities lawyers, accountants, underwriters, and dealers will act responsibly. It is expected that they will bring expertise, judgment, and a healthy dose of skepticism to their work. Said another way, even when the issue presented is narrow, market professionals are relied upon to bring knowledge of the broad legal framework, accounting rules, and the markets to bear.

Legal advice (or in the cases I will cite, the lack thereof) surrounding ICOs helps illustrate this point. Let me posit a few scenarios. First, and most disturbing to me, there are ICOs where the lawyers involved appear to be, on the one hand, assisting promoters in structuring offerings of products that have many of the key features of a securities offering, but call it an “ICO,” which sounds pretty close to an “IPO.”  On the other hand, those lawyers claim the products are not securities, and the promoters proceed without compliance with the securities laws, which deprives investors of the substantive and procedural investor protection requirements of our securities laws.

Second are ICOs where the lawyers appear to have taken a step back from the key issues – including whether the “coin” is a security and whether the offering qualifies for an exemption from registration – even in circumstances where registration would likely be warranted. These lawyers appear to provide the “it depends” equivocal advice, rather than counseling their clients that the product they are promoting likely is a security. Their clients then proceed with the ICO without complying with the securities laws because those clients are willing to take the risk.

With respect to these two scenarios, I have instructed the SEC staff to be on high alert for approaches to ICOs that may be contrary to the spirit of our securities laws and the professional obligations of the U.S. securities bar.

I recognize that in some ICOs there is no market professional involved. The SEC is undertaking significant efforts to educate the public that unregistered securities investments offered by unregistered promoters, with no securities lawyers or accountants on the scene, are, in a word, dangerous.

Before I move on to the next topic I want to raise one more narrow, distributed ledger or “blockchain”-related legal issue by means of a hypothetical. I doubt anyone in this audience thinks it would be acceptable for a public company with no meaningful track record in pursuing the commercialization of distributed ledger or blockchain technology to (1) start to dabble in blockchain activities, (2) change its name to something like “Blockchain-R-Us,” and (3) immediately offer securities, without providing adequate disclosure to Main Street investors about those changes and the risks involved. The SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the securities laws, particularly in the case of an offering.”