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

The Securities and Exchange Commission announced that the parent company of United Airlines has agreed to pay $2.4 million to settle charges for providing  a public official with more convenient flight options. The parent company did not admit or deny the SEC’s findings.

According to the SEC’s order, United reinstated a nonstop flight between Newark, N.J., and Columbia, S.C., at the behest of David Samson, the then-chairman of the Port Authority of New York and New Jersey who sought a more direct route to his home in South Carolina. The route previously experienced poor financial performance and was canceled by Continental Airlines prior to its merger with United, and a preliminary financial analysis conducted after Samson began privately advocating for the route’s return revealed it would likely lose money again.

Nevertheless, the SEC’s order finds that United officials feared Samson’s influence could jeopardize United’s business interests before the Port Authority, including the approval of a hangar project to help the airline at Newark’s airport. The company ultimately decided to initiate the route despite the poor financial projections.  The same day that United’s then-CEO approved initiation of the route, the Port Authority’s board approved the lease agreement related to the hangar project.  United employees were told “no proactive communications” about the new route.

According to the SEC’s order, United circumvented its standard process for initiating new routes, and no corporate record at United accurately and fairly reflected the authorization to approve the money-losing flight route from Newark to Columbia. The route ultimately lost approximately $945,000 before it ceased again roughly around the time of Samson’s resignation from the Port Authority.

Samson has pleaded guilty to bribery in a criminal case announced in July by the U.S. Attorney’s Office in New Jersey. United entered into a non-prosecution agreement with the U.S. Attorney and paid $2.25 million.

Wow. So the books and records provisions can be interpreted like it’s the Domestic Corrupt Practices Act.  I wonder if it will become in vogue to self-report these sorts of issues and spawn another web of FCPA, Inc. like practices to advise on these matters.

The CFPB issued a bulletin warning supervised financial companies that creating incentives for employees and service providers to meet sales and other business goals can lead to consumer harm if not properly managed. According to the CFPB, tying bonuses or employment status to unrealistic sales goals or to the terms of transactions may intentionally or unintentionally encourage illegal practices such as unauthorized account openings, unauthorized opt-ins to overdraft services, deceptive sales tactics, and steering consumers into less favorable products. The CFPB bulletin outlines various steps that it believes institutions can and should take to detect, prevent, and correct such production incentives so that they do not lead to abuse of consumers.

 

As previously noted, National Fuel Gas had rejected a proxy access nominee submitted by GAMCO Asset Management Inc. because of non-conformance with National Fuel’s proxy access by-law. Many wondered what would happen next.  It didn’t take long to find out, as GAMCO has filed an amended Schedule13D which notes “Lance Bakrow informed GAMCO this morning that he has decided to withdraw him name as a candidate for Director of National Fuel Gas Company. GAMCO will not pursue Proxy Access.”

GAMCO Asset Management Inc. made the news when it became the first to submit a nominee for National Fuel Gas’ board of directors using a proxy access by-law.

National Fuel Gas has now rejected the nominee because the nomination, in National Fuel Gas’ view, was not made in accordance with the proxy access by-law.  National Fuel Gas said “Based on GAMCO’s past conduct and current actions, the Board has determined that (1) GAMCO possessed an intent to change or influence control of the Company when acquiring some if not all of the Proxy Access Request Required Shares; and (2) GAMCO continues to have the intent to change or influence control of the Company. As a result, GAMCO’s Notice does not comply with the proxy access provision of the Company’s By-Laws, and the Company will not include GAMCO’s proposal in the Company’s proxy materials.”

Section 72003 of the FAST Act directs the SEC to carry out a study of Regulation S-K’s requirements and to consult with the Commission’s Investor AdvisoryCommittee (the “IAC”) and Advisory Committee on Small and Emerging Companies. The SEC must then issue a report to Congress within 360 days of enactment of the FAST Act.  The report must be followed within 360 days by proposed rules to implement the recommendations made in the report.

Section 72003 of the FAST Act requires the report to include:

  • All findings and determinations made in carrying out the study.
  • Specific and detailed recommendations on modernizing and simplifying the requirements in regulation S–K in a manner that reduces the costs and burdens on companies while still providing all material information.
  • Specific and detailed recommendations on ways to improve the readability and navigability of disclosure documents and to discourage repetition and the disclosure of immaterial information.

The SEC has issued the report required by the FAST Act. Some of the detailed recommendations include:

  • Relocate “Risk Factors” from Item 503(c) to a new, separate item (Item 105) in Subpart 100 of Regulation S-K.
  • Eliminate the Item 512(d), (e), and (f) undertakings because they are obsolete.
  • Permit the omission of attachments and schedules filed with exhibits, unless they contain information that is material to an investment decision that has not been disclosed otherwise.
  • Revise Item 601(b)(21) to require disclosure of legal entity identifiers (“LEIs”) for the registrant and within the list of significant subsidiaries.
  • Require machine-readable tagging of all of the information presented on the cover page of a registrant’s periodic and current reports.
  • Require the use of hyperlinks whenever the rules call for the inclusion of a web address, provided the appropriate technology is available to prevent such hyperlinks from jeopardizing the security and integrity of the EDGAR system.

According to this Reuters article and a blog by Elm Sustainability Partners LLC, an informal deal for EU conflict minerals legislation has been reached. The final text will be voted on by the member states on December 7, 2016, with a vote in the plenary expected in the first half of 2017. The regulation would become effective in 2021.

Although OECD guidelines will be used, the structure is much different than the United States. Only importers of tin, tungsten, tantalum, gold and their ores are covered.  The legislation does not reach manufactured products on a mandatory basis.

The legislation will apply to companies with more than 500 employees but small volume importers will be exempt from these obligations. Reports indicate dentists and jewelers are exempt.

According to this report, large manufacturers will be encouraged to voluntarily report on their “due diligence” and sourcing practices using new performance indicators. They will also be encouraged to join an EU registry, designed to track mineral sourcing policies.

However, a review clause included in the regulation means mandatory measures could be brought in if the voluntary measures prove too be having too limited an impact, with reviews set to take place two years after the start of the new law and then every three years thereafter.

On November 9, 2016, the Minnesota Department of Commerce approved the first crowdfunding portal operator, VentureNear.com, under the crowdfunding legislation known as MNvest. As soon as the portal is populated with offerings, the online platform will allow companies to sell equity securities or promissory notes to Minnesota investors.  While online crowdfunding offers a novel approach to raising capital, the relative benefits and simplicity of other exemptions from federal and state securities laws may limit the appeal of MNvest among issuers (and their counsel).

MNvest

As we have covered before, here, here, and here, the MNvest regulatory regime is fairly onerous on issuers.  MNvest is unavailable unless (among other things):

  • The issuer is organized under the laws of Minnesota;
  • The issuer’s principal offices are located in Minnesota;
  • At least 80% of the issuer’s assets are located in Minnesota; and
  • At least 80% of the issuer’s gross revenues from its business operations are derived in Minnesota.

The above list eliminates MNvest for companies that, for example, prefer to organize in Delaware or have more than 20% of its operations or assets located out-of-state. Other restrictions that limit the appeal of MNvest include the requirement that investors are Minnesota residents, the $1 million annual cap on funds raised via MNvest, the requirement to conduct the offering via a third-party funding portal (or take the time and pay the expense of registering your own) and the limited scope of permitted advertising that present traps for the unwary.

Rule 506(c)

In contrast to MNvest, any company (subject to the bad actor disqualifications of course) can raise an unlimited amount of money and use general advertisements to do so by utilizing the Rule 506(c) exemption of Regulation D. Such 506(c) offerings are, however, limited to accredited investors (among other things).  Nevertheless, since general solicitation is permitted under Rule 506(c), it is some ways easier to “crowdfund” an offering, albeit “the crowd” can only be comprised of accredited investors.

Revised Rule 504

For issuers who prefer to stay local, Rule 504 intrastate offerings also offer an alternative to MNvest. In fact, as we covered here, the SEC recently revised Rule 504 to increase the annual offering amount in any 12-month period from $1,000,000 to $5,000,000.  To top it off, in states that require registration of the securities and require the public filing and delivery to investors of a substantive disclosure document before sale, general solicitation methods may be employed.

From a legal standpoint, with the bevy of alternatives to crowdfunding currently available (including those not mentioned above), it will be interesting to see whether platforms such as MNvest flourish.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 13 cities, including Minneapolis, Mankato and St. Cloud, MN; Kansas City, St. Louis and Jefferson City, MO; Phoenix, AZ.; Denver, CO; Washington, D.C.; Decatur, IL; Wichita, KS; Omaha, NE; and Bismarck, ND.

Drew Kuettel is a member of the firm’s corporate finance group.  Drew works in the firm’s Minneapolis office and can be reached at andrew.kuettel@stinson.com or 612.335.1743.

ISS has announced its 2017 policy changes. Some key changes for the U.S. are discussed below.

Restrictions on Binding Shareholder Proposals.  ISS has adopted a new policy when shareholders do not have the ability to amend bylaws.  ISS will generally vote against or withhold from members of the governance committee if the company’s charter imposes undue restrictions on shareholders’ ability to amend the bylaws. Such restrictions include, but are not limited to: outright prohibition on the submission of binding shareholder proposals, or share ownership requirements or time holding requirements in excess of SEC Rule 14a-8. ISS will recommend a vote against on an ongoing basis.

Overboarded Directors:  ISS will recommend a vote against or withhold from individual directors who sit on more than five public company boards.  This isn’t a new policy per se; the one-year transition period from six to five public company boards is ending.

Stock Distributions: Splits and Dividends: Where there is a management proposal to increase capitalization in connection with a stock distribution or split, ISS will look to the “effective” increase.

Equity-Based and Other Incentive Plans.  ISS will consider dividends payable prior to vesting as a planned feature.  According to ISS, from an incentive and retention perspective, dividends on unvested awards should be paid only after the underlying awards have been earned and not during the performance/service vesting period. Under this new factor, full points will be earned if the equity plan expressly prohibits, for all award types, the payment of dividends before the vesting of the underlying award (however, accrual of dividends payable upon vesting is acceptable). No points will be earned if this prohibition is absent or incomplete (i.e. not applicable to all award types). A company’s general practice (not enumerated in the plan document) of not paying dividends until vesting will not suffice.

ISS also made modifications to the minimum vesting factor. First, an equity plan must specify a minimum vesting period of one year for all award types under the plan in order to receive full points for this factor. Second, no points will be earned if the plan allows for individual award agreements that reduce or eliminate the one-year vesting requirement.

Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m)) (formerly “Incentive Bonus Plans and Tax Deductibility Proposals (OBRA-Related Compensation Proposals).” This policy has been renamed and reorganized to more clearly differentiate the evaluation framework applicable to the various types of amendment proposals.

Shareholder Ratification of Director Pay Programs. This is a new policy.  ISS will recommend a vote case-by-case on management proposals seeking ratification of non-employee director compensation, based on the following factors:

  • If the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support; and
  • An assessment of the following qualitative factors:
    • The relative magnitude of director compensation as compared to companies of a similar profile;
    • The presence of problematic pay practices relating to director compensation;
    • Director stock ownership guidelines and holding requirements;
    • Equity award vesting schedules;
    • The mix of cash and equity-based compensation;
    • Meaningful limits on director compensation;
    • The availability of retirement benefits or perquisites; and
    • The quality of disclosure surrounding director compensation.

Equity Plans for Non-Employee Directors.  ISS is attempting to clarify and broaden the various factors considered when assessing the reasonableness of non-employee director equity plans.  ISS is updating the list of factors to be considered by including new factors (including relative pay magnitude and meaningful pay limits) and simplifying the language for the factors already considered.

The updated policy clarifies that when a non-employee director equity plan is determined to be relatively costly, ISS’ vote recommendation will be case-by-case, looking holistically at all of the factors, rather than requiring that all enumerated factors meet certain minimum criteria. This updated policy aligns the considered factors with the same ones provided under ISS’ new policy on proposals seeking ratification of non-employee director pay programs.

Risk factors related to uncertainties resulting from possible policies that may be implemented by President-elect Trump have begun to appear in SEC filings:

TPI Composites, Inc. Form 10-Q:

The results of the 2016 United States presidential and congressional elections may create regulatory uncertainty for the wind energy sector and may materially harm our business, financial condition and results of operations.

Various legislation, regulations and incentives designed to support the growth of wind energy have been implemented or proposed by the United States government such as the Production Tax Credit for Renewable Energy (PTC) and the Clean Power Plan. In addition, states and foreign governments also have adopted various legislations, regulations and incentives also designed to support the growth of wind energy.

Donald Trump’s victory in the U.S. presidential election, as well as the Republican Party maintaining control of both the House of Representatives and Senate of the United States in the congressional election, may create regulatory uncertainty in the clean energy sector and wind energy sector in particular. During the election campaign, President-elect Trump made comments suggesting that he was not supportive of various clean energy programs and initiatives designed to curtail global warming. It remains unclear what specifically President-elect Trump would or would not do with respect to these programs and initiatives, and what support he would have for any potential changes to such legislative programs and initiatives in the Unites States Congress, even if both the House of Representatives and Senate are controlled by the Republican Party. If President-elect Trump and/or the United States Congress take action or publicly speak out about the need to eliminate or further reduce the PTC, the Clean Power Plan or other legislation, regulations and incentives supporting wind energy, such actions may result in a decrease in demand for wind energy in the United States and other geographical markets and may materially harm our business, financial condition and results of operations.

IMPINJ, INC. Form S-1:

Significant developments stemming from the recent U.S. presidential election or the U.K.’s referendum on membership in the EU could have a material adverse effect on us.

On November 8, 2016, Mr. Donald J. Trump was elected the next president of the United States. As a candidate, President-Elect Trump espoused antipathy towards existing trade agreements, like NAFTA, and proposed trade agreements, like TPP, greater restrictions on free trade generally and significant increases on tariffs on goods imported into the United States, particularly from China. Changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently develop and sell products, and any negative sentiments towards the United States as a result of such changes, could adversely affect our business. In addition, negative sentiments towards the United States among non-U.S. customers and among non-U.S. employees or prospective employees could adversely affect sales or hiring and retention, respectively.

On June 23, 2016, the United Kingdom held a referendum and voted in favor of leaving the European Union, or EU. This referendum has created political and economic uncertainty, particularly in the United Kingdom and the EU, and this uncertainty may last for years. Our business in the United Kingdom, the EU, and worldwide could be affected during this period of uncertainty, and perhaps longer, by the impact of the United Kingdom’s referendum. There are many ways in which our business could be affected, only some of which we can identify as of the date of this prospectus.

The referendum, and the likely withdrawal of the United Kingdom from the EU it triggers, has caused and, along with events that could occur in the future as a consequence of the United Kingdom’s withdrawal, including the possible breakup of the United Kingdom, may continue to cause significant volatility in global financial markets, including in global currency and debt markets. This volatility could cause a slowdown in economic activity in the United Kingdom, Europe or globally, which could adversely affect our operating results and growth prospects. In addition, our business could be negatively affected by new trade agreements between the United Kingdom and other countries, including the United States, and by the possible imposition of trade or other regulatory barriers in the United Kingdom. Furthermore, we currently operate in Europe through an Impinj subsidiary based in the United Kingdom, which currently provides us with certain operational, tax and other benefits. The United Kingdom’s withdrawal from the EU could adversely affect our ability to realize those benefits and we may incur costs and suffer disruptions in our European operations as a result. These possible negative impacts, and others resulting from the United Kingdom’s actual or threatened withdrawal from the EU, may adversely affect our operating results and growth prospects.

The SEC’s Division of Corporation Finance staff issued seven Tender Offers and Schedules C&DIs on November 18th in relation to aspects of the tender offer rules under Regulations 14D and 14E. As administered by the Division’s Office of Mergers and Acquisitions (OM&A), these interpretations shed additional light on certain discrete disclosure requirements under Schedule 14D-9 and provide clarification on the staff’s application of the positions expressed in the Abbreviated Tender or Exchange Offers for Non-Convertible Debt Securities no-action letter (issued January 23, 2015).

Schedule 14D-9 refers to the filing required to be filed by an issuer in response a tender offer in which the issuer provides its recommendation to shareholders of the subject securities as to whether they should accept, reject or take other action with respect to the tender offer. The specified disclosure requirements are derived from the applicable disclosures required under Regulation M-A.

In Question 159.01, the staff indicates that the required summary of material terms of employment or other compensation arrangements for parties making recommendations with respect to the tender offer applies to a financial advisor engaged by an issuer’s board or independent committee for the exclusive purpose of providing financial advice on the underlying transaction.

The interpretation provides that the disclosure, as triggered by Item 5 of Schedule 14D-9 and Item 1009(a) of Regulation M-A, is required for such a financial advisor whose analyses or conclusions are discussed in the issuer’s Schedule 14D-9 even if such party expressly states that it is not soliciting or making a recommendation to the shareholders.

The OM&A staff again focuses on the required disclosure of the “material terms” of employment arrangements for third party advisors in Question 159.02, effectively advising against generic references to “customary compensation” in response to the applicable disclosure requirement and providing some guidance on the types of information that may provide a sufficient summary of applicable compensation terms for third party advisors.

Although determinations as to the sufficiency of disclosure is always subject to the staff’s standard facts and circumstances analysis, the interpretation clearly suggests that the staff is seeking further specificity on this point to ensure that shareholders have sufficient information to evaluate “the merits of the solicitation or recommendation and the objectivity of the financial advisors’ analyses or conclusions.”  Moreover, the staff notes that this interpretation is consistent with the overall purposes of disclosure under Schedule 14D-9 which is to “assist security holders in making their investment decision and in evaluating the merits of a solicitation/recommendation.”

Question 159.02 further suggests some specific disclosures that, while not expressly required by the rules, could reflect a sufficient summary of material compensation elements including:

  • the types of fees payable to the financial advisors;
  • a sufficiently-detailed narrative disclosure of fees (if there is, otherwise, no quantification of the fees);
  • any contingencies to the payment of the financial advisors’ compensation; and
  • any other information about the compensatory arrangement that would be material (including any material incentives or conflicts).
  • The remaining interpretations released by the staff (Questions 162.01 – 162.05) are each aimed at providing clarification on the application of the staff’s determination in The Abbreviated Tender or Exchange Offers for Non-Convertible Debt Securities no-action letter.

As background, the no-action letter discusses the parameters in which the staff would not object to a “Five Business Day Tender Offer” for non-convertible debt that would otherwise violate rules Rule 14e-1(a) or Rule 14e-1(b) under the Exchange Act (which, respectively, require that a tender offer must be open for no less than twenty business days and require a 10-day extension of the open period for a tender offer following certain increases and decreases to the class of securities being sought, the consideration, or the soliciting fee).

The 2015 no-action letter was a further relaxation of the staff’s application of the tender offer rules for non-convertible debt tenders (e.g., allowing a shorter offering period – five business days instead of 7-10 calendar days and the exchange of qualified debt securities as part of the tender offer). Historically, the staff’s accommodations for tender offers for non-convertible debt securities reflect the view that such offerings may not be subject to same concerns as tender offers for equity securities (and, thus, may not require the same protections).

The related interpretations issued by the staff clarify the following:

  • A foreign private issuer relying on the no-action letter to conduct an abbreviated offer can satisfy the stated requirement thereunder to furnish a press release announcing the abbreviated offer on a Form 8-K (on the first business day of the offer) by instead filing such notice on Form 6-K, the applicable form for foreign private issuers (Question 162.01);
  • References in the no-action letter to the requirement that abbreviated offers must be made “for any and all” subject debt securities do not preclude such offers from including minimum tender conditions (Question 162.02);
  • Under the letter, abbreviated offers for consideration consisting of Qualified Debt Securities may be made to qualified institutional buyers (QIBs) and non-U.S. persons for a fixed amount of Qualified Debt Securities so long as a fixed amount of cash consideration is concurrently offered to persons other than QIBs and non-U.S. persons. The cash to be offered to persons other than QIBs and non-U.S. persons may be calculated with reference to a fixed spread to a benchmark (provided that the calculation is the same as the calculation used in determining the amount of Qualified Debt Securities) (Question 162.03);
  • An offeror can still rely on the letter to conduct an abbreviated offer if it issues “Qualified Debt Securities” to “Eligible Exchange Offer Participants” pursuant to Securities Act Section 3(a)(9) (instead of Section 4(a)(2) or Rule 144A, as required in the no-action letter) (Question 162.04); and
  • Offerors relying on the no-action letter may announce an abbreviated offer at any time but may not commence the offer prior to 5:01 p.m. on the tenth business day after the first public announcement of a purchase, sale or transfer of a material business or amount of assets described as further defined in the letter. (Question 162.05).