The RR Donnelley Securities Newsletter contains the latest developments and practical guidance for corporate & securities law practitioners. The content is provided by TheCorporateCounsel.net.
The features in this issue include:
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1| A Little Holiday Present: SEC Adopts Accredited Investor Net Worth and Mine Safety Disclosure Rules
In late December, without an open Commission meeting, the SEC adopted accredited investor net worth and mine safety disclosure rules. Besides freaking out those that are now rushing to write memos about these new rules, many members asked if more adoptions are forthcoming before the end of the year given that the SEC’s Dodd-Frank implementation schedule was updated – and that still shows a lot of things planned for December.
Although anything can happen, we doubted any new rulemakings will happen during the seven working days left for the year. The two that came out seriatim were non-controversial and we couldn’t imagine the SEC would adopt rulemakings that are more controversial – such as conflict minerals – without an open meeting. Although an open meeting is not required…
2 | A Big Deal: Corp Fin Limits Confidential Submissions by Foreign Private Issuers
Historically, Corp Fin has allowed foreign private issuers (FPIs) to submit initial drafts of registration statements – for their IPO or other first-time filings – on a “draft” confidential basis. In late December, Corp Fin released this new policy that notes its position is being changed, effective immediately. Yes, immediately – there is language in the new policy that addresses those FPIs that have already filed and what it means for their amendments.
Here’s analysis from Alex Cohen of Latham & Watkins:
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Under the new policy, FPIs that are only listing securities in the United States – as opposed to FPIs that are listed or concurrently listing outside the United States – will in most cases no longer be able to submit confidentially. So, to take an example, a Chinese company doing an IPO on NASDAQ only will from now on likely have to file its F-1 registration statement publicly on EDGAR, and will not be able to submit initial rounds of the F-1 on a confidential basis.
According to the new policy, confidential submission is still allowed under the following circumstances:
- Foreign government that is registering its debt securities;
- FPI that is listed or is concurrently listing its securities on a non-U.S. securities exchange;
- FPI that is being privatized by a foreign government; or
- FPI that can “demonstrate that the public filing of an initial registration statement would conflict with the law of an applicable foreign jurisdiction.”
Under certain circumstances, Corp Fin may request a non-US issuer to publicly file its registration statement even though it would otherwise fall within the new policy. Also note that shell companies, blank check companies and “issuers with no or substantially no business operations” will also not be permitted to use confidential submission.
How does this affect ongoing deals? Let’s say you are currently in the middle of the confidential submission process but don’t meet the new policy – e.g., you are working on a Form F-1 for an FPI listing only in the United States. In that case, the SEC Staff will require the next draft of the F-1 to be filed publicly on EDGAR.
As for Broc’s thoughts, he suspects this new policy operating in conjunction with the new reverse merger limitations will limit the number of ‘not ready for prime time’ companies seeking to access the U.S. markets (and may disproportionately affect companies from certain countries). He imagines some foreign companies typically have more substantial comments and revisions in response to SEC comments than a comparable US company. Multiple rounds of F-1/As with heavy revisions to the financials will probably not instill potential IPO investors with a lot of confidence and, also, comment letters would eventually become public – whereas, He’s not sure they did before with a confidential review. Extensive comments probably don’t look good in the eyes of creditors even if a FPI decided to withdraw its registration statement which he thinks quite a few of the foreign confidential filers eventually do.
3 | Corp Fin Issues Disclosure Guidance for Real Estate Limited Partnerships
In late December, Corp Fin issued the second installment of its new type of informal written guidance – “CF Disclosure Guidance: Topic No. 3 – Sales Material under Guide 5“ – that explains the comments issued most frequently by the SEC Staff when they review sales material from real estate limited partnerships.
4 | SEC Enforcement's "Leveraging the Media" Strategy
As most of us in the securities law community know, the SEC tends to bring cases that target celebrities if they can because of their limited resources. The media boost by bringing these types of cases serve to help deter potential fraudsters – so it’s a good thing. Hence, this recent insider trading case against a former Red Sox baseball player – and this pump and dump case against “Rudy” Ruettinger, a former Notre Dame football walk-on and the subject of the movie “Rudy.” In his new “Cady Bar the Door Blog,” David Smyth of Brooks Pierce analyzes the latter in an entry entitled “Oh, Rudy....” And then the SEC charged a former NFL player in a pumping scheme...
5 | SEC Reconsidering 17 Rules for Small Business Impact (Including Reg FD and Insider Trading Rules)
As Vanessa Schoenthaler blogged in her “100 F Street Blog,” the Regulatory Flexibility Act of 1980 requires federal agencies to review those rules that “have a significant economic impact upon a substantial number of small entities . . . to determine whether [they] should be continued without change, or should be amended or rescinded ... [in order] to minimize any significant economic impact . . . [on] such small entities.” Reviews must be undertaken within ten years of a rule being adopted. In mid-December, the SEC published this list of 17 rules that will be reviewed over the next year.
By the way, note that this is a required regular exercise for the SEC – for example, here is its 2010 list, 2009 list and 2000 list. . .
6 | SEC Chair Discusses the Coming Beneficial Ownership Rules Overhaul
In this speech in mid-December, SEC Chair Mary Schapiro gave us a few broad parameters of what the agency’s overhaul of the beneficial ownership reporting rules might look like (the speech also addresses proxy plumbing, proxy access, say-on-pay, etc.). Here is what she said on that topic:
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Next year, we plan to begin a broad review of our beneficial ownership reporting rules. We think it’s important to modernize our rules, and we are considering whether they should be changed in light of modern investment strategies and innovative financial products. Issues that we will consider include:
- Whether the 10-day initial filing requirement for Schedule 13D filings should be shortened;
- Whether beneficial ownership reporting should be changed with respect to the use of cash-settled equity swaps and other types of derivative instruments;
- How the presentation of information on Schedules 13D and 13G can be improved.
The Dodd-Frank Act has provided the Commission with new statutory authority to shorten the 10-day filing deadline for 13D, as well as to regulate beneficial ownership reporting based on the use of security-based swaps. And, earlier this year, the SEC received a petition for rulemaking recommending amendments to Regulation 13D-G.
The petition asks the SEC to broaden the definition of beneficial ownership to include interests held by persons who use derivative instruments. The petition also specifically requests that the time period within which initial beneficial ownership reports must be filed be shortened to one calendar day because technological advances have rendered the 10-day window obsolete.
Many feel that the 10-day window:
- Results in secret accumulation of securities;
- Results in material information being reported to the marketplace in an untimely fashion; and
- Allows 13D filers to trade ahead of market-moving information and maximize profit, perhaps at the expense of uninformed security holders and derivative counterparties.
In response, some argue that:
- Tightening the timeframe may reduce the rate of returns to large shareholders, and thereby result in decreased investments and monitoring of and engagement with management;
- There is no evidence that changes in trading technologies and practices have led to significant increases in pre-disclosure accumulations of large ownership stakes; and that
- State law developments, such as the validity of poison pills, staggered boards and control share statutes, have tilted the regulatory balance in issuers’ favor.
Our first step will likely be a concept release given the controversy surrounding some of the issues.
7 | Shareholder Proposals: Corp Fin Supports Staff's Exclusion of Auditor Rotation Proposal
As Broc blogged a few weeks back on our “Proxy Season Blog,” the Carpenters Union had asked for a reconsideration of the Corp Fin Staff’s decision to allow the exclusion of the labor fund’s auditor rotation proposal at Deere & Company. In mid-December, Corp Fin decided to side with its Staff and allow the exclusion and not kick it up to the Commissioners...
8 | ISS Issues White Paper on "Pay-for-Performance" Test
In late December, ISS published its promised white paper that describes the pay-for-performance methodology under which it will implement its 2012 policy updates. ISS will begin to apply this new methodology on February 1st. Here’s an excerpt from a Wachtell Lipton memo by Michael Segal, Jeannemarie O’Brien, Jeremy Goldstein and Timothy Moore:
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The test is one of the primary methods by which ISS determines whether to recommend for or against a company’s management say-on-pay vote, with companies failing the test being deemed to have a “pay for performance disconnect.” In determining whether there is a “pay for performance disconnect” this proxy season, ISS will measure the degree of alignment between CEO pay and total shareholder return within the subject company’s peer group for a one- and three-year period, as well as the absolute alignment between CEO pay and the company’s TSR over a five-year period.
The white paper specifies that ISS will select 14 to 24 peer companies against which the subject company’s TSR performance and CEO pay will be measured for the one- and three-year periods ending on the last day of the month closest to the subject company’s fiscal-year end. Peer companies will be limited to those in the same two-digit GICS category as the subject company, each with annual revenues (or assets for financial companies) between 0.45x and 2.1x the subject company’s revenues (or assets) and a market capitalization between 0.2x and 5x the subject company’s market capitalization. This list of companies will then be filtered to 14 to 24 companies in the subject company’s six-digit GICS category (or four- or two-digit category if fewer than 14 companies exist in the six-digit category), with companies “closest in size” (presumably based on market capitalization or assets) selected first and larger and smaller companies added to maintain the subject company at or near the median size of the list of peer companies.
“Super-mega” non-financial companies (approximately 25 Russell 3000 companies each with greater than $50 billion in annual revenues and at least $30 billion in market capitalization) will collectively comprise a stand-alone peer group, and ISS will compare their respective one- and three-year TSR performance and CEO pay against the members of that group. In each case, annual revenue, assets and market capitalizations will be determined as of June 1 or December 1 (presumably the relevant year is the year prior to the year in which the proxy is definitively filed).
Now that the white paper has been released, companies can assess how their TSR performance and CEO pay will compare to that of their peers under ISS’ test. Companies should use the criteria set forth in the white paper to determine whether they are likely to have a “pay for performance disconnect” based on these criteria, and, if so, what actions, if any, are advisable to take in light of this analysis.
At the same time, ISS also announced a new version of its Governance Risk Indicators (GRId 2.0), and issued information about the changes that will become effective in February. Tune in on January 24th for the always entertaining webcast – “Pat McGurn’s Forecast for 2012 Proxy Season: Wild and Woolly.”
9 | House Financial Services to Hold Hearing on SEC Settlement Practices
As noted in this press release, the Republican and Democratic leaders of the House Financial Services committee are planning a hearing on the SEC’s practice of settling cases without requiring defendants to admit or deny guilt. No date has been selected yet...
10 | One Way to Increase Voting Levels? Pay Shareholders?
Ever since e-proxy’s implementation has dramatically reduced voter participation rates, practitioners have been trying to figure out new ways to encourage shareholders to vote. Although Broc doesn’t think the SEC would like kindly on companies paying shareholders to vote – not necessarily to vote with management, just to vote period to ensure quorum is reached – he’s sure that conversation has been had more than once.
But what might this look like if it was tried? A member emailed in this: I just happened to come across pages 3-4 of this proxy statement for an incorporated village in Alaska that is somehow subject to the securities laws and involved in a contested solicitation. The solicitation offers a chance to win cash prizes for those that send in their proxy including an “Early Bird Special.” Pretty wild.
So this change in Staff’s prior policy, which allowed FPIs to get ready for an IPO without publicly revealing their plans until they were ready to solicit, may affect whether non-US issuers decide to list their shares in the United States...
11 | A Delicate Situation: Stock Buybacks and Meeting Executive Pay Targets
With a down market and companies sitting on boatloads of cash, many are already think stock repurchases as noted in this recent NY Times article entitled “As Layoffs Rise, Stock Buybacks Consume Cash.” As intimated by the title of this article, buyback programs likely will be subject to more scrutiny than in the past. In particular, the purpose the buyback may be called into question – is there a relationship to achievement of an executive compensation target? The optics of a buyback are important these days.
Here’s an excerpt from the NY Times article to consider:
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The principle behind buybacks is simple. With fewer shares in circulation, earnings per share can rise smartly even if the company’s underlying growth is lackluster. In many cases, like that of the medical device maker Zimmer Holdings, executives are able to meet goals for profit growth and earn bigger bonuses despite poor stock performance.
“It’s clear there’s a conflict of interest,” said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “Unless earnings per share are adjusted to reflect the buyback, then to base a bonus on raw earnings per share is problematic. It doesn’t purely reflect performance.” In addition, executives, who are often large shareholders, stand to benefit from even a small, short-term jump in stock prices.
12 | Mailed: November-December Issue of "The Corporate Counsel"
We mailed the November–December Issue of The Corporate Counsel and it includes pieces on:
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- 2012 Proxy Season Items
- SLAB 14F–And the Shareholder Proposal Process Gets Much Simpler
- Crafting Issuer-Specific Shareholder Voting Outcome Requirements
- Late 8-K Reporting of Board’s Say-on-Pay Frequency Determination
- The Staff’s Opinions on Opinions
- The End of an Era–Confidential IPO Filings for Foreign Private Issuers
- Section 12(g) No-Action Relief for RSUs–The Windy Road from Facebook to Zynga/Twitter
- The Staff Clarifies the Rule 3-10 Consequences of Customary Subsidiary Guarantee Release Provisions
Act Now: Get this issue for free when you try a 2012 No-Risk Trial today.
13 | Mailed: November-December Issue of "The Corporate Executive"
We mailed the November–December Issue of The Corporate Executive and it includes pieces on:
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- Understanding the ISS Burn Rate Policy
- Tax Complexities in Diluted EPS Calculations
- Section 6039 Returns–Lessons Learned
- Rule 144 Gift Compliance Letters
Act Now: Get this issue for free when you try a 2012 No-Risk Trial today.
14 | More on "The Mentor Blog"
We continue to post new items daily on our blog – “The Mentor Blog“ – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
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- Watch Those Other Broker Charges
- Evidence: Effects of Prescribing Majority Voting as the Default Voting Standard
- Investors Back Majority Voting as Default Legal Standard
- Another Interview with Bob Monks
- #occupywallstreet: Live!
15 | People: Who's Doing What and Where
Corp Fin has announced that the releasing of comment letters and response letters would be reduced to “no earlier than 20 business days” from when Staff review is complete from the “no earlier than 45 days” standard that has been in effect since these types of documents were first made public in ‘05. The new standard commences on January 1st.
Note that the new standard uses “business days” rather than mere “days” in it – so the reduction is roughly a third, not a half as might appear at first blush.
16 | TheCorporateCounsel.net Conference Calendar
17 | What's New on TheCorporateCounsel.net and sister sites
Among other new additions, during the last month we have:
- Interviewed a number of experts for Inside Track on TheCorporateCounsel.net, CompensationStandards.com and DealLawyers.com, including:
- Posted the following:
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© 2012 Executive Press.
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