Q&A Discussion Forum For TheCorporateCounsel.net

Q: Do you know if there is any guidance regarding whether an issuer is required to include in item 15 of its Form D any commissions paid directly by investors to a placement agent in connection with a Reg D offering by such issuer, or is the issuer required to include only commissions/finders fees paid by the issuer (and not investors) to the placement agents? If it is required to include payments by investors to placement agents, it is possible that it might not be aware of such payments.

RE: I think Item 15 casts a pretty broad net. See Securities Act Forms CDI #130.08

Question 130.08

Question: Under "Item 15—Sales Commissions and Finder’s Fees Expenses" of Form D, are issuers required to provide only the amount of sales commissions and finders' fees that are paid directly or indirectly out of the offering proceeds?

Answer: No. The requirement is to provide the amounts of sales commissions and finder’s fees. There is no limitation to commissions and fees paid out of the offering proceeds. [Feb. 27, 2009]

I think if Item 15 wasn't interpreted to include a requirement to disclose commissions paid by investors, that would present a huge loophole permitting issuers to structure around the disclosure required by Item 15. I think the answer to your concern about making the issuer aware of the payments is to include an obligation to provide that information in the placement agent agreement and/or to include a rep in the subscription agreement.
-John Jenkins, Editor, TheCorporateCounsel.net 3/26/2020

Q: I wonder if issuers are closing their trading windows preventing their Section 16 officers from buying/selling issuer stock based on the fact that COVID-19 is negatively affecting their business and this news has not yet been publicly disseminated?

RE: Undoubtedly, and it's a very good idea. Here's an excerpt from the guidance that Corp Fin issued yesterday:

"Companies and other related persons need to consider their market activities, including the issuance or purchase of securities, in light of their obligations under the federal securities laws. For example, where COVID-19 has affected a company in a way that would be material to investors or where a company has become aware of a risk related to COVID-19 that would be material to investors, the company, its directors and officers, and other corporate insiders who are aware of these matters should refrain from trading in the company’s securities until such information is disclosed to the public."
-John Jenkins, Editor, TheCorporateCounsel.net 3/26/2020

Q: The issuer is contemplating pulling a full draw on its asset based lending and revolver credit lines. Is this an 8-K reportable event? None of the Items look applicable, but wanted to gut check myself. I figure several issuers especially in the oil and gas industries may be in a similar situation.

RE: Yes, there are a lot of companies drawing down lines, and I think that it's prudent to make an Item 2.03 filing if the company is making an extraordinary draw-down on a line of credit. Boeing & GM apparently thought so, too.
-John Jenkins, Editor, TheCorporateCounsel.net 3/26/2020

Q: A section 16 officer has asked to sell issuer stock which he holds in his own personal discount brokerage account. The trading window is "open," and he is not in possession of MNPI. We will file a Form 4 to disclose his sale, and there is no opposite-way matching transaction in the prior 6-months. Anything else we should consider? Would his broker still need to file a Form 144, or is that for restricted stock only?

RE: Those are the circumstances that would generally allow an officer to sell under most insider trading policies. Another thing to consider is how the shares were acquired. If they were registered on a Form S-8 or acquired in the open market, then they could be sold under Rule 144 without a holding period. If the securities are restricted securities for purposes of Rule 144, then the individual would need to establish a holding period before they could be sold under Rule 144.

Even if the issuance of the shares was registered on a Form S-8 or the shares were acquired in the open market, I think most companies take the position that their executive officers are affiliates and that they are subject to the notice, manner of sale, volume and current public reporting requirements of Rule 144.
-John Jenkins, Editor, TheCorporateCounsel.net 3/25/2020

RE: Is there a risk to the issuer if the Form 144 is not filed by the affiliate? This is a small discount broker, and they have no idea what Rule 144 entails.
-3/25/2020

Q: Has anyone encountered a situation where the audit fee disclosure in the proxy statement was subsequently amended to update the fee amounts? Can a company disclose preliminary fees in the definitive proxy statement, if there is a chance that those fees could be adjusted up or down after the proxy statement is filed? If not, how do companies handle a situation where the audit fees have not been finalized prior to the filing of the proxy statement?

RE: Ideally, you want to have the auditors verify the fee disclosure that you include with the proxy statement. If that's not possible to do in a timely fashion, I think the practical answer would be to use your best efforts to develop an estimate of the final number that your auditors and audit committee are comfortable with. I would probably footnote that number and indicate what it was and how it was determined. If the final number changes materially, then I think you'd want to supplement the proxy statement to disclose the actual number.

I've seen a number of proxy statements supplemented to include new numbers for audit fees. Most of the ones with which I'm familiar have involved correction of mistakes. Here's one that was filed last year:
-John Jenkins, Editor, TheCorporateCounsel.net 3/25/2020

Q: Does referencing pages from a company website in a proxy statement deem those pages incorporated by reference into the proxy, and thus causing the company to be liable for the contents of the website? I know that is the case in a securities offering, but does that rule apply to a proxy, too? The references are not related to any voting matters, if that matters. Thanks!

RE: I think that if you point to information on your website in an investor document, you're responsible for the accuracy of its content and potentially subject to liability for material misstatements or omissions contained in it. I think that's true regardless of whether you're doing it in a 1933 Act filing or a proxy or periodic report. If you link to it, you are clearly liable for it under Rule 105(c) of Reg S-T, but you're not permitted to link to it unless it is filed with the SEC.
-John Jenkins, Editor, TheCorporateCounsel.net 3/25/2020

Q: Where directors have had conflicts or other circumstances preventing them from attending an annual shareholders' meeting in- person, I know that companies allow them to dial-in to still participate in/attend the shareholders' meeting where possible under state law/the company bylaws. This dial-in is never made available to shareholders. This year, I think more directors than ever will participate in a shareholders' meeting via phone or video conference. I don't think state law typically allows for this — as it would be disparate treatment of shareholders of a particular class — director shareholders getting a dial-in and non-director shareholders not getting a dial-in, but what is the usual defense/analysis? Thanks for your thoughts.

RE: I don't think most shareholders find this to be a big deal, so I don't think companies spend a lot of time coming up with a defense for it. Shareholders want directors to attend the meeting. If they can't do so otherwise than by dialing in, then I think people are generally accepting of this. By the way, I think this is likely to be even less of an issue this year with so many companies using hybrid formats or going virtual.
-John Jenkins, Editor, TheCorporateCounsel.net 3/24/2020

Q: A majority stockholder is willing to provide a backstop commitment for our client's proposed rights offering but requires that the issuer agree to reimburse its expenses. NYSE is taking the position that reimbursement of such expenses is against their policy by providing a benefit to the related party and thus treating it differently than the public stockholders in the rights offering (thus taking it out of the exemption from the stockholder approval requirement). We had understood such provisions to be a customary approach. Is this a new policy for the NYSE, and is anyone aware of any authority in support of the position (interpretive guidance or otherwise) or any recent exceptions? Thanks.

RE: I don't know about expense reimbursements, but I know the NYSE has long objected to paying a backstop fee to an affiliate on the same grounds, so I guess its position on expense reimbursement isn't that surprising. Here's an excerpt from a Paul Hastings memo on rights offerings from the last crisis:

"However, if the rights offering includes a backstop purchaser who is also a current stockholder of the issuer, the NYSE and Nasdaq impose additional obligations on the issuer in order to qualify as a “public offering” under their listing standards. Specifically, the backstop purchaser may only participate in the rights offering on the same terms as the other stockholders and therefore may not be paid a backstop fee from the issuer. In addition, if the rights offering does not contain an over-subscription privilege, the NYSE prohibits the backstop purchaser from participating as a securityholder in the rights offering (i.e., the backstop purchaser is only permitted to purchase the securities not subscribed for in the rights offering). If the rights offering contains an over-subscription privilege, the NYSE permits the backstop purchaser from participating in the initial round of the rights offering, but prohibits the purchaser from participating in the oversubscription round.”
-John Jenkins, Editor, TheCorporateCounsel.net 3/24/2020

Q: Is the last day for a director not standing for re-election as the annual meeting, the day of the annual meeting?

RE: Yes. In the absence of a classified board, all directors' terms typically expire at the annual meeting of shareholders. So, if someone opted to complete his or her term as a director but not stand for reelection, that person's term would typically expire at the annual meeting. There's often language in the bylaws to that effect.
-John Jenkins, Editor, TheCorporateCounsel.net 3/23/2020

Q: Companies like Sonoco have taken a novel approach to their upcoming annual meeting by allowing shareholders access to the meeting via the live telecast/webcast and view slides, rather than attend their meeting in person. Berkshire Hathaway announced a similar but different approach. I see these types of creative ideas that are not a true Virtual/Hybrid meeting to increase in number. Is anyone aware of any other companies taking similar approaches?

RE: In their proxy statement (filed 3/20/20), PepsiCo says they are not permitted to hold a virtual-only meeting, but they are webcasting the meeting and encouraging shareholders to participate via the webcast.
-3/22/2020

Q: I seem to recall there was some guidance on whether a company needed to mail any supplemental materials for a director departure after the proxy was mailed but before the annual meeting of shareholders, but can't seem to get my hands on it. Does the analysis change if the director is or is not up for election? Thanks for any direction.

RE: I'm not sure that there's guidance from the Staff on this, but I think most practitioners take the position that it isn't necessary to amend or supplement the materials. Here's an excerpt from the July 2018 issue of The Corporate Counsel:

"While a director's resignation will prompt an 8-K filing and in some cases a press release, a director's departure does not impact the disclosure regarding the remaining directors and is unlikely to influence the shareholder vote on those directors. In other words, it is not material to the decision that investors are being asked to make. Companies may opt to update the proxy to reflect the director's departure, in which case it would likely disclose that any votes received for the former director will be disregarded. The other alternative is to do nothing, given the immaterial nature of the event."
-John Jenkins, Editor, TheCorporateCounsel.net 3/22/2020

Q: Given the effect that COVID-19 has had and will continue to have on businesses across the globe, the executives of a public reporting company each wish to take a reduction in salary in connection with a reduction in hours worked. The reduction in salary would be pro rata vs. the reduction in hours worked. I am aware of CDI 117.13 and have read the commentary on page 123 of the Form 8-K Handbook. It seems unclear whether this sort of ad-hoc amendment would fit under the umbrella of “routine change”. We do not believe the decrease to be material, but would an 8-K otherwise be triggered in connection with this type of salary decrease?

RE: I think I'd differentiate this situation from an ad hoc salary adjustment for a particular individual that doesn't involve any changes in the terms of that person's employment. Here, the company is implementing an across-the- board reduction in compensation that applies to its executive officer group and is accompanied by a reduction in hours worked. It's a judgment call, but I think that when a reduction in compensation is accompanied by a change in employment terms, I would file an Item 5.02 8-K.
-John Jenkins, Editor, TheCorporateCounsel.net 3/21/2020

Q: Where a company has such a policy and a resignation is required to be tendered upon a change in primary job/responsibilities, if a director gets terminated from his primary job/responsibilities, is it more customary for such a tendered resignation in this context to be accepted or rejected by the Board? Thanks.

RE: I don't have any empirical data, but I think employee directors' resignations are generally accepted when the company terminates their employment. It usually is a facts and circumstances decision with outside directors. In my own experience, the boards I've worked with that have a resignation policy have typically opted not to accept the resignation of an outside director. In these cases, the individuals were perceived to be good directors and played important roles on key committees. Ultimately, the board did not view their resignation as being in the best interests of the company.

I think that the answer is different when the outside director loses their position as an executive at another company under a cloud. In that case, I would expect the resignation to be accepted. I would also expect that resignations of directors designated by investors would often be accepted if those individuals were no longer affiliated with the investor who designated them.
-John Jenkins, Editor, TheCorporateCounsel.net 3/21/2020

Q: One of the eligibility requirements to S-3 is that the issuer has not "failed to pay any dividend or sinking fund installment on preferred stock." Does anyone have any experience analyzing "failure to pay" for PIK-like preferred stock? Terms of PS: --PS has an initial stated value. --Dividends are declared and paid only as, if and when declared by the Board. --Can be declared and paid in cash at specified rate. --If not declared and paid in cash, automatically, without any action of Board, accrue and increase stated value as of dividend payment date at rate higher than cash rate. --Ultimately convertible into common stock by reference to stated value. --Issuer has elected to allow dividends to accrue and increase stated value rather than pay in cash. I note this CD&I. Question 115.09 Question: Is the omission to declare a dividend on non-cumulative preferred stock a payment failure disqualifying an issuer from using Form S-3? Answer: No, because there is no liability to pay the dividend that arises under the terms of the non-cumulative preferred. This omission cannot be equated to a payment default on a debt instrument or capital lease. A declared but unpaid dividend on preferred stock, however, would disqualify the issuer from using Form S-3, as would the existence of accrued and unpaid dividends on cumulative preferred stock. [Feb. 27, 2009] Seems to me that: --there is not declared and unpaid dividends. --there is not a "failure to pay" because economically, the holders are either paid by (1) cash dividends or (2) increases in stated value. --there may never "exist" accrued and unpaid dividends since the payment amount is either paid or increases stated value as of dividend payment date. --cannot be equated to payment default because the actions by issuer are permitted under terms of PS.

RE: I've not seen anything directly addressing this, but if the terms of the securities provide the issuer with the ability to opt not to declare dividends and instead increase the stated value, I agree with your analysis. I don't see how this can reasonably be construed to involve a "failure to pay" dividend.

I would differentiate this situation from one involving accrued and unpaid dividends on cumulative preferred stock because the issuer has not satisfied an obligation to pay dividends to which it is subject under the terms of the securities. In contrast, here the issuer has satisfied its obligations to the holders by increasing the stated value of their shares in lieu of paying a cash dividend, as expressly permitted by the terms of the securities.
-John Jenkins, Editor, TheCorporateCounsel.net 3/20/2020

Q: With all the valid reasons to have a virtual annual meeting of shareholders this year (or at least valid reasons not to have a physical annual meeting of shareholders), what can be said about the liability/exposure for having such a meeting where it is not expressly permitted by state law (are companies going to take this risk, and why/why not)? What is the nature of the underlying claim, and what are the consequences? Thanks in advance for any insights.

RE: Who knows? But, there are likely numerous potential bases for liability. For example, there's plenty of tort case law supporting liability for negligently exposing someone to a contagious disease that a plaintiff might try to import into a situation like this. See, e.g., Duke v. Housen, 589 P.2d 334, 340 (Wyo.) ("One who negligently exposes another to an infectious or contagious disease, which such other person thereby contracts, can be held liable in damages for his actions.") and Crowell v. Crowell, 180 N.C. 516, 519, 105 S.E. 206, 208 (1920) ("[A]side from the question of assault, it is a well-settled proposition of law that a person is liable if he negligently exposes another to a contagious or infectious disease.") (citing Skillings v. Allen, 143 Minn. 323, 173 N.W. 663 (1919).
-John Jenkins, Editor, TheCorporateCounsel.net 3/20/2020

RE: Ah, definitely agree on those points! But my question was more around the governance point - where state law and a company's bylaws do not allow for a 100% virtual meeting, and company goes ahead and has a 100% virtual meeting anyway given the pandemic, can shareholders bring a claim for failure to have a physical meeting/violating state law and the bylaws, and what does such claim look like/what is the risk to the company? Thanks again.
-3/20/2020

RE: I think the biggest risk is a claim that the meeting and any actions taken at it were invalid, and a remedy that seeks a court order to hold a new one. See the response to Topic #10234 for an example of one potential scenario. While my guess is that courts will approach some of these issues with greater flexibility given the nature of the times, I don't think that holding a meeting that, on its face, does not comply with applicable provisions of state corporate law represents an insignificant risk.
-John Jenkins, Editor, TheCorporateCounsel.net 3/20/2020

Q: Trying to determine the level of risk if a Delaware corporation switches to a virtual annual meeting after filing/mailing proxy materials and decides not to mail a new notice to shareholders (as required by Delaware law). The only items on the agenda are the election of directors, ratification of auditors and say-on-pay. Any thoughts are appreciated.

RE: It's hard to quantify the risk, but I'd say the risks of completely ignoring a notice requirement are not insubstantial. It seems to me that in doing that, you'd leave yourself vulnerable to challenges to the validity of the meeting and the actions taken there. One potential risk might be an activist that wants board representation using the notice issue as leverage. For example, it may ask a court to compel a meeting based on allegations that the one you held was not properly noticed. That could significantly accelerate the timetable of a proxy fight.
-John Jenkins, Editor, TheCorporateCounsel.net 3/20/2020

Q: Hi. Given that the entire state of California is now under an order to stay at home, any thoughts on how to handle a shareholder meeting that is scheduled to be held in the coming days? The company already has all of the votes it needs to approve everything, did not expect any shareholders to attend (even before the order) and would be okay having one administrative person go to the meeting location to "chair" the meeting and read the script. The plan would be for everyone else to dial in on a conference line (management, counsel, inspector). Welcome thoughts on whether we think that (i) the meeting could be held this way (for instance, will the admin person be allowed to go to the building if it's not an "essential" service?) and (ii) whether there are any other concerns. They could try to scramble and do a virtual meeting, but would rather not incur the expense and scramble for that if it's not needed, especially since they have all the votes they need already. Thanks!

RE: When it comes to whether an individual may lawfully enter the building where the meeting is to be held under the terms of Gov. Newsom's order, I'd strongly urge you to consult with California counsel. The ink isn't dry on that order, and it addresses a rapidly evolving situation in that state; it's not particularly well suited for us to address in a Q&A forum.

Assuming you can't do that, then I think you're probably going to either need to postpone the meeting or, if you can, move to a virtual format. If you're a California corporation, going virtual might not be a viable alternative given the hoops you have to jump through under that state's statute. If you're a Delaware corporation, it's a lot easier. We have posted a number of law firm memos addressing transitioning to a virtual or hybrid meeting in the wake of COVID-19, and I'd suggest you take a look at them for further insights.
-John Jenkins, Editor, TheCorporateCounsel.net 3/20/2020

Q: For a new Company holding its first annual meeting of shareholders, how do ISS and Glass Lewis know where they should e-mail copies of preliminary and final reports (I don't think ISS/GL have e-mail addresses on file for Company contacts)? Should Company reach out to ISS/GL proactively. If so, at what phone number for each? Thanks.

RE: If you want to meet with Glass Lewis, they have an "Issuer" tab on the firm's website and within that, you can request a meeting. Once you click on the "Issuer" tab of Glass Lewis's website, there is also a link available to receive Glass Lewis's research paper, which you will need to purchase. CGLytics is currently Glass Lewis's partner for pay-for-performance analysis, and my understanding is that you may also purchase the report from them.

ISS generally requires that you provide contact information to them early in the year to ensure you will receive a preliminary copy of its proxy voting report before it's released to investors that subscribe to ISS's service. That said, when ISS provides the report to you for review, they typically provide it to you 24-48 hours before it is released to investors. Once the report is released to investors, the report is also released to the company and unlike Glass Lewis, it is free. Information on how to engage with ISS about proxy research can be found on this page of ISS's website:

More information about ISS and Glass Lewis can be found in our "Proxy Advisors" Handbook available on our site; here's the link for that handbook:
-Lynn Jokela, Associate Editor, TheCorporateCounsel.net 3/19/2020

Q: Instruction #1 to Item 405 states "If no disclosure is required, registrants are encouraged to exclude the caption 'Delinquent Section 16(a) Reports.'" Does this mean exclude the caption but include the disclosure that no one was late, or exclude the caption and the disclosure altogether?

RE: Exclude it all if you don't have delinquent filers to report. The intent was to eliminate unnecessary disclosure. Here's an excerpt from the proposing release:

"The staff’s final recommendation for revising Item 405 was to eliminate the use of the “Section 16(a) Beneficial Ownership Reporting Compliance” heading when the registrant does not have Section 16(a) delinquencies to report. The staff has observed that some registrants have included this heading to disclose that they have nothing to report pursuant to Item 405. To reduce unnecessary disclosure and improve the ability to search a registrant’s filings for disclosure of Section 16(a) reporting delinquencies, we are proposing to add an instruction to Item 405 that encourages registrants to exclude the heading if they have no delinquencies to report. We are also proposing to change the heading to “Delinquent Section 16(a) Reports” to more precisely describe the required disclosure and to further encourage registrants to exclude the heading if they do not have delinquencies to report."
-John Jenkins, Editor, TheCorporateCounsel.net 3/19/2020

Q: A registrant is considering disclosing in its proxy statement this year that it will include a proposal to make changes to its corporate governance in next year's (2021) proxy statement. In other words, the registrant is considering previewing a future proposal in its current filing. Is there any guidance around this approach?

RE: I'm not aware of any guidance. Off the top of my head, I can't recall any company that's done something like that. A company considering something like this should carefully think through the implications of tipping its hand about what it may propose at a future annual meeting. I can see scenarios where, depending on the nature of the proposal, the company might attract unwanted attention from activists or other shareholders, and possibly could end up with an activist pushing an agenda or a bunch of shareholder proposals that you have to deal with.

The other thing is that a lot can happen from one year to the next. As we're finding out, the world can quickly become a very different place than it was when you made the initial disclosure. Disclosing that you intend to make a particular proposal can put you in an awkward position if you have to subsequently walk that disclosure back.
-John Jenkins, Editor, TheCorporateCounsel.net 3/19/2020

Q: Is the Inspector of Elections required to attend the shareholder meeting, or can the inspector just provide a report of the voting results to whomever is presiding at the meeting? Thank you.

RE: Carl Hagberg recently included commentary about this in The Shareholder Service Optimizer. He said:

"Inspectors of Election can, and often do attend shareholder meetings “virtually” — via a conference call. Among the best practices are to introduce the Inspector(s) and have them confirm that a quorum is present; to explain in the script what will be done with proxies and ballots if there IS voting at the meeting [if there are relatively few items they can be scanned front and back and forwarded immediately to the Inspector; if there are many items they should be “overnighted” to the tabulator] and when the Final Report will be available on the company website. If there is little or no voting at the meeting the Inspector, or the Chair, can and should announce that all director candidates have been elected, and report on each other item as “approved” or “not approved.”
-Lynn Jokela, Associate Editor, TheCorporateCounsel.net 3/18/2020

RE: Thank you. This is helpful. Just to confirm, though, is Carl saying that the Inspector is required to attend the meeting itself, either in person or "virtually", or can the Inspector just provide his/her report to the person presiding at the meeting (and then not attend)?
-3/18/2020

RE: Shareholders are usually permitted to vote in person at the meeting (or online if it's a virtual meeting) and this would be described in the proxy statement. Because voting may occur the day of the meeting and until the voting polls are closed, the Inspector will need to attend virtually or in person to ensure any votes collected at the meeting are counted.
-Lynn Jokela, Associate Editor, TheCorporateCounsel.net 3/18/2020

RE: If you take a look at Section 231 of the DGCL, it seems to me hard to imagine a scenario where the Inspector of Elections can avoid attending the meeting either in person or virtually.
-John Jenkins, Editor, TheCorporateCounsel.net 3/18/2020

Q: Instruction 2 to Regulation S-K Item 407(a) provides: "Registrants shall provide the disclosure required by paragraph (a) of this Item for any person who served as a director during any part of the last completed fiscal year, except that no information called for by paragraph (a) of this Item need be given in a registration statement filed at a time when the registrant is not subject to the reporting requirements of section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)) respecting any director who is no longer a director at the time of effectiveness of the registration statement." While the exception addresses the IPO S-1, it does not on its face address the first Form 10-K/proxy statement. For a director who resigned prior to (but in the same year as) the IPO, do you agree that the principle underlying the exception for the IPO S-1 should also apply to the first Form 10-K/proxy statement? It seems odd to accept disclosure from the S-1 (closer in time to the former director's service) but require it later, when the director has had no role in the company while public or in its governance environment. And, as a practical matter, going out to these former directors with D&O questionnaires seems unwieldy... I don't see anything in the C&DIs [or your fantastic "Director Independence" handbook :) ] on this. Any thoughts?

RE: I tend to agree with you. The only commentary I've seen on this is in the 2005 proposing release. The release says that:

"This independence disclosure would be required for any person who served as a director of the company during any part of the year for which disclosure must be provided,[fn 282] even if the person no longer serves as director at the time of filing the registration statement or report or, if the information is in a proxy statement, if the director’s term of office as a director will not continue after the meeting. In this regard, we believe that the independence status of a director is material while the person is serving as director, and not just as a matter of reelection."

Footnote 282 says the following:

"However, disclosure would not be required for persons no longer serving as a director in registration statements under the Securities Act or the Exchange Act filed at a time when the company is not subject to the reporting requirements of Exchange Act Sections 13(a) or 15(d). Disclosure would not be required of anyone who was a director only during the time period before the company made its initial public offering if he was no longer a director at the time of the offering."

I'm reading tea leaves here, but to me, the last sentence of that footnote lays out the general concept that disclosure isn't required for people who weren't serving as a director at the time of the offering. I don't think the intent was to require disclosure about somebody in the 10-K that wasn't included in the S-1 filed for the IPO.
-John Jenkins, Editor, TheCorporateCounsel.net 3/18/2020

Q: We are counsel to a smaller reporting company whose common stock is traded on the Nasdaq Global Market. The company has filed a registration statement on Form S-8 which contains an S-3 reoffer prospectus covering certain options. In connection with certain proposed option exercises and sales of common stock, a large clearing broker-dealer has questioned not using Rule 144. As a result and because other options exist for Section 16 persons, we note this disclosure in TheCorporateCounsel Form S-3 Handbook. It appears to conclude that the shares underlying stock options may be sold under Rule 144 without any holding period. While Rule 144 has certain limitations, using it rather than filing another S-8 would save the company money. Please confirm that shares underlying stock options which were previously granted to affiliates and registered on a Form S-8 with or without a reoffer prospectus that are subsequently acquired by the affiliates through exercise of the options can be sold under Rule 144 without being held for any holding period if the other conditions of the rule are satisfied.

RE: Yes, that's right. If an affiliate acquires shares through a registered public offering, then those shares are regarded as being "control securities" and not "restricted securities" for purposes of Rule 144. The holding period requirement of Rule 144(d) applies only to restricted securities. Control securities may be resold in compliance with the notice, manner of sale, volume and other provisions of Rule 144, but are not subject to a holding period.

Public companies almost always file Form S-8 registration statements to cover the primary issuance of shares underlying employee stock option awards, but the use of an S-3 resale prospectus for those shares is less common. Many companies instead opt to rely on the ability of executives to resell under Rule 144 without a holding period.
-John Jenkins, Editor, TheCorporateCounsel.net 3/18/2020

Q: A member of the accounting department at my company recently told me that it is no longer required to include the stock performance graph in our 10-K. It seems to me that if we are using a 10-K wrap for our annual report to shareholders, we must include the performance graph to satisfy Rule 14a-3. Is anyone aware of a recent rule change that would have changed that requirement?

RE: My guess is that your colleague may be referring to the increase in the smaller reporting company threshold that was adopted earlier this year. Under the amended definition, a company will now be a smaller reporting company if it has a public float of less than $250 million instead of the current $75 million. Item 201(e)'s performance graph requirement does not apply to smaller reporting companies (see Instruction 6 to Item 201(e)).
-John Jenkins, Editor, TheCorporateCounsel.net 11/30/2018

RE: John, does your answer mean that if you qualify as an SRC, you still have to include the performance graph in the Annual Report even though you don't have to include it in the 10-K? If my understanding of your response is correct (and I apologize if I sound argumentative), (i) what's the purpose of eliminating the obligation to provide the performance graph from the 10-K if it still has to be provided in the Annual Report, and (ii) can you eliminate the selected financial data from the 10-K AND the annual pursuant to Item 301(c) though it would otherwise be required pursuant to 14a-3(b)(5)?
-3/17/2020

RE: No, that's not what I meant to imply. I guess I read 14a-3 to say that you need to "furnish the performance graph required by Item 201(e)," but since that line item itself says that an SRC isn't required to provide one, there is no performance graph that is "required" by Item 201(e). I agree that an interpretation that said an SRC would not have to provide a performance graph in the 10-K would be required to provide one in a Rule 14a-3 annual report wouldn't make a lot of sense.
-John Jenkins, Editor, TheCorporateCounsel.net 3/18/2020

Q: Hi, can you confirm whether there is any obligation for Schedule 13D filers to disclose that they have plans or have actually purchased debt securities of the issuer? I am not seeing any such requirements but wanted to see if you have seen this disclosed.

RE: See SEC's guidance below.

Question 110.03
Question: Do the references to "securities of the issuer" in Items 4(a) and 6 of Schedule 13D include all securities of the issuer, such as debt securities?

Answer: Yes, the references to "securities of the issuer" in Items 4(a) and 6 of Schedule 13D include all of the issuer's securities, whether or not the securities are a class of equity, have voting rights or are registered or to be registered under Section 12 of the Exchange Act. For example, a reporting person who has formulated any plans or proposals or entered into any agreements involving the acquisition of debt securities of the issuer will be required to amend promptly its Schedule 13D Item 4 and 6 disclosures to the extent material. [Sep. 14, 2009]
-3/17/2020

Q: Does anyone know if there is relief from the Form 11-K obligations for a short plan year (7 months or less)? I have seen some commentary on this, but I cannot confirm its veracity. Thinking about newly public companies (either through IPO or spin-off).

RE: Not to my knowledge. I believe there is some relief from the audit requirement under ERISA when filing the plan's Form 5500, but I don't think there's any exemption applicable to a Form 11-K filing obligation.
-John Jenkins, Editor, TheCorporateCounsel.net 3/17/2020

Q: While I have seen a number of companies indicate in the notice to shareholders a possibility of switching to a virtual meeting/remote communication, I do not see many companies putting that contingency on the proxy card (see GE). Should we (1) remove the reference to the location of our annual meeting, (2) keep the reference, but add language regarding a possible switch to remote communication or (3) keep the reference and stay silent on the possibility of a switch?

RE: I think the proxy rules would permit you to opt for any of the three alternatives (subject to any state law considerations that might apply to the contents of a proxy), but I guess my preference would be to eliminate the reference to the location of the meeting on the card itself (see, e.g., Bank of America's proxy). Rule 14a-4 doesn't require it, and I just think it would reduce the already small potential for a specious challenge to the form of proxy in the event that you flip to an all virtual meeting.
-John Jenkins, Editor, TheCorporateCounsel.net 3/17/2020

Q: Does the SEC now automatically accelerate Form 25s for redeemed securities? Registrant fully redeemed a series of 12(b) registered stock and has filed a Form 25 to de-register. We are trying to decide whether to keep listing this series as a 12(b) registered security on cover pages although (i) no shares are outstanding and (ii) full de-registration is pending and we understand this would occur 90 days after filing the Form 25. Our first thought was that — even if feeling a little odd to us — the black letter requirement would require us to list the security until the Form 25 was effective 90 days after its filing. HOWEVER, we noticed two things while looking at this. (1) The index page for our client’s Form 25 (and others we spot-checked) lists three dates — filing date, accepted date and EFFECTIVENESS date — all of which are the day of filing. (2) We found one example (Morgan Stanley) of an issuer dropping a security from the cover page AFTER filing a Form 25, but BEFORE 90 days passed after the filing of the Form 25 (the index page for which also listed an “effective date” that was also the “filing / accepted date”). Is the SEC automatically accelerating Form 25s? Can we rely on the “effective date” on the EDGAR index page for this determination? If we can't rely on the stated effective date on EDGAR, any other thoughts on what to do on cover pages with respect to securities that are pending de-registration after expiration of the 90-day period? Thanks in advance for any thoughts.

RE: No, I think the Form 25 still goes effective automatically 10 days after filing, but even though deregistration from Section 12(b) itself won't be effective for 90 days, there is no further obligation to file reports with respect to the securities once it has gone effective. Here's an excerpt from a MoFo memo on suspending reporting obligations:

When may an issuer stop filing reports after a Form 25 is filed for delisting/deregistration under Section 12(b)?

If an issuer does not have any reporting obligations with respect to any other class of securities, and is not required to continue reporting based on an obligation under Section 12(g) or Section 15(d) with respect to the class of securities that is delisted, then the issuer will not be required to file any current or periodic reports that are due on or after the date the Form 25 becomes effective. Until the termination of the Section 12(b) reporting obligation is effective 90 days after the Form 25 is filed (or such shorter period as the SEC may determine), any other obligations, such as those under the proxy rules, Section 16(b) and certain beneficial ownership reporting requirements will continue to apply. Once the termination of the Section 12(b) reporting obligation is effective 90 days after the Form 25 is filed, all reporting obligations arising from the Section 12(b) registration are terminated.

Since this is the case, my guess is that some companies simply remove the securities from the cover page of filings after they are redeemed.
-John Jenkins, Editor, TheCorporateCounsel.net 3/17/2020

Q: Does anyone know of a company that moved from an in-person to a virtual meeting? I would like to look at their related SEC filings to see what they disclosed. Thanks!

RE: Yes. Starbucks did that.
-John Jenkins, Editor, TheCorporateCounsel.net 3/17/2020

Q: A Separation Agreement has been negotiated with a former NEO. The NEO signed the Separation Agreement, but the issuer has not yet signed. For 8-K Item 5.02 purposes, does the "trigger" commence when the issuer signs or earlier, when the NEO has signed? I have heard some arguments that it is when the NEO signed because she has most of the responsibility under the Separation Agreement and that is the point in time when she becomes bound. I have also heard that it isn't until when the issuer signs because the issuer can always back out at the last moment. Any thoughts?

RE: There are arguments on both sides (particularly if you're dealing with a severance contract that has a revocation period), but assuming it's a done deal, I think the safer approach is consider the filing requirement to have been triggered as of the earliest reasonable date that somebody could claim that it was, which I think in your case would mean not waiting for the company signature.

An Item 1.01 8-K is triggered by the registrant's entry into a binding agreement. Item 5.02(e) has a much broader trigger. A filing obligation under Item 5.02(e) is triggered at the time a registrant "enters into, adopts, or otherwise commences" a new compensation arrangement, or an existing one is materially modified. Companies have a tendency to implement arrangements in accordance with business — and not legal — calendars, so my guess is that it may be the case that the company and the former NEO will be operating as if the agreement is in effect prior to having all the i’s dotted and t's crossed.
-John Jenkins, Editor, TheCorporateCounsel.net 3/16/2020

Q: I have seen several companies announce these closures, but I don't see anything filed on 8-K. At what point do these become material or otherwise trigger disclosure under 8-K? Thanks.

RE: Something can be material and still not result in an 8-K filing; ;you've got to trip one of the line items in Form 8-K to be required to make a filing. If you don't trip a line-item, then if you have a legal duty to disclose material information or otherwise determine that disclosure is prudent, you can make that disclosure in any FD compliant manner. Some companies choose to furnish information on an Item 7.01 8-K in order to establish compliance with Reg FD, while others may file an Item 8.01 8-K, particularly if they have an outstanding registration statement and want the information incorporated by reference into it in order to avoid any material omission.

Unfortunately, there are likely to be many more shoes to drop as a result of the pandemic, and continuing deterioration in a company's business could trigger a need to take impairment charges or a decision to engage in large-scale layoffs or even the abandonment of a particular line of business. Actions like those could well trigger 8-K line items (e.g., Item 2.05 and Item 2.06, for example).
-John Jenkins, Editor, TheCorporateCounsel.net 3/15/2020

Q: I know there are varying methods to counting shares under your S-8 as opposed to incentive plans with share recycling. Seems pretty clear to me that at least with respect to shares surrendered for tax withholding or restricted stock forfeitures that upon subsequent issuance (if your plan allows for recycling) they would need to be registered again. It is a subsequent "transaction." Therefore, your S-8 shares are likely to run out before your plan shares. Does anyone know of an SEC enforcement action, shareholder recession lawsuit or other problem that has come up because of this? I would like an example of what could go wrong if we are not doing it correctly. Thank you.

RE: I'm not aware of anything specifically targeting those issues, but compensation is an area that's attracted a lot of attention from plaintiffs in recent years. There were a lot of derivative suits filed when "say-on-pay" first came around, which focused on proxy disclosure and alleged breaches of fiduciary duty surrounding compensation decisions. More recent cases have focused on compliance with the terms of specific compensation plans themselves, and have challenged awards allegedly exceeding plan limits. The bottom line is that the whole subject of compensation plans and awards is an area where plaintiffs are actively trolling — and innovating.

For further information on compensation litigation, check out CompensationStandards.com's "Executive Compensation Litigation Portal."

You should also refer to the discussion beginning on page 44 of our "Form S-8 Handbook" for guidance on share counting issues:
-John Jenkins, Editor, TheCorporateCounsel.net 5/17/2017

RE: Actually, Securities Act Forms CDI 126.43 seems to demonstrate the relevant guiding principle: "[n]o new filing fee would be due" for "shares that will become authorized for issuance ... upon cancellation or termination of awards." While the example references options, the principle is consistent with not counting forfeited awards against the registered share total — i.e. no re-registration is mandated in relation to underlying shares that have not been issued. Not aware of any SEC rule, guidance and enforcement actions that would contradict this CDI.
-3/14/2020

Q: If the current PAO is terminated and the current CFO takes on the PAO responsibilities, is an 8-K required to disclose that the CFO will now also be the PAO (assuming no change in comp and an 8-K is filed for the departure of the PAO)?

RE: Yes. The appointment of a new PAO requires an 8-K, even if the current CFO is assuming those responsibilities.
-John Jenkins, Editor, TheCorporateCounsel.net 3/13/2020

Q: An executive officer who will be listed as an NEO in fiscal 2016 proxy, but was not an NEO in the fiscal 2015 proxy, gave notice of resignation and will enter into a (compensatory) separation agreement following the end of the Company's fiscal year but before the proxy is filed. Although the officer gave notice of resignation and will enter into the separation agreement prior to the filing of the proxy, the resignation will be effective and compensation under the separation agreement will begin following the filing of the proxy. I would appreciate any feedback on my analysis of required disclosure under these facts: First, I believe that no 5.02(b) or 5.02(e) disclosure would be triggered based on the officer's notice of resignation or entry into a compensatory separation agreement because he is not an NEO for 8-K purposes until the proxy for 2016 is filed. However, would the effectiveness of the resignation (which would occur following the filing of the proxy, thus he would be an NEO at that time for 8-K purposes) trigger a 5.02(b) 8-K (triggered under the language of the rule if an NEO "resigns.")? I am aware of CDI 117.01 stating that the 8-K disclosure obligation is triggered by a notice of a decision to resign, rather than the effective date of the resignation, but the CDI contemplates that notice of the resignation had been previously disclosed, which would not be the case here. Second, I believe that the compensatory separation agreement would need to be filed as an exhibit to the Company's 1st quarter 10-Q because the officer is an NEO for purposes of Item 601, which measures NEO status based on income for the year measured as of the end of the last fiscal year, rather than based on whether the individual is listed in last year's proxy. Thus, for 10-Q exhibit filing purposes, the officer became NEO after the end of the fiscal year. Lastly, if the compensatory separation agreement is instead entered into following filing of the proxy, I believe 5.02(e) disclosure of the compensation arrangement WOULD be triggered, and the separation would still need to be filed as an exhibit to the 1st quarter 10-Q. Any feedback on this analysis appreciated.

RE: I would be careful about tying the NEO determination to the filing of the proxy statement. I'm not aware of any guidance from the Staff on this, but in its absence, I think Instruction 4 of Item 5.02's reference to the "most recent filing" for which Item 402(c) disclosure is required could well be viewed as the Form 10-K, not the proxy statement. Part III of Form 10-K requires information about NEOs and executive comp, but lets you incorporate that info by reference if you get your proxy on file within 120 days. So, if this happens during the gap period between the 10-K and proxy statement filing, I think the prudent approach would be to either reach out to the Staff for guidance or take the position that this person may well fall into the NEO category during that period.

Assuming you can skin this 10-K v. proxy cat, I don't think that the effective date of the resignation matters. If it did, then the Staff's fairly straightforward position — it's the date of the resignation that triggers disclosure — would be transformed into one that says "what triggers a disclosure obligation depends on whether a disclosure obligation is triggered." I don't think that's what they're looking for.

I think you're right about the exhibit requirement, and once the individual becomes an NEO within the meaning of Instruction 4 to Item 5.02 (whether that's with the 10-K or proxy statement filing), then I also think you're right about disclosure of the compensation arrangement under Item 5.02(e) .
-John Jenkins, Editor, TheCorporateCounsel.net 10/6/2016

RE: Following up on this discussion, what about a situation where you have a 5.02(e) compensation agreement trigger between filing of the preliminary proxy statement and filing the definitive proxy statement. Assume for this purpose the 10-K has not been filed yet. Per 8-K, Item 5.02 instruction 4, "For purposes of this Item, the term “named executive officer” shall refer to those executive officers for whom disclosure was required in the registrant’s most recent filing with the Commission under the Securities Act (15 U.S.C. 77a et seq.) or Exchange Act (15 U.S.C. 78a et seq.) that required disclosure pursuant to Item 402(c) of Regulation S-K (17 CFR 229.402(c))" it seems to me that the preliminary proxy filing is the most recent filing with the SEC that required 402(c) disclosure, meaning that we should look to the SCT of the preliminary proxy filing (rather than last year's definitive proxy statement) to determine the NEOs for which 8-K, Item 502(e) disclosure is required. Thoughts? Many thanks.
-3/12/2020

RE: Sorry, I first read this question to say that the 10-K had been filed, so I deleted my response. But I think the answer is probably substantively the same — if you've filed a preliminary proxy and identified this person as an NEO, I think you're right. If it were me, I'd take the position that the cat was out of the bag and file a 5.02 if the person departed.
-John Jenkins, Editor, TheCorporateCounsel.net 3/13/2020

Q: Pursuant to Section 172 of the DGCL, directors are generally protected from liability if they rely in good faith upon the books and records of the company, or upon the report of an independent expert selected with reasonable care, when determining whether there are sufficient funds legally available to declare and pay a dividend either under the surplus or the net profits test. Section 102(b)(7) of the DGCL prohibits limiting or eliminating personal liability of directors for monetary damages with respect to unlawful dividends. I believe this provision may operate to limit indemnification for any such claims, but I wanted to see if anyone would be able to confirm whether I am on the right track. The Company has indemnification provisions in its Certificate of Incorporation and Bylaws, and it also has indemnification agreements with its directors and D&O insurance.

RE: I think you have to distinguish between the carve-out to Section 102(b)(7), and the separate rights to indemnification that are provided under Section 145 and applicable charter provisions. I'm not aware of any Delaware case directly addressing this issue (but since it's Delaware, there may well be), but I think the corporation could lawfully agree to indemnify a director to a certain extent for an unlawful dividend claim if the director met the standard of conduct set forth in Section 145.

However, even if the director satisfied the standard in Section 145, that indemnification would be limited to expenses incurred and amounts paid in settlement of such a claim. That's because an unlawful dividend claim is derivative, and not direct, so the corporation couldn't indemnify the director for a damage judgment without a court ordering it.
-John Jenkins, Editor, TheCorporateCounsel.net 3/12/2020

Q: Does the auditor's consent that is filed with our 10-K have to reference all S-3's that the company has filed, or only those S-3's that are still effective? In other words, if an S-3 is more than three years old, may it be omitted from the auditor's consent? Does it make a difference if the S-3 was used for a primary or secondary offering?

RE: If you don't plan to use an old S-3, then a consent isn't necessary for it. If the S-3 is more than three years old, you generally can't use it unless it falls into one of the categories to which the three year time limit doesn't apply. See footnote 12 in Staff Legal Bulletin No. 18 (March 15, 2010): "Note that the requirement to file a post-effective amendment to deregister unsold securities does not apply to registration statements that have expired under Securities Act Rule 415(a)(5). Under Rule 415(a)(5), if three years have elapsed since the initial effective date of the registration statement under which they were being offered and sold, and a new registration statement has not been filed under Rule 415(a)(6), the offering of securities on the registration statement has expired. The registration statement will not be required to be updated under Item 512(a)(3) of Regulation S-K and will not need to be post-effectively amended to deregister unsold securities."

This is where the primary v. secondary distinction might come into play. If you have a S-3 for secondary offerings, the three-year time limit doesn't apply. So, you could theoretically still use that one and if you had obligations to your selling shareholders to keep it current, you'd want to make sure you had a current accountant's consent on file.
-John Jenkins, Editor, TheCorporateCounsel.net 2/2/2017

RE: If an S-3 expires mid-year, is the auditor's consent for that fiscal year's annual report required to cover the S-3?
-3/12/2020

RE: Yes. For example, if you are filing a 10-K in February 2020 and the S-3 is live until June 2020, you need to include the auditor's consent.
-John Jenkins, Editor, TheCorporateCounsel.net 3/12/2020

RE: Just to clarify, what if the S-3 was live until February 2019 and you are filing the 12/31/19 10-K in March 2020? Does the fact that the S-3 was live during the year covered by the annual report matter, or is it just whether the S-3 is live at the time of filing the 10-K?
-3/12/2020

RE: No. If the registration statement is no longer live when you file your 10-K, you won't be incorporating the financial statements by reference into the S-3 and therefore there's no need for a consent.
-John Jenkins, Editor, TheCorporateCounsel.net 3/12/2020

Q: Issuer would like to issue non-voting shares of common stock but wants those shares to be listed/quoted for trading on Nasdaq and/or OTC Markets. I have been unable to find any restriction on such a course of action. Are there any restrictions on listing/quoting on such listing/quotation that I'm missing?

RE: The exchanges don't prohibit listing of non-voting stock (see, e.g., Snap), but once shares are listed, companies can't reduce the voting rights of the existing shares or issue a new class of superior voting shares. As a practical matter, this means that if you list your non-voting stock, you're only going to be able to issue non-voting stock in the future.
John Jenkins, Editor, TheCorporateCounsel.net 3/12/2020

RE: Thank you. Very helpful.
-3/12/2020

Q: If a new country addendum is added to an existing stock plan (no shareholder approval required), does the new country addendum have to be filed as an exhibit? Should the entire stock plan be refiled as an exhibit? Should it be filed with the next quarterly/annual report?

RE: Yes, the addendum should be filed. Item 601(a)(4) sets forth the general rule that "any amendment or modification to a previously filed exhibit to a Form 10, 10-K or 10-Q document shall be filed as an exhibit to a Form 10-Q and Form 10-K." The entire plan doesn't have to be refiled.

As to the timing, Instruction 2 to Item 601(b)(10) indicates material contracts need to be filed with the periodic report covering the period during which the contract is executed or becomes effective. So, if the amendment was put in place during the first quarter, you'd need to file it with that quarter's 10-Q. There's no prohibition on filing it early - for example, if you entered into the amendment during the first quarter, but before you filed your 10-K, you could also file it with your 10-K.
-John Jenkins, Editor, TheCorporateCounsel.net 3/11/2020

Q: A company filed an 8-K to report entering into a Separation Agreement with an NEO that included a form of release as an exhibit to the Separation Agreement. The Separation Agreement contemplated entering into the release after the NEO's term ends. The NEO's term has now ended and the company and the departed NEO will be signing the release with minor edits to the form of release that was filed with the 8-K. Does the Company need to file another 8-K under Item 5.02(e) to report entering into the release with the former NEO?

RE: If you disclosed the terms of the separation agreement and release in the original 8-K and there weren't material changes, I think it would be sufficient to file the executed copy as an exhibit to your next periodic report without amending the original filing.
-John Jenkins, Editor, TheCorporateCounsel.net 3/11/2020

Q: If a company is buying back stock pursuant to a 10b-18 repurchase program, can a director of the company also be buying stock at the same time? The director has no control over, or responsibility for, the repurchases made by the company. It would seem to me that the director is not an "affiliated purchase" because the term does not include "an officer or director of the issuer solely by reason of the officer or director's participation in the decisions to authorize Rule 10b-18 purchases by or on behalf of the issuer." Is it reasonable to think that the director is not an "affiliated purchaser" and can buy outside of the company's repurchase program?

RE: It's not prohibited, but we don't recommend that directors buy or sell stock while the company is in the market. See the discussion on page 39 of our "Stock Buybacks Handbook."
-John Jenkins, Editor, TheCorporateCounsel.net 3/11/2020

Q: The Company would like to incorporate by reference materials from its proxy statement into its 10-K (Part III information). However, it is unlikely that the Company will end up filing a proxy statement because of an impending bankruptcy (in which case the Company would file a 10-K/A with the Part III information in the 10-K). May the Company incorporate by reference? It seems like there are some unclear "intent" levels in the C&DIs when discussing the Company's intention of filing the proxy.

RE: I wouldn't lose a lot of sleep over filing the 10-K and indicating that you intend to incorporate the Part III information by reference. If there's not an intervening event that renders you unable to do that, that's what you "intend" to do. There may be a high likelihood that this intervening event will occur, but it hasn't yet and the company is simply preparing for its annual filings in good faith in accordance with its customary process. It also sounds like the company is prudently preparing to comply with its reporting obligations by amending the 10-K in a timely fashion if the intervening event occurs. I can't see the Staff getting their noses out of joint about you proceeding like this.
-John Jenkins, Editor, TheCorporateCounsel.net 3/11/2020

Q: Has the SEC provided any guidance as to whether provisions of Rule 14d-4(d) apply to 14E tender offers, such that disclosure of material public information for the first time during the pendency of a 14E tender offer necessitates a five business day period before the offer can expire?

RE: Not to my knowledge, but I think that the general principle that disclosure and dissemination of material changes must allow security holders the opportunity effectively to consider such information and factor it into the decisions about the tender offer applies to private tenders as well. Rule 14d-4(d)'s provisions reflect longstanding Staff guidance on extensions of offers in the event of material changes. Even if you're dealing with a Regulation 14E tender, it's still worth tracking down the Staff's guidance, which can be found in Exchange Act Release No. 34-24296, April 3, 1987.
-John Jenkins, Editor, TheCorporateCounsel.net 3/11/2020

Q: Is there any reason not to include a ticker symbol in an email under SEC or Nasdaq rules?

RE: Not to my knowledge.
-John Jenkins, Editor, TheCorporateCounsel.net 3/10/2020

Q: In light of COVD-19, if a company has already filed its proxy materials and now has to change the location of its annual meeting (or has to add a virtual component to supplement the physical component), is there any consensus on whether the proxy materials need to be re-mailed? Of course, I realize the impact of state law on the point; a popular law firm memo suggested that at least under Delaware law the answer is, absent special circumstances, that proxy materials do NOT have to be re-mailed, and that the change could be effectuated by issuing a press release with the change (and filing the press release as additional proxy solicitation materials on EDGAR). Thanks for any thoughts.

RE: We've posted the Davis Polk memo to which you refer and I agree with its conclusion. I think the general approach to deciding whether new information in a supplement requires a mailing turns on how material it is to a voting decision, and logistical information like this generally seems to be in a different category. I think a possible exception may be situations in which you have controversial proposals that are likely to prompt significant questioning and debate from the floor at the meeting. For a discussion of the circumstances under which companies should consider mailing supplemental materials, see the discussion beginning on page 4 of the July 2018 issue of The Corporate Counsel.
-John Jenkins, Editor, TheCorporateCounsel.net 3/10/2020

RE: Here's an excerpt from a Hunton Andrews Kurth memo on the impact of the coronavirus on annual meetings that just came out today:

"While the conservative approach will always be to give a new notice, some companies may find themselves in situations in which mailing a new notice is impractical (e.g., because the decision to change the meeting location or format is made less than 10 days before the meeting). In that situation, companies should consider whether there are important or contested items to be voted upon that might be challenged later because of the change (e.g., due to alleged inadequate notice or claims that the directors were acting inequitably to affect the outcome of the vote). In the absence of contested items, companies may have strong equitable arguments that a public announcement of the change is sufficient, especially when done to protect the public health. In addition, even if a court held that a company did not give adequate notice, the “holdover rule” provides that the incumbent directors would continue to hold office until their successors are duly elected."
-John Jenkins, Editor, TheCorporateCounsel.net 3/10/2020

Q: In addressing the signature requirements for filings with the SEC, '34 Act Rule 12b-11(d), Reg. S-K, 601(b)(24) (re powers of attorney), and Reg. S-T, 302(b) speak of signature pages, powers of attorney (in the case of Reg. S-K, Item 601(b)(24)), or other documents being MANUALLY signed. Can a power of attorney relating to the signing of an SEC filing be executed with an electronic signature only? For example, many electronic board portal products allow directors to sign documents (e.g. consents, powers of attorney, etc. via electronic signature.)

RE: This 2001 SEC release is the last guidance from the SEC on the use of electronic signatures:
-Broc Romanek, Editor, TheCorporateCounsel.net 1/13/2012

RE: I recently had discussions with the SEC Staff on this point. Their view is that "manually signed" means paper.
-8/21/2013

RE: I note a similar Q&A in TheCorporateCounsel's handbook relating to exhibits.:

Powers of Attorneys & Signatures

Question: Can a power of attorney relating to the signing of an SEC filing be executed with an electronic signature only? (For example, many electronic board portal products allow directors tosign documents, e.g., consents, powers of attorney, etc. via electronic signature.)

Answer: The requirements for signatures on powers of attorney (i.e., Item 601(b)(24)) calls for manual signatures. The SEC Staff’s view is that “manually signed” means paper.

However, this Q&A talks about the execution of the Power of Attorney. If the Power of Attorney is manually signed by the officers and directors, does a pdf of the manually signed copy need to be filed as Exhibit 24, or can an edgar version with conformed signatures be filed? I note that Item 601(b)(24) seems to require that a manually signed copy be filed; however, I have many examples of Exhibit 24s that are Edgar versions with conformed signatures.

Would greatly appreciate your thoughts.
-2/16/2015

RE: On a related note, do powers of attorney executed for Exchange Act periodic reports (e.g., directors signing a power of attorney granting power to execute the Form 10-K and amendments there) need to meet state law requirements for powers of attorney? Practices in this area seem to differ (I saw some Exhibit 24s with notaries, some with witnesses and some with neither), but state law requirements vary from jurisdiction to jurisdiction, so without doing too much research, it's hard to tell which registrants are complying with state law requirements.

On a related note, Romeo & Dye's treatise points to instructions on the Forms 3, 4 and 5 relating to requirements for powers of attorney for executing those forms, and takes the position that state law requirements need not be met. I do not see a similar instruction on Form 10-K, however.

Your thoughts would be appreciated!!
-2/16/2015

RE: For your 1st query, see Item 302(b) of Regulation S-T, reproduced below:

§232.302 Signatures.

(a) Required signatures to, or within, any electronic submission (including, without limitation, signatories within the certifications required by §§240.13a-14, 240.15d-14 and 270.30a-2 of this chapter) must be in typed form rather than manual format. Signatures in an HTML document that are not required may, but are not required to, be presented in an HTML graphic or image file within the electronic filing, in compliance with the formatting requirements of the EDGAR Filer Manual. When used in connection with an electronic filing, the term “signature” means an electronic entry in the form of a magnetic impulse or other form of computer data compilation of any letters or series of letters or characters comprising a name, executed, adopted or authorized as a signature. Signatures are not required in unofficial PDF copies submitted in accordance with §232.104.

(b) Each signatory to an electronic filing (including, without limitation, each signatory to the certifications required by §§240.13a-14, 240.15d-14 and 270.30a-2 of this chapter) shall manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing. Such document shall be executed before or at the time the electronic filing is made and shall be retained by the filer for a period of five years. Upon request, an electronic filer shall furnish to the Commission or its staff a copy of any or all documents retained pursuant to this section.

(c) Where the Commission's rules require a registrant to furnish to a national securities exchange or national securities association paper copies of a document filed with the Commission in electronic format, signatures to such paper copies may be in typed form.
-Broc Romanek, Editor, TheCorporateCounsel.net 2/17/2015

RE: Thanks! Any thoughts on complying with the state law requirements for powers of attorney?
-2/17/2015

RE: It's a challenging issue. There is this paragraph from the SEC's 2001 interpretive release related to E-Sign that supports the position that state law isn't implicated:

"We believe that these requirements to retain authentication documents are not subject to E-SIGN because authentication documents are records generated principally for governmental purposes rather than in connection with a business, consumer or commercial transaction. Moreover, these authentication documents arise in the context of a governmental filing. Governmental filings are expressly excluded from E-SIGN. Accordingly, issuers subject to these retention requirements should continue to retain the paper original of all authentication documents."

And you may remember the flap a few years ago when New York adopted a broad power of attorney statute that said it applied to "any" POA executed in NY, and NY lawyers all went crazy saying SEC filings would now be invalid because they were signed pursuant to the standard SEC power language included on the page of the filing that appoints some officer to file subsequent amendments (or Forms 4).

I believe that the SEC decides what constitutes adequate authority to sign SEC reports, not the 50 states. However, the language might not be as clear in some of the SEC's rules as compared to what Alan Dye thinks is in the Section 16 rules. Alan says in his Section 16 Treatise that state law requirements for powers of attorney don't govern Section 16 signature requirements.
-Broc Romanek, Editor, TheCorporateCounsel.net 2/17/2015

RE: Has anyone had any recent experience, discussions with the SEC staff, that they are more amenable to directors in their usual Board portal procedure that provides for authorization of their electronic signatures to be used for execution of the signature page of a Registration Statement or power of attorney relating thereto? Please advise. It seems nonsensical with EDGAR and E-sign and what they are allowing in the B/D-client context to require a wet manual signature in the Registration Statement context. Thanks.
-3/10/2020

Q: I am trying to get an understanding of what it means to be an "anchor" or "cornerstone" investor in a US IPO, including: (i) whether this term implies the investor taking an allocation in the IPO itself, or rather investing in a side-by-side private placement; and (ii) whether there are particular '33 Act, disclosure or underwriter negotiation issues that the issuer and/or the investor faces in the anchor/cornerstone scenario. Are you aware of any materials that usefully discuss this subject? Thanks very much.

RE: In European and Asian IPOs, I think the "anchor" investor actually commits to purchase shares in the IPO. That firm commitment would constitute gun jumping in the U.S., so I believe the term here is used to refer to institutions that furnish non-binding indications of interest in buying in the IPO or that are late round private placement institutional investors. This Morrison & Foerster slide deck provides an overview of the use of anchor investors in U.S. deals. See slide 13 for a description of the differences between U.S. and European & Asian practices.
-John Jenkins, Editor, TheCorporateCounsel.net 3/9/2020

RE: John, That is very helpful. Thanks.
-3/9/2020

Q: Our board will be acting by Unanimous Written Consent to increase the size of our board and to appoint an individual to its board. However, the director will not officially begin her term of service until the Annual Meeting in May. I assume the 8-K "trigger" will be the date the Consent is signed?

RE: Yes, I think so too. See Form 8-K CDI 117.07:

Question: If a director is elected to the board of directors other than by a vote of security holders at a meeting, but the director's term will begin on a later date, when is the reporting requirement under Item 5.02(d) of Form 8-K triggered?

Answer: The reporting requirement is triggered as of the date of the director's election to the board. The Item 5.02(d) Form 8-K should disclose the date on which the director's term begins. [April 2, 2008]
-John Jenkins, Editor, TheCorporateCounsel.net 3/9/2020

RE: Thank you.

Would the "term" begin on the date the Consent is signed or when service officially commences at the Annual Meeting?
-3/9/2020

RE: I think the term begins on the date when the person actually becomes a director.
-John Jenkins, Editor, TheCorporateCounsel.net 3/9/2020

Q: For purposes of determining the 12 calendar month period when calculating the gross proceeds an issuer receives from sales under IB6 "during the period of 12 calendar months immediately prior to, and including, the sale," I believe one relevant measuring point is the time of launch of the current take down. Let's say the issuer wants to launch a take down on March 15, 2020. Do you simply go back to March 15, 2019 and add up the gross proceeds from sales between March 15, 2019 and March 15, 2020? For some reason, I seem to recall there was a twist on determining the 12 month period, but I can't find it now. I may be confusing my "12 month" rules with the 12 calendar month period for purposes of determining if an issuer is eligible to file an Form S-3 (i.e., the issuer must have been subject to Exchange Act reporting requirements and filed all of the required reports for a period of at least 12 “calendar months” immediately before the Form S-3 filing, which I understand the SEC Staff interprets to be a period equal to 12 completed calendar months, running from the effective date of the IPO). Just to illustrate the difference more clearly, under the S-3 eligibility rule, my understanding is that if the IPO registration statement went effective on March 15, 2019, the issuer would not be S-3 eligible until April 1, 2020 (not March 15, 2020), assuming all other requirements are met.

RE: I think you're right about the relevant measuring point for a takedown. See pgs. 95 - 96 of our Form S-3 Handbook and about what "12 calendar months" means in the context of General Instruction 1.A.3. See Securities Act Forms CDI 115.06:

Question 115.06

Question: General Instruction I.A.3 of Form S-3 requires that the registrant have filed all material required to be filed for a period of at least twelve calendar months immediately preceding the filing of the registration statement. The instruction also requires that the registrant have filed in a timely manner all reports required to be filed during the twelve calendar months and any portion of a month immediately preceding the filing of the registration statement. How is calendar month calculated?

Answer: For purposes of these eligibility requirements, a calendar month begins on the first day of the month and ends on the last day of that month . Hence, if a registrant were not timely on a Form 10-Q due on September 15, 2008, but was timely thereafter, it would first be eligible to use Form S-3 on October 1, 2009. [Feb. 27, 2009]

I don't think the Staff has directly addressed whether this same approach applies to offerings under General Instruction I.B.6, but I'm inclined to think that, based on the text of I.B.6, it does not. I think further support for that position is provided by the language of instruction 7 to I.B.6, which provides that:

"Registrants must set forth on the outside front cover of the prospectus the calculation of the aggregate market value of the registrant’s outstanding voting and nonvoting common equity pursuant to General Instruction I.B.6. and the amount of all securities offered pursuant to General Instruction I.B.6. during the prior 12 calendar month period that ends on, and includes, the date of the prospectus."

That last clause seems to suggest that I.B.6 contemplates a "rolling" approach to the 12 calendar month requirement, rather than one that looks to the first date of the month as is the case with I.A.3.

I'm not aware of any other wrinkles in calculating the 12 month period for determining the gross proceeds from sales off of a baby shelf, although there are all sorts of wrinkles when it comes to determining the size of the public float and the 1/3rd limit. See the discussion beginning on page 68 of our S-3 Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 3/8/2020

RE: Thanks so much, John. Appreciate the prompt/weekend reply.
-3/8/2020

Q: Does a bank holding company that is a smaller reporting company and is providing 2 years of financial information in accordance with Art. 8 of Reg. S-X nevertheless need to provide 3 years/5 years of information to the extent called for under Industry Guide 3?

RE: I don't believe that the Staff provides smaller reporting companies with any break on the requirement to provide full Guide 3 information. In this regard, Section 5310.2 of the Financial Reporting Manual state: "Smaller reporting companies should provide all information required by the Industry Guides, and real estate companies should also refer to Item 13 [Investment Policies of Registrant], Item 14 [Description of Real Estate], and Item 15 [Operating Data] of Form S-11."
-Dave Lynn, TheCorporateCounsel.net 2/13/2010

RE: Is this still the general conclusion on application of industry guides (specifically Industry Guide 3 with respect to bank holding companies) to SRCs? The inconsistent application of time periods for reporting seems off to me.
-3/7/2020

RE: Guide 3 continues to apply to smaller reporting companies. It does provide scaled disclosure requirements for certain companies, but the overlap isn't complete. Here's an excerpt from the SEC's proposing release on updating statistical disclosures for bank holding companies:

"Guide 3 currently calls for five years of loan portfolio and loan loss experience data and for three years of all other data. This timeframe goes beyond the financial statement periods specified in Commission rules,299 which generally require two years of balance sheets and three years of income statements for registrants other than EGCs and SRCs. Guide 3 currently provides that registrants with less than $200 million of assets or less than $10 million of net worth may present only two years of information. However, the scaled disclosure regimes in Commission rules for SRCs and EGCs are based on other thresholds, such as public float, total annual revenues, or a combination of both. As such, SRCs and EGCs may not qualify for scaled disclosure under Guide 3."

The SEC proposes to bring the scaled disclosure requirements under Guide 3 into greater alignment with the other scaled disclosure regimes applicable to SRCs and EGCs, but it doesn't appear to contemplate eliminating compliance with these requirements.
-John Jenkins, Editor, TheCorporateCounsel.net 3/8/2020

Q: Public company's fiscal year ends December 31st. Company has an effective S-3 and the 10-K for 2019 is not due until the end of March 2020. The latest financial statements filed by the company were for Q3 of 2019. Although it is now beyond mid-February, can the company still use the S-3 before the 10-K is due/filed at the end of the month? Our understanding is that it can because it's not a new registration statement filing and nothing is being declared effective by the SEC.

RE: Yes. That's true even if you're a "loss corporation." Of course, you've got to assess the materiality of the information about the 4th quarter and fiscal year, and you may want to include at least unaudited capsule information in the pro supp.

See this Latham blog:

"Q: Let’s assume Mayan is a loss corporation. Can it conduct an offering off of an effective shelf registration statement during the gap period AFTER February 14 (when its third quarter financial statements go stale) and BEFORE it files its Annual Report on Form 10-K?

A: Yes. As a refresher, a “loss corporation” is a company that does not expect to report positive income after taxes but before extraordinary items and the cumulative effect of a change in accounting principle for the most recently ended fiscal year and for at least one of the two prior fiscal years. See S-X Rule 3-01(c). The SEC Staff will not object to a loss corporation taking down securities off an effective shelf during the gap period, as long as the shelf was effective before the gap period commenced. See C&DI 119.02. A loss corporation couldn’t go effective on a new shelf registration statement after the close of business on February 14, 2013 without audited year-end financials."
-John Jenkins, Editor, TheCorporateCounsel.net 3/6/2020

Q: Greetings, Reviewing the Non-GAAP Financial Measures Handbook (May 2019), it would appear that Item 10(e) would not apply to the "glossy" part of an issuer's Form 10-K wrap because the glossy part is not filed with the SEC, yet Reg. G would appear to apply. Per the Handbook "Because the Item 10(e)(1)(ii)(A) prohibition applies only to SEC filings, it would not apply to the annual report to stockholders, press releases or any other document that is not filed with the SEC. However, any portions of those documents that are filed with the SEC, for whatever reason, will be subject to Item 10(e)(1)(ii)(A) and should be drafted with that in mind." Consequently, (i) if an issuer includes Non-GAAP financial measures in the non-filed, glossy portion of its Annual Report to Shareholders (without including comparable GAAP financial measures in the glossy), and (ii) the issuer cross-references by means of a footnote in the glossy to the most-directly-comparable GAAP financial measures in the wrapped/filed Form 10-K (which attached Form 10-K complies with the prominence and reconciliation requirements of Item 10(e)), is the issuer compliant with the Non-GAAP Financial Measures requirements? Thank you. We look forward to your response.

RE: If I understand the question correctly, the non-GAAP language that is outside of what Item 10(e) permits appears in the non-filed portion of the wrap, and points to a reconciliation that appears in the filed portion. I guess I'm not sure how the reconciliation could avoid showing the non-GAAP number that's prohibited by Item 10(e) in the first place, but if you've figured out that part, it seems to me that this should be technically compliant with Reg G's requirements, and that the fact that the non-filed portion of the document points to a reconciliation that appears in a portion of the document that is filed isn't necessarily disqualifying, but I would point you to the paragraph following the language in the Handbook that you cite:

"Even when the measure is not prohibited by Item 10(e), it is prudent to consider the antifraud provisions of Regulation G. Any presentation of a liquidity measure that excludes items that actually had a negative impact on cash position or liquidity could have the potential to mislead investors. Accordingly, additional disclosure about the impact of the excluded items may be called for ."
-John Jenkins, Editor, TheCorporateCounsel.net 3/6/2020

RE: Thank you for the response. As a follow-up question to clarify with an example:

If an issuer presents Non-GAAP Adjusted Earnings Per Share in the non-filed portion of the wrap, but in that non-filed portion of the wrap -
(i) does not present the most directly comparable GAAP financial measure of Diluted Earnings Per Share at all; and
(ii) does not present a reconciliation of the differences between the Non-GAAP Adjusted Earnings Per Share and GAAP Diluted Earning Per Share;
however, the issuer cross-references to the filed and attached Form 10-K wherein -
(a) the GAAP Diluted Earnings Per Share is presented with equal or greater prominence to the Non-GAAP Adjusted Earnings Per Share; and
(b) a reconciliation of the differences between the Non-GAAP Adjusted Earnings Per Share and the GAAP Diluted Earnings Per Share,
is that acceptable under Reg. G and Item 10(e)?

Thank you again for your time.
-3/6/2020

RE: I apologize, but we're really not in a position to get that far down in the weeds and provide what essentially amounts to legal advice on specific disclosures in a Q&A forum.
-John Jenkins, Editor, TheCorporateCounsel.net 3/6/2020

RE: Understood, sorry to get so specific.
-3/6/2020

Q: A number of Canadian issuers release their audited annual financials and MD&A before their AIF is ready (the Annual Report in Canada), so they 6-K the financials and MD&A. If they have a live 33 Act registration statement(s) they will incorporate the financials and MD&A into the registration statement(s), and will also file an accountant’s consent as an exhibit to the 6-K. However, there are some 6-Ks where the accountant’s consent wasn’t incorporated into the registration statements. When the 40-F is filed, it will, of course, have an accountant’s consent as an exhibit, which will automatically be incorporated into any registration statements. Can you think of a reason why they incorporate the financials and MD&A from the 6-K, but not the consent?

RE: I'm speculating, but perhaps because the 40-F serves as the Section 10(a)(3) update for the registration statement, and they're taking the position that the consent wouldn't be required until that time.
-John Jenkins, Editor, TheCorporateCounsel.net 3/6/2020

Q: A non-US investor has a brokerage account with a non-US entity that is not an SEC registered broker-dealer, and trades NMS securities through this account. When the investor directs trades in NMS securities, the non-US entity uses its US SEC registered broker-dealer affiliates to execute and clear the trades. If the investor's trading activity, conducted in this way, were to meet the Rule 13H share volume or market value threshold, it's clear that the registered broker-dealer would have reporting obligations if it knows that the trades are all for the same investor. But, does the investor have to file a Form 13H to register as a large trader?

RE: Rule 13H applies to any foreign trader that uses U.S. jurisdictional means. Unfortunately, the SEC hasn't provided a lot of guidance for situations like yours. Here's an excerpt from a Withers memo on the large trader rules:

"Rule 13h-1 applies to large traders who “use the U.S. jurisdictional means” to effect transactions. Therefore certain foreign large traders will be required to register with the SEC. The obligations of foreign large traders that use foreign intermediaries with accounts at US-registered broker-dealers are not entirely clear at this point. Some foreign large traders may not have any accounts or direct relationships with a US-registered broker-dealer. Thus, it is unclear how such foreign large traders would disclose their IDs to US-registered broker-dealers. Additional clarification will be needed from the SEC on the application of Rule 13h-1 to foreign large traders that do not have direct relationships with US-registered broker-dealers. A foreign entity that is prohibited by local privacy laws from completing and filing the Form 13H may seek an exemption pursuant to Section 36 of the Exchange Act. However, the SEC has said it considers it unlikely that a foreign country’s laws would prohibit the completion and filing of Form 13H."

I'm far from an expert on this rule (this stuff isn't really what we cover here), but I haven't seen any clarification of how a foreign trader should comply.
-John Jenkins, Editor, TheCorporateCounsel.net 3/6/2020

Q: I am struggling with drafting a "Background of the Merger" section. Are there resources anyone may suggest that provide guidance on how to do this well? Thanks.

RE: Nothing comes to mind in terms of a how-to manual, but I usually use Intelligize or Bloomberg, or another research resource to search precedent proxy statements with similar deal structures and maybe similar industries (although industry is probably less important for drafting BOM). A critical point is to have a good set of notes on the history of the negotiations.
-3/5/2020

RE: Everybody struggles to draft this. It's by far the most difficult and most important section of the merger proxy. It helps immensely if you've been part of the deal process throughout. If not, you're going to need to get a lot of input from your colleagues who were. I will also tell you that if this is the first time anyone's thought about the Background of the Merger disclosure, you're going to have a particularly tough slog. There are big picture issues here as well as more mundane ones.

The biggest of big picture issues is that you need to have a good story to tell, and that means paying attention to the process from the start of the transaction. How is your deal process, and the directors' compliance with their fiduciary obligations, going to look in black and white?

On a more mundane level, the need to disclose the key exchanges between the parties and their representatives is something that should be talked about before negotiations begin. Names, dates, substance of discussions - all of these should be noted in real time so that they can be captured appropriately in the disclosure.

If you can get a jump on this before the deal is signed up, you’ll be in much better shape. The pressure to get something on file after signing is usually pretty intense.

In terms of the drafting process, here's what I've typically done when it has fallen to me to draft this section:

1. Review the line-item disclosure requirements (Item 1005 of Reg M-A is generally the key line-item for this section). Make sure that you know what you must address to comply with the line item.

2. Go to Edgar and pull recent S-4s or merger proxies in which prominent M&A law firms were involved. Read the Background sections. Most have a lot in common — they tend to be straightforward and factual in their descriptions, and without a lot of overt spin. There's plenty of spin in the best of these, but it's under the surface. The "spin" is the process they're describing. A lot of thought typically went into that process, and how it would look in black and white.

3. Look at S-4s or merger proxies involving companies in the relevant industry (regardless of the professionals involved). The business and strategic issues those boards were dealing with and that motivated the transaction may well be similar to your own client’s.

4. If you’re lucky enough to find deals that were fully reviewed by Corp Fin, read the Staff comment letters and responses. The Background sections tend to draw a lot of comments.

5. Reach out to the investment bankers and ask them to provide a draft description of their fairness opinion. They are expecting this request and you'll find the document helpful as you describe the board meetings at which the deal was considered. Bankers are often a very helpful resource when it comes to aspects of the negotiation process that you’re unclear about.

6. Armed with your knowledge of what these disclosures are supposed to look like, consult with the deal team in order to make sure you understand the transaction process, dates of meetings between the parties or their representatives, board meetings, banker and legal presentations, etc.

7. Prepare a draft. Once you do, circulate it internally among the deal team. You will get a lot of comments.

8. Review the draft, with a view to paring it down. This is the hardest part of the process because you need to use your judgment in making sure that the description of the process contains all of the material information about the negotiation and approval of the transaction, but eliminate the extraneous stuff that comes off as defensive or as "spin." That's the kind of stuff plaintiffs will latch onto. If you don’t have a lot of experience with this, make sure that the draft is reviewed by somebody who does. Also, I highly recommend sharing it with an experienced litigator.

9. When you take comments, don’t let anybody tell you to excise or massage uncomfortable facts. The classic example that I’ve seen is when you have a director who dissents – often, somebody will try to tell you to revise the disclosure to just indicate that the board approved the deal. Don’t do that; there’s Delaware case law to the effect that this is material information.

10. Once you've refined your internal draft and have received the sign-off from all relevant parties, send it to a small group of key deal people at the client for their input and to confirm its factual accuracy. Once you've done that, you can share it with your bankers, and then, with the other side. Ultimately, this disclosure often involves quite a bit of joint effort, particularly if both sides need shareholder approval.

Your mileage may vary on all of this, and I’m sure there are folks with a lot more experience than I have who can provide you with more and better insights into the drafting process. But for better or worse, those are my suggestions. Good luck.
-John Jenkins, Editor, TheCorporateCounsel.net 3/5/2020

RE: John, that is an incredibly useful summary. All great points. I would add, that you should be mindful that the SEC staff frequently does a substantive review of the merger proxy, and the BOM is a point of focus. The staff sometimes asks the registrant to provide backup materials (e.g. give us copies of all reports provided to the board or special committee), and then comments on things that should have been disclosed. Be sure to get all that material in front of you before you finalize your drafting, and start anticipating potential comments and issues. Better yet, as John suggests, gather it as the negotiations are in process, and start flagging issues for the client.
-3/5/2020

RE: Yes, great point. Thanks.
-John Jenkins, Editor, TheCorporateCounsel.net 3/5/2020

Q: What constitutes the "engagement" of a new auditor for purposes of Item 304? For example, if a company has a RFP selection process for auditor, and selects a new auditor for the 2020 fiscal year (which is disclosed in a Form 8-K), and that new auditor begins to review the company's accounting policies without having signed an engagement letter, has the new auditor been "engaged"? The reason for asking is whether any of the discussions that the new auditor and the company may have about the company's accounting policies after the selection (but before an engagement letter is signed) would need to be disclosed under 304(a)(2)(i). Thank you.

RE: Although there are AICPA standards about what client intake procedures auditors should follow before accepting an engagement, I am not aware of any bright line position from the Staff on when an auditor has been engaged. I think it's a facts and circumstances analysis.

To me, if the audit committee has signed off on the appointment, the auditor has indicated that it's willing to serve and an 8-K reporting the retention has been filed, advice provided subsequent to these events (for which the accounting firm will presumably be compensated) should not be regarded as pre-engagement consultation, even if a formal engagement letter has not been signed.

I think there are a couple of things in particular that support that conclusion. The first is that the pre-engagement consultation disclosure requirement is intended to smoke out whether the new accountant's willingness to accept controversial accounting positions may have played a role in its engagement. That doesn't seem to be a realistic concern if you've already gone public with the fact that you've engaged them.

The second is the consequences of the public 8-K filing. Once you've gone public with the announcement that you've hired a new auditor, subsequent discussions about accounting matters shouldn't be viewed with the same skepticism. In this situation, if the auditor indicates that it won't "play ball," the company's only real alternative would be to dismiss that auditor, and since you've already gone public with their retention, that starts the Item 4.01 8-K disclosure process all over again.
-John Jenkins, Editor, TheCorporateCounsel.net 3/5/2020

Q: An insider of a public company transferred shares to a grantor retained annuity trust (GRAT). While the insider is the beneficiary of the GRAT, the insider is not the trustee of the GRAT and the remainder interest goes to the insider's adult children. The insider does not have voting power or investment power over the shares in the GRAT, so I would assume that the shares do not need to be listed in the beneficial ownership table of the company's proxy statement, absent any other facts (alternatively, perhaps the shares could be listed within a footnote as excluded from ownership or with a statement that beneficial ownership has been disclaimed). I wanted to see if anyone has any thoughts or has faced a similar situation.

RE: Item 403 looks to Rule 13d-3 for its definition of beneficial ownership, and under that rule, it's voting & investment power that matters and not the existence of a pecuniary interest in the shares (that's relevant under Section 16). If a trust is revocable or will terminate within 60 days, then the beneficiary is deemed to beneficially own the shares as to which it will acquire voting and/or investment power and they will need to be included in the beneficial ownership table. It's my understanding that GRATs involve irrevocable trusts, so unless the GRAT will terminate within 60 days, the beneficiary won't be deemed to be the beneficial owner under Rule 13d-3 and the shares won't need to be included in the table.

Depending on the circumstances, you may want to drop a footnote indicating that the shares are not reported in the table, particularly if the table reflects a significant change in the individual's ownership compared to prior proxy disclosure.
-John Jenkins, Editor, TheCorporateCounsel.net 3/5/2020

Q: It doesn't appear that there is explicit guidance around rounding of fractional shares in proxy statements (like there is for rounding dollar amounts). Does anyone have a sense of whether it is more common to show rounded or fractional share amounts, particularly after an event like a forward or reverse split? Thanks in advance.

RE: Most companies cash out fractional shares to avoid having to deal with this, but unless fractional shares mattered for some reason, I guess I'd probably opt to disclose up front that fractional shares have rounded to the nearest whole share for purposes of the proxy statement and just use whole share amounts.
-John Jenkins, Editor, TheCorporateCounsel.net 3/5/2020

Q: The issuer maintains a long-term incentive plan (LTIP) from which annual awards to executives and non-executives are granted. This year's grant will take place at the end of the month. After the grant, there will be only a few shares remaining that are reserved for issuance under the LTIP. Our Annual Meeting will be in May and, for various reasons, we do not want to seek stockholder approval to amend the LTIP to increase the number of shares available under the LTIP for future awards. Our compensation consultant has suggested that some issuers get legal advice that allow them to "borrow" against the shares reserved for a plan if it is clear the issuer will not hit max levels on the plan (i.e. it is clear that future performance would not result in max payout under PSUs). I think the concept is that we would "borrow" against the remaining balance if we think or have data that strongly suggests we won't be paying out the max. If we did this, we wouldn't need to ask for more shares. Has anyone heard of this concept before? From my perspective, I don't see why we can't do this and the risk is actually on the back-end, if we don't have shares available under the LTIP at the time the awards are settled.

RE: I've never been involved in a situation where a company has done that, and while I'm no expert, the idea makes me uncomfortable. In most cases, there's an express obligation under the equity plans to maintain at all times sufficient reserved shares to satisfy outstanding awards, and "borrowing" against the shares reserved for issuance — even if it doesn't appear that they'll be needed to satisfy those awards — seems likely to result in at least a technical breach of the company's obligations under the plan document.

I think you'd want to speak to your auditors about whether and how doing something like this might impact financial statement disclosures concerning reserved shares and outstanding share awards. If the "borrowing" involves a potential contract breach, you'd probably need to run the traps under ASC 450 as well. I think you would also want to review other material contracts to ensure that there's no reps & warranties or cross-default provisions that might be triggered by an action like this. Finally, I think you need to consider the impact on your S-8 registration statements, and whether taking an action like this without disclosing it to participants would create potential issues under the Securities Act.
-John Jenkins, Editor, TheCorporateCounsel.net 3/5/2020

Q: I see that the handbook regarding beneficial ownership indicates that ESPP shares that are acquirable within 60 days must be reported. However, under many plans, this number would not be determinable since the option price is the lower of the beginning of the offering or the end of the offering. How should this be dealt with?

RE: To my knowledge, there's nothing from the Staff on this, but I think what I'd do is disclose the number of shares that could be acquired by the executive based on the price at the commencement of the offering period and then footnote that disclosure to indicate that's what you've done. I'd include in the footnote a brief description of the plan's pricing mechanics, and a statement that the actual number of shares that may be acquired under the ESPP will not be determinable until the end of the offering period.

Frankly, I'm not sure how many companies actually go to the trouble of doing something like this, although I think 13d-3 requires the conclusion that the executive beneficially owns "something" here and that Item 403 requires companies to disclose it. The amounts involved are typically pretty small and my guess is that some companies that allow officers to participate in these plans may just throw up their hands and say the amount that may be acquired within 60 days isn't determinable.
-John Jenkins, Editor, TheCorporateCounsel.net 3/4/2020

Q: An NYSE listed master limited partnership had an equity incentive plan approved by its unitholders. At the end of 2019, the MLP converted to a c-corp structure. Mechanically, the GP of the MLP converted from an LLC to a corporation, and through a merger transaction a wholly-owned subsidiary of the corporation became the sole limited partner of the MLP. The corporation (which remained the GP of the limited partnership), is now the public company and its stock is listed on the NYSE. It is a successor registrant for '34 Act purposes. Upon conversion, and as contemplated by the merger agreement, the board acted to have the corporation adopt the MLP's equity incentive plan and assume all outstanding awards thereunder. (The plan had been amended to contemplate the conversion, with awards referencing units that meant MLP common units prior to conversion and shares of the corporation's stock thereafter). We are advised that for IRC purposes this would be treated as adoption of the plan by the corporation such that it has one year in which to obtain stockholder approval of the plan for purposes of permitting ISOs. Given that the corporation's stockholders in their capacities as such have never approved the plan, does anyone have a view as to whether the NYSE shareholder approval requirements would also require that the stockholders approve the plan, notwithstanding that it had previously been approved by the unitholders of the prior plan sponsor, of which the corporation is the successor registrant?

RE: I should add that the M&A exception would apply in this case but for the last condition of the exemption, as the individuals to whom awards would be made would include individuals who were employees of the corporation prior to the transaction. I would think the spirit of the exemption would still apply as they were employees of the entity that is now the listed company only because it was serving as the general partner of the limited partnership whose plan was assumed. Perhaps a call to the NYSE to confirm?
-3/4/2020

RE: Yes, I'd suggest reaching out to the NYSE on this one. This fact pattern isn't addressed in the FAQs and I'm not personally familiar with a situation like yours. If you do speak with the NYSE, please let us know what they say. Thanks.
-John Jenkins, Editor, TheCorporateCounsel.net 3/4/2020

Q: Confirming that a company whose securities are quoted solely on the OTCQX is not a “listed issuer” under Rule 10A-3 and thus does not need to provide disclosure under Reg. S-K Item 407(d)(4) in its 10-K? The company has a 15(d) reporting obligation but is not listed on a national securities exchange and does not have securities registered under Section 12 of the Exchange Act. I know Rule 10A-3 did not apply to OTC issuers when initially adopted, but there have been a lot of changes to the OTC since then and just wanted to confirm that is still the case. Reg. S-K Item 407(d)(4) requires certain disclosure if the company is a “listed issuer” as defined in Rule 10A-3. Rule 10A-3(e)(9) says “listed” and “listing” means securities listed on a national securities exchange or listed in an automated inter-dealer quotation system of a national securities association or to issuers of such securities. Thanks in advance for your thoughts.

RE: OTCQX isn't a national securities exchange. Although I've seen it referred to by the SEC as an "inter-dealer quotation system," I have never seen it referred to as an "automated inter-dealer quotation system of a national securities association" and I don't think it is one. Under its rules, only a majority of a company's audit committee members need to be independent. Since that's the case, if the OTCQX was an "automated inter-dealer quotation system" of the type referenced in Rule 10A-3(e)(9), its listing standards would be non-compliant with Rule 10A-3(b)(1)(i).
-John Jenkins, Editor, TheCorporateCounsel.net 3/3/2020

Q: Our Compensation Committee annually approves all annual bonus (short-term program) payments to both the Executive Officers and key employees (about 100 of them). Our short-term program is based on EBITDA performance for the completed year. Our Committee is required to certify the performance of the issuer prior to payments to Execs and key employees. One of our Committee members has asked us why it's necessary for the Committee to approve the payments for key employees, noting that some payments are less than $5,000. I recall reading somewhere that the Committee has to authorize all compensation-related matters pertaining to Executive Officers, but I don't recall anything that this is the case for key employees. So, I guess the question is whether it's a legal requirement for the Committee to approve compensation-related matters to non-Executives? I would think that executive management would have this authority but our delegation of authority policy doesn't touch on this matter. Any thoughts?

RE: Nasdaq requires the comp committee's charter to provide that it is responsible for determining, or recommending to the board for determination, the CEO's compensation and the compensation of all other executive officers. The NYSE requires it to assume responsibility for reviewing and approving the CEO's performance and compensation, and recommending to the board non-CEO executive officer compensation, and incentive compensation and equity-based plans that are subject to board approval.

Although the comp committee provides oversight to the company's compensation plans, it is not required to approve specific awards to non-executive employees unless the charter requires them to or there is some applicable state law requirement that can't be delegated. Many companies include language in their comp committee charters delegating some decision-making authority to the CEO with respect to non-executive officers and other employees. See the discussion beginning on p. 85 of our NYSE Listing Standards Handbook and p. 62 of our Nasdaq Listing Standards Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 3/3/2020

Q: Should the director/senior management information provided under Item 6.A. of Form 20-F for an annual report be as of the the last day of the period covered by the report (i.e., December 31) or as of a date closer to the filing date? I have seen companies do both and haven't found any guidance one way or another. A company has some individuals that were in office as of December 31 but have since resigned and wondering if they should be listed in this table or not.

RE: I'm not aware of any guidance either, and in light of that I think Novo-Nordisk's approach is probably a safe one. It disclosed its current directors and senior management, but also identified two executives who departed during the year. Those individuals were also included in the compensation disclosures.
-John Jenkins, Editor, TheCorporateCounsel.net 3/3/2020

Q: A NYSE-listed Pubco director is an employee (but not an executive officer, general partner or managing member) of another public company ("HolderCo") that has over 20% voting power in Pubco. Per Rule 10A-3(e)(1)(i), HolderCo is an "affiliate" of Pubco. Rule 10A-3(e)(1)(iii) says a director of Pubco who is also an employee of an affiliate of Pubco will be deemed to be an affiliate of Pubco and would therefore not be eligible to sit on the Audit Committee of Pubco. Is there a lookback period for this rule? If the Pubco director resigns from his position at HolderCo today, would he be eligible to sit on the Audit Committee of Pubco tomorrow, assuming that he satisfies the other audit committee requirements?

RE: There isn't a lookback for the provisions of Rule 10A-3 prohibiting payments to audit committee members, which the SEC made clear in the adopting release. The SEC didn't say anything about a lookback under Rule 10A-3(e)(1)(iii), but since the rule itself says that an independent director may not "be an affiliate," I think the use of the present tense supports a reading that there shouldn't be a lookback under this provision of Rule 10A-3 either. But, that's just my view and, unfortunately, this is not an area about which the Staff has provided any guidance.

Perhaps more importantly, I don't think that simply resigning from a position as an employee of HolderCo resolves the issue of whether the former employee continues to be an affiliate. The rule itself only says that if you're in that employee category, you're presumed to be an affiliate. There's also a presumption baked into the rule that a person who isn't an executive officer & doesn't beneficially own more than 10% of an issuer's securities doesn't control that entity. Otherwise, the same facts and circumstances analysis that is used to determine whether a person, directly or indirectly, controls, is controlled by or is under common control with the issuer would apply to this determination as well.

There are express lookback provisions under Nasdaq & NYSE independence standards for certain relationships, but from the nature of your question it appears that you've concluded that none of those disqualifying provisions apply here.
-John Jenkins, Editor, TheCorporateCounsel.net 3/2/2020

Q: A Company has authorized a stock repurchase program that is in compliance with Rule 10b-18 (the "Plan"). Given the current status of the stock market, the Company intends to purchase immediately its current block under the Plan, at which point it would be maxed out for the remainder of the week. Company then intended to make further purchases of its stock, understanding that those purchases would not be Rule 10b-18 compliant. We understand that operating outside of the confines of Rule 10b-18 is a grey area and is based on facts and circumstances; however, if a Company does choose to operate outside of Rule 10b-18, we are wondering if you see companies issuing press releases, Form 8-Ks, or any other mitigating actions to lower the risk of a market manipulation claim? Specifically, we wonder if issuing a press release and corresponding Form 8-K notifying the public prior to the repurchases might be a meaningful protective measure? We are mostly concerned with mitigating actions that the Company could take to lower the risk profile in the event they purchase outside of the confines of Rule 10b-18.

RE: I can't recall an example of a company that has flagged its intention to make open market purchases outside of the safe harbor, but I think that, at a minimum, some sort of disclosure indicating that the company will be in the market, the amount of shares that it may acquire, and other material information about its buyback plans would be necessary in order to position it to defend against potential market manipulation claims. I also think that any company that did this would also be wise to follow as closely as possible the timing limitations and other provisions of Rule 10b-18, even if the volume of the repurchases takes it out of the safe harbor.

I also believe that doing something like this is inherently very risky, and suspect that one reason that I haven't seen disclosure like this is that not many companies do this. Lots of companies do privately negotiated repurchases outside of 10b-18, but I think large open market purchases outside the safe harbor are unusual and something that most companies shy away from.

In addition to 10b-5, Section 9(a)(2) of the Exchange Act casts a pretty wide net in terms of what might constitute market manipulation. You would also have to consider whether the disclosures you determined that you need to make might cause further complications - such as raising potential issues about whether what you're doing involves a tender offer. Those disclosures might well result in unwanted attention from regulators and the plaintiffs bar. Finally, it may be hard to find a brokerage firm with a compliance department that will sign-off on participating in a buyback outside of the safe harbor.
-John Jenkins, Editor, TheCorporateCounsel.net 3/2/2020

Q: Any thoughts on whether cash-settled SARs would be considered securities?

RE: I think it is a somewhat unsettled issue, although the SEC treats them as derivative securities for Section 16 purposes, and because of that, it is prudent to assume that they are. Here's an excerpt from a 2003 Miami Law Review article addressing the status of employee incentives under the securities laws:

"There exists some doubt, even apart from the approach articulated in this article, as to whether a SAR constitutes a "security." The exercise of a SAR for cash is the economic equivalent of an exercise of a stock option and the immediate sale of the shares subject to the option. See Fox, supra note 310, at 2188. The question, however, is analytically identical to that of cash-settled options, which were found to be securities in the recent case of Caiola v. Citibank, 295 F.3d 312 (2d Cir. 2002)."
-John Jenkins, Editor, TheCorporateCounsel.net 2/28/2020

Q: This seems like a simple question, but wanted to clarify when an interim written affirmation would be due. I understand that the filing would be due within 5 business days of the triggering event - does the 5 days include the triggering event day?

RE: It certainly could be clearer, but here's what I think: the language of the NYSE's 2020 guidance letter to listed companies says that "an Interim Written Affirmation must be filed promptly (within 5 business days) after any triggering event specified on that form." That's the same kind of language used in Form 8-K, which calls for the report to be filed "within four business days after occurrence of the event." So, I'm inclined to think that the most appropriate way to interpret the language grammatically is the same way that Form 8-K has been interpreted — the first day doesn't count, and the form must be filed by the end of the fifth business day beginning after the event.
-John Jenkins, Editor, TheCorporateCounsel.net 2/27/2020

Q: Item 407(b) requires disclosure of the number of meetings of the board of directors and number of meetings of the audit, nominating and compensation committees of the board held during the last fiscal year. If a regular scheduled quarterly meeting was cancelled because the directors could not attend so they instead executed a unanimous written consent in lieu of the meeting, do issuers usually "count" that consent as one of the meetings held during the fiscal year? A stockholder who reads our proxy statement may wonder why we held one fewer meeting than the prior year. This issue may also touch upon our committee charters where they state the committee shall meet no less than X times a year. Can we take the position that the consent satisfied one of the meeting requirements? We realize there are really no penalties per se or disclosure obligations for a technical violation of our charters.

RE: Alan Dye notes: If the meeting was cancelled, then no director missed the meeting. Violating the charter isn’t a problem—that doesn’t violate a listing standard or SEC rule. And I think you're right; the charter could be interpreted to allow written consent in lieu of a meeting.
-Broc Romanek, Editor, TheCorporateCounsel.net 11/22/2013

RE: Would a unanimous written consent of any one of the three major committees count toward the number of meetings held by each such committee under Item 407(b)(3)? I am aware of C&DI 233.01 that states that the total number of meetings for purposes of Item 407(b)(1) does not include board action by written consent, but I am curious whether most practitioners extend that to committee meetings as well. It would seem like an easy correlation but would appreciate some guidance.
-2/27/2020

RE: I think most people think that the position expressed in C&DI 233.01 extends to board committees as well. That's certainly how I've interpreted it.
-John Jenkins, Editor, TheCorporateCounsel.net 2/27/2020

Q: Client has a S-3 on file. Client desires to avail itself of Instruction 1 to Item 303(a) of Regulation S-K and omit in its 2019 10-K the discussion about the earliest of the three years in its MD&A and include a statement in the 2019 10-K that the 2017 information is located in Item 7 of its 2018 10-K. When the 2019 10-K is filed, will it serve as the Section 10(a)(3) update to the S-3?

RE: Yes, your 10-K filing will be a Section 10(a)(3) update, but that third year won't be deemed to be incorporated by reference into the registration statement unless you specifically provide that it is. See Regulation S-K C&DIs 110.02 - 110.04. I think what you're really asking is whether you will have a compliant prospectus if you don't specifically incorporate by reference the information that's in that discussion of the third year. There are two parts to that question. The first is, will you be compliant with the requirements of the applicable registration form? The second is, will your prospectus contain a material misstatement or omission if you don't include that information?

If you are a Form S-3 filer, I think the answer to the first question is pretty straightforward. S-3 doesn't have a line item requiring you to include an MD&A discussion; it merely requires you to incorporate by reference your Form 10-K. So, not having that third year doesn't make you non-compliant with the requirements of Form S-3. In contrast, Form S-1 does have a specific line item calling for the information required by Item 303. But if you are a Form S-1 filer and you're a smaller reporting company eligible to use forward incorporation by reference, then you're also good because a smaller reporting company is only required to provide a two-year MD&A discussion in the first place. Other S-1 filers aren't eligible to use forward incorporation by reference.

The answer to the second question depends on the materiality of the information in the omitted year. If it is material to an understanding of the company's financial statements or the discussion of its results of operations or financial position as presented, then it should be either included or specifically incorporated by reference into the 10-K. (See Reg S-K CDI 110.03). If it is not included or incorporated by reference under these circumstances, then you may have a material omission in your filing.
Reg S-K CDIs 110.02 - 110.04
-John Jenkins, Editor, TheCorporateCounsel.net 2/27/2020

Q: I have seen a split in practice between companies filing "Description of Capital Stock" and other companies filing "Description of Common Stock" to satisfy the new Item 601 requirement. I realize that technically companies are only required to file a description of common stock (and other registered securities), but is there any benefit to filing a "Description of Capital Stock" exhibit (possibly for incorporation into future shelf registration statements), assuming no other securities are registered?

RE: I suppose you could do that if you wanted to incorporate the exhibit by reference into a subsequent 33 Act filing. That being said, if you do a universal shelf or an S-3ASR, I think market practice is to generally include a description of all the securities that might be offered off the registration statement in the base prospectus, and then include the specific terms of the securities themselves in the Pro Supp. My guess is that if an underwriter is involved, they aren't going to want to deviate from the customary format.
-John Jenkins, Editor, TheCorporateCounsel.net 2/27/2020

Q: When the board amends the bylaws, disclosure is required under Item 5.03 (where the proposal was not disclosed in the proxy statement). It seems to me that this would also implicate Item 3.03(a), which requires disclosure if the "constituent instruments" defining the rights of holders of any class of registered securities have been materially modified, but that is not the practice from the 8-Ks I have reviewed. Does it depend on the particular amendment, or is it simply that bylaws are not considered "constituent instruments?" (601(b)(4)(i) certainly contemplates bylaws as an instrument that defines the rights of security holders.)

RE: Any thoughts on this?
-2/24/2020

RE: I think people may often read Item 3.03(a) narrowly to apply to changes in things like changes in the express terms of the stock itself, and not more general amendments to charter documents. But I think you make a good point, and that in many cases companies should file under both Item 5.03 and Item 3.03(a).
-John Jenkins, Editor, TheCorporateCounsel.net 2/26/2020

RE: Thanks! In our situation, the change is to the bylaws (so can be done by action of the Board without stockholder approval). It's a minor/procedural change, though more "substantive" than the guidance saying that a pure A&R without changing any terms wouldn't trigger an 8K. I think the safest bet is to file so not to risk a delinquent 8K that would result in loss of S3 eligibility. But, is that an overly cautious approach?
-2/26/2020

RE: I don't think there's any reason not to simply include Item 3.03 in your 8-K. There's no downside and with the lack of guidance, I don't think it's unreasonable to take a somewhat conservative approach.
-John Jenkins, Editor, TheCorporateCounsel.net 2/26/2020

RE: Thanks very much!
-2/26/2020

Q: Client is contemplating a transaction where they will be selling some properties to another party as well as buying some properties from the other party as part of an exchange transaction. For purposes of running the 3-05 significance tests, it appears to me that the client should not be excluding the disposed of properties from the denominator. That is crystal clear in the case of an exchange transaction where you are both contributing to a joint venture (see 2025.4 below) but less clear where there is no joint venture. I haven't seen anything that says that they just couldn't use the 2019 audit (without adjustment for disposition piece of exchange) if they wanted to. Are you aware of anything? I would also think the advice below re the disconnect between the timing of disposition pro formas (4 days after consummation) and acquisition pro formas (71 days) would also apply to exchange transactions involving joint ventures, but do you think we need to call the SEC to confirm that? 2025.4 Significance Implementation - Exchange Transaction (Acquisition and Disposition) If the transaction is an exchange transaction in which the registrant and another party each contribute businesses to a joint venture (or the “NewCo”) in exchange for an equity interest in the NewCo measure the significance of the disposition (registrant’s contributed business) and the acquisition (other party’s contributed business) separately to determine whether pro forma information about the disposition and receipt of an equity investment is required, and whether audited financial statements of the business contributed by the other party are required. Significance of the acquisition should be based on the acquired percentage of the other party’s business compared to the registrant’s historical financial statements (without adjustment for the related disposition of the business contributed by the registrant to the joint venture). Whether or not the transaction is accounted for at fair value, the investment test should be based on the fair value of the consideration given up or the consideration received, whichever is more reliably determinable. If reporting of both the disposition and the acquisition are required by Form 8-K, a registrant may be unable to present a pro forma income statement depicting the joint venture formation because financial statements of the business contributed by the other party are not available. Those financial statements and related pro forma financial statements need not be filed until 71 calendar days after the date that the initial report reporting the transactions on Form 8-K must be filed (that is, the sum of 4 business days after the transaction is consummated plus 71 calendar days). Pro forma financial statements depicting a significant disposition are ordinarily required to be filed within 4 business days of the disposition. In these circumstances, the initial Form 8-K reporting the transaction should include a narrative description of the effects of the disposition, quantified to the extent practicable, and complete pro forma information depicting the effects of the exchange of interests should be filed at the time that the audited financial statements of the acquired business are filed.

RE: My gut reaction is that you're right and that you should look to the guidance in the FRM for determining significance and the timing of the pro formas. But since you're dealing with a complex transaction that isn't directly addressed by the interpretation and one that I haven't personally encountered, I would advise you to reach out to the Staff.
-John Jenkins, Editor, TheCorporateCounsel.net 2/26/2020

Q: For the life of me, I can't recall where the proxy disclosure comes from regarding what can be done if a nominee is unable/unwilling to serve at the time of the annual meeting. Everyone seems to disclose a range of options...the proxies can vote for another nominee, or the board can leave the vacancy unfilled or reduce the size of the board. I don't see this in Reg S-K. Is it a state law requirement?

RE: I think it comes from a combination of sources. Rule 14a-4 allows proxies to convey discretionary authority to vote for a substitute nominee if the original nominee is unable or, for good cause, unwilling to serve. Instruction 4 to Item 401(a) of S-K says that if fewer director nominees are named than the number fixed by the company's charter documents, it must state "the reasons for this procedure and that the proxies cannot be voted for a greater number of persons than the number of nominees named." Companies that want to keep their options open and check off all possible disclosure options disclose that they may nominate a replacement and vote the proxies for that person, or that they may opt to leave a vacancy.
-John Jenkins, Editor, TheCorporateCounsel.net 2/26/2020

Q: Company has a previously existing Form S-3 shelf on file. Company missed a 10-Q deadline, but filed the 10-Q within 5 days after the deadline. Is it correct that since no Form 10-K has been filed since the 10-Q deadline was missed, if the company takes the position that no fundamental change has occurred, the company would become re-eligible to use its previously effective Form S-3 shelf? (I understand that the company would not be able to file a new Form S-3 absent an SEC waiver.) Thank you.

RE: Yes. Loss of eligibility to use a registration form after effectiveness and before its Section 10(a)(3) update will not affect an issuer's ability to use an existing registration statement until the time of its Section 10(a)(3) update. (i.e., the 10-K filing date). You have to conclude that you still have a good Section 10(a) prospectus, but if the delinquent filing has been made, most issuers usually conclude that they do.

Here's an excerpt from a Sidley memo summarizing how this works (although it addresses a late 8-K, the concepts are the same):

"The company in such a case may continue to use the effective registration statement through the date on which the company is required to update the registration statement under Section 10(a)(3) of the Securities Act, which is construed to be the date on which the company files its next Form 10-K. In all cases, a company must consider whether the prospectus included in the registration statement as of the effective date for the shelf takedown continues to be a valid Section 10(a) prospectus. Usually, a company will conclude that it may continue to make offers and sales under the registration statement so long as the untimely Form 8-K is in fact filed. However, after the company files its Form 10-K, all offers and sales under an effective registration statement on Form S-3 must cease."
-John Jenkins, Editor, TheCorporateCounsel.net 2/26/2020

Q: Does anyone have any idea why there is a specific item in Form 10-Q for Defaults Upon Senior Securities, but not in Form 10-K? I assume any default would be disclosed in the MD&A section of the Form 10-K, and probably on Form 8-K prior to that, but is there any specific reason for this inconsistency?

RE: I have the same question. Anyone have any idea why this is a 10-Q item but not a 10-K item?
-1/29/2012

RE: Anyone know the answer? I have the same question.
Thanks!
-2/24/2020

RE: That's a good question. I know that in the proposing release for the expansion of 8-K items back in the early 2000s, the SEC raised the possibility of deleting Item 3 of Part II of Form 10-Q in conjunction with the adoption of new Item 2.04 of Form 8-K, but they didn't do that—and didn't explain why—in the adopting release. I've never seen them address the discrepancy between the 10-Q and 10-K requirements, but I certainly think it's covered in other requirements.

I suppose it could have something to do with the fact that the table of contractual obligations, which is required to be included in the 10-K MD&A section, isn't required to be included in a 10-Q.
-John Jenkins, Editor, TheCorporateCounsel.net 2/25/2020

Q: Company has entered into a merger agreement to acquire a target (the "Transaction"). The Transaction will not require shareholder approval by the Company's shareholders. However, Company is interested in amending its charter/articles to increase the number of authorized shares of common stock, a portion of which would be used to complete the Transaction, and the Company will include a proposal in its proxy statement for the Company’s annual meeting of shareholders (the "Proposal"). In reading Note A to Schedule 14A, if the Company includes the Proposal in its proxy statement, it appears the Company is now required to include Item 11, 13 and 14 information in the proxy statement and the shareholders will be voting not only to approve the Proposal but on the Transaction as well. Given that shareholder approval of the Transaction is not required, but for Note A, is the Company still required to include Items 11, 13 and 14 disclosure? We have not seen any guidance with regards to the foregoing.

RE: Because you need shareholders to approve the amendment increasing the number of authorized shares in order to do the deal, Note A will require you to furnish the same info in the proxy that would be required if you were asking them to approve the merger. It will not, however, require you to submit the merger itself as a separate proposal if that's not required under state corporate law.
-John Jenkins, Editor, TheCorporateCounsel.net 2/22/2020

Q: Registrant has a 10b5-1 repurchase program for its publicly traded shares. It is starting a sale process that has not been publicly disclosed. The 10b5-1 program was adopted before the registrant decided to conduct a sale process. Any thoughts on best practices in this type of situation (e.g., suspend repurchases during the sale process)?

RE: 10b5-1 plans are intended to enable companies to continue to repurchase shares when they're in possession of MNPI, and messing with them is generally a bad idea. Early termination of a plan at a time when the company is in possession of MNPI can result in a loss of the Rule 10b5-1 affirmative defense for prior transactions if the termination calls into question whether the plan was entered into in good faith and not as part of a scheme to evade the insider trading laws. Refer to the discussions of plan modifications beginning on p. 37 of our Rule 10b5-1 Trading Plans Handbook and the discussion of Rule 10b5-1 plans in our Stock Buybacks Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 2/22/2020

Q: We are a "loss corporation" whose third quarter financials are now considered stale. We are also losing WKSI eligibility in connection with our Form 10-K filing. In order to keep our S-3ASR alive until we can get a new Form S-3 effective, we plan on proceeding as set forth in C&DI 198.06. In order to cure the staleness of our Q3 financials, can we simply file the latest year end financials (that will be filed with the 10-K) with the POSASR?

RE: You can cure staleness under 3-12 by filing the updated financials with the post-effective amendment (see, e.g., Section 1220.6 of the Financial Reporting Manual), but I think you probably need to do more than just that. That's because when you file the POSASR, you'd also need to comply with Item 11(a) of Form S-3, which requires you to "describe any and all material changes in the registrant’s affairs which have occurred since the end of the latest fiscal year for which certified financial statements were included in the latest annual report to security holders and which have not been described in a report on Form 10-Q (§249.308a of this chapter) or Form 8-K (§249.308 of this chapter) filed under the Exchange Act."
-John Jenkins, Editor, TheCorporateCounsel.net 2/22/2020

Q: The issuer is contemplating moving the annual stock award date for its executive officers and directors from December to the end of this month. We will file our 10-K at the beginning of next month. Do you see any issues with proceeding as planned? I do note that the grant date will be a little odd in that it is made when the trading window is "closed" and the window won't re-open until two days after the earnings release and 10-K filing. When these awards vest on an annual basis, shares are sold to satisfy the officers' withholding tax obligations. Sometimes, officers make voluntary sales at this time, but they will obviously be prohibited from doing so when the window is "closed."

RE: I think the potential issue you face with this timing is "spring loading" of the grants. For example, if you time them so the price doesn't reflect the impact of favorable information in your earnings release, then there may be fiduciary duty or other issues associated with the awards.

These issues haven't received a lot of attention since the backdating scandals of the early years of this century, but it's still a live issue with legal uncertainty surrounding it, and I don't think most companies would consider it a good practice.
-John Jenkins, Editor, TheCorporateCounsel.net 2/21/2020

Q: Under the General Instructions section of the Form S-3, Item I.B.3 indicates that Form S-3 can be used for transactions involving secondary offerings (i.e., the resale of outstanding securities by persons other than the issuer), if securities of the issuer of the same class are listed and registered on a national securities exchange. For resale registrations under a Form F-3, the parallel Form F-3 Item I.B.3 does not include the listing on a national securities exchange qualification requirement. Is it correct that any foreign private issuer can use the Form F-3 for a resale registration even if the issuer’s securities (of the same class as being registered) are not listed on a national securities exchange? Is the difference between the S-3 and the F-3 Item I.B.3 instructions intentional? I haven’t found any SEC pronouncements that address the national securities exchange listing requirement in the F-3 context. Thank you.

RE: It's apparently intentional, because the Staff certainly knows the distinction is there. In that regard, see this 2007 ABA comment letter on the baby shelf proposal specifically drawing that distinction to their attention. Here's an excerpt from page 8 (which isn't numbered for some reason):

". . . In sharp contrast, there is no listing or quotation requirement in Form F-3 for '[o]utstanding securities to be offered for the account of any person other than the [foreign private] issuer, including securities acquired by standby underwriters in connection with the call or redemption by the issuer of warrants or a class of convertible securities.'”
-John Jenkins, Editor, TheCorporateCounsel.net 2/20/2020

Q: We would like to include some charts and graphs of market data for our industry in our Investor Presentation slide deck that will be attached as an exhibit to our Form 8-K which will report our earnings. What is "the rule" for including such charts and graphs (i) into exhibits filed with 8-K's, and (ii) into SEC filings themselves? Can we include so long as we give proper attribution? Do we need consent from the author of this data? Thanks.

RE: Companies include 3rd party data in filings all the time. If you are including or incorporating the information in a 33 Act filing, then the Staff may take the position that an expert consent is required. Otherwise, your need for a consent before using the data in a filing will be a matter between the company and the author.

Obviously, you're also on the hook for it from a 10b-5 liability standpoint.
-John Jenkins, Editor, TheCorporateCounsel.net 2/20/2020

Q: Was curious to see whether it is standard practice to continue circulating FINRA questionnaires to the banks/company/d&os/5% holders in offerings on Forms S-3/F-3 where the issuer is exempt from FINRA filings pursuant to the 3 years of reporting and public float metrics? It seems you would still need (unless the issuer is otherwise exempt) to make a filing if there is a conflict of interest and you would need to otherwise confirm FINRA compliance but perhaps this just is not necessary?

RE: I can only speak to my own limited experience, but I haven't seen the underwriters ask issuers to make those inquiries through questionnaires in the recent deals I've worked on. The nature of the deals that I've been involved with may have a lot to do with that - but I think those deals have a lot in common with the kind of offerings that many companies that qualify for the exemption from FINRA's review of underwriting arrangements are doing these days.

Most of the deals I've worked on recently have involved issuance of investment grade debt, the proceeds of which will be used to repay outstanding obligations under revolving credit facilities. In these deals, the managing underwriters and many syndicate members are also lenders under the credit facility. Since that's the case, the conflict jumps right out at you, and the prospectus includes the disclosure required in FINRA Rule 5121 as a matter of course. The requirement to have a QIU doesn't apply because these are investment grade deals.

My guess is that in situations in which the conflict isn't as apparent, there may be more probing due diligence on the issue, including the use of D&O questionnaires with FINRA conflict of interest questions. Of course, some issuers that frequently access the capital markets may also include FINRA questions in their annual D&O questionnaires.
-John Jenkins, Editor, TheCorporateCounsel.net 2/20/2020

Q: A company and its lenders have just entered into an amendment of a material credit agreement that was previously filed as an item 4 exhibit. The amendment has been signed by the company, the agent (the primary bank), by a sufficient number of "Term A" lenders to make the amendment effective and by a number of "Term B" lenders. The company intends to file an 8-K to report the amendment. and to file the amendment as an exhibit. However, the agent is unwilling to allow the company to file with the 8-K the signature pages for any of the lenders other than the agent, on the basis that these other lenders want to keep their identities confidential. The agent contends that it is standard practice to omit the signature pages for all except the company and the agent. (Note that the agent did NOT sign the amendment on behalf of the various other lenders; they each sign independently.) We have indicated that, unless there's a basis for omitting the identities of these parties and their signature pages under the rules (e.g., something like 601(b)(10) (iii), instruction 1), we believe that the company must file the entire agreement, including conformed signature pages for all parties that have signed the amendment. We have not been able to find a basis under the rules for the omission. (Counsel to the agent has suggested filing the document as a form without any names of the parties, on the basis that filing a form is not prohibited, but we didn't find support for that approach other than for compensatory plans under (10)(iii) or instruction 2 to item 601. However, instruction 2 would seem to require that you identify the parties and other information on a schedule. Moreover, this is not really an instance of multiple contracts). We would appreciate it if you have any thoughts about whether omission of these signature pages is standard practice and what approach might work under the rules for the omission. Thanks very much for your help.

RE: I have never run into a situation where a counterparty seeks to withhold the identity of signatories, and you also must take the "standard practice" argument with a big grain of salt because i have always found that people usually raise that without any basis for it as a way of supporting their arguments. I think your position is well thought out and consistent with the standards of Item 601(b)(10). Any of the approaches suggested by the counterparty, such as filing a form of agreement or omitting the signatures entirely would not comply with Item 601 in my view. That said, I think that exhibit filing practices are all over the board, given that probably the biggest risk of filing a deficient exhibit is that you would draw a comment from the Corp Fin Staff.

Really the only way to omit portions of a complete agreement or amendment to an agreement is to submit a confidential treatment request, but I think in this situation you would have a hard time arguing that the disclosure of the signatory banks would cause competitive harm for the issuer.
-Dave Lynn, Editor, TheCorporateCounsel.net 6/23/2008

RE: I don't believe that about standard practice. I have filed credit facilities for several different companies, all syndicated, and we have identified every single signatory. And these include major banks. Of course, I can't recall that we necessarily told the banks we would be filing the agreement. At any rate, I'll bet you that if you searched the EDGAR database for the name of the bank in question, you would find all kinds of signature pages by that bank already on file.
-6/23/2008

RE: Do you know if this response is still accurate? It now seems fairly common to withhold signatures from credit agreements when there are many lenders. See the links below. We are wanting to omit lender sig pages because there are over 600 and it is just burdensome.
-2/17/2020

RE: I'm not aware of anything that's changed, but would echo the part of Dave's response where he noted that exhibit filing practices are all over the board. Given the likely limited downside, many companies may simply decide that this is a situation where they'd rather ask forgiveness than permission.

I think an argument in support of the position that the company doesn't have to include all signatories to a credit agreement amendment is strongest where the administrative agent is authorized to sign on behalf of the entire syndicate once the approval of a critical mass of required lenders has been obtained. In this situation, the argument would be that what's required to be filed under Item 601(b)(10) is a copy of the binding contract, and that the document bearing the signature of the administrative agent is the binding contract, regardless of whether the signatures of each lender are provided. I don't know how the Staff would react to that argument, and based on Dave's response there's reason for some skepticism that they'd sign off on it.
-John Jenkins, Editor, TheCorporateCounsel.net 2/18/2020

RE: For what it's worth, my take as a former staffer is that out of these three examples cited I'd probably go with the second as the least likely to draw pushback from the Staff, as it conforms the signatures of the company and administrative agent, then just says "LENDER SIGNATURES ON FILE WITH ADMINISTRATIVE AGENT."
-2/18/2020

Q: The handbook is very helpful, but is there a general rule of thumb (certainly appreciating all the nuances and facts and circumstances in the analysis) on the time at which disclosure of environmental legal proceedings is made? When the notice from the governmental authority is received (seems too early if registrant can reasonably believe that sanctions >$100K, although I think the C&D example in the handbook is distinguishable)? When the reserve is taken (again, seems conservative to trigger disclosure each time a reserve is taken, particularly for registrants in certain industries regularly scrutinized on these matters)? After registrant has negotiated with the governmental party and really has a sense of whether the sanctions will >$100K? Some other point in time? I understand the point about wanting to get this stuff out early, but at some early points it just seems useless to shareholders, and potentially misleading. Thanks for your thoughts.

RE: I think the closest thing to a rule of thumb when it comes to proceedings in which the government is involved is to always keep in mind that environmental proceedings disclosure isn't about materiality. It's a special category that's been pulled out of the general Item 103 disclosure guidelines because of policy considerations. The rule is designed to promote early disclosure, even in situations where that might result in what the economists call "noise." In that regard, if you look through the handbook's references to environmental disclosure, in almost every case where the rules could have been interpreted to permit deferring disclosure of governmental proceedings to a later date, they have not been so interpreted.

When it comes to other environmental proceedings, I think the general materiality considerations that inform the Item 103 materiality analysis continue to apply. But you also need to keep in mind that the accountants may construe ASC 450 to require disclosure in the financial statements before Item 103 might trigger disclosure. In some cases where a material loss is probable or reasonably possible, and the amount of a potential loss is not reasonably estimable, that may be before a specific accrual for the contingency is even made.
-John Jenkins, Editor, TheCorporateCounsel.net 2/18/2020

Q: Part II, Item 3(c) of the Form S-8 still requires an incorporation by reference of a description of securities filed in a registration statement. For companies that file a Description of Securities as an exhibit to their 10-K, should the S-8 now IBR that exhibit? Or would it make sense to IBR both (with the 10-K exhibit as a supplement or amendment of the registration statement description)?

RE: If the description in your exhibit is substantively the same as the one you used in your Form 8-A or Form 10, I'd continue to incorporate by reference to that filing.
-John Jenkins, Editor, TheCorporateCounsel.net 2/15/2020

Q: Publicly-reporting company is not current in its SEC filings due to a missed 10-K. Company will file the 10-K in about 3 weeks. Can the company file a Form S-1 for a potential registered offering now, or must it wait until it files the late 10-K before making the S-1 filing with the SEC? Thank you.

RE: There's nothing to prohibit you from filing an S-1, but it's going to need to have all of the required information in it, including the information required in the delinquent 10-K. If you can do that, then don't be surprised if the Staff asks rather pointedly why the 10-K itself hasn't been filed.
-John Jenkins, Editor, TheCorporateCounsel.net 2/14/2020

Q: Is there a standard for calculating director tenure? For example, assume Company has an annual shareholder meeting in May 2019. For the sake of the hypothetical, a director dies two days later and a new director is appointed in June 2019. Fast forward to the May 2020 meeting - does that new director have a tenure of zero? Or 1? Would it matter if the replacement was made in, say, January 2020? The answer I offered was along the lines of beauty being in the eye of the holder - i.e., it depends who is asking the question and their motive - but that wasn't satisfactory. Would appreciate any input.

RE: I don't think there is any standard, but as a practical matter, the primary source document for anyone doing a tenure calculation is going to be the company's proxy statement, and they're going to look to the disclosure about when the director joined the board to do the calculation. A lot of tenure calculations include fractions of years, so in your situation, it wouldn't surprise me if somebody wrote your director down as having a tenure of 0.9 years.
-John Jenkins, Editor, TheCorporateCounsel.net 2/13/2020

Q: Does anyone have a point of view as to whether a material contract entered into in 2019, by an entity that is not a newly formed registrant, and fully performed in 2019 has to be filed with the 2019 10-K? Item 601(a)(4) says that if a material contract is entered into during the period covered by the report, it must be filed with the report.It doesn't refer to the limitation in 601(b)(10), which says that only newly-formed registrants must file agreements entered within the last two years if no further performance obligations remain under them. An example would be a separation agreement with an NEO or director. If such an agreement were entered into on 12/31/19, and called for payment of a liquidated amount in release of all future payment obligations, and had no other meaningful obligations of the issuer which continued past the time of the filing of the 10-K, then if the "fully performed" prong had primacy, such an agreement would never be required to be filed, while if the "made in the period covered by the report" provision controlled, it would have to be filed. Thanks.

RE: I don't think that's been addressed, but my view is that the Staff is unlikely to read Item 601(b)(10) to allow a company to avoid filing a material contract altogether. In the Fast Act release, the SEC didn't address the interplay between Item 601(a)(4) & Item 601(b)(10), but it did say that the reason it eliminated the two-year look back requirement was "because investors would continue to have access to any material agreements previously filed on EDGAR."

An interpretation that would allow a material contract to slip between the cracks and never be filed because it was made & performed in a single period seems inconsistent with this rationale.
-John Jenkins, Editor, TheCorporateCounsel.net 2/13/202

Q: Do either Nasdaq or NYSE restrict companies from having directors with multiple votes on matters brought before the board? I am not seeing many examples of public companies that do this so wondering, aside from the governance issues, whether it was prohibited by the exchanges. Couldn't find in their rules.

RE: I'm not aware of anything in their rules either, but I can certainly see the exchanges taking the position that many of those regimes might cause the company to run afoul of director or committee independence requirements.
-John Jenkins, Editor, TheCorporateCounsel.net 2/13/2020

Q: Has anyone seen guidance on whether an estate can qualify as an accredited investor? An investor in ABC passed away in October. Prior to the investor’s death he owned Series C units and had made a capital commitment of $100,000, of which $11,000 had been funded. We are working with the investors family and ABC to prepare the documents needed to get the units held in the investor’s estate (as well as the obligation to make capital contributions to ABC to fund the remainder of investor’s capital commitment) transferred to a newly formed LLC owned by his heirs. One issue is that ABC made a capital call in December, which the estate didn’t make. Once the units are transferred to the new LLC, investor’s heirs intend to get caught up on making this missed capital contribution, but we want to make sure the documents appropriately address the failure to fund in December. Under ABC’s LLC Agreement, investor, as an accredited investor with an outstanding capital commitment, would have been required to timely make a contribution in connection with the December capital call and the failure to do so would have been an event of default. If an investor was an accredited investor, is his estate also considered one?

RE: To my knowledge, there's not any guidance. While an "estate" may be recognized as a legal entity for state law, it is not one of the persons or entities specifically listed in Rule 501(a) as potentially qualifying as an accredited investor.
-John Jenkins, Editor, TheCorporateCounsel.net 2/12/2020

Q: Our Company recently voluntarily delisted its securities from Nasdaq (the securities are no longer trading -- they did not move to another exchange), but the securities are still registered under the Securities Act. The Company has no immediate plans to relist its securities, but it may decide to do so in the future. Do we need to maintain a CUSIP for the registered securities even though there is no longer a public market for them? I tried to call CUSIP but they were not sure.

RE: I'm not aware of a legal requirement for corporate issuers to have a CUSIP and I'm no expert on this topic, but my gut says that not having one would make it more difficult for your shareholders who wanted to transfer their shares. It's a big part of the way brokerage firms and transfer agents track securities.
-John Jenkins, Editor, TheCorporateCounsel.net 2/3/2020

RE: Thanks, John! One more question -- since we no longer have publicly traded securities, would the holders of our remaining shares still have reporting obligations under Section 13?
-2/12/2020

RE: If the class of securities is no longer registered under Section 12 of the Exchange Act, then there's no longer a 13D or G filing obligation.
-John Jenkins, Editor, TheCorporateCounsel.net 2/12/2020

Q: I would appreciate any input on whether a "loss corporation" can make an S-8 filing after February 14 and before it files its audited financial statements. For a "normal" registered offering, the financial statements would be stale and the issuer could not go effective with its registration statement. However, an S-8 seems like a different animal since it goes effective automatically, but I cannot find any guidance that would permit an S-8 filing during this staleness time period. It would seem like a strange result that an S-8 cannot be filed, since I have never heard any indication that a "loss corporation" should stop using an already effective S-8 filing during the staleness period. Any input on this issue would be most appreciated.

RE: You're right, Form S-8 is a different animal & the 45 day year-end rule that applies to other filings doesn't apply to S-8. Here's an excerpt from Section 15120.4(c)(1) of the Financial Reporting Manual:

"Form S-8 is not subject to the same financial statement updating requirements as other registration statements. For example, the sponsor’s financial statements incorporated by reference into Form S-8 need not comply with the 45-day year-end rule. See Section 1220.3."
-John Jenkins, Editor, TheCorporateCounsel.net 2/10/2020

Q: After listening to yesterday’s webcast on Form SD, I had two questions: • Dave discussed the increasing acceptance of the 2017 staff guidance. Do you mean that fewer companies are filing CMRs? The data I saw last year showed that about 80% filed CMRs, which is about the same as in prior years and about the same as would naturally occur under the rules. My experience has been that the guidance has not led many companies to stop filing CMRs, but companies that are newly public or otherwise new to the requirement may be relying on the guidance. Is that not representative? Are more companies that have filed CMRs in the past now discontinuing filing CMRs based on the 2017 guidance? If you know, what is the data about the incidence of CMR filings and how is it breaking down between old and newer filers? • I thought I heard Dave say that the 2017 guidance did not eliminate the need to do a country-of-origin inquiry. I just wanted to confirm my understanding that it also did not eliminate the requirement to do due diligence, obviously a much bigger lift. Is it correct that due diligence is still required under the 2017 guidance, even if the company decides not to do a CMR? Thanks!

RE: Thanks for listening to the webcast! On your first question, I was revisiting the history that when the April 2017 guidance was first issued by the Staff, there was some focus on the unusual nature of the guidance, given that the guidance expressed the views of Corp Fin, was not binding on the Commission of the courts, and was subject to change. It was also issued at time when there was an Acting Chairman, and the other statements and request for comment about the conflict minerals disclosure rule were facing a lot of scrutiny. My point about acceptance of the guidance was intended to note that, given that nearly three years have passed and no change to the guidance has occurred or Enforcement actions initiated, it is harder to view the guidance with the same level of skepticism that was evident back in April 2017. That said, I did not mean to imply that “acceptance” translated into more issuers embracing the guidance and not filing CMRs in the last filing season. As Christine Robinson noted on the webcast, the reports are pretty much on “autopilot” and there has not been much a change in filing practices.

As for your second point, I noted in the March-April 2017 issue of The Corporate Counsel (and in prior webcasts):
"While not addressed in the April 7 statement, we do not believe that the Staff's guidance was intended to relieve issuers who fall under paragraph (c) of Item 1.01 from their obligations to exercise due diligence on the source and chain of custody of their conflict minerals; rather, they are relieved of the obligation to report on the due diligence and the other matters contemplated by Item 1.01(c), on the condition that they file a Form SD which describes their reasonable country of origin inquiry. While, in practice, the reasonable country of origin inquiry and the due diligence on the source and chain of custody of the conflict minerals have become somewhat interconnected (see our September-October 2014 issue, at pg 7), the potential to avoid providing the sometimes extensive disclosure describing that due diligence efforts does serve to relieve at least some burden for issuers brought about by the conflict minerals disclosure rules."
-Dave Lynn, CCRcorp.com 2/6/2020

RE: Thanks very much for the confirmations!!
-2/6/2020

Q: Do the provisions of S-K 601(b)(10)(iii) mandating that arrangements with NEOs and directors be filed still apply if the arrangement or contract in question has been fully performed (i.e., it is not to be performed in whole or in part after the filing of the report)? Even if it is not required to be filed, is there any merit to filing such an arrangement as an exhibit if the compensation paid thereunder is part of the compensation included in the summary compensation table included in the report? Specific question relates to a letter agreement for specified stay bonuses through end of 2018 for an NEO; the bonuses for 2018 will be included in the 2019 SCT, but there clearly is no obligation to be performed going forward.

RE: That's not required unless you're a newly reporting registrant, as described in Item 601(b)(10)(A)(1) or (2). It used to be that any material contract entered into within 2 years had to be filed even if it had been fully performed, but the SEC eliminated that requirement last year for more seasoned companies when it adopted the Fast Act Reg S-K cleanup rules.

I suppose you could keep it on file if you feel there are reasons why an investor might want to review the contract beyond what you're explaining in your CD&A. But most stay bonus arrangements are fairly straightforward, and you may well conclude that your description and other disclosure about the arrangement in previous filings & your current proxy statement may be sufficient.
-John Jenkins, Editor, TheCorporateCounsel.net 2/5/2020

Q: Is it customary for a transfer agent to require a registration/applicable exemption opinion in connection with a company's stock split (effected through a stock dividend)? I thought a stock dividend has been considered not to require registration since the inception of the 33 Act, as it does not involve a sale. Does C&DI 103.01 copied below come into play, or does it not apply, as the securities are not at the election of the recipients, but rather the company? Thanks in advance. Question 103.01 Question: If a company declares a dividend that is payable in either cash or securities at the election of the recipients, does the declaration of the dividend need to be registered under the Securities Act? Answer: No, as there is no sale of the dividend shares under the Securities Act. [Nov. 26, 2008]

RE: I think it's become customary for them to ask for legal opinions with respect to any new issuance of shares that purport to be freely tradeable, even if they are exempt, especially if the company is a small cap issuer.
-John Jenkins, Editor, TheCorporateCounsel.net 2/5/2020

Q: Instruction 4 to § 240.14A-21 provides that an EGC that loses EGC status within 2 years of its IPO must "include the first separate resolution described under § 240.14a-21(a)" not later than the three-year anniversary of the IPO. Assume a Company loses EGC status prior to its second year out, and that the three-year anniversary of the IPO would fall between the date on which the proxy statement that includes the SOP provisions is filed and the date on which the annual meeting occurs. Is it sufficient under the rule for the Company to have filed the proxy (including the SOP provisions) prior to the three-year anniversary? Or, must the vote be completed prior to the three-year anniversary?

RE: I don't believe there's guidance on this issue, but here's what I think. The rule requires companies to "include a separate resolution" for an advisory vote for SOP at their annual meetings, and the instruction requires a former EGC to take this action before the 3rd anniversary of its IPO. The rule doesn't say that the vote itself must be held within this time-period. Since that's the case, I think that it would be sufficient to include the resolution in definitive proxy materials for an annual meeting that are dated prior to the third anniversary of the IPO.
-John Jenkins, Editor, TheCorporateCounsel.net 2/5/2020

Q: Company A, which has an effective Form S-3ASR and Form S-8 on file, decides to omit the third year MD&A results from its 2019 Form 10-K and instead cross-references the information from the 2018 Form 10-K (as required by the new rules). In light of the new C&DIs, is there any detriment to Company A not expressly incorporating by reference the third year information into the Form 10-K considering that neither Form S-3 nor Form S-8 include any explicit Item 303 disclosure requirements (unless I am missing something)? Company A has no plans to file a Form S-4 in the near future.

RE: I think the issue is the same one that's raised in new CDI 110.03:

Question 110.03: May a registrant rely on Instruction 1 to Item 303(a) to omit a discussion of the earliest of three years from its current MD&A if it believes a discussion of that year is necessary?

Answer: No. Item 303(a) requires that the registrant provide such information that it believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations. A registrant must assess its information about the earliest of three years and, if it is required by Item 303(a), include it in the current disclosure or expressly incorporate by reference its discussion from a previous filing.

Notwithstanding the fact that Form S-3 doesn't have a line item that calls for Item 303 disclosure, you are required to incorporate by reference your most recent 10-K filing. If the missing year contains information that's material to understanding the disclosure in that 10-K that's incorporated by reference into the filing, then excluding it from that document raises potential issues for your Form S-3 under the antifraud provisions of the Securities Act & Rule 10b-5.
-John Jenkins, Editor, TheCorporateCounsel.net 2/4/2020

Q: We recently received a proposal from a stockholder who missed our deadline under 14a-8(e). However, the proposal is timely under our Bylaws. Are there any materials on this website that discuss how we should approach this proposal and fight it? I saw the Handbook on 14a-8(e).

RE: I would start with this checklist on late proposals and floor submissions. As a practical matter, the most important thing you can do to fight the proposal is to make sure that you preserve your discretionary authority to vote proxies against it. As noted in the checklist, you need to take certain actions in order to preserve your ability to do that. I would also look at the materials in our "Annual Meetings" practice area and our various annual meeting checklists.
-John Jenkins, Editor, TheCorporateCounsel.net 2/4/2020

RE: As follow-up, my understanding of the rules is that if the proponent failed to meet the 14a-8(e) deadline, then the issuer can exclude the proposal from inclusion in our proxy statement and NO notice is required to be sent to the proponent why the issuer is excluding the proposal. Is this correct?

Second, does the issuer have any further obligations? Does it need to request No Action relief from the SEC?

Third, if the proponent met the advance notice requirement under our Bylaws, do we need to communicate with the proponent for any reason prior to the Annual Meeting?

I read the materials you provided but wanted to be clear, especially since we have a no-action request deadline coming up.
-2/4/2020

RE: I don't think that's the case. Rule 14a-8 places the burden on the company to establish that it may exclude a rule proposal and requires it to notify the Staff of the basis on which the proposal is being excluded. You should file a no-action letter request with the Staff. Fortunately, it applies the deadline requirement pretty strictly. See the discussion beginning on page 95 of the Shareholder Proposals Handbook.

I don't think there's any requirement outside of 14a-8 to communicate with a proponent, but most companies that receive a shareholder proposal do engage in a dialogue with the proponent to establish the ground rules for presenting the proposal at the annual meeting (e.g., how and when the proponent will be recognized, etc.). Getting this sorted out ahead of time is generally in the company's best interest, because it avoids disruption at the meeting.
-John Jenkins, Editor, TheCorporateCounsel.net 2/4/2020

RE: Thank you!
If our deadline to file the no-action request is this coming Sunday, does this mean we have until Monday to file?
-2/4/2020

RE: The rule requires you to file at least 80 calendar days prior to the date that you file your definitive proxy. Since you control that filing date, I don't think the Staff feels the need to accommodate a company because the 80th day prior to the date that it plans to file definitive proxy materials happens to fall on a weekend.
-John Jenkins, Editor, TheCorporateCounsel.net 2/4/2020

Q: An issuer is filing a preliminary proxy for an annual meeting because shareholders are being asked to vote on a non-routine matter. The issuer has received a shareholder proposal that on its own would not require the filing of a preliminary proxy. Does the shareholder proposal have to be included in the preliminary proxy or can it wait until the definitive proxy filing? The issuer is still in discussions with the shareholder but needs to get the preliminary proxy filed. Given that the shareholder proposal alone would not trigger the requirement to file a preliminary proxy, it seems logical that it wouldn't have to be included. It seems clear that not including the statement in opposition in the preliminary is accepted practice but we can't find anything addressing the shareholder proposal itself. The issuer would of course comply with the 30 day requirement to provide the shareholder the statement in opposition if the shareholder and the issuer are not able to come to an agreement where the shareholder withdraws the proposal.

RE: I've dealt with this specific issue, but my gut reaction is that if you're still negotiating with the proponent and have a good faith belief that the proposal may be withdrawn, you could file the preliminary materials without including it. Obviously, you'd need to promptly file revised materials if it turned out that you had to include the proposal, and I think the biggest issue there is whether filing revised materials that contain the shareholder proposal will result in the recommencement of the 10-day waiting period.

I'm not aware of anything from the Staff on this either, but I think there is a good argument that the revised filing won't restart the waiting period. This excerpt from the July-August 2018 issue of The Corporate Counsel explains why:

"Restarting the waiting period due to an amendment or a supplement is the exception, rather than the rule. In that regard, Note 1 to Rule 14a-6(a) provides that "the filing of revised material does not recommence the ten-day time period unless the revised material contains material revisions or material new proposal(s) that constitute a fundamental change in the proxy material."

So, the issue of whether there's a 10-day waiting period turns on the question of whether the new or revised information constitutes a fundamental change. The whole concept of a "fundamental change" is one on which the Staff has provided little guidance—but is one that we addressed in the public offering context in the May-June 2018 issue of The Corporate Counsel.

The factors to consider in evaluating whether revisions to proxy materials involve a "fundamental change" are similar to those discussed in our prior article, but there is one important caveat associated with the proxy rules themselves. That caveat relates to the fact that unless you are only electing directors, ratifying auditors, or dealing with shareholder proposals or proxy access nominees, you are required by Rule 14a-6(a) to file your proxy statement with the SEC at least 10 days in advance of mailing.

Since that is the case, if you are adding a proposal that is subject to a preliminary filing requirement to a proxy statement that originally was not subject to this filing requirement, you will need to wait 10 days before you disseminate your materials regardless of whether you conclude that you're dealing with a fundamental change to your previous filing.

On the other hand, as pointed out in TheCorporateCounsel.net's "Preliminary Proxy Handbook," if the revised proxy materials contain an additional proposal that would not, on its own, have required a preliminary proxy filing (e.g., amendment to an equity compensation plan), there is a good argument that the new proposal is not a fundamental change."
-John Jenkins, Editor, TheCorporateCounsel.net 2/4/2020

Q: Our CEO takes a commercial flight every Friday to return to his home state for the weekend. With the outbreak of the corona virus, our risk group is considering a request that the CEO take the company's private plane home every weekend under the assumption that traveling privately is safer than than public transportation. Is it safe to assume that use of the company plane would be a personal benefit that is required disclosure under the Summary Compensation Table? From a corporate governance standpoint, would it make sense for the CEO to receive prior written consent from the full Board in order to utilize the company plane? Do we need to review our Code of Business Conduct? Anything else to consider? Did you ever think that talk about the corona virus would reach our message board? And yes, our risk group is being overly cautious.

RE: Yes, I think that's a perk. Here's what the Executive Comp Disclosure Treatise has to say about using the company plane for commuting:

"If a named executive officer living in another city uses the company's aircraft to travel from the executive officer's primary residence in that city to the company's headquarters where the executive officer works, then the flight would likely not be viewed as directly and integrally related to the executive officer's duties and would instead be deemed to confer a direct benefit on the executive officer that has a personal aspect, even if it is in the company's business interest that the executive officer arrive at the company's headquarters as quickly as possible from his or her home. This is because the executive officer's travel on the aircraft would be deemed "commuting" to the company's headquarters rather than travel for a specific business purpose. As a result of this analysis, the aggregate incremental cost of the travel would be reported as a perquisite or other personal benefit."

Corporate aircraft use is an area that has gotten a lot of scrutiny from investors and the SEC (e.g., the 2018 Dow Chemical enforcement proceeding), and I think the board should provide some oversight to a decision like this. If you don't have a formal policy on aircraft use, your board also may want to consider adopting one.

By the way, this would still be a perk even if the board "required" the exec to take the company plane.

See Chapter 7 of the Executive Compensation Disclosure Treatise for more information on airplane use as compensation.
-John Jenkins, Editor, TheCorporateCounsel.net 2/3/2020

Q: A shareholder is interested in pursuing stockholder action by written consent by obtaining consents from the holders of a majority of the shares outstanding by contacting/soliciting only 10 holders, thus utilizing the exemption under Section 14a-2(b)(2). Assuming the company's org docs permit this action, as I understand it, under DE law, the consent would be effective as soon as the holders of the requisite percentage of shares, as of the applicable record date, have submitted consents. A couple of questions I'd appreciate any thoughts on -- 1) Schedule 14C (or any other public filing/disclosure requirements?): Are/Should the SEC proxy rules be read to require the distribution to shareholders of an information statement on Schedule 14C relating to the action by consent at least 20 calendar days prior to its effectiveness (even when the filing of a consent solicitation statement on Schedule 14A is not required)? It seems that perhaps this requirement should not apply when consents were not sought by the Company, however I'm looking for some confirming guidance or thoughts one way or the other. Are there any other disclosure/filing requirements in connection with such an exempt solicitation that should be considered? 2) If the existing members of a 13D group are the ones soliciting the consents (or proxies), do all of the members of that group not count toward the 10-person test of Rule 14a-2(b)(2)? Any thoughts or suggestions on commentary/authority on this would be greatly appreciated!

RE: According to some recent case law supplemented by a comment letter exchange with the Staff, it appears that a 14C filing is not required for unilateral shareholder action.

If you were relying on Rule 14a-2(b)(1) and owned more than $5 million in stock, you'd need to file a notice of exempt solicitation under Rule 14a-6(g). I'm not aware of any similar requirement applicable to Rule 14a-2(b)(2) solicitations.

Unfortunately, there is very little authority addressing how you go about calculating the 10 person limit.

You'll note that the memo addresses the Take Two interactive situation from 2007 in which a dissident group relied upon Rule 14a-2(b)(2) to win control of Take Two's board. It's interesting to note that the dissident 13D group included 16 funds and individuals, and that the Staff appears to have commented on their filing, but the number doesn't appear to have disqualified them from relying on the exemption. You'll probably want to take a close look at the filings in that matter.
-John Jenkins, Editor, TheCorporateCounsel.net 1/28/2020

RE: Do you think the question/analysis of whether a 14C filing is required would change if some of the shareholders that were solicited and included in the "ten and under" written consent were affiliates of the issuer?
-1/30/2020

RE: The case discussed in the Cleary blog I cited involved the dispute between CBS and its 80% shareholder, NAI. NAI was about as affiliated as you can get, but in this case, the CBS board opposed its actuibs, CBS said a 14C should have been filed by NAI for its bylaw amendment, but NAI cited SEC authority to the effect that "action taken by stockholders with no involvement or encouragement by the issuer" isn't subject to 14C.

So, I guess the short answer is that it doesn't appear that the mere fact that an affiliate is involved would alter the result, but it could well be a different matter if the group were in cahoots with the board and management. I would strongly urge you to read the blog, the comment letters and the court's decision, because I think there are many shades of gray that you need to work through here.
-John Jenkins, Editor, TheCorporateCounsel.net 1/31/2020

Q: A company has lost its WKSI status and has filed its Form 10-K that acts as a Section 10(a)(3) update to is Form S-3ASR. The company did not file a POS ASR prior to filing its Form 10-K. The Form S-3ASR was a "pay-as-you-go". Under SEC guidance, I don't believe the client can now file a POS AM to amend the registration statement to convert it from a Form S-3ASR to a Form S-3 but will need to file a Form S-3. Has anyone else experienced this issue. Nothing was pulled down from the original Form S-3ASR so there are no issues from a "continuing offering" standpoint.

RE: Wanted to see if there was any follow up on this. I assume that the company can no longer rely on the S-3 ASR, would need to file a new Registration Statement on Form S-3, and would need to wait for the Part III information to be filed before the SEC would declare the new Registration Statement on Form S-3 effective.
-1/31/2020

RE: I think that's correct. See the discussion on pages 42-44 of our WKSI Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 1/31/2020

Q: My question is whether the business day of receipt is counted as day one for these purposes or if the business day after the business day of receipt is the first day of the 5 business day period in which the registrant must respond to a requesting security holder? Please advise. Thanks

RE: I note that Form 8-K requires filing "within 4 days" of the triggering event and the counting convention under 8-K is that day one of the 4 day period starts on the day after the event. Thinking the same would hold true under 14a-7 and that you start counting the 5 day period within which a response is required on the day after receipt of shareholder notice. Please advise, thanks.
-1/31/2020

RE: I haven't seen anything from the Staff interpreting this, but as you point out, that language is identical in its formulation to the language in Form 8-K (i.e., "within X business days after. . .") I think both grammatically & in light of how the same language in 8-K is interpreted, your interpretation is the correct one.
-John Jenkins, Editor, TheCorporateCounsel.net 1/31/2020

Q: Does this guidance require companies to include non-gaap measures in their MD&A, given that the non-gaap measures are important enough to be included in the quarterly earnings presentations? Do you have any data as to the prevalence of company practice in including non-gaap measures in their 10-Q's and 10-K's versus including their non-gaap measures only in their Item 2.02 8-K and/or earnings release materials?

RE: I think that's the kind of question companies have to ask themselves in light of the new guidance. Given the clear implication that KPI disclosure may sometimes be required under Item 303, I can certainly see a situation where a company that has non-GAAP KPIs plastered all over earnings releases and presentations doesn't say anything about them in MD&A might well draw a comment from the Staff. But I think the guidance is more concerned that companies use care and act with integrity when it comes to their KPI disclosures.

This guidance didn't come out of the blue - there have been a lot of statements in recent years from the Commissioners & senior Staff about KPIs, and enforcement actions as well. A Foley & Lardner memo provides some nice background about what came before yesterday's guidance:

I don't have hard data on how many companies have included non-GAAP KPIs in their MD&A discussions, but my guess based on my experience in my own practice is that it's pretty common. Given how ubiquitous the use of non-GAAP numbers is in earnings reports (96% of the S&P 500, per Audit Analytics), it would surprise me if they weren't turning up in a fair number of MD&A discussions.
-John Jenkins, Editor, TheCorporateCounsel.net 1/31/2020

Q: Instruction 2 to Item 601 provides that contracts substantially identical in all material respects need not be filed individually, and that registrant need only file one such contract, with a schedule identifying the other omitted documents. I have two questions regarding this instruction: (1) Is there any guidance we can look to in determining what would constitute a material deviation? (2) Is there any guidance we can look to regarding the form of this schedule (identifying omitted documents)? Thanks in advance!

RE: I think any deviation in a substantive contract term is likely to be regarded as a material deviation.

I don't think you see a lot of these filed. One reason may be that, if you've got a bunch of contracts with the same terms, it sure sounds like you're entering into them in the ordinary course of business. Another reason is that Instruction 2 to Item 601(b)(10) says that you don't usually have to file individual agreements under executive comp plans, which takes out another potential source of multiple substantially similar contracts.
-John Jenkins, Editor, TheCorporateCounsel.net 1/31/2020

Q: On the cover page of Form 10-Q and Form 10-K, a SRC checks the "smaller reporting company" box. (It has always been a SRC, even after the recent rule changes to the SRC definition). Should the issuer also check the box for "non-accelerated filer"? It is my understanding that, after the SRC definition was revised, some issuers may be SRC but also be an accelerated filer (if they have public float of $75 million or greater). I was just wondering if SRCs should now also check the appropriate box to designate their accelerated or non-accelerated filing status. Thoughts?

RE: Yes, it is possible for an issuer to be both. It should check all applicable boxes on the cover page.
-John Jenkins, Editor, TheCorporateCounsel.net 1/30/2020

Q: We represent a successor issuer that will be filing its first 10-K this spring. We note that Rule 12b-23 permits an exhibit to be incorporated by reference to a document filed with the SEC by same or any other person. Client has historically used the following format when doing so: "...incorporated by reference to Exhibit X.1 of Registrant's Current Report on Form 8-K filed on _____ __, 201__." Notwithstanding the need to include an active link to the applicable report/exhibit, would it still be prudent to modify that presentation to say "...Exhibit X.1 of predecessor Registrant's Current Report..." where the link is to a filing made by the predecessor?

RE: It may help clarify that the exhibit is a legacy document, to the extent that this distinction matters to the reader. Some companies do that - see, e.g., exhibits 4.1 & 4.2 to Baker Hughes' 10-K. However, others don't - take a look at Alphabet's 10-K exhibit index, which is a mishmash of Alphabet, Google & various acquired company documents that the company doesn't try to sort out.
-John Jenkins, Editor, TheCorporateCounsel.net 1/30/2020

Q: We filed our proxy statement and just noticed that we inadvertently have the wrong year in one of the proposals in two places in the proxy (1) on the notice and (2) on the proxy itself (not the proxy card). Instead of saying that the proposal is to elect directors to serve until our 2021 annual meeting (like we do elsewhere throughout the proxy and on the proxy card itself), we say the 2020 annual meeting. The proxy card has the correct date and the proxy card and proxy that were mailed have the correct date. We reviewed the proxy mistakes checklist already and believe this could fall within the typo category (and therefore be an immaterial mistake that could but did not need to be fixed). It doesn't seem logical that a there is a substantial likelihood that a reasonable shareholder would consider the incorrect date important in deciding how to vote (since the intent is to elect the directors to serve until the next meeting). However, we wanted to check-in to see what you thought. Thank you in advance!

RE: Just so I'm clear - there are two minor dating "typos" in your proxy materials as filed, but they were corrected in the version you disseminated to your shareholders? If that's right, I agree with you. This one sounds like it falls into the "close enough for government work" category.
-John Jenkins, Editor, TheCorporateCounsel.net 1/29/2020

RE: The typo in the proxy was corrected in the version mailed to shareholders, but the typo in the notice was not (though, if needed we could try to fix since we haven't mailed yet). Do you think it's necessary to fix the notice as well?
-1/29/2020

RE: This seems like more of a question of whether your notice as drafted is defective under state corporate law and your bylaws. If not, I don't think the proxy rules would compel a change. (Since it hasn't been mailed, my bias would be in favor of fixing it if you can do so without undue cost).
-John Jenkins, Editor, TheCorporateCounsel.net 1/29/2020

Q: We are trying to determine the appropriate way to file a Schedule 13G for an "exempt investor" under 13d-1(d) who beneficially owns shares of the issuer's stock both directly and through certain offshore entities. The entities are not operating entities and the reporting person has complete control over them. Entity A owns more than 5% of the company's stock; entity B does not. Is it necessary to do a joint filing listing each of the Investor and Entity A as joint filers (presumably we don't need to list Entity B as a joint filer because it has less than 5% but we would welcome thoughts on that)? It would seem that we don't need to do a joint filing but instead could only file for the Investor and disclose that the Investor owns certain of his shares through these entities, but we have been unable to locate any authority for that position and calls to the Staff were not returned. Any thoughts would be appreciated. Thanks in advance.

RE: Any guidance on this question?
-1/11/2008

RE: We have a similar situation and I'm curious how others have handled this.
-1/28/2020

RE: Alan Dye notes: I suspect you'll find that practice varies in who files the 13G and who is just listed in the text as a holder of securities beneficially owned by the reporting person(s). That was one of the issues, I think, the staff was going to address in the 13D/G project that was talked about for years and now seems to have been abandoned.

I generally advise clients that as long as all holdings are included in the 13G, it shouldn’t matter who is listed as a reporting person and who isn’t. Many people take the view that the RIA, if there is one, and any entity holding more than 5%, should be listed as reporting persons, but again I don’t think practice is uniform. Where an individual holds stock through wholly owned entities, though, as “personal holding companies,” I think it's possible that the staff may take the position that only the individual needs to file.

I’ll be curious to hear where you come out.
-Liz Dunshee, Editor, TheCorporateCounsel.net 1/28/2020

Q: An investor is reporting on Schedule 13G under Rule 13d-1(c), i.e., is reporting as a “passive investor.” The proviso in Rule 13d-2(b) tells us that the investor need not file an annual 13G amendment if the investor’s 12/31 beneficial ownership percentage has increased solely due to an issuer share buyback. However, there is no analogous proviso in Rule 13d-2(d), which relates to a passive investor's obligation to file an interim 13G amendment "promptly upon acquiring...greater than 10 percent" beneficial ownership. I’m not aware that the SEC staff has ever read such a proviso into Rule 13d-2(d). Are you? If not, could one argue that such an interim amendment is not in fact contemplated by the language of Rule 13d-2(d), on the basis that exceeding 10% solely due to a buyback does not constitute “acquiring” greater than 10% beneficial ownership? Thanks very much.

RE: I'm not aware of the Staff reading that proviso into Rule 13d-2(d), but I do think there's an argument that could be made that the transaction doesn't involve an "acquisition" within the meaning of Section 13(d). See Schedule 13D & 13G CDI 101.01, which suggests that an "acquisition" requires some action on the part of the filer.

However, I think that argument only could be made with respect the transaction in which the filer crossed the 10% threshold, because the requirement for subsequent amendments is triggered by a more than 5% "increase or decrease" in beneficial ownership, without regard to whether there is an acquisition.

If you run this one by the Staff, let us know how they respond.
-John Jenkins, Editor, TheCorporateCounsel.net 1/28/2020

Q: Are you aware of any guidance regarding whether Reg SHO applies only to US issuers and/or US registered securities? For example, would it apply to futures, commodities or securities of issuers established outside the US that do not have any security registered in the US?

RE: I believe the rule applies to any securities traded in the United States, but to my knowledge the only guidance they've provided is contained in Market Reg's FAQs. See the responses to Questions 1.3 & 4.6 of Market Reg's FAQs on Reg SHO and the portions of the adopting release cited therein for its applicability to overseas transactions.

Question 1.3: How does Regulation SHO apply to overseas transactions?

Answer: Any broker-dealer using the United States jurisdictional means to effect short sales in securities traded in the United States are subject to Regulation SHO, regardless of whether the broker-dealer is registered with the Commission or relying on an exemption from registration. Adopting Release, 69 FR at 48014 n.54. Short sale regulation applies to trades in reported securities when the trades are agreed to in the United States, even if the trades are booked overseas. Securities Exchange Act Release No. 48709 (Oct. 28, 2003), 68 FR 62972, 62997, 62998 (Nov. 6, 2003). Whether a short sale is executed or agreed to in the United States will depend on the particular facts and circumstances of the transaction. See id. at 62997-98 (providing some examples of when the staff would consider a short sale to have been agreed to in the United States).

For further information about how the provisions of Regulation SHO may apply to overseas transactions, please refer to Question 4.6.

Question 4.6: May a U.S. broker-dealer that executes orders on behalf of a foreign broker-dealer rely on a locate provided by such foreign broker-dealer in the same way that the U.S. broker-dealer may rely on a locate provided by a U.S. broker-dealer?

Answer: Rule 203(b)(1)(ii) permits a broker-dealer to accept a short sale order in an equity security from another person if the broker-dealer has reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due. Subject to certain requirements, Rule 203(b)(2)(i) provides an exception to the locate requirement for short sale orders received by a registered broker-dealer from another registered broker-dealer. This "broker to broker" exception applies only to transactions undertaken between broker-dealers registered in the U.S. pursuant to the requirements of Rule 15(a) of the Securities Exchange Act of 1934.

U.S. broker-dealers must treat an assurance from a non-U.S. registered broker-dealer that it obtained a source of securities that can be delivered in time for settlement in the same manner as an assurance originating from a non-broker-dealer customer. For instance, the U.S. broker-dealer must have a reasonable belief that the securities will be available for delivery on the date delivery is due. Moreover, the U.S. broker-dealer must document this information. Consistent with Footnote 58 of the Regulation SHO Adopting Release (Release No. 50103), the documentation should include the source of the securities obtained by the foreign broker-dealer and support for the reasonableness of the U.S. broker-dealer's reliance on the foreign broker-dealer's assurances. See also FAQs 4.3(B) and 4.3(C). For further information about how the provisions of Regulation SHO may apply to overseas transactions, please refer to Question 1.3.
-John Jenkins, Editor, TheCorporateCounsel.net 1/27/2020

RE: Thank you- are you aware of any guidance that SHO only applies to securities, as generally interpreted under the 33 Act, which would not include commodities or futures?
-1/27/2020

RE: I'm afraid that I don't have any insight on this. The SEC doesn't have a lot of authority in the commodities area, but it does share authority with the CFTC for the regulation of securities futures products. I don't know whether the two agencies have coordinated regulation on short sales or, if they have, to what extent they've agreed that SHO should apply.
-John Jenkins, Editor, TheCorporateCounsel.net 1/27/2020

Q: Has anyone ever seen warrants without an expiration date? Can you see any issues with that?

RE: I've heard of "perpetual warrants," but I've never seen them issued. They are permitted under the DGCL - Section 157(b), which deals with rights & options to acquire shares, allows corporations to issue rights and options that are "unlimited in duration."

I don't know of any specific issues relating to the perpetual nature of the warrants, but for public companies, there are some potentially significant accounting issues associated with warrants. In many situations, companies are required to account for them as liabilities, which means they have to be marked to market to reflect changes in the underlying value of the stock. That's bad, but if you had to do it indefinitely it would be even worse.
-John Jenkins, Editor, TheCorporateCounsel.net 1/26/2020

Q: I need to update existing warrants with new exercise dates (extending the exercise period for 1-2 more years). These warrants are referenced in a final prospectus supplement. Do I need to file a new prospectus supplement regarding the update to the warrants OR could I just file an Form 8-K with the new revised form of warrant.

RE: If the warrants and underlying shares are registered on Form S-3 or you're an S-1 issuer eligible to forward incorporate by reference, your 8-K will be incorporated by reference into your registration statement and essentially serve as a prospectus supplement. If you can't forward incorporate by reference, then you'll need to file a prospectus supplement with the information contained in your Form 8-K filing. See Securities Act Forms CDI 113.02.

"Question: How should a registrant conducting a continuous offering on Form S-1 update the prospectus to reflect the information in its subsequently filed Exchange Act reports?

Answer: If Form S-1 is used for a continuous offering, the prospectus may have to be revised periodically to reflect new information since, unlike Form S-3, the form does not provide for incorporation by reference of subsequent periodic reports. For example, in a continuous offering on a Form S-1 pursuant to Rule 415(a)(1)(ix), a registrant wants to update the prospectus to include Exchange Act reports filed after the effective date of the Form S-1. Item 512(a)(1) of Regulation S-K requires certain changes, including a Section 10(a)(3) update, to be reflected in a post-effective amendment. Other changes may be made in a prospectus supplement filed pursuant to Rule 424(b). If the registrant files a post-effective amendment, it could incorporate by reference previously filed Exchange Act reports if it satisfied the conditions in Form S-1 allowing incorporation by reference. [Jan. 26, 2009]"
-John Jenkins, Editor, TheCorporateCounsel.net 1/25/2020

Q: Does anyone have a view (or is there any guidance) regarding what public disclosure is required with respect to the actual designation of a board observer under an agreement between an investor/lender and a public company (outside of the initial Form 8-K disclosing the transaction in which the board observer right was granted)? And specifically whether the name of the actual board observer would need to be (or should) be disclosed? I've seen disclosure under the Item 404 "related party transaction" section in the proxy statement -- which I would think would only be triggered if the shareholder held at least 5% of the stock. And similarly have seen disclosure summarizing the board observer right in the corporate governance section of the proxy statement - but haven't seen any guidance as to whether the name of the board observer must be disclosed anywhere in public filings. Would appreciate any thoughts on this topic.

RE: I think Item 404 is the most likely disclosure trigger and I think the most common disclosure is a description of the right to designate the observer. I've not generally seen board observers named, except in cases like Nike, where Phil Knight is a board observer and director emeritus and his role is described in detail, or in situations where the observer was subsequently appointed to the board, and his or her prior role shows up in the bio. I don't think any of the other line items in the proxy rules would typically trigger disclosure of a non-director observer.

However, as this Weil memo I've included the link to below points out, if they have a right to be in the meeting, the NYSE takes the position that they are counted as directors – and therefore counted for purposes of determining whether the board is comprised of a majority of independent directors. I can see where that situation might prompt a decision to disclose the identity of the observer and additional disclosure in the proxy. The NYSE's position does not apply if the board (or committee) can ask the observer to leave the meeting.
-John Jenkins, Editor, TheCorporateCounsel.net 1/23/2020

Q: Does Reg. M permit an issuer to conduct concurrent distributions of (1) convertible preferred stock (convertible into common stock) and (2) common stock (which is a reference security for the convertible preferred)? Rule 102(a) on its own would seem to prohibit the common stock distribution. Would the exemption in Rule 102(b)(5) (i.e., offers to sell or the solicitation of offers to buy) apply to the common stock / reference security? That feels like the right answer to me. And the discussion under “Concurrent Distributions” in SLB No. 9 FAQs About Regulation M seems to make that point (assuming the issuer doesn’t use “impermissible inducements,” per SLB No. 9, to encourage participation in both distributions). Any thoughts? Thanks in advance.

RE: The guidance in SLB 9 seems to be generally applicable to concurrent distributions, although I'm a little uneasy about the fact that only example it provides involves a concurrent exchange offer, rather than an offering for cash. That being said, concurrent convertible preferred and common stock offerings aren't unprecedented, although most (but not all - see the Ovid press release linked below) appear to involve a public offering & a concurrent private placement to a handful of investors. I think you may want to confirm this analysis with the Staff.
-John Jenkins, Editor, TheCorporateCounsel.net 1/23/2020

Q: Our client has an ESPP plan pursuant to which stockholders can elect to change withholding percentages (which can be changed up until shares are purchased), to receive up to a specified maximum number of shares. Based upon the Beneficial Ownership Table Handbook, which states we are to include ESPP shares that will be acquired within 60 days, should we include a footnote regarding this arrangement? In addition, how do you calculate the number of shares to be disclosed, should you use the maximum share limit or base the number on current withholding percentages, even if they are subject to change?

RE: For purposes of the table, beneficial ownership is determined in accordance with Rule 13d-3, which views all shares that an individual has the right to acquire within 60 days as being beneficially owned. Since that's the case, and since the participants in the plan have the right to acquire up to the maximum number of shares provided in the plan, I think that you would report that amount even if it exceeds the number that would be acquired assuming they maintained their current withholding percentage.

Of course, that maximum amount may not reflect reality, so I also think a footnote explaining the ESPP and how you are reporting the shares beneficially owned under it makes sense.
-John Jenkins, Editor, TheCorporateCounsel.net 1/23/2020

Q: Anything required to be included for this year's D&O Questionnaires related to upcoming Annual Meetings in April/May for calendar year end filers? Apologies if this has already been discussed.

RE: I haven't seen any suggested changes other than those listed in the Stinson blog I mentioned in this blog back in September.
-John Jenkins, Editor, TheCorporateCounsel.net 1/22/2020

Q: How often should a Board be making the determination of incumbent directors that qualify as an Audit Committee Financial Expert? Said differently, is the designation of a director as an Audit Committee Financial Expert a once in a lifetime event or an annual event? Yes, under S-K 407 the determination must be reported annually. However, when there is no change in either (a) the composition of the Board or (b) the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s financial statements, walking the Board through the applicable legal standard and reviewing each incumbent director’s qualifications seems like a waste of the Board’s time.

RE: Our view is that the designation of an individual as an "Audit Committee Financial Expert" should be reviewed annually. Here's an excerpt from our "Audit Committees- Financial Experts" Checklist:

"The financial expert designation should be reviewed at some level annually as a disclosure control, and this review should be documented in the minutes of the audit committee and board meetings in which the review is conducted. While at first glance this may appear unnecessary under the assumption that once an individual is deemed to possess the five attributes required to be possessed by a financial expert, the attributes don't need to be revisited - the fact is that accounting statements, standards and interpretations and financial reporting requirements continuously evolve, and once-designated financial experts may not effectively be able to adequately fulfill their financial expert oversight role unless their understanding and experience remains relevant to ongoing accounting and financial reporting developments to the extent applicable to the company's financial statements."
-John Jenkins, Editor, TheCorporateCounsel.net 1/22/2020

Q: A Delaware corporation has mailed its annual meeting proxy statement. All of the directors serving at the time of mailing are up for re-election at the annual meeting. Subsequent to the mailing of the proxy statement, a new director was appointed to the board in connection with a financing transaction. I understand that the company will need to consider supplementing the proxy statement materials to note the appointment of the new director. However, is the company required to put the new director on the ballot for election at this year's annual meeting even though the new director will only have served for 5 weeks prior to the annual meeting? The company's bylaws are silent on this issue. Thank you.

RE: I think if you have a single class of directors, you're in a tough spot. There's a Chancery Court decision called Rohe v. Reliance Training Network (2000) that says "except in the case of a properly classified board, all directors must [face] the electorate on [an] annual basis at the corporation's annual meeting."
-John Jenkins, Editor, TheCorporateCounsel.net 7/18/2017

RE: Slightly different twist on the facts stated above. A Delaware NYSE-listed public company has reason to believe that there may be a vacancy on the board in the next month or two. Ideally, they will fill the vacancy shortly thereafter and before the proxy statement is filed and mailed in April. However, there is a chance that there will still be a vacancy when the proxy statement is required to be filed and mailed. Does this in and of itself create an issue? What if the company wants to appoint a director to fill the vacancy after the proxy statement has been filed/mailed but before the annual meeting? Do they need to amend or file a supplement to the proxy statement/proxy card to add the new director to the slate being nominated? Do the revised proxy materials then need to be printed, mailed, etc.? This company has a plurality voting requirement, which seems to take some pressure off of the amount of solicitation required. I've done some research on this, but I'm a little confused about what's legally required and what is best practice in this situation.
-12/13/2019

RE: I think the starting point is Delaware law, which as noted in the initial reply says that unless your board is classified, your directors need to be elected annually. So, if you plan to fill the vacancy prior to the meeting, the case law says the new director needs to stand for election by the shareholders at the upcoming annual meeting.

I would go out of my way to avoid a situation where you're filling the vacancy before the annual meeting, but after you've filed a proxy that says nothing about the new director. That's where you set yourself up for having to redo proxy statement disclosure, prepare a new card, delay the meeting, etc. I think the better approach is to either fill the vacancy prior to mailing (or identify the person who will fill the vacancy before mailing and include them on management's slate of nominees in the proxy & card), or defer filling the vacancy until after the annual meeting.

You may also want to refer to our article on "Avoiding Proxy Panic" that appeared in the July-August 2018 issue of The Corporate Counsel.
-John Jenkins, Editor, TheCorporateCounsel.net 12/13/2019

RE: Just a few more questions regarding the situation above. Are there any concerns with filing a proxy statement and asking shareholders to elect directors when there is a vacancy on the board? Based on the answers above, it sounds like it should be fine. But it feels a little odd to, for example, ask shareholders to elect 10 directors when the size of the board would normally be 11. Would we just explain the vacancy in the proxy statement, clarifying that the board would appoint a director to the board to the fill the vacancy when one has been chosen? Presumably then, the first opportunity the shareholders would have to elect the new director would be the annual meeting taking place the following year. I think this is all ok (though admittedly a bit awkward), but I would greatly appreciate a sanity check here!
-1/22/2020

RE: Yes, if you have a vacancy, you've got to disclose that fact in your proxy statement. Instruction 5 to Item 401(a) of S-K provides that "if fewer nominees are named than the number fixed by or pursuant to the governing instruments, state the reasons for this procedure and that the proxies cannot be voted for a greater number of persons than the number of nominees named."

That disclosure highlights one of the potential issues associated with having a vacancy - absent an advance notice bylaw, if you have a vacancy on the board, a shareholder may propose to fill it at the meeting. Since you couldn't use your proxies for this, you'd need to nominate your own candidate at the meeting and win the vote without the benefit of your proxies. That may or may not be an issue, depending on your ownership structure and who shows up at the meeting.
-John Jenkins, Editor, TheCorporateCounsel.net 1/22/2020

RE: Just to confirm, since our bylaws contain an advance notice procedure requiring written notice by no later than (for this year) February 21, we would not need to worry if a shareholder proposed a nominee at the meeting, correct? As we would with any other proposal from the floor, we would be able to say that the proposal was not presented in a timely manner and therefore cannot be considered. Given our shareholder meetings, I can't imagine this would actually be an issue, but I suppose one can never be certain.Thank you so much for your response. It is greatly appreciated!
-1/22/2020

RE: Sorry, I can't confirm that there's no wiggle room under your bylaw, and there's very little case law out there interpreting the conduct of an annual meeting, but I can tell you if the bylaw language was appropriate, I would likely rely on that provision to rule any floor nomination out of order & take my chances with the courts.
-John Jenkins, Editor, TheCorporateCounsel.net 1/22/2020

Q: A company has warrants (and shares underlying the warrants) registered on Form S-1 and intends to offer warrant holders a temporary reduction in the exercise price for a stated period of time (say, 30 days) to induce warrant holders to exercise. We are aware of the below SEC CDIs that appear to address a reduction in exercise price: 239.07 Warrants, and the shares issuable on their exercise, were registered. Now the warrants are being exchanged for warrants with a new expiration date and exercise price in reliance on Section 3(a)(9). The Division will not object if the original registration statement (updated to reflect the new terms through a post-effective amendment) is used in connection with the exercise of the new warrants. [Nov. 26, 2008] 239.08 An issuer may extend the exercise period for warrants and/or reduce the warrant exercise price through the filing and issuance of an appropriate Rule 424(b) prospectus supplement prior to the initial expiration date of the warrants. The issuer may not permit the exercise of such modified warrants, however, unless a current prospectus under Section 10(a)(3) with respect to the shares underlying the warrants is delivered. [Nov. 26, 2008] However, the above CDIs do not not seem to contemplate a temporary reduction in exercise price. Would the guidance still apply? Also, assuming the prospectus covering the warrants is current (i.e., it has been updated for the Company's 10-K), would it be permissible to offer the temporary reduction in exercise price by way of a prospectus supplement on a Rule 424(b) prospectus supplement (per CDI 239.08) or would the temporary reduction in exercise price be deemed to be an exchange of the warrant requiring a post-effective amendment on Form S-1 (per CDI 239.07)? Thanks.

RE: No one responded to this message posted a few years ago. Can anyone provide guidance on 239.07 vs. 239.08? If the terms of the warrant are amended, then presumably there would be a new CUSIP number. Does that mean that the change would be a new warrant requiring a post-effective amendment?
-1/21/2020

RE: I think the difference between the situations addressed in 239.07 and 239.08 may reflect the fact that the first CDI addresses the availability of the 3(a)(9) exemption to an exchange involving the issuance of a new security, while the second involves how to address modifications to the terms of such a security that don't necessarily involve the creation of a new security.

I think the answer to whether you have a new security as a result of a change in the exercise price depends on whether that modification is regarded as involving a fundamental change to the terms of the existing security. The good news here is that due to changes in the Item 512 undertakings put in place in recent years, a post-effective amendment to the registration statement to reflect such a change would be required only for companies that could not forward incorporate Exchange Act filings by reference, which is an increasingly small number of filers.

That's because Item 512(a)(1)(B) provides Form S-3 eligible issuers and smaller reporting companies that meet the criteria for forward incorporation by reference in Form S-1 with an alternative to a post-effective amendment. These issuers may satisfy the updating requirement triggered by a fundamental change by including the required information in an Exchange Act report.

In any event, the question of whether amendments to the terms of a particular security will create a new security turns on whether the amendments substantially affect the legal rights and obligations of the holders of that security. See McGuigan & Aiken, Amendment of Securities, 9 Rev. of Sec. Reg. 935, 935 (1976); see also 2 Louis Loss & Joel Seligman, Securities Regulation 1086 (3d ed. 1989). Under various judicial decisions and SEC no-action letters, this standard has traditionally been met when the amendments would significantly alter the "basic financial terms" or the "basic nature" of existing securities, as opposed to amendments that adjust contractual rights of a lesser magnitude. See, Leaseco Corp. (avail. Oct 22, 1982) (where the SEC agreed to take no action in response to a request asserting that an amendment eliminating certain prohibitions on the payment of dividends could be "characterized accurately as an adjustment of contractual rights rather than a substantial modification constituting a change in the basic nature of the security"). See also Abrahamson v. Fleschner, 568 F.2d 862 (2nd Cir. 1975) (holding that a new security arises only when there is a significant change in the nature of the investment or the investment risks).

The most comprehensive back-and-forth that I've seen on the issue of when changes to a warrant might involve the creation of a new security is contained in a series of 2009 comment letters and responses between the Staff and Sports Properties Acquisition Corp. The Staff inquired as to whether changes to the terms of the Warrants, which included an increase in the exercise price, resulted in the creation of a new security. The company argued that the changes did not, and also argued in the alternative that if a new security was involved, its issuance was exempt under Section 3(a)(9).

I don't think the fact that you're getting a new CUSIP number is dispositive of the new security issue. That was raised and addressed in another comment letter exchange involving CenturyTel.
-John Jenkins, Editor, TheCorporateCounsel.net 1/22/2020

Q: Earnings for a publicly reporting registrant are intended to be released on Friday after market close. As a result, the 8-K filing with the earnings release is not expected to be available until Monday. Is the 48-hour safe harbor triggered by the distribution of the original earnings release or the 8-K filing that furnishes the earnings release? If the latter, could a company technically wait until 4 business days after the distribution of the earnings release to furnish such info on an 8-K, and still take advantage of the 48-hour grace period for the earnings call after the 8-K filing date (e.g., potentially 6 days after original earnings release)? Thanks

RE: You'd think there would be a definitive answer for this somewhere, wouldn't you? I think that, based on the language of the rule and the CDIs on Item 2.02, the better view is that the 48 hour period begins with the issuance of the press release, although you can't rely on the safe harbor until the Form 8-K has been furnished. Under your scenario, You could still have the conference call, but you'd need to furnish an Item 2.02 8-K with any material financial information about the quarter (i.e., the relevant portions of the conference call transcript) outside of that 48 hour period in an 8-K within 4 business days of the call. See the discussion on page 98 of our Form 8-K Handbook.

Also see the January 2017 issue of The Corporate Counsel:
-John Jenkins, Editor, TheCorporateCounsel.net 1/21/2020

Q: Client will potentially exceed 50% significance with individually insignificant acquisitions this year and has a couple of already existing resale shelves for certain large holders of their securities. 2045.3 seems to suggest that the staff would likely think that individually insignificant acquisitions exceeding 50% are a fundamental change, but the new proposed rules that would say you never had to get those audits would suggest otherwise. Question 1: Do you think it is reasonable to conclude insignificant acquisitions exceeding 50% are NOT a fundamental change? Even if they are a fundamental change - I would not think you would have to take down the existing shelf b/c 2050.3 says that secondary sales may proceed on an existing shelf even if there has been a 50% acquisition and financials not on file. Question 2: However, if those holders decided to do an underwritten offering - even though 2050.3 says you could do that offering without the mathematical majority of the individually insignificant acquisitions, do you think it is likely that underwriters would be comfortable proceeding on that basis? Question 3: Have you guys had any discussions with auditors on what their audit practices would be if the proposed regs were adopted? The proposed rules seem to say audited financial statements of individually insignificant acquisitions would no longer be required but you would need pro formas should depict the aggregate effect of the acquired businesses for which financials are not otherwise required in all material respects, rather than just a majority of the individually insignificant acquisitions, so basically pro formas on a bunch of unreviewed/unaudited numbers. Does anyone think the auditors would be willing to provide comfort on pro formas in those circumstances? (I'm more just curious on how that would work than anything, 1 and 2 are my actual current questions) "2045.3: 1933 Act Registration Statement - Age of Financial Statements – Delayed and Continuous Offerings – (Last updated: 3/31/2009) After effectiveness, a domestic registrant has no specific obligation to update the prospectus except as stipulated by 1933 Act Section 10(a)(3) and S-K 512(a) with respect to any fundamental change. If an acquisition would be significant under S-X 3-05, management should consider whether the probability of consummation of the transaction would represent a fundamental change. It is the responsibility of management to determine what constitutes a fundamental change. The registrant should also consider whether individually insignificant acquisitions occurring subsequent to effectiveness, when combined with individually insignificant acquisitions that occurred after the most recent audited balance sheet in the registration statement but prior to effectiveness, may be of such significance in the aggregate that an amendment is necessary. Notwithstanding the guidance in Section 2045.3, offerings pursuant to effective registration statements cannot proceed if the significance of an acquisition exceeds 50% and financial statements have not been filed. See Section 2050.3." Section 2050.3 provides: Securities Offerings During the Grace Period Using a Registration Statement that became Effective Prior to Acquisition – Significance Exceeds 50% If significance exceeds 50% and the financial statements of the acquired business have not been filed, registrants should not make offerings pursuant to effective registration statements, or pursuant to Rules 505 and 506 of Regulation D if any purchasers are not accredited investors under Rule 501(a) of that Regulation, until the required audited financial statements are filed; provided however, that the following offerings and sales of securities may proceed during the grace period notwithstanding that the financial statements of the acquired business have not been filed: a. offerings or sales of securities upon the conversion of outstanding convertible securities or upon the exercise of outstanding warrants or rights; b. dividend or interest reinvestment plans; c. employee benefit plans; d. transactions involving secondary offerings; and e. sales of securities pursuant to Rule 144.

RE: That's an interesting question in light of the new rule proposals, but my own view would be that it would be prudent to comply with the acquired company financial statements requirement here for practical reasons - most notably, the concern that you raise in your second question: would the underwriters go for it? My guess is that the answer to that question is probably "no." They aren't often inclined to break new ground when it comes to interpretation of disclosure requirements. See the discussion beginning on page 3 of the May 2018 issue of The Corporate Counsel.

As for the comfort letter, I'd be shocked if an auditor would provide anything on pro formas addressing numbers that haven't been reviewed or audited. Here's an excerpt from paragraph 42 of AS 6101:

"Accountants should not comment in a comfort letter on pro forma financial information unless they have an appropriate level of knowledge of the accounting and financial reporting practices of the entity (or, in the case of a business combination, of a significant constituent part of the combined entity). This would ordinarily have been obtained by the accountants auditing or reviewing historical financial statements of the entity for the most recent annual or interim period for which the pro forma financial information is presented. Accountants should not give negative assurance in a comfort letter on the application of pro forma adjustments to historical amounts, the compilation of pro forma financial information, whether the pro forma financial information complies as to form in all material respects with the applicable accounting requirements of rule 11-02 of Regulation S-X or otherwise provide negative assurance with respect to pro forma financial information unless they have obtained the required knowledge described above and they have performed an audit of the annual financial statements, or an AS 4105 review of the interim financial statements, of the entity (or, in the case of a business combination, of a significant constituent part of the combined entity) to which the pro forma adjustments were applied."
-John Jenkins, Editor, TheCorporateCounsel.net 1/20/2020

Q: If a "restricted person" and existing shareholder of an issuer relies on the issuer-directed exemption in FINRA Rule 5130 to participate in an offering for a significant amount - let's say 15%. Does the fact that the shares would be directed by the issuer to be reserved by the underwriters necessitate that this be a part of a directed share program? Asked another way, they currently have a directed share program for friends and family - would all issuer directed shares need to be a part of that?

RE: I don't know that that you need to call this a single directed share program, and think it would be confusing to do so, but you need to squeeze the sale within the confines of Rule 5130(d)'s directed share exemption and disclose the proposed sale in the prospectus as you would do for the directed share program.

While not exactly on all fours with your situation, you may want to refer to this final prospectus for Bloomenergy's 2018 IPO. The prospectus discloses a directed share program covering 9% of the deal and a separate commitment to purchase another 18.5% of the shares by its directors and their affiliates, who were presumably subject to Rule 5131 and therefore were likely receiving a separate issuer directed allocation.
-John Jenkins, Editor, TheCorporateCounsel.net 1/20/2020

Q: On page 29 of the Guidelines linked here (https://www.issgovernance.com/file/policy/active/americas/US-Voting-Guidelines.pdf), ISS describes the relevant allowable increases to requests to increase common stock for general corporate purposes. My question relates to part B ("Companies with less than 50% of existing authorized shares either outstanding or reserved for issuance: 50% of existing authorized shares"). The "either" is a little confusing when read with "outstanding" or "reserved for issuance." The "outstanding" part makes sense, but I think that almost all companies will have less than 50% of their authorized shares "reserved for issuance." Surely the 50% isn't supposed to be read as having less than 50% of existed authorized shares outstanding OR having less than 50% of existing authorized shares reserved for issuance? If Company has 25,000,000 shares authorized, 17,000,000 shares outstanding, and 1,000,000 shares reserved for issuance under a stock incentive plan, it would seem that part A of the ISS standard on page 29 would apply to Company (and it could request an authorization for 50,000,000 shares instead of 37,500,000 shares) - even though less than 50% of its authorized shares would be "reserved for issuance"? Thanks for any thoughts.

RE: I think the wording is awkward, but I believe the intent is to focus on how much dry powder a company has in terms of its capacity to issue new shares, so my guess is that ISS would look to both the shares authorized AND those reserved for issuance in applying its guidelines. I think your interpretation of what would be permissible under the hypothetical that you laid out is right.
-John Jenkins, Editor, TheCorporateCounsel.net 1/17/2020

Q: Issuer received a notice of non-compliance from Nasdaq for failure to file a '34 Act report. The Item 3.01 8-K (and press release) is due within 4 business days of receipt of the notice of non-compliance. If, within the four business days and before the Form 8-K is due, the issuer files the applicable '34 Act report, is the 8-K and press release still required to be filed/issued? We have a call into our Nasdaq rep, but was curious as to this group's views. Thank you.

RE: My guess is that the Staff would take the position that the occurrence of the event itself is sufficient to trigger the filing, and that there's no "cure" concept built into Item 3.01, so you'd still need to file it.
-John Jenkins, Editor, TheCorporateCounsel.net 1/16/2020

Q: In our client's proxy the executive compensation section contains five NEO's, two of which did not receive an increase in base salary, while the other three did receive increases. Are we required to disclose that two executive officers did not receive an increase in base salary or can we remain silent with respect to such two executive officers in our component of base salary breakdown? If we are required to disclose are we required to give an explanation as to why the NEOs did not receive an increase?

RE: It's difficult to answer questions about CD&A disclosure in the abstract, because they are invariably highly fact-specific. However, Item 402(b) requires the CD&A to address all material elements of the registrant's compensation of its NEOs. Item 402(b)(2) lists information that may be material, and included in that list are "the factors considered in decisions to increase or decrease compensation materially." If the changes in base salary are material, I think this line item indicates that the reasons for decisions about those changes need to be addressed, and would expect that this discussion would likely need to address reasons why certain officers received adjustments when others did not.
-John Jenkins, Editor, TheCorporateCounsel.net 1/15/2020

Q: If a security is a federal covered security under Section 18(b)(1) of the 1933 Act (for instance, because it is listed on Nasdaq), then is the offer and sale of such security generally not subject to state registration/blue sky requirements? My understating is that, under many (if not most) state regulations, it would be a security exempt from the state registration requirements, but may be subject to state notice filing requirements. Does that sound correct?

RE: Yes. If you are offering a "covered security," then NSMIA preempts a state's ability to require you to register or qualify that security under state blue sky laws. The statute allows states to require notice filings of any document filed with the SEC (typically, a Form D), together with annual or periodic reports of the value of securities sold or offered to be sold to persons located in the state.

New York continues to be a bit of a problem child about NSMIA, because it purports to require, among other things, a pre-sale notice filing for offerings conducted under Rule 506(b). The NYSBA has issued a position paper stating its view that what New York purports to require is beyond what's permitted under NSMIA. Mintz Levin published a memo in 2014 taking a similar position with respect to offerings made under Rule 506(c).
-John Jenkins, Editor, TheCorporateCounsel.net 1/15/2020

Q: We have a single member, member managed LLC that will be a co-registrant for an a/b debt exchange offer. The sole member of the LLC is a corporation that itself is also a co-registrant (as it too is a guarantor of the debt). For purposes of the signature page to the S-4, does the LLC need the signature of its PEO, PFO and at least a majority of the directors of the corporation that is its member, which has the authority under the operating agreement to manage the LLC?

RE: I think that's right. Here's a precedent filing that did it that way. See page II-30.
-John Jenkins, Editor, TheCorporateCounsel.net 1/14/2020

Q: Company previously had a class of securities (the "Securities") trading on a national exchange and was/is continuing to report under Section 13(a) of the Exchange Act by virtue of Section 12(b) registration. In December 2019, trading of the Securities on the national exchange was suspended, and the Securities began trading on the OTC market. A Form 25 was filed on January 6, 2020, and, on January 16, 2020, (i) the Securities will be formally struck/delisted from the national exchange and (ii) the Company's reporting obligations under Section 13(a) will be suspended, absent there being another basis for continued reporting obligations (Section 12(g) and/or Section 15(d)). Assume that Section 12(g) does not apply, and that Section 15(d) is the only one in question. Prior to year end 2019, as of January 1, 2020, and currently, the Securities were/are owned by fewer than 300 record holders. The Company has a shelf registration statement on Form S-3 and a Form S-8 that were filed and first became effective in mid-2017. Both registration statements were updated under Section 10(a)(3) by the Form 10-K for 2018 that was filed in Q1 2019. We understand that duties under Section 15(d) are suspended while the Company was/is reporting under Section 13(a) as a result of Section 12(b) registration and that the Section 15(d) duty is revived, if at all, upon suspension of Section 13(a) obligations on January 16, 2020 (i.e., 10 days after filing of the Form 15). The Company is considering "going dark" under the Exchange Act due to the limited number of holders and ongoing administrative and cost burdens - there is currently no ongoing or pending bankruptcy, merger or other significant process/transaction. The question is whether the Company can avail itself of the automatic statutory suspension under Section 15(d) (not Rule 12h-3) and, as a result, not file a Form 10-K for 2019 that would otherwise be required to be filed in Q1 2020. The question taking into account that Company had no 15(d) duty during fiscal year 2019 and any such duty will only be revived in January 2020, and that the Company would file a Form 15 by January 31, 2020 notifying the SEC that the Section 15(d) automatic suspension is being relied upon. We note the SEC's guidance in Question 151.03 and other C&DI's, but also that Question 151.03 is posed from a situation in which the issuer had more than 300 record holders as of January 1st and that the SEC's response therefore speaks to Rule 12h-3. It seems unclear whether the Company's duty under 15(d) will be revived at all given the timing of that determination as a result of the Company's deregistration under Section 12(b). It seems that the potential determinations are that (a) the 15(d) duty will not be revived and filing the Form 10-K for 2019 can be avoided or (b) the 15(d) duty is revived, but only with respect to that Form 10-K, and the Company can "go dark" after filing that Form 10-K assuming that it post-effective amends its effective registration statements prior to that filing. Would certainly appreciate any thoughts you have on this matter.

RE: I haven't seen any guidance specifically addressing this scenario, but my sense is that the Staff is likely to view the Section 15(d) reporting obligation to be revived upon suspension of the Section 12 reporting obligation, and will assess your ability to suspend it as of January 1, 2020 by reference to the language of Section 15(d), which permits a company to suspend its reporting obligations for "any year other than the fiscal year within which such registration statement became effective" if it was below 300 shareholders on that date.

Since you had registration statements go effective through the 10-K updating process in 2019, I think the Staff's position would be that you can't suspend your 15(d) reporting obligations for 2019 - which would include the 10-K filing covering that fiscal year. Of course, if you don't deregister the shares covered by the registration statements in advance of filing the 10-K, you'd find yourself back in the same boat for 2020.

I suppose the counter to this is that because CDI 151.03 references the issuer "having more than 300 shareholders" at year end, that suggests that the Section 15(d) obligation won't revive if there are fewer than that number. In the absence of something more directly on point from the Staff, I'm inclined to think this is a bit of a red herring. The statute seems pretty clear that, even if you have fewer than 300 shareholders, you can't suspend your 15(d) obligation for a year in which you had a registration statement declared effective. I think that when that Section 15(d) reporting obligation is revived, you've got to look at whether you've complied with all filing obligations applicable to the year in which the registration statement became effective.
-John Jenkins, Editor, TheCorporateCounsel.net 1/14/2020

Q: One of the issuer's independent directors will resign shortly from the audit committee and full board. Because of the resignation, the issuer will only have two directors on the audit committee and thus, will not be in compliance with Nasdaq Rule 5605-4. We understand that the issuer must "immediately notify" Nasdaq of its non-compliance. A. How does the issuer provide such notice to Nasdaq? By mail correspondence? Edgar filing as correspondence? What is usually stated in such notices? B. The issuer will file a Form 8-K disclosing the resignation. Is it customary to later file an 8-K to disclose the notice to Nasdaq or should the issuer wait until it receives a letter of non-compliance from Nasdaq? Thanks in advance for all thoughts on this matter.

RE: The following Q&A from the Corporate Governance Rules & The Interpretative Process FAQs on the NASDAQ website addresses the process:

“What notification is required to be given to NASDAQ if a company no longer complies with the audit committee composition requirement of Listing Rule 5605(c)(2)(A)?

Rule 5625 states that a company must provide NASDAQ with prompt notification after an executive officer of the company becomes aware of any material noncompliance by the company with the requirements of Rule 5600 Series. Further, companies are required to notify NASDAQ if they are relying on the "Cure Periods" set forth in Rule 5605(c)(4) to regain compliance with the independent director requirement.

In addition, the Listing Agreement requires that a company notify NASDAQ upon discovery of any event of non-compliance.

A company can provide the required notification to its NASDAQ Listing Qualifications analyst. (Initial Posting: September 2, 2009)”

Paragraph (b) of Item 3.01 of Form 8-K requires the filing of an 8-K when the registrant has notified the exchange that the registrant is aware of any material non-compliance with a rule or standard for continued listing, so there is definitely no need to wait for notice from the exchange in order to trigger an 8-K obligation.
-Dave Lynn, TheCorporateCounsel.net 5/26/2010

RE: I'm aware that the issuer is required to notify Nasdaq when it regains compliance with this rule, but is there a requirement to also file an 8-K when the issuer regains compliance?
-1/14/2020

RE: There's not a specific requirement under Nasdaq rules to file an 8-K when you regain compliance (any FD compliant disclosure is permitted), but depending on how you fixed the deficiency, there may be independent 8-K triggers that come into play. For example, if you added a new director and put that person on the audit committee, you'd need to comply with Item 5.02 of Form 8-K.
-John Jenkins, Editor, TheCorporateCounsel.net 1/14/2020

Q: Can a merger S-4 that includes a preliminary joint proxy statement/prospectus be filed before the soliciting company's annual report is available? The definitive proxy statement would be preceded or accompanied by the annual report. Does it make a difference if the meeting is an annual or a special meeting?

RE: Further to the question, just ran across this. I assume it is still applicable?

The Corporate Counsel, Vol. XVIII, No. 2
March-April 1993
Circulating Preliminary Proxy Materials Prior to the Annual Report (CC Mar-April 93) As some of our readers know, the shareholder communication rule changes included a revision to Rule 14a-3(a) permitting an issuer to commence proxy solicitation via a publicly-filed preliminary proxy statement (i.e., during the Staff review period), so long as the proxy card is not provided until dissemination of the definitive proxy statement. However, Rule 14a-3(b), the rule which requires the delivery to shareholders of the annual report no later than delivery of the proxy statement, was not amended to deal with the new "preliminary delivery" concept. Thus, in this context, 14a-3(b) apparently requires that the annual report be delivered with or prior to the preliminary proxy solicitation.

The 14a-3(a) revision facilitates circulation of preliminary materials, e.g., to selected institutional investors, in advance of finalizing the proxy statement (which especially this year can be delayed for some time) and printing of the annual report. Fortunately, the Staff (both the Office of Disclosure Policy and the Office of Tender Offers) now has informally announced that the failure to revise 14a-3(b) was an oversight and may in the future be the subject of a technical amendment. Thus, preliminary proxy materials may be circulated prior to the annual report so long as the annual report accompanies or precedes the definitive proxy materials. We would like to thank Bill O'Neil of Crowell & Moring, Washington, D.C. for bringing the foregoing to our attention.

Confidential Treatment May Be Requested for Mergers, etc. Consistent with the new right to circulate preliminary materials, new Rule 14a-6(e)(1) makes preliminary proxy filings publicly available for the first time. However, confidential treatment can be obtained under Rule 14a-6(e)(2) for solicitations involving mergers and acquisitions.
-1/13/2020

RE: I assume you are also planning to elect directors at the meeting where you'll vote on the merger, because that's when you'd have to have an annual report accompany the proxy under Rule 14a-3(b) - and it doesn't matter if it's an annual meeting or a special meeting in lieu of an annual meeting.

With that said, I've not seen anything further on this topic from the Staff. My guess is that with continuing efforts to liberalize the ability of companies to communicate with shareholders, this probably hasn't been rolled back. However, I'd check with them before relying on a 25-year old interpretive position, particularly since the language of Rule 14a-3(b) has not been changed.
-John Jenkins, Editor, TheCorporateCounsel.net 1/14/2020

Q: If (1) an immediate family member of a director, which director is a member of the Audit Committee of a NYSE-listed company, receives less than "$120,000 in direct compensation from the listed company" during any twelve-month period within the last three years as an employee; and (2) the NYSE-listed company Board of Directors determines that such compensation to the immediate family member does not cause the Audit Committee member not to be independent, and there are no other independence issues with such director, is that sufficient to deem such Audit Committee member independent and report the same in the company's proxy statement? Or would that compensation to the immediate family member automatically cause the director to be deemed not independent under Rule 10A-3 or NYSE rules or raise any other independence issues? Thank you

RE: Under Exchange Act Rule 10A-3(b)(ii), audit committee members generally are prohibited from accepting "directly or indirectly" any compensation from the company aside from payments for board service. Under Rule 10A-3(e)(8), "indirect" compensation includes payments to "a spouse, a minor child or stepchild or a child or stepchild sharing a home with the member." If your director's family member falls into one of these categories, then the payment is disqualifying.

However, that won't necessarily be the case with others who are regarded as members of the director's "immediate family" under Rule 303A.02. A more limited group of family members is covered by Rule 10A-3(e)(8) than by NYSE Rule 303A.02's "immediate family" concept. The NYSE tells listed companies that when they are evaluating director independence under the general standards applied in Rule 303A.02, they need to use the NYSE's definition of immediate family. However, when evaluating audit committee independence under Rule 303A.06, they should use the Rule 10A-3(e)(8) standard instead.

See the discussion on page 70 of our Director Independence Handbook and FAQ F. 2. of the NYSE's Corporate Governance Standards FAQs.
-John Jenkins, Editor, TheCorporateCounsel.net 1/13/2020

RE: Thanks John, explanation and citations were very helpful.
-1/13/2020

Q: Company signs a definitive agreement to acquire a company in November 2019. Assume both companies are calendar year end (12/31). The acquisition closes in January 2020 and neither acquirer nor target has filed its 10-K to report 2019 annual financials. What financials are you comparing for significance determination for purposes of the financial statements that would be required in the 8-K? I think there's a few options: (a) 2019 annuals for target versus 2018 annuals for acquirer; (b) 2019 annuals for target versus 2019 annuals for acquirer; and (c) 2018 annuals for target versus 2018 annuals for acquirer. Absent use of pro forma financial statements in accordance with the second sentence in the rule below, I think the answer based on the below rule is (a) because (i) on the acquirer side it will not have filed its 10-K reporting 2019 annual financials at or prior to the date of acquisition and (ii) on the target side there doesn't seem to be a corresponding requirement to use the most recent financials "filed" so you could use 2019 unaudited annuals. Interested to see if folks have any other thoughts? Also, i wasn't really sure how the second part of the sentence means around the pro formas. Is there any guidance on that? Does that somehow allow you to use 2019 annual financials of the acquirer? (3) The determination shall be made by comparing the most recent annual financial statements of each such business, or group of related businesses on a combined basis, to the registrant's most recent annual consolidated financial statements filed at or prior to the date of acquisition. However, if the registrant made a significant acquisition subsequent to the latest fiscal year-end and filed a report on Form 8-K (§ 249.308 of this chapter) which included audited financial statements of such acquired business for the periods required by this section and the pro forma financial information required by § 210.11, such determination may be made by using pro forma amounts for the latest fiscal year in the report on Form 8-K (§ 249.308 of this chapter) rather than by using the historical amounts of the registrant. The tests may not be made by “annualizing” data. sorry - now reading that second part it seems to be referring to another sig. acquisition that happens and not the acquisition contemplated above. let me know if i am misreading that.

RE: Section 2015.2 of the FRM says that significance is generally determined by comparing the most recent pre-acquisition annual financial statements of the acquired business to the registrant's pre-acquisition consolidated financial statements as of the end of the most recently completed audited fiscal year required to be filed with the SEC. So, in your hypothetical, since the company hasn't been required to file its 10-K at the time of the closing, I think your answer is correct.

But the SEC's Accounting Staff gives you some flexibility here. Assuming you close in January, your acquired company financial statements won't be required to be reported on an 8-K for 75 days following that closing. By that time, the acquirer will have filed its 2019 10-K. Here's what Section 2025.2 of the FRM says about how companies in that situation can determine significance:

"2025.2 Significance Implementation - Form 10-K Filed Subsequent to Acquisition

Generally, a registrant measures significance using its pre-acquisition consolidated financial statements as of the end of the most recently completed audited fiscal year required to be filed with the SEC. If the acquisition is made after the registrant’s most recent fiscal year end and the registrant files its Form 10-K for the most recent fiscal year before the date financial statements of the acquired business would be required to be filed under Item 9.01 of Form 8-K, the registrant may evaluate significance using the registrant’s financial statements for most recent fiscal year reported in its Form 10-K. Alternatively, the registrant may choose to evaluate significance using the registrant’s financial statements for the most recently completed audited fiscal year required to be on file with the SEC as of the consummation date."
-John Jenkins, Editor, TheCorporateCounsel.net 10/24/2019

RE: Awesome! thanks John!
-10/24/2019

RE: In above hypo, if 2019 annuals are not complete for the target and the 2018 are the most recent can those be used to determine significance?
-1/13/2020

RE: Generally, the most recent pre-acquisition annual financial statements of the target are compared with a registrant’s pre-acquisition consolidated financial statements for its most recently completed audited fiscal year that is required to be filed with the SEC.

If the target isn't a reporting company, the financial statements that should be used for the significance tests should be determined as though it were one, which I believe means that the time frames for determining which year's financial statements to use for the target in conducting the significance test would be determined by reference to when the target would be required to file its 10-K if it were a reporting company. (I would strongly urge you to confirm my interpretation of this requirement with your accountants or the Staff). Note that the financials used to determine the significance of an acquisition of a non-reporting company don't have to be audited.

See the discussion on page 23 of this Deloitte memo.
-John Jenkins, Editor, TheCorporateCounsel.net 1/13/2020

Q: In December 2018, public Company A acquired 90% of the limited partnership units of private Company X. Company A filed an Item 2.01 8-K to report the acquisition within 4 business days of the acquisition, and an 8-K/A with 71 days of the required due date for the initial 8-K with audited financial statements for Company X and pro formas for the acquisition in accordance with Item 9.01(a). Company A initially accounted for its interest in Company X under the equity method. In December 2019, Company A was granted the right to appoint a majority of the board of directors of the general partner of Company X, allowing Company A to consolidate Company X in its financial statements beginning at 12/31/19. The question is whether, when Company A acquired the right to appoint a majority of the board of directors of the GP of Company X in December 2019 (and thus being able to consolidate Company X for accounting purposes), that triggered a new Item 2.01 disclosure obligation (and resulting requirement to file new financial statements for Company X and pro formas under Item 9.01(a)). Item 2.01 of 8-K defines an acquisition as “every purchase, acquisition by lease, exchange, merger, consolidation, succession or other acquisition.” Company A's accountants have raised the question whether Item 2.01 (and Item 9.01(a)/Rule 3-05 of S-X) was triggered in December 2019 because Company A will now be able to consolidate Company X in its financial statements. It seems odd that Company A would report the acquisition of a majority of the limited partnership units of Company X in 2018 (and file the required financials and pro formas), and then have to report again the acquisition of Company X (with new financials and pro formas) when it was granted the right to appoint a majority of the board of the GP of Company X in 2019. Section 2010.1 of the SEC's Financial Reporting Manual notes that somethings may be treated one way for reporting purposes and another way for accounting purposes (in this case, the grant of the right to appoint a majority of the board of directors of the GP of Company X may constitute a business combination for accounting purposes but not for reporting purposes). The list of transactions that constitute an "acquisition" for Item 2.01 purposes all seem like transactions under some legal framework (e.g., purchase, merger, etc.) and not events that have some impact on accounting conclusions.

RE: I think it's possible that additional financial statements might be triggered if the transaction is deemed to involve a "step acquisition." I don't know if simply consolidating the target will be viewed as involving something like this, but Section 2020.3 of the FRM says that if you are achieving an acquisition in stages, you'll need to test for significance based on the increase in your proportionate interest in the company:

2020.3 Significance Implementation - Business Combination Achieved in Stages or Step Acquisition of a Rule 11-01(d) Business – General

If a registrant increases its investment in a business relative to the prior year, base the tests of significance on the increase in the registrant's proportionate interest in assets and net income during the year, rather than the cumulative interest to date. However, step acquisitions which are part of a single plan to be completed within a twelve month period should be aggregated.

Of course, here you aren't "acquiring" a greater interest, but you are consolidating the subsidiary instead of reporting it as an equity method investment, which is going to make the investment look very different on your own financial statements. Given the size of your initial investment, it also seems unlikely that if you're viewed as increasing your proportionate interest in the target, that the amount of that increase would be "significant."

I don't know if the Staff would view this change from equity method to consolidated reporting as being encompassed by 2020.3, but I think it's probably worth reaching out to them to discuss it.
-John Jenkins, Editor, TheCorporateCounsel.net 1/13/2020

Q: Would a shareholder in a private Delaware corporation be able to unilaterally (i.e. with no written action on the part of the corporation) forfeit/grant his shares "back" to the company? The shareholder does not want anything in return; just wants to be rid of these specific shares.

RE: Unless there's some kind of a contract right to require the corporation to take the shares back, I'm not aware of anything in Delaware law that would give a shareholder the right to unilaterally compel a corporation to accept a return of shares that were validly issued, even if the shareholder simply wanted to forfeit the shares.
-John Jenkins, Editor, TheCorporateCounsel.net 1/13/2020

Q: In a fairly typical two-tiered UP-C structure setup involving a Pubco and operating partnership (OP), the holders of OP units have the right to exchange their OP units for Pubco shares. I believe the issuance of the Pubco shares in exchange for the OP units requires either registration under the Securities Act or an exemption from registration. Assuming Pubco would like to avoid registration, are UP-C companies in this situation generally relying on 4(a)(2)/Regulation D for the exemption to issue the shares? I’ve looked at a number of UP-C public filings, law firm memos and no-action letters, but they all seem to gloss over this particular detail. Thanks in advance.

RE: You aren't kidding - I pulled a number of Up-C deals, and they sure do gloss it over. I think the right answer is likely that the exchange is made in reliance on Section 4(a)(2), because I don't think that this structure would qualify for the other potential candidate, Section 3(a)(9), because the exchange doesn't involve the same issuer.
-John Jenkins, Editor, TheCorporateCounsel.net 1/13/2020

Q: My read of the Item is that a little "r" Restatement in a Form 10-K (for example) would cause an Item 4.02 8-K to be filed, but would appreciate your views. Thank you.

RE: I don't think that's typically the case. As I understand it, a "Little r" restatement is only possible when the correction doesn't have a material effect on prior periods, but is material to the current period. Since prior periods weren't materially misstated, the auditor wouldn't need to modify its opinion and the company would not have to advise investors that the prior period financial statements could no longer be relied upon.

Of course, the company would still need to disclose the correction in the footnotes of the current period financial statements (i.e., the financial statements that reflect the correction), but would not have to amend prior Form 10-K filings.
-John Jenkins, Editor, TheCorporateCounsel.net 1/12/2020

Q: Client intends to sell a business segment that represents a majority of its assets. Shareholder approval is required. SEC telephone interpretation says unaudited financial statements of the segment being sold should be provided in the proxy materials for the same periods as are required for the registrant, along with pro forma information. The proxy statement will include registrant's financial statements and pro forma financial statements as required. Is there any SEC guidance that stand-alone financials of the segment being sold may be excluded if it would be burdensome to prepare?

RE: Not to my knowledge. I think you'd need follow the Rule 3-13 waiver process and articulate a case as to why the information is both not material to investors & unduly burdensome to prepare. I think you'd also need to be prepared to offer up some sort of alternative disclosure that the company could provide.

SEC Chair Jay Clayton & senior Staff members have encouraged companies to make these submissions, so there's no harm in asking, but my gut reaction is that you're likely to have an uphill battle given the size of the segment.
-John Jenkins, Editor, TheCorporateCounsel.net 1/10/2020

Q: Does anyone have a template of disclosures in a Proxy Statement on why the company is not including the same proposals that have not passed in over 5 years in the current Proxy? We have two proposals (trying to amend our Certificate and Bylaws: (1) from 80% supermajority to 66 2/3%, and (ii) permitting shareholders to call special meetings of shareholders. We have run these same proposals in our Proxy for the past 5 years and they need 80% supermajority to pass, and we never get past 54%. In speaking with our investors, they are okay if we do not run the proposals this year, but they want to see some disclosure in the Proxy on why we are not running the proposals. Just wondering if anyone else has had this situation and if you are willing to share your disclosure.

RE: See the discussion beginning on page 9 of Phillips 66's 2017 proxy statement concerning the board's decision not to resubmit a declassification proposal that hadn't received the required vote in either of the two prior years. They put it in their discussion of shareholder engagement efforts, which is probably not a bad place for a discussion like this.
-John Jenkins, Editor, TheCorporateCounsel.net 1/9/2020

Q: Is there any rule or best practices whereby companies must have a certain amount of independent vs. non-independent directors serve on their boards?

RE: With the exception of controlled companies, the NYSE & Nasdaq require a majority of a company's directors to be independent in order for it to obtain a listing. Larger companies often have very few insiders on their boards. In many cases, only a single insider (the CEO) will serve as a director. Refer to our "Director Independence Handbook" and the other materials in our Director Independence Practice Area for more information.
-John Jenkins, Editor, TheCorporateCounsel.net 1/9/2020

Q: Client wants to hold special meeting of shareholders to approve a disposition of substantially all assets as soon as possible. Can we set the date for the special meeting and include the notice in the preliminary proxy statement, mail the preliminary proxy statement to shareholders (without the proxy card), wait the 10 days to see if we get SEC review, and if we don't get reviewed, file and mail the definitive proxy statement with the proxy card and hold the meeting a few days later? Other than potentially rubbing the SEC the wrong way by assuming no review, any issues with doing this?

RE: I don't see anything that would prohibit you from doing that. Rule 14a-3 permits solicitations using publicly filed preliminary proxy materials, and Rule 14a-6 only requires you to file preliminaries at least 10 days before you plan to mail definitive proxies.
-John Jenkins, Editor, TheCorporateCounsel.net 1/8/2020

Q: If we granted option awards in 2019 with a two year vesting cliff, would we include those in the relevant columns in the summary comp table for a Proxy? Would we also include them in calculating the PEO Pay Ratio FY 2019 or would we solely include those in the proxy statement FY 2020?

RE: Yes, they would be disclosed in the year they were awarded, even if they haven't vested. The vesting arrangements would be taken into account in determining the grant date fair value under ASC 718. Under Item 402(u)(2)(i), the “total compensation” for the CEO used in the pay ratio calculation is generally required to be determined in the same manner used as the Summary Compensation Table (under Item 402(c)(2)(x)).
-John Jenkins, Editor, TheCorporateCounsel.net 1/8/2020

Q: I'm writing because of some confusion between the literal language of the Item (pasted below) - which seems to require monthly reporting for the entire period covered by the report (i.e, all 12 months), versus what I've done in practice and what issuers (seemingly) customarily report (i.e., the last 3 months in the period - similar to what is reported on Forms 10-Q). Toll Brothers just reported only the last 3 months in its most recent 10-K. I'm grateful for your thoughts on what issuers should report in their 10-K for Issuer Purchases under Item 703. Thank you. Item: The table shall include the following information for each class or series of securities for each month included in the period covered by the report:

RE: Item 5(c) of Form 10-K just requires information about 4th quarter repurchases:

(c) Furnish the information required by Item 703 of Regulation S-K (§229.703 of this chapter) for any repurchase made in a month within the fourth quarter of the fiscal year covered by the report. Provide disclosures covering repurchases made on a monthly basis. For example, if the fourth quarter began on January 16 and ended on April 15, the chart would show repurchases for the months from January 16 through February 15, February 16 through March 15, and March 16 through April 15
-John Jenkins, Editor, TheCorporateCounsel.net 1/8/2020

Q: Do you know who the actual filer should be for a 13e-3? I would assume the subject company and filer would often be the same but hoping for some confirmation.

RE: There are often multiple parties required to file the Schedule 13E-3. See Rule 13e-3 CDI 101.01 & 101.02:

Question 101.01

Question: In a “going private” merger transaction involving the leveraged buy-out of a class of equity securities subject to Section 12(g) or Section 15(d) of the Exchange Act by an affiliate of the issuer of those securities, must both the issuer and the affiliate, as filing persons on Schedule 13E-3, speak to the issuer’s unaffiliated shareholders as to the fairness of the transaction?

Answer: Yes. The issuer’s obligation to comply with Rule 13e-3 arises from its engagement in a solicitation subject to Regulation 14A, or a distribution subject to Regulation 14C, in connection with the going private merger with its affiliate. See Rule 13e-3(a)(3)(i)(C). The affiliate, as a Rule 13e-3(a)(3)(i)(A) purchaser of the equity securities of the issuer, is also subject to Rule 13e-3. The affiliate is deemed to be a “purchaser” of the equity securities of the issuer due to the definition of “purchase” in Rule 13e-3(a)(2). This definition states that “purchase” includes “any acquisition pursuant to a merger.” Both the affiliate and the issuer, therefore, are required under Rule 13e-3(b)(2)(i) to complete, file and disseminate a Schedule 13E-3 in accordance with Rules 13e-3(d), (e) and (f). Item 8 of Schedule 13E-3 and corresponding Item 1014(a) of Regulation M-A direct that each person filing the Schedule state whether it “… reasonably believes that the Rule 13e-3 transaction is fair or unfair to unaffiliated security holders.” Because both the issuer and the affiliate are persons required to file the Schedule 13E-3, each must evaluate the going private transaction from the standpoint of fairness to the issuer’s unaffiliated shareholders and appropriately disclose the results of such evaluation. See Question and Answer No. 5 in Exchange Act Release No. 17719 (April 13, 1981). [January 26, 2009]

Question 101.02

Question: Is an acquisition vehicle created by an affiliated purchaser in a going private transaction required to be included as a filing person on Schedule 13E-3? Is the intermediate or ultimate parent of that acquisition vehicle also required to be included as a filing person?

Answer: Yes. Where the purchaser has created a merger subsidiary or other acquisition vehicle to effect the transaction, the staff will “look through” the acquisition vehicle and treat as a separate, affiliated purchaser the intermediate or ultimate parent of that acquisition vehicle. Accordingly, both the acquisition vehicle and the entity or person who formed it to acquire the issuer are considered affiliates engaged in the Rule 13e-3 transaction that have separate filing obligations. The filing persons may satisfy their separate filing obligations by making a joint filing on a Schedule 13E-3 that contains both of their signatures and required disclosures. [January 26, 2009]
-John Jenkins, Editor, TheCorporateCounsel.net 1/8/2020

RE: Thank you - understood that there are multiple filing persons. The question is who is the actual "Filer". I am leaning toward there being no right answer. Most often it appears that the Subject Company and the Filer are the same every once in a while that is note the case.

If you have any more guidance that would be great but understand you may not.
-1/8/2020

RE: Sorry, I misunderstood your question. Not aware of any guidance, but the issuer's been the actual filer in the situations I'm familiar with - even those in which it takes the position that it isn't a participant in the going private transaction.
-John Jenkins, Editor, TheCorporateCounsel.net 1/8/2020

Q: Hypo: Take private transaction where multiple private equity groups are party to an equity holders agreement and are deemed for Section 13 purposes to beneficially own shares greater than 5%. Thus each files a 31D to report such ownership. In the beneficial ownership table in the proxy, should each PE fund be listed on a separate row or should the main PE fund that owns the vast majority of the shares (and only one that is greater than 5% on its own) be listed on one row with a footnote that explains the relationship between the two other funds? We aren't finding too much guidance but have found the below guidance which seems to indicate that each should have a separate row. However, we think a cleaner approach is one line with the main PE fund and a FN explaining the relationship is cleaner. -----Although the second sentence of the below Instruction 5 to Reg. S-K Item 403 (required per Item 6(d) of Schedule 14A) is specific to beneficial ownership by management, the first instruction appears to be generally for both tables. Since there is more than one beneficial owner for the same “set” of securities, PE 1 and PE 2 should be disclosed to “avoid confusion”. Since the subject of Item 403 is the disclosure of 5% beneficial owners, we think in context the below instruction assumes that the owners of the same set of securities are each separately disclosed in the table, so the footnote is required to avoid the confusion that it looks like there are more securities than are outstanding. -----

RE: I think that because Instruction 2 to Item 403 calls for beneficial ownership to be determined in accordance with Rule 13d-3, and because each of the PE funds is deemed to be a beneficial owner of more than 5% under that rule, separate disclosure of each fund within the table is the preferable approach. I'd explain the relationship between the funds in a footnote. See the discussion on page 75 of our Beneficial Ownership Table Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 1/7/2020

Q: Our Bylaws states that - "the number of directors shall be fixed exclusively by resolution adopted by a majority of the Whole Board". Currently, there are 8 directors serving, if one of the directors is not nominated for the upcoming term, do we need to have the Whole Board adopt resolutions to effectively reduce the number of directors to 7? P.S. The initial 8 directors were fixed by the company's proxy over a year ago. Thanks.

RE: It's not required, but if you don't it sounds like you'd have a vacancy. If your board has the ability to increase the number of directors, then I think most companies would fix the number at 7 for now and change it if they wanted to add somebody.
-John Jenkins, Editor, TheCorporateCounsel.net 1/7/2020

Q: Company must hold a special meeting to ask shareholders to approve charter amendments and the issuance of common stock in a private placement (per the Nasdaq rules) for some necessary short-term financing. It seems we will have to incorporate financial information from the last 10-K and subsequent 10-Qs by reference under Item 13 of Schedule 14A. Instruction D(3) to Schedule 14A requires a minimum of 20 business days between the mailing of definitive proxy materials to shareholders and the special meeting date if financial information is incorporated by reference. Company is concerned it does not have this time before needing to close the financing transaction. I have seen companies either forget about this rule or ignore it during my searching. Any guidance on consequences or exemptions? Thanks!

RE: There is no exemption. As for consequences, this would be the province of the SEC's Division of Enforcement. I don’t think there’s a private right of action here, although I’m sure a creative plaintiff could conjure up something under state law.

I've also seen companies forget about this requirement too. However, this company apparently hasn't forgotten about it. To the contrary, it’s well aware of the requirement. If you know about a requirement and make a conscious decision not to comply with it, that’s a "willful violation" of the rule. The risk of enforcement may be low, but for a willful violation, the potential consequences for all involved are quite high. My advice would be don’t even think about it.
-Broc Romanek, Editor, TheCorporateCounsel.net 5/9/2016

RE: The below note from The Corporate Counsel (Vol. XXX, No. 6, November-December 2005) is a bit dated but seems like it could be helpful. Broc, do you know whether there have been any developments to change this position?

##

Incorporation by Reference in a Proxy Statement—20-Day Wait?

The SEC’s proxy rules do not impose a minimum shareholder solicitation period. Instead, issuers base their proxy solicitation period on state law (e.g., DGCL § 222’s ten days) and, more to the point, the practicalities of obtaining a quorum and sufficient affirmative votes to approve the matters to be presented at the meeting. A reader recently asked whether General Instruction D.3 to Schedule 14A effectively imposes a minimum 20-business-day solicitation period for issuers that incorporate required information by reference into the proxy statement, even where the issuer does include the incorporated information in the envelope mailed to shareholders. After doing a little research, we advised that the Staff’s current position seems to be that Instruction D.3 would not apply if the issuer includes the information incorporated by reference.

Our reader was in a hurry to obtain shareholder approval of an issuance of securities, which approval was needed to satisfy Nasdaq’s 20% rule (which requires shareholder approval of an issuance of common stock exceeding 20% of the outstanding voting power—see Rule 4350(i)(1)(D)(ii) of the NASD Manual and our January-February 2004 issue at pg 11). Item 11 of Schedule 14A (relating to authorization of a securities issuance) requires that the proxy statement include the financial information called for by Item 13(a) (see Item 11(e)). But, as permitted by 13(b), Item 13(a) may be satisfied by incorporating the financial information from the issuer’s previously filed 1934 Act reports.

Our reader noted that Instruction D.3 requires that a proxy statement that incorporates Item 13(a) information by reference be sent to shareholders at least 20 business days in advance of the meeting date. The issuer didn’t have time to wait 20 business days, and also didn’t want to include the information in the body of the proxy statement, but was willing to add to its mailing the 1934 Act reports that included the subject information.

While we couldn’t find a direct answer to the question, we did find a little history that got us (and our reader) comfortable that including the incorporated information with the materials mailed to shareholders would allow the issuer to hold the meeting without waiting 20 business days: Form S-4 General Instruction A.2 is virtually identical to 14A General Instruction D.3, i.e., if the Form S-4 incorporates information by reference, the prospectus/proxy statement must be sent to shareholders at least 20 business days prior to the meeting date. This waiting period affords interested shareholders time to obtain a copy of the incorporated information from the issuer and to review the information prior to the meeting. In the S-4 adopting release (Rel. No. 33-6578, April 23, 1985) the Commission stated that the issuer would have to comply with S-4 Instruction A.2 even if it delivered the documents incorporated by reference along with the prospectus/proxy statement.
-5/12/2016

RE: I believe this is generally still the case....
-Broc Romanek, Editor, TheCorporateCounsel.net 5/16/2016

RE: Scenario: Acquirer is a reporting public company. Target is a non-reporting private company and immaterial to Acquirer below 20%. Acquirer and Target are delivering a joint proxy statement/prospectus only to the shareholders of the Target in connection with their special meeting that incorporates by reference information regarding the Acquirer. Clearly, the document is a proxy statement from Target and a prospectus from Acquirer.

For the reasons stated above, Schedule 14A and Instruction D.3. (regarding 20 business days advance mailing) are not applicable to Target. Instruction A.2. of Form S-4 (regarding 20 business days advance mailing), however, applies to Acquirer.

Question: the import of Instruction A.2. and the cross-reference to Sections 13(e), 14(d) and 14(e) seems to suggest that the instruction is referring to the shareholders of Acquirer, not necessarily the Target. That said, the instruction is not exactly the paragon of clarity (“the prospectus must be sent to the security holders…..” though here Acquirer is sending the prospectus only to the shareholders of Target). Further, given that Instruction D.3. and A.2. are similar in requirement and purpose (give Target’s shareholders time to gather the incorporated information and digest it before voting), we are inclined to abide by the 20 business day advance notice in order to ensure compliance with (at least) the intent of the rule. Are we being overly conservative in taking that position? I’ve not seen anything that clearly parses the instruction (the closest being C&DI 125.10). We're fine with being conservative, but, if there is a silver bullet out there, we'd like to know that also. Thanks in advance.
-1/6/2020

RE: I don't think you're being overly conservative. To me, Instruction A. 2.'s use of the word "prospectus" implies that it governs the manner in which the registrant provides disclosure to the persons to whom it is offering the securities, which in the case of a stock-for-stock merger means the target's shareholders. I think that obligation applies regardless of whether the target is required to have its own 20 business day solicitation period under the proxy rules.
-John Jenkins, Editor, TheCorporateCounsel.net 1/6/2020

Q: We are preparing a Form S-8 to register shares of stock of a successor issuer/registrant whose shares are deemed to be registered under Section 12(b) of the Exchange Act pursuant to Rule 12g-3(a). How do we address Item 3(c) of Form S-8 given that no Exchange Act registration statement was required and thus there is no description of the class of securities to be incorporated by reference from any such registration statement?

RE: I've seen this handled in a couple of ways. Some companies that are successor issuers file a Form 8-A/A to reflect the changes to the description of securities between the predecessor and successor entities and incorporate that by reference. In other situations, companies have incorporated by reference to the description of securities contained in the Securities Act filing covering the issuance of the shares.
-John Jenkins, Editor, TheCorporateCounsel.net 1/5/2020

RE: Thanks. There is a description in the S-4 pursuant to which the shares of the successor issuer/registrant were registered and agree it makes sense to incorporate by reference to that in the absence of any '34 Act registration statement.
-1/6/2020

Q: Are there any best practices with respect to how much information a company should include about its executive officers on its IR website? We're considering slimming down the bio to just a sentence or two about his or her current role at the company. I see that many companies have detailed bios of their executives, which has me a little paranoid that I'm missing some obscure requirement or a best practice. Thanks.

RE: You should review our Website Disclosure Checklist for what's required to appear on the website. I'm afraid I'm not aware of anything addressing best practices, but most of the handful of S&P 500 sites I looked at seem to have opted for detailed bios. However, there's variation here as well - companies like Dollar Tree and J. M. Smucker are very bare bones in their approach when it comes to information about executive officers.
-John Jenkins, Editor, TheCorporateCounsel.net 12/28/2019

Q: Do you know where the financing of the merger section is derived from under Schedule 14A?

RE: I think you can interpret the language of Item 1004 of Reg M-A, which requires disclosure of the material terms of the merger, to encompass a requirement to disclose the financing arrangements for the deal. For example, if you disclose that your deal provides for cash consideration and doesn't contain a financing condition, that disclosure could well be misleading without disclosure of how the deal will be financed and the key conditions to the receipt of financing. I think that kind of disclosure is necessary to comply with your obligations under 14a-9 and 10b-5, even if you think my read of the line item requirement is a stretch.
-John Jenkins, Editor, TheCorporateCounsel.net 12/27/2019

RE: Oops! I just now noticed that you're talking about a going private merger. In that case, another more direct source of the obligation is Item 10 of Schedule 13E-3, which requires you to disclose the source of the funds for the deal. That directs you to Item 1007 of Reg M-A, which specifically requires detailed disclosure about the financing arrangements for the deal.
-John Jenkins, Editor, TheCorporateCounsel.net 12/27/2019

Q: Our client has an acquisition that will be consummated before their 2019 10-K is filed. The acquisition is less than 20% significant against 2018 f/s and 30% significant against 2019 f/s. Per 2025.2 of frm - seems like they can measure against their 2018 f/s and count it as not significant - no 2.01 8-k or f/s required. However - just wanted to confirm that that acquisition will be put in the individually insignificant bucket at 30% (so only 20% left to go) b/c that requires all acquisitions made post last balance sheet date to be included the bucket and it has to be tested against the prior year (2019). That acquisition doesn't technically meet the definition of individually insignificant acquisitions in 2035.2 (b/c over 20%) but sure the SEC would want it to be captured somehow. The FRM doesn't seem to cover this scenario specifically though so wanted to confirm you agreed that it would go in the individually insignificant bucket per above. Thanks

RE: I don't know of anything from the Staff on this, and would recommend you reach out to them, but personally, I think a conservative interpretation of the interplay between 2025.2 and 2035.2 along the lines you suggest is the appropriate one. If you do contact the Staff, please let us know what they say.
-John Jenkins, Editor, TheCorporateCounsel.net 12/27/2019

Q: The SEC issued this press release last week announcing that Edgar would be closed on Dec 24 because the government would be shut down (https://www.sec.gov/oit/announcement/edgar-will-be-closed-tuesday-december-24-2019-and-wednesday-december-25-2019). Does that mean that Dec 24 should be considered a federal holiday and doesn’t count as a business day for Form 8-K purposes? So, for example, if an 8-K event occurred Friday, Dec 20, is the due date Fri, Dec 27 or Mon, Dec 30? If a federal holiday, it shouldn’t count as a business day. It’s a bit confusing, however, because Dec 24 isn’t listed as a federal holiday on the SEC’s website.

RE: Yep, we blogged on this last week-

Unlike the announcement last year, this year’s wasn’t clear about whether the 24th would be considered a business day for purposes of computing filing deadlines. But the Staff has now informally confirmed in a call that it would not. So you’ve got an extra day.
-Liz Dunshee, Editor, TheCorporateCounsel.net 12/26/2019

Q: Company insider is trustee of irrevocable trust for the sole benefit of grandchild. Irrevocable trust (IR) seeks to purchase shares outside a Company's trading window. Should the IR wait for the next window? Issues of concern? Thanks in advance.

RE: Yes, in my view it should. Furthermore, most well drafted insider trading policies will also apply to "controlled entities" - i.e., those for which an insider subject to the policy is calling the shots. See the language of the model insider trading policy on page 58 of the Insider Trading Policies Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 12/21/2019

Q: I believe the answer is yes, but is it permissible when using the notice-only option to mail the Proxy Statement and Form 10-K (in satisfaction of the 14a-3 Annual Report requirement) to those shareholders who have requested copies while also posting an electronic-only version of a separate Annual Report (with the intent that the electronic-only version would be used more as a shareholder communication tool and not include the pages from the 10-K)?

RE: That should work - as long as you're abiding by the deadlines and all of the content requirements for each form of delivery. You can't stratify your notice & access delivery by document type (i.e. you can't deliver the proxy via mail and say the annual report is online) - but it sounds like your full-set shareholders will be getting a wrap that satisfies all of the rules. Take a look at the discussions of the hybrid approach to notice & access in our "Notice & Access Handbook." And see the "multiple versions" discussion on page 36 of our "Annual Report & 10-K Handbook."
-Liz Dunshee, Editor, TheCorporateCounsel.net 12/19/2019

Q: If a registrant has registered common stock/notes, is the SEC looking for disclosure similar to the common stock description in the most recent shelf/description of notes (DON) from the applicable final prospectus filed as a new exhibit to meet the new requirement? The DON tends to be a long 10-20 page disclosure, and it doesn't look like it can be incorporated by reference to the prospectus in the first year, so I just wanted to check if others were taking the same approach. Thanks.

RE: Yes, I think that's exactly what the SEC is looking for. In that regard, the adopting release notes a comment letter from Davis Polk to the effect that the inability to incorporate this information by reference if it hasn't previously been filed under new Item 601(b)(4)(vi) would impose a burden on issuers of multiple classes of registered debt that was far beyond the 0.5 hour paperwork burden referenced in the proposing release. See footnote 182 of the adopting release. But they adopted the rule as proposed anyway.
-John Jenkins, Editor, TheCorporateCounsel.net 4/17/2019

RE: Working through this, I'm realizing that it will be even longer than anticipated because the DON from the applicable shelf (about debt securities generally) needs to be included with the DON for the prospectus supplement (about the specific 12(b) notes) in order for the disclosure to make sense, but let me know if you disagree/take a different approach (to avoid including the more general description of the debt securities from the shelf). Thanks.
-4/22/2019

RE: What would the approach be if an registrant issues preference stock to an unconsolidated special purpose trust, which then in turn issues listed "trust preference securities"; would those trust preference securities issued by the SPT need to be described in the registrants new Item 601(4) exhibit?
-12/16/2019

RE: I haven't seen how people have approached that, but here's what I think. The "Description of Securities" section for most prospectus supplements offering trust preferred securities describe both the trust preferred that's going to be issued by the SPE and the notes issued by the parent. There's usually an option for the parent to liquidate the SPE and distribute the notes directly to investors, and that's built into the terms of the trust preferred securities themselves. Those trust preferred securities are also typically guaranteed by the parent, and the parent is listed on the cover page as one of the issuers of the package of securities.

Since that's the case, if you have a trust preferred that's registered under the Exchange Act, I think I'd include in the 10-K the same information that you included in the Description of Securities section of the prospectus, which would include both the stock and the notes.
-John Jenkins, Editor, TheCorporateCounsel.net 12/17/2019

Q: Issuer is currently the plan sponsor of a 401(k) Plan pursuant to which Issuer's (and its subsidiaries') employees may purchase Issuer's common stock, which is registered under an effective S-8 registration statement. Issuer proposes to amend the 401(k) Plan to provide that its wholly owned subsidiary ("Sub") will be the plan sponsor, but the Plan will continue to offer Issuer's stock. Question 1: Does Issuer (or Sub) need to amend the S-8 or file a new one? I would think not. Question 2: I would assume that Issuer would need to describe the Plan amendment to change the plan sponsor in the next 11-K but that this would not trigger an 8-K filing. Is this a correct assumption? Question 3: Are there any other amendments/filing obligations that could be required in this context?

RE: Since it doesn’t appear that the registrant changes here based on your description, it seems that this change of sponsor could be dealt with by including disclosure about the new plan sponsor in the materials that comprise the prospectus under Securities Act Rule 428. I don’t think that a new S-8 or an amendment to the S-8 should be required.

As noted in our "Checklist of Items to Consider when Drafting a Form S-8" in our "Form S-8" Practice Area, documents previously furnished need not be re-delivered in the event that you update the Form S-8 prospectus, but a copy of any previously furnished documents must be furnished upon written or oral request

On the question of whether a Form 8-K is required to report the change in plan sponsor, first off I can’t think of any 8-K item that would necessarily be triggered by the change in sponsor, and second, I believe that the staff has relatively recently reversed its prior positions (at least with respect to Item 4 Form 8-Ks) and has said that an employee benefit plan with a Section 15(d) obligation that files a Form 11-K or that has its filing obligation satisfied by compliance with Exchange Act Rule 15d-21 is generally not required to file any other current or periodic reports, including Form 8-K. I think that this interpretation is the better answer as to an employee benefit plan's reporting obligation, in that it is consistent with the language of Exchange Act Rule 15d-21 and a no-action letter to Citizens and Southern Corporation (3/8/1988), in which the Staff indicated that for a plan filing annual reports on Form 11-K “no other reports required by Section 13 of the 1934 Act would be required.”

I suspect that the next 11-K in your situation would include information about the new plan sponsor, and someone at the subsidiary will now sign the 11-K.
-Dave Lynn, Editor, TheCorporateCounsel.net 7/31/2007

RE: Circling back to this question. What if the plan is not a broad-based plan and is otherwise a material compensatory plan in which the NEOs participate? Would an Item 5.02(e) Form 8-K be triggered by the change of the plan sponsor (i.e., is the change of sponsor a material amendment or modification to a material compensatory plan in which the NEOs participate)?
-12/15/2019

RE: When you change the sponsor, you're changing the entity that's ultimately on the hook for the honoring the plan, so my gut is that such a change could be a material amendment.
-John Jenkins, Editor, TheCorporateCounsel.net 12/16/2019

Q: Is there any SEC guidance regarding a requirement to identify the "true" material contract counterparty (or actual beneficial owner recipient of unregistered securities) with respect to transactions relating to disclosure under Items 1.01, 2.03, 3.02 and/or 3.03 of Form 8-K? Registrant is entering into material contracts and the counterparty wants the Form 8-K to only disclose the name of the SPE entity that is the listed party to the contracts and recipient of unregistered securities, and does not want the "true" counterparty/beneficial owner to be named.

RE: Not to my knowledge. But keep in mind Rule 12b-20's requirement not to include disclosure in your filing that's necessary to make it not misleading. If the SPE is being used to cloak the identity of the party that's actually calling the shots for some reason that could be material, I'd be concerned about that issue.
-John Jenkins, Editor, TheCorporateCounsel.net 12/16/2019

Q: Can an issuer make an oral pre-fling communication of a planned registered offering in reliance on the Rule 135 safe harbor? Rule 135 refers to “publish[ing] through any medium a notice of a proposed offering” and requires the “notice” to include a legend. Can these elements be satisfied with an oral communication? Thank you.

RE: I think the safe harbor is designed for written communications, so it looks like an awkward fit, but "any medium" seems pretty broad to me. Even if the SEC concluded that oral statements aren't technically covered, I think that there's a strong argument that oral communications that are limited to the items addressed in the rule shouldn't be regarded as "offers"
-John Jenkins, Editor, TheCorporateCounsel.net 12/16/2019

Q: Based on SEC Release 34-29226, if an investor, including a non US investor, owns more than 5% of the equity securities of non US issuer that has ADRs listed on a US exchange, that investor must file a 13G or 13D. It does not matter if the investor is a US person or a non US person, or if the investor owns ADRs or owns the equity securities directly. For example, if a Japanese investor acquires more than 5% of the common stock of Toyota Motor Corp (which it buys in Tokyo), that investor is required to file a 13G or, if the investor had control intent, a 13D. I believe that the same analysis used to determine if a US investor can file a 13G or a 13D with respect to a US issuer or if a US investor is a member of a "group" for 13(d) purposes for a US issuer applies. Can you please let me know if you agree with that analysis and if you have a sense for whether non US investors generally are aware of this obligation.

RE: Yeah, I think that's right. The release is pretty clear that a "reporting obligation under Section 13(d) is determined by ownership of the class of deposited securities, including ownership of those securities through ADRs.”

I don't work much with foreign investors, but my guess is that the sophisticated ones are aware of their obligations. There are law firm memos out there addressing beneficial ownership reporting by foreign investors, most of which seem to have been put out when the ability of these investors to file 13Gs was liberalized back in 2008.
-John Jenkins, Editor, TheCorporateCounsel.net 12/15/2019

Q: A public company with outstanding registered debt securities, which are guaranteed by a number of wholly owned subsidiaries, will redeem all such outstanding registered debt securities during the first quarter of 2020. Each of the subsidiary guarantors are relying on Rule 12h-5. The associated guarantor footnote required by Rule 3-10 of Regulation S-X has been included in both the parent company's initial registration statement and each periodic report filed by the parent company since the registered debt securities and registered guarantees were issued. Will the parent company be required to include a guarantor footnote in its Form 10-Q filed for the first quarter of 2020? Paragraph 2540.2 of the SEC financial reporting manual indicates that use of the 12h-5 exemption is conditioned on the parent company providing the guarantor footnote "so long as the registered security is outstanding". Once the registered debt securities and registered guarantees are redeemed, I believe there is no longer a requirement for the subsidiary guarantors to seek an exemption from complying with the SEC disclosure requirements applicable to registrants. Therefore, I believe the parent company need not include a guarantor footnote for the period in which the applicable debt securities are redeemed. Do you agree? Thanks very much in advance.

RE: I guess the issue here is whether the requirement to include the guarantor footnote covers any period during which the securities were outstanding, even if they've been redeemed before the report is due. I don't think there's anything out there on this - the 2000 release and the 2018 proposing release that would liberalize the ability to terminate reporting simply use the phrase used in the FRM "so long as the registered security is outstanding." I didn't find anything insightful in 12h-5 or 3-10 of S-X either.

You may want to contact the Staff to get a formal response to this, but my guess is that in the current environment - where, based on last year's proposal, there seems to be a desire to make it somewhat easier for companies to terminate this obligation - they would probably conclude that if the securities were no longer outstanding at the time the report was due, the parent would not be required to include the guarantor footnote.
-John Jenkins, Editor, TheCorporateCounsel.net 12/15/2019

Q: We have a disagreement with our auditors regarding which type of accounting treatment that should apply to a specific transaction completed earlier this year. Do you think it's worthwhile to try to get an audience with the SEC Staff to assist on the point, or is it more or less futile since the Staff is likely to defer to the accountants generally? Thank you.

RE: I think you can and should reach out to the Staff for guidance on an interpretive issue arising under GAAP or S-X, but they really aren't in the business of refereeing disputes between auditors and issuers as to the proper accounting for a particular matter.
-John Jenkins, Editor, TheCorporateCounsel.net 12/15/2019

Q: Have been looking at a number of precedents for subscription right offerings and most seem to file the 5.1 opinion at the launch of the offering as opposed to waiting until the subscription period is closed. Does anyone know if there is a particular reason for this or is it just market practice?

RE: I believe that's because the general rule is that you have to have the Exhibit 5 opinion on file prior to effectiveness. See Staff Legal Bulletin 19. Rights offering registration statements are generally declared effective at the start of the subscription period, so the opinion would be filed prior to that time There's an exception for offerings that are made on a delayed basis under Rule 415(a)(1)(x), and some rights offerings made off of a shelf S-3 that's already effective might be able to take advantage of that.
-John Jenkins, Editor, TheCorporateCounsel.net 10/11/2019

RE: That makes sense, thanks. One further question on the 5.1 opinion, legal bulletin 19 suggests that a "binding" opinion as to the rights must be given if you are registering the offer and sale of the rights; however, if you are only registering the offer and sale of the underlying security, it would seem that no such opinion would be required? Asking primarily because in that situation a number of firms still give that opinion.
-12/13/2019

Q: Client terminates agreement with investment adviser who has filed a Schedule 13G as the "passive investor" holding more than 5% of a company's equity securities. Client now has beneficial ownership of these securities and intends to sell them before the passage of 10 calendar days. Must client still file a Schedule 13G as the brief beneficial owner of the securities, even though the sale occurred before the filing due date ? If so, can the 13G also reflect the disposition of the shares or is a separate amendment required to be filed?

RE: I believe a 13G would technically be required under these circumstances for someone relying on the passive investor exemption in Rule 13d-1(c). That's because the SEC has interpreted the 5% beneficial ownership trigger pretty strictly in somewhat similar situations. For example, take a look at this CDI:

Question 101.06

Question: A customer instructed its broker to purchase up to 4.9 percent of the outstanding class of a Section 12 registered voting common stock of a company. The broker mistakenly purchased over five percent for the customer's account. The customer refused to pay for the excess shares and instructed the broker to sell all shares in excess of 4.9 percent. Is the customer required to file a Schedule 13D or 13G pursuant to Rule 13d-3(a)?

Answer: Yes. The customer acquired beneficial ownership of greater than five percent of the class pursuant to Rule 13d-3(a) and, therefore, is required to file a Schedule 13D or Schedule 13G under Sections 13(d) and 13(g) of the Exchange Act. The absence of an intent to acquire in excess of five percent is not a consideration with respect to the applicability of Sections 13(d) and 13(g). [Sep. 14, 2009]

I think this stands for the proposition that once you've crossed the threshold, you've incurred a reporting obligation, regardless of whether you intend to hold it. The answer would probably be different if you were an institutional investor, because 13d-1(b)(2) doesn't require them to file until 45 days after year-end, and then only if they held more than 5% at year-end.

I've never seen anybody combine an initial filing with an exit amendment, so you may want to reach out to the Staff for some guidance if you intend to take this approach. I don't see the harm in filing an initial report that discloses the share ownership at the date that the report was triggered and the fact that all of the shares were disposed of before the filing date, and checking the exit box. On the other hand, it might actually be easier to file an initial 13G and an amendment, simply because the form itself doesn't seem to be a good fit for a combined approach like this.
-John Jenkins, Editor, TheCorporateCounsel.net 11/20/2019

RE: Thank you, John, for the very prompt and helpful reply. Since the client advises a single family office, it is not required to be SEC registered and thus the "Institutional Investor" annual filing alternative is not available. It appears that the third-party EDGAR filing service the client uses will profit from the SEC's strict interpretative position.
-11/20/2019

RE: I have a similar question. A company does a follow-on offering and an investor purchases shares in the market on the morning of the closing. That morning purchase causes the investor to exceed 5%. In the afternoon, the investor decides to take some profits and sells down, such that at the close of the trading day the investor is back below 5%.

Do we think the investor needs to file a 13G? (Assume the investor isn't a QII, so there's no prospect of waiting to evaluate the investor's 12/31 holdings as the basis for determining whether a filing is necessary.) I guess the tenor of CDI 101.06 suggests the staff would say a filing indeed has been triggered, but I've never seen any specific guidance concerning an investor who exceeds and then goes below 5% on an intra-day basis.
-12/13/2019

Q: A Delaware corporation has mailed its annual meeting proxy statement. All of the directors serving at the time of mailing are up for re-election at the annual meeting. Subsequent to the mailing of the proxy statement, a new director was appointed to the board in connection with a financing transaction. I understand that the company will need to consider supplementing the proxy statement materials to note the appointment of the new director. However, is the company required to put the new director on the ballot for election at this year's annual meeting even though the new director will only have served for 5 weeks prior to the annual meeting? The company's bylaws are silent on this issue. Thank you.

RE: I think if you have a single class of directors, you're in a tough spot. There's a Chancery Court decision called Rohe v. Reliance Training Network (2000) that says "except in the case of a properly classified board, all directors must [face] the electorate on [an] annual basis at the corporation's annual meeting."
-John Jenkins, Editor, TheCorporateCounsel.net 7/18/2017

RE: Slightly different twist on the facts stated above. A Delaware NYSE-listed public company has reason to believe that there may be a vacancy on the board in the next month or two. Ideally, they will fill the vacancy shortly thereafter and before the proxy statement is filed and mailed in April. However, there is a chance that there will still be a vacancy when the proxy statement is required to be filed and mailed. Does this in and of itself create an issue? What if the company wants to appoint a director to fill the vacancy after the proxy statement has been filed/mailed but before the annual meeting? Do they need to amend or file a supplement to the proxy statement/proxy card to add the new director to the slate being nominated? Do the revised proxy materials then need to be printed, mailed, etc.? This company has a plurality voting requirement, which seems to take some pressure off of the amount of solicitation required. I've done some research on this, but I'm a little confused about what's legally required and what is best practice in this situation.
-12/13/2019

RE: I think the starting point is Delaware law, which as noted in the initial reply says that unless your board is classified, your directors need to be elected annually. So, if you plan to fill the vacancy prior to the meeting, the case law says the new director needs to stand for election by the shareholders at the upcoming annual meeting. I would go out of my way to avoid a situation where you're filling the vacancy before the annual meeting, but after you've filed a proxy that says nothing about the new director. That's where you set yourself up for having to redo proxy statement disclosure, prepare a new card, delay the meeting, etc. I think the better approach is to either fill the vacancy prior to mailing (or identify the person who will fill the vacancy before mailing and include them on management's slate of nominees in the proxy & card), or defer filling the vacancy until after the annual meeting.

You may also want to refer to our article on "Avoiding Proxy Panic" that appeared in the July-August 2018 issue of The Corporate Counsel.
-John Jenkins, Editor, TheCorporateCounsel.net 12/13/2019

Q: Has anyone come across any definitive guidance one way or another regarding whether a foreign public company that is listed on the NYSE (but not a foreign private issuer) can neveretheless follow its less stringent home country laws regarding shareholder approval (instead of the NYSE shareholder approval requirements)? As far as I can tell from the Exchange Rules, the only exception for complying with the shareholder approval requirements is for foreign private issuers that also comply with Section 303A.11 disclosure in their annual reports, but curious if anyone has had a different experience with the NYSE.

RE: I haven't dealt with the NYSE on its treatment of foreign entities that aren't foreign private issuers, but Section 110 of the Listed Company Manual suggests that some accommodation for such entities based on the differences between home country governance requirements (including shareholder approval) and those imposed by the NYSE might be possible in connection with the original listing process. I'd suggest that you contact the exchange.
-John Jenkins, Editor, TheCorporateCounsel.net 12/12/2019

Q: An issuer uses notice and access for its proxy materials. Hard copies of the materials are mailed to shareholders who have made an election to receive hard copies. In connection with its next annual meeting, the issuer is contemplating mailing a hard copy of the proxy statement without the Annual Report. Shareholders would instead be directed to view the electronic copy of the Annual Report posted on the issuer's website. This does not seem permissible under the rules, but I have heard of other issuers adopting this practice. Has this become an accepted practice?

RE: See the response to Topic #9987. To my knowledge, the SEC has not changed its position that you can't stratify your delivery by document type.
-John Jenkins, Editor, TheCorporateCounsel.net 12/12/2019

Q: A 501(c)3 nonprofit wants to purchase shares outside a Company's trading window. The nonprofit's leadership includes four (4) family members of a Company executive. The executive is not involved in the nonprofit. Should the nonprofit wait for the next window? Issues of concern? Thanks in advance.

RE: Most well-drafted insider trading policies would extend to "controlled entities," and although they might not catch entities in which the insider is not personally involved with, I still think it would be prudent for an entity that's influenced or controlled by an insider's family members to refrain from trading when the window isn't open.
-John Jenkins, Editor, TheCorporateCounsel.net 12/11/2019

Q: The research group affiliated with the lead placement agent for a private placement by a public company is planning to initiate research coverage. Coverage may be initiated within 30 days (or so) of when the public company plans to commence or complete the private placement. We have not found any restrictions that would prohibit the firm from initiating research coverage and also acting as lead placement agent for a private placement during the same 30-day window. It seems that most restrictions apply to public offerings. However, we would appreciate confirmation (or guidance) from the group. Thank you.

RE: There have been a number of changes in recent years relaxing the restrictions on initiating research by a potential participant in a public offering, but I think there remains a lingering issue that needs to be addressed in the Section 4(a)(2) & Rule 506(b) private placement context, and that's whether the publication of research by an offering participant might be regarded as a "general solicitation."

In the Securities Act Reform release Rel. No. 33-8591 at n. 380, the SEC noted that research can create general solicitation concerns in the context of a Rule 144A offering: “Where [a broker or dealer] distributes research about the issuer around the time of a Rule 144A transaction, questions arise regarding whether it may be viewed as making offers to persons that receive the research, including those who are not QIBs.”) The SEC established a safe harbor under Rule 138 & Rule 139 for research issued during the pendency of a Rule 144A offering, but it doesn't extend to traditional privates and it doesn't cover the initiation of coverage.

There's a separate research exemption for EGCs that was added to Section 2(a)(3) of the Securities Act by the JOBS Act, but that applies only to public offerings, not private placements.

Initiation of research would be permitted if you've opted to conduct the offering in reliance on Rule 506(c), which would permit a general solicitation, but you'd have to jump through the accredited investor verification hoops and other requirements applicable to those offerings. Also, many broker-dealers are very reluctant to initiate coverage while they're marketing an offering, due to concerns about 10b-5 liability.

You may find the more detailed analysis in this Cleary Gottlieb document helpful.
-John Jenkins, Editor, TheCorporateCounsel.net 12/11/2019

Q: An issuer is filing a Form S-8 for its new 401k plan. The participants will have an option to investment a portion of their voluntary employee contributions in issuer stock (not a self directed brokerage window, but an employer securities fund). The shares of issuer common stock in which participants may invest will be purchased on the open market (not original issuances of the issuer). Two questions: 1. For the "Calculation of Registration Fee Table" how do you determine the number of shares to include in the "Amount to be Registered"? 2. Must a copy of the 401k plan be filed as an exhibit to the Form S-8? Many thanks.

RE: Unfortunately, there are a lot of methodologies and no consensus view for determining the number of shares to be registered for a 401(k) plan that requires registration. The most important thing is to develop a consistent methodology for tracking the usage of the shares so that you can prevent sales from exceeding the amount registered. Refer to the discussion of share counting issues beginning on page 44 of the Form S-8 Handbook and the discussion of issues unique to 401(k) plans that appears on page 50. We also recommend that you file the plan documents as exhibits. See page 66 of the Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 12/10/2019

Q: Our public company client recently filed their Annual Report on Form 10-K and, in the course of preparing their proxy statement, we realized that they did not include a Description of Securities exhibit per the new requirement to do so in Rule 601(b)(4)(vi) of Regulation S-K. From our brief review of recently filed 10-Ks it looks like a number of issuers have omitted this exhibit in error and we have only seen one 10-K/A amending an issuer’s Form 10-K to include such exhibit. Do you have any opinion on whether it’s necessary to remedy the error and whether we should advise our client to (i) file the missing exhibit with an updated exhibit list as a 10-K/A, (ii) file the missing exhibit with a current report on Form 8-K explaining the discrepancy, (iii) add the exhibit to their next quarterly report on Form 10-Q, or (iv) wait and add the exhibit to their 10-K next year. Thank you in advance.

RE: I think a lot of early filers missed that requirement, and one reason may be a misprint in the Code of Federal Regulations that suggested the filing was only required in a Form 10-D. Many may have opted not to correct their filings on that basis (if they've even discovered the error). I don't know whether that's technically the legally correct approach, but I can certainly understand its attraction as a practical matter & I don't think I'd throw myself in front of a bus to stop a client who decided to proceed without an amendment under these rather unusual circumstances.

Anyway, that misprint has been corrected and we generally think that if you don't file a required exhibit, you should amend the filing to include it. See the article on amending Exchange Act filings in the May-June issue of The Corporate Counsel.
-John Jenkins, Editor, TheCorporateCounsel.net 12/10/2019

Q: The Form S-8 Handbook includes the following: "Corp Fin interpretations make a distinction between traditional consultants—who are providing specific and limited services—and “quasi-employees,” who are providing services in something more akin to a traditional employment arrangement. This kind of “de-facto” employment relationship may exist where a non-employee provides the company with bona fide services that traditionally are performed by an employee, and the compensation paid by the company for those services is the primary source of the person’s earned income. For example, a doctor providing medical services to an HMO would likely be deemed a quasi-employee, while a doctor providing advice to a biotechnology company on the development of a new product would likely deemed a consultant." Can you direct me to the referenced Corp. Fin. interpretations? Thanks

RE: See the discussion beginning on page 8 of the Pillsbury memo addressing the SEC's take on issues relating to the status of consultants under Rule 701 & Form S-8 .
-John Jenkins, Editor, TheCorporateCounsel.net 12/9/2019

Q: Are there any rules or restrictions in the U.S. on issuing zero-strike warrants? I understand the possibility of penny warrants and cashless exercises but am specifically interest in structuring Warrants to have no strike price at all.

RE: I would check with Delaware counsel on that...It probably creates an issue in terms of whether the shares are fully paid for if there's no other consideration for the warrant.
-12/6/2019

Q: We have traditionally included the Section 302 certifications and the Section 906 joint certification in our posted/mailed Annual Report to Shareholders in the form of a "wrapped" Form 10-K. Your helpful handbook on the subject states - Wrapped Form 10-Ks Need Certifications If a company elects to deliver a “wrapped” Form 10-K to shareholders instead of a glossy annual report, you don’t have to include the Section 302 certifications physically in the “wrapped” Form 10-K that is delivered to shareholders, but the Form 10-K exhibits still need to include the certifications. To clarify on our end, we would include the Section 302 certifications and the Section 906 joint certification as Exhibits 31.1 and 31.2, and 32, respectively, in our Form 10-K EDGAR filing. Would that suffice for regulatory purposes and could we drop the tradition of including the Section 302 and 906 certifications from the Annual Report (that is, a 10-K wrap) that we deliver/make available to our shareholders and post on our website? Thank you

RE: Yes, you can do that. Your wrap is serving as the annual report required to be provided to shareholders under Rule 14a-3, so what you need to include in it is governed by that rule, not the more extensive requirements applicable to your 10-K filing.
-John Jenkins, Editor, TheCorporateCounsel.net 12/6/2019

Q: BACKGROUND: An investment fund (“Fund”) acquired more than 5% of an issuer’s (“Issuer”) common stock and filed a 13G as a passive investor pursuant to Rule 13d-1(c). Fund thereafter continued to purchase Issuer shares. Issuer then announced that it and another public company (“Acquiror”) have agreed to a merger, in which each share of Issuer common stock would be canceled in exchange for the right to receive a specified number of Acquirer shares. The consummation of the merger is conditioned on the approval of Issuer’s and Acquirer's respective shareholders. Fund did not have any prior expectation or knowledge that Issuer would announce a merger. Fund has continued to purchase Issuer shares following the merger announcement. Fund intends to vote in favor of the merger. QUESTION: Does the fact that Fund has continued to purchase or hold Issuer shares post-announcement require Fund to switch from 13G to 13D (and undergo a cooling-off period), on the basis that Fund now has acquired or is holding the shares “in connection with a transaction having the purpose or effect of changing control of the issuer”? I am aware of the Faith Colish no-action letter. But I am not sure of its applicability to this situation, for the following reasons: (1) Colish related to a purported QII that proposed to file on 13G pursuant to Rule 13d-1(b), which would have delayed disclosure until 45 days after year-end, whereas Fund has already entered the Section 13 reporting system as a passive investor under Rule 13d-1(c); (2) Colish defined “risk arbitrage” as “acquiring securities SOLELY for the purpose of tendering such securities in a tender or exchange offer”, whereas Fund has acquired at least the bulk of its Issuer shares for normal investment purposes before learning about the merger; and (3) Colish speaks of a “tender or exchange offer,” whereas the proposed transaction here is a stock-for-stock merger (though my inclination is that this formal structural distinction probably doesn’t matter). I also note, if it’s relevant, that when Fund engages in what it considers “merger arb,” it shorts the shares of the proposed acquirer, which Fund has not done in this case. Thanks for any thoughts.

RE: You're probably also familiar with the Perry Corp enforcement proceeding, which involved post-announcement purchases by a fund engaging in arbitrage and resulted in the SEC's conclusion that 13d-1(b) was not available to it. While your Fund doesn't appear to be engaging in traditional merger arbitrage, the fact that it has continued to purchase shares post-announcement could lead the Staff to characterize its purchases as having the purpose of voting the shares in favor of the deal or otherwise influence the outcome of the transaction, which is the position it took in Perry.

I'd suggest that you reach out to the Staff, because several commentators have pointed out that the application of the SEC's position in the Perry Corp enforcement proceeding to Rule 13d-1(c) filers is an open question. Here's an excerpt from a Schulte Roth memo on that proceeding:

"What is unclear after the Perry Order is whether the SEC’s focus on the “ordinary course of business” prong leaves the door open for an investor in similar circumstances to rely on Rule 13d-1(c) and file a short-form disclosure statement on form Schedule 13G within 10 days of crossing the 5% threshold, rather than filing a Schedule 13D. A Schedule 13G filed pursuant to the passive investor requirement of Rule 13d-1(c) is not subject to an “ordinary course of business” requirement, since the Rule only includes the requirement that the investor not have acquired the shares with the purpose or effect of changing or influencing the control of the issuer. In light of the SEC’s interpretation of “ordinary course of business,” it is unlikely that activities similar to those in the Order would be viewed by the SEC as being eligible for filing on Schedule 13G. If faced with these facts, it will be interesting to see if the SEC feels compelled to argue that passive intent also is inherent in the requirement not to acquire the shares with the purpose or effect of changing or influencing control of the issuer."
-John Jenkins, Editor, TheCorporateCounsel.net 12/4/2019

Q: In preparing a new Form D filing for a client, we realized that a director was left off of the two most recent Form D filings (but was included on the earlier Form D filings preceding those filings). The question is whether the issuer should amend the two most recent Form D filings to include this director. It seems to be a question of materiality under Rule 503(a)(3)(i), which says that an issuer must file an amendment to previously filed Form D to correct a material mistake of fact or error in the previously filed Form D, as soon as practicable after discovery of the material mistake or error. Do you think the omission of the director is a material error? Thank you in advance!

RE: My gut reaction is that it probably is a material error. As I read Rule 503, the materiality of a mistake is determined by reference to the requirements of the Form D itself. Form D expressly calls for the identification of all related persons, and the most recent filings didn't do that. A director is a member of the body that has ultimate decision-making authority for the corporation, and I think that the Staff would likely take the position that overlooking a director when preparing the information required by Form D about related persons is a material mistake.
-John Jenkins, Editor, TheCorporateCounsel.net 12/3/2019

Q: A company provides a non-qualified deferred equity compensation plan to certain executives. During the open enrollment period at the end of each year, executives may 1) make the initial election to participate in the plan the following year, or 2) adjust the amount and percentage allocation (between a mutual fund and a company stock fund) of their deferral for the following year. This year, the open enrollment period overlaps with an event-specific blackout period affecting some of these executives. We are trying to determine if any of the following violate insider trading laws while the executives are potentially in possession of material, non-public information: 1) An insider executive elects to begin deferring compensation under the plan; 2) An insider executive elects to retain his/her current deferral amounts and allocations under the plan; 3) An insider executive elects to increase or decrease the amount of deferred compensation; 4) An insider executive elects to change the allocation of the deferral with respect to the company stock fund. Any thoughts would be appreciated. These questions are also posted on Compensation Standards in case that is a more appropriate forum.

RE: I don't think any of them necessarily raises an insider trading issue, so long as the only parties to the deferral transactions are the company and executives who are aware of the event that's prompted the closing of the trading window. However, to the extent that you have registered the shares issuable under the plan on an S-8, you've got to consider whether the prospectus contains all material information about the company in the absence of any disclosure about the event in question.

See the discussion beginning on page 33 of our "Insider Trading Policies Handbook."
-John Jenkins, Editor, TheCorporateCounsel.net 12/3/2019

Q: Good afternoon, If a company is considering a proxy proposal that would affect the rights or privileges of shareholders, would the filing of the proxy statement with the proposal on EDGAR suffice for the "immediate publicity" requirement under NYSE Rules 204.01 and 401.01? Or would the Company need to provide notice upon Board approval of the proxy proposal (several months in advance of the proxy statement delivery to shareholders)? Many thanks for your help.

RE: I don't think the NYSE has published any interpretation specifically addressing the meaning of "immediate publicity" under those two rules. Since that's the case, and since the information might well be regarded as material, I think the best approach would be to adhere to the NYSE's immediate release policy in terms of dissemination of that information. Rule 202.06 of the Listed Company Manual permits information to be disseminated by any Reg FD compliant method, although it encourages the use of a press release.

Reg FD expressly says that an 8-K filing is adequate dissemination under the rule, and in Reg FD CDI 102.02, the Staff says that disclosure in other Exchange Act filings, including a proxy statement, may be compliant as well:

Question 102.02

Question: Could an Exchange Act filing other than a Form 8-K, such as a Form 10-Q or proxy statement, constitute public disclosure?

Answer: Yes. In general, including information in a document publicly filed on EDGAR with the SEC within the time frames that Regulation FD requires would satisfy the rule. In considering whether that disclosure is sufficient, however, companies must take care to bring the disclosure to the attention of readers of the document, must not bury the information, and must not make the disclosure in a piecemeal fashion throughout the filing. [Aug. 14, 2009]

So, it looks like you have some legal arguments in support of a decision to prominently include this information in one place in your proxy statement (of course, you'll have to provide the specific information about the meeting to the NYSE that it requires under Section 4 of the Listed Company Manual). If you opted for that approach, I think you'd want to take particular care to make sure that all of the information about the proposal is prominent and in one place.

But the bigger question is whether, from an investor relations standpoint, you've taken appropriate steps to get the word out. If your practice is to issue a press release when announcing material information, then simply relying on a preliminary proxy filing to do so here may raise questions about why you are departing from that practice here.
-John Jenkins, Editor, TheCorporateCounsel.net 12/2/2019

Q: Do we have any observations/statistics, either formal or informal, on how frequently companies are taking advantage of the rule change to eliminate discussion of the third preceding year in their 10-K (of course, including a statement where the prior disclosure can be found as required by the rule)? Trying to get a sense of how this plays out in practice and whether reputable companies are actually taking advantage of the rule (I have noticed Apple and a couple others doing so). Thanks in advance.

RE: Yeah, I took a look at a batch of 79 10-Ks filed by large accelerated filers for an article on the FAST Act rule changes in the July issue of The Corporate Counsel. At that point, 17 companies, or a little more than one-in-five, had opted to use the abbreviated MD&A format.
-John Jenkins, Editor, TheCorporateCounsel.net 12/2/2019

Q: What secure Board portal do you use for messaging and document management for your directors? Kindly advise on what you like about your selected platform, as well as any limitations it presents. Thanks!

RE: There are many vendors that offer board portals and we used BoardVantage for managing documents and distributing documents to our board. We did not use the portal for messaging directors although that functionality is available. We liked the document management capabilities of BoardVantage, easy to upload documents, easy to collate an entire set of meeting materials, edit documents, etc.

Periodically we ran into technical issues that our IT folks would need to address. There were random issues with needing to update documents after directors already received documents and may have annotated - for example, how do you retain annotations and replace the document.

Diligent is another board portal that is widely used and although we did not use it, Diligent appeared to offer more advanced functionality than BoardVantage. One thing to consider when selecting a board portal is whether any of your directors already have experience using a particular portal and what they liked or didn't like about it.
-Lynn Jokela, CCRCorp 12/2/2019

RE: Also check out the transcript from our recent webcast: "Secrets of the Corporate Secretary Department." Our panel touched on some things to consider when using board portals.

If you haven't already, also visit our "Board Portals" Practice Area - we have checklists, a list of service providers, and other resources on this topic.
-Liz Dunshee, Editor, TheCorporateCounsel.net 12/2/2019

Q: Who needs to sign the actual proxy card when the shares are held in an IRA account FBO Shareholder Name? Does it matter if the IRA is a "self-directed" IRA? The ProxyCard/Voting Instruction Form Handbook seems to indicate the IRA custodian needs to sign but I wanted to check if having a "self-directed" IRA changes anything. Thank you!

RE: This is the kind of back-office stuff that proxy solicitors and transfer agents know better than anyone, but I believe that the custodian of the IRA account is still technically the record owner & should sign the proxy card in that capacity, even if the account itself is self-directed. The beneficial owner of the account would instruct the custodian how to vote using a VIF.
-John Jenkins, Editor, TheCorporateCounsel.net 11/26/2019

Q: Is there any magic to interpreting the 12 calendar month requirement in General Instruction I.A.3(a) of Form S-3? If an issuer went effective on an IPO S-1 on December 15th of year one, could that issuer file the Form S-3 as soon as December 15th of year two?

RE: I think the way that the Staff interprets the 12 "calendar month" requirement, under your scenario the company would not be eligible to file the S-3 until January 1 of year three. See Securities Act Forms CDI 115.06:

'Question: General Instruction I.A.3 of Form S-3 requires that the registrant have filed all material required to be filed for a period of at least twelve calendar months immediately preceding the filing of the registration statement. The instruction also requires that the registrant have filed in a timely manner all reports required to be filed during the twelve calendar months and any portion of a month immediately preceding the filing of the registration statement. How is calendar month calculated?

Answer: For purposes of these eligibility requirements, a calendar month begins on the first day of the month and ends on the last day of that month . Hence, if a registrant were not timely on a Form 10-Q due on September 15, 2008, but was timely thereafter, it would first be eligible to use Form S-3 on October 1, 2009. [Feb. 27, 2009]

Here's an excerpt from a Latham blog on this topic:

"To be eligible to file a registration statement on Form S-3, an issuer must, among other things, have been subject to Exchange Act reporting requirements and filed all of the required reports for a period of at least 12 “calendar months” immediately before the Form S-3 filing (see General Instruction I.A.3 of Form S-3). The SEC Staff interprets the 12-month requirement to mean a period equal to 12 completed calendar months, running from the effective date (not the filing date) of your initial registration statement. See C&DI 115.14. Therefore, if an IPO registration statement went effective on July 15, 2010, the issuer would not be S-3 eligible until August 1, 2011, assuming all other requirements are met. (It also could not qualify to be a WKSI before August 1, 2010, because WKSI status depends in part on S-3 eligibility.)"
< -John Jenkins, Editor, TheCorporateCounsel.net 11/26/2019

Q: A consolidated subsidiary of a reporting company entered into a loan agreement with a City under which the City loaned to the subsidiary the proceeds of mortgage revenue bonds issued by the City to finance a project being constructed by the subsidiary. The subsidiary is obligated to repay the loan and the public company parent company guaranteed the indebtedness. The bonds trade. The public company wants to repurchase the bonds on the open market (apparently the bonds trade at a discount on the market). Do the tender offer rules apply? What are the securities laws consideration here? Any guidance would be appreciated.

RE: The term "tender offer" isn't defined in the securities laws - the 8 factor test in Wellman v. Dickinson and the "totality of the circumstances" test in Hanson Trust v. SCM are the customary reference points that are used to determine whether a particular transaction involves a tender offer.

Many open market debt repurchase programs are structured to avoid the impact of these tests. If a debt purchase involves a tender, then it would have to be conducted in compliance with the requirements of Section 14(e) of the Williams Act and the rules promulgated thereunder. Unlike a tender for registered equity subject to Regulation 14D, however, there would be no filing with the SEC and a number of other requirements applicable under those rules wouldn't apply.

See the attached MoFo, Mayer Brown & Pillsbury memos and the other materials in the "Tender Offers" Practice Area on DealLawyers.com for a discussion of tender offer issues relating to debt buybacks.
-John Jenkins, Editor, TheCorporateCounsel.net 11/5/2019

RE: I have a similar question

Doesn't Regulation 14E apply to tender offers for any securities (debt or equity) other than "exempt securities" as defined in Section 3(a)(12) of the Exchange Act? (Rule 14d-1(a) excludes from Regulation 14E "exempted securities".)
Accordingly, Regulation 14E would not apply to municipal revenue bonds because they municipal securities that are "exempt securities" under Section 3(12) of the Exchange Act. Does this sound right?
-11/25/2019

RE: I don't claim any public finance expertise, but if the bonds in question fell within the definition of municipal securities in Section 3(a)(12), then I think you're right about not having to comply with Regulation 14E. I believe that the general antifraud provisions of Section 14(e) would apply to the tender offer.
-John Jenkins, Editor, TheCorporateCounsel.net 11/25/2019

Q: I have reviewed the Stock Buybacks handbook and the script from the recent Best Practices webcast on the topic - great content, thanks. Where Company's insider trading policy doesn't expressly subject Company to the same trading window as other designated insiders, how common is it to see a different/slightly longer window for Company than for designated insiders? Obviously, subjecting Company to the same window as designated insiders is most conservative position, but I'm wondering how often the risk of having Company subject to a slightly longer window is taken as a practical matter (of course, with Company's comfort that there is no MNPI for the duration of the longer window)? Thanks in advance.

RE: I think most insider trading policies apply to directors, officers, employees, family members, etc. and not necessarily to transactions by the company itself. That's because the company always is in control of the disclosure decision, while trades by those individuals could take that decision out of their hands and compel earlier disclosure.

Many times, companies choose to be in the market during periods when a trading window might not be open under the terms of their insider trading policy, but they opt to disclose the material non-public information that would otherwise prohibit them from engaging in transactions in their own securities. For example, it's not unusual for a company to decide to engage in a public offering near or shortly following the end of a quarter. In those situations, it is common for companies to provide some form of "flash numbers" and recent developments disclosure that puts the market on an even footing with the company.

If for some reason a company does have a "trading window" that applies to its own transactions, I don't think that it makes sense to have it differ in length from the one that applies to persons covered by the insider trading policy. Presumably, the dates when the window closes have been established by reference to times during the quarterly cycle when non-public information about the current quarter has ripened sufficiently to be potentially material. That's the relevant inquiry regardless of whether or not the company or one of its insiders is in the market. As to when the window opens, that has to do with an assessment of when material information has been adequately disseminated to the market, and I think the answer's the same here too, regardless of whether the company or its insiders are trading.
-John Jenkins, Editor, TheCorporateCounsel.net 11/25/2019

Q: An issuer (“Issuer”) registered its common stock as a class under Section 12(b) some years ago in connection with listing the stock on a national securities exchange. Issuer has never registered the class under Section 12(g) and would not be subject to “springing” 12(g) registration. Nor has Issuer ever sold securities under an effective ‘33 Act registration statement, so there is no prospect of having a “springing” reporting obligation under Section 15(d). The stock exchange has filed a Form 25 to de-list the common stock and to de-register the common stock under Section 12(b). That Form 25 filing occurred 10 days ago, such that Issuer’s obligation to file Exchange Act reports is now suspended by virtue of Rule 12d2-2(d)(5). However, per Rule 12d2-2(d)(2), the actual de-registration of the common stock under Section 12(b) won’t take effect until 90 days after the Form 25 filing, i.e., the de-registration won’t occur until 80 days from now. My question is whether Reg FD continues to apply to Issuer during the remaining 80 days while it waits for class deregistration to take effect pursuant to Rule 12d2-2-2(d)(2). Rule 101(b) of Reg FD defines an “issuer” subject to Reg FD as “one that has a class of securities registered under Section 12 … or is required to file reports under Section 15(d) ….” On its face, this would seem to mean that Issuer does remain subject to Reg FD for the next 80 days, notwithstanding that the common has been de-listed and Issuer’s reporting obligations are suspended. Is that correct? I have not seen anything in the Reg FD FAQs or elsewhere addressing this question. Thank you.

RE: I haven't seen anything either, but my gut reaction is that the rule would continue to apply in these circumstances. I can't see the Staff signing off on an interpretation of FD that might allow for some "end of period" shenanigans involving a company that's exiting the public marketplace.
-John Jenkins, Editor, TheCorporateCounsel.net 11/25/2019

Q: This may have an easy answer, but we have been struggling with the following question: An issuer consummated a significant acquisition in late 2016. The target's audited financials have been filed on an 8-K already and the target's auditors consented to their incorporation by reference into the issuer's effective S-3s. Our reading of S-K 512(b) is that the issuer's upcoming FY 2016 10-K filing will be considered either a new registration statement or a post-effective amendment with respect to each of the issuer's existing S-3s, and thus we will need to assess age of financial statements requirements with respect to those S-3s at the time of the 10-K filing. Because the target's audited financials will not have been included in the issuer's YE end 2016 audited financials for nine months (see FRM 2040.2), we believe that the issuer will need to continue presenting target audited financials on new registration statements until the filing of their FY 2017 10-K. Our question is - if the 10-K filing is considered a new registration statement/post-effective amendment, will we accordingly need a new consent from the target's auditor at the time our issuer files its 10-K (because the target's previously-filed audited financials will technically be included in the "new registration statement")? The financial reporting manual has unfortunately not been instructive on this point. If we are overthinking this, please let us know. Thanks.

RE: Yes, if you're going to include the target's audited financial statements in a 10-K that's incorporated by reference into an existing registration statement, you will need to include a new consent from its auditor as an exhibit. See FRM 4810.4(a)
-John Jenkins, Editor, TheCorporateCounsel.net 9/28/2016

RE: I'm confused. In the above situation, for what period would the target financial statements be required? The same financial statements that were filed with the Form 8-K/A after completion of the acquisition? How is this accomplished? Do you re-file those with the Form 10-K and put the new consent of the target company's auditors on file as an exhibit to the Form 10-K so such acquired company financial statements can continue to be incorporated by reference into existing S-3s and S-8s? Or do you just continue to incorporate by reference the Form 8-K/A with respect to new S-3s and S-8s even though it was filed prior to the most recent Form 10-K filing?
-11/22/2019

RE: See the discussion on the need to update acquired company financials & pro formas beginning on page 4 of this Shearman publication.
-John Jenkins, Editor, TheCorporateCounsel.net 11/22/2019

Q: The registrant's telephone number has recently changed. Do I simply use a different telephone number on the cover of future SEC filings or do I need to do something more?

RE: Nope, you're good. Just use the new number on the next filing. -John Jenkins, Editor, TheCorporateCounsel.net 11/22/2019

Q: 34 Exchange Act Issuer (from an 8-A filing) has an S-8 on file that was filed years ago. They do not have any effective S-1s or S-3s. On January 1, 2020 they will have less than 300 record shareholders. Assuming they withdraw the S-8 prior to January 1, 2020 and file the Form 15, do they have to file the Form 10-K for year ending December 31, 2019?

RE: Unfortunately, the company will have to file the Form 10-K for the current year because by virtue of the filing of last year's 10-K - which served as a Section 10(a)(3) update of the Form S-8 registration statement - it will be deemed to have a registration statement that became effective during 2019. That means the company won't be eligible to take advantage of the statutory right to suspend their reporting under 15(d), even if it has less than 300 holders on 1/1/20.

If the company deregisters the unsold shares on the S-8 before the Form 10-K is due, and the company meets the other requirements of Rule 12h-3, it can file a Form 15 and that filing will suspend its Section 15(d) obligations going forward. As noted above, the company must still file a Form 10-K for 2019 because the Form S-8 was updated for that year.

You may want to refer to the discussion beginning on page 100 of our "Disclosure Deadlines Handbook," as well as our Deregistration Checklist.
-John Jenkins, Editor, TheCorporateCounsel.net 11/22/2019

Q: If a Registrant has an indirect wholly-owned subsidiary that is a 501(c)(3) corporation organized for charitable, scientific, and educational purposes (the "Foundation") and the Registrant contributes shares of the Registrant's common stock (treasury shares) to the Foundation-subsidiary, with the expectation that the Foundation would immediately thereafter sell those shares of the Registrant's common stock for cash, are there any registration or reporting requirements, or other securities law issues implicated? Officers of the Registrant compose the Foundation's Board of Directors; however, neither those Officers nor any relatives of Officers or Directors of the Registrant receive any compensation from the Foundation (so there would not be any benefit that would be similar to the scenario discussed in John White's 2006 speech). The Registrant's contributions would be over the Reg. S-K, Item 404 $120,000 threshold (in the area of $1,000,000 per annum - close to the annual disbursements of the Foundation and more than the Foundation's Net Assets). The Registrant's contributions would not be part of a director legacy under Item 402(k)(2)(vii)(G). The Foundation would not be anywhere close to being a 10% shareholder of the Registrant, a Mid-Cap., listed company. The main concern is that, despite the benefit to the charitable Foundation in the middle, the transactions would be viewed as a public offering of the Registrant's common stock without an applicable exemption from Securities Act registration. A secondary concern is whether the Foundation, as a subsidiary of the Registrant, is even permitted to own shares of its own parent-Registrant, albeit briefly. Would certainly appreciate your thoughts on this scenario. Thank you.

RE: I think it's pretty clear under this scenario that you'd need to register the shares. The fact that they're treasury shares doesn't matter. From a securities law perspective, you're using an affiliate as a conduit to make a public distribution of the shares. The SEC might well view the resale of those shares as a disguised primary offering because of the relationship between the issuer and the subsidiary, but they are at the very least a statutory underwriter, because they are acquiring the shares with a view to their further distribution.

The second issue is a corporate law question, and the answer depends on where your sub is organized. While I don't think the subsidiary would be permitted to vote the parent's shares, I am not aware of a prohibition on a subsidiary owning shares of a parent under Delaware law. Some jurisdictions may have a different answer - I know the U.K. Companies Act generally bars a subsidiary from owning parent shares.
-John Jenkins, Editor, TheCorporateCounsel.net 11/22/2019

Q: Has anyone dealt with a situation where (i) a company (Company A) would need to include previously-filed exhibits of an acquired (and previously public) subsidiary (Company B) in the exhibit list of Company A's Form 10-K and (ii) such exhibits were hyperlinked to the relevant Exchange Act filing of Company B. Is this permissible under Rule 12b-32, or would Company A need to re-file all previously-filed exhibits of Company B that would be material to Company A? The latter approach seems impractical, but I was hoping for some guidance to back up the position that no re-filing is necessary.

RE: The good news is that Rule 12b-32 was repealed as part of the Fast Act Modernization, so all you have to deal with now is Rule 12b-23(c), which specifically says that you can incorporate by reference from any document filed "by the same or any other person." You just have to hyperlink to whatever you incorporate by reference.
-John Jenkins, Editor, TheCorporateCounsel.net 11/21/2019

Q: Do most public companies have a Conflict of Interest Policy or an RPT Policy, or both? Trying to get a handle on what is required/customary/best practice in this space. Thanks in advance.

RE: I think practice varies. Some companies have stand-alone related party transactions policies, while others embed procedures for review and approval of transactions in other governance documents. Most companies also have some sort of broad-based conflicts of interest policy that's part of their ethics policy and likely covers matters beyond related party transactions. Check out the materials in our "Related Party Transactions" Practice Area. We have a number of sample policies, surveys on policies and procedures and other resources. You should also review the "Related Party Transactions Disclosure" Handbook, which contains a section discussing policies.
-John Jenkins, Editor, TheCorporateCounsel.net 11/21/2019

Q: We have been notified that the agent for service of process/US representative on a Form S-8 has changed its address. Does the company have to amend its Form S-8 to reflect the new address?

RE: To my knowledge, there's no obligation to do that for a change in the address of an agent identified on the cover page of a Form S-8, but foreign issuers that have identified an agent for service on Form FX have an obligation to update that form to reflect a change in address.

I don't think the fact that the agent also serves as your "U.S. Duly Authorized Representative" will independently trigger a notification requirement. That concept is, to my knowledge, entirely statutorily based. Section 6(a) of the Securities Act simply requires a USDAR to sign a registration statement filed by a foreign issuer, but aside from Rule 402, which requires the S-8 to be signed by the persons identified in Section 6(a), I'm not aware of any rules under that section that would require a notification of a change in address.
-John Jenkins, Editor, TheCorporateCounsel.net 11/21/2019

Q: With the FAST Act rules allowing companies to omit the oldest year-over-year comparison from the MD&A, is anyone analyzing whether that info is material, or will most companies just plan to omit it?

RE: Everyone I've talked to so far is just planning to omit it. Right now it seems largely administrative and hasn’t generated a lot of discussion other than reminders.
-Liz Dunshee, Editor, TheCorporateCounsel.net 5/6/2019

RE: The newly revised rule permits omission of "the earliest of the three years." Like a lot of companies (including, apparently, the person who posted the original question in this string), we have typically discussed our financial results in terms of year-over-year changes, not a discussion of each individual year in a vacuum. So, our MD&A has always discussed year 3 vs. year 2 and year 2 vs. year 1.

Just to double-check that I am in the mainstream of how I am interpreting the new rule, is this the same scenario that others are in and in which they are omitting the year 3 vs. year 2 discussion (i.e., 2017 vs. 2018 in the upcoming 10-K) even though it discusses not only year 3 but also year 2? I assume so, as that is the discussion that was already included in the previously-filed 10-K, so including it again would be redundant. The year 2 vs. year 1 discussion would be included and would include year 2 (i.e., 2018), though the overall information in the MD&A about year 2 would be reduced because the year 3 vs. year 2 discussion would be omitted. Interested to know if this is consistent with how others are interpreting the rule.
-11/21/2019

RE: That's how the companies I've seen opt for an abbreviated MD&A have approached it - and if they're wrong, well, so's Apple. I've attached the urls for Apple's 10-K and another one recently filed by Oshkosh that took the same approach.
-John Jenkins, Editor, TheCorporateCounsel.net 11/21/2019

Q: Client terminates agreement with investment adviser who has filed a Schedule 13G as the "passive investor" holding more than 5% of a company's equity securities. Client now has beneficial ownership of these securities and intends to sell them before the passage of 10 calendar days. Must client still file a Schedule 13G as the brief beneficial owner of the securities, even though the sale occurred before the filing due date ? If so, can the 13G also reflect the disposition of the shares or is a separate amendment required to be filed?

RE: I believe a 13G would technically be required under these circumstances for someone relying on the passive investor exemption in Rule 13d-1(c). That's because the SEC has interpreted the 5% beneficial ownership trigger pretty strictly in somewhat similar situations. For example, take a look at this CDI:

Question 101.06

Question: A customer instructed its broker to purchase up to 4.9 percent of the outstanding class of a Section 12 registered voting common stock of a company. The broker mistakenly purchased over five percent for the customer's account. The customer refused to pay for the excess shares and instructed the broker to sell all shares in excess of 4.9 percent. Is the customer required to file a Schedule 13D or 13G pursuant to Rule 13d-3(a)?

Answer: Yes. The customer acquired beneficial ownership of greater than five percent of the class pursuant to Rule 13d-3(a) and, therefore, is required to file a Schedule 13D or Schedule 13G under Sections 13(d) and 13(g) of the Exchange Act. The absence of an intent to acquire in excess of five percent is not a consideration with respect to the applicability of Sections 13(d) and 13(g). [Sep. 14, 2009]

I think this stands for the proposition that once you've crossed the threshold, you've incurred a reporting obligation, regardless of whether you intend to hold it. The answer would probably be different if you were an institutional investor, because 13d-1(b)(2) doesn't require them to file until 45 days after year-end, and then only if they held more than 5% at year-end.

I've never seen anybody combine an initial filing with an exit amendment, so you may want to reach out to the Staff for some guidance if you intend to take this approach. I don't see the harm in filing an initial report that discloses the share ownership at the date that the report was triggered and the fact that all of the shares were disposed of before the filing date, and checking the exit box. On the other hand, it might actually be easier to file an initial 13G and an amendment, simply because the form itself doesn't seem to be a good fit for a combined approach like this.
-John Jenkins, Editor, TheCorporateCounsel.net 11/20/2019

RE: Thank you, John, for the very prompt and helpful reply. Since the client advises a single family office, it is not required to be SEC registered and thus the "Institutional Investor" annual filing alternative is not available. It appears that the third-party EDGAR filing service the client uses will profit from the SEC's strict interpretative position.
-11/20/2019

Q: A company entered into a services agreement with a service provider, under which the consideration to the service provider is to be paid by issuing ordinary shares of the company. The number of shares to be issued will be calculated by dividing $X by the weighted average closing price of the shares of the company for the X trading days preceding the issue date on the Exchange. The issue date will be the Xth day following the effective date of the services agreement (i.e., September 2017). The Company has a "universal" registration statement on Form S-3 which was declared effective in June 2016. The registration statement makes no reference to selling shareholders or to resales thereunder. To effect the registration of the shares under the services agreement – should the company add the service provider as a selling shareholder pursuant to a post-effective amendment, file a prospectus supplement or otherwise. Thank you.

RE: If the issuer is a WKSI, it can add the new selling shareholder via a prospectus supplement under Rule 430B. If it isn't, then there are additional requirements that have to be satisfied before Rule 430B can be used in this way. One of those requirements is that the securities were outstanding at the time of the initial registration statement, so it doesn't look like you'll be eligible to rely on Rule 430B. In that case, a post-effective amendment would be necessary to add the selling shareholder.

In the context of Rule 430B, the staff has taken the position that the fact that the original universal shelf doesn't reference selling shareholders won't preclude an issuer from adding them in a prospectus supplement. I'm not aware of any guidance specifically addressing this issue for issuers who aren't able to rely on Rule 430B, but it seems to me that there's no reason that position shouldn't apply to post-effective amendments to a universal shelf as well.

If the original S-3 was purely a secondary shelf, then a new registration statement would be required, because Rule 413 would preclude you from adding new securities to the existing registration statement by means of a post-effective amendment. Under a universal shelf, you're merely allocating a portion of the securities that were originally registered to secondary sales.
-John Jenkins, Editor, TheCorporateCounsel.net 7/6/2017

RE: C&DI 116.09 clarifies that Form S-3 is available for transactions in which the consideration for the securities consists of services performed for the issuer by the recipient of the securities. So why wouldn’t you just file a prospectus supplement to offer the primary issuance of the shares to the service provider? Why all of the focus on registering the secondary sales by the service provider?
-11/19/2019

RE: I think the problem is that Form S-3 can only be used in primary offerings for cash, so a company couldn't use it to register the original issuance of shares that are payment for services. See General Instruction B. 1.
-John Jenkins, Editor, TheCorporateCounsel.net 11/20/2019

RE: Take a look at C&DI 116.09 (Securities Act Forms) that I referred to in my question above. Thanks.

Question 116.09

Question: What is the meaning of the "for cash" requirement in General Instruction I.B.1 of Form S-3?

Answer: The "for cash" reference was intended only to make clear that Form S-3 is not available for exchange offers or other business combination transactions. Accordingly, Form S-3 would be available, for example, for transactions in which the consideration for the securities consists of promissory notes or services performed for the issuer by the recipient of the securities. [Feb. 27, 2009]
-11/20/2019

RE: Good point. I completely overlooked that CDI. I guess one very plausible explanation is that people may be making the same mistake I did!
-John Jenkins, Editor, TheCorporateCounsel.net 11/20/2019

Q: In a proposed acquisition of a private company by a public company in an all-stock transaction, the acquirer is requiring, as a condition to signing the merger agreement, that two 5% shareholders of the target execute and deliver voting agreements to agree to be contractually obligated to vote in favor of the proposed deal. Neither shareholder is a director or officer of the target or has any representation on the board or in management (and they are not even aware of the proposed deal, naturally). The acquirer has indicated that it must receive the executed voting agreements concurrently with the execution of the merger agreement. However, this seems to present a potential issue regarding communications to parties that are not a party to the transaction under Release 33-7760. Additionally, that release reiterates the general position that a securityholder cannot be asked to make an investment decision prior to receiving a prospectus containing all material information related to the transaction. While shareholders may trade in the market based on an announcement of a deal prior to receiving a prospectus, they are not obligated to make an investment decision until the shareholder's meeting, so that seems not to be an analogous situation. The issuer's counsel suggests that having the shareholders execute an NDA and then disclosing the terms to them is sufficient, but I'd be curious to hear any other input on this topic.

RE: Voting agreements can present a problem because they are generally viewed as involving an investment decision. However, the Staff does not typically object to such agreements if they are limited to the seller's directors, officers, affiliates and 5% holders. See Securities Act Sections CDI 239.13:

"239.13 An acquiring company may seek a commitment from management and principal security holders of a target company to vote in favor of a business combination transaction, frequently referred to as a “lock-up agreement.” The execution of a lock-up agreement may constitute an investment decision under the Securities Act. If so, the offer and sale of the acquirer's securities would be made to persons who entered into those agreements before the business combination is presented to non-affiliated security holders for their vote.

Recognizing the legitimate business reasons for seeking lock-up agreements in the course of business combination transactions, the staff has not objected to the registration of offers and sales where lock-up agreements have been signed in the following circumstances:

- the lock-up agreements involve only executive officers, directors, affiliates, founders and their family members, and holders of 5% or more of the voting equity securities of the company being acquired;

- the persons signing the lock-up agreements collectively own less than 100% of the voting equity of the target; and

- votes will be solicited from shareholders of the company being acquired who have not signed the agreements and would be ineligible to purchase in a private offering.

Where, however, the persons entering into the lock-up agreements also deliver written consents approving the business combination transaction, the staff has objected to the subsequent registration of the exchange on Form S-4 for any of the shareholders because offers and sales have already been made and completed privately, and once begun privately, the transaction must end privately. [Nov. 26, 2008]"
-John Jenkins, Editor, TheCorporateCounsel.net 11/19/2019

RE: Thank you for the response..I did see the referenced CDI after posting the question. I'd be interested to know if there is any difference between a 5% shareholder who might be involved in the deal and has an understanding of the terms versus someone how is merely approached at the 11th hour and asked to sign a binding voting agreement - from a practical standpoint, it seems to me that this is almost identical to delivering a consent to the deal if the acquirer may enforce the contract against the shareholder. At a minimum, it seems like there may be some degree of risk that the shareholder could claim the agreement was procured without full disclosure of all material information in the absence of their involvement in the deal or a prospectus, but perhaps I'm overthinking this and the Staff guidance applies the same in all situations.
-11/19/2019

RE: I think the guidance likely does apply to all 5% shareholders - it would have been very easy in the CDI for the Staff to draw a distinction here between affiliates and outside holders who are strangers to the deal, but they didn't. However, I also think it's reasonable to push back on efforts to condition a deal on a voting commitment from outside holders who have no ties to the company. That may well be both a disruptive and an unproductive exercise, particularly if you're dealing with institutional investors.

Obviously, every deal is different, but for what it's worth, I can't recall a public deal that I've been involved in where we've gone to unaffiliated holders simply because they were over the 5% threshold.
-John Jenkins, Editor, TheCorporateCounsel.net 11/19/2019

Q: An Exchange Act reporting company filed a 1-A offering statement under Regulation A and it was qualified by the SEC. The placement agent for the offering has committed funds in escrow in excess of the minimum amount required to close. The company just completed a significant acquisition (e.g., 12% of total assets). Here are my questions: [1] Can we file an offering circular supplement (instead of a post-qualification amendment) that includes a copy of the 8-K disclosing the closing of the significant acquisition, which 8-K indicates that financial statements will be provided for the target within 75 days of the closing at which point (within 75 days or sooner when the financials are ready) we would file a post-qualification amendment (not an offering circular supplement) to update the financial statements included in the 1-A? Or, do we have to file a post-qualification amendment now that discloses the closing of the acquisition and includes the requisite financial statements. [2] If we must file a post-qualification amendment now, then do we have to stop all of our selling efforts (and not take in any money already in escrow) while we wait for the post-qualification amendment to be qualified? In other words, does the closing of the significant acquisition require us to stop all selling efforts and file a post-qualification amendment? Thank you in advance for any guidance you can provide on this issue.

RE: If the acquisition results in a "fundamental change" to your offering statement, Rule 252(f)(2) requires you to file a post-effective amendment. For a discussion of the fundamental change issue, see the May-June 2018 issue of The Corporate Counsel.

Deciding whether a particular acquisition transaction involves a fundamental change is a judgment call that I'm obviously not in a position to make. But I don't think the fact that an acquisition is "significant" under S-X automatically means its a fundamental change - and I think a conclusion that a significant acquisition doesn't automatically involve a fundamental change is helped by the the SEC's position about when acquired company financials have to be included in a registration statement. Typically, Rule 3-05 of S-X doesn't require them to be included until the due date for the 8-K, unless they're significant at the 50% level, which I think provides a pretty strong argument that the size of the deal alone won't necessarily trip the fundamental change wire until you've crossed that threshold.

I'm not sure whether the SEC would graft that approach on to a Reg A offering, but I do know that when it comes to what constitutes a fundamental change that will trigger a current reporting obligation on Form 1-U for Regulation A issuers, the SEC has taken a position that's arguably consistent with this approach. Item 1 of Form 1-U requires Regulation A reporting companies to file a report in the event they enter into or terminate a material agreement that would result in a fundamental change in the nature of its business or plan of operations. The instructions to the form set forth a non-exclusive list of agreements that will be regarded as involving a fundamental change - and it specifically mentions an acquisition in which the purchase price exceeds 50% of the company’s total consolidated assets as of the end of its most recent fiscal year or a merger, consolidation, acquisition or similar transaction that requires approval by the company’s securityholders.

If you need to file a post-qualification amendment, I don't think you can sell until it's qualified. Although it doesn't directly address Reg A, Securities Act Sections CDI 139.28 says that a company may sometimes continue to offer securities while a post-effective amendment to a registration statement is pending, but may not make sales:

Question: Must offers and sales be suspended during the waiting period of a post-effective amendment to an effective registration statement?

Answer: Offers and sales must be suspended if the post-effective amendment is filed for the purpose of a Section 10(a)(3) amendment and the prospectus is already stale for Section 10(a)(3) purposes. In addition, sales, but not offers, must be suspended during the pendency of a post-effective amendment filed for the purpose of complying with the Regulation S-K Item 512(a)(1) undertakings, such as a fundamental change or a material change to the plan of distribution. Offers may continue during this time; however, if the prospectus is used to make offers, it should not be materially deficient. A post-effective amendment filed to add selling stockholders does not require a suspension of offers and sales by selling stockholders already named in the registration statement. [Aug. 14, 2009]

I don't see any reason why this wouldn't apply to Reg A offering statements.
-John Jenkins, Editor, TheCorporateCounsel.net 11/18/2019

RE: John, thank you very much. This is very helpful! I really appreciate it.
-11/18/2019

Q: Just curious if there is a consensus as to the appropriate amount of time to provide Board/Committee meeting materials in advance of a regularly scheduled meeting? And under what circumstances would it be viewed to be appropriate to update previously distributed materials? Materials are delivered electronically through an online platform. Certainly, this is highly board/situation specific but curious if there is a market practice for large (S&P 500-ish) issuers.

RE: The last time I saw anything on this was in the 2016 Deloitte Board Practices Report. According to that survey, 38% of respondents distributed their board materials a week in advance of the meeting and 30% distributed them 5 days in advance. Nearly 80% of large & mid-cap companies distributed materials a week in advance. You should also review the resources in our "Board Materials" practice area.

In terms of updating, I think the best practice would be to distribute updated information when there have been material changes to the information previously provided to the board, particularly concerning any matters that it will be called upon to address at the meeting. Obviously, some situations may be quite fluid, and it may not be practical to provide the latest information until the time of the board meeting. But to the extent potentially important new information is available, it should be distributed to the directors in advance.

Judgment is required as to both the timing and content of updated materials - you don't want to ambush directors with voluminous new information right before the meeting, but you also don't want to flood the portal with constant updates that will be too much or too disjointed to wade through. In many cases, it may be appropriate to provide a comprehensive update a couple of days in advance of the meeting, and to advise the board that additional developments will be addressed at the meeting itself.
-John Jenkins, Editor, TheCorporateCounsel.net 11/18/2019

Q: How is the timing determined for a S-1 filer that cannot rely upon incorporating subsequent exchange act documents by reference, and must file a prospectus supplement under Rule 424(b)(3) in connection with period filings made subsequent to the effectiveness of the S-1? is same day as public filing best practice? there is no underwriter involved- what is the application of "first use" in such case?

RE: I think best practice for an S-1 where incorporation by reference isn't available would clearly be to file the prospectus supplement on the same day that you otherwise disclose the new material information, whether that's in a 10-Q, an 8-K, or a press release. If there's a gap between the disclosure and the filing of the prospectus supplement, then there's the possibility that sales could be made during a period in which the prospectus does not include all material information. For that reason, in terms of dating the supplement, I think best practice here would be to date it the same date as the public disclosure is made.
-John Jenkins, Editor, TheCorporateCounsel.net 11/18/2019

Q: We understand that the SEC's position is that under non-qualified deferred compensation plans, the debt owing to plan participants IS viewed as a debt security that either (1) must be registered (aka “deferred compensation obligations”) or (2) must be exempt from registration (such as under Section 4(2)). We also understand that non-qualified deferred compensation plan for a large number of employees would generally not constitute a private offering due to the number of employees involved and the lack of sophistication/access to company information of some of the employees in the offeree group. On the other hand, a director-only deferred compensation plan would be a good candidate for a 4(2) exemption, given the very small number of offerees and their sophistication, relationship with the issuer and access to company information. So, we know that a lot of companies get comfortable that their director-only deferred compensation plans are exempt from registration under 4(2). However, what if the current participants in a "Key Employees" Deferred Compensation Plan was approximately 75 (with the number of offerees an even larger group). We are assuming that this group is sophisticated and has access to company information. Do you think a participant group of 75 is too large to rely on the 4(2) exemption for the deferred comp obligations? Thank you in advance.

RE: Personally, I wouldn't be comfortable relying on the 4(a)(2) exemption under these circumstances. The case law & the Supreme Court's Ralston Purina decision is very demanding, and looks not just to purchasers, but to all offerees as well. Any single person that, in the view of a court, needs the protection of the Securities Act can mess up the exemption for all parties involved. It seems to me that it would be exceedingly difficult to police compliance with the exemption with a group of 75 investors & an even larger group of offerees.
-John Jenkins, Editor, TheCorporateCounsel.net 11/18/2019

Q: My company is a 12/31 year end company; therefore, the proxy statement must be filed by April 30. The company would like to hold its annual meeting in July and set its record date in May (within the timeline under DE law and the bylaws). At the time of filing the proxy, the company has no idea of knowing how many shares will be outstanding on the record date given that the record date is in the future. Item 6 of Schedule 14A requires that, for each class of securities entitled to vote at the meeting, the company state the number of outstanding shares per voting class. Again, given that the record date is in the future, can the company give the number of outstanding shares at the time of filing the proxy statement? Thank you in advance.

RE: I think you could file the definitive proxy statement with the current information about the number of shares outstanding. If there are changes when you get to your record date, you would file amended definitive materials to reflect the revised information. Even if you were required to file preliminary proxy materials, a revision like this seems unlikely to result in a fundamental change that would recommence the 10 day waiting period.
-John Jenkins, Editor, TheCorporateCounsel.net 3/12/2019

RE: So you would be mailing to stockholders in May (i.e., post-record date) a proxy statement dated prior to that and with information not current as of the approximate mailing date? So would the disclosures say "stockholders as of the record date that will be set by the board are entitled to notice of and to vote at the meeting"? Seems funky. I'd recommend filing supplemental materials with the record date information.
-11/14/2019

RE: No. I think the right approach to mailing would be the one you suggest. I was trying to address whether they could file a definitive proxy statement in advance of that record date so they could incorporate Part III info into the 10-K.
-John Jenkins, Editor, TheCorporateCounsel.net 11/14/2019

Q: Client has a share buy back program and executes it through 10b51 plan entered into every quarter immediately post earnings. I'm struggling with what if any officers would be considered "affiliated purchasers" in these circumstances when they do not control the day to day purchases. Do you think the officer that sets the parameters of the 10b51 plan and that has the authority to terminate it would still be considered an affiliated purchaser for purposes of 10b-18? Affiliated purchaser means: i. a person acting, directly or indirectly, in concert with the issuer for the purpose of acquiring the issuer’s securities; or ii. an affiliate who, directly or indirectly, controls the issuer’s purchases of such securities, whose purchases are controlled by the issuer, or whose purchases are under common control with those of the issuer; provided, however, that “affiliated purchaser’ shall not include a broker, dealer, or other person solely by reason of such broker, dealer, or other person effecting Rule 10b-18 purchases on behalf of the issuer or for its account, and shall not include an officer or director of the issuer solely by reason of that officer or director’s participation in the decision to authorize Rule 10b-18 purchases by or on behalf of the issuer.

RE: As the rule provides, an officer's participation in the decision to authorize Rule 10b-18 purchases doesn't make that individual an affiliated purchaser solely for that reason, but that's a narrow exception. See the discussion on pages 73-74 of our "Stock Buybacks Handbook." I would be very concerned about any transactions by such an affiliate during a period when purchases are being made under the 10b5-1 plan. As a practical matter, I think it's a very short trip for an officer who was involved in the plan's establishment and therefore can plausibly be alleged to have a detailed knowledge of how the plan works to be viewed as an "affiliated purchaser."
-John Jenkins, Editor, TheCorporateCounsel.net 11/13/2019

Q: Issuer is considering a continuous offering under Reg A+, Tier II, with trading on OTC Markets. To provide liquidity to investors, especially those who live in states with blue sky laws which make secondary trading on OTC Markets difficult, issuer would like to offer the option to redeem investors' shares, perhaps at a price based upon the net asset value of issuer's real estate portfolio. Is that possible to do and comply with Regulation M? In particular, Rule 102(b)(6) of Reg M exempts "Unsolicited purchases that are not effected from or through a broker or dealer, on a securities exchange, or through an inter-dealer quotation system or electronic communications network." What does "unsolicited" mean in this context? Would a publicly disclosure of such a redemption program be considered "unsolicited" if the issuer is not actively seeking redemptions - just making them available to investors who reach out to the issuer? Any other possible ways to provide liquidity during a Reg A+ distribution while complying with Reg M?

RE: Reg M's unsolicited transactions exemption is viewed pretty narrowly, and while I'm not aware of any Staff guidance on your specific scenario, I would be very hesitant to endorse reliance on the exemption for a company that plans to publicly disclose that it will serve as a source of liquidity to its shareholders.

Continuing distributions just aren't a good fit with Reg M's prohibitions. For example, it frequently creates a number of challenges for companies with ATM programs that involve "distributions." If you want to provide liquidity, a better approach may be to suspend the offering periodically in order to create windows during which the company could repurchase shares from interested investors without violating Reg M.
-John Jenkins, Editor, TheCorporateCounsel.net 11/13/2019

RE: Thank you for the prompt and helpful reply.
-11/13/2019

Q: What is the typical notice between announcement of rights offering and record date? I think the minimum notice is 10 days. Is the prospectus supplement usually filed before or after the record date?

RE: There are a whole bunch of NYSE & Nasdaq rules relating to notice of a rights offering, some of which can influence the time between the announcement of the offering and the record date. The first of these are NYSE Rule 703.03(B) and Nasdaq Rules 4310(c)(16) and 4320(e)(14), which require companies to publicly release all known details of a proposed rights offering immediately after the board has authorized it. This can be quite some time in advance of the record date (sometimes months).

NYSE Rule 703.03(B) and Nasdaq Rules 4310(c)(25) and 4320(e)(21) require at least 10 days advance notice of the record date, and NYSE Rule 703.03(C) requires companies to provide at least 10 days written notice of the rights offering to their shareholders as well. That notice has to be pretty detailed, and lay out the proposed terms of the offering. I haven't canvassed the market, but I don't think the practice is to provide notice very far in advance of the required date, and most of the press releases that I've seen announcing definitively that the company is moving forward have been 10 days to 2 weeks before the record date.

If the company doesn't have an existing shelf on file, then the NYSE also recommends that the effective date for the registration statement be set for at least 6 business days in advance of the record date in order to prevent confusion in the event of a delay. The NYSE will not allow the record date to be set in advance of the anticipated effective date of the registration statement.

The bottom line is that sorting through the various notice & timing requirements can influence the time between an initial announcement and commencement, as well as between the final announcement of the definitive terms of the deal and commencement. In practice, I think that most companies want to launch relatively soon after the record date, but the launch date may be several days or more after the record date, and the prospectus supplement has to be on file when they commence the offering. That's usually shortly after the record date. But, practice sometimes varies here as well. For example, Hertz Global recently did a rights offering for which it filed a prospectus supplement more than 2 weeks in advance of the record date.
-John Jenkins, Editor, TheCorporateCounsel.net 11/13/2019

Q: If the title of the person signing the minutes changes between the date of the meeting for which the minutes were taken and the date the board approves the minutes, should the person executing the minutes use their old title (as of the date of the meeting), their new title (as of the date of the approval), or something else entirely? Note, the only date on our minutes is the date of the meeting (and not the date of the approval). The approval of the minutes is reflected in the minutes of a subsequent meeting, however. Further note, we typically would include the person's full HR title and Secretary Pro tem. Here, I'm thinking we may just include Secretary Pro tem, but curious as to how others would handle.

RE: I guess my reaction would be that the individual should sign the minutes in the capacity that he or she recorded them at the meeting, which if the person was not the corporate secretary at the time probably means that they were serving as secretary pro tem. If you wanted to add their current title to that designation because that's your custom, I don't think that presents a problem.
-John Jenkins, Editor, TheCorporateCounsel.net 11/8/2019

Q: Issuer acquired Target which qualified as a significant acquisition requiring an Item 2.01 8-K. Issuer filed 8-K/A containing Target's historical financials and pro forma financials. Target's auditor consented to the incorporation by reference of the 8-K/A into its existing shelf registration statement on Form S-3. Issuer now is doing a shelf takedown pursuant to which the prospectus supplement will incorporate by reference the 8-K/A. The Target's auditor will be named as an "Expert" in the pro supp. A question has arisen as to whether the Target's auditor needs to issue a consent containing specific language consenting to being named as an "Expert" in the registration statement. The consent filed under the 8-K/A does not contain the typical language to that effect. Rule 436(a) seems to require that language, but Rule 436(b) does not. It not clear to me which subsection this situation falls under. Any insight would be appreciated.

RE: My recollection is that if the financial statements of the target (and related pro formas) set forth in the acquiror's Form 8-K are material (and presumably they are), and they have not yet been "baked into" the acquiror's financial statements, such that they are included in the acquiror's financial statements, and the acquiror's auditors are on the job reviewing them, then the consent of the target's auditors would be required in the shelf registration statement prior to takedown. Of course, that's the somewhat technical answer that I recall from memory. Might be worth checking Corp Fin's Financial Reporting Manual. My guess, however, is that if the shelf registration statement has been declared effective already, most issuers (acquirors) would simply proceed with the takedown, and not bother to go back and get the target's accountants to consent (again), without thinking about the issue.
-Broc Romanek, Editor, TheCorporateCounsel.net 6/20/2012

RE: I just wanted to follow up to see if there is any further input on this point.

Issuer is doing a shelf take down by filing a prospectus supplement. The prospectus supplement incorporates by reference a Form 8-K/A with audited Target financials.

Do we need a consent from Target auditor to be listed under the "expert" paragraph in the prospectus supplement?

Similarly, do we need a consent from the issuer's auditor to be listed under the "expert" paragraph in the prospectus supplement? The issuer's auditor provided a consent to be so listed at the time the original registration statement (and base prospectus) was filed. Does that consent cover identifying the issuer's auditor in the prospectus supplement?
Any help is appreciated.
-11/7/2019

RE: If the target's financials are required to be incorporated by reference in the filing, you'll need a consent from target's accountant. Section 7 of the Securities Act requires that there be filed with the registration statement the written consent of “any person whose profession gives authority to a statement made by him, [who] is named as having prepared or certified any part of the registration statement," and Rule 436 requires it to be filed as an exhibit. You can provide the target auditor's consent in an 8-K filing that is incorporated by reference into the S-3.

You have already filed the consent of the issuer's accountant as an exhibit when you filed the registration statement. If there have been no changes to the financial statements covered by the consent, you won't need to update it. Typically, a new consent would be signed at the time of your 10-K filing that serves as a Section 10(a)(3) update of the registration statement, and filed as an exhibit to that document.
-John Jenkins, Editor, TheCorporateCounsel.net 11/7/2019

Q: An issuer is planning an IPO that would fall within the definition of "new issue" in Finra Rule 5130. An investment fund wishes to gain exposure to the IPO, not by accepting an allocation of shares from a Finra member broker-dealer, but rather by entering into an equity TRS with a Finra member broker-dealer. Would the fund getting such swap exposure to the IPO implicate Rule 5130? That is, would the broker-dealer's provision of swap exposure to the fund constitute allocation of a new issue to the fund? It does not seem to me that it should--at least by a plain reading of the "new issue" definition in Rule 5130--but I've not been able to locate any specific guidance on this question. Thank you for any thoughts.

RE: I'm not aware of any guidance from FINRA on this either, and I've not dealt with it myself. On the face of it, it wouldn't seem to apply to a swap arrangement that didn't involve the sale of the new issue into an account in which a restricted person had a beneficial interest. But the rule is worded in such an odd manner that it is difficult to reach a definitive conclusion. For example, while a "sale" to an account in which a restricted person has an interest would seem to be required, the exemptive provisions of Rule 5130(c) extend to transactions to restricted persons "directly or through accounts in which such persons have a beneficial interest."

The use of that language in carving out general exemptions seems to imply that a "sale" includes both direct and indirect transactions involving a new issue as well. The term beneficial interest is defined to include "any economic interest, such as the right to share in gains or losses," & the rule doesn't define the word "account," and I'm a little concerned that an equity swap arrangement might itself be viewed as an account in which a restricted person has a beneficial interest, and thus subject to Rule 5130.
-John Jenkins, Editor, TheCorporateCounsel.net 11/6/2019

Q: Do you need to submit a cover letter to the SEC's FOIA office if you are requesting confidential treatment over a 3-13 waiver request sent to OCA? I think so but wasn't sure if this was necessary.

RE: As far as I know, a cover letter to the FOIA office is required for any Rule 83 confidential treatment request. See the discussion of Rule 83 procedures beginning on page 56 of our "Confidential Treatment Requests Handbook."
-John Jenkins, Editor, TheCorporateCounsel.net 11/6/2019

Q: For companies with existing Board authorized repurchase plans providing for repurchases through private negotiations, what is the usual process/documentation for purchasing a block of stock from an existing 5% holder - a short purchase agreement between the parties, the company including the repurchase disclosure in the 10-K/10-Q (pursuant to S-K 703), and the holder amending its Schedule 13G? Thanks in advance for any additional items to flag/thoughts.

RE: When buying back a large number of shares in a privately negotiated transaction, there's often some kind of purchase agreement prepared. In addition to disclosure under Item 703, these agreements up being disclosed in Item 1.01 or 8.01 8-K filings, particularly if they involve an affiliate.
-John Jenkins, Editor, TheCorporateCounsel.net 11/6/2019

Q: Issuer completed a merger transaction in which the acquirer filed an S-4 registration statement and received stockholder approval. Issuer subsequently determines that there may have been errors in certain pro forma financial statements included in the S-4. (It's unclear at this time whether these would be material errors.) Because the transaction has already been completed and the S-4 does not survive, are there any steps the issuer should now take to correct the S-4 errors? Thanks in advance.

RE: Fortunately, I've not had to deal with a situation like this, but here's my 2 cents: If the errors are not material, I wouldn't do anything except address them, to the extent relevant, in future filings. If they're material, you've got a duty to correct the inaccurate information. Since the deal is closed, I'm not sure a post-effective amendment to your S-4 would accomplish anything. However, any Form 8-K filings containing the inaccurate information would need to be amended. I also think you would need to take steps to more generally alert investors and correct the record in a Reg FD compliant way. If you wanted to mitigate liability to the seller's shareholders, I think the only solution under the circumstances would be a registered rescission offer.
-John Jenkins, Editor, TheCorporateCounsel.net 11/5/2019

Q: When do exhibits, such as an unqualified opinion and an underwriting agreement, need to be filed when you're doing a shelf takedown, assuming you intend to file them on an 8-K that is incorporated by reference into the shelf? Practice seems to be to file them prior to closing, as opposed to pricing, but is there any guidance anywhere or support for the practice? thanks

RE: When does the underwriting agreement need to be filed as an exhibit to a Form 8-K for a shelf takedown? If the underwriting agreement doesn't need to be reported under Item 1.01, can it be included as an exhibit after 4 business days on the day of closing, along with the opinions?
-11/5/2019

RE: Yes, that's the customary practice. I've worked with issuer's counsel who want to have the underwriting agreement filed on the date that the offering is priced, but I think it's also common to file the agreement at closing even if the issuer decides that the underwriting agreement is a material agreement under Item 1.01.
-John Jenkins, Editor, TheCorporateCounsel.net 11/5/2019

Q: We are a relatively new public company and today received our first letter and resume from a gentleman expressing a desire to serve on our board. The letter merely summarizes his background and states he would welcome the opportunity to discuss the potential of serving on our board. We do not have any vacancies on our board and just had our annual meeting last week, at which we re-elected all of our current directors. What are best practices in this situation? Do we just document that the chair of the nominating committee received and reviewed the communication? How, if at all, does the shareholder nominee process fit into this analysis? To me this is not a shareholder nominee situation since it met none of the requirements outline in our bylaws. But do we need to respond to his letter to that affect?

RE: I think you should document receipt of the letter and resume by sending a letter to the gentleman stating that the communication has been provided to the chair of the nominating committee, but then also specifically referring the gentleman to your company's Reg S-K Item 407(c) nominating committee process for identifying and evaluating nominees for director, which often includes, but is not limited to (and shouldn't necessarily be limited to) shareholders' nominees.
-Randi Morrison, Associate Editor, TheCorporateCounsel.net 5/11/2015

RE: I have a follow up question to this (trying to understand how other public companies handle). We receive several letters/e-mails with respect to unsolicited director candidates (typically cover letter with resume). The letters, which appear to be a form template for the most part, are typically addressed to our CEO/Chairman and never mention anything about being a shareholder. Historically, we have provided a response acknowledging receipt of the letter and noting that it will be provided to our Nominating and Governance Committee for consideration during their annual nominating process (with no promises that we need to follow up). Is it customary to respond to EVERY unsolicited director candidate (not being sent by a shareholder)? None of the letters are being sent in accordance with our posted process for either communicating with our Board or for nominating candidates to the Board.
-11/5/2019

Q: A consolidated subsidiary of a reporting company entered into a loan agreement with a City under which the City loaned to the subsidiary the proceeds of mortgage revenue bonds issued by the City to finance a project being constructed by the subsidiary. The subsidiary is obligated to repay the loan and the public company parent company guaranteed the indebtedness. The bonds trade. The public company wants to repurchase the bonds on the open market (apparently the bonds trade at a discount on the market). Do the tender offer rules apply? What are the securities laws consideration here? Any guidance would be appreciated.

RE: The term "tender offer" isn't defined in the securities laws - the 8 factor test in Wellman v. Dickinson and the "totality of the circumstances" test in Hanson Trust v. SCM are the customary reference points that are used to determine whether a particular transaction involves a tender offer.

Many open market debt repurchase programs are structured to avoid the impact of these tests. If a debt purchase involves a tender, then it would have to be conducted in compliance with the requirements of Section 14(e) of the Williams Act and the rules promulgated thereunder. Unlike a tender for registered equity subject to Regulation 14D, however, there would be no filing with the SEC and a number of other requirements applicable under those rules wouldn't apply.

See the attached MoFo, Mayer Brown & Pillsbury memos and the other materials in the "Tender Offers" Practice Area on DealLawyers.com for a discussion of tender offer issues relating to debt buybacks.
-John Jenkins, Editor, TheCorporateCounsel.net 11/5/2019

Q: Client's S-1 went effective in early 2016. Several of Client's pre-IPO non-affiliate shareholders continue to hold certificates representing a significant number of Client's shares and containing a standard 33 Act legend (because the shares were issued through pre-IPO private placements). All of these shares are eligible to have the legends removed pursuant to Rule 144, and Client's transfer agent has a "blanket" Rule 144 opinion on file for this purpose. There are no other transfer restrictions relating to these shares. Question: Does Client include these shares when calculating its public float under Rule 12b-2? A straight reading of 12b-2 would seem to indicate that the answer is yes, include these shares. However, we cannot find anything definitive from the SEC on this point. Thank you in advance.

RE: Yes the client should include those shares.
-12/28/2016

RE: On a somewhat related matter, as a sanity check, any reason why shares issued in connection with an acquisition that are held in escrow and subject to restrictions on transfer could not be counted for purposes of public float? The holders would be able to vote the shares, they just wouldn't be able to transfer until the escrow period terminates (12-24 months). Thanks.
-11/3/2019

RE: I don't think the existence of restrictions on transfer would result in the exclusion of the shares from the public float calculation. Under both Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act, public float is determined by "multiplying the aggregate worldwide number of shares of its voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity." It's pretty clear from this approach that only shares held by affiliates would be excluded.

Now, there is one potential fly in the ointment. In some situations, escrowed shares are not deemed to be "outstanding" for purposes ofInstruction I.B.3 of Form S-3. Here's the relevant CDI:

216.09 Pursuant to a private placement, securities were to be issued into an escrow account upon partial payment equal to the securities’ par value. The issuer contemplated that the securities would be released from escrow upon payment of the remainder of the market price, simultaneously with effectiveness of a Form S-3 for resale of the securities. Although the securities would be considered outstanding under Delaware law at the time of issuance into escrow, they would not be “outstanding” for purposes of General Instruction I.B.3. In addition, the use of the escrow arrangement and the de minimis down payment suggests that the offering was in substance a “primary offering” for purposes of Form S-3 eligibility. [Feb. 27, 2009]

Even assuming that the Staff would take this position with respect to shares held in a customary merger escrow, the eligibility to file a resale shelf for escrowed shares seems to me to be a different issue than whether to count those shares in the public float. Given the language used in Rule 405, I still think that the answer should be that the escrowed shares are part of the public float, notwithstanding the potential contingency, assuming they are regarded as outstanding under applicable state corporate law.
-John Jenkins, Editor, TheCorporateCounsel.net 11/4/2019

RE: Thanks so much, John. Greatly appreciate the prompt reply. That CDI appears to address a unique situation where full payment for the escrowed shares has not been made by the time the resale S-3 is filed. I thought it was common practice to file a resale S-3 for merger consideration shares held in a customary escrow for indemnification purposes.
-11/4/2019

RE: Yes, I do think that is a common practice and don't think the CDI should apply beyond that situation addressed in it. But it is out there and conceivably relevant to your issue, so I just wanted to flag it in responding to your question.
-John Jenkins, Editor, TheCorporateCounsel.net 11/4/2019

RE: I appreciate you flagging it and providing a complete answer. Thanks again.
-11/4/2019

Q: Public reporting company is externally managed pursuant to a management agreement that has been filed. The management agreement provides for a base management fee and an incentive management fee. A portion of the incentive management fee is payable in the form of restricted shares of common stock. The payment of shares of restricted stock in any quarter is disclosed in the 10-Q/10-K, but does it also qualify as a "Unregistered Sale of Equity Securities"? Essentially is the issuance required to be disclosed as a 3.02 8-K or in Item 2 of Part II of 10-Q? Peer companies do not seem to make this disclosure but I can find no exception to rely on.

RE: I think the issuance of stock in payment for services rendered is a "sale" that, if unregistered, would trigger an Item 3.02 8-K filing. One reasons you may not find a lot of these for periodic payments is that Item 3.02 would require the arrangement to be disclosed once a binding contract was entered into. But that would be the only Item 3.02 filng required if the maximum amount of shares issuable under the contract were disclosed in the initial 8-K.
-John Jenkins, Editor, TheCorporateCounsel.net 11/4/2019

Q: Has anyone come across a situation similar to this? We have a fairly immediate question and have searched unsuccessfully for precedent. - A Form S-4 is declared effective immediately prior to the staleness date for Q2 numbers - The registrant furnishes its earnings release after close of business on the staleness date and files its Form 10-Q within a couple of days - The registrant files a Form 8-K that includes interim pro forma financials with Q3 numbers that would be incorporated by reference into the effective Form S-4. This Form 8-K would be filed within a couple of weeks of the Form S-4 being declared effective (and a couple of weeks in advance of the stockholders' meetings and subsequent closing of the proposed merger). The goal of filing the pro formas in the Form 8-K would be to go effective with the Q2 financials and to avoid preparing and filing a new Form S-4 amendment with Q3 numbers. One thought we had was that this situation could arise where a Form S-4 registrant files interim pro forma financials to reflect the consummation of a disposition of a business occurring between the effectiveness of the Form S-4 and the stockholders' meeting and closing. Still, we have not had any luck. Any guidance or examples that quickly come to mind would be extremely helpful.

RE: I've worked on a deal where the parties were coming up on a staleness date (they included FYE numbers in the document), so they included a recent developments section in the S-4's prospectus/proxy statement with capsule information about the quarter, and the staff permitted them to go effective & mail shortly before the fiscal year-end numbers went stale. By the way, the Staff's willingness to allow them to go effective so close to the stalness date was predicated on including the recent developments section. The pro formas weren't updated after effectiveness.
-John Jenkins, Editor, TheCorporateCounsel.net 11/1/2019

Thank you - this was a very helpful response.
-11/1/2019

Q: If a CEO of a public company A serves on multiple public company boards (in excess of the ISS and Glass Lewis standards for CEOs), does the fact that she also serves on the board of public company A, but public company A is OTC-listed and thinly traded (as opposed to public company A being larger and listed on NYSE/Nasdaq) get her any relief from the overboarding standard? I think not, but wanted to get other thoughts. Thanks.

RE: I don't think so. These guys all rely heavily on proxy disclosure to make their calls, and when it comes to overboarding, my sense is that their analysts just look at your proxy disclosure and count.
-John Jenkins, Editor, TheCorporateCounsel.net 11/1/2019

Q: Is there a handbook somewhere that has useful information about proxy solicitation -- what needs to be legended, what needs to be filed, when, etc.?<.font>