RE: I don't think that's a good idea. Rule 10b5-1 plans should only be entered into at a time when the insider is not in possession of MNPI, and you don't want this to be a gray area. With a huge acquisition pending, it seems to me that there is a significant risk that an insider will have information about the transaction that hasn't been made public and that could be regarded as MNPI. I think that's true even if the basic terms of the transaction have been announced. It's simply too easy for someone to second-guess the insider's knowledge at the time the plan was established based on hindsight. See the discussion on p. 64 of our "Rule 10b5-1 Trading Plans Handbook."
-John Jenkins, Editor, TheCorporateCounsel.net 11/12/2020
RE: I haven't seen any guidance on this, but I think that if GAAP would require disclosure of this as an arrearage in the financial statement footnotes (which I believe — based on the accounting expertise I acquired with my History major — it would), then disclosure would be required under Item 3(b).
-John Jenkins, Editor, TheCorporateCounsel.net 11/12/2020
RE: The answer based on existing guidance appears to be unclear, although I think the better view is that the SPAC should not be required to consider the target's revenues for the prior fiscal year. I would encourage you to contact the Staff and discuss this issue with them. In any event, here's how I get to my conclusion.
The Financial Reporting Manual suggests that, in the case of a previously reporting company, the answer generally is that it's only the actual revenues for the prior fiscal year that matter. Here's an excerpt from Section 5110.2: A previously reporting company must meet the revenues test based on its annual audited financial statements as originally filed with the SEC (not restated for subsequent discontinued operations) for its most recent fiscal year."
The answer is different in the case of a company without a previous reporting history. Here's what Section 5110.2 of the Financial Reporting Manual says:
"A company that has not previously reported to the SEC must meet the revenues test based on the most recent fiscal year for which audited financial statements are included in the initial registration statement. However, if, consideration of the pro forma effect of (1) businesses acquired during the latest fiscal year, and (2) consummation of business combinations identified as probable at the time of filing the initial registration statement would result in the issuer exceeding the revenue limit, the issuer would not qualify as a smaller reporting company."
So, based on those two sections, it looks like the answer is that unless you're dealing with a company that hasn't reported previously, you don't have to worry about a pro forma adjustment to the prior year's annual revenues to reflect the transaction. However, in the case of a shell company, here's what the FRM says about determining smaller reporting company status:
"A reporting company that meets the definition of a shell company as defined in Rule 12b-2 of the Exchange Act and Regulation C, Rule 405 also will generally qualify as a smaller reporting company and be eligible to use the scaled disclosure. Upon a transaction that causes the reporting entity to lose its shell company status (typically a reverse merger), the surviving entity must file a Form 8-K. The information that must be provided is what would be required if the registrant were filing a general form for registration of securities under Form 10. Scaled disclosure would be appropriate only if the surviving entity qualifies as a smaller reporting company. This Form 8-K, including the financial statements of the accounting acquirer, is due within four business days of the completion of the transaction. Exchange Act Rule 12b-25 does not permit an extension of the due date for filing this Form 8-K."
This seems to stand for the general proposition that SPACs need to give effect to the de-SPAC transaction when determining their reporting status. However, it does not specifically address whether there is a need for the surviving entity to look back at the target's historical results in determining whether it satisfies the applicable revenue test. Given the general position about the application of the revenue test to previously reporting companies, my sense is that, if the surviving entity is the SPAC, the better view is that determining annual revenues for the prior fiscal year on a pro forma basis should not be required.
-John Jenkins, Editor, TheCorporateCounsel.net 11/11/2020
RE: Frankly, I don't think people give a whole lot of thought to these issues when dealing with lenders, although you raise some good points. I'm not a commercial lawyer, but I think a lot of issuers rely on the statutory 4(a)(2) exemption for the warrant issuances, because issuing securities to a bunch of sophisticated banks in a contractual lending relationship presents about as strong an argument for reliance on the statutory exemption as you're likely to find.
That being said, I agree that there is potentially an issue concerning the lack of a preexisting relationship with the syndicate banks that might create some issues for a Rule 506(b) offering, so relying on Rule 506(c) would probably be the safest route. However, I don't view a typical situation like this as being particularly high risk. I also think that, depending on how the transaction is structured, Section 4 (1 1/2) or even Rule 144A might be available for the agent's redistribution of warrants to syndicate members.
-John Jenkins, Editor, TheCorporateCounsel.net 11/10/2020
RE: I know that it is sometimes possible for Nasdaq to grant an additional 180 day grace period to address minimum bid price issues, but I am not aware of a comparable NYSE practice. It's been a long time since I've been involved in a delisting based on the failure to satisfy the minimum share price requirement, but my limited experience has been that the exchanges aren't terribly interested in a business plan to regain compliance- they're looking for a reverse stock split. I would encourage you to reach out to the company's listing rep.
-John Jenkins, Editor, TheCorporateCounsel.net 11/10/2020
RE: Yes, I'd recommend that you do that. Not every disclosure requirement addressed in a D&O questionnaire is limited to NEOs (e.g., Item 403 and Item 404 information), and it is helpful to have a baseline response to work off of in future years.
-John Jenkins, Editor, TheCorporateCounsel.net 11/10/2020
RE: I would delete all the references to the former director on the signature page.
-John Jenkins, Editor, TheCorporateCounsel.net 11/10/2020
RE: I don't think you'd need a post-effective amendment, because including the incorporation by reference language for those 6-Ks in the pro supp doesn't seem to be the kind of change that would trigger a need to file a post-effective amendment under your Item 512 undertakings. In fact, under Item 512(a)(1)(B), even something that would ordinarily trigger a post-effective amendment (e.g., a "fundamental change") can be addressed through the incorporation by reference of Exchange Act reports or the filing of a 424(b) prospectus in the case of a Form F-3.
However, I think you'd need to address the fact that the 6-Ks don't include the language flagging the fact that they'll be incorporated by reference in the filing. It seems to me that you could address that by filing 6-K/As and including that language in them prior to filing the pro supp.
-John Jenkins, Editor, TheCorporateCounsel.net 11/10/2020
RE: Okay. But the Form 6-Ks would all need to be amended in order for the Company to be able to incorporate them by reference into the prospectus supplement for the offering.
-11/10/2020
RE: Yup. See the second paragraph of my original response
-John Jenkins, Editor, TheCorporateCounsel.net 11/10/2020
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
RE: Following up on John's reply.
If you don't recommend that directors (or, presumably, executive officers) buy or sell while the company is in the market, is this recommendation a day-to-day analysis, or at all while the company's repurchase program is in effect and can be used, even if it is not being used?
Company's board just authorized a repurchase plan, delegated authority to the CEO and CFO, and they entered into a 10b-18 plan with a broker. The CEO wishes to purchase for his own account on the open market. Can the CEO rely on the 'Affiliated Purchaser' carveout ("solely by reason of the officer or director's participation in the decision to authorize Rule 10b-18 purchases"), or is he truly an Affiliated Purchaser because he has the actual authority to instruct the broker to make repurchases on any given day? If the answer is that he can't make trades for his own account on any day when the company effects a repurchase, then doesn't that put him in the role of having to decide which days he can purchase versus which days the company can repurchase?
-11/9/2020
RE: I don't think the concern is an executive being in the market during any period in which the company has a 10b-18 repurchase plan in effect. The issue is buying or selling while the company is in the market. The affiliated purchaser exemption is very narrow, and depends on the facts and circumstances, and that's why we don't recommend that an insider be in the market at the same time as the company is buying back shares. I think the situation you describe, in which the CEO is calling the shots, makes his or her position even riskier. See the discussion beginning on p. 39 of our Stock Buybacks Handbook.
If the CEO has been delegated the authority to decide when the company should buy back stock under the repurchase plan, then yes, the CEO is in a position of having to decide when he or she can purchase vs. when the company can purchase. But the CEO is also a fiduciary with a duty of loyalty, so in resolving that conflict, he or she will need to put the company's interest first. If you have a company with a CEO who is interested in making regular open market purchases of the company's stock, then it may be prudent to revisit the delegation policy in order to address the conflict of interest it creates.
-John Jenkins, Editor, TheCorporateCounsel.net 11/9/2020
RE: There's no prohibition on that, and I think some issuers decide to file an 8-K in addition to a press release in order to avoid any dispute over whether the release satisfied the dissemination requirement and to claim the Reg FD safe harbor that comes from an Exchange Act filing.
-John Jenkins, Editor, TheCorporateCounsel.net 11/9/2020
RE: I think it varies from company to company, but in concept the quarterly blackout should extend to all individuals who would be expected to have access to non-public information about the quarter. I don't think it's necessarily a big leap of faith to assume that people won't inappropriately share information if they know they could lose their jobs and potentially face legal sanctions if they do. The key is putting appropriate policies and education programs in place. See the discussion beginning on page 12 of our Insider Trading Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 11/6/2020
RE: Your duty to file periodic reports is suspended when you file the Form 15, but deregistration doesn't become fully effective until 90 days later. During that 90 day period, the stock is still registered under the Exchange Act, so Section 16 filings continue to be required.
-John Jenkins, Editor, TheCorporateCounsel.net 11/6/2020
RE: It could be, but I'm not sure that's what is intended. I think footnote 41 is just intended to provide a reminder that the general prohibition on double incorporation by reference would apply to filings that opt to use that approach to complying with new Item 101(a). Rule 411(e) and 12b-23 already apply to information that's forward incorporated by reference in an existing filing, so I don't know that the reference to "subsequent filings" is meant to limit their application to new filings.
See the discussion in Topic 10462 for some other nuances on the double incorporation by reference issue. I honestly don't think the SEC thought about all of those incorporation by reference issues when they drafted that footnote.
-John Jenkins, Editor, TheCorporateCounsel.net 11/4/2020
RE: I've never seen term limits for executive officers, but a minority of public companies have mandatory retirement policies that apply to CEOs. Here's an excerpt from this 2019 Harvard Governance blog summarizing a report from The Conference Board on mandatory retirement in the context of CEO succession planning:
"Few companies force their CEOs to leave when they reach a certain age, as retirement policies tend to be viewed as an overly rigid, one-size-fits-all solutions that would deprive the business of experienced and well-performing leaders. Researchers established that every additional year in CEO age is associated with a 0.3 percent decrease in firm value. Older CEOs are also found to be less active (in terms of engagement in M&A activity, for example) and less innovative. Nevertheless, most companies choose not to institute a CEO retirement policy based on age, possibly because a one-size-fits-all approach may unnecessarily restrict the tenure of well-performing executives.
Retirement policies are seen in only 18 percent of non financial services companies, 21.9 percent of manufacturing firms, and 25.1 percent of financial institutions. The analysis by size shows a correlation between the use of CEO retirement policies and the annual revenue of the business: While about one-quarter of larger manufacturing and non financial services companies do require CEOs to step down upon reaching a certain age, a similar policy is used only in 7.8 percent of companies with revenue under $1 billion. Instead, in the financial sector, the smallest companies are more inclined to use a mandatory retirement policy than the largest ones (28.6 percent of those with asset valued $10 billion or less and 16.7 percent of firms with $10 billion and over in asset value). When a retirement policy is adopted, the typical limit is set at 65 years of age."
-John Jenkins, Editor, TheCorporateCounsel.net 11/4/2020
RE: I have this same question with effective Form S-3s resale registration statements and Form S-8s for incentive plans. We have the Rule 416(a) language for a forward split in the Form S-3, but nothing in the Form S-3 regarding a reverse split (or reduction in shares), and nothing at all in the Form S-8. The 10(a) prospectus for the incentive plan is not filed with the SEC, but it does mention that adjustments will be made to the plan for stock splits and similar transactions. Are post-effective amendments required for these types of filings under Rule 416(b), since they are not covered by Rule416(a)? Any thoughts would be appreciated.
-9/20/2013
RE: I know this is a rather old question, but I was wondering if anyone had any current guidance on this? Thanks.
-11/2/2020
RE: I think that unless you've included the appropriate Rule 416(a) language, you'll need to file a post-effective amendment. The only guidance on Rule 416(b) of which I'm aware is contained in Securities Act Rules CDI 213.03:
"Question: When a registrant splits its stock prior to the completion of the distribution of securities included in a registration statement, and the registration statement does not specifically refer to the existence of anti-dilution provisions for such situations, must the registrant file a post-effective amendment to the registration statement to reflect the change in the amount of securities registered?
Answer: Yes. In this situation, the use of Rule 416(b) is premised upon the filing of a post-effective amendment. Similarly, a pre-effective amendment would have been required to use Rule 416(b) if the split had occurred prior to effectiveness and no mention had been made of anti-dilution provisions in the registration statement. No additional filing fee is required. [Jan. 26, 2009]"
While this CDI addresses a stock split, I think the same reasoning would apply to a reverse stock split. I also think that interpretation is consistent with the language of Rule 416(b) itself, which says that if Rule 416(a) is not applicable, the registration statement "shall be amended prior to the offering of such additional or lesser amount of securities to reflect the change in the amount of securities registered."
-John Jenkins, Editor, TheCorporateCounsel.net 11/4/2020
RE: I've heard of some companies using a general guideline (e.g., not more than 25% of vested holdings), but I don't think it's common to have a hard and fast rule. The issue that you run into with having a guideline is that people will then feel it's acceptable to regularly sell up to whatever maximum you've set. You'll also be faced with having to oversee compliance and respond to the inevitable requests for exceptions. Sometimes there are valid reasons for large sales, like the executive is buying a house, but you don't necessarily want to be the arbiter of that. Most companies, even those who have some sort of guideline in place, emphasize that the size of the sale is ultimately the executive's decision, but there are negative market perceptions of large sales and they trust the executives will act with that in mind.
-Lynn Jokela, Associate Editor, TheCorporateCounsel.net 11/3/2020
RE: In the absence of definitive guidance, I'd proceed under the assumption that both notices are going to be regarded as soliciting material under Rule 14a-6(b) and should technically be filed in accordance with Rule 14a-16(i), even if they are substantially the same.
-John Jenkins, Editor, TheCorporateCounsel.net 11/2/2020
RE: You can register shares issuable upon exercise of awards made under an employee benefit plan on Form S-4. If your agreement calls for existing awards to be accelerated and converted into the right to receive the merger consideration, then it's pretty straightforward. I think the answer is a little more complicated, and probably less helpful, if you're rolling the awards over into awards of options to acquire New Pubco shares under its plan.
In that situation, you still can register the New Pubco shares to be issued to Target option holders upon exercise, but I think you're going to need to file a post-effective amendment on Form S-8 to include the information that form calls for about the New Pubco plan. I don't think you'd be eligible to file such an amendment until you were eligible to use Form S-8. See Securities Act Forms CDI 125.02:
Question: A registrant included in its Form S-4 registration statement securities to be issued subsequent to the merger, in connection with a dividend reinvestment plan and an employee benefit plan. After the merger, can the registrant amend the registration statement for use by the two plans, providing a separate prospectus for each?
Answer: Yes, the registrant could file a post-effective amendment to the Form S-4 (on Form S-8) for the employee benefit plan, and a second post-effective amendment to the Form S-4 (on Form S-3) to cover the dividend reinvestment plan. [Feb. 27, 2009]
I haven't seen anything specifically addressing SPACs, so it may be worth a call to the Staff to see whether this CDI would apply to a situation where the issuer isn't immediately eligible to use Form S-8.
-John Jenkins, Editor, TheCorporateCounsel.net 10/30/2020
RE: I'm sure there are logistical issues that somebody like Broadridge would be in a better position to assess than we are. I don't think there's any legal prohibition on it — to my knowledge, the SEC's only prohibition on stratification is that you can't do it by document type (e.g., not permitted to use notice-only for the glossy annual report and full set delivery for the proxy statement).
I haven't heard about U.S. issuers that have opted to do this (although some may), but I believe some Canadian companies opt to stratify by geographic location.
-John Jenkins, Editor, TheCorporateCounsel.net 10/29/2020
RE: Disclosure that the company intends to make significant purchases may well move the price upward, particularly if the stock is not particularly liquid and the market isn't efficient. Still, I think most companies take the position that once they've announced publicly the parameters of their buyback plan, there's no obligation to provide additional disclosure before they enter the market. The market's on notice that they can buy back shares under the disclosed terms of the plan at any time.
But some companies want to get that kind of information out for business reasons, and in some instances, the amount of the company's capital resources to be committed to the repurchases may be sufficient to trigger an independent disclosure obligation in the MD&A section of the filing. For a company that wants to announce that its going to make significant purchases under a plan that hasn't seen any activity, and even more so for one that finds itself with an independent disclosure obligation about the cash being devoted to that purpose, I think it would be prudent to delay making purchases under that plan for a few days in order to let the market absorb the news.
-John Jenkins, Editor, TheCorporateCounsel.net 10/29/2020
RE: I don’t think there are any rules other than the S-T requirement that graphics must be text searchable (See Reg S-T CDI 118.01). My guess as to why you're not finding a lot out there is that this isn’t an area that many companies want to highlight through a graphic. Most of the proxies I’ve seen just make a passing reference or two to cybersecurity in the discussion of board committee responsibilities and/or risk oversight. This EY memo gives stats about where cyber info is appearing in the proxy statement and includes a few sample narrative disclosures.
-Liz Dunshee, Managing Editor, TheCorporateCounsel.net 10/27/2020
RE: I don't think they've addressed this. But just reading their COVID-19 policy guidance about pills, I think that they'd be skeptical about supporting a decision to renew a short term pill without seeking shareholder approval, even if the argument is that the stock continues to be depressed due to the pandemic.
-John Jenkins, Editor, TheCorporateCounsel.net 10/23/2020
RE: Sure, the CFO could email the Audit Committee Chair with the request, but I also think it would incumbent upon the Chair to make sure that he or she has enough information about the proposed services to ensure compliance with the requirements of the policy. The audit committee doesn't have to approve services as to which it has delegated authority to an individual committee member, but it must be informed of those services. Most delegation policies that I've seen require the Audit Committee to be informed of services that have been approved at the next meeting.
Preapproval of non-audit services is an area that the PCAOB looks at very closely, and they have raised independence issues in the case of procedures that they don't think are sufficient. While the PCAOB's focus is on the auditor's compliance with independence requirements, potential independence issues are a problem for the company as well.
Approving the audit engagement letter is a core Audit Committee responsibility, and I think some sort of formal process that makes it clear that the engagement has been duly authorized by the Committee is required. To me, that means approval at a meeting or — and I think this is much less preferable — by a written consent action. I don't think just circulating the engagement letter to the Committee and asking if anybody has a problem with it is sufficient. I doubt the auditors would accept something like that either.
-John Jenkins, Editor, TheCorporateCounsel.net 10/23/2020
RE: Yes, I believe that's correct. Here's an excerpt from a recent Winston & Strawn memo summarizing the NYSE requirements applicable to reverse stock splits:
NYSE-listed companies are required to (a) immediately notify the exchange regarding the calling of a stockholders’ meeting and provide the meeting date, record date and the matters to be voted on at least 10 days prior to the record date, (b) provide written notice of at least 20 days prior to the effective date of the reverse stock split, (c) prepare and file a supplemental listing application for each class of stock affected by the reverse stock split at least two weeks before the effective date of the stock split, and (d) notify the exchange at least ten minutes prior to releasing any public information regarding the stock split. With respect to stockholder approval of a charter amendment, such approval must be obtained by no later than a company’s next annual meeting and the action must be implemented promptly thereafter.
-John Jenkins, Editor, TheCorporateCounsel.net 10/22/2020
RE: Graphic images may be used in a shareholder proposal. See the discussion in SLB 14I on their permissibility and potential grounds for exclusion.
-John Jenkins, Editor, TheCorporateCounsel.net 10/22/2020
RE: In my anecdotal experience, Broadridge has typically prepared the document and the company reviews it.
-John Jenkins, Editor, TheCorporateCounsel.net 10/19/2020
RE: It depends on which level of service you engage Broadridge for. If you engage Broadridge to do only the bare minimum, then yes, the transfer agent would prepare the Notice for record holders, and Broadridge would do it for the beneficial holders. In my experience, the transfer agent works similarly to a financial printer, i.e., they send you a proof, you review it and mark it up, the transfer agent prepares a revised proof, etc. until you are satisfied with it. On the other hand, Broadridge is less flexible. You log into their website, input the details about your meeting, proposals, etc. and then it auto-generates a Notice for your approval. It's a pretty rigid process with minimal opportunities to customize the Notice to your own preferences.
If you sign up for Broadridge's "full service," then Broadridge prepares the Notice for both types of holders. We did this a few years ago, and Broadridge was more flexible in allowing me to customize the card.
-10/21/2020
RE: The Staff takes the following views with respect to amending a Form 8-A:
- you cannot amend an effective Section 12(b) registration statement to register an additional class of securities under Sections 12(b) or 12(g), to change the exchange on which you have registered securities, or to register the already-registered class of securities on an additional national securities exchange; and
- you cannot amend an effective Section 12(g) registration statement to register an additional class of equity securities under Section 12(g), to register the same class of securities under Section 12(b), or to register another class of securities under Section 12(b);
In each of these cases, the Staff takes the view that you have to file a new registration statement. That registration statement can be on Form 8-A if you are eligible. If you are not eligible for Form 8-A, then you must register on a Form 10.
As for the charter amendment, I think that should be filed under Item 5.03(a) of Form 8-K. With that filing, I would not think that there is a need to go back and amend the Form 8-A.
-Dave Lynn, Editor, TheCorporateCounsel.net 11/8/2007
RE: Should a registrant file a new 8-A to move a class of securities from 12(g) to 12(b), must it submit a formal withdrawal request of the initial 8-A filing?
-10/15/2020
RE: Yes, you need to file a new Form 8-A12B to register the shares transferred from Nasdaq to the NYSE, as well as a Form 25 delisting the shares from the Nasdaq. An Item 3.01 8-K would also be required. See the various filings that Ambac Financial made in late January and early February of 2020:
-John Jenkins, Editor, TheCorporateCounsel.net 10/15/2020
RE: The SEC said that you had to have paper copies of manually signed signature pages in the E-Sign interpretive release, and I don't believe they've changed that position.
-John Jenkins, Editor, TheCorporateCounsel.net 11/17/2017
RE: if you search this Forum for "E-Sign," there's been a few queries over the years related to this, and all those answers remain the same. The SEC hasn't changed its position as John has noted...
-Broc Romanek, Editor, TheCorporateCounsel.net 11/17/2017
RE: Has there been any indication that the SEC has changed its position on this? Thank you.
-9/21/2018
RE: Nope, no indication of a change.
-Broc Romanek, Editor, TheCorporateCounsel.net 9/21/2018
RE: In light of the prevalence of Docusign, as well as issues of having a remote workforce due to COVID-19, has the view on this changed?
-10/15/2020
RE: Not really. Earlier this year, the Staff issued guidance temporarily cutting people some slack on the document retention requirement contained in Rule 302(b) of S-T. Wilson Sonsini, Fenwick & West and Cooley also filed a rulemaking petition asking the SEC to amend rules under Reg S-T that would permit companies to obtain electronic signatures for documents filed with the SEC. To my knowledge, there's been no action on that petition.
-John Jenkins, Editor, TheCorporateCounsel.net 10/15/2020
RE: I think the most straightforward approach would be to include the founder's purchase as part of the Reg D offering, and take the position that the offering began with the founder's purchase. Alternatively, some might take the position that the initial investment didn't involve the purchase of a security, because the founder is actively involved in the management of the business (you'd also need to check if this is viable under applicable blue sky law).
I've seen people take the latter position, but I much prefer the former, particularly given how close in time the initial investment and subsequent financing are. Assuming you can fit both of the issuances within the Reg D exemption, I think this approach provides more certainty and avoids potential issues down the road with subsequent investors.
-John Jenkins, Editor, TheCorporateCounsel.net 10/14/2020
RE: Thank you. Totally agree that that would have been the best approach from the beginning, but now that 15+ days have passed since the founder's investment, that position has become less attractive.
-10/14/2020
RE: I have always assumed so, although I'm not aware of any Staff guidance directly addressing this issue. Here's why I think this falls within the scope of Rule 14a-16(m).
First, the proxy rules themselves treat a vote on the issuance of the shares as a vote on the business combination, because they require companies to comply with the same disclosure obligations that they would need to comply with if they were seeking approval of the deal itself.. See Note A to Schedule 14A:
"Where any item calls for information with respect to any matter to be acted upon and such matter involves other matters with respect to which information is called for by other items of this schedule, the information called for by such other items also shall be given. For example, where a solicitation of security holders is for the purpose of approving the authorization of additional securities which are to be used to acquire another specified company, and the registrants' security holders will not have a separate opportunity to vote upon the transaction, the solicitation to authorize the securities is also a solicitation with respect to the acquisition. Under those facts, information required by Items 11, 13 and 14 shall be furnished."
Second, with that kind of disclosure obligation imposed by Schedule 14A, it seems very hard to argue that the vote on issuing new shares for the deal doesn't involve a solicitation "in connection with a business combination." I think it's even more clear that a solicitation such as this "relates" to a business combination within the meaning of Rule 14a-3(a)(3)(i).
-John Jenkins, Editor, TheCorporateCounsel.net 10/13/2020
RE: Thank you. Would your answer change if the acquisition is not a “business combination” as defined in Rule 145(a)(3)?
-10/13/2020
RE: Yes. If it doesn't fit into that box, then it seems to be outside the scope of Rule 14a-16(m) and Rule 14a-3(a)(3)(i).
-John Jenkins, Editor, TheCorporateCounsel.net 10/14/2020
RE: I should clarify. The waiver being sought is by the Registrant itself (not any director or officer) which has a 10b-5 plan in place for company stock repurchases through its buyback plan. The Registrant would like to modify the plan at this point in time (i.e., in the earnings blackout). Technically, the Registrant is not subject to the Insider Trading Policy.
Sorry for the lack of clarity.
-10/13/2020
RE: I'm less concerned about the insider trading policy than with the concept of amending a 10b5-1 plan during a blackout period, even if management can say with a straight face that they don't have any visibility into earnings. It's just too easy to second guess the good faith of a company that modifies a plan outside of an open trading window, particularly if that permits the company to engage in transactions (or avoid transactions) that may be called into question with the benefit of hindsight.
The optics are potentially terrible, and you may attract attention from the plaintiffs' bar or the Division of Enforcement. If you do move forward, I would recommend public disclosure of the modification and the imposition of a "cooling off" period before transactions may occur under the modified plan. See the discussion beginning on p. 37 of the Rule 10b5-1 Trading Plans Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 10/13/2020
RE: That's an interesting question. For what it's worth, here are my two cents.
In the case of an already effective S-3, I don't think that updating to address the new requirements would be required. That's because the registration statement contained everything "required to be stated therein" under the rules applicable at the effective time, and that's when Section 11 speaks. The fact that information incorporated by reference into that registration statement no longer complies with the amended requirements of Item 105 wouldn't implicate Section 11.
I think the obligation to update the prospectus would instead be governed by the obligations imposed by the undertakings in Item 512 of S-K, Rule 10b-5, and Section 12(a)(2) of the Securities Act. My guess is that in most instances, issuers would likely conclude that the existing disclosure incorporated by reference into the filing doesn't need to be updated to conform to the requirements of amended Item 105 in order to comply with any of these potential updating obligations.
Obviously, the answer would be different in the case of a new Form S-3 filed after the effective date of the amendments.
-John Jenkins, Editor, TheCorporateCounsel.net 10/9/2020
RE: Along those lines, if a new Form S-3 registration statement is filed prior to November 9 but will go effective after November 9, is your understanding that the Form S-3 will need to comply with the amendments to Items 101, 103 and 105 at the time of effectiveness, and therefore would need to be filed in a form that complies with the amendments?
-10/10/2020
RE: I think the key date is the effective date, so my view would be that the S-3 would technically need to be amended to address the line item requirement in effect at that time. I would call the Staff though, to see whether they might be willing to provide transition relief to a company that found itself in this position.
-John Jenkins, Editor, TheCorporateCounsel.net 10/12/2020
RE: A Form 8-A is a registration statement under Section 12 of the Exchange Act, so if that's your issuer's situation and it was not subject to a reporting obligation under the Exchange Act (i.e., it didn't have to file Form 10-Ks, 10-Qs or 8-Ks with the SEC) prior to the effective date of the Form 8-A, it seems to me that the exemption would be available.
-John Jenkins, Editor, TheCorporateCounsel.net 10/9/2020
RE: It seems hard to conclude that you could do this with a prospectus supplement. You can update information in a prospectus to reflect material changes by means of a prospectus supplement, but generally, the undertakings in Item 512 require you to file a post-effective amendment to reflect in the prospectus "any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement."
Even if you're in one of those quirky situations where your 10-K doesn't trigger a Section 10(a)(3) update because of when the registration statement became effective, a new year of audited financial statements for the issuer is the kind of change that may well be regarded as a "fundamental change" requiring a post-effective amendment. But putting that aside, the sheer volume of information that you'd likely need to update just from a 10b-5 perspective over a period of more than six months makes me think that you're likely going to be dealing with a fundamental change to the prospectus in any event.
You may want to look at this article on "The Fundamentals of a Fundamental Change" that appeared in the May 2018 issue of The Corporate Counsel.
-John Jenkins, Editor, TheCorporateCounsel.net 10/8/2020
RE: Based on a search of the Federal Register website, the final rule does not appear to have been published yet.
-John Jenkins, Editor, TheCorporateCounsel.net 10/7/2020
RE: Posting this in multiple threads so people get notifications.
According to the Federal Register website, the amendments will be published on October 8, 2020. Thirty days results in an effective date of Saturday, November 7th.
That means that Form 10-Q reports and other filings submitted after 5:30 p.m. Eastern time on Friday, November 6th must comply with the amendments to Items 101, 103 and 105, to the extent applicable.
-10/7/2020
RE: Note that the Edgar filing window for a same-day filing stamp closes at 5:30 p.m. Eastern time. The next filing day is Monday, November 9th, so filings made after the window closes but before 10 p.m. should comply with the amendments.
-10/7/2020
RE: As an update, as published today, the Federal Register lists the effective date as Monday, November 9. For all practical purposes, this doesn't change my reply above because the SEC Edgar system will show Monday as the filing date for filings accepted after 5:30 p.m. Eastern time on Friday, November 6. Form 10-Q filings submitted after 5:30 p.m. Eastern time on Friday, November 6 should comply with the amendments to Items 101, 103 and 105.
-10/8/2020
RE: The only example I found involved Bally Technologies, which changed its name from Alliance Gaming and subsequently restated its financials. The 10-K/A referenced the prior name in the explanatory paragraph and referenced the name elsewhere in the document, but used the new name in the filing (other than the exhibit index, which it left unchanged).
I think if you don't use the new name throughout, things may get confusing, because I think the accountant’s opinion is going to be directed to the board of the company under its new name, and the financial statements themselves would typically be issued with the new name in them, since that was the name of the company on the date that the report on the restated financial statements was issued.
-John Jenkins, Editor, TheCorporateCounsel.net 10/7/2020
RE: I haven't seen anything on that topic, but I generally agree with your approach to the materiality assessment. However, one thing to bear in mind is that there is some case law out there to the effect that information required by SEC line-items is presumptively material. See, e.g., Howing Co. v. Nationwide, 927 F.2d 263, 265-66 (6th Cir. 1991); In re Craftmatic Securities Litigation, 890 F.2d 628, 641 (n. 17 (3d. Cir. 1989) (“[d]isclosures mandated by law are presumably material”).
In light of statements like that, since the appointment of a new director would trigger an 8-K filing, I think there's an argument that even the appointment of John or Jane Doe to the board could be MNPI pending its public disclosure. For what it's worth, the House passed the "8-K Trading Gap Act" earlier this year. If enacted, that statute would require companies to bar executive officers and directors from trading between the time a reportable event occurs and the Form 8-K filing about the event.
-John Jenkins, Editor, TheCorporateCounsel.net 10/7/2020
RE: I haven't seen anything on this, but I don't think so. I think the Staff's response would be that Item 1 of 14C requires you to "furnish the information called for by all of the items of Schedule 14A of Regulation 14A (17 CFR 240.14a-101) (other than Items 1(c). 2, 4 and 5 thereof) which would be applicable to any matter to be acted upon at the meeting if proxies were to be solicited in connection with the meeting."
In other words, Schedule 14C itself is saying "let's pretend you are asking for a vote" when it comes to everything required by 14A, so I don't think the fact that you aren't asking for one would allow you to exclude the financials that would be required if you were.
-John Jenkins, Editor, TheCorporateCounsel.net 10/5/2020
RE: Unless you're dealing with a replacement nominee for someone who is unable or unwilling to serve and you've disclosed that your appointed proxies have discretion to vote for replacement nominees, I think the short answer is "all of the above." This excerpt from the Latham memo linked below addresses the situation involving a new nominee. While the memo is discussing a replacement nominee, the same considerations apply for a nominee for an open position:
"If the board instead decides to appoint a new board member and the company’s bylaws require the director to stand for election at the upcoming meeting, the company would be required not only to file supplemental proxy material but also to disseminate that material by sending a new Notice of Internet Availability (time permitting) or mailing the supplement and a new proxy card to stockholders. Most companies would allow previously submitted proxies voting for the remaining directors to continue to count. However, such proxies would be insufficient to confer authority to vote for the replacement nominee, except for the limited circumstances described in Rule 14a-4(c)(5), and therefore a new solicitation would be required. The company would also need to determine whether sufficient time remains for the stockholders to consider and vote on the additional director or decide to postpone the meeting. The only exception to the requirement to disseminate new materials is if the withdrawing nominee is unable to serve, or for "good cause" will not serve, and the proxy expressly confers discretionary authority to vote for a replacement candidate under such circumstances."
-John Jenkins, Editor, TheCorporateCounsel.net 10/5/2020
RE: I don't know for sure, but I assume it has something to do with the predictability of the timing of an annual meeting in comparison to special meetings. Those meetings may arise on short notice, and their timing isn't always under the company's control (i.e., in situations where meetings may be called by shareholders). I also think it probably relates to the fact that the burden on securities firms of complying with these requests was greater at the time the rule was put in place than is now the case with current technologies.
-John Jenkins, Editor, TheCorporateCounsel.net 10/5/2020
RE: I don't think you need to mess with the numbers. If you want to add a clarifying statement along the lines you suggest, I think that's fine.
The information in Item 13 of the Form D is tied to the securities that you sold under the terms of the exemption that you claimed in Item 6. (See the instruction to Item 13). To the extent an exemption was needed for an investor's subsequent decision to convert the note, most issuers would usually rely on the Section 3(a)(9) exemption. That's not one of the exemptions that Item 6 of Form D addresses.
Most garden-variety convertible notes conversions would be likely to qualify for the 3(a)(9) exemption, which involves conversions or exchanges by an issuer and its own security holders exclusively. In order to qualify, the securities also must be convertible into securities of the same issuer, no additional consideration may be paid by the security holder upon conversion, and no commission or compensation may be paid for soliciting the exchange.
-John Jenkins, Editor, TheCorporateCounsel.net 10/1/2020
RE: As noted by Andrew Schwartz of BNY Mellon Shareowner Services in response to the same question raised on the NASPP Discussion Forum: “Seems to me that a prerequisite for using share withholding is that the company has enough cash on hand to fund the taxes. Otherwise the employees should sell enough shares upon vesting to cover the taxes. Having the company withhold the shares only to immediately resell them exposes the company to market risk, further delays the receipt of proceeds until the sale settles, and defeats the whole purpose of share withholding—which is to minimize dilution. (Aside from the possible securities law issues as you mention).”
I have not run into any situations where companies have filed registration statements specifically for the purpose of selling the withheld shares into the market to raise cash.
-Dave Lynn, Editor, TheCorporateCounsel.net 8/27/2008
RE: If the shares were already registered under an S-8, would the company reselling them trigger another registration?
-2/12/2010
RE: Conceivably it would be a different transaction if the resale of the shares is into the market as opposed to issued pursuant to an employee benefit plan on the Form S-8. Recall that each transaction in securities must be registered or exempt—the fact that the securities were registered for one purpose on Form S-8 would not obviate the need for registration in another transaction occurring in the same securities.
-Dave Lynn, Editor, TheCorporateCounsel.net 2/13/2010
RE: Couldn’t the company be viewed as selling the shares to cover withholding on behalf of the award recipient or as an agent of the award recipient, so that the seller in the transaction is still the award recipient? Couldn’t the award recipient report the sale price into the market obtained by the company on the award recipient’s Form 4? This is messy from an accounting, tax record/reporting and timing (execution risk) perspective (so probably not anyone’s plan A), but shouldn’t this characterization be possible/acceptable?
-9/25/2020
RE: I don't think the Staff would endorse a position that allowed an issuer to sell shares into the market as the purported "agent" of a shareholder without registering those shares under the Securities Act.
-John Jenkins, Editor, TheCorporateCounsel.net 9/28/2020
RE: I think that's right. See footnote 41 of the adopting release:
"Securities Act Rule 411(e) and Exchange Act 12b-23(e), however, provide that information must not be incorporated by reference in any case where such incorporation would render the disclosure incomplete, unclear, or confusing, such as incorporating by reference from a second document if that second document incorporates information pertinent to such disclosure by reference to a third document. We remind registrants that, consequently, a filing that includes an update and incorporates by reference the more complete Item 101(a) discussion could not be incorporated by reference into a subsequent filing, such as a Form S-3 or Form S-4."
-John Jenkins, Editor, TheCorporateCounsel.net 9/28/2020
RE: If the issuer is repurchasing the shares, Rule 144 won't come into play. In addition to the issues you've flagged, you may also want to look at restrictions on buybacks or transactions with related parties contained in credit agreements or other contracts.
-John Jenkins, Editor, TheCorporateCounsel.net 9/28/2020
RE: I'm not aware of anything directly addressing this issue, but I think the better view is that an FPI doesn't lose that status for purposes of the Securities Act exemptions until the beginning of the next fiscal year, except in the case of an FPI that reincorporates in the U.S. I read the third paragraph of the instruction to the definition of an FPI in Rule 405 as you suggest, and I think that position is consistent with the one the Staff has taken under the parallel Exchange Act rule in Exchange Act Rules CDI 110.01:
"Question: A foreign issuer qualifies as a foreign private issuer on the last business day of its most recently completed second fiscal quarter, which is the "determination date" for foreign private issuer status under Exchange Act Rule 3b-4(c). Shortly thereafter, the foreign issuer reincorporated in Delaware. May it continue to use the foreign private issuer forms and rules until it retests its foreign private issuer status on the next determination date?
Answer: No. Under Exchange Act Rule 3b-4(e), a foreign issuer generally may use the foreign private issuer forms and rules until the first day of the fiscal year following the determination date on which it no longer qualifies as a former private issuer. That provision, however, does not apply to domestic issuers. A U.S.-domiciled company can never be a foreign issuer or foreign private issuer, no matter how few U.S. shareholders it may have or where its assets, business, officers or directors are located. Therefore, as a successor to the foreign issuer's reporting obligations, the Delaware corporation must immediately begin filing Exchange Act reports on domestic issuer forms. [Aug. 11, 2010]"
-John Jenkins, Editor, TheCorporateCounsel.net 9/28/2020
RE: I don't know that the Staff has spoken directly to this in the reverse merger context, but I think the general proposition is that a successor entity under Rule 12g-3 inherits the reporting history of its predecessor. That seems to be the way the issue has been approached in recent SPAC transactions. See, for example, the disclosure that appears on p. 38 of the DraftKings S-4, which ties the expiration of its EGC status to the closing of its predecessor's IPO:
We will remain an emerging growth company until the earlier of: (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of DEAC’s initial public offering, (b) in which we have total annual revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common equity that is held by non-affiliates exceeds $700 million as of the end of the prior fiscal year’s second fiscal quarter; and (2) the date on which we have issued more than $1.00 billion in non-convertible debt securities during the prior three-year period.
-John Jenkins, Editor, TheCorporateCounsel.net 9/28/2020
RE: No, I don't think there is. You may want to take a look at this Galey & Lord no action letter, which involves a similar fact pattern. In granting the no-action request from a company whose outstanding shares had been cancelled in bankruptcy, the Staff specifically noted the filing of a post-effective amendment deregistering shares in granting the company's no-action request. That suggests that the Staff doesn't view the bankruptcy order as wiping the slate clean when it comes to existing registration statements.
-John Jenkins, Editor, TheCorporateCounsel.net 9/24/2020
RE: As noted in our May webcast, that "except the passage of time" phrase is troublesome because it seems to suggest that if there has been an event of default, and the company has received a notice but there's a cure period, then you still need to go ahead and file the 8-K. If the default is cured during the cure period, I would think you'd want to file another Form 8-K to make clear that the event of default never actually occurred. Hopefully, the SEC will come out with some clarification as to exactly how that is supposed to work.
-Broc Romanek, Editor, TheCorporateCounsel.net 10/29/2004
RE: Have you seen any additional guidance on the "except for the passage of time" language in Instruction 2 to Item 2.04 of Form 8-K? Is the accepted practice still to file the Form 8-K within 4 business days after the receipt of a notice of default even though the event of default (i.e., the triggering event) occurs only after the recipient fails to cure the default during a specific cure period which is not over yet?
-5/11/2009
RE: I know this is an old question, but is anyone aware of any developments on this front?
-4/19/2016
RE:I want to confirm that there is no informal SEC guidance or other updates on this question.
-9/23/2020
RE: I have not seen anything further on this.
-John Jenkins, Editor, TheCorporateCounsel.net 9/24/2020
RE: See Liz's response in Topic #10435. The panelists at our conference today referenced this issue, but nobody had any information on the anticipated timing of publication.
-John Jenkins, Editor, TheCorporateCounsel.net 9/23/2020
RE: Unfortunately, one of the side-effects of a principles-based approach is that many companies find themselves looking at a blank piece of paper while trying to determine what aspects of the somewhat amorphous "human capital" concept are material to their businesses. The SEC provided some guidance in the language of Item 101(c) itself, when it included a non-exclusive list of potential topics that might be materia, "such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel".
I think many of the topics that you identify are potentially fair game for disclosure — again, "to the extent material."
While the SEC didn't adopt a prescriptive approach, I think companies may find it helpful to take a look at some of the specific disclosure items suggested in the 2017 rulemaking petition that the Human Capital Management Association filed with the SEC (and which it referenced a number of times in the adopting release). The whole petition itself is worth reading, but in particular, this excerpt:
"Although we agree that it may be appropriate to tailor some disclosure requirements more precisely, there is broad agreement that certain categories of information are fundamental to human capital analysis, and some disclosures from each category, whether quantitative or qualitative (or both), should be required (examples, which are not intended to be exhaustive, are in parentheses after each category):
1. Workforce demographics (number of full-time and part-time workers, number of contingent workers, policies on and use of subcontracting and outsourcing)
2. Workforce stability (turnover (voluntary and involuntary), internal hire rate)
3. Workforce composition (diversity, pay equity policies/audits/ratios)
4. Workforce skills and capabilities (training, alignment with business strategy, skills gaps)
5. Workforce culture and empowerment (employee engagement, union representation, work-life initiatives)
6. Workforce health and safety (work-related injuries and fatalities, lost day rate)
7. Workforce productivity (return on cost of workforce, profit/revenue per full-time employee)
8. Human rights commitments and their implementation (principles used to evaluate risk, constituency consultation processes, supplier due diligence)
9. Workforce compensation and incentives (bonus metrics used for employees below the named executive officer level, measures to counterbalance risks created by incentives)."
Reviewing some of the comment letters received on that petition may also provide you with some food for thought on potential topics.
My guess is that you're not going to see many companies including disclosure that addresses every item on this or some other wish list, but I do think that there are likely to be changes in disclosure about human capital practices as a result of the new rules. First, Chair Clayton made it clear in his statement that the SEC expects "meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs.” Second, I think investors are increasingly looking for this kind of disclosure, so I do expect to see companies respond to this new requirement.
-John Jenkins, Editor, TheCorporateCounsel.net 9/23/2020
RE: The affiliate determination is essentially a "facts and circumstances" analysis, and it's an issue about which the Staff hasn't provided much guidance. The most detailed analysis of the affiliate issue that I've seen is contained in a comment response that Latham provided about 15 years ago.
That being said, in the public company M&A deals in which I've been involved over the years, I can't recall a situation where a conclusion was reached that mid- and lower-level target employees who joined the buyer in a similar capacity post-closing were regarded as "affiliates" of the buyer. The affiliate definition focuses on whether a person controls, is controlled by or is under common control with another person. I don't think that this definition would encompass a bunch of mid- and lower-level employees.
With respect to more senior officials, I don't know that a title like "vice president" is dispositive, particularly in the situation you cite where a company might have hundreds of people with VP titles (e.g., a financial institution). But, I think you need to look at the responsibilities of the individual in question. To me, it becomes very difficult to argue that an individual who is treated as an "executive officer" under Rule 3b-7 or a Section 16 "officer" of the buyer post-closing isn't in that "control" group, particularly since the people covered by those definitions are performing significant policy-making functions for the buyer.
-John Jenkins, Editor, TheCorporateCounsel.net 9/23/2020
RE: I think that's probably the case. For example, the experience of the financial crisis continues to ripple through risk factors and other disclosures, and I would expect the same to be the case with the pandemic.
-John Jenkins, Editor, TheCorporateCounsel.net 9/22/2020
RE: Lynn blogged about that topic last week, and you can check out our (admittedly unscientific) poll of our members accompanying that blog on what they plan to do on a diversity question.
-John Jenkins, Editor, TheCorporateCounsel.net 9/21/2020
RE: Yes, it's the technical report summary that triggers Section 11 liability for the qualified person. Here's an excerpt from the adopting release:
"In the Proposing Release, we explained that if the filing that requires the technical report summary is a Securities Act registration statement, the qualified person would be deemed an “expert” who must provide his or her written consent as an exhibit to the filing pursuant to Securities Act Rule 436. In such situations, the qualified person would be subject to liability as an expert for any untrue statement or omission of a material fact contained in the technical report summary under Section 11 of the Securities Act."
-John Jenkins, Editor, TheCorporateCounsel.net 9/21/2020
RE: For smaller A/R facilities, I think companies may well decide both that the agreement is in the ordinary course and not material. It seems to me that a conclusion that a large A/R arrangement is in the ordinary course of business is probably an easier one to reach than a conclusion that the amounts involved aren't material.
-John Jenkins, Editor, TheCorporateCounsel.net 9/19/2020
RE: Unless the company in question qualifies as a "foreign private issuer," I'm not aware of any special benefit that an SEC reporting company would gain from incorporating in the Cayman Islands or BVI (other than those that apply generally to any corporation).
-John Jenkins, Editor, TheCorporateCounsel.net 9/19/2020
RE: Reg FD applies to any communication of material information by a company or a person acting on its behalf to a Reg FD covered person (e.g., a broker deal, investment advisor, investor, analyst or other market participant). If information about the post-closing true-up is material, then a company would need to make public disclosure in a Reg FD compliant manner if it intended to disclose it to a covered person who has not agreed to keep it confidential.
-John Jenkins, Editor, TheCorporateCounsel.net 9/17/2020
RE: Form 8-K CDI 217.03 suggests that the answer is yes. A resignation subject to a contingency should be disclosed when it is delivered:
"217.03 A director who is designated by an issuer's majority shareholder gives notice that he will resign if the majority shareholder sells its entire holdings of issuer stock. This notice triggers an obligation to file an Item 5.02(b) Form 8-K, which should state clearly the nature of the contingency and the extent to which the resigning director can control occurrence of the contingency. [April 2, 2008]"
The Staff hasn't addressed the situation involving a resignation letter delivered in connection with a merger, but my view is that this CDI doesn't makes a lot of sense in the context of a merger agreement that provides the directors of the target will resign at closing.
Viewing this as a contingent resignation akin to the situation in CDI 217.03 seems to unduly elevate what is essentially a ministerial act into a disclosure trigger. Signed resignations are usually a closing delivery, and typically take the form of a one sentence statement to the effect that "I hereby resign as a director of the target, effective upon the closing." They're usually held by the target's counsel and aren't released until closing. That seems different to me than the situation addressed in the CDI. And that doesn't even take into account the fact that in this situation, the director resignation requirement is built into the merger agreement that's been filed publicly, and will have been disclosed in the proxy statement well in advance of when the 8-K would be due.
Finally, my admittedly anecdotal experience also suggests that filing an 8-K under these circumstances is not customary. Director resignations are frequently addressed as part of the 8-K filing in conjunction with the closing, but I haven't seen an Item 5.02 8-K filed in advance just to address director resignations that will be effective on closing. See this Avon Products 8-K.
-John Jenkins, Editor, TheCorporateCounsel.net 9/17/2020
RE: Thank you. This was our thinking as well. Appreciate the quick reply.
-9/17/2020
RE: To my knowledge, there isn't an express expiration date. The policies apply to governance or capital structure elements that ISS finds objectionable and that were put in place in connection with an IPO, and I think ISS's general approach with its newly public company policies is to cut these companies a little slack on governance and capital structure issues that would automatically result in a withhold recommendation if it was dealing with an established company.
For these newly public companies, ISS seems to be saying that if their objectionable practices in these areas have reasonable sunset provisions, it will think about not issuing such a recommendation based on its assessment of the overall facts and circumstances. So, one of the key things that a company needs to have in order to fit into this policy is a sunset provision, and I think that's what will effectively serve as the expiration date of their "newly public company" status in the eyes of ISS.
See the discussion on page 36 of our Proxy Advisors Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 9/15/2020
RE: Thanks for the quick response, John.
-9/15/2020
RE: There's no prohibition on making a gift outside of the 10b5-1 plan, and the argument in favor of permitting it is the one you make. However, the status of gifts by insiders under the securities laws is a little complicated. See the discussion on page 63 of our Rule 10b-5 Trading Plans Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 9/15/2020
RE: See the response to topic #10299 regarding the "fundamental change" analysis. I'm not aware of anything directly addressing this extension issue in the Reg A context and would recommend that you discuss this with the Staff (although they're unlikely to tell you that something is or isn't a fundamental change — they tend to leave that up to the issuer).
With that being said, here are my thoughts: If the offering is a contingency offering and you haven't hit the minimum or satisfied other applicable conditions to closing, then in addition to any 10b-9 or 15c2-4 issues that may be implicated in an extension, I think there's a pretty strong argument that you're dealing with a fundamental change. If that's not the case, and there's disclosure in the offering circular reserving the right to extend the offering, then I think you have a better argument that simply extending the offering, while material, does not necessarily involve a fundamental change.
-John Jenkins, Editor, TheCorporateCounsel.net 9/14/2020
RE: Thank you very much for your response! In our case, there was no minimum, but the language in the offering circular did not specifically provide the company with a right to make an additional extension.
-9/14/2020
RE: I think the ability to exclude U.S. holders from participating in a foreign issuer's rights offering is an issue that's determined by reference to the laws of the foreign issuer's home jurisdiction. I'm no Regulation S expert, but as I understand it, the cross-border exemptions of Reg S were adopted to encourage foreign issuers to include U.S. holders in these transactions by permitting them to avoid more burdensome U.S. regulatory constraints if the conditions set forth in Reg S were satisfied. Here's an excerpt from this Cleary Gottlieb blog on the topic:
"A rights offering by a foreign private issuer may be exempt from the registration requirements of the Securities Act pursuant to Rule 801 under the Securities Act. This exemption is available if 10% or less of the class of stock in respect of which rights are being issued is held of record by U.S. holders and applies only to all-cash rights offerings made on a pro rata basis to all shareholders of the class (including American Depositary Receipts (“ADRs”) evidencing the shares). The exemption provided by Rule 801 is available to issuers only, and underwriters will not be able to rely on the exemption for resales of any rump shares. Accordingly, any such shares sold in the United States would have to be privately placed with QIBs or AIs. In addition, rights issued to U.S. shareholders under Rule 801 are not transferable except outside the United States in accordance with Regulation S, though the shares underlying the rights are freely transferable in the United States so long as the shares in respect of which the rights are issued are unrestricted securities. In addition, the issuer must consent to service of process in the United States. A rights offering under Rule 801 is not subject to liability under sections 11 and 12(a)(2) of the Securities Act, but is subject to section 10(b) of, and Rule 10b-5 under, the Exchange Act.
In circumstances where Rule 801 is not available or not feasible to use, and SEC registration is impractical or undesirable, a foreign private issuer may choose, subject to any applicable constraints under non-U.S. laws, to exclude U.S. holders from participating in a rights offering, or extend the rights offering to U.S. holders only on a private placement basis. In these circumstances, the issuer generally would arrange for the rights to be sold for the benefit of U.S. holders (other than any U.S. holders participating by way of private placement) and remit the cash to them."
You should also take a look at the SEC's cross-border exemption adopting releases.
If you aren't relying on the Reg S exemptions, then I don't believe you'd be required to make a Form CB filing in the U.S. If information about the rights offering is material, I think you would want that to be disclosed to your U.S. holders, although any such disclosure should clearly indicate that the offering is not being made to them. Your disclosure obligations to U.S. holders may also be significantly influenced by the laws of the foreign issuer's home jurisdiction.
-John Jenkins, Editor, TheCorporateCounsel.net 9/11/2020
RE: You may incorporate the existing indenture by reference as an exhibit, but you'll need a new T-1. See Trust Indenture Act CDI 108.02:
"Question: May a Form T-1 be incorporated by reference?
Answer: No. A Form T-1 may not be incorporated by reference from a previous filing because the Form T-1 requires recent information. [March 30, 2007]"
-John Jenkins, Editor, TheCorporateCounsel.net 9/10/2020
RE: I'm not aware of any Staff position that would prohibit a selling shareholder from selling shares to a single purchaser in a privately negotiated transaction. I know there were some metaphysical issues at one time about whether a resale of a registration statement to a single purchaser or a small number of purchasers involved a "public offering," but I haven't seen that raised in quite some time.
It's my understanding that so long as the plan of the distribution section is broad enough to cover the transaction, then the registration statement may be used to cover it. I do think that the SEC still takes the position that if the registered shares are sold directly to a broker-dealer, it would need to be identified as an underwriter in a prospectus supplement.
I've seen some registration statements that explicitly address the possibility that a selling stockholder may sell directly to a single purchaser (although I think less specific language would probably suffice). See the language on p. 53 of this 2018 Hilton prospectus.
-John Jenkins, Editor, TheCorporateCounsel.net 9/9/2020
RE: We haven't compiled a handbook addressing "Major Stockholder" issues in a single volume, although many of those issues are addressed in a variety of places here and on CompensationStandards.com, DealLawyers.com and Section16.net. But that's definitely something we should consider. In the meantime, I think you may find this MoFo checklist helpful.
-John Jenkins, Editor, TheCorporateCounsel.net 9/9/2020
RE: I think the difference between a redemption and a repurchase is that a redemption involves a transaction that either the issuer or the noteholders are compelled to undertake by the terms of the indenture, while a repurchase involves a transaction that's volitional on both sides. By its nature, an obligation to participate in a redemption is going to arise only under circumstances that are explicitly spelled out in the indenture. On the other hand, since a repurchase is volitional, the terms of the repurchase are up to the issuer, and the noteholders are free to participate or not.
-John Jenkins, Editor, TheCorporateCounsel.net 9/2/2020
RE: I too am having trouble finding guidance on Rule 424(b)(8). We have an issuer that is having some technical difficulty and is concerned about missing the 5:30 p.m. filing deadline for a prospectus supplement. They are using every effort to get it filed on time, but if it ends up filed after 5:30 or in the morning, what are the practical implications?
-9/2/2020
RE: There isn't a lot of guidance on Rule 424(b)(8). I think the key place to look is in the Securities Act Reform Adopting Release's discussion of Rule 172, which begins at pg. 246.
Rule 172 provides an exemption from Section 5(b)(1) of the Securities Act for sending confirmations of sale if the requirements of paragraph (c) of that rule are satisfied. In turn, paragraph (c) requires, among other things, that "The issuer has filed with the Commission a prospectus with respect to the offering that satisfies the requirements of section 10(a) of the Act or the issuer will make a good faith and reasonable effort to file such a prospectus within the time required under Rule 424 (§ 230.424) and, in the event that the issuer fails to file timely such a prospectus, the issuer files the prospectus as soon as practicable thereafter."
There are a handful of CDIs addressing Rule 172 in the Securities Act Rules CDIs:
Rule 424(b)(8) is intended to implement Rule 172(c)'s provisions. Here's an excerpt from this S&C memo on the adopting release:
"The issuer good faith component and the “cure period” were added in response to comments and are designed to prevent retroactive violations of Securities Act Section 5 that might otherwise arise when an underwriter or dealer sends a written confirmation but the issuer fails to file the final prospectus with the SEC in a timely manner. See Rel. No. 33-8591, supra note 1, at paragraphs referencing nn.566 and 568. The Reforms also add new paragraph (b)(8) to Securities Act Rule 424 that specifically requires a prospectus to be filed as soon as practicable after discovery of the failure to file it as required. See Securities Act Rule 424(b)(8)."
-John Jenkins, Editor, TheCorporateCounsel.net 9/2/2020
RE: There are probably a number of reasons for that approach, but I think the biggest may be that it allows the fund to avoid any potential issues that may arise over whether or not it is a "closely held" entity. There isn't much guidance on this from the SEC, and if the fund isn't closely held, then the recipients would not be able to tack their holding periods for purposes of Rule 144. If the shares they receive are covered by a registration statement, then tacking isn't an issue.
I think registration also helps eliminate any potential issues about compliance with provisions in limited partnership agreements that require the securities received to be "freely tradeable" as a condition to the fund's ability to make in-kind distributions (although most people take the position that shares that may be sold under Rule 144 satisfy this condition).
I also think it's just kind of a "no brainer" for funds with registration rights. If you're registering the shares for resale by the fund anyway, why not cover in-kind distributions in the plan of distribution section of the prospectus?
-John Jenkins, Editor, TheCorporateCounsel.net 9/2/2020
RE: Thank you very much for your response. I agree that the registration is a no brainer if permissible but, more fundamentally, doesn't registration require a "sale" of securities? It's unclear to me how a distribution would qualify under the Securities Act definition of a sale (i.e., how is the value requirement being satisfied?).
-9/2/2020
RE: That's probably too narrow a view of the registration concept. Section 5 prohibits unregistered offerings in the absence of an available exemption, but it doesn't prohibit registering offerings for which an exemption may be available.
And I think "may" is the right word to focus on here. There's nothing in the statute or in the rules that etches in stone the idea that an in-kind distribution is always and everywhere exempt under a "no-sale" theory. That's just an interpretive position that private counsel and the SEC Staff have gotten comfortable with under appropriate factual circumstances. It isn't a blanket exemption, and the Staff hasn't hesitated to call a no-sale position into question in other contexts involving distributions of securities. See e.g., the recent enforcement actions involving ICO "airdrops."
I think that's one of the reasons that people get concerned about the "closely held" requirement for Rule 144 tacking. What's underlying that, I think, is a concern that if you start making in-kind distributions to a large number of people, you start to look like a statutory underwriter. If you are, then the distribution would need to be registered. But it isn't clear where the cutoff is, and a fund that may be comfortable that it could make an unregistered in-kind distribution at one point in its life cycle may find itself in a different position later. Conversely, the SEC's interpretive position could change in a way that adversely affects a particular fund's ability to make an in-kind distribution.
-John Jenkins, Editor, TheCorporateCounsel.net 9/2/2020
RE: In the case of an immediately convertible security, you are right - the offer of the underlying security is viewed as ongoing. The Staff's view of the application of the integration concept to such an offering would preclude the company from registering the underlying common stock for its original issuance. If the securities were not convertible until a later date, then it is possible that the original issuance of the underlying common could be registered, notwithstanding the fact that the original security was issued in a private offering. In terms of how long a period must elapse, Securities Act Sections CDI 139.01 suggests at least a year, although commentators (Stan Keller in particular) have noted that some counsel have been able to get comfortable with a shorter period.
However, it is also my understanding that the exercise of a an immediately exercisable conversion right exempt under Rule 3(a)(9) would not raise integration issues with respect to the initial Reg D offering of the convertible securities, and that there's no prohibition on relying on Section 3(a)(9) for an immediate exercise (assuming the other conditions of the exemption are satisfied).
See the discussion beginning on p. 10 of Stan Keller's Integration Outline:
-John Jenkins, Editor, TheCorporateCounsel.net 9/2/2020
RE: This is another one of those areas in which the requirements of the amended S-K Item don't necessarily line up nicely with the line item requirements of the Form itself. I think the narrow answer to your question is that since Form 10-Q doesn't require compliance with Item 105, a company that opted to regurgitate all of its 10-K risk factors in lieu of just updating them as Form 10-Q requires would not be noncompliant with the requirements of Form 10-Q if it failed to include the two-page summary.
However, I think that as a matter of disclosure hygiene, if the company's practice is to include the entire risk factor disclosure from its 10-K filing in subsequent 10-Qs, it should also include the summary required by amended Item 105 of S-K. I think it's fair to say that failure to do so could raise a Staff comment or an investor question, and would be something that a plaintiff would draw attention to in an effort to portray the differences between the two filings in a negative light.
-John Jenkins, Editor, TheCorporateCounsel.net 9/1/2020
RE: I don't think that's overkill. You still have a registration statement that is active and being used to cover shares to be issued under outstanding awards, so you still have a Section 15(d) reporting obligation that is refreshed with each annual update of the registration statement pursuant to Section 10(a)(3) of the Securities Act.. You would need to file a post-effective amendment deregistering the shares that are still covered by the S-8 in order to be in a position to suspend that obligation under Section 15(d) or Rule 12h-3. See Staff Legal Bulletin 18.
-John Jenkins, Editor, TheCorporateCounsel.net 9/1/2020
RE: I think that the general rule is that materiality is assessed at the time the agreement was entered into for purposes of determining whether an 8-K has been triggered. See 8-K CDI 102.01. Given the timeframe here and the apparent ongoing dialogue between the parties, the best argument that an 8-K wasn't triggered may be that notwithstanding the documentation, the parties didn't actually reach a definitive agreement until the terms of the business arrangement were finalized or that they ultimately determined that they were unable to reach a meeting of the minds on key issues and terminated discussions. The strength of that argument depends on state law contract formation principles.
-John Jenkins, Editor, TheCorporateCounsel.net 9/1/2020
RE: Publication in the Federal Register usually happens within a month, but sometimes it can be longer — for example if there are errors in the release that need to be fixed or if the release gets kicked back to the Staff because it doesn't conform to the Federal Register style guide. Or sometimes they just have to wait for room in the Federal Register. If it takes a month, that would put the effective date right around the end of October.
-Liz Dunshee, Managing Editor, TheCorporateCounsel.net 8/31/2020
RE: That's an interesting observation. I agree that there appears to be a disconnect between the new language of Item 101(a) and the current requirements of Item 1 of Form 10-K. In reading the adopting release, the intent of revised Item 101(a) appears to be that companies must either provide a full blown, principles based description of the development of the business that addresses the matters identified in Item 101(a)(1), to the extent material, or simply provide an update & incorporate the more complete disclosure by reference along with the link required by Item 101(a)(2). But the Form 10-K line item continues to require updating disclosure addressing only the fiscal year covered by the report, so some sort of clarification (or a revision to the 10-K line item) would be helpful.
For a fair number of companies, this issue probably isn't going to matter very much. That's because many companies have a practice of continuing to provide a discussion of the general development of their business over the previously required five year period in their 10-K filings, rather than just providing updating disclosure covering the most recent fiscal year. For example, check out GM's comment letter on the rule proposal in which it objected to the proposal to permit only updating disclosure. GM's letter noted that "this rule change would have a minimal impact on GM’s current disclosure," and stated the company's belief that "the entirety of this disclosure should be included in each filing."
-John Jenkins, Editor, TheCorporateCounsel.net 8/31/2020
RE: I don't know if the topic of the issuer's payment of the exchanging note holders' legal fees has been specifically addressed by the Staff, but my gut reaction is that this shouldn't necessarily result in the unavailability of the Section 3(a)(9) exemption.
Securities Act Rule 150 provides that "The term commission or other remuneration in section 3(a)(9) of the Act shall not include payments made by the issuer, directly or indirectly, to its security holders in connection with an exchange of securities for outstanding securities, when such payments are part of the terms of the offer of exchange." I think an agreement to pick up the legal fees incurred by an exchanging note holder should be viewed as an indirect payment to the note holder, and if it is part of the terms of the exchange offer, then it seems to me that it should be encompassed within Rule 150.
-John Jenkins, Editor, TheCorporateCounsel.net 8/31/2020
RE: If a company doesn’t have a public float of at least $75 million at the time the S-3 is filed, but the public float increases to $75 million after the effective date of the registration statement, the 1/3 cap no longer applies. If the public float later falls back below $75 million when the next Form 10-K is filed, the 1/3 cap is reinstated. For more details, see the discussion on pages 69-70 of our "Form S-3 Handbook."
I'm not in a position to say whether your structure "works," but if you're an issuer eligible to use S-3 for primary offerings, then I don't think there's anything that would prohibit you from using the existing S-3 to issue these preferred shares for cash, even if the terms of your deal with the investor give it some discretion as to the timing of the purchases. The key thing is that you've got an effective registration statement on file for the shares you propose to issue.
If you didn't use shares registered under the existing S-3, but instead struck a deal with the investor and then wanted to file a new primary S-3 covering the shares you propose to issue, my answer would be different, because I think you'd have an unregistered offer and would need to issue the shares in an unregistered, exempt transaction. You could only register the shares for resale after they'd been issued.
Your eligibility to use Form S-1 for a series of transactions like this depends on whether you can hang your hat on Rule 415(a)(ix), because an S-1 issuer generally may use Rule 415 for a primary issuance only if an offering is made on a continuous basis. I don't know the details of your offering, but it sounds like it may possibly involve a continuous offering. If you aren't a smaller reporting company, you would be ineligible for forward incorporation by reference into the S-1, which could make the transaction procedurally more cumbersome in terms of keeping the prospectus current.
-John Jenkins, Editor, TheCorporateCounsel.net 8/23/2020
RE: Perfect. Thank you for the sanity check!
-8/23/2020
RE: Hi. Follow-up question. If you have an existing resale Form S-1, but it ultimately is registering the resale of more shares than are needed (e.g., the original number of shares to be issued was based on a formula tied to closing price). Can you file a post-effective amendment to deregister ONLY the excess shares, such that the registration statement can continue to be used for the number of shares actually issued? Or does this trigger SEC comments as to how you calculated everything, etc.?
-8/27/2020
RE: I've never seen anything directly addressing this, but I don't know why you couldn't. I think you'd just include an appropriate explanatory note.
-John Jenkins, Editor, TheCorporateCounsel.net 8/28/2020
RE: Rule 14a-6(j) provides that any proxy statement, form of proxy or other soliciting material required to be filed under Rule 14a-6 that is also filed under Rule 425 "is required to be filed only under the Securities Act, and is deemed filed under this section."
-John Jenkins, Editor, TheCorporateCounsel.net 8/26/2020
RE: I haven't seen hard data on the timing of a Form 10, but my guess is that for planning purposes, you should assume an IPO-type schedule (e.g., budget 90-120 days from the date of the initial filing) for addressing SEC comments. One wrinkle in the timing results from the fact that the Form 10 goes effective automatically in 60 days. In order to avoid going effective prior to clearing Staff comments, many companies opt to withdraw their filing before it becomes effective. Companies then file a new Form 10 responding to comments. Depending on the comment and response process, this may be repeated a few times.
Each transaction is different, but you may find VICI Properties’ 2017 Form 10 process helpful to look at. That company, which is a $1 billion REIT, was represented by Kirkland & Ellis and its audits were performed by Deloitte. The process took about five months, but it appears that the reason for that involved the company's desire to time the effectiveness of the Form 10 with its emergence from bankruptcy. It appears to have cleared all substantive Staff comments about three months after the initial filing.
-John Jenkins, Editor, TheCorporateCounsel.net 8/24/2020
RE: See paragraph (a)(5) of General Instruction A.1. of Form S-8 for a list of the types of trusts and other entities that may exercise awards of securities registered under Form S-8. You can also see the discussion on page 40 of the Form S-8 Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 8/23/2020
RE: If a company doesn’t have a public float of at least $75 million at the time the S-3 is filed, but the public float increases to $75 million after the effective date of the registration statement, the 1/3 cap no longer applies. If the public float later falls back below $75 million when the next Form 10-K is filed, the 1/3 cap is reinstated. For more details, see the discussion on pages 69-70 of our "Form S-3 Handbook."
I'm not in a position to say whether your structure works, but if you're an issuer eligible to use S-3 for primary offerings, then I don't think there's anything that would prohibit you from using the existing S-3 to issue these preferred shares for cash, even if the terms of your deal with the investor give it some discretion as to the timing of the purchases. The key thing is that you've got an effective registration statement on file for the shares you propose to issue.
If you didn't use shares registered under the existing S-3, but instead struck a deal with the investor and then wanted to file a new primary S-3 covering the shares you propose to issue, my answer would be different, because I think you'd have an unregistered offer and would need to issue the shares in an unregistered, exempt transaction. You could only register the shares for resale after they'd been issued.
Your eligibility to use Form S-1 for a series of transactions like this depends on whether you can hang your hat on Rule 415(a)(ix) because an S-1 issuer generally may use Rule 415 for a primary issuance only if an offering is made on a continuous basis. I don't know the details of your offering, but it sounds like it may possibly involve a continuous offering. If you aren't a smaller reporting company, you would be ineligible for forward incorporation by reference into the S-1, which could make the transaction procedurally more cumbersome in terms of keeping the prospectus current.
-John Jenkins, Editor, TheCorporateCounsel.net 8/23/2020
RE: Perfect. Thank you for the sanity check!
-8/23/2020
RE: No, not if the shares being sold are registered for resale.
-John Jenkins, Editor, TheCorporateCounsel.net 8/21/2020
RE: That's my sense as well. For what it's worth, I did a quick search using the term "financial statements of a significant customer" and only found a single comment letter and response exchange where the Staff raised the possibility of a potential need for financial statements. The issuer was GEX Management Inc., and the back and forth came in connection with a 2016 S-1 filing. Here are the company's response letters, which include the SEC's comments. Comment 22 of the original response letter is the place to start:
-John Jenkins, Editor, TheCorporateCounsel.net 8/19/2020
RE: Pushing this up. I would be interested in any thoughts on this topic. Would the answer change if the preferred holders did not have rights to vote on an as-converted basis?
-11/30/2017
RE: Pushing this up. Any thoughts on this? We have situations where preferred shareholders typically don't have voting rights but are required under merger agreement to approve merger (along with common). As practical matter, preferred shareholders have all agreed to vote for merger, but I’m curious if a proxy statement is required in connection with communications with preferred shareholders since preferred is convertible at-will into common.
-8/19/2020
RE: I'm not aware of any guidance on this point, but in its absence, I think the language of Rule 14a-2 leads to the conclusion that the proxy rules would not apply. Rule 14a-2 says that the proxy rules apply to "every solicitation of a proxy with respect to securities registered pursuant to section 12 of the Act," but unless you're dealing with a rollup transaction, there's no provision in the rule to apply it to solicitations involving a class of securities not registered under Section 12.
Although the fact that the securities are freely convertible into the registered class certainly matters in determining whether the holders beneficially own the underlying shares for purposes of Section 13(d), I don't think that fact or the fact that the class votes on an "as converted" basis matters in the Rule 14a-2 analysis. Those terms may give the holders of the unregistered class rights that are similar to those enjoyed by the holders of the registered class, but they are simply terms of the unregistered class of securities itself. Unless the securities independently exceed the thresholds for registration under Section 12(b) or 12(g), then I don't think it is appropriate to conclude that rules expressly limited to securities registered under Section 12 should apply to them.
-John Jenkins, Editor, TheCorporateCounsel.net 8/19/2020
RE: I believe it doesn't suspend the underlying registration statement, but you wouldn't ordinarily want to draw down because filing the amendment typically means that there is material updating information to add (but in the situation mentioned, that might not be true if it involves merely switching forms).
-Broc Romanek, Editor, TheCorporateCounsel.net 10/17/2005
RE: It had always been my understanding that a post-effective amendment needs to be declared effective.
-10/19/2005
RE: That is true in most cases (with exceptions laid out in Rule 462), but even when a post-effective amendment is not yet effective, the original registration statement is still effective; that's what the question above relates to.
-Broc Romanek, Editor, TheCorporateCounsel.net 10/20/2005
RE: This is a bit confusing to me. How can the original registration statement still be effective while the amendment is being reviewed?
In "Securities Law Techniques" by A.A. Sommer Jr (ed.), it provides that "there will be an interruption in the selling process during the period required for staff review and compliance with staff comments."
To put it more concretely, my question is this: If Issuer had a resale registration statement on SB-2 declared effective, then files a post-effective amendment to change the stated plan of distribution, can the selling stockholders continue to sell their shares covered under the original registration statement while the post-effective amendment is being reviewed?
-11/27/2007
RE: The Staff has historically taken the position the continuing offers and sales may be made after filing but before the effectiveness of a post-effective amendment if the prior prospectus is still current under Section 10(a)(3). This may be the case when the issuer has filed a post-effective amendment to update the prospectus under Section 10(a)(3) before it is required to do so under the statute, or in situations where the issuer has filed a post-effective amendment for reasons other than updating under Section 10(a)(3).
If the prospectus no longer satisfies the requirements of Section 10(a)(3), then no sales can be made after filing but before effectiveness of the post-effective amendment. Further, the adequacy of the prospectus needs to be evaluated from a Section 12(a)(2) and antifraud perspective before making any offers and sales.
-Dave Lynn, Editor, TheCorporateCounsel.net 11/27/2007
RE: Dave, is this still the Staff's position? Thank you.
-6/30/2015
RE: Bump,
-8/18/2020
RE: Based on the latest Reg Flex Agenda, it looks like they're targeting April 2021 for action on it, but that schedule isn't etched in stone, and it wouldn't be shocking if it slipped.
-John Jenkins, Editor, TheCorporateCounsel.net 8/17/2020
RE: At our company, it's usually 2-3 days; they can request longer, and we’ll revisit and extend after the first one expires.
-8/15/2020
RE: Our model insider trading policy suggests 5 business days as the amount of time that pre-clearance lasts, but I think it is very fact-specific and agree that 2-3 days with the possibility of extension sounds reasonable. We are also running a survey right now on insider trading adjustments due to COVID.
-Liz Dunshee, Managing Editor, TheCorporateCounsel.net 8/15/2020
RE: Our company is pretty conservative on compliance issues like this, but our pre-clearance just lasts for 24 hours.
-8/17/2020
RE: Thank you. Glad to hear you enjoyed the blog. You may find it helpful to visit our "Clawbacks" Practice Area on CompensationStandards.com. We've posted memos there that walk through trends and give sample language. We also have a section about clawback trends and disclosure in the CD&A chapter of our Executive Compensation Disclosure Treatise, which is posted on CompensationStandards.com or available in hard copy:
Lastly, we have a panel at our fast-approaching Proxy Disclosure & Executive Pay Conferences that will be devoted to discussing clawback & forfeiture provisions — including the trend to broaden those provisions, the impact on recruitment & retention, interplay with advancement provisions, legal considerations and enforcement, and expectations for rulemaking. As I blogged on our “Advisors’ Blog” a few weeks ago, the SEC’s Reg Flex Agenda says that it plans to re-propose clawback rules by October.
-Liz Dunshee, Managing Editor, TheCorporateCounsel.net 8/15/2020
RE: This is a bit complicated, but the upshot is that I think Jeff or Amazon will want to make some kind of announcement when the transfer is about to occur, just to control the news and the spin? So, that might be a voluntary disclosure on a Form 8-K (with a press release as an attachment), not required by the SEC’s rules.
If they don’t go that route, the mandatory disclosure might be on a Form 4 under the Section 16 rules. But this is complicated and so it’s “maybe, but not necessarily.” Rule 16a-12 exempt from Section 16, including from the Form 4/5 reporting requirement, an insider’s transfer of securities pursuant to a domestic relations order. So, if the spouses agree to a property settlement and submit it for court approval as part of the divorce (the usual practice), or even if they don’t and a judge has to decide how to allocate the marital estate, the transfer of shares won’t be reportable. If Jeff just transfers the shares without a court order, that would be reportable (on Form 4 or Form 5, depending on whether Jeff wanted to characterize the transfer as a “gift”), but that’s a less likely scenario. If Jeff transfers in an exempt transaction, he might nevertheless, later, have a transaction reportable on Form 4 or Form 5. At that point, his total holdings reported in that report would reveal that he had transferred a bunch of stock, and most insiders explain in a footnote why their total holdings dropped.
You might also check to see if Jeff files on Schedule 13D (not 13G). If so, the transfer of more than 1% of the class would require a “prompt” amendment to the 13D.
Broc Romanek, Editor, TheCorporateCounsel.net 1/11/2019
RE: Wouldn’t it be MacKenzie — and not Jeff — that would have to file the 13D or 13G since she would be the one taking ownership? Or am I missing something?
-1/11/2019
RE: As Jeff already owns more than 5% of Amazon stock, he would have either a 13D or 13G on file already. A 1% change would require the “prompt” filing. If MacKenzie gets more than 5% of Amazon stock, she will be required to file either a 13D or 13G — but deadlines for either of those would be later than the “prompt” filing requirement for Jeff. So, Jeff’s filing would likely precede MacKenzie’s…
-Broc Romanek, Editor, TheCorporateCounsel.net 1/11/2019
RE: Has the SEC provided any guidance on what constitutes a "prompt" filing (i.e., how many days)? Alternatively, is there any practical guidance here?
-8/12/2020
RE: As far as the SEC is concerned, prompt means really fast. Here's what it said in Release 34-39538:
"In order to be prompt, an amendment must be filed "as soon as practicable" under the facts and circumstances of the case. In the Matter of Cooper Laboratories, Inc., Exchange Act Release No. 22171 (June 26, 1985), [1984-85] Fed. Sec. L. Rep. (CCH) 83,788 at 87,526-27. "Any delay beyond the time an amendment could reasonably have been filed may not be deemed to be prompt." Id. at 87,526."
In practice, I think many people take the position that you've potentially got an issue if you don't amend your filing within one business day of the change requiring an amendment. See this Davis Polk memo, which notes that "Generally speaking, an investor must file a Schedule 13D with the SEC within 10 days of crossing the 5% threshold, and thereafter report any material changes by filing an amendment within one business day of the change."
-John Jenkins, Editor, TheCorporateCounsel.net 8/13/2020
RE: Thank you. Seems like an onerous requirement on a holder whose percentage holdings change merely because of a change in the number of outstanding shares.
-8/13/2020
RE: Sorry. Now that I am further reading 5230.2, it talks about an SRC OPERATING company, so it seems like 3 years of audits would be required in the 8-K unless the operating target qualified as an SRC.
-8/7/2020
RE: Looking into a related question, how are you calculating the public float for the target company? Is it just non-affiliate shares x the deal price per share (i.e., do you disregard the "in the case of an IPO" clause, or would you add in any other common shares issued in the de-spac'ing x the deal price per share)?
Everything I've come across so far references the target company's SRC eligibility, which leads me to believe you disregard the IPO clause, but have not found anything clearly confirming that read.
-8/13/2020
RE: I found the answer on Form 8-K, but if anyone has more color, please let me know.
During the period after a registrant has reported a business combination pursuant to Item 2.01 of this form, until the date on which the financial statements specified by this Item 9.01 must be filed, the registrant will be deemed current for purposes of its reporting obligations under Section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m or 78o(d)). With respect to filings under the Securities Act, however, registration statements will not be declared effective and post-effective amendments to registrations statements will not be declared effective unless financial statements meeting the requirements of Rule 3-05 of Regulation S-X (17 CFR 210.3-05) are provided. In addition, offerings should not be made pursuant to effective registration statements, or pursuant to Rule 506 of Regulation D (17 CFR 230.506) where any purchasers are not accredited investors under Rule 501(a) of that Regulation, until the audited financial statements required by Rule 3-05 of Regulation S-X (17 CFR 210.3-05) are filed; provided, however, that the following offerings or sales of securities may proceed notwithstanding that 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; or
(e) sales of securities pursuant to Rule 144 (17 CFR 230.144).
-8/12/2020
RE: A couple of things. First, if you don't file the financial information within 71 days of the due date of the initial 8-K filing, then the issuer will be deemed to be late. Missing a deadline to provide an 8-K with required pro forma and acquired company financial statements will cause an otherwise eligible issuer to lose Form S-3 eligibility for at least 12 months. That means the issuer won't be able to file a new Form S-3 registration statement for at least a year. See the discussion on page 57 of our Form S-3 Handbook.
If you have an existing shelf S-3 on file, it is sometimes possible to continue to use it even if you're late (subject to the limitations addressed in the instructions to Form 8-K that you cited if the financial information still hasn't been provided) until the next required Section 10(a)(3) update. However, that is contingent on the issuer reaching the conclusion that the information in the missed report does not constitute a "fundamental change" to the prospectus, which may be difficult to do. In any event, you'd also need to get comfortable that you have enough information about the acquisition in the prospectus to conclude that it doesn't have a material omission. See the discussion on page 75 of the Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 8/12/2020
RE: Thank you!
-8/12/2020
RE: If the tender offer involves shares that are registered under the Exchange Act, then the affiliate would need to comply with Regulation 14D, not 13e-4. See the discussion in Topic #10238.
Since the shares aren't being resold to the issuer, a holder of restricted securities would need an available exemption to participate in the tender. If the shares are being acquired for investment purposes and the affiliate is accredited, then it might be possible to structure the sale in reliance on Section 4(a)(7),
-John Jenkins, Editor, TheCorporateCounsel.net 8/11/2020
RE: Not anymore. That requirement used to be in Item 10(d) with respect to incorporation by reference of documents that were more than 5 years old, but it was eliminated as part of the FAST Act amendments. See this blog from Cydney Posner:
-John Jenkins, Editor, TheCorporateCounsel.net 8/9/2020
RE: Unfortunately, there's no exemption from the prohibition on insider trading for tax- motivated transactions, so sales into the market during a blackout period are potentially a problem. However, transactions between the company and an insider don't raise those concerns, so one solution may be to include a net share settlement provision in the plan. Under a net share settlement, the company keeps a portion of the newly vested shares equal to the tax needed for withholding.
-John Jenkins, Editor, TheCorporateCounsel.net 8/7/2020
RE: Thanks, John. If the company were to allow net settlement, then isn't the company then responsible for paying the tax and, if so, wouldn't they have to sell into the market?
-8/7/2020
RE: I think the plans include these provisions because the company presumably has greater cash resources than individual plan participants and can bear the cash flow impact without having to sell the shares it is withholding. If that's not the case, then it doesn't work.
-John Jenkins, Editor, TheCorporateCounsel.net 8/7/2020
RE: I don't think so. See Exchange Act Rules CDI 130.01:
Question 130.01
Question: A condition for meeting the definitions of “accelerated filer” and “large accelerated filer” in Rule 12b-2 is that the issuer must have been subject to the requirements of Section 13(a) or 15(d) of the Exchange Act for a period of at least “twelve calendar months” as of the end of its fiscal year. What is a “calendar month” for purposes of the definitions of “accelerated filer” and “large accelerated filer”?
Answer: The term “calendar month” under Rule 12b-2 is interpreted in a manner consistent with the term “calendar month” in determining Form S-3 eligibility. In both cases, a “calendar month” begins on the first day of the month and ends on the last day of that month. For example, if an issuer became subject to the requirements of Section 13(a) on January 15 and remains subject to Section 13(a) through the end of the year, it will have been subject to the requirements of Section 13(a) for eleven “calendar months” as of December 31. [September 30, 2008]
-John Jenkins, Editor, TheCorporateCounsel.net 8/7/2020
RE: I don't think so. IPO filing fees are calculated under Rule 457(a), and are based on a bona fide estimate of the maximum offering price. It seems hard to me to provide that kind of estimate in the context of a registration statement filed for publicly traded shares that are to be used for future market price-based awards under the plan. I think in that case, Rule 457(h) tracks you into 457(c), which looks at the market prices of the shares.
Interestingly, Rocket Companies filed an S-8 yesterday and used the maximum aggregate offering price listed in the IPO S-1 ($22 per share) that it went effective on last week to calculate the fee. However, that deal wasn 't priced until after the market closed yesterday (at $18 per share), so trading didn't start until today. Technically, I think Rule 457(h) would have permitted them to use the book value of the securities, but since the S-1's dilution table suggests that, as usual, book value is much lower than the maximum offering price, I don't think anyone will second guess them.
-John Jenkins, Editor, TheCorporateCounsel.net 8/6/2020
RE: ISS has indicated that this outreach is an effort to ensure accuracy of data that underlies its research and ratings, and the annual policy survey that they put out last week suggests that their investor clients are interested in info about broader forms of diversity. We don’t know whether a new voting policy is being contemplated, but since there’s already one on board gender diversity, and in light of the focus lately on racial and ethnic diversity, it may not be too far of a stretch to think that a broader policy will be coming.
To ensure the data that ISS has is accurate and to improve the chances that their circumstances are considered in crafting a potential policy and phase-in, I personally think it’s in companies’ best interest to respond if they have the bandwidth to do so. I predict ISS will do some targeted follow-up to encourage that.
As a heads up, we are partnering with ISS Corporate Solutions for a webcast onThursday, August 6th, and will be covering board diversity as one of the topics. If anyone didn’t get the invite and wants to register for that, feel free to email me.
-Liz Dunshee, Editor, TheCorporateCounsel.net 8/3/2020
RE: Rule 302(b) of S-T just requires them to be dated "before or at the time the electronic filing is made," so I don't think you've violated any rule. There's no harm in reaching out to get the filing date adjusted, although I don't think that's an urgent matter unless you'd be late without the adjustment.
For what it's worth, I was involved in a couple of filings yesterday that were submitted before 5:30 p.m., but they weren't accepted (or at least we didn't receive notice of acceptance) until after that time, and the SEC gave us a 7/30 file date. Since we didn't need to do anything, perhaps the SEC overlooked your filing for some reason.
-John Jenkins, Editor, TheCorporateCounsel.net 7/31/2020
RE: Thank you!
-7/31/2020
RE: Both roles may be filled by a single person. I've seen many situations where the CFO is both the PFO & CAO.
-John Jenkins, Editor, TheCorporateCounsel.net 7/30/2020
RE: I'm not completely sure, but assuming the other offering is separate and not a continuous offering, I think the better answer is that you would only consider the amount sold. The exception to the general rule that you only count securities that are sold in calculating the 1/3rd limit is laid out in Securities Act Forms CDI 116.23. That CDI speaks only to multiple concurrent continuous offerings:
"Question: A company is able to sell up to $10 million in securities using its effective shelf registration statement on Form S-3, in reliance on General Instruction I.B.6. On Monday, June 7, the company files a prospectus supplement to offer and sell up to $5 million of securities in a continuous offering. The company promptly begins its offering and has sold $2.5 million of securities to date. The company intends to file a prospectus supplement for another continuous offering on the following Monday, June 14. What is the maximum amount of securities that can be offered by the June 14 prospectus supplement, assuming the 1/3 limit in General Instruction I.B.6 continues to be $10 million?
Answer: The general rule is that, when measuring the amount available for a later takedown, only those securities actually sold are counted against the 1/3 limit. See Question 116.22. In the context of multiple, concurrent continuous offerings, however, any securities that continue to be offered in other continuous offerings in reliance on General Instruction I.B.6 would also count against the 1/3 limit. In this example, the company has sold $2.5 million of securities to date and therefore, as of June 14, can offer and sell up to $7.5 million of securities pursuant to General Instruction I.B.6. Because the company continues to offer up to $2.5 million of securities with the June 7 prospectus, it can only offer and sell up to $5 million of securities with the June 14 prospectus. To permit otherwise would allow a company to do in two or more transactions what it cannot do in one transaction. [Aug. 11, 2010]"
I'm not aware of this position being extended to a situation involving a discrete takedown in a separate offering that is not being made on a continuous basis but that takes place concurrently with a continuous offering. It seems to me that this would have been an easy thing to do when drafting the CDI. The concept appears to be that a different position could allow companies to offer, on a continuous basis, an amount of securities that exceeds the 1/3rd limit, which is prohibited (See CDI 116.22). I don't think the same concerns would apply to a takedown in a truly separate, non-continuous offering. I would recommend that you run this one by the Staff.
-John Jenkins, Editor, TheCorporateCounsel.net 7/30/2020
RE: That's a tough one. It's a very unusual situation, but I guess I'd approach the materiality analysis here in the same way I would with respect to a contingency — Basic's probability/magnitude test. In terms of probability, you know a financial publication may publish a (presumably favorable) article about the company at some point in the future. The magnitude of the impact of a favorable story on the company depends on a number of factors. Is the company a relatively unknown small cap or a widely followed larger company? What news will the story break? Is it consistent with the market's expectations about the company, or are you dealing with a Kodak or Moderna-type bombshell?
It appears that the company and its management will cooperate in the story, which suggests to me that they are going to have an informational advantage over the market when it comes to assessing the answers to these questions. Assuming you're dealing with an event that would likely be material if it came to pass, that's a warning light. Courts tend to determine that contingent events are material fairly early on in the process when insiders have an informational advantage over the market, in order to deprive them of a trading advantage.
Even if you can reach the conclusion that the potential story isn't material at the time the 10b5-1 plans are entered into, you've also got to factor in how risk averse the company and its executives are. When insiders appear to have fortunately timed trades under a 10b5-1 plan, it often results in close public scrutiny and a lot of criticism. Just ask the folks at Moderna.
-John Jenkins, Editor, TheCorporateCounsel.net 7/29/2020
RE: Once risk factors are updated in a 10-Q, they should continue to be included in subsequent 10-Qs for the remainder of that fiscal year. The language of Form 10-Q provides the basis for this requirement. Form 10-Q expressly requires companies to set forth "any material changes from risk factors as previously disclosed in the registrant's Form 10-K" in response to Item 1A to Part 1 of Form 10-K.
-John Jenkins, Editor, TheCorporateCounsel.net 7/20/2020
RE: As a follow-up to this QA, do the 10-Q1 risk factors actually need to be repeated in the 10-Q2, or can the company incorporate by reference the risk factors previously disclosed (Rule 12b-23, Exchange Act) in the 10-Q1?
-7/20/2020
RE: It can be incorporated by reference.
-John Jenkins, Editor, TheCorporateCounsel.net 7/20/2020
RE: How does the language from the instructions to Part II play in here? "If substantially the same information has been previously reported by the registrant, an additional report of the information on this form need not be made." If there's no change from one quarter to the next, would the risk factors as included in the first quarter 10-Q not be considered "previously reported"?
-7/27/2020
RE: I think you could certainly make that argument, and I'm sure many people take that position. The potential problem is that there's a discrepancy between what was in the SEC's adopting release for the 10-Q risk factor requirement and what is contained in the current language of the form. In the 2005 adopting release, the SEC “set forth any material changes from risk factors as previously disclosed in the registrant’s Exchange Act reports." The current language of the form calls for disclosure of any material changes from the risk factors as disclosed in the 10-K.
In the face of that discrepancy, I think people are uncertain how to interpret the general statement permitting companies to avoid repeating disclosure of previously disclosed information versus the specific line item that calls for “10-Q disclosure of changes made to the risk factor language in the Form 10-K." See this Bass Berry blog.
-John Jenkins, Editor, TheCorporateCounsel.net 7/28/2020
RE: OK. Thanks, John! That's a helpful explanation. Certainly incorporating by reference as you suggested above is not too onerous, but this seems like a place where some disclosure simplification might be worthwhile!
-7/28/2020
RE: The Sept-Oct issue of The Corporate Counsel stated:
Despite the literal language of Item 1A of Form 10-Q, the Staff has now confirmed that a new or updated risk factor disclosure included in a 10-Q (e.g., the Q.1 Form 10-Q) does not need to be repeated in subsequent 10-Qs. The Securities Offering Reform adopting release uses broader language than in Item 1A, saying that risk factors should be included in Form 10-Q to reflect material changes "from previously disclosed risk factors," and even discourages "unnecessary restatement or repetition of risk factors in quarterly reports." While language used in an adopting release doesn't override the express requirements of a rule, we understand that the Staff takes the above position.
Anyone know of this position changing?
-7/28/2020
RE: The cited article was from 2010.
-7/28/2020
RE: Thanks. That's news to me. I have not seen that interpretation. I will check with Dave and Mike to see if they can shed some light on it.
-John Jenkins, Editor, TheCorporateCounsel.net 7/28/2020
RE: I did some checking internally, and was told that statement in the Sept. 2010 issue was likely the result of an informal discussion with someone in the Chief Counsel's Office. Unfortunately, nothing more formal came out confirming that view.
-John Jenkins, Editor, TheCorporateCounsel.net 7/29/2020
RE: There are no formal requirements as to the credentials or experience a PFO must have, but it is a position of significant responsibility as far as the securities laws are concerned, so the board would be well advised to have concluded that the individual is up to the task prior to selecting that person.
There's no prohibition on a consultant signing a certification as a PFO, if that person is performing the functions of a PFO. As this Exchange Act Rules CDI notes, that's what matters:
Question 161.06
Question: An issuer does not have a principal executive officer or a principal financial officer. Who must execute the certifications required by Rules 13a-14(a) and 15d-14(a)?
Answer: As set forth in paragraph (a) of Rules 13a-14 and 15d-14, where an issuer does not have a principal executive officer or a principal financial officer, the person or persons performing similar functions at the time of filing of the report must execute the required certification. [September 30, 2008]
-John Jenkins, Editor, TheCorporateCounsel.net 7/29/2020
RE: Form 10-Q doesn't have a line-item that requires Item 404 disclosure of related party transactions in the narrative, but GAAP may require some disclosure of them in the financial statements. Of course, the transaction may trigger an 8-K filing obligation.
-John Jenkins, Editor, TheCorporateCounsel.net 7/28/2020
RE: In the first instance, whether the board has to elect a particular officer is a state law issue, and Delaware doesn't mandate such an officer position (see Section 142 of the DGCL). However, at the federal level, you need to look at Rule 3b-7 under the Exchange Act and assess whether the individual's functions render him or her an "executive officer" as defined by that rule. Because of the responsibilities and potential liabilities imposed on executive officers under the federal securities laws, I think that it would clearly be a best practice to have the board formally elect any officer that would be classified as an executive officer under the securities laws.
Regardless of whether the company considers its chief accounting officer to be an executive officer, Form 8-K CDI 117.06 makes it clear that the Staff considers the principal accounting officer to be an executive officer for purposes of Form 8-K reporting requirements.
"Question 117.06
Question: If the registrant does not consider its principal accounting officer an executive officer for purposes of Items 401 or 404 of Regulation S-K, must the registrant make all of the disclosures required by Item 5.02(c)(2) of Form 8-K?
Answer: Yes. All of the information required by Item 5.02(c)(2) regarding specified newly appointed officers, including a registrant’s principal accounting officer, is required to be reported on Form 8-K even if the information was not required to be disclosed in the Form 10-K because the position does not fall within the definition of an executive officer for purposes of Items 401 or 404 of Regulation S-K. [April 2, 2008]"
-John Jenkins, Editor, TheCorporateCounsel.net 7/28/2020
RE: If you haven't held a meeting, then the deadline under Rule 14a-8 is a "reasonable time before the company begins to print and distribute proxy materials." Unfortunately, that's a facts and circumstances test that the SEC applies in a decidedly pro-proponent manner. In most cases, that means that a shareholder can submit a Rule 14a-8 shareholder proposal until the company has begun printing and distributing its proxy materials. See the discussion beginning on p. 100 of our Shareholder Proposals Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 7/27/2020
RE: Thank you. I had read through that discussion and appreciate it is a facts and circumstances test. For example, the company likely will need to file a preliminary proxy statement, which it would likely file within two weeks after a 10-day deadline. (I note one exclusion discussed in the guide where the proposal was submitted after preliminary materials were filed.) For various reasons, the company also does not have the flexibility of delaying the date of its meeting. I guess the bottom line is that we can announce a 14a-8 deadline, but the company would not be able to rely on that deadline to have a proposal excluded on the basis that it was untimely submitted and would need to persuade the staff that it was reasonable under the circumstances?
-7/27/2020
RE: If the Form 10-K is not filed until after 5:30 p.m. EST on the due date, it will be assigned a filing date of the next day, and therefore would not be considered a timely filing. Rule 12b-25 provides an automatic 15-day extension of the Form 10-K filing deadline, as long Form 12b-25 is filed within one business day of the deadline. If you file the Form 12b-25 and the Form 10-K together on the evening of the due date, both the Form 12b-25 and the Form 10-K would be considered timely filed.
-Associate Editor, TheCorporateCounsel.net 3/16/2009
RE: Do you think the same would apply in this situation: issuer files a 10-Q after 5:30 on the due date, and then files the 12b-25 the next day. The 12b-25 was timely, so does it still act to make the 10-Q timely, even though filed after the 10-Q was filed?
-7/27/2020
I think so. Rule 12b-25 doesn't condition its extension of the due date on the periodic report not being filed prior to the time that the Form 12b-25 is filed. Assuming the Form 12b-25 is filed on a timely basis, I think that if you satisfy the conditions set forth in the rule, the extension should apply under these circumstances.
I think a different interpretation would encourage companies to delay the filing of the 10-Q, instead of encouraging them to file it as soon as possible. That's not a policy outcome that seems to make a lot of sense.
-John Jenkins, Editor, TheCorporateCounsel.net 7/27/2020
RE: This is just my gut reaction, but for what it's worth, I'm not entirely sure that it technically complies with the guidance. But, assuming this is a one-off situation, I don't think I would make the signatory re-sign the document and include the date and time under these circumstances. I think you could argue that the inclusion of the date and time of receipt on the email correspondence initiated by the signatory is sufficient.
-John Jenkins, Editor, TheCorporateCounsel.net 7/27/2020
RE: It's not entirely clear as to whether the inclusion of a non-numerical reference to EBITDA would be regarded as a non-GAAP financial measure subject to Reg G, but we think the more prudent course is to treat it as if it was. There's an in-depth discussion of this issue on p. 113 of our Non-GAAP Financial Measures Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 7/27/2020
RE: SLB 4 isn't quite that ancient. It goes back to 1997, not 1977, and it's still very much alive. In terms of using Form 1-A, I don't see anything in that form that would prohibit its use to register a distribution like this, but I would check with the Staff. One potential issue is that the Holdco distribution could well be regarded as a secondary offering, and thus subject to the 30% limitation on secondary sales under Form 1-A.
-John Jenkins, Editor, TheCorporateCounsel.net 7/27/2020
RE: The Staff doesn't require adjusting the historical financial information solely for a split in order to incorporate it by reference into a proxy statement, but it does require appropriate disclosure in the Selected Financial Data section of the document. Here's the relevant language from Section 13500 of the FRM:
"Stock splits also require retrospective presentation. Ordinarily, the staff would not require retrospective revision of previously filed financial statements that are incorporated by reference into a registration or proxy statement for reasons solely attributable to a stock split. Instead, the registration or proxy statement may include selected financial data which includes relevant per share information for all periods, with the stock split prominently disclosed."
-John Jenkins, Editor, TheCorporateCounsel.net 11/13/2016
RE: Hi, John.
Same scenario, except that the pre-split financial statements would be incorporated by reference into a new Form S-3 filed after the split. Does this change the analysis?
-7/23/2020
RE: I don't believe so. The language of FRM Section 13500 expressly applies to registration statements as well as proxy statements, and seems to represent a general exception to the requirement that financial statements must be retrospectively revised prior to filing in the event of the kinds of subsequent events referenced in Topic 13.
-John Jenkins, Editor, TheCorporateCounsel.net 7/24/2020
RE: Under Item 403(b), if the shares are listed as being beneficially owned in column 3, then any pledges related to those shares need to be disclosed. Beneficial ownership in Item 403 is determined by reference to Rule 13d-3, which looks to voting and investment control, not the existence of a pecuniary interest in the shares.
-John Jenkins, Editor, TheCorporateCounsel.net 7/23/2020
RE: This is a good question, for which I have not seen or heard any guidance from the SEC Staff.
By the straight operation of Instruction 4, it seems that the result would be that you would have to disclose any such post-termination arrangements, but that result seems to me to be completely inconsistent with the purposes of the Item. Has anyone received any guidance from the Staff on this point?
-Dave Lynn, Editor, TheCorporateCounsel.net 7/30/2008
RE: Any updated answers, insight or guidance on this question? Continuing disclosure would seem even more "odd" if the only reason a person is named in the proxy statement was because they served as the CEO or CFO during a portion of the fiscal year.
On its face, Instruction 4 would seem to require the issuer to disclose 5.02(e) transactions with any person who is named in the proxy as an NEO (even if they were named because they served for a portion of the fiscal year, but then retired) until a proxy statement including the 402(c) disclosure is filed.
-5/3/2010
RE: Same question. Years later. NEO, who appeared in the 2020 10-K executive compensation disclosure as an NEO, is terminated in June 2020. An 8-K was timely filed to announce his departure. He will be included in the 2021 executive compensation disclosure as one of the "plus 2" for whom disclosure would have been provided but for the fact he was not serving in such capacity at the end of fiscal 2020. The question is whether he is still considered an NEO for 8-K triggering purposes after his termination: he may enter into a separation agreement with the company, after the actual termination date, clarifying certain payments, etc., that he will get. I think this will trigger a new 8-K, but I welcome your thoughts. Thank you.
-7/22/2020
RE: I think so too, based on the language of Instruction 4. to Item 5.02. Dave Lynn ultimately reached a similar conclusion in his response to Topic #4125, based on some internal Staff guidance. See also the discussion on p. 206 of our Form 8-K Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 7/22/2020
RE: We typically avoid granting options during a blackout period, primarily to avoid the risk of spring-loaded options. We wait until the blackout ends (or more specifically, until after our earnings release) to ensure that the option price reflects our latest earnings information. I am not aware of any similar issues with granting RSUs, but I am interested in others' views on that.
-7/22/2020
RE: Yes, that's the issue. Take a look at the discussion in Topic #10175. Spring loading of RSUs has been alleged in at least one piece of litigation involving equity awards. Bono v. O'Connor, (D NJ 2016):
-John Jenkins, Editor, TheCorporateCounsel.net 7/22/2020
RE: Once risk factors are updated in a 10-Q, they should continue to be included in subsequent 10-Qs for the remainder of that fiscal year. The language of Form 10-Q provides the basis for this requirement. Form 10-Q expressly requires companies to set forth "any material changes from risk factors as previously disclosed in the registrant's Form 10-K" in response to Item 1A to Part 1 of Form 10-K.
-John Jenkins, Editor, TheCorporateCounsel.net 7/20/2020
RE: As a follow-up to this QA, do the 10-Q1 risk factors actually need to be repeated in the 10-Q2, or can the company incorporate by reference the risk factors previously disclosed (Rule 12b-23, Exchange Act) in the 10-Q1?
-7/20/2020
RE: It can be incorporated by reference.
-John Jenkins, Editor, TheCorporateCounsel.net 7/20/2020
RE: I don't think there's uniformity in the approach to situations like this. Since ASC 450 may require disclosure of contingencies involving much less than the 10% of current assets threshold under Item 103, some companies conclude that there is no reason to reference it in the legal proceedings section. Others take the position that the legal proceedings disclosure should always include a cross reference to the contingencies footnote. I've also seen some situations where the company opts to include identical disclosure in the legal proceedings section and the contingencies footnote, even if that footnote includes matters that aren't required to be disclosed under Item 103.
In my anecdotal experience, I've usually seen companies opt to include disclosure in the legal proceedings section of litigation matters that turn up in the contingencies footnote under ASC 450, at least by means of a cross-reference. Since there isn't perfect alignment between Item 103's disclosure requirements and ASC 450's, I don't think this is necessarily a good approach to disclosure of matters that are required to be addressed under Item 103, unless the company includes the expanded disclosure in the footnote.
As for matters that aren't required to be disclosed under Item 103, I think a cross-reference is not a bad idea, and I don't really see a downside. I've heard arguments from lawyers who have included the language of the contingencies footnote in the legal proceedings section argue that this avoids the risk of a plaintiff contending that it "buried" information in a footnote that it should have included in the description of legal proceedings. I guess that argument doesn't persuade me, since it seems unlikely to me that investors and analysts would overlook a contingencies footnote. I find it even less persuasive if the Item 103 disclosure is accompanied by language that essentially says, "hey, you also should look at the footnote."
One other point to keep in mind is that while a contingency that's subject to footnote disclosure under ASC 450 may not require disclosure under Item 103, depending on the particular situation, you may need to consider whether it triggers a disclosure obligation under MD&A's known trends & uncertainties disclosure requirement. Companies that feel a matter is important enough to address in MD&A will likely opt to include it in the legal proceedings discussion, even if there may be a basis for not disclosing it based on the line item provisions of Item 103.
You may find the discussion beginning on p. 14 of our Legal Proceedings Handbook to be of some assistance.
-John Jenkins, Editor, TheCorporateCounsel.net 7/17/2020
RE: Glass Lewis simply says that they will engage outside the solicitation period, which begins when a company issues its notice of meeting and ends with the meeting.
I don't think ISS has a hard deadline, but it cautions that "during the annual meeting season, in-person meetings are typically limited to contentious issues, including contested mergers, proxy contests, or other special situations, while engagement on other topics is handled telephonically."
For more details on the practicalities of engaging with proxy advisors, see the discussion beginning on p. 42 of our Proxy Advisors Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 7/16/2020
RE: From a legal standpoint, the answer to that question depends on your assessment of how material the new information is. That depends on your situation, but unless the director is going to run afoul of major investor or proxy advisor overboarding policies, this doesn't sound too earthshaking to me. My answer would be different if the director joined the new boards before the proxy statement was mailed, in which case you'd be dealing with a proxy statement that didn't contain required disclosure.
Out of an abundance of caution, I think I'd probably file a proxy supplement disclosing the new board positions in advance of the meeting, but I don't think I would feel the need to disseminate it unless there's something else that's potentially problematic about the new directorships.
You may want to refer to the article on "Avoiding Proxy Panic: Tips for Dealing with Post-Mailing Surprises" in the July 2018 issue of The Corporate Counsel.
-John Jenkins, Editor, TheCorporateCounsel.net 7/16/2020
RE: There isn't a lot out there on Rule 415(a)(ix). The best description I've seen about what's required to be considered a continuous offering is in this excerpt from a MoFo memo:
In a “continuous offering,” securities are offered promptly after effectiveness (within two days) and will continue to be offered in the future. The term “continuous” only applies to offers of the securities, not to sales of the securities; sales can be made sporadically over the duration of the offering. In a “delayed offering,” there is no present intention to offer securities at the time of effectiveness. Generally, only more seasoned issuers that are eligible to use Form S-3 or Form F-3 on a primary basis may engage in delayed primary offerings.
Since you aren't eligible to incorporate by reference, you'll need to keep in mind applicable updating requirements for your prospectus and registration statement. Guidance on those requirements is provided in Securities Act Forms CDIs 113.01 & 113.02:
Question 113.01
Question: If a continuous offering under Securities Act Rule 415 is registered on Form S-1, is a post-effective amendment required to be filed in order to satisfy the requirements of Securities Act Section 10(a)(3), to reflect fundamental changes or to disclose material changes in the plan of distribution?
Answer: Yes. A post-effective amendment is required in these circumstances pursuant to the issuer's Item 512(a) undertakings. Form S-1 does not provide for forward incorporation by reference of Exchange Act reports filed after the effective date of the registration statement. Other changes to the information in the prospectus contained in the registration statement generally may be made by filing a prospectus supplement. [Feb. 27, 2009]
Question 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 7/16/2020
RE: What constitutes a purchase of assets subject to 5635's shareholder approval requirements hasn't been addressed in Nasdaq's FAQs or interpretive letters, but I would be surprised if the issuance of shares in connection with the acquisition of a license didn't require compliance with it. You should reach out to Nasdaq. It sounds like your licensing arrangement could be characterized as involving the purchase of an asset (the right to use intellectual property) that belongs to another entity. It seems to me that the wording of the rule is broad enough to encompass a transaction like this.
-John Jenkins, Editor, TheCorporateCounsel.net 7/15/2020
RE: If the agreement is one that's entered into in the ordinary course of business and thus removed from the material definitive agreement classification on that definitional basis as per instruction 1 to Item 1.01. I think it is possible that an amendment involving a large payment wouldn't necessarily alter the analysis, unless the amount involved somehow undermined the conclusion that the agreement should still be considered to have been entered into in the ordinary course of business. See the discussion beginning on page 51 of our 10-K & 10-Q Exhibits Handbook.
The Handbook cites Nike's decision not to file the $1 billion contract that it entered into with LeBron a few years ago as an example of a situation where a contract that has an enormous dollar value might still be an ordinary course contract. As a more mundane example, I can imagine changes to a large purchase order or similar ordinary course contract that might significantly alter the economics and impact a company's bottom line in a material way, but if the company enters into those purchase orders in the ordinary course of its business, I don't think the change in terms would necessarily transform the purchase order itself into a material definitive agreement. As you note, however, the impact of such a change may still require disclosure.
On the other hand, if the contract was not definitionally excluded and the materiality assessment of the initial contract turned on the economics, then the amendment might be sufficient to result in a reclassification of the original contract, in which case, I think an 8-K would be triggered upon amendment and the original contract, and the amendment should be filed. In terms of timing, Instruction 3 to Item 601(b)(10) requires the contract to be filed as an exhibit to the Form 10-Q or Form 10-K filed for the corresponding period during which it was entered into or became effective. In this case, I think you'd look to the date of the amendment that made the contract material.
-John Jenkins, Editor, TheCorporateCounsel.net 7/13/2020
RE: I think you're right. The XBRL adopting release contains extensive discussion of the transition to the new rule, so if the SEC wanted to carve out special provisions for successors, I think it would have done so there. That's also consistent with the general position that a successor stands in the shoes of its predecessor when it comes to reporting obligations and status.
-John Jenkins, Editor, TheCorporateCounsel.net 7/10/2020
RE: It sounds like you’re on the right track for the analysis, though you may want to consider specifically identifying ransomware as a form of cyberattack that’s occurred. You may also want to be prepared for investors to ask about these events during engagements, and you would want your public disclosure to align with anything you expect to cover in those conversations.
-Liz Dunshee , Editor, TheCorporateCounsel.net 7/11/2020
RE: As a follow-up to Liz's response, we did a pretty deep dive on disclosure and internal control issues surrounding cyber incidents in the September-October 2018 issue of The Corporate Counsel.
-John Jenkins, Editor, TheCorporateCounsel.net 7/11/2020
RE: I think it's fair to characterize the entire registration fee as an expense of the offering, regardless of whether the fee is paid entirely in cash or through a rollover like that contemplated by 457(p). The fee is required to do the offering. You've simply paid it in part by applying the cash you used for a previous filing fee. It may not involve fresh cash, but it does involve crediting you for your unused prior cash payment.
-John Jenkins, Editor, TheCorporateCounsel.net 7/10/2020
RE: I don't think this has been addressed in the bankruptcy context, but this comment letter response cites a couple of no-action letters (GulfMark Offshore, Inc. (available January 12, 2010) and Aether Systems, Inc. (available April 26, 2005)), supporting the proposition that a successor issuer inherits the predecessor's accelerated filer status.
There are technical issues about whether a company emerging from bankruptcy is a successor issuer, but there are a couple of Exchange Act Rules CDIs that suggest the successor company that emerges from bankruptcy could inherit its predecessor's reporting status.
"250.04 Following emergence from bankruptcy, the same issuer issues a new class of common stock that has substantially the same terms as its old common stock, except for a different par value. Under the bankruptcy plan, all shares of the old common stock are canceled simultaneously with the issuance of the new common stock to new holders. Although Rule 12g-3 technically does not apply because only one issuer is involved, the Division is of the view that the new common stock would succeed to the registered status of the old common stock, so that continuous Exchange Act reporting would be required. [September 30, 2008]
250.05 Rule 12g-3(a) would be available to effect Section 12 registration of securities of a successor issuer formed as part of the predecessor’s emergence from bankruptcy, even though the class of securities so registered will be issued to persons other than the holders of the registered class of the predecessor. [September 30, 2008]?"
-John Jenkins, Editor, TheCorporateCounsel.net 7/10/2020
RE: If you're listing on an exchange, then it's a listing rule, so you'd need to have the required materials posted at the time of listing. If you're not listed, then I think the proxy disclosure requirement would be the trigger for having the stuff referenced in Item 407 posted.
SEC rules also require companies to disclose in their Form 10-Ks whether they post their periodic (Form 10-K and Form 10-Q) and current (Form 8-K) reports on their websites, and if not, why not and whether they will provide electronic or paper copies free of charge upon request. Some stuff, like Section 16 reports and certain conflict minerals information, must be posted sooner. See our Website Disclosure Checklist for more details.
-John Jenkins, Editor, TheCorporateCounsel.net 7/9/2020
RE: Bumping this up to the top from 11 years ago. :)
-7/9/2020
.
RE: I don't think shares underlying warrants or convertible securities would count because you can’t include shares in the public float computation until they are actually issued. See Securities Act Forms CDI Question 216.05:
"216.05 General Instruction I.B.1 of Form S-3 requires an issuer to have $75 million of voting and non-voting common equity held by non-affiliates. The instruction indicates that the $75 million public float requirement may be computed on the basis of the last price at which the issuer's common equity was sold as of a date within 60 days prior to the date of filing. An interim daily price may not be used instead of a closing daily price. In addition, an issuer may not include shares in the public float computation until they are actually issued. [Feb. 27, 2009]"
-John Jenkins, Editor, TheCorporateCounsel.net 7/9/2020
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, and 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. 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
RE: Has a best practice emerged to correct the omission of the Description of Securities exhibit? It has been a few months, and I've only found one 10-K/A correcting the omission. Thanks in advance.
-7/8/2020
RE: If the proponent hasn't addressed the deficiencies within the relevant time period after you've provided proper notice of them, I don't think that you have to give the proponent advice on how to fix them, but you will still need to follow the no-action process under Rule 14a-8(j). The process of notifying a proponent of deficiencies and responding to the proponents efforts to address them is a complex process, and there are nuances that may be involved based on the nature of the deficiency. In the end, depending on the nature of the deficiency, the Staff may give the proponent another bite at the apple. I would encourage you to review the Shareholder Proposal Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 7/6/2020
RE: Outside of the context of Section 2(a)(11), I've never seen anyone contend that a control person of a public corporation is an "issuer." The language of Section 2(a)(11) itself makes it pretty clear that the expansive definition of the term "issuer" is limited to how the term is "used in this paragraph." Such persons are encompassed within the term "issuer" in Section 2(a)(11) in order to allow an entity to avoid characterization as a statutory underwriter simply by not purchasing securities directly from the entity that originally issued them. I don't think there's anything in the statute that would require them to be treated as issuers in any other context.
As you know, control persons rely on Rule 144 all the time, and in doing so, they are in actuality relying on the Section 4(a)(1) exemption. (See, e.g., the preliminary note to Rule 144.) That's because Rule 144 provides a "safe harbor" under which corporate officers, directors and other control persons that trade in compliance with its requirements may avoid characterization as statutory underwriters and therefore permit those trades to qualify for the Section 4(a)(1) exemption for transactions by persons other than issuers, underwriters or dealers.
-John Jenkins, Editor, TheCorporateCounsel.net 7/6/2020
RE: Thanks John! Super helpful and is exactly where I was going with this, but wanted to make sure I wasn't missing something obvious.
-7/6/2020
RE: I usually throw the phrase "at least" into the script. It doesn't have to be up to the minute. You just want to indicate the basis for the determination that a quorum exists.
-John Jenkins, Editor, TheCorporateCounsel.net 7/3/2020
RE: We have provided both unredacted exhibits and TTW materials to SEC examiners on multiple IPOs via an electronic data room (either one set up just for this purpose or one with a folder for this purpose, which folder is the only one the SEC examiner would have access to). It has worked well so far, since mail is not being forwarded from the SEC's address and we certainly cannot send to the examiner's home. We have determined not to send via email so as not to ruin confidentiality (since SEC emails can be subject to FOIA requests).
-7/2/2020
RE: Legally, I think the answer is no. There is nothing in the rules to suggest that a company has an obligation to amend an Exchange Act report that was accurate when it was filed merely because some significant development occurs subsequent to filing. There may be a business issue about whether it is advisable to file an amendment or highlight the updated disclosure in an 8-K based on the company's assessment of the potential for shareholder confusion.
You may want to refer to the article: "When, Why & How to Amend an Exchange Act Report" that appeared in the May-June 2019 issue of The Corporate Counsel.
-John Jenkins, Editor, TheCorporateCounsel.net 7/1/2020
RE: As the SEC made clear in the adopting release for the WKSI definition, the non-affiliate equity market capitalization is calculated in the same manner as for Form S-3 primary offering eligibility. For both of these purposes, you need a market price from a public trading market and the aggregate amount of common equity (as defined in Rule 405) held by non-affiliates. I believe that unless the private placement investors that you describe are affiliates of the issuer, the securities that they hold should be included in the amount of outstanding common equity.
-Dave Lynn, Editor, TheCorporateCounsel.net 6/18/2007
RE: To confirm, it doesn't matter that the private placement investors had been affiliates of the issuer within the past three months (like for Rule 144), correct?
-6/30/2020
RE: I don't think the interim number is what you want to disclose here. The Office of the Chief Accountant provided guidance on this in FAQ 2 issued in 2001:
"Q: In determining fees that are disclosed pursuant to Items 9(e) (1) – (e) (4) of Schedule 14A, should the disclosure be based on when the service was performed, the period to which the service applies, or when the bill for the service is received?
A: Fees to be disclosed in response to Item 9(e)(1) of Schedule 14A should be those billed or expected to be billed for the audit of the registrant’s financial statements for the two most recently completed fiscal years and the review of financial statements for any interim periods within those years. If the registrant has not received the bill for such audit services prior to filing with the Commission its definitive proxy statement, then the registrant should ask the auditor for the amount that will be billed for such services, and include that amount in the disclosure . Amounts disclosed pursuant to Items 9(e) (2) – (e) (4) should include amounts billed for services that were rendered during the most recent fiscal year, even if the auditor did not bill the registrant for those services until after year-end."
Since the guidance makes it pretty clear the Staff wants the final number, if that’s not possible to do by the time you file, 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. The fact that it's an estimate should be appropriately footnoted, and if it changes materially, then you may need to supplement the proxy statement.
See the discussion on pgs. 16-22 of our Audit Fees Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 6/30/2020
RE: Rule 12g-3 should be available for the succession by the holding company to the bank's '34 Act registration. Under Rule 12g-3, the succession happens by operation of law and no '34 Act registration statement on Form 10 or Form 8-A is required.
This conclusion is borne out by a few SEC Staff telephone interpretations. In interp. M.19., the Staff explains that succession under Rule 12g-3 happens by operation of law and it is implemented by the SEC's acceptance of the Form 8-K. Interp M.20. deals with succession in a holding company context, noting that the holding company is automatically deemed to be registered under Section 12, whether or not an 8-K or 8-A is actually filed. Finally, in interp. M.23., the Staff specifically contemplates the circumstances surrounding the formation of a one-bank holding company, noting that because the subsidiary bank has no '34 Act file number (presumably because it previously satisfied its '34 Act obligations by reporting to its banking regulator), the new '34 Act file number is assigned when the successor holding company file the Form 8-K required under Rule 12g-3(f).
One practical note: when you file the 8-K via EDGAR, make sure that you use the header submission type of "8-K12G3" in order to ensure that the 8-K is recognized as announcing the succession and getting a file number assigned.
-Dave Lynn, Editor, TheCorporateCounsel.net 6/30/2007
RE: Regarding your practical note, would you use submission type "8-K12G3" or submission type "8-K12B" to establish the succession pursuant to 12g-3 for a registrant with a class of securities registered under Section 12(b)?
-9/23/2009
RE: If the class of securities is registered under Section 12(b), then the issuer should use submission type "8-K12B" to file the 8-K.
-Dave Lynn, Editor, TheCorporateCounsel.net 9/23/2009
RE: Thank you.
-9/23/2009
RE: When you search EDGAR under a successor company’s new file number, will the predecessor company’s filings (i.e., all filings prior to the succession transaction) show up in the successor’s filing history? What if you search under the successor's name, rather than the file number? Would the answer change if the predecessor company is going to continue filing reports on EDGAR using its file number following the reorg?
-6/27/2013
RE: Keir Gumbs notes the following in his article "Understanding Succession Issues under the Federal Securities Laws," 19 INSIGHTS 4 (April 2005). I would also note that, in a change of position, the Staff will no longer give no-action relief in its successor line of letter whereby the successor is permitted to keep the predecessor's Exchange Act filing number.
When a new registrant files a registration statement
with the Commission, the EDGAR system generates a
new file number, which can then be used to identify the
registrant. Thus, a successor issuer that wants a new
file number must file a Form 8-K indicating that it is
being filed pursuant to Rule 12g-3.27 Otherwise, the
issuer will not receive a new file number after the succession
is complete and must continue using the predecessor’s
file number as though no change had taken
place. In these circumstances, the succession will be
equivalent to a name change. That is, the successor will
continue to use the file number and EDGAR access
codes (CIK, CCC and password) of the predecessor
and the reporting history of the predecessor will show
as the reporting history of the successor.
-Dave Lynn, Editor, TheCorporateCounsel.net 6/28/2013
RE: Thanks, Dave. Did the Staff expressly change its position re: succeeding to a predecessor's file number? If so, can you direct us to that? Interactive Intelligence, Inc. (available April 27, 2011) appears to be the last no-action letter where the SEC permitted the successor to keep the predecessor's file number. It's also the last no-action request we can find where the issuer requested use of the predecessor's number. We assume the change came about shortly after Interactive Intelligence but can't find anything definitive. Thanks in advance.
-7/2/2013
RE: I have seen a post-SPAC combined company file its Super 8-K with the 8-K12b designation (which makes sense for certain SPAC business combinations, depending on merger structure), and then immediately file an identical Super 8-K without the 8-K12b designation. Is there any reason to do that? It seems as if the filer holds the view that an 8-K with designation 8-K12b does not qualify as a current report on Form 8-K, as far as EDGAR goes.
-6/30/2020
RE: I don't think there's any reason that the 8-K12B wouldn't count for some reason. The requirements for successor issuers under Rule 12g-3 are to "indicate in the Form 8-K report filed with the Commission in connection with the succession, pursuant to the requirements of Form 8-K, the paragraph of section 12 of the Act under which the class of securities issued by the successor issuer is deemed registered."
I'm no SPAC expert, but it seems to me that the Super 8-K is likely in most cases to be the "8-K report filed . . . in connection with the succession," so I don't see why another identical filing would be necessary. I wonder if the practice has something to do with the limitations of the EDGAR System? The EDGAR Filer Manual says that up to nine items may be specified on a single EDGARLink Online Form 8-K submission. I noticed that the DraftKings filing had more than that, and that while the filings were identical, the EDGAR Page lists one as containing eight items and the other as containing two items.
-John Jenkins, Editor, TheCorporateCounsel.net 6/30/2020
RE: I don't think the U.K. Act permits delegation, and actually requires the statement to reference that it has been approved by the board. But my understanding is that the level of compliance is not high. You should check out ModernSlaveryRegistry.org, which contains an inventory of over 15,000 MSA statements, and tracks their compliance with regulatory requirements. According to that site, only 46% of the MSA statements include explicit language indicating that the board has approved it, and only 29% of the statements are fully compliant with the law's requirements.
-John Jenkins, Editor, TheCorporateCounsel.net 6/29/2020
RE: Very helpful as always. Has anyone seen U.S. companies include COVID-related disclosure responsive to the U.K. guidance issued late this spring? There appear to be none when I search that language on the website, but I can't tell if this is due to a glitch. I would think that there would be at least some examples given that June 30 is tomorrow. Thanks for any thoughts.
-6/29/2020
RE: Not to my knowledge. But I think the better view given the language of Rule 13d-3 would be that since the determination as to whether the holder would receive cash or stock would be made by the issuer, the holder did not have the "right" to acquire voting or investment power with respect to the equity security and so shouldn't be regarded as the beneficial owner in advance of conversion.
I think the issuer's right to decide whether to issue shares or cash upon conversion introduces a contingency, and should have the same result on the beneficial ownership analysis as the registration contingency addressed in Regulation 13D-G CDI 105.02:
"Question: An investor receives a right to acquire more than five percent of an issuer's voting class of equity securities registered under Section 12 of the Exchange Act without the purpose or effect of changing or influencing control of the issuer. The right is exercisable within 60 days and conditioned upon the effectiveness of a related registration statement. Must the investor report beneficial ownership of the underlying securities?
Answer: The investor is not required to file a beneficial ownership report on Schedule 13D or Schedule 13G until the contingency to acquiring the underlying securities is removed and the right becomes exercisable by the investor within 60 days from that date. Under Rule 13d-3(d)(1), an investor is not deemed to be a beneficial owner of the underlying equity securities when satisfaction of conditions to an investor's right to acquire the securities, such as the effectiveness of a registration statement, remains outside the investor's control. [Sep. 14, 2009]"
-John Jenkins, Editor, TheCorporateCounsel.net 6/29/2020
RE: That makes good sense. Thank you
-6/29/2020
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
RE: If the 8-A description is out of date, is the previous poster's solution (incorporating by reference the 8-A description as updated by the new 10-K exhibit) an acceptable solution? I've certainly seen companies doing some version of that, and I'm just wondering whether the 10-K exhibit constitutes an "amendment or report filed for the purpose of updating such description?” Amending the 8-A at this point seems somewhat pointless (or at least duplicative) given the 10-K exhibit; I understand that the two documents serve different purposes, but it seems to go against "disclosure simplification" to require a company to keep both descriptions — separately — up to date. I just haven't seen anything indicating either that the 10-K filing updates the 8-A description, or that the 10-K exhibit can be incorporated by reference in lieu of the 8-K description. I would appreciate your thoughts on this. Thanks in advance!
-6/28/2020
RE: I've seen a lot of companies do that. Although I haven't seen anything from the Staff, I think that approach is okay. It doesn't seem to me to be a huge stretch to say that the required exhibit to the 10-K should be regarded as "a report filed for the purpose of updating such description" within the meaning of Item 3(b) of Part II.
-John Jenkins, Editor, TheCorporateCounsel.net 6/29/2020
RE: I believe the intent is to set forth the address at which the company may be reached by mail. I've had clients that have used P.O. boxes for addresses without drawing a comment, and some pretty big companies only use a P.O. box as well. For example, see Kimberly Clark's most recent 10-Q.
-John Jenkins, Editor, TheCorporateCounsel.net 6/26/2020
RE: Thanks for the prompt response! Do you think the answer is the same for the agent for service? I'm just wondering if that's different because you'd be limiting the manner of service by providing only a mailing address (not that someone couldn't very easily find the street address).
-6/26/2020
RE: Never seen anything from the Staff on that, but for what it's worth, Kimberly Clark just uses the P.O. Box there too, and I'm sure they aren't alone.
-John Jenkins, Editor, TheCorporateCounsel.net 6/26/2020
RE: Helpful examples. Thank you!
-6/26/2020
RE: I have had the same problem. To determine the value for purposes of Rule 701 limitations, we ended up going with the accounting value under GAAP. We think the Staff would respect that in the absence of an exercise price, etc. and a tax value of $0. A few years ago, we contacted the Staff on this point, but they wouldn't take a position.
-6/23/2020
RE: This is a real problem, and there isn't anything from the Staff on it. Sometimes, I've seen companies limit participation in a plan involving profits interests to accredited investors in order to avoid the uncertainties of Rule 701. However, I don't think using GAAP accounting value is an aggressive position.
In terms of the reasonableness of the zero value approach, it's worth noting that Davis Polk made a comment in response to the SEC's 2018 concept release on Rule 701 arguing that this is the approach the SEC should take to valuing profits interests:
"In our view, the Commission could reasonably determine to apply the IRS' approach with regard to grant date valuation of profits interests, and treat qualifying profits interests as having zero value for purposes of Rule 701. This approach would have the effect of exempting such offerings from the additional information requirements of 701(e), but this result does not offend our sensibilities given that the recipient is not required to provide any payment beyond their services to acquire the interest, and profits in many circumstances are entirely uncertain. The effect would be similar to the application of the "no-sale" theory for registration exemption, which should be available for qualifying profits interests in any case where the acquisition of the interest is not voluntary, such that the recipient did not make an investment decision."
Although the idea of proposing amendments to Rule 701 did hit the Reg Flex Agenda last May, the SEC hasn't issued proposed rules (aside from the harmonization proposal issued in March, which addresses Rule 701 tangentially).
-John Jenkins, Editor, TheCorporateCounsel.net 6/23/2020
RE: Thanks. While Section 4(a)(2) is a viable position at the federal level, many states have tied their employee benefit plan exemptions to compliance with Rule 701, which makes the outcome of this analysis more pertinent. Otherwise, we are looking at complying with limited offering exemptions in states which could not work due to the number of employees in the state, or could require notice filings each time an issuance is made.
-6/23/2020
RE: The STOCK Act does provide that covered Congressional personnel owe duties of trust and confidence with respect to information they receive in their official capacity. Since that's the case, I think you can draw some comfort from the language of footnote 27 to the FD adopting release, which says that even though it is conceivable that a governmental representative might be a stockholder, it ordinarily would not be foreseeable for the issuer engaged in an ordinary-course business-related communication to expect that person to buy or sell securities based on that information. In that regard, the footnote observes that someone who did trade under those circumstances could themselves face liability for insider trading under the misappropriation theory. See the discussion on page 59 of the Regulation FD Handbook.
As to other steps to take in responding to a Congressional investigation, there are a number of law firm memos that address confidentiality issues that you may find useful, and I've included the URLs for a couple below. Unfortunately, Congress holds most of the leverage here, but this excerpt from this Marten law firm memo provides some recommendations on protecting confidentiality:
"Without appearing to be hostile to the committee’s request, oversight counsel should certainly flag confidentiality as an impediment to voluntary production. The information asymmetries involved – e.g., committee staff will not be able independently to verify that a responding company’s assessment of the harm likely to be incurred by disclosure is reasonable – may prevent success, but companies are nevertheless well-advised to seek three accommodations as a condition of disclosure:
- that committee staff commit in writing not to release designated confidential materials outside of the committee without a compelling legislative justification not achievable by less burdensome means;
- that staff allow the responding company to affix durable watermarks on all such documents to designate them as subject to this understanding; and,
- if the committee nevertheless feels compelled to publicize the material further, that staff provide notification no less than 72 hours in advance.
It also worth arguing for some or all of these accommodations even where a subpoena is at issue, since none are legally binding in any case."
-John Jenkins, Editor, TheCorporateCounsel.net 6/23/2020
RE: I haven't come across recent survey data, but there has been a push by Corp Fin in recent years to get more consistency between what measures are presented in the Form 8-K/earnings release and the Form 10-Q or 10-K. See question #8 on page 105 of our "Non-GAAP Handbook."
The Handbook also has a discussion on page 96 of the different types of liability that attach to these Forms.
-Liz Dunshee, Editor, TheCorporateCounsel.net 6/23/2020
RE: I'm afraid that kind of information is tough to keep under wraps. You will trigger an Item 5.02(b) 8-K reporting requirement in connection with the termination of the NEO, regardless of when that termination is effective. The precise timing as to when that reporting requirement will be triggered depends on the facts and circumstances, but I think you'd be hard pressed to conclude that it hasn't been triggered once the termination decision has been communicated to the NEO.
You will also trigger a reporting requirement under Item 5.02(e) when you enter into a new compensation arrangement with that NEO. The instruction to Item 5.02(c) and the position in CDI 117.05 applies only to disclosures relating to an incoming executive.
-John Jenkins, Editor, TheCorporateCounsel.net 6/19/2020
RE: Thanks, John.
I just wanted to follow up with a couple questions:
(a) With respect to 5.02(e), is there any way that the agreement could be structured such that reporting is not triggered immediately? For example: the agreement springs into effect, if and when a certain event occurs (i.e., the selection of a replacement)?
(b) With respect to 5.02(b), I assume that reporting is not required so long as discussions are ongoing and there has not been a definitive decision made and communicated, correct?
Thanks!
-6/19/2020
RE: (a) No, I don't think that would work. A formal contract isn't necessary to trigger the 8-K requirement. An Item 5.02(e) 8-K would be if the company "enters into, adopts, or otherwise commences a material compensatory plan, contract or arrangement (whether or not written)" in which an NEO participates, or "such compensatory plan, contract or arrangement is materially amended or modified." It seems to me that if you've agreed informally that revised comp arrangements that will spring into effect once a replacement has been identified, then you've already modified the individual's compensation arrangements to address such a contingency.
(b) If you're at a point where the company has not decided to terminate the NEO, but is merely considering or engaging in discussions about that possibility, then I don't think you've triggered an Item 5.02(b) 8-K. But if the die is cast, and you're just talking about interim comp & severance arrangements with the NEO, then I think it has been triggered. Again, the Item 5.02(e) trigger may come at a different time.
When you look at these issues, you need to bear in mind that the SEC's purpose in adopting these rules was to encourage disclosure at an early time in the process, so they are intended to make efforts to structure around them very difficult.
-John Jenkins, Editor, TheCorporateCounsel.net 6/21/2020
RE: I haven't seen any survey data on that. Most of the companies I've worked with have responded in some fashion to investor ESG inquiries and to rating services that they believe move the needle with their investors. But ESG ratings have become a cottage industry, and given how burdensome responding to all of the questionnaires a company might receive can be, I don't think most companies respond to all of them.
With growing investor interest in ESG, it makes sense for companies to consider which, if any, questionnaire requests they are going to respond to and develop a strategy for approaching them.
-John Jenkins, Editor, TheCorporateCounsel.net 6/19/2020
RE: I haven't seen anything on that either. I think the Staff's position on PIPEs was premised on its view that since the investor was shorting shares acquired in a private placement, the initial short sale that occured prior to the effective date of the resale registration statement itself involved a non-exempt "sale" of the security in violation of Section 5. I don't know what position the Staff would take here, but the circumstances surrounding receipt of securities in an 1145(a) public offering by an unaffiliated creditor seem different to me, particularly if a trading market exists for those shares at the time of the short.
I also recall that the SEC didn't have a lot of luck persuading the courts of the merits of its position on shorting PIPE shares, and incurred a few outright losses when it litigated the issue.
-John Jenkins, Editor, TheCorporateCounsel.net 6/19/2020
RE: If you wanted to offer and sell these securities all at once, I think you could do that with a Form S-1, but it sounds like the issuer contemplates selling these securities in tranches over a period of time. That would mean it would have to meet the requirements applicable to primary shelf offerings under Rule 415.
I'm not aware of any guidance addressing this exact scenario, but I think its permissibility depends on whether what you're doing involves a "continuous" offering or an offering being made on a "delayed" basis. If the offering contemplates individual takedowns over time of multiple tranches of securities with different terms, my guess is that the Staff would take the position that you're engaging in a primary shelf offering at least a portion of which will be made on a delayed basis. That's not something that Rule 415 permits you to do with an S-1. Rule 415(a)(ix) permits any issuer to engage in a primary offering that's being made on a continuous basis, but only S-3 eligible issuers can engage in primary offerings on a delayed basis under Rule 415(a)(x).
You may want to look into the possibility of relying on the "baby shelf" rules for your transaction. Assuming that the issuer isn't a shell company, has been reporting for 12 calendar months, has a class of shares listed on an exchange and otherwise meets the registrant requirements under General Instruction I. A. to Form S-3, it may engage in a primary offering registered on Form S-3 in an amount not exceeding one-third of the aggregate market value of the voting and non-voting common equity held by non-affiliates. See General Instruction I. B. 6. to Form S-3.
-John Jenkins, Editor, TheCorporateCounsel.net 6/19/2020
RE: Yes, I think that's correct, given that the resignation was not prompted by either of the previously disclosed events and that the director will be leaving the board earlier than contemplated by the prior 8-K disclosure.
-John Jenkins, Editor, TheCorporateCounsel.net 6/17/2020
RE: Question 1. I'm not aware of anything directly addressing this issue, but it seems to me that there's a pretty good argument that the conversion of the preferred should be disregarded. That's because Rule 13d-3 says that an entity beneficially owns shares that it has a right to acquire within 60 days. Since the shareholder had the right to convert the shares into common at its option, I think you could argue that the conversion merely represented a change in the form of beneficial ownership, from direct to indirect, and that the shareholder already was the beneficial owner of the underlying common. You may want to discuss this with the Staff.
Question 2. I believe that once you cross the 5% threshold, you have incurred a reporting obligation. I think that position is arguably implicit in the Staff's response in CDI 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 5% 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 5% is not a consideration with respect to the applicability of Sections 13(d) and 13(g). [Sep. 14, 2009]"
-John Jenkins, Editor, TheCorporateCounsel.net 6/16/2020
RE: The date of the resignation is a facts and circumstances question, so it is possible that a resignation communicated prior to a formal letter may be sufficient to start the clock running. As to disclosure, I think Form 8-K CDI 217.02 does require disclosure of someone who is temporarily serving in that capacity.
"217.02 When a principal financial officer temporarily turns his or her duties over to another person, a company must file a Form 8-K under Item 5.02(b) to report that the original principal financial officer has temporarily stepped down and under Item 5.02(c) to report that the replacement principal financial officer has been appointed. If the original principal financial officer returns to the position, then the company must file a Form 8-K under Item 5.02(b) to report the departure of the temporary principal financial officer and under Item 5.02(c) to report the "re-appointment" of the original principal financial officer. [April 2, 2008]"
See the discussion beginning on p. 219 of our Form 8-K Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 6/15/2020
RE: I don’t think that a non-GAAP measure in a press release would necessarily be deemed to be accompanied by the required reconciliation if the reconciliation is available solely through a hyperlink to the company’s website. Of course, when a company releases non-GAAP financial measures orally, telephonically or by webcast, broadcast or other similar means (as opposed to in writing), it may provide the Regulation G information and reconciliation by: posting the information on the company's website; and disclosing the location and availability of that information during the presentation.
-Dave Lynn, Editor, TheCorporateCounsel.net 4/18/2010
RE: Any CDIs or FAQs on this?
-4/22/2010
RE: Not that I have seen. If anyone has discussed this issue with the Staff, please let us know.
-Dave Lynn, Editor, TheCorporateCounsel.net 4/27/2010
RE: Has there been any change in this area in light of the recent trends in hyperlinking (and avoiding duplication)? In that context, is there a difference between hyperlinking to information on the company's website vs. to a previously filed document?
-6/12/2020
RE: I think the Staff is still fairly inflexible on hyperlinks, with the possible exception of tweets. See the discussion beginning on p. 61 of our Non-GAAP Financial Measures Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 6/12/2020
RE: I haven't seen anything from the Staff on this, but I agree that people do use the management holdco structure. I think there may be more flexibility in the language of Rule 701 than you might think at first. The exemption extends to any "written compensatory benefit plan (or written compensation contract) established by the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer's parent, for the participation of their employees. . ."
People using the management holdco structure may take the position that the structure itself is a feature of the written compensatory plan established "for the participation" of only Rule 701 eligible people. Alternatively, they may view a pure pass-through entity in which the beneficial owners are all Rule 701 eligible as simply not being inconsistent with the limitations of the rule.
-John Jenkins, Editor, TheCorporateCounsel.net 6/11/2020
RE: John, thank you! Very helpful.
-1:24:45 PM
RE: My guess is that the starting point would be the Supreme Court's Morrison decision on the extraterritorial application of the securities laws. I think a foreign buyer would have a stronger case for claiming that U.S. securities laws applied to its transaction if the company was located in the U.S. and the transaction would be consummated here. Anyway, this is a complex issue and not one that I'm going to be able to shed a lot of light on for you in a Q&A forum. The materials on extraterritorial application of the securities laws in our "Securities Litigation" Practice Area may be helpful in researching the issues.
-John Jenkins, Editor, TheCorporateCounsel.net 6/11/2020
RE: That's interesting to know about other companies. I would think that folks file the 8-K. Others must take the position that the information has been "previously reported" because it was disclosed in the proxy statement, but I thought actual approval was a different disclosure. Anyone else?
-Broc Romanek, Editor, TheCorporateCounsel.net 8/15/2013
RE: Any update on this topic? Thanks!
-6/11/2020
RE: My guess is similar to Broc's. Many people may be taking the language from the instruction to Item 5.02(e) that excepts grants or awards that are materially consistent with the plan terms disclosed in the proxy statement and simply assuming that it applies to the new plan adoption as well. I am not aware of anything from the Staff on this.
-John Jenkins, Editor, TheCorporateCounsel.net 6/11/2020
RE: Because you haven't triggered Item 5.03 (since your proposed amendment was described in your proxy statement), I believe that you can file the amended certificate with the next periodic report. Item 5.03 specifically calls for the text of the amendment to be filed with the 8-K. Item 5.07 does not contain similar language, and General Instruction B. 4. provides that "copies of agreements, amendments or other documents or instruments required to be filed pursuant to Form 8-K are not required to be filed or furnished as exhibits to the Form 8-K unless specifically required to be filed or furnished by the applicable Item."
When you do file the exhibit, bear in mind that Item 601(b)(3) will require you to file a complete copy of the articles as amended.
-John Jenkins, Editor, TheCorporateCounsel.net 6/11/2020
RE: I think the difference between your situation and the one in the Latham hypothetical is that you had a Section 12(b) reporting requirement at year end and the Latham piece only addresses companies with 15(d) reporting obligations. The Staff is basically saying that you can't look back to suspend an obligation in reliance on the fewer than 300 holders provision of 15(d) when, at the relevant time, your reporting obligation was suspended under another provision of 15(d) due to your Section 12 registration. In other words, you can't suspend that obligation because it was already on ice at the relevant time for another reason. It's only now that the other reason has been eliminated that the 15(d) reporting obligation has arisen.
It really comes down to interpreting how two sentences of Section 15(d) relate to one another, and I don't think there's much in the way of case law on this. So sure, the Staff's position may ultimately be incorrect, but you'd have to take the risk of an enforcement action if you wanted to fight it out on the merits.
-John Jenkins, Editor, TheCorporateCounsel.net 6/11/2020
RE: I tend to doubt that it will be extended. In the blog post announcing that it was relaxing its policy for meetings held before 6/30, Glass Lewis said that the standard policy would apply for meetings held after that date. Glass Lewis's rationale was that "even if the pandemic continues well beyond this date, companies have been given sufficient time to address shareholder concerns as outlined in our standard policy."
It's worth noting that Glass Lewis doesn't have a per se policy against virtual-only meetings. However, it wants those meetings to be conducted in a manner that affords shareholders the same rights and opportunities to participate that they would enjoy at a physical meeting, and it wants robust disclosure in the proxy that provides appropriate assurances of that. See the discussion beginning on page 48 of the 2020 Glass Lewis Policy Update.
-John Jenkins, Editor, TheCorporateCounsel.net 6/11/2020
RE: This isn't an area on which you'll find a lot of law, but I've seen a number of physical meetings held by companies with similar bylaw provisions conducted in this same manner. I don't think most practitioners interpret the role of the meeting chair to require the individual to take the lead in conducting the business of the meeting itself. Instead, I think the role contemplates that the chair will preside over the meeting.
In that role, I think the chair would be responsible for ruling on any objection to some aspect of the meeting and determining whether or not a particular matter is out of order (obviously, after consulting with counsel and other advisors). On the other hand, I don't see a problem with the chair calling the meeting to order, recognizing the CEO and delegating the responsibility for conducting the business of the meeting itself to that individual and other appropriate corporate officers.
-John Jenkins, Editor, TheCorporateCounsel.net 6/11/2020
RE: Yes, that's the only exhibit required.
-John Jenkins, Editor, TheCorporateCounsel.net 6/10/2020
RE: The most in-depth discussion of this from ISS that I've seen begins on p. 79 of the 2020 QualityScore Methodology Guide.
-John Jenkins, Editor, TheCorporateCounsel.net 6/9/2020
RE: I think in the typical case, the exercise of a conversion right that's baked into the terms of a security would fall within the Section 3(a)(9) exemption. I think most practitioners also take the position that the exercise of a garden-variety optional conversion right doesn't involve a tender offer. It just seems to flunk way too many of the Wellman factors.
The Staff does, from time to time, question whether the kind of contingent conversion right that's attached to public converts may involve a tender offer, but even there, most companies seem to have persuaded them that it does not or to at least agree to disagree.
However, while the exercise of a conversion right may be exempt from registration under the Securities Act under Section 3(a)(9) and not involve a tender offer under the Exchange Act, I don't think that you can conclude that an exchange offer that qualifies for the 3(a)(9) exemption is automatically not considered a tender offer. You can have a valid 3(a)(9) for an exchange offer but still need to comply with applicable tender offer rules, and I think that's the position that many companies engaging in exchange offers take.
-John Jenkins, Editor, TheCorporateCounsel.net 6/9/2020
RE: If the proponent has missed the advance notice bylaw deadline, then as The Corporate Counsel article says, the company should advise the proponent of that fact in advance of the meeting. Since it won't be properly brought before the meeting, the Rule 14a-4(c) analysis isn't relevant.
Assuming there's no advance notice bylaw, the company will retain discretionary authority to vote on a shareholder proposal if "specific statement to that effect is made in the proxy statement or form of proxy." That doesn't mean a company has to identify a proposal that it hasn't received or supplement a proxy statement to disclose one received after the 45-day cut-off date. All that's required is a specific statement that as to any other matter properly presented before the meeting, the proxy holders will exercise their discretion or vote "as they may deem advisable." That statement conferring discretionary authority as to those other matters appears on the proxy cards of most companies.
If you have received a non-14a-8 proposal by the relevant deadline, you will have to reference it in your proxy statement in order to exercise discretionary authority to vote against it. Last year, Bernie Sanders supposedly intended to submit a floor proposal at Walmart's annual meeting calling for employee representation on the board. The proposal was not a Rule 14a-8 proposal, but because the company knew about it prior to any applicable deadline, it included the following disclosure on page 103 of its proxy statement, under the caption "Other Matters." Here's the relevant language:
"There are no other matters the Board intends to present for action at the 2019 Annual Shareholders’ Meeting. However, the company has been notified that a shareholder intends to present a proposal at the 2019 Annual Shareholders’ Meeting concerning the consideration of hourly associates as potential director candidates. If this proposal is properly presented at the 2019 Annual Shareholders’ Meeting, the persons named as proxies in the accompanying form of proxy have informed the company that they intend to exercise their discretionary authority to vote against the proposal."
-John Jenkins, Editor, TheCorporateCounsel.net 6/9/2020
RE: If all the shares have been issued, there's no need to keep the S-8 effective. Your Item 512 undertakings would only require you to file a post-effective amendment deregistering any shares that remain unsold at the conclusion of the offering. If there are none, then you aren't required to file a post-effective amendment.
-John Jenkins, Editor, TheCorporateCounsel.net 6/8/2020
RE: I think you're right. Since C3 wasn't and isn't an affiliate of either party and received registered shares in the transaction, it may dispose of them as it sees fit, including by distributing them to its own shareholders.
-John Jenkins, Editor, TheCorporateCounsel.net 6/5/2020
RE: I don't see any reason why a WKSI couldn't rely on Rule 462(b) if it had an existing S-3 with availability and wanted to use that registration statement instead of filing a new S-3ASR. I think the idea was to provide additional privileges to companies that qualify as WKSIs, not to narrow their ability to rely on more restrictive rules that are generally applicable to all S-3 issuers.
-John Jenkins, Editor, TheCorporateCounsel.net 6/5/2020
RE: We spoke to Delaware counsel on this, and they advised that the Inspector of Election should be present. It is best if you could make someone there the Inspector of Election (such as the Chairman of the meeting), and then have your usual Inspector of Election call in and help them with their duties. But officially, the person present would be the inspector. Alternatively, you could have the Inspector of Election be on the phone, and have someone there in person as the "representative" of the Inspector of Election to help them complete their in-person duties. That isn't as solid as the first option though.
On the accountants, I don't think they need to be there in person; I don't think that would cause the meeting to be invalid. I also don't think you need to re-mail materials because of the way people are attending the meeting. I don't see that as being material.
-6/3/2020
RE: Thanks!
-John Jenkins, Editor, TheCorporateCounsel.net 6/4/2020
RE: Any responses to this?
-6/3/2020
RE: If it's a public acquirer of a private target, would target generally be considered as "joining the offer" such that they should consider their written communication an offer that needs to be filed under 425?
-6/3/2020
RE: This merited only a single sentence in the Reg M&A adopting release, and aside from one vague reference in Question B. 9. of the telephone interps on Reg M-A, I'm not aware of any guidance on this from the Staff. That being said, I don't think the idea of "joining in the offer" was meant to capture actions that a seller's board and management would take in the ordinary course of soliciting proxies from their own shareholders and complying with their other disclosure obligations in a deal in which the consideration involved the buyer's securities.
I've always thought that what this language is getting at is the "underwriter" concept embodied in Section 2(a)(11) of the 1933 Act. Does the seller look like its management and board are simply fulfilling their fiduciary duties and disclosure obligations to their own shareholders in connection with the deal, or are their activities more akin to those who are "participating in a distribution" of securities on behalf of the issuer?
Since that's my understanding, I think this was meant to capture situations in which the target's management or controllers were actively involved in promoting the deal to investors generally. For example, it seems to me that situations in which the seller's reps were planning to actively participate in "road shows" for the buyer's deal-related financings or other marketing efforts designed to promote the post-deal company (such as might be the case in a merger of equals or other situations in which members of the seller's management team would occupy key roles in the combined entity) might be what that language is getting at.
-John Jenkins, Editor, TheCorporateCounsel.net 6/4/2020
RE: You're right - most of the commentary and all of the Staff guidance that I've seen focuses on the general solicitation issues raised by the filing of the registration statement. While this hasn't been addressed definitively, my own view is this isn't a concern with respect to an investor in the private offering that also wants to buy securities in the public offering. However, there still may be a problem in permitting private investors to purchase in the public offering, and it has to do with the information that may have been provided to investors in the private offering. Here's an excerpt from this Latham blog that explains the issue:
"The other issue that comes up in the context of concurrent public and private offerings is that potential private investors may expect information that is not typically part of the IPO disclosure package, particularly projections. Once a private investor has received projections from the issuer or placement agent in connection with the private offering, you will have to think carefully whether it will be wise to include that investor in the public offering. In most cases of concurrent public and private offerings, it can prove difficult to keep both the public and private options open as to the same institutional investor. At some point, you and your banks will need to decide which investors are exclusively private side and which are exclusively public side."
That isn't going to be an issue in every concurrent offering, and in its absence, I don't think participation of the private investors in the public deal raises concern. In that regard, although it's important not to draw too much comfort from an individual issuer's comment letter process, I would still refer you to this response from Ceres Inc. to a Staff comment raising integration concerns about concurrent private and public offerings. Investors in the company's private placements also purchased securities in its concurrent public offerings. The response letter addressed the Staff's comment solely by reference to the general solicitation issue relating to the private offering. The Staff did not raise any further comments.
-John Jenkins, Editor, TheCorporateCounsel.net 6/2/2020
RE: I think auditors have become much more intrusive with their inquiries about related party transaction ever since the implementation of ASC 18. The auditor's need to perform the assessment of related party transactions required by ASC 18 is what is driving this request, and it's by no means an unprecedented one. As the discussion in Topic #8536 of this Q&A Forum reflects, companies have handled this in different ways, one of which is to include a request for this information in the D&O questionnaire.
You may find the discussion of related party due diligence practices on pages 20-25 of our D&O Questionnaire Handbook to be helpful. A discussion of ASC 18 due diligence procedures begins on page 23.
-John Jenkins, Editor, TheCorporateCounsel.net 5/29/2020
RE: It is awkward, but I think it has to do with making sure that information about basic terms of an offering that's incorporated by reference to Exchange Act reports is subject to Section 11 liability, and isn't just subject to prospectus liability under Section 12. The SEC has always taken the position that this information and information in a prospectus supplement is subject to Section 11 liability, but not everyone agreed with that position. So, when they adopted Rule 430B as part of Securities Act Reform, the SEC added this language to make sure that information was included in a prospectus supplement, which is subject to Section 11 under the rule. Here's an excerpt from this MoFo memo:
"The SEC’s position has always been that Section 11 liability under the Securities Act attaches to the prospectus supplement and incorporated Exchange Act reports, but some commentators disagreed. However, Rule 430B and Rule 430C, adopted in 2005, codify the SEC’s position (which was generally taken by the courts in the case of takedowns off a shelf) that the information contained in a prospectus supplement required to be filed under Rule 424, whether in connection with a takedown or otherwise, will be deemed part of and included in the registration statement containing the base prospectus to which the prospectus supplement relates."
It seems to me there may have been other, less clunky, ways to accomplish this than the approach used in Rule 430B(h), but perhaps something about the nature of the commentators' concerns and the fact that there was judicial precedent applying Section 11 liability to pro supps that led the SEC to think that this would be a more certain approach than deeming any Exchange Act filings incorporated by reference to be subject to Section 11 liability.
-John Jenkins, Editor, TheCorporateCounsel.net 5/28/2020
RE: If the promissory note is valid consideration for the issuance of the preferred (as I think would be the case for Delaware corporations under current law), I don't think the fact that the preferred is paid for by a promissory note would preclude a resale registration statement for the underlying common. Those shares would be currently outstanding, and the PIPE analysis for convertible securities looks to the status of those securities, not the shares into which they may be converted. See Securities Act Sections CDI #139.11.
I think the answer might be different if the parties got cute with the terms of the note itself. For example, if instead of being a straightforward promise to pay, the promissory note had payment conditions baked into it that went beyond what was contemplated by the Staff's PIPE interpretive position — for example, if there were contingencies to the payment obligation that were within the investor's control.
-John Jenkins, Editor, TheCorporateCounsel.net 5/26/2020
RE: Thanks. So, it's enough that the convertible preferred is outstanding in order to register the issuance of the underlying common, right? Even though there is no obligation that the preferred will ever get converted. Just checking.
-5/26/2020
RE: You cannot register the original issuance of the underlying common shares. If you are S-3 eligible, you may be able to register the underlying common shares for resale prior to their issuance upon conversion. Take a look at the CDI to which I referred in my prior response and the one immediately preceding it (CDI #139.10).
-John Jenkins, Editor, TheCorporateCounsel.net 5/26/2020
RE: Perfect. Thanks for confirming!
-5/26/2020
RE: Sorry, one more follow up. I think the same analysis would apply if only some portion of the preferred is currently outstanding, but the purchaser has an irrevocable obligation to buy the remainder, yes?
So, we could still register the resale of, say, 100 shares of common stock issuable upon conversion of 100 preferred shares, even if only 50 preferred shares are currently outstanding, so long as the buyer is obligated and no conditions within its control, etc.
-5/26/2020
RE: Hi. I am also curious to hear thoughts on this.
-5/27/2020
RE: I think this would be permissible if you qualified for the Staff's PIPE position, but please read the CDIs to which I referred in my previous responses. Note in particular the language of CDI #139.11 to the effect that unless a transaction meets the criteria for a PIPE, "if the company continues to sell privately additional convertible securities after it has filed the registration statement for the securities underlying the previously sold convertible securities, the continuation of the same offering may call into question the Section 4(2) exemption generally claimed for the entire convertible securities offering."
-John Jenkins, Editor, TheCorporateCounsel.net 5/27/2020
RE: I've never seen anything to that effect, but I've also never seen somebody shuffle the deck in terms of presenting line item disclosure. What I have seen is companies filing an 8-K under one item (where it most logically fits), and then referencing other items at the bottom of the disclosure and indicating that to the extent called for by Form 8-K, the information is incorporated by reference into those items.
-John Jenkins, Editor, TheCorporateCounsel.net 5/26/2020
RE: I am not aware of any interpretation of 312.04's "binding agreement" requirement, but I wouldn't be comfortable taking the position that your agreement is binding without NYSE input. It's still contingent on a definitive agreement and the parties may not see eye-to-eye when it comes to what "customary" terms of the agreement are.
-John Jenkins, Editor, TheCorporateCounsel.net 5/22/2020
RE: I think it is easier to make a "no sale" argument when you're dealing with modifications to non-fundamental terms of debt securities than when you're dealing with a holding company formation that's within the scope of Rule 145. I know there are a few no-action letters involving holding company formations where companies have been successfully able to argue that no sale is involved, but the path is narrow. The no-action letters referred to in the discussion of Rule 145 & Section 2(a)(3) in this no-action letter may help you get started.
-John Jenkins, Editor, TheCorporateCounsel.net 5/22/2020
RE: Unless you registered the shares that would fund the successor plan on your Form S-4, you can't add them in a post-effective amendment on Form S-8. (See Rule 413(a)).
If you qualify as a successor issuer under Rule 414, then you could adopt the S-8 by means of a post-effective amendment. Because the shares were previously registered, you wouldn't need to pay an additional registration fee.
If you qualify as a successor and file a new registration statement, you can carry over the fees paid on the unused portion of the registration statement that you terminated under Rule 457(p), but only if the original registration statement was filed within 5 years of your new one. That appears to be what Alphabet did, although it wasn't able to offset the entire amount of the fee payable because of the age of the registration statements involved and because it appears that Alphabet registered additional securities (deferred compensation obligations).
So, I think that alternative (i) may not be viable, but if it is, it would have the same result as alternative (ii). It seems to me that alternative (ii) and (iii) may both be viable, but alternative (iii) could end up costing you more if you can't wholly offset the filing fee under Rule 457(p).
-John Jenkins, Editor, TheCorporateCounsel.net 5/19/2020
RE: There are apparently all sorts of problems with Broadridge this year, reportedly due to a tragic situation in their NY warehouse in which 6 employees died of COVID-19. I have been advised that they have reduced staffing significantly and instituted enhanced social distancing measures. That's apparently led to some significant delays. See the discussion in Topic # 10312.
-John Jenkins, Editor, TheCorporateCounsel.net 5/12/2020
RE: Another item to note is that if materials are sent through USPS, there are sporadic delays. There's an article about mail delays in Michigan, albeit back at the beginning of April.
-Lynn Jokela, Associate Editor, TheCorporateCounsel.net 5/12/2020
RE: Broadridge has informed our proxy solicitor that the mail out DID occur on May 1st. Acknowledging that these mailings were mailed via US Standard A (bulk) mail which may be delayed as a result of COVID-19, and as it is already May 13th, should we be concerned that our street stockholders have not received their proxy statements in the mail? What do we do about this?
-5/13/2020
RE: It has been 18 days since Broadridge allegedly mailed out our proxy materials and stockholders have still not received them in the regular mail.
-5/19/2020
RE: I think Rule 10A-3 creates a problem for you here. Rule 10A-3(e)(1)(iii) provides that executive officers, employee directors, general partners and managing members of the company or any affiliated entity will be deemed “affiliates.” So, if you've already determined that the entity with which he's affiliated is an "affiliate" of the company, so is he. See the discussion on pgs. 69-71 of our "Director Independence Handbook."
If your affiliation determination with respect to the entity is based only on the amount of its ownership interest, then you may have some more wiggle room. The 10% number in Rule 10A-3 is just a safe harbor, and the Nasdaq has concluded in at least one instance that control over a 25% shareholder did not result in a person being regarded as an "affiliate" (although that didn't directly involve an audit committee position). See Nasdaq Staff Interpretation Letter 2010-10.
-John Jenkins, Editor, TheCorporateCounsel.net 1/7/2019
RE: John, that Nasdaq letter you cited weighs in on whether a director (who is affiliated with the 25% holder) would be considered an employee of the company. Can you please clarify how you concluded this indicates that Nasdaq did not view the 25% holder as an affiliate or deemed to control the company? Thank you.
-5/15/2020
RE: I see your point. Perhaps I should have simply said that the interpretation didn't necessarily preclude a finding that the person was "independent" under Rule 5605(a).
-John Jenkins, Editor, TheCorporateCounsel.net 5/17/2020
RE: There are apparently all sorts of problems with Broadridge this year, reportedly due to a tragic situation in their NY warehouse in which 6 employees died of COVID-19. I have been advised that they have reduced staffing significantly and instituted enhanced social distancing measures. That's apparently led to some significant delays. See the discussion in Topic # 10312.
-John Jenkins, Editor, TheCorporateCounsel.net 5/12/2020
RE: Another item to note is that if materials are sent through USPS, there are sporadic delays.
-Lynn Jokela, Associate Editor, TheCorporateCounsel.net 5/12/2020
RE: Broadridge has informed our proxy solicitor that the mail out DID occur on May 1. Acknowledging that these mailings were mailed via U.S. Standard A (bulk) mail, which may be delayed as a result of COVID-19, and as it is already May 13th, should we be concerned that our street stockholders have not received their proxy statements in the mail? And, what do we do about this?
-5/13/2020
RE: I think the first question that you have to ask is whether your virtual annual meeting is compliant with Reg FD's requirements in the first place. If the virtual meeting isn't made available to the public and advance notice of how the public may access the meeting is not provided, then it won't satisfy FD's requirements (just as most traditional annual meetings don't). See Reg FD C&DI 102.05. So, if your meeting isn't FD compliant and an executive inadvertently spills the beans on MNPI during the meeting, you will have to promptly disclose the information in an FD compliant manner (press release, Form 8-K, etc.).
Assuming that the virtual annual meeting is FD compliant, there's no specific requirement for a transcript to be posted, but it is clearly a best practice when it comes to earnings calls and other management presentations. Most annual meetings have not been structured to comply with Reg FD in the past, and the universe of virtual annual meetings is pretty small. That means there isn't a lot of precedent when it comes to posting transcripts. Since that's the case, my recommendation would be that companies post a transcript and keep it up for as long as they customarily keep earnings releases posted.
-John Jenkins, Editor, TheCorporateCounsel.net 5/13/2020
RE: Thanks, John. The company issued a press release announcing that it was switching to a virtual annual meeting and providing a link to a site where the annual meeting can be accessed (without having to register in advance). The press release was posted on the company website and filed as DEFA 14A. Wouldn't that notice be considered broadly disseminated to satisfy Reg FD obligations? Alternatively, if the company announced the virtual meeting in its proxy materials filed with the SEC, would that work under Reg FD? In both cases, assume that guests are allowed to listen in but not otherwise participate in the meeting.
-5/13/2020
RE: Yes. I think if you allow everyone to listen in and have provided advance notice informing the public that they may participate through a combination of a press release, website disclosure and an SEC filing, the virtual meeting should be FD compliant.
-John Jenkins, Editor, TheCorporateCounsel.net 5/13/2020
RE: As for just disclosing it in the proxy materials, that could work, but it needs to be prominently disclosed. See Reg FD C&DI 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]
-John Jenkins, Editor, TheCorporateCounsel.net 5/13/2020
RE: This is a good question, and, other than the guidance that you cite, there is not much out there from the staff that I am aware of.
I think that as a matter of principle, the triggering events under Item 5.02 are more often than not the earliest to occur of the possible chain of events that may be associated with the employment process. Further, it is notable that the triggering events are not specifically tied to any formal action on the part of the board in Item 5.02(c), unlike, say, in Item 2.05 or 2.06 where some action by the board, a board committee or an officer is required. Presumably if the SEC had wanted Item 5.02(c) to be limited to the formal process, it would have done so explicitly in the Item.
In the case that you describe, I think the appointment comes when the officer signs the employment agreement or offer letter or otherwise reaches an understanding as to his or her employment with the registrant, rather than the later time when some formal action is taken by the board. If you are in a situation where the public disclosure of the appointment is not made until the board action (or some other later time), then you could rely on the Instruction to paragraph (c) that permits a delay in filing the Form 8-K until the day of the public announcement.
The determination of whether a person is a “principal executive officer,” “principal financial officer,” “principal accounting officer” or “principal operating officer” is based upon the person’s function and not necessarily his or her title. These terms have not been specifically defined under the Exchange Act, whereas the terms “executive officer” and “officer” are defined under the Securities Act Rule 405 and Exchange Act Rules 3b-2, 3b-7, and 16a-1(f). The determination as to officer or executive officer is really a functional test in the sense of whether the person is performing the duties of that particular kind of officer.
Given these points, the Staff has generally said that an Item 5.02(c) 8-K is required when someone assumes the responsibilities of a "principal officer," even if only on an interim basis.
-Dave Lynn, Editor, TheCorporateCounsel.net 12/19/2007
RE: Does the answer to this change for a director offer letter? That one is keyed off of the "election" to the board. That seems stronger than appointment in the officer standpoint. For example, if we had the director sign an offer letter with the terms of the directorship, subject to his formal appointment to the board, is the signing of the offer letter or the appointment the trigger?
-5/12/2020
RE: I think it depends on the facts and circumstances surrounding the letter. If this "offer letter" is something that the bylaws require all individuals who are nominated to serve as directors to sign before their candidacy is considered by the board, then I can see an argument that the Item 5.02 clock hasn't started ticking. If, however, the board has essentially elected this person to the position subject to the execution of the offer letter, then I think it clearly has started ticking.
For situations in between these two extremes, I think you need to keep in mind Dave's point about the bias toward early disclosure. I also think that there's merit to establishing procedures designed to avoid these murky situations in the first place. For example, it might be appropriate to ensure that consideration of the individual's nomination for the vacancy and his or her execution of any required offer letter occur on the same day.
-John Jenkins, Editor, TheCorporateCounsel.net 5/13/2020
RE: Thanks for raising that. I'm trying to find out where that language came from. Personally, I've always thought that Item 103 spoke as of the filing date, and didn't think it distinguished between new proceedings and developments in existing ones.
-John Jenkins, Editor, TheCorporateCounsel.net 5/11/2020
RE: Thanks again for bringing this to our attention. I think the consensus here is that the better practice is to disclose new proceedings that are instituted prior to the filing date. We'll revise it when we update the handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 5/12/2020
RE: Section 204 is non-exclusive when it comes to voidable acts, but it is sometimes difficult to distinguish between "void" acts, which can't be ratified outside the statutory procedure, and "voidable" acts, which can be. My gut says that if none of the improperly vested shares have been issued, management's actions should be regarded as voidable, not void, and ratification by the committee is probably sufficient, but I have not researched the issue. You may find this Richards Layton memo on recent case law on the void v. voidable distinction to be of some help.
-John Jenkins, Editor, TheCorporateCounsel.net 5/12/2020
RE: I think you're correct.
-John Jenkins, Editor, TheCorporateCounsel.net 5/12/2020
RE: You should consult with your accountants, but this is my understanding of when the Staff views financial statements to be issued:
"Generally, the staff believes that financial statements are "issued" as of the date they are distributed for general use and reliance in a form and format that complies with generally accepted accounting principles (GAAP) and, in the case of annual financial statements, that contain an audit report that indicates that the auditors have complied with generally accepted auditing standards (GAAS) in completing their audit. Issuance of financial statements then would generally be the earlier of when the annual or quarterly financial statements are widely distributed to all shareholders and other financial statement users4 or filed with the Commission. Furthermore, the issuance of an earnings release does not constitute issuance of financial statements because the earnings release would not be in a form and format that complies with GAAP and GAAS."
Refer also to ASU 2014-15.
-John Jenkins, Editor, TheCorporateCounsel.net 5/12/2020
RE: Check out Rule 13g-2. If the warrants would have been required to be registered under 12(g) except for the fact that they were listed on Nasdaq and registered under Section 12(b), then when that registration is terminated, they'll be deemed to be registered under Section 12(g) without the need to file another Exchange Act registration statement.
-John Jenkins, Editor, TheCorporateCounsel.net 5/5/2020
RE: Thanks. You probably mean Rule 12g-2, but that only applies if the warrants were otherwise subject to mandatory Section 12(g) registration, which is not the case here. Here, there would be no revived or automatic new (per 12g-2) Section 12(g) registration. Do you agree with the fourth sentence in the post above? Thoughts on the question in the fifth sentence? And, can Form 25 provide for delisting only, and what if Registrant wants to maintain 1934 Act registration under Section 12(b) (e.g., list on another exchange)? Thank you.
-5/5/2020
RE: Yes, thank you for correcting that reference. I've never encountered your exact situation, but I've always understood that delisting for a company that isn't listing on another exchange and doesn't have a dormant Section 12(g) registration will ultimately result in deregistration as well. You may want to reach out to the Staff, but if you can't fit into the 12g-2 box, it appears to me that a new registration statement under Section 12(g) would be required if you wanted the warrants to remain registered under the Exchange Act.
-John Jenkins, Editor, TheCorporateCounsel.net 5/6/2020
RE: Thank you. Just to be clear, could you clarify what you mean by “that isn’t listing on another exchange and…?” What if the company is listing on Exchange #2 after being delisted from Exchange #1? Could the Form 25 provide for delisting only? Thanks again.
-5/6/2020
RE: Here are some recent press releases announcing virtual meetings. Most indicate that the stockholder list may be accessed through the online platform for the meeting. As for pre-meeting access, some companies still tell shareholders that the list will be available at the company's business address, while others provide a contact email for shareholders who want to inspect the list.
Some press releases say nothing about pre-meeting access. My guess is that these companies have opted to simply rely on the existing disclosure about how shareholders may access the list during the 10-day period prior to the meeting that they included in their original proxy materials, notwithstanding the impact of closures.
-John Jenkins, Editor, TheCorporateCounsel.net 5/6/2020
RE: If you had a registration statement that was updated through the filing of your 2018 10-K, then I think it is pretty clear that you have to file the 10-K before you can suspend the Section 15(d) reporting obligation. See this C&DI.
Exchange Act Rules C&DI 153.03:
Question: Can a company suspend its reporting obligations under Section 15(d) with respect to “the fiscal year within which such registration statement became effective?”
Answer: No. A company must always file the Form 10-K for the fiscal year in which the registration statement is declared effective. The Form 10- K is required regardless of whether the company suspends its reporting obligation under Section 15(d) or Rule 12h-3. [September 30, 2008]
If that's not the case, then I think it boils down to the language of the statute, and I stumble over the fact that Section 15(d) says that the duty to file under 15(d) shall be "automatically suspended as to any fiscal year" if, at the beginning of that year, the company fell below the statutory threshold. The way I read that, even assuming you could suspend your reporting obligations going forward, you would not be excused from filing your Form 10-K for 2019, because it relates to the prior fiscal year.
-John Jenkins, Editor, TheCorporateCounsel.net 5/6/2020
RE: IR websites always make me uncomfortable, but if it's any consolation, lots of companies have a similarly captioned section on their IR websites.
-John Jenkins, Editor, TheCorporateCounsel.net 5/5/202
RE: I have seen many companies structure their meetings to discourage Q&A until after the meeting has adjourned. The Chair will frequently announce at the outset of these meetings that the company will act on the formal business of the meeting, and then, after adjournment, provide management presentations and respond to shareholder questions. This allows them to avoid addressing the Q&A session and presentations in the minutes, and helps get the meeting over with quickly.
This is a fairly common approach to shareholder meetings, so it certainly suggests to me that lawyers have gotten comfortable with the idea that you don't have to include a formal Q&A period or otherwise invite shareholder questions in order to have a valid meeting. But, I think that a court would take a dim view of efforts to shut down a shareholder at one of these meetings who had the moxie to stand up and try to ask a question about a matter that was on the agenda.
So, while not having a formal Q&A session or not inviting questions might be legally defensible, affirmatively barring them seems to me to be a different matter. By the way, whatever may legally be permitted, your shareholders are very likely to get their noses out of joint if you did something like this. In that regard, the CII sent a letter to the SEC's Investor Advisory Committee over the weekend that catalogues investor complaints about virtual meetings. Q&A issues feature prominently.
-John Jenkins, Editor, TheCorporateCounsel.net 5/5/2020
RE: Item 9(c) of Schedule 14A requires the proxy statement for an annual meeting to disclose the following information:
The proxy statement shall indicate: (1) Whether or not representatives of the principal accountant for the current year and for the most recently completed fiscal year are expected to be present at the security holders' meeting, (2) whether or not they will have the opportunity to make a statement if they desire to do so, and (3) whether or not such representatives are expected to be available to respond to appropriate questions.
I've never seen a proxy statement that didn't contain this disclosure, and most of the meetings I've attended have language in the script providing for the introduction of the representative from the auditor and a statement that the auditor will be available for questions. I don't think this is necessarily required, and some companies may take the position that proxy disclosure is sufficient, and that if a shareholder raises a question for the auditor, they'll let the representative address it — but they aren't looking to invite questions in the script.
-John Jenkins, Editor, TheCorporateCounsel.net 5/1/2020
RE: You mentioned how auditors would be available for questions. Should these be limited to matters involving their prior audit?
-5/4/2020
RE: I've never seen any guidance on what "appropriate questions" are. I think that in addition to questions about their audit, any disclosure in their opinion, the financial statements or in the MD&A relating to critical accounting policies would probably be fair game for a question. My gut reaction is that I'd probably say that questions that would require the auditor to address the content of confidential communications with the board or the audit committee should be out of bounds.
-John Jenkins, Editor, TheCorporateCounsel.net 5/4/2020
RE: I don't think that flies. I don't think there would be a problem pre-recording your CEO's speech, but I don't think you're allowed to put your entire meeting in a can before it's held. You need to have a real, live meeting in which shareholders have an opportunity to participate.
-John Jenkins, Editor, TheCorporateCounsel.net 5/4/2020
RE: I don't think the order provides relief for companies that filed proxy materials after April 7.
-John Jenkins, Editor, TheCorporateCounsel.net 4/29/2020
RE: I'm surprised they didn't give some more time. Companies that filed on April 8, 9, etc. (a day after the Order) had most likely already started printing and notice cards were already at Broadridge. To double up on that cost does not seem fair.
Thanks again.
-4/29/2020
RE: This is really unfortunate. I understand that Broadridge is struggling right now to get materials mailed to shareholders. If reports are to be believed, they had an outbreak at a warehouse in New York that resulted in several deaths. Their staffing levels have been drastically reduced as they are trying to comply with social distancing efforts, and they are notifying clients of delays in mailings of material and fulfilling requests for hard copy materials. Requiring notices of changes to a virtual meeting format (rather than just press release/SEC filing) will only compound the problem.
-5/1/2020
RE: Under Delaware law, I was advised that a new notice would only be required to record holders and Broadridge should be left out of this with respect to the street holders. Anyone agree? Also, is anyone else hearing about this issue? There are probably a lot of companies stuck in the middle. Is there going to be a shareholder litigation over valid meetings after April 7? Seems really unfortunate if one group of companies gets relief and one doesn't for the exact same practice.
-5/1/2020
RE: Under state law, notice is generally only required to be given to stockholders of record, so it strikes me that this approach might be a viable workaround for companies that don't have large numbers of record holders and aren't setting a new record date. See Enstar v. Senouf, 535 A.2d 1351, 1355 (Del. 1987):
"As this Court stated in American Hardware Corp. v. Savage Arms Corp., Del. Supr., 136 A.2d 690 (1957): Under the General Corporation Law, no one but a registered stockholder is, as a matter of right, entitled to vote, with certain exceptions not pertinent here. If an owner of stock chooses to register his shares in the name of a nominee, he takes the risks attendant upon such an arrangement, including the risk that he may not receive notice of corporate proceedings, or be able to obtain a proxy from his nominee."
-John Jenkins, Editor, TheCorporateCounsel.net 5/3/2020
RE: I think the typical approach is for the Chair to be elected annually along with the other corporate officers.
-John Jenkins, Editor, TheCorporateCounsel.net 4/28/2020
RE: Just as a follow-up, it may be the case that (notwithstanding the annual appointment) the Chair would not technically be deemed an officer (the treatment of the Chair as an officer, or not, varies by state of incorporation).
-4/30/2020
RE: I don't think you're missing anything. I think you've identified the issue on which reasonable people can disagree. If you're comfortable that identifying an underwriter is not a material change to the plan of distribution or the addition of material new information, then you could certainly supplement the prospectus. I'm generally not comfortable with that position.
My general position is that naming underwriters when none were named in the original prospectus represents the "addition of information with respect to the plan of distribution not previously disclosed in the registration statement" or a "material change to such information in the registration statement" within the meaning of Item 512(a)(1)(iii), and that an S-1 issuer that wasn't allowed to forward incorporate information by reference would need to file a post-effective amendment.
My basis for that position is that in this situation, the issuer is adding entities that are assuming Section 11 liability that weren't previously identified, and that this is something I believe would ordinarily be material to a reasonable investor.
I think that the answer might be different in a situation like the one contemplated by Loss in which the plan of distribution section already contemplates an underwriting syndicate (in which case lead underwriters are usually already named). After all, that's something that's already sanctioned in the context of the information required to be in the prospectus at the time of effectiveness through Rule 430A. I'm not sure about the more typical situation in shelf offerings where the possibility of an underwritten offering is raised as part of the plan of distribution laundry list, but no underwriters are identified. I think I'd probably come to the same conclusion as I did with respect to situations in which underwriters hadn't previously been identified.
Again, the materiality of these changes is only an issue for S-1 registrants that can't forward incorporate by reference and aren't authorized to provide the information by means of a 424(b) prospectus supplement as S-3 registrants are.
I do think the deletion of the language in Item 512 — which happened way back in 1982 — does help your argument. But even there, the issue is a change in a previously identified underwriting group, not the addition of underwriters in the first instance. Also, I think that change was prompted by interpretive issues about the term "managing underwriter," and I didn't see any language in the proposing or adopting release that addressed the broader issue of whether naming underwriters was a material change or the addition of material new information.
-John Jenkins, Editor, TheCorporateCounsel.net 4/30/2020
RE: Yes, that's what 428 requires. Regarding the second query, anyone holding stock (restricted stock, ESPP stock) will get the proxy statement and ARS in the ordinary course. People who get an option — or who elect to contribute to the ESPP or company stock fund of the 401K plan — have to receive a current prospectus. Rule 428 says that includes the proxy statement and 10-K (or glossy annual report).
-Broc Romanek, Editor, TheCorporateCounsel.net 6/6/2006
RE: Just so I am clear. We had our annual meeting in May (mailed our proxy statement in March). On August 1st, a new employee becomes eligible to participate in our 401(k) and ESPP. At that point we would need to send him a copy of last year's annual report and proxy statement (the one mailed in March). Would we send him these documents upon becoming eligible to participate in the 401(k) and ESPP, or only if he elects the company stock fund under the 401(k) or to participate in the ESPP?
-6/7/2006
RE: Yes, those documents should be delivered, even though incorporated by reference. They don't need to be delivered to someone who isn't electing to participate in the company stock fund, but most companies provide the documents to all new hires, so they can have a basis for determining whether to elect the company stock fund, initially or at some later time.
-Broc Romanek, Editor, TheCorporateCounsel.net 6/7/2006
RE: Thanks Broc. One last question. Is it possible to provide the annual report and proxy statement electronically and just give the employees upon hiring a notice that such documents are available on the website and in hard copy if they request?
-6/8/2006
RE: Yes, you should be able to do that. Check out the 1996 and 1995 electronic delivery interpretative releases for the specific conditions. 33-7288 (5/9/96) and 33-7233 (10/6/95) (available on sec.gov).
-Julie Hoffman, Associate Editor, TheCorporateCounsel.net 6/8/2006
RE: Ah, one of my pet topics. I wrote these FAQs many moons ago on my first site: http://www.realcorporatelawyer.com/faqs/faqed2.html. The SEC allows companies to imply consent for employee-stockholders if a few conditions are met, as noted by Julie. Among them, employees must be given opportunity to opt in to paper delivery and must have some indication that the document was in fact received.
-Broc Romanek, Editor, TheCorporateCounsel.net 6/9/2006
RE: Broc,
When you say they "have to receive a current prospectus," does that mean that the company should be updating its prospectus each time it has an ESPP offering period or grants options/RSUs? We include the "statement of availability of information" from Rule 428(a)(1)(ii) within the prospectus (statement of general information re: applicable plan), and that references incorporating the 10-K, 8-Ks, etc. by reference. Should we be updating that section every time we have an offering period or equity grant (i.e., referring to the most recent 10-K and 8-Ks filed), or can we rely on the fact that the document is dated as of a certain date and includes the reference to incorporating all documents subsequently filed with the SEC after the date of the document?
Thank you.
-4/29/2020
RE: I don't think you need to update the information contained in Item 2 of Part I of Form S-8 to add references to the latest documents incorporated by reference to the registrant's Exchange Act filings. Your obligation under Item 2 of Part I is to tell them that you'll provide, at their request, the materials that are incorporated by reference in Item 3, but I don't think that encompasses an obligation to provide an up-to-the-minute list of what those are.
I think that requiring otherwise would be contrary to the concept set forth in General Instruction G. of Form S-8, which basically says that you update information about the registrant through the incorporation by reference process and information about the plan in the physical prospectus itself.
-John Jenkins, Editor, TheCorporateCounsel.net 4/29/2020
RE: I don't think the order provides relief for companies that filed proxy materials after April 7. See the discussion in a Morris Nichols memo.
-John Jenkins, Editor, TheCorporateCounsel.net 4/29/2020
RE: I'm surprised they didn't give some more time. Companies that filed on April 8, 9, etc. (a day after the order) had most likely already started printing and notice cards were already at Broadridge. To double up on that cost does not seem fair.
Thanks again.
-4/29/2020
RE: I haven't seen anything from Delaware suggesting that companies can keep a record date that's older than 60 days for a postponed meeting. However, that might be possible if they adjourned the meeting instead of postponing it. See Section 213(a) of the DGCL and this excerpt from a recent Cleary Gottlieb blog:
"Under Delaware and New York law, the record date for an annual meeting must not be more than sixty (60) days or less than ten (10) days prior to the annual meeting. Accordingly, if a company incorporated in Delaware or New York postpones its annual meeting to a date that would result in its record date being more than sixty (60) days before the annual meeting, the board must change the record date. A change in record date would generally require the company to provide notice of the new record date to shareholders.[9] In the event that a company adjourns, rather than postpones, its annual meeting under Delaware law, it may not be required to change its record date, even if such date is beyond thirty (30) days from the date of the original annual meeting."
-John Jenkins, Editor, TheCorporateCounsel.net 4/8/2020
RE: Ah, yes. That is what they did. They announced in advance that they intended to adjourn the meeting immediately after it was convened. However, with an executive order in place preventing such an event from occurring, I'm not sure how they technically could have convened the meeting in the first place. I would have thought the only option in such a situation would be to postpone and set a new record date.
-4/9/2020
RE: I hear you. I've learned more about annual meeting law in the last three weeks than I'd learned in 34 years of practice.
-John Jenkins, Editor, TheCorporateCounsel.net 4/9/2020
RE: Does Delaware require that the company have a quorum at the annual meeting of stockholders before it can be adjourned, or is this strictly a matter governed by the company's bylaws (organizational documents)? Thanks.
-4/28/2020
RE: Like most states, Delaware has a statute permitting a meeting to be adjourned (Section 222 of the DGCL) but doesn't say much about who can adjourn a meeting or the circumstances justifying adjournment. Those are usually topics that are addressed in the bylaws and to a certain extent, case law. But, it's pretty clear that if you don't have a quorum, you can't transact business at the meeting, so you would need to look to the adjournment provisions of your bylaws for the mechanics of how you'd do that.
-John Jenkins, Editor, TheCorporateCounsel.net 4/29/2020
RE: I think you could do that because you are relying on Section 4(a)(2) at the federal level. Rule 506 is a safe harbor for the Section 4(a)(2) exemption, so that's the relevant statutory provision. Just bear in mind that if there are ever issues with the offering, a state may claim that because you relied on the 4(a)(2) exemption at the state level, it isn't preempted under NSMIA from challenging your offering's compliance with state blue sky laws the way it would be if you relied on Rule 506.
-John Jenkins, Editor, TheCorporateCounsel.net 4/28/2020
RE: I think the typical approach is for the Chair to be elected annually along with the other corporate officers.
-John Jenkins, Editor, TheCorporateCounsel.net 4/28/2020
RE: No, but bear in mind that under Delaware law, you create a debtor/creditor relationship when you declare a dividend, so you're creating an obligation regardless of how far out you set your record date. Some companies that declared but haven't paid dividends are facing some issues due to the impact of the COVID-19 pandemic on their financial position. See the materials in the Dividend Payments section of our "COVID-19 Issues" Practice Area for some guidance on this topic.
-John Jenkins, Editor, TheCorporateCounsel.net 4/27/2020
RE: Item 303(a)(5) requires the contractual obligations table as of the latest fiscal year. However, Instruction 7 to Item 303(b) states that the table in (a)(5) is not required for interim periods and instead, the registrant should disclose material changes outside the ordinary course of the registrant's business in the specified contractual obligations during the
interim period.
I haven't seen any interpretive guidance on this, and I could see the Staff going either way on this one. It's probably worth a call to the Office of Chief Counsel. Let me know what they say.
-Broc Romanek, Editor, TheCorporateCounsel.net 5/16/2005
RE: Has anyone spoken with the Staff on this topic or have an idea of how most issuers disclose the contractual obligations in the first 10-Q after leaving SRC status? It seems that disclosure of only material changes would suffice, but we can't seem to find any guidance on this.
-7/25/2012
RE: I don't understand how you would disclose only material changes when there is no table to refer to as the baseline. I would think the best practice from a disclosure perspective is to include the table.
-Dave Lynn, TheCorporateCounsel.net 7/26/2012
RE: I am wondering if there is any new insight into this question. SRCs are also not required to provide Item 305 disclosure, and the instructions in Item 305(c) are clear that no interim disclosure is required until after a completed fiscal year. I have not been able to locate any similar guidance to Item 303(b) for SRCs that have transitioned to accelerated filer status.
-4/26/2020
RE: I'm afraid I haven't seen anything further on this, and since the SEC has proposed to eliminate the table, I doubt there will be anything forthcoming in the way of guidance. Assuming there are changes outside the ordinary course, I think the options would be to weave the disclosure into the narrative, or to take the approach Dave suggested, which would probably be easier to follow.
-John Jenkins, Editor, TheCorporateCounsel.net 4/27/2020
RE: You should look in our COVID-19 Issues Practice Area. We have an entire section devoted to annual meeting issues. I'm not aware of any sample scripts, but ConocoPhillips has posted an online transcript from its 2017 annual meeting, which was held virtually. You may find that helpful in tweaking your own script.
-John Jenkins, Editor, TheCorporateCounsel.net 4/27/2020
RE: When it comes to 401(k) plans, I think people often rely on the language of Item 601(b)(10)(iii)(C)(4), which says that you don't have to file "any compensatory plan, contract or arrangement which pursuant to its terms is available to employees, officers or directors generally and which in operation provides for the same method of allocation of benefits between management and non-management participants."
-John Jenkins, Editor, TheCorporateCounsel.net 4/26/2020
RE: I'm no expert on the ADR market and don't know whether the exchanges would entertain something like this, but I'm not aware of any company that's listed an ADR without having its shares listed on a foreign exchange. If you don't have a publicly traded stock on a foreign exchange, I don't know why an ADR listing would be preferable to simply doing a direct listing like Spotify — which is a foreign private issuer — opted to do.
-John Jenkins, Editor, TheCorporateCounsel.net 4/23/2020
RE: Talend S.A. is an example of a company with an ADR listed on Nasdaq without having its shares listed on a foreign exchange.
-4/24/2020
RE: Thank you very much. You said the company's stock wasn't listed on any foreign exchanges. Do you know if Nasdaq is the only place where trading occurs?
-John Jenkins, Editor, TheCorporateCounsel.net 4/24/2020
RE: Nasdaq is the only place trading occurs.
-4/24/2020
RE: I think the term "withdraw" implies that you're pulling guidance that's previously been issued, while "suspend" seems more appropriate when a company is telling the market that it's discontinuing its practice of issuing guidance for some period going forward. Of course, many companies may be doing both in the current environment. In the end, I think that regardless of what terminology is used, the message is likely to be clear to investors and analysts — "you're on your own."
-John Jenkins, Editor, TheCorporateCounsel.net 4/23/2020
RE: Thank you!
-4/23/2020
RE: I haven't seen anything addressing that, but given how the Staff has interpreted the date of sale concept in other contexts, I think that the date when the investment decision is made would be the better approach. The Tier 2 exemption is based on Section 3(b)(2) of the Securities Act, which limits the amount that may be "offered and sold" under the exemption to $50 million. Since Section 2(a)(3) of the statute defines the term "sale" to include "every contract of sale," I think that looking to the date of the investor's investment decision rather than the date of issuance is the better approach.
-John Jenkins, Editor, TheCorporateCounsel.net 4/22/2020
RE: It's probably a mix of both. I haven't seen any kind of survey data, but I do think that paper certificates are going the way of the Dodo. For example, Apple, Facebook and Microsoft don't issue paper certificates, and neither do old line companies like GM. Heck, even Disney got rid of their certificates with Mickey and Minnie on them. Companies like IBM and Ford still issue them, and I think there are some quirks in California and Arizona law that likely mean that companies incorporated there will keep paper certificates, but I don't think many big companies still do.
-John Jenkins, Editor, TheCorporateCounsel.net 4/22/2020
RE: For details on the short-form CTR extension process, see the discussion beginning on page 52 of our “Confidential Treatment Requests Handbook.”
-John Jenkins, Editor, TheCorporateCounsel.net 4/22/2020
RE: Has the Staff provided any guidance on using the short-form CTR extension for an extension of shorter than three years? I did not see anything in the handbook or SEC releases.
-4/22/2020
RE: Hi. Yes, I did. I am wondering if I need an 8-K on sending the email to the SEC, or if I have other options.
-4/22/2020
RE: Not that I'm aware of.
-John Jenkins, Editor, TheCorporateCounsel.net 4/22/2020
RE: I suppose that you could file the new redacted version of the exhibit on a 10-Q or 10-K and time your request to coincide with that filing, but otherwise I'm not aware of an alternative to satisfy the requirement to get the document filed on EDGAR.
-John Jenkins, Editor, TheCorporateCounsel.net 4/22/2020
RE: There was a section 310(c), but it was repealed as part of Dodd Frank. However, Section 310(c) appears in the table of contents included as Section 301 of the Act (see the link below). That leads me to two possible explanations. The first one is that some extremely fastidious lawyers may be simply referencing Section 310(c) as "NA" instead of excluding it altogether because it continues to be referenced in Section 301. The second explanation is that people frequently just markup the last cross reference sheet they filed without giving it a whole lot of thought. As I recall, it took about 20 years for the cross-reference sheet to catch up to the changes made in the Trust Indenture Reform Act of 1990, so the changes made by Dodd-Frank are still breaking news to the trust indenture community.
-John Jenkins, Editor, TheCorporateCounsel.net 4/22/2020
RE: Happy to know the history. Thanks!
-4/22/2020
RE: Unfortunately, that's the Securities Act's ultimate judgment call, and I'm simply not in a position to make it without all the facts and circumstances surrounding the offering, not just basic information about the nature of the change itself. Here's what I can say — there's no definition of the term "fundamental change," but it is clearly something that's more than simply material. As to whether a change in your placement agent and fees qualify, I guess I can see an argument that this type of modification to the terms of the offering would not necessarily be regarded as a "fundamental change." There are a few things I would point to that might help you support an argument like that:
1. In the context of registered offerings outside of Reg A, the undertaking in Item 512 requires a post-effective amendment in the event of a "fundamental change" to the information contained in the prospectus, but calls separately for a post-effective amendment in the event of material changes in the plan of distribution. The fact that there are two separate triggers suggests that in drawing the rules on the events that would trigger a post-effective amendment, the SEC implicitly acknowledged that not every material change in the plan of distribution would be a fundamental change. In contrast to Item 512, Rule 252 doesn't address material changes in the plan of distribution, it just says you need to file a post-qualification amendment in the event of a fundamental change.
2. Form 1-U includes a requirement to disclose the entry into or termination of any agreement that would result in a fundamental change in an issuer's business. It actually discusses the kind of situations that, in that context at least, would result in a fundamental change. It's not apples to apples, but the discussion there may be helpful to your analysis. The May 2018 issue of The Corporate Counsel also has an in-depth article addressing the fundamental change issue.
When you assess the fundamental change issue, I think it's very important not to focus narrowly on the wording changes themselves, but on the facts and circumstances surrounding the decision to change the placement agent and the implications of the increased fees and how they may flow through to disclosures in other areas of the document.
-John Jenkins, Editor, TheCorporateCounsel.net 4/20/2020
RE: You have to disclose the beneficial ownership information for all NEOs in the table, even those who have departed. Since that's the case, I think they should be included in the "all directors and executive officers as a group" disclosure as well. I also think doing both of those things makes no sense, but I believe that's what is required (unless the person died, in which case there's a C&DI that says you can exclude them). I would appropriately footnote the disclosure to indicate the number of shares held by the former NEO and included in the calculation.
See the discussion on page 9 of the “Beneficial Ownership Table Handbook.”
-John Jenkins, Editor, TheCorporateCounsel.net 4/17/2020
RE: I bet practice differs here. The definition of NEO looks back to "during the last completed fiscal year" and "at the end of the last fiscal year," so you can have someone who is an NEO that has left but satisfies the definition. The definition of executive officer under 3b-7 does not look back, so it seems to me to be more "current" and someone who has left the company does not literally fit into the definition (as they have no position). I always specify the information as of a specific date, and label the group as "Directors, nominees and 'current' executive officers" and only include executive officers that were serving as of that date.
-4/20/2020
RE: As I read the relevant releases, this legend isn't necessary. The guidance was provided at a time before the SEC formalized rules requiring the SOX 906 certification to be filed as Exhibit 32. I think the intent of the language was to ensure retention of the documents as contemplated by Rule 302(b) of S-T at a time when that rule didn't expressly cover the Section 906 certifications, which I think is pretty clear if you look at footnote 157 to the adopting release.
The rule changes adopted in Release 33-8238 did ensure those files were subject to S-T. Here's an excerpt:
"We are amending Exchange Act Rules 13a-14 and 15d-14 and Investment Company Act Rule 30a-2 to require the Section 906 certifications to accompany periodic reports containing financial statements as exhibits. We also are amending the exhibit requirements in Forms 20-F, 40-F and Item 601 of Regulations S-B and S-K to add the Section 906 certifications to the list of required exhibits to be included in reports filed with the Commission. . . A failure to furnish the Section 906 certifications would cause the periodic report to which they relate to be incomplete, thereby violating Section 13(a) of the Exchange Act.148 In addition, referencing the Section 906 certifications in Exchange Act Rules 13a-14 and 15d-14 and Investment Company Act Rule 30a-2 subjects these certifications to the signature requirements of Rule 302 of Regulation S-T."
Consistent with this understanding of the rule, the adopting release expressly provides that "for issuers that are not investment companies, that interim voluntary guidance shall remain in effect until the rules become effective."
-John Jenkins, Editor, TheCorporateCounsel.net 4/20/2020
RE: I'm not aware of any guidance that does that, but I do think that, as you suggest, Item 601(b)(4)(iii) can be read as a standalone provision, notwithstanding the references to it in (b)(4)(ii) and (b)(4)(v) in the context of the requirements of specific forms.
-John Jenkins, Editor, TheCorporateCounsel.net 4/20/2020
RE: The Staff hasn't spoken directly to this issue, but my own view is that a company that's entitled to provide information under Item 402(m) for the comp table can use that information for the beneficial ownership table required under Item 403 as well. Like I said, the Staff hasn't addressed that issue, but it did address another area under S-K where the rule didn't address SRCs that determined their NEOs under Item 402(m), and it cut those companies some slack. Here's Reg S-K CDI 146.09.
Question: How should a smaller reporting company that relies on Item 402(m)(2) of Regulation S-K rather than Item 402(a)(3) to determine its "named executive officers" comply with Item 601(b)(10)(iii)(A) of Regulation S-K, which describes management contracts and compensatory plans, contracts and arrangements in which named executive officers participate that must be filed as exhibits to registration statements and reports?
Answer: Although Item 601(b)(10)(iii)(A) refers only to the Item 402(a)(2) definition of "named executive officer," if a smaller reporting company applied Item 402(m)(2) to determine the named executive officers in its registration statement or report and provides the disclosure permitted under Items 402(m) through 402(r) instead of the disclosure required under Items 402(a) through 402(k), the smaller reporting company need only file as exhibits those plans, contracts and arrangements in which named executive officers as determined under Item 402(m)(2) participate. [July 3, 2008]
I can't see any reason why this same approach shouldn't apply to your situation.
-John Jenkins, Editor, TheCorporateCounsel.net 4/20/2020
RE: I've never dealt with this, but my guess is that if the security was authorized, issued and outstanding pre-listing, the NYSE would not require compliance with the shareholder approval rules for the conversion. That's only a guess, and with the NYSE, I've always found that it is best to raise these issues directly with them in the listing process. They don't have a lot of published guidance and precedent is difficult to find and interpret.
-John Jenkins, Editor, TheCorporateCounsel.net 4/20/2020
RE: I think a lot of issuers don't because the exhibit table in Item 601(a) doesn't call for material agreements to be filed with an S-8. Frankly, it's by no means clear that the plan is required to be filed under Item 601 either, but in Reg S-K CDI 146.10 the Staff said the plan should be filed. See the discussion on page 65 of the Form S-8 Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 4/17/2020
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
RE: Following up on this, I'm wondering how Berkshire Hathaway is complying with Delaware law. They announced an in-person meeting, then changed to telecast/webcast only, without going to a true hybrid/virtual model. If shareholders aren't permitted to physically attend the meeting, and there is no mechanism to satisfy DE's requirements for a virtual meeting (verifying shareholders, providing an opportunity to participate in the meeting and to vote), then how can this be considered a proper meeting? Isn't there risk when not doing a true hybrid/virtual if shareholders aren't allowed to attend in person?
-4/17/2020
RE: I have wondered about the same thing. I'm sure they've analyzed the issue, but it seems to me that Berkshire's plan to ban shareholders from attending and directing them to a passive Yahoo stream of the event and encouraging them to submit questions to the press who may be present isn't what Delaware law contemplates.
-John Jenkins, Editor, TheCorporateCounsel.net 4/17/2020
RE: There’s a 2001 SEC release with 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 to sign 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 first 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."
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 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
RE: I'm very interested in this question of using a board portal — which stores a manual, if not "wet," signature — for SEC filings, particularly given the SEC's late-March guidance relaxing signature requirements in light of COVID-19. Appreciate any thoughts.
-4/17/2020
RE: I have heard anecdotally that the Staff has informally advised some registrants that Rule 302(b) of S-T's requirements may be satisfied through the use of board portal procedures. Here's an excerpt from this recent Bass Berry blog on the Staff's new guidance:
"While this record retention relief is welcomed by registrants and practitioners, it stops short of offering maximum flexibility to registrants by saying that a “manual signature” can be satisfied through the usual board portal procedure that provides for authorization of a director’s electronic signature on the signature page of an Exchange Act report or Securities Act registration statement. We understand practice is mixed in this regard, with some practitioners relying on past verbal comfort from the Staff that using board software packages to execute SEC filings satisfied the “manual signature” requirement."
-John Jenkins, Editor, TheCorporateCounsel.net 4/17/2020
RE: No, I don't think an accelerated filer can transition before it files its first annual report following the effective date. Here's what the adopting release says:
"The final amendments will apply to an annual report filing due on or after the effective date. Even if that annual report is for a fiscal year ending before the effective date, the issuer may apply the final amendments to determine its status as a non-accelerated, accelerated, or large accelerated filer. For example, an issuer that has a March 31, 2020 fiscal year end and
that is due to file its annual report after the effective date of the amendments may apply the final amendments to determine its filing status even though its fiscal year end date precedes the effective date. An issuer that determines it is eligible to be a non-accelerated filer under the final amendments will not be subject to the ICFR auditor attestation requirement for its annual report due and submitted after the effective date of the amendments and may comply with the filing deadlines that apply, and other accommodations available, to non-accelerated filers."
When it comes to iXBRL phase-in, I haven't seen anything from the Staff, but based on the language of the adopting release, I think that if your annual report isn't due on or before the June 15, 2020 transition date for accelerated filers, you'll still be an accelerated filer and will have to comply with it in your first 10-Q filing following that date.
-John Jenkins, Editor, TheCorporateCounsel.net 4/1/2020
RE: Corp Fin staff have confirmed by telephone that a 12/31 issuer that was an accelerated filer at 12/31 under the then-effective definition but would have been a non-accelerated filer under the amended definition (effective date April 17, 2020) must file its Form 10-Q reports during 2020 no later than the *accelerated filer* filing deadlines. These issuers cannot take advantage of the non-accelerated filer filing dates until the Form 10-K report for the year ended 12/31/20 (assuming that these issuers satisfy the requirements for non-accelerated filer status at 12/31/20).
-4/16/2020
RE: Thanks for letting us know. Much appreciated!
-John Jenkins, Editor, TheCorporateCounsel.net 4/16/2020
RE: I think it was initially rejected. The last that I've seen on it is this Reuters article from April 6 that says the NYSE is "in talks" with the SEC.
-John Jenkins, Editor, TheCorporateCounsel.net 4/16/2020
RE: Yup, if the quarter has been completed. The 8-K is triggered by any announcement disclosing material nonpublic information regarding the registrant’s results of operations or financial condition for a completed quarterly or annual fiscal period. See Form 8-K C&DI 106.07
Question: A registrant reports "preliminary" earnings and results of operations for a completed quarterly period, and some of these amounts may even be estimates. In issuing this preliminary earnings release, must the registrant comply with all of the requirements of, and instructions to, Item 2.02 of Form 8-K?
Answer: Yes. [April 24, 2009]
-John Jenkins, Editor, TheCorporateCounsel.net 4/14/2020
RE: Since the shares are fungible, I don't know that one alternative is preferable to the other or that there are any "best practices" with regard to handling unpurchased shares. I think the two most important factors in the current environment are that the board makes a fully informed decision about whether to continue the program, and that if a new program is to be authorized, that the company disclose that information promptly before it makes further purchases under the existing program. See the discussion on page 75 of our Stock Buybacks Handbook.
If your plan is a 10b5-1 plan, terminating it can create some issues, but I would refer you to Brink Dickerson's comments about 10b5-1 plan terminations in the COVID-19 environment that I blogged about last week.
-John Jenkins, Editor, TheCorporateCounsel.net 4/14/2020
RE: I haven't seen it interpreted to waive a requirement to provide notice of the change. Here's an excerpt from Sullivan & Cromwell's memo on Gov. Cuomo's order:
"Although the executive order suspends certain aspects of the meeting notice requirements under Section 605(a) of the NYBCL relating to a physical meeting location, companies incorporated in New York remain subject to all applicable shareholder notification and disclosure requirements under their governance documents, federal securities laws and stock exchange listing rules."
-John Jenkins, Editor, TheCorporateCounsel.net 4/14/2020
RE: I think that this kind of modification would likely be viewed as a material change in the plan of distribution and that a post-effective amendment would be required pursuant to the undertaking in Item 512(a)(1)(iii).
-John Jenkins, Editor, TheCorporateCounsel.net 4/14/2020
RE: I think the most common reason that companies file an Item 8.01 8-K instead of furnishing an Item 7.01 8-K is that they have registration statements on file and believe the information should be incorporated by reference into their 33 Act filings. A decision to suspend a dividend strikes me as information that a company might well conclude is material and should be incorporated into its registration statements.
-John Jenkins, Editor, TheCorporateCounsel.net 4/14/2020
RE: I'd check with your accountants (because I'm definitely not one), but I believe that the costs associated with the sale of a subsidiary would usually be governed by ASC 360 (SFAS 144), and not ASC 420 (SFAS 146) or the other accounting standards referenced in Item 2.05. However, I've also seen references to the fact that one-time employee termination benefits aren't regarded as selling costs, so it seems to me that it's possible that an Item 2.05 filing might be triggered in some instances by a divestiture. See this excerpt from a Deloitte publication on ASC 360:
"ASC 360-10-35-38 states that “costs to sell are the incremental direct costs to transact a sale, that is, the costs that result directly from and are essential to a sale transaction and that would not have been incurred by the entity had the decision to sell not been made.” Examples of costs to sell include legal and other professional fees, broker fees, and title transfer fees. Costs to sell do not include costs that would have been incurred if the assets were not sold, such as rent, insurance, utilities, or security services. Costs to sell also do not include costs that are within the scope of ASC 420-10, such as one-time termination benefits, lease termination costs, facility closing costs, and employee relocation costs."
-John Jenkins, Editor, TheCorporateCounsel.net 4/13/2020
RE: Exchange Act Rules C&DI 153.03:
Question: Can a company suspend its reporting obligations under Section 15(d) with respect to “the fiscal year within which such registration statement became effective”?
Answer: No. A company must always file the Form 10-K for the fiscal year in which the registration statement is declared effective. The Form 10- K is required regardless of whether the company suspends its reporting obligation under Section 15(d) or Rule 12h-3. [September 30, 2008].
I think the answer to your second question is yes, unless you fit within the exceptions laid out in SLB 18. See footnote 13 to SLB 18.
-John Jenkins, Editor, TheCorporateCounsel.net 4/13/2020
RE: Thank you. What about the first sentence of (i) above — is that inferred from SLB 18? If not, where does that come from? If that procedure is followed, no no-action letter is needed to suspend going forward, correct?
-4/13/2020
RE: I think that's just mechanically what you'd need to do in order to avoid getting caught by Rule 12h-3(c). If you don't file post-effective amendments terminating the registration statements before you file the 10-K, then that would serve as their Section 10(a)(3) update, which would make you'll be ineligible to rely on 12h-3 and stuck in the reporting cycle for another year absent no action relief.
SLB 18 addresses those companies that are unable to rely on 12h-3 because of 12h-3(c). I don't believe you'd need no-action relief if you complied with Rule 12h-3 to the letter, which I think is what the approach outlined in the checklist does.
-John Jenkins, Editor, TheCorporateCounsel.net 4/13/2020
RE: I think that's the case for tender offers subject to 14D, which includes only those involving securities registered under Section 12 of the Exchange Act. But Rule 13e-4 also applies to tender offers involving 15(d) reporting companies, so the affiliate would be subject to its provisions under those circumstances. There aren't any tender offer C&DIs on this topic, but here's a Staff telephone interp:
"A tender offer by an issuer's ESOP, for equity securities of the issuer, is treated the same as a tender offer by any other affiliate of the issuer. If the securities are registered pursuant to Section 12 of the Exchange Act, and after the tender offer the ESOP will hold more than 5% of the outstanding shares of the class, then the ESOP must comply with Regulation 14D. Schedule 13E4 would not be required, inasmuch as Rule 13e-4(g)(4) exempts tender offers governed by Section 14(d) from Rule 13e-4. If, however, the tender offer is not within the scope of Section 14(d), then Rule 13e-4 should be examined to determine whether the offer must be made in compliance with that rule. In all events, a tender offer by an ESOP will be subject to Section 14(e) of the Exchange Act and Regulation 14E."
-John Jenkins, Editor, TheCorporateCounsel.net 4/13/2020
RE: I think those are likely to be regarded as non-GAAP measures, unless the line of business is itself a reportable segment and the information is reported in accordance with ASC 280 (although I'd suggest getting an accountant's view on that). I'm also concerned that the information about the investment in the new line of business could be viewed as a liquidity measure, even if that's not how the company uses it. If that's the case, a per share presentation would be prohibited.
-John Jenkins, Editor, TheCorporateCounsel.net 4/10/2020
RE: Yes, they would need to be disclosed on an 8-K, unless you've suspended your reporting obligation before they are due. Depending on where you are in your process, that may be possible by using an issuer-initiated delisting process. Here's an excerpt from this article by Andrew Jack & Keir Gumbs:
"Due to these timing considerations, an issuer may wish to consider relying on the issuer-initiated delisting process, discussed above, that is permitted by Rule 12d2-2(c) under the Exchange Act. If an issuer takes this approach, it can ensure that its shares are delisted on the same date that the merger closes by filing the Form 25 10 days in advance of the merger closing. The flexibility afforded by Rule 12d2-2(c) may be of particular utility in situations where an issuer needs to be able to suspend its reporting obligations immediately on closing the merger. This would be the case, for example, if a periodic report would be due during the 10-day period between the exchange’s filing of the Form 25 and the effective date of the Form 25."
-John Jenkins, Editor, TheCorporateCounsel.net 4/10/2020
RE: Thank you. Are you aware of any SEC enforcement against companies for failing to disclose something in this limbo period? I would imagine it is very rarely, if ever, enforced. Is that your understanding?
-4/10/2020
RE: I haven't researched the issue, but I'm not aware of any enforcement actions. I doubt this is an enforcement priority, because I think many people simply overlook it. My guess is that Enforcement would pay attention if they believed a company made a conscious decision not to comply.
-John Jenkins, Editor, TheCorporateCounsel.net 4/10/2020
RE: I posted something from Brink Dickerson on that topic over on The Mentor Blog earlier this week.
-John Jenkins, Editor, TheCorporateCounsel.net 4/10/2020
RE: Not specifically, but Corp Fin's guidance makes it clear that it expects companies to notify "shareholders, intermediaries in the proxy process, and other market participants of such plans in a timely manner and disclose clear directions as to the logistical details of the “virtual” or “hybrid” meeting, including how shareholders can remotely access, participate in, and vote at such meeting."
It seems to me that including a link to the virtual site on the website investors typically go to in order to access information about the company would facilitate accomplishment of that objective. I think you've essentially got to ask yourself whether someone viewing your overall approach objectively would conclude that you took appropriate action to get the word out. Including a link to the virtual site prominently on your own site would seem to be helpful in establishing that you did, but as I said, it's not specifically required.
We have a bunch of materials in our COVID-19 Practice Area addressing logistical considerations for virtual annual meetings, and you may find some of them helpful to your assessment.
-John Jenkins, Editor, TheCorporateCounsel.net 4/9/2020
RE: My guess is that a lot of companies will end up doing this the same way they're doing the rest of their business — remotely. In a number of states, they may not really have a choice because non-essential gatherings of people are banned.
-John Jenkins, Editor, TheCorporateCounsel.net 4/9/2020
RE: I haven't seen anything from Delaware suggesting that companies can keep a record date that's older than 60 days for a postponed meeting. However, that might be possible if they adjourned the meeting instead of postponing it. See Section 213(a) of the DGCL and this excerpt from a recent Cleary Gottlieb blog:
"Under Delaware and New York law, the record date for an annual meeting must not be more than sixty (60) days or less than ten (10) days prior to the annual meeting. Accordingly, if a company incorporated in Delaware or New York postpones its annual meeting to a date that would result in its record date being more than sixty (60) days before the annual meeting, the board must change the record date. A change in record date would generally require the company to provide notice of the new record date to shareholders.[9] In the event that a company adjourns, rather than postpones, its annual meeting under Delaware law, it may not be required to change its record date, even if such date is beyond thirty (30) days from the date of the original annual meeting."
-John Jenkins, Editor, TheCorporateCounsel.net 4/8/2020
RE: Ah, yes. That is what they did. They announced in advance that they intended to adjourn the meeting immediately after it was convened. However, with an executive order in place preventing such an event from occurring, I'm not sure how they technically could have convened the meeting in the first place. I would have thought the only option in such a situation would be to postpone and set a new record date.
-4/9/2020
RE: I hear you. I've learned more about annual meeting law in the last 3 weeks than I'd learned in 34 years of practice.
-John Jenkins, Editor, TheCorporateCounsel.net 4/9/2020
RE: Yes, you can use it until the next required 10(a)(3) update. In fact, this exact fact pattern was addressed in Securities Act Forms CDI 214.01.
214.01 A registrant has an effective Form S-3 for a secondary offering. At the time of filing, all requirements for use of the form were met. Three months later, a dividend payment on certain preferred stock was missed. The registrant may continue to use the effective Form S-3 so long as there is no need to update the registration statement for the purposes of Section 10(a)(3) . At the time that updating is necessary, Rule 401 would require the use of whatever form is available to the registrant at that time. [Feb. 27, 2009]
-John Jenkins, Editor, TheCorporateCounsel.net 4/9/2020
RE: I had a client face a similar situation several years ago, and that's all they opted to do in response.
-John Jenkins, Editor, TheCorporateCounsel.net 4/9/2020
RE: Yes, it sounds like you have a cheap stock problem. Any time equity awards are made within 12 months of an IPO at a discount to the IPO price, you can expect comments from the SEC on whether the award was at fair value. A contemporaneous valuation is the best way to address the issue, and failing that, you may have an uphill battle if you want to avoid some sort of compensation expense. You may also have issues under Section 409A of the Internal Revenue Code.
-John Jenkins, Editor, TheCorporateCounsel.net 4/8/2020
RE: There's no relief under the Delaware statute, but unlike some statutes which specify how the notice has to be delivered unless the shareholder has consented to a different method (e.g., Ohio), Section 222 simply says that notice of a meeting "in the form of a writing or electronic transmission" must be provided. That leaves some room for interpretation as to whether an 8-K, a press release and website disclosure along the lines contemplated in the SEC's guidance might be sufficient, and the equities in favor of some flexibility in extraordinary circumstances like these are strong.
Still, the law firm memos that I've read (and we have a bunch on the topic of annual meetings in our COVID-19 Practice Area) suggest that the safest route is to provide a new written notice by means of mail or email. The problem is that the uncertainties around the adequacy of notice could be used as fodder for litigation challenging the actions taken at the meeting or seeking an order to hold a new meeting. For instance, this might be exploited as a leverage point by an activist, since the uncertainty means that an adverse decision could compel the company to confront a proxy contest many months before it might otherwise face one.
I have asked around and will see if I can get a handle on what market practice is here.
-John Jenkins, Editor, TheCorporateCounsel.net 4/6/2020
RE: Good news! Yesterday, Delaware's Governor issued an order providing that, for public companies, compliance with the SEC's guidance would satisfy Delaware's notice requirements for changes in meeting locations due to COVID-19.
-John Jenkins, Editor, TheCorporateCounsel.net 4/7/2020
RE: Thanks for the tip on the DE order. Any idea whether it is enforceable (i.e., can the order override DGCL)? Also, the order speaks only to a change from in-person to a physical meeting. Do you think a company that also has to change the time or date of the meeting can fall back on the same relief in terms of mailing a notice of such change (especially if the change of time and/or date is in the same notice as a change to virtual meeting)?
-4/8/2020
RE: I haven't seen any of the concerns expressed about Gov. Carney's order that I've seen about Gov. Newsom's order in California, but I'm not a Delaware lawyer and really can't address the intricacies of that state's law necessary to fully address that issue.
As for interpreting the scope of the order, I think you'd need to talk to Delaware counsel for definitive guidance, but it appears to me that the first part of the order addresses only the change from a physical to a virtual meeting, not other logistical changes. However, the second part of the order appears to allow for adjournment of a meeting before it is convened (i.e., essentially a postponement), and allows the meeting to be moved "to another date or time, to be held by remote communication, by providing notice of the date and time and the means of remote communication in a document filed by the corporation with the Securities and Exchange Commission." So, the second part seems to set forth a procedure that might accomplish your objective.
-John Jenkins, Editor, TheCorporateCounsel.net 4/8/2020
RE: I don't think it does. The NYSE American shareholder approval rules are different, and are in most respects more liberal to begin with than the NYSE rules.
-John Jenkins, Editor, TheCorporateCounsel.net 4/8/2020
RE: I think the potential problem is the language of Rule 411, which is the Securities Act's rule on incorporation by reference. Its general approach is that "unless otherwise provided in the appropriate form, information must not be incorporated by reference into the prospectus." Form S-4 is pretty specific about when information may be incorporated by reference — Items 11, 12 and 13 explicitly permit S-3 eligible registrants to incorporate the specified information by reference.
In contrast, Item 14 does not explicitly permit incorporation by reference and requires registrants to "furnish" the specified information. Since that's the case, in light of Rule 411, I think it's tough to back in to a position that says because Form S-1 explicitly permits backward incorporation by reference in the prospectus, Form S-4 should be deemed to as well, despite the absence of language authorizing that for any company other than an S-3 eligible registrant.
-John Jenkins, Editor, TheCorporateCounsel.net 4/7/2020
RE: Thanks. That is where we were coming out, but it seems like an anomalous result since an S-1 can be used for an exchange offer, and then you could arguably take advantage of the S-1's incorporation rules (noting that it's an exchange offer, not a business combination, where incorporation by reference isn't permitted).
-4/7/2020
RE: No, board and committee meetings are considered on a combined basis. The line item calls for disclosure of any director who attended fewer than 75% of the "aggregate" (i.e., considered as a single amount) of the total number of board meetings AND the total number of meetings of committees on which the director served. So, in order to determine the relevant percentage you add them all up, and divide them by the number of board and committee meetings the director attended. See the discussion on page 8 of the handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 4/7/2020
RE: I suppose it's possible that somebody might argue that Rule 415(a)(1)(ix) could be used for resale shelfs based on the fact that it doesn't limit its application to "the issuer." But, I don't think that was its intent, and I've never seen any Staff guidance supporting that interpretation. I also think the Staff has interpreted the "continuous" requirement in a way that might make it difficult to characterize the typical episodic sales under a resale shelf as involving a continuous offering.
I don't think you'd need to deregister those shares under the scenario laid out in your second question. That's because if the company files a new registration statement and uses the fee offset provided for in Rule 457(p), the unsold shares in the old offering are deemed deregistered. See Release 33-7943 (Jan. 26, 2001) at n.67 and accompanying text.
-John Jenkins, Editor, TheCorporateCounsel.net 4/6/2020
RE: Interestingly, I don't think iXBRL Exhibit 104 is covered by that certification. It's mandated by Rule 406 of S-T, not Rule 405. I don't think it's material either, but I think it's pretty clearly required to be filed as part of the 8-K. My suggestion would be to amend the report to address it.
-John Jenkins, Editor, TheCorporateCounsel.net 4/6/2020
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 Finders' 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 finders' 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
RE: Thank you.
If the manager of an investment fund pays a placement agent a "trailer fee," which means that each year the investor identified by the placement agent remains invested in the fund, the manager pays the placement agent a portion of the management fee paid to the manager, how would one estimate that amount since it depends on (i) the length of time the investor remains invested and (ii) the value of the fund for each year of that investment (since management fees are based on the value of the fund)?
-3/27/2020
RE: I apologize. I was scrolling through the forum and noticed that I overlooked this follow-up. There are a handful of Form Ds that reference trailer fees, and most of the ones I've seen simply disclose the percentage and the basis upon which it is calculated in the initial filing, and then provide updated information when they file amended Form Ds.
Obviously, there's no guidance from the Staff on this, but the instructions to Item 15 of Form D say that "information on sales commissions and finders' fees expenses may be given as subject to future contingencies." In light of that language, I think there's an argument that in the case where the offering is not ongoing, disclosure of the specifics about how the trailer fee will be calculated and what it is contingent upon may be sufficient.
-John Jenkins, Editor, TheCorporateCounsel.net 4/3/2020
RE: You have to file the definitive proxy statement with the SEC via EDGAR, but you don't need to send copies via postal mail. In March 2018, the NYSE amended Section 402.01 of the NYSE Listing Manual to provide that listed companies aren't required to provide hard copies of proxy materials to the NYSE, so long as they were included in an SEC filing available on EDGAR.
-Broc Romanek, Editor, TheCorporateCounsel.net 4/1/2019
RE: Good Morning.
Has the SEC posted a written notice or other communication indicating that we are no longer required to send 8 copies by postal mail? To date, we have continued to send the eight copies of proxy materials to the SEC because we haven't seen anything in writing advising us otherwise. We have stopped sending the copies to the NYSE because they have placed in writing that it is no longer required.
-4/3/2020
RE: The Staff issued a CDI in 2016 that generally eliminated the requirement to furnish the SEC with paper copies of the annual report:
As to the proxy materials, it's actually laid out in Regulation S-T. Rule 101(a)(1)(iii) of Reg S-T requires these to be filed electronically, and Rule 14 of Reg S-T says that paper filings of documents required to be filed electronically won't be accepted.
The NYSE eliminated the paper filing requirement for proxy materials a few years ago.
As for annual reports, the NYSE is a little more murky there, but apparently it has for several years taken the position that the annual report was not part of the materials that were until 2018 required to be filed with it in paper form.
-John Jenkins, Editor, TheCorporateCounsel.net 4/3/2020
RE: As a point of clarification, we do file the Proxy Materials electronically through EDGAR, and we also post the materials online on our investor website. In practice, and in accordance with Rule 14a-6(b), we have also followed the electronic filing with eight copies of the Proxy Statement (as well as Annual Report and 10K materials) to the SEC on the date of the mailing. I don't see anything that specifically eliminates the requirement of Rule 14a-6(b). Am I missing something?
Thanks for your help!
-4/3/2020
RE: Unfortunately, the SEC hasn't repealed the rules that have been trumped by S-T, For example, Rule 12b-11 still requires paper copies of everything. But, in addition to the provisions of Reg S-T that I mentioned earlier, there's also Rule 309(b) of S0T, which says:
"An electronic format document, submitted in the manner prescribed by the EDGAR Filer Manual, shall satisfy any requirement that more than one copy of such document be filed with or provided to the Commission."
-John Jenkins, Editor, TheCorporateCounsel.net 4/3/2020
RE: If you have an advance notice bylaw, probably not much, if anything, other than procedural matters like motions to dispense with the minutes of the prior year's meeting and to adjourn upon completion of business. If you don't have an advance notice bylaw, then all sorts of floor proposals and director nominations might be offered.
-John Jenkins, Editor, TheCorporateCounsel.net 4/2/2020
RE: What is the purpose of the Rule 14a-8 and Rule 14a-4(c)(1) 120 day/45 day deadlines then? Don't those prohibit bringing any proposals before the meeting past those dates?
-4/2/2020
RE: They just address the criteria for what shareholder proposals may qualify to appear in management's proxy statement and what proposals proxy holders can or can't use discretion to vote on. Neither addresses what may lawfully be proposed by a shareholder at a meeting, which is a matter of state law.
-John Jenkins, Editor, TheCorporateCounsel.net 4/2/2020
RE: If the notes are not registered under Section 12 (either because they are not listed on an exchange under 12(b) or are not required to be registered under 12(g) as an equity security held by more than 500 holders), then the proxy and information statement rules should not apply to the consent solicitation.
The biggest issue in soliciting consents to change the terms of notes typically arises in assessing whether the change or changes to the indenture are so material that – in effect – the holders are making a new investment decision in determining whether to consent to the amendments, hold onto the security without consenting or sell into the market. If you are in that situation, then the solicitation could be considered an offer or sale of a new security under Securities Act Rule 145(a). If you do have a new security, then you need to register the transaction and qualify an indenture unless an exemption is available.
If the consents are solicited in connection with a tender offer and the offeror conditions acceptance of a tender on receipt of the consent, then the consent is considered part of the transaction and thereby subject to the tender offer rules.
-Dave Lynn, Editor, TheCorporateCounsel.net 10/23/2007
RE: There is a lot of commentary about the "new security" issue mentioned above. Yet, issuers regularly conduct consent solicitations – particularly exit consents – which permit the elimination of substantially all restrictive covenants in the applicable indentures. Sometimes the indentures are even amended to release guarantees and collateral. Generally, the issuers have also retained a dealer manager, which suggests that any "new security" deemed to be issued as a result of the consent solicitation is not exempt from registration under Securities Act Section 3(a)(9).
Are you aware of any clear guidance on whether these types of changes create a "new security"? Or does anyone have any practical guidance on how these issuers might be dealing with the Rule 145(a) new security issue?
-6/16/2008
RE: This issue has been around for quite some time, and it was really a “hot topic” back in the early 1990s. Since that time, I am not aware of much that has been said on it, although it still comes up from time to time with the Staff. I think the most concise statement of the issue is in Loss and Seligman’s Securities Regulations, where it states:
“There is always the question, however, whether the rights of security holders have been so substantially affected by the particular change in the terms of the outstanding security that it becomes a new security. For example, a change in interest or dividend rate or liquidation preference or underlying security, or a change in the identity of the issuer, would seem quite clearly to result in a new security. On the other hand, there is likely to be agreement that a mere change in the name of the security (perhaps from common to Class B stock), or a change in the name of the issuer without a change of identity, or certain types of charter amendment affecting the powers of the directors do not make a new security. In between come a great variety of other changes--for example, from par to no par or vice versa, changes in par or stated value, changes in redemption or cumulative or conversion features, various changes in voting rights. There the answer must depend on the context, and, in fact, it varies in different contexts under the SEC statutes themselves.”
There have been a number of judicial precedents on the issue, starting with SEC v. Associated Gas & Electric Co., et al., 24 F. Supp. 795 (S.D.N.Y. 1938), where the court (deciding the case under Securities Act Section 5 the now repealed Section 6(a) of the Public Utility Holding Company Act) found that a proposal to extend the maturity of certificates had the effect of surrendering the old certificates and issuing new certificates. The SEC also has issued no-action letters on the topic (well over 20, dating back to the early 1970s), although I don’t think there have been any in recent memory. Generally, the analysis has gone along the lines of whether the modification of the terms of the security results in a fundamental change in the nature of the investment or in the rights and interests of holders, or whether there has been a material change in the legal relationship of the parties based on a benefit/detriment test.
Some secondary sources from the time when this issue was widely discussed are as follows:
- Adee, “Creating a New Statutory Security,” Insights, Vol. 3, No. 4 (April 1989)
- Adee, “Update – Creating a New Security,” Insights, Vol. 11, No. 4 (November 1990)
- Smith, “Applicability of the Securities Act of 1933 and the Trust Indenture Act of 1939 to Consent Solicitations to Amend Trust Indentures,” 35 Howard Law Journal 343 (1992)
I think that in many situations today, counsel is able to get comfortable with the fact that soliciting the exit consents is not tantamount to offering a new security when there is no change in interest or dividend rate, liquidation preference or underlying security, or obligor, but instead the solicitation contemplates modification of protective covenants that, on balance, don’t fundamentally change the nature of the investment.
-Dave Lynn, Editor, TheCorporateCounsel.net 6/17/2008
RE: The language of Rule 145(a) seems to be only applicable to securities offered in a business combination transaction. In this regard, would a consent solicitation to amend an indenture that may be deemed to involve the issuance of a new security be even subject to Rule 145(a)? Any thoughts on whether it would be feasible to do a consent solicitation that is limited to QIBs and accredited investors as a way to ensure that the deemed issuance of the new security would be exempt by virtue of Rule 506 of Regulation D? Or, would Rule 145(a) deem that an offer and sale has occurred with respect to those noteholders who did not participate in the consent solicitation, even if the consent of those noteholders is not being sought (and presumably the noteholders are not making an investment decision on an individual basis)?
Thanks
-6/6/2012
RE: I think the Staff has read Rule 145(a) broadly in this context.
Dave Lynn, TheCorporateCounsel.net 6/7/2012
RE: Following up on this question. Our client is a 34 Act reporting company that has issued convertible notes. We registered the notes in 2019. We are in talks to extend the maturity. My understanding is that extension of maturity would result in a new security.
(1) Is that a correct understanding, or is there any wiggle room?
(2) If it is a new security, would we then need to exchange the old notes for new notes? Would that require us to re-register the notes?
If you have other thoughts or implications, let me know. We are in talks with the trustee and DTC.
-4/2/2020
RE: There's a lot of nuance in the Staff's views on when a new security is involved as a result of a modification in debt terms, but arguments that an extension of the maturity of the security shouldn't be regarded as creating a new security are usually tough to make. This Linklaters memo generally summarizes market practice when it comes to the "new security" issue:
"In light of existing case law guidance and the absence of any SEC or SEC staff action to the contrary, market practitioners generally take the position that the new security doctrine should not be implicated when a proposed modification does not have the effect of (i) extending the maturity, (ii) reducing or altering the due dates of payable principal or interest or (iii) modifying a redemption premium, place of payment, currency or the right to enforce upon a default in payment of principal and interest. In other cases, securities lawyers will advise that there is a substantial risk – the parameters of which are not always clear and are highly fact-intensive – that the SEC or a court could take the position that the modification was an offer of a new security."
If you're looking for more detail, a Becton Dickinson comment letter response addresses some of the nuances in the Staff's position on debt modifications.
If you do have a new security, you'll need to register it unless you have an available exemption. One that is not infrequently relied upon is Section 3(a)(9). A Weil memo (p. 3) provides a good overview of that exemption in the exchange offer context.
Restructuring debt is a complex process involving a variety of other issues. A Pillsbury document is a good starting point:
-John Jenkins, Editor, TheCorporateCounsel.net 4/2/2020
RE: Very helpful. Thanks very much.
-4/2/2020
RE: My guess is that companies may do that to prevent anyone from reading traditional bylaw language giving the board authority to set the time, date and "location" of a meeting as somehow precluding it from holding a meeting without any physical location. Here's an excerpt from this O'Melveny memo:
"The bylaws of Delaware corporations in particular typically state that companies need to provide advance notice to shareholders of the time and place of a shareholder meeting. Even if the bylaws are flexible and, for example, allow shareholder meetings to be held anywhere in the United States or as may be designated in the meeting notice, the bylaws may still be too restrictive to allow for a virtual meeting. As a result, some Delaware corporations have added specific language to their bylaws to expressly permit virtual shareholder meetings."
I'm not sure that it's necessary in every case, given the fact that the language of Section 211 is broadly enabling, but a lot of companies seem to do it.
-John Jenkins, Editor, TheCorporateCounsel.net 4/2/2020
RE: I agree. It doesn't say anything about applying to reports filed under Section 13(p).
-John Jenkins, Editor, TheCorporateCounsel.net 4/1/2020
RE: I don't do much REIT work, so I am not all that familiar with Maryland law, but I've always thought Venable's piece on proxy disclosure by Maryland corporations was kind of the bible, and the most recent version appears to continue to indicate that the default standard in Maryland is that broker non-votes are not counted as votes cast against a director. Here's a link to the current year's version of their memo:
I'm not familiar with firms taking a contrary position, but that's not surprising given that I don't encounter Maryland corporations much. If there is a dispute about this developing within the bar, then I think it's important to understand the nature of the arguments and, if the position is uncertain, to make that clear to the company when drafting the disclosure. Ultimately, the risk of getting it wrong is the possibility of a challenge to the validity of the election and bad proxy disclosure.
-John Jenkins, Editor, TheCorporateCounsel.net 4/1/2020
RE: I agree with you that each individual investor has a reporting obligation under 13D and that it would be required to disclose its ownership percentage in an amendment filed after the closing.
-John Jenkins, Editor, TheCorporateCounsel.net 4/1/2020
RE: No, I don't think an accelerated filer can transition before it files its first annual report following the effective date. Here's what the adopting release says:
"The final amendments will apply to an annual report filing due on or after the effective date. Even if that annual report is for a fiscal year ending before the effective date, the issuer may apply the final amendments to determine its status as a non-accelerated, accelerated, or large accelerated filer. For example, an issuer that has a March 31, 2020 fiscal year end and
that is due to file its annual report after the effective date of the amendments may apply the final amendments to determine its filing status even though its fiscal year end date precedes the effective date. An issuer that determines it is eligible to be a non-accelerated filer under the final amendments will not be subject to the ICFR auditor attestation requirement for its annual report due and submitted after the effective date of the amendments and may comply with the filing deadlines that apply, and other accommodations available, to non-accelerated filers."
When it comes to iXBRL phase-in, I haven't seen anything from the Staff, but based on the language of the adopting release, I think that if your annual report isn't due on or before the June 15, 2020 transition date for accelerated filers, you'll still be an accelerated filer and will have to comply with it in your first 10-Q filing following that date.
-John Jenkins, Editor, TheCorporateCounsel.net 4/1/2020
RE: I don't think anybody's gotten quite that granular when it comes to best practices. For me, the starting point would be the time that you've customarily allotted, and consideration of how the technology and procedures you're using for Q&A would affect the time required for shareholders to raise questions and for management to respond to them.
I would check out the guidelines on virtual annual meetings issued by the CII and Glass Lewis that lay out investor and proxy advisor expectations for Q&A practices at virtual meetings.
We also did a webcast on virtual annual meetings a few years ago that touched on Q&A procedures.
Overall, people are kind of scrambling this year. Given the extraordinary circumstances, I think companies are going to have some flexibility about how they approach Q&A sessions, as long as what they're doing appears to be fair and reasonable and they are very transparent in communicating how it is going to work.
-John Jenkins, Editor, TheCorporateCounsel.net 4/1/2020
RE: If the awards under the plan aren't materially consistent with what was previously disclosed, you'll need to file an Item 5.02(e) 8-K. See the discussion beginning on page 209 of our 8-K Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 3/31/2020
RE: I haven't seen somebody make that claim, and am not aware of any guidance on that specific issue. Still, I doubt the Staff would take the position that the proposal deadline for the current year should be reopened with respect to an adjourned meeting. In that case, the meeting has been held as scheduled and is simply adjourned to be reconvened at a later date. I don't think that would be the likely result in the ordinary course, and it is even less likely when the adjournment is due to a public health emergency. The Rule 14a-8 deadline is established in the preceding year's proxy statement, and has always been treated as a bright line.
I suppose the risk of reopening the deadline is greater for postponements, since the meeting isn't actually held on the originally scheduled date, assuming the decision to postpone the meeting is made before the proxy materials are printed and mailed. I guess part of it might depend on the length of the postponement. But even here, I'm not sure the Staff would want to wade into a situation about which it has always adopted a bright line approach, particularly under the circumstances that companies are facing this year.
-John Jenkins, Editor, TheCorporateCounsel.net 3/31/2020
RE: I have not seen anyone with a plan to prepare for that specific scenario, but I think one alternative is the use of an executive committee. Many companies have an executive committee, and those that don't at this point may want to think about establishing one. That committee could be delegated authority to act on behalf of the full board in the event that a quorum for a board meeting can't be achieved due to the pandemic.
Delaware permits the delegation of almost all of the board's powers to such a committee, and also allows the board to designate one or more alternate members of such a committee to serve in the place of absent or disqualified members. (See Section 141(c) of the DGCL). The designation of alternates would allow the committee to function and avoid its own quorum issues if one or more of its own members became ill.
-John Jenkins, Editor, TheCorporateCounsel.net 3/31/2020
RE: I don't think so, unless for some reason those debt holders had voting rights on the transaction itself. I haven't seen anything directly addressing this, but there doesn't seem to be a sale involved. In terms of why I reach that conclusion, I guess I'd point to Securities Act Rule 145, which details when a "sale" of a security is involved in an M&A transaction. As I read that rule, in order for a M&A transaction to involve a sale as to any particular group of security holders, it must be submitted to "such security holders" for a vote. So, while a sale is involved in a typical public company merger as far as the seller's common stockholders are concerned, I don't think a sale would be deemed to be involved with respect to the holders of non-voting debt.
-John Jenkins, Editor, TheCorporateCounsel.net 3/30/2020
RE: My guess is that this disclosure is intended to track compliance with the company's debt covenants. I think that some people take the position that any information that's tied to compliance with a debt covenant should not be regarded as a non-GAAP performance or liquidity measure under Reg G. I think that position is based on the fact that both Regulation G and Item 10(e) exclude from their scope measures that are required to be disclosed by SEC. See Rule 101(a)(3) and Item 10(e)(5). People taking this position argue that this information relating to compliance with debt covenants is material, and therefore is required to be disclosed. See the discussion on page 75 of the Non-GAAP Financial Measures Handbook.
Personally, I think that companies that freely toss around non-GAAP ratios on the basis that they have some tie to the status of debt covenants without complying with Reg G or Item 10(e) are taking an aggressive interpretation of the rule and the Staff's guidance addressing MD&A disclosure of non-GAAP debt covenants (Non-GAAP CDI 102.09). Other companies that have made recent disclosure of this kind of information have taken a more conservative approach.
-John Jenkins, Editor, TheCorporateCounsel.net 3/30/2020
RE: It seems hard to conclude that those reward points aren't a perk, particularly if the company ultimately controls which person receives that benefit. It doesn't seem appropriate to conclude that the receipt of these award points is integrally and directly related to the performance of an executive's duties. Under the 2006 release, if it doesn't fall into that category, it's a perk if it confers a direct or indirect benefit that has a personal aspect, regardless of whether it may be provided for some business reason, unless it's generally available on a non-discriminatory basis to all employees.
It sounds like there may not be any incremental cost to the registrant associated with these reward points, in which case it may be possible to omit the disclosure from the "All Other Compensation" column of the Summary Comp Table, but in Question 119.07 of the Reg S-K CDIs, the Staff has taken the position that a perk having no aggregate incremental cost should still be identified by type.
-John Jenkins, Editor, TheCorporateCounsel.net 3/28/2020
RE: I think many companies permit a transfer like this, but check your insider trading policy. Some have provisions relating to transfers to trusts or other entities over which the insider or members of the insider's immediate family have control that may prohibit such a transfer during the blackout period. Gifts and transfers to trusts aren't as simple as they appear. See the discussion beginning on page 23 of the Insider Trading Policies Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 3/28/2020
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
RE: If a single portion, or discrete portions, of the issuer's corporate website are expressly referenced in the filing, is the view that the entire corporate website (i.e., information OTHER than the portions of the website that are expressly referenced) is deemed incorporated (even if there is a disclaimer that information accessible on the website is not incorporated into the filing)? Thank you.
-3/27/2020
RE: I think we start with the proposition that you're always potentially liable for information on your website that an investor might reasonably rely on. However, it's a lot easier to establish reasonable reliance if a company says in a proxy statement or other filing, "Hey, investor. Go to these pages on our website." So, I think the potential for liability for everything said on the site is there, but pointing to particular pages enhances the company's potential liability with respect to those pages. Here's a fairly recent MoFo piece on website liability that you may find helpful.
-John Jenkins, Editor, TheCorporateCounsel.net 3/27/2020
RE: Not if you've already filed an 8-K disclosing the change before you mailed the annual report wrap or if you include it as required in the proxy statement. Here's an excerpt from the "Accountant Changes and Disagreements Handbook":
"Even though Item 304(a) disclosure is part of the 14a-3 annual report information that’s required to accompany or precede the proxy statement (i.e., in the glossy annual report or 10-K wrap), Instruction 1 to Item 304 says that disclosure isn’t required if the information has been “previously reported” (e.g., in an Exchange Act report or the proxy statement—see Exchange Act Rule 12b-2) . This exception isn’t available for the proxy statement. As a result of this Instruction and Form 8-K CDIs 101 .01 and 214 .02, a company will rarely report Item 304(a) information in its Form 10-K or glossy annual report. But because the proxy rules require Item 304(a) disclosure if a change of accountants occurred at any time during the company’s two most recent fiscal years or any subsequent interim period, a change will be disclosable in at least two consecutive annual proxy statements."
-John Jenkins, Editor, TheCorporateCounsel.net 3/27/2020
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
RE: Yes. Starbucks did that.
-John Jenkins, Editor, TheCorporateCounsel.net 3/17/2020
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
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
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
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
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
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
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
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
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
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
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
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
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
RE: Not to my knowledge.
-John Jenkins, Editor, TheCorporateCounsel.net 3/10/2020
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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: 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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.)"
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-John Jenkins, Editor, TheCorporateCounsel.net 11/26/2019
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
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
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
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
RE: Nope, you're good. Just use the new number on the next filing. -John Jenkins, Editor, TheCorporateCounsel.net 11/22/2019
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
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
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
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
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
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
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: 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
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
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
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
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 prospec
