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 prospectus supplement, then there's the possibility that sales could be made during a period in which the prospectus does not include all material information. For that reason, in terms of dating the supplement, I think best practice here would be to date it the same date as the public disclosure is made.
-John Jenkins, Editor, TheCorporateCounsel.net 11/18/2019
RE: Personally, I wouldn't be comfortable relying on the 4(a)(2) exemption under these circumstances. The case law & the Supreme Court's Ralston Purina decision is very demanding, and looks not just to purchasers, but to all offerees as well. Any single person that, in the view of a court, needs the protection of the Securities Act can mess up the exemption for all parties involved. It seems to me that it would be exceedingly difficult to police compliance with the exemption with a group of 75 investors & an even larger group of offerees.
-John Jenkins, Editor, TheCorporateCounsel.net 11/18/2019
RE: I think you could file the definitive proxy statement with the current information about the number of shares outstanding. If there are changes when you get to your record date, you would file amended definitive materials to reflect the revised information. Even if you were required to file preliminary proxy materials, a revision like this seems unlikely to result in a fundamental change that would recommence the 10 day waiting period.
-John Jenkins, Editor, TheCorporateCounsel.net 3/12/2019
RE: So you would be mailing to stockholders in May (i.e., post-record date) a proxy statement dated prior to that and with information not current as of the approximate mailing date? So would the disclosures say "stockholders as of the record date that will be set by the board are entitled to notice of and to vote at the meeting"? Seems funky. I'd recommend filing supplemental materials with the record date information.
-11/14/2019
RE: No. I think the right approach to mailing would be the one you suggest. I was trying to address whether they could file a definitive proxy statement in advance of that record date so they could incorporate Part III info into the 10-K.
-John Jenkins, Editor, TheCorporateCounsel.net 11/14/2019
RE: As the rule provides, an officer's participation in the decision to authorize Rule 10b-18 purchases doesn't make that individual an affiliated purchaser solely for that reason, but that's a narrow exception. See the discussion on pages 73-74 of our "Stock Buybacks Handbook." I would be very concerned about any transactions by such an affiliate during a period when purchases are being made under the 10b5-1 plan. As a practical matter, I think it's a very short trip for an officer who was involved in the plan's establishment and therefore can plausibly be alleged to have a detailed knowledge of how the plan works to be viewed as an "affiliated purchaser."
-John Jenkins, Editor, TheCorporateCounsel.net 11/13/2019
RE: Reg M's unsolicited transactions exemption is viewed pretty narrowly, and while I'm not aware of any Staff guidance on your specific scenario, I would be very hesitant to endorse reliance on the exemption for a company that plans to publicly disclose that it will serve as a source of liquidity to its shareholders.
Continuing distributions just aren't a good fit with Reg M's prohibitions. For example, it frequently creates a number of challenges for companies with ATM programs that involve "distributions." If you want to provide liquidity, a better approach may be to suspend the offering periodically in order to create windows during which the company could repurchase shares from interested investors without violating Reg M.
-John Jenkins, Editor, TheCorporateCounsel.net 11/13/2019
RE: Thank you for the prompt and helpful reply.
-11/13/2019
RE: There are a whole bunch of NYSE & Nasdaq rules relating to notice of a rights offering, some of which can influence the time between the announcement of the offering and the record date. The first of these are NYSE Rule 703.03(B) and Nasdaq Rules 4310(c)(16) and 4320(e)(14), which require companies to publicly release all known details of a proposed rights offering immediately after the board has authorized it. This can be quite some time in advance of the record date (sometimes months).
NYSE Rule 703.03(B) and Nasdaq Rules 4310(c)(25) and 4320(e)(21) require at least 10 days advance notice of the record date, and NYSE Rule 703.03(C) requires companies to provide at least 10 days written notice of the rights offering to their shareholders as well. That notice has to be pretty detailed, and lay out the proposed terms of the offering. I haven't canvassed the market, but I don't think the practice is to provide notice very far in advance of the required date, and most of the press releases that I've seen announcing definitively that the company is moving forward have been 10 days to 2 weeks before the record date.
If the company doesn't have an existing shelf on file, then the NYSE also recommends that the effective date for the registration statement be set for at least 6 business days in advance of the record date in order to prevent confusion in the event of a delay. The NYSE will not allow the record date to be set in advance of the anticipated effective date of the registration statement.
The bottom line is that sorting through the various notice & timing requirements can influence the time between an initial announcement and commencement, as well as between the final announcement of the definitive terms of the deal and commencement. In practice, I think that most companies want to launch relatively soon after the record date, but the launch date may be several days or more after the record date, and the prospectus supplement has to be on file when they commence the offering. That's usually shortly after the record date. But, practice sometimes varies here as well. For example, Hertz Global recently did a rights offering for which it filed a prospectus supplement more than 2 weeks in advance of the record date.
-John Jenkins, Editor, TheCorporateCounsel.net 11/13/2019
RE: I guess my reaction would be that the individual should sign the minutes in the capacity that he or she recorded them at the meeting, which if the person was not the corporate secretary at the time probably means that they were serving as secretary pro tem. If you wanted to add their current title to that designation because that's your custom, I don't think that presents a problem.
-John Jenkins, Editor, TheCorporateCounsel.net 11/8/2019
RE: My recollection is that if the financial statements of the target (and related pro formas) set forth in the acquiror's Form 8-K are material (and presumably they are), and they have not yet been "baked into" the acquiror's financial statements, such that they are included in the acquiror's financial statements, and the acquiror's auditors are on the job reviewing them, then the consent of the target's auditors would be required in the shelf registration statement prior to takedown. Of course, that's the somewhat technical answer that I recall from memory. Might be worth checking Corp Fin's Financial Reporting Manual. My guess, however, is that if the shelf registration statement has been declared effective already, most issuers (acquirors) would simply proceed with the takedown, and not bother to go back and get the target's accountants to consent (again), without thinking about the issue.
-Broc Romanek, Editor, TheCorporateCounsel.net 6/20/2012
RE: I just wanted to follow up to see if there is any further input on this point.
Issuer is doing a shelf take down by filing a prospectus supplement. The prospectus supplement incorporates by reference a Form 8-K/A with audited Target financials.
Do we need a consent from Target auditor to be listed under the "expert" paragraph in the prospectus supplement?
Similarly, do we need a consent from the issuer's auditor to be listed under the "expert" paragraph in the prospectus supplement? The issuer's auditor provided a consent to be so listed at the time the original registration statement (and base prospectus) was filed. Does that consent cover identifying the issuer's auditor in the prospectus supplement?
Any help is appreciated.
-11/7/2019
RE: If the target's financials are required to be incorporated by reference in the filing, you'll need a consent from target's accountant. Section 7 of the Securities Act requires that there be filed with the registration statement the written consent of “any person whose profession gives authority to a statement made by him, [who] is named as having prepared or certified any part of the registration statement," and Rule 436 requires it to be filed as an exhibit. You can provide the target auditor's consent in an 8-K filing that is incorporated by reference into the S-3.
You have already filed the consent of the issuer's accountant as an exhibit when you filed the registration statement. If there have been no changes to the financial statements covered by the consent, you won't need to update it. Typically, a new consent would be signed at the time of your 10-K filing that serves as a Section 10(a)(3) update of the registration statement, and filed as an exhibit to that document.
-John Jenkins, Editor, TheCorporateCounsel.net 11/7/2019
RE: I'm not aware of any guidance from FINRA on this either, and I've not dealt with it myself. On the face of it, it wouldn't seem to apply to a swap arrangement that didn't involve the sale of the new issue into an account in which a restricted person had a beneficial interest. But the rule is worded in such an odd manner that it is difficult to reach a definitive conclusion. For example, while a "sale" to an account in which a restricted person has an interest would seem to be required, the exemptive provisions of Rule 5130(c) extend to transactions to restricted persons "directly or through accounts in which such persons have a beneficial interest."
The use of that language in carving out general exemptions seems to imply that a "sale" includes both direct and indirect transactions involving a new issue as well. The term beneficial interest is defined to include "any economic interest, such as the right to share in gains or losses," & the rule doesn't define the word "account," and I'm a little concerned that an equity swap arrangement might itself be viewed as an account in which a restricted person has a beneficial interest, and thus subject to Rule 5130.
-John Jenkins, Editor, TheCorporateCounsel.net 11/6/2019
RE: As far as I know, a cover letter to the FOIA office is required for any Rule 83 confidential treatment request. See the discussion of Rule 83 procedures beginning on page 56 of our "Confidential Treatment Requests Handbook."
-John Jenkins, Editor, TheCorporateCounsel.net 11/6/2019
RE: When buying back a large number of shares in a privately negotiated transaction, there's often some kind of purchase agreement prepared. In addition to disclosure under Item 703, these agreements up being disclosed in Item 1.01 or 8.01 8-K filings, particularly if they involve an affiliate.
-John Jenkins, Editor, TheCorporateCounsel.net 11/6/2019
RE: Fortunately, I've not had to deal with a situation like this, but here's my 2 cents: If the errors are not material, I wouldn't do anything except address them, to the extent relevant, in future filings. If they're material, you've got a duty to correct the inaccurate information. Since the deal is closed, I'm not sure a post-effective amendment to your S-4 would accomplish anything. However, any Form 8-K filings containing the inaccurate information would need to be amended. I also think you would need to take steps to more generally alert investors and correct the record in a Reg FD compliant way. If you wanted to mitigate liability to the seller's shareholders, I think the only solution under the circumstances would be a registered rescission offer.
-John Jenkins, Editor, TheCorporateCounsel.net 11/5/2019
RE: When does the underwriting agreement need to be filed as an exhibit to a Form 8-K for a shelf takedown? If the underwriting agreement doesn't need to be reported under Item 1.01, can it be included as an exhibit after 4 business days on the day of closing, along with the opinions?
-11/5/2019
RE: Yes, that's the customary practice. I've worked with issuer's counsel who want to have the underwriting agreement filed on the date that the offering is priced, but I think it's also common to file the agreement at closing even if the issuer decides that the underwriting agreement is a material agreement under Item 1.01.
-John Jenkins, Editor, TheCorporateCounsel.net 11/5/2019
RE: I think you should document receipt of the letter and resume by sending a letter to the gentleman stating that the communication has been provided to the chair of the nominating committee, but then also specifically referring the gentleman to your company's Reg S-K Item 407(c) nominating committee process for identifying and evaluating nominees for director, which often includes, but is not limited to (and shouldn't necessarily be limited to) shareholders' nominees.
-Randi Morrison, Associate Editor, TheCorporateCounsel.net 5/11/2015
RE: I have a follow up question to this (trying to understand how other public companies handle). We receive several letters/e-mails with respect to unsolicited director candidates (typically cover letter with resume). The letters, which appear to be a form template for the most part, are typically addressed to our CEO/Chairman and never mention anything about being a shareholder. Historically, we have provided a response acknowledging receipt of the letter and noting that it will be provided to our Nominating and Governance Committee for consideration during their annual nominating process (with no promises that we need to follow up). Is it customary to respond to EVERY unsolicited director candidate (not being sent by a shareholder)? None of the letters are being sent in accordance with our posted process for either communicating with our Board or for nominating candidates to the Board.
-11/5/2019
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: Yes the client should include those shares.
-12/28/2016
RE: On a somewhat related matter, as a sanity check, any reason why shares issued in connection with an acquisition that are held in escrow and subject to restrictions on transfer could not be counted for purposes of public float? The holders would be able to vote the shares, they just wouldn't be able to transfer until the escrow period terminates (12-24 months). Thanks.
-11/3/2019
RE: I don't think the existence of restrictions on transfer would result in the exclusion of the shares from the public float calculation. Under both Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act, public float is determined by "multiplying the aggregate worldwide number of shares of its voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity." It's pretty clear from this approach that only shares held by affiliates would be excluded.
Now, there is one potential fly in the ointment. In some situations, escrowed shares are not deemed to be "outstanding" for purposes ofInstruction I.B.3 of Form S-3. Here's the relevant CDI:
216.09 Pursuant to a private placement, securities were to be issued into an escrow account upon partial payment equal to the securities’ par value. The issuer contemplated that the securities would be released from escrow upon payment of the remainder of the market price, simultaneously with effectiveness of a Form S-3 for resale of the securities. Although the securities would be considered outstanding under Delaware law at the time of issuance into escrow, they would not be “outstanding” for purposes of General Instruction I.B.3. In addition, the use of the escrow arrangement and the de minimis down payment suggests that the offering was in substance a “primary offering” for purposes of Form S-3 eligibility. [Feb. 27, 2009]
Even assuming that the Staff would take this position with respect to shares held in a customary merger escrow, the eligibility to file a resale shelf for escrowed shares seems to me to be a different issue than whether to count those shares in the public float. Given the language used in Rule 405, I still think that the answer should be that the escrowed shares are part of the public float, notwithstanding the potential contingency, assuming they are regarded as outstanding under applicable state corporate law.
-John Jenkins, Editor, TheCorporateCounsel.net 11/4/2019
RE: Thanks so much, John. Greatly appreciate the prompt reply. That CDI appears to address a unique situation where full payment for the escrowed shares has not been made by the time the resale S-3 is filed. I thought it was common practice to file a resale S-3 for merger consideration shares held in a customary escrow for indemnification purposes.
-11/4/2019
RE: Yes, I do think that is a common practice and don't think the CDI should apply beyond that situation addressed in it. But it is out there and conceivably relevant to your issue, so I just wanted to flag it in responding to your question.
-John Jenkins, Editor, TheCorporateCounsel.net 11/4/2019
RE: I appreciate you flagging it and providing a complete answer. Thanks again.
-11/4/2019
RE: I think the issuance of stock in payment for services rendered is a "sale" that, if unregistered, would trigger an Item 3.02 8-K filing. One reasons you may not find a lot of these for periodic payments is that Item 3.02 would require the arrangement to be disclosed once a binding contract was entered into. But that would be the only Item 3.02 filng required if the maximum amount of shares issuable under the contract were disclosed in the initial 8-K.
-John Jenkins, Editor, TheCorporateCounsel.net 11/4/2019
RE: I've worked on a deal where the parties were coming up on a staleness date (they included FYE numbers in the document), so they included a recent developments section in the S-4's prospectus/proxy statement with capsule information about the quarter, and the staff permitted them to go effective & mail shortly before the fiscal year-end numbers went stale. By the way, the Staff's willingness to allow them to go effective so close to the stalness date was predicated on including the recent developments section. The pro formas weren't updated after effectiveness.
-John Jenkins, Editor, TheCorporateCounsel.net 11/1/2019
Thank you - this was a very helpful response.
-11/1/2019
RE: I don't think so. These guys all rely heavily on proxy disclosure to make their calls, and when it comes to overboarding, my sense is that their analysts just look at your proxy disclosure and count.
-John Jenkins, Editor, TheCorporateCounsel.net 11/1/2019
RE: Check out the Annual Meeting Handbook & the other materials in our "Annual Shareholders' Meetings" Practice Area.
-John Jenkins, Editor, TheCorporateCounsel.net 10/31/2019
RE: We also have a few checklists & handbooks that discuss the shareholder engagement process and Schedule 14A filing & mailing requirements.
-Liz Dunshee, Editor, TheCorporateCounsel.net 10/31/2019
RE: Rule 14a-1 is broad, and any communication to security holders "under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy" is encompassed within its definition of the term "solicitation." But that still leaves a lot of room for engagement with shareholders about topics that they are interested in without violating the proxy rules.
I think there's a very good argument that, in most situations, general off-season engagement with shareholders on these topics is likely not to be regarded as solicitations. There's no meeting looming, there are no specific items on the agenda, etc. There's also safety in numbers - many, many companies engage with their shareholders on various topics outside of proxy season without filing any sort of proxy materials. That suggests that neither the companies involved nor the SEC find this kind of ordinary course engagement particularly troubling.
-John Jenkins, Editor, TheCorporateCounsel.net 10/30/2019
RE: Looks like you omitted the links you described in your second sentence, so I'm not sure what the conflict is. But I think the answer to your question is that a DRSLTR is required for a Form 10 confidential submission, even if the issuer is an EGC. That's because while the SEC's policy covers those in some cases, the JOBS Act only amended the Securities Act to add a confidential submission procedure for EGCs (Section 6(e)), and didn't amend the Exchange Act. If you look back to the 2015 JOBS Act FAQs, the Staff said that the confidential submission process wasn't available to EGCs submitting Form 10 registration statements, because Section 6(e) only applied to Securities Act filing.
Since that's the case, I think the requirements that apply under Corp Fin's guidelines to all other companies making confidential submissions of Section 12(b) registration statements apply to EGCs as well.
-John Jenkins, Editor, TheCorporateCounsel.net 10/30/2019
RE: I'm not aware of any exception, but as you probably already know, if the company needs to issue its earnings release and hold its conference call, it can do so. The Item 2.02 8-K can be furnished at any time within four business days from the release of the information about the completed quarter. Of course, if you opt for that, you won't be able to rely on the safe harbor in Item 2.02(b) and will need to furnish a transcript of the earnings call if you disclose any other information about the completed quarter in that call.
-John Jenkins, Editor, TheCorporateCounsel.net 10/24/2019
RE: Thanks for this question and answer! EDGAR is down again today so this advice was very timely.
-10/29/2019
RE: I'm not aware of the Staff objecting to an opinion that bears a date that differs a few days from the filing date, so long as nothing has transpired that would have a material effect on the opinion as rendered. My guess is that this practice wouldn't concern the Staff, because, whatever its date, Section 11 of the Securities Act would compel an opinion included in the registration statement to be correct at the time of effectiveness. I know they used to sometimes require updated Exhibit 5 opinions if there was a significant delay between the original filing of the opinion and effectiveness, but I think it was recognition of the Section 11 point that ultimately persuaded them to drop this.
Be sure to review SLB 19 for the Staff's position on other issues relating to Exhibit 5 opinions.
-John Jenkins, Editor, TheCorporateCounsel.net 10/29/2019
RE: As the statute's written, it looks like it would remain a covered security until it is officially delisted, but I haven't seen any interpretive guidance on this from the Staff or Nasdaq.
-John Jenkins, Editor, TheCorporateCounsel.net 10/28/2019
RE: Yes. Reg FD permits companies to disclose information to investors and other persons covered by the rule "who expressly agrees to maintain the disclosed information in confidence." So, the short answer is yes, but not all investors will sign up for a confidentiality agreement , and those who are willing often will require a commitment to public disclosure after a relatively short period.
-John Jenkins, Editor, TheCorporateCounsel.net 10/25/2019
RE: I responded to a similar question a few years ago on the CompensationStandards.com Q&A Forum (Topic #1259). My initial reaction was the same as yours - that unless you were dealing with a de facto termination of the type discussed in CDI 117.03, no filing would be triggered. But one of our members, who is a very knowledgeable partner at a major international firm, advised me that his firm's view is that the CDI is neutral, and that any situation involving a significant reshuffling of an NEO's responsibilities, including a promotion, could trigger a filing.
-John Jenkins, Editor, TheCorporateCounsel.net 10/25/2019
RE: Sorry - now reading that second part it seems to be referring to another sig. acquisition that happens and not the acquisition contemplated above. Let me know if I am misreading that.
-10/24/2019
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
awesome! thanks John!
-10/24/2019
RE: You've already concluded that you're dealing with material information, so the first question that you need to consider is - is the company or its insiders in the market? If the company has a repurchase program, has registration statements on file, or insiders are trading in the stock, then you'll need to disclose that information promptly.
You should also look at any prior disclosures concerning the borrowing base, and whether someone might argue that you have a duty to correct or update them that might be triggered in advance of the Form 10-Q. I'd also keep an eye on the stock to see if there are unusual price movements that suggest potential leaks - in which case you will need to make a public announcement. Absent these factors or a slip of the tongue by an insider implicating FD, you're probably okay waiting until the 10-Q.
-John Jenkins, Editor, TheCorporateCounsel.net 10/24/2019
RE: Assuming you're dealing with a "clear day" amendment, I think you've got pretty good arguments in favor of permitting it to be applied to the 2020 meeting. There is a lot of case law in Delaware surrounding efforts to enjoin an advance notice bylaw based on the proximity of its adoption to a meeting, and I think those decisions are relevant to your situation as well. That case law is reviewed in the Fried Frank piece that I've included the url for below. This is from 2015, and there may be more recent cases addressing this issue. You may want to look into those and to review the other materials in our "Advance Notice Bylaws" practice area.
-John Jenkins, Editor, TheCorporateCounsel.net 10/24/2019
RE: Well, I guess one thing to point to is the SEC's willingness to shorten the prospectus delivery period for companies that are listed on an exchange. Under Section 4(a)(3) of the Securities Act and Rule 174, dealers have an obligation to deliver a prospectus for a period of 90 days after an initial public offering, but the SEC amended that rule back in 1988 to shorten that period to 25 days for NYSE or Nasdaq companies, due to their listing requirement that are intended to assure that information about qualifying issuers is available to the marketplace and is updated on a timely basis.
I suppose it would be more helpful if this change happened post-internet, but I think it does give you the ability to point out that the magical 90 day period following an IPO isn't set in stone, even when it's baked into the statute, and that the level of information that's available about an issuer was a key factor in the SEC's willingness to shorten that period even way back when cell phones were the size of bricks.
-John Jenkins, Editor, TheCorporateCounsel.net 10/24/2019
RE: I've never seen anything discussing that issue, but I think the better view is that you could accept tenders on a "pay-as-you-go" basis in a private tender offer that doesn't have to permit tenders to be withdrawn. There doesn't seem to be much benefit to a shareholder from interpreting the 20 business day rule to require the offeror to refrain from paying for tendered shares that can't be withdrawn until the offer expires. Of course, there may be reasons why you don't want to do that - for example, if you decided for business reasons to allow for proration, paying for the shares immediately would put you in a position of trying to unscramble eggs.
Regarding your second question, I'd suggest you take a look at the comment response letter & the other materials that I reference in Topic #9864. That letter, which came from Fried Frank, provides a really good, concise analysis of the relevant factors under the Wellman and Hanson tests. While it involves a debt tender involving sophisticated offerees, I still think you may find it and the case law that it references helpful in determining whether you have any basis for an argument that what you're doing isn't a tender offer.
-John Jenkins, Editor, TheCorporateCounsel.net 10/24/2019
RE: I don't know of any established best practice here, but I think the key thing is to make sure that the receipt of the other approval upon which the committee's action is conditioned is appropriately documented in the corporate records. It may be appropriate to confirm that the condition was satisfied and ratify the action taken at a subsequent meeting, and appropriately record that action in the minutes.
The idea of a conditional approval doesn't bother me - many transactions receive board approval subject to conditions. But I think the critical point is making sure that you don't leave any "dangling participles" that could create issues in subsequent due diligence or complicate the process of rendering a legal opinion at a future date.
-John Jenkins, Editor, TheCorporateCounsel.net 10/23/2019
RE: There is an SEC "Hot Topics" Teleconference from July 2004 that provides insight into FAQ #3 (address provided). However, I think there is still some ambiguity when management should provide its assessment.
-6/7/2006
RE: I can do that one better. Then-Deputy Chief Accountant, discussed this on a DealLawyers.com webcast that was devoted solely to internal controls and M&A. Here's an excerpt from his remarks:
"FAQ 3 essentially scopes out of Section 404 the requirement for the assessment and reporting by management on the acquired entities - your merger targets - internal controls over financial reporting in the first annual report on internal control over financial reporting subsequent to the business combination. ... Because FAQ 3 grants a carve-out on one annual 404 assessment; it could be more than a year that management excludes the acquired business from the internal control sections of the 302 certification. For example, if a business combination occurred January of 2005, management can exclude the acquiree from the 404 assessment for the year ended 12/31/05. And include the acquiree in the annual assessment for the year ended 12/31/06. So, virtually a two-year hiatus in which you can work on the internal control issue, including remediation issues.
Broc Romanek, Editor, TheCorporateCounsel.net 6/7/2006
RE: FAQ 3 was not changed by the 2007 revisions. However, I cannot locate a CDI on this, only the September 2007 Frequently Asked Question release/
-1/12/2011
RE: Right, it doesn't appear that the Corp Fin Staff has updated the FAQs in that release, so it likely is a good interp.
-1/14/2011
RE: Does FAQ 3 govern any acquisition? The FAQ speaks about material acquisitions. Where an acquisition or acquisitions completed during a fiscal year are not material (e.g., less than 2% of total assets and net sales), is it necessary to disclose that management's assessment of its internal controls did not cover the acquired business(es)?
10/22/2019
RE: The guidance doesn't require the acquisition to be "significant" - see footnote 2 to FAQ 3. So, it's appropriate to conclude that the relief extends beyond those transactions that might be significant under Rule 1-02(w) of S-X. But I think the Staff included a materiality qualifier for a reason and it seems unlikely that it meant to extend this relief to acquisitions that were immaterial.
-John Jenkins, Editor, TheCorporateCounsel.net 10/22/2019
RE: But, it wouldn't make sense to provide relief for material acquisitions and require that management' assessment include immaterial acquisitions.
-10/22/2019
RE: It might, because an immaterial acquisition presumably may not present the same level of challenges to assessing controls that a larger acquisition could pose.
-John Jenkins, Editor, TheCorporateCounsel.net 10/22/2019
RE: I'm not sure that a "series of similar transactions" requiring aggregation is automatically involved simply by virtue of the fact that more than one immediate family member is employed by the company. I think it depends on the facts and circumstances surrounding their hiring. If the exec is putting his or her thumb on the scale & turning the company into a hiring hall for family members, then that seems like a clear case for aggregation. But I think there's a strong argument that the compensation shouldn't be aggregated if the family members were hired prior to the time the individual became an executive or at different times through traditional hiring processes in which the executive wasn't involved. See the discussion on pgs. 50-51 of the Related Party Transactions Disclosure Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 10/22/2019
RE: I haven't seen a lot of companies adopting new language and I don't expect to see a lot of companies seeking this information out. The inquiries required to facilitate the disclosure discussed in the guidance are incredibly awkward for all parties involved, and the disclosure that it contemplates can potentially create the impression that a particular director was chosen BECAUSE they checked a particular diversity box. Very few nominating committees or directors - even those for whom board diversity is a priority - want to sign up for that kind of disclosure. See the discussion on pgs. 16-17 of our "D&O Questionnaires Handbook."
-John Jenkins, Editor, TheCorporateCounsel.net 10/22/2019
RE: Thanks, John. Are you seeing any revisions to questionnaires to address the revised S-X Rule 2-01(c) on debtor/creditor relationships with the audit firm/covered person/immediate family members of covered persons?
-10/22/2019
RE: I haven't seen anything on that yet. My guess is that, as with AS #18, many companies will reach out to their auditors to discuss what additional questions or revisions to existing questions they might want to see.
-John Jenkins, Editor, TheCorporateCounsel.net 10/22/2019
RE: There's not much on SOX 402, but there's actually a Delaware Chancery Court decision addressing this precise issue in some detail. The Chancery Court concluded that the prohibition did not apply to loans to former officers. Here's what Chancellor Chandler had to say about loans to former officers in Tafeen v. Homestore:
"Section 402 applies to directors, executive officers, or equivalents thereof. Homestore contends that because Section 402 does not limit its application to current directors and officers, it necessarily applies to former directors and officers. I disagree.
First, as a matter of statutory interpretation, Section 402 is clear and unambiguous. Under the “plain meaning rule,” so long as the language of a statute is clear and unambiguous, there is “no need to ‘interpret’ the language.” And, as the United States Supreme Court has stated, “where the language of an enactment is clear and construction according to its terms does not lead to absurd or impracticable consequences, the words employed are to be taken as the final expression of the meaning intended.” The words of the statute, moreover, are given their common meaning. Here, the statute clearly states “director or executive officer,” not “current or former director or officer.” Not only is this clear and unambiguous, it leads to a perfectly logical conclusion.
Second, even if one were to interpret the language of Section 402, the legislative history indicates that the purpose of Section 402 is to prohibit loans to those in control of corporate decision making. Once a director or officer steps down from her position, becoming a former director or officer, the ability to control corporate decision making is diminished considerably. Though not completely eliminated, Congress did not see former officers and directors as sufficient threats to specifically address in Sarbox. As Congress was presumably aware, any undue influence brought by former officers or directors on those currently holding a corporation’s decision-making powers can be remedied by a breach of loyalty suit brought by aggrieved stockholders.
Further instructive is Section 402 and its interaction with the ’34 Act. Although Sarbox does not define director or executive officer, the interpretive rules of the ’34 Act, which Section 402 amends, do define executive officer. Rule 3b-7 of the General Rules and Regulations promulgated under the ’34 Act defines executive officer, when used with reference to a registrant (which Homestore undoubtedly is under the ’34 Act), as the registrant’s “president, any vice president of the registrant in charge of a principal business unit, division, or function (such as sales, administration or finance), any other officer who performs a policy making function or any other person who performs similar policy making functions for the registrant.” Given the use of the present tense in this definition of executive officer, it is apparent that the term “executive officer,” as employed in Section 402, does not include former executive officers.
Since Section 402 applies only to current directors and executive officers, and Tafeen is a former executive officer, Section 402 has no application here. Homestore’s motion for summary judgment as to this issue is denied as a matter of law."
-John Jenkins, Editor, TheCorporateCounsel.net 10/21/2019
RE: You frequently see something like this situations involving activist nominees, because of some shenanigans that went on in the past (check out this DealLawyers.com blog: https://www.deallawyers.com/blog/2017/10/activism-intent-to-serve-bylaws-tackle-placeholder-nominees.html). But in non-adversarial settings, I don't recall any company formally requesting something like that and I don't think it's a common practice.
-John Jenkins, Editor, TheCorporateCounsel.net 10/18/2019
RE: One additional thought - some companies have D&O questionnaires that include a question asking the person to confirm that they are willing to serve as a director if nominated.
-John Jenkins, Editor, TheCorporateCounsel.net 10/21/2019
RE: It's my understanding that if you haven't implemented the change in segments, the annual 10-K updating process isn't going to require you to accelerate its implementation and recast your financial statements to reflect that change prospectively - and I'm not sure the accountants would sign off on an attempt to do that.
If you do implement a change during the1st quarter of the new fiscal year and after those 1st quarter numbers have been filed, you subsequently want to file a new S-3, then you're going to have to recast the financials for the prior year because of the updating requirement in Item 11(b) of Form S-3. See Section 13110.2 of the FRM.
In contrast, if you are simply doing a takedown off an existing shelf and filing a prospectus supplement subsequent to the change, Item 11(b) won't come into play and you only have to update to include recast audited numbers if you are dealing with a "fundamental change" under Item 512 of Reg S-K. (See the May 2018 issue of The Corporate Counsel for a discussion of the "fundamental change" issue). However, if the changes resulting from the segment reclassification are material, they should be addressed in the prospectus supplement. In many instances, this is done through disclosure in the selected financial data section without filing revised audited financial statements.
-John Jenkins, Editor, TheCorporateCounsel.net 10/17/2019
RE: My concern is that the updating of a shelf (here a secondary shelf on S-1 for a SRC so you have forward incorp by ref) through the filing of a 10-K is the equivalent of filing a post-effective amendment and it is my understanding that you treat post-effective amendments the same as if you were filing a new S-3 (let me know if I'm incorrect on that in this particular context). So if the reporting segments change on 1/1, once you file the 2019 10-K (reflecting the segments as they were in 2019), the automatic incorp by ref into the shelf S-1 is treated as a post-effective amendment, which would require recast 2019 10-K b/c post-effective amendment treated the same as filing a new shelf S-1. I'm not sure that exact scenario addressed in your response - but let me know if I am missing something.
-10/17/2019
RE: I don't think so. Under your scenario, you are making the change in the first quarter of the next fiscal year. The 10-K financials wouldn't need to be recast because the change hadn't been adopted during the period covered by the report.
Under Item 11(b) of S-3, you're only required to recast the financials "if there has been a change in accounting principles or a correction in an error where such change or correction requires a material retroactive restatement of financial statements." Run this past your accountants, but I believe that under ASC 250, because you hadn't adopted the change as of the fiscal year end, you haven't triggered the requirement to recast the financials covering that period at the time of the Section 10(a)(3) update.
I think this is consistent with the FRM's approach to a new S-3 filing - it's only if you file after you've published numbers that contain the new segment presentation (i.e., you've filed your 1st quarter 10-Q) that you'd need to recast the numbers in the 10-K to comply with Item 11(b).
-John Jenkins, Editor, TheCorporateCounsel.net 10/17/2019
RE: Thanks - think we can safely assume 11A under form S-1 means the same? (this is a small reporting company that forward incorporates on form s-1 for its shelf) - its a bit more generic than 11b under S-3. I don't think this is material to registrant - they are just rolling up several currently reporting segments that have become so small they do not need to be their own segments any more (and have revised leadership structure to reflect same).
Item 11A. Material Changes.
If the registrant elects to incorporate information by reference pursuant to General Instruction VII., describe any and all material
changes in the registrant’s affairs which have occurred since the end of the latest fiscal year for which audited financial statements were included in the latest Form 10-K and that have not been described in a Form 10-Q or Form 8-K filed under the Exchange Act.
-10/21/2019
RE: Item 11A under Form S-1 is comparable to Item 11(a) of S-3 - a general updating mandate that doesn't get into the nitty gritty of recast financial statements like Item 11(b) of S-3 does. Given the language of Form S-1, I think you might very well actually have more flexibility than an S-3 filer would have. That's an odd result, but I suspect that the Staff's answer here on the need to recast prior financials might be the same that it gave with respect to Form S-8, which also contains only a general updating mandate. Here's what the Staff said in Securities Act Forms CDI 126.40:
"Question: After its Form 10-K is filed, a registrant has a change in accounting principles (or changes in segment presentation or discontinued operations), which will cause the financial presentation in its subsequent Form 10-Qs to differ from that in its most recent Form 10-K. In this situation, Item 11(b)(ii) of Form S-3 would require the annual audited financial statements filed in the Form 10-K to be restated to reflect the change in accounting principles (or changes in segment presentation or discontinued operations). Would General Instruction G.2 of Form S-8, which requires that "material changes in the registrant's affairs" be disclosed in the registration statement, also require such restatement?
Answer: Not necessarily. Form S-8 does not contain express language similar to Item 11(b)(ii) of Form S-3, requiring the restatement of financial statements to reflect specified events. The fact that financial statements eventually will be retroactively restated does not necessarily mean that there are "material changes in the registrant's affairs," thereby requiring the financial statements to be restated for inclusion, or incorporation by reference, in a Form S-8. In other words, financial statements for which Item 11(b)(ii) of Form S-3 would require restatement may not necessarily need to be restated for incorporation by reference in a Form S-8. The registrant is responsible for determining if there has been a material change and, if so, the related information that is required to be disclosed in a Form S-8. Correspondingly, it is the auditor's responsibility to determine if it will issue a consent to use of its report in a Form S-8 if there has been a change in the financial statements in a subsequent Form 10-Q and the financial statements in the Form 10-K have not been retroactively restated. [Aug. 14, 2009]"
The Staff hasn't addressed this in the context of Form S-1, so I would definitely run this issue past them. But given the similar language in both Form S-1 & S-8, it seems to me that they may well end up in the same place.
-John Jenkins, Editor, TheCorporateCounsel.net 10/21/2019
RE: I have exactly the same issue. I assume the analysis hinges on whether the swap is material to the registrant and that swaps that are ordinary course hedges of existing debt are not usually considered material. I am not aware of any companies that actually consider them material and file an 8-K. Anyone have any thoughts?
-10/4/2010
RE: There are companies that file Forms 8-K to report interest rate hedge agreements. (For example, a quick informal search revealed, among others, Commercial Metals Company, Education Management Corp., Crown Castle International, Discover Communications, Portfolio Recovery Associates, Inc. and Domino's, Inc. etc.) Any guidance or thoughts on market practice would be appreciated. Thanks.
-7/7/2011
RE: Does anyone have any further thoughts on this issue?
-10/18/2019
RE: I don't think there's a standard market practice on reporting these agreements on Form 8-K. Many times, you see them referenced when describing the overall terms of a credit facility that's being reported, and I don't think the universe of stand-alone filings for swaps is particularly large. However, I'm not sure that the idea that they're in the ordinary course necessarily resolves the issue of whether they trigger an 8-K. If the swap agreement is material, disclosure may also be required under Item 2.03 of Form 8-K, because it may involve the creation of an off balance sheet obligation, and there's no carve-out for ordinary course transactions in Item 2.03.
-John Jenkins, Editor, TheCorporateCounsel.net 10/21/2019
RE: I'm not real familiar with the details, but I know they have an online "DirectStock" program that participants can use to purchase and sell shares in participating issuers. I believe the terms of the plan provide that they will execute sale transactions that are placed with them through licensed broker dealers.
-John Jenkins, Editor, TheCorporateCounsel.net 10/16/2019
RE: Yes, it's a very common platform and service provided to directly held participants; many through employer ESOPs, etc.
-10/21/2019
RE: Unless the word makes a material change to the meaning of the document, I think I'd probably rely on the "close enough for government work" exemption and fix it in the 10-Q. If you opted to file the 8-K/A, I think it would be prudent to describe why you're amending the document. It's generally in the company's interest not to make readers wade through an amendment to try to discover what's been changed. For a general discussion as to when, how & why to amend an Exchange Act filing, see the May issue of The Corporate Counsel.
-John Jenkins, Editor, TheCorporateCounsel.net 10/18/2019
RE: Yes, I believe that is still the case. The listing process involves a lot of interaction between the company and the exchange, and you'll get an individual analyst assigned to you once you're approved to help you through the process. Exchanges are pretty good about doing the stuff that they need to do on their end to get you listed, and you can always reach out to them if there's a problem.
-John Jenkins, Editor, TheCorporateCounsel.net 10/17/2019
RE: Thank you John! Are you aware of a rule or guidance that states effectiveness is conditioned on receipt of the certification from the exchange? Form 8-A only speaks to timing of effectiveness, but is vague on this point.
-10/18/2019
RE: It's in the statute - Section 12(d) of the Exchange Act:
"(d) Effective date of registration; withdrawal of registration
If the exchange authorities certify to the Commission that the security has been approved by the exchange for listing and registration, the registration shall become effective thirty days after the receipt of such certification by the Commission or within such shorter period of time as the Commission may determine."
-John Jenkins, Editor, TheCorporateCounsel.net 10/18/2019
RE: For what it's worth, I found that the problem (for me at least) seemed related to the age of my computer, not the browser. I had a 3+ year old Dell that TheCorporateCounsel.net issued me when I first joined the company that took forever to load an iXBRL filing. In contrast, my law firm issued me a new machine less than a year ago. I've never had a problem with loading an iXBRL filing on that computer, which also uses Internet Explorer. Similarly, my old Dell was recently replaced with a new Lenovo laptop, and I now have no problem.
Your mileage may vary.
-John Jenkins, Editor, TheCorporateCounsel.net 10/17/2019
RE: See if you find it in the "Securities Act Liability" Practice Area
-Broc Romanek, Editor, TheCorporateCounsel.net 10/17/2019
RE: That's not something that's addressed in the adopting release, and I haven't seen any guidance on it from the Staff. But more than a few companies are going to find themselves with this transition issue, so it wouldn't surprised me if they have been asked about it already. I think it would be a good idea to contact them. If you do, please let us know what they say.
-John Jenkins, Editor, TheCorporateCounsel.net 10/16/2019
RE: In the proposing release for Item 703, the SEC said the line item requirement would "include disclosure of issuer purchases of securities convertible into the issuer's equity securities or options to purchase the issuer's equity securities if those convertible securities and options are themselves equity securities of a class registered under Section 12 of the Exchange Act." No changes were made as part of the adopting release, so I think the consensus is that unregistered convertible debt wouldn't be subject to disclosure under Item 703
-John Jenkins, Editor, TheCorporateCounsel.net 10/16/2019
RE: I don't think the fact that the payable has been disclosed in the 10-Q is necessarily dispositive of the 8-K issue. I think you should consider the original payable and the new note and security agreement separately. You may well still be able to get to a position where you conclude that an 8-K filing here isn't necessary, but I think you've got to run a few more traps before reaching that conclusion.
My guess is that you've already considered the issue and concluded that the payable, while large, is appropriately characterized as being in the ordinary course of business - and I think that's a position most companies would take with accounts payable to vendors, even large ones. If it is in the ordinary course, then an Item 1.01 8-K filing wouldn't be triggered.
When it comes to the note and security agreement though, I think you've got to again ask yourself whether agreeing to secure a large payable with a vendor it is itself an ordinary course of business transaction. You've taken the position that the documentation needs to be filed as a material contract. Subject to certain exceptions for contracts with insiders, Item 601(b)(10)(a) generally only requires the filing of a contract "not made in the ordinary course of business that is material to the registrant and is to be performed in whole or in part at or after the filing of the registration statement or report." So, your position on the need to file the documents may not align with a conclusion that they don't involve a material definitive agreement.
The other thing you've got to consider is whether by entering into the note and security agreement, you've triggered an 8-K obligation under Item 2.03 because you've created a material "direct financial obligation" under Item 2.03(c) in the form of either a "short term debt obligation arising other than in the ordinary course of business" or a "long-term debt obligation, as de?ned in Item 303(a)(5)(ii)(A) of Regulation S-K."
In analyzing these issues, I think you have to answer a number of questions. Some that come to mind include:
- What are the circumstances that prompted the company to agree to enter into the note and security agreement?
- Has the company previously agreed to similar security arrangements in the past with its vendors or is it a customary practice in the industry when dealing with large payables?
- What is the nature and extent of the security arrangements?
- Are there any potential implications of this arrangement under the company's existing credit agreements?
- How are the rights and obligations of the parties under the note and security agreement different/more extensive than what existed under the purchase order or other documentation typically governing the company's payables?
- Is there any impact on how the payable will be accounted for now that the obligation is embodied in a note and security agreement?
-John Jenkins, Editor, TheCorporateCounsel.net 10/16/2019
RE: That's a good question, and one that I don't think has been addressed by the Staff. I think the answer depends on whether you used Rule 457(a) or Rule 457(o) for purposes of calculating the fee on the original registration statement. If you filed under 457(a) and included the number of shares offered in the fee table, then I think the price at which those shares were sold is irrelevant. I would argue that you simply look to the amount of the original fee allocated to the remaining unsold shares, and use that as the offset. For a Rule 457(a) fee table, I don't think the value of the takedowns is relevant.
If you filed under Rule 457(o) and just included an unallocated dollar amount of securities in the fee table, then I think the answer is different. I don't think the fact that there's no price to the public listed in the prospectus is fatal to your ability to offset the fees, but you have to come up with a number, and the general position here is that the burden is on the issuer to keep track of the potential offset amount.
Given the nature of a bought deal, as a practical matter, the price paid by the underwriters may be what you end up using as your offset. As to the shares that were dribbled out, I think you will need to have some sort of mechanism that provides a reasonable basis for determining what price those shares were sold at in order to claim an offset. I would also suggest that you reach out to the Staff. My guess is that they may have responded to similar questions from others.
-John Jenkins, Editor, TheCorporateCounsel.net 10/16/2019
RE: I don't think that changes anything as far as applying the rule and disclosing the mechanics of your calculation. You'll just end up with a pay ratio of zero.
See Fossil Group's latest proxy:
Other examples include Twitter & Re-Max, and there are a few more beyond that who had really low ratios because the CEO was paid a nominal amount (eg Alphabet).
FYI, we have a pay ratio chapter as part of our "Executive Compensation Disclosure Treatise" - which is available by hard copy and for members of CompensationStandards.com. Here's the "Detailed Table of Contents" for the whole book -
-Liz Dunshee, Editor, TheCorporateCounsel.net 10/16/2019
RE: I want to bump this conversation to see if anyone has thoughts. We have more and more directors claiming that "everyone is doing" this, but we keep rejecting this request for many of the reasons mentioned above with respect to cash fees, but also with respect to equity compensation.
-10/11/2019
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: I think you can do that. I've seen plenty of proxies with disclosures like "Director since: 2012" in the bios. I've even seen some companies just use phrases like "Ms. Doe has served as Vice President of XYZ Corp for more than the past five years" for Item 401(e) disclosures.
-John Jenkins, Editor, TheCorporateCounsel.net 10/11/2019
RE: Yes. See the discussion on page 80 of our "10-K and 10-Q Exhibits Handbook."
-John Jenkins, Editor, TheCorporateCounsel.net 10/11/2019
RE: Ok. I was reading that as saying the forbearance agreement must be deemed material in order to be required to be filed. Or is your point that any substantive change is material.
-10/11/2019
RE: I think the general rule is that immaterial amendments to material agreements are required to be filed. We don't think that every waiver is an amendment, but we also don't think a waiver necessarily needs to be material to be an amendment. The view that we take in the Handbook is basically that waivers that affect substantive rights under the agreement or that make prospective changes to obligations are better viewed as amendments to the contract itself.
We concede that there's not always a clear line here - someone who is especially punctilious might take the position that ultimately, even a waiver relating to a ministerial obligation affects substantive rights because non-compliance with the obligation could ultimately result in declaration of an event of default. But we think that at some point it becomes a little silly to file a waiver relating to something like an officer's certificate that was a day late or failing to provide an updated good standing certificate.
-John Jenkins, Editor, TheCorporateCounsel.net 10/11/2019
RE: Generally, the two exemptions you've identified are the ones that are currently available, although earlier this year NASAA adopted a model rule that would exempt secondary transactions in Reg A, Tier 2 securities by issuers that comply with applicable ongoing reporting requirements. I've attached a link to that model rule, but I'm unaware of whether any states have adopted it at this point.
If all you've got to hang your hat on is the unsolicited brokerage transactions exemption, you may find that some brokerage firms are unwilling to trade in the security. This problem was summarized in a comment letter that OTC Markets Group sent to the SEC in 2014 arguing to extend a secondary trading exemption to Reg A, Tier 2 securities:
"When a security is not Blue Sky eligible in a given state, investors in that state may still place an unsolicited order to purchase or sell that security. However, if a broker has solicited or advised on other securities, the broker is subject to the potential risk of the trade being rescinded because an investor claims they were offered advice in that security. As a result, the broker may choose not to accept even unsolicited orders in the security. After all, investors only seek to rescind trades that did not work out in their favor, which subjects brokers to the potential for 100% downside."
For now, you're left with trying to fit your secondary transactions into either the manual box, the unsolicited transactions box, or some other idiosyncratic exemption that might be available in a particular state. In short, it's a mess, and the 2014 OTC Markets Group letter does a pretty good job of laying out the extent of the problem.
-John Jenkins, Editor, TheCorporateCounsel.net 10/10/2019
RE: Yes. It's a new exhibit that was put in place as part of the FAST Act rule changes.
-John Jenkins, Editor, TheCorporateCounsel.net 10/8/2019
RE: I was asking about the first 10-K filed for a large accelerated filer with a fiscal year ended after June 15, 2019, not a Form 10-Q covering a period after June 15, 2019.
-10/8/2019
RE: Sorry. There hasn't been any change to the phase-in schedule, so companies that are doing that with a 10-K that's their first filing after the effective date for large accelerated filers are doing so voluntarily. The adopting release is pretty clear that it's the first 10-Q after the effective date for which cover page tagging & the related exhibit 104 would be required.
-John Jenkins, Editor, TheCorporateCounsel.net 10/8/2019
RE: I don't think there's anything from the SEC on this subsequent to its 2000 interpretive release, in which it said that website posting didn't work. Of course, there's been a lot of water under the bridge since then, and the Staff might take a more flexible approach today, but I'm not aware of anything directly addressing this topic.
-John Jenkins, Editor, TheCorporateCounsel.net 10/7/2019
RE: All CDI 244.04 really does is restate the exact language of Rule 462(b)(2), which requires the new registration statement to be filed before confirmations are sent or given, so in reality, the answer is the same whether you're doing a "delayed" or "continuous" offering. I believe that what the Staff was getting at here has to do with the difference between a "continuous" and a "delayed" offering and who is eligible to engage in them.
Under Rule 415(a)(ix), companies may use a shelf for a continuous offering - i.e., one that will begin immediately and may extend for more than 30 days. In contrast, Form S-3 eligible issuers may offer securities on a delayed or continuous basis under Rule 415(a)(x). While a shelf covering "delayed" offerings will usually involve discrete offerings accomplished through separate shelf takedowns, a "continuous" offering is by its nature a single offering.
Rule 462(b) always applies to your "last" offering off the shelf. If you're doing a single continuous offering, then the Staff says you've got to make the call about upsizing before you send out your first confirm for that offering, even though additional confirmations may be sent out over a period of days or weeks. In delayed offerings involving multiple takedowns, CDI 244.03 says that you calculate the 20% limit by reference to what you have left on the shelf at your final takedown, not what you originally registered. If you want to use the Rule 462(b) procedure for your last takedown, you also need to file the registration statement before you confirm sales.
-John Jenkins, Editor, TheCorporateCounsel.net 10/7/2019
RE: I don't think the Staff has directly addressed this, but if the error is sufficient to result in a decision that the financial statements no longer can be relied upon, then an Item 4.02 8-K would be required. It seems to me that the language of Item 4.02 itself requires this conclusion, and I think it's also supported conceptually by Form 8-K CDI 101.01, which says that although most reportable events can be addressed in a periodic report if it's filed within 4 business days of the event that would have prompted an 8-K filing, that isn't permitted for Item 4.02 8-Ks. In other words, the Staff is pretty rigorous when it comes to Item 4.02.
That being said, if you search, you will find examples of companies that have filed 10-Q/As to correct errors in financial statements without filing an Item 4.02 Form 8-K. (I've included a link to a 2010 10Q/A example from Chesapeake Energy, which was prompted by a Staff comment) Some companies have apparently concluded that although the error is sufficiently material to require a 10-Q/A, it isn't significant enough to prompt a decision that the financial statements should no longer be relied upon. That's an issue I think you need to consult with your accountants about.
-John Jenkins, Editor, TheCorporateCounsel.net 10/7/2019
RE: That's certainly how the current version seems to read, but it remains subject to comments. I also don't know what gloss the accounting firms may put on it or whether the Staff will have its own views about the need to check the SRC box in order to take advantage of it. Of course, you can still check the box and opt not to provide the scaled disclosure.
-John Jenkins, Editor, TheCorporateCounsel.net 8/20/2019
RE: I read the provisions of FRM 2045.16 the same way that you do, and think that a prior filing including 9/30 unaudited financial information filed with the registration should be regarded as including "substantially the same information" as the 6/30 unaudited financial information that would be required under Form 8-K. That being said, this is not a situation I've personally encountered, and the very few Staff comment letters addressing interpretive issues under FRM 2045.16 haven't covered it either. I think it might make sense to reach out to the Staff to confirm this interpretation.
-John Jenkins, Editor, TheCorporateCounsel.net 10/3/2019
RE: I have certainly heard this argument before, and my view is that the Staff has broad discretion to decide what it wants to review and comment about once an issuer files the preliminary proxy statement, so I don't think you can necessarily assume that the information you change or add isn't going to be relevant to the Staff in making its review and comment decisions just because that information doesn't have anything to do with the proposal or proposals that triggered a preliminary filing. I think your risk here is that you go straight to the definitive, the Staff notes the changed information and decides to then comment on that information. At that point you are dealing with potentially revising and recirculating an already mailed proxy statement.
One thing to note here is that notwithstanding whatever is going on with the Staff process, an issuer could always decide to go definitive and mail, and I certainly recall situations when I was a staff reviewer where issuers would file definitive and mail the proxy statement even though Staff comments were outstanding. I have never thought this was a particularly good approach and it certainly makes the Staff unhappy when they have been wasting their time looking at your proxy statement. The reason this can happen is that it is not like under the Securities Act, where you have to wait for the Staff to declare the registration statement effective or else you have potential liability or the prospect of the SEC stop order.
-Dave Lynn, TheCorporateCounsel.net 2/13/2014
RE: Hi Dave and others,
As a follow up to this, have you seen examples where a company has filed their definitive proxy statement with staff comments outstanding due to annual meeting timing considerations, and then subsequently update the definitive proxy statement in response to the comments? If so, what form does this take - a restated definitive proxy statement, or just the provision of supplemental materials?
-DCL 2/10/2015
RE: It depends on the circumstances (and what the Staff might say what to do) - but I imagine that is typically handled via filing & delivery of additional solicitation materials.
-Broc Romanek, Editor, TheCorporateCounsel.net 2/11/2015
RE: As a follow up to this question, following the expiration of the 10 days, the company files its definitive proxy statement. A few days later the company files a revised proxy statement that would be considered a fundamental change. In this case, is the 10 day clock also reset and would we need to file a preliminary proxy again?
-10/2/2019
RE: If the revision makes a fundamental change to disclosure about a non-routine proposal or adds a new non-routine proposal, then I believe that a preliminary supplement/amendment must be filed and the 10 day waiting period will recommence. Here's an excerpt from this Latham blog:
"If the new proposal deals with a “non-routine” matter, Rule 14a-6 requires a company to file a preliminary supplement to the proxy statement. This requirement could significantly impact timing, as the company needs to wait at least 10 days before filing definitive proxy material. In either case (whether the new proposal covers a routine or non-routine matter), a company needs to assess if there is enough time to allow stockholders to vote on the new proposal."
I think the analysis is the same if you're dealing with a fundamental change to one of the proposals that prompted you to file preliminaries in the first place. You may also want to refer to the "Avoiding Proxy Panic" article that appeared in the July 2018 issue of The Corporate Counsel for some other things to consider.
-John Jenkins, Editor, TheCorporateCounsel.net 10/2/2019
RE: Since you've included the disclosure that would've been in the exhibit, I think I'd put that in the category of a non-substantive typo and wouldn't amend the filing for that.
-John Jenkins, Editor, TheCorporateCounsel.net 10/1/2019
RE: To my knowledge, this is only an underwriting agreement concept, and it reflects the fact that one of the things that you can do with an FWP is customize it to address different types of investors. An FWP like would not be distributed to everyone, unlike what the Underwriting Agreement would refer to as a "General Free Writing Prospectus," and I think that these documents - if there are any - are what the defined term "Limited Use Free Writing Prospectus" is intended to encompass.
-John Jenkins, Editor, TheCorporateCounsel.net 9/30/2019
RE: Check with your accountants, but it seems to me that this business would likely be classified as "held for sale" on the target's 6/30 financials and that the disposition itself might be reflected in a subsequent events footnote. I'm just a history major, so take my accounting thoughts with a whole bunch of salt, but this doesn't strike me as something that should be presented by recasting the target's financials as of 6/30. You may even be able to reflect the transaction in the pro formas.
-John Jenkins, Editor, TheCorporateCounsel.net 9/27/2019
RE: In a word, yes. It also has to be pro rata. Since you have a private company, do you have any preferred holders? That can sometimes complicate the pro rata part (or at least sometimes the spin structure can get caught up in some of the preferred stockholder provisions).
-4/7/2010
RE: There are no preferred stock holders. Can't the parent company take the position that the spin-off is not registrable on the basis of a no-sale theory or on a private placement theory? If so, is an information statement still required?
-4/7/2010
RE: You can take that position, I would just recommend against it because the SEC has given you a clear path in SLB 4 and the tons of NALs that preceded it (which all include providing an info statement). Keep in mind that the info statement isn't actually that hard to put together. In the context of a spin prior to a merger (which has its own issues because in that case you have concerns over whether the shareholders really are making an investment decision about the spin), we've put together info statements in 2-3 days - they really aren't that big of a deal. If you're ever diligenced later in a offering or acquisition, you're going to get asked about it and will have to answer why you didn't provide one.
-4/7/2010
RE: Thanks for your help. Do you think it is possible to rely on the 4 (1-1/2) exemption? There are less than 100 investors and they are all accredited. The stock has been held for 6 years.
-4/8/2010
RE: Didn't the information statement need to include certain financials (per Items 11 and 13 of Schedule 14A)? In that case, how were you able to complete the statements in 2-3 days?
-10/25/2011
RE: Typically the company will have audited financials already prepared that you can just attach
-10/25/2011
RE: To add to this discussion, I note that SLB No. 4, in the context of discussing condition 3 relating to the parent providing adequate information about the spin to its shareholders and the trading markets, states "In this discussion, we assume the parent is a reporting company." Has the SEC expressly extended the information statement guidance to situations where a private company is spinning off a private subsidiary?
I also have one additional question. Do you know of any guidance on the "pro rata" condition relating to treatment of holders of restricted common stock (i.e., unvested stock) and holders of options (for example, whether holders of unvested stock should participate in the pro rata distribution, and whether option holders should only receive the distribution for the vested and in-the-money portion of the options)? Thanks!
-9/19/2019
RE: With respect to your first question, see footnote 5 to SLB 4, which addresses how the Staff has addressed application of condition #3 to non-reporting parents. With respect to the second, see this response that Western Union provided to the Staff when it raised a similar comment in connection with a 2006 transaction.
-John Jenkins, Editor, TheCorporateCounsel.net 9/25/2019
RE: When it comes to equity lines, I think you've got to be very cautious. The Staff has provided guidance on when an equity line offering is "complete" for purposes of determining when a resale S-3 may be filed, and I think in the absence of guidance on your specific issue, I think I would look to that. Here's an excerpt from Stan Keller's integration outline that addresses when a equity line transaction is regarded as being "complete":
"For the transaction to be “complete,” the investor must be irrevocably bound to purchase all the securities. This means that only the company may exercise the put subject only to conditions outside the investor’s control. This would include “bring downs” of customary representations and warranties and customary material adverse change conditions. However, a “diligence out” will not qualify, nor may the investor have the right to transfer its obligation under the equity line or to acquire additional securities (such as through the exercise of warrants) at the same time or after the issuer exercises the put. Provisions allowing the investor to affect the timing or price or allowing termination of the put are also suspect. Also, the company may not put securities convertible into the common shares being registered because the investor would have a further investment decision whether to convert and purchase the underlying registered shares. If the investor has a right to take interest payment in shares, the transaction may not be considered “complete.” The staff’s interpretation of “complete” in this context may have relevance for purposes of Rule 152."
-John Jenkins, Editor, TheCorporateCounsel.net 9/25/2019
RE: Did anyone every receive any SEC guidance on the above question of whether Item 3.03 of Form 8-K is triggered (in addition to Item 1.01 and 2.03) when the new credit agreement includes customary financial covenant and a restriction on payment of dividends?
-9/24/2019
RE: There's nothing from the Staff on this to my knowledge, but here's my 2 cents. Item 3.03(b) is triggered if "the rights evidenced by any class of registered securities have been materially limited or quali?ed by the issuance or modi?cation of any other class of securities by the registrant. . ." While Item 3.03 is clear that dividend restrictions are covered by its provisions, it is only triggered if those restrictions arise out of "the issuance or modification of any other class of SECURITIES."
So, I think that the answer technically turns on whether the credit agreement involves a "security" within the meaning of the 1933 Act. That's an issue that's governed by the Supreme Court's decision in Reeves v. Ernst & Young, and I think that for most ordinary course business lines of credit, the answer is that they don't involve a security. Check out this blog for an overview of the application of the Reeves case to loan arrangements.
-John Jenkins, Editor, TheCorporateCounsel.net 9/25/2019
RE: It really depends on your facts and circumstances and I don't think there's a one size fits all answer. If you have a good D&O questionnaire that addresses AS #18 and the director appears to answer it fully, I think many companies would rely on that response. You might find the discussion on due diligence practices for related party transactions and AS #18 that appears on pages 21-25 of our D&O Questionnaires Handbook to be helpful here - Broc surveyed our advisory board members about their own due diligence practices when it comes to related party transactions.
-John Jenkins, Editor, TheCorporateCounsel.net 9/24/2019
RE: That's correct. When it comes to audit committees, Item 10 of Form 10-K requires companies to address the disclosure requirements in Items 407(d)(4) and (5) of Regulation S-K. The audit committee report requirement is contained in Item 407(d)(3) of S-K, and only Item 7(d) of Schedule 14A requires that disclosure.
-John Jenkins, Editor, TheCorporateCounsel.net 4/12/2017
RE: Notwithstanding this, it seems that many companies, when amending their 10-Ks to provide Part III information, also include the Audit Committee Report in such disclosure, in the response to either Item 10 or Item 14 of Form 10-K. As it not arguable that the report is technically *not* required in such a 10-K/A?
-9/24/2019
RE: I've never dealt with this particular issue myself, but I think there are two issues that you need to consider. The first is Rule 14a-3 - what are you legally required to deliver in an annual report before you can solicit proxies? The second is what information needs to be included in the proxy in order to make the information contained therein, under the circumstances, not misleading?
The specifics of what needs to be provided in the annual report are set forth in Rule 14a-3, and that would include only financial statements for the registrant and its subsidiaries, and acquired company financial information isn't required. See also Section 1410.2 of the Financial Reporting Manual "the annual report does not need to include the separate financial statements of other entities, pro forma data, or schedules required by Articles 3, 8, 11 and 12 of Regulation S-X, or predecessor audit reports. [Rule 14a-3(b)(1)]" So, I think you'd be compliant with the requirements of Rule 14a-3 and could technically solicit proxies without additional information about the target's financial statements.
As to the second question, I think the materiality question depends on what you're asking shareholders to approve. If it's just ordinary course matters such as electing directors, ratifying auditors and say-on-pay, then you might conclude that since the acquired company financial information is already public, it's already part of the total mix of information and not particularly germane to the issues being addressed in the proxy statement, so there's no need to include it in your proxy statement..
At the other extreme, if you are acting on matters that specifically require financial statement disclosure under Schedule 14A, then those acquired company financial statements included in the 8-K would need to be part of the proxy materials themselves. See, e.g., Item 11, 12 and 13 of Schedule 14A.
In between might be matters where an explanation of the financial aspects of the acquisition may be necessary in order to adequately inform shareholders of all material facts relating to a particular proposal. For example, if you have a proposal relating to new compensation plans being put into place due to the new transaction, while full blown financial statements probably wouldn't be necessary, some details about the financial aspects of the transaction may be appropriate in order to adequately apprise shareholders of the reasons for the proposed actions..
John Jenkins, Editor, TheCorporateCounsel.net 9/18/2019
RE: Thanks! Just to confirm, it looks like a few words are missing at the end of the second paragraph?This is very helpful.
-9/18/2019
RE: Sorry about that. I fixed it (along with the misspelled word that you were too polite to mention).
-John Jenkins, Editor, TheCorporateCounsel.net 9/19/2019
RE: Thanks! To confirm, does the fact that the formerly private company that PubCo acquired in the merger is technically the "accounting acquirer"? So, essentially, the PrivateCo (now subsidiary of Registrant) financials have become the registrant's financials?
I'm thinking that the merger proxy (which included the audited financials of Registrant/PubCo and audited financials of the PrivateCo/Now-Subsidiary/Accounting-Acquirer) would be the better document to "wrap"? If that is the case, would we also include the registrant's 10K, which is out of date at this point? Can it hurt to just put everything in a wrapper and call it a day (intention is to do notice & access so hopefully printing won't be an issue).
Really appreciate your thoughts.
-9/19/2019
RE: I think you need to check with the Staff on that. My sense is that if you're still dealing with the same registrant, then the 14a-3 analysis is the same, but like I said, I've not dealt with this situation and I'm not aware of any specific guidance on that.
-John Jenkins, Editor, TheCorporateCounsel.net 9/19/2019
RE: With respect to Exchange Act registration and reporting for liquidating trusts, the Staff has a long line of no-action letters providing relief from the Exchange Act registration requirements for the beneficial interests in the trust, provided that the liquidating trust follows a modified reporting scheme of filing 8-Ks and Form 10-Ks that include most of the same disclosures as a regular issuer, except that the financial statements can be unaudited. These letters are typically based on an opinion of counsel that the beneficial interests in the trust are not “securities.”
For some examples of the relief that the Staff has provided to liquidating trust, see, e.g., G REIT, Inc. and G REIT Liquidating Trust (February 25, 2008); ICON Cash Flow Partners L.P. Seven and ICON Cash Flow Partners L.P. Seven Liquidating Trust (August 14, 2007); T REIT, Inc. and T REIT Liquidating Trust (August 9, 2007); FORE Holdings LLC and FORE Holdings Liquidating Trust (December 1, 2005); and PLM Equipment Growth Fund III, Liquidating Trust (June 9, 2003).
Another consideration is whether it would be necessary to register the liquidating trust under the Investment Company Act of 1940. The Staff has provided no-action relief on this issue, e.g., in I.C.H. Corporation (Feb. 26, 1997).
I think in the situation that you describe, it is probably best to seek a no-action request on the registration and reporting issue.
-Dave Lynn, TheCorporateCounsel.net 7/1/2009
RE: Has the Staff granted no-action relief from the Exchange Act registration requirements for interests in an entity that is not technically a liquidating trust (such as an LLC), but that performs the same function as a liquidating trust?
Also, has relief been granted without the requirement that the trust/entity follow a modified reporting scheme of filing 8-Ks and 10-Ks?
-10/15/2010
RE: I am not aware of a situation where relief has been granted to an entity other than a trust (although perhaps there is such precedent out there) and typically the letters have contemplated a modified reporting approach as opposed to a complete pass on continuing reporting.
-Dave Lynn, TheCorporateCounsel.net 10/16/2010
RE: Going back to an old topic. What is the interplay between this line of no-action letters and Section 1145? Do the no-action letters speak to the distribution of interests in the trust to beneficiaries, while Section 1145 governs the distribution of shares based on those trust interests? What about the initial transfer of the shares from the company to the trust, would that also be covered by Section 1145?
-9/17/2019
RE: That's a lot of ground to cover in a Q&A forum. I'd suggest you start with the discussion on pgs. 25-40 of these Skadden materials, which reviews in some detail the application of Section 1145 and touches on its availability to liquidating trusts.
-John Jenkins, Editor, TheCorporateCounsel.net 9/18/2019
RE: Thanks John. The question was really two-fold: (1) Is the line of no-action letters on this topic that Dave referenced above meant to provide the same relief as Section 1145 would provide, or are they doing different things? It seems to me that they are providing different relief, i.e. one for registration of the trust interests and one for registration of the sale of the company shares, but I am not sure if that is the right way to think about this. (2) Does 1145 cover the initial transfer of the shares from the company to the trust? It would seem not, since the return of the creditor claims element is missing. Appreciate the help.
-9/18/2019
RE: After reviewing Item 512 of Reg. S-K, as supplemented by the discussions in Topics 4170 and 4323 of this site, and other guidance, I think the company needs to continue to update its prospectus until the exercise period for the warrants expire. I assume this is accomplished through the incorporation by reference of the issuer’s periodic reports (as permitted for registration statements on form S-3), but what about updating the financial information? In the above question, the shelf registration has been exhausted, but shares of common stock underlying the warrants must be offered and sold pursuant to 10(a)(3) prospectus, including financial information, this is usually accomplished as a result of the incorporation by reference of the company’s 10-K into the prospectus and the accountant consent being filed with the 10-K consenting to the incorporation by reference of its report into the prospectus contained in registration statement on form S-3, No. 333-_______. Correct so far?
Suppose the warrants are exercisable for a period of 5-years, suppose the S-3 registration statement was effective in 2008. The registration statement will expire 3 years from its effective date (2011), yet the warrants are exercisable until 2014. How does the issuer accomplish the incorporation by reference into an expired registration statement, I am actually referring to the accountant consent for inclusion of the financial statements into the S-3 prospectus.
Am I correct that the 10(a)(3) prospectus is maintained through the incorporation by reference of the company’s periodic reports and, while the accountant consent typically references the registration statement containing the prospectus, it is really the prospectus that the accountant is consenting to the inclusion of its report. The registration statement served its purpose – registering the securities – and the prospectus continues to serve its purpose (offers and sales of securities) regardless of the fact that the registration statement has expired? So, the accountant consent should, in fact, reference “the prospectus (and any supplement thereto) contained in the registration statement on Form S-3 (333 -_______)” and not worry about the fact that the registration – itself – has expired?
-7/16/2009
RE: We realize there may be an obvious answer here, but we would appreciate input, guidance.
-7/17/2009
RE: Note that the three-year limitation of Rule 415(a)(5) applies with respect to securities described in paragraphs (a)(1)(vii), (ix), and (x) (assuming we aren’t dealing with an automatic shelf here). The securities issuable upon exercise of the outstanding warrants would be offered under Rule 415(a)(1)(iii), “securities which are to be issued upon the exercise of outstanding options, warrants and rights.” So the registration for the shares underlying the warrants should not expire within the Rule 415(a)(5) timeframe, and thus you can keep the registration updated over the five-year terms of the warrants via regular-course incorporation by reference of the issuer’s periodic reports. The 10(a)(3) updating would be accomplished by incorporating by reference the 10-K, and the accountant’s consent would typically be filed with the 10-K and thereby incorporated by reference into the registration statement. The language of the accountant’s consent is driven by Securities Act Section 7, which refers specifically to the registration statement, and Rule 436 thereunder, which refers to the expertized portion of “a registration statement or prospecuts.”
-Dave Lynn, TheCorporateConsel.net 7/17/2009
RE: Can a company with a public float of less than $75 million rely on Rule 415(a)(1)(iii), or would it need to file a new shelf registration statement on Form S-3 (after a three-year period) for purposes of its common shares issuable upon the exercise of the warrants? Instruction 6 to General Instruction I.B.6 of Form S-3 (applicable to companies with a public float of less than $75 million) provides that a primary offering on Form S-3 pursuant to Instruction I.B.6 is for purposes of Rule 415(a)(1)(x) only, and registration statements filed under Rule 415(a)(1)(x) are subject to a three-year expiration period. Does that mean that a smaller reporting company cannot rely on Rule 415(a)(1)(iii) and has to file a new registration statement on Form S-3 (pursuant to Rules 415(a)(5) and (6)) in order to have a valid Section 10(a)(3) prospectus for common shares issuable upon the exercise of the warrants? It does not seem that incorporation by reference of periodic reports into an expired S-3 would be sufficient. We would appreciate any guidance.
-10/23/2010
RE: A related issue concerns the interaction between Rule 415(a)(1)(iii) and Rule 415(a)(1)(x). Would it be deemed that the company's shelf registration statement on Form S-3 is under Rule 415(a)(1)(x) (rather than Rule 415(a)(1)(iii)) and therefore expires after three years even if the company met the requirements of Instruction I.B.4 to Form S-3?
-10/25/2010
RE: I would be interested in any feedback on the 10/23/10 and 10/25/10 queries.
-5/6/2011
RE: Based on the discussions with the SEC's Staff, if the requirements of Instruction I.B.4 are satisfied and relied upon at the time of filing the S-3, the company can rely on 415(a)(1)(iii) and its shelf registration statement on Form S-3 does not expire after three years.
-5/9/2011
RE: Suppose similar facts to those above - i.e., expiring shelf, prior issuances under the shelf included warrants. Additional fact - the issuer has not completely depleted the securities available for issuance under the existing shelf. How does one (1) roll the unused fee into a new registration statement and (2) calculate the amount of the prior shelf that has been used? Do the shares to be issued upon exercise of the warrants need to be included on the new registration statement or can the existing shelf be left in place in respect of those securities? If the latter (which I believe to be the case), how does that reconcile with 415(a)(6) regarding termination of the offering under the existing shelf?
-7/28/2011
RE: I would like someone to answer this question as it directly pertains to a replacement shelf that I am working on now.
-4/13/2012
RE: On these facts (expiring shelf under which there are outstanding warrants which have not been exercised), I was told by someone on the SEC staff that the expiring shelf could not be used to register the issuance of stock pursuant to the future exercise of the warrants for the simple reason that the entire registration was expiring. When I pointed out that the 3 year expiration rule did not apply to the prior registration statement to the extent it covered the 415(a)(1)(iii) registration of the common stock to be issued upon exercise of warrants, he hesitated and said that he did not believe that the staff had ever taken this position. He said that the common stock to be issued upon the exercise of the warrants would have to be registered under the replacement shelf and accordingly, within that replacement registration statement, there would need to be a description of those outstanding warrants.
He also said that 415(a)(6) could not be used unless specific securities, such as common stock, had been registered on the expiring shelf. An ordinary shelf, which registers a dollar amount of securities and lists several types of securities which could be issued, does not come under 415(a)(6) but the offset under 457(p) could be used.
I would like to hear any comments about this.
-4/17/2012
RE: Hopefully you will hear back from someone actually knowledgeable, but just out of curiosity I opened 415 and glanced at it. maybe this will help (or maybe not!)
On the 3 year expiration rule, just based on the plain text here it looks like it depends on whether the expiring shelf was an automatic shelf or not. I would read this to say that the the 3 year expiration applies to "Securities registered on an automatic shelf registration statement and securities described in paragraphs (a)(1)(vii), (ix), and (x)." was your expiring shelf an automatic shelf? if not, then it should turn on whether your warrants fall within vii, ix or x, but like you said they seem to be in iii, so I would think, no. if that's the case, then I would call back, and point that out more specifically and ask him to double check and maybe ask for some specific authority for why your shelf is expiring. However, you described your shelf as expiring, so I am wondering why you think that? maybe because your shelf is automatic. if it was automatic, then I think, again based on plain text reading, that the 3 year expiration should apply to ALL securities registered on the automatic shelf, and your shelf is an automatic shelf, then the 3 categories listed are irrelevant to you.
as for 415(a)(6) -- I am baffled about this specific securities business. What I am looking at in (a)(6) says "an issuer may file a new registration statement covering securities described in such paragraph (a)(5) of this section." when I look back to (a)(5) it covers "securities registered on an automatic shelf registration statement and securities described in paragraphs (a)(1)(vii), (ix), and (x)." So, if your original shelf was an automatic shelf, and therefore is subject to the 3 year expiration, then just based on a plain reading of the regulation I would have thought that you could do a replacement under (a)(6). but this is my first time in this labyrinth, so maybe I am missing something.
-4/17/2012
RE: Thanks for your thoughts. This is not an automatic shelf but it is a shelf with securities registered under 415(a)(1)(x) so it would seem that, under the language of 415(a)(5), the registration of ALL the securities registered on that form, including the common stock underlying the outstanding warrants, should expire at the end of three years (subject to the limited extension contemplated by 415(a)(5)). And this is the advice that I was given by the staffer. However, the common stock underlying the outstanding warrants would also seem to be subject to 415(a)(1)(iii) which is not subject to the three year registration.
As far as 415(a)(6), it seems odd to me but the staffer took the position that 415(a)(6) would not apply because our expiring shelf registered a dollar amount of indeterminate securities (as is the common practice) rather than a specific number of a specific type of security, such as 100 million shares of common stock. I don't read 415(a)(6) that way (ultimately, all registration statements register securities, not dollars) but he seemed clear that this was the staff position. I think, however, that the staffer would agree that the common stock underlying the outstanding warrants would be covered by 415(a)(6).
-4/17/2012
RE: I can see the (a)(5) position, but I also think the (a)(6) position is weird and doesn't make any sense. also, it seems to create some weirdness with respect to your warrants. the whole point right is that the warrants constitute an ongoing offering, but you do not have the power to terminate that offering. how can they just randomly terminate the effectiveness of the registration statement in the middle of the term? that is very odd and seems like it doesn't fit right with the Section 5 scheme. the warrants are really different from any other security on there, it seems to me, because a "real" offering can be terminated before the sale takes place, so the issuer has control over that. but here, its the Staff who has taken the position that warrants constitute an ongoing offering, even though the contract has already been entered into. And then there is the weird timing issue. If you file a new registration statement to include the warrants, before the expiration date, then you will have two different effective registration statements for the same "offering," but you can't wait until after the expiration date or else you will have a period of time in which you are conducting an offering with no registration. Well I admit I am no guru on securities offering reform, but this doesn't seem like it adds up right.
-4/17/2012
RE: Has there been any further thought given to this subject or has anyone had further discussions with the staff since April?
-12/12/2012
RE: Am confronting this issue now. Anyone have any thoughts or experience on this Staff position?
Further, assuming that this position re unallocated shelfs is not correct, is there anything preventing the issuer from doing a 20% increase in the expiring shelf under Rule 462(b) during the Rule 415(a)(5) grace period?
-9/24/2013
RE: I want to bring this up again. Is anyone aware if the Staff's position remains that 415(a)(6) should not be used to carry over securities from a prior un-allocated/indeterminate/universal shelf?
A quick search looks like this is being done.
For example:
In 2016, BRT filled an S-3 registering $75,000,000 of an indeterminate amount of beneficial interests, preferred stock, warrants and subscription rights.
In 2019, BRT filed an S-3 registering $100,000,000 of indeterminate amount of common stock, preferred stock, warrants and subscription rights and offset some filing fees under the new registration statement.
Intra-Cellular Therapies is another example.
Admittedly, those do look more like "fee offsets" under 457(p) than carryovers under 415(a)(6).
-9/17/2019
RE: I think you need to reach out to the Staff on this one. I'm not aware of this position and, as others have noted, it appears to be inconsistent with the language of Rule 415(a)(6) itself (and I think the practice of a lot of registrants).
-John Jenkins, Editor, TheCorporateCounsel.net 9/18/2019
RE: Exhausted S-3
RE: Thanks, John. When you say you are not aware of the position, are you referring to the position that 415(a)(6) is not available to carry over from an unallocated shelf, and that you feel others are doing it?
-9/18/2019
RE: Yeah, I think you're right that others with unallocated shelves are doing this. I don't know how many are just referencing Rule 415(a)(6) v. actually trying to rely on Rule 415(a)(5) during the period before effectiveness.
-John Jenkins, Editor, TheCorporateCounsel.net 9/18/2019
RE: According to the 2018 Spencer Stuart Board Index, only 5% of the S&P 500 have any specific tenure limitations on directors. While the survey doesn't address your specific issue, my sense is that tenure limits on board chairs are also unusual. You may want to research some of the materials in our "Corporate Governance Surveys" Practice Area.
-John Jenkins, Editor, TheCorporateCounsel.net 9/17/2019
RE: You don't have to have an information or proxy statement that complies with the proxy rules, but you've got state law fiduciary duties of disclosure that will usually make it prudent to circulate some kind of disclosure document even in the private company setting. There are likely other requirements under state law, your charter documents, or applicable shareholder agreements that you will need to address.
-John Jenkins, Editor, TheCorporateCounsel.net 9/17/2019
RE: Companies can use Rule 457(p) as an alternative to Rule 415(a)(6), so you could file a new shelf with Debt Securities using that procedure. But I don't think you can use Rule 457(p) and still get the benefits of Rule 415(a)(6) for your replacement shelf. That's because when the registration fee is reallocated under Rule 457(p), the unsold securities under the initial registration statement are removed from registration without the necessity of a post-effective amendment, which would preclude you from offering any securities under the initial registration statement
-John Jenkins, Editor, TheCorporateCounsel.net 9/17/2019
RE: Based on this language from BlackRock's 2019 Investor Stewardship Report, it sounds like they're taking the same approach as Vanguard:
"Previously, we had considered two external board positions manageable. This update reflects the increasing expectations and responsibilities of sitting CEOs. As such, this year we voted against the re-election of more CEO-directors to external boards on which they served than last year (we did not vote against them at their own company). Increasingly, companies are limiting the participation of CEOs on outside boards. We expect these trends will lead to improved governance."
-John Jenkins, Editor, TheCorporateCounsel.net 9/16/2019
RE: Is anyone aware of any guidance on the question raised in this post? That is, is an 8-K required under Item 5.02(b) upon the demotion of an NEO who does not serve, or perform similar functions as, the principal executive officer, president, principal financial officer, principal accounting officer or principal operating officer? Is it parsing the language too much to read CD&I 117.03 as not applying to NEOs and only to the listed officer positions?
-9/16/2019
RE: I think that's too narrow of a reading and that the disclosure obligation extends to any NEO, because NEOs are included in the group of officers identified in Item 5.02(b).
-John Jenkins, Editor, TheCorporateCounsel.net 9/16/2019
RE: I think the biggest concern is the 33 Act registration statement. If that's being used to sell securities, the company has a potential problem if it doesn't update it in some fashion to address what is pretty clearly a material development in the business. The risk factor doesn't really help after the event's happened - as the 5th Cir. famously put it in Huddleston v. Herman & MacLean, “to warn that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavorable events to happen when they have already occurred is deceit.”
If you are eligible to forward incorporate by reference, then you can do this with an 8-K. If not, you may need to file either a prospectus supplement or a post-effective amendment. If you go down this route, I think public disclosure by means of a press release or an 8-K would also be appropriate to make sure everyone in the market is aware of the development.
-John Jenkins, Editor, TheCorporateCounsel.net 9/13/2019
RE: I believe that the term "publicly traded" is actually defined in some parts of the Exchange Act, but for the purposes of Rule 10b-17 there appears to be no prescribed definition.
I would say that, given the remedial purposes behind Rule 10b-17, the term "publicly traded" will always be construed broadly to pick up all manner of trading transactions involving public investors, whether they occur on a national securities exchange or over-the-counter through broker-dealers.
When the Commission amended 10b-17 to exempt unit investment trusts from the rule, it explained that (at the time) securities of UITs and open-end investment companies were exempted because such securities “are not purchased in the open market by public investors” and thus not within the intent of the rule.
The various no-action letters that were considered around the time of the adoption of rule 10b-17 in 1971 all seem to turn on whether there is any sort of public trading of the securities, including most notably over-the-counter trading involving brokers through quotations on the bulletin board or pink sheets. I suspect that the Staff would reach similar conclusions about the meaning of "publicly traded" in 10b-17 if asked today.
-Dave Lynn, Editor, TheCorporateCounsel.net 7/3/2007
RE: Is this still how we would approach the analysis today - quoted on OTC pink probably means "publicly traded" under Exchange Act Rule 10b-17? Thanks.
-10/10/2018
RE: Yes, and I think that's even more clear after the adoption of FINRA Rule 6490 in 2010.
-John Jenkins, Editor, TheCorporateCounsel.net 10/10/2018
RE: We have a somewhat related question. Do you know whether ISS, Glass Lewis, Vanguard or BlackRock would consider an OTCpink company a "public" company for purposes of determining whether a director is overboarded/overcommitted?
-9/13/2019
RE: I don't know if any of those proxy advisors or institutions considers Pink companies to be "publicly traded" for purposes of their overboarding assessments, but I think they tend to rely on proxy statement disclosures to make those kind of judgments. The proxy rules only require those disclosures with respect to 12(g) registered or 15(d) reporting companies. Some OTC Pink companies may be 15(d) reporters, but many use alternative reporting standards and those directorships wouldn't have to be disclosed under Item 401 of S-K.
-John Jenkins, Editor, TheCorporateCounsel.net 9/13/2019
RE: I've always thought that the answer to this is no under most typical indemnification agreements, although others may differ. My view is that most indemnification agreements implement rights provided to directors and officers in their capacity as such under state corporate law and corporate charter documents, and not in their personal capacity. For the most part, the agreements establish procedures and presumptions for asserting those rights, but don't typically confer a lot of substantive rights that directors and officers don't already have.
You noted that your contract isn't a standard, off-the-shelf indemnity. In that case, I think the answer could be different if the agreement was providing substantive rights that the individual did not have under state law or your charter documents.
-John Jenkins, Editor, TheCorporateCounsel.net 9/13/2019
RE: Yes, and many companies condition their executives' ability to establish 10b5-1 plans on language suspending those plans during the pendency of a tender offer to which Rule 14e-3 applies. See this excerpt from a Schiff Hardin memo:
Q. Are there other circumstances that should give rise to an automatic suspension or termination of a Rule 10b5-1 plan?
A. Yes. Rule 10b5-1 provides a defense only to a claim of a violation of Rule 10b-5. There is also a prohibition on insider trading — buying or selling — in Rule 14e-3, when a person is in possession of material nonpublic information regarding a tender offer. Because Rule 10b5-1 does not expressly provide a defense in the event that the person who establishes a trading plan comes into possession of material nonpublic information regarding a tender offer, the plan should provide for cancellation when the person comes into possession of that kind of information. Of course, to be effective, the person needs to communicate that fact, on a confidential basis, to the entity that is implementing the plan. Alternatively, the person whose plan does not include that automatic termination clause should unilaterally terminate the plan upon learning of the information regarding the tender offer. Rule 14e-3(b), however, contains a defense for an entity comparable to Rule 10b5-1(c)(2).
I'm afraid I don't have any specific insight on the automatic share withholding, although there is an exemption from 14e-3 that applies to "co-offering persons" that you might be able to hang your hat on if you are dealing with a senior enough person. In that regard, see the discussion of the litigation surrounding the Allergan transaction on page 9 of this Simpson Thacher memo.
-John Jenkins, Editor, TheCorporateCounsel.net 7/23/2018
RE: On the question of share withholding during an issuer self-tender, Rule 14e-(c)(2) seems to offer a solution.
That paragraph provides that "notwithstanding anything in paragraph (a) of this section to contrary [i.,e., the insider trading prohibition], the following transactions shall not be violations of paragraph (a) of this section: ... (2) Sale(s) by any person of any security described in paragraph (a) of this section to the offering person."
If the employee were to sell shares sufficient to satisfy the tax withholding to the company engaged in the self tender [i.e., "to the offering person"] and those shares are retained as treasury shares, rather than selling those shares in the market, the employee and the company could avoid insider trading problems under both Rule 10b-5 and Rule 14e-3.
As to Rule 10b-5, both buyer and seller would possess the MNPI about the pending tender offer, so there would be no fraud or material information imbalance in the transaction. As to Rule 14e-3, the employee's sale to the tender offeror is expressly exempted, and the purchase by the "offering person" can never violate Rule 14e-3(a), because the rule applies only to "any other person."
[Comments do not represent the views of the author's employer, are provided for hypothetical discussion purposes and do not constitute legal advice.]
-9/13/2019
RE: I think that is still the case, but am not aware of anything other than secondary references to the Staff's position. See, e.g., this Ellenoff Grossman memo noting that "a company can become a shell company through various means, including a sale or liquidation of its business or by agreeing to spin off its current assets and liabilities at the time of the reverse merger." In light of your clients' experience, I'd suggest that you reach out to the Staff for clarification. We'd be very interested to hear what they say.
-John Jenkins, Editor, TheCorporateCounsel.net 9/13/2019
RE: Levi-Strauss comes to mind, as does PPG. Mark Borges blogged about both comp disclosures and you should check out some of the other companies that he highlighted in his blog.
-John Jenkins, Editor, TheCorporateCounsel.net 9/12/2019
RE: I actually wrote a lengthy response suggesting you couldn't do this, but deleted it when I realized I was mixing the requirements applicable to departing execs with newly hired ones. (It's tough getting old. I think I need to start pinning a sheet of paper with my home address to my clothes.)
Anyway, now that I've recovered my senses I think you're technically correct when it comes to the 8-K. There's no explicit requirement to amend it (as there is for new hires), but I would want to pay close attention to the disclosure relating to the terms of the consulting agreement so that nobody can argue with the benefit of hindsight that you had a material omission.
In that regard, I do think that Item 5.02(e) could be read to say that if you've entered into a material compensation arrangement with a PFO, subsequent material modifications to those arrangements could also trigger a filing even if the person is no longer serving in that capacity. But in my admittedly anecdotal experience, I don't think I've ever seen anybody do that, and I think robust disclosure in the 8-K about the material terms of the consulting agreement may help take the starch out of that kind of argument..
I'm not sure I agree with you on the exhibit issue. As you note, the payments are going to ultimately show up in a summary comp table, and I also think that this consulting agreement will likely need to be filed as an exhibit for the 10-K relating to the fiscal year during which this person served as PFO. Item 402(a)(3) says that anybody who serves as PFO during the fiscal year is an NEO regardless of compensation level, and when it comes time to file the Form 10-K for that year, I think Item 601(b)(10) reference to Item 402(a) is going to catch that contract.
-John Jenkins, Editor, TheCorporateCounsel.net 9/11/2019
RE: Thanks for your helpful reply. Though this is a smaller reporting company, my expectation is that the then-former CFO will still be captured as an NEO by 402(m)(2)(iii) and so it would be captured in the 10-K. In light of that, my recommendation will be to file as an exhibit to the 8-K if it is signed together with the severance agreement and to consider filing with the third quarter 10-Q if it is signed later but before end of the quarter.
-9/12/2019
RE: Under Rule 13d-1(e), once a person that previously has been eligible to file a 13G holds the securities with a purpose or effect of changing or influencing control of the issuer, it immediately becomes subject to a 13D filing obligation and has 10 days to get a 13D on file. Deciding when that line is crossed is an extremely fact-intensive inquiry, but in terms of discussions with management, the Staff issued Schedule 13D-G CDI 103.11 in 2016 detailing the kinds of engagement that wouldn't by themselves be deemed to cross the line.
I think that waiting until you make an offer is likely to be too late and leave you vulnerable. The CDI indicates that some limited engagement with the board or management on governance topics, executive comp or ESG stuff would not be problematic for a 13G passive filer, but as this Gibson Dunn blog discussing the guidance points out, if that dialogue's a precursor to discussions about a potential change in control, then even there you've likely crossed the line:
"In providing this helpful guidance, the Staff emphasized that the ability to continue reporting on Schedule 13G will be determined by “all relevant facts and circumstances.” Noting that if the dialogue is really a precursor to facilitating a change of control transaction (e.g., pushing for a merger, removal of directors in an election contest, or sale of a significant amount of assets) then such activities would likely be deemed inconsistent with the passive investor certification required by Schedule 13G and the reporting person(s) would need to amend and report on Schedule 13D."
This is an area where there really is a lot of nuance, and doesn't really lend itself to a quick Q&A response. One resource that I'd definitely recommend you take a look at is this Proskauer piece on "When a Passive Investor Drifts into Active Status," which gets into a lot of the details you need to consider.
-John Jenkins, Editor, TheCorporateCounsel.net 9/11/2019
RE: Yes, we get asked this a lot. Although some think it stands for "Management's Discussion & Analysis," there are those that believe it stands for "Monkey Dung & Apples" - a delicacy found in certain parts of the country. There is also a company called "MD&A Turbines" and employees there simply refer to the company as "MD&A"
-Broc Romanek, Editor, TheCorporateCounsel.net 9/11/2019
RE: It's not unprecedented. Here's a link to a Baker Hughes filing that discloses some officer appointments under Item 8.01. I don't think there's a downside, and if you've got S-8s or S-3s out there and you think the appointment might be material, then I think getting an 8-K on file is prudent so that the information gets incorporated by reference.
-John Jenkins, Editor, TheCorporateCounsel.net 9/10/2019
RE: I think you've got to keep in mind that Rule 144A is focused on resales, not the initial issuance of the securities. As you note, that needs to be exempt under Section 4(a)(2). The idea of the rule is that once the purchasers have acquired the shares, their subsequent sales in compliance with the rule won't foul up your initial private placement, even though under traditional ways of looking at the private offering exemption, resales shortly after the initial issuance would call into question whether the securities were acquired for investment and not with respect to their further distribution, which would in turn call the exempt status of the initial offering into question.
That what preliminary note 7 and Rule 144A(e) are getting at. Resales of securities under Rule 144A won't screw up the exemption for the original issuance. But as to whether the two private placements under which the securities were originally issued should be integrated, I don't think that's covered by Rule 144A, but is a separate issue that's governed by the SEC's existing guidance on integration.
However, if the only issuances that you're doing are the two private placements that are designed to comply with Rule 144A, then do you care if they're integrated? There's no dollar limit to the amount of securities that you can offer, and you're going to be issuing securities to super-accredited investors only, so it's unlikely that integration is going to result in your loss of the private placement exemption for either offering. And Rule 144A(e) says that subsequent sales by the purchasers in the first offering aren't going to effect the exemption for the first one, and vice versa.
-John Jenkins, Editor, TheCorporateCounsel.net 9/6/2019
RE: Thanks extremely helpful. Agree, no particular reason to care about the integration per se, but wanted to make sure that any language around integration (e.g., in the reps) was drafted appropriately.
-9/10/2019
RE: Yes, you can do that. Item 11(b) of Form S-3 allows you to incorporate by reference information contained in a Securities Act prospectus, and the SEC made it clear in the FAST Act Disclosure Simplification Release (see page 77) that you may incorporate only selected parts of another filing into your document. In that regard, Securities Act Rule 411 and Exchange Act Rule 12b-23 both have language to the effect that “where only certain pages of a document are incorporated by reference . . ., the document from which the [information or material] is taken shall be clearly identified in the reference." -John Jenkins, Editor, TheCorporateCounsel.net 9/10/2019
RE: You can link directly to Edgar. That's what ExxonMobil does.
-John Jenkins, Editor, TheCorporateCounsel.net 9/5/2019
RE: I think that's asking for trouble. Many companies have their independent directors approve an internal screening procedure for shareholder to director communications. There are a lot of things to consider in managing the communications process, and they are discussed in detail in our "Shareholder Communications with Directors Handbook."
-John Jenkins, Editor, TheCorporateCounsel.net 9/5/2019
RE: I've never seen anybody make a blue sky filing for the issuance of securities to a parent company by its wholly owned subsidiary and I don't think there's any reason to do that. States sometimes have much broader definitions of "securities" than the SEC, but I can't imagine even the most benighted state regulator saying that forming a wholly owned sub implicates the blue sky laws.
-John Jenkins, Editor, TheCorporateCounsel.net 9/4/2019
RE: In the absence of Staff guidance on this, I think the prudent course would be to view inclusion of the electronic road show as being beyond what is contemplated by Rule 134.
-John Jenkins, Editor, TheCorporateCounsel.net 9/4/2019
RE: Correct. With respect to the second scenario, note that the Form T-1 would become effective ten calendar days after filing, unless effectiveness is accelerated by the Commission (which never happens). The Staff takes the view that so long as the trustee is eligible to serve under the requirements of Section 310 of the Trust Indenture Act, then the issuer can sell the securities even when the Form T-1 is not yet effective.
-Dave Lynn, TheCorporateCounsel.net 6/18/2009
RE: Following up on Dave Lynn's above posting from 2009, I note that some issuers continue to sell securities and close offerings before 10 days have elapsed after the filing of a T-1 in connection with the appointment of a new indenture trustee. Can anyone confirm that the staff position identified by Dave covers both selling securities and closing offerings, or are issuers aggressive on this approach? Also, is there any impact on the qualification of the indenture under the Trust Indenture Act if the T-1 has not yet become effective (assuming that there are no material changes in the offering from a previously filed indenture)?
Finally, can anyone point to any formal SEC guidance that an issuer may sell securities prior to the T-1 becoming effective?
Thank you for any assistance.
-9/3/2019
RE: Early in my career, I was advised by a senior partner that one thing I should never do was become the firm expert on the Trust Indenture Act - and that's some of the best advice I've ever received. That being said, I'll take a shot at answering your question.
I'm not aware of anything in writing from the Staff, but I don't think there needs to be anything. Section 305(b)(2) contemplates an already effective registration statement with a qualified indenture, and specifically lays out the SEC's authority with respect to acting upon that application. Nothing in the Trust Indenture Act prohibits an issuer from effecting sales while an application is pending. In fact, Rule 5b-3 under the Trust Indenture Act doesn't even require the Form T-1 to be filed until "the second business day following the initial date of public offering or sales after effectiveness of the registration statement with respect to such securities."
My anecdotal experience is that doing a shelf takedown & closing it prior to the time the T-1 has become effective is pretty much a universal practice.
-John Jenkins, Editor, TheCorporateCounsel.net 9/4/2019
RE: Yes - check out our handbook on disclosure requirements for legal proceedings, in particular pages 14-15. (also note that the Item 103 disclosure requirement is broader than just litigation - see pg 12 of the handbook)
-Liz Dunshee, Editor, TheCorporateCounsel.net 9/4/2019
RE: On this question, there is not much in the way of guidance out there, and I think in many ways it turns on the nature of what the consultants were doing prior to joining the company as CEO and CFO. I have included a variety of questions and answers from the 2012 Executive Compensation Disclosure Treatise and Reporting Guide (copies are on sale now) which address these types of issues. In addition to the executive compensation disclosure considerations, you would also need to consider the Item 404 related person transaction implications, given that Item 404 extends to transactions that took place since the beginning of the last fiscal year, even prior to an individual becoming a related person.
Consulting Firm Fees for Interim CFO
Question: A company paid a consulting firm for the services of a former interim CFO’s salary. The company paid the consulting firm for the interim CFO’s services and the consulting firm and the interim CFO had their own arrangement regarding what the CFO was paid. What should be disclosed in the Summary Compensation Table?
Answer: We believe that you should report in the Summary Compensation Table the amount the company paid to the consulting firm for the interim CFO’s services and footnote the arrangement the company had with the consulting firm, as this appears to provide the best disclosure of compensation cost to obtain the individual’s services.
Consultant as NEO
Question: If a company engages a consultant who reports directly to the PEO and has a policymaking role within the organization, should that person be considered an executive officer and, given high enough compensation, a named executive officer? In other words, does the Exchange Act Rule 3b-7 provision for “any other person who performs similar policy making functions for the registrant” extend to persons not actually employed by the registrant?
Answer: The definition of executive officer in Exchange Act Rule 3b-7 is very broad, notably referencing “persons” as opposed to “employees.” We think that the definition is broad enough to pick up a consultant serving in a policy-making function with the company. However, as a practical matter, it is rare to see a consultant have so much influence that they are deemed to have a policymaking function within the organization, as opposed to making recommendations to those who make the policy.
Former PEO Still a NEO?
Question: A smaller reporting company’s only current executive officers are the PEO and PFO.In 2010, the prior PEO resigned and executed a separation agreement. During 2011, he served as a paid consultant and also received severance (over $100,000). He was not an employee during any part of 2011. Should the prior PEO be included in the Summary Compensation Table as a named executive officer for both 2010 and 2011, with the severance and consulting amounts disclosed under the “All Other Compensation” column for 2011?
Answer: The ex-PEO would have been required in the 2010 Summary Compensation Table, since he was a PEO at some time during the last completed fiscal year. Whether the ex-PEO is a named executive officer in 2011 really depends on the nature of his consulting services. If he was performing some sort of policy-making function during 2011, then it may be the case that he should be deemed an executive officer and be included in the table as one of the highest paid executives other than the PEO and PFO. If not, then we don’t think any disclosure would be required regarding his compensation in the 2011 Summary Compensation Table.
Consulting Fee
Question: The CEO/director of a public company resigned his position as CEO of the company, but remained on the board of directors. Immediately following his resignation, he served as a consultant to the company for a period of six months and received a consulting fee for these services. He did not receive any board fees during the period he received the consulting fee. Where should the consulting fee be reported?
Answer: See Interpretation 227.02 of the SEC Staff’s Regulation S-K Compliance and Disclosure Interpretations, which states that consulting fees should be included in the Director Compensation Table pursuant to Item 402(k)(2)(vii), even where the services are provided by the director in situations other than as a director. We note that Instruction 3 to Item 402(c) indicates that fees paid to persons who are both directors and NEOs must be reported in the Summary Compensation Table
-Dave Lynn, TheCorporateCounsel.net 12/29/2011
RE: I have a slightly different scenario. Non-employee consultant has been working for company since January (as a consultant) and is hired as full-time employee in an executive officer role during November (for a calendar year company). Because he is serving as an executive officer during the year, he is eligible for NEO status if his compensation for the year exceeds $100,000. Do we include the compensation paid to him by the company when he was a non-employee consultant during January-October? I would think yes, but am looking for a gut check. many thanks!
-11/30/2013
RE: Hi - I have the same question as the prior post. If a consultant works for a short time for a company, and is subsequently hired as an executive officer, does their consulting compensation (assuming immaterial) need to be included in the comp disclosure? What about the bio - is this a "position" held with the issuer?
-9/3/2019
RE: Item 402(a)(2) of S-K requires disclosure of "all plan and non-plan compensation awarded to, earned by, or paid to the named executive officers designated under paragraph (a)(3) of this Item, and directors covered by paragraph (k) of this Item, by any person for all services rendered in all capacities to the registrant and its subsidiaries." To me, that suggests that under this scenario, the default option would be to include the consulting compensation, particularly if the consulting payments were made to the NEO in his or her individual capacity.
I'm not aware of any guidance directly addressing this issue, but I suppose there might be an argument that the answer could be different if the NEO provided consulting services as an employee of a third party consulting firm. Under those circumstances & depending on the nature of the consulting services, it might be possible to argue that the services in question were rendered to the employer, and not to the company. Of course, if the NEO was an affiliate of the consulting firm, then you may have disclosure under Item 404. In light of the language of Item 402(a)(2), I don't think this is a supportable argument if the nature of the consulting services were such that the individual was performing policy-making functions prior to becoming an employee of the company.
-John Jenkins, Editor, TheCorporateCounsel.net 9/3/2019
RE: One issue that's always going to be there is the potential for somebody to claim that suspension of the repurchase program was in some fashion coordinated with the selling shareholder's distribution in order to depress the market price and provide insiders with the ability to purchase securities at a discount. I don't think Reg M would prohibit the company's officers and directors from buying securities directly from the selling shareholder in the distribution, but because of the other concerns, would suggest that you consider the guidance provided in SLB 9:
Q: Are affiliated purchasers of the issuer, a selling security holder, or of a distribution participant permitted to purchase the issuer's securities that are being distributed?
A: Yes. The definition of "completion of participation in a distribution" clarifies that affiliated purchasers of an issuer, a selling security holder, or of a distribution participant may purchase in the distribution, provided that the securities are acquired for investment purposes. However, consideration may need to be given to other requirements, depending on the nature of the offering or the extent of purchases. For example, disclosure in the registration statement may be necessary, if information regarding such purchases would be material to investors' decision to buy in the offering. Also, affiliated purchasers must comply with the requirements under Exchange Act Rule 10b-9 if applicable to the offering and the Free-Riding and Withholding Interpretation, IM-2110-1 (Interpretation) contained in National Association of Securities Dealers, Inc. ("NASD") Conduct Rule 2110, if the offering involves a "hot issue."
This isn't a neat fit in the case of an unregistered distribution, but I think the FAQ references to purchasing for investment and disclosure of the potential purchases may be worth considering
-John Jenkins, Editor, TheCorporateCounsel.net 8/31/2019
RE: It's the way the SEC has interpreted the e-proxy rules. The adopting release sanctioned the idea of "stratififying" by individual shareholder, but this excerpt makes it clear that companies can't mix and match with respect to deliveries to an individual shareholder:
"The notice only option does not permit an issuer to accompany the Notice with any other documents. In contrast, an issuer relying on the full set delivery option will deliver a full set of proxy materials, including a proxy statement, annual report to shareholders if required by Rule 14a-3(b), and a proxy card, along with the Notice. Under this option, when the Notice is initially sent, it must be accompanied by all of these documents, not just some of them. For example, an issuer may not send only the Notice and a proxy card to a shareholder as part of its initial distribution of proxy materials."
-John Jenkins, Editor, TheCorporateCounsel.net 8/31/2019
RE: No, the rules are the same for everybody. Refer to our "E-Proxy/Notice & Access Handbook" and the other materials in our E-Proxy/Notice & Access Practice Area.
-John Jenkins, Editor, TheCorporateCounsel.net 8/28/2019
RE: There were a few surveys done shortly after Sarbanes-Oxley was enacted that indicated that the practice of sub-certifications was already pretty widespread. I think the AFP did a survey in 2003 that said around 2/3rds of companies used sub-certifications. More recently, the Society for Corporate Governance Professionals did a survey of members in 2018 which found that fewer than 10% did not require sub-certifications.
So, I think the answer is that it's a pretty widespread practice
-John Jenkins, Editor, TheCorporateCounsel.net 8/28/2019
RE: You're correct there are no bright-line rules. That's because materiality depends on the likelihood of the deal and the significance to the company - which are both very fact-specific. You'd typically implement the trading ban before signing, though (presumably by that point you'll be announcing a material deal on Form 8-K, even if closing occurs later).
Often these types of situations require regular attention to the materiality analysis as circumstances evolve, since a deal may not start out as "material" and could move in that direction as it becomes more likely. Or vice versa if a deal falls apart. Check out the discussion starting on page 15 of our "Insider Trading Policies Handbook" for other things to think about.
-Liz Dunshee, Editor, TheCorporateCounsel.net 8/27/2019
RE: In my experience, most companies that are part of an M&A process for a potentially significant deal will close the window for deal teams, officers and directors prior to the commencement of negotiations, and frequently at the time an NDA is signed up.
A possible acquisition is a contingency, and its materiality is assessed under Basic v. Levinson's test, which looks at both its probability and its magnitude. Because insiders are in a better position than the market to determine how likely it is that a deal is going to happen, courts tend to find information about a deal to be material at a relatively early stage - and the bigger the deal, the earlier the point in time that a court is likely to find it to be "probable."
In addition to the materials that Liz pointed you to, you may want to take a look at this Gibson Dunn memo, which has a public company M&A checklist for in-house counsel.
-John Jenkins, Editor, TheCorporateCounsel.net 8/27/2019
RE: I might be missing something here, and if so, I apologize, but I'm not sure why you'd need to do that. I mean, his ownership interest in the target business is an asset that he currently owns. So its value is already part of his net worth before the buyer pays the cash consideration for it.
You can't count unrealized capital appreciation for purposes of the income test under Rule 501(a), but I'm not aware of any similar restriction when it comes to the net worth calculation. The SEC seems to take a simpler approach here - in Securities Act Rules CDI 255.14, it says that net worth "is simply the excess of assets over liabilities."
-John Jenkins, Editor, TheCorporateCounsel.net 8/26/2019
RE: There's plenty of stuff in our "Proxy Season" Practice Area
-Broc Romanek, Editor, TheCorporateCounsel.net 8/27/2019
RE: The 10-day rule only applies to preliminary proxy materials (and it's 10 calendar days, so you're free to mail even if the 10th day falls on a weekend). Securities Act filings are a completely different matter, because the SEC has to declare those effective before you can use them to confirm sales. You usually hear about whether the Staff will review your filing within a matter of days (if it's an IPO, you will be fully reviewed), and in the case of a full review, you can anticipate comments around 30 days or so after the initial filing. If it's been 10 days and you haven't heard from the Staff, you should give the appropriate Corp Fin office a call to find out the status of the filing.
-John Jenkins, Editor, TheCorporateCounsel.net 8/26/2019
RE: Also check out our just-updated handbook on the SEC comment letter process. Pages 7-9 talk about how to find out what type of review your '33 Act filing will receive (and who to call, as John suggested).
-Liz Dunshee, Editor, TheCorporateCounsel.net 8/27/2019
RE: bumping this up to see if anyone has any thoughts. The award was made under a plan that was previously disclosed and the executive is voluntarily cancelling it.
-8/26/2019
RE: If your plan or the applicable option agreement provides a mechanism for cancellation of options that's been publicly disclosed in a prior SEC filing & this cancellation is consistent with those provisions, then I think you could rely on Instruction 2 to Item 5.02(e) and not report the cancellation in an Item 5.02 8-K.
I took a quick look and only found one filing that involved the cancellation of underwater options outside of the repricing context. Corrections Corporation of America did it back in 2010, when its CEO relinquished some underwater options to provide additional availability for grants to other execs.
-John Jenkins, Editor, TheCorporateCounsel.net 8/27/2019
RE: I think it depends on the type of offering.
If by "shelf" you are envisioning a primary offering by the issuer, it seems Rule 415 still is an issue. When I hear "shelf" I think of a delayed offering (in the sense that you go effective and wait until a later time to make an offering (hence it is "delayed")).
Rule 415 specifies what sorts of offerings can be made on an immediate, delayed or continuous basis. I think most issuers that put up a shelf on a delayed basis rely on Rule 415(a)(x) which is limited to Form S-3.
415(a)(1)(i) allows delayed, but only by persons other than the registrant/subsidiary (so delayed secondary offerings from a Form S-1 would seem okay, but not primary).
Happy to hear other thoughts though.
-8/26/2019
RE: For a small cap issuer that's eligible to forward incorporate, then other than the number of line items you've got to comply with and perhaps an increased risk of review, I don't think there's a huge difference between S-1 and S-3. There is more flexibility for an S-3 shelf registration statement under Rule 415(a)(1)(x) than an S-1 shelf filed under 415(a)(1)(ix). Rule 415 (a)(1)(x) allows S-3 issuers to conduct a primary offering on a delayed, continuous or immediate basis, while 415(a)(1)(x) - which S-1 issuers can use under Rule 415(a)(2) - only permits offerings that will commence reasonably promptly and be made on a continuous basis.
-John Jenkins, Editor, TheCorporateCounsel.net 8/26/2019
RE: I agree with the first comment - and you beat me to the punch.
-John Jenkins, Editor, TheCorporateCounsel.net 8/26/2019
RE: To clarify - the above question is directed at how we disclose the re-filing/amendment in the actual filing to comply with reg S-K. Please disregard the question regarding whether we need trustee approval (as this is governed by the terms of the indenture).
-8/26/2019
RE: I think you could add an explanatory note to the exhibit if you wanted to, and could see why you might want to do that if you were filing this via an 8-K instead of an amendment to your registration statement. If you are amending a registration statement, I did find one company that drew a comment for failing to file the cross-reference sheet with their initial filing. They simply replaced the earlier exhibit to their S-3 with a corrected version without making any statement about the reasons for the change.
(See comment 7 and response)
(Amendment No. 2 to the company's S-3)
For what it's worth, I also think there's an argument that you can fix this without refiling the entire indenture As the Staff's comment in the letter to which I linked points out, the requirement for the cross-reference sheet is in Item 601(b)(iv) of S-K, not the Trust Indenture Act. Furthermore, Item 601 requires the indenture to include "or be accompanied by" the cross-reference sheet. Since that's the case, it seems to me that renumbering your existing indenture - which will be incorporated by reference & linked in the filing - as Exhibit 4. _ (a) and adding a cross-reference sheet as Exhibit 4._(b) in the new filing might be another way to skin the cat here. I'd argue that if you did this, your indenture would now be "accompanied by" the required cross-reference sheet.
I know you withdrew the first question about the authority to amend the indenture to address this, but since this is an Item 601 of S-K requirement and doesn't have to be in the Indenture itself, I think you can address it without the need to amend or supplement the existing indenture.
-John Jenkins, Editor, TheCorporateCounsel.net 8/26/2019
RE: Yes, I think that's right. You may have already considered this - but if not, you may want look into whether your transaction could be structured as a 3(a)(9) exchange. Under current Staff interpretations, securities that are obtained in a Section 3(a)(9) exchange generally assume the same character (i.e., restricted or unrestricted) as the securities that have been surrendered.
Given the fact that more than a year has passed since you issued the warrants, it's possible that your warrant holders who aren't affiliates may receive freely tradeable stock in the exchange if you can fit it within 3(a)(9). If you can't and have to rely on Rule 506, your holders may end up starting a new holding period as a result of the transaction.
Check out the recent exchange offer for registered warrants/shares that Orthogenesis just completed, which involved an unregistered exchange for shares underlying warrants that were covered by an S-3, and that was done in reliance on 3(a)(9).
-John Jenkins, Editor, TheCorporateCounsel.net 8/24/2019
RE: Thanks, John. The Orthogenesis example you cited appears to be a straight exchange of warrants for shares. In our case, the warrant holders would exercise the warrants and receive registered shares under the S-3 and would receive a new warrant in a private placement. I don't think 3(a)(9) works in that structure because of the exercise payment. The new warrants and shares underlying them would be restricted securities.
-8/26/2019
RE: The only Exchange Act rule that I'm aware of governing paper size is Rule 12b-12(a), which says that the paper used for SEC filings can't be any larger than 8.5 x 11 (Rule 309 of S-T says that rule doesn't apply to electronic formatted documents). But I'm not aware of any rule governing the paper size used in an annual report.
-John Jenkins, Editor, TheCorporateCounsel.net 8/23/2019
RE: Yes, you need to continue to incorporate it by reference in any filing that calls for that exhibit to be provided - and plans of acquisition are required to be filed in 10-Qs. Item 601(a)(4) addresses when the initial filing of the exhibit must be made, and allows companies that have signed up a contract before filing a 10-K or 10-Q for the prior reporting period the flexibility to defer filing it until the applicable Exchange Act report covering the period when it was entered into is due.
The operative provision is Instruction 2 to the Exhibit Table in Item 601(a), which notes that each document required to be filed for a form must be filed, even if it was previously filed with another document and even if it's unchanged. See the discussion on page 38 of our 10-K & 10-Q Exhibits Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 8/21/2019
RE: That definition is certainly broad enough to catch venture capital funds. See Question 3 of IM's 13F FAQs & this Gunderson memo concerning annual reporting obligations of PE & VC funds.
-John Jenkins, Editor, TheCorporateCounsel.net 8/21/2019
RE: That's certainly how the current version seems to read, but it remains subject to comments. I also don't know what gloss the accounting firms may put on it or whether the Staff will have its own views about the need to check the SRC box in order to take advantage of it. Of course, you can still check the box and opt not to provide the scaled disclosure.
-John Jenkins, Editor, TheCorporateCounsel.net 8/20/2019
RE: Incorporating the previous certification by reference into the new filing is essentially the same as refiling it. I think refiling the exhibit certifying that the prior 10-K was correct is inconsistent with filing a 10-K/A with restated financial statements. I've not seen companies incorporate prior certifications into a 10-K/A filing and I don't think it's required or a good practice.
-John Jenkins, Editor, TheCorporateCounsel.net 8/20/2019
RE: Thanks for the response. Would the analysis be that the new 302 certs "correct" the prior certs to the extent they speak to matters other than internal controls and disclosure controls and procedures and that the originally filed 302 certs address the internal controls and disclosure controls and procedures adequately, consistent with the SEC's guidance on omitting those paragraphs in amendments that do not modify 307 or 308 disclosures?
-8/20/2019
RE: I think that's right, assuming that there's nothing to implicate the prior conclusions about the effectiveness of disclosure controls and procedures and internal control over financial reporting. Most restatements that I've seen implicate the control environment in some fashion, and result in modifications to prior disclosure, so your situation may be a bit unusual (assuming you're restating to correct an error, and not merely to retroactively reflect a change in accounting principle).
-John Jenkins, Editor, TheCorporateCounsel.net 8/20/2019
RE: The Emerson Electric no-action letter doesn't specifically say that you need to file a Form 15 to comply with its requirements, but because it is silent, there is uncertainty and we think some expectation that the Staff expects to see one. Keep in mind that the only authority you're relying on here is a no-action letter, which isn't binding precedent and nly addresses the specific facts at hand for the company that requested it.
While companies rely on positions expressed in no-action letters all the time, their lack of precedential value warrants a cautious approach to compliance with their requirements. I think that's why we say while filing a Form 15 in this situation is only "arguably" not necessary, and that in any event, it is a "best practice."
-John Jenkins, Editor, TheCorporateCounsel.net1/4/2019
RE: Thank you so much for your help. We had a nuanced follow-up question. We have a client that is about to freeze its company stock fund in its 401(k) plan, let's say as of 4 pm on 2/1/19. At that time, no more investment decisions can be made but shares of company stock will remain in participants' accounts for a period of time. If someone makes an investment decision shortly before the freeze, it may take a day or 2 to process, which means that new shares may be allocated to his or her account after the freeze. However, because the freeze ends the participants' ability to make any additional investment decisions, we think that the S-8 post-effective amendment can be filed as soon as the company stock fund is frozen, even if there may be some lagging allocations into accounts. This seems consistent with the May-June 2011 Corporate Counsel article regarding the removal of the “voluntary and contributory” aspect of the plan. There will not be any dividend reinvestments. Do you agree? Thank you again for your help.
-1/7/2019
RE: Yes, I agree. I think the key thing is the elimination of the ability to make an investment decision going forward, not the back office stuff necessary to complete allocations based on investment decisions made before the freeze.
-John Jenkins, Editor, TheCorporateCounsel.net 1/8/2019
RE: Happy Monday! I have a follow-up question relating to the Form 15 that the original poster inquired about. What happens in the situation where the Emerson Electric requirements are otherwise met but there continues to be more than 300 holders of plan interests. Thus, technically, the suspension of the 15(d) obligations with respect to the plan interests is not available under Exchange Act Rules 12h-3 or 15d-6, and we won’t be able to file a Form 15.
I’m thinking in this case we proceed to file the S-8 POS to deregister the securities, which should still eliminate the Form 11-K filing obligation per the Emerson Electric no-action letter. And, to keep in line with best practice for the Form 15, I suppose we’ll just have to wait until such time as there are less than 300 holders of plan interests before we file the Form 15 (which may not be for some time) even though there is no longer any need to file the Form 11-Ks. Any thoughts would be much appreciated. Thank you.
-8/19/2019
RE: There's support for the view that you can eliminate the 11-K requirement upon effectiveness of a post-effective amendment deregistering the shares covered by the S-8. That's the position Emerson Electric took. See the discussion on pg. 76 of the Form S-8 Handbook.
-John Jenkins, Editor, TheCorporateCounsel.net 8/19/2019
RE: Most DRIP prospectuses have the name of the plan administrator plastered all over them, and direct shareholders to contact the plan administrator with any questions about the plan. Since that's the case, I think the prospectus should be supplemented when the administrator is changed.
In terms of how to do it, I can't speak to the industry standard, but I think most companies want to keep the prospectus as user friendly as possible, given the fact that the participants are primarily retail investors. That suggests to me that the better approach might be to revise the entire prospectus instead of adding another piece of paper that the shareholders will have to sort through.
-John Jenkins, Editor, TheCorporateCounsel.net 8/16/2019
RE: To be clear, do you think that a revised prospectus that merely changes the Plan Administrator is a substantive change that requires a 424(b) filling?
-8/16/2019
RE: Yes
-John Jenkins, Editor, TheCorporateCounsel.net 8/16/2019
RE: It's been a while, but based on my anecdotal experience & discussions with New York lawyers over the years, I think a lot of issuers rely on the position paper. While the position paper says that no post-sale filing need be made until the Martin Act is appropriately amended, not all issuers take that position. Some issuers also make a post-sale filing of Form 99, along with a copy of Form D, in lieu of filing in advance as required by the Martin Act.
There's no private right of action under the Martin Act, and I'm not aware of any enforcement actions that have been brought by the New York AG against issuers who have relied on the position paper's approach or made a post-sale filing in New York along with other post-sale notice filings. But the New York AG has not signed off on either approach, so there are no guarantees that an issuer won't find itself a test case at some point.
-John Jenkins, Editor, TheCorporateCounsel.net 8/12/2019
RE: That does seem rather opaque, doesn't it? My hunch is that what they're getting at is that you only report long positions on a 13F, and I think they're using the term "written" as being interchangeable with "short," which isn't really the case with a put option. I think you should reach out to the Staff at IM on this one.
-John Jenkins, Editor, TheCorporateCounsel.net 8/10/2019
RE: Thank you for the response. Given the history and purpose behind the act, that is the result that I would expect, though the language in the FAQ certainly isn't clear. If you or others on this forum have any anecdotal evidence of how filers typically report put options (reporting puts that give you the obligation to purchase, but not those that give you the right to sell, or vice versa), it would be interesting to hear.
-8/11/2019
RE: I think the most direct statement from the SEC that this is okay came in the 1998 proposing release for the changes implemented in Release 33-7645. Here's the language from the proposing release:
"In the past few years, it has become increasingly commonplace to sell stock of a private subsidiary to employees of a parent or affiliate subsidiary. Given that these transactions appear to retain the envisioned compensatory aspect, the proposed amendments would expand coverage to sales to employees of majority-owned subsidiaries of the issuer's parent (i.e., brother-sister subsidiaries)."
So, in proposing to expand the ability of sibling entities to rely on Rule 701, this language acknowledges that sales of shares of a sub to employees of a parent are not only okay under Rule 701, but "increasingly commonplace."
-John Jenkins, Editor, TheCorporateCounsel.net 8/9/2019
RE: The typical way to do it is #1. See our "Form 8-K Handbook" for possible exceptions to that approach, in particular page 83.
-Liz Dunshee, TheCorporateCounsel.net 3/13/2019
RE: What dated would you use if the Form 8-K reports two events -- one that is required to be reported, and another that is voluntarily being reported under Item 8.01 ? The event being voluntarily reported happened a day earlier than the one required to be reported. Which date would you use on the cover page for "date of report"? Thanks!
-8/7/2019
RE: The cover page itself says that the date of the report is the "Date of earliest event reported." I don't think there's a distinction between an event you're reporting voluntarily and one that triggers a required filing.
-John Jenkins, TheCorporateCounsel.net 8/7/2019
RE: To my knowledge, the only guidance the Staff has provided on this relates to option cancellations and is contained in Securities Act Rules CDI 271.11: Question 271.11
Question: May an issuer disregard options that are cancelled or forfeited when applying the Rule 701(d) and (e) limits?
Answer: Yes. Once options are forfeited or cancelled, those options need not be counted for purposes of the Rule 701(d) and (e) limits. [Jan. 26, 2009]
I think there's a good argument that this should be applied to forfeitures of unvested equity awards as well. For purposes of calculating the 701(d) and (e) limits, options and restricted stock units are both valued at the date they were awarded, regardless of whether they're exercised or vested, so if the recipient never receives the compensatory benefit of the award due to a forfeiture prior to vesting, there doesn't seem to be a good reason to treat that forfeiture differently than the cancellation of an unexercised option.
I'm not comfortable taking the same position with respect to stock that is repurchased by the company. It seems to me that the argument in favor of deducting forfeited awards is that the recipient never received the compensatory value associated with the award. That's not the case if the company repurchases the equity from the award recipient.
-John Jenkins, TheCorporateCounsel.net 8/7/2019
RE: That's a specific line item in Form S-8 and I can't imagine Corp Fin waiving it. Otherwise, that information wouldn't be part of the registration statement and the company wouldn't have 1933 Act liability to the plan participants for misstatements and omissions in its 1934 Act filings. Sounds like somebody may have made a mistake.
-John Jenkins, TheCorporateCounsel.net 8/7/2019
RE: I found the initial Form S-8 which did include Item 3. Looks like subsequent S-8s relied on Instruction E (omitting Item 3.) Looks like the issuer is fine then.
-8/7/2019
RE: I'm sorry, but I'm not sure I understand your question - Corp Fin's OCA focuses on disclosure issues in SEC filings, and the SEC's OCA focuses on big picture interpretive issues, but generally in the context of their application to public companies. I don't think either office would be in a position to weigh in on the appropriate accounting treatment for a private company that isn't required to comply with the accounting rules applicable to SEC registrants.
-John Jenkins, TheCorporateCounsel.net 8/7/2019
RE: Yes, I think that's right. See this correspondence from Indiana Community Bancorp in response to a Staff comment questioning its eligibility to use S-3 for the registration of unlisted warrants. The Staff had no further comment regarding this issue.
-John Jenkins, TheCorporateCounsel.net 8/7/2019
RE: All AICPA member firms are required to undergo peer review (I think it's required every 3 years). I'm not aware of anything that exempts firms that audit public companies. Some states also have laws that require peer review.
-John Jenkins, TheCorporateCounsel.net 8/4/2019
RE: Assuming neither of these funds are affiliated with the issuer, I think the answer depends on the language of the plan of distribution. If it's broad enough to cover a privately negotiated transfer from Fund X to Fund Y, then Fund Y would have acquired shares transferred pursuant to the effective S-3 registration statement, and may not need to have subsequent transfers of those shares covered by the S-3.
If not or if the answer is unclear, a prospectus supplement may be used to update the registration statement to reflect a post-effective transfer pursuant to the second paragraph of Securities Act Rules CDI 220.04:
"Question 220.04
Question: How should registration statements for secondary offerings reflect the addition of selling shareholders or the substitution of new selling shareholders for already named selling shareholders?
Answer: If the company is eligible to rely on Rule 430B when the registration statement was originally filed, the company may add or substitute selling shareholders to a registration statement related to a specific transaction by prospectus supplement. The supplement is filed under Rule 424(b)(7).
If the company is not eligible to rely on Rule 430B when the registration statement is initially filed, it must file a post-effective amendment to add selling shareholders to a registration statement related to a specific transaction that was completed prior to the filing of the resale registration statement. A Rule 424(b) prospectus supplement may be used to post-effectively update the selling shareholder table to reflect a transfer from a previously identified selling shareholder. The new investor’s shares must have been acquired or received from a selling shareholder previously named in the resale registration statement and the aggregate number of securities or dollar amount registered cannot change. [Apr. 24, 2009]"
-John Jenkins, TheCorporateCounsel.net 8/2/2019
RE: I think that’s right, although I have to admit I’m not really savvy on the back-end mechanics of these filings. Plus I hear that Corp Fin is still figuring out how this implementation stuff all works with 8-K. Anyway, I gather from the Edgar Filer Manual that you actually have to include Exhibit 104 in your 101, so for non-financial 8-Ks like the one described you will see an underlying EX-101 document in the EDGAR file even though there is no Exhibit 101. Weird stuff!
-Broc Romanek, TheCorporateCounsel.net 8/1/2019
RE: The Edgar Filing Manual (Vol II) says:
6.3.2 .... To minimize the need for preparing multiple data files, filers subject to 17 CFR 232.406 should satisfy its requirement for providing a Cover Page Interactive Data File (Exhibit 104) using an Inline XBRL Document Set (see 5.2.5 above) with EX-101.* attachments other than EX101.INS.
So, the EFM is saying to use an EX-101 tag because there's no EX-104 tag. Some folks are misinterpreting that to mean that you don't need to list Exhibit 104 in the Form 8-K. That's not correct, IMO. Item 601 expressly requires Exhibit 104 for iXBRL tagged Form 8-Ks. The EFM does not indicate otherwise; it simply provides a technical work-around until the schema is updated.
-8/2/2019
RE: 1. Based on recent conversations with Corp Fin, which cautioned that it is still wrestling with implementation issues, it's my understanding that you are supposed to explicitly reference an Exhibit 104 in the Exhibit Index. The blog also noted that a majority of companies who are subject to mandatory iXBRL didn't identify this exhibit, as I think it is catching everyone by surprise. I expect to see more companies catching on as later 10-Qs get filed and publicity of this issue gets out.
2. The answer should not change if you are tagging the cover page of the 10-Q within the general XBRL instance document or doing it separately, as Item 601 includes a separate entry for Exhibit 104. I can't think of any other place in the Exhibit Index where you have a required exhibit but can omit it. Rather, I think of this as similar to counsel's consent for a legal opinion in an offering document that is part of Exhibit 5 and cross-referenced. In that instance, you still would see an Exhibit 23 listed even though there is no standalone "Exhibit 23."
In addition, it's not clear that you could even tag Exhibit 104 by itself based on this language from the EDGAR Filer Manual: "To minimize the need for preparing multiple data files, filers subject to 17 CFR 232.406 should satisfy its requirement for providing a Cover Page Interactive Data File (Exhibit 104) using an Inline XBRL Document Set (see 5.2.5 above) with EX-101.* attachments other than EX101.INS." Note the use of "should" rather than "may."
3) Yes, based on recent conversations with Corp Fin, it is my understanding that you should explicitly reference an Exhibit 104 (notwithstanding what Workiva stated).
- Broc Romanek, Editor, TheCorporateCounsel.net 7/30/2019
RE: On response #2 - would it then make sense to add, similar to what you see sometimes in Ex. 23.1, a parenthetical indicating it is included in Exhibit 101?
Thanks for this discussion. We've been reviewing filings as well and Amazon is the only one we've seen including Ex. 104.
-7/30/2019
RE: Our firm thinks so. That's what we've been recommending to clients since we became aware of the 104 requirement.
-7/30/2019
RE: We included Exhibit 104 in the list of exhibits in our 10-Q filed yesterday.
Also, the Exhibit 104 is required to be listed for 8-Ks filed after the first periodic report that includes the iXBRL cover page information.
-8/1/2019
RE: I spoke with senior staff in OCC this morning and they are still considering their interpretive position with respect to 8-K's and whether item 9.01 should be required in situations where no other exhibit is being filed other than the interactive data file. I understand they will be providing guidance on this in the very near future.
-8/1/2019
RE: In the meantime, however, Item 601 clearly requires Exhibit 104 for Form 8-Ks containing iXBRL cover page tagging.
The EFM created some confusion by providing a work-around using EX-101 tagging until the XBRL schema is updated to provide a tag for EX-104. Some of the financial printers have interpreted that to mean no Exhibit 104 is required, which is not correct.
Here's how we're approaching the text in 99.1, given that there is no actual Exhibit 104:
104. Cover Page Interactive Data File - the cover page iXBRL tags are embedded within the Inline XBRL document
-8/2/2019
RE: Two blogs have been posted by law firms with their take on these issues: Bass Berry blog & Gibson Dunn blog
-Broc Romanek, TheCorporateCounsel.net 8/2/2019
RE: As a follow-up to the current iXBRL discussion, we have noted that some companies are moving away from filing Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, and 101.PRE, and, instead, are using an Exhibit 101 description closer to what Amazon does:
101 The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in Inline XBRL: (i) Consolidated Statements of Cash Flows, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Balance Sheets, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
Do you have any thoughts on how companies should be drafting their Exhibit 101? Many thanks in advance.
-8/6/2019 10:09:14 AM
RE: There's not a lot of detail in Item 601 about what Exhibit 101 should look like (other than an instruction that says companies need to include "Inline" in the title line. Personally, I prefer Amazon's approach over the more traditional one because it actually tells people in an understandable manner the information that's been submitted in iXBRL. The traditional approach includes a lot of iXBRL gobbledlygook that is meaningless to most readers.
-John Jenkins, TheCorporateCounsel.net 8/6/2019
RE: As a follow-up to my comment above, I spoke with OCC staff this afternoon and received the following guidance related to a registrant's exhibit 104 reference obligation in 8-Ks:
If the 8-K does NOT otherwise have an exhibit being filed under item 9.01(d), then the company does not need to include item 9.01(d) in the 8-K solely for the exhibit 104 reference. (But cover page tagging is still required in the background, just no standalone exhibit 104 reference.)
In contrast, if the 8-K does have another exhibit being filed under item 9.01(d) (e.g., there is a material contract), then the company should include a reference to exhibit 104 in the 9.01(d) disclosure, since there is already disclosure being provided under this item. (Note that, unlike the 10-Q examples, in the 8-K context the express reference will be to exhibit 104 (rather than the cross-reference to 101), because in most cases a separate 101 exhibit is not required.)
The principle behind this position is that item 9.01 is intended to have an informational component to it, and if an exhibit 104 reference is required in every 8-K, then the informational benefit of item 9.01 is weakened.
-8/6/2019
RE: There really isn't much to go on other than general concepts of materiality. For a good discussion of Item 601(b)(10), see the the September-October 2011 issue of The Corporate Counsel at page 7.
-Dave Lynn, TheCorporateCounsel.net 1/5/2012
RE: Is there an argument to be made that an otherwise ordinary course premises lease (or lease amendment) need not be disclosed on a Form 8-K because, in the parlance of Item 601(b)(10)(ii)(D) there is no "property described in the registration or report". In other words, (D) purports to exclude from ordinary course and classify as a material contract "a material lease under which a part of the property described in the registration statement or report is held by the registrant", which by definition requires a separate description of the property in a registration or a report before the disclosure is triggered. Thus, arguably, there is no disclosure obligation until the "property is [otherwise] described" presumably in the next Q or K.
-7/31/2019
RE: If you read Item 1.01 of Form 8-K literally, I think you have at least a technical argument that your lease is in the "ordinary course," but I don't think it's one I'd run with. Even though a literal interpretation would suggest that the lease may not fit strictly within the parameters of those contracts that are automatically deemed to be outside the ordinary course under the instruction to Item 1.01, you're about as close as you can get, and I think that makes the argument that the amendment is in the ordinary course more difficult to make.
-John Jenkins, Editor, TheCorporateCounsel.net 7/31/2019
RE: I think a court would grant an unhappy director's books and records request to review those ballots in a heartbeat. My guess is that a shareholder books and records request for the same information for purposes of determining whether to file a derivative action against the directors would also be likely to receive favorable consideration.
Directors have broad rights to information, and I think that encompasses the right to know how their colleagues voted on an action taken by the board. Similarly, shareholders who question whether a particular board action violated the directors' fiduciary duties should be able to find out how directors voted. In that regard, there is Delaware case law to the effect that failing to disclose a dissenting director when seeking shareholder approval is a violation of the duty of candor.
-John Jenkins, Editor, TheCorporateCounsel.net 7/31/2019
RE: I'm not an executive comp expert, but I think hedging is actually a pretty common way for companies to manage the risks associated with their obligations under non-qualified deferred compensation programs. (See the url for materials from the Plan Sponsor Council below).
I haven't seen anything from the Staff, but my gut reaction is that I don't think Item 407(i) is meant to cover this kind of hedging activity. It specifically addresses policies regarding D&Os ability to hedge the risks associated with their ownership of the company's stock. It doesn't address company hedges that are designed to protect the company's downside associated with obligations that are tied to the value of its equity. My sense is that the policy concerns raised by the former situation are not presented by the latter.
-John Jenkins, Editor, TheCorporateCounsel.net 7/26/2019
RE: You may find the discussion in topic #9864 and the materials referenced there helpful.
-John Jenkins, Editor, TheCorporateCounsel.net 7/24/2019
RE: I would recommend that you confirm this with the Staff, but I think it does. The SEC's statement about its draft registration statement review procedures - which apply to Form 10 filings as well as S-1 filings - says the following:
"While an issuer should take all steps to ensure that a draft registration statement is substantially complete when submitted, we will not delay processing if an issuer reasonably believes omitted financial information will not be required at the time the registration statement is publicly filed. In addition, we will consider an issuer’s specific facts and circumstances in connection with any request made under Rule 3-13 of Regulation S-X. an issuer should take all steps to ensure that a draft registration statement is substantially complete when submitted, we will not delay processing if an issuer reasonably believes omitted financial information will not be required at the time the registration statement is publicly filed. In addition, we will consider an issuer’s specific facts and circumstances in connection with any request made under Rule 3-13 of Regulation S-X."
That's accompanied by a footnote that basically says that the procedure is intended to track the provisions of Section 71003 of the Fast Act.
-John Jenkins, Editor, TheCorporateCounsel.net 7/23/2019
RE: On a similar note - the plain text and guidance on the JOBs act states Section 7(a)(2)(A) of the Securities Act, which permits two years of financial statements, applies only to the registration statement for the initial public offering of common equity securities.
The latest guidance we have found is from 2015 (below). Are you aware of any updates that would allow an registration statement on Form 10 for an EGC to only provide 2 years of financial statements?
-7/24/2019 7:57:10 AM
Re: No, in fact Section 10220.1.d of the Financial Reporting Manual says that Exchange Act registration statements filed by EGCs need to have 3 years of financials unless the issuer is a smaller reporting company.
-John Jenkins, Editor, TheCorporateCounsel.net 7/24/2019
RE: Skadden's Josh LaGrange, who was one of today's panelists, has these thoughts: Even an event-specific blackout doesn’t require suspending an existing plan—the benefit of adopting the plan in compliance with 10b5-1 is that it can continue when the company has MNPI at any time (if that’s what the plan prescribes), not just through the company’s regularly-scheduled quarterly blackouts. What you can’t do, though, is write a plan so that the transactions “spring” into effect based on a company actions, including that the company implements a blackout period.
-Liz Dunshee, Editor, TheCorporateCounsel.net 7/23/2019
RE: I believe the NYSE will rule the proposal routine if management recommends a vote FOR the amendment. I am not aware of a specific exchange rule change on this - I think they simply realized that in cases where both the shareholders and the company were in agreement on the change to annual election of directors, it made sense to designate the proposal as routine for broker voting purposes, especially since the governing articles/bylaws often require a supermajority vote "for" to amend.
Until the change in interpretation by NYSE a few years ago, it was not that uncommon for a company to propose declassification, only to find it couldn't achieve the required vote to do so due to the high vote threshold and unvoted shares.
-Broc Romanek, Editor, TheCorporateCounsel.net 5/6/2008
RE: Is there any current guidance on this question for a Nasdaq listed company?
-7/22/2019
RE: This is an NYSE rule that regulates the conduct of NYSE member brokerage firms. So, the guidance shouldn't differ based on whether the issuer itself is listed on the NYSE or Nasdaq.
-John Jenkins, Editor, TheCorporateCounsel.net 7/23/2019
Re: I believe each paragraph is an independent exclusion.
-Broc Romanek, Editor, TheCorporateCounsel.net 2/14/2007
RE: Is the "carve out" mentioned above in Instruction 4(c) to 404(a) for ordinary course bank loans just a carve out from what needs to be disclosed in terms of information or is it read to mean that no disclosure is necessary? Thanks in advance.
-7/18/2019
RE: I think you read them as follows: clause (a) lays out the type of debt you don't have to disclose at all, clause (b) lays out the related people for whom debt disclosure isn't required, and clause (c) says if you're a bank and you've made loans to related persons listed in Instruction 1.a., then you need to provide the disclosure listed in (c), and that's it.
So, if you're a bank and you've made the kind of loans laid out in clause (c) to related parties, you need to disclose that the loans to such persons were made in the ordinary course of business, were on subtantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the lender, and did not involve more than the normal risk of collectability or present other unfavorable features. Here's Citigroup's 2019 proxy disclosure (page 40):
"Certain transactions in excess of $120,000 involving loans, deposits, credit cards, and sales of commercial paper, certificates of deposit, and other money market instruments and certain other banking transactions occurred during 2018 between Citibank, n.a. and other Citi banking subsidiaries on the one hand, and certain Directors or executive officers of Citi, members of their immediate families, corporations or organizations of which any of them is an executive officer or partner or of which any of them is the beneficial owner of 10% or more of any class of securities, or associates of the Directors, the executive officers or their family members, on the other. The transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, that prevailed at the time for comparable transactions with other persons not related to the lender and did not involve more than the normal risk of collectability or present other unfavorable features. personal loans made to any Director or an executive officer must comply with Sarbanes-Oxley, Regulation O, and the Corporate Governance Guidelines, and must be made in the ordinary course of business."
- John Jenkins, Editor, TheCorporateCounsel.net 7/18/2019
RE: It's a little confusing because the Staff generally allowed companies that met the revised standards to transition to SRC status immediately, but I think you're right. As I read the guidance, the company could qualify on the basis of the fact that it fell below the $250 million public float threshold as of the end of the fiscal 2019 second quarter. Here's the language from the Staff's compliance guide:
"For purposes of the first determination of SRC status on or after September 10, 2018, a company will qualify as a SRC if it meets the initial qualification thresholds in the revised definition as of the date it is required to measure its public float and, if applicable, had annual revenues of less than $100 million in its most recently completed fiscal year, even if such company previously did not qualify as a SRC."
Since this is the company's first determination of SRC status after 9/10/18, and it met the new initial qualification threshold of <$250 million in public float as of the "date it is required to measure its public float," the guidance indicates that you would qualify as an SRC.
https://www.sec.gov/corpfin/amendments-smaller-reporting-company-definition
-John Jenkins, Editor, TheCorporateCounsel.net 7/16/2019
RE: I don't think there's any guidance from the Staff on this particular issue, but the language of Item 5.02(e) is very broad - it is triggered when a registrant "enters into, adopts, or otherwise commences" a compensation plan. I think that language is potentially broad enough to cover a parent company plan in which the executives of the registrant participate, even in the absence of board action. So in the absence of Staff guidance, I think the prudent approach would be to assume that it applies to this plan.
-John Jenkins, Editor, TheCorporateCounsel.net 7/16/2019
RE: I believe so. The most recent comment letter response asserting this position that I'm aware of is from 2017, but it would be surprising given the SEC's recent rule proposal to simplify Rule 3-10 to see it walk back this position.
Here's the comment letter response. The Staff had no further comments:
https://www.sec.gov/Archives/edgar/data/1637558/000119312517065927/filename1.htm
-John Jenkins, Editor, TheCorporateCounsel.net 7/16/2019
RE: I have substantially the same questions as above with respect to outstanding RSUs and restricted stock of a target that will be assumed by an acquirer in a merger and that will vest post-merger based solely on continued service until the end of the vesting period sepcified in the applicable RSU and restricted stock agreement that the target had entered into with the participant.
-7/15/2019
RE: I think that filing an S-8 is the right approach. The problem is that you'll need a current registration statement covering the shares when they're issued, and if you don't file an S-8, you'll need to keep the S-4 updated. I think filing a new S-8 is easier.
-John Jenkins, Editor, TheCorporateCounsel.net 7/16/2019
RE: There's no requirement for a joint filing, even if a 13D "group" exists. If it has a 13D reporting obligation, Party B may file its own 13D. If a group exists, it needs to be disclosed, but that depends on the facts and circumstances - and determining whether a "group" exists and whether members of the group share the beneficial ownership of each individual member is a complex process. You should review the discussion in this MoFo memo:
https://media2.mofo.com/documents/faqs-schedule-13d-g.pdf
-John Jenkins, Editor, TheCorporateCounsel.net 7/15/2019
Re: Check out the Dominion Energy no-action letter (12/18). It seems to address a fact pattern similar to your situation. In Dominion Energy, the Staff permitted a company to exclude a second proposal that was received more than 14 days after the company's request for documentary support of the shareholder's ownership in connection with his submission of an earlier proposal. Citing SLB 14F, the Staff said that a proponent who does not adequately prove ownership in connection with a proposal is not permitted to submit another proposal for the same meeting at a later date.
https://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2018/stewarttaggart121718-14a8.pdf
-John Jenkins, Editor, TheCorporateCounsel.net 7/11/2019
RE: Yes, there actually is a big distinction. SandRidge used a universal proxy, but Icahn could not. It relates back to the issue that Olshan covers in their alert about how company counsel is using advance notice bylaws and/or director nominee questionnaires to extract "consents" from dissident nominees, while not agreeing to provide reciprocal consents for the Company's nominees to the dissident. Thereby creating a one-way advantage for the company to use a universal proxy card - while the dissident is left with a card that can only name the dissident's nominees. The Rice Team & Olshan didn't let EQT get away with that - they went to court. Hats off to Olshan's Andrew Freedman for helping me on this one...
-Broc Romanek, Editor, TheCorporateCounsel.net 7/11/2019
RE: For the SEC positions on this, take a look at Release 33-6188 and Release 33-6281, both of which are available on the "Frequently Requested Materials" page in the Corp Fin section of sec.gov.
One thing to keep in mind in applying the historic "no sale" position in the context of bonus stock is that it needs to be a situation were an employee does not "individually bargain to contribute cash or other tangible or definable consideration," which may not work in the case of a new hire.
-Dave Lynn, Editor, TheCorporateCounsel.net 4/18/2008
RE: I am confused. I thought option grants or restricted stock grants to induce a person to come work for the company was a "no sale" situation
- 1/14/2010
RE: Any additional thoughts on this last question? I, too, was under the impression that an inducement grant (in my current situation, of unrestricted stock) would constitute a "no sale" situation, exempt from registration.
- 10/13/2011
RE: Reviving this topic - I am interested as well.
-7/10/2019 1:53:14 PM
RE: I think you've got to really take a hard look at your facts and circumstances and see how they align with situations in which the SEC has signed off on use of the "bonus stock exemption," because it is by no means a free pass for inducement awards to new hires. In fact, as Dave noted, the case of an inducement award to a new hire may be a tough one to fit into this exemption because of concerns that an element of bargaining is involved.
The SEC has a longstanding position that stock awarded under an employee benefit plan at no direct cost to “a relatively broad class of employees” does not constitute a “sale” for purposes of section 2(a)(3). Release 33-6188 indicates that this position is premised on the fact that employees do not “individually bargain to contribute cash or other tangible or definable consideration to such plans.”
There are a number of no-action letters in which the Staff has endorsed the view that no registration is required under the Securities Act for grants of bonus stock, restricted stock units or similar awards for no consideration to a reasonably broad class of employees who have not individually negotiated the terms or conditions of the awards. These include WorleyParsons Ltd. (October 17, 2008); Verint Systems Inc. (May 24, 2007); ING Groep N.V. (December 29, 2000); The Goldman Sachs Group, Inc. (August 24, 1998); Farmers Group, Inc. (December 1, 1995); MCA Inc. (May 26, 1992).
-John Jenkins, Editor, TheCorporateCounsel.net 7/10/2019
RE: I think you've got a good argument that you should look at the 1% cap on an individual basis, and that the term "series of related transactions" should be assessed with reference to a single individual. In addition to the fact that the language of the rule is consistently singular, I think it's helpful that paragraphs (2) and (3) can be read to specifically enumerate parties whose purchases would be aggregated with a related party's for purposes of the rule, and the list doesn't include other officers just by virtue of that status. But since the NYSE doesn't provide formal guidance on this, I would recommend that you contact the Exchange and run this specific scenario by it.
-John Jenkins, Editor, TheCorporateCounsel.net 7/2/2019
RE: NYSE staff confirmed the 1% cap applies on an individual basis.
-7/10/2019 9:25:32 AM
RE: Thanks so much for letting us know!
- John Jenkins, Editor, TheCorporateCounsel.net 7/10/2019
RE: Rule 12b-12(c) says the filing has to be in 10 point type, except for tables, which can be in 8 point type, but those rules apply to paper filings. When it comes to EDGAR, Rule 308 of Regulation S-T says that "provisions relating to type size, font and other legibility requirements shall not apply to electronic format documents."
-John Jenkins, Editor, TheCorporateCounsel.net 7/10/2019
RE: The bigger the news, the more certain you want to be that you're communicating in a way that is FD compliant - and only a 34 Act filing will give you a safe harbor under FD. Even today, I would still be very hesitant to proceed under the assumption that the SEC would automatically view a website posting as FD compliant. If you weren't going to file an 8-K, I think in most cases it would be advisable to issue a press release as well as posting the information on the website. See the discussion on page 59 of the Reg FD Handbook. https://www.thecorporatecounsel.net/GreatGovernance/member/handbook/RegFD.pdf Another big consideration is whether the company has any 1933 Act registration statements on file. In that situation, the company would likely want to ensure that any material information was appropriately included in the prospectus, and in many instances, the easiest way to do that will be to file a Form 8-K that gets incorporated by reference into the registration statement. If you wanted to incorporate the 8-K by reference into one or more 33 Act filings, you would need to file it under Item 8.01, not furnish it under Item 7.01. -John Jenkins, Editor, TheCorporateCounsel.net 7/9/2019
RE: This isn't scientific, but it looks like there's a tendency among more recent ones to include them both in a single policy. You'll find lots of samples going the other way too. Here are some samples of combined policies:
Lululemon
http://investor.lululemon.com/static-files/621a960b-67cb-429b-a971-10d4b8dbeda3
Valero
https://www.valero.com/en-us/Documents/Corporate%20Governance/Stock%20Ownership%20Retention%20Guidelines.pdf
Hubbell
https://hubbell.gcs-web.com/static-files/c015105e-767f-4632-849f-209009d31d66
5/3rd Bank
https://www.53.com/content/dam/fifth-third/docs/internal/pe-about53-cg-stock-ownershipguidelines.pdf
-John Jenkins, Editor, TheCorporateCounsel.net 7/8/2019
RE: For some companies with non-calendar fiscal years, the first filing after the applicable compliance date might be the due date for their 10-K, not a 10-Q. I think the SEC was just trying to make the phase-in a little easier by providing that the first filing whose cover page you'll need to tag isn't as extensive as a 10-K. As to the sequencing of the 8-K and 10-Q, I haven't dug into this, but it does seem to be consistent with the SEC's guidance to the effect that the cover page tagging requirement doesn't kick in until that first post-compliance date 10-Q..
-John Jenkins, Editor, TheCorporateCounsel.net 7/8/2019
RE: Whether or not you disclose the margin sale on the Form 4, the timing of the sale is going to get noticed. You may get investor inquiries about the sale and I don't think a books and records request surrounding your insider trading policy and board oversight is out of the question. I think you need to consider the fact that a derivative suit is not out of the question, and give some thought to your potential vulnerabilities here.
A few things that you may want to consider:
- Item 403(b) of S-K requires disclosure of pledged shares. If this exec didn't tell you about the margin position, you may well have bad proxy disclosure out there.
- Did your D&O questionnaire ask about pledging? Has the exec's response been reviewed?
- How were company employees made aware of the anti-pledging policy?
- Did the exec violate the policy, or was the position grandfathered?
- Has the governance committee been made aware of the situation?
- Has an investigation been conducted or is one contemplated?
- If the executive violated the policy, what sort of sanction will be imposed?
- Are there others in violation of the policy?
If I were you, I'd suggest that you proceed under the assumption that this will all eventually come out and work to put the company and the board in the best position to deal with the fallout.
The optics of these situations are bad, and if the person is senior enough and the amount of shares large enough, they can be catastrophic. The worst scenario I can remember involving pledged shares was when Green Mountain Coffee's founder & chairman had pledged shares sold out from under him during a blackout period. As this Reuters article demonstrates, things got very ugly. You may want to check out the company's SEC filings during the relevant time period for more unpleasant disclosure. https://www.reuters.com/article/us-greenmountain-stiller/green-mountain-replaces-chairman-after-stock-sale-idUSBRE84717T20120509
-John Jenkins, Editor, TheCorporateCounsel.net 11/26/2018
RE: I have a related question. Assume the executive officer does have the cash to avoid the margin sale, but the margin sale happened. In the Insider Trading Policies Handbook (pp. 1-31 and 1-32), one remedy suggested is to "reverse" the trade. Does that mean see if you can get the broker to cancel the trade? Or does it mean have the executive officer make a corresponding purchase to effectively negate the sale? I was always taught that a second violation of the blackout period (i.e., a corresponding purchase to negate the sale) would just compound the problem and should be avoided. Especially if the executive officer actually has MNPI, since that would mean two violations of the blackout period and 10b-5 (the margin sale and the corresponding purchase), rather than just one violation (the margin sale). Any clarification would be appreciated. many thanks!
-7/3/2019
RE: No, the manual isn't suggesting an opposite side trade (which would be matchable for Section 16 purposes), it's talking about having the broker cancel the original transaction.
-John Jenkins, Editor, TheCorporateCounsel.net 7/3/2019
RE: Thanks for the clarification. One additional question. In the case of trading on MNPI, the handbook also says that you should try to have the trade reversed (i.e., cancelled) "if the news is not out yet"....what is the significance of the news not being out yet...is it that it is too late to undo the insider trading once the news is out? many thanks.
-7/5/2019
RE: I haven't seen anything like this before, but if you are in privity with the PrivateCo holders, I think there's an argument that there's no need for any additional disclosure or an exemption for returning their PrivateCo stock. The terms of the investment they signed up for provided you with a contract right to unwind the transaction and return the consideration to them if a specified condition had not been met by a certain date, and you are exercising that right. There's no new investment decision being made by them at this time.
You may want to rummage around in our Rescission Offers Practice Area.
https://www.thecorporatecounsel.net/member/FAQ/RescissionOfferings/
-John Jenkins, Editor, TheCorporateCounsel.net 7/3/2019
RE: I'm not aware of anything in the FAQs on 303A.08, and they don't provide written guidance on 312.03, so I'd recommend you discuss this with them. For what it's worth, I agree with you. If the proxy statement discloses that the maximum individual share awards can be greater than 1% of the outstanding and also discloses that related parties will receive awards under the plan, then it seems to me you've satisfied the requirements of both sections.
-John Jenkins, Editor, TheCorporateCounsel.net 7/2/2019
RE: Yes. Unlike some other forms, acquired company financial statements are not specifically required to be included in the Form S-8, so the only trigger would be the provisions requiring incorporation by reference of an 8-K filed after the latest 10-K. If the acquisition 8-K with financials was filed before that, it would not need to be incorporated by reference and no consent would be required.
-John Jenkins, Editor, TheCorporateCounsel.net 7/2/2019
RE: Section 303A(12)(c) of the Listed Company Manual essentially says that the events that trigger an interim written affirmation filing are those matters enumerated in the form itself. Hiring a new CFO isn't one of them. But there are notice requirements that you need to comply with here. Section 204.10 of the Listed Company Manual requires you to give prompt notice to the NYSE of any changes in your directors or executive officers. See also the NYSE's 2019 Annual Guidance Letter for a discussion of the application of the NYSE's Timely Alert/Material News Policy, which the NYSE says applies to changes in executive officers.
--John Jenkins, Editor, TheCorporateCounsel.net 5/17/2019
RE: It's been replaced by the "Listing Manager" web app. You can access it on this page: https://www.nyse.com/regulation/nyse
--Liz Dunshee, Editor, TheCorporateCounsel.net 5/17/2019
RE: Good question. I'm not aware of any statement from the NYSE directly addressing this. Probably the most time sensitive item for listed companies is the interim written affirmation, and that's due within 5 business days of the triggering event- so the weekend issue takes care of itself. But as for filings that are due within a certain number of calendar days, the ability to submit filings 24/7 through Listing Manager suggests to me that they need to be filed by the due date, even if that date falls on a weekend.
--John Jenkins, Editor, TheCorporateCounsel.net 5/16/2019
RE: I'm not aware of any general definitive statement that SEDAR filings meet Rule 144's "current public information" requirement, but there is a helpful 2013 no-action letter allowing former Canadian shell companies to use Rule 144 that suggests that those reports may be sufficient to satisfy the current public information requirement. I'd recommend that you reach out to the Staff on this issue.
--John Jenkins, Editor, TheCorporateCounsel.net 5/15/2019
RE: Typically changes to the employee benefit plan are dealt with be revising the materials that comprise the Rule 428 prospectus, as opposed to post-effectively amending an exisiting S-8 or filing a new S-8. I am not sure what sort of changes you are contemplating but in the normal course there are no consequences for the registration statement unless you need to register additional shares with a new registration statement or register plan interests, etc.
--Dave Lynn, Editor, 3/29/2013
RE: The plan is changing names and the terms of the plan are changing materially, but the company plans to continue to use the basket of shares previously registered. So at some level it is a new plan but the securities issuable are the same and from the same pool of shares of common stock that have already been registered. Seems an amendment to the S-8 to reflect the new name of the plan and update other corresponding references would be appropriate but a new S-8 would not be necessary--would you agree?
--3/29/2013
RE: I am interested in thoughts on this as well. I am inclined to think that no amendment to the S-8 is necessary.
--5/15/2019
RE: I think Dave's answer is still the right one - generally, you shouldn't need to file an amendment, and can reflect changes in the materials required to be delivered to plan participants. That being said, I think if the changes are so extensive that you're really dealing with a new plan, you should consider filing a post-effective amendment. My concern is the potential that a disgruntled participant might use the existence of sweeping changes to the plan to call into question the continuing validity of the registration statement, which could put you in the position of violating Section 5 of the Securities Act.
I have no idea how a court would react to that kind of argument. I'm not aware of anything on this issue from the Staff or otherwise on when or whether changes to plan cross the line and make it a new plan. But I think the procedure in Securities Act Forms CDI 126.43, which would allow you to file a post-effective amendment rolling over the old plan's shares into a new plan without incurring any filing fees might be a good way to avoid any potential concerns. See the discussion on pg. 46 of our Form S-8 Handbook.
--John Jenkins, Editor, TheCorporateCounsel.net 5/15/2019
RE: Mark Borges notes: In reviewing the disclosures that purport to respond to Item 5.07(d) of Form 8-K (many of which are included in the initial Form 8-K reporting the voting results of the annual meeting and not in an amendment to that filing as contemplated by sub-Item (d)), several companies have not used the precise language of Item 5.07(d) to disclose their decisions about the frequency of future “Say on Pay” votes. In other words, they have not used the phrase “until the next required vote on the frequency of shareholder votes on the compensation of executives” as part of their disclosure. (See, for example, the GAP’s Form 8-K, which omits the word “required.”) That appears correct to me, as I believe that it would be incongruous for the validity of the disclosure to turn on the precision of the wording used to make the disclosure. And, as far as I know, the SEC Staff has not said that the disclosure must conform to the wording of Item 5.07(d).
Having said that, I would be inclined to avoid giving the impression that the company has affirmatively decided not to hold another frequency vote until 2017 (which may result if the phrase “next required vote” is used), unless that, in fact, is the case. While I don’t believe that the use of the language “next required vote” precludes a company from holding an earlier vote (for example, in 2012 or 2013), I would want to avoid any criticism from shareholders that the company’s original disclosure was misleading. In any event, I expect that a company that schedules a frequency vote prior to 2017 is probably going to need to explain its motivations for holding an earlier vote; and should probably reach out to some of its major shareholders in advance to explain its reasoning.
--Broc Romanek, Editor, TheCorporateCounsel.net 6/14/2011
RE: I think that it is also not a bad idea to include some additional language saying "or the Board of Directors otherwise determines that a different frequency for such advisory votes is in the best interests of the stockholders of the Company" after you have said something along the lines of "until such time as the next advisory vote is submitted to stockholders regarding the frequency of advisory votes on executive compensation."
--Dave, 6/14/2011
RE: Item 5.07(d) of Form 8-K provides, in relevant part: “No later than one hundred fifty calendar days after the end of the annual or other meeting of shareholders at which shareholders voted on the frequency of shareholder votes on the compensation of executives as required by section 14A(a)(2) of the Securities Exchange Act of 1934 . . . by amendment to the most recent Form 8-K filed pursuant to (b) of this Item, disclose the company’s decision in light of such vote as to how frequently the company will include a shareholder vote on the compensation of executives in its proxy materials until the next required vote on the frequency of shareholder votes on the compensation of executives.”
Is it permissible to report the company’s decision on frequency in the same 8-K that is filed to report the voting results of the annual meeting and not in an amendment?
--10/3/2016
RE: Restating the final question in this post:
Is it permissible to report the company’s decision on frequency in the same 8-K that is filed to report the voting results of the annual meeting and not in an amendment?
We have an annual meeting coming up in a few days and the frequency votes are clearly in favor of including say-on-pay every year, which the company has been doing and expects to continue doing. Can we just say that in the original 8-K in which voting results will be reported, rather than an amendment to the 8-K? I think practice shows issuers doing it all different ways, but I don't see any SEC guidance for including it in the original 8-K.
--5/15/2019
RE: Yes, this is permissible. See the first sentence of the 3rd paragraph of this Skadden memo.
https://www.skadden.com/insights/publications/2017/06/reminder-report-say-on-pay-frequency-determination
--John Jenkins, Editor, TheCorporateCounsel.net 5/15/2019
RE: Yes, you have to have them manually sign the 10-K. Unfortunately, the SEC has not changed its position on that.
--John Jenkins, Editor, TheCorporateCounsel.net 3/29/2019
RE: As an informal practice survey, do companies tend to have directors forward the signed signature pages by postal mail for the company's files or just request scanned copies of the manually-signed signature pages to be emailed to the company?
--4/1/2019
RE: In-house lawyer here with experience at Fortune 10, Fortune 50 and Fortune 500 companies. Every client I have advised obtains manual signatures at an in-person Board meeting, typically several weeks in advance of the Form 10-K filing date.
--5/10/2019
RE: For what it's worth, see these results of our informal survey related to this from June 17.
--Broc Romanek, Editor, TheCorporateCounsel.net 5/10/2019
RE: It really depends on the specific language. Many of the generic plan of distribution sections I've seen include a catch-all phrase to the effect that the shareholder may dispose of the shares "in any other manner permissible by law." I haven't ever raised this with the Staff, but it seems to me that kind of catch all provision would be broad enough to cover a transfer without consideration.
The status of the shares transferred depends on the status of the transferee. If he or she is an affiliate of the issuer, and not just the selling shareholder, then they are control securities in that person's hands and would need to be registered or sold in reliance on Rule 144.
--John Jenkins, Editor, TheCorporateCounsel.net 5/10/2019
RE: Right - sounds like you don't need a proxy solicitor. We have several checklists about solicitors in our "Proxy Solicitation" Practice Area. And I'm in the process of setting up a webcast for the Fall about the "Nuts & Bolts of Proxy Solicitation"...
--Broc Romanek, Editor, TheCorporateCounsel.net 2/28/2018
RE: The solicitor is often very helpful in coordinating the broker search card requests, the printing, the registered mailing and the Broadridge mailing. I don't think there's much more to it than that for most public companies that don't have a reason to solicit actively (i.e., not a contested meeting).
--3/6/2018
RE: Agree with the proxy solicitor being helpful in coordinating the various pieces of the mailing. In addition, we recently experienced an issue with our transfer agent not printing enough material - our proxy solicitor jumped in to print/copy materials, make sure everything was delivered properly and generally went above and beyond to make sure that the rest of our mailing went smoothly.
--3/20/2018
RE: does the proxy solicitor do any sort of advocacy of a proposal or is it usually just helping coordinate to make sure more people vote
--5/9/2019
RE: They aren't typically salespeople making pitches to investors, if that's what you mean, but they do a lot more than trying to get votes back. They help the company develop and implement its strategy for soliciting votes, have a great deal of expertise in navigating back offices of brokerage firms and institutions, have a wealth of experience and expertise in navigating compliance challenges associated with the solicitation and voting process, particularly when you're dealing with contested situations.
--John Jenkins, Editor, TheCorporateCounsel.net 5/9/2019
RE: We have several checklists about solicitors in our "Proxy Solicitation" Practice Area. And see the transcript there for the webcast about the "Nuts & Bolts of Proxy Solicitation"that we held last year...
--Broc Romanek, Editor, TheCorporateCounsel.net 5/9/2019
RE: No, I'm not. See our Website Posting Obligations Checklist for applicable posting requirements.
I can't think of any downside to not doing it other than the fact that investors may be accustomed to finding all filings on other companies' sites. I think most companies just sign-up for a feed that sends everything they file - including 1933 Act filings, rather than trying to cull what's not required to be posted.
--John Jenkins, Editor, TheCorporateCounsel.net 5/9/2019
RE: No, I don't think so. The SEC has taken the language that used to be in Item 601(b)(2 )and moved it to a new Item 601(a)(5) that extends its application to agreements filed under any provision of Item 601. So, the ability to exclude immaterial schedules to acquisition agreements without jumping through the hoops that apply to seeking confidential treatment for portions of the required filing is still there. See the discussion beginning at pg. 61 of the adopting release.
--John Jenkins, Editor, TheCorporateCounsel.net 5/9/2019
RE: My guess is that voluntary means voluntary. I've not seen anything that says you're locked in if you go early, and I suspect that the Staff's position is the same as expressed in the Interactive Data CDI. But I'd recommend you contact them. If you do, please let us know what they say.
--John Jenkins, Editor, TheCorporateCounsel.net 5/8/2019
RE: I don't believe so. While private company securities can be encompassed by the penny stock definition in Rule 3a51-1, the prohibition on incorporation by reference in Form S-1's instructions applies to a company that was "a registrant" for an offering of penny stock within the past three years. To me, the use of the term "registrant" clearly implies that it covers a company that engaged in some form of registered public offering involving penny stock, and would not extend to private companies that made exempt offerings during the relevant period.
--John Jenkins, Editor, TheCorporateCounsel.net 5/8/2019
RE: They didn't say anything about this in the adopting release, but I think "None" is the right answer. That's the way a Section 12(g) registered issuer would answer the question on its Form 10-K, and in the absence of guidance to the contrary, that's what I'd do on the new Form 10-Q.
--John Jenkins, Editor, TheCorporateCounsel.net 5/6/2019
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
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