Yesterday, the Securities and Exchange Commission issued a release and report of investigation announcing that issuers can use social media outlets, such as Facebook and Twitter, to disclose material information in compliance with Regulation FD, so long as investors have been alerted in advance about which social media will be used by the issuer to disseminate such information. 

In issuing the Release and Report, the SEC clarified its position regarding its investigation of whether Netflix, Inc. and its CEO, Reed Hastings, violated Regulation FD and Section 13(a) of the Exchange Act when Hastings used his personal Facebook page to announce that Netflix had streamed 1 billion hours of content in June 2012 – information that Netflix had not previously disclosed to the public.  Neither Hastings nor Netflix had previously used Hastings’s personal Facebook page to announce company metrics, and Netflix had not previously informed shareholders that Hastings’ personal Facebook page would be used to disclose information about Netflix.  The post was not accompanied by a press release, a post on Netflix’s own web site or Facebook page, or a Form 8-K.  However, as noted in our prior blog post regarding the Wells notices issued to Hastings and Netflix, Hastings did have more than 200,000 Facebook subscribers, and many news outlets quickly reported on the Hastings’ Facebook post. 

As noted in the Report, the SEC determined not to pursue an enforcement action in this matter.  The Report confirms that, in the SEC’s view, Regulation FD applies to social media and other emerging means of communication in the same way that it applies to company websites.  Reflecting on its 2008 “Guidance on the Use of Company Web Sites,” Securities Exchange Act Release 34-52588, the SEC at least clarified that the 2008 Guidance applies to the use of social media and further stated that, while company communications made through social media channels could constitute selective disclosure in violation of Regulation FD, social media channels can also serve as effective means for disseminating information to investors “if they’ve been made aware that’s where to look for it.”

The SEC explained that, for purposes of complying with Regulation FD in the social media context, the SEC will take the position that a company makes public disclosure “designed to provide broad, non-exclusionary distribution” when the company distributes information “through a recognized channel of distribution.”  The SEC further explained that whether a company’s site of disclosure is a recognized channel of distribution will depend on the steps that the company has taken to alert the market to its disclosure site and its disclosure practices.  In evaluating a Regulation FD inquiry, the SEC will focus on “whether the company has made investors, the market, and the media aware of the channels of distribution it expects to use, so these parties know where to look for disclosures of material information about the company or what they need to do to be in a position to receive this information.”  In our view, this clarification from the SEC was merely a common sense extension of its pre-existing position regarding company websites and in any event continues to require companies to make potentially difficult determinations regarding channels of distribution, including the extent to which information posted is regularly picked up by the market and readily available media.

Takeaways.  Issuers that choose to utilize social media channels should (1) provide disclosures in their periodic reports, press releases and on their corporate web site that the company routinely posts important information on that website or through the identified social medial channel(s), (2) identify the specific social media channel(s) a company intends to use for the dissemination of material non-public information that would give investors and the markets the opportunity to take the steps necessary to be in a position to receive important disclosures – e.g., subscribing, joining, registering, or reviewing that particular channel, (3) consistently utilize the identified channel(s) as the source of the disclosure of important information to the investing public, and (4) analyze the requirements of the 2008 Guidance regarding the characteristics of a recognized channel of distribution.  Without such advance notice to investors that the particular site(s) may be used for this purpose, the SEC states that it is unlikely to qualify as a method “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” within the meaning of Regulation FD.

The NASDAQ Stock Market LLC (Nasdaq) recently proposed a rule change to require listed companies to establish and maintain an internal audit function.  Of course, many listed companies already have an internal audit function as a matter of best practice.  NYSE listed companies have been required to maintain an internal audit function since 2004.

The purpose of the internal audit function is to ensure that management and the audit committee receive information about their company’s risk management processes and internal control system.  Companies would be permitted to outsource the internal audit function to a third party service provider other than their independent auditor.  The audit committee would have sole, non-delegable responsibility to assist the board in overseeing the internal audit function.    

If the rule change is approved by the SEC, companies listed on Nasdaq on or prior to June 30, 2013, would be required to have an internal audit function no later than December 31, 2013.  Companies listing on Nasdaq after June 30, 2013, would be required to have an internal audit function prior to listing.

Although the dispute between hedge fund manager David Einhorn and Apple, Inc. is about Apple’s capital allocation strategy, it has brought attention to the SEC rules on “unbundling” of proxy statement proposals.  On Friday, the U.S. District Court for the Southern District of New York enjoined Apple from holding a shareholder vote at its February 27 annual meeting on a proposal (Proposal No. 2) to amend its articles of incorporation to “[(i)] eliminate certain language relating to the term of office of directors in order to facilitate the adoption of majority voting for the election of directors; [(ii)] eliminate ‘blank check’ preferred stock; [(iii)] establish a par value for the Company’s common stock of $0.00001 per share; and [(iv)] make other conforming changes . . ., including eliminating provisions in the Articles relating to preferred stock of the Company.”

The SEC adopted the unbundling rules in 1992 (SEC Release No. 34-31326 (Oct. 16, 1992)).  Exchange Act Rule 14a-4(a)(3) requires that “[t]he form of proxy . . . [s]hall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters.”  Exchange Act Rule 14a-4(b)(1) requires that the proxy card provides shareholders with “an opportunity to specify by boxes a choice between approval or disapproval of, or abstention with respect to each separate matter referred to therein as intended to be acted upon.”  In 1999, the U.S. Court of Appeals for the Second Circuit held that an implied private right of action exists under Rules 14a-4(a)(3) and 14a-4(b)(1) (Koppel v. 4987 Corp., 167 F.3d 125, 134-138 (2d Cir. 1999)).

When preparing their proxy statements for the 2013 proxy season, smaller reporting companies should keep in mind that the temporary exemption from the say-on-pay vote requirements that applied to them during the last two proxy seasons is no longer available going forward.  For shareholder meetings occurring on or after January 21, 2013, smaller reporting companies will be required to conduct non-binding say-on-pay and say-on-frequency votes in accordance with Rule 14a-21(a) and (b) under the Securities Exchange Act of 1934. 

The non-binding say-on-pay vote is required at least once every three calendar years and covers only named executive officer compensation as disclosed pursuant to Item 402(m) through (q) of Regulation S-K.  The Instruction to Rule 14a-21(a) includes a non-exclusive example of a say-on-pay resolution that would satisfy the requirements.

At least once every six years, a non-binding say-on-frequency vote is required as to whether the say-on-pay vote should be held every one, two or three years.  The form of proxy must include four boxes, giving shareholders the ability to choose among one, two or three years for the say-on-frequency vote or to abstain.  Other alternatives are not permitted. 

A company has to disclose in an amendment to the Form 8-K disclosing the voting results of the last shareholder meeting its decision as to how frequently it will hold the say-on-pay votes.  The Form 8-K amendment must be filed no later than 150 days after the end of the shareholder meeting at which the say-on-frequency vote occurred, but not later than 60 days before the Rule 14a-8 deadline for submitting shareholder proposals as disclosed in the company’s most recent proxy statement.

On January 11, 2013, the SEC approved listing standards proposed by the NYSE and the NASDAQ Stock Market (Nasdaq) implementing the requirements of Rule 10C-1 under the Securities Exchange Act of 1934 relating to compensation committee member independence and compensation committee advisers.  Our client alerts on the NYSE’s and Nasdaq’s initial proposals can be found here and here, and our blog entries on amendments to the proposals can be found here and here.

Effective as of July 1, 2013, listed company compensation committees must have (i) authority to retain compensation consultants, legal counsel and other advisers, (ii) responsibility to appoint and oversee the work of such advisers, (iii) authority to fund such advisers and (iv) responsibility to consider certain independence factors before selecting such advisers.  Both NYSE and Nasdaq-listed companies will be required to comply with the new listing standards on compensation committee member independence by the earlier of (a) the listed company’s first annual meeting after January 15, 2014 or (b) October 31, 2014.  The same latter compliance dates apply to the new Nasdaq listing standard that will now require listed companies to have a standing compensation committee that is comprised of at least two independent directors and has a written charter.

The SEC orders approving the new listing standards include guidance on how frequently a compensation committee should conduct the required independence assessment with respect to compensation consultants, legal counsel and other advisers.  The SEC states that it “anticipates that compensation committees will conduct such an independence assessment at least annually.”

The NYSE and the NASDAQ Stock Market (Nasdaq) recently filed additional amendments to their proposed listing standards implementing the requirements of Rule 10C-1 under the Securities Exchange Act of 1934 relating to compensation committee member independence and compensation committee advisers.  Our client alerts on the NYSE’s and Nasdaq’s initial proposals can be found here and here, and our blog entry on an earlier amendment to Nasdaq’s proposal can be found here.

The proposed listing standards would require compensation committees to consider certain independence factors before selecting a compensation consultant, legal counsel or other adviser, other than in-house legal counsel.  Under the additional amendments, an independence assessment would not be required for a compensation committee adviser whose role is limited to (i) consulting on any broad-based plan that does not discriminate in scope, terms or operation, in favor of executive officers or directors of the listed company, and that is available generally to all salaried employees or (ii) providing information that either is not customized for a particular issuer or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.  This exception mirrors Item 407(e)(3)(iii) of Regulation S-K, which includes an exception from disclosure for the same types of compensation committee advisers.   

In addition, the NYSE amendment also (i) modifies the start date of the six-month transition period for companies graduating from smaller reporting company status, which would now commence on the date on which the company actually ceases to be a smaller reporting company, and (ii) clarifies that a compensation committee would not be precluded from selecting, or receiving advice from, a compensation committee adviser that is not independent.  

As noted previously, the deadline for the SEC to take action on proposed stock exchange listing standards relating to compensation committees and their advisers is January 13, 2013. 

 The Federal Trade Commission announced yesterday that it has made its annual adjustments to the thresholds for determining whether a transaction is reportable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the amount of the related filing fee.  The new thresholds were published today in the Federal Register.  Under HSR, certain transactions may not be completed until a waiting period (generally 30 days unless extended by a request for additional information or terminated early upon request) has expired after the required notifications are filed.

The new thresholds, which will apply to any transaction closing on or after February 11, 2013, are as follows:

• $283.6 million:  must report if transaction value exceeds
• $70.9 million:  no report required if transaction value does not exceed
• $14.2 million/$141.8 million:  size of parties tests

While the amount of the filing fees will not change, the revised thresholds will change the transaction values to which the fees apply:

• $45,000:  transactions with value less than $141.8 million
• $280,000:  transactions with value of at least $709.1 million
• $125,000:  all other transactions

If you are involved in a transaction that is or may be subject to HSR reporting, the new thresholds present two timing issues for you to consider:

• If your transaction value is more than $68.2 million but less than $70.9 million and the size of parties test will be met, delaying closing until on or after February 11, 2013 will eliminate the HSR reporting requirement.
• If your transaction value is more than $136.4 million but less than $141.8 million, or more than $682.1 million but less than $709.1 million, delaying your HSR notification filing until on or after February 11, 2013 will decrease your filing fee.

A “books and records” action brought by New York’s comptroller to determine how Qualcomm Incorporated “is spending corporate funds in the political arena” may create a precedent for shareholders seeking to force corporate disclosure of political contributions. 

The suit was brought last week in Delaware Chancery Court by Comptroller Thomas DiNapoli as trustee of the New York State Common Retirement Fund, a shareholder of Qualcomm.  The complaint cites to recent studies concluding that “corporate political spending is negatively correlated with enterprise value” and may indicate “more widespread control and governance deficiencies.”

The Retirement Fund’s action comes at a time when the Securities and Exchange Commission may be considering rules to require public companies to disclose political spending.  The Harvard Law School Forum on Corporate Governance and Financial Regulation reported in a January 9, 2013, entry that the Securities and Exchange Commission has indicated in an “entry in the Office of Management and Budget’s Unified Agenda … that, by April, it plans to issue a Notice of Proposed Rulemaking on requiring public companies to disclose their spending on politics.” 

The NASDAQ Stock Market (Nasdaq) recently filed an amendment to its proposed listing rules implementing the requirements of Rule 10C-1 under the Securities Exchange Act of 1934 relating to compensation committee member independence and compensation committee advisers.  Our client alert on Nasdaq’s initial listing rule proposal can be found here.

The amendment makes changes in three areas: First, it changes the effective and compliance dates of the proposed listing rules.  The rules requiring that the compensation committee have (i) authority to retain compensation consultants, legal counsel and other advisers, (ii) responsibility to appoint and oversee the work of such advisers, (iii) authority to fund such advisers and (iv) responsibility to consider certain independence factors before selecting such advisers, other than in-house legal counsel, would now become effective July 1, 2013.  The initial rule proposal provided for immediate effectiveness upon SEC approval.  Listed companies would be required to comply with the remaining rules, which would require a standing compensation committee and compensation committee member independence, by the earlier of (i) the listed company’s first annual meeting after January 15, 2014 or (ii) October 31, 2014.  The initial rule proposal contemplated compliance by the earlier of the listed company’s second annual meeting after SEC approval or December 31, 2014.  The proposed new effective and compliance dates are consistent with those proposed by the NYSE in its proposed listing standards relating to compensation committees, which we have discussed here. 

Second, the amendment removes the word “independent” prior to “legal counsel” to clarify further that the compensation committee would be required to conduct an independence assessment with respect to any compensation consultant, legal counsel or other adviser to the compensation committee, other than in-house legal counsel, for which no such assessment is required.   

Third, the amendment extends the phase-in schedule for companies graduating from smaller reporting company status. 

Finally, the amendment includes a form of compensation committee certification that a listed company would have to use when certifying to Nasdaq its compliance with the new compensation committee listing rules, no later than 30 days after the final implementation deadline applicable to it.   

As we noted previously, the SEC has extended the deadline for taking action on proposed stock exchange listing rules relating to compensation committees and their advisers to January 13, 2013.

The Wall Street Journal and other news outlets reported late yesterday that Netflix, Inc. filed a Form 8-K disclosing that each of Netflix and its CEO, Reed Hastings, had received a Wells notice from the staff of the Securities and Exchange Commission relating to an alleged violation of Regulation Fair Disclosure (FD) in connection with a Facebook post by Hastings on July 3, 2012.  Hastings’ Facebook post stated that “Netflix monthly viewing exceeded 1 billion hours for the first time ever in June.  When House of Cards and Arrested Development debut, we’ll blow these records away.”

Regulation FD requires simultaneous “public disclosure” whenever an issuer, or any person acting on its behalf, discloses any material nonpublic information to a “prohibited person” (brokers, dealers, investment advisers and shareholders, among others) regarding the issuer or the issuer’s securities.  To satisfy the public disclosure requirement, issuers must file a Form 8-K or instead “disseminate[] the information through another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public.”  In order to succeed in an enforcement action against Netflix and Hastings, the SEC will need to show that the Facebook post constituted material nonpublic information and was not reasonably designed to provide broad, non-exclusionary distribution of the information to the public. 

FINRA Rule 5123 became effective December 3, 2012 for private placements that begin selling efforts on or after that date.

Rule 5123 requires each member firm that sells securities in a private placement to file with FINRA a copy of the private placement memorandum, term sheet or other offering document, including any materially amended versions, used by the firm in connection with the sale of the securities; or the firm must indicate that it did not use any such offering document. The filing must be made within 15 calendar days following the date of first sale.

A wide range of private placements is exempt from Rule 5123 based on the type of investor (e.g., certain institutional accredited investors, qualified institutional buyers, institutional accounts and qualified purchasers), the offering type (e.g., offerings under Rule 144A and Regulation S) or the type of security involved. Our client alert on Rule 5123 is available here.

On November 28, 2012, the SEC extended the deadline for taking action on proposed rule changes relating to compensation committees and their advisors from November 29, 2012 until January 13, 2013.

The New York Stock Exchange, NYSE Arca LLC, NASDAQ Stock Market LLC and other exchanges filed proposed rule changes with the SEC on September 25, 2012 to amend their listing standards relating to compensation committees and their advisors.  For further information, please see our client alerts here and here.

The SEC determined that it needed additional time to consider the proposed rule changes and the comment letters it had received.

On October 19, 2012, the U.S. Chamber of Commerce and the National Association of Manufacturers filed a petition for review with the U.S. Court of Appeals for the District of Columbia Circuit challenging the SEC’s rule on disclosure of the use of conflict minerals and requesting that the rule be modified or set aside in whole or in part.  The petition also requests a review of Section 1502 of the Dodd-Frank Act, pursuant to which the SEC adopted the conflicts mineral rule on August 22, 2012.  The petitioners have not yet provided their arguments for challenging the rule. 

Our client alert discussing the conflict minerals rule is available here.  Issuers subject to the conflict minerals rule are currently required to comply with the rule for the calendar year beginning January 1, 2013 and file their first reports on new Form SD by May 31, 2014.  It remains to be seen whether the SEC will stay the rule while the litigation is pending as it did when its proxy access rule was challenged in 2010.

This is the second SEC rule to be challenged within the last two weeks.  As we reported previously, the SEC’s resource extraction payment disclosure rule was challenged in federal courts by the U.S. Chamber of Commerce and other groups on October 10, 2012.

On October 10, 2012, the U.S. Chamber of Commerce, the American Petroleum Institute and other groups filed a petition for review and a complaint with federal courts in Washington, D.C. challenging the SEC’s rule requiring resource extraction issuers to report payments to the U.S. or foreign governments for the commercial development of oil, natural gas or minerals.  The SEC adopted the rule on August 22, 2012 pursuant to Section 1504 of Dodd-Frank.  Our client alert discussing this rule is available here.

Resource extraction issuers are currently required to provide the new disclosure for fiscal years ending after September 30, 2013, and the reports are due within 150 days after fiscal year-end.  It remains to be seen whether the SEC will stay the rule while the litigation is pending as it did when its proxy access rule was challenged in 2010.   

On September 25, 2012, the NASDAQ Stock Market (Nasdaq) proposed amendments to its corporate governance listing rules to implement the requirements of Rule 10C-1 under the Securities Exchange Act of 1934 relating to compensation committee member independence and compensation committee advisers.  In addition, the amendments would require listed companies to have standing compensation committees with a written charter.  The proposed amendments are subject to U.S. Securities and Exchange Commission (SEC) approval.

The amendments relating to compensation committee advisers would be effective immediately upon SEC approval.  Most listed companies would not be required to implement the requirements relating to standing compensation committees and compensation committee member independence until their 2014 annual meeting.