Duane Morris on Capital Markets

January 15, 2019 by Darrick M. Mix

The Government Shutdown and Effectiveness of Registration Statements under Section 8(a)

Given the shutdown of the SEC as part of the wider government shutdown, we are seeing many registration statements being filed with no delaying amendment language and with the language required by Rule 473 to allow automatic effectiveness in 20 days in accordance with Section 8(a) of the Securities Act. In the last two weeks, at least 30 such registration statements have been filed. In all of 2018, there were only three such registration statements, and in all of 2017, there were only two. Obviously, the deals must go on, and corporate issuers and their counsel have seen the Division of Corporation Finance’s FAQs regarding Actions During Government Shutdown and have heeded the answers set forth therein. (For now, the FAQs are posted on the Division of Corporation Finance’s homepage.)

The first of these “automatically effective” registration statements filed in 2019 was on Form S-4 in connection with the pending merger of BSB Bancorp and People’s United Financial, Inc. Since then, issuers have filed these registration statements on Forms S-1, S-3 and S-4 in connection with a variety of transactions. If the government shutdown continues, we should expect to see many more of these filings.

December 19, 2018 by Richard A. Silfen

SEC Adopts Final Rules for Disclosure of Hedging Policies

On December 18, 2018, the SEC approved final rules requiring companies to disclose their practices or policies with respect to hedging transactions by officers and other employees as well as directors. The final rules have not yet been published, but the SEC issued a press release (https://www.sec.gov/news/press-release/2018-291) describing the rule it adopted. The new rule implements Section 955 of the Dodd-Frank Act.

New Item 407(i) of Regulation S-K will require a company to disclose in proxy or information statements for the election of directors its practices or policies for officers and other employees, as well as directors, relating to:

purchasing securities or other financial instruments, or otherwise engaging in transactions,
that hedge or offset, or are designed to hedge or offset,
any decrease in the market value of equity securities granted as compensation or held, directly or indirectly, by the officer, other employee or director.

The new item has broad application for affiliated entities and will require disclosure of practices or policies on hedging activities with respect to equity securities of the company, any parent or subsidiary of the company or any subsidiary of any parent of the company.

Companies may either summarize their practices or policies for these types of hedging activities or, alternatively, disclose their practices or policies in full. If a company does not have a practice or policy with respect to hedging activities, it must disclose that fact or state that it permits hedging transactions generally.

Companies will be required to comply with the new disclosure requirements in proxy and information statements for the election of directors during fiscal years beginning on or after July 1, 2019. “Smaller reporting companies” and “emerging growth companies” will have an additional year to comply with the new disclosure requirements. Companies that have adopted policies on hedging may opt to provide the additional disclosure during the 2019 proxy season.

October 4, 2018 by Darrick M. Mix

California Mandates Gender Diversity on Public Company Boards

California has become the first state in the nation to require public companies to put female directors on their boards. On September 30, 2018, Governor Jerry Brown signed a bill mandating that by the end of 2019 certain publicly traded companies with headquarters in the state appoint at least one woman to their boards. Further, by 2021, companies subject to the law with at least five directors will need to appoint at least two female directors to their boards, and those with at least six directors will need to appoint at least three female directors to their boards. Companies subject to the law that do not comply with the mandates will face financial penalties.

Whether the law is constitutional is questionable. Governor Brown acknowledged as much after he signed the bill, stating, “I don’t minimize the potential flaws that may indeed prove fatal to its ultimate implementation,” but he justified the law, stating that “recent events in Washington, D.C.—and beyond—make it crystal clear that many aren’t getting the message.” Opponents argue that the mandate violates both the California and U.S. Constitutions because it imposes impermissible gender quotas and requires companies to reject or replace men seeking to serve on boards. In addition, opponents claim that the law violates constitutional principles because it applies to companies headquartered in California even if they are incorporated in another state, creating an inherent conflict between California law and the corporate law of every other state.

Regardless of whether the California law is ultimately enforceable, there is no question that proxy advisory firms and some institutional investors like BlackRock remain focused on board diversity, including gender diversity, and there will continue to be pressure on public company boards to increase their diversity. Action by shareholders seeking to increase board diversity, rather than state governments mandating quotas, is likely to be more enduring and ultimately more successful.

February 21, 2018 by Barry Steinman

U.S. Supreme Court Holds Whistleblowers Must Report to SEC to be Afforded Protection Under Dodd-Frank Act

On Wednesday, February 21, 2018, the United States Supreme Court held, 9-0, in the case of Digital Realty Trust, Inc. v. Somers that the term “whistleblower” under the Dodd-Frank Wall Street Reform and Consumer Protection Act does not include individuals who report violations of securities laws internally to their companies but not to the United States Securities and Exchange Commission.

In Digital Realty Trust, Paul Somers sued his former employer, Digital Realty Trust, alleging that his employment was terminated because he reported certain suspected securities laws violations to Digital Realty Trust’s senior management and that such termination constituted an unlawful retaliation against a whistleblower under the Dodd-Frank Act. The Court held in favor of Digital Realty Trust, stating that the whistleblower anti-retaliation provision under the Dodd-Frank Act does not protect individuals who have reported alleged misconduct internally to their employer, but not to the SEC.

In reaching its conclusion, the Court focused on the actual text of the anti-retaliation provision of the Dodd-Frank Act as well as the Dodd-Frank Act’s purpose. The Court noted that the Dodd-Frank Act defines a “whistleblower” as “any individual who provides…information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” Further, the Court stated that the purpose of the Dodd-Frank Act was to aid the SEC’s enforcement efforts by motivating people who know of securities law violations to tell the SEC.

The Court’s ruling overturned the Ninth Circuit’s March 2017 ruling and resolved a split between the Ninth and Fifth Circuits. In March 2017, the Ninth Circuit found that Mr. Somers was entitled to protection under Dodd-Frank Act. In July 2013, the Fifth Circuit ruled in the case of Asadi v. G.E. Energy that whistleblowers must take their complaints to the SEC to be eligible for protection under the Dodd-Frank Act.

May 15, 2017 by Barry Steinman

SEC Issues Updated Guidance Regarding Conflict Mineral Rules

On April 7, 2017, the SEC Division of Corporate Finance issued updated guidance regarding the SEC’s conflict minerals rules, stating that, in light of uncertainties regarding how the SEC will resolve issues relating to its conflict mineral rules, the SEC will not recommend enforcement action with respect to a company – even if it is subject to Item 1.01(c) of Form SD – to comply with the disclosure obligations under the SEC’s conflict minerals rules by only including in its Form SD the disclosures required by Items 1.01(a) and (b) of Form SD.

The SEC was prompted to update its guidance by the April 3, 2017 final judgment of the U.S. District Court for the District of Columbia in National Association of Manufacturers, et al. v. Securities and Exchange Commission,[1] in which the court held that the provisions of Item 1.01(c) of Form SD that require companies to report to the SEC and state on their websites that a product has “not been found to be ‘DRC conflict free’” violates the First Amendment of the U.S. Constitution.

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August 10, 2016August 11, 2016 by Richard A. Silfen

First SEC Staff Comments on Recent Non-GAAP CDIs

As many of us have noticed, the first comment letters from the staff in the SEC’s Division of Corporation Finance, following Corp Fin’s recent issuance of new CDI guidance on the presentation of non-GAAP financial measures, have become available publicly. The comment letters shed additional useful light on Corp Fin’s views concerning non-GAAP presentations.

One of the comment letters sent to Alexandria Real Estate Equities, Inc. on June 20, 2016, provides a particularly helpful glimpse into Corp Fin’s views about the use of non-GAAP information in the executive summary of MD&A. The staff’s letter includes the following comment in reference to MD&A in the registrant’s 2015 Form 10-K:

We note that in your executive summary you focus on key non-GAAP financial measures and not GAAP financial measures which may be inconsistent with the updated Compliance and Disclosure Interpretations issued on May 17, 2016 (specifically Question 102.10). We also note issues related to prominence within your earnings release filed on February 1, 2016. Please review this guidance when preparing your next earnings release.

Indeed, the executive summary portion of the MD&A – when initially conceptualized in the SEC’s 2003 release providing interpretive guidance in the preparation of MD&A – was supposed to include an overview to facilitate investor understanding. The overview was intended to reflect the most important matters on which management focuses in evaluating operating performance and financial condition. In particular, the overview was not supposed to be duplicative, but rather more of a “dashboard” providing investors insight in management’s operation and management of the business.

Looking back at the release to write this blog entry, I note references, with regard to Commission guidance on preparation of the MD&A overview, explaining that the presentation should inform investors about how the company earns revenues and income and generates cash, among other matters, but should not include boilerplate disclaimers and other generic language. The Commission even acknowledged that the overview “cannot disclose everything and should not be considered by itself in determining whether a company has made full disclosure.”

Many companies have presented in their MD&A overview those non-GAAP measures used by management to operate the business and otherwise manage the company. Where appropriate, references typically are made to the information appearing elsewhere in the document, presented to enable compliance with applicable rules and guidance for non-GAAP presentations. Interestingly, the staff, in its comment, questions the “prominence” of the non-GAAP presentation in the context of the earnings release (noting that the staff provides less specificity in the portion of its comment relating to the MD&A overview). This focus on prominence – to the extent the staff’s concerns relate to the MD&A overview – is worth further consideration in preparing MD&A disclosure. In this connection, query whether the staff – in questioning prominence – could be expressing a view that when management analyzes for investors the measures on which it focuses in managing the business, if management relies on non-GAAP measures, it necessarily must focus on (and explain) – with no less prominence – the corresponding GAAP measures.

December 15, 2014 by Darrick M. Mix

The Comverge Case: Fiduciary Duties and Break-up Fees in M&A

Our partner Richard Renck in Wilmington recently posted an entry on our Delaware Business Law Blog regarding the Comverge case decided last month by the Delaware Court of Chancery. Among other things, the Court’s opinion provides practitioners and clients with insight regarding break-up fees as well as a road map of how the Court of Chancery reviews challenges to third-party sale transactions, approved by a disinterested board, under the enhanced scrutiny of Revlon. Please see Richard’s post here.

July 25, 2013September 10, 2014 by Richard L. Cohen

SEC Ends Losing Streak; Conflict Minerals Rule Upheld

The SEC scored a victory in the U.S. Court of Appeals for the District of Columbia Circuit in a case filed in October 2012 by the U.S. Chamber of Commerce, the Business Roundtable, and the National Association of Manufacturers. The plaintiffs challenged the SEC’s rule on disclosure of the use of conflict minerals on grounds that aspects of the rule were arbitrary and capricious under the Administrative Procedure Act and claiming that the disclosures required by the SEC and by Congress run afoul of the First Amendment. In a 63-page decision in favor of the SEC, the Court found no problems with the SEC’s rulemaking and disagreed that the “conflict minerals” disclosure scheme transgressed the First Amendment.

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July 24, 2013September 10, 2014 by Darrick M. Mix

Fifth Circuit to Dodd-Frank Whistleblowers: Call the SEC First

The U.S. Court of Appeals for the Fifth Circuit’s decision last week in Asadi v. G.E. Energy (USA) has been hailed as a triumph for employers because it requires whistleblowers who bring retaliation claims under the Dodd–Frank Wall Street Reform and Consumer Protection Act to show that they suffered retaliation because they reported potential violations to the U.S. Securities and Exchange Commission. The Fifth Circuit rejected the position adopted by the SEC in its regulations implementing Dodd-Frank and by the few district courts that have addressed the issue. That rejected approach interprets Section 922 of Dodd-Frank to apply its enhanced protections to certain whistleblowers even if they had not reported their concerns to the SEC. Although this decision narrows the category of employees who can seek the enhanced protections of Dodd-Frank, it will likely increase the number of whistleblowers who report their concerns to the SEC.

Our firm’s client alert regarding the case can be found here.

January 11, 2013September 10, 2014 by Thomas G. Spencer

FTC Revises Hart-Scott-Rodino Thresholds

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.

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