Shareholder Proposal Rule Amended by SEC

On September 23, 2020, the Securities and Exchange Commission adopted the amendments to its shareholder proposal rule, which governs the process for a shareholder to have a proposal included in the company’s proxy statement for consideration by all shareholders. Typical shareholder proposals include recommendations that a company or its board of directors take specified actions. The amendments are designed to promote engagement between the company and the proponent, raise eligibility thresholds for shorter-term investors and further restrict repeat proposals garnering minimal support.

To read the full text of this Duane Morris Alert, please visit the firm’s website.

“Accredited Investor” and “Qualified Institutional Buyer” Get Updated Definitions in SEC Final Rule

On August 26, 2020, the U.S. Securities and Exchange Commission (SEC) adopted final rules amending the definitions of “accredited investor” and “qualified institutional buyer” (QIB). The purpose of the amendments is to identify more effectively institutional and individual investors that have sufficient knowledge and expertise to participate in investment opportunities without investor protections provided by registration under the Securities Act of 1933.

The final amendments will be published in the Federal Register soon and become effective 60 days after publication.

To read the full text of this Duane Morris Alert, please visit the firm website.

SEC Adopts Final Amendments to Proxy Rules on Proxy Voting Advice

On July 22, 2020, the U.S. Securities and Exchange Commission adopted amendments to its rules under the Securities Exchange Act of 1934 that exempt persons furnishing proxy voting advice from the information and filing requirements of the federal proxy rules. The most prominent proxy advisory firms that provide such proxy voting advice in the United States today are Institutional Shareholder Services and Glass Lewis & Co. Pursuant to the amendments, the SEC codified its view that proxy voting advice generally constitutes a “solicitation,” imposed new conditions to exemptions under Exchange Act Rule 14a-2(b) and added examples of what may be “misleading” within the meaning of Exchange Act Rule 14a-9. The SEC also published supplemental guidance to assist investment advisers on assessing how to consider registrant responses to proxy voting advice in light of the new amendments to the proxy rules.

The new rules have the potential to alter the dynamics between public companies and proxy advisory firms, with public companies gaining some leverage. The new rules have been criticized by some industry participants with an interest in maintaining the prior system.

Duane Morris’ client alert on these new rules was issued on July 30, 2020 and is available here.

SEC Adopts Amendments to Financial Reporting Requirements in Acquisitions and Dispositions of Businesses

Yesterday, May 21, 2020, the Securities and Exchange Commission announced that it approved amendments to its rules and forms “to improve for investors the financial information about acquired or disposed businesses, facilitate more timely access to capital, and reduce the complexity and costs to prepare the disclosure.”  The 267-page final rule release is available by clicking here.

The amendments update SEC rules which have not been comprehensively addressed since their adoption, some over 30 years ago.  Jay Clayton, the SEC’s Chairman, said that amendments are “designed to enhance the quality of information that investors receive while eliminating unnecessary costs and burdens [and] will benefit investors, registrants and the market more generally.”

Among other things, the amendments:

  • update the significance tests (i.e., to determine when financial statements regarding an acquisition or disposition must be included) in Rule 1-02(w) and elsewhere by revising the investment test to compare the registrant’s investments in and advances to the acquired or disposed business to the registrant’s aggregate worldwide market value if available; revising the income test by adding a revenue component; expanding the use of pro forma financial information in measuring significance; and conforming, to the extent applicable, the significance threshold and tests for disposed businesses to those used for acquired businesses;
  • modify and enhance the required disclosure for the aggregate effect of acquisitions for which financial statements are not required or are not yet required by eliminating historical financial statements for insignificant businesses and expanding the pro forma financial information to depict the aggregate effect in all material respects;
  • require the financial statements of the acquired business to cover no more than the two most recent fiscal years;
  • permit disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity;
  • permit the use of, or reconciliation to, International Financial Reporting Standards as issued by the International Accounting Standards Board in certain circumstances;
  • no longer require separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for nine months or a complete fiscal year, depending on significance; and
  • make corresponding changes to the smaller reporting company requirements in Article 8 of Regulation S-X, which will also apply to issuers relying on Regulation A.

The amendments will be effective on Jan. 1, 2021, but voluntary compliance will be permitted in advance of the effective date.

 

 

SEC Amendments to Accelerated and Large Accelerated Filer Definitions Become Effective

Today, final amendments to the definitions of “accelerated filer” and “large accelerated filer” under Rule 12b-2 of the Securities Exchange Act of 1934 became effective. The SEC adopted the final rule implementing the amendments on March 12, 2020.

The amendments are designed to reduce the number of issuers that qualify as accelerated and large accelerated filers, thereby promoting capital formation for certain smaller reporting companies by reducing compliance costs while still maintaining investor protections.

For additional information regarding the amendments, please visit the firm website.

SEC Announces Reporting Relief and Issues Guidance Regarding COVID-19

On March 25, 2020, the Securities and Exchange Commission announced that it is extending the filing periods covered by its previously enacted conditional reporting relief for certain public company filing obligations under the federal securities laws, and that it is also extending regulatory relief previously provided to funds and investment advisers whose operations may be affected by COVID-19.  In addition, the SEC’s Division of Corporation Finance issued its current views regarding disclosure considerations and other securities law matters related to COVID-19.

Filing Deadline Relief for Public Companies

To address potential compliance issues, the SEC issued an order [https://www.sec.gov/rules/exorders/2020/34-88465.pdf] that, subject to certain conditions, provides public companies with a 45-day extension to file certain disclosure reports that would otherwise have been due between March 1 and July 1, 2020.  This order supersedes and extends the SEC’s prior order of March 4, 2020.  Among other conditions, companies must continue to convey through a current report (Form 8-K) a summary of why the relief is needed in their particular circumstances for each periodic report that is delayed.  The SEC may provide extensions to the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant.  The SEC encouraged companies and their representatives to contact SEC staff with questions or matters of particular concern.

Relief for Funds and Investment Advisers

The SEC also issued two orders [https://www.sec.gov/rules/other/2020/ia-5469.pdf and https://www.sec.gov/rules/other/2020/ic-33824.pdf] that provide certain investment funds and investment advisers with additional time with respect to holding in-person board meetings and meeting certain filing and delivery requirements, as applicable.  These orders supersede and extend the filing periods covered by the SEC’s prior orders of March 13, 2020.  Among other conditions, entities must notify the SEC and/or investors, as applicable, of the intent to rely on the relief, but generally no longer need to describe why they are relying on the order or estimate a date by which the required action will occur.

Disclosure Guidance for Public Companies

Further, the Division of Corporation Finance issued Disclosure Guidance Topic No. 9 [https://www.sec.gov/corpfin/coronavirus-covid-19] (the “Guidance”), providing the staff’s current views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 and related business and market disruptions.  The Division has been monitoring how companies are reporting the effects and risks of COVID-19 on their businesses, financial condition, and results of operations and is providing the Guidance as companies prepare disclosure documents during this uncertain time.  In the Guidance, the Division reminds companies that a number of existing rules or regulations require disclosure about the known or reasonably likely effects of and the types of risks presented by COVID-19.  As a result, disclosure of these risks and COVID-19-related effects may be necessary or appropriate in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements.  The Guidance also poses a series of questions designed to help companies assess COVID-19-related effects and consider their disclosure obligations (for example: How has COVID-19 impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition? Do you expect that COVID-19 will impact future operations differently than how it affected the current period?)

The Guidance notes that companies and related persons to be mindful of their market activities, including the issuance or purchase of securities, in light of their obligations under the federal securities laws.  For example, where COVID-19 has affected a company in a way that would be material to investors or where a company has become aware of a risk related to COVID-19 that would be material to investors, the company, its directors and officers, and other corporate insiders who are aware of these matters should refrain from trading in the company’s securities until such information is disclosed to the public.  The Guidance also reminds companies of their obligations under Regulation FD to avoid selective disclosures.

SEC Adopts Simplified, Modernized Disclosure Requirements

On March 20, 2019, the SEC adopted amendments to rules and forms of Regulation S-K to further simplify and modernize disclosure requirements. The final amendments were published in the Federal Register on April 2, 2019, and, except as noted below, become effective on May 2, 2019, 30 days after publication in the Federal Register. The SEC stated that it intends for the amendments to benefit investors by eliminating outdated, redundant and unnecessary disclosure; reducing cost and burdens of SEC reporting companies; and simplifying investors’ access to, and evaluation of, material information. These new rules follow on the heels of the SEC’s prior effort on simplification, which was published in the Federal Register on October 4, 2018. Combined with the earlier effort, these latest changes reflect a concerted push by the SEC to relieve SEC reporting companies of filing obligations that provide little value to investors.

This Alert provides a brief overview of certain of the amendments and practical considerations for SEC reporting companies and does not address parallel amendments to investment company and investment adviser rules and forms.

Read the full Alert on the Duane Morris LLP website.

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.

Richard 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.

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.