Category Archives: Capital Markets

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.

SEC Releases New Guidance on Cybersecurity Disclosures for Public Companies

The recent spate of high-profile cybersecurity breaches has not spared public companies, as demonstrated by large data breaches in recent years involving Equifax Inc. (NYSE: EFX) and a multitude of other companies.  In response to the proliferation of cybersecurity threats to public companies, on February 21, 2018, the SEC released interpretive guidance to assist companies in preparing disclosures about cybersecurity risks and incidents.  The release, which expands upon the staff’s 2011 guidance and addresses several new topics, was adopted unanimously by the full SEC and, therefore, carries significant weight.

As the SEC release makes clear, in order to meet their ongoing disclosure requirements, public companies should adequately and timely disclose any and all material cybersecurity risks and incidents in their registration statements and in their periodic and current reports.  Public companies must weigh the potential materiality and likelihood of identified risks and, in the case of cybersecurity incidents, the importance of any compromised information and the impact on their operations.  Further, the SEC encourages the use of Forms 8-K and 6-K to promptly disclose cybersecurity risks and incidents, as it will help to reduce the risks of selective disclosure and insider trading.  The SEC guidance indicates that, although some time may be needed to discern the scope and implications of a cybersecurity incident, an ongoing internal or external investigation would not, on its own, provide a basis for avoiding disclosures of a material cybersecurity incident.  The release includes specific guidance on a number of disclosure elements required by Regulation S-K and Regulation S-X, including risk factors, management discussion and analysis, description of the business, legal proceedings, financial statements and board risk oversight. Continue reading SEC Releases New Guidance on Cybersecurity Disclosures for Public Companies

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.

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.

Continue reading SEC Issues Updated Guidance Regarding Conflict Mineral Rules

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.

New York Comptroller Seeks Qualcomm’s Records on Political Giving; SEC Contemplating Political Contribution Disclosure Rules

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.”

Continue reading New York Comptroller Seeks Qualcomm’s Records on Political Giving; SEC Contemplating Political Contribution Disclosure Rules