Category Archives: Corporate Governance

David N. Feldman

Lawsuit Seeks Exemption from Broker Registration for Private Placement Finders

A few months ago, a real estate company brought an action against the Securities and Exchange Commission, and apparently the SEC now has been served in the case, known as Platform Real Estate, Inc. vs. United States Securities and Exchange Commission. The federal case was filed in the Southern District of NY. The suit seeks a “declaratory judgment,” or a court’s interpretation of the law as it applies to a particular situation. The plaintiff is asking the court to declare that traditional finders in private securities offerings should not have to be registered as broker-dealers with the SEC. The SEC’s position on the matter, set out in a series of “no-action” letters back in 2001, provides only very limited circumstances where private placement finders would not have to be registered. Prior to that, finders that merely introduced investors to a company and did not engage in negotiations or provide financial advice could earn commissions without registration.

Why does this matter? Many smaller companies, both public and private, struggle to raise money. Traditional investment banks often eschew involvement with smaller companies since the amounts raised are smaller, making their fees smaller. Thus, many of these companies turn to unregistered finders, often individuals who are expert at raising smaller amounts for earlier stage companies. The cost of registering as a broker, maintaining that registration and satisfying net capital requirements is prohibitive for a number of these finders given the size of deals they tend to work on.

Platform’s argument is that the SEC’s position is legally wrong. They point to language in Section 15(a) of the Securities Exchange Act and argue that the language limits the requirement to register to those using securities exchanges or over-the-counter platforms to effect securities transactions. Finders generally do not effect trades through exchanges or OTC platforms. In 2014, the SEC did provide no-action relief for brokers of mergers and acquisitions involving private companies to avoid registration in many circumstances. We will monitor this case for further developments.

David N. Feldman

SEC Approves New Venture Exchange

Last Friday, the Securities and Exchange Commission approved a new Silicon Valley-based national securities exchange, the Long Term Stock Exchange (LTSE), with a unique twist – a focus on earlier stage companies and long term investing. The idea of “venture exchanges” has been around for decades. Canada has long touted the TSX Venture Exchange, effectively launched in 2001, as performing a similar purpose. In 2011, the SEC approved Nasdaq’s BX Venture Market, but that exchange was never ultimately launched. The general idea: a national exchange with lower quantitative listing standards than the larger exchanges, but with more benefits than trading in the over-the-counter markets.

Back in 2015, the head of the SEC’s trading and markets division touted the potential benefits in Congressional testimony thusly: “Venture exchanges potentially could.. [provide] investors a transparent and well-regulated environment for trading the stocks of smaller companies that offers both enhanced liquidity and strong investor protections. As such, they could strengthen capital formation and secondary market liquidity for smaller companies and expand the ability of all investors to participate through well-regulated platforms in the potential growth opportunities offered by such companies.” Current SEC Chairman Jay Clayton also has bemoaned the trend towards fewer and fewer companies going and remaining public.

The LTSE, the brainchild of entrepreneur Eric Ries, will operate without a trading floor, only electronic trading will take place. The SEC noted in its approval release that the LTSE’s listing standards are similar to the Investors Exchange (IEX), another exchange approved by the SEC last year. IEX is focused more on lower listing fees and increased transparency of its processes and trading as opposed to listing earlier stage companies. LTSE governance requirements are similar to the big exchanges, including a majority independent board and fully independent audit committee. But the LTSE will encourage longer-term investing by, among other things, allowing companies to offer greater voting rights to stockholders holding their shares for longer periods, and limiting executive bonuses that are tied to shorter-term goals. The goal of the exchange, according to its website, is that when companies list they “will adopt a set of governing practices that mirror their long-term horizon.”

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.

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.

David N. Feldman

OTCQX Strengthens Listing and Governance Requirements

The OTCQX, owned by OTC Markets, Inc., announced last week that they are increasing their listing and governance requirements effective January 1. The QX is the highest tier of trading among the OTC options. There will now be a higher initial bid price of $0.25 to trade on the OTCQX U.S. tier.  US companies on the QX will have to keep a price above $0.10. International companies will be required to meet new initial and ongoing minimum bid prices of $0.25 and $0.10 to trade on the OTCQX International tier. Both US and international companies will have higher initial and ongoing market capitalizations of $10 million and $5 million, respectively.  All companies now will be required to have at least two market makers.

In addition, there are new minimum corporate governance requirements for American companies on the QX. These are: a minimum of two independent directors on the board of directors; an audit committee composed of a majority of independent directors; and they must conduct annual shareholders’ meetings and submit annual financial reports to shareholders at least 15 calendar days prior to such meetings. They also added even more stringent new requirements for the higher level “premier” tier on the QX.

In their announcement, OTC Markets CEO Cromwell Coulson acknowledged the purpose of these changes is to strengthen the legitimacy of the QX and get more attention from investors, Wall Street firms and analysts for these companies. My take: good stuff!

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.

NYSE Further Narrows Broker Discretionary Voting: Potential Impact on a Company’s Proxy Season Planning

The New York Stock Exchange (NYSE) once again has limited the ability of a broker to vote on proposals at shareholder meetings for which the broker has not received voting instructions from its customers. This narrowing follows recent rule amendments triggered by the Dodd-Frank Act prohibiting brokers from voting uninstructed shares in the election of directors and on proposals relating to executive compensation.

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Executive Compensation: Negative Say-on-Pay Vote Does Not Trump Board Authority

In an important battle in the ongoing executive compensation wars, last week a federal court in Oregon affirmed that directors of Oregon corporations are indeed protected by the business judgment rule in making executive compensation decisions. In ruling that the claim in Plumbers Local No. 137 Pension Fund v. Davis should be dismissed, the specifically declined to follow a recent controversial decision by an Ohio court allowing a say-on-pay lawsuit to proceed under similar circumstances.

Continue reading Executive Compensation: Negative Say-on-Pay Vote Does Not Trump Board Authority