The Public Companies Newsletter is a bimonthly publication of our Securities and Corporate Governance Team, featuring articles on reporting and compliance issues of particular interest to SEC reporting companies.
Spring Edition 2014
Pay Up! (Are Issuers Shortchanging the SEC by Underpaying S-8 Registration Fees?)
A quick survey of Forms S-8 filed in the last four years on the SEC’s EDGAR system turns up something surprising—dozens of issuers appear to be underpaying the required registration fees for shares to be issued pursuant to employee benefit plans, shortchanging the SEC out of potentially millions of dollars. In fact, a large number of these issuers are even calling attention to their underpayments by citing as support for their fee calculations an SEC telephone interpretation that was withdrawn many years ago. These underpayments appear to stem in large part from issuers’ and their counsels’ misunderstanding of the current rules and interpretations that allow issuers to utilize the filing fees paid with respect to previously filed Forms S-8. In some instances, these rules and interpretations allow issuers to transfer and reuse fees paid for registering shares under predecessor plans that the issuer no longer expects to issue under those predecessor plans. Misunderstanding these rules and interpretations could result in something worse than a demand from the SEC that the full registration fee be paid—the Staff takes the position that failure to pay the full registration fee required for an offering results in the shares not having been registered on the registration statement. If this were the case, issuers would need to scramble to provide support for valid private placement exemptions for plan issuances and could be faced with the need to impose transfer restrictions on employees, file resale registration statements, or at worst, conduct rescission offers and “bust” resale trades. Please click here to read this alert.
Audit Committees: The Proposed Disclosure of Critical Audit Matters
In August 2013, the Public Company Accounting Oversight Board (“PCAOB” or the “Board”) issued a proposed audit standard which, among other items, would require auditors of public companies to report “critical audit matters” in their audit opinion letters. The nature of the critical audit matters is described further below, but in summary they would include items which may be sensitive and problematic for the company. This requirement would raise many concerns for audit committees. Although the final standard has not been adopted, audit committees should begin considering their response to this expanded disclosure. Please click here to read this alert.
Winter Edition 2014
New Tools to Manage the Problem of Nuisance Shareholder Litigation: Delaware Emphatically Upholds Forum Selection Bylaws with Reasoning that May Support Bylaws for Reimbursement of Attorney’s Fees
Plaintiffs’ counsel instigated shareholder litigation against corporate defendants has markedly increased in recent years. For example, the plaintiff’s bar now files suit in almost every large merger transaction. In 2011, 96% of all mergers and acquisitions valued at over $500 million were subject to litigation, representing an increase of 43 percentage points over the proportion of transactions garnering litigation in 2007. These suits are profitable for the plaintiff’s firms sponsoring the litigation. The New York Times reported that corporations agreed to pay plaintiff’s legal fees of about $1.2 million on average for suits filed in 2010 and 2011. But the benefit to shareholders nominally behind these suits is less clear. Five percent of these settlements produced more cash for shareholders, while more than 80% of the suits required only additional disclosures. Of the 162 transactions in which litigation was settled on a disclosure only basis, only two were later voted down by stockholders. One leading securities professor noted: “Unless one believes that ‘disclosure only’ settlements truly benefit shareholders and justify million dollar fee awards (in which case this author would like to sell you a bridge to Brooklyn at a very cheap price), then such litigation gives off at least a faint odor of collusion . . . with shareholders ultimately bearing the costs of both sides” of the litigation. Please click here to read this alert.
Is the Game Worth the Candle? The Burdens of the Proposed Crowdfunding Exemption
In April 2012, Congress passed the Jumpstart Our Business Startups Act (the “JOBS Act”) with the intent (as the Act’s name suggests) to provide small businesses with increased access to sources of capital and bolster job and overall economic growth. Of the Act’s several provisions, Section 201(a) of the JOBS Act directed the Securities and Exchange Commission (the “SEC”) to lift the long-standing ban on general solicitation and advertising in offerings conducted pursuant to Rule 506 of Regulation D. In accordance with the foregoing mandate, earlier this year the SEC adopted new Rule 506(c) allowing companies to raise capital from accredited investors through general solicitation. Companies have already begun to utilize the new rule, which went into effect on September 23, 2013, to raise capital. Please click here to read this alert.
Fall Edition 2013
Social Media and Your Public Company – Don’t Forget Rule 10b-5
There has been a renewed focus on social media guidelines and policies for public companies this past year. If you’ve been paying attention, you know that much of the attention stems from a single post by Reed Hastings, the CEO of Netflix, who disclosed the company’s monthly viewership results on his Facebook page. The SEC subsequently expressed concerns about a possible violation of Regulation FD, which prohibits companies from disclosing material nonpublic information on a selective basis to certain individuals (generally holders of the issuer’s securities that might reasonably be expected to trade based on the information and securities market professionals). After its investigation, the SEC issued new guidance for public companies regarding compliance with Regulation FD when releasing material inside information via various forms of social media. As such, there have been numerous publications in the last few months advising companies on the new guidance and how to best conform their social media practices to the guidance. Please click here to read this alert.
Reminder: The Ban on General Solicitation in Rule 506 and 144A Offerings Will Soon Be Lifted
Beginning on September 23, 2013, issuers may engage in general solicitation and advertising in conjunction with Rule 506 offerings, and resellers may do likewise in Rule 144A resales. Pursuant to new Rule 506(c), general solicitation and advertising will be permitted in Rule 506(c) offerings, provided that (1) all purchasers are reasonably believed to be “accredited investors,” as defined in Rule 501 of Regulation D and (2) the issuer takes reasonable steps to verify that all purchasers are accredited investors. Whether the steps taken to verify accredited investor status are “reasonable” will require an objective determination by the issuer, in the context of the particular facts and circumstances of each purchaser and transaction. The Securities and Exchange Commission (“SEC”) has, however, provided issuers with four methods that issuers may use to satisfy the verification requirement as it applies to natural persons. Please click here to read this alert.
Spring Edition 2013
How to Confidently Use Your Website and Social Media to Comply With Regulation FD
Last month, the SEC issued new guidance clarifying how companies can use social media channels, such as Twitter and Facebook, in compliance with Regulation FD. The guidance came in the form of an “investigation report” which grew out of the highly publicized use by Netflix’s CEO of his personal Facebook account to announce important information regarding Netflix. While the April report does not solve all the mysteries surrounding use of electronic media under Regulation FD, it does go a long way toward helping companies chart a path to using these technologies without worrying about violating Regulation FD. Based on this new guidance, we have developed a blueprint that companies can use to comfortably use websites and electronic media without worrying about FD issues. This is not the only way to comply with FD, but we think it is a good – and more importantly, easy- way. Please click here to read this alert.
Unexpected Material Developments – A Checklist
When new material information develops, a whole host of issues arises, often requiring immediate action by the company. Thanks to today’s disclosure control and compliance program requirements, most companies have (or should have!) procedures in place designed to provide advance notice of potentially material developments. But sometimes material events occur suddenly, and there may be little time to parse through the issues. Having good controls therefore also means being ready to respond to unexpected developments. We thought a short checklist might help. Please click here to read this alert.
MD&A and Disclosure of Known Uncertainties (or talking about the future, even though you don’t want to)
The Annual Report on Form 10-K and Quarterly Reports on Form 10-Q attempt to present, among other things, a picture of a company’s results of operations, liquidity and financial condition through the eyes of management. Specifically, we’re referring to Management’s Discussion and Analysis of the Company’s Financial Condition and Results of Operations, better known as the MD&A. This required, and important, disclosure of management’s take on the company’s results, liquidity and financial condition can seem fairly straightforward when describing past and even present conditions; however, it can begin to feel like the SEC has played a dirty trick on companies when they are forced to turn their attention to the future. Please click here to read this alert.
The SEC’s Payment Disclosure Rule for Resource Extraction Issuers
On August 22, 2012, the SEC adopted new Exchange Act Rule 13q-1 and amended new Form SD, which had been adopted as part of the SEC’s “conflict minerals” rules, to implement the requirements of Section 13(q). Rule 13q-1 requires resource extraction issuers to make annual disclosures on new Form SD of payments made by the issuer, its subsidiaries, and entities under its control to a foreign government or the U.S. federal government for the purpose of the commercial development of oil, natural gas or minerals. This article outlines the new rule, analyzes the rule’s application, and explains the disclosure requirements and compliance dates. Please click here to read this alert.
Why the SEC’s New Conflict Minerals Rules Scare Me (And Why They Should Scare You)
You’ve probably seen a number of articles addressing the SEC’s new disclosure requirements relating to conflict minerals, implemented pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Although the basics are deceptively simple, once you dig a little deeper, you realize there’s a lot hidden beneath surface. I’ve listed some of the top concerns, followed by a summary of each and a description of the basics of the SEC’s final rule. Please click here to read this alert.
Responding to the SEC Comment Letter
Each year the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (“SEC”) issues approximately 2,200 comment letters on the registration statements and reports filed under the Securities Act of 1933 and the Securities Exchange Act of 1934. Responding to these comment letters absorbs a tremendous amount of the time and resources of management teams, their counsel and the auditors. Listed in this alert are some practical considerations for making the process as efficient as possible. Please click here to read this alert.