Securities Regulation

The SEC has adopted final rules requiring an active hyperlink to each filed exhibit identified in the exhibit index of most Securities Act and Exchange Act registration statements and reports that are required to include exhibits under Item 601 of Regulation S-K.  The rules become effective on September 1, 2017 (though the adopting release encourages early compliance), provided that smaller reporting companies and non-accelerated filers that submit filings in ASCII format need not comply with the rules until September 1, 2018.  The new requirements will apply to Forms S-1, S-3, S-4, S-8, S-11, F-1, F-3, F-4, SF-1, SF-3, 10, 10-K, 10-Q, 8-K, F-10, 20-F and 10-D (though the compliance date for Form 10-D will be announced at a later date).  The requirement will not apply to other forms under the multi-jurisdictional disclosure system used by certain Canadian issuers or to Form 6-K, as exhibits and exhibit indexes are not required by those forms. 

On February 14, 2017, the U.S. Securities and Exchange Commission (the “SEC”) announced the settlement of an enforcement action against CVR Energy, Inc. (“CVR” or the “Company”).  The SEC brought action against the Company for its failure to disclose adequately the material terms of its fee arrangements with two investment banks in connection with the financial advisory services each bank provided to CVR during the pendency of a hostile tender offer launched by an activist.  See CVR Energy, Inc., Exchange Act Release No. 80039 (February 14, 2017).

In a case closely watched by companies and investors alike, on January 17, 2016, the Second Circuit Court of Appeals overturned the decision of the District Court for the Southern District of New York in Marblegate Asset Management vs. Education Management Corp.  The District Court had held that a series of debt restructuring transactions by Education Management Corp. violated Section 316(b) of the Trust Indenture Act of 1939, as amended.  Section 316(b) of the Trust Indenture Act provides that “the right of any holder of any indenture security to receive payment of the principal and interest on such indenture …shall not be impaired or affected without the consent of such holder.”  Reading this provision broadly, the District Court found that a restructuring that released a parent guarantee and effectively stripped most of the assets from the issuer of the debt without the consent of each bondholder violated Section 316(b), even though the particular indenture for the bonds in question was not amended in connection with the restructuring.  The District Court concluded that Section 316(b) protects a bondholder’s practical ability to receive payment even where the indenture was not explicitly modified.  The District Court’s decision, together with another similar decision in the Southern District of New York in the case of Meehancombs Global Opportunities Funds, LP v. Caesers Entertainment Corp., caused significant concern among practitioners that these decisions significantly limited companies’ ability to enter into negotiated debt restructurings without consent of 100% of all indenture bondholders.  Because the requirement of 100% approval gives bondholders significant negotiating leverage and creates a real risk of “holdouts,” such a requirement could effectively prevent many debt restructurings outside of a bankruptcy court.  

On December 8, 2016, the SEC released a series of Compliance and Disclosure Interpretations (better known as “CD&Is”) of relevance to “foreign private issuers” and their counsel.  The new C&DIs are included in the Securities Act Rules, Exchange Act Rules and Exchange Act Forms pages of the Division of Corporation Finance C&DI area of www.sec.gov.  Below is a summary of the principal new interpretations.  Thanks to Alan Bannister for preparing this summary. Definition of “Foreign Private Issuer” For purposes of the U.S. Securities Act of 1933 (the “Securities Act”) and the U.S. Securities Exchange Act of 1934 (the “Exchange Act”), the term “foreign private issuer” is defined as any foreign issuer, other than a foreign government, that does not meet the following conditions on the relevant date:     (a) more than 50 percent of its outstanding voting securities are held (directly or indirectly) of record by residents of the United States, and      (b) any of the following:         (i) the majority of the issuer’s executive officers or directors are U.S. citizens or residents;         (ii) more than 50% of the issuer’s assets are located in the United States; or         (iii) the issuer’s business is administered principally in the United States. See Rule 405 under the Securities Act and Rule 3b-4(c) under the Exchange Act. The new interpretations included insights into each element of this definition for purposes of both the Securities Act and the Exchange Act. More than 50 percent of its voting securities held by U.S. residents.  The Staff noted that a person with a green card is assumed to be a U.S. resident, and other persons without such permanent residency may also be deemed U.S. residents.  The issuer should consistently apply other criteria which it chooses, and such criteria could include physical presence, mailing address, nationality or tax residence. (Securities Act Rules – Question 203.18; Exchange Act Rules – Question 110.03) The Staff also addressed the impact of multiple classes of voting securities, noting that an issuer must make this determination either on the basis of voting power or numbers of securities, provided that the issuer is consistent in applying the methodology over time. (Securities Act Rules – Question 203.17; Exchange Act Rules – Question 110.02) Majority of Board or Executive Officers are U.S. citizens or residents.  When an issuer has more than one board, the Staff indicated that the issuer must make its determination based on the board that performs functions most closely similar to those undertaken by a U.S.-style board of directors, and if those duties are divided between both boards, the issuer could aggregate the members of both boards in making its calculation. (Securities Act Rules – Question 203.20; Exchange Act Rules – Question 110.05) In a separate CD&I, the Staff clarified that the determination of U.S. citizenship and residency for officers and for the board must be made for each group separately. (Securities Act Rules – Question 203.19; Exchange Act Rules – Question 110.04) Assets in the U.S.  The Staff confirmed that an issuer may use the geographic segment information determined in preparing its financial statements in determining whether more than 50 percent of its assets are in the U.S.  Alternatively, the issuer may apply any other reasonable method of assessing the location and amount of its assets, if that method is applied on a consistent basis. (Securities Act Rules – Question 203.21; Exchange Act Rules – Question 110.06) Administration of the business principally in the United States.  In one CD&I, the Staff indicated that this determination will require the exercise of judgment by the issuer, as it noted that there is no single factor or group of factors that are determinative under this clause of the definition.  Instead, the issuer must assess on a consolidated basis the locations from which its officers and managers primarily direct, control and coordinate the issuer’s activities. (Securities Act Rules – Question 203.22; Exchange Act Rules – Question 110.07) In a further interpretation, the Staff noted that a board holding an annual board meeting in the United States would not, alone, result in a conclusion that the issuer’s business is principally administered in the U.S. (Securities Act Rules – Question 203.23; Exchange Act Rules – Question 110.08) Regulation S The collection of CD&Is released last week addressed a number of issues under Regulation S, which provides a safe harbor exemption from registration under the Securities Act for certain offshore offerings and sales of securities. Category 1 Offerings:  Overseas Directed Offering.  An offering which qualifies as an “overseas directed offering” will be eligible for exemption under Category 1 of Regulation S – the least burdensome category under that Regulation.  An overseas directed offering is an offering by a foreign issuer directed solely into, and to residents of, a single country (other than the United States).  The Staff stated that securities offered in one or more countries within the European Union (and no other jurisdictions) will be treated as an offering made into a single country in light of the extent of the integration of the EU rules for prospectuses, transparency, trading and other matters. (Securities Act Rules – Question 277.02) In another similar query, the Staff confirmed that the Category 1 exemption under Rule 903(b)(1)(iv) for securities offered and sold to employees of the issuer or an affiliate pursuant to a benefit plan established and maintained under the laws of a country outside the United States is available for such plans established under the laws, customs and practices of the European Union. (Securities Act Rules – Question 277.03)   Factors to Determine Whether a Natural Person is a Resident of the United States for Purposes of the Definition of “US person”.  The Staff took an almost identical position on this query as it did in response to questions regarding the method of determining the residency of the holders of the issuer’s voting securities for purposes of the definition of foreign private issuer discussed above. (Securities Act Rules – Question 276.01) Guaranteed Debt Securities:  Determining Which Category of Regulation S.  Rule 903(b)(4) states that in an offering of debt securities fully and unconditionally guaranteed by the parent, the status of the parent company guarantee alone determines which category of Regulation S is applicable.  The Staff, however, has clarified that the provisions of Rule 903(b)(4) should be interpreted to apply whether the parent company is the issuer or co-issuer (with other subsidiaries) of securities guaranteed by one or more of its subsidiaries or where the parent is the guarantor (or co-guarantor with other subsidiaries) of debt securities issued by one or more of its subsidiaries.  As a result, under this interpretation, provided that the guarantee is full and unconditional, the status of the parent’s guarantee or its (guaranteed) debt securities (as the case may be) will determine the appropriate category of Regulation S applicable to the offering. (Securities Act Rules – Question 277.06) Use of F Forms for Certain Non-Foreign Private Issuers of Guaranteed Securities Foreign private issuers of debt securities are accorded certain favorable accommodations in their registration statements and ongoing reporting obligations, including for example an exemption from including a compensation discussion and analysis, as well as details of individual compensation for the directors and named executive officers. Foreign private issuers also benefit from reduced reporting requirements, required only to file an annual report and any other reports or information required to be, or voluntarily made, public under the laws of the issuer’s home country or any other jurisdictions where its securities trade.

On Friday, November 18, 2016, the Staff in the Office of Mergers & Acquisitions (“OM&A”) in the Division of Corporation Finance (the “Staff”) at the Securities and Exchange Commission released several new Compliance and Disclosure Interpretations (“C&DIs”) addressing: