On February 2, 2018, the Securities and Exchange Commission approved a change to the New York Stock Exchange’s (Exchange) listing rules that permit companies to use “direct listings” to list their shares on the Exchange based on having a minimum independent valuation of $250 million and without having completed an underwritten initial public offering (IPO) or having their shares first traded on a private market. Direct listing will continue to be at the NYSE’s discretion and require that the company have an effective resale registration statement on file with the SEC for at least some amount of its outstanding shares. Direct listings provide an option by which private companies can accomplish three goals without requiring an IPO: (a) make their shares a more attractive currency for merger and acquisition activity, (b) provide greater liquidity for existing shareholders, and (c) increase the value of their shares and employee stock options. The SEC approval comes in the wake of recent commentary by SEC Chairman Jay Clayton that he believes more IPOs are needed, noting they are generally beneficial to the retail investor community to the extent they provide investors with more investment alternatives, more opportunities to invest, and greater liquidity.
Securities Regulation
Federal Court Rejects Section 16(b) “Short-Swing Profits” Claim Challenging Share Withholding To Satisfy Taxes
A federal court in Oklahoma today issued a precedent-setting decision in favor of Gibson Dunn client WPX Energy, Inc., in Olagues v. Muncrief, No. 17-cv-153 (N.D. Okla. Jan. 26, 2018), ECF No. 42. In the decision, the court held that pre-approved tax withholding dispositions made in connection with the vesting of equity grants are exempt from Section 16(b)’s prohibition on short-swing profits under Exchange Act Rule 16b-3(e)—even when an employee otherwise subject to the short-swing trading restrictions purchased the company’s shares during the six-month period preceding or following the tax withholding disposition. This is the first time that a federal court has substantively addressed these types of short-swing trading claims, which have been serially raised by a small group of investors—first in the form of litigation demands and then, absent a payout to the investors, in litigation—during the last sixteen months. A number of companies have refused the investors’ settlement demands, which has resulted in Section 16(b) cases against the companies’ executives in federal courts in California, Colorado, Delaware, Florida, Massachusetts, North Carolina, Ohio, Oklahoma, Tennessee, Texas, and Washington state.
Technical Points To Remember When Preparing Your Form 10-K
With all of the substantive issues impacting disclosures in companies’ upcoming annual reports, there are a few technical points reporting companies should bear in mind when preparing their annual report. Note that some of these issues are easy to miss given that they are not yet reflected in the official PDF of Form 10-K.
SEC Staff Provides Important Guidance for Disclosure and Accounting Implications of the Tax Cuts and Jobs Act- Practical Considerations for Reporting Companies
On December 22, 2017, the Securities and Exchange Commission’s Office of the Chief Accountant and Division of Corporation Finance (“Staff”) issued important guidance that provides significant relief and helpful answers on some of the accounting and disclosure issues raised by the comprehensive tax act, commonly called the Tax Cut and Jobs Act,[1] that was signed into law on that same date (the “Tax Act”). The Staff’s guidance is contained in two pronouncements: (1) Staff Accounting Bulletin No. 118 (“SAB 118”), which essentially allows companies to take a reasonable period of time to assess, measure and record the effects of the Tax Act, and (2) Compliance and Disclosure Interpretation 110.02 (“CDI 110.02”) under Exchange Act Form 8-K, which confirms that the accounting implications of the Tax Act will generally not trigger impairment reporting under Form 8-K.
Securities and Exchange Commission Releases Public Statement on Cybersecurity
On Wednesday, September 20, 2017, Chairman Jay Clayton of the U.S. Securities and Exchange Commission (the “Commission”) released a public statement addressing cybersecurity risks.
NYSE Delays Implementation of Rule Change on Dividend-Related Announcements
As a follow-up to our prior blog, the New York Stock Exchange (“NYSE”) is delaying implementation of its rule change on notifications to the NYSE about announcements outside of market hours related to dividends or stock distributions. Companies should continue to comply with the current rule (summarized here) and follow their existing practices until the implementation date for the new rule, which will likely be in February 2018. The NYSE plans to provide companies with updated information prior to the date when they will be required to begin complying. As a result of the rule change, companies will have to notify the NYSE at least ten minutes in advance of an announcement related to a dividend or stock distribution made at any time, including outside market hours. Although the rule change was approved by the Securities and Exchange Commission (“SEC”) on Monday, August 14 and took effect immediately, the NYSE staff has advised orally that it is delaying implementation of the rule change. The NYSE filed a proposal (available here) seeking SEC approval of the delay on August 22nd. According to the proposal, the NYSE plans to implement the rule change no later than February 1, 2018. The purpose of the delay is to allow listed companies time to change their internal procedures and to give the NYSE more time to put in place technology and processes to facilitate staff review of dividend notifications.
NYSE Rule Change on Dividend-Related Announcements Made Outside Market Hours Now Effective
The New York Stock Exchange (“NYSE”) has amended its rules on companies’ notifications to the NYSE about upcoming dividends. The rule changes were approved by the Securities and Exchange Commission on Monday, August 14 and took effect immediately. The amended rules require companies that intend to make announcements outside market hours that involve dividends or stock distributions to notify the NYSE at least ten minutes before making the announcement. The NYSE has not made any changes to the requirements for announcements made during market hours. A blackline of the changes to the text of the Listed Company Manual is available here. A chart prepared by the NYSE in anticipation of the rule change comparing the requirements that will apply during and outside of market hours is available here. Under the NYSE’s policy on the immediate release of material news, found in Section 202.05 of the Listed Company Manual, NYSE companies must release quickly to the public any news or information that might reasonably be expected to materially affect trading in their securities. Under Section 202.06, which details the procedures for public release of information under this policy, a listed company must alert the NYSE at least ten minutes in advance when its intends to release news between the hours of 7:00 a.m. (eastern) and the close of trading on the NYSE (generally 4:00 p.m. eastern). Listed companies announcing dividend or stock distributions during these hours must comply with the immediate release policy. Accordingly, companies that publicly announce a dividend or distribution during market hours must call the NYSE’s Market Watch team, and email Market Watch a copy of the proposed announcement, at least ten minutes in advance of issuing the announcement. Companies must have NYSE approval before issuing a dividend or distribution announcement. As a result of the rule changes, companies will have to notify the NYSE at least ten minutes in advance of an announcement involving a dividend or stock distribution made at any time, rather than just during the hours when the immediate release policy is in effect. Companies providing this advance notification to the NYSE outside of the immediate release policy timeframe will not have to wait for NYSE approval before making their announcements. However, in filing the rule proposal, the NYSE stated that it intends to have staff available at all times to review dividend and stock distribution notices immediately upon receipt by the NYSE, “regardless of what time or day of the week they are provided.” NYSE staff will contact a listed company “immediately” if there is a problem with the notification. The NYSE “strongly encourages” companies to submit their dividend notifications through Listing Manager, the NYSE’s web portal. The rule changes do not alter other requirements relating to dividends and distributions, including: (1) the requirement in Section 204.12 that companies give notice to the NYSE promptly, and at least ten days in advance of the record date, of any action relating to a dividend or stock distribution, including notice of the omission or postponement of a dividend action at the customary time, and declaration of a dividend; and (2) the requirement in Section 204.21 that companies give prompt notice to the NYSE of the fixing of a record date for dividends and stock distributions. According to the NYSE, the purpose of the rule changes is to enable NYSE staff to work with listed companies in addressing any issues that may arise in relation to announcements involving dividends or stock distributions. Among other things, the NYSE will be able to confirm that a company’s proposed dividend schedule complies with NYSE requirements, and that the company’s disclosure about application of the NYSE’s ex-dividend trading policy is accurate. The ex-dividend date is the last date on which a buyer can purchase a company’s stock and still be entitled to receive a dividend that has already been declared. As a reminder, with the upcoming transition from a T+3 to T+2 settlement cycle, which will occur on September 5, 2017, the NYSE has announced that no securities will be ex-dividend on September 5, 2017 to avoid confusion about the proper time frame for settlement. The change to T+2 will also shorten the time period for which transactions in stocks will be ex-dividend to the business day before the record date for the dividend (from two business days before the record date).
Major Indices Move to Curb Multiple Class Structures
Multiple class share structures have come under increasing scrutiny since Snap Inc. (“Snap”) offered exclusively non-voting shares in its March 1, 2017, initial public offering (“IPO”). Companies employing the multiple-class structure argue that the structure contributes to corporate stability and long-term returns for shareholders, and aides in the revival of the sluggish IPO market by helping issuers overcome a reluctance to go public in the face of activist investors. However, citing corporate governance concerns and following considerable pressure and lobbying from institutional investors, both the FTSE Russell and Standard & Poor (“S&P”) Dow Jones have recently taken measures that may be seen as discouraging the practice.
ISS Releases Surveys for 2018 Policy Updates
On August 3, 2017, the proxy advisory firm Institutional Shareholder Services (“ISS”) launched its annual policy survey. Each year, ISS solicits comments in connection with the review of its proxy voting policies. ISS then uses the data to inform its voting policy review. At the end of this process, ISS will announce its updated proxy voting policies applicable to 2018 shareholder meetings.
Delaware Approves Use of Blockchain in New DGCL Amendments
On July 21, 2017, Delaware Governor John C. Carney Jr. signed into law, effective August 1, 2017, Senate Bill 69 (“SB 69”), amending Delaware’s General Corporation Law (“DGCL”) to, among other things, allow corporations to utilize electronic databases and blockchain technology to maintain and distribute certain corporate records. The passage of SB 69 further solidifies Delaware’s position as the leader in corporate regulatory innovation by demonstrating the state’s readiness to embrace new and innovative technologies being utilized by the corporate market.