On May 16, the Staff of the Division of Corporation Finance updated C&DI’s across topic areas primarily relating to Securities Act practice. This is the first set of updates to the C&DI’s for the Securities Act and its rules and forms since February 2012. The new and revised C&DI’s do not reveal significant shifts in Staff views, but they do include new guidance regarding Rule 144 holding periods and volume limits, use of resale registration statements after private equity line financings, Form 8-K reporting of material impairments and disclosure of non-GAAP financial measures in a company’s compensation discussion and analysis. Following is a summary of the new and revised C&DI’s. Securities Act Forms · In calculating whether the size of a stock and warrants offering exceeds Form S-3 General Instruction I.B.6(a)’s one-third cap, an issuer is required to follow Instruction 2, even when the warrants are not exercisable for common stock within 12 months. (Securities Act Forms Question 116.24) · An issuer may post-effectively amend an automatic shelf registration statement to add more securities of a class already registered, even when the initial registration statement registered the offer and sale of a specified number and class of securities. (Securities Act Rules Question 210.03) · Even if an issuer relies on Rule 430B(b) to omit from a prospectus until after effectiveness “the identities of selling security holders and amounts of securities to be registered on their behalf,” the issuer must disclose the aggregate number of shares registered for resale before effectiveness. (Securities Act Rules Question 228.04) · When a company files a resale registration statement for securities sold in a private equity line financing, the private transaction may be deemed to be “completed” (a factor that must be met for the company to be allowed to register the “resale” of the securities prior to its exercise of the put) despite the lack of a fixed price if (1) the agreement provides for pricing based on a formula tied to market price and (2) there is an existing market for the securities as evidenced by trading on a national securities exchange or through the facilities of the OTC Bulletin Board or the OTCQX or OTCQB marketplaces of OTC Link ATS. (Securities Act Sections Question 139.13) · Although Form S-4 Item 3 does not expressly contemplate incorporation by reference of risk factors, a registrant that is permitted to, and does, incorporate by reference registrant information under either Item 11 or 13 of Form S-4 may also incorporate risk factors from its latest Form 10-K. (Securities Act Forms Question 125.12) Rule 144 · Non-affiliate donees and pledgees of securities that the donor or pledgor acquired in the open market may resell the securities pursuant to Rule 144 without regard to the holding period requirement of Rule 144(d) but subject to the current information requirement in Rule 144(c)(1). (Securities Act Rules Question 129.03 and Interpretation 532.01) · An affiliate’s sales of securities back to an issuer in a private transaction are excludable when calculating the amount of securities that the affiliate may sell under Rule 144. (Securities Act Rules Question 133.07) Regulation D · If an acquiror seeks written consents from a target’s shareholders, which include non-accredited investors, to approve a business combination transaction involving the issuance of securities in reliance on Rule 505 or 506, then financial statement and other information specified in Rule 502(b)(2) must be provided to target shareholders who are non-accredited investors a reasonable amount of time prior to obtaining written consents. (Securities Act Rules Question 256.22) Regulation S-K · Instruction 5 to Regulation S-K Item 402(b) provides that the rules governing non-GAAP financial measures do not apply to target levels (for compensation purposes) that are non-GAAP financial measures, other than to disclose “how the number is calculated from the registrant’s audited financial statements.” This Instruction applies not only to the target levels but also to the actual results of the non-GAAP financial measure used as a target. (Regulation S-K Question 118.09) · In an IPO, a price range in excess of $2 for offerings up to $10 per share, or in excess of 20% of the high end of the range for offerings over $10 per share, will not be considered a “bona fide estimate of the range of the maximum offering price” for purposes of Instruction 1 to Regulation S-K Item 501(b)(3). Also, “[i]f an auction clearing price will be used as the primary factor in establishing the final offering price, a price range in excess of $4, for offerings up to $20 per share, or in excess of 20% of the high end of the range, for offerings over $20 per share, will not be considered bona fide.” (Regulation S-K Question 134.04) · Although Regulation S-K Item 601(b)(101)(i) requires an interactive data file “only if the registration statement contains a price or price range,” “registration statements for shelf offerings, at-the-market offerings, exchange offers and secondary offerings must comply with the interactive data filing requirement even though they generally do not include a specific offering price at the time of effectiveness, unless the financial statements are incorporated by reference into the registration statement” (emphasis added). (Regulation S-K Question 146.17) Exchange Act Form 8-K · An impairment conclusion that is made at a time that coincides with the preparation, review or audit of financial statements for the next periodic report, even if not made “in connection with” such preparation, review or audit, does not trigger an Item 2.06 Form 8-K. (Exchange Act Form 8-K Question 110.01)
Securities Regulation
Proposed Amendments to DGCL Section 251 Increasing Attractiveness of Tender Offer Structure
The Delaware State bar recently proposed an amendment to Section 251 of the Delaware General Corporation Law (DGCL) to add new subparagraph (h) that would greatly enhance the appeal of the tender offer over a one-step merger structure.
Corp Fin Grants No-Action Relief in Stock and Cash Tender Offer
The Division of Corporation Finance recently granted no-action relief to Alamos Gold, Inc., a Canadian corporation, in connection with its proposed acquisition of Aurizon Mines Ltd., another Canadian corporation. The proposed acquisition is structured as a tender offer with consideration consisting of a mix of stock and cash subject to proration that would limit each form of consideration to a specified maximum aggregate amount in both the initial and any subsequent offering period. The Division granted an exemption from Rule 14d-10(a)(2) under the Exchange Act, which provides that no bidder shall make a tender offer unless the consideration offered and paid to any security holder for its securities tendered is the highest consideration paid to any other security holder for its securities tendered. In addition, relief was granted from Rules 14d-11(b) and 14d-11(f) under the Exchange Act, which provide that a bidder may offer a mix of consideration in a subsequent offering period provided there is no ceiling on any form of consideration offered, and the same form and amount of consideration is offered in both the initial and subsequent offering periods.
SEC Issues Guidance on Disseminating Corporate Information Through Social Media
Today the Securities and Exchange Commission (the “SEC”) issued a report of investigation under the Securities Exchange Act of 1934 providing guidance to public companies on the application of Regulation FD and SEC interpretive guidance to corporate disclosures made through social media. The report [1] clarifies that public companies under certain circumstances may disseminate material, nonpublic information via social media in compliance with Regulation FD if investors previously have been alerted that the specific social media will be used to disseminate such information.
SEC Staff Explains Analysis For Assessing Vague Shareholder Proposals Under Rule 14a 8(i)(3)
During the 2012 proxy season, the SEC staff concurred that a number of high profile shareholder proposals could be excluded from company proxy statements because various key terms in the proposals were not adequately defined or explained within the text of the proposal and supporting statement. See e.g., WellPoint, Inc. (SEIU Master Trust) (avail. Feb. 24, 2012, recon. denied Mar. 27, 2012) (concurring with exclusion of an independent chair proposal that referred to the New York Stock Exchange standard of independence without defining it because “neither shareholders nor the company would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires”); Textron Inc. (avail. Mar. 7, 2012) (arguing that a reference to the Rule 14a-8 eligibility requirements in a proxy access shareholder proposal was vague and indefinite, although the staff ultimately concurred with the exclusion of the shareholder proposal on other grounds); Dell Inc. (avail. Mar. 30, 2012) (concurring with the exclusion of a similar proxy access shareholder proposal because the proposal’s reference to the Rule 14a-8 eligibility requirements was vague and indefinite). While these no-action letters reflected long-standing SEC staff precedent, in the current proxy season, there has continued to be a large number of no-action requests arguing that various terms in shareholder proposals are undefined or vague and therefore excludable under Rule 14a-8(i)(3).
Senate Banking Committee Holds Hearing on Nomination of Mary Jo White to Chair SEC
The Senate Committee on Banking, Housing and Urban Affairs held a hearing today on the nomination of Mary Jo White to chair the Securities and Exchange Commission. The Senators showed high support for White’s nomination and, contrary to expectation, asked few tough questions about her ties to Wall Street banks arising from her work at the law firm Debevoise & Plimpton LLP and other potential conflicts of interest.
U.S. Supreme Court Issues Two Significant Decisions Involving Securities Law Matters
On February 27, 2013, the U.S. Supreme Court issued opinions in two significant securities law cases, Gabelli v. Securities and Exchange Commission, 568 U.S. ___ (2013) and Amgen Inc., v. Connecticut Retirement Plans and Trust Funds, 568 U.S. ___ (2013). In the Gabelli decision the Court addressed the ability of the government to bring civil enforcement actions seeking civil penalties where the alleged fraudulent conduct occurred outside the five-year statute of limitations period. In the Amgen decision the Court addressed the class certification pleading requirements in security holder class action suits.
SEC Petitioned for Rulemaking to Accelerate 13F Filing Deadline
Last week, the NYSE Euronext, the Society of Corporate Secretaries and Governance Professionals, and the National Investor Relations Institute submitted a joint petition (available here) to the SEC, requesting that the Commission amend the beneficial ownership reporting rules under Section 13(f) of the Securities and Exchange Act of 1934, as amended. Fund managers subject to the 13(f) reporting requirements currently have until 45 days after the last day of each calendar quarter to file their Form 13F; the petition suggests that the time period be shortened to two business days.
Court Holds that Nonconvertible Securities with Different Voting Rights Not Matchable under Section 16(b)
Last week, in Gibbons v. Malone, the Second Circuit affirmed the lower court’s dismissal of a shareholder suit brought under Section 16(b) of the Securities and Exchange Act of 1934 against a former director of Discovery Communications, Inc. Also known as the short swing profit rule, Section 16(b) provides for the disgorgement of any profits earned from the purchase and sale, or sale and purchase, by a corporate insider, of any equity security within a six-month period. In Gibbons, the corporate insider sold Series C common stock, which had no voting rights, and purchased Series A common stock which had voting rights, within a six-month period. The three-judge panel held that absent SEC guidance, the purchase and sale of different types of stock in the same company, where those securities are separately traded, nonconvertible, and come with different voting rights cannot be matched, and therefore do not trigger the short swing profit rule.
SEC Approves PCAOB Auditing Standard No. 16 – Communications with Audit Committees
Yesterday, the SEC issued an order approving new Auditing Standard No. 16, Communications with Audit Committees (“AS 16”). AS 16 was previously approved by the Public Company Accounting Oversight Board (“PCAOB”) at an open meeting held on August 15, 2012. As we noted in our August client alert reporting on this new standard (available here), AS 16 retains most of the preexisting communication requirements, but also adds a number of new topics that the auditor must discuss with the audit committee and requires that the auditor seek specific responses from the audit committee when discussing certain topics. In response to comments, the SEC also clarified that the new standard will apply to audits of foreign private issuers. Significantly, the SEC concurred with the PCAOB that AS 16 will apply to emerging growth companies (“ECGs”) and will be effective for fiscal periods beginning on and after December 15, 2012.