Institutional Shareholder Services (“ISS”), the most influential proxy advisory firm, today launched its annual global policy survey. Each year, ISS solicits comments in connection with its review of its proxy voting policies. At the end of this process, in November 2013, ISS will announce its updated proxy voting policies applicable to 2014 shareholders’ meetings.
Removal of General Solicitation Ban, Bad Actor Disqualification Rules to Become Effective September 23, 2013; Comment Period on Related Proposed Amendments Also to End September 23, 2013
The Commission’s final rules to remove the ban on general solicitation and general advertising in offerings pursuant to Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) and pursuant to Rule 144A under the Securities Act, and to disqualify felons and certain other “bad actors” from participating in offerings pursuant to Rule 506, were published in the Federal Register today. As a consequence, the final rules will become effective on September 23, 2013.
U.S. District Court Upholds SEC’s Conflict Minerals Rules
Yesterday, Judge Robert Wilkins of the U.S. District Court for the District of Columbia issued a decision granting the SEC’s motion for summary judgment in a suit challenging the SEC’s conflict minerals rules, which were mandated under the Dodd-Frank Act and issued by the SEC on August 22, 2012. As a result, the conflict minerals rules remain in effect as adopted by the SEC. The parties have not yet indicated whether they will appeal the decision. The National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable had challenged the rules in October 2012, arguing that the rules are arbitrary and capricious and impose undue costs on companies in violation of the Administrative Procedure Act of 1946 and the Securities Exchange Act of 1934, and compel speech in violation of the First Amendment by requiring companies to make misleading disclosures suggesting that their products promote violence and human rights abuses. Rejecting the petitioners’ arguments, the court found that various aspects of the conflict minerals provision in the Dodd-Frank Act were ambiguous, and it gave deference to the SEC’s judgments, including its determination not to adopt a de minimis exception and to include within the scope of the rules issuers that “contract to manufacture” products containing conflict minerals. In regard to the First Amendment argument, the court gave deference to Congress in light of the foreign affairs aspect of the Dodd-Frank conflict minerals provision. The district court’s opinion is available at https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2013cv0635-37.
NYSE Amends Rule on Matters Requiring Shareholder Approval Under NYSE Rules
The New York Stock Exchange (“NYSE”) recently amended its rules to eliminate the quorum requirement that previously applied to proposals that require shareholder approval under NYSE rules. This rule change became effective July 11, 2013.
SEC Approves Final Rules to Permit Advertising in Rule 506 and Rule 144A Offerings; Also Proposes Rules to Add Additional Investor Protections
At an Open Commission Meeting on July 10, 2013, the Securities and Exchange Commission (the “SEC” or the “Commission”) adopted final rules to eliminate the prohibition against general solicitation and general advertising (together, “general solicitation”) in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) and Rule 144A under the Securities Act, as required by Section 201(a) of the Jumpstart Our Business Startups Act (the “JOBS Act”). Rule 506 currently permits an issuer to raise an unlimited amount of capital in a private placement to an unlimited number of accredited investors and up to 35 non-accredited investors provided that the issuer does not engage in general solicitation; it is the most widely used exemption under Regulation D. Rule 144A permits the resale of an unlimited amount of securities in a private transaction to qualified institutional buyers. The Commission approved the rules by a vote of 4-1 with Commissioner Aguilar dissenting.
Guidance on Compensation Committees’ Assessment of Adviser Independence
As discussed in our April 26, 2013 posting on the Gibson Dunn Securities Regulation and Corporate Governance Monitor, under recently amended NYSE Rule 303A.05 and NASDAQ Rule 5605(d), board compensation committees cannot select or receive advice from a compensation consultant, legal counsel or other adviser without first taking into consideration that adviser’s independence, including consideration of the factors enumerated in the rules. As compensation committees and their advisers are preparing for the July 1 effective date of these new listing standards, three observations are important:
Corp Fin Updates Compliance and Disclosure Interpretations
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)
July 1, 2013 Deadline Approaches for Updates to Compensation Committee Charters
By July 1, 2013, companies listed on the New York Stock Exchange (“NYSE”) and NASDAQ Stock Market (“NASDAQ”) must comply with new listing standards relating to compensation committees and their responsibilities and authority with respect to outside advisers. In view of the upcoming deadline, listed companies should review and update their compensation committee charters to provide the committee with these responsibilities and authority. In addition, compensation committees will need to assess the independence of their advisers in the coming months so they can receive advice from them after July 1.
Three Recent Surveys Provide Insights On Corporate Governance
Since January, three new surveys have become available that provide insights on corporate governance practices at public companies. The surveys, which are released annually, are from Institutional Shareholder Services Inc. (“ISS”), The Conference Board, Inc. (in collaboration with NASDAQ OMX and NYSE Euronext), and Deloitte LLP (in collaboration with the Society of Corporate Secretaries and Governance Professionals). These surveys can be a useful tool for companies seeking to benchmark their board practices against those of their peer companies.
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.