In anticipation of the 2014 proxy season, Vanguard is sending letters to approximately 350 companies to proactively engage with them on governance issues. The letters are tailored to the individual companies and identify governance practices at the companies that Vanguard believes are not in line with what Vanguard views as best practices.
Private Placement of Publicly Traded Equity Securities as Consideration in an M&A Transaction after the JOBS Act
In April 2012, we wrote here about the potential future impact of the Jumpstart Our Business Startups Act (“JOBS Act”) on M&A transactions in which an acquirer seeks to issue its privately placed equity securities as consideration in an acquisition. Our discussion at the time focused on the conditions of Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) and, in particular, the tension faced by issuers that are required to determine the offerees’ status as “accredited investors” or as otherwise suitable to evaluate the potential investment. We noted that such issuers have historically been prohibited from using any form of “general solicitation” when offering securities in such transactions. Subsequently, in July 2013, the SEC adopted final rules (effective September 23, 2013) to eliminate the absolute prohibition against general solicitation in securities offerings conducted pursuant to Rule 506, as required by Section 201(a) of the JOBS Act (Gibson Dunn’s summary and analysis of the rules may be found here). The following discussion updates our earlier post to address the legal and practical effects of these new rules for M&A transactions that include a private placement component.
SEC Staff Grants Request to Exclude Rule 14a-8 Shareholder Proposal Regarding Repayment of Student Loans
Gibson Dunn successfully represented DeVry Inc. in obtaining no-action relief from the SEC staff (the “Staff”) for the exclusion of a shareholder proposal requesting that DeVry “annually report to shareholders on the expected ability of students at Company-owned institutions to repay their student loans.” The shareholder proposal, which was submitted by the New York City Comptroller’s Office on behalf of several New York City pension funds, specified particular quantitative and other information to be included in the requested report. DeVry’s no-action request argued that DeVry could exclude the shareholder proposal under Rule 14a-8(i)(7) as relating to DeVry’s ordinary business operations because the proposal implicated decisions concerning product quality. The no-action request identified shareholder proposal precedents relating to the quality of products or services in other industries (such as beverages and banking) and pointed out that, similar to those precedents, the proposal at issue was focused on the quality of DeVry’s educational services. In a response letter dated September 6, 2013, the Staff concurred that the shareholder proposal could be excluded, noting that “the proposal focuses primarily on information the company should provide regarding the quality of its educational services” and that “[p]roposals that concern product quality are generally excludable under rule 14a-8(i)(7).” The Staff’s decision to grant DeVry’s no-action request is notable because the Staff had denied a no-action request earlier this year regarding an identical shareholder proposal submitted to another company. The earlier no-action request had also asserted that the proposal was excludable under Rule 14a-8(i)(7), but its reasoning focused on the proposal’s infringement of the company’s risk assessment practices and compliance with laws rather than on how the proposal implicated the quality of the company’s products or services. The Staff’s concurrence with DeVry’s no-action request highlights the importance of identifying the appropriate issue that may support exclusion of a shareholder proposal, exploring and addressing any precedents and clearly articulating the reasons for which the proposal implicates a particular basis for exclusion.
SEC Proposes Rules Regarding Internal Pay Ratio Disclosure
The SEC today held an open meeting and voted, 3-2, to approve the issuance of proposed rules to implement the internal pay ratio disclosure requirement in Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). SEC Chair Mary Jo White and Commissioners Kara Stein and Luis Aguilar voted to propose the rules and Commissioners Daniel Gallagher and Michael Piwowar dissented. Statements made by the Commissioners today regarding the proposal are on the SEC website and available here. The comment period for the SEC’s proposed rules will be 60 days after the proposing release is published in the Federal Register; the proposing release is on the SEC website and available here.
Reminder to Respond This Week to the ISS Policy Survey
Companies wishing to participate in Institutional Shareholder Services’ (“ISS”) annual global policy survey should do so this week. The ISS policy survey closes on September 13. Public companies and others are urged to submit their views by completing the survey, as ISS considers the responses to its survey when developing its proxy voting policies for the coming proxy season. When responding to the survey, it is not necessary to enter a response to every question that is asked.
NGOs Release Report on Expectations for Conflict Minerals Reporting
On September 5, 2013, a white paper titled, “Expectations for Companies’ Conflict Minerals Reporting,” was released by two NGOs dedicated to human rights issues, the Enough Project and the Responsible Sourcing Network, describing in detail the expectations and suggestions of certain sustainable and responsible investors, or SRIs, and nongovernmental organizations, or NGOs, for the content of Form SD filings and Conflict Minerals Reports expected to be filed with the SEC next year. The two groups make a number of suggestions that far-exceed the literal requirements of the SEC’s conflict minerals rules. The paper, which is available at www.enoughproject.org/files/Expectations-for-Companies-Conflict-Minerals-Reporting.pdf, suggests that issuers disclose, among other things:
Reminder for Companies Planning to Rely on the “End-User Exception” for Swaps Activities
On Monday, September 9, new CFTC rules will take effect for non-financial companies that use swaps to hedge or mitigate commercial risk. These rules will require the clearing of interest rate swaps and credit default index swaps unless an exception is available. One such exception is the “end-user exception,” and public companies planning to rely on this exception must take certain governance steps. These include obtaining approval from the board of directors or an appropriate committee to enter into swaps exempt from clearing. For more information on these governance steps, please see our June 17, 2013 client alert entitled “Public Companies and the ‘End-User Exception’ for Swaps: Governance Action Items,” which is available here.
Are Changes to the Audit Report on the Horizon? PCAOB Issues Two Significant Proposals
Today, the Public Company Accounting Oversight Board (“PCAOB”) proposed for public comment two audit standards that, if adopted, would significantly change the audit report model, and dramatically expand the auditor’s responsibilities in reporting on management’s disclosures outside the financial statements. PCAOB Chairman Doty remarked that the proposed standards – running to almost 300 pages – mark a “watershed moment” for auditing in the United States.
ISS Releases Survey for 2014 Policy Updates
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.