|Corp Fin Clarifies Non-GAAP Guidance in the Business Combination Context|
On October 17, 2017, the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff”) issued one new Compliance & Disclosure Interpretation (“C&DI”) and revised an existing C&DI addressing the disclosure of forward-looking financial measures in the business combination context. These two C&DIs seek to clarify the Staff’s position as to when:
- certain forecasts or projections shared in a business combination are not deemed non-GAAP financial measures; and
- a GAAP reconciliation of such information is appropriate.
The new and revised C&DIs are available here.
By way of background, Regulation G and Item 10(e) of Regulation S-K do not apply to non-GAAP financial measures included in disclosures relating to a proposed business combination transaction that are subject to the SEC’s communications rules applicable to business combination transactions (i.e., Securities Act Rule 425, and Exchange Act Rules 14a-12, 14d-2(b)(2), and 14d-9(a)(2)). These rules basically cover the early communications filed on the date of first use before a final disclosure document is filed (e.g., definitive proxy statement, registration statement/prospectus, tender offer or solicitation/recommendation statement). For more information on the topic, see “Conditions for Use of Non-GAAP Financial Measures” adopting release, available here.
Historically, parties to a business combination transaction have disclosed projections or forecasts for Rule 10b-5 cleansing purposes, to comply with line-item SEC disclosure requirements (e.g., Item 1015 of Regulation M-A), as well as to satisfy disclosure duties under applicable state law. However, the practice of providing a full-blown reconciliation of the non-GAAP financial measures found within those forecasts has been somewhat mixed. As a result, the Staff is now updating their interpretive guidance on this topic in order to facilitate greater consistency and compliance with the applicable rules.
New C&DI Question 101.01 makes clear the financial measures included in forecasts are not non-GAAP financial measures so long as the forecasts are:
|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.
Chairman Clayton’s statement is part of an ongoing effort to communicate the Commission’s approach to cybersecurity in connection with the May 2017 assessments of the Commission’s internal cybersecurity and of its approach to cybersecurity as a regulatory agency.
The statement addressed the Commission’s collection and use of data, the Commission’s management of internal cybersecurity risks, incorporation of cybersecurity considerations in the Commission’s regulatory approach with respect to disclosures and its supervisory programs, coordination by the Commission with other government entities, and enforcement by the Commission of federal securities laws.
The most noteworthy portion of the statement was the revelation by Chairman Clayton that the Commission had discovered in August 2017 that a cyberattack, previously detected in 2016, may have provided the basis for illicit gain through trading. According to Chairman Clayton, a vulnerability in the EDGAR test filing system had allowed individuals to access nonpublic information. It is not believed that any personally identifiable information was obtained through the exploitation of the vulnerability, but the Commission continues to investigate the matter.
The Commission has emphasized in recent months that it utilizes trading data and other information in identifying risks, detecting fraud, and enforcing securities laws (for our blog post regarding recent related comments by the SEC’s Acting Director and Acting Chief Economist, see here). Wednesday’s revelation serves as a reminder that the Commission’s role in collecting and maintaining sensitive nonpublic information may make it a particularly attractive target for cyberattacks. While the particular vulnerability in EDGAR was patched promptly after discovery, the Commission’s investigation is ongoing and cyberattacks will continue to present an ongoing threat not only to companies, but also to the Commission itself.
Chairman Clayton’s statement went on to describe in detail the ways in which the Commission manages cybersecurity risks internally and ways in which cybersecurity considerations inform the Commission’s regulatory approach. ...Read More
|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.
|SEC Updates Guidance on Draft Registration Statements |
New SEC Policy Permits the Exclusion of Certain Financial Information from Draft Registration Statements; Additional Detail Provided Regarding Recent Updates to Draft Registration Statement Procedures
On August 17, 2017, the Securities and Exchange Commission (“SEC”) issued new guidance regarding financial information that may be omitted from draft registration statements and also updated its recent expansion of the confidential review process for draft registration statements. These measures represent the latest step in the SEC’s ongoing efforts to facilitate capital formation, highlighted by Chairman Clayton in his first public remarks following his confirmation.
Under the new policy, any issuer may omit both interim and annual financial information from a draft registration statement to the extent the issuer reasonably believes the omitted financial information will not be required when the registration statement is publicly filed. Therefore, as one example, an issuer with a December 31 fiscal year-end may exclude interim financial information for the quarter ended March 31 from a draft registration statement so long as the issuer reasonably believes it will not publicly file the registration statement until after its interim financial information for the six months ended June 30 becomes available and is included in the registration statement. Previously, this relief to exclude financial information from draft registration statements was available only to Emerging Growth Companies (“EGCs”) under Section 71003 of the FAST Act and was limited to financial information covering completed fiscal years. EGCs, however, remain the only type of issuer that can omit annual financial information from publicly filed registration statements under Section 71003 to the extent the issuer reasonably believes the ann...Read More
|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 avai...Read More
|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.
On July 27, FTSE Russell said that it was “draw[ing] a principled line in the sand” by barring the inclusion of companies in its indices unless over 5% of their voting rights are in the hands of public–“unrestricted”–shareholders. The application of this rule with respect to Snap, whose public shareholders exclusively hold non-voting shares, is clear. But many companies employ multiple class voting structures in which founders and other early-round investors hold higher vote shares and others, often public shareholders, hold lower vote shares, typically in a 10 to 1 ratio. Prior to announcing its new rule, FTSE Russell conducted a study and found that 37 companies already listed in its indices fail to meet the new 5% threshold given these high/low vote share structures or other structures similarly reducing public shareholder voting power. Those companies, which include Hyatt Hotels Corp. and Dell Technologies, will have until September 2022 to conform their capital structures or be removed from these indices. The final rule will be published on August 25, 2017, though some are already speculating that the 5% threshold may increase when the FTSE Russell conducts its intended annual reviews of the rule. Indeed, the Council of Institutional Investors (“CII”) initially recommended that the FTSE Russell set the threshold at 25% and CII and others are likely to continue pressing for an increase in the FTSE’s contemplated 5% threshold.
The S&P ...Read More
|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.
This year, ISS divided its survey into two parts: the Governance Principles Survey and the Policy Application Survey. The Governance Principles Survey consists of a brief, high-level set of questions addressing what ISS views as the “fundamental and high-profile” issues this year:
- One-share, one-vote principle. Snap Inc.’s initial public offering was the first to issue only non-voting shares to the public in an IPO. In addition, there has been recent investor criticism of dual class stock structures that concentrate voting control in the hands of founders and early-round investors. The Governance Principles Survey asks when it is appropriate, if ever, for companies to issue multi-class capital structures with unequal voting rights and whether those structures should automatically expire or be subject to periodic reapproval by holders of the low-vote shares.
- Gender diversity on boards. The survey asks whether the absence of female directors on a public company’s board is problematic and, if so, what factors impact that analysis (e.g., company disclosure about efforts to increase gender diversity or industry practices). The Governance Principles Survey then asks what actions are appropriate for shareholders to take at a company that has no gender diversity on the board and/or has not disclosed a policy on the issue.
- Virtual/hybrid meetings. The Governance Principles Survey asks whether virtual-only and/or hybrid (physical and virtual) meetings—an increasing trend in the United States—are an acceptable practice. Among the responses is the option to indicate that virtual-only meetings are acceptable “if they [provide] the same shareholder rights as a physical meeting.”
- Pay ratio. Beginning in 2018, U.S. public companies will be required to report in their proxy statements the ratio of their chief executive officer’s pay to that of its median company employee. The Governance Principles Survey asks how respondents intend to evaluate this information (e.g., compare across industries or assess year-to-year changes in a company’s ratio) and seeks input as to how shareh...Read More
|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.
SB 69’s most notable changes involve how corporations may create and distribute corporate stock ledgers and stockholder communications. Where stock ledgers previously needed to be written or recorded by an officer of the corporation, the newly amended DGCL Sections 219 and 224 allow corporate stock ledgers, as well as books of accounts and minute books, to be “administered by or on behalf of the corporation” by means of “one or more electronic networks or databases (including one or more distributed electronic networks or databases).” Though this may give the impression that Delaware corporations can go completely digital with such records, any records kept in electronic form under DGCL Section 224 must still be convertible into clearly legible paper form within reasonable time. What’s more, electronic stock ledgers must also be able do the following:
- Prepare the corporation’s list of stockholders as required by DGCL Sections 219 and 220, which deal with stockholder demands to inspect books and records;
- Record certain information specified in DGCL Sections 156 (regarding consideration for partly paid for shares), 159 (regarding transfer of shares for collateral security), 217(a) (regarding pledged shares) and 218 (regarding voting trusts); and
- Record transfers of stock governed by Article 8 of the Delaware Uniform Commercial Code.
Additionally, SB 69 amended the definition of “electronic transmission” in DGCL Section 232 such that the many stockholder communications that a corporation makes pursuant to the DGCL, its certificate of incorporation and bylaws may also be made via electronic networks and databases, in addition to more traditional means of electronic transmission such as email.
SB 69 marks a historic move towards the recognition and adoption of blockchain and distributed ledger tech...Read More
|SEC Requests Comments on New PCAOB Auditor Reporting Standard|
On June 1, 2017, the PCAOB adopted a new auditor reporting standard—PCAOB Release No. 2017-001, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards (the “Standard”)—that will be significant for public companies. A copy of our prior client alert on the Standard is here.
If approved by the Securities and Exchange Commission (SEC), the Standard would require auditors to identify in their audit reports any “critical audit matters” (CAMs)—certain matters related to the audit that the auditor determines involved especially challenging, subjective, or complex auditor judgment. The Standard would further require that the audit report describe the principal considerations that led the auditor to determine that the matter is a critical audit matter, and explain how the critical audit matter was addressed in the audit.
Today, the SEC issued a request for public comments on the proposed Standard in order to determine whether the Commission should approve the Standard. There is only a brief comment period, with comments due by August 18, 2017.
Because there remain serious issues for public companies if the Standard is approved by the SEC, management and audit committees should consider commenting to the SEC about the issues raised by the new PCAOB standard. Issues presented include:
- Complying with the Standard may require auditors to disclose information about public companies that those companies themselves are not otherwise required to disclose—which may be at odds with management’s traditional role in shaping a company’s disclosures. The SEC lacks statutory authority to turn...Read More
|SEC Warns that Securities Laws May Apply to Initial Coin Offerings and Other Digital Currency Sales|
On Tuesday, July 25, 2017, the Securities and Exchange Commission (“SEC”) issued a Report of Investigation (the “Report”) finding for the first time that an offer and sale of virtual currency, often called an Initial Coin Offering (abbreviated “ICO”) or “Token Sale”, can be subject to U.S. federal securities laws. While the SEC decided not to pursue an enforcement action in this particular instance, the SEC did find that that the ICO that was the subject of the Report involved an offering of securities subject to U.S. federal securities laws.
ICOs and Token Sales are an innovative means by which many organizations use distributed ledger or blockchain technology to raise capital. Such sales have been subject to significant regulatory uncertainty. The Report serves as a warning to the industry and market participants that virtual tokens and coins can be considered securities “regardless of the terminology or technology used”, in which case issuers must register offers and sales unless an exemption to registration applies. Similarly, platforms for trading tokens and coins may also be subject to federal securities laws regulating securities exchanges.
The Report arose as a result of the SEC’s inquiry into an ICO made by a virtually existing entity, called The DAO, for the sale of its virtual DAO Tokens, the proceeds of which would be used to fund “projects” in exchange for a return on investment. The SEC began its investigation after hackers stole approximately one-third of The DAO’s assets after the tokens were sold to investors.
In its Press Release announcing the Report, the SEC emphasized that the Report confirms “that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption [to registration] applies.” However, in the Report and in an Investor Bulletin released concurrently with the Report, the SEC noted that whether particular virtual coins or tokens are securities will depend on the facts and circumstances of each ICO, including underlying economic realities of a particular transaction. In the case of The DAO, the SEC found that the DAO Tokens were securities regardless of the fact that (a) the tokens were only purchasable with “Ether,” a virtual currency, (b) the DAO itself was not a traditional corporate entity, but rather a decentralized aut...Read More
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