Securities Regulation and Corporate Governance

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Non-Voting Shares Make Their Public Debut and Generate Some Governance Concerns, but How Will Courts View the Structure When First Presented?

On March 1, 2017, Snap Inc. (“Snap” or the “Company”) – owner of the popular social media platform Snapchat – priced its highly anticipated initial public offering (“IPO”). With 200 million shares sold at $17 per share, the IPO raised approximately $3.4 billion for the Company. On their first trading day, Snap shares opened at $22.41 per share and peaked as high as $28.84 the following day. As of March 10, shares closed at $22.07, above its initial offering price, but below its opening trading price. As the largest IPO of any U.S.-based company since Facebook’s public offering in 2012, many investors’ primary focus here has been on the complete lack of voting privileges associated with the shares sold in the IPO. 

As described in Snap’s IPO prospectus, the Company has three classes of shares: Class A common stock, the publicly traded shares; Class B common stock, reserved for early investors and executives; and Class C common stock, owned solely by the company’s co-founders Evan Spiegel and Bobby Murphy. Class A shares are not entitled to vote, while Class B and Class C shares are each entitled to one and ten votes, respectively, and vote together as a single class. Given this structure, even before shares were sold in the IPO, 88.5 percent of the voting power of the Company remained concentrated in its two founders. Furthermore, Class B shares lose voting privileges when sold or transferred, and Spiegel’s and Murphy’s control of the Company through their Class C shares will not diminish even if either or both leave Snap.

Attempting to preserve control through non-traditional voting structures is not a new concept for companies, especially technology companies. Many technology companies have dual class structures, in which founders and other early-round investors hold higher vote shares (typically ten votes per share) and others hold low vote shares (typically one vote per share).  In the last several years, a number of companies including Alphabet, Google’s parent company, Facebook, Zillow and Under Armour have introduced non-voting shares into their capital structures in order to delay the loss of voting control of their founder(s). Snap, however, is the first to issue only non-voting shares to the public in an IPO.

There has been a fair amount of criticism of Snap’s move to publicly offer shares that do not include voting rights. Kurt Schacht, the Chair o...Read More

SEC Adopts Requirements for Active Hyperlinks In Exhibit Indexes

The SEC has adopted final rules requiring an active hyperlink to each filed exhibit identified in the exhibit index of most Securities Act and Exchange Act registration statements and reports that are required to include exhibits under Item 601 of Regulation S-K.  The rules become effective on September 1, 2017 (though the adopting release encourages early compliance), provided that smaller reporting companies and non-accelerated filers that submit filings in ASCII format need not comply with the rules until September 1, 2018.  The new requirements will apply to Forms S-1, S-3, S-4, S-8, S-11, F-1, F-3, F-4, SF-1, SF-3, 10, 10-K, 10-Q, 8-K, F-10, 20-F and 10-D (though the compliance date for Form 10-D will be announced at a later date).  The requirement will not apply to other forms under the multi-jurisdictional disclosure system used by certain Canadian issuers or to Form 6-K, as exhibits and exhibit indexes are not required by those forms. 

Hyperlinks are required for each exhibit other than exhibits filed with Form ABS-EE, XBRL exhibits, and exhibits filed in paper pursuant to a temporary or continuing hardship exemption.  Registration statements will require hyperlinks in the exhibit index of the initial filing and each subsequent pre-effective amendment. 

Historically, the EDGAR system has supported filings in either HTML format or ASCII format, but registrants will now have to file registration statements and reports subject to the hyperlinking requirements in HTML format, because the ASCII format does not support hyperlinking.  The adopting release noted that in 2015, less than one percent of the forms affected by the rule were submitted in the ASCII format.  The SEC provided the one-year phase-in period for smaller reporting companies and non-accelerated filers that file in ASCII format to mitigate some of the cost burdens for those companies related to switching to the HTML format.

In the event that a hyperlink is malfunctioning or incorrect, the hyperlink must be corrected (i) by pre-effective amendment, in the case of a registration statement that is not yet effective, or (ii) in the next Exchange Act report that contains an exhibit index, in the case of an effective registration statement or Exchange Act report. An inaccurate hyperlink in an effective registration statement may also be corrected in a post-effective amendment.   The adopting release provides that an inaccurate hyperlink alone will not render a filing materially deficient, nor affect a registrant’s eligibility to use short-form registration statements. 

The SEC will be issuing an updated EDGAR Filer Manual that will describe the procedures necessary to create hy...Read More

SEC Brings Enforcement Action for Deficient Disclosure of Financial Advisors’ Fee Arrangements

On February 14, 2017, the U.S. Securities and Exchange Commission (the “SEC”) announced the settlement of an enforcement action against CVR Energy, Inc. (“CVR” or the “Company”).  The SEC brought action against the Company for its failure to disclose adequately the material terms of its fee arrangements with two investment banks in connection with the financial advisory services each bank provided to CVR during the pendency of a hostile tender offer launched by an activist.  See CVR Energy, Inc., Exchange Act Release No. 80039 (February 14, 2017).

Notwithstanding the fact that the banks failed to help CVR avoid a takeover by the activist or produce a higher offer price, they collected approximately $36 million in success fees based on the expansive definition of the term “success” set forth in their engagement letters with the Company.  The engagement letters (negotiated with the assistance of CVR’s outside counsel), provided the banks would receive an increased fee in the event the company were sold, regardless of whether:  (i) the final sale price was deemed adequate by CVR’s board, (ii) the banks succeeded in defending against the activist’s bid, or (iii) the banks were successful in causing the activist to raise its bid for the Company.

According to the SEC’s order, CVR violated Section 14(d)(4) and Rule 14d-9 thereunder which require an issuer to summarize the material terms of the compensation arrangements with its financial advisor when disclosing a solicitation or recommendation on Schedule 14D-9 in response to a tender offer.  CVR’s Schedule 14D-9 (prepared by CVR’s outside counsel), indicated the banks’ fee arrangements were “customary.”  The SEC’s order found CVR’s disclosure of customary compensation inadequate under the circumstances noting that it failed to inform CVR shareholders of the potential conflicts of interest arising from the structure of the fee arrangements.

This enforcement action comes on the heels of recent guidance published by the SEC that addresses the appropriate level of disclosure relating to a financial advisor’s fee arrangements in Schedule 14D-9 filings.  On November 18, 2016, the Staff in the Office of Mergers & Acquisitions in the Division of Corporate Finance (the “Staff”) at the SEC rel...Read More

Acting SEC Chair Piwowar Directs Staff to Reconsider Conflict Minerals Rule

On January 31, 2017, the SEC’s Acting Chairman, Michael Piwowar, issued a public statement (available here) that he has directed the Commission’s Staff to reconsider whether the Staff’s prior guidance on conflict minerals disclosures (previously published in April 2014 and available here) is still appropriate and evaluate whether additional relief may be appropriate. 

By way of background, the SEC’s conflict minerals disclosure rules – Exchange Act Rule 13p-1 and Form SD – were challenged shortly after adoption. Ultimately, the Court of Appeals for the D.C. Circuit in National Association of Manufacturer’s et al. v. SEC et al. held that certain of the disclosures required by the SEC’s conflict minerals rule violated the First Amendment.  Specifically, the Court of Appeals held that Section 13(p) and Rule 13p-1 (the “Rule”) “violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and state on their website that any of their products have not been found to be ‘DRC conflict free.’”

Shortly thereafter, the Corporation Finance Division Director at the time, Keith Higgins, issued a public statement providing guidance that companies will be afforded some flexibility in how they describe products in their Conflict Minerals Reports.  The guidance explained that companies are not required to affirmatively describe their products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict indeterminable.”  However, if a company voluntarily elects to describe any of its products as “DRC conflict free”, then the company would be permitted to do so provided it had obtained an independent private sector audit (IPSA) as otherwise required.

Piwowar goes on in his statement to provide several general observations regarding the current state of affairs surrounding the Rule.  Specifically, Piwowar notes that the litigation relating to the Rule is ongoing, the Staff’s prior guidance in this area remains in effect, and the temporary transition period relating to the Rule has expired.  Specifically, the reporting period beg...Read More

Marblegate Case Overturned by Second Circuit Court of Appeals

In a case closely watched by companies and investors alike, on January 17, 2016, the Second Circuit Court of Appeals overturned the decision of the District Court for the Southern District of New York in Marblegate Asset Management vs. Education Management Corp.  The District Court had held that a series of debt restructuring transactions by Education Management Corp. violated Section 316(b) of the Trust Indenture Act of 1939, as amended.  Section 316(b) of the Trust Indenture Act provides that “the right of any holder of any indenture security to receive payment of the principal and interest on such indenture …shall not be impaired or affected without the consent of such holder.”  Reading this provision broadly, the District Court found that a restructuring that released a parent guarantee and effectively stripped most of the assets from the issuer of the debt without the consent of each bondholder violated Section 316(b), even though the particular indenture for the bonds in question was not amended in connection with the restructuring.  The District Court concluded that Section 316(b) protects a bondholder’s practical ability to receive payment even where the indenture was not explicitly modified.  The District Court’s decision, together with another similar decision in the Southern District of New York in the case of Meehancombs Global Opportunities Funds, LP v. Caesers Entertainment Corp., caused significant concern among practitioners that these decisions significantly limited companies’ ability to enter into negotiated debt restructurings without consent of 100% of all indenture bondholders.  Because the requirement of 100% approval gives bondholders significant negotiating leverage and creates a real risk of “holdouts,” such a requirement could effectively prevent many debt restructurings outside of a bankruptcy court.  

In a 2-1 decision, the Second Circuit overturned the decision of the District Court and held that Section 316(b) of the Trust Indenture Act did not prohibit the restructuring by Education Management Corp.  The Second Circuit agreed with the District Court that Section 316(b) of the Trust Indenture Act is ambiguous, and therefore conducted its own review of the legislative history of the provision.  After such review, the Second Circuit concluded that Section 316(b) was intended only to prohibit formal amendments to the core payment rights of an indenture without consent of each bondholder, and not to prevent restructuring that effectively reduced the issuer’s ability to repay the bonds. 

There remain some steps the plaintiffs could take to challenge the Second Circuit’s decision in Marblegate, including seeking a rehearing in the Second Circuit or appeal to the U.S. Supreme Court.  Unless and unt...Read More

SEC Staff Grants No-Action Request Concurring with Exclusion of Shareholder Proposal On Virtual-Only Annual Meetings

In recent years, an increasing number of companies have opted to hold annual shareholder meetings exclusively online.  These annual meetings are commonly referred to as “virtual-only annual meetings”.   In a decision critical for companies that currently hold or are contemplating switching to virtual-only annual meetings, the staff of the Securities and Exchange Commission (the “SEC Staff”) recently issued a no-action letter permitting a company to exclude a shareholder proposal that objected to virtual-only annual meetings.  Specifically, the shareholder proposal requested that the company’s board adopt a policy to initiate or restore in-person annual meetings.  The SEC Staff concurred that the proposal could be excluded under Rule 14a-8(i)(7) on the grounds that the decision whether to hold in-person annual meetings is related to the company’s ordinary business operations because the proposal “relates to the determination of whether to hold annual meetings in person.”  The SEC Staff’s decision is not yet available on the SEC’s website.   

The proposal in question was submitted to HP Inc. (“HP”) by John Chevedden and Bart Naylor.  HP has been holding its annual meetings solely online since 2015.  Previously, in a no-action letter dated December 9, 2016, the SEC Staff permitted Hewlett Packard Enterprise (which also adopted a virtual-only annual meeting format when it became a stand-alone publicly traded company) to exclude the same proposal based on procedural grounds without addressing the Rule 14a-8(i)(7) arguments (which Hewlett Packard Enterprise also included in its no-action request).  By concurring with arguments made by Gibson Dunn on HP’s behalf, the SEC Staff confirmed that this proposal is also excludable under Rule 14a-8(i)(7).

In permitting HP to exclude the proposal, the SEC Staff reaffirmed its position on this subject from more than 14 years ago.  Specifically, in EMC Corp. (avail. Mar. 7, 2002), the Staff concurred in the exclusion under Rule 14a-8(i)(7) of a proposal “request[ing] that EMC Corporation adopt a corporate governance policy affirming the continuation of in-person annual meetings, adjust its corporate practices policies [sic] accordingly, and make this policy available publicly to investors” on the basis that the proposal “relat[ed] to EMC’s ordinary business operations (i.e., the determination whether to continue to hold annual meetings in-person).”   

Companies that currently hold and are considering holding virtual-only annual meetings should take comfort in this decision from the SEC Staff – whether to go virtual properly remains within the purvi...Read More

SEC Releases Multiple Interpretations of Interest for Foreign Private Issuers

On December 8, 2016, the SEC released a series of Compliance and Disclosure Interpretations (better known as “CD&Is”) of relevance to “foreign private issuers” and their counsel.  The new C&DIs are included in the Securities Act Rules, Exchange Act Rules and Exchange Act Forms pages of the Division of Corporation Finance C&DI area of www.sec.gov.  Below is a summary of the principal new interpretations.  Thanks to Alan Bannister for preparing this summary.

Definition of “Foreign Private Issuer”

For purposes of the U.S. Securities Act of 1933 (the “Securities Act”) and the U.S. Securities Exchange Act of 1934 (the “Exchange Act”), the term “foreign private issuer” is defined as any foreign issuer, other than a foreign government, that does not meet the following conditions on the relevant date:

    (a) more than 50 percent of its outstanding voting securities are held (directly or indirectly) of record by residents of the United States, and 
    (b) any of the following:
        (i) the majority of the issuer’s executive officers or directors are U.S. citizens or residents;
        (ii) more than 50% of the issuer’s assets are located in the United States; or
        (iii) the issuer’s business is administered principally in the United States.

See Rule 405 under the Securities Act and Rule 3b-4(c) under the Exchange Act.

The new interpretations included insights into each element of this definition for purposes of both the Securities Act and the Exchange Act.

More than 50 percent of its voting securities held by U.S. residents.  The Staff noted that a person with a green card is assumed to be a U.S. resident, and other persons without such permanent residency may also be deemed U.S. residents.  The issuer should consistently apply other criteria which it chooses, and such criteria could include physical presence, mailing address, nationality or tax residence. (Securities Act Rules – Question 203.18; Exchange Act Rules – Question 110.03)

The Staff also addressed the impact of multiple cl...Read More

OM&A Staff Publishes Updated Guidance on Tender Offers

On Friday, November 18, 2016, the Staff in the Office of Mergers & Acquisitions (“OM&A”) in the Division of Corporation Finance (the “Staff”) at the Securities and Exchange Commission released several new Compliance and Disclosure Interpretations (“C&DIs”) addressing:

  • the level of disclosure deemed appropriate for compensation arrangements with financial advisors retained in connection with responding to registered tender offers subject to Regulation 14D; and
  • certain timing and structural matters related to “abbreviated” debt tender offers (i.e., tender offers for non-convertible debt securities that can remain open for as little as five business days pursuant to a no-action letter issued in early 2015 available here) subject only to Regulation 14E.

With respect to a financial advisor’s employment and compensation arrangements, the Staff reminds those companies subject to a tender offer for which a Schedule 14D-9 must be filed that Item 5 of Schedule 14D-9 and Item 1009(a) of Regulation M-A require a “summary of all material terms” of employment or other arrangements for compensation payable to persons “directly or indirectly” engaged to make solicitations or recommendations in connection with a tender offer.  The Staff notes that even though an advisor may disclaim making a recommendation to or solicitation of security holders, if the issuer’s board or independent committee retained the advisor to advise with respect to a tender offer and the analysis is discussed in the issuer's Schedule 14D-9, then that is sufficient to bring the advisor’s engagement within the scope of the disclosure requirement.

In addition, consistent with past Staff comments on the topic, the C&DIs remind issuers that boilerplate disclosures on compensatory arrangements are inappropriate.  Specifically, the Staff objects to generic disclosures indicating that an advisor will receive “customary compensation.”  Instead, the Staff observed that while the disclosure of such arrangements will depend on the facts and circumstances, it should be sufficiently detailed to allow a security holder to make an ...Read More

First-Come, First-Served: Enrollment Opens for Glass Lewis 2017 Issuer Data Report Program

On November 17, Glass Lewis announced that it has opened enrollment for its 2017 Issuer Data Report (IDR) program.  The IDR program enables public companies to access (for free!) a data-only version of the Glass Lewis Proxy Paper report prior to Glass Lewis completing its analysis and recommendations relating to public company annual shareholders meetings.  Glass Lewis does not provide drafts of its voting recommendations report to issuers it reviews, so the IDR is the only way for issuers to confirm the accuracy of the data before Glass Lewis’ voting recommendations are distributed to its clients.  Moreover, unlike Institutional Shareholder Services (ISS), Glass Lewis does not provide each issuer with complimentary access to the final voting recommendations for its annual shareholders meeting.

IDRs feature key data points used in Glass Lewis’ corporate governance analysis, such as information on directors, auditors and their fees, summary compensation data and equity plans, among others.  The IDR is not a preview of the final Glass Lewis analysis as no voting recommendations are included.

Each participating public company receives its IDR approximately three weeks prior to its annual shareholders meeting and generally has 48 hours to review the IDR for accuracy and provide corrections, including supporting public documents, to Glass Lewis. 

Participation is limited to a specified number of companies, and enrollment is on a first-come, first-served basis.  Enrollment closes on January 6, 2017, or as soon as the annual limit is reached. 

To learn more about the IDR program and sign up to receive a copy of the 2017 IDR for your company, go to https://www.meetyl.com/issuer_data_report.


Shareholder Nominates First Proxy Access Nominee
In what appears to be the first use of a company’s proxy access bylaw, GAMCO Asset Management filed today a Schedule 13D/A (available here ) and a Schedule 14N (available here ) announcing that it has used the proxy access bylaw at National Fuel Gas (NFG) to nominate a director candidate for election at NFG’s 2017 Annual Meeting.  According to the 13D/A, GAMCO and its affiliates beneficially own in the aggregate approximately 7.81% of NFG’s Common Stock and yesterday delivered a letter to NFG nominating Lance A. Bakrow to the Board of Directors.  NFG described itself in its most recent Form 10-K as “a diversified energy company engaged principally in the production, gathering, transportation, distribution and marketing of natural gas.”  According to the Schedule 13D/A, Mr. Bakrow is the “co-founder and a director of Greenwich Energy Solutions, a private company that provides independent energy solutions in the northeastern United States.”


NFG’s Proxy Access Bylaw

NFG amended its Bylaws to adopt proxy access in March 2016.  The Bylaws provide that a shareholder, or a group of up to 20 shareholders, owning 3% or more of the Company’s outstanding Common Stock continuously for at least three years may nominate and include in the company’s proxy materials directors constituting up to 20% of the board, provided that the shareholders(s) and the nominee(s) satisfy the bylaw requirements.   NFG’s proxy access bylaw is available here

GAMCO’s Activism at NFG

Based on past Schedule 13Ds, GAMCO and its affiliates have beneficially owned in the aggregate at least 5% of NFG’s outstanding shares since 2010 and have been advocating for several years that NFG consider a spin-off of certain of its operations.  This included GAMCO submitting for consideration at NFG’s 2015 Annual Meeting a Rule 14a-8 shareholder proposal asking that “the Board of Directors and management, act expeditiously consistent with effective tax considerations, to engage an investment banking firm to effectuate a spin-off of the Company’s utility segment, which represents the operations of National Fuel Gas Distribution Corporation, into a separate publicly traded C-corporation.”  That shareho...Read More
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