Dates to Remember:
October 10, 2011
Columbus Day - SEC closed.
November 9, 2011
Deadline for Large Accelerated Filers and Accelerated Filers to file Form 10-Q for quarter ended September 30, 2011.
November 11, 2011
Veterans Day - SEC closed.
November 14, 2011
Deadline for Non-Accelerated Filers and Smaller Reporting Companies to file Form 10-Q for quarter ended September 30, 2011; Deadline to file Form 13-F for quarter ended September 30, 2011.
November 24, 2011
Thanksgiving Day - SEC and U.S. markets closed.
December 26, 2011
Christmas Day (Observed) - SEC closed.
Quote of the Day:
"We are disappointed by today's decision striking down a rule that made it easier for shareholders to nominate a candidate to a company's board of directors. We are considering our options going forward. We note that our rule allowing shareholders to submit proposals for proxy access at their companies, which we adopted at the same time, is unaffected by the court's decision."
– Meredith Cross, Director, Division of Corporation Finance, U.S. Securities and Exchange Commission, July 22, 2011, in response to the decision of the U.S. Court of Appeals striking down the SEC's proxy access rule.
Public Company Perspectives
The SEC was stopped in its tracks in July when a three-person panel of the U.S. Court of Appeals for the District of Columbia vacated the SEC's controversial "proxy access" rule. This is the fourth time in eight years that the SEC has failed to implement some form of proxy access, and it is unlikely that the SEC will attempt a fifth try in the near term, with many rule making mandates still open pursuant to the Dodd-Frank Act. As described in our featured article below, however, this was not a total failure for proponents of proxy access, as the SEC lifted a stay on the implementation of amendments to Rule 14a-8, the so-called "private ordering" amendments, which allow shareholders to propose amendments to charter documents to allow for proxy access. The private offering amendments may effectively achieve the same result as the proxy access rule, but on a company-by-company basis. If these amendments are popular and successfully implemented in the 2012 proxy season, shareholder rights advocates may find private ordering to be an adequate substitute and not miss proxy access.
- According to the Division of Corporation Finance of the SEC, Well-Known Seasoned Issuers (generally, issuers with market capitalizations of $700 million or more) that lose their status as such due to violations of federal anti-fraud rules, may be granted waivers if a review of all the facts and circumstances leads to the conclusion that a waiver would be consistent with the public interest and the protection of investors. The Division stated that it will consider waivers based on, among other factors, whether the violation stems from the issuer's own disclosures about itself and whether the violation is scienter-based.
- On July 7, 2011, the SEC sponsored the Roundtable on International Financial Reporting Standards, which featured 3 panels representing investors, smaller reporting companies and regulators. The panel discussions focused on investors' understanding of IFRS, the impact of IFRS on smaller public companies and the benefits and challenges of incorporating IFRS into U.S. public company accounting. It is expected that discussions will proceed into 2012.
- On July 11, 2011, President Obama issued an Executive Order on Regulation and Independent Regulatory Agencies, to improve regulations and regulatory review and to produce a regulatory system that protects public health, welfare, safety and the environment while promoting economic growth, innovation, competiveness and job creation. As part of that goal, the Order states that independent regulatory agencies such as the SEC should consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient or excessively burdensome, and to modify, streamline, expand or repeal them in accordance with has been learned. The Order also states that within 120 days of the date of such Order, each independent regulatory agency should develop and release to the public a plan under which the agency will periodically review its existing significant regulations to determine whether any such regulations should be modified, streamlined, expanded or repealed so as to make the agency's regulatory programs more effective or less burdensome in achieving their regulatory objectives. As a result of this Order, on September 6, 2011, the SEC announced that it will seek public comment on the process it should use to conduct retrospective reviews of its existing regulations, such as how often rules should be reviewed, the factors that should be considered and ways to improve public participation in the rulemaking process. Public comments to the SEC should be received by October 6, 2011.
- The SEC announced that the Sino-U.S. Symposium on Audit Oversight was held in Beijing on July 11, 2011 and July 12, 2011. In attendance were officials from the SEC, the PCAOB, the China Securities Regulatory Commission and the Chinese Ministry of Finance. The Symposium was characterized in an SEC press release as "an important step toward Sino-U.S. cooperation on audit oversight of public companies." Nothing concrete was agreed upon at the Symposium that would address the ongoing issues related to cross-border audit oversight, but rather served as an additional step toward deeper cooperation between the U.S. and China. This meeting is one of many similar discussions since 2007 regarding a bi-lateral agreement that would enable the PCAOB to conduct inspections of auditing firms in China.
- On July 12, 2011, four House Republicans introduced the Whistleblower Improvement Act of 2011, which would require employees to first report possible violations of the securities laws to their employers before being eligible to participate in the SEC's recently-enacted Whistleblower Program. As noted in volume 2 of Herrick, Feinstein's Public Company Perspectives, the ability of employees to bypass a company's internal policies and compliance programs is one of the most controversial aspects of the Whistleblower Program. Stay tuned for a future edition of Public Company Perspectives for updates on this bill.
- On July 22, 2011, the SEC and the Capital Markets Board of Turkey announced a relationship to enhance cooperation and collaboration with the aim of promoting investor protection, fostering market integrity and facilitating cross-border security activities between Turkey and the U.S. The three main objectives of the dialogue between the agencies are to (i) identify and discuss regulatory issues of common concern, (ii) improve cooperation and the exchange of information in securities enforcement matters and (iii) maintain and continue to develop the existing training and technical assistance programs that benefit the agencies and other regional regulators.
- On July 26, 2011, the SEC adopted new rules removing credit ratings as eligibility criteria for issuers seeking to use short form registration statements on Form S-3 and Form F-3. The new rules allow the use of such short forms if the issuer satisfies one of the following four tests:
- The issuer has issued, as of a date within 60 days prior to the filing of the registration statement, at least $1 billion in non-convertible securities other than common equity, in private offerings for cash, not exchange, registered under the Securities Act over the prior three years.
- The issuer has outstanding, as of a date within 60 days prior to the filing of the registration statement, at least $750 million of non-convertible securities other than common equity, issued in primary offerings for cash, not exchanged, registered under the Securities Act
- The issuer is a wholly own-subsidiary of a Well-Known Seasoned Issuer.
- The issuer is a majority-owned operating partnership of a real estate investment trust that qualifies as a Well-Known Seasoned Issuer.
The final rules also include a temporary grandfather provision that allows an issuer to use the short forms for a period of three years from the effective date of the amendments if it would have been eligible to register the securities offerings under the old provision.
On August 1, 2011, the Business Transparency on Trafficking & Slavery Act, was introduced in the House of Representatives, to require companies to include in their annual reports to the SEC a disclosure describing any measures that the company has taken during the year to identify and address conditions of forced labor, slavery, human trafficking and child labor within the company's supply chains. We will update our readers in a subsequent Public Company Perspectives on the future of this bill.
On August 3, 2011, the Committee on Disclosure of Corporate Political Spending, composed of ten academics whose teaching and research focus on corporate and securities laws, sent a letter to the SEC, asking the SEC to develop rules that would require public company disclosure of corporate political spending, in part due to increasing investor interest in this topic and the importance of such disclosure to investor monitoring and corporate accountability mechanisms. Similarly, on July 13, 2011, legislation entitled the Shareholder Protection Act was introduced to, among other things, require (i) shareholder authorization before a public company may make certain political expenditures and (ii) public company disclosure of expenditures for political activities exceeding $10,000 in each annual report.
On August 12, 2011, the SEC launched its new Office of the Whistleblower website, which allows persons to report violations of federal securities laws pursuant to the new Whistleblower Program recently implemented by the SEC. The webpage is at www.sec.gov/whistleblower
The PCAOB issued a concept release on August 16, 2011 to solicit public comment on ways that auditor independence, objectivity and professional skepticism could be enhanced, including, in particular, the advantages and disadvantages of mandatory audit firm rotation. Comments should be received by the PCAOB no later than 5:00pm EST on December 14, 2011.
The NYSE and NYSE AMEX proposed new listing requirements for reverse merger companies. For a discussion, please see Herrick, Feinstein's Corporate Alert of September 2011 by clicking here
On September 13, 2011, the SEC announced the formation of an Advisory Committee on Small and Emerging Companies to focus on interests and priorities of small businesses and smaller public companies. According to the release, the Committee is intended to provide a formal mechanism through which the SEC can receive advice and recommendations specifically related to privately held small businesses and publicly traded companies with less than $250 million in public market capitalization. The Advisory Committee would advise and consult with the SEC on such issues as capital raising, trading in securities and public reporting requirements of small and emerging and small publicly traded companies.
U.S. Court of Appeals Vacates Proxy Access Rule
On July 22, 2011, a three person panel of the Court of Appeals for the District of Columbia vacated the SEC recently enacted proxy access rule (Rule 14a-11), which required public companies to include in its proxy materials persons nominated by qualifying shareholders for election to the Board of Directors. The Business Roundtable and the U.S. Chambers of Commerce petitioned for review of the proxy access rule, arguing that the SEC promulgated the rule in violation of the Administrative Procedure Act because, among other things, the SEC failed to adequately consider the rule's effect upon efficiency, competition and capital formation, as required by the Securities Exchange Act of 1934 and the Investment Company Act of 1940. The panel agreed, finding that the SEC did not adequately assess the rule's economic impact.
Although some proponents of proxy access asked the SEC to request the full U.S. Court of Appeals for a rehearing, the SEC determined not to do so or to appeal the ruling to the U.S. Supreme Court. The SEC is continuing to review the decision as well as the comments the SEC previously received from interested parties, to find a way to make it easier for shareholders to nominate candidates to corporate boards. Accordingly, proxy access may not be dead, but just delayed further. It is worth noting that, according to a letter by SEC Chairman Mary Schapiro on August 5, 2011, the SEC spent approximately $2.2 million in labor costs over 2 years to write the proxy access rule, and approximately $315,000 to defend it in court. This translates to approximately 21,000 staff hours on rulemaking and 2,700 staff hours on litigation. These figures should be considered basic estimates since the SEC does not track or record times spent by staff on specific projects. This information was in response to an earlier letter by Representative Scott Garrett and other members of the House of Representatives, charging that the proxy access rule was a serious mismanagement of the SEC's priorities.
Even though the proxy access rule was vacated, the "private ordering" amendments to Rule 14a-8, adopted at the same time as the proxy access rule but stayed pending the court case, are now in effect. Shareholders may now require companies to include shareholder proposals relating to proxy access procedures in the company's proxy materials. The stay was lifted over the objections of the American Bar Association's Federal Securities Regulation Committee, who requested the SEC to more fully consider how the decision to vacate proxy access now affects private ordering.
Pursuant to private ordering, a company may no longer exclude an otherwise proper proposal that would amend or require its Board of Directors to consider amending the company's charter or by-laws to facilitate director nominations by shareholders or disclosures related to nominations made by shareholders.The SEC also codified some of the Staff's historical interpretations of Rule 14a-8, which permitted exclusion of certain shareholder proposals. As a result of private ordering, shareholders will still have the opportunity to establish proxy access standards notwithstanding the proxy access rules being vacated, although such procedures will be done on a company-by-company basis.
In fact, in some respects private ordering may be more beneficial for shareholder rights advocates, as under the rule, investors will not need to meet any special ownership requirements other than the minimum $2,000 stake held for at least one year, which is the current requirement to file a shareholder proposal on other topics. Under the vacated proxy access rule, shareholders would have had to hold a minimum of 3% of a company's shares for three years, a much higher standard that many shareholder rights advocates felt was too high to meaningfully affect universal proxy access. Accordingly, shareholders utilizing the private ordering may propose standards that are substantially less restrictive than those provided in the proxy access rule and, if there is success in doing so, the proxy access rule may not be missed that much. On the flip side, as with any shareholder proposal, companies will still be permitted to submit a request for no-action to exclude the proposal if the other requirements for including the shareholder proposal are not met.
Furthermore, unlike the proxy access rule, which had a phase-in period for smaller companies, private ordering would take effect for all issuers, including smaller reporting companies, at the same time, although it is likely that shareholder rights advocates would initially only target larger reporting companies.
SEC's Division of Corporation Finance Issues New Compliance and Disclosure Interpretations
The Division of Corporation Finance issued seven new Compliance and Disclosure Interpretations, or CDIs. CDIs are interpretations that reflect the views of the staff of the Division, and are not rules, regulations or statements of the SEC, and are not binding on the SEC due to their highly informal nature. Nevertheless, they provide an invaluable resource to practitioners with respect to interpretive guidance on many areas of securities law. The new CDIs are as follows:
An issuer that files a Form 12b-25, but does not expect to be able to meet the 15 day extension period, should not check the box on the form indicating that it will do so. If the issuer is later able to file within the 15 day period, the periodic report will be considered timely, even though the box was not checked. (Question 107.02)
Companies are not required to disclose the number of broker non-votes with respect to the frequency of shareholder advisory votes on executive compensation. (Question 121A.03)
An issuer may timely report the frequency of a shareholder advisory vote on executive compensation in a periodic report filed on or prior to the date a Form 8-K disclosing that information is due. (Question 121A.04)
Information omitted from a proxy statement regarding directors whose term will not continue after the annual shareholders' meeting is not required to be included in the Annual Report on Form 10-K that incorporates its Part III information by reference from the proxy statement. If the issuer does not incorporate by reference from the proxy statement, then the information must be included in the Form 10-K. This CDI superseded and replaced a CDI issued on March 4, 2011 to the opposite effect, after opposition from issuers and legal practitioners. (Question 116.10)
Issuers may omit information in their executive compensation disclosures regarding disability plans that are generally available to all employees and do not discriminate in scope, terms or operation in favor of executive officers or directors. (Question 117.07)
Non-GAAP financial information that does not relate to disclosure of target levels presented in an issuer's Compensation Disclosure and Analysis section or in any other part of the proxy statement is subject to the requirements of Regulation G and Item 10(e) of Regulation S-K. (Questions 108.01 and 108.08)
In connection with Item 402 of Regulation S-K, the grant date fair value for stock and option awards subject to performance conditions must be reported based on the probable outcome of the performance conditions on the grant date, even if the actual outcome of the performance conditions is known by the time of the filing of the proxy statement. (Question 119.28)
For more information on these issues, please contact Stephen Fox at 212.592.5924 or email@example.com or Irwin Kishner at 212.592.1435 or firstname.lastname@example.org.
Copyright © 2011 Herrick, Feinstein LLP. Public Company Perspectives is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.