At the end of last week, SEC Chair Jay Clayton addressed the Financial Stability Oversight Council, focusing on three areas: market function, market monitoring and corporate and other issuer disclosure. Early in his remarks, Clayton praised the efforts of FSOC “to preserve the flows of credit and capital in our economy[, which] have substantially mitigated the economic consequences of COVID-19.” He noted in particular that “the rapid fiscal, monetary and financial regulatory response to market and economic effects of COVID-19 has been both remarkable and appropriate.” However, it was the data he provided on market functioning and volatility that was most revealing.
The SEC has declared immediately effective (yet another) proposed change to the rules of an exchange—this one from the NYSE. The NYSE has adopted new Section 312.03T of the NYSE Listed Company Manual, which will provide a temporary exception, through June 30, 2020, from the application of the shareholder approval requirements for specified issuances of 20% or more of the outstanding shares (Section 312.03) and, in certain narrow circumstances, by a limited exception for issuances to related parties or other capital-raising issuances that could be considered equity compensation (Sections 312.03 and 303A.08). Although not entirely congruent, the exception appears to be modeled closely on the comparable Nasdaq exception that was approved just over a week ago. (See this PubCo post.) In light of the unprecedented disruption in the economy as a result of COVID-19, many listed companies “are experiencing urgent liquidity needs during this period of crisis due to lost revenues and maturing debt obligations.” The temporary exception is designed to respond to this unprecedented emergency and to help companies access necessary capital quickly.
In April, the SEC approved a Nasdaq rule change to expedite delisting (1) for securities with a closing bid price at or below $0.10 for ten consecutive trading days during any bid price compliance period and (2) for securities that have had one or more reverse stock splits with a cumulative ratio of one for 250 or more shares over the prior two-year period. (See this PubCo post.) The rule change modified the Nasdaq listing rules to shorten compliance periods and permit earlier delisting and enhanced review procedures for securities in these two categories. As approved, the rule change would have been applicable for companies that first received notification of non-compliance after the date of the approval order, April 21. But, in the midst of a pandemic, was that rule change really the way to go? Apparently, Nasdaq has had some regrets. Now, the SEC has declared immediately effective another proposed rule change to delay the implementation date to September 1, 2020.
In his keynote address to Securities Enforcement Forum West 2020, SEC Enforcement Co-Director Steven Peikin discussed some of the efforts of the Division of Enforcement to detect misconduct arising out of the COVID-19 pandemic and related market disruption, including the formation of a steering committee to proactively identify and monitor areas of potential misconduct. Of particular interest here are the focus on insider trading and financial and disclosure-related fraud.
Are the allegations in Hughes v. Hu an example of the SEC/PCAOB’s recent cautionary Statement on emerging market risks come to life? (See this PubCo post.) The case involves a Caremark claim against the audit committee and various executives of Kandi Technologies, a publicly traded Delaware company listed on the Nasdaq Global Select Market and based in an emerging market country. The complaint alleged that they consciously failed “to establish a board-level system of oversight for the Company’s financial statements and related-party transactions, choosing instead to rely blindly on management while devoting patently inadequate time to the necessary tasks.” You might recall that, in Marchand v. Barnhill (June 18, 2019), then-Chief Justice Strine, writing for the Delaware Supreme Court, started out his analysis with the recognition that “Caremark claims are difficult to plead and ultimately to prove out,” and constitute “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” (See this PubCo post.) Although Caremark presented a high hurdle, the complaint in Marchand was able to clear that bar and survive a motion to dismiss. In the view of the Delaware Chancery Court, Hughes proved to be comparable—the Court denied two motions to dismiss, holding that the allegations in the complaint were sufficient to support “a reasonable pleading-stage inference of a bad faith failure of oversight by the named director defendants.” Is clearing the Caremark bar becoming a thing?
On April 6, the Governor of Delaware signed an emergency order applicable to public reporting companies addressing the urgent need of many companies, in light of COVID-19, to change their annual meetings from physical locations to virtual-only formats, including at different dates. The order allowed companies to provide notice of the change by issuing and filing with the SEC a press release instead of complying with the Delaware requirement to send a formal written notice to stockholders or convening the meeting to adjourn, which could be extremely difficult under the current circumstances. (See this PubCo post.) However, the order provided relief only to companies that had already sent out, as of the date of the order, notice of a meeting of stockholders that indicated a physical location. What about companies that sent out their notices after April 6, but still needed to make a change? The relief under the Delaware order was apparently not available to them. Now, the Corporate Law Section of the Delaware State Bar has approved a proposal to amend the DGCL to address this issue. Will the Delaware legislature provide the necessary relief? And if so, when? [Update: this bill was signed into law on July 16.]
When I first saw this temporary relief from the NYSE, I dismissed it as relief designed to help an overwhelmed Broadridge. The relief temporarily allowed discretionary voting on routine matters even if the proxy materials were transmitted to beneficial owners only 10 days in advance of shareholders’ meetings instead of the required 15 days. I had no idea there might be a tragedy underlying it.
The SEC has declared immediately effective new Nasdaq Rule 5636T, which will provide a temporary exception, through June 30, 2020, from the shareholder approval requirements for certain issuances of 20% or more of the outstanding shares (Rule 5635(d)) and for a narrow subset of capital-raising issuances that could be considered equity compensation (Rule 5635(c)). Given that stay-at-home orders in effect in many communities have wreaked havoc on the revenue streams of many businesses, companies may have urgent needs to raise capital. Nasdaq believes that this temporary exception “will permit companies to raise capital quickly to continue running their businesses and address the immediate health crisis caused by the COVID-19 pandemic, including its impact on their employees, customers, and communities.”
Corp Fin has posted four new COVID-19-related FAQs, most of which concern the interaction of Form S-3 and the SEC’s COVID-19 Order. As you know, in the COVID-19 Order, the SEC provided public companies that are unable to file timely “due to circumstances related to COVID-19” with conditional 45-day extensions to file or furnish specified SEC various reports, schedules and forms that would otherwise have been due between March 1 and July 1, 2020, provided they comply with certain requirements (see this PubCo post). If a company does not file a required report on the original due date in reliance on the COVID-19 Order, what does that mean for its use of Form S-3?
At a meeting today of the SEC’s Investor Advisory Committee, the committee discussed disclosure considerations arising in the context of COVID-19. In addition to relentlessly complimenting the SEC for its efforts during the pandemic, the committee members offered a number of valuable insights, particularly related to human capital disclosure (which one committee member characterized as “as important a mission as the SEC has ever faced”) and other stakeholder disclosures, as well as accounting, controls and liability issues. Many of the committee also seemed to be pleased with nature of the disclosure that companies were providing, even offering in-quarter information in some cases. There was also a brief discussion of virtual shareholder meetings.