Category: Securities
Delaware Supreme court upholds facial validity of exclusive federal forum provisions
Yesterday, in Salzberg v. Sciabacucchi (pronounced Shabacookie!), the Delaware Supreme Court unanimously held that charter provisions designating the federal courts as the exclusive forum for ’33 Act claims are “facially valid,” thereby reversing the decision of the Chancery Court, which had invalidated the provisions in the charters of three Delaware companies. The Chancery Court had previously invalidated the exclusive federal forum provisions (FFPs) at issue in the case because, among other reasons, Delaware’s enabling statute (Section 102(b)(1))—which provides general authority for non-mandatory charter provisions—was, in the lower court’s view, inherently limited to “internal affairs” and FFPs were “external” matters. On de novo review, the Delaware Supreme Court rejected this analysis. It characterized FFPs as intra-corporate matters, located in a new territory—the “outer band” between internal and external matters—which fell within the statutory scope of Section 102(b)(1) and are, therefore, valid on their face. Given the substantial benefits of an FFP in the event of ’33 Act litigation (which includes Section 11 claims), companies that do not have an FFP in their charters or bylaws, whether as a result of uncertainty about the validity of FFPs or otherwise—may want to revisit the issue.
Senators urge SEC to institute moratorium on non-COVID-19-related rulemaking
The SEC has announced that, in light of the challenges associated with COVID-19 and particularly the difficulty associated with submission of comment letters, it will not take formal action before April 24 on a number of different proposed rulemakings with comment periods otherwise set to expire in March. Of course, the SEC has historically been open to consider comments submitted after the deadline but before adoption. The purpose of this extension was to expressly allow commenters additional time to comment if needed. Apparently, however, the SEC’s action was not enough for two Senators on the Senate Banking Committee, ranking member Sherrod Brown and Chris Van Hollen.
SEC adopts carve-out from the auditor attestation requirement of SOX 404(b) for low-revenue companies
On March 12, the SEC voted (by a vote of three to one, with Commissioner Allison Lee dissenting) to approve amendments to the accelerated filer and large accelerated filer definitions to provide a narrow carve-out for companies that qualify as smaller reporting companies (SRCs) and reported less than $100 million in annual revenues in the most recent fiscal year for which audited financial statements were available. Most significantly, under the final amendments, companies qualifying for the carve-out will no longer be subject to the SOX 404(b) requirement to have an auditor attestation report on internal control over financial reporting (ICFR), a requirement that applies to accelerated and large accelerated filers. In adopting these amendments, the SEC said that the amendments will “more appropriately tailor the types of issuers that are included in the definitions, thereby reducing unnecessary burdens and compliance costs for certain smaller issuers while maintaining investor protections. The amendments are consistent with the Commission’s and Congress’s historical practice of providing scaled disclosure and other accommodations to reduce unnecessary burdens for new and smaller issuers.” The new rules will become effective 30 days after publication in the Federal Register.
Guidance provides regulatory flexibility regarding annual meetings
Today, in light of the spread of COVID-19, the SEC announced new Corp Fin staff guidance regarding annual meetings. Because of limitations on the ability to hold in-person annual meetings as a result of health and travel concerns, the staff guidance “provides regulatory flexibility to companies seeking to change the date and location of the meetings and use new technologies, such as ‘virtual’ shareholder meetings that avoid the need for in-person shareholder attendance, while at the same time ensuring that shareholders and other market participants are informed of any changes.”
SEC adopts changes to accelerated filer definition
Yesterday, the SEC cancelled an open meeting that had been scheduled to consider the proposal to create an exemption from the SOX 404(b) auditor attestation requirement for low-revenue smaller reporting companies. (See this PubCo post.) True to form, the SEC nonetheless went ahead and adopted the rule amendments largely as proposed, with Commissioner Allison Lee dissenting. (BTW, all so predictable, I wrote that sentence two days ago.) The final rules were adopted today, and the rules and related press release have now been posted. The amendments revise the accelerated filer and large accelerated filer definitions by providing a narrow carve-out for companies that qualify as smaller reporting companies (SRCs) and reported less than $100 million in annual revenues in the most recent fiscal year for which audited financial statements were available. The final rule will become effective 30 days after publication in the Federal Register. Watch this space for an updated post with more details of the final rules and Commissioner statements.
Corp Fin operating status
Corp Fin has issued an announcement regarding Corp Fin’s operating status, in light of the impact of the coronavirus. Not to worry—Corp Fin is still open and operating, but many Corp Fin staff members are “teleworking.” (Apparently, according to the WSJ, an employee at the SEC was “referred for novel coronavirus testing.”) Nonetheless, Corp Fin continues “to conduct normal business functions,” including reviewing filings and accelerating registration statements under normal time frames—at least that’s the plan.
SEC posts proposal to harmonize private securities offering exemptions
As seems to be common practice these days, the SEC cancelled its open meeting scheduled for this morning and instead went ahead and posted its proposal to amend the rules to harmonize and simplify the framework for private securities offering exemptions. Here is the 341-page proposing release and the related press release. The proposal draws on input received in response to the SEC’s concept release issued in June of last year (see this PubCo post), which sought public comment on ways to promote capital formation, to harmonize and streamline the patchwork universe of private placement exemptions and “to expand investment opportunities while maintaining appropriate investor protections.” Currently, the framework has 10 different exemptions or safe harbors, with different sets of requirements. As SEC Chair Jay Clayton said in a 2018 speech, the current framework would not likely exist as it is if the SEC were starting with blank slate. The comment period will be open for 60 days.
SEC provides conditional relief related to coronavirus (COVID-19)
Last week, SEC officials suggested that the SEC might provide relief to address the impact of the coronavirus (see this PubCo post), and today, the SEC came through, issuing an order providing “conditional regulatory relief for certain publicly traded company filing obligations.” As SEC Chair Jay Clayton observed, the “health and safety of all participants in our markets is of paramount importance. While timely public filing of Exchange Act reports is a cornerstone of well-functioning markets, we recognize that this situation may prevent certain issuers from compiling these reports within required timeframes.” According to the order, a number of companies have advised the staff that the coronavirus “may present challenges in timely meeting certain of their obligations under the federal securities laws. These entities may include U.S. companies with significant operations in the affected areas, as well as companies located in those regions.” The SEC encourages companies to contact SEC staff with questions or matters of particular concern, such as administrative issues related to inability to obtain a required signature due to a quarantine or other issues that may need to be addressed on a case-by-case basis.
SEC streamlines financial disclosure requirements applicable to registered debt offerings
On Monday, without an open meeting, the SEC voted, with a dissent from Commissioner Allison Lee, to adopt final amendments to Rules 3-10 and 3-16 of Reg S-X. Part of the SEC’s Disclosure Effectiveness Initiative, the amendments are designed to streamline and modernize the financial disclosure requirements applicable to registered debt offerings that involve guaranteed or collateralized securities, such as subsidiary guarantees. According to the press release, the “changes are intended to both improve the quality of disclosure and increase the likelihood that issuers will conduct debt offerings on a registered basis. The amended rules focus on the provision of material, relevant, and decision-useful information regarding guarantees and other credit enhancements, and eliminate prescriptive requirements that have imposed unnecessary burdens and incentivized issuers of securities with guarantees and other credit enhancements to offer and sell those securities on an unregistered basis.” According to the SEC, by improving disclosure and reducing the compliance burden, the final amendments may encourage issuers “to offer guaranteed or collateralized securities on a registered basis, thereby affording investors protection they may not be provided in offerings conducted on an unregistered basis.” The rules will apply to several categories of issuers, including foreign private issuers, smaller reporting companies and issuers offering securities pursuant to Reg A. The changes were originally proposed in July 2018. (See this PubCo post.) The amendments will become effective on January, 4, 2021, but voluntary compliance will be permitted in advance of the effective date.
How do the largest fund families vote on shareholder proposals related to ESG?
In 2019, investor support for shareholder proposals related to environmental, social and governance matters reached a record average high of 29%, according to Morningstar. And that doesn’t take into account the number of climate-related proposals that were withdrawn after successful negotiation—a number that exceeded the number of climate proposals that actually went to a vote. In this report, Morningstar analyzes the level of proxy voting support by 52 of the largest fund families for ESG-related shareholder proposals in 2019 and over the five years from 2015 to 2019. Although Morningstar finds substantial increases in average support over the last five years, five of the largest fund families, including BlackRock, voted against over 88% of ESG-related proposals, enough to prevent many of these proposals from achieving majority support. But, in 2020, with BlackRock having joined Climate Action 100+— reportedly “the world’s largest group of investors by assets pressuring companies to act on climate change”—and having announced that it was putting “sustainability at the center of [BlackRock’s] investment approach,” the question is whether that voting strategy is about to change?
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