Legislative Actions
Inflation Reduction Act: New Excise Tax Discourages Stock Repurchase Transactions
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022, HR 5376 (the “Act”), into law. Among other significant changes, the Act includes a new 1% excise tax on stock repurchase transactions by certain publicly traded corporations (the “Excise Tax”). The Excise Tax is substantially identical to the excise tax included in numerous versions of the previously proposed Build Back Better Act and is intended to discourage certain publicly traded corporations from engaging in stock repurchase transactions. Under the Excise Tax, subject to certain exceptions discussed below, a “covered corporation” is subject to a 1% excise tax on the fair market value of certain stock “repurchased” during the covered corporation’s taxable year, irrespective of whether any such repurchase is part of an open-market stock buyback program. In computing the Excise Tax, the fair market value of stock repurchased is reduced by the fair market value of any stock issued by the covered corporation during the taxable year, including any stock issued or provided to an employee of such corporation (including upon exercise of an employee stock option), or to an employee of a “specified affiliate” (as defined below) of such corporation. The Excise Tax applies at a fixed rate without regard to whether such covered corporation has taxable income or loss during the taxable year. For these purposes, a “repurchase” includes a redemption of stock within the meaning of Code Section 317(b), as well as any transaction determined by the Secretary to be economically similar to a redemption of stock within the meaning of Code Section 317(b). Code Section 317(b) provides that stock shall be treated as redeemed by a corporation if the corporation acquires its stock from a shareholder in exchange for property, whether or not the stock so acquired is cancelled, retired or held as treasury stock. Accordingly, redemptions subject to the Excise Tax may include an acquisition by a covered corporation: (i) of its own stock for cash, regardless of whether such purchase is made on the open market or in a private transaction, (ii) to effectuate a “bootstrap acquisition” or a leveraged buyout, and (iii) of fractional shares for cash in an acquisition. Subject to further guidance from the IRS and U.S. Treasury Department, because the Excise Tax only applies to a repurchase of “stock”, the repurchase of an unexercised option or warrant not otherwise treated as a stock for U.S. federal income tax purposes is not anticipated to be subject to the Excise Tax. Further guidance from the Secretary will be necessary to determine the precise scope of the Excise Tax. The Act provides that the Excise Tax will not apply to a stock repurchase transaction: to the extent that the repurchase is part of a reorganization (within the meaning of Code Section 368(a)) and no gain or loss is recognized on such repurchase by the shareholder by reason of such reorganization; in any case in which the stock repurchased, or an amount of stock equal to the value of stock repurchased is, contributed to an employer-sponsored retirement plan, employee stock ownership plan, or similar plan; in any case in which the total value of the stock repurchased during the taxable year does not exceed U.S.$1,000,000; under regulations prescribed by the Secretary, in cases in which the repurchase is by a dealer in securities in the ordinary course of business; to repurchases by registered investment companies or real estate investment trusts; or to the extent that the repurchase is treated as a dividend for tax purposes. For these purposes, a “covered corporation,” includes any U.S. corporation whose stock is traded on an established securities market (e.g., NASDAQ, NYSE, TSX, LSE, etc.) irrespective of the market capitalization of such corporation. A “covered corporation” also includes any non-U.S. corporation treated as a U.S. corporation for U.S. federal income tax purposes pursuant to the anti-invstoersion rules under Code Section 7874(b) as well as any non-U.S. corporation that is deemed a “surrogate foreign corporation” pursuant to the inversion rules under Code Section 7874(a)(2)(B) on or after September 20, 2021 (and, only for the applicable ten-year period thereafter as contemplated by Code Section 7874(d)(1)) whose stock is traded on an established securities market (e.g., NASDAQ, NYSE, TSX, LSE, etc.) irrespective of the market capitalization of such corporation. The Excise Tax also applies to a covered corporation if its stock is repurchased by a “specified affiliate”, which includes any corporation or partnership which is more than 50 percent owned, directly or indirectly, by the covered corporation. In addition, U.S. corporations and partnerships (which, for these purposes, includes a non-U.S. partnership with a direct or indirect U.S. entity as a partner) that are “specified affiliates” of a non-U.S. parent corporation corporations will also be subject to the Excise Tax upon the repurchase of stock of its non-U.S. parent corporation if: (i) the non-U.S. parent corporation has stock traded on an established securities market, and (ii) such U.S. domestic corporation or partnership is a “specified affiliate” of the non-U.S. parent corporation. Further, the reductions to the Excise Tax with respect to stock issuances during the taxable year, as described above, are limited to those made by such specified affiliate to its employees. The new Excise Tax applies to repurchases effected after December 31, 2022. No grandfathering rule currently applies to stock repurchase transactions already authorized or approved.
August 22, 2022
by Kendall R. Fisher, Ian E. Brown, and John D. Hollinrake, Jr
Legislative Actions
Washington State to Require Gender Diversity on Public Company Boards or Board Diversity Disclosure
Effective as of June 11, 2020, the Washington State legislature has amended the Washington Business Corporation Act (“WBCA”) to require public companies to either have a gender-diverse board of directors by January 1, 2022 or comply with new board diversity disclosure requirements. A public company will be deemed to have a gender-diverse board of directors if, for at least 270 days of the fiscal year preceding the applicable annual meeting, individuals who self-identify as women comprised at least 25% of the directors serving on the board. If a Washington public company does not have a gender-diverse board of directors beginning January 1, 2022, the company must deliver to its shareholders a board diversity discussion and analysis no fewer than 10 nor more than 60 days before its annual meeting. The board diversity discussion and analysis must either be included in the company’s definitive proxy statement filed with the SEC or posted on the company’s website or another electronic network. The board diversity discussion and analysis must include information regarding the company’s approach to developing and maintaining diversity on its board of directors, including, among other things a discussion of: how the board, or an appropriate committee, considered the representation of any diverse groups in identifying and nominating candidates for election as directors in connection with the last annual meeting of shareholders, and if it did not, why not; any policy adopted by the board, or an appropriate committee, relating to identifying and nominating members of any diverse groups for election as directors, and if it does not have such a policy, the reasons why it does not; and the mechanisms used to refresh the board, such as term limits and mandatory retirement age policies for its directors, and if the company does not use any such mechanisms, the reasons why it does not. While these disclosure requirements go beyond the SEC’s current proxy statement requirements relating to board diversity, some companies are already including this type of information in their proxy statements. As noted above, in order to meet the 25% threshold of board members that self-identify as women by January 1, 2022, a Washington public company must have the requisite number of self-identified women directors on the board for at least 270 days in the prior fiscal year. For example, for a Washington public company with a December 31 fiscal year end and an eight person board, at least 2 women directors must serve at least 270 days during 2021. So, if in order to meet the 25% threshold by January 1, 2022 a company wanted to nominate additional women for election as directors at its annual shareholders meeting in 2021, the meeting would be required to be held by April 6, 2021, or the women would need to be appointed to fill vacancies on the board by that date. On the other hand, if at the beginning of the fiscal year 25% of a company’s directors self-identify as women and the board then desires to expand the number of directors on the board to add someone who does not self-identify as a woman (which will lower the percentage of women on the board), in order to meet the 25% threshold the board could not be expanded until September 28th. These new requirements do not apply to public companies: that do not have shares listed on a national securities exchange; that qualify as an “emerging growth company” or “smaller reporting company”; 50% or more of the voting shares of which are held by a person or group of persons; of which the articles of incorporation authorize the election of all or a specified number of directors by one or more separate voting groups; or that is not required by the WBCA or any national securities exchange to hold an annual meeting. The exclusive remedy for a public company’s failure to comply with these requirements is that a shareholder may, after notice to the company, apply for a court order to require the company to furnish the board diversity discussion and analysis to shareholders. Whether or not a company’s board meets the threshold percentage for gender diversity, we recommend that board or nominating committee of a Washington public company review the disclosure requirements imposed by the WBCA amendment and consider whether it desires to adopt or amend a diversity policy in response to such potential disclosure requirements.
May 14, 2020
by Clint Foss
Legislative Actions
House Overwhelmingly Passes Bill to Address 8-K Trading Gap
On January 14, 2020, the U.S. House of Representatives passed HR 4335, the “8-K Trading Gap Act of 2019” (the “Act”) by a bipartisan vote of 384 to 7. The Act is designed to stop company insiders from trading during the 8-K trading gap, as described below. While many companies have insider trading policies in place which would already prevent such trades, a 2015 Columbia Law School paper found that insiders are more likely to engage in open market purchases of their own company’s stock when the firm is about to reveal new agreements with customers and suppliers, and that, when engaging in such purchases, insiders are correct about the directional impact of the 8-K filing more often than not. The Act would require the SEC to adopt rules, within one year of the Act’s enactment, to require all SEC reporting companies to establish and maintain policies, controls and procedures reasonably designed to prevent their executive officers and directors from trading in or otherwise transferring the company’s securities during the 8-K trading gap, that is, between the occurrence of the event triggering the Form 8-K filing and the filing itself. For Section 7 (Regulation FD) furnished disclosures and Section 8 (Other Events) filings, the prohibition on trading would apply from the date the company determines it would disclose the event on Form 8-K. The Act gives the SEC authority to exempt certain transactions, including transactions under a 10b5-1 plan which was adopted outside of an 8-K trading gap. The Act will now pass to the Senate, where it appears likely to pass, although the timing of passage is uncertain.
January 29, 2020
by Clint Foss
Legislative Actions
SEC Updates FAQs Regarding the Ongoing Government Shutdown
On January 10, 2019, the Division of Corporation Finance of the Securities and Exchange Commission updated its Frequently Asked Questions (FAQs) about how to handle certain filing matters during the U.S. government shutdown, which is now entering its fourth week. (See, sec.gov/page/corpfin-section-landing.) The staff revised questions 4 and 5 and added new questions 6 and 9. Question 4 was revised to emphasize that Rule 430A is only available to add pricing information to registration statements declared effective prior to the government shutdown (i.e., by December 26, 2018). Issuers whose registration statements were not declared effective before the shutdown are not eligible to use Rule 430A. Question 5 was revised to specify the “magic words” that must be included in an amendment to a registration statement to remove the delaying amendment language and start the 20-day clock to take the registration statement effective. The amendment must include the statement: “This registration statement shall hereafter become effective in accordance with the provisions of section 8(a) of the Securities Act of 1933.” Registrants who amended their registration statements to remove the delaying amendment without including the “magic words” will need to file amendments to add them. New question 6 adds clarity for registrants who have unresolved staff comments on their filings and wish to amend their registration statements to remove the delaying amendment. The staff stated that registrants could nevertheless remove the delaying amendment, but reiterated that responsibility for complete and accurate disclosure lies with the registrant and others involved in the preparation of the registration statement. Finally, new question 9 indicates that issuers may request relief under Rule 3-13 of Regulation S-X, which provides that the SEC may permit the omission of one or more of the financial statements required by Regulation S-X or the filing of appropriate substitute financial statements “where consistent with the protection of investors.” During the shutdown, however, such requests must relate to a demonstrable emergency and the protection of a significant property interest. Whether Rule 3-13 proves useful as a practical matter during the shutdown remains to be seen. Below are (1) the revised text of questions 4 and 5 with new language shown in blue text, and (2) the text of the new questions 6 and 9. Question Answer 4. If my registration statement was declared effective prior to the shutdown (my effective date was December 26, 2018 or earlier) what happens if I don’t price my offering within the 15-day time period provided in Rule 430A? Because your registration statement was declared effective prior to the shutdown, you are eligible to use Rule 430A and you may file post-effective amendments, as necessary, under Rule 462(c) to restart the 15-business-day period so that, at the time of pricing you will be able to include the pricing information in a 424(b) prospectus supplement. Post-effective amendments filed pursuant to Rule 462(c) are effective upon filing. Alternately, at the time of pricing, you could file a post-effective amendment under Rule 462(c), prior to the time confirmations are sent or given, to include the information omitted under Rule 430A. NOTE: You cannot rely on Rule 462(c), however, to include the pricing information if the post-effective amendment includes substantive changes from, or additions to, the prospectus in the effective registration statement. 5. Now that the shutdown is in effect, can I file an amendment to my current registration statement to remove the delaying amendment so my registration statement will be effective in 20 days? Yes. If you choose to remove the delaying amendment, your registration statement will not become effective until 20 days have passed. If the SEC’s operational status does not change and you wish to further delay the effective date of your registration statement, you may file another pre-effective amendment during the 20-day period. The registration statement would not become effective until 20 days after the latest pre-effective amendment that does not include a delaying amendment. If the SEC’s operating status changes to operational and your registration statement is not yet effective, we would consider a request to accelerate to an earlier date. We may ask you to amend the registration statement to include the delaying amendment. NOTE: Simply omitting the delaying amendment from an amendment will not begin the 20-day period. [Emphasis added.] A company that intends to remove the delaying amendment must amend its registration statement to include the following language provided by Rule 473(b) - “This registration statement shall hereafter become effective in accordance with the provisions of section 8(a) of the Securities Act of 1933.” It must also amend to include all information required by the form, including the price of the securities it will sell. Rule 430A is not available in the absence of a delaying amendment because Rule 430A is only available with respect to registration statements that are declared effective by the Commission or the staff. 6. Can I amend to remove the delaying amendment while I have outstanding, unresolved staff comments on my filings? Yes. As in all situations, responsibility for complete and accurate disclosure lies with the company and others involved in the preparation of a company’s filings. If you amend your filing to remove the delaying amendment and our operating status changes prior to your effective date, we may ask you to amend your filing to include the delaying amendment so that we may work with you to resolve outstanding comments. 9. Will the Division consider a request for emergency relief under Rule 3-13 of Regulation S-X? During a lapse in appropriations, the Division’s activities are limited. The Anti-deficiency Act generally prohibits agencies from continued operation in the absence of appropriations, but contains exceptions, one of which is for emergencies involving the protection of property. Thus, an agency may act where there is some reasonable likelihood that the protection of property would be compromised, in some significant degree, by delay in the performance of the function in question. In an emergency where Rule 3-13 may provide relief for registrants, the Division may grant an application where consistent with the limitations discussed below [sic]. Submit requests to CFEmergency@sec.gov and describe the emergency and the significant property interest to be protected. More information about the SEC's plan of operations and the effect on securities offerings, public company reporting, investment companies, and securities markets during the government shutdown can be found in our prior blog post here: governancecomplianceinsider.com/u-s-government-shutdown-impacts-sec-operations-edgar-and-other-filings-enforcement-and-regulatory-activities/, and also on Dorsey's website here: dorsey.com/newsresources/publications/client-alerts/2019/01/government-shutdown-limits-sec-operations.
January 15, 2019
by Paul Thompson and Whitney Holmes
Legislative Actions
U.S. Government Shutdown Impacts SEC Operations, EDGAR and Other Filings, Enforcement and Regulatory Activities
In response to the U.S. government shutdown that began on December 22, 2018, the U.S. Securities and Exchange Commission and its Divisions of Corporation Finance and Investment Management published public guidance regarding the impacts on their operations. Although electronic filings will continue to be accepted in many cases, as described below, nearly all SEC operations, including the review and processing of filings and enforcement and regulatory functions, will be curtailed. Issuers and practitioners should make contingency plans to address the effects upon ongoing or planned securities offerings, filings, and requests for interpretive guidance, among other things. SEC operational status: Government shutdown impact The SEC published its operations plan under a lapse in appropriations and government shutdown (Securities and Exchange Commission, Operations Plan Under a Lapse in Appropriations and Government Shutdown, https://www.sec.gov/files/sec-plan-of-operations-during-lapse-in-appropriations-2018.pdf), which went into effect on December 27, 2018. During the shutdown, the SEC will have limited operations and limited staff. The SEC will retain only an extremely limited number of excepted staff members available to respond to emergencies involving the safety of human life or the protection of property, including law enforcement. Of the approximately 4,400 staff employees, fewer than 300 excepted staff remain in service during the shutdown. In summary, during the shutdown, while SEC systems will continue to accept various electronic filings and submissions, the SEC staff will discontinue: processing and approvals of ‘33 Act filings and registrations, including review and acceleration of effectiveness of registration statements; ongoing enforcement litigation, except for emergency enforcement matters; all non-emergency rulemaking, interpretive advice, and no-action letters; processing new and pending exemptive relief applications; approving applications for registration by investment advisers; processing proposed self-regulatory organization (SRO) rule changes, including NYSE and Nasdaq rule changes; responding to requests for information under the Freedom of Information Act, absent compelling need; responding to tips, complaints, or referrals, although limited staff will attempt to respond to certain critical matters, including allegations of ongoing fraud and misconduct; and responding to complaints, questions, or requests for information. In addition, while the SEC will continue to accept comment letters, the SEC anticipates that there will be delays in posting them to the SEC website. The public reference room will be closed. EDGAR Filings and Rulemaking. The shutdown will not affect the ability to submit EDGAR filings. Additionally, SEC personnel will be able to process requests for EDGAR access codes and password resets and answer questions about fee-bearing EDGAR filings and other emergency questions regarding EDGAR submissions. The Divisions of Corporation Finance, Investment Management, and Trading and Markets, and the Office of Compliance Inspections and Examinations, however, will not process filings, provide non-emergency interpretive advice, issue no-action letters, or conduct any other normal Division and Office activities. The SEC will discontinue all non-emergency rulemaking and processing new or pending applications for exemptive relief. New or pending registration statements and applications for exemptive relief will not be processed regardless of the status of any review of those filings. The Division of Corporation Finance also published a set of Frequently Asked Questions (FAQs), discussed below, regarding Issuers’ options with respect to new and ongoing securities offerings during the shutdown. Division of Corporation Finance FAQs. The SEC’s Division of Corporation Finance (CorpFin) has posted on its website additional guidance regarding the impact of the shutdown (See, https://www.sec.gov/page/corpfin-section-landing). A limited number of CorpFin staff members are available during the shutdown to answer questions relating to fee calculations for EDGAR filings, but will not generally be available to respond to other questions. Issuers and their representatives seeking assistance in calculating a filing fee for a filing during the shutdown should submit their requests to CFEmergency@sec.gov. CorpFin also provided a series of FAQs containing guidance with respect to ongoing and new offerings of securities during the shutdown: If a company with an effective registration statement determines it must update the information in its prospectus before commencing its offering, it should not go forward with the offering without updating the prospectus. The company must decide whether it can update the prospectus without filing a post-effective amendment because the staff will not be in a position to declare that amendment effective. Similarly, a company with a previously qualified Form 1-A that must be updated should not go forward with its offering before updating its offering statement. The staff will not be in a position to qualify a post-qualification amendment filed on EDGAR. If a company does not price its offering within the 15-day time period provided in Rule 430A, the CorpFin FAQs indicate the company may file post-effective amendments under Rule 462(c), which are automatically effective upon filing, to restart the 15-business-day period so that, at the time of pricing, the registrant will be able to include pricing information in a 424(b) prospectus supplement. As an alternative, at the time of pricing, the registrant could file a post-effective amendment under Rule 462(c), prior to the time confirmations are sent or given, to include the information omitted under Rule 430A. Registrants should note, however, that a Rule 462(c) post-effective amendment may not include substantive changes or additions to the prospectus in the registration statement at the time it became effective. The CorpFin FAQs indicate that a registrant may file an amendment to a current registration statement to remove the delaying amendment, in which case the registration statement will be effective in 20 days. The CorpFin staff notes, however, that if the SEC’s operating status changes to operational and the registration statement is not yet effective, the staff will consider a request to accelerate to an earlier date or ask the registrant to amend the registration statement to include the delaying amendment. Companies considering this approach should be aware that Rule 430A is not available in the absence of a delaying amendment. As a result, when a company amends a registration statement to remove the delaying amendment, the registration statement and prospectus must also be amended to include all information required by the applicable form, including the price of the securities being offered. A registrant may also file a new registration statement without a delaying amendment during the shutdown. Again, however, the CorpFin staff notes that, if the SEC’s operating status changes during the 20-day period prior to effectiveness, the staff may ask the registrant to amend the document to include a delaying amendment. Investment Adviser Registration Depository (IARD) system. The SEC’s IARD system will continue to accept filings, including amendments to Form ADV, Form ADV-W, and Form ADV-E filings, but the Office of Compliance Inspections and Examinations will not approve applications for registration by investment advisers and the Division of Investment Management will not provide interpretive advice regarding the Advisers Act, rules or forms or consider applications for exemptive relief under the Advisers Act. As a result, new or pending investment adviser applications will not be processed. Division of Investment Management FAQs. The SEC’s Investment Management (IM) also posted additional guidance regarding the impact of the shutdown (See, https://www.sec.gov/investment-management). Investment companies can continue to make filings on EDGAR during the shutdown, but the IM staff will not be available to respond to any questions about pending matters, other than answering questions relating to fee calculations for EDGAR filings. The IM guidance notes that a significant percentage of investment companies’ filings, including post-effective amendments to registration statements, become effective automatically either immediately upon filing or following the passage of a certain number of days. These filings will continue to become effective automatically in accordance with the applicable rules. The IM staff will follow the procedures established by Corp Fin, described above, with regard to the acceleration of initial registration statements and other types of filings made by registered investment companies during the federal government shutdown. Questions relating to calculating filing fees should be directed to IMEmergency@sec.gov. Central Registration Depository (CRD) and Transfer Agent Registration Systems. The CRD system, used for broker-dealer licensing and registration, will continue to accept filings, but the Division of Trading and Markets and the Office of Compliance Inspections and Examinations will not review pending filings, consider new or pending applications or registrations, provide interpretive advice, or issue no-action letters. In addition, the staff will not be available to conduct any other normal Division and Office activities. Electronic Form Filing System (EFFS). The EFFS will continue to accept submissions by self-regulatory organizations (SROs), but any SRO proposed rule change submitted through EFFS during the shutdown will have as its filing date the next business day after the shutdown has ended and SEC opens for regular business. Days that the SEC is operating under its shutdown plan (i.e. while the lapse in appropriations continues) will not constitute “business days” under Section 19 of the Exchange Act and Rule 19b-4 thereunder. Enforcement/Litigation. The Division of Enforcement will have only a limited staff, and ongoing litigation, examinations, and investigative work will be suspended, except for limited emergency enforcement matters, including temporary restraining orders and/or investigative steps necessary to protect public and private property, monitoring the SEC’s “tips, complaints, and referrals” system and web-based investor complaint system, and process referrals from SROs and others to identify matters that are emergencies and take follow-up steps relating to such emergencies. The SEC also will continue Market Watch activities and continue to monitor market technology operations and any broker-dealers reported as being in financial distress. Money market fund surveillance and monitoring will also continue. The staff will also continue monitoring any international market developments that might affect the United States. Emergency Contacts. Page 16 of the SEC’s shutdown plan contains a list of emergency contact telephone numbers and email addresses to reach an extremely limited number of Commission staff members in each office and division who are available to respond to emergency situations.
January 2, 2019
by Paul Thompson and Whitney Holmes
Legislative Actions
SEC Guidance on Cybersecurity Disclosure and Policies - Recap of Dorsey Webinar Presentation
Earlier this week, Dorsey hosted a webinar panel presentation on the SEC’s recent guidance on cybersecurity disclosures and policies. The webinar provided a detailed walk-through of the SEC’s guidance, including issues related to enhanced disclosure, insider trading, and Reg FD policies. The panel also discussed the impact of the SEC’s guidance within the changing landscape of cybersecurity and current developments in shareholder litigation, SEC enforcement actions, and other regulatory and legislative initiatives such as the GDPR. The Equifax data breach is used as a case study to illustrate how the SEC’s guidance might play out in this broader context. The webinar recording and presentation materials are available on our website at www.dorsey.com/newsresources/events/videos/2018/06/seminar-playback-sec-guidance-on-cybersecurity.
June 8, 2018
by Gary L. Tygesson
Legislative Actions
Do You Need a Risk Factor for Proposed U.S. Federal Income Tax Reform?
Tax reform efforts by Congress are ongoing, and the substance of the tax bills remains fluid. However, for foreign corporations with U.S. operations, there are some specific potential risks to consider, such as additional limitations on the deductibility of interest, the migration from a “worldwide” system of taxation to a territorial system, and the use of certain border adjustments. Foreign corporations with U.S. operations may want to consider including a risk factor in their periodic reports or offering documents regarding the potential impact of U.S. tax reform. A sample risk factor (based on the current iteration of the tax bills) is below. As the tax bills are amended during the legislative process, the language of the risk factor may need to be edited prior to use. Possible U.S. federal income tax reform could adversely affect us. The new U.S. administration and certain members of the U.S. House of Representatives have stated that one of their top legislative priorities is significant reform of the Internal Revenue Code. Proposals by members of Congress have included, among other things, changes to U.S. federal tax rates, imposing significant additional limitations on the deductibility of interest, allowing for the expensing of capital expenditures, the migration from a “worldwide” system of taxation to a territorial system, and the use of certain border adjustments. There is substantial uncertainty regarding both the timing and the details of any such tax reform. The impact of any potential tax reform on our business and on holders of our common shares is uncertain and could be adverse. [Prospective investors should consult their own tax advisors regarding potential changes in U.S. tax laws.]
November 15, 2017
by Kimberley R. Anderson
Legislative Actions
Regulation A+ May Become Available To SEC Reporting Issuers
On September 5, 2017, the U.S. House of Representatives overwhelmingly passed (by a vote of 403-3) the Improving Access to Capital Act. The Act directs the SEC to amend Regulation A+ to allow SEC reporting issuers to use Regulation A+ when raising capital, and to deem their SEC periodic reports to satisfy the periodic and current reporting requirements of Tier 2 of Regulation A+. The Act is now being considered by the Senate. If the Act becomes law, it will increase the alternatives available to SEC reporting companies in seeking additional capital. Smaller public companies that are not listed on Nasdaq or the NYSE, and are therefore subject to state securities regulation in respect of their capital raising activities, may find Regulation A+ especially attractive, because an offering under Tier 2 of Regulation A+ is preempted from state securities regulation other than the potential requirement to make a notice filing, consent to service of process, and pay a filing fee.
September 11, 2017
by Christopher L. Doerksen
Legislative Actions
The Era of Private Ordering for Corporate Governance
Following the 2016 election, corporate governance circles have focused intently on what will happen in the nation’s capital with regard to a potential roll back of the current regulatory regime. While attention given to Congress and the SEC for the possible direction of corporate governance is not misplaced, future changes in this arena will most likely come from investors, and they have their own agenda which is very different from that of the Trump administration. Regardless of, or perhaps in response to, any changes in the U.S. governance regulatory framework, investors and groups of investors are likely to continue to push for actions and disclosures beyond what is mandated and will use the their voting power to effect change. Public companies should also anticipate increased demand for the use of metrics and related disclosures that facilitate comparison, including in non-traditional performance areas such as certain environmental, social and governance matters where investors see a strong tie to long-term value creation. Read the full article here, as posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation.
August 28, 2017
by Gary L. Tygesson
Legislative Actions
SEC Updates Regulatory Flex Agenda, Tables Dodd-Frank Rules on Executive Compensation Disclosure
The SEC's semi-annual update of its rulemaking docket was released on July 20. Overall, the SEC has cut its rulemaking agenda by about half under the Trump administration. A number of long-anticipated Dodd-Frank rulemakings on executive compensation disclosure are missing from the docket: Pay Versus Performance Listing Standards for Recovery of Erroneously Awarded Compensation (Clawbacks) Disclosure of Hedging by Employees, Officers and Directors Incentive Compensation at Financial Institutions. Likewise, the Universal Proxy rulemaking was missing. Still on the docket of proposed rulemakings: Amendments to the XBRL Program Business and Financial Disclosures required by Regulation S-K Guide 3 Bank Holding Company Disclosure Reporting of Proxy Votes on Executive Compensation and Other Matters Concept Release on Possible Revisions to Audit Committee Disclosures Rulemaking to Simplify Regulation S-K Provisions Governing Non-Financial Disclosures
July 24, 2017
by Cam C. Hoang
Legislative Actions
SEC Commissioner Addresses Prospects for CEO Pay Ratio
This week, during his opening remarks at the 2017 National Conference of the Society for Corporate Governance, SEC Commissioner Michael Piwowar remarked on prospects for repealing or delaying the CEO pay ratio rule. Under the rule, most public companies must disclose the median of the annual total compensation of all employees (including non-U.S., part-time, temporary and seasonal workers), except for the CEO; the annual total compensation of the CEO; and the ratio of the two amounts, as calculated under proxy rules. The disclosure must be prepared for fiscal years beginning on or after January 1, 2017, which would be disclosed in 2018 proxy statements. Emerging growth companies, smaller reporting companies and foreign issuers are not subject to the rule. Commissioner Piwowar expressed his support for repealing the rule, which would require Congressional action. In terms of delaying effectiveness of the rule, he stated that public commentary would determine whether that alternative is feasible in light of the associated costs and benefits of implementing the rule. Though the latest comment period on the rule has ended, he urged interested parties to continue to submit comment letters describing specific reasons why the rule is burdensome, as well as proposed fixes. During the latest comment period, the SEC received approximately 180 unique comments, with 150 of those comments in favor of the rule. Given the approaching 2018 proxy season, we advise companies not to count on a repeal or delay of the rule. Companies should continue preparing for the CEO pay ratio disclosure, and keep in mind that there is significant latitude for how the ratio may be calculated, in accordance with Item 402(u) of Regulation S-K and related guidance in C&DIs 128C.01-128C.05. In particular: The median employee, which must be identified once every three years absent a significant change, may be identified from a survey of the entire employee population, a statistical sample or other reasonable method. A de minimis exemption allows companies to exclude non-U.S. employees who account for 5% or less of their employees, including employees whose inclusion would result in a violation of foreign privacy data laws. If certain employees are excluded, then all employees from that jurisdiction must be excluded. Companies may use a consistently applied compensation measure (“CACM”) other than annual total compensation to identify the median employee, as long as the CACM reasonably reflects the annual compensation of employees. For example, total cash compensation could be a CACM unless the company also distributed annual equity awards widely among its employees. Companies may select a determination date within three months prior to the end of their fiscal year, in order to determine employee population from which to identify the median. In applying the CACM to identify the median employee, companies are not required to use a compensation period that includes the determination date. Nor are they required to use a full annual period. As an example, the SEC states that a company may use annual total compensation from its prior fiscal year so long as there has not been a change in the registrant’s employee population or employee compensation arrangements that would result in a significant change of its pay distribution to its workforce. Workers whose compensation is determined by an unaffiliated third party may be excluded from the pay ratio calculation. This population may include leased workers, independent contractors who determine their own compensation, and even workers whose minimum level of compensation is set by the company. Companies should consider testing alternative methodologies in order to assess the quality and consistency of results. While there is considerable latitude to design a pay ratio methodology, companies should let reason be their guide and be prepared to explain the decisions that they make. Companies are required to describe in their proxy statements the methodology used, as well as any material assumptions, adjustments and estimates. Not surprisingly, CEO pay ratios have varied significantly depending on the companies surveyed and the methodology. The AFL-CIO’s annual report on CEO pay calculated a CEO-to-worker-pay ratio of 347-to-1 for 2016, based on the average total compensation package for 400 of the S&P 500 CEOs of $13.1 million last year, and the average annual cash income only (excluding fringe benefits) for America’s 100,525,000 rank-and-file workers of $37,632. In contrast, a 2016 Mercer study found the ratio among respondents to be less than 200-to-1.
July 1, 2017
by Cam C. Hoang
Legislative Actions
Say-on-Pay Voting Frequency ― The Financial CHOICE Act Adds Uncertainty to the Process
The House passed the Financial CHOICE Act on Thursday as part of the new administration’s bid to overhaul Dodd-Frank. It is not expected to get through the Senate in its current form, but it does provide an interesting read. While current disclosure requirements have become too lengthy and cumbersome in many respects, the proposed change to Say-on-Pay voting frequency requires a materiality determination that may prove difficult for companies to implement. Currently, public companies are required to provide their shareholders with an advisory vote on executive compensation no less than once every three years. Most companies hold the vote annually. The Financial CHOICE Act would modify this requirement so that the vote is held “[e]ach year in which there has been a material change to the compensation of executives of an issuer from the previous year.” So, each year the issuer would have to determine if there has been a material change to executive compensation when deciding what proposals are put before shareholders at the annual meeting. I expect many issuers would continue to hold an annual vote to seek feedback from their shareholders even if there was no material change in compensation. However, given the high profile nature of a negative say-on-pay result, would issuers shy away from the advisory vote in a year of poor company performance (absent an obviously material change to executive compensation)? Will an issuer’s determination not to include the advisory vote bring on another wave of proxy disclosure litigation? Could an issuer determine not to hold a say-on-pay vote for multiple years in a row? Fewer say-on-pay advisory votes may not be problematic for issuers with strong corporate governance and shareholder engagement. However, for other issuers, say-on-pay advisory votes provided shareholders with a powerful (albeit imprecise) means of communicating their displeasure to the Board of Directors.
June 9, 2017
by Kimberley R. Anderson
Legislative Actions
Smaller Issuer Relief in the Financial CHOICE Act
As noted in the earlier post, the House passed the Financial CHOICE Act yesterday. While the headline-grabbing aspects of the Financial CHOICE Act relate to a repeal of the Volcker Rule and reducing the authority of the Consumer Financial Protection Bureau, there are some other interesting tidbits relating to public company disclosure, including two that would provide significant relief for smaller issuers. However, the Financial CHOICE Act is unlikely to be adopted by the Senate, which is expected to draft its own measure to modify the Dodd-Frank Act. Hopefully these provisions will be considered for the Senate's bill. Voluntary XBRL. Smaller issuers with total annual gross revenues of less than $250 million as well as emerging growth companies would be exempt from the requirement to use XBRL for their financial statements or other periodic reporting. They could, however, elect to use XBRL voluntarily. Expanded Exemption from Internal Control Attestation. Section 404(b) of Sarbanes-Oxley requires an issuer to file an attestation report from its independent registered public accounting firm on the issuer’s internal control over financial reporting. The current requirement only applies to accelerated filers or large accelerated filers. The Financial CHOICE Act amends and expands the exemption to include any issuer that has total market capitalization of less than $500 million and any issuer that qualifies for the new low-revenue issuer exemption. The low-revenue issuer exemption is a temporary exemption which applies to an issuer that: ceased to be an emerging growth company on the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933; had average annual gross revenues of less than $50 million as of its most recently completed fiscal year; and is not a large accelerated filer. These amendments are a dramatic expansion of the exemption and would provide significant relief to smaller issuers. They also stand in stark contrast to the position taken by the SEC back in 2011, when the SEC examined the impact of 404(b) on smaller issuers with a market capitalization between $75 and $250 million. Back in 2011, the SEC recommended against expanding the existing exemption.
June 9, 2017
by Kimberley R. Anderson
Legislative Actions
The House Financial Services Committee to Hold a Hearing on Financial CHOICE Act 2.0 this Wednesday – Here’s a Summary of Governance and Executive Compensation Provisions
While passage in the House seems likely, the Financial Choice Act may undergo significant changes before it may pass in the Senate. Here is a summary of certain governance and executive compensation provisions that are included in the discussion draft: Prohibit Universal Proxy Ballots. Currently, companies are not required to use a universal proxy ballot in the event of a proxy contest, so shareholders receive one ballot listing candidates nominated by the board of directors and separate ballot(s) listing candidates nominated by the shareholder proponents. The Financial CHOICE Act would prohibit the SEC from requiring that companies use a universal proxy ballot. Modernize Shareholder Proposal Thresholds. The Financial CHOICE Act would increase share ownership thresholds for submitting shareholder proposals, from ownership of 1% of outstanding shares or $2,000 for one year, to 1% of outstanding shares for three years; increase resubmission thresholds; and prohibit proposals by a proxy other than the shareholders. Amend Frequency of Say-on-Pay Votes. Currently, under the Dodd-Frank Act, non-binding shareholder votes approving executive compensation must occur at least once every three years. The Financial CHOICE Act would amend the frequency to “each year in which there has been a material change to the compensation..." Require proxy advisory firms to register with the SEC and to provide companies with an opportunity to review and provide meaningful comment on draft recommendations. The registration application would include a certification that the firm has the financial and managerial resources to consistently provide proxy advice based on accurate information. The firm would be required to disclose the procedures and methodologies used in developing proxy voting recommendations, its organizational structure, whether or not it has a code of ethics, any potential or actual conflict of interest, and its policies and procedures to manage conflicts of interest. The registration would be updated as there are material changes, and at least on an annual basis. Repeal CEO Pay Ratio Disclosure. The Financial CHOICE Act would repeal the section of the Dodd-Frank Act which requires companies to disclose the ratio of pay between CEOs and the median employees. Acting SEC Chairman Michael S. Piwowar’s has requested an expedited review of unanticipated challenges to implementing the CEO pay ratio disclosure rule. Repeal Incentive-Based Compensation Disclosure by Covered Financial Institutions. The Financial CHOICE Act would repeal the Dodd-Frank provision which requires enhanced disclosure and reporting of incentive-based compensation by covered financial institutions. This Dodd-Frank Act provision targets excessive compensation and compensation that could lead to material financial loss. More broadly, President Trump has issued an executive order mandating that the Department of the Treasury review financial regulations, including the Dodd-Frank Act. Repeal Disclosure of Hedging Policies. The Financial CHOICE Act would repeal the Dodd-Frank requirement that companies disclose whether employees or directors may engage in hedging transactions in the company’s equity securities. Limit Clawbacks. Under the Dodd-Frank Act, companies that haven’t developed and implemented compensation clawback polices cannot be listed on national securities exchanges and associations. The Financial CHOICE Act would limit the scope of the clawback rule to current and former executives who had “control or authority over the financial reporting that resulted in the accounting restatement.” Pay vs. Performance Disclosure. The future of the pay versus performance provision is uncertain because it isn’t addressed by the Financial CHOICE Act or Hensarling’s memo. Section 953(a) of Dodd-Frank requires companies to disclose the relationship between executive compensation actually paid and the financial performance of the company.
April 24, 2017
by Cam C. Hoang
Legislative Actions
Gender Pay Gap Reporting for Companies with More Than 250 Employees in Great Britain
Beginning April 2017, companies with 250 or more employees in England, Wales and Scotland on April 5th should be aware of a requirement to begin publishing annually on their own website and on a government website the following four figures: Gender pay gap (mean and median averages) Gender bonus gap (mean and median averages) Proportion of men and women receiving bonuses Proportion of men and women in each quartile of the organization’s pay structure Please note that the term “employee” is very broadly defined for this reporting purpose. For guidance on managing the calculation and reporting requirements, the Government Equalities Office and Acas prepared guidance available here: http://www.acas.org.uk/index.aspx?articleid=5768
April 12, 2017
by Jason Brenkert
Legislative Actions
Senate Banking Committee Focused on Deregulation
On March 9, 2017, the Senate Banking Committee passed a series of four bills focused on deregulation, including one that would make it easier for privately held companies to issue stock awards through equity compensation plans. Each of the bills was a bipartisan effort. One bill eases certain restrictions on reporting on exchange traded funds (ETFs). The bill would address securities laws and regulations that discourage broker-dealers from publishing research on ETFs by directing the Securities and Exchange Commission (SEC) to provide a safe harbor for research reports that cover ETFs. The second bill proposes to ease reporting thresholds for privately held corporations when issuing stock awards. Currently, under Item 701 under the Securities Act of 1933, as amended, if the sales price or amount of securities sold in any 12-month period under a private company’s equity compensation plans exceeds $5 million, then the company must provide certain information to the holders of the equity compensation securities, which many companies consider onerous and inappropriate for a privately held corporation. The bill would increase that threshold to $10 million and have it adjusted for inflation. A third bill would raise to 250 from 100 the number of investors venture capital funds can acquire before triggering SEC registration requirements under the Investment Company Act of 1940, as amended. The final bill would credit stock exchanges for any fees they have overpaid the SEC. The bills have been reported to the Senate, placed on the Senate legislative calendar and are awaiting further action by the Senate. Companion bills in the House are moving through the House Finance Committee.
March 17, 2017
by Jason Brenkert
