23 March 2018
In our global, interconnected, rapidly changing business environment, GCs, CFOs, CEOs, entrepreneurs and other business leaders need to be familiar with both their own areas of expertise and the broader legal and economic developments affecting their businesses. This Corporate News update aims to present readers with recent key developments in relevant economic, transactional and legal matters, including:
SECURITIES AND PUBLIC COMPANY DEVELOPMENTS
SEC to Permit Prospective Issuers to Test File in Preparation for Crowdfunding Offerings Under SEC rules taking effect on May 16, 2016, companies will be permitted to offer and sell securities through crowdfunding. Companies that want to conduct a crowdfunding offering using the new rules must file the required disclosures about the offering on a new Form C on EDGAR, the SEC's electronic document filing system. Prospective issuers may immediately begin test filings of the Form C. The test filings will be accepted until February 29, 2016, and are intended to help prospective issuers become more familiar with the mechanics of the filing process in advance of a crowdfunding offering. Prospective issuers can access the Form C on the SEC's EDGAR filing website, www.edgarfiling.sec.gov/Welcome/EDGARLogin.htm, provided they have a Central Index Key (CIK) and a CIK Confirmation Code (CCC). For more information, see: www.sec.gov/corpfin/announcement/cf-announcement—-crowdfunding-testing.html ** Nasdaq Proposes to Grant Compliance Extension Before Delisting Company for Failure to Hold Annual Meeting On December 22, 2015, Nasdaq submitted a proposed rule change to the SEC which would provide Nasdaq staff with limited discretion to grant a listed company additional time to solicit proxies and hold an annual meeting of shareholders before delisting a listed company that fails to comply with Nasdaq's annual meeting requirement. In determining whether to grant a listed company an extension to regain compliance, Nasdaq will consider the likelihood that the company would be able to hold an annual meeting within the exception period, the listed company's past compliance history, the reasons for the failure to timely hold an annual meeting, corporate events that may occur within the exception period, the listed company's general financial status, and the listed company's disclosures to the market. The proposal would limit the length of an extension granted by Nasdaq staff to no more than 180 calendar days from the deadline to hold the annual meeting. For more information on the proposal, see: www.sec.gov/rules/sro/nasdaq/2015/34-76731.pdf SEC Issues Staff Report on Accredited Investor Definition On December 18, 2015, the SEC issued a staff report on the accredited investor definition. The Dodd-Frank Wall Street Reform and Consumer Protection Act directs the Commission to review the accredited investor definition as it relates to natural persons every four years to determine whether the definition should be modified or adjusted. Staff from the Divisions of Corporation Finance and Economic and Risk Analysis prepared the report in connection with the first review of the definition. The staff report examines the history of the accredited investor definition and considers comments on the definition received from a variety of sources, including public commenters, the Investor Advisory Committee and the Advisory Committee on Small and Emerging Companies. The staff report considers alternative approaches to defining “accredited investor,” provides staff recommendations for potential updates and modifications to the existing definition and analyzes the impact potential approaches may have on the pool of accredited investors. The SEC invites members of the public to provide comments on the accredited investor definition, generally, and specifically on the staff recommendations contained in the report. To review the staff reports, see: www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf. To submit comments, see: go.usa.gov/ck8Z7. SEC Re-Proposes Resource Extraction Rules On December 11, 2015, the SEC proposed revised Dodd-Frank Act rules that would require resource extraction issuers to file annual “Form SD” reports with the SEC, disclosing payments made to the U.S. federal government or foreign governments related to commercial development of oil, gas or mineral resources. Under the proposed rules, intended to promote greater transparency as to resource-extraction payments, an issuer that is required to file annual Exchange Act reports with the SEC would be required to disclose payments made to the U.S. federal government or a foreign government by the company or a subsidiary thereof, or by an entity controlled by the company. In 2013, American Petroleum Institute et al. had won a lawsuit vacating the SEC's 2012 resource extraction rules, in which the court found that requiring annual reports to be publicly disclosed (rather than confidentially filed) was not mandated in the rule requirement and that it would be arbitrary and capricious not to exempt certain countries from the rules' application (e.g., countries prohibiting payment information from being disclosed). The newly proposed rules reflect the outcome of the 2013 litigation, with comments due by January 25, 2016 and reply comments due by February 16, 2016. For more information, see the SEC's press release at www.sec.gov/news/pressrelease/2015-277.html and the proposed rules at www.sec.gov/rules/proposed/2015/34-76620.pdf. SASB Issues New Implementation Guide The Sustainability Accounting Standards Board (SASB) recently published its SASB Implementation Guide for Companies. The Implementation Guide is a reference guide for companies that are in the process of integrating SASB standards into their existing Form 10-K or 20-F disclosure processes. The SASB Implementation Guide is designed to help companies achieve their objectives of (i) identifying industry-specific sustainability topics that are most likely material to an investor, (ii) understanding the current state of disclosure and performance regarding those topics, and (iii) enhancing existing reporting processes to more effectively disclose material information on sustainability topics. The SASB Implementation Guide helps companies to achieve these objectives by providing structure and key considerations for companies seeking to implement the sustainability accounting standards within their existing business functions and processes. For more information, see using.sasb.org/implementation-guide-for-companies/. Fixing America's Surface Transportation (FAST) Act Enacted, Including Capital-Raising and Disclosure Provisions for Public and Private Companies President Obama recently signed the Fixing America's Surface Transportation (FAST) Act into law, designed as a follow-on to the Jumpstart Our Business Startups (JOBS) Act of 2012, which included capital formation provisions. The FAST Act includes provisions designed to help modernize certain public company disclosure requirements and facilitate capital-raising transactions for public companies and secondary trading for private companies. The FAST Act reduces burdens on emerging growth companies (or ECGs, defined as having fewer than $1 billion in annual gross revenues) and mandates that the SEC scale back certain securities disclosure and filing obligations to ease the burden on smaller issuers such as ECGs and smaller reporting companies. It also codifies a U.S. securities resale exemption long known as the “Section 4 (1 Ã‚½)” exemption. For more information, see the FAST Act at www.gpo.gov/fdsys/pkg/BILLS-114hr22enr/pdf/BILLS-114hr22enr.pdf. ISS Amends Director Overboarding Policy Institutional Shareholder Services (ISS) has issued 2016 voting policy updates that include a change to its policies relating to directors serving on too many public company boards (called “overboarding”). ISS's current policy recommends that shareholders vote against or withhold votes from individual directors who sit on more than six public company boards or who are CEOs of public companies and sit on the boards of more than two other public companies. For meetings on or after February 1, 2017, ISS will recommend that shareholders vote against or withhold votes from individual directors who sit on more than five public company boards or who are CEOs of public companies and sit on the boards of more than two other public companies. For 2016, ISS will note in its analysis if a director is serving on more than five public company boards while leaving the six-board maximum intact. ISS has noted that, since the prior limits were adopted, the average time commitment for board service has significantly increased, and recent academic research generally shows a negative association between board “busyness” and company performance. For more information, see www.issgovernance.com/file/policy/2016-americas-policy-updates.pdf. SEC to Require Voluntary Disclosure for DPA/NPA Resolutions in FCPA Cases The SEC recently announced at a Foreign Corrupt Practices Act (FCPA) conference that companies subject to FCPA enforcement actions would need to self-report their potential misconduct in order to be eligible for deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs). The SEC's new policy is intended to encourage self-reporting of violations and incentivize firms to promptly report FCPA misconduct. While the policy requires companies to self-report for DPA or NPA eligibility, self-reporting will not guarantee such an outcome. For more information, see www.sec.gov/news/speech/ceresney-fcpa-keynote-11-17-15.html.
MERGERS AND ACQUISITIONS DEVELOPMENTS
Harvard Publishes Withers Advice On Successful Proxy Contest Defense The Harvard Law School Forum on Corporate Governance and Financial Regulation recently published a short advisory piece authored by Withers providing helpful advice (including keys to success) for public companies defending against strong activist pressure backed by ISS and other proxy advisors. For more information, see corpgov.law.harvard.edu/2015/12/18/lessons-learned-from-a-highly-successful-proxy-contest-defense/. Delaware Upholds Financial Advisor Liability for Failure to Disclose Conflict of Interest to Seller Board The Delaware Supreme Court recently ruled that the Royal Bank of Canada (RBC) must pay over $75 million to the shareholders of Rural/Metro Corporation for RBC's role in advising Rural/Metro's 2011 $438 million sale to Warburg Pincus, a private equity firm. The ruling upheld a lower court's decision that RBC was liable to shareholders for aiding and abetting the Rural/Metro board's breach of its duty of care because it had persuaded Rural/Metro's board to accept an offer from Warburg Pincus without disclosing a conflict of interest to the board – that RBC was trying to win a lucrative financing deal from Warburg Pincus. For more information, see http://reaction.withersworldwide.com/rs/emsdocuments/RBC Capital Markets v Jervis.pdf.
PRIVACY AND DATA PROTECTION LAW DEVELOPMENTS
Uniform Law Commission to Vote on Model Social Media Legislation in 2016 The Uniform Law Commission (a non-profit association drawing from uniform law commissions from each U.S. state) has announced that it expects to vote on model social media privacy legislation in 2016. The proposed legislation would aim to make social media privacy laws consistent and uniform nationwide, particularly in the roughly half of states that have not yet passed any form of such legislation. The proposed legislation would cover both employers' access to employees' online account information and universities' access to students' online account information. As currently written, the proposal would not only address social media privacy but would add privacy protection to all online account information protected by a password or some other form of special access. For more information, see www.bna.com/uniform-social-media-n57982064785/. California Adopts Digital Privacy Rights Law The State of California recently enacted the Electronic Communications Privacy Act (ECPA), its newest data security and privacy legislation. The ECPA prohibits government agencies from (a) compelling production of or access to electronic communication information from a service provider, (b) compelling production of or access to electronic device information from any person or entity other than the authorized possessor of the device or © accessing electronic device information by means of physical interaction or electronic communication with the electronic device (except where the intended recipient of an electronic communication voluntarily discloses electronic communication information), in each case without an appropriate warrant, order or subpoena. The ECPA impacts the production of private electronic communications such as emails, text messages and GPS data that are stored in the “cloud” and on digital devices such as smartphones, tablets and laptops. The ECPA also requires the government to destroy the electronic information it receives in this process within a specified period of time. The ECPA does not impact federal demands for such information, which are governed by federal law. The ECPA takes effect on January 1, 2016. For more information, see leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201520160SB178. ** European Union Agrees to Significant Data Protection Reform On December 16, 2015, the European Union agreed to pass a strict new data protection regulation called the General Data Protection Regulation (GDPR) that will significantly change compliance obligations for businesses worldwide that process and transfer personal data on data subjects within the European Union. The GDPR will establish a single set of EU-wide data protection rules that replace the varying individual countries' data protection rules and thus make it easier and less costly for companies to do business in the EU. Serious violations could result in sanctions of up to 4% of a company's global revenue. The GDPR will require a data protection officer for companies that handle certain minimum amounts of data, and contain measures aimed at providing consumers with more control over businesses' ability to use their personal information. The GDPR will reduce some compliance burdens for small and medium companies by eliminating notifications to supervisory authorities and exempting them from the obligations to appoint a data protection officer or perform impact assessments unless the core business is data processing or there is a high risk to the personal data processed. The GDPR has an extraterritorial element in that it will apply even to companies without a physical presence in the EU that process personal data about EU persons. Stakeholders are finalizing the GDPR text, which may occur as early as year-end 2015 (in which case the GDPR will become effective in 2017). For more information, see europa.eu/rapid/press-release_IP-15-6321_en.htm.
*TAX LAW DEVELOPMENTS *
IRS Issues Guidance on Internal Revenue Code Section 162(m) The IRS recently revised its guidance to clarify which officers are considered “covered employees” for Section 162(m) deduction purposes. The IRS clarified that covered employees are determined based on SEC executive compensation disclosure requirements. In its guidance, the IRS noted that SEC disclosure rules are different for smaller reporting companies, which need not disclose officer compensation by reason of the individual serving as principal financial officer. Instead, the rules consider a smaller reporting company's principal financial officer a covered employee” (and require disclosure of his or her compensation) only if such officer is one of the two most highly compensated executive officers (other than the principal executive officer) who was serving as an executive officer at year end. For more information, see dodd-frank.com/consider-new-irs-guidance-on-162m-when-drafting-proxy-statement-disclosures/. Secretary of State Granted Power to Deny and Revoke Passports Due to Delinquent Taxes Under FAST Act The FAST Act included new Internal Revenue Code Section 7345, which authorizes limited sharing of information between the Secretary of State and Secretary of the Treasury. If the Commissioner of Internal Revenue certifies to the Secretary of the Treasury the identity of persons who have “seriously delinquent” federal tax debts or who owe more than $2,500 in child support payments, the Secretary of the Treasury or its delegate is authorized to transmit such certification to the Secretary of State for use in determining whether to issue, renew or revoke a passport. Applicants whose names are included on the certifications provided to the Secretary of State are ineligible for a passport. A seriously delinquent tax debt generally includes any outstanding debt for federal taxes in excess of $50,000, including interest and penalties (which amount will be adjusted annually for inflation). For more information, see transportation.house.gov/uploadedfiles/joint_explanatory_statement.pdf.
ENVIRONMENTAL LAW DEVELOPMENTS
EPA Launches eDisclosure Portal to Facilitate Self-Reporting Violations The U.S. Environmental Protection Agency (EPA) recently modernized implementation of its self-disclosure policies by creating a centralized web-based “eDisclosure” portal to receive and automatically process self-disclosed civil environmental law violations. Under the new automated system, effective December 9, 2015, the EPA expects that businesses will be able to resolve more routine types of disclosures on a streamlined basis. Regulated entities generally must use the new eDisclosure system to receive potentially substantial benefits and incentives of self-reporting environmental non-compliance. The EPA's existing “Audit Policy” issued in 2000 has provided certain major incentives for self-reporting environmental violations, including significant penalty mitigation, a potential reprieve from criminal prosecution and an exemption from routine requests for audit reports. The eDisclosure system does not modify the Audit Policy with respect to incentives and benefits resulting from self-reporting, but instead alters how disclosures are made and processed. For more information, see the eDisclosure launch notice at www.gpo.gov/fdsys/pkg/FR-2015-12-09/pdf/2015-30928.pdf and the Audit Policy at www.epa.gov/compliance/epas-audit-policy.
The PCAOB Adopts Rules Requiring Disclosure of Engagement Partner The Public Company Accounting Oversight Board (PCAOB) has adopted rules to provide investors with additional information as to the identities of participants in public company audits. Under the rules, auditors will be required to disclose on a new PCAOB Form AP (“Auditor Reporting of Certain Audit Participants”), for each issuer audit, the audit engagement partner's name as well as names, locations and extent of participation of other accounting firms (other than the principal auditor) who took part in the audit, including whether their work constituted 5% or more of total audit hours (and for other accounting firms whose individual participation was less than 5%, the number and extent of participation in the aggregate). The form must be filed with the PCAOB by the 35th day after the auditor's report is first included in a document filed with the SEC, with a 10-day deadline for IPOs. The forms will be accessible by investors through a searchable database. Assuming that the SEC approves the PCAOB rules, the rules will be effective for auditors' reports issued on or after (a) the later of January 31, 2017 and three months after SEC approval, as to engagement partner disclosure requirement, and (b) June 30, 2017, as to disclosure of other audit firms participating in the audit. For more information, see pcaobus.org/Rules/Rulemaking/Docket029/Release-2015-008.pdf. SEC Settles Charges with Grant Thornton Over Deficient Audits The SEC recently announced that the auditing firm Grant Thornton LLP (and two of its partners) have settled charges that they ignored red flags and fraud risks while conducting audits of two publicly traded companies. In December 2014, the SEC announced fraud charges against two former Assisted Living Concepts (ALC) executives accused of making false disclosures and manipulating internal books and records by listing fake occupants at some senior residences in order to meet lease covenant requirements. In 2015, the SEC charged Broadwind Energy and senior officers with accounting and disclosure violations that prevented investors from learning that reduced business was damaging the company's long-term financial prospects. Grant Thornton issued audit reports containing unqualified opinions on ALC's 2009 to 2011 financial statements and Broadwind's 2009 financial statements. An SEC investigation found that Grant Thornton and the two partners had repeatedly violated professional standards, that their inaction allowed the companies to make numerous false and misleading public filings and issue misleading financial statements, and that they inaccurately stated that the audits had been conducted in accordance with PCAOB standards. Grant Thornton admitted wrongdoing and agreed to pay a $3 million penalty and forfeit approximately $1.5 million in audit fees and interest, and the partners agreed to pay cash penalties and to be suspended from practicing before the SEC as accountants for several-year periods. For more information, see www.sec.gov/news/pressrelease/2015-272.html.
OTHER REGULATORY DEVELOPMENTS
New York Proposes Anti-Terrorism/Money Laundering Banking Regulations Governor Andrew Cuomo's administration has proposed rules that would clarify and expand New York State banks' responsibility to prevent money laundering and terrorist financing using a Transaction Monitoring and Filtering Program. Key Transaction Monitoring and Filtering Program requirements would include maintaining manual or automated systems for (a) monitoring of transactions post-execution for potential Bank Secrecy Act/money-laundering violations and (b) prohibiting, delaying or disrupting of transactions pre-execution where the transactions appear prohibited by applicable sanctions (including “Office of Foreign Asset Control” and other sanctions lists, “politically exposed person” lists and internal watch lists). Under the rules, a New York bank's chief compliance officer or functional equivalent would need to submit to the New York Department of Financial Services an annual certification by each April 15th, to the effect that the bank maintains systems to detect, weed out and prevent illicit money transfers. A compliance officer who files an incorrect or false certification could face criminal penalties for the violation. The rules would become effective beginning with the fiscal year starting on April 1, 2017, and the proposal is subject to a 45-day notice and comment period commencing on New York State Register publication. For more information, see the proposed rules at www.dfs.ny.gov/legal/regulations/proposed/rp504t.pdf and the related press release at www.dfs.ny.gov/about/press/pr1512011.htm. New U.K. Anti-Slavery/Trafficking Act Requires Companies with U.K. Operations to Produce Compliance Statements Section 54 of the U.K. Modern Slavery Act 2015 effective late October 2015 requires many U.K. companies (as well as many non-U.K. companies with U.K. operations) to prepare a statement disclosing steps (if any) that they have taken to ensure that there is no slavery or human trafficking in their businesses and supply chains. Organizations (including corporations, partnerships and charities) that supply goods or services and have a consolidated global revenues of £36 million per year (about $54 million) or more must publicly post a “slavery and human trafficking statement” for each financial year. A statement is required for any company whose fiscal year ends on or after March 31, 2016, and the statement must be posted within six months after fiscal year end. The U.K. law is broader than the California Transparency in Supply Chains Act of 2011, which only applies to manufacturers, retailers and supply chains and has a $100 million annual revenue threshold. For more information, see www.withersworldwide.com/news-publications/modern-slavery-act-2015-are-you-required-to-produce-a-slavery-and-human-trafficking-statement—2. Fantasy Sports Companies Facing Intensified Legal Scrutiny Fantasy sports companies are facing increased legal scrutiny. Boston's DraftKings and New York's FanDuel (the largest operators) are fighting a New York Attorney General order that they stop operating in that state. Yahoo has elected not to operate daily fantasy sports games in states where local law effectively bans the industry (i.e., Arizona, Iowa, Louisiana, Montana, Nevada and Washington) and for the time being is continuing operations in New York despite its Attorney General having issued a subpoena requesting more information about its fantasy sports operations. CBS Sports (another major player in the traditional, season-long fantasy sports world, which offers competition for cash prizes) appears to be taking a more conservative approach by rolling out its daily fantasy games under a revived brand during the Major League Baseball season and not continuing games into the National Football League (NFL) season as originally expected. Smaller startups (e.g., Mondogoal and Star Fantasy Leagues) appear to be more risk-averse and to have pulled out of various states, and an even more risk-averse operator (StarsDraft) withdrew from most states shortly after launching for the NFL season. For more information, see espn.go.com/chalk/story/_/id/14257320/fantasy-sports-companies-weigh-leaving-us-market-amid-draftkings-fanduel-controversy.