May 2013

SEC Chair Mary Jo WhiteThe mission of the U.S. Securities and Exchange Commission (“SEC”) is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. This sounds great, but how does the SEC actually carry out its mission? The answer lies in the SEC’s oversight and regulation function of the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. A key player in how the SEC exercises this function is the SEC Chair, essentially, the SEC’s chief executive.

On April 10, 2013, the SEC announced the swearing in of Mary Jo White as the 31st Chair of the SEC. So who is Mary Jo White? White is a former federal prosecutor, specializing in complex securities and financial institution frauds and international terrorism cases from 1993-2002. After working as a prosecutor, White became a partner at Debevoise & Plimpton where she represented high-profile clients, including JPMorgan Chase & Co, former Bank of America Corp. CEO, Ken Lewis, UBS AG and accounting giant, Deloitte & Touche LLP.

So what’s not to like? The confirmation from the Senate came with little dissent: it voted unanimously in her favor, and its Banking Committee voted 21-1 in her favor. The one nagging criticism of White stems from her ability to effectively navigate conflicting interests. Essentially, some critics fear that her ties to Wall Street will cloud the SEC’s decision-making with respect to these institutions’ behavior during the 2007-09 financial crisis.

Importantly, because of White’s vast experience as both a federal prosecutor and Wall Street defense lawyer, she must, as SEC Chair, recuse herself from investigating former clients for at least a year. Notably, after defending JPMorgan Chase for its role in the financial crisis, for example, White could have to sit out an SEC investigation into the bank’s recent $6 billion trading loss.

Even without consideration of White’s association with Wall Street, she takes over at the SEC at a time of transition, and is faced with grave challenges. According to many, the SEC has been “stuck in a rut” since former SEC Chair, Mary Schapiro, resigned in December of 2012, leaving the SEC’s five-member panel divided between two Democrats and two Republicans.  But White is starting to make changes.  Recently, she appointed Keith Higgins as the new Director of Corporation Finance and appointed acting director, Lona Nallengara, as SEC chief of staff.  Also, President Obama nominated two U.S. Senate aides to replace Continue Reading New SEC Chair: Mary Jo White

SEC Staff provide insight as to SEC agendaOn Tuesday, the Securities Law Committee of the Society of Corporate Secretaries and Governance Professionals met with officials from the Divisions of Corporation Finance, Investment Management, and Trading and Markets and the Office of the Whistleblower.  While neither new Chair Mary Jo White (confirmed in April) nor new Director of Corporation Finance Keith Higgins (starts at the SEC in June) was present at the meeting, the Staff provided some important takeaways.  Although the two hour meeting covered a significant amount of issues, the most important discussions involved the following topics: 

  • The Staff’s focus will be on Congressional mandates.  Although the Staff couldn’t give timelines, the remaining provisions from Dodd-Frank and the JOBS Act appear to be the focus of upcoming rulemaking activity.   Agenda items such as mandatory disclosure of political contributions, while constantly popping up in the news as imminent, would not fit into the stated focus.  The Staff noted that no one was working on rule making requiring the disclosure of political contributions, which is consistent with Chair White’s Congressional testimony last week
  • Issuers continue to have problems with erroneous reports from the proxy advisory firms.  The Staff noted that they continue to receive complaints from issuers specifically regarding errors, difficulty speaking to the correct person at ISS and Glass Lewis, and overlooking key aspects such as an issuer changing its fiscal year.  The Staff has met with ISS and Glass Lewis over the past year and has requested that the advisory firms improve their transparency.  The Society repeated its concerns with the proxy advisory firms and noted that the issues are acute when dealing with smaller issuers.
  • The Office of the Whistleblower is now adequately staffed and deep in implementation mode.  While only one award has been made under the program, no imminent changes are expected, despite the musings of a recent New York Times article
  • The Staff did a terrific job in responding to no action requests regarding shareholder proposals.  All but 25 requests were responded to in less than 60 days.  The Staff is very cognizant of the costs of missing printing deadlines and therefore reminds issuers to alert the Staff of not only print deadlines, but also notice and access deadlines.
  • The timeline for the four remaining controversial executive pay provisions of Dodd-Frank remains Continue Reading Recent meeting between the Society of Corporate Secretaries and Governance Professionals and SEC Staff provides insight

Gunster and the Southeastern Chapter of the Society of Corporate Secretaries and Governance Professionals are jointly hosting a complimentary event in Fort Lauderdale, Florida on June 6. 

The two-hour program will feature the following speakers:

 SEC update: what’s on the mind of the staff … and the new SEC chair?

  • Brian V. Breheny, Partner, Skadden, Arps, Slate, Meagher & Flom LLP
  • Bob Lamm, Chair of the Securities Law Committee, Society of Corporate Secretaries and Governance Professionals

 Hot topics and lessons learned from the 2013 proxy season

  • Fred Marquardt, Managing Director, Morrow & Co. LLC
  • David E. Shapiro, Partner, Wachtell, Lipton, Rosen & Katz

 Sign up to attend the free June 6 event now. Seating is limited.

Please contact either person below with questions: 

Jake Amsbary – Chapter President
Society of Corporate Secretaries and Governance Professionals
404-828-8542
jamsbary@ups.com 

David Scileppi – Shareholder
Gunster
954-713-6433
dscileppi@gunster.com

New social disclosures are designed to make issuers tattletalesIn other breaking news that many may have missed, Orbitz Worldwide, Inc. recently reported in its most recent 10-Q that a handful of employees of a Hilton-branded hotel were paid wages via direct deposit into bank accounts maintained with Bank Melli. The obvious question is why is Orbitz reporting on seemingly immaterial activities of a third party private hotel company in its public filings? The answer is because the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA) now requires it. 

The ITRA recently added new Iran-related disclosure requirements for public reporting companies under new Section 13(r) of the Securities Exchange Act of 1934, which became effective for SEC periodic reports due on or after February 6, 2013. Among other things, public companies are required to disclose in their periodic reports whether they knowingly engaged in (or any of their affiliates knowingly engaged in) certain “Iran-related activities, ” which generally include dealings involving: 

  • the Iranian government;
  • entities owned or controlled by the Iranian government;
  • persons designated on the OFAC Specially Designated Nationals (SDN) list as representatives of the Iranian government;
  • persons and entities identified on the SDN list as supporters of terrorism or proliferators of weapons of mass destruction;
  • financial institutions that facilitated a transaction for any person or on the SDN list whose property is blocked in connection with certain terrorist-related activities; or
  • Iranian oil resources. 

At first glance, many reporting companies may believe that the new requirements of Section 13(r) would be inapplicable to their business and operations. However, a significant number of public companies are taking a conservative approach with their Iran-related disclosures and are reporting almost anything that is potentially covered by the ITRA. The reason for this conservatism is likely due to two key aspects of the ITRA requirements. 

First, Section 13(r) requires reporting of activity of both the issuer and its affiliates. The term “affiliate” is Continue Reading Are new Iran-related disclosure requirements turning public companies into tattletales?

Limited SEC guidance moving companies to slowly adopt social mediaPublic companies are beginning to cautiously adopt social media as a disclosure channel. This area has experienced substantial changes lately as the SEC moved from a posture of threatening action against Netflix’s CEO for a post he made on his personal Facebook page to adopting a more relaxed and expansive position. This was really just facing reality given the widespread and growing use and acceptance of social media as a communications mode, but I give the SEC credit for recognizing this and moving to a more reasonable and realistic position. 

As mentioned in my prior blog post, the SEC recently gave some preliminary guidance for the use of social media as a disclosure method. This guidance can be found in this SEC Press Release and in the SEC’s report on its investigation of the Facebook postings made by Netflix’s CEO. While the SEC’s actions didn’t pave the way for widespread disclosure by social media, it at least provided some guidance in this area and gave social media disclosure an initial level of validation and credibility. It was good to see this change in the SEC’s position after it initially took a rather harsh stance on the Netflix CEO’s Facebook post (see my prior blog post). It’s early in this process, but I wanted to see how companies of different sizes and from different industries were handling this process. The announcements of first quarter earnings and quarterly results for many companies seemed like a good opportunity to get a progress report. 

It appears that public companies are initially taking a cautious approach to using social media as a disclosure channel. The companies that I examined seemed to be testing the waters by either using or referring to social media as a disclosure method while still utilizing more traditional forms of disclosure. This is understandable and prudent. Companies are moving slowly here due to the lack of direct guidance and the significant potential downside if a mistake is made. As I mentioned in my prior blog post, Regulation FD still applies to disclosure even when social media is being used. Many companies hedged their bets by using social media while also using conventional disclosure methods as this significantly reduces the risk of a Regulation FD or other disclosure problem. 

Based on some examples that I saw, both new economy and old economy companies are Continue Reading Social media as a disclosure channel – slow but steady

Registering shares of stock in a mergerThis is the fifth part of our Securities Law 101 series.  Because capital raising is such a critical function for middle market companies, we designed this series to introduce their management teams to some of the fundamental concepts in securities law.  We hope that this series will prevent some of the most common mistakes management teams make.  We will periodically publish posts examining different aspects of securities law. 

So your company wants to use its stock to buy another company?  As we have seen, stock consideration is coming back into vogue.  Issuing shares of stock for mergers and acquisitions, however, triggers the need to either register the new shares with the SEC (and possibly state securities regulators) or to find an exemption from the requirements found under Section 5 of the Securities Act of 1933. The presence of these rules can substantially increase the cost of the deal and could even make you consider going public before you thought possible.      

For mergers, finding an exemption from registration is not usually an easy task unless the target company is still held largely by the founder. Usually, the target company’s shareholders in the merger are often numerous, from many different states or jurisdictions, and represent a wide range of investor qualifications (accredited, sophisticated, etc.). As such, in many cases, finding a securities exemption is all but impossible. With exemptions off the table, let’s look at how to register stock in a merger. 

Stock that is registered in the context of a merger is registered on Form S-4.  This form was specifically designed for business combinations and exchange offers.  A transaction in which security holders are required to elect to receive new or different securities in exchange for their existing security (so called Rule 145 transactions) would qualify to use Form S-4.

Disclosure under Form S-4 can be quite complex. Generally, Form S-4 requires full disclosure regarding both the acquiring and target companies and, if the post-merger entity will differ materially from the acquiring entity, then full disclosure with respect to the post-merger entity is also required. Form S-4s also include the proxy statement for the shareholder meeting to approve the transaction and, typically, combine this proxy with the prospectus. Form S-4 mandates extensive disclosure of the transaction in the prospectus/proxy statement, including any fairness opinions and a comparison of the rights of the shareholders of the parties to the transaction.  Essentially, the disclosures are tailored to the specific transaction and nuances in the deal can create the need for a lot of disclosure.  Notably, for some companies, (e.g., 1st United Bancorp, Inc.) Continue Reading Securities Law 101 (Part V): Issuing shares of stock for mergers and acquisitions