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In the last several days, the SEC has engaged in a skirmish, and possibly an opening battle, against SPACs.  A recap follows.

The first shot was fired on March 31, when the Staff of the SEC’s Division of Corporation Finance and the Office of Chief Accountant issued separate public statements about a number of risks and challenges associated with taking private companies public via “deSPAC” transactions.

The CorpFin statement covered a lot of territory, pointing out the following pitfalls, among others, facing companies that go public via a deSPAC.  These pitfalls reflect that such companies are subject to rules governing shell companies that do not apply to companies going public through conventional IPOs.

  • Financial statements for the target must be filed with an 8-K report within four business days of the completion of the business combination.  The usual 71-day extension for such financial statements is not available.
  • The combined company will not be eligible to incorporate Exchange Act reports or proxy or information statements until three years after the completion of the business combination.
  • The combined company will not be eligible to use Form S-8 for the registration of securities issuable under compensation and benefit plans until at least 60 calendar days after the combined company has filed current Form 10 information. (This information is customarily included in a “Super 8-K” filed within four business days after closing of the deSPAC transaction.)
  • For three years following the completion of the deSPAC transaction, the company will be unable to use some streamlined procedures for offerings and other filings, such as using a free-writing prospectus.

The statement also reminds companies that public issuers are required to maintain accurate books and records as well as internal control on financial reporting – both areas that have been the basis for enforcement actions by the SEC.
Continue Reading Caveat Everybody — The SEC Takes Aim at SPACs

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My apologies to those of you who thought I would expound on the corporate governance implications of Madonna’s early oeuvre; but I want to write about materiality, and I’m a sucker for a catchy title.

Those of us who spend our waking (and many sleeping) hours thinking about disclosure know that materiality is the linchpin of disclosure; if something is material, you at least have to consider disclosing it – though of course, probability and other factors can impact that decision.  We also know that there are any number of judicial interpretations of what is and is not material.  However, it seems to me that we are approaching a tipping point in how materiality may impact disclosures.

Take, for example, the position of SEC Commissioner Elad Roisman, who has stated, in effect, that there is no need for SEC rules explicitly requiring disclosures concerning climate change and other ESG matters, because existing rules already require disclosure of anything that is material to a company.  (For example, see his keynote address to the 2020 National Conference of the Society for Corporate Governance.)  I have been a member of the Society for many years, and I have heard many of my fellow members express similar views.  However, if that is the case, taking that view to its logical extreme, why have any specific disclosure requirements at all?  Why not just say “tell us what’s material”?
Continue Reading Living in a material world

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It’s no secret that the smaller a company’s market cap, the less likely it is to be concerned with governance “nice-to-haves,” such as independent board leadership, annual elections of directors, and board diversity.  Over the years, I’ve heard time and time again, “next year is the year when all these things will begin to trickle down to the smaller-cap companies.”  After a while, these assurances began to sound like the old line about quitting smoking – “I can quit whenever I want – after all, I’ve done it many times.”

Perhaps the great governance trickle-down has begun.  On December 1, 2020, Nasdaq announced that it had filed with the SEC a proposed change in its listing standards that “would require all companies listed on Nasdaq’s U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors [and] to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.”  An “underrepresented minority” is “an individual who self-identifies in one or more of the following groups: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander or Two or More Races or Ethnicities.” If adopted, the proposal would be implemented based on a company’s listing tier and would eventually apply to the roughly 3,000 companies listed on Nasdaq.
Continue Reading Has the great governance trickle-down begun? Nasdaq pushes for board diversity

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There was good news and bad news from the SEC this week.

First, the good news.

It’s unofficial, but Bloomberg reported this week that the SEC is “shelving” its proposed overhaul of Form 13F.  (Hopefully, “shelving” doesn’t mean being put on the shelf to be taken down later on, as in a shelf registration.  In a hopeful sign, the Bloomberg piece says that “some within the [SEC] have been notified it’s dead.”)  As readers of this blog know, I was not a fan of the overhaul;  from my perspective, it was a misstep in what has otherwise been a run of pretty good rulemaking by the SEC.

As if to prove that investors and companies sometimes have more in common than one might think, the proposal was criticized by a broad swath of groups.  Companies objected to the fact that it would make it even harder to identify and communicate with their investors (that was the major concern I expressed in my blog posting).  But investors weren’t happy with it either; some questioned whether the proposal would generate the cost savings the SEC cited as one of the principal benefits.  In fact, the Bloomberg article cites a Goldman Sachs study to the effect that of the 2,238 comment letters received on the proposal, only 24 supported it.

The article states that the SEC “still believes that the…trigger [for 13F filings]…hasn’t been altered in four decades [and] needs to be changed.”  True, perhaps, but the SEC’s approach was to throw out baby (i.e., the benefits of 13F filings) with the bathwater.  The SEC is also quoted to the effect that “[t]he comments received illustrate that the form is being used in ways that were not originally anticipated.”  Also true, but that speaks to many larger issues, including so-called proxy plumbing, that the SEC needs to address.  In the meantime, this quick fix was not a fix at all.

Now for the bad news.
Continue Reading Good News, Bad News

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While we have been busy in 2020 learning how to social distance, wear masks and do Zoom meetings, the SEC has spent the year turning out a relentless tsunami of new rules and amendments of old ones. Among the latter are extensive amendments to the financial disclosure obligations of a public company when it acquires or disposes of a business. Adopted in May 2020, these long-awaited amendments go into effect on January 1, 2021, so a summary seems timely.

Given the extent and complexity of these amendments, we will summarize them in installments. This first installment considers the changes to the periods to be presented in the financial statements, the amendments to the Investment Test and the Income Test in the definition of a “significant subsidiary,” and the codification of the staff practice of permitting abbreviated financial statements for acquisitions of components of an entity. In reading this and future summaries, bear in mind that the new rules are complex and need to be reviewed carefully against the detailed terms of an acquisition or disposition.
Continue Reading The SEC Fixes those Pesky M&A Financial Disclosure Requirements

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Remember when you were a kid and you didn’t clean up your room or do something else you were supposed to do, and a parent would say “How many times do I have to tell you…?”  Well, the same holds true for perquisites disclosure.

Not quite four months ago, I wrote about an SEC enforcement action involving perquisites and the importance of paying close attention to perks.  Well, the SEC has done it again.  Two enforcement actions in four months may not a trend make, but as we approach the end of the calendar year – and the onset of the 2021 proxy season – a reminder seems in order.

The recent enforcement action, concluded at the end of September, sounds similar to so many other sagas of nondisclosure of perks.  In this case, the company disclosed “All Other Compensation” just shy of $600,000 over a four-year period.  The compensation included “certain personal travel and lodging costs.”  However, according to the SEC, the company failed to disclose $1.7 million of “travel-related perquisites and personal benefits,” consisting of personal use of corporate aircraft, expenses associated with hotel stays, and taxes related to both items.  It seems hard to overlook $1.7 million, but it’s not the first time it’s happened, and it almost surely will not be the last.
Continue Reading Perquisites Disclosure: “How Many Times Do I Have to Tell You?”

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How did we get here?

On September 11, 2020, the SEC adopted new rules to “update and expand the statistical disclosures” that bank holding companies, banks, savings and loan holding companies, and savings and loan associations are required to provide to investors. The old regime – Industry Guide 3, “Statistical Disclosure by Bank Holding Companies” – had not been meaningfully updated for more than 30 years.  There have been all sorts of developments since then, including new accounting standards, a financial crisis, and new disclosure requirements imposed by banking agencies. So it’s not surprising that the SEC began questioning the need to make changes to Industry Guide 3, requesting comments in 2017 and again with a proposed rule in September 2019.

So, what’s new?

The changes were implemented in part to eliminate overlaps with disclosures already required under SEC rules, U.S. GAAP, and International Financial Reporting Standards (“IFRS”), as well as to incorporate new accounting standards. Under the new rules, disclosures are required for each annual period presented (as well as any additional interim period should a material change in the information or trend occur), aligning these disclosures with the annual periods for financial statements.
Continue Reading Out with the old, in with the new: Banks and S&Ls must now provide updated and expanded statistical disclosures

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On August 26, 2020, the SEC continued to keep its foot on the gas with respect to its recent practice of modernizing disclosure rules by adopting amendments to the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K. As discussed in a previous post by my colleague, Bob Lamm, regarding the rule changes as originally proposed on August 8, 2019, the changes significantly update the provisions of Regulation S-K and signal a continuing shift to a principles-based approach to disclosure. The SEC gave the green light to the amendments substantially as proposed in 2019, with some minor modifications. Details of the final amendments are included below. The previous post provides commentary on some of the rule changes and some observations regarding the potential impacts of the shift to a principles-based approach to disclosure on registrants and their advisors.

In its press release announcing the amendments, the SEC acknowledged that these updates were due – actually, overdue – after decades of evolution in the capital markets and the domestic and global economy without any corresponding revisions in the disclosure rules. SEC Chairman Jay Clayton stated that  the improvements to these rules “are rooted in materiality and seek to elicit information that will allow today’s investors to make more informed investment decisions,” adding that the revisions “add[] efficiency and flexibility to our disclosure framework.”
Continue Reading Pedal to the metal on principles-based disclosure

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For both public and private companies, it’s important to determine the skills and other attributes needed to form a good or, hopefully, great board.  Of course, there are basics that always apply, such as integrity, intelligence, and a good mix of collegiality and candor.  However, once you get past those basics, it’s desirable to figure out what the organization really needs.  If the company has a consumer-facing business, you probably want to have a director or two with experience in that and related fields, such as marketing.  If it’s a defense contractor, you likely need someone with expertise in government relations.  And so on. However, in searching for and, hopefully, finding those board members, it’s also desirable to find individuals whose abilities extend beyond a single area of experience or expertise.

The notion of avoiding such “one-trick ponies” came to me while reading an article in a recent article in the Financial Times.  Since a subscription may be needed to access the article, the headline reads “US companies urged to appoint Covid-19 experts to boards.”  In fairness, the headline was a bit misleading; the article itself said that “the dean of Harvard’s school of public health has called on companies to put public health professionals [i.e., not Covid-19 experts] on their boards… to manage a pandemic threat that could hang over businesses for years.”
Continue Reading One-trick ponies and hordes of directors

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From where I sit, the SEC under the chairmanship of Jay Clayton has generally done a good job for public companies.  It has adopted a number of rules and amendments that make disclosure more effective without appreciably adding to – and in some cases reducing – the burdens on public companies.  Examples include streamlining financial disclosure requirements, rationalizing the definitions of “smaller reporting company”, “accelerated filer”, and “large accelerated filer”, and revising the rules governing financial statements of acquired and disposed businesses (although the latter do not take effect until 2021). And let’s not forget the very recent rule changes affecting proxy advisory firms, including a critical requirement that those firms provide companies with their voting recommendations.

While I wish that the SEC had also focused on proxy plumbing, it’s still a pretty good record, and it’s only a partial listing.

However (you knew there would be a “however”), I’m profoundly disappointed in the SEC’s proposal to “fix” Form 13F – the form on which large investment managers report their equity holdings of public companies.  While it’s nice that the SEC has turned its attention to a form that has long been in need of updating, the proposal seems to me to be unacceptable in at least two major respects.
Continue Reading 13F proposal — the SEC can (and should) do better