Campaign diclosure rules to create administrative nighmareAs first reported by Professors  Lucian Bebchuk and Robert J. Jackson, Jr. in their recent posting on the Harvard Law School Forum on Corporate Governance and Financial Regulation, the SEC may take action to issue proposed rules on corporate political spending disclosures by public companies as early as the second quarter of this year. This is according to the most recently updated Current Unified Agenda and Regulatory Plan, where the SEC appears to have preliminarily scheduled a notice of proposed rulemaking on this subject for April. Realistically, the fact that these rules are scheduled on this regulatory agenda is probably not very significant and may have gotten there as a means to temporarily appease shareholder rights advocates that have recently been pressing for these disclosures. Additionally, considering that the current four-person commission is equally divided on the political front, it is not likely that anything significant will come out of the SEC in the near future until a replacement for Mary Schapiro is appointed and confirmed. 

If something does miraculously materialize, it would be an interesting move by the SEC considering that rules required to be adopted under the Dodd-Frank Act have yet to be fully implemented almost three years after the bill was signed into law in 2010. This fact was emphasized in Commissioner Gallagher’s recent comments to the U.S. Chamber Center for Capital Markets Competitiveness. In those comments, Commissioner Gallagher specifically noted that “the SEC, like other regulators, is now dealing with the problem of rushed, inadequate rule proposals that were pushed out in a bid to meet arbitrary congressional deadlines.”  With the backlog of Dodd-Frank and JOBS Act rules, why would the SEC even bat an eyelash at a rules proposal with no Congressional mandate? 

In any case, there’s no question that campaign contribution disclosure has been a hot topic, particularly in the wake Continue Reading Proposed campaign contribution disclosure rules may be coming as early as April (but not likely)

Resolutions by in-house counsel for 2013As we start 2013, I thought it would be fun to ask in-house counsel what their New Year’s resolutions were.  I wasn’t looking for the usual “go to the gym more/ lose weight/ get organized” type answers, but rather what corporate secretaries/ securities counsel would want to improve upon in 2013 in their professional lives.  I heard back from a variety of in-house counsel, some of whom wish to remain anonymous.  Many had similar types of goals for this year.  I want to thank Bob Lamm, Assistant General Counsel and Assistant Secretary at Pfizer Inc., and Stacey Geer, Senior Vice President and Associate General Counsel at Primerica, Inc., both of whom were especially helpful in coming up with this list.  Here are the top resolutions submitted by in-house counsel:

Refresh the board and committee self-evaluation process.  Now is a good time to refresh the board and committee self-evaluation process.  If your board and committees are like most, they may be “bored” with the process by now.  By asking the same questions every year, eventually the process becomes stale and the answers become predictable.  Rather than have the directors complete the same survey consider changing the questions, or better yet, having a third party facilitate the evaluation process.  Remember to set aside some time to discuss the evaluation because the discussion of the evaluation is the most important part of the process. 

Tweak your director orientation program.  A good director orientation program allows new board Continue Reading Starting the New Year off right: In-house counsel disclose their New Year’s resolutions

Proxy advisory firms' influence over proxy votingAs we say “goodbye” to 2012 we say “hello” to another proxy season full of angst caused by the self-appointed czars of corporate governance, the proxy advisory firms.  Although ISS and Glass Lewis have been making voting recommendations for more than a decade, over the past two years their power over voting outcomes has increased.  When the Dodd-Frank Act was enacted in 2010 Congress was very clear that the Say-on-Pay votes were merely advisory and that directors would not be subjected to increased liability over a company’s executive compensation practice; however, the unintended consequence of Dodd-Frank was to strengthen the unregulated proxy advisory firm industry by allowing these firms to be the near-final arbiters of whether executive compensation should be approved by shareholders.  Failure to comply with the arbitrary guidelines of ISS or the often unknowable guidelines of Glass Lewis can cause a company the potential embarrassment of a “failed” Say-on-Pay vote regardless of whether the independent directors at the company, who painstakingly analyzed various metrics in deciding what to pay the executive officers, determined the compensation to be in the best interests of the company and its shareholders.  In fact, Matteo Tonello of the Conference Board suggests there is substantial evidence demonstrating that the proxy advisory firms have significant influence over the design of executive compensation programs, but no evidence that they have contributed at all to improved governance quality or increased shareholder value.

The SEC clairvoyantly expected a growing conflict between issuers and the proxy advisory firms when it Continue Reading Are investors’ interests served by proxy advisory firms?

Following up on my post on the subject, I had the chance to speak with Colin O’Keefe of LXBN regarding the SEC sending a Wells notice to Netflix and its CEO over a Facebook post the latter made. In the interview, I explain what happened, why the SEC is displeased and why it needs to do more to make sure its rules and regulations reflect the changing technological landscape.

The use of social media as a public company information channel encountered a roadblock on December 5, 2012 as Netflix, Inc. and its CEO, Reed Hastings, both received Wells notices from the SEC regarding a prior Facebook post that Mr. Hastings had made. A Wells notice is a notification from the SEC that it intends to recommend enforcement action against a company or individual. This notice also gives the affected parties an opportunity to explain why such an action is not appropriate. 

Mr. Hastings’ July 2012 Facebook post congratulated the company’s content licensing team for exceeding a milestone in monthly viewing hours. It also contained a positive prediction regarding future monthly viewing hours. Netflix did not issue a Form 8-K, a press release or any other disclosure at the time of this post. Mr. Hastings has made a habit of posting company information on his Facebook page. Here is the post that is the subject of the Wells notice:

 FD issue for Netflix

Netflix filed a Form 8-K regarding this matter on December 5, 2012. According to this 8-K, the Wells notices indicated that the SEC staff intended to recommend that the SEC institute a cease and desist proceeding and/or bring a civil injunctive action against Netflix and Mr. Hastings for violations of Regulation FD, Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-11 and 13a-15 under the 1934 Act. Mr. Hastings also provided a statement that was attached as an Exhibit to this Form 8-K. The statement clearly indicates his feeling that the SEC’s application of Regulation FD is incorrect here. 

Regulation FD prohibits selective disclosure of material information. This regulation was enacted to prevent public companies from selectively releasing material information to certain shareholders or other parties without broad distribution. For example, Regulation FD prevents a company from selectively providing information to certain friendly investment analysts or major shareholders before it is publicly. The policy behind this rule is that all investors should have equal access to material information. 

Regulation FD is conceptually a good rule, as it helps to level the playing field among investors and interested parties. The real problem in the social media context is that Continue Reading Netflix CEO’s Facebook post leads to possible Regulation FD action by SEC – Time for some changes

General Solicitation and Stock SalesFor securities issuers, the most widely used exemption from registration is the private offering exemption in Section 4 of the Securities Act. Formerly referred to as the “Section 4(2)” exemption, the enactment of the JOBS Act in April of this year fixed the section numbering in Section 4 of the Securities Act which, until now, had not conformed to the alternating number-letter-number format contained in the other sections of that Act. Thus, the old 4(2) private offering exemption is now the Section 4(a)(2) exemption, although many issuers and practitioners have failed to realize this administrative change as evidenced by recent Form 8-K filings pursuant to Item 3.02 which still make reference to the “Section 4(2)” private offering exemption as the applicable exemption relied upon for their respective unregistered securities offerings.

But aside from this administrative fix, has the JOBS Act actually changed the exemption requirements itself? Arguably it has as I will hypothesize in this post.

Most securities professionals are aware that the JOBS Act requires the SEC to amend Rule 506 to permit general solicitation and advertising in connection with a private offering in which all purchasers are “accredited investors.” Many people mistakenly refer to Rule 506 as an “exemption” but it is not actually an exemption per se. Rather, the SEC adopted Rule 506 to provide a safe harbor to give definitive guidance to issuers who undertook private placements of their securities under then-Section 4(2) (now Section 4(a)(2)) as to what criteria must be satisfied to provide certainty to the issuer that their offering complied with the private offering exemption. Simply put, if you meet the requirements of Rule 506, then the offering is exempt pursuant to Section 4(a)(2).

Prior to the adoption of Rule 506 which established definitive criteria for compliance with the private offering exemption, the 4(a)(2) exemption standards were developed through case law over the years. The famous Ralston Purina case and its progeny focused on three primary factors to consider in determining whether the private offering exemption applied based on Continue Reading Did the JOBS Act unintentionally change the statutory private offering exemption?

Small tick sizes are hurting the markets
Photo by Luigi Rosa

Mr. Steiner is the Chief Operating Officer and Managing Director – Investment Banking at Ladenburg Thalmann & Co. Inc.  The views expressed in this posting are Mr. Steiner’s personal views and should not be attributed to Ladenburg Thalmann & Co. Inc., its employees, affiliates or subsidiaries or to Gunster.   

While the Jumpstart Our Business Startups Act (the “JOBS Act”) is a well-intentioned effort to assist smaller companies in their ability to raise capital (and ultimately increase hiring), it falls short with respect to one of the most pressing problems facing capital formation. One can not argue with relaxed rules in several areas such as (i) permitting solicitation for certain private placements; (ii) reducing the reporting requirements for Emerging Growth Companies (generally, newly public companies with less than $1 billion in annual revenue); and (iii) improving the largely unused Regulation A; however, while the burdens of becoming publicly traded have been eased for some smaller companies under the JOBS Act legislation, a major issue that was not addressed is the inability of small and micro-capitalization public companies to fully gain the benefits of their publicly traded status. Or more to the point – it might be easier to go public via the IPO process, but why be public in the first place? 

Regardless of size, a company’s status as being publicly traded is an asset. The manner in which a company maximizes the value of its public status is by maximizing the liquidity in its traded securities in the public markets. This results in easier, more predictable capital raising, the ability to use its stock as currency for acquisitions and hiring of key personnel, and less opportunity for “game-playing” by the unsavory Continue Reading GUEST BLOGGER: Tick size remains large obstacle for middle market public companies

Business CombinationsCash may be king, but the use of stock to buy a target company can be very advantageous.  The practice of using stock to purchase a target company never really went away, but it did become less desirable to target company shareholders during the recent economic downturn.  With stock values dropping and access to credit diminishing, mergers and acquisitions that did close were often done in cash.  However, as markets have become more stable and many stocks have risen to higher valuations, purchasers are looking more and more to again use their stock to buy companies.

In a typical merger, the question of whether to use cash, stock, a combination of the two or some other form of consideration is a business decision to be negotiated by the purchaser and target companies, with the consultation of professionals. Despite the recent economic downturn and its effect on market volatility, reduced market volatility over the last three years, combined with a legislative push to assist small businesses in raising capital, has made stock a more attractive form of consideration for buyers and sellers alike.

There are many benefits to using stock in a deal.  Perhaps the most important benefit stems from qualifying the transaction as a tax-free “reorganization,” provided that the transaction is structured properly. As a tax-free reorganization, the target shareholders would generally not have to realize gains on the exchange of their stock for the purchasers stock.  In contrast, target shareholders would normally have to realize gains to the extent they receive cash for their shares in a merger.  So the use of stock in a deal can be very advantageous to seller shareholders for tax reasons.

The use of stock consideration can also assist in addressing possible absolute and relative valuation issues by allowing the parties to negotiate with an eye toward the market. Further, stock consideration can help to minimize deal risks that arise in transactions where Continue Reading Has stock returned as the currency of choice in mergers and acquisitions?

Campaign contribution disclosure rulesPetition and comment letters urging the SEC to create rules requiring public companies to disclose their political contributions may finally be gaining some traction.  We previously blogged about this petition, which was submitted by a group of ten law professors in response to the Supreme Court’s opinion in the Citizens United v. Federal Election Commission case, asking the SEC to consider adopting rules that would require public companies to make disclosures about their political contributions. We also blogged about SEC Commissioner Luis Aguilar’s subsequent comments during a speech stating that the SEC should consider rules requiring this type of disclosure. Until recently, the SEC had not taken any action to consider issuing rules in this area. 

However, according to a Wall Street Journal report from November 8th, the SEC’s Division of Corporate Finance is now considering recommending that the agency’s commissioners propose rules mandating public companies to provide disclosure to shareholders regarding the uses of corporate resources for political purposes. Such rules, of course, would not be inconsistent with the recent trend toward mandating social disclosures in public company filings, like the conflict mineral rules which were recently adopted in August of this year. Although many have argued that these types of social disclosure rules Continue Reading Are political contribution disclosure rules for public companies coming in the near future?

How public companies should handle social mediaSocial media use has experienced a meteoric rise. According to Tweetsmarter (a social media blog), the top five social media sites (Facebook, Twitter, LinkedIn, Google+ and Pinterest) have 1.8 billion users. Many companies have also embraced social media use as a cheap and efficient channel for the dissemination of information. Good examples here include Best Buy’s Facebook page and Whole Foods’ Twitter account.

While social media is a very powerful force in marketing and branding, public companies face significant potential problems from its use.  A public company’s posting of information on a social media site is equivalent to any other written information that is disclosed by other means. If material nonpublic information is disclosed via a social media channel, the company will face the same securities law issues that it would face from any other disclosure made through other means. Accordingly, public companies must consider the possible impacts of social media use and take steps to control and mitigate the potential negative effects of social media use.

While there is no perfect solution to the potential problems that social media use creates for public companies, I have assembled the following list of guidelines and best practices for public companies in the social media area:

Continue Reading Careful with that tweet! Social media considerations for public companies