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SEC staff announces guidance for SPACs

Last week the Staff of the Division of Corporation Finance issued a statement addressing a variety of accounting, financial reporting and governance issues that a private operating company should consider before undertaking a business combination with a special purpose acquisition company (a “SPAC”), shortly followed by one by the Acting Chief Accountant addressing financial reporting and auditing considerations for companies considering merging with SPACs.

The Corporation Finance statement addressed:

  • Ineligibility for
    • The 71-day extension for target company financials, which must be filed on Form 8-K within four business days of closing the de-SPAC transaction
    • Incorporation of 1934 Act filings on Form S-1 until three years after closing 
    • Use of Form S-8 to register equity plans until 60 days after filing the “Super 8-K” containing required “Form 10 information” 
    • WKSI status, use of free writing prospectuses and certain other less strict requirements for public offerings 
  • Public company reporting requirements applicable to the SPAC before, and the combined company after, closing including
    • Books and records requirements
    • SEC reporting and disclosure requirements 
    • The Staff noted that in the limited circumstances described in S-K CDI 215.02, it would not object if the combined company were to exclude management’s assessment of internal control over financial reporting in the Form 10-K covering the fiscal year in which the transaction was consummated 
    • New accounting requirements
  • Stock exchange listing standards, including quantitative as well as corporate governance

SEC Acting Chair Announces Sweeping Climate and ESG Initiatives, New Regulatory Priorities and Potential Rollback of Recent Rule Changes

In a speech on March 15, 2021, Allison Herren Lee, Acting Chair of the SEC, reported on the steps the SEC is taking to meet investors’ growing demand for climate and ESG information, stating that “no single issue has been more pressing for me” and that “climate and ESG are front and center for the SEC.”  She observed that there has been a shift in capital towards ESG and sustainable investment strategies, and that ESG risks and metrics increasingly affect investment decision-making.

Lee indicated that the SEC will devote substantial resources to investor protection initiatives that extend beyond, but are mutually reinforcing of, the SEC’s climate and ESG initiatives.  She noted that these other initiatives include, among others, ensuring strong and clear standards for broker-dealers, taking a “hard look” at the effects of the continuing flow of capital away from the public markets and proceeding with equity market structure reforms.  Reflecting the change in administration and SEC leadership, she noted that this may result in undoing some recently adopted rules and/or guidance.

Highlights of Acting Chair Lee’s speech follow:

Improving Climate and ESG Disclosures.  Lee noted that the SEC’s fundamental role with respect to climate and ESG is helping ensure that material information gets into the market in a timely manner.  She believes the SEC’s current voluntary framework for climate and ESG disclosures neither ensures that result nor meets investor demands; as a result, the SEC has begun taking steps to create a mandatory and comprehensive ESG disclosure framework

SEC Acting Director Coates proposes framework for future ESG rulemaking

Yesterday, John Coates, the acting director of the SEC’s Division of Corporation Finance, announced a proposed framework for considering new ESG disclosure requirements, recognizing that while the scope of ESG issues is very broad, specific ESG issues affect particular companies differently based on industry, geography and other factors.

Need for “adaptive and innovative” policy

Coates compared ESG issues to asbestos-related risks, which evolved from invisible “non-financial” risks that were not addressed in SEC filings to visible and eventually clear financial risks that were increasingly disclosed in companies’ filings.  He believes that SEC policy needs to be adaptive and innovative and, for example, respond to climate risks that were formerly peripheral and now have greater significance.

Effective ESG disclosure system

Coates believes some of the questions the SEC should consider include:

  • What disclosures are most useful?
  • What is the right balance between principles and metrics?
  • How much standardization can be achieved across industries?
  • How and when should standards evolve?
  • What is the best way to verify or provide assurance about disclosures?
  • Where and how should disclosures be globally comparable?
  • Where and how can disclosures be aligned with information companies already use to make decisions?

Costs from having no ESG requirements

Although recognizing that disclosure requirements impose costs on companies, Coates believes that failing to establish ESG requirements is itself costly – that the lack of consistent, comparable and reliable ESG data discourages investment and voting decisions.  Companies incur higher costs in responding to multiple, conflicting or redundant investor

Nasdaq amends its board diversity proposal

On Friday, Nasdaq submitted a revised proposal that addresses board diversity membership for listed companies.  As discussed in our prior alert, Nasdaq had originally called for public companies – over a two-to-four year phase-in period — to include two diverse directors on their boards and to disclose in a “diversity matrix” certain anonymous aggregate data regarding gender identity, race, ethnicity and sexual orientation.

Based on comments, including criticism as discussed here, Nasdaq has modified the proposal in a variety of areas:

  • Smaller boards. Companies with five or fewer directors would only need to include one diverse director, instead of two.
  • Grace period for vacancies. A one-year grace period would be provided for companies that no longer meet the diversity objective as a result of a vacancy on the board.
  • Timing of disclosure. Diversity information would need to be made publicly available before annual shareholder meetings, to align with disclosures for other proxy-related governance matters.
  • Extra time for newly-listed companies. Newly-listed companies that become listed after the phase-in period for the new rules ends would have an additional two-year period after the phase-in period to fully meet the diversity objective.
  • Trigger date. The operative date for disclosure would be the later of (1) one calendar year from the date of SEC approval of the revised proposal or (2) the date the proxy statement is filed for a company’s annual meeting during the calendar year of such SEC approval date.
  • Location of disclosure. Companies could choose to disclose

SEC guidance targets disclosures during “meme stock” volatility

February 9, 2021

Categories

Yesterday, the SEC’s Division of Corporation Finance issued guidance on securities offering disclosure during times of extreme price volatility, which it viewed as characterized by:

  • recent stock run-ups or recent divergences in valuation ratios relative to those seen during traditional markets,
  • high short interest or reported short squeezes, and
  • reports of strong and atypical retail investor interest (whether on social media or otherwise)

The guidance was issued in the form of a sample comment letter to address topics such as:

  • On the prospectus cover page
    • recent price volatility and any known risks of investing under these circumstances
    • comparative market prices before and after the volatility
    • whether any recent changes in financial condition or results of operations are consistent with the stock price changes
  • Risk factors that address
    • recent extreme volatility
    • the effects of a potential short squeeze, including on purchasers in the offering
    • the effect of the number of shares being offered relative to the number outstanding, including on stock prices and investors
    • the potential dilutive effect of future offerings, if contemplated
  • Priorities for use of proceeds, insofar as the targeted proceeds are based on a current stock price that significantly exceeds the company’s historic average price per share, in the event the actual proceeds are less than expected

The staff noted that the sample comments do not constitute an exhaustive list of the issues that companies should consider.

Court ruling highlights confidentiality risks for non-employee directors who use outside email addresses

A recent decision by the Delaware Court of Chancery highlights risks for outside directors in using third-party email systems when communicating about confidential company matters.  In that case, the court ruled that attorney-client privilege was lost because of the lack of a reasonable privacy expectation.

The case arose out of a tender offer by Softbank for shares of WeWork that was oversubscribed but terminated prior to closing. During discovery, the plaintiffs sought documents from Softbank in the custody of “dual hat” employees of Softbank and its majority-owned subsidiary, Sprint.  The documents – which related to Softbank and not Sprint – were sent to or from Sprint email accounts but withheld by Softbank on the basis of its attorney-client privilege. 

The court explained that the privilege issue turned on whether the employees had a reasonable expectation of privacy in their work email accounts, which must be decided on a case-by-case basis, and applied the four-factor test established in In re Asia Global Crossing, Ltd.:

(1) does the corporation maintain a policy banning personal or other objectionable use, (2) does the company monitor the use of the employee’s computer or e-mail, (3) do third parties have a right of access to the computer or e-mails, and (4) did the corporation notify the employee, or was the employee aware, of the use and monitoring policies? [322 B.R. 247, 257 (Bankr. S.D.N.Y. 2005)]

In this case, the court found that a number of factors supported production of the documents:

  • Although

SEC Rule 144 Proposals Target “Toxic” Convertible Securities and Paper Filings

Last week the SEC proposed to amend Rule 144 in order to:

  • Eliminate tacking for shares underlying market-adjustable securities of unlisted companies
  • Update and simplify certain filing requirements, including mandating electronic filing of Form 144s

Elimination of tacking for shares underlying market-adjustable securities of unlisted companies

The proposals would amend Rule 144(d)(3)(ii) to eliminate “tacking” for securities acquired upon the conversion or exchange of the market-adjustable securities of an unlisted company – that is, a company without any securities listed, or approved for listing, on a national securities exchange. As a result, the holding period for the underlying securities — either six months for securities issued by a reporting company or one year for securities issued by a non-reporting company — would not begin until the conversion or exchange of the market-adjustable securities.

In the SEC’s view, the change is needed because applying Rule 144 “tacking” provisions to market-adjustable securities undermines one of the key premises of Rule 144, which is that holding securities at risk for an appropriate period of time prior to resale can demonstrate that the seller did not purchase the securities with a view to distribution and as a result is not an underwriter for the purpose of Securities Act Section 4(a)(1).

In transactions involving market-adjustable securities, the discounted conversion or exchange features in these securities typically provide holders with protection against investment losses that would occur due to declines in the market value of the underlying securities prior to conversion or exchange. Often,

SEC affirms NYSE rule changes allowing primary capital raises by issuers in direct listings

Yesterday, by another 3-2 vote, the SEC approved changes to NYSE listing rules relating to primary direct listings after conducting a “de novo” review following objections raised by certain investors and commentators.

In August, using delegated authority, the SEC’s Division of Trading and Markets had approved changes to NYSE listing rules to allow companies to raise capital in connection with a direct listing on the NYSE without a firm commitment offering.  Shortly afterwards, the SEC notified the NYSE that the rule changes had been stayed following receipt of notice from the Council of Institutional Investors (CII) that the CII was submitting a petition for a full Commission review of the delegated approval by the Division.

The Commission conducted a de novo review, considering the CII petition and comments submitted.  The majority decided to affirm the rule change – described in our earlier post – as consistent with applicable law.  The CII’s principal concerns, which were shared by Commissioners Lee and Crenshaw, related to:

  • The lack of an underwriter and corresponding due diligence, resulting in reduced investor protection
  • The reduced ability for shareholders to recover damages for false or misleading disclosures, due to the judicial doctrine of “traceability,” under which courts have held that plaintiffs lack standing to pursue claims if they cannot trace their purchased shares back to the offering covered by the registration statement

In response to these concerns, the SEC majority concluded:

  • Primary direct listings will be registered under the Securities Act and subject

New Nasdaq Listing Proposal: Add Diverse Directors or Explain Why Not

Nasdaq yesterday announced a proposed new listing rule that would require all Nasdaq-listed companies to publicly disclose consistent, transparent board diversity statistics in a specified form of matrix.  In addition, the proposed rule would require Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors:  one woman and one person who self-identifies as either an underrepresented minority or LGBTQ.

Nasdaq believes its proposal would benefit investors and the public interest, citing in its SEC filing numerous empirical studies as support for its finding that diverse boards “are positively associated with improved corporate governance and financial performance.”  It also noted calls for diversity from institutional investors, corporate stakeholders and legislators.

If the rule is approved by the SEC, companies would be required to disclose board-level diversity statistics within one year of the SEC’s approval of the listing rule.  In addition:

  • All operating companies will be expected to have one diverse director within two years of the SEC’s approval of the listing rule (non-operating companies, such as asset-backed issuers, cooperatives, limited partnerships and investment management companies, as well as certain specified issuers of non-equity securities, would be exempt from the proposed rule).
  • Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market will be expected to have a second diverse director within four years of the SEC’s approval.
  • Companies listed on the Nasdaq Capital Market will be expected to have a second diverse director within five years of the SEC’s

SEC Proposes Significant Amendments to Rule 701 and Form S-8 to Better Align with Current Employment Practices

The SEC recently approved proposed amendments to rules governing the offer or sale of securities to employees through compensation programs. The proposed changes to Rule 701 — which exempts sales of securities by privately held companies made to compensate employees, consultants and advisors — and Form S-8 – which is the form used to register the sale of public company securities to employees and others — are designed to modernize the framework for compensatory securities offerings in light of the significant evolution in such offerings and the composition of today’s workforce.

We have prepared a client alert describing the amendments that can be found here.

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