BCLP – US Securities and Corporate Governance – Bryan Cave Leighton Paisner

US Securities and Corporate Governance

COVID-19

Main Content

Good News: SEC Allows Electronic Signatures in Authentication Documents

The SEC recently approved amendments to Rule 302(b) of Regulation S-T, which governs the signing of “authentication documents” relating to typewritten signatures included in documents that are filed with the SEC electronically via EDGAR.  Current Rule 302(b) requires that, prior to or at the time of such a filing, each signatory manually sign a signature page (or other document) “authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing.”  Rule 302(b), as amended, will for the first time allow a signatory to use an electronic signature (as an alternative to a manual signature) on any such authentication document, provided certain requirements are met, as described below.

Effective Date.  The amendments will become effective upon publication in the Federal Register.  Following approval of the amendments, however, the SEC staff issued a statement indicating that, in light of COVID-19 concerns, early reliance on and compliance with amended Rule 302(b) is permitted.

Attestation Document (New).  Before using an electronic signature in an authentication document for the first time, a signatory will be required to manually sign a document attesting that he or she agrees that the use of an electronic signature in any authentication document will be the legal equivalent of such individual’s manual signature.

Electronic Signature Procedures.  In connection with the amendments, the SEC updated the EDGAR Filer Manual to set out the procedures that are required to be followed before an electronic signature may be used in an authentication document.  The electronic signing

2021 Annual Shareholder Meetings – Avoiding a Super Spreader Event

As COVID-19 rages on, companies are again flocking to virtual annual meetings for the 2021 proxy season, but with one important difference:  the luxury of time.  Many companies are already exploring retention of virtual annual meeting providers and alternatives for video and real-time Q&A, as well as drafting fulsome disclosure about meeting logistics in their proxy materials to address concerns raised by investors, the SEC and others with respect to some pitfalls during the 2020 proxy season.

Service Providers and Technology.  For 2021, an issuer will have additional time to select an appropriate provider of a virtual meeting platform.  The most widely used vendor for hosting virtual meetings is Broadridge Financial Solutions, Inc., which reported that it hosted 1,494 virtual shareholder meetings during the first six months of 2020.  Other service providers, such as stock transfer agents, also provide such services.  A few companies have even arranged to facilitate the virtual component of an annual meeting via Zoom.

In 2020, some companies were caught off-guard by technology glitches.  For 2021, issuers should be in a position to anticipate technology issues and to put contingency plans in place to address them.  Issuers can follow best practices for virtual meetings by, for example, putting in place technical support lines for the duration of their meetings.

Format and Rules of Conduct (including Q&A).  Companies need to decide whether a meeting will be virtual-only, physical-only or a hybrid.  For any virtual component, they need to decide whether the access will be

ISS releases FAQs addressing COVID-related compensation actions

ISS recently published FAQ guidance addressing how it will approach COVID-related pay decisions under its pay-for-performance qualitative evaluation.  The guidance reflects feedback from discussions with investors and its annual policy survey.

  • Temporary salary reductions have limited impact on ISS scoring unless incentive payout opportunities are also reduced, as base salaries typically represent a small portion of total pay.
  • Changes to bonus/annual incentive metrics, targets or measurement periods will be evaluated for reasonableness on a case-by-case basis in light of the justifications and rationale disclosed.  The guidance sets forth a non-exclusive list of factors to consider for disclosure.
    • Specified disclosure of board consideration of payout opportunities would also be needed where the reduced target falls below the prior year’s performance levels without commensurate reductions of payout opportunities.
  • Changes to in-progress long-term incentive awards will generally be viewed negatively, as they are intended to cover multiple years – particularly in the case of companies with poor quantitative pay-for-performance alignment.
  • Changes to 2020 long-term incentive awards may be viewed as reasonable, where clearly disclosed and modest. For example, switching to relative or qualitative metrics due to uncertainty in forecasts could be viewed as reasonable – but not shifts to predominantly time-vesting equity or short-term measurement periods.
  • Retention or one-time awards may be viewed as reasonable if (i) the rationale is clearly disclosed and furthers investor interests, (ii) reasonable in magnitude and represent an isolated practice, (iii) vesting conditions are strongly performance-based and properly linked to the underlying rationale,

Four Things You May Have Missed about the PPP Change of Ownership Notice

As previously discussed, on October 2, 2020, the SBA published Procedural Notice 5000-20057 addressing Paycheck Protection Program Loans and Changes of Ownership. Based on a review of memos on the subject by other law firms and accounting firms, four items stood out as not being regularly addressed (in addition to some expressing the mistaken belief that buyers have to assume the PPP loan in any asset transaction).

1. Any Merger Triggers the Procedural Notice.

The definition of a change of ownership includes any merger of the PPP borrower with or into another entity.  Even if the PPP borrower is the surviving entity and there is no change in shareholder ownership, it would appear to be pulled into the SBA Procedural Notice. Accordingly, either internal reorganizations or acquisitions could trigger the obligations of the Procedural Notice if structured as a merger.

2. Stock Transfers Between Existing Shareholders Can Trigger Procedural Notice.

Stock transfers to affiliates and existing owners are covered, not just sales to new owners. Any change in shareholder composition that results in a greater than 50% change since the receipt of the PPP loan triggers a change of ownership of ownership under the Procedural Notice.

3. Silence as to Already Completed Changes of Ownership.

The SBA Procedural Notice does not provide any guidance for what should be done about changes in ownership that closed prior to the publication of the Notice. The significance of this silence is then either amplified or minimized, depending on one’s

Key issues for upcoming Q3 10-Q filings

As public companies prepare their Q3 releases and filings, some of the key issues they should consider include:

  • MD&A – as we reported last quarter, the SEC Staff issued COVID-19 guidance in June calling for companies to disclose the impact of the pandemic through the eyes of management, including, to the extent material:
    • The effects of the pandemic on a company’s operations, liquidity and capital resources; the short- and long-term impact of any federal relief received under the CARES Act; and the company’s ability to continue as a going concern
    • Operational changes as a result of the pandemic – from converting to telework to modifying supply chain and customer contracts, and now converting to the return to the workplace and business reopenings
    • Trends, events or uncertainties (such as possible events of default, breach of covenants, etc.), unless a company can conclude either that it is not reasonably likely that the trend, uncertainty or other event will occur, or that a material effect on the company’s liquidity, capital resources or results of operations is not reasonably likely to occur
  • Non-GAAP Financial Measures – as we recently noted, it appears few companies are jumping on the EBITDAC bandwagon; however, the SEC staff has issued comments on such measures that include adjustments for COVID-19, as in Comment 6 here. Accordingly, companies should be prepared to explain the quantification of any such adjustments and their rationale, consistent with the guidance described in our earlier

Buyers’ obligation to assume PPP debt hinges on need for SBA approval

The Small Business Administration recently published a procedural notice on changes of ownership for PPP borrowers. One specific area where we’ve seen confusion is whether the procedural notice requires a buyer to assume all of the PPP borrower’s obligations in an asset sale transaction. As discussed below, while the procedural notice does require the buyer to assume the PPP loan obligations in an asset sale in order to obtain the SBA’s prior approval, so long as the SBA’s prior approval is not required, then the parties remain free to structure the asset transaction in whatever manner makes economic sense for the parties, including leaving the PPP loan obligations with the seller.

Section 2.b. of the procedural notice indicates that, in connection with obtaining SBA pre-approval for a change of ownership, that SBA approval “will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms.” The procedural notice goes on to indicate that the purchase or sale agreement “must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity, or a separate assumption agreement must be submitted to the SBA.” Accordingly, if SBA pre-approval is required in connection with a change of control structured as an asset sale, then it would be necessary to have the

Red flags for directors: SEC may take magnifying glass to disclosures involving significant judgments in COVID-19 era

In a fast-paced webinar, the Heartland NACD chapter recently explored the board’s role in SEC inquiries and discussed red flags for directors, as well as SEC trends and developments. Panelists included Terri Vaughan, a seasoned board leader; Lory Stone, an SEC enforcement attorney; and Terry Pritchard, an experienced securities litigator at Bryan Cave Leighton Paisner LLP.

During a discussion of red flags that should draw directors’ attention, Ms. Stone noted that the SEC may take a magnifying glass to disclosures involving significant judgements and estimates, particularly in the current economic conditions.  She quoted her former colleague Steven Peikin, previous Co-Director of the Division of Enforcement, who stated in a speech at a recent securities enforcement forum:

Recognizing that the economic impacts of any downturn may vary across different industries and sectors, the [SEC’s Coronavirus] Steering Committee has developed a systematic process to review public filings from issuers in highly-impacted industries, with a focus on identifying disclosures that appear to be significantly out of step with others in the same industry. We are also looking for disclosures, impairments, or valuations that may attempt to disguise previously undisclosed problems or weaknesses as coronavirus-related.

Other red flags discussed during the webinar included:

  • Tips/hotline reports, which should be closely examined by the board;
  • “Domineering” CEOs who may have unchecked power;
  • Auditor resignations, which should prompt the board to understand the reason for the resignation;
  • Management shake-ups, with abrupt terminations or resignations;
  • Government investigations;
  • Financial restatements;
  • Practice changes in judgment areas (debt restructuring, revenue recognition practices);

When What Goes Down Comes Up – Reporting NEO Compensation Restoration

As the COVID-19 pandemic unfolded, public companies took action in response to the impact and potential impact of the pandemic on their businesses and the economy.  The actions often included temporary compensation reductions (voluntary and otherwise) for a company’s principal executive officer, principal financial officer and/or named executive officers (collectively, “NEOs”).

As would be expected, many companies reported these changes under Item 5.02(e) of Form 8-K, which is triggered when a company enters into, adopts or materially amends a material compensatory plan or arrangement with NEOs or in which they participate.  Some companies, however, reported the reductions under Item 7.01 or 8.01 of Form 8-K or, sometimes, in a stand-alone press release or not at all.  As we previously noted in March, companies that did not report the reductions under Item 5.02(e) likely were comfortable that, based on their specific facts and circumstances, the decreases were not material to the executives’ compensation arrangements or, in the case of voluntary compensation reductions where employment agreements were in place, perhaps by analogy to SEC C&DI 117.13, that Item 5.02(e) was not triggered.

As we move into the final quarter of 2020, and in view of developments following the initial compensation reductions relative to the continuing effects of the pandemic, a number of industries and companies have had relatively positive financial performance in the face of the pandemic, and may have a more favorable business outlook or simply better visibility into the effects of the pandemic.  As a result, some companies have

SEC Issues New COVID-19 Guidance: Health-Related or Personal Transportation Benefits May Be Perqs

The SEC Division of Corporate Finance yesterday issued new Regulation S-K guidance, CD&I 219.05, to help public companies determine whether benefits provided to executive officers because of COVID-19 should be disclosed as perquisites or personal benefits for purposes of executive compensation proxy disclosures.  Consistent with Release 33-8732A, the guidance confirms that an item provided because of the COVID-19 pandemic is not a perquisite or personal benefit if it is “integrally and directly related to the performance of the executive’s duties,” which depends on the particular facts.

The CD&I states:  “In some cases, an item considered a perquisite or personal benefit when provided in the past may not be considered as such when provided as a result of COVID-19. For example, enhanced technology needed to make the NEO’s home his or her primary workplace upon imposition of local stay-at-home orders would generally not be a perquisite or personal benefit because of the integral and direct relationship to the performance of the executive’s duties. On the other hand, items such as new health-related or personal transportation benefits provided to address new risks arising because of COVID-19, if they are not integrally and directly related to the performance of the executive’s duties, may be perquisites or personal benefits even if the company would not have provided the benefit but for the COVID-19 pandemic, unless they are generally available to all employees.”

Perqs have been, and will continue to be, an area of SEC focus.  We urge companies to carefully give thought

SEC Staff Announces Temporary Procedures for Supplemental Materials and Rule 83 Confidential Treatment Requests

In light of health and safety concerns related to the pandemic, the SEC staff recently announced the availability of a temporary secure file transfer process for the submission of supplemental materials pursuant to Rule 418 under the Securities Act of 1933 or Rule 12b-4 under the Securities Exchange Act of 1934 and information subject to Rule 83 confidential treatment requests (“CTRs”).

From time to time companies provide supplemental materials to the SEC staff, typically when responding to SEC comments.  Rule 418 provides broad authority to the SEC and its staff to request information concerning a company, its registration statement, the distribution of its securities and market or underwriter activities. Rule 12b-4 provides similar authority with respect to registration statements and periodic or other reports. Both rules require the SEC to return supplemental materials upon request, provided the request is made at the time they are furnished to the staff and return of the materials is consistent with the protection of investors and FOIA.  Rule 418 also requires that the materials not have been filed in electronic format.

SEC Rule 83 provides a procedure by which persons submitting information may include a CTR for portions of that information where no other confidential treatment process applies. Typically, this is utilized when companies provide responses to SEC staff comments.  Rule 83 generally requires the submission of the information covered by the CTR separately from that for which confidential treatment is not requested, appropriately marked as confidential, and accompanied by

The attorneys of Bryan Cave Leighton Paisner make this site available to you only for the educational purposes of imparting general information and a general understanding of the law. This site does not offer specific legal advice. Your use of this site does not create an attorney-client relationship between you and Bryan Cave LLP or any of its attorneys. Do not use this site as a substitute for specific legal advice from a licensed attorney. Much of the information on this site is based upon preliminary discussions in the absence of definitive advice or policy statements and therefore may change as soon as more definitive advice is available. Please review our full disclaimer.