Corporate Securities Law Blog

On August 22, 2012, the SEC adopted disclosure rules required by Sections 1502 and 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act related to conflict minerals and payments by issuers engaged in resource extraction.

The new rules on conflicts minerals disclosures will apply to all SEC reporting companies for which the identified conflict minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the issuer. We will be providing more detailed summaries of these rules in future posts.

On April 5, 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act, enacting it into law. The JOBS Act is intended to make it easier for smaller and earlier stage companies to raise capital and also to revitalize the U.S. market for initial public offerings, which has been in decline since the beginning of the last decade.

The provisions of the JOBS Act represent a watershed change to the laws and regulations governing capital raising for private companies. Some of the provisions – such as the “IPO on-ramp” provisions and the increase in the number of holders triggering mandatory registration and public reporting under the Securities Exchange Act of 1934, are effective immediately. Others, including the new crowdfunding exemption, the removal of the ban on general solicitation for offerings under Rule 506 to accredited investors and Rule 144A to QIBs, and the new exemption modeled on Regulation A, will require SEC rulemaking before they come into force.

We have previously blogged about the original House version of the Act and the changes the Senate adopted, which changes were enacted into law. This article discusses the full Act as enacted.

On March 22, 2012, the Senate passed the Jumpstart Our Business Startups (JOBS) Act by a vote of 73-26. The House of Representatives passed the JOBS Act on March 8, 2012 by a vote of 390-23. The Senate bypassed its typical committee process to rush the bill to a floor vote. Legislators in both parties and the President have adopted the JOBS Act as an election-year demonstration of their commitment to small businesses and entrepreneurialism, and they have paid little heed to strongly-worded opposition from SEC Chairman Mary Schapiro, state regulators and organizations ranging from the Council for Institutional Investors to the AARP.

On January 1, 2012, the California Transparency in Supply Chains Act of 2010 will become effective. This legislation will require every large retailer and manufacturer doing business in California to publicly disclose whether it has taken specified actions to eliminate slavery and human trafficking from its product supply chain. The Act does not require a company to make any effort to eliminate slavery or human trafficking, but only to disclose the extent, if any, to which it has taken the actions listed in the Act. The impact of the Act ultimately will depend on whether consumers, investors and activists use the required disclosure to pressure companies to monitor and eliminate abuses in their supply chains. California Civil Code Section 1714.43(a).
 

On September 6, 2011, the Securities and Exchange Commission confirmed that it would not seek rehearing or Supreme Court review of the decision by the U.S. Court of Appeals in Washington, D.C. partially vacating the SEC’s proxy access rules. (Click here for our blog reporting on the D.C. Circuit’s decision.) Chairman Mary L. Schapiro issued a statement indicating her continuing interest in “finding a way to make it easier for shareholders to nominate candidates to corporate boards” but suggesting no immediate SEC plans to propose new proxy access rules.
 

Earlier today, in Business Roundtable v. Securities & Exchange Commission, No. 10-1305 (D.C. Cir. July 22, 2011), the United States Court of Appeals for the District of Columbia Circuit issued its decision invalidating the SEC’s proxy access rules adopted in August 2010 with the intention that they be effective for the 2011 proxy season (see our blog here). The Business Roundtable and U.S. Chamber of Commerce filed the lawsuit in September 2010 challenging the SEC’s adoption of proxy access rules and separately requesting for the SEC to stay implementation of the rules pending the outcome of the lawsuit. The SEC granted the request for stay in October 2010 and issuers were relieved of the burdens of proxy access for the 2011 proxy season. (See our blog posts here and here.)

You may be saying to yourself . . . Xbox?  X Games?  X what?  XBRL is something altogether different: eXtensible Business Reporting Language.  The SEC is proposing to require public companies to use this new language to provide financial statements, financial statement footnotes and schedules in interactive data format.  The question is . . . are you ready?

The SEC has issued an interpretive release that provides guidance on the use of company web sites to disclose information to investors.  The release became effective upon publication in the Federal Register on August 7, 2008.  The SEC last provided comprehensive guidance regarding company web sites in 2000.  In its recent release, the SEC acknowledges that investors are increasingly relying on the Internet for information to aid their investment decisions, and that "where access is freely available to all, use of electronic media is at least equal to other methods of delivering information or making it available to investors and the markets."  In providing updated guidance, the SEC hopes to encourage companies to continue to develop their web sites in compliance with the federal securities laws so that they can serve as effective information and analytical tools for investors.  However, in light of the subjective nature of many of the factors set forth in the release, a company which is satisfied with its current practice of distributing press releases or filing Form 8-Ks to disclose developments in its business, or a smaller company whose web site is less frequently accessed, will likely maintain their current disclosure procedures while monitoring the response to the new guidance.

A company can be liable for violating its employees' privacy rights when it looks at the content of their text messages, even when the text-messaging devices were provided by the company, held the Ninth Circuit Court of Appeals.  Employers thus cannot be complacent about privacy rights just because they own the means by which their employees communicate.  Employers can, however, still access their employee's electronic communications if they take appropriate and consistent measures to alert employees of the employer's rights to these communications.

On May 6, 2008, the Securities and Exchange Commission (the “SEC” or “Commission”) proposed various amendments to, and provided new clarifying guidance regarding, the rules governing cross-border transactions.

On December 19, 2007, the SEC adopted amendments to its disclosure and reporting requirements under the Securities Act of 1933 and Securities Exchange Act of 1934 to expand the number of companies that qualify for the SEC's "scaled" (i.e., significantly less burdensome) disclosure requirements for smaller reporting companies.  Eligible issuers have the option to use the new scaled disclosure requirements when filing their next registration statement or periodic report after the effective date of the amendments.

In In re Netsmart Technologies, Inc. Shareholders Litigation, C.A. No. 2536-VCS (Del. Ch. Mar. 14, 2007), Vice Chancellor Strine held that the shareholder plaintiffs demonstrated a probability of success on the merits of their claim that the Netsmart board of directors failed to fulfill their Revlon duties in considering and approving a cash sale of the company to two private equity firms.  The Court determined that the board’s decision not to conduct a broad market canvass for strategic acquirers, and instead focus the search for acquirers solely on private equity firms, did not appear to be reasonable under the circumstances.  The Court also held that the post-signing “market check” recommended by the company’s financial advisers was not appropriate for a small-cap company like Netsmart, thus was far too passive to have been effective in mitigating the narrowness of the pre-signing market canvass.  This decision provides guidance to boards when considering a sale to a private equity firm — an increasingly common situation affecting boards of directors of public companies throughout the country.

On August 11, 2006, the SEC issued its adopting release for the new rules on executive compensation and related party disclosures. Beginning for fiscal years ending on or after December 15, 2006, companies will have to comply with the SEC's new rules that will substantially revise the disclosure requirements for executive and director compensation and security ownership, related party transactions, director independence, and other corporate governance matters. For calendar year end companies, the new rules will apply to the 2007 proxy statements.

On January 27, 2006, the SEC proposed amendments to the disclosure requirements for executive and director compensation, related party transactions, director independence and other corporate governance matters and security ownership of officers and directors. These amendments would apply to disclosure in proxy and information statements, periodic reports, current reports and other filings under the Securities Exchange Act of 1934 and the Securities Act of 1933.

In December 2004, the SEC and The Walt Disney Company settled charges that Disney had failed to disclose timely relationships between Disney and certain of its directors or their adult children or spouses. SEC rules require the disclosure of material relationships between the company and directors, officers, significant shareholders, or members of their immediate families. In 2003, the NYSE and the Nasdaq adopted stricter definitions of independence for directors, required that a majority of the directors be independent, and mandated the role of independent directors in various areas, including the audit, compensation and nominating committees.

Earlier this year, the SEC and DOJ settled parallel criminal and civil enforcement actions against Titan Corporation ("Titan") under the Foreign Corrupt Practices Act ("FCPA"). Titan agreed to pay the largest FCPA penalty to date of $28.5 million. This case is a reminder that companies need to adopt and enforce FCPA compliance policies before the discovery of FCPA problems leads to the unraveling of potential merger discussions and creates financial and reputational risk for the company, both of which occurred in Titan's case. The SEC's investigation of Titan also highlights future potential enforcement actions under the antifraud and proxy provisions of the federal securities laws for publication of false or misleading material disclosures regarding provisions in merger and other agreements filed with the SEC by an "issuer." See Related Resources

In widely publicized enforcement actions against Tyson Foods and General Electric Company, and recent speeches by members of the staff, the SEC has emphasized the need to accurately and clearly identify, characterize, value and disclose executive perquisites and other personal benefits.

The SEC recently settled an enforcement action against Flowserve Corporation, its CEO and Director of Investor Relations for reaffirming the company's previous earnings guidance in a private meeting with analysts, near the end of a reporting period. Companies should ensure that their Regulation FD policies are enforced and that their investor relations professional cautions analysts in a private setting about topics that are off-limits. Companies should be wary about changing or confirming any earnings guidance in a non-public forum, especially near the end of a reporting period.

A recent survey from the National Investor Relations Institute ("NIRI"), accessible at http://www.niri.org/irresource_pubs/alerts/ea050330.cfm, shows that more companies now offer less guidance, and that companies are moving towards the practice of annual guidance rather than quarterly guidance. Some companies believe that providing guidance is important for maintaining analyst coverage, and that analyst coverage is important for attracting institutional investors. One problem with providing guidance is that once you provide it you may have an obligation to correct or update it. For a small company, one major customer win or loss could radically change the results for a quarter. By omitting quarterly guidance, the company does not have to worry whether events are material enough to merit additional guidance.