Public Companies

The New Nasdaq and NYSE Compensation Committee Listing Standards

by Vanessa Schoenthaler on February 11, 2013

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Over the next week or so I’ll hopefully be catching up on a few things that I haven’t been able to get to from the last several weeks, the first being the new Nasdaq and NYSE compensation committee listing standards:

By way of background, Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Securities Exchange Act of 1934 by adding new Section 10C which requires that the Securities and Exchange Commission adopt rules directing the national securities exchanges to prohibit the listing of a company’s equity securities if that company does not comply with certain compensation committee and compensation adviser requirements. To implement Section 10C, the Commission adopted new Rule 10C-1 and amended Item 407 of Regulation S-K. Rule 10C-1 requires that the national securities exchanges adopt listing rules to effectuate the requirements of Section 10C. Each of the NYSE and Nasdaq filed proposed rule changes on September 25, 2012, and thereafter filed amendments to their proposed rule changes.

Last month, on January 11, 2013, the Commission issued orders approving the NYSE and Nasdaq rule changes, as amended, on an accelerated basis. Below is a comparative summary of the rules:

   

NYSE

 

Nasdaq

General Requirements Listed companies must have a compensation committee composed entirely of independent directors.

 

 

 Listed companies must have, and certify that they have and will continue to have, a standing compensation committee composed of at least two members each of whom must be independent directors.
Compensation Committee Charter The compensation committee must adopt a written charter that addresses:

(1) the committee’s purpose and responsibilities, which, at a minimum, must be to have direct responsibility to:

(A) review and approve corporate goals and objectives relevant to the chief executive officer’s compensation, evaluate the chief executive officer’s performance in light of those goals and objectives, and, either as a committee or together with the other independent directors (as directed by the board), determine and approve the chief executive officer’s compensation level based on this evaluation;

(B) make recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval; and

(C) prepare the compensation committee disclosures required by Regulation S-K;

(2) an annual performance evaluation of the compensation committee;

(3) the committee’s rights and responsibilities related to compensation  advisers, including that:

(A) the committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser;

(B) the committee be directly responsible for the appointment, compensation and oversight of the work of any compensation adviser retained;

(C) the company must provide for appropriate funding, as determined by the committee, for payment of reasonable compensation to a compensation adviser retained by the committee;

(D) the committee may select a compensation adviser only after taking into consideration, all factors relevant to that person’s independence from management, including the
following:

(i) other services provided to the company by the compensation adviser’s employer;

(ii) the fees received from the company by the compensation adviser’s employer as a percentage of such employer’s total revenues;

(iii) the policies and procedures of the compensation adviser’s employer that are designed to prevent conflicts of interest;

(iv) any business or personal relationship of the compensation adviser with a member of the compensation committee;

(v) any stock of the company owned by the compensation adviser; and

(vi) any business or personal relationship of the compensation adviser or the compensation adviser’s employer with an executive officer of the company.

 The compensation committee must adopt a written charter and review and assess the adequacy of that charter on an annual basis.

The compensation committee charter must specify:

(1) the scope of the committee’s responsibilities and how it carries those responsibilities out, including structure, processes and membership requirements;

(2) the committee’s responsibility for determining or recommending executive compensation;

(3) that the chief executive officer may not be present during voting or deliberation on his compensation; and

(4) the committee’s specific responsibilities and authorities related to compensation advisers, including that:

(A) the committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser;

(B) the committee be directly responsible for the appointment, compensation and oversight of any compensation consultant, independent legal counsel and other adviser retained by the compensation committee;

(C) the company must provide appropriate funding for payment of reasonable compensation, as determined by the compensation committee;and

(D) the committee may select, or receive advice from, a compensation adviser, other than with respect to in-house legal counsel, only after taking into consideration the following factors:

(i) other services provided to the company by the compensation adviser’s employer;

(ii) the fees received from the company by the compensation adviser’s employer as a percentage of such employer’s total revenues;

(iii) the policies and procedures of the compensation adviser’s employer that are designed to prevent conflicts of interest;

(iv) any business or personal relationship of the compensation adviser with a member of the compensation committee;

(v) any stock of the company owned by the compensation adviser; and

(vi) any business or personal relationship of the compensation adviser or the compensation adviser’s employer with an executive officer of the company.
Director Independence  Compensation committee members must be  independent under the general board independence requirements (Listing Standard 303A.02).

In addition, in affirmatively determining the independence of a director who will serve on the compensation committee, a company’s board must consider all factors specifically relevant to whether the director has a relationship to the company which is material to the director’s ability to be independent from management in connection with the duties of a committee member, including, without limitation:

(1) the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the company; and

(2) whether the director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company.

Compensation committee members must be  independent under the general board independence requirements (Listing Rule 5605(a)(2)) and not accept, directly or indirectly, any consulting, advisory or other compensatory fee from the company or a subsidiary of the company.

The prohibition on compensatory fees excludes fees received as a member of the compensation committee itself and fixed fees received under a retirement plan for prior service to the company.

In addition, in determining whether a director is eligible to serve on the compensation committee, a company’s board also must consider the whether the director has affiliate relationships and whether such affiliations would impair the director’s judgment as a member of the compensation committee.

Under exceptional and limited circumstances,  where there are at least three members of a compensation committee, one may be a non-independent director who is not an executive officer, family member of an executive officer or employee, if the board determines that appointment of the non-independent director is in the best interests of the company and its shareholders. A non-independent director appointed under this exception may not serve longer than two years. In addition the company will be required to make certain disclosures either through its website or in its proxy statement related to the appointment.
Adviser Independence It is not necessary that a compensation adviser actually be independent, only that the compensation committee conduct and independence assessment taking into consideration the independence factors enumerated in the committee’s charter, before selecting, or receiving advice from, a compensation adviser.

However, no independence assessment is required in the case of in-house counsel or a compensation adviser who’s role is limited to:

(1) consulting on any broad-based plan that does not discriminate in scope, terms or operation, in favor executive officers or directors and is generally available to all salaried employees; and/or

(2) providing information that either is not customized for the company or that is customized based on parameters that are not developed by the adviser and about which the adviser does not provide advice.

 It is not necessary that a compensation adviser actually be independent, only that the compensation committee conduct and independence assessment taking into consideration the independence factors enumerated in the committee’s charter, before selecting, or receiving advice from, a compensation adviser.

However, no independence assessment is required in the case of in-house counsel or a compensation adviser who’s role is limited to:

(1) consulting on any broad-based plan that does not discriminate in scope, terms or operation, in favor executive officers or directors and is generally available to all salaried employees; and/or

(2) providing information that either is not customized for the company or that is customized based on parameters that are not developed by the adviser and about which the adviser does not provide advice.
Adviser Recommendations The compensation committee will not be required to implement or act consistently with the advice or recommendations of any compensation adviser, but rather shall retain the ability and obligation to exercise its own judgement in fulfillment of its duties.

 

 The compensation committee will not be required to implement or act consistently with the advice or recommendations of any compensation adviser, but rather shall retain the ability and obligation to exercise its own judgement in fulfillment of its duties.
Cure Period If a company fails to meet the compensation committee requirements because a member ceases to be independent for reasons outside of that member’s reasonable control, that person, with prompt notice to NYSE and only so long as a majority of the compensation committee continues to be independent, may remain a compensation committee member until the earlier of:

(1) the next annual shareholders’ meeting; or

(2) one year from the occurrence of the event that caused the member to be no longer independent.

 If a company fails to meet the compensation committee requirements because of a vacancy on the committee or because a member ceases to be independent for reasons outside of that member’s reasonable control, the company shall regain compliance by the earlier of:

(1) the next annual shareholders’ meeting; or

(2) one year from the occurrence of the event that caused the noncompliance.

However, if the annual shareholders’ meeting occurs no later than 180 days following the event that caused noncompliance, the company will instead have 180 days to regain compliance. A company relying on the cure period must immediately notify Nasdaq upon learning of its noncompliance.

 
Smaller Reporting Companies Smaller reporting companies are required to have a compensation committee composed entirely of independent directors.However, smaller reporting companies are exempt from compliance with the additional independence requirements specific to compensation committee membership, as well as from the requirements that the compensation committee to conduct an independence assessment prior to selecting a compensation adviser. Smaller reporting companies are required to have, and certify that they will continue to have, a compensation committee composed of at least two independent directors and to adopt, and certify that they have adopted, a formal written charter (or board resolution in place of a charter) specifying:

(1) the scope of the committee’s responsibilities and how it carries those responsibilities out, including structure, processes and membership requirements;

(2) the committee’s responsibility for determining or recommending executive compensation; and

(3) that the chief executive officer may not be present during voting or deliberation on his compensation.

Smaller reporting companies are exempt from the remaining compensation committee requirements, including the requirements related to specific compensation committee responsibilities and authority.

Smaller reporting companies may avail themselves of the exception for non-independent directors under exceptional and limited circumstances and the cure period.

 
Foreign Private Issuers Foreign private issuers are permitted to follow home country practice in lieu of NYSE’s compensation committee listing standards but must still disclose any significant ways in which their corporate governance practices differ from those followed by domestic companies under NYSE listing standards. Foreign private issuers that follow home country practices in lieu of Nasdaq’s compensation committee listing standards must discloses in their annual report:

(1) the reasons they do not have an independent compensation committee;

(2) the requirements they do not follow; and

(3) the home country practices followed in lieu thereof.

 
Transition Period Companies must comply with the requirements related to compensation committee’s authority to retain and compensate advisers and responsibility to consider certain independence factors prior to selecting advisers beginning on July 1, 2013.

Companies will have until the earlier of:

(1) their first annual meeting after January 15, 2014; or

(2) October 31, 2014,

to comply with the independence requirements specific to compensation committee service.

 Companies must comply with the requirements related to compensation committee responsibilities and authority by July 1, 2013.

If a company does not have a standing compensation committee by July 1, 2013, then the independent directors who determine, or recommend to the board for determination, executive compensation must comply with the requirements related to responsibilities and authority.

Companies must comply with the remaining requirements related to compensation committees, including having a written compensation committee charter, by the earlier of:

(1) their first annual meeting after January 15, 2014; or

(2) October 31, 2014.

Companies must certify their compliance with the compensation committee rules to Nasdaq no later than 30 days after the final implementation deadline.

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Additional Lessons in Social Media and the Securities Laws Courtesy of Zipcar

by Vanessa Schoenthaler on January 7, 2013

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On Friday night DealBook reported that Zipcar, the car-sharing company which Avis Budget Group recently agreed to acquire, filed a Form 8-K earlier in the evening to disclose the following tweet by CEO Scott Griffith:

Scott Griffith Tweet

Zipcar also filed a copy of The Boston Globe article referenced in Griffith’s tweet and a copy of a transcript from Griffith’s CNBC interview earlier that day.

For the most part the remainder of Dealbook’s brief article goes on to discuss Netflix CEO Reed Hastings’ July 2012 Facebook posting and the potential Regulation FD issues surrounding that posting, including Netflix and Hastings’ recent receipt of Wells notices from the Securities and Exchange Commission.

But Zipcar’s filing on Friday night wasn’t about Regulation FD, which to its credit Dealbook does acknowledge:

Zipcar made the S.E.C. filing about Mr. Griffith’s Twitter message because the transaction with Avis is subject to Zipcar’s shareholder approval and securities laws dictate that the company must file with regulators any announcements that could be construed as soliciting shareholder votes.

Unfortunately, that single sentence was placed without elaboration in the middle of a discussion about the role of Regulation FD in the age of social media. So it seems like this might actually be a Regulation FD issue. But it’s not.

Zipcar’s Form 8-K filing is about the proxy solicitation rules. As Zipcar is in the process of being acquired by Avis, it must seek shareholder approval of its merger agreement, which in turn requires that Zipcar file a proxy statement to solicit shareholder votes and proxies.

Whenever anyone “solicits” proxy authority, regardless of whether it’s the company, an officer, director, shareholder or even a third-party proponent, that person must meet certain disclosure and filing requirements. While not every communication qualifies as a solicitation, the Commission does define the term broadly to include any communication—whether in the form of a widely distributed announcement or a private email message—that is reasonably calculated to result in the procurement, withholding or revocation of a proxy.

If a communication qualifies as a solicitation and it’s in writing then it must be filed with the Commission on the same day that it’s first published, sent or given to a shareholder. Written communications encompass all forms of information not otherwise disseminated orally and generally include things like blog posts, tweets, slide presentations and videos (which must be transcribed when filed).

Which is exactly what’s going on here. Griffith’s tweet and the other exhibits to Zipcar’s Form 8-K are being filed as proxy solicitation materials, not as some last-minute filing after a CEO tweet slips out (as might be inferred from the Dealbook piece). What’s more, Zipcar’s legal team seems to be right on top of its social media presence, having previously filed tweets by both the company and Griffith on January 2nd:

Zipcar Tweet

Scott Griffith Tweet

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One to Watch: Netflix Discloses that its CEO’s Facebook Posting May Trigger a Reg. FD Violation

by Vanessa Schoenthaler on December 7, 2012

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Yesterday Netflix filed a Form 8-K disclosing that it and its CEO, Reed Hastings, have each received a “Wells notice” indicating that the Staff of Securities and Exchange Commission intends to recommend that the Commission institute a cease and desist proceeding or bring a civil injunctive action or both against Netflix and Hastings for violations of Regulation FD related to a posting on Hastings’ Facebook page back in July.

Here’s the posting at issue:

Here’s Hastings’ response, also posted on his Facebook page a few moments after it was filed as an exhibit to Netflix’s Form 8-K:

Regulation FD requires that whenever a company or, as in this case, someone acting on a company’s behalf, discloses material nonpublic information to certain market participants it must also disclose that information publicly—simultaneously, in the case of an intentional disclosure, and promptly, in the case of an unintentional disclosure.  The public disclosure requirement can be satisfied by filing a Form 8-K or by any other method reasonably designed to provide broad, non-exclusionary distribution of the information to the public.

Hastings’ strongest argument is that the information was not material and therefore Regulation FD should not come into play at all. However, the more interesting argument is that information posted on his Facebook page “is very public”, which implies that even if the information in question was material, posting it on Facebook would constitute a public disclosure in compliance with the requirements of Regulation FD.

The difficulty with such a conclusion is that, as Hastings notes, Netflix “doesn’t currently use Facebook and other social media to get material information to investors … .”

For purposes of Regulation FD, information posted on a company’s website is public once it has been disseminated in a manner calculated to reach investors in general through recognized channels of distribution and investors have been afforded a reasonable waiting period to react to that information.

It would be challenging to cast Hastings’ Facebook page as a recognized channel of distribution for one instance of disclosure, particularly since investors haven’t been alerted to the fact that Netflix intended to use the page as such.

This is definitely a matter to follow, as there hasn’t been much, if anything, in the way of new guidance from the Commission on the use of company websites and social media since its 2008 release. I imagine the matter will settle around the issue of whether the information disclosed was material, but it’ll still be informative to see what arguments are raised and what position the Commission ultimately takes.

It’s also a good reminder to occasionally dust off and review your social media policy with everyone in the company.

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The SEC Issues New Exchange Act C&DIs: Business Activities Related to Iran

by Vanessa Schoenthaler on December 6, 2012

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The Iran Threat Reduction and Syria Human Rights Act of 2012 (the “Act”), which was enacted on August 10, 2012, amended the Securities Exchange Act of 1934 to add new Section 13(r), requiring reporting companies to disclose certain business activities related to Iran in periodic reports filed with the Securities and Exchange Commission after February 6, 2013.

Yesterday the Division of Corporation Finance issued seven new Compliance and Disclosure Interpretations related to Section 13(r). In summary:

  • If an issuer’s annual report is required to be filed after the Act’s February 6, 2013 effective date, the report must include disclosure of Iran-related business activities pursuant to Section 13(r) even if the issuer files the report early (on or before the February 6, 2013 effective date).
  • If an issuer’s annual report is required to be filed after the Act’s February 6, 2013 effective date, the report must include disclosure of Iran-related business activities pursuant to Section 13(r) that occurred during the entire fiscal year covered by the report, including the period prior to enactment of the Act. For example in the case of an issuer that files an annual report for the fiscal year ending December 31, 2012, that issuer is required to disclose any Iran-related business activities specified in Section 13(r) for the period from January 1, 2012 through December 31, 2012.
  • The term “affiliate” as used in the Act has the meaning set forth in Exchange Act Rule 12b-2.
  • Disclosure is only required in a periodic report if an issuer or any of its affiliates engaged in any Iran-related business activities specified in Section 13(r) for the period covered by the report; it is not necessary to include a statement to the effect that the issuer and its affiliates have not engaged in any Iran-related business activities specified in Section 13(r).
  • A transaction or dealing with any person or entity identified under 31 CFR § 560.304 must be disclosed unless it was specifically authorized by a U.S. federal department or agency. If a disclosable transaction was specifically authorized by a foreign governmental authority, an issuer may disclose that fact in addition to the other information specified in Section 13(r) to provide appropriate context.
  • Both general and specific licenses constitute specific authorization by the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury to engage in a transaction, provided all conditions of the applicable license are strictly observed.
  • Any disclosures included in a periodic report in response to Section 13(r) will automatically become publicly available upon filing through the EDGAR system.

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The SEC Announces Relief Measures for Those Affected by Hurricane Sandy

by Vanessa Schoenthaler on November 15, 2012

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Yesterday the Securities and Exchange Commission announced the issuance of an order exempting publicly traded companies and others affected by Hurricane Sandy and its aftermath from certain Exchange Act rules and requirements.

Exchange Act Reports, Schedules and Forms

In particular, the order conditionally exempts issuers subject to Sections 13(a) or 15(d) of the Exchange Act from the requirement to file certain Exchange Act reports, schedules or forms during the period from and including October 29, 2012 through November 20, 2012, provided that the issuer:

  • is unable to meet a filing deadline due to Hurricane Sandy and its aftermath;
  • files the required report, schedule or form by November 21, 2012; and
  • discloses in the report, schedule or form that it is relying on the Commission’s order and states the reasons why, in good faith, it could not file the report, schedule or form on a timely basis.

Proxy Solicitation Materials and Information Statements

The order also conditionally exempts issuers from the requirement to furnish proxy statements, annual reports and other soliciting materials, and information statements and annual reports to a security holder, provided:

  • the security holder has a mailing address located in a zip code where the postal service has suspended mail service of the type or class of mail customarily used by the issuer;
  • the issuer has followed normal procedure when furnishing solicitation or information materials to the security holder in accordance with applicable rules; and
  • if requested by the security holder, the issuer provides the solicitation or information materials by a means reasonably designed to furnish the materials to the security holder.

Any issuer or other person unable to meet a deadline, including any shareholder who is unable to meet a deadline applicable to a shareholder proposal, or delivery obligation as a result of Hurricane Sandy or who is in need of other assistance related to public filings, can also call or email CorpFin.

Auditor Independence and Reconstruction of Accounting Records

In addition, the order conditionally exempts independent certified public accountants that are engaged to provide audit services for an issuer from Exchange Act rules and requirements that prohibit auditors from providing bookkeeping or other services related to the accounting records of an audit client, provided that any such services are:

  • limited to reconstruction of previously existing accounting records that were lost or destroyed as a result of Hurricane Sandy and cease as soon as the lost or destroyed records are reconstructed, financial systems are fully operational and the issuer can effect an orderly and efficient transition to management or other service provider; and
  • subject to pre-approval by the issuer’s audit committee.

Filing Date Adjustments

The Commission also announced that it will take the following positions regarding filing dates:

For purposes of eligibility to use Form S-3 (as well as well-known seasoned issuer status) for an issuer relying on the Commission’s order, any of that issuer’s Exchange Act reports that would have been required to be filed during the period from October 29, 2012 to November 20, 2012 will be due by November 21, 2012. Such an issuer will, therefore, be considered:

  • current in its Exchange Act reports prior to November 21, 2012 if it was current in its Exchange Act reports as of October 28, 2012;
  • current in its Exchange Act reports as of November 21, 2012 if it was current in its Exchange Act reports as of October 28, 2012 and it has made any filings required during the period from October 29, 2012 to November 20, 2012;
  • timely in its Exchange Act reports prior to November 21, 2012 if it was timely in its Exchange Act reports as of Oct. 28, 2012; and
  • timely in its Exchange Act reports as of November 21, 2012 if it was timely in its Exchange Act reports as of October 28, 2012 and it has made any filings required during the period from October 29, 2012 to November 20, 2012 on or before November 21, 2012.

For purposes of eligibility to use Form S-8 and the current public information eligibility requirements of Rule 144(c), an issuer relying on the Commission’s order will be considered:

  • current in its Exchange Act reports prior to November 21, 2012 if it was current in its Exchange Act reports as of October 28, 2012; and
  • current in its Exchange Act reports as of November 21, 2012 if it was current in its Exchange Act reports as of October 28, 2012 and it has made any filings required during the period from October 29, 2012 to November 20, 2012.

Notification of Late Filing on Form 12b-25

Issuers that receive an extension on filing Exchange Act annual reports or quarterly reports pursuant to the Commission’s order will be considered to have a due date of November 21, 2012 for those reports for purposes of Exchange Act Rule 12b-25. As such, those issuers will be permitted to rely on Rule 12b-25 where they are unable to file the required reports on or before November 21, 2012.

Investment Companies, Transfer Agents and Other Persons

The Commission’s order and announcement also detail certain conditional exemptions and filing date adjustments for transfer agents, investment companies and others, which are not addressed here.

(Download File)

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The SEC’s Resource Extraction Rules Will Not Be Put On Hold

by Vanessa Schoenthaler on November 9, 2012

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Yesterday the Securities and Exchange Commission issued an order denying a joint motion to stay the effectiveness of Exchange Act Rule 13q-1 and new Form SD (related to disclosure of payments by resource extraction issuers) pending the outcome of the American Petroleum Institute, Chamber of Commerce, Independent Petroleum Association of America and the National Foreign Trade Council’s petition for review filed with the U.S. Court of Appeals for the D.C. Circuit on October 10, 2012.

The Court of Appeals has directed expedited briefing and argument on the parties’ petition for review, and the Commission notes in its order that a determination on Rule 13q-1′s validity may be made as soon as this spring.

Resource extraction issuers are not required to begin complying with the new rules until the fiscal year ending after September 30, 2013.

(Download File)

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How to Request a Filing Date Adjustment for a Late Filing

by Vanessa Schoenthaler on November 2, 2012

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While EDGAR remained up and running throughout Hurricane Sandy the rest of us may not have been so lucky. A number of east coast data centers either went down or were taken offline during the storm and millions of homes and businesses lost and many still remain without power.

One of the many compliance issues that arises in a power-related emergency is what happens if you are supposed to submit a Form 8-K, registration statement or some other filing but are unable to do so?

In the case of Hurricane Sandy, the Commission has been posting updates on its website all week and advises filing when you can and that CorpFin will consider filing date adjustments on a case-by-case basis.

Leading to the question: how do you request a filing date adjustment?

If this isn’t your first filing you probably already know that the official filing date for any EDGAR filing is the business day on which the Commission receives it, with 5:30 pm eastern time being the cutoff for Securities Act filings and most Exchange Act filings (with the exception of Section 16 filings on Forms 3, 4 and 5 and Schedule 14N filings (related to shareholder director nominees), which have a cutoff time of 10:00 pm eastern time).

As for adjusting a filing date, Rule 13(b) of Regulation S-T provides that the Commission may, upon request, adjust a filing date if a filer in good faith attempts to file a document in a timely manner but the filing is delayed due to technical difficulties beyond the filer’s control.

The Commission has previously issued guidance on how to request a filing date adjustment for both issuers and investment companies, and has made similar filing date adjustments following a 2003 power outage in the northeast.

To apply for a filing date adjustment you must submit a written request, through the EDGAR system, via EDGAR CORRESP, to the Chief, Office of Information Technology, Division of Corporation Finance (or if you are an investment management company, to the Senior Special Counsel (EDGAR), Division of Investment Management), and include the following information:

  • the filer name and CIK;
  • the accession number and EDGAR submission type of the filing;
  • a concise but detailed description of the technical difficulty leading to the late filing, including the date and time of the initial attempted transmission;
  • a statement of how the filer will be harmed if a filing date adjustment is not granted (e.g., financial statements would be stale);
  • an affirmative request pursuant to Rule 13(b) of Regulation S-T for adjustment of the filing date from the specific filing date to the date of the initial attempted transmission; and
  • any e-mails sent by the EDGAR system.

Update November 5,  2012:

The Commission announced today that it is preparing relief measures for those affected by Hurricane Sandy and it aftermath.

The measures are expected to include an extension of the filing deadline for those filings due between October 29, 2012 and November 20, 2012; the extended filing deadline anticipated to be November 21, 2012.

The extension will apply to publicly traded companies, investment companies and investment advisers, among others.

The Commission will also continue to consider other requests for additional relief on a case-by-case basis.

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The Division of Corporation Finance Issues a New Staff Legal Bulletin on Rule 14a-8 Shareholder Proposals

by Vanessa Schoenthaler on October 17, 2012

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Yesterday the Division of Corporation Finance (CorpFin) issued a new Staff Legal Bulletin, No. 14G,  in its ongoing series of guidance focusing on shareholder proposals under Exchange Act Rule 14a-8.

Staff Legal Bulletin (SLB) No. 14G elaborates on three matters addressed in prior SLBs:

  • the sufficiency of proof of ownership under Rule 14a-8(b)(2)(i) for purposes of verifying whether a beneficial owner is eligible to submit a shareholder proposal;
  • the manner in which a company should notify a shareholder of a failure to provide sufficient proof of ownership under Rule 14a-8(b)(1)’s one-year continuous ownership requirement; and
  • the use of website addresses in proposals and supporting statements.

A Shareholder’s Proof of Ownership

To be eligible to submit a proposal under Rule 14a-8 a shareholder must provide proof that they have continuously held at least $2,000 in market value, or 1%, of a company’s securities entitled to vote on the proposal for at least one year by the date of proposal’s submission and confirm that they will continue to hold the securities through the date of the shareholder meeting.

There are two ways for a shareholder to hold securities: directly in their own name, as a registered owner, or indirectly, through one or more securities intermediaries, as a beneficial owner. In the latter case, the securities are either held in the name of the intermediary (in “street name”) or, where the intermediary is a Depository Trust Company (DTC) participant, are deposited with DTC and held in the name of DTC’s nominee (Cede & Co.).

One way for a beneficial owner to demonstrate eligibility under Rule 14a-8′s proof of ownership requirement is by obtaining a proof of ownership letter from the holder of record, the securities intermediary.

In SLB No. 14F CorpFin expressed the view that, with respect to securities that are deposited with DTC, only intermediaries that are DTC participants should be considered holders of record for purposes of providing proof of ownership.

In this latest SLB No. 14G, CorpFin clarifies that a proof of ownership letter from an affiliate of a DTC participant will also satisfy the requirement to provide proof of ownership from a DTC participant.

CorpFin also clarifies that a shareholder holding securities through an intermediary that is not a broker or bank can demonstrate eligibility under Rule 14a-8′s proof of ownership requirement by obtaining a proof of ownership letter from that intermediary. However, if that intermediary is not a DTC participant or an affiliate of a DTC participant, then the shareholder must also obtain a proof of ownership letter from a DTC participant or affiliate that can verify the intermediary’s holdings.

A Company’s Notice of Failure to Provide Sufficient Proof of Ownership

If a shareholder submits a proposal but fails to satisfy one of Rule 14a-8′s eligibility or procedural requirements a company may exclude the shareholder’s proposal if, after the company notifies the shareholder of the defect and explains in adequate detail what the shareholder must do to remedy it, the shareholder fails to correct the defect.

In SLB No. 14G CorpFin voices concern over notices that are not adequately describing defects or explaining what a shareholder must do to remedy defects that occur in proof of ownership letters.

For example, CorpFin notes that a commonly occurring defect is for a proof of ownership letter not to verify a shareholder’s beneficial ownership for the entire one-year period preceding and including the submission date of a shareholder proposal. Yet some notices of defect fail to point out the gap in ownership covered by the proof of ownership letter.

As such, CorpFin will no longer concur in the exclusion of a shareholder proposal on the basis of the shareholder’s proof of ownership not covering the required one-year period unless the company provides a notice of defect that identifies the specific date on which the proposal was submitted and explains that in order to cure the defect the shareholder must obtain a new proof of ownership letter verifying continuous ownership of the requisite amount of securities for the one-year period preceding and including such date.

CorpFin considers the submission date to be the date on which the shareholder proposal is postmarked or transmitted electronically, and notes that companies should include copies of the postmark or evidence of electronic transmission with their no-action requests.

A Shareholder’s Use of Website Address in Proposals and Supporting Statements

In SLB No. 14 CorpFin takes the position that referencing a website address in a shareholder proposal or supporting statement will not violate the 500-word limitation imposed by Rule 14a-8(d) because the website address only counts as one word. However, a website address could be subject to exclusion if it refers to information that may be materially false or misleading, irrelevant to the subject matter of the proposal or otherwise in contravention of the Commission’s proxy rules.

SLB No. 14G reaffirms this position and provides additional guidance on appropriate uses of website addresses in shareholder proposals and supporting statements.

In particular, CorpFin notes that if a proposal or supporting statement refers to a website that provides information necessary for shareholders and the company to understand with reasonable certainty exactly what actions or measures the proposal requires, and such information is not also contained in the proposal or in the supporting statement, then the proposal would raise concerns under Rule 14a-9 (false or misleading statements) and would be subject to exclusion under Rule 14a-8(i)(3) as vague and indefinite. However, if shareholders and the company can understand with reasonable certainty exactly what actions or measures the proposal requires without reviewing the information provided on the website, then the proposal would not be subject to exclusion under Rule 14a-8(i)(3) on the basis of the reference to the website address, as the information on the website would only be considered supplemental.

Secondly, CorpFin notes that it will not concur that a reference to a website may be excluded as irrelevant under Rule 14a-8(i)(3) on the basis of the website not yet being operational, if the shareholder, at the time the proposal is submitted, provides the company with the materials that are intended for publication on the website and a representation that the website will become operational at, or prior to, the time the company files its definitive proxy materials.

Finally, if information on a website is revised after submission of a proposal and the company believes that the revised information renders the website reference excludable, but the deadline for submitting a no-action letter request has lapsed, CorpFin may concur that the changes to the website constitute good cause for missing the no-action request deadline.

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NYSE and Nasdaq Propose Listing Standards for Compensation Committees and Advisers

by Vanessa Schoenthaler on October 1, 2012

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Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Securities Exchange Act of 1934 by adding new Section 10C which requires that the Securities and Exchange Commission adopt rules directing the national securities exchanges to prohibit the listing of a company’s equity securities if that company does not comply with certain compensation committee and compensation adviser requirements. To implement Section 10C, the Commission adopted new Rule 10C-1 and amended Item 407 of Regulation S-K. Rule 10C-1 requires that the national securities exchanges adopt listing rules to effectuate the requirements of Section 10C.

Each of the NYSE and Nasdaq filed proposed rule changes that would implement new Rule 10C-1 last Tuesday and Wednesday, respectively. Below is a comparative summary of those proposed changes:

   

NYSE

 

Nasdaq
General Compensation Committee Requirements No changes. Nasdaq is proposing to require that all listed companies maintain a standing compensation committee comprised of at least two independent directors.The compensation committee would be required to adopt a formal written charter specifying: (i) the scope of the committee’s responsibilities and how it carries those responsibilities out, including structure, processes and membership requirements, (ii) the committee’s responsibility for determining or recommending executive compensation, (ii) that the chief executive officer may not be present during voting or deliberation on his compensation, and (iv) the committee’s specific responsibilities and authorities related to compensation advisers.The compensation committee would be required to review and assess the adequacy of its charter on an annual basis.

Nasdaq’s proposed change would eliminate the current compensation committee alternative available in Listing Rule 5605(d)(1)(A), under which company may have a majority of the board’s independent directors determine, or recommend to the board for determination, executive compensation, in lieu of having a compensation committee.
Compensation Committee Director Independence Requirements NYSE is proposing that compensation committee members be required to be independent under the general board independence requirements (Listed Company Manual Section 303A.02), in addition to meeting independence requirements specific to compensation committee service, which would necessitate that, in affirmatively determining independence, a company’s board consider all factors specifically relevant to determining whether a director has a relationship to the company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to, consideration of the director’s compensation and affiliate relationships.NYSE is not proposing to adopt any specific numerical tests or require that boards consider any other specific independence factors.

Nasdaq is proposing that compensation committee members be required to be independent under the general board independence requirements (Listing Rule 5605(a)(2)) and be prohibited from accepting, directly or indirectly, any consulting, advisory or other compensatory fee from the company or a subsidiary of the company, beginning with the director’s term of service on the company’s compensation committee. This prohibition on compensatory fees would exclude fees received as a member of the compensation committee itself and fixed fees received under a retirement plan for prior service to the company.

In addition, in determining whether a director is eligible to serve on the compensation committee, a company’s board also must consider the whether the director has affiliate relationships and whether such affiliations would impair the director’s judgment as a member of the compensation committee.

Nasdaq is not proposing to adopt any specific numerical or bright line tests or require that boards consider any other specific independence factors.

Nasdaq proposes to retain the existing exception which allows a non-independent director serve on a compensation committee for exceptional and limited circumstances.
Compensation Committee Advisers NYSE is proposing that a company’s compensation committee charter specify that: (i) a compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser, (ii) a compensation committee be directly responsible for the appointment, compensation and oversight of any compensation consultant, independent legal counsel and other adviser retained by the committee, and (iii) the company provide appropriate funding for payment of reasonable compensation, as determined by the compensation committee. Nasdaq is proposing that a company’s compensation committee charter specify that: (i) a compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser, (ii) a compensation committee be directly responsible for the appointment, compensation and oversight of any compensation consultant, independent legal counsel and other adviser retained by the compensation committee, and (iii) the company provide appropriate funding for payment of reasonable compensation, as determined by the compensation committee.
Compensation Committee Adviser Independence NYSE is proposing that a company’s compensation committee charter specify that before a compensation committee selects a compensation adviser, other than with respect to in-house legal counsel, the committee must consider the six independence factors specified in Rule 10C-1(b)(4): (i) other services provided to the company by the compensation adviser’s employer, (ii) the fees received from the company by the compensation adviser’s employer as a percentage of such employer’s total revenues, (iii) the policies and procedures of the compensation adviser’s employer that are designed to prevent conflicts of interest, (iv) any business or personal relationship of the compensation adviser with a member of the compensation committee (v) any stock of the company owned by the compensation adviser, and (vi) any business or personal relationship of the compensation adviser or the compensation adviser’s employer with an executive officer of the company.NYSE is not proposing to specify any additional factors.NYSE is proposing to specify in the commentary to proposed Listed Company Manual Section 303A.05 that nothing shall be construed to: (i) require a compensation committee to implement or act consistently with the advice or recommendations of a compensation adviser, or (ii) to affect the ability or obligation of a compensation committee to exercise its own judgment in fulfillment of its duties. Nasdaq is proposing that a company’s compensation committee charter specify that before a compensation committee selects a compensation adviser, other than with respect to in-house legal counsel, the committee must consider the six independence factors specified in Rule 10C-1(b)(4): (i) other services provided to the company by the compensation adviser’s employer, (ii) the fees received from the company by the compensation adviser’s employer as a percentage of such employer’s total revenues, (iii) the policies and procedures of the compensation adviser’s employer that are designed to prevent conflicts of interest, (iv) any business or personal relationship of the compensation adviser with a member of the compensation committee (v) any stock of the company owned by the compensation adviser, and (vi) any business or personal relationship of the compensation adviser or the compensation adviser’s employer with an executive officer of the company.Nasdaq is not proposing to specify any additional factors.
Cure Period NYSE is proposing that if a company fails to meet the compensation committee requirements because a member ceases to be independent for reasons outside of that member’s reasonable control, that person, with prompt notice to NYSE and only so long as a majority of the compensation committee continues to be independent, may remain a compensation committee member until the earlier of: (i) the next annual shareholders’ meeting, or (ii) one year from the occurrence of the event that caused the member to be no longer independent. Nasdaq is proposing that if a company fails to meet the compensation committee requirements because of a vacancy on the committee or because a member ceases to be independent for reasons outside of that member’s reasonable control, the company shall regain compliance by the earlier of: (i) the next annual shareholders’ meeting, or (ii) one year from the occurrence of the event that caused the noncompliance. However, if the annual shareholders’ meeting occurs no later than 180 days following the event that caused noncompliance, the company will instead have 180 days to regain compliance.A company relying on the cure period must immediately notify Nasdaq upon learning of its noncompliance.
Transition Period NYSE is proposing that companies comply with the requirements related to the committee’s authority to retain and compensate advisers and responsibility to consider certain independence factors prior to selecting advisers beginning on July 1, 2013.NYSE is proposing that companies have until the earlier of: (i) their first annual meeting after January 15, 2014, or (ii) October 31, 2014, to comply with the independence requirements specific to compensation committee service. Nasdaq is proposing that companies immediately comply with the requirements related to the compensation committee’s authority to retain and compensate advisers and responsibility to consider certain independence factors prior to selecting advisers.Nasdaq is proposing that companies comply with the remaining requirements, including the formation of a standing compensation committee, adoption of a formal written charter and the independence requirements specific to compensation committee service, by the earlier of: (i) their second annual meeting held after the date of approval of the proposed rules; or (ii) December  31, 2014.
Exemptions NYSE is proposing to exempt smaller reporting companies from compliance with the independence requirements specific to compensation committee service.NYSE is also proposing to exempt companies that only list preferred stock, and the categories of issuers that are exempt under Rule 10C-1, including limited partnerships, companies in bankruptcy, open-ended management investment companies and foreign private issuers that disclose in their annual report the reasons they do not have an independent compensation committee.With respect to foreign private issuers, NYSE is proposing to continue to permit foreign private issuers to follow home country practices in lieu of complying with NYSE compensation committee listing standards.

Nasdaq is proposing to exempt smaller reporting companies from compliance with the independence requirements specific to compensation committee service and the requirements relating to compensation advisers.

Smaller reporting companies will not, however, be exempt from the requirement that they have a standing compensation committee comprised of at least two independent directors and adopt a formal written charter (or board resolution in place of a charter).

Nasdaq is also proposing that its existing exemptions from compensation-related listing rules remain unchanged. Exempt issuers include asset-backed issuers and other passive issuers, cooperatives, limited partnerships, management investment companies, and controlled companies.

Nasdaq is proposing to exempt foreign private issuers that follow home country practices in lieu of complying with Nasdaq compensation committee listing standards if they discloses in their annual report: (i) the reasons they do not have an independent compensation committee, (ii) the requirements they do not follow, and (iii) the home country practices followed in lieu thereof.
Update December 1, 2012:
The Commission has designated a longer period for action, until January 13, 2013, to approve or disapprove exchange rule changes related to compensation committees and advisor listing standards.

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SEC Now Accepting Draft Registration Statements for Confidential and Non-Public Review on EDGAR

by Vanessa Schoenthaler on September 26, 2012

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Earlier today the Securities and Exchange Commission announced that beginning on Monday, October 1, 2012, emerging growth companies and foreign private issuers will be able to submit draft registration statements for confidential and non-public review through the EDGAR system.

From October 1, 2012 until the EDGAR Filer Manual for EDGAR Release 12.2 becomes effective companies have the option of submitting draft registration statements either via the new EDGAR system or the current email system. Once the EDGAR Filer Manual for EDGAR Release 12.2 becomes effective, however, filing through the new EDGAR system will become mandatory.

The Commission also posted instructions on how to prepare an electronic submission of a draft registration statement and amendments thereto.

Update October 11, 2012:

The Commission announced today that the EDGAR Filer Manual for EDGAR Release 12.2 will become effective on October 15, 2012. As such, emerging growth companies and foreign private issuers must begin filing draft registration statements, amendments and related correspondence through the EDGAR system on October 15, 2012.

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