SEC Proposes Amendments Required by JOBS Act Increasing Thresholds for Section 12(g)

Last week, the SEC proposed JOBS Act-required rules that would increase thresholds for registration, termination of registration, and suspension of reporting under Section 12(g) of the Exchange Act. Among other things, the proposal would increase the existing exemption from registration for offerings of securities up to $5 million within a 12-month period to $50 million of securities within a 12-month period. 

The proposal also revises the definition of "held of record."  When determining whether an issuer is required to register a class of securities, it could exclude securities: (i) held by persons who received them under an employee compensation plan in a transaction exempt from the 1933 Act Section 5 registration requirements or those that did not involve a sale under the 1933 Act Section 2(a)(3) and - in certain circumstances - (ii) held by persons who received them in exchange for securities received under an employee compensation plan.

Small & Emerging Companies Advisory Committee Addresses "Accredited Investor" Definition

The SEC's Advisory Committee on Small and Emerging Companies met last week to discuss the Rule 506, Regulation D definition of "accredited investor." Securities offerings made to "accredited investors" - defined as individuals with an annual income of at least $200,000/year (or $300,000 with their spouse) or a net worth of at least $1 million - are exempt from the SEC's registration and disclosure requirements, and the securities can't be freely resold.  

SEC Commissioner Aguilar discussed concerns about the current "accredited investor" definition and the changes proposed by the SEC's Investor Advisory Committee. Specifically, he noted the lack of a correlation between the definition's income and net worth "tests" - and the type of financial sophistication that would warrant the investor protection carve-out that accredited investors receive under Regulation D. Commissioner Aguilar supports the IAC's recommendations which would take into account an individual's specialized work experience, investment experience, licensing and other professional credentials to gauge financial sophistication for "accredited investor" purposes.  

Delaware Senate Confirms New Superior Court Judge

Last week, the Delaware Senate confirmed the nomination of Jan Jurden as new President Judge of the Superior Court. Jurden was nominated to replace James Vaughn, who was appointed to the Delaware Supreme Court in October. As noted in this blog, Jurden was appointed to the Superior Court in 2001 after 13 years as a litigator at Delaware's Young, Conaway, Stargatt & Taylor.

Cybersecurity & Other Recently Enacted Bills of Interest

• Cybersecurity Enhancement Act of 2014 - to provide for an ongoing, voluntary public-private partnership to improve cybersecurity, and to strengthen cybersecurity research and development, workforce development and education, and public awareness and preparedness.

• Insurance Capital Standards Clarification Act of 2014 - to clarify the application of certain leverage and risk-based requirements under the Dodd-Frank Act.

• Community Financial Institutions - to enhance the ability of community financial institutions to foster economic growth and serve their communities, boost small businesses, increase individual savings.

• American Savings Promotion Act - to provide for the use of savings promotion raffle products by financial institutions to encourage savings.

JPMorgan Publishes Business Practices Report In Response to ICCR Shareholder Proposal to Split CEO/Chair  

JPMorgan Chase just released this "How We Do Business" report describing its business practices and standards and reviewing how it has addressed recent challenges. According to this article, the report was prompted by investor Interfaith Center of Corporate Responsibility's push for corporate governance changes resulting from the fallout of the 2008 financial crisis. Although Interfaith has purportedly agreed to pull its campaign to split JPM's CEO and board chair roles in exchange for issuance of the report, the article states that "the group is not giving up its quest to split the roles at other large banks" - despite historically insufficient levels of shareholder support for such proposals on an overall basis.

Specifically, the JPMorgan report highlights the company's efforts to re-articulate and reemphasize its cultural values and corporate standards - with the aim of ensuring that employees internalize and live by these standards. The report details many of the company's large-scale efforts and investments to strengthen its control environment through improved infrastructure, technology, operating standards and governance, and describes the company's commitment to its customers and to its relationships with regulators, shareholders and communities.

Audit Risk Roadmap for Audit Committees 

Earlier this month, the CAQ highlighted for its members seven key audit areas for the 2014 audit cycle - including revenue recognition, ICFR and related party transactions - based on recent regulatory scrutiny. In his monthly Update, Baker & McKenzie's Dan Goelzer observes that - while the CAQ's Alert is directed toward auditors - it "provides a road map for audit committees regarding the topics that auditors are likely to view as posing the greatest risks - and the highest likelihood of PCAOB inspection attention.  As such, it may help audit committees better understand the perspective from which their audit firm will approach its 2015 engagements." Dan's update conveniently identifies each of the highlighted audit areas with links to the associated PCAOB guidance and his own prior topic-specific updates.  

PwC Addresses SEC Comment Letter Trends & Considerations 

PwC recently released reports on key 2014 SEC comment letter trends and considerations for selected industries and accounting topics. Each report highlights the areas that received the most comments from the SEC and provides relevant examples of recent comments to help companies assess whether their disclosures are transparent and consistent with relevant accounting and reporting guidance. 

PwC offers the following reports by industry:

• Entertainment, Media & Communications
• Technology IPO
• Energy and Mining
• Healthcare Provider
• Technology
• Retail & Consumer
• Automotive
• Industrial Products
• Financial Services
• Pharmaceutical and Life Sciences
• Power and Utilities

Big 4 Highlight Key AICPA Conference Topics for Companies & Audit Committees

We previously reported (here and here) on certain SEC and PCAOB developments discussed at the recent AICPA conference - including audit committee disclosure, ICFR, the COSO transition and auditor independence-related "scope creep." PwC, KPMG, Deloitte and EY have since published their own robust summaries of conference highlights which may be of interest to companies and audit committees.

Management Proxy Access Proposals Prompt No-Action Requests on Shareholder Proposals

Marathon Oil and Cabot Oil have requested no-action letters from the SEC to exclude shareholder proposals on proxy access from their 2015 proxies based on their plans to include conflicting management proposals on the ballot under Rule 14a-8(i)(9). Both companies received proposals from the NYC Comptroller requesting proxy access rights for any shareholder or group of shareholders who own at least 3% of the company's stock for 3 years - for up to 25% of the board seats.

Marathon Oil's proposal would be effected via a bylaw amendment and provide for proxy access for any shareholder (but not a group of shareholders) owning at least 5% for five years - for up to the greater of (a) one director, or (b) 10% of the board. Cabot Oil's proposal would be effected via a bylaw amendment and provide proxy access for any shareholder or group of shareholders owning at least 5% of the company's stock for 3 years - for up to 20% of the board seats.

There are more coming - stay tuned!

Also, we previously reported the SEC's grant of no-action letter relief to Whole Foods in connection with a proxy access proposal submitted by James McRitchie based on the company's assertion that the proposal directly conflicts with a proxy access bylaw amendment the company plans to submit to its stockholders at its 2015 annual meeting. McRitchie is now appealing to the SEC for reconsideration of that decision.

Study Suggests Investors Should Use Economic Value Creation in Say-on-Pay Votes to Foster Long-Term Performance 

This new Organizational Capital Partners/IRRCi study - which analyzed recent say-on-pay votes for over 100 institutional investors - found no discernible link between company economic performance and say-on-pay support. Company performance was measured using return on invested capital (ROIC) minus weighted average cost of capital (economic profit) and positive or negative total shareholder return (TSR). Specifically, the study found:

• Average say-on-pay vote was 82% for 32 low performing companies, and 84% for 32 high performing companies.
• Median say-on-pay vote was 90% for low performing companies, and 96% for high performing companies.
• No meaningful difference between the recommendations of ISS and Glass Lewis, whose support was comparable for both high and low performing companies.

The study concludes that economic value creation fundamentals either aren't used in current say-on-pay voting and proxy advisor recommendations - or are outweighed by other considerations. IRRCi executive director Jon Lukomnik remarked, "It's time for institutional investors to step up and recognize that they also contribute to short-termism and sub-optimal value creation. The report suggests that using value-based performance metrics such as ROIC as part of Say-on-Pay voting analysis would help move the focus of executive compensation from short-term alignment with stock market swings to long-term corporate economic performance."  

Hedge Fund Director Nominees Accompanied by "Golden Leashes" 

In this blog, Society member and The Conference Board's Donna Dabney describes several activist hedge fund "golden leash" scenarios and related corporate governance concerns. "Golden leashes" refer to incentives offered by investors (typically activist hedge funds) to directors they nominate to serve on the investee-company's board. 

Most recently, Dow Chemical agreed to nominate two of hedge fund investor Third Point's director nominees accompanied by sizeable golden leash pay plans consisting a two $250,000 lump sum payments (one payment upon agreeing to serve, and another upon being appointed as a director) to be invested in Dow stock - and additional incentive compensation based on increases in Dow's stock price over a 3-year and 5-year period. The payments aren't contingent on Third Point's continued ownership of Dow stock. Previous, well-publicized golden leash scenarios (described in the blog) had generated significant discussion and governance concerns. 

Referencing Columbia Law School Professor John Coffee's 2013 article on golden leashes, the blog highlights these concerns:

• Timing conflicts. Special pay incentives encourage those directors who receive them to take short term actions that may not be appropriate for the company.
• Risk appetite. Directors with incentives to boost stock price quickly may be more inclined to take risks to boost stock price such as by leveraging the company. The Dodd Frank Act restricted incentives for executives at major financial institutions precisely because such compensation was thought to have led to the short term incentives that produced the financial crisis.
• Directors have a fiduciary obligation to the company and all of its shareholders, yet special compensation paid by one shareholder may unduly influence a director to act in that shareholder's interest at the expense of other shareholders and the company's interests as a whole.
• Conflicts of interest. Compensation can give rise to a conflict of interest that induces a director to subordinate his or her own judgment to that of the institution paying the director.

Delaware Court Case Roundup

Here are summaries of just a handful of the many recent noteworthy Delaware court cases.

Complaint Challenging Audit Committee-Approved Related Party Transaction is Dismissed

In In re Sanchez Energy Deriv. Litig., the Delaware Court of Chancery dismissed a derivative complaint challenging a related-party transaction approved by the audit committee.  The court held that the plaintiff failed to: (i) sufficiently allege that the three members of the company's audit committee who approved the transaction were not disinterested and independent, and (ii) show that the founders, who had two of the five board seats and collectively owned 21.5% of the equity, should be treated as a controlling stockholder and thus receive heightened scrutiny under the entire fairness standard.

See also This Hunton & Williams memo.

17.5% CEO-Stockholder May Be "Controlling" Stockholder

In In Re Zhongpin Inc. Stockholders Litigation, the Delaware Court of Chancery denied a motion to dismiss a complaint challenging a going-private transaction where the company's CEO, board chair and 17.5% stockholder was leading the buyout group.  The complaint was deemed to plead sufficient facts to raise an inference that the CEO was a controlling stockholder. As a result, the entire fairness standard of review - rather than more deferential business judgment rule - applied.

Notably, in response to the CEO's buyout proposal, the board formed a special committee composed solely of non-employee directors, which retained independent financial and legal advisers before deciding to recommend the merger agreement with the CEO-led group for shareholder approval. See also this Orrick memo. 

Board Has Leeway to Decide Sales Process 

In C&J Energy Servs., Inc. v. City of Miami Gen. Emps.' & Sanitation Emps.' Ret. Trust, the Delaware Supreme Court reversed the Court of Chancery's injunction of a proposed merger transaction for failure of the board to affirmatively shop the company notwithstanding the merger agreement's no-shop provision. The court affirmed the board's ability to conduct discussions with only one potential buyer - subject to adhering to the Revlon duties.  

See Wachtell Lipton's memo about this case, quoting from Chief Justice Strine:

Revlon does not require a board to set aside its own view of what is best for the corporation's stockholders and run an auction whenever the board approves a change of control transaction. Independent and well-informed directors may choose any reasonable path when selling a company, so long as the transaction is subject to an effective market check under circumstances in which any bidder interested in paying more has a reasonable opportunity to do so. 

Case Provides Guidance on Board's Evaluation of M&A Antitrust Risk

In In re Family Dollar Stores, Inc. Stockholders Litigation, the Delaware Chancery Court denied a motion for a preliminary injunction where plaintiffs challenged the board's refusal to enter into negotiations with a particular competitor that had proposed a competing bid based on antitrust considerations. This Cleary Gottlieb memo describes the case and the aspects of the board's conduct that supported the court's decision.

This week's highlighted question from the Huddle is:

Because our executives are in one location and our business units are spread out, we are looking at the use of electronic signatures on documents.  Does anyone have insight on a good vendor to use for this and, if you use electronic signatures, what kind of controls do you have around it?  Do you have one person/department in your organization who is responsible for getting the signatures? 

This question generated a lot of activity and many excellent answers (too many to note here) including: 

We use our electronic Diligent boardbook site to gather electronic signatures from both directors and officers that are not local.  We post the document online.  They have to log in and attach their electronic signature.  I can print out the document at the headquarters.  It looks much better than the old send an email and get a scan back of the signature method we were using previously. 

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