Monthly Archives: November 2017

SEC Guidance On Rule 701(e) Financial Statement Confidentiality

The following post is based on a publication from Paul, Weiss, Rifkind, Wharton & Garrison LLP, authored by Mark Bergman, David Huntington, Jack Lange and Hank Michael.

Private companies granting share-based compensation to their employees often will rely on Rule 701 under the Securities Act of 1933 (the “Securities Act”), particularly if the employees being granted options or restricted stock units (or other forms of compensation that otherwise would implicate the registration requirements of Section 5 of the Securities Act) do not qualify as “accredited investors.” Rule 701(e) requires an issuer to deliver, a reasonable period prior to the date of sale, financial statements, among other things, to all employees in the United States to whom the issuer sells securities in reliance on Rule 701 if the issuer sells securities in excess of $5 million in a 12-month period under Rule 701. [1] For private companies, this delivery requirement can raise concerns that their financial information may become widely disseminated (or at least obtainable by competitors). On November 6, the SEC Staff published a Compliance & Disclosure Interpretation (C&DI 271.25) setting forth additional guidance that can mitigate the effect of the delivery requirement.


Corporate Governance as Privately-Ordered Public Policy: A Proposal

Lynn Stout is Distinguished Professor of Corporate and Business Law and Director of the Clarke Program on Corporations and Society at Cornell Law School. Sergio Gramitto is a Post-Doctoral Associate, Adjunct Professor, and Assistant Director of the Clarke Program on Corporations and Society at Cornell Law School. This post is based on their recent paperRelated research from the Program on Corporate Governance includes Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here), and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

In this paper, we show how our society can use corporate governance shifts to address, if not entirely resolve, a number of currently pressing social and economic problems. These problems include: rising income inequality; demographic disparities in wealth and equity ownership; increasing poverty and income insecurity; a need for greater innovation and investment in solving problems like disease and climate change; the “externalization” of many costs of corporate activity onto third parties such as customers, employees, creditors, and the broader society; the corrosive influence of corporate money in politics; and discontent and loss of trust in the capitalist system among a large and growing segment of the population.


General Counsel Pay Trends

Matthew Goforth is Senior Governance Advisor at Equilar, Inc. This post is based on an Equilar publication by Mr. Goforth. The full report, with commentary from BarkerGilmore, can be downloaded at Equilar’s website.

General Counsel Pay Trends, an Equilar publication, examines the compensation of General Counsel (GC) disclosed in SEC filings by public companies for the fiscal years 2016 and 2015. Companies that filed a proxy statement (DEF 14A) or disclosed compensation information in an amended 10-K filing (10-K/A) by May 1, 2017 were included in the fiscal 2016 year—2015 was defined similarly. Analysis of GC compensation is divided by company revenue ranges for the larger sample of all public companies in the Equilar database.


Impact of Tax Reform Bill on Executive Compensation

Scott P. Spector is a partner, and Marshall Mort and Sarah Ghulamhussain are associates at Fenwick & West LLP. This post is based on a Fenwick publication by Mr. Spector, Mr. Mort, Ms. Ghulamhussain, Kristin O’HanlonPatrick V. Grilli, and Ariel Gaknoki.

The House Ways and Means Committee on November 2, 2017, released the proposed Tax Cuts and Jobs Act, which may have significant impact on the taxation of equity and performance-based compensation for both private and public companies. The 400-plus-page draft bill was revised on November 3, 2017, and remains subject to further revision by the House, Senate and members of the White House Administration, including the Treasury Department in the coming days. If enacted in its current form, the bill would become effective January 1, 2018.


Analysis of SEC Guidance on Shareholder Proposals

Troy Paredes is a former Commissioner of the U.S. Securities and Exchange Commission, the founder of Paredes Strategies LLC and a Senior Advisor to CamberView Partners; Allie Rutherford is a partner and Sharo M. Atmeh is a principal at CamberView Partners. This post is based on a CamberView publication by Mr. Paredes, Ms. Rutherford, Mr. Atmeh, and Abe M. Friedman, CEO and founder of CamberView Partners.

New guidance released on November 1st by the staff of the U.S. Securities and Exchange Commission (SEC) Division of Corporation Finance has the potential to reshape the playing field of shareholder proposals, with new opportunities and obligations for issuers and company boards. The guidance, which primarily deals with how SEC staff will respond to requests to exclude proposals based on Rule 14a-8(i)(5) (economic relevance) and Rule 14a-8(i)(7) (ordinary business), significantly elevates the role of boards in responding to resolutions. While it remains to be seen how deferential SEC staff will be to a board’s reasoning for proposal exclusion and the level of detail and analysis required to support such reasoning, issuers should begin preparing for what will be a dynamic and evolving space for boards and investors.


Second Circuit Analysis of Fraud-on-the-Market Doctrine

Brad S. Karp is Partner and Chairman at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss publication by Mr. Karp, Susanna BuergelAndrew EhrlichDaniel Kramer, Jane O’Brien, and Audra SolowayRelated research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here).

In Waggoner v. Barclays PLC, No. 16-1912 (2d Cir. Nov. 6, 2017), the Second Circuit held that shareholder plaintiffs seeking class certification under the presumption of reliance conferred by the fraud-on-the-market doctrine need not offer direct evidence of market efficiency so long as other indicia of market efficiency are established. This ruling will make it more difficult for public companies defending securities fraud class actions to oppose class certification unless certain indirect evidence of inefficiency is also present.


In June 2014, the New York Attorney General (“NYAG”) filed suit against Barclays under New York’s Martin Act, alleging that Barclays concealed information about the operation of its private “dark pool” trading system, LX. Following news of the lawsuit, Barclays’ stock price fell 7.38 percent. Shortly thereafter, investors in Barclays’ American Depository Shares (“ADS”) filed a putative securities fraud class action in the Southern District of New York.


Stock Trades of SEC Employees

Shivaram Rajgopal is the Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing at Columbia Business School; Roger M. White is an Assistant Professor of accounting at Arizona State University W.P. Carey School of Business. This post is based on a recent article by Professor Rajgopal and Professor White, forthcoming in the Journal of Law and Economics.

In March 2009, H. David Kotz, then Inspector General (IG) of the SEC, released a report outlining the questionable trading activity of two lawyers employed by the SEC’s enforcement division. IG Kotz admitted in subsequent testimony before Congress that the SEC lacked a compliance system capable of tracking and auditing employees’ trades [1]. This report and testimony, as well as the accompanying public outrage, spurred Mary Shapiro, then SEC Chairman, to impose new, stricter internal rules, beginning in August of 2010, whereby SEC employees must (i) refrain from buying or selling stocks of firms under SEC investigation; (ii) have their transactions pre-approved, and; (iii) order their brokers to provide transaction-level information to the SEC. [2]


ISS Final 2018 Voting Policies

Andrew R. Brownstein, David A. Katz, and Andrea K. Wahlquist are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell publication by Mr. Brownstein, Mr. Katz, Ms. Wahlquist, Sabastian V. Niles, and S. Iliana Ongun.

Proxy advisory firm Institutional Shareholder Services (ISS) has announced its final U.S. voting policies for the 2018 proxy season, which will apply to stockholder meetings held on or after February 1, 2018. ISS had previously released draft proposals on several (though not all) of the topics in October. Changes to non-U.S. voting policies were also announced.

Shareholder Rights Plans. In order to “simplify” ISS’s approach to rights plans and “to strengthen the [ISS] principle that poison pills should be approved by shareholders in a timely fashion,” ISS will now recommend voting against all directors of companies with “long-term” (greater than one year) unilaterally adopted shareholder rights plans at every annual meeting, regardless of whether the board is annually elected. Short-term rights plans will continue to be assessed on a case-by-case basis, but ISS’s analysis will focus primarily on the company’s rationale for the unilateral adoption.


Introduction to the Tax Cuts and Jobs Act

The following post is based on a publication from Paul, Weiss, Rifkind, Wharton & Garrison LLP, authored by Robert Fleder, Andrew Gaines, Alan Halperin, Patrick Karsnitz, David Sicular and Scott Sontag.

On November 2, 2017, House Ways and Means Committee Chairman Kevin Brady (R-TX) released a comprehensive tax reform bill titled the “Tax Cuts and Jobs Act,” on November 3, 2017 Chairman Brady proposed an Amendment in the Nature of a Substitute to the bill and on November 6, 2017 Chairman Brady proposed an Amendment to the Amendment in Nature of a Substitute to the bill (together, the “Act”). The Ways and Means Committee (the “Committee”) will consider the Act this week, and the Senate Finance Committee expects to release its version of a tax reform bill shortly after the Committee finishes its markup of the Act. The Republican legislators’ stated goal is to reach an agreement on a single tax reform bill before the end of 2017. Given the compressed timeline to consider changes to the Act, the extensive nature of the changes under consideration and the larger political context, it is hard to predict with any certainty which proposals in the Act, if any, may ultimately become law.

In its current form, the Act would make a number of significant changes to the U.S. federal income taxation of both individual taxpayers and businesses, including:


A Practical Guide to Virtual-Only Shareholder Meetings

Steven M. Haas is a partner and Charles L. Brewer is an associate at Hunton & Williams LLP. This post is based on a Hunton & Williams publication by Mr. Haas and Mr. Brewer. This post is part of the Delaware law series; links to other posts in the series are available here.

Last year, a record number of public companies held virtual-only shareholder meetings, which are now permitted in Delaware, Virginia, and numerous other states. Despite some shareholder opposition, we believe this trend is likely to continue. This post provides a comprehensive overview of practical issues that a company must consider in deciding whether to switch to, and then how to implement, virtual-only shareholder meetings.


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