Securities Regulation
White House Freezes Pending Regulations
By Thomas W. White, Retired Partner, WilmerHale
On January 20, President Biden’s first day in office, the White House chief of staff issued a memorandum that freezes many regulatory actions by executive departments and agencies. The purpose of the freeze is to “ensure that the President’s appointees or designees have the opportunity to review any new or pending rules.” Subject to certain exceptions and to applicable laws, the memorandum precludes departments or agencies from proposing or issuing a new rule until the rule is reviewed and approved by a Biden appointee or designee. If a rule has been sent for publication in the Federal Register but not yet published, the department or agency is to immediately withdraw the rule to permit such review and approval.
Finally, the memorandum calls for departments and agencies to “consider” postponing the effective date of rules that have been published in the Federal Register, or issued in any matter, but have not taken effect. The rules’ effective dates would be extended to 60 days from the date of the memorandum (March 21, 2021). The department or agency would then consider opening a 30-day comment period to allow interested parties to provide comments and to consider pending petitions for reconsideration involving such rules. The memorandum permits further delays of the effective dates of rules that raise substantial questions of fact, law or policy.
The memorandum defines “rule” broadly to include not just rules as defined in the Administrative Procedure Act but also other substantive actions that may lead to rulemaking and statements of general applicability and future effect with policy implications.
At least one Securities and Exchange Commission (SEC) rule could be subject to the 60-day effective date extension. The SEC’s recent amendments to Regulation S-K regarding MD&A, supplementary financial information, and selected financial data have been published in the Federal Register and have an effective date of February 10, 2021. Registrants are not required to comply with the new rules until the first fiscal year that is 210 days after publication in the Federal Register (August 9, 2021). However, registrants can early adopt the new rules at any time after the effective date. That option could be precluded for many calendar-year filers’ 2020 10-Ks, if the SEC postpones the effective date until March 21 as contemplated by the memorandum.
SEC Approves NYSE Plan to Allow Direct Listings with a Concurrent Primary Issuance
By Brian Hirshberg, Mayer Brown
On December 22, 2020, the SEC approved the proposal submitted by the New York Stock Exchange (NYSE) that allows companies to conduct concurrent primary offerings as part of a direct listing on the exchange. The NYSE’s proposal had been put on hold since August 2020, following the SEC’s receipt of a notice of intention to petition for review submitted by the Council of Institutional Investors. As a result of the approval, a company undertaking a direct listing on the NYSE may issue new shares and sell them to the public on its first trading day without conducting a firm commitment underwritten offering. Previously, private companies that chose to undertake a direct listing on the NYSE undertook the listing together with registering with the SEC the resale of shares by their existing shareholders. The NYSE will deem a company to have met the applicable aggregate market value of publicly-held shares requirement in order to proceed with the direct listing coupled with a primary offering if the company sells at least $100 million in market value of its shares in the NYSE’s opening auction on the first day of trading. Alternatively, the NYSE will determine that the company has met its market value of publicly-held shares requirement if the aggregate market value of the shares the company will sell in the opening auction on the first day of trading and the shares that are publicly-held immediately prior to the listing is at least $250 million, with the market value calculated using a price per share equal to the lowest price of the price range established by the company in its registration statement. Generally, the companies that have elected to pursue direct listings to date have raised capital in private placement transactions and have sought to undertake the direct listing principally as a means of providing liquidity to existing shareholders. This new alternative provides greater flexibility, making direct listings an option for many more companies.
A link to the SEC’s approval of the NYSE proposal can be found here.
SEC Solicits Comment on NYSE Proposed Changes to Shareholder Approval Rules
By Brian Hirshberg, Mayer Brown
On December 16, 2020, the NYSE filed a proposed rule change to certain of its shareholder approval requirements, which would bring the NYSE’s shareholder approval rules into closer alignment with those of Nasdaq. Last year, the NYSE temporarily waived certain requirements under Section 312 in order to provide listed companies with greater flexibility to raise capital during the COVID-19 crisis (the NYSE has proposed to extend these temporary waivers through March 31, 2021). The NYSE’s proposed rule change includes amendments that are identical to such waivers.
Section 312.03(b) requires shareholder approval for certain issuances of common stock to specified related parties. Approval is required if the shares to be issued exceed 1% of the shares outstanding before the issuance. However, a limited exception permits sales to related parties that are only substantial security holders of the issuer so long as no more than 5% of outstanding shares are issued and the shares are issued at no less than the minimum price. The NYSE proposes to amend this rule to limit the class of related parties that would trigger the requirement to obtain shareholder approval. Section 312.03(b) as amended would require prior shareholder approval only for sales to directors, officers and substantial security holders and would no longer require approval for sales to such related party’s subsidiaries, affiliates or other persons closely related or to entities in which a related party has a substantial interest. Further, Section 312.03(b) as amended would no longer require shareholder approval for issuances of more than 5% of outstanding shares to a related party so long as these are issued at the minimum price. Instead, the NYSE proposes to require that any listed company obtain shareholder approval for a transaction in which a director, officer or substantial security holder has a 5% or greater interest (or such persons collectively have a 10% or greater interest) in the company or assets to be acquired or in the consideration to be paid in the transaction and the issuance of shares could result in an increase in outstanding shares of 5% or more.
Section 312.03(c) requires shareholder approval of any issuance of 20% or more of outstanding shares before such issuance, excluding (i) any public offering; or (ii) any bona fide private financing (defined as no one purchaser acquiring more than 5% of outstanding shares) that complies with the minimum price requirement. The NYSE proposes to replace the reference to “bona fide private financing” with “other financing in which the company is selling securities for cash.” This change would effectively eliminate the 5% limit for any single purchaser but retain the minimum price requirement.
See the NYSE’s proposed rule and the SEC’s notice to solicit public comment here.
Glass Lewis Issues Recommendations Regarding Virtual Meetings
By Melissa Sanders, Fox Rothschild LLP
Glass Lewis recently issued recommendations related to virtual and hybrid shareholder meetings. The guidance is generally supportive of virtual and hybrid meetings as long as the company holding the meeting transparently addresses key points related to shareholder participation. The key points include communicating with shareholders about when, where and how they can ask questions (including, for those companies with restrictions on questions during meetings, an explanation of how the board will address appropriate questions received during or before the meeting); communicating with shareholders about the procedure and requirements for participation; and providing shareholders with technical support both before and during the meeting. Where a company does not provide such disclosures to shareholders, Glass Lewis recommends accountability measures, which may include voting against directors who are up for reelection in “egregious” cases. The guidance notes that hybrid meetings can be beneficial to shareholder rights by allowing participation by those who are unable to attend in person or by proxy, and recommends that a company communicate about the same points as in virtual-only meetings. In addition to the guidance related to virtual and hybrid meetings, Glass Lewis recommends that completely closed door meetings where there is no ability for shareholders to participate should be avoided.
State Street Global Advisors Expands Guidance on Racial and Ethnic Diversity Disclosures
By Alan J. Wilson, WilmerHale
Expanding upon its August 2020 letter to board chairs, State Street Global Advisors (SSGA) has released Guidance on Enhancing Racial and Ethnic Diversity Disclosures. The guidance expands SSGA’s focus on gender diversity to include racial and ethnic diversity, which is a priority for SSGA’s Asset Stewardship team in 2021. SSGA plans to engage with the largest employers in the US and UK during 2021, first analyzing their diversity disclosures at the beginning of the year, then requesting engagement with the employers during the year, and finally reporting on the employers’ progress at year end.
SSGA’s guidance also includes updated voting policies, starting with the 2021 proxy season, to vote against the Chair of the Nominating & Governance Committee of S&P 500 and FTSE 100 companies that do not do the following:
- In 2021 – companies that do not disclose the racial and ethnic composition of their boards;
- In 2022 – S&P 500 companies only that do not disclose their EEO-1 Survey responses; and
- In 2022 – companies that do not have at least one director from an underrepresented community on their boards.