There have certainly been many developments in securities claims jurisdiction in the past several years, particularly in the area of “exclusive forum” provisions contained in charters or bylaws. Exclusive forum provisions typically provide that a certain court (e.g., the Delaware Court of Chancery) is the sole and exclusive forum for certain types of litigation involving the company. These provisions are often tested in the courts, especially when they seem to be in conflict with controlling precedent.  For example, in 2018 in Cyan v. Beaver Cty. Empls. Ret. Fund, the United States Supreme Court concluded that federal law did not bar state courts from adjudicating class actions alleging only claims under the 1933 Act, and it also prohibited the removal of such class actions from state to federal court.

Following Cyan, several Delaware companies attempted to avoid litigating 1933 Act class actions in state court by adopting charter-based federal forum provisions, which required stockholders to file any claim under the 1933 Act in federal court. Those efforts to circumvent the consequence of Cyan, however, failed when in a December 2018 case (Sciabacucchi v. Salzberg), the Delaware Court of Chancery rejected use of these federal forum provisions. The court reasoned that Delaware corporations could only adopt forum-selection provisions for “internal-affairs claims.” According to the Delaware Court of Chancery, “a 1933 Act claim is external to the corporation.” Therefore, because 1933 Act claims are external to Delaware corporations, charter provisions requiring a federal forum for 1933 Act class actions brought by corporation shareholders were invalid under Delaware law.

Notwithstanding the above related to the 1933 Act class actions, federal courts continue to have “exclusive jurisdiction” to hear claims brought under the 1934 Act as a result of Section 27(a) of that law.

Continue Reading Exclusive Forum Provisions in Charters and Bylaws: An Area of Frequent SEC Comment

On March 20, 2019, nearly a year and a half after proposing them, the SEC adopted amendments to disclosure requirements for reporting companies, as mandated by the 2015 Fixing America’s Surface Transportation Act (the “FAST Act”).  The amendments are a part of an ongoing effort by the SEC to simplify and modernize disclosure obligations.  According to the SEC’s press release, the amendments are expected “to benefit investors by eliminating outdated and unnecessary disclosure and making it easier for them to access and analyze material information.”

Among many other items, the amendments address the following topics:

  • Greater Flexibility When Filing Under Item 601 of Regulation S-K

    • Omission of Immaterial Schedules and Exhibits—The amendments revise Item 601 of Regulation S-K to expand the ability of registrants to omit immaterial schedules and similar attachments to required exhibits, which previously was only available to schedules and exhibits to acquisitions agreements being filed under Item 601(b)(2).

Continue Reading SEC Amendments Help Streamline Reporting for Public Companies

Usually this blog is reserved for matters involving corporate and securities law rather than updates in the accounting standards, but the email alert from the Financial Accounting Standards Board (FASB) that I received yesterday is definitely an exception. The FASB email alert first mentions that FASB yesterday issued Accounting Standards Update No. 2019-02, Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials (a consensus of the FASB Emerging Issues Task Force). To read more about this update, see this news release. However, the best part of the update in my non-accountant opinion was the video explanation produced by FASB where it discussed the new accounting standard and the related effective dates.

As a former staffer in Corp Fin’s Office of Rulemaking, I’ve personally worked on SEC adopting releases, and I’ll proudly say that they are probably the most in-depth and user-friendly rule publications of all the financial agencies, and even include an economic analysis where some of the other agencies do not. However, I must admit that FASB’s video explanation idea may set a new bar! Should we expect to see SEC Commissioners and staff starring in the roll-out of new rules soon? I really hope so. It appears from this “SEC Videos” page that the agency already has great video production capabilities.

Click on the image to view the FASB video

As it is proxy season for calendar year companies, many of which are filing preliminary proxy statements that are subject to screening by the SEC Staff, I thought it might be helpful to publish answers to a few common questions about this process.

  • Is preliminary proxy screening different from other filings?

    Yes, in my experience the screening process for preliminary proxies is a little different than the process for a review of registered transactions. For registration statements, the Staff will call you at some point with a screening decision because in most cases they will need to take the filing effective, which requires more interaction between you and the Staff (i.e., acceleration request, etc.)   In comparison, if you file a preliminary proxy and you have not heard from the Staff within 10 calendar days from the date of your filing, you are free to file the definitive proxy, print and mail at that point—you don’t have to call the Staff to confirm that they are not going to review the filing.

    Continue Reading 5 FAQs on Proxy Screening Procedures

This week the SEC proposed to expand the “test-the-waters” accommodation—currently available to emerging growth companies (EGCs)—to all issuers, including investment company issuers. The proposed rule and related amendments under the Securities Act of 1933 would enable all issuers (and its authorized representatives, including underwriters) to engage in test-the-waters communications with certain institutional investors regarding a contemplated registered securities offering prior to, or following, the filing of a registration statement related to such offering. These communications would be exempt from restrictions imposed by Section 5 of the Securities Act on written and oral offers prior to or after filing a registration statement and would be limited to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs).

In the SEC’s press release announcing the action, SEC Chairman Jay Clayton said, “Extending the test-the-waters reform to a broader range of issuers is designed to enhance their ability to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies.”  Chairman Clayton added, “I have seen first-hand how the modernization reforms of the JOBS Act have helped companies and investors. The proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.”

Under proposed Securities Act Rule 163B:

Continue Reading SEC Proposes to Expand “Test-the-Waters” to All Issuers

The American Law Institute (ALI) approved a new project last month – Restatement of the Law, Corporate Governance. Over 25 years ago, the ALI approved and published the Principles of Law, Corporate Governance and this new project will examine the evolution of corporate governance over the last 25 years and reflect the current state of the law. New York University Law School Professor Edward Rock will serve as the Reporter for the Restatement, assisted by a number of associate reporters and advisors with diverse experiences. The project is likely to take several years to complete.

Jim Cheek, a member of Bass, Berry & Sims and of the Board of Trustees of the American College of Governance Counsel, is also a member of the ALI and will be following the project closely.

In response to the mandate of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Securities and Exchange Commission recently issued final rule amendments permitting companies reporting under Section 13 or 15(d) of the Securities Exchange Act to offer securities pursuant to the registration exemption Regulation A. Previously, offerings pursuant to Regulation A were expressly limited to non-reporting companies. The rule amendments also provide that, so long as the reporting company is current in its Exchange Act periodic reports, the reporting company has no additional periodic reporting obligations under Regulation A. These amendments became effective on January 31, 2019, upon publication in the Federal Register.

Continue Reading SEC Amends Rules to Permit Existing Reporting Companies to Offer Securities Pursuant to Regulation A+; Updated and Revised Regulation A+ FAQs

An SEC comment letter exchange recently made public serves as a helpful reminder to consider Section 5 of the Securities Act when structuring a PIPE (private investments in public equity) transaction.  In a PIPE, a public company issues securities to one or more accredited investors in a private placement exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, or the safe harbor thereunder provided by Regulation D.  Since the securities in a PIPE offering are initially “restricted securities” within the meaning of the Securities Act, investors cannot freely resell their securities until a holding period under Rule 144 has lapsed or a registration statement has been filed.

PIPE transactions often include registration rights whereby the issuer agrees to file a resale registration statement with the SEC within an agreed-upon period.  The crux of the Section 5 issue in PIPEs often hinges on the timing of the investment decision in the private offering, including whether commitments are in place from all investors, subject only to conditions outside their control so that there is no further investment decision after the filing of the registration statement, and the investors have market risk at the time that the resale registration statement is filed.   In other words, the “sale” in the private offering is completed prior to filing the registration statement.  As discussed in the comment letter exchange below, other related factors include whether the private offering closes prior to, or after, the filing of the registration statement and when the shares to be resold were actually issued to the purchaser.

Continue Reading How to Avoid Running a PIPE into Section 5 Problems: A Recent SEC Comment Letter Example

With the government partially shut down, the SEC is following its operations plan during a shutdown, which entails an extremely limited number of staff members available to respond to emergency situations involving market integrity and investor protection, including law enforcement.  While EDGAR will accept registration statements, offering statements and other filings during the shutdown, the SEC is neither screening nor reviewing filings during the shutdown.  This means the Staff is not be able to declare registration statements effective nor qualify Form 1-A offering statements.

Continue Reading Removing the Delaying Amendment – An Example

On December 19, 2018, the Delaware Chancery Court held that a business incorporated in Delaware could not use its corporate charter or bylaws to require that its shareholders bring any securities claims under the Securities Act of 1933 (the “1933 Act”) in federal court.  The 1933 Act requires that any person selling or offering securities make certain disclosures through a registration statement approved by the Securities and Exchange Commission and provides a private right of action to securities purchasers to enforce its provisions.

Earlier this year, in Cyan, Inc. v. Beaver Cty. Empls. Ret. Fund, the United States Supreme Court concluded that federal law did not bar state courts from adjudicating class actions alleging only 1933 Act claims.  Importantly, it also prohibited the removal of such class actions from state to federal court.  As a result of the Supreme Court’s decision in Cyan, if a securities purchaser brings a 1933 Act class action in state court, a defendant corporation will find it difficult to have those federal claims heard in federal court.

Continue Reading Delaware Chancery Court Closes Off Potential Route Around <i>Cyan</i>