In Case You Missed It - Interesting Items for Corporate Counsel - December 2016

Stoel Rives LLP

Stoel Rives LLP

  1. As the SEC as we know it labors through its last five weeks, we note the following activities:
    • Publication last week of 35 CDIs, here, covering a host of topics, including Regulation S and qualified institutional buyer status under Rule 144A.
    • Publication in November of guidance on tender offers, here.
    • Publication in November of CDIs about Regulation A (182.12-.14) and Regulation D (256.34), here. The Regulation D interpretation – that there are no integration issues if a 506(c) offering is commenced within six months of a 506(b) offering – is significant.
    • Updates to the SEC’s financial reporting manual, here, to add guidance to Topic 606 (revenue from contracts with customers), Topic 842 (leases) and Topic 944 (disclosure of short-duration contracts).
    • A report on modernization and simplification of Regulation S-K, here.
    • The announced departures of SEC Chair Mary Jo White, see here, SEC Enforcement Director Andrew Ceresney, here, and SEC Corporation Finance Director Keith Higgins, here.
  2. The U.S. Supreme Court issued its opinion in Salman v. United States, here, in which it held that tipping a friend or relative about material non-public information satisfies the “personal benefit” requirement of Dirks v. SEC and that the government need not prove a “tangible benefit” to the tipping insider to support an insider trading conviction for the tippee. Commentary on the holding is here, here and here. Securities lawyers get all atwitter when the Supreme Court rules on anything related to securities laws, and the number of law firm memos about the case reflects that. To condense the overarching lesson from the decision: don’t count on technical legal arguments to duck liability for unscrupulous insider trading, you dip.
  3. Not unexpectedly (see, e.g., here), several commentators note (see here and here) the advent of Trump risk factors, generally of the “coming trade wars” and “regulatory uncertainty” variety. As the world turns, we expect some variation of the following will become standard: “Donald Trump may call us out in a tweet because we, or a company with a name similar to ours, have criticized his policies, lack of experience or hair. We are not able to predict what might set him off. Such a tweet may cause a temporary drop in our stock price. Also, if he starts a trade war, that will be bad for our business; if he starts a nuclear war, that probably will be even worse.”
  4. On the shareholder services/activism front:
    • Institutional Shareholder Services and Glass Lewis issued their 2017 policy updates, respectively here and here.
    • Glass Lewis announced public companies may access a data-only version of the Glass Lewis report before it completes its analysis and proxy voting recommendations. Sign up is here.
    • The Government Accountability Office issued a report on proxy advisory firms’ role in voting and corporate governance here.
    • A review of shareholder activism in 2016 is here.
    • A review of shareholder activism in 2016 for Bay Area companies, including Silicon Valley, is available here.
  5. Oh, Portland. In what at least three Portland City Council members, probably a majority of Portlanders and most lunatic Trump and Sanders voters will characterize as a daring blow for income equality, and almost everyone else will characterize as harebrained populism, Portland’s City Council last week adopted a city tax surcharge tied to public CEO-to-median employee pay ratio disclosure (see here). Under the ordinance, any company that discloses in SEC filings a pay ratio of 100:1 but less than 250:1 pays an additional 10% in city tax, and anyone who discloses a ratio of 250:1 or more pays an additional 25%. Articles about this first-of-its kind tax are here, here, here and here. The tax would apply beginning January 1, 2017. Some additional information, and a whole lot of editorializing, follows.
    • As a reminder, the SEC requires that beginning in 2018 a public company disclose the total prior-year compensation of its CEO and its median employee (including foreign, part-time and temporary employees) and the ratio of the CEO-to-median employee pay. This disclosure rule may be repealed with the rest of the Dodd-Frank Act, which we have all recently learned was only enacted by Democrats in a malicious and concerted effort to ruin this once-great nation and not as a result of any kind of then-extant financial crisis. So thank goodness. Repeal of the disclosure requirement would vitiate the taxsurcharge. (But see here.)
    • The Council recognized this move is largely symbolic, and notes in its adopting statement that if every city adopts a similar law, “shareholders may realize that extreme [] pay ratios reduce their profits and, with this result in mind, make changes to their pay structure.” Presumably once that happens, voila – income equality. Of course, this ignores that more than 99% of U.S. businesses are private and not subject to the additional tax. It also ignores other things, like differences among industries (say, a retail business that employs lots of minimum-wage high school kids compared to a software company that employs highly skilled programmers), that providing disincentives to going public may further concentrate wealth among the few, that (gasp!) many CEOs are actually worth the money even though they are paid much more than you, and that perhaps the public company shareholders who pay the salaries are better positioned than Portland to judge whether their CEO is overpaid. Ultimately, the ordinance may come only to symbolize Portland’s disdain for business, and we anxiously await Seattle’s forthcoming “Not as crazy as Portland” campaign to lure companies away.
    • No less symbolic, perhaps, the posed photo of outgoing Councilman Steve Novick in the New York Times piece about his ordinance (here) makes him look heroic. Kind of like Superman. (But to assume this is about him, and not the greater good, is cynical and absurd. Shame on you.)
    • In addition to not working and being a bit silly, there’s plenty of legal room to challenge the new tax law assuming a company is bold enough to withstand the pitchforks and name-calling if it does. A dormant commerce clause claim, say, or maybe even an equal protection claim. (Yes, that’s right, the U.S. Constitution. The same document that could be the last refuge of our editorial staff for the snide fake risk factor they included above, after the Sedition Act of January 23, 2017 is signed into law.)
    • In a rational world, where thoughtful people articulate and discuss meaningful policy ideas and land on what more or less makes sense in a range of reason, Councilman Novick’s proposal would not have been adopted. Ah, to live in that world.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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