220 Search Results

April 8, 2021 |
New York Adopts LIBOR Legislation

Click for PDF

On April 6, 2021, New York Governor Andrew Cuomo signed into law Senate Bill 297B/Assembly Bill 164B (the “New York LIBOR Legislation”), the long anticipated New York State legislation addressing the cessation of U.S. Dollar (“USD”) LIBOR.[1]  The New York LIBOR Legislation generally tracks the legislation proposed by the Alternative Reference Rates Committee (“ARRC”).[2] It provides a statutory remedy for so-called “tough legacy contracts,” i.e., contracts that reference USD LIBOR as a benchmark interest rate but do not include effective fallback provisions in the event USD LIBOR is no longer published or is no longer representative, and that will remain in existence beyond June 30, 2023 in the case of the overnight, 1 month, 3 month, 6 month and 12 month tenors, or beyond December 31, 2021 in the case of the 1 week and 2 month tenors.[3]

Under the new law, if a contract governed by New York law (1) references USD LIBOR as a benchmark interest rate and (2) does not contain benchmark fallback provisions, or contains benchmark fallback provisions that would cause the benchmark rate to fall back to a rate that would continue to be based on USD LIBOR, then on the date USD LIBOR permanently ceases to be published, or is announced to no longer be representative, USD LIBOR will be deemed by operation of law to be replaced by the “recommended benchmark replacement.” The New York LIBOR Legislation provides that the “recommended benchmark replacement” shall be based on the Secured Overnight Financing Rate (“SOFR”) and shall have been selected or recommended by the Federal Reserve Board, the Federal Reserve Bank of New York or the ARRC for the applicable type of contract, security or instrument. The recommended benchmark replacement will include any applicable spread adjustment[4] and any conforming changes selected or recommended by the Federal Reserve Board, the Federal Reserve Bank of New York or the ARRC.

The New York LIBOR Legislation also establishes a safe harbor from liability for the selection and use of a recommended benchmark replacement and further provides that a party to a contract shall be prohibited from declaring a breach or refusing to perform as a result of another party’s selection or use of a recommended benchmark replacement.

It should be noted that the New York LIBOR Legislation does not affect contracts governed by jurisdictions other than New York, and that the parties to a contract governed by New York law remain free to agree to a fallback rate that is not based on USD LIBOR or SOFR; the new law does not override a fallback to a non-USD LIBOR based rate (e.g., the Prime rate) agreed to by the parties to a contract. Although this legislation provides crucial safeguards, it should not be viewed as a substitute for amending legacy USD LIBOR contracts where possible. Rather, it should be viewed as a backstop in the event that counterparties are unwilling or unable to agree to adequate fallback language prior to the cessation date or date of non-representativeness.

The ARRC, the Federal Reserve Board and several industry associations and groups have expressed their strong support for the new law.[5]

__________________

   [1]   See https://www.nysenate.gov/legislation/bills/2021/S297.

   [2]   See https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/libor-legislation-with-technical-amendments.

   [3]   We note that certain contracts, such as derivatives entered into under International Swaps and Derivatives Association (ISDA) standard documentation, provide for linear interpolation of the 1 week and 2 month USD LIBOR tenors until USD LIBOR ceases to exist for all tenors on June 30, 2023. The New York LIBOR Legislation provides that if the first fallback in a contract is linear interpolation, then, for the 1 week or 2 month tenor USD LIBOR contracts, the parties to the contract would continue to use linear interpolation for the period between December 31, 2021 and June 30, 2023. See the definition of “LIBOR Discontinuance Event” and “LIBOR Replacement Date” in the New York LIBOR Legislation.

   [4]   Note that the ICE Benchmark Administration Limited and the UK Financial Conduct Authority formally announced LIBOR cessation and non-representative dates for USD LIBOR on March 5, 2021. These announcements fixed the spread adjustment contemplated under certain industry-standard documents. See Gibson Dunn’s Client Alert: The End Is Near: LIBOR Cessation Dates Formally Announced, available at https://www.gibsondunn.com/the-end-is-near-libor-cessation-dates-formally-announced/.

   [5]   See “ARRC Welcomes Passage of LIBOR Legislation by the New York State Legislature,” ARRC (March 24, 2021, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210324-arrc-press-release-passage-of-libor-legislation; see also, Randall Quarles, Keynote Address at the “The SOFR Symposium: The Final Year,” an event hosted by the Alternative Reference Rates Committee, New York, New York (March 22, 2021), available at https://www.federalreserve.gov/newsevents/speech/quarles20210322a.htm.


Gibson Dunn's lawyers are available to answer questions about the LIBOR transition in general and these developments in particular. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Capital Markets, Derivatives, Financial Institutions, Global Finance or Tax practice groups, or the following authors of this client alert:

Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) John J. McDonnell – New York (+1 212-351-4004, jmcdonnell@gibsondunn.com)

Please also feel free to contact the following practice leaders and members:

Capital Markets Group: Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com)

Derivatives Group: Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) Darius Mehraban – New York (+1 212-351-2428, dmehraban@gibsondunn.com) Erica N. Cushing – Denver (+1 303-298-5711, ecushing@gibsondunn.com)

Financial Institutions Group: Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com) Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com) M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com) Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)

Global Finance Group: Aaron F. Adams – New York (+1 212 351 2494, afadams@gibsondunn.com) Linda L. Curtis – Los Angeles (+1 213 229 7582, lcurtis@gibsondunn.com) Ben Myers – London (+44 (0) 20 7071 4277, bmyers@gibsondunn.com) Michael Nicklin – Hong Kong (+852 2214 3809, mnicklin@gibsondunn.com) Jamie Thomas – Singapore (+65 6507 3609, jthomas@gibsondunn.com)

Tax Group: Sandy Bhogal – London (+44 (0) 20 7071 4266, sbhogal@gibsondunn.com) Benjamin Fryer – London (+44 (0) 20 7071 4232, bfryer@gibsondunn.com) Jeffrey M. Trinklein – London/New York (+44 (0) 20 7071 4224/+1 212-351-2344), jtrinklein@gibsondunn.com) Bridget English – London (+44 (0) 20 7071 4228, benglish@gibsondunn.com) Alex Marcellesi - New York (+1 212-351-6222, amarcellesi@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 7, 2021 |
SEC Staff Issues Cautionary Guidance Related to Business Combinations with SPACs

There were more initial public offerings (“IPOs”) of special purpose acquisition companies (“SPACs”) in 2020 alone than in the entire period from 2009 until 2019 combined, and in the first three months of 2021, there have been more SPAC IPOs than there were in all of 2020. All of these newly public SPACs are looking for business combinations and many private companies are or will be considering a combination with a SPAC as a way to go public.

After an IPO, a SPAC has a limited amount of time to acquire a target company. Many of these business combinations move quickly and a private company becomes a public reporting company in a relatively short period of time. It is important for sponsors, target companies and investors to be aware of some of the special attributes of SPACs and the post-business combination public company.

On March 31, 2021, the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “SEC”) issued a statement addressing certain accounting, financial reporting and governance issues related to SPACs and the combined company following a SPAC business combination.

Read More

The following Gibson Dunn attorneys assisted in preparing this update: Hillary Holmes, Peter Wardle, Gerald Spedale and Rodrigo Surcan.

March 9, 2021 |
The End Is Near: LIBOR Cessation Dates Formally Announced

Click for PDF

On March 5, 2021, regulators and industry groups provided market participants with much anticipated clarity by announcing the dates for the cessation of publication of, and non-representativeness of, various settings of the London Interbank Offered Rate (“LIBOR”)[1] which will allow market participants to identify the date that their financial instruments and commercial agreements that reference LIBOR will transition to an alternative reference rate (e.g., a risk free rate).

The March 5th announcement is not only critical in providing certainty for the financial markets regarding timing for the replacement of LIBOR, but the announcement will also fix the spread adjustment contemplated under certain industry-standard documents as of March 5, 2021—thereby providing greater clarity around the economic impact of the transition from LIBOR to a risk free rate, like the Standard Overnight Financing Rate (“SOFR”) or the Sterling Overnight Index Average (“SONIA”).

LIBOR Announcement

The ICE Benchmark Administration Limited (“IBA”), the authorized administrator of LIBOR, published on March 5, 2021 a feedback statement on its consultation regarding its intention to cease the publication of LIBOR (the “IBA Feedback Statement”).[2]  The IBA Feedback Statement comes in response to the consultation published by IBA on December 4, 2020 (the “Consultation”)[3] and confirmed IBA’s intention to cease the publication of:

  • EUR, CHF, JPY and GBP LIBOR for all tenors after December 31, 2021;
  • one week and two month USD LIBOR after December 31, 2021; and
  • all other USD LIBOR tenors (e.g., overnight, one month, three month, six month and twelve month) after June 30, 2023.

Concurrent with the publication of the IBA Feedback Statement, the UK Financial Conduct Authority (the “FCA”) announced the future cessation or loss of representativeness of the 35 LIBOR settings published in five currencies (the “FCA Announcement”) from the above mentioned dates.[4]

Summary of FCA Announcement and IBA Feedback Statement:

Last Date of Publication or Representativeness is December 31, 2021:

Currency

Tenors

Spread Adjustment Fixing Date

Result

EUR LIBOR

All Tenors (Overnight, 1 Week, 1, 2, 3, 6 and 12 Months)

March 5, 2021

Permanent Cessation.

CHF LIBOR

All Tenors (Spot Next, 1 Week, 1, 2, 3, 6 and 12 Months)

March 5, 2021

Permanent Cessation.

JPY LIBOR

Spot Next, 1 Week, 2 Month and 12 Month

March 5, 2021

Permanent Cessation.

JPY LIBOR

1 Month, 3 Month and 6 Month

March 5, 2021

Non-Representative.  “Synthetic” rate possible for one additional year.

GBP LIBOR

Overnight, 1 Week, 2 Month and 12 Month

March 5, 2021

Permanent Cessation.

GBP LIBOR

1 Month, 3 Month and 6 Month

March 5, 2021

Non-Representative.  “Synthetic” rate possible for a “further period” after end-2021.

USD LIBOR

1 Week and 2 Month

March 5, 2021

Permanent Cessation

Last Date of Publication or Representativeness is June 30, 2023:

Currency

Tenors

Spread Adjustment Fixing Date

Result

USD LIBOR

Overnight and 12 Month

March 5, 2021

Permanent Cessation.

USD LIBOR

1 Month, 3 Month and 6 Month

March 5, 2021

Non-Representative.  “Synthetic” rate possible for a “further period” after end-June 2023.

The FCA Announcement and the IBA Feedback Statement are critical as they make clear the dates on which certain LIBOR settings will cease to exist or become non-representative (as described in more detail above), and they will serve as a “trigger event” for the fallback provisions in industry standard or recommended documentation, including those fallback provisions recommended by the Alternative Reference Rates Committee (“ARRC”) with respect to USD LIBOR and the fallback provisions in the International Swaps and Derivatives Association (“ISDA”) documentation.[5]

The FCA Announcement drew attention in markets around the globe.  For example, the Asia Pacific Loan Market Association (“APLMA”) issued a statement on March 8, 2021 in which it clarified the APLMA’s understanding of the FCA Announcement: The APLMA stated that the FCA Announcement indicates that the most widely used USD LIBOR settings in Asia, such as 1, 3 and 6 Month USD LIBOR, will continue to be published until June 30, 2023 and will continue to be representative until that date.  The APLMA also confirmed that based on undertakings received from the panel banks, the FCA does not expect that any LIBOR settings will become unrepresentative before the relevant dates set out above.

ISDA Index Cessation Event Announcement

Relatedly, shortly after the publication of the IBA Feedback Statement and the FCA Announcement, ISDA announced that these statements constitute an “Index Cessation Event” under the IBOR Fallbacks Supplement (Supplement Number 70 to the 2006 ISDA Definitions) and the ISDA 2020 IBOR Fallbacks Protocol, which in turn triggers a “Spread Adjustment Fixing Date” under the Bloomberg IBOR Fallback Rate Adjustments Rule Book for all LIBOR settings on March 5, 2021.[6]  The ARRC has stated[7] that its recommended spread adjustments for fallback language in non-consumer cash products referencing USD LIBOR (e.g., business loans, floating rate notes, securitizations) will be the same as the spread adjustments applicable to fallbacks in ISDA’s documentation for USD LIBOR.[8]  For further information on why a spread adjustment is necessary, see our previous alert from May 2020.[9]

This ISDA announcement provides market participants holding legacy contracts with greater clarity regarding the economic impact of the transition from LIBOR to risk free rates; however, even though the spread adjustment is now fixed, a value transfer is nonetheless expected to occur as a result of transition.  This is because the spread adjustment looks backwards to the median difference between the risk free rate and LIBOR over the previous five years, which is unlikely to be equivalent to what the net present value of the relevant instrument would have been at the time of transition, had LIBOR not been discontinued / ceased to be representative.  For example, in the case of USD LIBOR, when all tenors cease to be published or are deemed non-representative (at the end of December 2021 or June 2023, as the case may be) fallbacks for swaps will shift to SOFR, plus the spread adjustment that has now been fixed as of March 5, 2021. The fallback replacement rate of SOFR plus the spread adjustment that was fixed over two years prior is unlikely to match what would, absent transition, have been the net present value of such swap on the applicable LIBOR end date, thereby ultimately resulting in a value transfer to one party. However, the extent to which such value transfer will impact a particular financial instrument on the relevant LIBOR end date is unclear, as markets have been pricing in, and will continue to price in, the expected transition when valuing legacy instruments referencing LIBOR.

Potential “Synthetic” LIBOR for Limited Use

The IBA Feedback Statement explains that in the absence of sufficient bank panel support and without the intervention of the FCA to compel continued panel bank contributions to LIBOR, IBA is required to cease publication of the various LIBORs after the dates described above.[10]  Importantly, the IBA Feedback Statement and the FCA Announcement note that the UK government has published draft legislation (in proposed amendments to the UK Benchmarks Regulation set out in the Financial Services Bill 2019-21)[11] proposing to grant the FCA the power to require IBA to continue publishing certain LIBOR settings for certain limited (yet to be finalized) purposes, using a changed methodology known as a “synthetic” basis.

Specifically, the FCA has advised IBA that “it has no intention of using its proposed new powers to require IBA to continue publication of any EUR or CHF LIBOR settings, or the Overnight/Spot Next, 1 Week, 2 Month and 12 Month LIBOR settings in any other currency beyond the intended cessation dates for such settings.”  However, for the nine remaining LIBOR benchmark settings, the FCA has advised IBA that it will consult on using its proposed new powers to require IBA to continue publishing, on a synthetic basis, 1 Month, 3 Month and 6 Month GBP and JPY LIBOR (for certain limited periods of time) and will continue to consider the case for the “synthetic” publication of 1 Month, 3 Month and 6 Month USD LIBOR.  On March 5, 2021, the FCA also published statements of policy regarding some of the proposed new powers that the UK government is considering granting to the FCA.  These statements of policy include more detail on why the FCA is making these distinctions (e.g., to reduce disruption and resolve recognized issues around certain “tough legacy” contracts) and explain the intended methodology for the publication of the identified LIBORs on a synthetic basis (i.e., a forward looking term rate version of the relevant risk free rate, plus a fixed spread adjustment calculated over the same period, and in the same way as the spread adjustment implemented in the IBOR Fallbacks Supplement and the 2020 IBOR Fallbacks Protocol published by ISDA).[12]

If the FCA is granted the power to, and decides to require IBA to continue the publication of any LIBOR setting on a “synthetic” basis, the FCA Announcement makes clear that the synthetic LIBOR settings will no longer be deemed “representative of the underlying market and economic reality the setting is intended to measure”[13] (notwithstanding that the FCA may be able to compel the publication of a “synthetic” LIBOR rate for one or more of the 1 Month, 3 Month or 6 Month tenors for JPY LIBOR, GBP LIBOR and/or USD LIBOR beyond the set cessation date).

Notably, if the UK government decides to grant the FCA the power to, and the FCA decides to compel IBA to publish “synthetic” LIBOR for certain settings, the intent would be to assist only holders of certain categories of legacy contracts that have no or inappropriate alternatives and cannot practically be renegotiated or amended (so called “tough legacy” contracts, such as notes which may require up to 90% or 100% noteholder consent to amend the relevant terms of the note).[14]  As such, the powers are intended to be of limited use, and regulators have consistently stressed the need for market participants to actively transaction their legacy contracts.  For example, under the proposals in the UK Financial Services Bill, UK regulated firms would be prohibited from using such “synthetic” LIBOR settings in regulated financial instruments.  The FCA plans to consult on the “tough legacy” contracts that will be permitted to use “synthetic” LIBOR in the second quarter of this year.

Conclusion

The announcements on March 5th bring us one step closer to the cessation of LIBOR. The announcements are likely to offer market participants much needed clarity regarding the timing, and economics, of the transition of LIBOR to alternative reference rates. They also provide a reminder to, and increase pressure on, market participants to actively transition their financial instruments and commercial agreements that reference LIBOR to risk free rates.

______________________

   [1]   LIBOR is the index interest rate for tens of millions of contracts worth hundreds of trillions of dollars, ranging from complex derivatives to residential mortgages to bilateral and syndicated business loans to commercial agreements.

   [2]   ICE LIBOR® Feedback Statement on Consultation on Potential Cessation (March 5, 2021), available here.

   [3]   ICE LIBOR® Consultation on Potential Cessation (December 2020), available here.

   [4]   “FCA announcement on future cessation and loss of representativeness of the LIBOR benchmarks,” Financial Conduct Authority (March 5, 2021), available here.

   [5]   We note that although the FCA Announcement and IBA Feedback Statement would constitute ”trigger events” under ARRC standard fallback language (e.g., a “Benchmark Transition Event”) and under ISDA standard fallback language (e.g., an “Index Cessation Event”), such financial instruments would continue to reference LIBOR until the date that LIBOR ceases to be published or is deemed non-representative (i.e., after December 31, 2021 or after June 30, 2023).  In other words, the date on which LIBOR changes to a risk free rate and the “trigger event” will likely be two distinct events as a result of the announcement.

   [6]   See Future Cessation and Non-Representativeness Guidance on FCA announcement on future cessation and loss of representativeness of the LIBOR benchmarks, ISDA (March 5, 2021), available here; see also IBOR Fallbacks, Technical Notice – Spread Fixing Event for LIBOR, Bloomberg, available here.

   [7]   See “ARRC Commends Decisions Outlining the Definitive Endgame for LIBOR,” Alternative Reference Rates Committee (March 5, 2021), available here; “ARRC Announces Further Details Regarding Its Recommendation of Spread Adjustments for Cash Products,” Alternative Reference Rates Committee (June 30, 2020), available here.

   [8]   The ARRC followed ISDA’s announcement stating that the IBA Feedback Statement and the FCA Announcement constitute a “Benchmark Transition Event” with respect to all USD LIBOR settings pursuant to the ARRC’s recommended fallbacks for new issuances of LIBOR floating rate notes, securitizations, syndicated business loans and bilateral business loans.  See “ARRC Confirms a “Benchmark Transition Event” has occurred under ARRC Fallback Language,” ARRC (March 8, 2021), available here.

   [9]   See Tax implications of benchmark reform: UK tax authority weighs in, Gibson Dunn (May 2020) available here.

  [10]   IBA received 55 responses to the Consultation which are summarized in the IBA Feedback Statement.  IBA notes that it shared and discussed the feedback received on the Consultation with the FCA.

  [11]   The text and status of the Financial Services Bill 2019-21 are available here.

  [12]   See “Proposed amendments to the Benchmarks Regulation,” Policy Statement, FCA (March 5, 2021) available here.

  [13]   FCA Announcement at footnote 3.

  [14]   See “Paper on the identification of Tough Legacy issues,” The Working Group on Sterling Risk-Free Reference Rates (May 2020), available here.


The following Gibson Dunn lawyers assisted in preparing this client update: Linda Curtis, Arthur Long, Jeffrey Steiner, Jamie Thomas, Bridget English, and Erica Cushing.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following practice group leaders and members:

Capital Markets Group: Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com)

Derivatives Group: Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) Darius Mehraban – New York (+1 212-351-2428, dmehraban@gibsondunn.com) Erica N. Cushing – Denver (+1 303-298-5711, ecushing@gibsondunn.com)

Financial Institutions Group: Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com) Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com) M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com) Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com) Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)

Global Finance Group: Aaron F. Adams – New York (+1 212 351 2494, afadams@gibsondunn.com) Linda L. Curtis – Los Angeles (+1 213 229 7582, lcurtis@gibsondunn.com) Ben Myers – London (+44 (0) 20 7071 4277, bmyers@gibsondunn.com) Michael Nicklin – Hong Kong (+852 2214 3809, mnicklin@gibsondunn.com) Jamie Thomas – Singapore (+65 6507 3609, jthomas@gibsondunn.com)

Tax Group: Sandy Bhogal – London (+44 (0) 20 7071 4266, sbhogal@gibsondunn.com) Benjamin Fryer – London (+44 (0) 20 7071 4232, bfryer@gibsondunn.com) Jeffrey M. Trinklein – London/New York (+44 (0) 20 7071 4224/+1 212-351-2344), jtrinklein@gibsondunn.com) Bridget English – London (+44 (0) 20 7071 4228, benglish@gibsondunn.com) Alex Marcellesi - New York (+1 212-351-6222, amarcellesi@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 3, 2021 |
Considerations for Preparing Your 2020 Form 10-K

Click for PDF

As we do each year, we offer our observations on new developments and recommended practices for calendar-year filers to consider in preparing their Form 10-K. In addition to the many challenges of the past year, the U.S. Securities and Exchange Commission (“SEC”) adopted and provided guidance on a number of changes to public company reporting obligations impacting disclosures in the 10-K annual report for 2020. In particular, we discuss the recent amendments to Regulation S-K, disclosure considerations in light of COVID-19, a number of technical considerations that may impact your Form 10-K annual report, and other considerations in light of recent and pending changes in the executive branch and at the SEC.

An index of the topics described in this alert is provided below.

 ______________________

Table of Contents

I. Amendments to Regulation S-K Requirements

A. Amendments to 100 Series of Regulation S-K Requirements (Part I of Form 10-K)

1. Business (Part I, Item 1 of For 10-K)

a. General Development of Business b. Description of Business c. Spotlight on Human Capital Disclosure.

2. Legal Proceedings (Part I, Item 3 of Form 10-K)

3. Risk Factors (Part I, Item 1A of Form 10-K)

a. Organization of Risk Factors under Headings b. “Materiality” Replaces “Most Significant” Standard c. Risk Factor Summary d. Cautionary Note about Hypothetical Language

B. Amendments to 300 Series of Regulation S-K Requirements (Part II of Form 10-K)

1. Selected Financial Data (Part II, Item 6)

2. Supplementary Financial Data (Part II, Item 8)

3. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Part II, Item 7)

a. New Item 303(a) – Objectives of MD&A. b. Amended Item 303(b) – Full Fiscal Year Presentation c. Amended Item 303(b) – Items no Longer Required d. Amended Item 303(b) – Clarification on Discussion of “Underlying Reasons” for Period-to-Period Changes e. Amended Item 303(b) – A Note on Product Lines f. New Item 303(c) – Interim Period Discussion.

II. COVID-19 Disclosure Considerations

A. Impact on Management’s Discussion and Analysis of Financial Condition and Results of Operations

B. Impact on Risk Factors

C. Impact on Non-GAAP Financial Measures

III.   Other Considerations and Reminders

A. Key Performance Indicators (KPIs)

B. Impact of Changes to Filer Definitions

C. Omitting Third Year of MD&A

D. Exhibit List Reminders

1. Exhibit 4 – Description of registered securities 2. No lookback period for material contracts 3. Omission of schedules to exhibits 4. Omission of information from exhibits without confidential treatment request 5. Exhibit 22 – List of guarantors

E. Extending confidential treatment

F. E-signature Rules

G. Cover Page Changes

H. Critical Accounting Matters

I. Updates to Disclosure Controls and Procedures

 ______________________

I.   Amendments to Regulation S-K Requirements

A.   Amendments to 100 Series of Regulation S-K Requirements (Part I of Form 10-K)

As discussed in our prior client alert,[1] in August 2020, the SEC adopted amendments to Item 101 (Description of Business), Item 103 (Legal Proceedings) and Item 105 (Risk Factors) designed to result in improved disclosure that is tailored to reflect a company’s particular circumstances (the “Business Disclosure Amendments”).[2] These rules went into effect on November 9, 2020, making the upcoming Form 10-K the first SEC filing for which most calendar-year filers will need to implement these new rules.

1.  Business (Part I, Item 1 of For 10-K)

The recent amendments to Item 101 of Regulation S-K (Description of Business) introduce flexibility by replacing certain prescriptive requirements with a more principles-based approach. The amendments also introduce a new area of focus: human capital management.

a.   General Development of Business

Principles-based approach. Item 101(a) of Regulation S-K focuses on the general development of a company’s business. The Business Disclosure Amendments make the general development of business disclosure more principles-based: first, by providing a non-exclusive list of topics that a company may need to disclose; and second, by requiring disclosure of a topic only to the extent such information is material to an understanding of the general development of a company’s business.

General development disclosure topics. Three of the four disclosure topics in the non-exclusive list should be familiar to companies from the pre-amendment requirements: (1) bankruptcy or similar proceedings; (2) material reclassification or mergers, and (3) acquisitions / dispositions of material amount of assets. The fourth (new) topic relates to material changes to a previously disclosed business strategy. In its final rule, the SEC declined to define “business strategy” in order to allow companies to tailor such disclosure as appropriate for their business. The SEC emphasized that the new principles-based approach to this disclosure should mitigate any disincentives in disclosing a business strategy as companies have the flexibility to determine the appropriate level of detail for such disclosure based on materiality.

No longer required. The Business Disclosure Amendments delete the requirement in Item 101(a) of Regulation S-K to disclose the company’s year and form of organization and any material changes in the mode of conducting business. In addition, the Business Disclosure Amendments eliminate the five-year prescribed timeframe for disclosure of general developments of the business, allowing companies to focus on the aspects of the development of their business they deem material, regardless of when the developments occurred.

Updates only in lieu of full discussion. The Business Disclosure Amendments eliminate the requirement to provide a full discussion of the general developments of the business each time Item 101 disclosure is required. Instead a company can provide “an update to the general development of its business, disclosing all of the material developments that have occurred since the most recent registration statement or report that includes a full discussion of the general development of its business.” If the company provides these updates only, it must also incorporate by reference (including an active hyperlink) the relevant disclosure from such registration statement or report with the latest full discussion of the general development of the business. The SEC staff has explained that it anticipates that this updating method will apply mainly to registration statements.[3] Companies are cautioned that using the updating method in a Form 10-K is likely to cause incorporation issues for registration statements and subsequent Form 10-K filings. Accordingly, including a full description, as opposed to providing an update, is a cleaner, simpler approach that is likely no more burdensome than merely disclosing updates.

b.   Description of Business

Principles-based approach. Continuing with the principles-based approach, Item 101(c) of Regulation S-K was also updated to provide a non-exclusive list of the types of information that a company may need to disclose if material to an understanding of the business. This approach is in lieu of the 12 enumerated disclosure topics, some of which the SEC noted may not be relevant to all companies. Item 101(c) now focuses on seven disclosure topics, and continues to distinguish between topics for which segment disclosure should be the primary focus, and those for which the focus should be on the company’s business taken as a whole. It should be noted that under the principles-based approach, companies would have to provide disclosure about any other topics regarding their business as well if they are material to an understanding of the business and not otherwise disclosed. A discussion of the seven topics is set forth below.

Segment-level disclosure topics. For the following topics, companies should provide this information with a focus on their reporting segments. Note that when describing each segment, only information material to an understanding of the business taken as a whole is required.

1. “Revenue-generating activities, products and/or services, and any dependence on revenue-generating activities, key products, services, product families or customers, including governmental customers.”

This principles-based requirement replaces the prior line-item requirements related to (i) principal products and services and principal markets and methods of distribution, (ii) quantitative disclosure around the percentage of total revenue attributable to a class of product or services, and (iii) disclosure of key customers. Companies should take this opportunity to carefully comb through the disclosures that have historically been included in the Business section to confirm that the information and any metrics provided are still material and to determine whether it would be appropriate to add disclosure regarding any additional revenue-generating activities. Some companies may determine that continued disclosure of the information required by the former prescriptive requirements (e.g., ≥10% customers) is still an appropriate way to communicate the extent to which certain revenue-generating activities are material to an understanding of the business.

2. “Status of development efforts for new or enhanced products, trends in market demand and competitive conditions.”

This principles-based requirement replaces the current line-item requirements related to (i) status of a new product or services and (ii) competitive conditions in the business. Companies should be mindful of the requirement to disclose trends in market demand to the extent material to an understanding of the business. While discussion of such trends has been required under the MD&A rules, this is the first time trend information has been specifically called for in the Business section. Among other things, it may be important for companies to think through broader societal trends (e.g., increased use of social media, increased use of and access to big data, increased focus on environmental, social, and governance issues, etc.) and whether those are a material to an understanding of the business.

3. “Resources material to a [company’s] business, such as: (a) sources and availability of raw materials; and (b) the duration and effect of all patents, trademarks, licenses, franchises, and concessions held.”

This principles-based requirement is more broad than the prior line-item requirements related to raw materials and intellectual property, asking about resources generally and using those specific items as examples. Companies should think through the resources required to run their businesses (e.g., to determine whether any of those merit additional attention). The previous focus on raw materials made sense in the context of manufacturing, but with an increasing number of digitally focused businesses, resources such as information and technology are becoming increasingly important.

4. “A description of any material portion of the business that may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government.”

This requirement remained unchanged from the prior line-item requirement.

5. “The extent to which the business is or may be seasonal.”

This requirement remained unchanged from the prior line-item requirement.

Company-Level Disclosure Requirements. For the following topics, companies should provide this information to the extent material to an understanding of the business taken as a whole. Note that if the topic is material to a particular segment, then information should be provided with respect to that segment.

6. “The material effects that compliance with government regulations, including environmental regulations, may have upon the capital expenditures, earnings and competitive position of the [company] and its subsidiaries, including the estimated capital expenditures for environmental control facilities for the current fiscal year and any other material subsequent period.”

While all companies are impacted by government regulation to one extent or another, not all companies will determine that their compliance with those regulations materially affects their capital expenditures, earnings, or competitive position, so we expect a portion of companies to not provide any new disclosure in response to this requirement. Even before the Business Disclosure Amendments, it was relatively common for companies, especially those in highly regulated industries, to provide a summary of applicable government regulations. When including a discussion of government regulations for the upcoming Form 10-K filing, companies should consider that the mention of a regulation may suggest that the company views compliance with that regulation as having a material effect on the company. A laundry list of every regulation impacting the company is not required.

7. “A description of the [company’s] human capital resources, including the number of persons employed by the [company], and any human capital measures or objectives that the [company] focuses on in managing the business (such as, depending on the nature of the [company’s] business and workforce, measures or objectives that address the development, attraction and retention of personnel).”

The new disclosure topic regarding human capital received particular attention at the meeting at which the rules were adopted, and we expect this topic and related disclosure will continue to evolve. A discussion of this new topic is set forth below.

c.   Spotlight on Human Capital Disclosure

In addition to retaining the former prescriptive requirement to disclose the number of employees, the Business Disclosure Amendments now impose a principles-based requirement to describe the company’s “human capital resources . . . and any human capital measures or objectives that the [company] focuses on in managing the business.” Although the disclosure is required “to the extent material to an understanding of the business,” it will be rare for a company to conclude such disclosure is not material to the business.

The rules do not include any specific reporting framework or define “human capital” instead leaving it to companies to determine what information about human capital resources is material to an understanding of the business. The new rule emphasizes that disclosure will vary depending on the nature of the company’s business and workforce. The disclosure should not be boilerplate and should be relevant to each company’s facts and circumstances. When preparing your human capital disclosure, reviewing disclosures from companies in the same industry will be the most helpful. Disclosure by a small professional services company headquartered in a major US city will be different than disclosure by a multinational manufacturer of consumer goods that primarily employs low wage workers, because their human capital resources will be vastly different, as will the measures and objectives they employ.

Getting Started. Before putting pen to paper on these human capital disclosures, management should begin the process by reviewing the following:

  1. Existing internal and external statements regarding key human capital resources, measures, and objectives (e.g., proxy statement, website, recruiting materials, ESG reports, internal memos, PR videos, employee handbooks);
  2. Past and current discussions at the board and executive level regarding human capital topics;
  3. Past engagement with and input from shareholders on this topic; and
  4. The list of disclosure topics suggested by the SEC. Specifically, depending on the nature of the company’s business and workforce: measures or objectives that address the development, attraction and retention of personnel.

Description of Human Capital Resources. The first requirement is to describe the company’s human capital resources. Who are the people who make the products or provide the services that generate revenues for the company? There are many different ways in which a company can describe its work force, and the description should be relevant to understanding the company’s business as a whole. If, for example, the company has two segments, one of which entails manufacturing products in China and Mexico and the other is providing consulting services to Silicon Valley and Wall Street, then the workforces of these two segments will be very different and may need to be described separately. Companies should also be mindful of what they have said about the composition of their workforce in their CEO pay ratio disclosures.

Examples of Measures and Objectives. While the Business Disclosure Amendments stress the need for each company to consider how to make its human capital disclosure specific to its industry and workforce approach and relevant to its unique facts and circumstances, the proposing release and public comments referred to in the adopting release shed light on potential measures or objectives that might be material and worth discussing, including:

  • worker recruitment, employment practices and hiring practices;
  • employee benefits and grievance mechanisms;
  • employee engagement or investment in employee training;
  • strategies and goals related to human capital management;
  • legal or regulatory proceedings related to employee management;
  • whether employees are covered by collective bargaining agreements;
  • employee compensation or incentive structures;
  • types of employees, including the number of full-time, part-time, seasonal, and temporary workers;
  • measures with respect to the stability of the workforce, such as voluntary and involuntary turnover rates;
  • information regarding human capital trends, such as competitive conditions and internal rates of hiring and promotion;
  • measures regarding worker productivity;
  • measures of employee engagement; and
  • workplace health and safety measures.

The amended rule requires disclosure of the number of employees. In addition, companies that run their business through a workforce that includes persons who are not technically employees (e.g., consultants or management services arrangements) should discuss those non-employee workforce arrangements and the management of that human capital.

Companies should also discuss the progress that management has made with respect to any objectives it has set regarding its human capital resources. Former Chairman Clayton commented that he would expect companies to “maintain metric definitions constant from period to period or to disclose prominently any changes to the metrics.”

We have monitored human capital disclosures made by S&P 500 companies since the effective date of the rule through the date of this alert. Based on that benchmarking, common focus areas we have seen addressed include (parenthetical represents the number of companies which included the topic):

  • Talent attraction, development and retention (28): Focus on overarching human capital, talent recruitment, retention strategies and goals; talent development; succession planning.
  • Diversity (22): Discussion of disclosure and inclusivity programs.
  • Workforce statistics (20): Breakdown of employee base by employee classification (full-time, part-time, contractor) and geography; Turnover rates; Diversity representation stats (e.g., % male/female, % minority, etc.). Not all companies include each statistic noted above.
  • Employee compensation (19): Compensation/incentive mechanisms; potentially pay equity.
  • Health and safety (18): Workplace safety; Employee mental health.
  • Culture and engagement (17): How a company monitors its workplace culture; Culture initiatives taken by the company.
  • COVID-19 (15): Health and safety of employees in light of COVID-19 and work from home measures.
  • Governance (10): Organizational and governance structure through which human capital is managed (C-suite level) and overseen (board level).

Consider Investors and Other Stakeholders. Human capital has rapidly emerged as a growing focus area for stakeholders, which means companies cannot simply consider what is required to comply with SEC rules. In a 2020 survey, 64% of institutional investors said they would focus on human capital management when engaging with boards (second only to climate change, at 91%).[4] BlackRock’s approach to engagement on human capital highlights one reason for this focus: “Most companies BlackRock invests in on behalf of clients have, to varying degrees, articulated in their public disclosures that they are operating in a talent constrained environment, or put differently, are in a war for talent. It is therefore important to investors that companies explain as part of their corporate strategy how they establish themselves as the employer of choice for the workers on whom they depend.”[5]

Expect an Evolution of Disclosures. We expect human capital disclosures to evolve over time and companies should be prepared to develop their disclosure over the course of the next couple 10-Ks. In the initial year, companies may opt for conservative disclosure, adding additional disclosure as appropriate in subsequent years as they observe peer practices or to address regulatory changes. You should not be surprised by a growing group of companies that will disclose granular details about human capital, not necessarily because it is material to the company, but because they might perceive other advantages in doing so. We anticipate that the SEC will be focused on this disclosure as part of the comment letter process. In the first year, the SEC staff likely to go after low-hanging fruit (e.g., companies that omit human capital disclosure altogether), but in subsequent years, as industry practices develop, we may see the SEC staff probe deeper into what information is material and should be disclosed in certain industries. The SEC staff may also issue a report of observations regarding human capital disclosure in the first year.

In addition, the recent change in the administration and shift to a Democrat-controlled SEC, as well as increasing attention placed by institutional investors on ESG matters, may result in additional requirements for companies in this area. In this regard, we note that the two Democrat Commissioners’ dissent from the adoption of the amended rules pushed back on the principles-based approach and noted the lack of specific disclosure requirements concerning ESG matters and prescriptive requirements for metrics on diversity, climate change and human capital. As further evidence of the SEC likely focus on the area, a senior position was added to the Office of the Chairman devoted exclusively to ESG matters.

2.   Legal Proceedings (Part I, Item 3 of Form 10-K)

The Business Disclosure Amendments provided two helpful updates to legal proceedings disclosure. While the requirement of Item 103 of Regulation S-K to disclose any material pending legal proceedings, other than ordinary routine litigation incidental to the company’s business, has not changed, the Business Disclosure Amendments expressly allow a company to provide the information required by Item 103 by hyperlink or cross-reference to disclosure located elsewhere in the document. This approach confirms a common practice by many companies to cross-reference to the duplicate or similar disclosure in the notes to the financial statements.

The second update to Item 103 raised the threshold for disclosure of governmental environmental proceedings. Previously, companies were required to disclose environmental proceedings involving potential monetary sanctions of $100,000 or more. That threshold has been raised to $300,000 to adjust for inflation. However, in line with its principles-based approach to business disclosure, the Business Disclosure Amendments acknowledge that a bright-line threshold may not be indicative of materiality on a company-specific basis and therefore allow a company to establish a different disclosure threshold as high as $1 million (or, if lower, one percent of the current assets of the company). Interpretive guidance may be required to confirm whether disclosure of this alternative threshold for environmental proceedings must be disclosed even when the company has no such proceedings to report, or only when a proceeding involves sanctions exceeding the $300,000 threshold. Disclosing the dollar amount of a company-determined materiality threshold is not currently a common practice.

3.   Risk Factors (Part I, Item 1A of Form 10-K)

Companies are no doubt familiar with the prior Item 105 of Regulation S-K requirement to disclose the most significant factors that make investing in the company speculative or risky. Developments in securities litigation and risk profiles have caused risk factor disclosure to grow over the years. The Business Disclosure Amendments attempt to curb the ever-expanding list of risk factors in three ways.

a.   Organization of Risk Factors under Headings

Companies are required to organize logically their risk factors into groups under headings that adequately describe the type of risk. Many companies already breakdown their risk factors into 3-4 categories, with some companies presenting subcategories. Examples of such categories include “Risks Related to our Business”, “Risks Related to our Assets”, “Legal and Regulatory Risks”, “Financial Risks” and “Market Risks.” With the focus on discouraging lengthy disclosure of generic risk factors, the Business Disclosure Amendments emphasize that the presentation of risks that could apply generically to any company is discouraged; however, to the extent any such risk factors are presented, they must be disclosed at the end of the risk factor section under the caption “General Risk Factors.”

b.   “Materiality” Replaces “Most Significant” Standard

Continuing with the effort to reduce the use of generic risk factors and shorten the risk factor disclosure, the Business Disclosure Amendments change the standard for disclosure from the “most significant” factors to factors that are “material.” The adopting release expresses the view that this will result in risk factor disclosure more tailored to a company’s facts and circumstances, with a focus on the risks to which reasonable investors would attach importance in making investment or voting decisions. For most companies, this is unlikely to result in a major overhaul of their risk factors, but rather a review of current disclosure to confirm it is consistent with the new materiality standard.

c.   Risk Factor Summary

The third update to Item 105 of Regulation S-K added a requirement that, if the risk factor disclosure exceeds 15 pages, the company must provide a series of concise, bulleted or numbered statements that is no more than two pages summarizing the principal factors that make an investment in the company speculative or risky. The adopting release noted that “the requirement to provide a risk factor summary may create an incentive for companies to reduce the length of their risk factor discussion to avoid triggering the summary requirement.” Companies who have already filed their Forms 10-K with risk factor summaries have generally listed the captions or abbreviated versions of the captions of their risk factors. Companies are not required to list all of the risk factors in the bulleted list.

If a risk factor summary is required, it must be included in “the forepart of the … annual report.” There is no clear guidance on what is considered the “forepart” of Form 10-K. Placement of the summary in pages preceding Item 1 (Business) seems most consistent with the spirit of the requirement; however, we have also seen the summary included at the beginning of Item 1A (Risk Factors).

d.   Cautionary Note about Hypothetical Language

As a reminder for companies when reviewing risk factors for the recent changes, two enforcement cases brought by the SEC in 2019 emphasized the need to revisit risk factor disclosure regularly and treat it as “living” as much as the rest of the Form 10-K. Companies should thoroughly review their risk factor disclosures so that the disclosures do not speak about events hypothetically (e.g., “could” or “may”) if those events have occurred or are occurring. If a risk has manifested itself, that factual event should be appropriately reflected in the body of the risk factors. Companies should be careful with how they describe significant events (e.g., material cyber breaches, material events impacting operating results) as well as more routine items (e.g., fluctuations in demand, inventory write-downs, customer reimbursement claims, intellectual property claims, poorly performing investments, and tax audits). If a risk involves a situation that arises from time to time, then it would likely be preferable to refer to the consequences of such situation as a material contingency, instead of referring to the situation as a hypothetical contingency.

B.   Amendments to 300 Series of Regulation S-K Requirements (Part II of Form 10-K)

On November 19, 2020, the SEC announced[6] that it had adopted amendments to Item 301 (Selected Financial Data), Item 302 (Supplementary Financial Information) and Item 303 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Regulation S-K designed to improve disclosure by enhancing its readability, discouraging repetition and eliminating information that is not material, and to “allow investors to view the [company] from management’s perspective” (the “Financial Disclosure Amendments”).[7]

The Financial Disclosure Amendments will become effective on February 10, 2021, though companies will not be required to comply with the new requirements until their first fiscal year ending on or after August 9, 2021. This means compliance will first be required in the Form 10-K for 2021 for calendar year end companies. Companies are permitted to update their Form 10-K disclosure consistent with the Financial Disclosure Amendments any time after the effective date; provided that, if they choose to apply the amended requirements for one item of Regulation S-K, they must apply all of the provisions of that amended item. As a result, companies filing their Form 10-K prior to February 10, 2021 will be required to comply with the pre-amendment Regulation S-K requirements, but companies filing after February 10, 2021 will have the option of whether to adopt the changes to one, two, or three of the amended items. Companies should exercise caution in early adopting the amendments to any of Items 301, 302 or 303. In light of President Biden’s January 21 Executive Order and the change in acting Chairman at the SEC, there is a possibility that, prior to February 10th, effectiveness of the amendments is delayed 60 days and, once the new Chairman is confirmed, the amendments do not become effective. Of course, any company is entitled to early adopt and apply the amended rules once they are effective on or after February 10th, even if the rules are further amended at a later time.

The discussion below provides a high-level summary of the Financial Disclosure Amendments. We also refer you to our prior post, which contains a summary chart and comparative blackline reflecting the Financial Disclosure Amendments.[8]

1.   Selected Financial Data (Part II, Item 6)

Elimination of Presentation of Past Five Years of Financial Data. The Financial Disclosure Amendments will “[r]emove and reserve” Item 301 of Regulation S-K and Part II, Item 6 of Form 10-K, completely eliminating the requirement to furnish in the Form 10-K selected financial data in comparative tabular form for each of the company’s last five fiscal years. The SEC has not indicated when it plans to update the Form 10-K pdf available on its forms site, but we suspect it will do so shortly after the February 10, 2021 effective date.

The adopting release emphasizes that, despite removal of this requirement, the material trend disclosures that Item 301 was meant to highlight continue to be elicited by the MD&A requirements, and companies should consider whether trend information for periods earlier than those presented in the financial statements may be necessary as part of MD&A’s objective to “provide material information relevant to an assessment of the financial condition and results of operations.” The release also encouraged companies to “consider whether a tabular presentation of relevant financial or other information, as part of an introductory section or overview, including to demonstrate material trends, may help a reader’s understanding of MD&A.”

2.   Supplementary Financial Data (Part II, Item 8)

Elimination of Presentation of Quarterly Financial Data. The Financial Disclosure Amendments also eliminate the requirement to disclose in the Form 10-K and Form 10-Qs selected quarterly financial data of specified operating results and variances in these results from amounts previously reported on a prior Form 10-Q.

Replace with Principles-Based Requirement For Material Retrospective Changes. Under the new rule, if there are retrospective changes to the statements of comprehensive income for any of the quarters within the two most recent fiscal years that are material individually or in the aggregate, a company must (a) explain the reasons for the changes, and (b) for each affected quarterly period and the fourth quarter in the affected year, disclose (i) summarized financial information related to the statements of comprehensive income (net sales, gross profit, income from continuing operations, net income, and net income attributable to the entity), and (ii) earnings per share reflecting the changes. Material retrospective changes might include correction of an error, discontinued operations, reorganization of entities under common control, or change in accounting principle.

To comply with this rule, companies should have in place an annual procedure whereby retrospective changes are identified and then evaluated to determine whether disclosure is required. Such a procedure will likely be similar to what companies use to comply with the requirement in the current rule to provide an explanation whenever the amounts disclosed in the Form 10-K table vary from the amounts previously reported on the Form 10-Q.

3.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (Part II, Item 7)

a.   New Item 303(a) – Objectives of MD&A

The Financial Disclosure Amendments add a new first paragraph to Item 303 to emphasize the objective of MD&A for both full fiscal years and interim periods, which incorporates much of the substance of current instructions and codifies the guidance that MD&A should enable investors to view the company from management’s perspective. While many companies may ultimately determine that no changes to their disclosure need to be made in response to this rule, focusing on the objective when preparing and reviewing MD&A is always a worthwhile exercise.

b.   Amended Item 303(b) – Full Fiscal Year Presentation

Amended Item 303(b) focuses on the full fiscal year presentation and lists three main components, (i) liquidity and capital resources, (ii) results of operations, and (iii) critical accounting estimates. The primary updates from the Financial Disclosure Amendments are described below.

Liquidity and Capital Resources. The Financial Disclosure Amendments codify past guidance and require each company to describe its “material cash requirements, including commitments for capital expenditures, as of the end of the latest fiscal period, the anticipated source of funds needed to satisfy such cash requirements and the general purpose of such requirements.” Companies must identify and disclose all known material cash requirements, not just those needed for capital expenditures (e.g., funds necessary to maintain current operations, complete projects underway, and achieve stated objectives or plans). The adopting release notes that “while capital expenditures remain important in many industries, certain expenditures and cash commitments that are not necessarily capital investments in property, plant, and equipment may be increasingly important to companies, especially those for which human capital or intellectual property are key resources.” The adopting release also emphasizes that these changes solicit information that may otherwise be lost with the deletion of the contractual obligations table (discussed below).

Results of Operations. The Financial Disclosure Amendments require a company to disclose events that are reasonably likely to (as opposed to events that “will” or that the company “reasonably expects will”) have a material impact on revenue/income or cause a material change in the relationship between costs and revenues, syncing with the disclosure standard used elsewhere in MD&A. This new phrasing emphasizes that the standard for disclosure of trends in MD&A is not an unreasonably high one where forward-looking disclosure is only required in instances where there is certainty about what will happen.

In addition, the Financial Disclosure Amendments codify past guidance and specify that discussion of changes in price/volume and new products is required whenever there are “material changes” to revenue, rather than simply when there are “material increases” in revenue.

Critical Accounting Estimates. The Financial Disclosure Amendments codify past guidance and require companies to provide qualitative and quantitative disclosure necessary to understand the uncertainty and impact a critical accounting estimate has had or is reasonably likely to have on financial condition or results of operations of the company, including why each estimate is subject to uncertainty. This disclosure is only required to the extent the information is material and reasonably available, and should include “[(i)] how much each estimate and/or assumption has changed over a relevant period, and [(ii)] the sensitivity of the reported amount to the methods, assumptions and estimates underlying its calculation.”

The adopting release clarifies that this disclosure of critical accounting estimates is not a recitation of what is required under U.S. GAAP. For example, there is no general requirement to disclose underlying assumptions for material accounting estimates included in the financial statements, and U.S. GAAP does not require a discussion of material changes in the underlying assumptions over a relevant period. The adopting release notes that “[to] the extent the financial statements include information about specific changes in the estimate or underlying assumptions, the [Financial Disclosure Amendments] include an instruction that specifies that critical accounting estimates should supplement, but not duplicate, the description of accounting policies or other disclosures in the notes to the financial statements.”

c.   Amended Item 303(b) – Items no Longer Required

Inflation and Price Changes. The Financial Disclosure Amendments eliminate the requirement that companies discuss the impact of inflation and price changes on their net sales, revenue, and income from continuing operations. Despite these deletions, companies are still expected to discuss the impact of inflation or changing prices if they are part of a known trend or uncertainty that has had, or the company reasonably expects to have, a material impact.

Off-Balance Sheet Arrangements. The Financial Disclosure Amendments eliminate the requirement to present a separately captioned section discussing off-balance sheet arrangements and instead add a principles-based instruction to discuss certain commitments or obligations (including those formerly disclosed as off-balance sheet arrangements).

Contractual Obligations. The Financial Disclosure Amendments eliminate the requirement to provide a contractual obligations table, as much of the information is included in the notes to the financials under GAAP or elsewhere in MD&A under the new requirements to discuss cash commitments. The Financial Disclosure Amendments add a provision reiterating that material cash requirements from known contractual or other obligations should be discussed in Liquidity and Capital Resources, and also add an instruction that material requirements from known contractual obligations may include, for example, lease obligations, purchase obligations, or other liabilities reflect on the balance sheet. While the Form 10-K and Form 10-Q are no longer required to include a contractual obligations table and material updates, care should be taken that any material cash requirements are discussed elsewhere in the Liquidity and Capital Resources discussion. In addition, a company’s accounting personnel should confirm whether there is any information currently contained in the table that is required by GAAP and, therefore, must be added elsewhere in the notes to the financials.

d.   Amended Item 303(b) – Clarification on Discussion of “Underlying Reasons” for Period-to-Period Changes

The Financial Disclosure Amendments also clarify that, where there are material changes from period-to-period in one or more line items, companies must describe the underlying reasons for such changes in both quantitative and qualitative terms, rather than only the “cause” for such changes. The Financial Disclosure Amendments also amend the language to clarify that companies should discuss material changes within a line item even when such material changes offset each other. These amendments codify what the SEC staff has been asking companies to include via the comment letter process for some time.

Companies should more closely examine the drivers behind changing operating results and how those drivers are described in the Form 10-K. Superficial discussions of, for example, decreased sales volumes or increased compensation expenses may not be sufficient. Evaluating the disclosure required by this rule will likely be done in tandem with the evaluation of whether certain trends should be identified in MD&A.

e.   Amended Item 303(b) – A Note on Product Lines

The Financial Disclosure Amendments add “product lines” as an example of subdivisions of a company’s business that should be discussed where, in the company’s judgment, such a discussion would be necessary to an understanding of the company’s business. The prior rule requested discussion of “segment information and/or of other subdivisions (e.g., geographic areas) of the company’s business.” Similar to the rule change in Item 101 requiring disclosure of “any dependence on … product families,” this rule change should focus companies’ attention on groups of products about which information may be material to investors’ understanding of the business.

f.   New Item 303(c) – Interim Period Discussion

The Financial Disclosure Amendments permit companies to compare the operating results from their most recently completed quarter to the operating results from either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter. If a company changes the comparison from the prior interim period comparison, the company is required to explain the reason for the change and present both comparisons in the filing where the change is announced. Notwithstanding this change, a discussion of any material changes in the company’s results of operations for the most recent the year-to-date period would still need to be compared to the results of operations from the corresponding year-to-date period of the preceding fiscal year.

For companies who choose to adopt new Item 303(c) for their first quarter 2021 Form 10-Q, a new comparison of Q1 2021 to Q4 2020 will be required, as well as the existing comparison of Q1 2021 to Q1 2020 results and an explanation as to the change. Going forward, a comparison of the current quarter to the previous quarter will be sufficient, so long as a comparison of any material changes from the current quarter to the prior year’s corresponding quarter is provided. Given the cyclical nature of many businesses, we expect that many companies will not make any changes as result of this amendment; however, companies whose businesses lend themselves to sequential analysis will probably welcome the change.

II.   COVID-19 Disclosure Considerations

As we round the one-year mark of the COVID-19 pandemic, it is important for companies to evaluate whether their COVID-19 disclosure adequately and accurately reflects the impact of COVID-19. This should continue to be a focus of disclosure controls and procedures and may continue to draw scrutiny from the SEC staff. While many companies have crafted and tailored this disclosure over the past several months, it is helpful to refer back to prior SEC guidance[9] and SEC enforcement actions, a helpful summary of which is included in our prior client alerts.[10] As we look towards the 2020 Form 10-K filing, we reflect on a few important considerations below.

A.   Impact on Management’s Discussion and Analysis of Financial Condition and Results of Operations

As reflected in the new MD&A objectives statement in the Financial Disclosure Amendments, the purpose of MD&A is to provide material information relevant to an assessment of the financial condition and results of operations of the company. The company should aim to allow investors to understand the business results through the eyes of management. New Item 303(a) specifically calls out a focus on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. As companies review their MD&A disclosure, they should pay particular attention to how the COVID-19 pandemic, including (i) actions taken by governments, customers, suppliers, and other third-parties, (ii) work from home measures and employee safety, and (iii) impact on the economy or industry in which they operate, has impacted their results of operations or financial condition. Companies should continue to evaluate whether it is necessary to revise their liquidity and capital resources section to reflect the historical and any future impacts to the COVID-19 pandemic. In characterizing the impact of the pandemic, companies should be specific and clarify the time periods involved in the disclosure. It is no longer appropriate to provide only generic statements about the company’s inability to predict the impact of the pandemic, which may have been included in the Form 10-K for 2019.

B.   Impact on Risk Factors

A great number companies have included a COVID-19 risk factor in one of their quarterly reports since the outset of the pandemic. As companies review their risk factor disclosure in light of the Business Disclosure Amendments, it is important that the COVID-19 risk factor disclosure be appropriately tailored to the facts and circumstances of the particular company, whether due to (i) risks that directly impact the company’s business, (ii) risks impacting the company’s suppliers or customers, or (iii) ancillary risks, including a decline in the capital markets, a recession, a decline in employee relations or performance, governmental regulations, an inability to complete transactions, and litigation. The SEC has reiterated that risk factors should not use hypotheticals to address events that are actually impacting the company’s operations and brought enforcement actions against certain companies for portraying realized risks as hypothetical.[11] Accordingly, companies should be specific in providing examples of risks that have already manifested themselves.

C.   Impact on Non-GAAP Financial Measures

When reviewing 2020 operating results and performance, companies may consider presenting non-GAAP financial measures for historical periods impacted by the COVID-19 pandemic that reflect adjustments from the required GAAP measures. If such non-GAAP measures are presented in the Form 10-K, the disclosure should be clear and the rationale for the presentation explained. Management may articulate the position that these adjustments are critical in order for investors to be able to compare the performance of the business period over period.

Companies should be mindful of the rules relating to non-GAAP supplemental measures under Regulation G and Item 10(e) of Regulation S-K. In guidance issued on March 25, 2020, the Division of Corporation Finance reminded companies that “we do not believe it is appropriate for a company to present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company.”[12] Additionally, companies should be mindful of Non-GAAP Financial Measures CD&I 100.02, which states that non-GAAP measures can be misleading if presented inconsistently between periods, and CD&I 100.03, which states that non-GAAP measures can be misleading if they exclude charges, but do not exclude any gains. In addition, to the extent a company discloses any key performance metrics and changes have been made to such metrics to exclude items related to the crises or address such items in a different manner, the company should be clear to call out such changes and provide updated comparable prior period information to the extent practicable.

III.   Other Considerations and Reminders

A.   Key Performance Indicators (KPIs)

As mentioned in our prior post,[13] the SEC issued an Interpretative Release[14] in January 2020 providing guidance on key performance indicators and metrics discussed in MD&A. The release was a reminder that companies must disclose key variables and other qualitative and quantitative factors that management uses to manage the business and that would be peculiar and necessary for investors to understand and evaluate the company’s performance, including non-financial and financial metrics.

The guidance instructs companies that, when including metrics in their disclosure, they should consider existing MD&A requirements and the need to include such further material information, if any, as may be necessary in order to make the presentation of the metric, in light of the circumstances under which it is presented, not misleading. The disclosure of such additional metrics, based on the facts and circumstances, should be accompanied by the following disclosures:

  • a clear definition of the metric and how it is calculated;
  • a statement indicating the reasons why the metric provides useful information to investors;
  • a statement indicating how management uses the metric in managing or monitoring the performance of the business; and
  • whether the disclosure of any estimates or assumptions underlying such metric or its calculations are necessary to be disclosed for the metric not to be materially misleading.

In addition, if a company changes the method by which it calculates or presents the metric from one period to another or otherwise, the company should disclose, to the extent material, the differences between periods, the reasons for the changes and the effect of the changes. Changes may necessitate recasting the prior period’s presentation to help ensure the comparison is not misleading.

B.   Impact of Changes to Filer Definitions

On March 12, 2020, the SEC announced[15] the adoption of a final rule amending the “accelerated filer” and “large accelerated filer” definitions.[16] The amendments became effective April 27, 2020 and first impacted annual reports on Form 10-K due after the effective date. The amendments exclude from the “accelerated filer” and “large accelerated filer” definitions issuers that are otherwise eligible to be a “smaller reporting company” and that had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. The most notable effect of these amendments is that a smaller reporting company with less than $100 million in revenues, while obligated to establish and maintain internal control over financial reporting (“ICFR”) and have management assess the effectiveness of ICFR, will not be subject to the requirements of Section 404(b) of the Sarbanes-Oxley Act, which requires that an issuer’s independent auditor attest to, and report on, management’s assessment of the effectiveness of ICFR (i.e., the so-called auditor attestation report). Note that these smaller companies will continue to be subject to a financial statement audit by an independent auditor, who is required to consider ICFR in the performance of that audit, but will not be required to obtain an auditor attestation report.

The amendments also (i) increase the public float transition threshold for an accelerated and a large accelerated filer becoming a non-accelerated filer from $50 million to $60 million and for existing large accelerated filer status from $500 million to $560 million; and (ii) add the Smaller Reporting Company revenue test to the transition threshold for both accelerated filer and large accelerated filer status. Please see our prior post for more information regarding these amendments.[17]

C.   Omitting Third Year of MD&A

In 2019, the SEC adopted amendments to modernize and simplify various disclosure requirements, which included the option for companies to omit from MD&A a discussion of the earliest of the three years of financials included in the Form 10-K if such discussion was included in a prior filing with the SEC.[1] When a company takes this approach, the location of the omitted discussion must be identified in the current Form 10-K, but that previous disclosure should not be incorporated by reference. On January 24, 2020, the Division of Corporation Finance issued three new Compliance and Disclosure Interpretations (C&DIs)[18] addressing common questions regarding Instruction 1 to Item 303(a). A brief overview of this guidance is discussed below and in more detail in our prior post.[19]

Question 110.03 – May not Omit Earliest Year if Necessary to Understanding of Financial Condition. Provides that a company may not omit a discussion of the earliest of three years from its current MD&A if it believes a discussion of that year is necessary to an understanding of its financial condition, changes in financial condition and results of operations. When determining whether to omit the earliest year discussion, a company should analyze whether the entirety of the discussion of its financial condition and operating results from three years ago (e.g., 2018 for the 2020 10-K), either as previously reported or updated to reflect trends or developments, is necessary to understand its financial condition, changes in financial condition and results of operations. If so, that discussion should be included in the Form 10-K. In our survey of S&P 500 companies that filed a 10-K between the effective date of the revised instruction through the date of our alert on the topic in early 2020, approximately 54% have opted to exclude the earliest year’s discussion in the MD&A.

Question 110.02 – Earliest Year Discussion Not Incorporated Unless Explicitly Stated. Clarifies that when a company omits a discussion of the earliest of three years and includes the required statement that identifies the location of such discussion in a prior filing with the SEC, such discussion is not incorporated by reference into the filing unless the company expressly states that the information is incorporated by reference. According to our survey mentioned above, less than 10% of companies chose to expressly incorporate the prior discussion by reference.

Question 110.04 – Incorporation by Reference in Registration Statements. Given that the Form 10-K operates as the Section 10(a)(3) update to an effective registration statement, once the Form 10-K is filed without an MD&A discussion for the earliest year of financials, the effective registration statement would not include the MD&A discussion for the earliest year. As such, the company will not incur Securities Act liability on such discussion. When filing a new registration statement or commencing an offering, a company should analyze whether the entirety of the discussion of its financial condition and operating results from three years ago, either as previously reported or updated to reflect trends or developments, is necessary to understand its financial condition, changes in financial condition and results of operations. While in many cases such information will not be material to a current investment decision, in those cases when such information (or any other earlier information) is deemed necessary, companies and their counsel should discuss how best to incorporate such information into the offering documents.

Most companies that choose to exclude the earliest year of financials have tended to include the statement identifying the location of the prior disclosure at the beginning of the MD&A, the beginning of the Results of Operation section, or the end of the Results of Operation section before Liquidity and Capital Resources.

D.   Exhibit List Reminders

In 2019, a number of changes were made to the exhibit requirements in Exchange Act reports.[20] While companies may be familiar with these changes in connection with their Form 10-K filing last year, the short summary below serves as a reminder of the key changes to exhibits when preparing the 2020 Form 10-K this year.

1.   Exhibit 4 – Description of registered securities

Companies are required to provide a brief description of all securities registered under Section 12 of the Exchange Act (i.e., the information required by Item 202(a) through (d) and (f) of Regulation S-K) as an exhibit to their Forms 10‑K. The securities covered by this exhibit are the same as those required to be listed on the cover of the Form 10‑K. While many companies prepared this exhibit for their 2019 Form 10-K, the previously filed exhibit should be reviewed for any changes to the information called for by Item 202 of Regulation S-K. If no changes since the prior filing, the company may simply incorporate by reference to the previously filed exhibit.

2.   No lookback period for material contracts.

Companies other than “newly reporting registrants” need only disclose material contracts to be performed in whole or in part at or after the filing of their Forms 10‑K. Previously, there was a two-year lookback period with respect to material contracts for most companies, which often resulted in filing copies of stale / terminated contracts. (See Item 601(b)(10)(i) of Regulation S‑K.)

3.   Omission of schedules to exhibits

Companies may omit entire schedules or similar attachments to exhibits, unless the schedules or attachments contain material information that is not otherwise disclosed in the exhibit or SEC filing. A brief list identifying the contents of the omitted schedules or other attachments must be included in the exhibit, unless the exhibit already includes information that conveys the subject matter of the omitted material. Companies are no longer required to state that they will furnish a copy of the omitted schedules or attachments to the SEC upon request (which was typically done through a notation in the exhibit index); though they must still provide a copy if requested by the SEC. (See Item 601(a)(5) of Regulation S‑K.)

4.   Omission of information from exhibits without confidential treatment request

Companies are permitted to omit confidential information from material contracts filed under Item 601(b)(10) and agreements filed under Item 601(b)(2) without requesting confidential treatment from the SEC where this information is both (i) not material and (ii) would likely cause competitive harm to the company if publicly disclosed. Companies must mark the exhibit index to indicate that portions of the material contract have been omitted; include a prominent statement on the first page of the redacted material contract indicating certain information has been omitted; and indicate with brackets where this information has been omitted within the material contract.

Companies are also allowed to omit personally identifiable information (such as bank account numbers, social security numbers, telephone numbers, home addresses, and similar information) from all exhibits without submitting a confidential treatment request for this information.

Although companies are no longer required to file confidential treatment requests with respect to exhibits filed pursuant to Item 601(b)(10) and Item 601(b)(2), they are still responsible for ensuring all material information is disclosed and limiting redactions to those portions necessary to prevent competitive harm. The SEC staff will continue to selectively review companies’ filings and assess whether companies have satisfied their disclosure responsibility with respect to these redactions.

5.   Exhibit 22 – List of guarantors

In March 2020, the SEC adopted amendments to Rules 3-10 and 3-16 of Regulation S-X, which became effective on January 4, 2021. These amendments relate to the financial disclosure requirements applicable to registered debt offerings and were adopted in an effort to “improve the quality of disclosure and increase the likelihood that issuers will conduct debt offerings on a registered basis.”[21] Please see our prior post for a detailed description of these amendments, which became effective on January 4, 2021.[22] In connection with the amendments, companies with registered debt securities are required to include a new Exhibit 22, which requires a list, as applicable, the company’s subsidiaries and affiliates covered by new Rules 13-01 and 13-02 of Regulation S-X. Specifically the list must include each of the company’s subsidiaries that is a guarantor, issuer, or co-issuer of the guaranteed security and each of the company’s affiliates whose security is pledged as collateral for the company’s security. For each affiliate, the security or securities pledged as collateral must also be identified.

E.   Extending confidential treatment

As discussed in our prior post,[23] on September 9, 2020, the Division of Corporation Finance updated its guidance on confidential treatment requests to provide companies with the ability to transition to the new redaction rules under certain circumstances.[24] When the SEC first amended its exhibit filing requirements to allow redactions without a confidential treatment request in March 2019, companies that had previously submitted confidential treatment requests were not able to simply refile a redacted exhibit, but rather were required to file an extension to their prior request. The updated guidance now provides that:

[if] it has been more than three years since the initial confidential treatment order was issued, and if the contract continues to be material, companies have the option to transition to compliance with the requirements set out in Regulation S-K Item 601(b)(10) and other parallel rules, referred to here as the redacted exhibit rules. The redacted exhibit rules allow for the filing of redacted exhibits without submitting an explanation or substantiation to the SEC, or providing an unredacted copy of the exhibit, except upon request of the staff.

In order to transition to the redacted exhibits rules in these situations, a company would only be required to refile the material contract in redacted form and comply with the legend and other requirements of the applicable redacted exhibit rule, most commonly Item 601(b)(10)(iv) of Regulation S-K. We anticipate that many, if not most, companies will chose to transition to this process since substantiation of compliance and submission of unredacted materials to the staff is only required upon staff request.”

There are two other options that remain available to companies faced with a soon-to-expire confidential treatment. The first alternative is for the company to simply refile the unredacted exhibit. The second alternative is to apply for an extension to the confidential period pursuant to Rule 406 or Rule 24b-2 prior to the confidential treatment order’s expiration, which can be done by submitting a short-form application (available here) to CTExtensions@sec.gov (if the initial order was issued less than three years ago) or a complete application (if the initial order was issued more than three years ago).

F.   E-signature Rules

On November 17, 2020, the SEC approved amendments to Regulation S-T and the EDGAR Filer Manual relating to the use of electronic signatures for SEC filings, including Form 10-K.[25] The new rules expressly provide for the use of e-signature methods (e.g., “DocuSign” and “AdobeSign”). In general, where a document submitted electronically to the SEC is required to be signed, the signature appearing in the filing must appear in the electronic filing in typed form, not in manual or graphic form. Signatures that are not required in a filing may appear as in manual or graphic form (e.g., the signature in a letter to shareholders included in a Proxy Statement).

Under Rule 302(b) of Regulation S-T, when an SEC filing must be signed, the signatory must either manually sign the actual signature page or electronically sign the signature page or some other document that authenticates, acknowledges or otherwise adopts the signature appearing in the filing. Before allowing a signatory to electronically sign an SEC filing, a company must obtain a manually signed attestation from the signatory agreeing that the signatory’s electronic signature of an SEC filing has the same effect as a manual signature. This attestation must be retained for a minimum period of seven years after the date of the most recent electronically signed authentication document for the applicable signatory. Companies who plan on shifting to electronic signatures may wish to send a form attestation to their board for manual signature when sending the Form 10-K to the board for approval. A form of attestation document is included in our prior post,[26] which also discusses other applicable considerations and requirements associated with the Regulation S-T and EDGAR Filer Manual amendments.

G.   Cover Page Changes

When the SEC adopted amendments to the definitions of “accelerated filer” and “large accelerated filer” back in March 2020, a new check box was added to the cover page of the Form 10-K to indicate whether an auditor attestation report under Section 404(b) of the Sarbanes-Oxley Act is included in the filing. As a reminder, companies that are large accelerated filers or accelerated filers will be required to tag this new cover page check box disclosure in Inline XBRL. All other companies will be required to comply with the new XBRL tagging requirements for fiscal periods ending on or after June 15, 2021.

H.   Critical Accounting Matters

Form 10-Ks for all companies (except emerging growth companies) require a company’s auditor to include disclosures in its audit report about critical audit matters (“CAMs”) that the auditor identifies during the course of the audit. The audit standard, AS 3101,[27] requires that for each CAM communicated in the auditor’s report, the auditor must: (i) identify the CAM; (ii) describe the principal considerations that led the auditor to determine that the matter is a CAM; (iii) describe how the CAM was addressed in the audit; and (iv) refer to the relevant financial statement accounts or disclosures that relate to the CAM. As noted in our previous client alert,[28] companies should consider possible scenarios where this standard might put the auditor in a position of having to make disclosures of original information, and prepare in advance for how to address such situations. Since CAMs will typically address a topic that also is discussed in financial statement footnotes or MD&A, companies should make sure that their language is consistent with the discussion in the CAM.

I.   Updates to Disclosure Controls and Procedures

In light of the substantial number of changes to the Form 10-K requirements and disclosure guidance, it is important for personnel and counsel to consider the manner in which the company’s disclosure controls and procedures are addressing the changes. It is also important that the disclosure committee and audit committee are briefed on the changes and the company’s approach to addressing them.

_____________________

[1] For further discussion on these amendments, please see our prior client alert “SEC Continues to Modernize and Simplify Disclosure Requirements” (March 26, 2019), available at https://www.gibsondunn.com/wp-content/uploads/2019/03/sec-continues-to-modernize-and-simplify-disclosure-requirements.pdf.

[1] Available at https://www.gibsondunn.com/a-double-edged-sword-examining-the-principles-based-framework-of-the-sec-recent-amendments-to-disclosure-requirements/.

[2] See Modernization of Regulation S-K Items 101, 103, and 105, Release No. 33-10825 (August 26, 2020), available at https://www.sec.gov/rules/final/2020/33-10825.pdf.

[3] See Transitional FAQs Regarding Amended Regulation S-K Items 101, 103 and 105 (November 5, 2020), Question 3, available at https://www.sec.gov/corpfin/transitional-faqs-amended-regulation-s-k-items-101-103-105.

[4] See Morrow Sodali 2020 Institutional Investor Survey, available at https://morrowsodali.com/insights/institutional-investor-survey-2020.

[5] See BlackRock’s Commentary, Investment Stewardship’s Approach to Engagement on Human Capital Management, available at https://www.blackrock.com/corporate/literature/publication/blk-commentary-engagement-on-human-capital.pdf.

[6] See “SEC Adopts Amendments to Modernize and Enhance Management’s Discussion and Analysis and other Financial Disclosures” (November 19, 2020), available at https://www.sec.gov/news/press-release/2020-290.

[7] See Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, Release No. 33-10890 (November 19, 2020), available at https://www.sec.gov/rules/final/2020/33-10890.pdf.

[8] Available at https://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=432.

[9] See CF Disclosure Guidance: Topic No. 9 (March 25, 2020), available at https://www.sec.gov/corpfin/coronavirus-covid-19, and CF Disclosure Guidance: Topic No. 9A (June 23, 2020), available at https://www.sec.gov/corpfin/covid-19-disclosure-considerations.

[10] See “Perspectives from One Month into the COVID-19 U.S. Outbreak: Public Company Disclosure Considerations” (April 9, 2020), available at https://www.gibsondunn.com/wp-content/uploads/2020/04/perspectives-from-one-month-into-the-covid-19-u-s-outbreak-public-company-disclosure-considerations.pdf. See “SEC Brings First Enforcement Action Against a Public Company for Misleading Disclosures About the Financial Impacts of the Pandemic” (December 7, 2020), available at https://www.gibsondunn.com/sec-brings-first-enforcement-action-against-a-public-company-for-misleading-disclosures-about-the-financial-impacts-of-the-pandemic/.

[11] See “2019 Year-End Securities Enforcement Update” (January 14, 2020), available at https://www.gibsondunn.com/2019-year-end-securities-enforcement-update/.

[12] See CF Disclosure Guidance: Topic No. 9 (March 25, 2020), available at https://www.sec.gov/corpfin/coronavirus-covid-19.

[13] Available at https://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=394.

[14] See Commission Guidance on Management’s Discussion and Analysis of Financial Condition and Results of Operations, Release No. 3310751 (January 30, 2020), available at https://www.sec.gov/rules/interp/2020/33-10751.pdf.

[15] See “SEC Adopts Amendments to Reduce Unnecessary Burdens on Smaller Issuers by More Appropriately Tailoring the Accelerated and Large Accelerated Filer Definitions” (March 12, 2020), available at https://www.sec.gov/news/press-release/2020-58.

[16] See Accelerated Filer and Large Accelerated Filer Definitions, Release No. 34-88365 (March 12, 2020), available at https://www.sec.gov/rules/final/2020/34-88365.pdf.

[17] Available at https://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=400.

[18] Available at https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm#110.02.

[19] Available at https://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=393.

[20] See FAST Act Modernization and Simplification of Regulation S-K, Release No. 33-10618 (March 20, 2019), available at https://www.sec.gov/rules/final/2019/33-10618.pdf.

[21] See Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities, Release No. 33-10762 (March 2, 2020), available at https://www.sec.gov/rules/final/2020/33-10762.pdf.

[22] See “SEC Amends Rules to Encourage Issuers to Conduct Registered Debt Offerings” (March 7, 2020), available at https://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=396.

[23] Available at https://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=425.

[24] See Confidential Treatment Applications Submitted Pursuant to Rules 406 and 24b-2 (December 19, 2019, Amended September 9, 2020), available at https://www.sec.gov/corpfin/confidential-treatment-applications#options.

[25] See “Electronic Signatures in Regulation S-T Rule 302, Release No. 33-10889 (November 17, 2020), available at https://www.sec.gov/rules/final/2020/33-10889.pdf.

[26] Available at https://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=431.

[27] Available at https://pcaobus.org/Standards/Documents/Implementation-of-Critical-Audit-Matters-The-Basics.pdf.

[28] See “PCAOB Adopts New Model for Audit Reports” (June 2, 2017), available at https://www.gibsondunn.com/pcaob-adopts-new-model-for-audit-reports/.


The following Gibson Dunn attorneys assisted in preparing this client update: Hillary H. Holmes, Elizabeth Ising, Thomas J. Kim, Brian J. Lane, James J. Moloney, Ronald O. Mueller, Michael Scanlon, Michael A. Titera, and Justine Robinson.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work in the Securities Regulation and Corporate Governance and Capital Markets practice groups, or any of the following practice leaders and members:

Securities Regulation and Corporate Governance Group: Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) James J. Moloney – Orange County, CA (+ 949-451-4343, jmoloney@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Brian J. Lane – Washington, D.C. (+1 202-887-3646, blane@gibsondunn.com) Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com) Michael A. Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com)

Capital Markets Group: Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 28, 2021 |
Webcast: The Art of the Spin-off

Public companies have for many years used the spin-off as a technique for transferring a business unit that is no longer a good strategic fit with the businesses they wish to retain. Although there have been relatively few spin-offs since the pandemic began, this tool is likely to receive renewed attention as the economy emerges from the pandemic and companies reconfigure their businesses. This webcast reviews the principal issues that management teams and their advisors are likely to confront when they structure a spin-off transaction, including corporate, tax, capital markets, intellectual property and employee benefits matters. It will focus on the latest techniques for solving the problems that most frequently arise in each of these areas. View Slides (PDF)



PANELISTS: Stephen Glover is a partner in Gibson Dunn’s Washington, D.C. office and Co-Chair of the firm’s Mergers and Acquisitions Practice Group. Mr. Glover has an extensive practice representing public and private companies in complex mergers and acquisitions, including spin-offs and related transactions, as well as other corporate matters. Mr. Glover’s clients include large public corporations, emerging growth companies and middle market companies in a wide range of industries. He also advises private equity firms, individual investors and others. Daniel Angel is a partner in Gibson Dunn’s New York office, Co-Chair of the firm’s Technology Transactions Practice Group and a member of its Strategic Sourcing and Commercial Transactions Practice Group. He is a transactional attorney who has represented clients on technology-related transactions since 2003. Mr. Angel has worked with a broad variety of clients ranging from market leaders to start-ups in a wide range of industries including financial services, private equity funds, life sciences, specialty chemicals, insurance, energy and telecommunications. Mike Collins is a partner in Gibson Dunn’s Washington, D.C. office and Co-Chair of the Executive Compensation and Employee Benefits Practice Group. His practice focuses on all aspects of employee benefits and executive compensation. He represents buyers and sellers in corporate transactions and companies in drafting and negotiating employment and equity compensation arrangements, and has advised many clients on the employment and benefits issued raised in corporate spin-offs. Andrew Fabens is a partner in Gibson Dunn’s New York office, Co-Chair of the firm’s Capital Markets Practice Group and a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Fabens advises companies on long-term and strategic capital planning, disclosure and reporting obligations under U.S. federal securities laws, corporate governance issues and stock exchange listing obligations. He represents issuers and underwriters in public and private corporate finance transactions, both in the United States and internationally. Saee Muzumdar is a partner in Gibson Dunn’s New York office and a member of the firm’s Mergers and Acquisitions Practice Group. Ms. Muzumdar is a corporate transactional lawyer whose practice includes representing both strategic companies and private equity clients (including their portfolio companies) in connection with all aspects of their domestic and cross-border M&A activities and general corporate counseling. Dan Zygielbaum is a partner in Gibson Dunn’s Washington, D.C. office and a member of the firm’s Tax and Real Estate Investment Trust (REIT) Practice Groups. Mr. Zygielbaum’s practice focuses on tax planning for public and private M&A, spinoffs, joint ventures, investment fund formations, real estate transactions, REITs, and capital markets transactions. His clients include private equity and real estate sponsors, public and private companies, REITs, sovereign wealth funds, and real estate investors, developers, managers, and lenders. Julia Lapitskaya is of counsel in Gibson Dunn’s New York office and a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Ms. Lapitskaya’s practice focuses on corporate governance best practices, state corporate laws, SEC regulations and executive compensation disclosure issues, with particular emphasis on disclosure issues and issues arising in initial public offerings and mergers and acquisitions transactions.
MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

January 21, 2021 |
Beau Stark and Robyn Zolman Named Denver’s Top Lawyers 2021

Denver magazine 5280 named partners Beau Stark and Robyn Zolman to its annual “Denver’s Top Lawyers 2021” list, which recognizes “the best attorneys in the region.” The list was published in January 2021. Beau Stark advises private equity funds and other public and private enterprises in the energy sector and a broad range of other industries, in both international and domestic markets.  He has broad experience in all aspects of corporate practice, including public and private mergers and acquisitions, joint ventures, public offerings, capital markets transactions, securities offerings, management participation and financing, tender offers, private fund formation and general corporate matters. Robyn Zolman’s practice is concentrated in securities regulation and capital markets transactions.  She represents clients in connection with public and private offerings of equity and debt securities, tender offers, exchange offers, consent solicitations and corporate restructurings.  She also advises clients regarding securities regulation and disclosure issues and corporate governance matters, including Securities and Exchange Commission reporting requirements, stock exchange listing standards, director independence, board practices and operations, and insider trading compliance.

January 20, 2021 |
Webcast: SEC Disclosure and Proxy Season Outlook for 2021

Gibson Dunn presents a panel discussion regarding recently adopted and proposed SEC rulemakings and what to expect for the upcoming proxy season.

View Slides (PDF)

PANELISTS: Michael Titera, Daniela Stolman, & Aaron Briggs
MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

January 8, 2021 |
Open Questions Remain after SEC Approves Primary Direct Listings on the NYSE

Click for PDF

Direct listings have emerged as one of the new innovative pathways to the U.S. public capital markets, thought to be ideal for entrepreneurial companies with a well-recognized brand name or easily understood business model. We have also found them attractive to companies that are already listed on a foreign exchange and are seeking a dual listing in the United States. Because direct listings have been limited to secondary offerings by existing shareholders, they have not been an attractive option for companies seeking to raise new capital in connection with going public. That has changed now that the NYSE will permit primary offerings in connection with direct listings – or “Primary Direct Floor Listings” (see “Gibson Dunn Guide to Direct Listings” below).

Primary offerings through direct listings pose new challenges and questions, but nonetheless have the potential to expand access to the U.S. public markets. This new option to raise capital in connection with a listing is expected to increase the number of companies that find direct listings attractive, although we do not expect direct listings to serve as a replacement for underwritten IPOs generally.[1] Many of the open questions we discussed when the NYSE’s Selling Shareholder Direct Floor Listing rules were amended in 2018 (link here) are raised again with the new rules on Primary Direct Floor Listings (see “Open Questions” below).

History

It has taken more than a year for the NYSE’s rule changes to become effective. As we previously discussed (link here), in December 2019, the NYSE submitted its first rule proposal to the SEC that would permit a privately held company to conduct a direct listing in connection with a primary offering, but this proposal was quickly rejected by the SEC. As we further detailed (link here), the NYSE subsequently revised and resubmitted the proposal, which was approved by the SEC on August 26, 2020 following a public comment period. However, only five days later, the SEC stayed its approval order after a notice from the Council of Institutional Investors (CII) that it intended to file a petition for the SEC to review the SEC’s approval. CII objected to the proposals to allow Primary Direct Floor Listings arguing that such an offering would harm investors by limiting investors’ legal recourse for material misstatements in offering documents. In particular, CII raised concerns regarding the ability of investors to “trace” the purchase of their shares to the applicable offering document. Another criticism of the NYSE’s proposal is that the rule changes could not guarantee sufficient liquidity for a trading market in the applicable securities to develop following the direct listing.

Final Approval

On December 22, 2020, the SEC issued its final approval of the NYSE’s proposed rules. The SEC states that, following a de novo review and further public comment period, it has found that the NYSE’s proposal was consistent with the Exchange Act and the rules and regulations issued thereunder and, furthermore, that the proposed rules would “foster[] competition by providing an alternate method for companies of sufficient size [to] decide they would rather not conduct a firm commitment underwritten offering.” The SEC order discussed several procedural safeguards included by the NYSE in its proposed rules that were intended to “clarify the role of the issuer and financial advisor in a direct listing” and “explain how compliance with various rules and regulations” would be addressed. These changes include the introduction of an “Issuer Direct Offering Order type,” the clarification of how market value would be determined in connection with primary direct listings and the agreement to retain FINRA to monitor compliance with Regulation M and other anti-manipulation provisions of federal securities laws.

Notably, the SEC’s order rejects the notion that offerings not involving a traditional underwriter would “‘rip off’ investors, reduce transparency, or involve reduced offering requirements or accounting methods,” finding that the relevant “traceability issues are not exclusive to nor necessarily inherent in” Primary Direct Floor Listings. In approving the NYSE’s proposal and reaching its conclusion that the NYSE’s proposal provided a “reasonable level of assurance” that the applicable market value threshold supports a public listing and the maintenance of fair and orderly markets, the SEC specifically noted that the applicable thresholds for the equity market value under the revised rules were at least two and a half times greater than the market value standard that exists for a traditional IPO ($40 million). The SEC order also positively discussed steps taken by the NYSE to ensure compliance by participants in the direct listing process with Regulation M and other provisions of the federal securities laws.

“This is a game changer for our capital markets, leveling the playing field for everyday investors and providing companies with another path to go public at a moment when they are seeking just this type of innovation,” NYSE President Stacey Cunningham said in a statement. In a separate statement, Commissioner Elad L. Roisman stated, “Primary direct listings represent an alternative way for companies to fairly and efficiently offer shares to the public in a manner that preserves important investor protections” and have “the additional benefit of increasing opportunities for investors to purchase shares at the initial offering price, rather than having to wait to buy in the aftermarket.”

The two Commissioners who dissented (Allison Herren Lee and Caroline A. Crenshaw) and certain investor protection groups have issued statements expressing concern that the absence of a traditional underwriter removes a key gatekeeper present in traditional IPOs that helps prevent inaccurate or misleading disclosures.

New Requirements for Primary Direct Floor Listings

Under the NYSE’s rules, a privately held company seeking to conduct a primary offering in connection with a direct listing will qualify for such a primary offering if (a) it meets the already existing requirements for a direct listing (e.g., 400 round lot holders, 1.1 million publicly held shares outstanding and minimum price per share of at least $4.00 at the time of initial listing); and (b) (i) the company issues and sells common equity with at least $100 million in market value in the opening auction on the first day of listing, or (ii) the market value of common equity sold in the opening auction by such company and the market value of publicly held shares (i.e., excluding shares held by officers, directors and 10% owners) immediately prior to listing, together, exceed $250 million. In each case, such market value will be calculated using a price per share equal to the lowest price of the price range established by the issuer in its registration statement for the primary offering (the price range is defined as the “Primary Direct Floor Listing Auction Price Range”).

The NYSE will also create a new order type to be used by the issuer in a Primary Direct Floor Listing and rules regarding how that new order type would participate in a Direct Listing Auction. Specifically, the NYSE will introduce an Issuer Direct Offering Order (“IDO Order”), which would be a Limit Order to sell that is to be traded only in a Direct Listing Auction for a Primary Direct Floor Listing. The IDO Order would have the following requirements: (1) only one IDO Order may be entered on behalf of the issuer and only by one member organization; (2) the limit price of the IDO Order must be equal to the lowest price of the Primary Direct Floor Listing Auction Price Range; (3) the IDO Order must be for the quantity of shares offered by the issuer, as disclosed in the prospectus in the effective registration statement; (4) the IDO Order may not be cancelled or modified; and (5) the IDO Order must be executed in full in the Direct Listing Auction. Consistent with current rules, a Designated Market Maker (“DMM”) would effectuate a Direct Listing Auction manually, and the DMM would be responsible for determining the Auction Price. Under the new rules, the DMM would not conduct a Direct Listing Auction for a Primary Direct Floor Listing if (1) the Auction Price would be below the lowest price or above the highest price of the Primary Direct Floor Listing Auction Price Range; or (2) there is insufficient buy interest to satisfy both the IDO Order and all better-priced sell orders in full. If there is insufficient buy interest and the DMM cannot price the Auction and satisfy the IDO Order as required, the Direct Auction would not proceed and such security would not begin trading.

While not a change, the NYSE emphasized in its proposal that any services provided by a financial advisor to the issuer of a security listing in connection with a Selling Shareholder Direct Floor Listing or a Primary Direct Floor Listing (the “financial advisor”) and the DMM assigned to that security must provide such services in a manner that is consistent with all federal securities laws, including Regulation M and other anti-manipulation requirements.

Nasdaq Is Next

The Nasdaq Stock Market also has pending before the SEC a proposed rule change to allow primary offering in connection with direct listings in the context of Nasdaq’s own distinct market model, some of which require fewer record holders than the NYSE for direct listings. Additionally, on December 22, Nasdaq submitted a separate proposed rule change on this issue for which Nasdaq seeks immediate effectiveness without a prior public comment period. On December 23, the Staff of the Division of Trading and Markets of the SEC issued a public statement that “the Staff intends to work to expeditiously complete, as promptly as possible accommodating public comment, a review of these proposals, and as with all self-regulatory organizations’ proposed rule changes, will evaluate, among other things, whether they are consistent with the requirements of the Exchange Act and Commission rules.”

Gibson Dunn Guide to Direct Listings

Any company considering a direct listing is encouraged to carefully consider the risks and benefits in consultation with counsel and financial advisors. Members of the Gibson Dunn Capital Markets team are available to discuss strategy and considerations as the rules and practice concerning direct listings evolve. Gibson Dunn will also continue to update its Current Guide To Direct Listings (available here) from time to time to further describe the applicable rules and provide commentary as practices evolve.

Open Questions

It remains to be seen how the NYSE’s revised rules and forthcoming rules from NYSE and Nasdaq will play out in practice. Some of the relevant open questions include:

  • Will the loss of a traditional firm-commitment underwriter create additional risks for investors? The NYSE’s revised rules permit companies to raise new capital without using a firm-commitment underwriter. The two Commissioners who dissented (Allison Herren Lee and Caroline A. Crenshaw) and certain investor protection groups have expressed concern that the absence of a traditional underwriter removes a key gatekeeper present in traditional IPOs that helps prevent inaccurate or misleading disclosures. In its order approving the NYSE’s revised rules on Primary Direct Floor Listings, the SEC suggests that, depending on the facts and circumstances, a company’s financial advisers could be subject to Securities Act liability, or at least lawsuits alleging underwriter liability, in connection with direct listings. The two dissenting Commissioners, however, suggest that guidance as to what may trigger status as a statutory underwriter should have been considered and concurrently provided.
  • Will a Primary Direct Floor Listing create new risks for the listing company? Under current rules and precedent, in a Primary Direct Floor Listing the listing company may have more rather than less liability in a direct listing than a traditional IPO. In a traditional IPO, because of customary lockup arrangements, investors can generally guarantee the traceability of their shares to the registration statement because only shares issued under the registration statement are trading in the market until the lockup period expires. Under current case law, which is being appealed, the tracing requirement has been seemingly abandoned, meaning all the shares in the market can potentially make claims under Section 11.
  • How will legal, diligence and auditing practices develop around direct listings? Because the listing must be accompanied by an effective registration statement under the Securities Act, the liability provisions of Section 11 and 12 of the Securities Act will be applicable to sales made under the registration statement. We note that in many of the direct listings to date, the companies have engaged financial advisors to assist with the positioning of the equity story of the company and advise on preparation of the registration statement, in a process very similar to the process of preparing a registration statement for a traditional IPO. Because a company will be subject to the same standard for liability under the federal securities laws with respect to material misstatements and omissions in a registration statement for a direct listing to the same extent as for a registration statement for an IPO, a company’s incentives to conduct diligence to support the statements in its registration statement do not differ between the two types of transactions. Similarly, financial statement requirements, and the requirements as to independent auditor opinions and consents, do not differ between registration statements for direct listings and IPOs. Furthermore, follow-on offerings by the company that involve firm-commitment underwriting or at-the-market programs will require the traditional diligence practices. To date, there have been no lawsuits alleging that financial advisers in a direct listing could be subject to Securities Act liability in connection with direct listings.
  • What impact will the expanded availability of direct listings have on IPO activity? One could argue that the greatest attraction of a direct listing is that it can nearly match private markets in being faster and less costly than an IPO. In some cases, it could provide similar liquidity as a traditional IPO, although trading price certainty and trading volume could be lower following a direct listing than following an IPO. Direct listings have been available on the NYSE and Nasdaq for a decade but have not been utilized regularly by large private companies in lieu of a traditional IPO. In any event, the requirement for 400 round lot holders will continue to be a hurdle for many private companies looking to list directly.
  • How will the initial reference price and/or price range in the prospectus be determined? There is no reference price from another market for the DMM to apply and no negotiation between the issuer and the underwriter as in an IPO. The NYSE seems to bridge this gap with the requirement for the DMM to consult with an independent financial adviser to determine the initial reference price in a Selling Shareholder Direct Listing and, in a Primary Direct Floor Listing, to determine the price range to be set forth in the applicable prospectus. Eventually, a standardized set of practices around the financial adviser’s work and presentation of the price to the issuer and the Exchange should develop.
  • Without the firm-commitment IPO process, in which the offering is oversold and heavily marketed, how will direct listed shares trade in the aftermarket? Without an underwritten offering, the issuer will not engage in price finding and book building activities. In a direct listing, the issuer will also take on much of the role of investor outreach that is borne by underwriters in a traditional IPO. Although direct listing marketing efforts may include one or more investor days and a roadshow-like presentation, sell-side analysts will presumably not be involved, building models and educating investors. It may be more difficult for the issuer to tell its forward-looking story and build value into the trading price of the stock without research coverage prior to or after the listing. For this reason, the most successful direct listings to date have been well-known companies with widely recognized brands that have successfully engaged with a broad set of new investors. We expect that companies engaging in direct listings will continue to develop more robust internal investor/shareholder relations functions than may be needed for a company conducting a traditional IPO.
  • Will large private placements (often called “private IPOs”) have a new advantage? The expanded option to direct list, whether in a secondary or primary format, through an independent valuation alone may mean investors in a private company can have access to public markets faster than through an IPO process. When private companies market private equity capital raises, including private IPOs, they might use the direct listing option as a marketing tool to attract investors to the private placement.
  • Are there any companies that are well-positioned for a Primary Direct Floor Listing? The NYSE’s revised rules may prompt well-positioned companies to consider a capital raise where the private or IPO markets are otherwise unattractive. Furthermore, until Nasdaq’s rules are approved, how will the NYSE’s rules affect the decision of where to list?

Read More

Thank you to associate Evan Shepherd* for his valuable assistance with this article and the Current Guide to Direct Listings.

 _______________________

[1] The SEC Final Release states in footnote 114: “While the Commission acknowledges the possibility that some companies may pursue a Primary Direct Floor Listing instead of a traditional IPO, these two listing methods may not be substitutable in a wide variety of instances. For example, some issuers may require the assistance of underwriters to develop a broad investor base sufficient to support a liquid trading market; others may believe a traditional firm commitment IPO is preferable given the benefits to brand recognition that can result from roadshows and other marketing efforts that often accompany such offerings. Thus, we do not anticipate that all companies that are eligible to go public through a Primary Direct Floor Listing will choose to do so; the method chosen will depend on each issuer’s unique characteristics.”


Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Capital Markets or Securities Regulation and Corporate Governance practice groups, or the authors:

J. Alan Bannister – New York (+1 212-351-2310, abannister@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Boris Dolgonos – New York (+1 212-351-4046, bdolgonos@gibsondunn.com) Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) James J. Moloney – Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com) Evan Shepherd* – Houston (+1 346-718-6603, eshepherd@gibsondunn.com)

Please also feel free to contact any of the following practice leaders:

Capital Markets Group: Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com)

Securities Regulation and Corporate Governance Group: Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) James J. Moloney – Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)

*Mr. Shepherd is admitted only in New York and is practicing under the supervision of Principals of the Firm.

© 2021 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 8, 2021 |
A Current Guide to Direct Listings

Click for PDF Over the course of December 2019, Gibson Dunn published its “Current Guide to Direct Listings” and “An Interim Update on Direct Listing Rules discussing, among other things, the direct listing as an evolving pathway to the public capital markets and the U.S. Securities and Exchange Commission’s (SEC) rejection of a proposal by the New York Stock Exchange (NYSE) to permit a privately held company to conduct a direct listing in connection with a primary offering, respectively. The NYSE continued to revise its proposal in consultation with the SEC and, on August 26, 2020, the SEC approved an amendment to the NYSE’s proposal that will permit primary offerings in connection with direct listings. The August 26 order, which would have become effective 30 days after being published in the Federal Register, was stayed by the SEC on September 1, 2020 in response to a notice from the Council of Institutional Investors (CII) that it intended to file a petition for the SEC to review the SEC’s approval. On December 22, 2020, the SEC issued its final approval of the NYSE’s proposed rules. Consequently, Gibson Dunn has updated and republished its Current Guide to Direct Listings to reflect today’s landscape, including an overview of certain issues to monitor as direct listing practice evolves included as Appendix I hereto. Direct Listings: An evolving pathway to the public capital markets.   Direct listings have increasingly been gaining attention as a means for a private company to go public. A direct listing refers to the listing of a privately held company’s stock for trading on a national stock exchange (either the NYSE or Nasdaq) without conducting an underwritten offering, spin-off or transfer quotation from another regulated stock exchange. Under historical stock exchange rules, direct listings involve the registration of a secondary offering of a company’s shares on a registration statement on Form S-1 or other applicable registration form publicly filed with, and declared effective by, the Securities and Exchange Commission, or the SEC, at least 15 days in advance of launch—referred to as a Selling Shareholder Direct Listing.[1] Existing shareholders, such as employees and early stage investors, whose shares are registered for resale or that may be resold under Rule 144 under the Securities Act, are able to sell their shares on the applicable exchange, but are not obligated to do so, providing flexibility and value to such shareholders by creating a public market and liquidity for the company’s stock. Historically, companies were not permitted to raise fresh capital as part of the direct listing process. On December 22, 2020, however, the SEC issued its final approval of rules proposed by the NYSE that permit a primary offering along with, or in lieu of, a direct secondary listing—referred to as a Primary Direct Floor Listing.[2] Upon listing of the company’s stock, the company becomes subject to the reporting and governance requirements applicable to publicly traded companies, including periodic reporting requirements under the Securities Exchange Act of 1934, as amended (the Exchange Act), and governance requirements of the applicable exchange. Companies may pursue a direct listing to provide liquidity and a broader trading market for their shareholders; however, the listing company can also benefit even if not raising capital in a Primary Direct Floor Listing. A direct listing, whether a Primary Direct Floor Listing or a Selling Shareholder Direct Listing, will provide a company with many of the benefits of a traditional IPO, including access to the public markets for capital raising and the ability to use publicly traded equity as an acquisition currency. Advantages of a direct listing as compared to an IPO. Immediate Benefits to Existing Shareholders. In both a Selling Shareholder Direct Listing and Primary Direct Floor Listing, all selling shareholders whose shares are registered on the applicable registration statement or whose shares are eligible for resale under Rule 144 will have the opportunity to participate in the first day of trading of the company’s stock. Shareholders who choose to sell are able to do so at market trading prices, rather than only at the initial price to the public set in an IPO. The ability to sell at market prices on the first day of a listing can be a significant benefit to existing shareholders who elect to sell. However, this benefit assumes there is sufficient market demand for the shares offered for resale. Potentially Wider Initial Market Participation. The traditional IPO process includes a focused set of participants, and institutional buyers tend to feature prominently in the initial allocation of shares to be sold by the underwriting syndicate. Direct listings offer access to a wider group of investors, as any investor may place orders through its broker.  In a Selling Shareholder Direct Listing, any prospective purchasers of shares are able to place orders with their broker-dealer of choice, at whatever price they believe is appropriate, and such orders become part of the initial-reference, price-setting process. The price-setting mechanisms applicable to Primary Direct Floor Listings differ in material respects from the practice that has developed with respect to Selling Shareholder Direct Listings. In a Primary Direct Floor Listing, prospective purchasers of shares are able to place orders with their broker-dealer of choice at whatever price they believe is appropriate, but will have priority for purchases at the minimum offering price specified in the related prospectus. Flexibility in Marketing. IPO marketing has become more flexible since the introduction of rules providing for “testing-the-waters” communications by Emerging Growth Companies and, starting December 3, 2019, all companies.[3] However, a direct listing allows a company to avoid the rigidity of the traditional roadshow conducted for a specified period of time following the publicly announced launch of an IPO and allows it to tailor marketing activities to the specific considerations underlying the direct listing. For instance, the traditional roadshow has been replaced in some direct listings by an investor day whereby the company invites investors to learn about the company one-to-many, such as via a webcast, which can be considered more democratic as all investors have access to the same educational materials at once. Marketing efforts may include one or more of these investor days and a roadshow-like presentation, conducted at times deemed most advantageous (although the applicable registration statement must still be publicly filed for at least 15 days in advance of any such marketing efforts). Although the approximate timing of the direct listing can be inferred from the status of the publicly filed registration statement, the company may have more flexibility as to the day its shares commence trading on the applicable stock exchange. Brand Visibility. As direct listings are still a relatively novel concept in U.S. capital markets, any direct listing with moderate success, in particular a direct listing involving a primary capital raise, will likely draw broad interest from market participants and relevant media. This effect is multiplied when the listing company has a well-recognized brand name. No Underwriting Fees. A direct listing can save money by allowing companies to avoid underwriting discounts and commissions on the shares sold in the IPO. In direct listings to date, the companies have engaged financial advisers to assist with the positioning of the company and the preparation of the registration statement. Such financial advisors have been paid significant fees, though substantially less than traditional IPO underwriting discounts and commissions. This may marginally decrease a company’s cost of capital, although the company will still incur significant fees to market makers or specialists, independent valuation agents, auditors and legal counsel. More Flexible Lockup Agreements. In most direct listings to date, existing management and significant shareholders are not typically subject to the restrictions imposed by 180-day lockup agreements standard in IPOs. Notwithstanding, as practice evolves, practice may vary from transaction to transaction. For example, Spotify’s largest non-management shareholder was subject to a lockup and Palantir’s directors and executive officers were subject to a lockup period. We expect that lockup arrangements in direct listings will continue to be more tailored to the particular company’s circumstances than in traditional IPOs. Certain issues to consider before choosing a direct listing. Establishing a Price Range or Initial Reference Price. No marketing efforts are permissible without a compliant preliminary prospectus on file with the SEC, and such prospectus must include an estimated price range. In a traditional IPO and Primary Direct Floor Listing, the cover page of the preliminary prospectus contains a price range of the anticipated initial sale price of the shares. In a Selling Shareholder Direct Listing, the current market practice is to describe how the initial reference price is derived (e.g., by buy-and-sell orders collected by the applicable exchange from various broker-dealers). These buy-and-sell orders have in the past been largely determined with reference to high and low sales prices per share in recent private transactions of the subject company. In cases where a company does not have such transactions to reference, additional information will be necessary to educate and assist investors and help establish an initial bid price. In addition, the listing company in a direct listing may elect to increase the period between the effectiveness of its registration statement and its first day of trading, thereby allowing time for additional buy-and-sell orders to be placed. In either case, the financial advisor to the company will play an important role in establishing a price range or initial reference price, as applicable. Financial Advisors and Their Independence. In a Selling Shareholder Direct Listing, the rules of both the NYSE and Nasdaq require that the listing company appoint a financial advisor to provide an independent valuation of the listing company’s “publicly held” shares and, in practice, assist the applicable exchange’s market maker or specialists, as applicable, in setting a price range or initial reference price, as applicable. In past direct listings, in particular those involving the NYSE, the financial advisor that served this role was not the financial advisor the listing company engaged to advise generally, including to assist the company define objectives for the listing, position the equity story of the company, advise on the registration statement, assist in preparing presentations and other public communications and help establish a firm price range in a Primary Direct Floor Listing. As reviewed in detail below, the financial advisor that values the “publicly held” shares and assists the applicable exchange’s market maker or specialists, as applicable, must be independent, which under the relevant rules disqualifies any broker-dealer that has provided investment banking services to the listing company within the 12 months preceding the date of the valuation. Shares to be Registered. In a direct listing, in addition to new shares being issued in connection with a Primary Direct Floor Listing, a company generally registers for resale all of its outstanding common equity which cannot then be sold pursuant to an applicable exemption from registration (such as Rule 144), including those subject to registration rights obligations. The company may also register shares held by affiliates and non-affiliates who have held the shares for less than one year or otherwise did not meet the requirements for transactions without restriction under Rule 144.[4] Companies may also register shares held by employees to address any regulatory concerns that resales of shares by employees occurring around the time of the direct listing may not have been entitled to an exemption from registration under the Securities Act. All shares subject to registration may be freely resold pursuant to the registration statement only as long as the registration statement remains effective and current. The company will typically bear the related costs. Direct Listing-Specific Risks. Traditional IPOs offer certain advantages that are not currently present in direct listings. Going public without the structure of an IPO process is not without risk, such as the need to obtain research coverage in the absence of an underwriting syndicate that has research analysts or the need to educate investors on the company’s business model. Any company considering a direct listing should contemplate whether its investor relations apparatus is capable of playing an outsized role in coordinating marketing efforts and outreach to potential investors, both in connection with the listing and after the transaction. Notably, in a Selling Shareholder Direct Listing, the listing company’s management plays no role in setting the initial reference price, and certain market-making activities conducted by the underwriting syndicate may be unavailable. In a Primary Direct Floor Listing, the listing company’s management may play an outsized role in determining an initial price range. Either scenario may present unacceptable risk for companies that may otherwise be poised to undertake a direct listing. The NYSE and Nasdaq rules applicable to a direct listing. Background. The direct listing rules of both the NYSE[5] and Nasdaq Global Select Market[6] are substantially similar and are structured as an exception to each exchange’s requirement concerning the aggregate market value of the company to be listed. Prior to the direct listing rules, companies that did not previously have their common equity registered under the Exchange Act were required to show an aggregate market value of “publicly held” shares in excess of $100 million ($110 million for Nasdaq Global Select Market, under certain circumstances), such market value being established by both an independent third-party valuation and recent trading prices in a trading market for unregistered securities (commonly referred to as the Private Placement Market). “Publicly held” shares include those held by persons other than directors, officers and presumed affiliates (shareholders holding in excess of 10%). The Private Placement Market includes trading platforms operated by any national securities exchange or registered broker-dealers. Generally, in a direct listing, the relevant company either (i) does not have its shares traded on a Private Placement Market prior its listing or (ii) underlying trading in the Private Placement Market is not sufficient to provide a reasonable basis for reaching conclusions about a company’s trading price. Direct Listings on Secondary Markets. Nasdaq rules permit direct listings onto the Nasdaq Global Market and Nasdaq Capital Market, the second- and third-tier Nasdaq markets, respectively.[7] If the company to be listed on a secondary market does not have recent sustained trading activity in a Private Placement Market, and thereby must rely on an independent third-party valuation consistent with the rules described above, such calculation must reflect a (i) tentative initial bid price, (ii) market value of listed securities and (iii) market value of publicly held shares that each exceed 200 percent of the otherwise applicable requirements. Requirements for a Direct Listing. The direct listing rules discussed above were intended to provide relief for privately held “unicorns,” or companies that are otherwise sufficiently capitalized and which do not need to raise money. Each exchange’s listing standards applicable to direct listings by U.S. companies are summarized, by relevant exchange, in the table that follows:

Overview of Listing Standards Applicable to Direct Listings

 

NYSE (Selling Shareholder Direct Listing)

NYSE (Primary Direct Floor Listing)

Nasdaq Global Select Market

Nasdaq Global Market

Nasdaq Capital Market

Market Value of Publicly Held Shares (i.e., held by persons other than directors, officers and presumed affiliates)

The listing company must have a recent valuation from an independent third party indicating at least $250 million in aggregate market value of publicly held shares. (Rule 102.01A(E))[8]

The listing company (i) must sell at least $100 million of shares in the opening auction or (ii) show that the aggregate market value of shares sold in the opening auction, together with publicly held shares, exceeds $250 million, in each case with market value calculated using the lowest price per share set forth in the related prospectus.

The listing company must have a recent valuation from an independent third party indicating at least $250 million in aggregate market value of publicly held shares. (Rule IM-5315-1(b))9

The listing company must have a recent valuation[9] from an independent third party indicating in excess of $16 million to $40 million in aggregate market value of publicly held shares, depending on the financial standard met below. (Rule 5405)

The listing company must have a recent valuation10 from an independent third party indicating in excess of $10 million to $30 million in aggregate market value of publicly held shares, depending on the financial standard met below. (Rule 5505)

Financial Standards

The listing company is required to meet one of the following applicable financial standards:

(i)       Each of (a) aggregate adjusted pre-tax income for the last three fiscal years in excess of $10 million, (b) with at least $2 million in each of the two most recent fiscal years and (c) positive income in each of the last three fiscal years (the “NYSE Earnings Test”).

(ii)     Global market capitalization of $200 million (the “Global Market Capitalization Test”).

Same as the NYSE (Selling Shareholder)

The listing company is required to meet one of the following applicable financial standards:

(i)       Each of (a) aggregate adjusted pre-tax income for the last three fiscal years in excess of $11 million, (b) with at least $2.2 million in each of the two most recent fiscal years and (c) positive income in each of the last three fiscal years (the “Nasdaq Earnings Standard”).

(ii)     Each of (a) average market capitalization in excess of $550 million over the prior 12 months, (b) $110 million in revenue for the previous fiscal year and (c) aggregate cash flows for the last three fiscal years in excess of $27.5 million and positive cash flows for each of the last three fiscal years (the “Capitalization with Cash Flow Standard”).

(iii)   Each of (a) average market capitalization in excess of $850 million over the prior 12 months and (b) $90 million in revenue for the previous fiscal year (the “Capitalization with Revenue Standard”).

(iv)    Each of (a) market capitalization in excess of $160 million, (b) total assets in excess of $80 million, and (c) stockholders’ equity in excess of $55 million (the “Assets with Equity Standard”).

The listing company is required to meet one of the following applicable financial standards:

(i)       Each of (a) aggregate adjusted pre-tax income in excess of $1 million in the latest fiscal year or in two of the last three fiscal years and (b) Stockholders’ equity in excess of $15 million.

(ii)     Each of (a) Stockholders’ equity in excess of $30 million and (b) two years of operating history.

(iii)   Market value of listed securities in excess of $150 million.

(iv)    Total assets and total revenue in excess of $75 million in the latest fiscal year or in two of the last three fiscal years.

The listing company is required to meet one of the following applicable financial standards:

(i)       Each of (a) Stockholders’ equity in excess of $15 million and (b) two years of operating history.

(ii)     Each of (a) Stockholders’ equity in excess of $4 million and (b) market value of listed securities in excess of $100 million.

(iii)   Total assets and total revenue in excess of $75 million in the latest fiscal year or in two of the last three fiscal years.

Distribution Standards

The listing company must meet all of the following distribution standards:

(i)       400 round lot shareholders;

(ii)     1.1 million publicly held shares; and

(iii)   Minimum initial reference price of $4.00.

Same as the NYSE (Selling Shareholder)

The listing company must meet all of the following liquidity requirements:

(i)       450 round lot shareholders or 2,200 total shareholders;

(ii)     1.25 million publicly held shares; and

(iii)   Minimum initial reference price of $4.00.

The listing company must meet all of the following distribution standards:

(i)       400 round lot shareholders;

(ii)     1.1 million publicly held shares; and

(iii)   Minimum initial reference price of $8.00.

The listing company must meet all of the following liquidity requirements:

(i)       300 round lot shareholders;

(ii)     1 million publicly held shares; and

(iii)   Minimum initial reference price of $8.00 OR closing price of $6.00.[10]

Engagement of Financial Advisor

Any valuation used in connection with a direct listing must be provided by an entity that has significant experience and demonstrable competence in the provision of such valuations. (Rule 102.01A(E))

A valuation agent will not be deemed to be independent if (Rule 102.01A(E)):

(i)       At the time it provides such valuation, the valuation agent or any affiliated person or persons beneficially own in the aggregate, as of the date of the valuation, more than 5% of the class of securities to be listed, including any right to receive any such securities exercisable within 60 days.

(ii)     The valuation agent or any affiliated entity has provided any investment banking services to the listing applicant within the 12 months preceding the date of the valuation. For purposes of this provision, “investment banking services” include, without limitation, acting as an underwriter in an offering for the issuer; acting as a financial adviser in a merger or acquisition; providing venture capital, equity lines of credit, PIPEs (private investment, public equity transactions), or similar investments; serving as placement agent for the issuer; or acting as a member of a selling group in a securities underwriting.

(iii)   The valuation agent or any affiliated entity has been engaged to provide investment banking services to the listing applicant in connection with the proposed listing or any related financings or other related transactions.

Not required in connection with a Primary Direct Floor Listings as the related prospectus is required to include a price range within which the company anticipates selling the shares it is offering.

Any valuation used in connection with a direct listing must be provided by an entity that has significant experience and demonstrable competence in the provision of such valuations. (Rule IM-5315-1(e)) A valuation agent shall not be considered independent if (Rule IM-5315-1(f)):

(i)       At the time it provides such valuation, the valuation agent or any affiliated person or persons beneficially own in the aggregate, as of the date of the valuation, more than 5% of the class of securities to be listed, including any right to receive any such securities exercisable within 60 days.

(ii)     The valuation agent or any affiliated entity has provided any investment banking services to the listing applicant within the 12 months preceding the date of the valuation. For purposes of this provision, “investment banking services” include, without limitation, acting as an underwriter in an offering for the issuer; acting as a financial adviser in a merger or acquisition; providing venture capital, equity lines of credit, PIPEs (private investment, public equity transactions), or similar investments; serving as placement agent for the issuer; or acting as a member of a selling group in a securities underwriting.

(iii)   The valuation agent or any affiliated entity has been engaged to provide investment banking services to the listing applicant in connection with the proposed listing or any related financings or other related transactions.

Same as the Nasdaq Global Select Market

Same as the Nasdaq Global Select Market

Upon satisfaction of the above requirements of the applicable exchange, the exchange will generally file a certification with the SEC, confirming that its requirements have been met by the listing company. After such filing, the company’s registration statement may be declared effective by the SEC (assuming the SEC review has run its course). In practice, the SEC has reviewed registration statements that contemplate a direct listing in substantially the same manner it reviews traditional IPO registration statements, with some additional focus on process as direct listing practice and the related rules evolve. After the registration statement is declared effective by the SEC, the company becomes subject to the governance requirements of the applicable exchange (subject to compliance periods) and the reporting requirements under the Exchange Act. The company may then establish the day its equity will commence trading in consultation with the applicable exchange, which could be the same day as the SEC declares the registration statement effective, assuming, in the case of a Selling Shareholder Direct Listing, the exchange’s market maker or specialists, as applicable, and the financial advisor appointed by the company are able to determine an initial reference price. NYSE’s recent rule changes: Primary capital raise via direct listing Allowing companies to conduct their initial public offering outside of the traditional IPO format (i.e., an underwritten firm commitment) could potentially revolutionize the way in which companies go public. Historically, companies were not permitted to raise fresh capital as part of the direct listing process. On June 22, 2020, the NYSE filed a revised proposal with the SEC that would allow companies to publicly raise capital through a direct listing, which was approved by the SEC staff on August 26, 2020. The NYSE’s proposal, which would have become effective 30 days after being published in the Federal Register, was stayed by the SEC on September 1, 2020, after the Council of Institutional Investors (CII) made public its intention to file a petition for the SEC’s Commissioners to review the August 26 order approving the NYSE’s proposal. The grounds for CII’s Petition for Review of an Order are discussed below. On December 22, 2020, the SEC issued its final approval of the NYSE’s proposed rules. The NYSE’s rules, which we expect will become effective 30 days after being published in the Federal Register, will allow a company to sell shares on its own behalf, without underwriters, in addition to or in place of a secondary offering by shareholders. Under the NYSE’s rules, companies hoping to conduct a primary offering while listing pursuant to the NYSE’s proposed rules will be required to either:
  • sell at least $100 million in the opening auction on the first day of listing, thereby ensuring that there will be at least $100 million in public float after the first trade; or
  • the aggregate market value of publicly held shares immediately prior to listing together with the market value of shares sold by the company in the opening auction totals at least $250 million, with such market value calculated using a price per share equal to the lowest price of the price range established in the related prospectus.
The NYSE previously proposed a “Distribution Standard Compliance Period” whereby, in a Primary Direct Floor Listing, the requirements to have 400 round lot shareholders and 1.1 million publicly held shares would be operative after a 90-day grace period. Under the proposal approved by the SEC, companies conducting a Primary Direct Floor Listing must meet these and all other initial listing requirements at the time of initial listing. To facilitate Primary Direct Floor Listings, the NYSE’s proposal includes a new order type that would permit a Primary Direct Floor Listing to settle only if (i) the auction price would be within the price range specified by the company in its effective registration statement and (ii) all shares to be offered by the company can be sold within the specified price range, together with other technical revisions to the order process to enable and ensure compliance with the foregoing. Notably, the NYSE will create a new order type to be used by the issuer in a Primary Direct Floor Listing, referred to as an Issuer Direct Offering Order (“IDO Order”), which would be a limit order to sell that is to be traded only in a Primary Direct Floor Listing. The IDO Order would have the following requirements: (1) only one IDO Order may be entered on behalf of the issuer and only by one member organization; (2) the limit price of the IDO Order must be equal to the lowest price set forth in the applicable prospectus; (3) the IDO Order must be for the quantity of shares offered by the issuer, as disclosed in the prospectus in the effective registration statement; (4) the IDO Order may not be cancelled or modified; and (5) the IDO Order must be executed in full in the direct listing auction. The NYSE’s proposal also includes additional revisions to related definitions that are “intended to clarify the application of the existing rule and . . . not substantively change it.” Nasdaq. The Nasdaq Stock Market also has pending before the SEC a proposed rule change to allow primary-offering, direct listings in the context of Nasdaq’s own distinct market model, some of which require fewer record holders than the NYSE for direct listings. Additionally, on December 22, Nasdaq submitted a separate proposed rule change on this issue for which Nasdaq seeks immediate effectiveness without a prior public comment period. On December 23, the Staff of the Division of Trading and Markets of the SEC issued a public statement that “the Staff intends to work to expeditiously complete, as promptly as possible accommodating public comment, a review of these proposals, and as with all self-regulatory organizations’ proposed rule changes, will evaluate, among other things, whether they are consistent with the requirements of the Exchange Act and Commission rules.” CII’s Objection & SEC Response On August 31, 2020, the Council of Institutional Investors (CII) notified the SEC of its intention to file a petition for the SEC’s Commissioners to review the August 26 order approving the NYSE’s proposed rule change.[11] On September 8, 2020, CII filed its petition for review with the SEC, setting forth its principal criticism that liberalization of direct listing regulations in the face of current limitations on investors’ legal recourse for material misstatements and omissions is not consistent with Section 6(b)(5) of the Exchange Act,[12] which requires exchange rules be “designed . . . to protect investors and the public interest.” CII previously raised concerns that the NYSE proposal would not guarantee sufficient liquidity for a trading market in the securities to develop after the listing, but did not raise this concern in its petition for review. Section 11 & Traceability Concerns. Section 11 of the Securities Act of 1933 (Section 11) provides legal action against a wide range of corporate actors in connection with material misstatements or omissions contained in a registration statement, where a person acquires securities traceable to that registration statement in reliance on such misstatements or omissions. Under the precedent established in Barnes v. Osovsky,[13] a person bringing such a claim for material misstatements or omissions contained in a registration statement under Section 11 must generally show that either the securities they held were purchased at the time of their initial offering or that they were issued under the deficient registration statement and purchased at a later time in the secondary market, which is referred to in concept as traceability. As discussed above, in a direct listing, a company generally registers for resale all of its outstanding common equity that cannot then be sold pursuant to an applicable exemption from registration. Generally, holders of shares that are eligible for resale pursuant to an applicable exemption from registration may, simultaneous with shares sold under an effective registration statement, sell unregistered shares in transactions under Rule 144 or otherwise not subject to, or exempt from, registration under the Securities Act. As a result, shares available in the market upon a direct listing include both shares sold under the registration statement and shares sold pursuant to an exemption from registration (and therefore not under the registration statement). At a high level, shares sold pursuant to a registration statement may be subject to claims under Section 11 as well as under Rule 10b-5 under the Exchange Act (the general anti-fraud provisions of the Exchange Act), while shares sold otherwise than under a registration statement may be subject to claims only under Rule 10b-5.  Due to differences in the standards of the two rules, and defenses available to the company or other defendants, it may generally be more difficult for a holder to make successful claims with respect to shares not sold pursuant to a registration statement. As highlighted by CII in its petition, investor concerns about the traceability of shares sold in a direct listing were highlighted in a recent case of first impression concerning direct listings.[14] In that case, the listing company argued that a Section 11 claim could not be brought as the complaining investors could not distinguish between the shares sold under the registration statement and unregistered shares sold by an insider and were consequently unable to establish traceability. Although the district court in that case denied the motion to dismiss, appeal of the issue before the U.S. Court of Appeals for the Ninth Circuit is pending. The ultimate decision in the Ninth Circuit, which includes Silicon Valley, could play an outsized role in future cases. In earlier commentary, the SEC noted that although the NYSE’s proposal did present a “recurring” Section 11 concern, as the issue was not “exclusive” to Primary Direct Floor Listings, approval of the NYSE’s proposal did not pose a “heighted risk to investors” (emphasis added). CII’s petition also raises certain proposals that it argues would alleviate investors’ burden in proving traceability, such as the introduction of blockchain-traceable shares, and should be addressed in advance of liberalizing direct listing rules to accommodate Primary Direct Floor Listings. Final Approval. On December 22, 2020, the SEC issued its final approval of the NYSE’s proposed rules, finding the NYSE’s proposal is consistent with the Exchange Act and the rules and regulations issued thereunder and, furthermore, that the proposed rules would “foster[] competition by providing an alternate method for companies of sufficient size [to] decide they would rather not conduct a firm commitment underwritten offering.” The SEC’s December 22 order discussed several procedural safeguards included by the NYSE in its proposed rules that were intended to “clarify the role of the issuer and financial advisor in a direct listing” and “explain how compliance with various rules and regulations” would be addressed. These changes include the introduction of an “IDO Order type,” the clarification of how market value would be determined in connection with primary direct listings and the agreement to retain FINRA to monitor compliance with Regulation M and other anti-manipulation provisions of federal securities laws. Notably, the SEC’s December 22 order rejects the notion that offerings not involving a traditional underwriter would “‘rip off’ investors, reduce transparency, or involve reduced offering requirements or accounting methods,” finding that the relevant “traceability issues are not exclusive to nor necessarily inherent in” Primary Direct Floor Listings. In approving the NYSE’s proposal and reaching its conclusion that the NYSE’s proposal provided a “reasonable level of assurance” that the applicable market value threshold supports a public listing and the maintenance of fair and orderly markets, the SEC specifically noted that the applicable thresholds for the equity market value under the revised rules were at least two and a half times greater than the market value standard that exists for a traditional IPO ($40 million). The SEC order also positively discusses steps taken by the NYSE to ensure compliance by participants in the direct listing process with Regulation M and other provisions of the federal securities laws. The two Commissioners who dissented (Allison Herren Lee and Caroline A. Crenshaw) and certain investor protection groups have issued statements expressing concern that, because of the absence of traditional underwriters, the primary direct listing process will lack a key gatekeeper present in traditional IPOs that helps prevent poorly run or fraudulent companies from going public. In its order approving the NYSE’s revised rules on Primary Direct Floor Listings, the SEC suggests that, depending on the facts and circumstances, a company’s independent financial adviser could be subject to Securities Act liability, or at least lawsuits alleging underwriter liability, in connection with direct listings. The two dissenting Commissioners, however, suggest that guidance as to what may trigger status as a statutory underwriter should have been considered and concurrently provided. Conclusion In any event, direct listings are a sign of the times. As U.S. companies raise increasingly large amounts of capital in the private markets, the public capital markets are responding to the need to provide a wider variety of means for a private company to enter the public capital markets and provide liquidity to existing shareholders. Although direct listings will undoubtedly provide new opportunities for entrepreneurial companies with a well-recognized brand name or easily understood business model, we do not expect direct listings to replace IPOs any time soon. Direct listing practice is evolving and involves new risks and speedbumps. There are a number of novel issues and open questions raised by the evolving direct listing landscape, some of which are highlighted in Appendix I hereto (Open Questions for Direct Listings). Regulatory divergence between the price-setting mechanisms applicable to Primary Direct Floor Listings and Selling Shareholder Direct Listings may spur further rulemaking to conform to  applicable standards. Gibson Dunn will also continue to update this Current Guide to Direct Listings from time to time to further describe the applicable rules and provide commentary as practices evolve. Any company considering an entry to the public capital markets through a direct listing is encouraged to carefully consider the risks and benefits in consultation with counsel and financial advisors. Members of the Gibson Dunn Capital Markets team are available to discuss strategy, options and considerations as the rules and practice concerning direct listings evolve. ___________________ [1]       Many foreign private issuers have listed their shares, in the form of American Depositary Shares (evidenced by American Depositary Receipts), on U.S. exchanges without a simultaneous U.S. capital raising, seeking such listing in connection with the company’s filing of a registration statement on Form 20-F under the Securities Exchange Act of 1934, as amended, and the depositary bank’s filing of a registration statement on Form F-6 under the Securities Act of 1933, as amended (a so-called “Level II ADR facility”). Such Level II ADR facilities are outside the scope of this article and should be separately considered with the advice of counsel. [2]       The NYSE’s most recent proposal, submitted on June 22, 2020, is available at the following link: https://www.sec.gov/comments/sr-nyse-2019-67/srnyse201967-7332320-218590.pdf. The NYSE’s prior proposal, submitted on December 12, 2019, is available at the following link: https://www.nyse.com/publicdocs/nyse/markets/nyse /rule-filings/filings/2019/SR-NYSE-2019-67%2c%20Re-file.pdf. The NYSE’s initial proposal, submitted on November 26, 2019, which was withdrawn, is available at the following link: https://www.nyse.com/publicdocs/nyse/markets/nyse/rule-filings/filings/2019/SR-NYSE-2019-67.pdf. [3]       The SEC’s revision to Rule 163B under the Securities Act of 1933, as amended, which permits “testing-the-waters” communications by all issuers, was adopted on September 25, 2019. The adopting release is available at the following link: https://www.sec.gov/rules/final/2019/33-10699.pdf. [4]       The SEC has published a helpful guide concerning Rule 144 transactions that is available at the following link: https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144htm.html. Such a transaction is outside the scope of this article and should be separately considered with the advice of counsel [5]       Certain NYSE rules are reviewed herein. The NYSE Listed Company Manual, which contains all of the listing standards and other rules applicable to a company listed on the NYSE, is available at the following link: https://nyse.wolterskluwer.cloud/listed-company-manual. [6]       Certain Nasdaq rules are reviewed herein. The Nasdaq Equity Rules, which contain all of the listing standards and other rules applicable to a company listed on Nasdaq, are available at the following link: http://nasdaq.cchwallstreet.com/. [7]       On August 15, 2019, Nasdaq submitted to the SEC proposed rule changes related to direct listings on the Nasdaq Global Market and Nasdaq Capital Market, the second- and third-tier Nasdaq markets, respectively. The Nasdaq proposal, submitted on August 15, 2019, is available at the following link: https://www.sec.gov/rules/sro/nasdaq/2019/34-86792.pdf. Nasdaq’s amendment to its proposal, submitted on November 26, 2019, is available at the following link:  https://www.sec.gov/comments/sr-nasdaq-2019-059/srnasdaq2019059-6482012-199454.pdf. The SEC’s adopting release approving the Nasdaq proposal is available at the following link: https://www.sec.gov/rules/sro/nasdaq/2019/34-87648.pdf. [8]       There must be an independent valuation where a company goes public without an underwriting syndicate that would otherwise represent to the applicable exchange that such exchange’s distribution requirements will be met by the contemplated offering. If consistent and reliable private-market trading quotes are available, both the independent valuation and valuation based on private-market trading quotes must show a market value of “publicly held” shares in excess of $100 million ($110 million for Nasdaq Global Select Market, under certain circumstances). [9]       In lieu of a valuation for listings on the Nasdaq Global Market and Nasdaq Capital Market, the exchange may accept “other compelling evidence” that the (i) tentative initial bid price, (ii) market value of listed securities and (iii) market value of publicly held shares each exceed 250 percent of the otherwise applicable requirements. Under the rules, as amended, such compelling evidence is currently limited to cash tender offers by the company or an unaffiliated third party that meet certain other requirements. [10]     To qualify under the closing price alternative, the listing company must have: (i) average annual revenues of $6 million for three years, or (ii) net tangible assets of $5 million, or (iii) net tangible assets of $2 million and a three-year operating history, in addition to satisfying the other financial and liquidity requirements listed above. If listing on the Nasdaq Capital Markets under the NCM Listed Securities Standard in reliance on the closing price alternative, such closing price must be in excess of $4.00. [11]     The Council of Institutional Investors’ August 31 notice to the SEC is available at the following link: https://www.cii.org/ files/issues_and_advocacy/correspondence/2020/August%2031%202020%20%20letter%20to%20SEC-AB.pdf. The SEC’s letter to the NYSE notifying the exchange of the stay of the SEC staff’s August 26 order is available at the following link: https://www.sec.gov/rules/sro/nyse/2020/34-89684-carey-letter.pdf. [12]     The Council of Institutional Investors’ Petition for Review of an Order is available at the following link: https://www.sec.gov/rules/sro/nyse/2020/34-89684-petition.pdf. [13]        373 F.2d 269 (2d Cir. 1967). [14]     See generally Pirani v. Slack Technologies, Inc., 445 F.3d 367 (N.D. Cal. 2020).

APPENDIX I

Open Questions for Direct Listings (as of January 8, 2021)

Some of the relevant open questions include:
  • Will the loss of a traditional firm-commitment underwriter create additional risks for investors? The NYSE’s revised rules permit companies to raise new capital without using a firm-commitment underwriter. The two Commissioners who dissented (Allison Herren Lee and Caroline A. Crenshaw) and certain investor protection groups have expressed concern that the absence of a traditional underwriter removes a key gatekeeper present in traditional IPOs that helps prevent inaccurate or misleading disclosures. In its order approving the NYSE’s revised rules on Primary Direct Floor Listings, the SEC suggests that, depending on the facts and circumstances, a company’s financial advisers could be subject to Securities Act liability, or at least lawsuits alleging underwriter liability, in connection with direct listings. The two dissenting Commissioners, however, suggest that guidance as to what may trigger status as a statutory underwriter should have been considered and concurrently provided.
  • Will a Primary Direct Floor Listing create new risks for the listing company? Under current rules and precedent, in a Primary Direct Floor Listing the listing company may have more rather than less liability in a direct listing than a traditional IPO. In a traditional IPO, because of customary lockup arrangements, investors can generally guarantee the traceability of their shares to the registration statement because only shares issued under the registration statement are trading in the market until the lockup period expires. Under current case law, which is being appealed, the tracing requirement has been seemingly abandoned, meaning all the shares in the market can potentially make claims under Section 11.
  • How will legal, diligence and auditing practices develop around direct listings? Because the listing must be accompanied by an effective registration statement under the Securities Act, the liability provisions of Section 11 and 12 of the Securities Act will be applicable to sales made under the registration statement. We note that in many of the direct listings to date, the companies have engaged financial advisors to assist with the positioning of the equity story of the company and advise on preparation of the registration statement, in a process very similar to the process of preparing a registration statement for a traditional IPO. Because a company will be subject to the same standard for liability under the federal securities laws with respect to material misstatements and omissions in a registration statement for a direct listing to the same extent as for a registration statement for an IPO, a company’s incentives to conduct diligence to support the statements in its registration statement do not differ between the two types of transactions. Similarly, financial statement requirements, and the requirements as to independent auditor opinions and consents, do not differ between registration statements for direct listings and IPOs. Furthermore, follow-on offerings by the company that involve firm-commitment underwriting or at-the-market programs will require the traditional diligence practices. To date, there have been no lawsuits alleging that financial advisers in a direct listing could be subject to Securities Act liability in connection with direct listings.
  • What impact will the expanded availability of direct listings have on IPO activity? One could argue that the greatest attraction of a direct listing is that it can nearly match private markets in being faster and less costly than an IPO. In some cases, it could provide similar liquidity as a traditional IPO, although trading price certainty and trading volume could be lower following a direct listing than following an IPO. Direct listings have been available on the NYSE and Nasdaq for a decade but have not been utilized regularly by large private companies in lieu of a traditional IPO. In any event, the requirement for 400 round lot holders will continue to be a hurdle for many private companies looking to list directly.
  • How will the initial reference price and/or price range in the prospectus be determined? There is no reference price from another market for the DMM to apply and no negotiation between the issuer and the underwriter as in an IPO. The NYSE seems to bridge this gap with the requirement for the DMM to consult with an independent financial adviser to determine the initial reference price in a Selling Shareholder Direct Listing and, in a Primary Direct Floor Listing, to determine the price range to be set forth in the applicable prospectus. Eventually, a standardized set of practices around the financial adviser’s work and presentation of the price to the issuer and the Exchange should develop.
  • Without the firm-commitment IPO process, in which the offering is oversold and heavily marketed, how will direct listed shares trade in the aftermarket? Without an underwritten offering, the issuer will not engage in price finding and book building activities. In a direct listing, the issuer will also take on much of the role of investor outreach that is borne by underwriters in a traditional IPO. Although direct listing marketing efforts may include one or more investor days and a roadshow-like presentation, sell-side analysts will presumably not be involved, building models and educating investors. It may be more difficult for the issuer to tell its forward-looking story and build value into the trading price of the stock without research coverage prior to or after the listing. For this reason, the most successful direct listings to date have been well-known companies with widely recognized brands that have successfully engaged with a broad set of new investors. We expect that companies engaging in direct listings will continue to develop more robust internal investor/shareholder relations functions than may be needed for a company conducting a traditional IPO.
  • Will large private placements (often called “private IPOs”) have a new advantage? The expanded option to direct list, whether in a secondary or primary format, through an independent valuation alone may mean investors in a private company can have access to public markets faster than through an IPO process. When private companies market private equity capital raises, including private IPOs, they might use the direct listing option as a marketing tool to attract investors to the private placement.
  • Are there any companies that are well-positioned for a Primary Direct Floor Listing? The NYSE’s revised rules may prompt well-positioned companies to consider a capital raise where the private or IPO markets are otherwise unattractive. Furthermore, until Nasdaq’s rules are approved, how will the NYSE’s rules affect the decision of where to list?

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Capital Markets or Securities Regulation and Corporate Governance practice groups, or the authors: Alan Bannister– New York (+1 212-351-2310, abannister@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Boris Dolgonos – New York (+1 212-351-4046, bdolgonos@gibsondunn.com) Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) James J. Moloney – Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com) Evan Shepherd* – Houston (+1 346-718-6603, eshepherd@gibsondunn.com) Please also feel free to contact any of the following practice leaders: Capital Markets Group: Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com) Securities Regulation and Corporate Governance Group: Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) James J. Moloney – Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) *Mr. Shepherd is admitted only in New York and is practicing under the supervision of Principals of the Firm. © 2021 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 4, 2020 |
Nasdaq Proposes New Board Diversity Rules

Click for PDF

On December 1, 2020, The Nasdaq Stock Market LLC (“Nasdaq”) announced that it filed with the U.S. Securities and Exchange Commission (the “SEC”) a proposal to advance board diversity and enhance transparency of board diversity statistics through new listing requirements. This client alert provides a summary of the proposed rules and the rationale for the proposals. In summary, if approved by the SEC, the proposed rules would require certain Nasdaq-listed companies to: (A) annually disclose diversity statistics regarding their directors’ voluntary self-identified characteristics in substantially the format proposed by Nasdaq for the current year and (after the first year of disclosure) the immediately prior year; and (B) include on their boards of directors at least two “Diverse” directors (as defined in the rules) or publicly disclose why their boards do not include such “Diverse” directors.

Nasdaq’s Annual Board Diversity Disclosure Proposal

The proposed rules would require Nasdaq-listed companies, other than “Exempt Entities” (as defined below), to provide statistical information about each director’s self-identified gender, race, and self-identification as LGBTQ+ in substantially the format proposed by Nasdaq under new proposed Rule 5606 (the “Board Diversity Matrix”), which is reproduced as Exhibit A below and is also available at the Nasdaq Listing Center here. Following the first year of disclosure, companies would be required to disclose the current year and immediately prior year diversity statistics using the Board Diversity Matrix or in a substantially similar format.

This statistical information disclosure would be required to be provided (A) in the company’s proxy statement or information statement for its annual meeting of shareholders, or (B) on the company’s website. If the company provides such disclosure on its website, the company must also submit such disclosure and include a URL link to the disclosure through the Nasdaq Listing Center no later than 15 calendar days after the company’s annual shareholders meeting.

The proposed diversity disclosure requirement is limited to the board of directors of the company, and does not require disclosure of diversity metrics for management and staff. Foreign Issuers may elect to satisfy the board composition disclosure requirement through an alternative disclosure matrix template. (See Nasdaq Identification Number 1761).

Include Diverse Directors or Explain

The proposed listing rule would require most Nasdaq-listed companies, other than “Exempt Entities” (as defined below), to:

(A)

have at least two members of its board of directors who are “Diverse,” which includes:

(1)

at least one director who self-identifies her gender as female, without regard to the individual’s designated sex at birth (“Female”); and

(2)

at least one director who self-identifies as one or more of the following:

(i)

Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities (“Underrepresented Minority”); or

(ii)

as lesbian, gay, bisexual, transgender or a member of the queer community (“LGBTQ+”); or

(B)

explain why the company does not have at least two directors on its board who self-identify as “Diverse.”

For the purposes of the proposed rule described above, the term “Diverse” means an individual who self-identifies in one or more of the following categories defined above: Female, Underrepresented Minority or LGBTQ+.

Foreign Issuers (including Foreign Private Issuers) and Smaller Reporting Companies would have more flexibility to satisfy the requirement for two Diverse directors by having two Female directors. In the case of a Foreign Issuer, in lieu of the definition above, “Diverse” means an individual who self-identifies as one or more of the following: Female, LGBTQ+, or an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the company’s home country jurisdiction.

While Nasdaq’s definition of a “Diverse” director is substantially aligned with California’s Board Gender Diversity Mandate, there are some key differences, which are highlighted by Nasdaq here. Also, according to Nasdaq, the proposed rule “would exclude emeritus directors, retired directors and members of an advisory board. The diversity requirements of the proposed rule would only be satisfied by Diverse directors actually sitting on the board of directors of the company.” (See Nasdaq Identification Number 1770).

The definition of “Underrepresented Minority” is consistent with the categories reported to the U.S. Equal Employment Opportunity Commission through the Employer Information Report EEO-1 Form.

Exempt Entities

The following entities are exempt from the requirements described under “Nasdaq’s Annual Board Diversity Disclosure Proposal” and “Include Diverse Directors or Explain” above (the “Exempt Entities”):

  • acquisition companies listed under IM-5101-2 (Listing of Companies Whose Business Plan is to Complete One or More Acquisitions);
  • asset-backed issuers and other passive issuers (as set forth in Rule 5615(a)(1) (Asset-backed Issuers and Other Passive Issuers));
  • cooperatives (as set forth in Rule 5615(a)(2) (Cooperatives));
  • limited partnerships (as set forth in Rule 5615(a)(4) (Limited Partnerships));
  • management investment companies (as set forth in Rule 5615(a)(5) (Management Investment Companies));
  • issuers of nonvoting preferred securities, debt securities and Derivative Securities (as set forth in Rule 5615(a)(6) (Issuers of Non-Voting Preferred Securities, Debt Securities and Derivative Securities)); and
  • issuers of securities listed under the Rule 5700 Series (Other Securities).

Compliance Period

Annual Board Diversity Disclosure Proposal

Each Nasdaq-listed company would have one calendar year from the date the SEC approves the Nasdaq rules (the “Approval Date”) to comply with the board diversity disclosure requirement. Each company newly listing on Nasdaq, including any Special Purpose Acquisition Company (“SPAC”) listed or listing in connection with a business combination under Nasdaq’s IM-5101-2, would be require to comply with the board diversity requirement within one year of listing, subject to the conditions further discussed under “Phase-in Period” below.

Board Diversity Rule Proposal

Each Nasdaq-listed company would have two calendar years from the Approval Date to have, or explain why it does not have, at least one Diverse director. Further, Nasdaq proposes for each company to have, or explain why it does not have, two diverse directors no later than: (i) four calendar years after the Approval Date, for companies listed on the Nasdaq Global Select or Nasdaq Global Market; or (ii) five calendar years after the Approval Date, for companies listed on the Nasdaq Capital Market. A company listing after the Approval Date, but prior to the end of the periods set forth in this paragraph, must satisfy the Diverse directors requirements by the latter of the periods set forth in this paragraph or one year from the date of listing. A SPAC “would be exempt from the proposed board diversity and disclosure rules until one year following the completion of [the SPAC’s] business combination.” (See Nasdaq Identification Number 1762).

Phase-in Period

Any company newly listing on Nasdaq will be permitted one year from the date of listing on Nasdaq to satisfy the requirements of Diverse directors, as long as such company was not previously subject to a substantially similar requirement of another national securities exchange, including through an initial public offering, direct listing, transfer from the over-the-counter market or another exchange, or through a merger with an acquisition company listed under Nasdaq’s IM-5101-2. This phase-in period will apply after the end of the transition periods described under “Compliance Period” above.

Cure Period

If a company does not have at least two Diverse directors and fails to provide the required disclosure, the Nasdaq’s Listing Qualifications Department will notify the company that it has until the later of the company’s next annual shareholders meeting or 180 days from the event that caused the deficiency to cure the deficiency.

Rationale

The proposed requirements are an extension of Nasdaq’s (and other securities exchanges’) use of the listing rules to improve listed companies’ corporate governance (e.g., the requirement of independent committees). The proposed disclosure requirements build on the SEC Division of Corporation Finance’s Compliance and Disclosure Interpretations 116.11 and 133.13, issued on February 6, 2019, regarding director and director nominee diversity disclosure under Items 401 and 407 of Regulation S-K, and reflect similar movement in the market (e.g., Goldman Sachs’s new standard requirement to have at least one diverse board member on companies it helps take public in 2020 and two in 2021). However, according to the New York Times, “[o]ver the past six months, Nasdaq found that more than 75 percent of its listed companies did not meet its proposed diversity requirements.”

Nasdaq’s proposal cited studies about the positive correlation of diversity and shareholder value, investor protection, decision making and monitoring management. In connection with the proposed rules, Nasdaq also announced that it “conducted an internal study of the current state of board diversity among Nasdaq-listed companies based on public disclosures, and found that while some companies already have made laudable progress in diversifying their boardrooms, the national market system and the public interest would best be served by an additional regulatory impetus for companies to embrace meaningful and multi-dimensional diversification of their boards.”

Additional Information

Nasdaq has provided additional information through a summary and Frequently Asked Questions available on Nasdaq’s Reference Library Advanced Search, in Identification Numbers 1745 through 1777.

Nasdaq also announced a partnership with Equilar, Inc., a provider of corporate leadership data solutions, to aid Nasdaq-listed companies with board composition planning challenges and allowing Nasdaq-listed companies, through the Equilar BoardEdge platform, to have access to diverse board candidates to amplify director search efforts.

Next Steps

The proposed rules will be published in the Federal Register and subject to public comment. Comments to the proposed rules should be submitted to the SEC within 21 days of their publication in the Federal Register.

The approval period may take as little as 30 calendar days and as long as 240 calendar days from the date of publication of the proposed rules in the Federal Register (as described in further detail below). If approved by the SEC, the “Compliance Period” discussed above would begin.

  • Section 19(b)(2)(C)(iii) of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), provides that the SEC may not approve a proposed rule change earlier than 30 days after the date of publication of the proposed rules in the Federal Register, unless the SEC finds good cause for so doing and publishes the reason for the finding.
  • Under Section 19(b)(2)(A)(i) of the Exchange Act, within 45 days of the date of publication of the proposed rules in the Federal Register, the SEC may approve or disapprove the proposed rule change by order or, under Section 19(b)(2)(A)(ii) of the Exchange Act, extend the period by not more than an additional 45 days (to a total of 90 days).
  • However, if the SEC does not approve or disapprove the proposed rule change, Section 19(b)(2)(B)(i)(II) of the Exchange Act allows the SEC the opportunity for hearings to be concluded no later than 180 days after the notice of the proposed rule change (which can be extended by not more than 60 days (to a total of 240 days), pursuant to Section under Section 19(b)(2)(B)(ii)(II) of the Exchange Act).

Exhibit A

Board Disclosure Format

Board Diversity Matrix (As of [DATE])
Board Size:
Total Number of Directors #
Gender: Male Female Non-Binary Gender Undisclosed
Number of directors based on gender identity # # # #
Number of directors who identify in any of the categories below:
African American or Black # # # #
Alaskan Native or American Indian # # # #
Asian # # # #
Hispanic or Latinx # # # #
Native Hawaiian or Pacific Islander # # # #
White # # # #
Two or More Races or Ethnicities # # # #
LGBTQ+ #
Undisclosed #
 
Board Diversity Matrix (As of [DATE]) Foreign Issuer under Rule 5605(f)(1)
Country of Incorporation: [Insert Country Name]
Board Size:
Total Number of Directors #
Gender: Male Female Non-Binary Gender Undisclosed
Number of directors based on gender identity # # # #
Number of directors who identify in any of the categories below:
LGBTQ+ #
Underrepresented Individual in Home Country Jurisdiction #
Undisclosed #
 

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any lawyer in the firm’s Securities Regulation and Corporate Governance and Capital Markets practice groups, or the authors:

Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Ron Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Rodrigo Surcan – New York (+1 212-351-5329, rsurcan@gibsondunn.com)

Please also feel free to contact any of the following practice leaders and members:

Securities Regulation and Corporate Governance Group: Elizabeth Ising – Co-Chair, Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com) Ron Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) Lori Zyskowski – Co-Chair, New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Aaron Briggs – San Francisco (+1 415-393-8297, abriggs@gibsondunn.com) Courtney Haseley – Washington, D.C. (+1 202-955-8213, chaseley@gibsondunn.com) Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com) Cassandra Tillinghast – Washington, D.C. (+1 202-887-3524, ctillinghast@gibsondunn.com)

Capital Markets Group: Andrew L. Fabens – Co-Chair, New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Co-Chair, Houston (+1 346-718-6602, hholmes@gibsondunn.com) Stewart L. McDowell – Co-Chair, San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) Peter W. Wardle – Co-Chair, Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com)

© 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 3, 2020 |
Proxy Advisory Firm Updates and Action Items for 2021 Annual Meetings

Click for PDF

The two most influential proxy advisory firms—Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”)—recently released their updated proxy voting guidelines for 2021. The key changes to the ISS and Glass Lewis policies are described below along with some suggestions for actions public companies should take now in light of these policy changes and other developments. An executive summary of the ISS 2021 policy updates is available here and a more detailed chart showing additional updates to its voting policies and providing explanations for the updates is available here. The 2021 Glass Lewis Guidelines are available here and the 2021 Glass Lewis Guidelines on Environmental, Social & Governance Initiatives are available here.

ISS 2021 Voting Policy Updates On November 12, 2020, ISS released updates to its proxy voting guidelines for shareholder meetings held on or after February 1, 2021. This summary reviews the major policy updates that apply to U.S. companies, which are used by ISS in making voting recommendations on director elections and company and shareholder proposals at U.S. companies. ISS plans to issue a complete set of updated policies on its website in December 2020. ISS also indicated that it plans to issue updated Frequently Asked Questions (“FAQs”) on certain of its policies in December 2020, and it issued a set of preliminary FAQs on the U.S. Compensation Policies and the COVID-19 Pandemic in October 2020, which are available here. In January 2021, ISS will evaluate new U.S. shareholder proposals that are anticipated for 2021 and update its voting guidelines as necessary.
  1. Director Elections
Board Racial/Ethnic Diversity While ISS has not previously had a voting policy regarding board racial or ethnic diversity, ISS noted that many investors have shown interest in seeing this type of diversity on public company boards, especially in light of recent activism seeking racial justice. In its annual policy survey administered in the summer of 2020, ISS reported that almost 60% of investors indicated that boards should aim to reflect a company’s customer base and the broader societies in which companies operate by including directors drawn from racial and ethnic minority groups, and 57% of investors responded that they would also consider voting against members of the nominating committee (or other directors) where board racial and ethnic diversity is lacking. Under ISS’s updated policy, at companies in the Russell 3000 or S&P 1500 indices:
  • For the 2021 proxy season, the absence of racial/ethnic diversity on a company’s board will not be a factor in ISS’s voting recommendations, but will be highlighted by ISS in its research reports to “help investors identify companies with which they may wish to engage and foster dialogue between investors and companies on this topic.” ISS will only consider aggregate diversity statistics “if specific to racial and/or ethnic diversity.”
  • For the 2022 proxy season, ISS will generally recommend votes “against” the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members. Mitigating factors include the presence of racial and/or ethnic diversity on the board at the preceding annual meeting and a firm commitment to appoint at least one racially and/or ethnically diverse member within a year.
ISS highlighted several factors in support of its new policy, including obstacles to increasing racial and ethnic diversity on boards (citing studies conducted by Korn Ferry and the “Black Corporate Directors Time Capsule Project”), new California legislation, AB 979, to promote the inclusion of “underrepresented communities” on boards, recent comments by SEC Commissioner Allison Lee in support of strengthened additional guidance on board candidate diversity characteristics, diversity-related disclosure requirements and SEC guidance, and investor initiatives focused on racial/ethnic diversity on corporate boards. Board Gender Diversity ISS announced a policy related to board gender diversity in 2019, and provided a transitional year (2020) for companies that previously had no female directors to make a commitment to add at least one female director by the following year. In its recent policy updates, ISS removed the transition-related language, as the transition period will end soon. After February 1, 2021, ISS will recommend votes “against” the chair of the nominating committee (or other directors on a case-by-case basis) at any company that has no women on its board except in situations where there was at least one woman on the board at the previous annual meeting, and the board commits to “return to a gender-diverse status” by the next annual meeting. Material Environmental & Social Risk Oversight Failures Under extraordinary circumstances, ISS recommends votes “against” directors individually, committee members, or the entire board, in the event of, among other things, material failures of risk oversight. Current ISS policy cites bribery, large or serial fines or sanctions from regulatory bodies, significant adverse legal judgments or settlements, or hedging of company stock as examples of risk oversight failures. The policy updates add “demonstrably poor risk oversight of environmental and social issues, including climate change” as an example of a board’s material failure to oversee risk. ISS previously noted in its proposed policy updates that this policy is intended for directors of companies in “highly impactful sector[s]” that are “not taking steps to reduce environmental and social risks that are likely to have a large negative impact on future company operations” and is “expected to impact a small number of directors each year.” “Deadhand” or “Slowhand” Poison Pills ISS generally recommends votes case-by-case on director nominees who adopted a short-term poison pill with a term of one year or less, depending on the disclosed rationale for the adoption and other relevant factors. Noting that the unilateral adoption of a poison pill with a “deadhand” or “slowhand” feature is a “material governance failure,” ISS will now also generally recommend votes “against” directors at the next annual meeting if a board unilaterally adopts a poison pill with this feature, whether the pill is short-term or long-term and even if the pill itself has expired by the time of that meeting. ISS explains that a deadhand pill provision is “generally phrased as a ‘continuing director (or trustee)’ or ‘disinterested director’ clause and restricts the board’s ability to redeem or terminate the pill” and “can only be redeemed if the board consists of a majority of continuing directors, so even if the board is replaced by shareholders in a proxy fight, the pill cannot be redeemed,” and therefore, “the defunct board prevents [the redemption]” of the pill. Continuing directors are defined as “directors not associated with the acquiring person, and who were directors on the board prior to the adoption of the pill or were nominated by a majority of such directors.” A slowhand pill is “where this redemption restriction applies only for a period of time (generally 180 days).” Classification of Directors as Independent While there are several changes to ISS’s policy, the primary change is to limit the “Executive Director” classification to officers only, excluding other employees. According to ISS, this change will not result in any vote recommendation changes under its proxy voting policy, but may provide additional clarity for institutional holders whose overboarding policies apply to executive officers.
  1. Other Board-Related Proposals
Board Refreshment Previously, ISS generally recommended votes “against” proposals to impose director tenure and age limits. Under the updated policy, ISS will now take a case-by-case approach for tenure limit proposals while continuing to recommend votes “against” age-limit proposals. With respect to management proposals for tenure limits, ISS will consider the rationale and other factors such as the robustness of the company’s board evaluation process, whether the limit is of sufficient length to allow for a broad range of director tenures, whether the limit would disadvantage independent directors compared to non-independent directors, and whether the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner. With respect to shareholder proposals for tenure limits, ISS will consider the scope of the proposal and whether there is evidence of “problematic issues” at the company combined with, or exacerbated by, a lack of board refreshment. ISS noted that the board refreshment is “best implemented through an ongoing program of individual director evaluations, conducted annually, to ensure the evolving needs of the board are met and to bring in fresh perspectives, skills, and diversity as needed,” but it cited the growing attention on board refreshment as a mechanism to achieve board diversity as an impetus for this policy change.
  1. Shareholder Rights and Defenses
Exclusive Forum Provisions Exclusive forum provisions in company governing documents historically have required shareholders to go to specified state courts if they want to make fiduciary duty or other intra-corporate claims against the company and its directors. In March 2020, a unanimous Delaware Supreme Court confirmed the validity of so-called “federal forum selection provisions”—provisions that Delaware corporations adopt in their governing documents requiring actions arising under the Securities Act of 1933 (related to securities offerings) to be filed exclusively in federal court. Noting that the benefits of eliminating duplicative litigation and having cases heard by courts that are “well-versed in the applicable law” outweigh the potential inconvenience to plaintiffs, ISS updated its policy to recommend votes “for” provisions in the charter or bylaws (and announced it would not criticize directors who unilaterally adopt similar provisions) that specify “the district courts of the United States” (instead of particular federal district court) as the exclusive forum for federal securities law claims. ISS will oppose federal exclusive forum provisions that designate a particular federal district court. ISS also updated its policy on state exclusive forum provisions. At Delaware companies, ISS will generally support provisions in the charter or bylaws (and will not criticize directors who unilaterally adopt similar provisions) that select Delaware or the Delaware Court of Chancery. For companies incorporated in other states, if the provision designates the state of incorporation, ISS will take a case-by-case approach, considering a series of factors, including disclosure about harm from duplicative shareholder litigation. Advance Notice Requirements ISS recommends votes case-by-case on advance notice proposals, supporting those that allow shareholders to submit proposals/nominations as close to the meeting date as reasonably possible. Previously, to be “reasonable,” the company’s deadline for shareholder notice of a proposal/nomination had to be not more than 60 days prior to the meeting, with a submittal window of at least 30 days prior to the deadline. In its updated policy, ISS now considers a “reasonable” deadline to be no more than 120 days prior to the anniversary of the previous year’s meeting with a submittal window no shorter than 30 days from the beginning of the notice period (also known as a 90-120 day window). ISS notes that this is in line with recent market practice. This policy applies only in limited situations where a company submits an advance notice provision for shareholder approval. Virtual Shareholder Meetings In light of the ongoing COVID-19 pandemic and other rule changes regarding shareholder meeting formats, ISS has added a new policy under which it will generally recommend votes “for” management proposals allowing for the convening of shareholder meetings by electronic means, so long as they do not preclude in-person meetings. Companies are encouraged to disclose the circumstances under which virtual-only meetings would be held, and to allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in-person meeting. ISS will recommend votes case-by-case on shareholder proposals concerning virtual-only meetings, considering the scope and rationale of the proposal and concerns identified with the company’s prior meeting practices.
  1. Social and Environmental Issues
Mandatory Arbitration of Employment Claims The new policy on mandatory arbitration provides that ISS will recommend votes case-by-case on proposals requesting a report on the use of mandatory arbitration on employment-related claims, taking into account the following factors:
  • The company’s current policies and practices related to the use of mandatory arbitration agreements on workplace claims;
  • Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to the use of mandatory arbitration agreements on workplace claims; and
  • The company’s disclosure of its policies and practices related to the use of mandatory arbitration agreements compared to its peers.
ISS added this policy because proposals on mandatory arbitration have received increased support from shareholders, and ISS clients have expressed interest in a specific policy on this topic. Sexual Harassment ISS’s new policy on sexual harassment provides that ISS will recommend votes case-by-case on proposals requesting a report on actions taken by a company to strengthen policies and oversight to prevent workplace sexual harassment, or a report on risks posed by a company’s failure to prevent workplace sexual harassment. ISS will take into account the following factors:
  • The company’s current policies, practices, and oversight mechanisms related to preventing workplace sexual harassment;
  • Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace sexual harassment issues; and
  • The company’s disclosure regarding workplace sexual harassment policies or initiatives compared to its industry peers.
Similar to the new policy on mandatory arbitration discussed above, ISS cited increasing shareholder support for sexual harassment proposals and client demand as reasons for establishing this new policy. Gender, Race/Ethnicity Pay Gap ISS recommends votes case-by-case on proposals requesting reports on a company’s pay data by gender or race/ethnicity, or a report on a company’s policies and goals to reduce any gender or race/ethnicity pay gaps. In its updated policy, ISS adds to the list of factors to be considered in evaluating these proposals “disclosure regarding gender, race, or ethnicity pay gap policies or initiatives compared to its industry peers” and “local laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities.” ISS notes that this change is to “highlight that some legal jurisdictions do not allow companies to categorize employees by race and/or ethnicity and that definitions of ethnic and/or racial minorities differ from country to country, so a global racial and/or ethnicity statistic would not necessarily be meaningful or possible to provide.” Glass Lewis 2021 Proxy Voting Policy Updates On November 24, 2020, Glass Lewis released its updated proxy voting guidelines for 2021. This summary reviews the major updates to the U.S. guidelines, which provides a detailed overview of the key policies Glass Lewis applies when making voting recommendations on proposals at U.S. companies and on environmental, social and governance initiatives.
  1. Board of Directors
Board Diversity Glass Lewis expanded on its previous policy on board gender diversity, under which it generally recommends votes “against” the chair of the nominating committee of a board that has no female members. Under its expanded policy:
  • For the 2021 proxy season, Glass Lewis will note as a concern boards with fewer than two female directors.
  • For the 2022 proxy season, Glass Lewis will generally recommend votes “against” the nominating committee chair of a board with fewer than two female directors; however, for boards with six or fewer members, Glass Lewis’s previous policy requiring a minimum of one female director will remain in place. Glass Lewis indicated that, in making its voting recommendations, it will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending that shareholders vote against directors when boards have provided a sufficient rationale or plan to address the lack of diversity on the board.
In addition, Glass Lewis noted that several states have begun to address board diversity through legislation, including California’s legislation requiring female directors and directors from “underrepresented communities” on boards headquartered in the state. Under its updated policy, Glass Lewis will now recommend votes in accordance with board composition requirements set forth in applicable state laws when they come into effect. Disclosure of Director Diversity and Skills Beginning with the 2021 proxy season, Glass Lewis will begin tracking the quality of disclosure regarding a board’s mix of diverse attributes and skills of directors. Specifically, Glass Lewis will reflect how a company’s proxy statement presents: (i) the board’s current percentage of racial/ethnic diversity; (ii) whether the board’s definition of “diversity” explicitly includes gender and/or race/ethnicity; (iii) whether the board has adopted a policy requiring women and minorities to be included in the initial pool of candidates when selecting new director nominees (also known as the “Rooney Rule”); and (iv) board skills disclosure. Glass Lewis reported that it will not be making voting recommendations solely on the basis of this assessment in 2021, but noted that the assessment will “help inform [its] assessment of a company’s overall governance and may be a contributing factor in [its] recommendations when additional board-related concerns have been identified.” Board Refreshment Previously, Glass Lewis articulated in its policy its strong support of mechanisms to promote board refreshment, acknowledging that a director’s experience can be a valuable asset to shareholders, while also noting that, in rare circumstances, a lack of refreshment can contribute to a lack of board responsiveness to poor company performance. In its updated policy, Glass Lewis reiterates its support of periodic board refreshment to foster the sharing of diverse perspectives and new ideas, and adds that, beginning in 2021, it will note as a potential concern instances where the average tenure of non-executive directors is 10 years or more and no new directors have joined the board in the past five years. Glass Lewis indicated that it will not be making voting recommendations strictly on this basis in 2021.
  1. Virtual-Only Shareholder Meetings
Glass Lewis has removed its temporary exception to its policy on virtual shareholder meeting disclosure that was in effect for meetings held between March 30, 2020 and June 30, 2020 due to the emergence of COVID-19. Glass Lewis’s standard policy will be in effect, under which Glass Lewis will generally hold the governance committee chair responsible at companies holding virtual-only meetings that do not include robust disclosure in the proxy statement addressing the ability of shareholders to participate, including disclosure regarding shareholders’ ability to ask questions at the meeting, procedures, if any, for posting questions received during the meeting and the company’s answers on its public website, as well as logistical details for meeting access and technical support.
  1. Executive Compensation
Short-Term Incentives Glass Lewis has codified additional factors it will consider in assessing a company’s short-term incentive plan, including clearly disclosed justifications to accompany any significant changes to a company’s short-term incentive plan structure, as well as any instances in which performance goals have been lowered from the previous year. Glass Lewis also expanded its description of the application of upward discretion, including lowering goals mid-year and increasing calculated payouts, to also include instances of retroactively prorated performance periods. Long-Term Incentives With respect to long-term incentive plans, under its updated policy Glass Lewis has defined inappropriate performance-based award allocation as a criterion that may, in the presence of other major concerns, contribute to a negative voting recommendation. Glass Lewis will also review as “a regression of best practices” any decision to significantly roll back performance-based award allocation, which may lead to a negative recommendation absent exceptional circumstances. Glass Lewis also clarified that clearly disclosed explanations are expected to accompany long-term incentive equity granting practices, as well as any significant structural program changes or any use of upward discretion.
  1. Environmental, Social & Governance Initiatives
Workforce Diversity Reporting Glass Lewis has updated its guidelines to provide that it will generally recommend votes “for” shareholder proposals requesting that companies provide EEO-1 reporting. It also noted that, because issues of human capital management and workforce diversity are material to companies in all industries, Glass Lewis will no longer consider a company’s industry or the nature of its operations when evaluating diversity reporting proposals. Management-Proposed E&S Resolutions Glass Lewis will take a case-by-case approach to management proposals that deal with environmental and social issues, and will consider a variety of factors, including: (i) the request of the management proposals and whether it would materially impact shareholders; (ii) whether there is a competing or corresponding shareholder proposal on the topic; (iii) the company’s general responsiveness to shareholders and to emerging environmental and social issues; (iv) whether the proposal is binding or advisory; and (v) management’s recommendation on how shareholders should vote on the proposal. Climate Change Glass Lewis will no longer consider a company’s industry when reviewing climate reporting proposals, noting that because of the extensive and wide-ranging impacts climate change can have, it is an issue that should be addressed and considered by companies regardless of industry. As a result, under its new policy, Glass Lewis will generally recommend votes “for” shareholder proposals requesting that companies provide enhanced disclosure on climate-related issues, such as requesting that the company undertake a scenario analysis or report that aligns with the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”). Glass Lewis explained that that while it is generally supportive of these types of proposals, it will closely evaluate them in the context of a company’s unique circumstances and when making vote recommendations will continue to consider: (i) how the company’s operations could be impacted by climate-related issues; (ii) the company’s current policies and the level and evolution of its related disclosure; (iii) whether a company provides board-level oversight of climate-related risks; (iv) the disclosure and oversight afforded to climate change-related issues at peer companies; and (v) if companies in the company’s market and/or industry have provided any disclosure that is aligned with the TCFD recommendations. Glass Lewis’s updated policy also addresses its approach to proposals on climate-related lobbying. When reviewing proposals asking for disclosure on this issue, Glass Lewis will evaluate: (i) whether the requested disclosure would meaningfully benefit shareholders’ understanding of the company’s policies and positions on this issue; (ii) the industry in which the company operates; (iii) the company’s current level of disclosure regarding its direct and indirect lobbying on climate change-related issues; and (iv) any significant controversies related to the company’s management of climate change or its trade association memberships. Under its policy, while Glass Lewis will generally recommend that companies enhance their disclosure on these issues, it will generally recommend votes “against” any proposals that would require the company to suspend its memberships in or otherwise limit a company’s ability to participate fully in the trade associations of which it is a member. Environmental and Social Risk Oversight Glass Lewis has updated its guidelines with respect to board-level oversight of environmental and social issues. Under its existing policy, for large-cap companies and in instances where Glass Lewis identifies material oversight concerns, Glass Lewis will review a company’s overall governance practices and identify which directors or board-level committees have been charged with oversight of environmental and/or social issues. Under its updated policy:
  • For the 2021 proxy season, Glass Lewis will note as a concern when boards of companies in the S&P 500 do not provide clear disclosure (in either the company’s proxy statement or governing documents such as committee charters) on board-level oversight of environmental and social issues.
  • For the 2022 proxy season, Glass Lewis will generally recommend votes “against” the governance committee chair at S&P 500 companies without explicit disclosure concerning the board’s role in overseeing these issues.Glass Lewis clarified in its updated policy that, while it believes it is important that these issues are overseen at the board level and that shareholders are afforded meaningful disclosure of these oversight responsibilities, it believes that companies should determine the best structure for this oversight (which it noted may be conducted by specific directors, the entire board, a separate committee, or combined with the responsibilities of a key committee).
  1. Other Changes
Glass Lewis’s 2021 voting policies also include the following updates:
  1. Special Purpose Acquisition Companies (“SPACs”): New to its policy this year is a section detailing Glass Lewis’s approach to common issues associated with SPACs. Under its new policy, Glass Lewis articulates a generally favorable view of proposals seeking to extend business combination deadlines. The new policy also details Glass Lewis’s approach to determining independence of board members at a post-combination entity who previously served as executives of the SPAC, whom Glass Lewis will generally consider to be independent, absent any evidence of an employment relationship or continuing material financial interest in the combined entity.
  2. Governance Following an IPO or Spin-Off. Glass Lewis clarified its approach to director recommendations on the basis of post-IPO corporate governance concerns. Glass Lewis generally targets the governance committee members for such concerns; however, if a portion of the governance committee members is not standing for election due to a classified board structure, Glass Lewis will expand its recommendations to additional director nominees, based on who is standing for election. Glass Lewis also clarified its approach to companies that adopt a multi-class share structure with disproportionate voting rights, or other anti-takeover mechanisms, preceding an IPO, noting it will generally recommend voting against all members of the board who served at the time of the IPO if the board: (i) did not also commit to submitting these provisions to a shareholder vote at the company’s first shareholder meeting following the IPO; or (ii) did not provide for a reasonable sunset of these provisions.
  3. Board Responsiveness. Glass Lewis did not change its board responsiveness policy, but clarified its approach to assessing significant support for non-binding shareholder resolutions. Specifically, for management resolutions, Glass Lewis will note instances where a resolution received over 20% opposition at the prior year’s meeting and may opine on the board’s response to such opposition; however, in the case of majority-approved shareholder resolutions, Glass Lewis generally believes significant board action is warranted in response.
Recommended Actions for Public Companies
  • Submit your company’s peer group information to ISS for the next proxy statement: As part of ISS’s peer group construction process, on a semiannual basis in the U.S., companies may submit their self-selected peer groups for their next proxy disclosure. Although not determinative, companies’ self-selected peer groups are considered in ISS’s peer group construction, and therefore it is highly recommended that companies submit their self-selected peer groups. Certain companies with annual meetings to be held between February 1, 2021 and September 15, 2021 may submit their self-selected peer groups through the Governance Analytics page on the ISS website from November 16, 2020 to December 4, 2020. The peer group should include a complete peer list used for benchmarking CEO pay for the fiscal year ending prior to the next annual meeting. Companies that have made no changes to their previous proxy-disclosed executive compensation benchmarking peers, or companies that do not wish to provide this information in advance, do not need to participate. For companies that do not submit changes, the proxy-disclosed peers from the company’s last proxy filing will automatically be considered in ISS’s peer group construction process.
  • Evaluate your company’s practices in light of the updated ISS and Glass Lewis proxy voting guidelines: Companies should consider whether their policies and practices, or proposals expected to be submitted to a shareholder vote in 2021, are impacted by any of the changes to the ISS and Glass Lewis proxy voting policies. For example, companies should consider whether their exclusive forum provisions or poison pills in the charter or bylaws contain any specific feature that would lead to adverse voting recommendations for directors by ISS or Glass Lewis.
  • Assess racial/ethnic diversity on your board and consider enhancing related disclosures in the proxy statement: Companies should assess the composition of their board with respect to gender and racial/ethnic diversity, and consider whether any changes are needed to the board’s director recruitment policies and practices. Companies should also consider whether their diversity disclosures in the proxy statements or other public filings are adequate. To facilitate this assessment and support enhanced public disclosures, companies should consider asking their directors to self-identify their diverse traits in their upcoming director and officer questionnaires. As also noted by ISS, investors, too, are increasingly focused on racial/ethnic diversity. California recently passed the new board racial/ethnic diversity bill that expands upon the 2018 gender diversity bill, and the Illinois Treasurer launched a campaign representing a coalition of state treasurers and other investors in October 2020 asking Russell 3000 companies to disclose the race/ethnicity and gender of their directors in their 2021 proxy statements. In August 2020, State Street sent a letter to the board chairs of its U.S. portfolio companies, informing them that starting in 2021, State Street will ask companies to provide “specific communications” to shareholders regarding their diversity strategy and goals, measures of the diversity of the employee base and the board, goals for racial and ethnic representation at the board level and the board’s role in oversight of diversity and inclusion. In addition, earlier this week, Nasdaq filed a proposal with the SEC to adopt new listing rules related to board diversity and disclosure. The proposed rules would require most Nasdaq-listed companies to publicly disclose statistical information in a proposed uniform format on the company’s board of directors related to a director’s self-identified gender, race, and self-identification as LGBTQ+ and would also require such Nasdaq-listed companies “to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.”
  • Consider enhancing board oversight and disclosures on environmental and social matters: Although ISS noted that its update related to material environmental and social risk oversight failures is expected to affect a small number of directors in certain high-risk sectors, it is notable that ISS explicitly adds environmental and social risk oversight as an area where it will hold directors accountable. Also, institutional investors continue to focus on these issues in their engagements with companies and voice their concerns at companies that lag behind on this front. For example, BlackRock recently reported that, during the 2020 proxy season, it took actions against 53 companies for their failure to make sufficient progress regarding climate risk disclosure or management, either by voting against director-related items (such as director elections and board discharge proposals) or supporting certain climate-related shareholder proposals. Regardless of sector or industry, companies should evaluate whether their board has a system that properly enables them to oversee how the company manages environmental and social risks and establishes policies aligned with recent developments.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work in the Securities Regulation and Corporate Governance and Executive Compensation and Employee Benefits practice groups, or any of the following practice leaders and members:

Securities Regulation and Corporate Governance Group: Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com) Ron Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) Lori Zyskowski – New York, NY (+1 212-351-2309, lzyskowski@gibsondunn.com) Aaron Briggs – San Francisco, CA (+1 415-393-8297, abriggs@gibsondunn.com) Courtney Haseley – Washington, D.C. (+1 202-955-8213, chaseley@gibsondunn.com) Julia Lapitskaya – New York, NY (+1 212-351-2354, jlapitskaya@gibsondunn.com) Cassandra Tillinghast – Washington, D.C. (+1 202-887-3524, ctillinghast@gibsondunn.com) Executive Compensation and Employee Benefits Group: Stephen W. Fackler – Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, sfackler@gibsondunn.com) Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) Krista Hanvey – Dallas (+ 214-698-3425, khanvey@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 1, 2020 |
Proposal to Publish LIBOR Beyond 2021

Click for PDF

Announcements

On November 30, 2020, ICE Benchmark Administration (“IBA”), the administrator of LIBOR, with the support of the Federal Reserve Board and the UK Financial Conduct Authority, announced plans to consult on specific timing for the path forward to cease the publication of USD LIBOR. In particular, IBA plans to consult on ceasing the publication of USD LIBOR on December 31, 2021 for only the one week and two month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors (i.e., overnight, one month, three month, six month and 12 month tenors). This announcement is significant as regulators had indicated that all USD LIBOR tenors would cease to exist or become non-representative at the end of 2021. This proposal significantly lengthens the transition period to June 30, 2023 for most legacy contracts, allowing time for many contracts to mature before USD LIBOR ceases to exist. Legacy contracts with maturities beyond June 30, 2023 would still need to be amended to incorporate appropriate fallback provisions to address the ultimate cessation of USD LIBOR.

This announcement follows on the heels of IBA’s November 18th announcement that it plans to consult on ceasing publication of all GBP, EUR, CHF and JPY LIBOR settings after December 31, 2021. IBA plans to close the consultation for feedback on both proposals by the end of January 2021. IBA noted that any publication of the overnight and one, three, six and 12 month USD LIBOR settings based on panel bank submissions beyond December 31, 2021 will need to comply with applicable regulations, including as to representativeness.

Concurrently, a statement by the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation included supervisory guidance that encourages banks to stop new USD LIBOR issuances by the end of 2021, noting that entering into new USD LIBOR-based contracts creates safety and soundness risks.

The regulators and IBA make clear that these announcements should not be read as an index cessation event for purposes of contractual fallback language (i.e., they should not be read to say that LIBOR has ceased, or will cease, to be provided permanently or indefinitely or that it is not, or no longer will be, representative). IBA will need to receive feedback on the consultation and will make separate announcement(s) regarding the cessation dates once final. Accordingly, the IBA proposal is not final and is subject to the feedback on the consultation.

The Alternative Reference Rates Committee (the “ARRC”) also released a statement in support of the announcements, expressing that the developments “would support a smooth transition for legacy contracts by allowing time for most to mature before USD LIBOR is proposed to cease, subject to consultation outcomes.” The ARRC further stated that “these developments align with the ARRC’s transition efforts, and will accelerate market participants’ use of the Secured Overnight Financing Rate (SOFR), the ARRC’s preferred alternative to USD LIBOR.”

Impact

If commonly used USD LIBOR tenors continue to be published and remain representative until June 30, 2023, this will provide an extra 18 months for the completion of the LIBOR transition process beyond what was previously expected. Fallback provisions in existing contracts using these USD LIBOR tenors would not be triggered until June 30, 2023, when, under the proposal, LIBOR would ultimately cease to exist. This will also allow additional time for the development of a forward-looking version of SOFR (“Term SOFR”), which could further ease the transition.

Counterparties with existing loans, derivatives and other contracts that mature prior to June 30, 2023 and reference most USD LIBOR rates would not need to incorporate fallback amendments, since these contracts will terminate before the transition. Additionally, with respect to derivatives and loans that reference USD LIBOR and have maturities beyond June 30, 2023, counterparties are likely to consider delaying adoption of fallback amendments because there no longer is an immediate threat of application of the fallback, yet uncertainty remains as to the extent of the mismatch between the ARRC-recommended fallback provisions for loans (Term SOFR, if available, or, otherwise, daily simple SOFR) and the ISDA 2020 IBOR Fallbacks Protocol for derivatives (SOFR compounded in arrears).

Furthermore, counterparties may opt to wait and see how the market develops before amending legacy contracts, especially given uncertainty around the appropriate adjustment to contractually specified spreads over the reference rate when adopting SOFR in place of LIBOR.

Although certain tenors of USD LIBOR may continue to be published until mid-2023, banks have now been advised, for safety and soundness concerns, not to enter into any new contracts that reference LIBOR after December 31, 2021. This will result in a longer period during which banks and other market participants will have both LIBOR loans and swaps and SOFR loans and swaps. Banks and other market participants should consider the operational and pricing impacts of maintaining products based on both benchmarks and confirm whether they have any contracts that reference one week or two month USD LIBOR, which are expected to be discontinued after December 31, 2021.


Gibson Dunn's Capital Markets, Derivatives, and Financial Institutions practice groups are available to answer questions about the LIBOR transition in general and these developments in particular. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Capital Markets, Derivatives, or Financial Institutions practice group, or the authors of this client alert:

Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com) Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Ben Myers – London (+44 (0) 20 7071 4277, bmyers@gibsondunn.com) Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) John J. McDonnell – New York (+1 212-351-4004, jmcdonnell@gibsondunn.com)

Please also feel free to contact any of the following practice leaders:

Capital Markets Group: Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com)

Derivatives Group: Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)

Financial Institutions Group: Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com) Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com) Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)

© 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 5, 2020 |
Webcast: Raising Capital in the Current Environment VII: Going Private and Going Dark

The current environment is leading many public companies to reconsider the costs and benefits of remaining listed on a US securities exchange and continuing to file reports with the SEC. During 2020, many public companies have experienced declines in revenues and market capitalization, and their compliance costs have increased as a percentage of revenues. These companies may consider “going dark,” which refers to the process of delisting a public company’s shares from a national securities exchange and suspending or terminating the company’s public reporting obligations. Going dark does not result in a change in the capital structure but does require a highly technical compliance process under applicable SEC and stock exchange rules. For similar reasons, large shareholders of some public companies may consider a “going private” transaction, which generally involves the cash-out of all or a substantial portion of a company’s public shares so that the company becomes eligible to delist and terminate its reporting obligations. Going private transactions can take many forms and may involve a merger, tender offer or reverse split of the company’s shares. These transactions require extensive board consideration, fairness opinions, SEC filings and possibly a shareholder vote.

In this presentation, we will discuss the procedures involved in the going dark process and going private transactions, including SEC requirements, stock exchange requirements, board governance considerations and timelines. We will also explore the common issues that must be managed in these transactions, including conflicts of interest, fiduciary duties, solvency, M&A strategy, financing arrangements and access to capital markets.

View Slides (PDF)

PANELISTS: Boris Dolgonos is a partner in the New York office of Gibson, Dunn and Crutcher and a member of the Capital Markets and Securities Regulation and Corporate Governance Practice Groups. Mr. Dolgonos has more than 20 years of experience advising issuers and underwriters in a wide range of equity and debt financing transactions, including initial public offerings, high yield and investment-grade debt offerings, leveraged buyouts, cross-border securities offerings, and private placements. He also regularly advises U.S. and non-U.S. companies on corporate governance, securities laws, stock exchange rules and regulations, and periodic reporting responsibilities. Tull Florey is a partner in the Houston office of Gibson, Dunn & Crutcher and a member of the firm’s Mergers & Acquisitions, Capital Markets, Oil & Gas and Securities Regulation and Corporate Governance practice groups. He has an extensive corporate and securities law practice, emphasizing transactional and governance matters. His practice focuses on mergers and acquisitions and securities offerings for companies in the energy industry. He has particular experience with clients engaged in oilfield service, oil and gas exploration and production, oilfield equipment manufacturing, midstream and seismic activities. He also assists clients on an ongoing basis with general corporate concerns, including Exchange Act reporting, corporate governance and Section 16 matters. Mr. Florey has been widely recognized, including Chambers USA ,The Legal 500 U.S., The Best Lawyers in America®, and Texas Super Lawyer. Courtney C. Haseley is of counsel in Gibson, Dunn & Crutcher’s Washington, D.C. office, where she is a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Ms. Haseley focuses her practice on governance matters and securities regulatory issues. Prior to joining Gibson Dunn, Ms. Haseley served as Special Counsel in the Division of Corporation Finance’s Office of Chief Counsel at the U.S. Securities and Exchange Commission, where she provided interpretive advice on a variety of matters under the Securities Act, Exchange Act, Trust Indenture Act, and associated rules and forms. Ms. Haseley also co-managed the 2019 and 2017 Shareholder Proposal Task Force. Before joining the SEC, Ms. Haseley was a corporate associate at two leading international law firms, advising clients on securities transactions, public offerings, private placements, mergers and acquisitions and governance matters. Hillary H. Holmes is a partner in the Houston office of Gibson, Dunn & Crutcher, Co-Chair of the firm’s Capital Markets practice group, and a member of the firm’s Securities Regulation and Corporate Governance, Energy, M&A and Private Equity practice groups. Ms. Holmes advises companies in all sectors of the energy industry on long-term and strategic capital planning, disclosure and reporting obligations under U.S. federal securities laws and corporate governance issues. She has deep experience representing all parties in a wide array of equity and debt capital markets transactions, as well as going dark processes and going private transactions. Among other recognitions, Ms. Holmes is Chambers Band 1 ranked for Capital Markets Central U.S. and ranked for Energy Transactional Nationwide and Corporate/M&A Texas. Ms. Holmes also regularly advises boards of directors, special committees and financial advisors in M&A transactions and situations involving complex issues and conflicts of interest.
MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 0.50 credit hour, of which 0.50 credit hour may be applied toward the areas of professional practice requirement.  This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 0.75 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

November 4, 2020 |
Webcast: Navigating the dynamic ESG landscape – key UK considerations for boards and senior management

COVID-19 has shone a bright light on the critical role that ESG considerations can play for companies and firms. Questions of corporate purpose and the meaning of “success” have been reprised and are being carefully considered in the context of an active debate around stakeholder capitalism.  Critically, the role and expectations of directors and management in pursuing a sustainability agenda have risen to the top of the agenda for corporates, legislatures and regulators alike. But what constitutes “good governance” in the context of ESG and how do boards and senior managers address the complex web of rules, regulations, standards and frameworks which apply at a national, regional and global level? During this webinar, members of the ESG Practice Group of Gibson Dunn (London) will provide some insights to help navigate the global ESG landscape from a UK perspective, touching on key rules and regulations, forthcoming developments and trends, and practical tips including:

  • An overview of the ESG landscape
  • How boards are fulfilling their directors’ duties in the wake of the new vision of the “purposeful company” including engagement with stakeholder groups
  • Key reporting and disclosure requirements
  • Governance structures and features that underpin effective, integrated ESG business models
  • Market trends and emerging rules, regulations and policy changes
  • Risk mitigation, litigation risk and shareholder pressures
  • Practical guidance and examples for boards and managers
View Slides (PDF)

PANELISTS: Selina Sagayam is a partner in Gibson Dunn’s international corporate team. Her practice focuses on international corporate finance transactional work, including public and private M&A, joint ventures, international equity capital markets offerings and advisory work focused on corporate governance, shareholder activism and securities law advice. Regarded as one of the leading public M&A advisers in the UK, Ms. Sagayam has advised on hostile, competitive and recommended takeovers. Ms. Sagayam is also noted for her expertise in financial services and regulatory advice. She advises boards and senior management of international corporations, exchanges, regulators, investment banks, and financial sponsors (private equity and hedge funds) on such issues. Her experience as a senior secondee at the UK takeover Panel and also as a non-executive director of a FTSE250 company has positioned her uniquely in her practice area. Ms. Sagayam established and co-chairs the firm’s UK ESG Practice Group. Susy Bullock is a partner in Gibson Dunn’s international litigation team.  Ms. Bullock specializes in commercial litigation and investigations, and business and human rights. Previously Ms. Bullock was Head of Litigation for Europe, the Middle East and Africa at UBS and had responsibility for all litigation and contentious regulatory matters in the EMEA region for the bank including commercial and white-collar criminal litigation, as well as certain internal investigations. In a business and human rights context, Ms. Bullock has supported the Thun Group of banks since 2016 and has also participated in various consultations of the UN Office of High Commissioner for Human Rights. Ms. Bullock can advise clients on sustainability and corporate social responsibility matters such as supply chain issues and investigations, non-financial disclosures and Modern Slavery Act 2015 compliance, and disputes.  Ms. Bullock co-chairs the firm’s UK ESG Practice Group. Anna Howell is a partner in Gibson Dunn’s international corporate team, a co-chair of the Oil & Gas practice, and a member of the firm's Energy & Infrastructure, M&A, Private Equity, and UK ESG practice groups.  Ms. Howell advises on complex cross-border transactions and advisory work in the energy sector with a particular focus on alternative energy, renewables, gas and liquefied natural gas (LNG).  Over her 25+ year career she has advised high-profile clients on some of their most prestigious and challenging mandates, including first entries into both mature and emerging markets throughout Europe, Africa, Latin America, Asia Pacific, and the Middle East.  Ms. Howell has advised clients on re-use and repurposing in the context of decommissioning as well as switching to cleaner fuels, energy efficiency, sustainability and emissions trading.   Ms. Howell spent over 11 years practising in Asia and has worked in London, Singapore, Hong Kong and Beijing.

October 30, 2020 |
Who’s Who Legal 2020 Guides Recognize 12 Gibson Dunn Partners

Twelve Gibson Dunn partners were recognized in Who’s Who Legal 2020 Capital Markets, Hospitality, Private Funds, and Thought Leaders: Litigation guides. Who’s Who Legal 2020 Capital Markets recommended Dallas partner Doug Rayburn. Who’s Who Legal 2020 Hospitality recommended London partner Alan Samson and New York partner Andrew Lance. Who’s Who Legal 2020 Private Funds recommended Dubai partner Chézard Ameer, Hong Kong partners Albert Cho and John Fadely, Los Angeles partner Jennifer Bellah Maguire, New York partners Shukie Grossman and Edward Sopher, and Washington D.C. partner William Thomas. Who’s Who Legal 2020 Thought Leaders: Litigation recommended Hong Kong partner Brian Gilchrist and New York partner Randy Mastro. Who’s Who Legal 2020 Capital Markets was published on August 28, 2020; the Hospitality guide was published on September 1, 2020; Thought Leaders: Litigation was published on October 8, 2020; and the Private Funds guide was published on October 29, 2020.

October 29, 2020 |
How to Raise Energy Capital in Tough Times

Houston partner Hillary Holmes and Dallas associate Louis Matthews are the authors of "How to Raise Energy Capital in Tough Times" [PDF] published in the October 2020 issue of Oil and Gas Investor.

October 20, 2020 |
Gibson Dunn Deal Wins 2020 TMT Deal of the Year

China Law & Practice named Alibaba’s acquisition of NetEase Kaola as its TMT Deal of the Year at the China Law & Practice Awards 2020. Gibson Dunn advised NetEase on the transaction. The awards were announced on October 15, 2020.

October 14, 2020 |
Webcast: Raising Capital in the Current Environment VI: 5 Things to Know for Your Successful IPO

After the COVID-19 pandemic seemed to close the IPO market overnight, over the past few months IPOs have roared back to life in an incredibly active market. While some parts of the process have remained steady, the current environment has raised unforeseen challenges and novel practices for issuers, underwriters and their counsel in the IPO process. This short webcast will break down the current market and the key legal, financial and execution issues affecting IPOs in late 2020, as well as best practices for successfully navigating the IPO process in the current environment. Please join our expert panelists as they discuss recent developments, market trends and disclosure considerations in the IPO market, as well as current expectations for the future of the IPO process.

View Slides (PDF)

PANELISTS: Peter W. Wardle is Co-Partner in Charge of the Los Angeles office of Gibson, Dunn & Crutcher. He is a member of the firm’s Corporate Transactions Department and Co-Chair of its Capital Markets Practice Group. Mr. Wardle’s practice includes representation of issuers and underwriters in equity and debt offerings, including IPOs and secondary public offerings, and representation of both public and private companies in mergers and acquisitions, including private equity, cross border, leveraged buy-out, distressed and going private transactions. He also advises clients on a wide variety of general corporate and securities law matters, including corporate governance issues. Stewart McDowell is a partner in the San Francisco office of Gibson, Dunn & Crutcher. She is a member of the firm’s Corporate Transactions Practice Group, Co-Chair of the Capital Markets Practice Group. Ms. McDowell’s practice involves the representation of business organizations as to capital markets transactions, mergers and acquisitions, SEC reporting, corporate governance and general corporate matters. She has significant experience representing both underwriters and issuers in a broad range of both debt and equity securities offerings. She also represents both buyers and sellers in connection with U.S. and cross-border mergers, acquisitions and strategic investments.
MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 0.5 credit hour, of which 0.5 credit hour may be applied toward the areas of professional practice requirement.  This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 0.5 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

October 13, 2020 |
Hillary Holmes Honored with 2020 GRIT Award

ALLY by Pink Petro, the leading resource in diverse talent, careers, and culture, creating an inclusive workforce in the energy sector, honored Houston partner Hillary Holmes with a 2020 GRIT Award in the Executives category. The award was presented on October 13, 2020. Hillary Holmes is Co-Chair of the firm’s Capital Markets practice group. She advises companies in all sectors of the energy industry on long-term and strategic capital planning, disclosure and reporting obligations under U.S. federal securities laws and corporate governance issues. She represents issuers, underwriters, MLPs, financial advisors, private investors, management teams and private equity firms in all forms of capital markets transactions.

October 7, 2020 |
33 Gibson Dunn Partners Recognized in Banking, Finance and Transactional Expert Guide

Expert Guides has named 33 Gibson Dunn partners to the 2020 edition of its Banking, Finance and Transactional Guide, which recognizes the top legal practitioners in the industry.  Selection to this guide is determined by a survey of fellow legal practitioners in more than 80 jurisdictions.  The Gibson Dunn partners included in the guide are Frankfurt partner Dirk Oberbracht, Hong Kong partners Albert Cho, John Fadely, Scott Jalowayski, Michael Nicklin, and Patricia Tan Openshaw, Houston partner Hilary Holmes, London partners Christopher Haynes and Steve Thierbach, Los Angeles partners Jennifer Bellah Maguire, Dennis Arnold and Robert Klyman, New York partners Barbara BeckerAndrew Fabens, David Feldman, Dennis Friedman, Sean GriffithsShukie Grossman, Michael RosenthalRoger Singer, and Edward Sopher, Orange County partners Jonathan Layne and James Moloney, Palo Alto partner Russell Hansen, San Francisco partners Stewart McDowell, Robert Nelson and Douglas Smith, Singapore partner Brad Roach, and Washington, D.C. partners Mark Director, Stephen Glover, Elizabeth Ising, Brian Lane and Ronald Mueller.  The guide was published on September 21, 2020.