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November 21, 2018 |
Gibson Dunn Ranked in the 2019 UK Legal 500

The UK Legal 500 2019 ranked Gibson Dunn in 13 practice areas and named six partners as Leading Lawyers. The firm was recognized in the following categories: Corporate and Commercial: Equity Capital Markets Corporate and Commercial: M&A – Upper Mid-Market and Premium Deals, £250m+ Corporate and Commercial: Private Equity – High-value Deals Dispute Resolution: Commercial Litigation Dispute Resolution: International Arbitration Finance: Acquisition Finance Finance: Bank Lending: Investment Grade Debt and Syndicated Loans Human Resources: Employment – Employers Public Sector: Administrative and Public Law Real Estate: Commercial Property – Hotels and Leisure Real Estate: Commercial Property – Investment Real Estate: Property Finance Risk Advisory: Regulatory Investigations and Corporate Crime The partners named as Leading Lawyers are Sandy Bhogal – Corporate and Commercial: Corporate Tax; Steve Thierbach – Corporate and Commercial: Equity Capital Markets; Philip Rocher – Dispute Resolution: Commercial Litigation; Cyrus Benson – Dispute Resolution: International Arbitration; Jeffrey Sullivan – Dispute Resolution: International Arbitration; and Alan Samson – Real Estate: Commercial Property and Real Estate: Property Finance. Claibourne Harrison has also been named as a Next Generation Lawyer for Real Estate: Commercial Property.

November 1, 2018 |
Glass Lewis Issues 2019 Proxy Voting Policy Updates

Click for PDF On October 24, 2018, Glass Lewis released its updated U.S. proxy voting policy guidelines for 2019, including guidelines for shareholder proposals.  The updated U.S. guidelines are available here, and the guidelines on shareholder proposals are available here.  The most significant updates to the guidelines are summarized below. The updated U.S. proxy voting guidelines include discussion of two previously announced policy changes that will take effect for meetings held after January 1, 2019, relating to board gender diversity and virtual-only annual meetings. Board Gender Diversity As previously announced, for a company that has no female directors, Glass Lewis generally will begin recommending votes “against” the nominating/governance committee chair, and may also recommend votes “against” other committee members depending on factors such as the company’s size, industry, state of headquarters, and governance profile. Glass Lewis will “carefully review a company’s disclosure of its diversity considerations” and may not recommend votes “against” directors when the board has provided a “sufficient rationale” for the absence of any female board members.  Such rationale may include any notable restrictions on the board’s composition (e.g., the existence of director nomination agreements with significant investors) or disclosure of a timetable for addressing the board’s lack of diversity. In light of California’s recently enacted legislation requiring a minimum number of women on public company boards (discussed here), which includes having at least one woman by the end of 2019, Glass Lewis will recommend votes “against” the nominating/governance committee chair at companies headquartered in California that do not have at least one woman on the board and do not disclose a “clear plan” for addressing this issue before the end of 2019. Conflicting Shareholder Proposals Glass Lewis updated its policy on conflicting shareholder proposals to address special meeting proposals specifically.  These updates respond to developments during the 2018 proxy season, when the Securities and Exchange Commission (the “SEC”) staff permitted companies to exclude “conflicting” special meeting shareholder proposals when seeking shareholder ratification of an existing special meeting right with a higher ownership threshold. The updated policy states that Glass Lewis generally favors a 10%-15% special meeting right and will generally recommend votes “for” shareholder and company proposals within this range.  When companies exclude a special meeting shareholder proposal by seeking ratification of an existing special meeting right, Glass Lewis will recommend votes “against” both the company’s ratification proposal and the members of the nominating/governance committee. When the proxy statement includes both shareholder and company proposals on special meetings: Where the proposals have different thresholds for requesting a special meeting, Glass Lewis will generally recommend voting “for” the lower threshold (typically the shareholder proposal); and Where the company does not currently have a special meeting right, Glass Lewis may recommend that shareholders vote “for” the shareholder proposal and abstain from the company proposal seeking to establish a special meeting right.  Glass Lewis views the practice of abstaining as a means for shareholders to signal their preference for an appropriate special meeting threshold while not directly opposing establishment of a special meeting right. While it appears that the special meeting threshold will be the primary focus of Glass Lewis’s analysis, Glass Lewis also will consider the company’s overall governance profile, including its responsiveness to and engagement with shareholders. Director Voting Recommendations Based on Excluded Shareholder Proposals With respect to the exclusion of shareholder proposals more generally, Glass Lewis states in the updated policy that “it generally believe[s] that companies should not limit investors’ ability to vote on shareholder proposals that advance certain rights or promote beneficial disclosure.”  In light of this, Glass Lewis will make note of instances where a company has successfully petitioned the SEC to exclude shareholder proposals and, “in certain very limited circumstances,” may recommend votes “against” the members of the nominating/governance committee if it believes exclusion of a shareholder proposal was “detrimental to shareholders.” Environmental and Social Risk Oversight Glass Lewis believes that companies should have “appropriate board-level oversight of material risks” to their operations, including those that are environmental and social in nature.  For large cap companies or companies where Glass Lewis identifies “material oversight issues,” Glass Lewis will seek to identify the directors or committees charged with oversight of environmental and social issues, and will note instances where companies have not clearly defined this oversight in their governance documents. Where Glass Lewis believes that a company has not properly managed or mitigated environmental or social risks “to the detriment of shareholder value,” Glass Lewis may recommend votes “against” directors who are responsible for oversight of environmental and social risks.  If there is no explicit board oversight of environmental and social issues, Glass Lewis may recommend votes “against” members of the audit committee.  Ratification of Auditor: Additional Considerations Glass Lewis’s policies list situations in which it may recommend votes “against” ratification of the outside auditor.  Under the 2019 policy updates, Glass Lewis will consider factors that may call into question an auditor’s effectiveness, including auditor tenure, any pattern of inaccurate audits, and any ongoing litigation or controversies.  In “limited cases,” these factors may lead to a recommendation “against” auditor ratification. Virtual-Only Shareholder Meetings As previously announced, Glass Lewis’s new policy on virtual-only shareholder meetings will take effect January 1, 2019.  Under this policy, for a company that chooses to hold a virtual-only meeting, Glass Lewis will analyze the company’s disclosure of its virtual meeting procedures and may recommend votes “against” the members of the nominating/governance committee if the company does not provide “effective” disclosure assuring that shareholders will have the same opportunities to participate at the virtual meeting as they would at in-person meetings. Examples of effective disclosure include descriptions of how shareholders can ask questions during the meeting, the company’s guidelines on how questions and comments will be recognized and disclosed to meeting participants, procedures for posting questions and answers on the company’s website as soon as practical after the meeting, and how the company will deal with any potential technical issues regarding accessing the virtual meeting including providing technical support. Director Recommendations Based on Company Performance Glass Lewis typically recommends that shareholders vote against directors who have served on boards or as executives at companies with “indicators of mismanagement or actions against the interests of shareholders.”  One instance where Glass Lewis may issue an “against” recommendation is where a company’s performance for the past three years has been in the bottom quartile of the sector and the board has not taken reasonable steps to address the poor performance.  For 2019, Glass Lewis has clarified that rather than looking solely at stock price performance, it will also consider the company’s overall corporate governance, pay-for-performance alignment, and board responsiveness to shareholders, in order to assess whether “the company performed significantly worse than its peers.” Directors Who Provide Consulting Services Under its voting policies on conflicts of interest, Glass Lewis recommends that shareholders vote “against” directors who provide, or whose immediate family members provide, material professional services to the company, including legal, consulting or financial services.  Beginning in 2019, Glass Lewis will generally refrain from voting against directors who provide consulting services if they do not serve on the audit, compensation or nominating/governance committees and Glass Lewis has not identified “significant governance concerns” at the company. Executive Compensation Glass Lewis clarified or amended several executive compensation policies: Say-on-pay voting recommendations.  Glass Lewis has provided additional guidance on how it evaluates executive compensation programs in making recommendations on say-on-pay proposals.  In particular, Glass Lewis evaluates both the structure of a company’s program and the company’s disclosures, in each case using a rating scale of “Good,” “Fair” and “Poor.”  According to Glass Lewis, most companies receive a “Fair” rating for both structure and disclosure, and the other two ratings primarily highlight companies that are outliers. Peer group and other practices.  Glass Lewis’s say-on-pay policy identifies practices that may lead to an “against” recommendation for say-on-pay proposals.  The 2019 updates clarify that these practices may also influence Glass Lewis’s evaluation of the structure of a company’s compensation program.  The updates also provide more detail on the peer group practices that Glass Lewis views as problematic.  These practices now will include the use of outsized peer groups and compensation targets set well above peers. Pay-for-performance assessment.  Glass Lewis uses a grading system of “A” through “F” to benchmark executive pay and company performance against a peer group.  The updated voting policies clarify that the grades represent the relationship between a company’s percentile rank for pay and its percentile rank for performance.  In other words, a grade of “A” reflects that a company’s percentile rank for pay is significantly less than its percentile rank for performance, while a grade of “F” reflects that the pay ranking is significantly higher than the performance ranking.  Separately, the analysis in Glass Lewis’s proxy papers reflects a comparison between a company and its peer group, with respect to both pay levels and performance. Added excise tax gross-ups.  Glass Lewis may recommend votes “against” all members of the compensation committee if executive employment agreements contain new excise tax gross-up provisions, particularly if the company had previously committed not to provide gross-ups.  New gross-up provisions related to excise taxes on excess parachute payments also may lead to votes “against” a company’s say-on-pay proposal. Sign-on and severance arrangements.  Glass Lewis has clarified the terms of sign-on and severance arrangements that may contribute to negative voting recommendations on say-on-pay proposals.  Glass Lewis will consider the size and design of any contractual payments, as well as U.S. market practice.  Excessive sign-on awards may support or drive a negative voting recommendation, and multi-year guaranteed bonuses may drive “against” recommendations on their own.  In addition to the size of contractual payments, Glass Lewis will consider their terms.  Key man clauses, board continuity conditions, or excessively broad change in control triggers may help drive a negative voting recommendation.  In general, Glass Lewis will be wary of terms that are “excessively restrictive” in favor of an executive or could incentive behaviors that are not in a company’s best interests.  Glass Lewis believes companies should abide by pre-determined severance amounts in most circumstances, and will consider severance amounts actually paid and in “special cases,” their appropriateness given the circumstances of the executive’s departure. Grants of front-loaded awards.  Glass Lewis has added a new discussion of “front-loading,” or providing large grants intended to serve as compensation for multiple years.  In making recommendations on say-on-pay proposals, Glass Lewis will apply particular scrutiny to front-loaded awards.  It will consider a company’s rationale for front-loaded awards and expects companies to include a firm commitment not to grant additional awards for a defined period.  If a company breaks this commitment, Glass Lewis may recommend “against” the company’s say-on-pay proposal unless the company provides a “convincing” rationale. Clawbacks.  Glass Lewis will begin looking beyond the minimum legal requirements for clawbacks and considering the specific terms of companies’ clawback policies.  According to the updated voting policies, Glass Lewis believes that clawbacks “should be triggered, at a minimum, in the event of a restatement of financial results or similar revision of performance indicators upon which bonuses were based.”  Clawback policies that simply track minimum legal requirements “may inform” Glass Lewis’s overall view of a company’s compensation program. Discretionary short-term incentives.  Glass Lewis will not recommend votes “against” a say-on-pay proposal solely based on a company’s use of discretionary short-term bonuses if there is meaningful disclosure of the rationale behind the use of a discretionary mechanism and the bonus amount determinations.  However, other “significant” issues, such as a disconnect between pay and performance, may help drive a negative voting recommendation. Equity plans that cover directors.  Glass Lewis continues to believe that equity grants to directors should not be performance-based.  Where an equity plan covers non-management directors exclusively or primarily, the updated voting policies state that the plan should not provide for any performance-based awards.  Where non-management director grants are made under a broad-based equity plan, Glass Lewis will continue to use its proprietary model to guide its voting recommendations.  However, beginning in 2019, if a broad-based plan allows or explicitly provides for performance-based awards to directors, Glass Lewis may recommend “against” the plan on this basis, particularly if the company has granted performance-based awards to directors in the past. Reduced executive compensation disclosure for smaller reporting companies.  Glass Lewis may recommend votes “against” all compensation committee members when the board has “materially decreased” proxy disclosure about executive compensation practices in a manner that “substantially impacts” shareholders’ ability to make an informed assessment of a company’s executive compensation practices.  In its summary of the 2019 policy updates, Glass Lewis indicates that this new policy applies to smaller reporting companies, in light of recent SEC rule changes to the definition of “smaller reporting company” that expand the number of registrants qualifying for scaled disclosure accommodations in their SEC filings, including in the area of executive compensation. Shareholder Proposals In addition to special meeting shareholder proposals (discussed above), Glass Lewis has also updated its policies on other shareholder proposals in several respects: Environmental and social proposals.  Glass Lewis has formalized the role that financial materiality will play in its consideration of environmental and social proposals.  In the discussion of its “Overall Approach” to these proposals, Glass Lewis states that it will evaluate shareholder proposals on environmental and social issues “in the context of the financial materiality of the issue to the company’s operations” and will “place a significant emphasis on the financial implications of a company adopting, or not adopting” a proposal.  Glass Lewis believes that all companies face risks associated with environmental and social issues, but that these risks manifest themselves differently at different companies, based on factors including a company’s operations, workforce, structure and geography.  Glass Lewis plans to use the standards developed by the Sustainability Accounting Standards Board (“SASB”) to assist it in determining financial materiality. Written consent proposals.  If a company has adopted a special meeting right of 15% or lower and reasonable proxy access provisions, Glass Lewis will generally recommend that shareholders vote “against” a shareholder proposal seeking the right for shareholders to act by written consent. Workforce diversity.  Glass Lewis has adopted a formal policy on shareholder proposals asking companies to provide disclosure about workforce diversity or efforts to promote diversity within the workforce.  In making voting recommendations, Glass Lewis will consider a company’s industry and the nature of its operations, the company’s current disclosures on issues involving workforce diversity, the level of disclosure at peer companies, and any lawsuits or accusations of discrimination within the company. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance and Executive Compensation and Employee Benefits practice groups: Securities Regulation and Corporate Governance Group Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Gillian McPhee – Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com) Aaron Briggs – San Francisco (+1 415-393-8297, abriggs@gibsondunn.com) Maia Gez – New York (+1 212-351-2612, mgez@gibsondunn.com) Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com) Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) Executive Compensation and Employee Benefits Group Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) Michael J. Collins – Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Krista Hanvey – Dallas (+1 214-698-3425; khanvey@gibsondunn.com)  © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

October 30, 2018 |
Webcast: Spinning Out and Splitting Off – Navigating Complex Challenges in Corporate Separations

In the current strong market environment, spin-off deals have become a regular feature of the M&A landscape as strategic companies look for ways to maximize the value of various assets. Although the announcements have become routine, planning for and completing these transactions is a significant and multi-disciplinary undertaking. By its nature, a spin-off is at least a 3-in-1 transaction starting with the reorganization and carveout of the assets to be separated, followed by the negotiation of separation-related documents and finally the offering of the securities—and that does not even account for the significant tax, corporate governance, finance, IP and employee benefits aspects of the transaction. In this program, a panel of lawyers from a number of these key practice areas provided insights based on their recent experience structuring and executing spin-off transactions. They walked through the hot topics, common issues and potential work-arounds. View Slides (PDF) PANELISTS: 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. Michael J. 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. Andrew L. 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. Stephen I. 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. Elizabeth A. Ising is a partner in Gibson Dunn’s Washington, D.C. office, Co-Chair of the firm’s Securities Regulation and Corporate Governance Practice Group and a member of the firm’s Hostile M&A and Shareholder Activism team and Financial Institutions Practice Group. She advises clients, including public companies and their boards of directors, on corporate governance, securities law and regulatory matters and executive compensation best practices and disclosures. 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. Daniel A. Zygielbaum is an associate 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 international and domestic taxation of corporations, partnerships (including private equity funds), limited liability companies, REITs and their debt and equity investors. He advises clients on tax planning for fund formations and corporate and real estate acquisitions, dispositions, reorganizations and joint ventures. 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 1.50 credit hours, of which 1.50 credit hours 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 Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@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 1.50 hours. 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 10, 2018 |
Why We Think the UK Is Heading for a “Soft Brexit”

Click for PDF Our discussions with politicians, civil servants, journalists and other commentators lead us to believe that the most likely outcome of the Brexit negotiations is that a deal will be agreed at the “softer” end of the spectrum, that the Conservative Government will survive and that Theresa May will remain as Prime Minister at least until a Brexit deal is agreed (although perhaps not thereafter).  There is certainly a risk of a chaotic or “hard” Brexit.  On the EU side, September’s summit in Salzburg demonstrated the possibility of unexpected outcomes.  And in the UK, the splits in the ruling Conservative Party and the support it relies upon from the DUP (the Northern Irish party that supports the Government) could in theory result in the ousting of Prime Minister May, which would likely lead to an extension of the Brexit deadline of 29 March 2019.  However, for the reasons set out below we believe a hard or chaotic Brexit is now less likely than more likely. Some background to the negotiations can be found here.  It should be noted that any legally binding deal will be limited to the terms of the UK’s departure from the EU (“the Withdrawal Agreement”) and will not cover the future trading relationship.  But there will be a political statement of intent on the future trading relationship (“the Future Framework”) that will then be subject to further detailed negotiation. There is a European Council meeting on 17/18 October although it is not expected that a final agreement will be reached by then.  However, the current expectation is that a special meeting of the European Council will take place in November (probably over a weekend) to finalise both the Withdrawal Agreement and the Future Framework. Whatever deal Theresa May finally agrees with the EU needs to be approved by the UK Parliament.  A debate and vote will likely take place within two or three weeks of a deal being agreed – so late November or early December.  If Parliament rejects the deal the perceived wisdom is that the ensuing political crisis could only be resolved either by another referendum or a general election. However: the strongest Brexiteers do not want to risk a second referendum in case they lose; the ruling Conservative Party do not want to risk a general election which may result in it losing power and Jeremy Corbyn becoming Prime Minister; and Parliament is unlikely to allow the UK to leave without a deal. As a result we believe that Prime Minister May has more flexibility to compromise with the EU than the political noise would suggest and that, however much they dislike the eventual deal, ardent Brexiteers will likely support it in Parliament.  This is because it will mean the UK has formally left the EU and the Brexiteers live to fight another day. The UK’s current proposal (the so-called “Chequers Proposal”) is likely to be diluted further in favour of the EU, but as long as the final deal results in a formal departure of the UK from the EU in March 2019, we believe Parliament is more likely than not to support it, however unsatisfactory it is to the Brexiteers. The key battleground is whether the UK should remain in a Customs Union beyond a long stop date for a transitional period.  The UK Government proposes a free trade agreement in goods but not services, with restrictions on free movement and the ability for the UK to strike its own free trade deals.  This has been rejected by the EU on the grounds that it seeks to separate services from goods which is inconsistent with the single market and breaches one of the fundamental EU principles of free movement of people.  The Chequers Proposal is unlikely to survive in its current form but the EU has acknowledged that it creates the basis for the start of a negotiation. There has also been discussion of a “Canada style” free-trade agreement, which is supported by the ardent Brexiteers but rejected by the UK Government because it would require checks on goods travelling across borders.  This would create a “hard border” in Northern Ireland which breaches the Good Friday Agreement and would not be accepted by any of the major UK political parties or the EU.  The consequential friction at the borders is also unattractive to businesses that operate on a “just in time” basis – particularly the car manufacturers.  The EU has suggested there could instead be regulatory alignment between Northern Ireland and the EU, but this has been accepted as unworkable because it would create a split within the UK and is unacceptable to the DUP, the Northern Ireland party whose support of the Conservatives in Parliament is critical to their survival.  This is the area of greatest risk but it remains the case that a “no deal” scenario would guarantee a hard border in Ireland. If no deal is reached by 21 January 2019 the Prime Minister is required to make a statement to MPs.  The Government would then have 14 days to decide how to proceed, and the House of Commons would be given the opportunity to vote on these alternate plans.  Although any motion to reject the Government’s proposal would not be legally binding, it would very likely catalyse the opposition and lead to an early general election or a second referendum.  In any of those circumstances, the EU has already signalled that it would be prepared to grant an extension to the Article 50 period. This client alert was prepared by London partners Charlie Geffen and Nicholas Aleksander and of counsel Anne MacPherson. We have a working group in London (led by Nicholas Aleksander, Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) addressing Brexit related issues.  Please feel free to contact any member of the working group or any of the other lawyers mentioned below. Ali Nikpay – Antitrust ANikpay@gibsondunn.com Tel: 020 7071 4273 Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225 Nicholas Aleksander – Tax NAleksander@gibsondunn.com Tel: 020 7071 4232 Philip Rocher – Litigation PRocher@gibsondunn.com Tel: 020 7071 4202 Jeffrey M. Trinklein – Tax JTrinklein@gibsondunn.com Tel: 020 7071 4224 Patrick Doris – Litigation; Data Protection PDoris@gibsondunn.com Tel:  020 7071 4276 Alan Samson – Real Estate ASamson@gibsondunn.com Tel:  020 7071 4222 Penny Madden QC – Arbitration PMadden@gibsondunn.com Tel:  020 7071 4226 Selina Sagayam – Corporate SSagayam@gibsondunn.com Tel:  020 7071 4263 Thomas M. Budd – Finance TBudd@gibsondunn.com Tel:  020 7071 4234 James A. Cox – Employment; Data Protection JCox@gibsondunn.com Tel: 020 7071 4250 Gregory A. Campbell – Restructuring GCampbell@gibsondunn.com Tel:  020 7071 4236 © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 27, 2018 |
SEC Streamlines Disclosure Requirements As Part of Its Overall Disclosure Effectiveness Review

Click for PDF This client alert provides an overview of changes to existing disclosure requirements recently adopted by the Securities and Exchange Commission (the “Commission”).  On August 17, 2018, the Commission adopted several dozen amendments (available here) to existing disclosure requirements to “simplify compliance without significantly altering the total mix of information” (the “Final Rules”).  In Release No. 33-10532, the Commission characterized the amended requirements as redundant, duplicative, overlapping, outdated or superseded, in light of subsequent changes to Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (“GAAP”), International Financial Reporting Standards (“IFRS”) and technology developments.  The Final Rules are largely consistent with the changes outlined in the Commission’s July 13, 2016 proposing release, available here (the “Proposed Rules”).  They form part of the Commission’s ongoing efforts in connection with the Disclosure Effectiveness Initiative relating to Regulations S-K and S-X and the Commission’s mandate under the Fixing America’s Surface Transportation (“FAST”) Act to eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated, or unnecessary. The Commission adopted the amendments addressed in the Proposed Rules with few exceptions. The Final Rules will become effective 30 days from publication in the Federal Register.  In the short term, issuers and registrants will need to revise their disclosure practices and compliance checklists in light of the amendments before filing a registration statement or periodic report following effectiveness of the Final Rules. I.   Summary of Adopted Changes For certain disclosure requirements that are related to, but not the same as, U.S. GAAP, IFRS, or other Commission disclosure requirements, the Commission: (i) deleted those disclosure requirements that convey reasonably similar information to or are encompassed by the disclosures that result from compliance with overlapping U.S. GAAP, IFRS, or Commission disclosure requirements; and (ii) integrated those disclosure requirements that overlapped, but required information that was incremental to, other Commission disclosure requirements. A.   Deletions of Requirements Covered Otherwise The Commission eliminated the following disclosure requirements, as proposed:[1] Amount Spent on R&D.  The Commission deleted the requirement to disclose amounts spent on research and development activities for all years presented (Item 101(c)(1)(xi) of Regulation S-K) because it is already covered by U.S. GAAP. Financial Information by Segment.  The Commission deleted the requirement to disclose financial information (specifically, revenues from external customers, a measure of profit or loss and total assets) about segments for the last three years (Item 101(b) of Regulation S-K),[2] because it is already covered by U.S. GAAP. Financial Information by Geographic Area.  The Commission deleted the requirement to disclose financial information by geographic area (Item 101(d)(2) of Regulation S-K) and risks associated with an issuer’s foreign operations and any segment’s dependence on foreign operations (Item 101(d)(3) of Regulation S-K), because it is already covered by U.S. GAAP. Dividend History.  The Commission deleted the requirement to disclose the frequency and amount of cash dividends declared (Item 201(c)(1) of Regulation S-K), because this information is already covered by amended Rule 3-04 of Regulation S-X. Ratio of Earnings to Fixed Charges.  The Commission deleted the requirement to provide a ratio of earnings to fixed charges (Items 503(d) and 601(b)(12) of Regulation S-K; Instruction 7 to Exhibits of Form 20-F), because U.S. GAAP already provides the disclosure of the components commonly used to calculate these ratios.  Issuers no longer need to include this information in an exhibit to their 10-K or in their registration statements. B.   Integrations of Duplicative Requirements The Commission integrated the following duplicative disclosure requirements, as proposed: Restrictions on Dividends.  The Commission consolidated several disclosure requirements related to the restriction of dividends and related items.  Where formerly the disclosure requirements were located in parts of both Regulation S-K and Regulation S-X, the Commission consolidated such disclosure requirements for domestic issuers under a single requirement in revised Rule 4-08(e)(3) of Regulation S-X. The disclosure will now only appear in the notes to the financial statements. Discussion of Geographic Areas.  The Commission integrated the requirement to discuss facts indicating why performance in certain geographic areas may not be indicative of current or future operations by eliminating the requirement from Item 101(d)(4) of Regulation S-K and revising Item 303 of Regulation S-K (which currently requires a discussion regarding elements of income that are not indicative of the issuer’s ongoing business), to add an explicit reference to “geographic areas.”  In addition, the Commission adopted the following clarification as suggested by the commenters: the discussion of income from certain geographic areas under revised Item 303 of Regulation S-K is not required in all circumstances, but only when management believes such discussion would be appropriate to an understanding of the business. C.   Deletions of Outdated Disclosure Requirements[3] The Commission also eliminated provisions that have become outdated as a result of the passage of time or changes in the regulatory, business, or technological environment (such as stale transition dates and moot income tax instructions), including the following: Available Information. The Commission deleted the requirement (contained in Item 101(e)(2) and Item 101(h)(5)(iii) of Regulation S-K, Forms S-1, S-3, S-4, S-11, F-1, F-3, and F-4,  Item 1118(b) of Regulation AB, and Forms SF-1, SF-3, N-1A, N-2, N-3, N-5, N6, and N-8B-2) to identify the Public Reference Room and disclose its physical address and phone number. The Commission retained the requirement (contained in Item 101(e)(2) of Regulation S-K, and Forms S-1, S-3, S-4, S-11, F-3, F-4, SF-1, SF-3, and N-4) to disclose the Commission’s Internet address and a statement that electronic SEC filings are available there and expanded this requirement to Forms 20-F and F-1. The Commission added a requirement to Items 101(e) and 101(h)(5) of Regulation S-K, and Forms S-3, S-4, F-1, F-3, F-4, 20-F, SF-1, and SF-3 that all issuers disclose their Internet addresses (or, in the case of asset-backed issuers, the address of the specified transaction party). Exchange Rate Data. The Commission deleted the requirement in Item 3.A.3 of Form 20-F  that foreign private issuers provide exchange rate data when financial statements are prepared in a currency other than the U.S. dollar insofar as this data is widely available on the internet. Age of Financial Statements. The Commission added language clarifying the facts and circumstances when foreign private issuers may comply with the aging requirement to include audited financial statements in an initial public offering that are not older than 15 months compared to the 12 months aging requirement. They also deleted the reference to a waiver in Instruction 2 to Item 8.A.4 of Form 20-F. Market Price. The Commission eliminated the detailed disclosure requirement under Item 201(a)(1) of Regulation S-K related to historical high and low sale prices in light of the fact that the daily market price of most publicly traded securities are easily accessible free of charge on numerous websites that provide more information than is required under Regulation S-K.  Such requirements remain in place for issuers with no class of common equity traded in an established trading market; however, for issuers with established trading markets, the Final Rules require the disclosure of the trading symbols used for each class of common equity and the principal foreign public trading market in the case of foreign issuers.  In addition, issuers with common equity that is not traded on an exchange are required to indicate, as applicable, that any over-the-counter quotations reflect inter-dealer prices and may not necessarily represent actual transactions. The Final Rules also amended Item 9.A.4 of Form 20-F to be consistent with the adopted amendments to Item 201(a). D.   Amendments to Superseded Disclosure Requirements[4] The Commission amended disclosure requirements that were inconsistent with recent legislation and more recently updated U.S. GAAP and Commission disclosure requirements.  In addition to updating references to auditing standards in numerous rules and Commission forms and eliminating non-existent or incorrect references and typographical errors, the Final Rules include several substantive changes with both generally applicable and industry-specific effects in light of changes to U.S. GAAP requirements, including the following: Sale of REIT Property.  The Commission eliminated the requirement that REITs present separately all gains and losses on the sale of properties outside of continuing operations (Rule 3-15(a)(1) of Regulation S-X), insofar as U.S. GAAP rules require only the presentation of gains and losses on the disposal of “discontinued operations.” Insurance Companies.  The Final Rules include changes applicable to Insurance Company issuers. The Commission removed elements of disclosure requirements regarding reinsurance recoverable on paid losses and the reporting of separate account assets (Rules 7-03(a)(6) and 7-03(a)(11) of Regulation S-X) that conflict with U.S. GAAP. Consolidated and Combined Financial Statements.  The Final Rules include several changes to Regulation S-X related to the presentation of consolidated and combined financial statements in order to reflect changes to U.S. GAAP. Specifically, the Commission corrected for numerous inconsistencies with respect to Differences in Fiscal Periods (Rule 3A-02 of Regulation S-X), the Bank Holding Act of 1956 (Rule 3A-02 of Regulation S-X), Intercompany Transactions (Rules 3A-04 and 4-08 of Regulation S-X) and Dividends Per Share in Interim Financial Statements (Rules 3-04, 8-03, and 10-01 of Regulation S-X). E.   Deletion of Redundant or Duplicative Requirements[5] The Commission deleted all duplicative requirements identified in the Proposed Rules, primarily under Regulation S-X, that require substantially similar disclosure as required under U.S. GAAP, IFRS, or other Commission requirements (with the exception of the requirements in Rule 3-20 of Regulation S-X related to the foreign currency disclosure in the financial statements of foreign private issuers).  These minor amendments deleted duplicative language covering a wide variety of disclosure topics, including the following: Consolidation. The Commission deleted Rule 4-08(a) of Regulation S-X requiring compliance with Article 3A (duplicative of Article 3A), Rule 3A-01 of Regulation S-X stating the subject matter of Article 3A (duplicative of Article 3A), language in Rule 3A-02(b)(1) of Regulation S-X permitting consolidation of an entity’s financial statements for its fiscal period if the period does not differ from that of the issuer by more than 93 days (duplicative of ASC 810-10-45-12), language in Rule 3A-02(d) of Regulation S-X requiring consideration of the propriety of consolidation under certain restrictions (duplicative of ASC 810-10-15-10), language in Rule 3A-02 and 3A-03(a) of Regulation S-X requiring disclosure of the accounting policies followed in consolidation or combination (duplicative of ASC 235-10-50-1 and ASC 810-10-50), and language in  Rule 3A-04 of Regulation S-X requiring the elimination of intercompany transactions (duplicative of ASC 323-10-35-5a and ASC 810-10-45). Income Tax Disclosure. The Commission deleted language in Rule 4-08(f) of Regulation S-X requiring income tax rate reconciliation (duplicative of ASC 740-10-50-12) and language in Rule 4-08(h)(2) of Regulation S-X permitting income tax rate reconciliation to be presented in either percentages or dollars (duplicative of ASC 740-10-50-12). Earnings Per Share. The Commission deleted language in Rule 10-01(b)(2) of Regulation S-X requiring presentation of earnings per share on interim income statement (duplicative of ASC 270-10-50-1b) and Item 601(b)(11) of Regulation S-K and Instruction 6 to “Instructions as to Exhibits” of Form 20-F requiring disclosure of the computation of earnings per share in annual filings (duplicative of ASC 260-10-50-1a, Rule 10-01(b)(2) of Regulation S-X, and IAS 33, paragraph 70). Interim Financial Statements. The Commission deleted Rule 10-01(b)(5) of Regulation S-X requiring  disclosure of the effect of discontinued operations on interim revenues, net income, and earnings per share for all periods presented (duplicative of ASC 205-20-50-5B, ASC 205-20-50-5C, ASC 260-10- 45-3, and ASC 270-10-50-7) and language in Rule 10-01(b)(3) of Regulation SX requiring that common control transactions be reflected in current and prior comparative periods’ interim financial statements (duplicative of ASC 805-50-45-1 to 5). Bank Holding Companies. The Commission deleted Rule 9-03.6(a) of Regulation S-X requiring disclosure of the carrying and market values of securities of the U.S. Treasury and other U.S. Government agencies and corporations, securities of states of the U.S. and political subdivisions, and other securities (duplicative of ASC 320-10-50-1B, ASC 320-10-50-2, ASC 320-10-50-5, and ASC 942-320-50-2), Rule 9-03.7(d) of Regulation S-X requiring  disclosure of changes in the allowance for loan losses (duplicative of ASC 310-10-50-11B(c)), and language in Rule 9-04.13(h) of Regulation S-X requiring disclosure of the method followed in determining the cost of investment securities sold (duplicative of ASC 235-10-50-1 and ASC 320-10-50-9b). II.   Summary of Proposed Rules Not Adopted A.   Retained Requirements The Commission originally proposed to delete the following overlapping disclosure requirements, but instead chose to retain the requirements without amendment: Pro-Forma Dispositions.  The Commission retained the requirement under Rule 8-03(b)(4) of Regulation S-X to present pro forma financial information regarding business dispositions. This decision was in response to commenter concerns that the disclosure would not be sufficiently substituted by Regulation S-K, because Item 9.01 of Form 8-K only references significant acquisitions rather than dispositions.  The Commission determined that the issue warranted additional analysis and consideration and opted not to amend the requirement. Seasonality.  The requirement to discuss seasonality under Item 101(c)(1)(v) of Regulation S-K was retained without amendment. This decision was in response to concerns about the potential loss of information in the fourth quarter about the extent to which an issuer’s business is seasonal because U.S. GAAP may not elicit this disclosure. Legal Proceedings.  The Commission declined to adopt amendments to the legal proceedings disclosure required under Item 103 of Regulation S-K or to refer the disclosure requirements under Item 103 to the FASB for potential incorporation into U.S. GAAP.  The Commission cited several differences between the Regulation S-K requirement and its parallel requirement under U.S. GAAP, and emphasized that integration could have broad implications such as expanding costly audit reviews and increasing the disclosure of immaterial items. Mutual Life Insurance Companies. The Commission did not adopt the proposed change to Rule 7-02(b) of Regulation S-X, which would have eliminated the ability of mutual life insurance companies to prepare financial statements in accordance with statutory accounting requirements. B.   Potential Changes Referred to FASB For Prompt Review The Commission originally proposed to delete the following overlapping disclosure requirements, but instead opted to retain these requirements and refer them to the Financial Accounting Standards Board (“FASB”), with a request that FASB complete its review within 18 months of the publication of the Final Rules in the Federal Register: Repurchase and Reverse Repurchase Agreements.  The Commission retained  the Regulation S-X disclosure requirements related to repurchase and reverse repurchase agreements (such as the separate presentation of repurchase liabilities on the balance sheet).  The Commission emphasized that several commenters had expressed concern that deletion of this requirement would eliminate disclosures that are material and not otherwise available to investors in the repo market. Equity Compensation Plans.  The Commission also retained the requirement under Item 201(d) of Regulation S-K to discuss securities authorized under equity compensation plans in an information table, noting commenter concerns that U.S. GAAP does not require certain information, such as the number of securities available for issuance under an equity compensation plan, which may be material to investors. C.   Retained Requirements Referred to FASB for Potential Review For disclosure requirements that overlapped with, but required information incremental to, U.S. GAAP, the Commission elected to solicit further comment before determining whether to retain, modify, eliminate, or refer them to FASB for potential incorporation into U.S. GAAP.[6]  In the Final Rules, the Commission generally retained and referred such requirements to FASB to be considered in its normal standard-setting process.  For example: Major Customers.  The Commission retained the requirement to discuss major customers under Item 101(c)(1)(vii) of Regulation S-K despite it being substantially similar to U.S. GAAP requirements, because Regulation S-K (unlike U.S. GAAP) contains an incremental requirement to disclose the name of a major customer in certain instances.  The Commission referred this particular requirement to FASB because it continues to believe the identity of major customers represents material information to investors and allows investors to better assess the risks associated with a particular customer. Revenue from Products and Services.  While Regulation S-K and U.S. GAAP both require the disclosure of the amount of revenue from products and services, Item 101(c)(1)(i) of Regulation S-K only requires this information if a certain threshold is met, while U.S. GAAP includes a “practicability” exception.  Accordingly, the Commission retained and referred the Regulation S-K requirement to FASB for potential incorporation into U.S. GAAP. Conclusion The amendments contained in the Final Rules are highly technical and are explicitly intended to avoid any substantive changes to the “total mix of information provided to investors.” Nonetheless, these changes should reduce the cost and time of issuer compliance both by eliminating specific outdated and superfluous disclosure requirements and by reducing the overall number of rules to consider. In the short term, issuers and registrants will need to revise their disclosure practices and compliance checklists in light of the amendments before filing a registration statement or periodic report following effectiveness of the Final Rules. Furthermore, issuers should expect additional changes in the future as part of the Commission’s ongoing efforts to clean up and modernize disclosure requirements in connection with its Disclosure Effectiveness Initiative.    [1]   For a complete discussion on final adoptions for overlapping disclosure requirements proposed to be deleted, see page 37 of the Final Rules.    [2]   Additionally, the Commission eliminated Rule 3-03(e) of Regulation S-X as suggested by a commenter (which was not in the Proposed Rules), because it is likewise redundant with U.S. GAAP (see page 71 of the Final Rules).    [3]   A complete discussion of adopted amendments for outdated disclosure requirements begins on page 100 of the Final Rules.    [4]   A complete discussion of adopted amendments for superseded disclosure requirements begins on page 108 of the Final Rules.    [5]   A complete discussion of adopted amendments for redundant or duplicative disclosure requirements begins on page 28 of the Final Rules.    [6]   For a complete discussion on overlapping disclosure requirements where the Commission solicited comments see page 83 of the Final Rules. 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: Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) 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) Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) Michael A. Mencher – New York (+1 212-351-5309, mmencher@gibsondunn.com) Maya J. Hoard – Orange County, CA (+1 949-451-4046, mhoard@gibsondunn.com) Please also feel free to contact any of the following practice leaders: Capital Markets Group: Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com) Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) J. Alan Bannister – New York (+1 212-351-2310, abannister@gibsondunn.com) Securities Regulation and Corporate Governance Group: Elizabeth Ising – Co-Chair, Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) James J. Moloney – Co-Chair, Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) © 2018 Gibson, Dunn &amp Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 6, 2018 |
SEC Proposes Streamlined Financial Disclosures for Certain Guaranteed Debt Securities and Affiliates Whose Securities Are Pledged to Secure a Series of Debt Securities

Click for PDF On July 24, 2018, the Securities and Exchange Commission (the “Commission”) proposed amendments to Rules 3-10 and 3-16 of Regulation S-X (available here) (the “Proposal”) in an effort to “simplify and streamline” the financial disclosures required in offerings of certain guaranteed debt and debt-like securities (collectively referred to as “debt securities”), as well as offerings of securities collateralized by securities of an affiliate of the registrant, registered under the Securities Act of 1933, as amended (the “Securities Act”). These proposed changes would, if implemented, facilitate greater speed to market for such public offerings, significantly reducing the Securities Act disclosure burdens for such registrants, as well as reducing the registrant’s disclosure obligations in its subsequent annual and interim reports required under Securities Exchange Act of 1934, as amended (the “Exchange Act”). Background Current Alternative Disclosure Regime for Certain Guaranteed Debt Securities.  For purposes of the Securities Act and the Exchange Act, guarantees of securities are deemed separate securities from the underlying security that is guaranteed.  As a result, absent a regulatory exception or exemption, a prospectus prepared for a public offering of guaranteed debt securities registered under the Securities Act is required to include the full separate financial statements of (and disclosure regarding) each guarantor (in addition to those of the issuer of the guaranteed debt security) in the form and for the periods required for registrants under Regulation S-X, and each such guarantor (like the issuer of the guaranteed debt security) is also required to be registered under the Exchange Act and thereafter file annual and interim reports under that Act just as any other registrant.  Recognizing the substantial burdens of such disclosures that would otherwise be imposed in connection with registered public offerings of certain guaranteed debt securities involving parent companies and their wholly-owned subsidiaries, much of which would be duplicative, the SEC has embraced exceptions (as currently set out in Regulation S-X Rule 3-10 (“S-X 3-10”)) to instead permit the parent company in a qualifying offering of such guaranteed debt securities to file only its consolidated financial statements, together with certain condensed consolidating financial information (“Consolidating Financial Information”) intended to allow investors to distinguish between the obligor and non-obligor components of the consolidated group of companies represented in the parent’s consolidated financial statements.  S-X 3-10 also requires the registrant to include specified textual disclosure, where applicable,  about the limited nature of the assets and operations of the issuer, guarantor(s) or non-guaranteeing subsidiaries, as the case may be, and describing any material limitations on the ability of the parent or any guarantor to obtain funds (whether by dividend, loan or otherwise) from its subsidiaries and any other relevant limitations on any subsidiary’s use of its fund (together with the Consolidating Financial Information, the “Alternative Disclosure”).  The Alternative Disclosure is required to be included in a note to the parent’s consolidated audited financial statements and must cover the same periods for which the parent is required to include its consolidated financial statements.  The parent company is required to include the Alternative Disclosure in its annual and quarterly Exchange Act reports filed after the guaranteed debt securities are issued and to continue to do so as long as the securities remain outstanding, even for periods in which the issuer(s) and guarantors have no Exchange Act reporting obligation with respect to such securities.  In addition, for certain significant recently-acquired subsidiary guarantors, S-X 3-10 currently requires that the registration statement for the offering include the separate audited financial statements for such subsidiaries’ most recent fiscal year and unaudited financial statements for any interim period for which the parent is required to include its interim financial statements. Pursuant to Rule 12h-5, each guarantor or issuer subsidiary in any such qualifying transaction is exempt from the separate ongoing Exchange Act reporting obligations otherwise applicable to a registrant. Notwithstanding the advantages offered by the exception provided by S-X 3-10, the conditions to the current regulation, including that the subsidiaries be 100% owned by the parent and that all guarantees be full and unconditional, the often time-consuming process of producing and auditing the Consolidating Financial Information, as well as the requirement that the parent continue to include the Alternative Disclosure for as long as any of the guaranteed debt securities remain outstanding, have limited the range of subsidiaries that are used as guarantors, delayed offerings and/or led to reliance on Rule 144A for life offer structures for some guaranteed debt offerings to avoid registration. Current Disclosure Requirements for Securities Collateralized by Affiliate Securities.  Current Regulation S-X Rule 3-16 (“S-X 3-16”) requires a registrant to provide separate audited annual financial statements, as well as unaudited interim financial statements, for each affiliate whose securities constitute a “substantial portion”[1] of the collateral pledged for such registrant’s registered securities as though such affiliate were itself a registrant, and thereafter file annual and interim reports under the Exchange Act for such affiliate.  The production of the financial statements required by S-X 3-16 is often time consuming and costly to the issuer and the requirement is triggered entirely by the outcome of the substantial portion test, without regard to the comparative importance of the relevant affiliate to the registrant’s business and operations as a whole or the materiality of such financial statements to an investment decision.  To avoid the burden of preparing separate full financial statements for each affiliate whose securities are pledged as collateral, issuers often reduce collateral packages or structure collateralized securities as unregistered offerings.  Additionally, debt agreements are sometimes structured to specifically release collateral if and when such collateral may trigger the S-X 3-16 financial statement requirements. Proposed Amendments In the SEC’s effort to streamline the disclosure requirements in connection with certain guaranteed debt securities offered and sold in public offerings registered under the Securities Act, as well as simplify the current number of myriad offer structures entitled to disclosure relief, the amendments proposed to S-X 3-10 would: replace the current detailed list of offer structures permitted relief under S-X 3-10 with a more simple requirement that the debt securities be either: issued by the parent or co-issued by the parent, jointly and severally, with one or more of its consolidated subsidiaries; or issued by a consolidated subsidiary of the parent (or co-issued with one or more other consolidated subsidiaries of the parent) and fully and unconditionally guaranteed by the parent; replace the condition currently included in S-X 3-10 that a subsidiary issuer or guarantor be 100% owned by the parent company, requiring instead that the subsidiary merely be consolidated in the parent company’s consolidated financial statements in accordance with U.S. GAAP or, in the case of foreign private issuer, IFRS (as promulgated by the IASB).  As a result, in addition to 100% owned subsidiaries, controlled subsidiaries and joint ventures which are consolidated in the parent’s financial consolidated financial statements could be added as issuers or guarantors in such offerings and take advantage of the reduced disclosure permitted under the Proposal, provided the other conditions of the revised regulation are met; modify the requirement that all guarantees be full and unconditional, requiring only that the parent guarantee (in the case of a subsidiary issuer) be full and unconditional.  The proposal would thereby allow greater flexibility with the extent and nature of guarantees to be given by subsidiary guarantors, provided the terms and limitations of such guarantees are adequately disclosed; eliminate the Consolidating Financial Information currently required to be included in the registration statement and the parent’s Exchange Act annual and (where applicable) quarterly reports under S-X 3-10, and, in lieu thereof, add a new Rule 13-01 of Regulation S-X requiring such parent companies to include (i) certain summary financial information (the “Summary Financial Information”) for the parent and guarantors (the “Obligor Group”) on a combined basis (after eliminating intercompany transactions among members of this Obligor Group), and (ii) certain non-financial disclosures, including expanded qualitative disclosures about the guarantees and factors which could limit recovery thereunder, and any other quantitative or qualitative information that would be material to making an investment decision about the guaranteed debt securities (the Summary Financial Information and such non-financial disclosures, the “Proposed Alternative Disclosure”); require that the Summary Financial Information conform to the current provisions of Regulation S-X Rule 1-02(bb) and include summarized information as to the assets, liabilities and results of operations of the Obligor Group only; reduce the periods for which the Summary Financial Information must be provided, requiring such information for only the most recent fiscal year and any interim period for which consolidated financial statements of the parent are otherwise required to be included; permit the parent flexibility as to the location of the Summary Financial Information and other Proposed Alternative Disclosures, including in the notes to it consolidated financial statements, in the “management’s discussion and analysis of financial condition and results of operations” or immediately following “risk factors” (if any”) or the pricing information in the Securities Act registration statement and related prospectus and in Exchange Act reports on Forms 10-K, 20-F and 10-Q required to be filed during the fiscal year in which the first bona fide sale of the guaranteed debt securities is completed.  By permitting such flexibility, the parent issuers may realize greater speed to market for such offering as the Summary Financial Information would not be required to be audited if located outside the notes to its consolidated financial statements; by allowing a parent company the option to exclude the Summary Financial Information from the notes to its audited financial statements, such parent may realize greater speed to market for such offerings as the Summary Financial Information would not be required to be audited as part of the offer process; such Summary Financial Information would, however, be required to be included in a footnote to the parent’s annual and (where applicable) quarterly reports (and thus audited), beginning with its annual report filed on Form 10-K or 20-F for the fiscal year during which the first bona fide sale of the guaranteed debt securities is completed.  Thus, for example, for guaranteed debt securities issued in the second quarter of fiscal 2018, the Summary Financial Information would first be required to be included in the notes to the parent’s financial statements filed in its annual report filed on Form 10-K for its fiscal year 2019; eliminate the current requirement that, for so long as the guaranteed debt securities remain outstanding, a parent company continue to include the Consolidating Financial Information within its annual and interim reports (including for periods in which the Obligor Group is not then  subject to the reporting requirements of the Exchange Act).  Under the Proposal, the Summary Financial Information and other Proposed Alternative Disclosures would not be required to be included in the parent’s annual and quarterly reports for such periods in which the Obligor Group is not then subject to the reporting requirements of the Exchange Act.  Nonetheless, some parent companies with an Obligor Group that issues guaranteed debt securities on a regular basis may elect to continue to prepare and include the Revised Alternative Disclosure in its Exchange Act reports to ensure a more rapid access to the market for future transactions; and eliminate, with respect to recently-acquired subsidiary guarantors or issuers, the current requirement under S-X 3-10 that the parent include in the registration statement for the offering separate audited financial statements for the most recent fiscal year of the recently-acquired subsidiary (as well as separate unaudited interim financial statements for any relevant interim periods).  Note, however, that other provisions of Regulation S-X regarding the impact of recent material acquisitions and the potential requirement thereunder to include separate financial statements of the acquired entity (and, in some cases, pro forma consolidated financial information regarding the acquisition) remain unchanged by the Proposal. The proposed amendments to S-X 3-16 would: replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with a requirement to include the Summary Financial Information and any additional non-financial information material to investment decisions about the affiliate(s) (if more than one affiliate, such information could be provided on a combined basis) and the collateral arrangement(s).  The elimination of the requirement to include the affiliate’s separate audited financial statements would significantly decrease the cost and burden of an offering secured by the securities of an affiliate of the registrant; permit the proposed financial and non-financial affiliate disclosures to be located in filings in the same manner (and for reports for the same corresponding periods) as described above for the disclosures related to guarantors and guaranteed securities, which would bring the level and type of disclosure for collateralized securities in line with other forms of credit enhancement; and replace the requirement to provide disclosure only when the pledged securities meet or exceed a numerical threshold relative to the securities registered or being registered with a requirement to provide the applicable disclosures in all cases, unless they are immaterial to holders of the collateralized security, which would replace the arbitrary numerical cutoff with a consideration of materiality to investors. Set forth below, we summarizing the current requirements, and proposed changes to such requirements, for the use of abbreviated disclosure for subsidiary issuer/guarantors of certain guaranteed debt securities and for issuers of securities collateralized by securities of affiliates. Guaranteed Debt Securities:  Summary of Current Requirements for Abbreviated Disclosure and Proposed Revisions Current Provisions of S-X 3-10: Proposed Provisions: Offer Structures Permitted Disclosure Relief Finance subsidiary issuer of debt securities guaranteed by  parent; Operating subsidiary issuer of debt securities guaranteed by parent; Subsidiary issuer of debt securities guaranteed by  parent and one or more other subsidiaries; Single subsidiary guarantor of debt securities issued by parent; or Multiple subsidiary guarantors of debt securities issued by parent Debt securities: Issued by parent or co-issued by parent, jointly and severally, with one or more of its consolidated subsidiaries; or Issued by a consolidated subsidiary of parent (or co-issued with one or more other consolidated subsidiaries) and fully and unconditionally guaranteed by parent Conditions to Relief Each subsidiary issuer or guarantor must be 100% owned by parent; and All guarantees must be full and unconditional Subsidiary issuer/guarantors must be consolidated in the parent’s consolidated financial statements Only the parent guarantee, if any, must be full and unconditional Alternative Disclosure Condensed Consolidating Financial  Information, and certain textual disclosure Summary Financial Information for Obligor Group on a combined basis (after eliminating transactions between Obligors) and certain textual disclosure Periods for which Disclosure Required in Registration Statement For each year and any interim periods for which parent is required to include financial statements The most recent fiscal year and any interim period for which the parent is required to include financial statements Locations of Disclosure The Alternative Disclosure must be included in the notes to the parent’s audited consolidated financial statements (and in its unaudited interim financial statements where such financial statements are required to be included) In the Registration Statement and in Exchange Act reports filed during the fiscal year in which the debt securities are first bona fide offered to the public, the parent has the choice of including them in the notes to its consolidated financial statements or elsewhere, including within “management’s discussion and analysis of financial condition and results of operations” or immediately following “risk factors” For the parent’s annual report for the fiscal year in which the debt securities were first offered to the public, and all Exchange Act reports required to be filed thereafter, the Proposed Alternative Disclosures must be included in the notes to the parent’s consolidated financial statements How Long is Exchange Act Disclosure Required For so long as any of the debt securities remain outstanding Only for periods in which the Obligors are required to file Exchange Act reports in respect of the debt securities Additional Requirements For Recently Acquired Subsidiary Guarantor/Issuers Parent must include separate audited financial statements of the recently acquired subsidiary issuer/guarantor for the most recent fiscal and any interim period for which the parent is required to include financial statements No separate financial statements of a recently acquired subsidiary issuer/guarantor is required for relief under the Proposal Summary of Current Disclosure Requirements for Securities Collateralized by Securities of Affiliates and the Proposed Revisions Current Provisions of S-X 3-16: Proposed Provisions: Offer Structure Triggering Disclosure Requirement Securities issued by a registrant and collateralized with the securities of its affiliates where such collateral constitutes a “substantial portion” of the collateral for any class of securities Securities issued by a registrant and collateralized with the securities of its affiliates, unless such collateral is immaterial to making an investment decision about the registrant’s securities Additional Disclosure Required If the pledged securities of an affiliate constitute a “substantial portion” of the collateral for the secured class of securities, separate audited annual financial statements, as well as unaudited interim financial statements, for such affiliate as though such affiliate were itself a registrant Summary Financial Information with respect to any affiliate whose securities are pledged to secure a class of securities, and any additional non-financial information material to investment decisions about the affiliate(s) and the collateral arrangement Basis of Presentation Separate financial statements for each affiliate whose securities constitute a “substantial portion” of the collateral Summary Financial Information of affiliates consolidated in the registrant’s financial statements can be presented on combined basis If information is applicable to a subset of affiliates (but not all) separate Summary Financial Information required for such affiliates Periods for which Disclosure Required in Registration Statement For each year and any interim period as if affiliate were a registrant The most recent fiscal year and any interim period for which the registrant is required to include consolidated financial statements Locations of Disclosure Separate financial statements required to be included in the registration statement in the registrant’s annual report on Form 10-K or 20-F Disclosure not required in quarterly reports of the registrant In the Registration Statement and in Exchange Act reports filed during the fiscal year in which the first bona fide sale is completed, the registrant has the choice of including them in the notes to its consolidated financial statements or elsewhere, including within “management’s discussion and analysis of financial condition and results of operations” or immediately following “risk factors” For the registrant’s annual report for the fiscal year in which the first sale was completed, and all Exchange Act reports required to be filed thereafter, the required information must be included in the notes to the registrant’s consolidated financial statements   The SEC is seeking public comments on its proposal for a period of 60 days from July 24, 2018. Comments can be submitted on the internet at http://www.sec.gov/rules/other.shtml; via email to  rule-comments@sec.gov (File Number S7-19-18 should be included on the subject line); or via mail to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.    [1]   E.g., if the aggregate principal amount, par value or book value of the pledged securities as carried by the issuer of the collateralized securities, or market value, equals 20% or more of the aggregate principal amount of the secured class of securities offered. 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) Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Alina E. Iarve – New York (+1 212-351-2406, aiarve@gibsondunn.com) Michael J. Scanlon – Washington, D.C. (+1 202-887-3668, mscanlon@gibsondunn.com) Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 12, 2018 |
Shareholder Proposal Developments During the 2018 Proxy Season

Click for PDF This client alert provides an overview of shareholder proposals submitted to public companies during the 2018 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests. Top Shareholder Proposal Takeaways From the 2018 Proxy Season As discussed in further detail below, based on the results of the 2018 proxy season, there are several key takeaways to consider for the coming year: Shareholder proposals continue to be used by certain shareholders and to demand significant time and attention.  Although the overall number of shareholder proposals submitted decreased 5% to 788, the average support for proposals voted on increased by almost 4 percentage points to 32.7%, suggesting increased traction among institutional investors.  In addition, the percentage of proposals that were withdrawn increased by 6 percentage points to 15%, and the number of proponents submitting proposals increased by 20%.  However, there are also some interesting ongoing developments with respect to the potential reform of the shareholder proposal rules (including the possibility of increased resubmission thresholds). It is generally becoming more challenging to exclude proposals, but the Staff has applied a more nuanced analysis in certain areas.  Success rates on no-action requests decreased by 12 percentage points to 64%, the lowest level since 2015.  This is one reason (among several) why companies may want to consider potential engagement and negotiation opportunities with proponents as a key strategic option for dealing with certain proposals and proponents.  However, it does not have to be one or the other—20% of no-action requests submitted during the 2018 proxy season were withdrawn (up from 14% in 2017), suggesting that the dialogue with proponents can (and should) continue after filing a no-action request.  In addition, companies are continuing to experience high levels of success across several exclusion grounds, including substantial implementation arguments and micromanagement-focused ordinary business arguments.  Initial attempts at applying the Staff’s board analysis guidance from last November generally were unsuccessful, but they laid a foundation that may help develop successful arguments going forward.  The Staff’s announcement that it will consider, in some cases, a board’s analysis in ordinary business and economic relevance exclusion requests provided companies with a new opportunity to exclude proposals on these bases.  Among other things, under the new guidance, the Staff will consider a board’s analysis that a policy issue is not sufficiently significant to the company’s business operations and therefore the proposal is appropriately excludable as ordinary business.  In practice, none of the ordinary business no‑action requests that included a board analysis were successful in persuading the Staff that the proposal was not significant to the company (although one request based on economic relevance was successful).  Nevertheless, the additional guidance the Staff provided through its no-action request decisions should help provide a roadmap for successful requests next year, and, therefore, we believe that companies should not give up on trying to apply this guidance.  It will be important for companies to make a determination early on as to whether they will seek to include the board’s analysis in a particular no-action request so that they have the necessary time to create a robust process to allow the board to produce a thoughtful and well-reasoned analysis. Social and environmental proposals continue to be significant focus areas for proponents, representing 43% of all proposals submitted.  Climate change, the largest category of these proposals, continued to do well with average support of 32.8% and a few proposals garnering majority support.  We expect these proposals will continue to be popular going into next year.  Board diversity is another proposal topic with continuing momentum, with many companies strengthening their board diversity commitments and policies to negotiate the withdrawal of these proposals.  In addition, large asset managers are increasingly articulating their support for greater board diversity. Don’t forget to monitor your EDGAR page for shareholder-submitted PX14A6G filings.  Over the past two years, there has been a significant increase in the number of exempt solicitation filings, with filings for 2018 up 43% versus 2016.  With John Chevedden recently starting to submit these filings, we expect this trend to continue into next year.  At the same time, these filings are prone to abuse because they have, to date, escaped regulatory scrutiny. Click here to READ MORE. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance practice group: Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Gillian McPhee – Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com) Maia Gez – New York (+1 212-351-2612, mgez@gibsondunn.com) Aaron Briggs – San Francisco (415-393-8297, abriggs@gibsondunn.com) Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com) Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 12, 2018 |
The Politics of Brexit for those Outside the UK

Click for PDF Following the widely reported Cabinet meeting at Chequers, the Prime Minister’s country residence, on Friday 6 June 2018, the UK Government has now published its “White Paper” setting out its negotiating position with the EU.  A copy of the White Paper can be found here. The long-delayed White Paper centres around a free trade area for goods, based on a common rulebook.  The ancillary customs arrangement plan, in which the UK would collects tariffs on behalf of the EU, would then “enable the UK to control its own tariffs for trade with the rest of the world”.  However, the Government’s previous “mutual recognition plan” for financial services has been abandoned; instead the White Paper proposes a looser partnership under the framework of the EU’s existing equivalence regime. The responses to the White Paper encapsulate the difficulties of this process.  Eurosceptics remain unhappy that the Government’s position is far too close to a “Soft Brexit” and have threatened to rebel against the proposed customs scheme; Remainers are upset that services (which represent 79% of the UK’s GDP) are excluded. The full detail of the 98-page White Paper is less important at this stage than the negotiating dynamics.  Assuming both the UK and the EU want a deal, which is likely to be the case, M&A practitioners will be familiar with the concept that the stronger party, here the EU, will want to push the weaker party, the UK, as close to the edge as possible without tipping them over.  In that sense the UK has, perhaps inadvertently, somewhat strengthened its negotiating position – albeit in a fragile way. The rules of the UK political game In the UK the principle of separation of powers is strong as far as the independence of the judiciary is concerned.  In January 2017 the UK Supreme Court decided that the Prime Minister could not trigger the Brexit process without the authority of an express Act of Parliament. However, unlike the United States and other presidential systems, there is virtually no separation of powers between legislature and executive.  Government ministers are always also members of Parliament (both upper and lower houses).  The government of the day is dependent on maintaining the confidence of the House of Commons – and will normally be drawn from the political party with the largest number of seats in the House of Commons.  The Prime Minister will be the person who is the leader of that party. The governing Conservative Party today holds the largest number of seats in the House of Commons, but does not have an overall majority.  The Conservative Government is reliant on a “confidence and supply” agreement with the Northern Ireland Democratic Unionist Party (“DUP”) to give it a working majority. Maintaining an open land border between Northern Ireland and the Republic of Ireland is crucial to maintaining the Good Friday Agreement – which underpins the Irish peace process.  Maintaining an open border between Northern Ireland and the rest of the UK is of fundamental importance to the unionist parties in Northern Ireland – not least the DUP.  Thus, the management of the flow of goods and people across the Irish land border, and between Northern Ireland and the UK, have become critical issues in the Brexit debate and negotiations.  The White Paper’s proposed free trade area for goods would avoid friction at the border. Parliament will have a vote on the final Brexit deal, but if the Government loses that vote then it will almost certainly fall and a General Election will follow – more on this below. In addition, if the Prime Minister does not continue to have the support of her party, she would cease to be leader and be replaced.  Providing the Conservative Party continued to maintain its effective majority in the House of Commons, there would not necessarily be a general election on a change in prime minister (as happened when Margaret Thatcher was replaced by John Major in 1990) The position of the UK Government The UK Cabinet had four prominent campaigners for Brexit: David Davis (Secretary for Exiting the EU), Boris Johnson (Foreign Secretary), Michael Gove (Environment and Agriculture Secretary) and Liam Fox (Secretary for International Trade).  David Davis and Boris Johnson have both resigned in protest after the Chequers meeting but, so far, Michael Gove and Liam Fox have stayed in the Cabinet.  To that extent, at least for the moment, the Brexit camp has been split and although the Leave activists are unhappy, they are now weaker and more divided for the reasons described below. The Prime Minister can face a personal vote of confidence if 48 Conservative MPs demand such a vote.  However, she can only be removed if at least 159 of the 316 Conservative MPs then vote against her.  It is currently unlikely that this will happen (although the balance may well change once Brexit has happened – and in the lead up to a general election).  Although more than 48 Conservative MPs would in principle be willing to call a vote of confidence, it is believed that they would not win the subsequent vote to remove her.  If by chance that did happen, then Conservative MPs would select two of their members, who would be put to a vote of Conservative activists.  It is likely that at least one of them would be a strong Leaver, and would win the activists’ vote. The position in Parliament The current view on the maths is as follows: The Conservatives and DUP have 326 MPs out of a total of 650.  It is thought that somewhere between 60 and 80 Conservative MPs might vote against a “Soft Brexit” as currently proposed – and one has to assume it will become softer as negotiations with the EU continue.  The opposition Labour party is equally split.  The Labour leadership of Jeremy Corbyn and John McDonnell are likely to vote against any Brexit deal in order to bring the Government down, irrespective of whether that would lead to the UK crashing out of the EU with no deal.  However it is thought that sufficient opposition MPs would side with the Government in order to vote a “Soft Brexit” through the House of Commons. Once the final position is resolved, whether a “Soft Brexit” or no deal, it is likely that there will be a leadership challenge against Mrs May from within the Conservative Party. The position of the EU So far the EU have been relatively restrained in their public comments, on the basis that they have been waiting to see the detail of the White Paper. The EU has stated on many occasions that the UK cannot “pick and choose” between those parts of the EU Single Market that it likes, and those it does not.  For this reason, the proposals in the White Paper (which do not embrace all of the requirements of the Single Market), are unlikely to be welcomed by the EU.  It is highly likely that the EU will push back on the UK position to some degree, but it is a dangerous game for all sides to risk a “no deal” outcome.  Absent agreement on an extension the UK will leave the EU at 11 pm on 29 March 2019, but any deal will need to be agreed by late autumn 2018 so national parliaments in the EU and UK have time to vote on it. Finally Whatever happens with the EU the further political risk is the possibility that the Conservatives will be punished in any future General Election – allowing the left wing Jeremy Corbyn into power. It is very hard to quantify this risk.  In a recent poll Jeremy Corbyn edged slightly ahead of Theresa May as a preferred Prime Minister, although “Don’t Knows” had a clear majority. This client alert was prepared by London partners Charlie Geffen and Nicholas Aleksander and of counsel Anne MacPherson. We have a working group in London (led by Nicholas Aleksander, Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) addressing Brexit related issues.  Please feel free to contact any member of the working group or any of the other lawyers mentioned below. Ali Nikpay – Antitrust ANikpay@gibsondunn.com Tel: 020 7071 4273 Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225 Nicholas Aleksander – Tax NAleksander@gibsondunn.com Tel: 020 7071 4232 Philip Rocher – Litigation PRocher@gibsondunn.com Tel: 020 7071 4202 Jeffrey M. Trinklein – Tax JTrinklein@gibsondunn.com Tel: 020 7071 4224 Patrick Doris – Litigation; Data Protection PDoris@gibsondunn.com Tel:  020 7071 4276 Alan Samson – Real Estate ASamson@gibsondunn.com Tel:  020 7071 4222 Penny Madden QC – Arbitration PMadden@gibsondunn.com Tel:  020 7071 4226 Selina Sagayam – Corporate SSagayam@gibsondunn.com Tel:  020 7071 4263 Thomas M. Budd – Finance TBudd@gibsondunn.com Tel:  020 7071 4234 James A. Cox – Employment; Data Protection JCox@gibsondunn.com Tel: 020 7071 4250 Gregory A. Campbell – Restructuring GCampbell@gibsondunn.com Tel:  020 7071 4236 © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 26, 2018 |
Toward T+0: Preparing For Faster Securities Settlements

New York of counsel Nicolas H.R. Dumont is the author of “Toward T+0: Preparing For Faster Securities Settlements” [PDF] published in Law360 on June 26, 2018.

May 15, 2018 |
CFTC Chairman and Chief Economist Co-Author “Swaps Reg Reform 2.0”

Click for PDF On April 26, 2018, Commodity Futures Trading Commission (“CFTC”) Chairman J. Christopher Giancarlo and the CFTC’s Chief Economist Bruce Tuckman released a co-authored white paper titled Swaps Regulation Version 2.0: An Assessment of the Current Implementation of Reform and Proposals for Next Steps (“White Paper”),[1] which analyzes and assesses the CFTC’s current implementation of the swaps reforms promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).[2]  The White Paper focuses on the following five specific areas of Dodd-Frank swaps reform:  clearing and central counterparties (“CCPs”); swaps data reporting; swaps execution rules; swap dealer capital requirements; and the end-user exception.  The paper’s title is intended to draw an analogy between the need to further refine the CFTC’s swaps regulatory reform under Dodd-Frank and the process undertaken by technology companies when updating or upgrading their software applications.  Indeed, the authors suggest that the CFTC—like a technology company—needs to assess where its Dodd-Frank swaps regulations are working, where those regulations require “updates” and where they require an upgrade or a complete overhaul. As part of its analysis and assessment, the White Paper primarily cites to academic research and market activity in reaching certain conclusions regarding the progress made to date and areas for improvement in the CFTC’s implementation of Dodd-Frank swaps reform.  The authors also cite to the CFTC’s four years of regulatory experience in implementing Dodd-Frank swaps reform in the United States as the basis upon which they make certain recommendations “to recognize success, address flaws, recalibrate imprecision and optimize measures. . . .”[3] Although the White Paper is comprehensive in its scope, it is noteworthy what the paper does not cover.  For instance, while the White Paper includes the authors’ recommendations for further changes to the CFTC’s swaps regulations and guidance, the paper does not propose detailed or prescriptive modifications to specific CFTC rules.  Thus, the paper describes at a high level what the authors envision would result in regulations that are more “economy-focused” and “what’s in the best interest of the markets.”[4] Additionally, the authors make clear that the White Paper does not express the views of the full commission.  Interestingly, however, the White Paper does include significant input from CFTC senior staff across all operating divisions (i.e., the directors of the CFTC’s Division of Market Oversight, the Division of Swap Dealer and Intermediary Oversight, and the Division of Clearing and Risk). Further, the White Paper does not discuss other important Dodd-Frank swaps reform topics such as position limits, the CFTC’s swap dealer de minimis threshold, the bounds of the CFTC’s cross border authority or how best to harmonize the CFTC’s swaps ruleset with the security-based swaps ruleset of its sister agency, the Securities and Exchange Commission. Lastly, the White Paper does not outline the timetable for any proposed changes to the CFTC’s swaps regulations.  In unveiling the White Paper at an industry conference, Chairman Giancarlo noted that the CFTC will likely begin issuing proposals in the areas of trading and swaps data reporting in the early part of the summer of 2018.  Chairman Giancarlo further noted with respect to timing that, “We’re not in the wake of a crisis right now — we need to take the time to get this right.  We have an ambitious timetable, and we will get this done, but we will do this right.”[5] In this client alert, we have summarized below some of the key takeaways from each of the five topical areas covered in the White Paper. Please contact us if you have any questions regarding the White Paper or the CFTC’s widely anticipated reforms to its swaps regulations. Clearing and CCPs The White Paper notes that swaps clearing is probably the most far-reaching and consequential of the swaps reforms adopted under Title VII of Dodd-Frank.  The authors cite data collected by the CFTC in finding that the CFTC’s implementation of Dodd-Frank’s clearing mandate was highly successful based on the increasing volumes of cleared swaps when compared to before the enactment of Dodd-Frank.[6] This section of the White Paper then focuses on the topics of CCP resources to maintain viability under extreme but plausible conditions, CCP recovery when those resources prove insufficient and CCP resolution in the highly unlikely event that a CCP fails.  In short, the authors applaud the substantial progress that CCPs and the CFTC have made in order to ensure that CCPs are safe and sound under extreme but plausible scenarios and the work that CCPs have undertaken to develop credible recovery plans to remain viable without government assistance. In terms of their recommendations to address continuing challenges in this space, the authors assert—without picking winners or losers as between CCPs and their clearing members—that further market-wide discussions are necessary regarding: (1) the development of potential solutions to ensure the liquidity of prefunded resources; (2) the network and systemic effects of defaults; (3) the liquidation costs of defaulted positions; and (4) improving transparency and predictability of CCP recovery plans.  Lastly, the authors note that the CFTC must continue to coordinate with the Federal Deposit Insurance Corporation (“FDIC”) in formulating resolution plans, which would guide the authority vested in the FDIC under Dodd-Frank to intervene upon the highly unlikely event that a CCP fails. Swaps Data Reporting In the section of the White Paper covering swaps data reporting, the authors note that, while the state of data reporting has improved considerably, the CFTC’s current swaps reporting regime is “suboptimal” and “imperfect.”  They cite the lack of uniform data standards and nomenclature as the biggest problems with the regime.  Another cited problem is the fact that the CFTC has not provided sufficient technical specifications to swap data repositories (“SDRs”) in collecting data from reporting parties. The authors then discuss a number of steps that the CFTC has taken within the last few years to improve the effectiveness of its swaps reporting regime, including the CFTC’s cooperation with the global regulatory community, SDRs and reporting counterparties to harmonize uniform data standards, nomenclature and technical guidance.  The paper also mentions the work that CFTC staff has begun as outlined in the CFTC’s 2017 Roadmap to Achieve High Quality Swaps Data (“Roadmap”).[7]  Through the Roadmap consultation process, CFTC staff has heard from a wide range of market participants and interested parties.  Under consideration in the Roadmap are changes to the CFTC’s reporting rules with the goal of making available to the CFTC and to the public more complete, more accurate and higher quality data. Finally, in this section, the authors urge the CFTC to ensure that its swaps reporting reforms will remain technologically neutral in order to allow for technological advancement (e.g., through the use of distributed ledger technology) to make reporting systems more reliable, more automated and less expensive.  They also urge CFTC staff and market participants to continue to collaborate in order to recalibrate the trade data reporting regime so that it is specific, accurate, and useful enough to:  (1) capture systemic risk, market abuse and market manipulation; (2) harmonize with globally accepted risk data fields; and (3) achieve transparency while promoting healthy trading liquidity. Swaps Execution Rules In the section covering swaps execution, the authors repeat many of the same concerns and arguments made by Chairman Giancarlo in his 2015 White Paper on swap trading reforms, which was titled Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank, White Paper.[8]  Essentially, they assert that Congress did not mandate that swap execution facilities (“SEFs”) utilize any particular method of trading and execution.  In its final swaps execution rules, however, the CFTC determined that swaps which are “made available to trade” should be subject to the CFTC’s mandatory trade execution requirement and must be traded through specified execution protocols (i.e., an order book or a request-for-quote system to three).  The authors cite to comprehensive industry research in noting that the CFTC’s current swaps execution requirements have stunted swaps trading in the United States, fragmented global trading liquidity, increased market liquidity risk, restricted technological innovation and incentivized a significant amount of price discovery and liquidity to take place off-exchange. To correct these ills, the authors recommend that the CFTC eliminate the requirement that SEFs maintain an order book and permit SEFs to offer any means of interstate commerce for the trading or execution of swaps subject to the CFTC’s mandatory trade execution requirement.  Additionally, they argue that the CFTC also should expand the category of swaps subject to the trading mandate to include all swaps that are subject to the CFTC’s clearing mandate, unless no SEF or designated contract market lists the swap for trading.  Finally, they suggest that the CFTC’s regulatory focus should be on enhancing the professional conduct of swaps execution through licensure, testing and the adoption of professional conduct principles. Swap Dealer Capital In the section covering swap dealer capital, the authors note that while current bank capital rules are extremely relevant to the swaps dealing business and the efficiency of swap markets, there are aspects of the current regime that result in an unintended bias against risk taken through swaps markets.  To correct this bias, the White Paper argues that bank capital rules need to allow firms to rely on internal models instead of a standardized approach.  The paper also argues that the current standardized approach and industry-developed models inappropriately rely on swap notional amounts to measure risk.[9] The authors do not offer one specific recommended approach to correct these concerns.  Instead, the paper offers a couple of remedial approaches.  One approach suggested by the authors to correct these concerns is for regulators to continue to refine—and by necessity complicate—the standardized models imposed on market participants.  Another suggested approach is for regulators to improve their capabilities with respect to approving and monitoring the use of bank internal models. End-User Exception In the last section of the White Paper, the authors assert that Congress intended a robust end-user exception from Dodd-Frank clearing and margin requirements for entities that are unlikely sources of systemic risk.  They further assert that there are a number of entities that currently fall within the Dodd-Frank definition of “financial entity” (and thus are ineligible to elect an exception from those requirements) but should not be captured under the definition because those entities are not sources of systemic risk.  Specifically, the paper identifies bank holding companies, savings and loan holding companies and certain relatively small financial institutions as being broadly and unnecessarily captured under the definition. To reduce the burdens on these categories of end-users, the authors offer a few recommendations.  First, the authors recommend that the CFTC codify into regulation relief for bank holding companies and savings and loan holding companies that is currently provided in CFTC staff no-action relief.[10] Second, the authors recommend that the CFTC exempt certain small financial institutions including pension funds and small insurance companies from clearing and margin requirements through a “material swaps exposure” test, which is similar to the test set forth in the CFTC’s final uncleared margin rules.  Related to their second recommendation, the authors further assert that the CFTC and prudential regulators should consider exempting small financial end-users from uncleared margin requirements by tweaking the material swaps exposure thresholds to address real risk as opposed to risk based on swap notional amounts.  Interestingly, the authors cite to studies suggesting that pension funds and insurance companies should not broadly be excluded from the definition because larger entities might still pose significant risks. Finally, the authors argue that the CFTC should amend the calculation of initial margin for uncleared swaps in the CFTC’s uncleared margin rules so that those rules do not promote a bias against the trading of uncleared swaps.  On this point, the authors argue that Congress did not intend for the CFTC’s and prudential regulators’ uncleared margin rules to favor cleared products.    [1]   J. Christopher Giancarlo and Bruce Tuckman, Swaps Regulation Version 2.0: An Assessment of the Current Implementation of Reform and Proposals for Next Steps (Apr. 26, 2018), available at https://www.cftc.gov/sites/default/files/2018-04/oce_chairman_swapregversion2whitepaper_042618.pdf.    [2]   Dodd-Frank Wall Street Reform and Consumer Protection Act, 124 Stat. 1376, Pub. Law 111-203 (July 21, 2010), as amended.    [3]   White Paper at p.i.    [4]   CFTC Press Release, No. 7719-18, CFTC Chairman Unveils Reg Reform 2.0 Agenda (Apr. 26, 2018), available at https://www.cftc.gov/PressRoom/PressReleases/7719-18.    [5]   Id.    [6]   See White Paper, p.7 (“According to data collected by the CFTC on U.S. reporting entities, about 85% of both new interest rate swaps and new credit default swaps were cleared in 2017. Precise data as far back as 2010 are not available, but the Bank for International Settlements (BIS) estimated minimum global clearing rates at that time of about 40% for interest rate swaps and 8% for credit default swaps.”).    [7]   Staff Advisory, Division of Market Oversight, Roadmap to Achieve High Quality Swaps Data, U.S. Commodity Futures Trading Commission, July 10, 2017, available at http://www.cftc.gov/idc/groups/public/@newsroom /documents/file/dmo_swapdataplan071017.pdf.    [8]   J. Christopher Giancarlo, Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank, Jan. 29, 2015, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom /documents/file/sefwhitepaper012915.pdf.    [9]   The CFTC’s Chief Economist and others have published a paper proposing an alternative approach to measuring swaps risk.  See Richard Haynes, John Roberts, Rajiv Sharma and Bruce Tuckman, Introducing ENNs: A Measure of the Size of Interest Rate Swap Markets (Jan. 2018), available at https://www.cftc.gov/ sites/default/files/idc/groups/public/@economicanalysis/documents/file/oce_enns0118.pdf. [10]   See CFTC Letter 16-01 (Jan. 8, 2016). The following Gibson Dunn lawyers assisted in preparing this client update: Carl Kennedy and Jeffrey Steiner. 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 Financial Institutions practice group, or any of the following: Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Carl E. Kennedy – New York (+1 212-351-3951, ckennedy@gibsondunn.com) Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 4, 2018 |
Efforts to Strengthen U.S. Public Capital Markets Continue – New SIFMA Report Provides Recommendations to Help More Companies Go and Stay Public

Click for PDF On April 27, 2018, the Securities Industry and Financial Markets Association (“SIFMA”), the leading industry group representing broker-dealers, banks and asset managers, along with other securities industry related groups, released a report called “Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public” (the “Report”).[1]  In response to the decline in the number of IPOs and the number of public companies generally in the United States over the last twenty years, the Report provides recommendations aimed at reducing perceived impediments to becoming and remaining a public company. As the Report notes, the United States is now home to only about half the number of public companies that existed 20 years ago.  This decline is believed to have had adverse repercussions for the American economy generally, and the jobs market specifically.  For example, the Report cites a 2010 study by IHS Global Insight suggesting that, generally speaking, 92% of a company’s job growth occurs after it completes an IPO.[2]  In addition, the growth of private capital markets at the expense of public capital markets has raised concerns that individual investors are being marginalized.  More specifically, as many of the most innovative companies in the U.S. stay private longer and raise significant amounts of capital privately, the returns generated by such companies appear to accrue disproportionally to institutional, high net worth and other similar investors.  As Securities and Exchange Commission (the “SEC”) Chairman Jay Clayton noted in a July 2017 speech, “the reduction in the number of U.S.-listed public companies is a serious issue for our markets and the country more generally.  To the extent companies are eschewing our public markets, the vast majority of main street investors will be unable to participate in their growth.  The potential lasting effects of such an outcome to the economy and society are, in two words, not good.” To remedy this decline, the Report makes recommendations in five areas: 1.      enhance several provisions of the Jumpstart Our Business Startups Act (the “JOBS Act”); 2.      encourage more research on emerging growth companies (“EGCs”)[3] and other small public companies; 3.      improve certain corporate governance, disclosure, and other regulatory requirements; 4.      address concerns relating to financial reporting; and 5.      tailor the equity market structure for small public companies. 1. Enhancing the JOBS Act Over the past six years, the JOBS Act has demonstrated that rules and regulations around capital raising can be modernized while maintaining investor protections.  Its accomodations have been widely adopted. The Report sets forth four recommendations to further enhance some of the key provisions of the JOBS Act: Extend Title I “on-ramp provisions.” The JOBS Act Title I “on-ramp” provisions  provide a number of significant benefits to EGCs, including confidential review of registration statements and streamlined financial and executive compensation disclosure requirements, among others.  The Report recommends that the benefits available to EGCs be extended from 5 years to 10 years after a company goes public.  The “on-ramp” provisions have been widely utilized by EGCs since enactment.  By increasing the length of time these benefits are available, the Report argues that even more companies may consider going public. Expand the “testing the waters” exemption to all issuers. The Report recommends that Section 5(d) of the Securities Act of 1933 (the “Securities Act”) be modified to permit all issuers, not just EGCs, to engage in “testing the waters” communications with qualified institutional buyers (“QIBs”) or institutional accredited investors to determine interest in a securities offering.  Consistent with this, in April 2018, SEC Director of Corporation Finance Bill Hinman reported to a congressional committee that the SEC is planning to expand the “testing the waters” benefit to all companies.  This change would allow companies to better understand investor interest prior to undertaking the expense of an IPO. Increase exemption for reporting on adequacy of internal controls from 5 to 10 years for EGCs. The JOBS Act gives EGCs a five-year exemption from Section 404(b) of the Sarbanes-Oxley Act, which requires external auditors to attest to the adequacy of the company’s internal control on financial reporting.  The Report recommends that this be extended from 5 years to 10 years for EGCs that have less than $50 million in revenue and less than $700 million in public float.  This change is designed to ensure that internal control reporting requirements, and associated costs, are appropriately scaled to the size of the company. Remove “phase out” rules relating to EGC status. The Report argues that the “phase out” rules related to EGC status should be removed, specifically given the overlap in certain status designations (e.g., companies who qualify as both a large accelerated filer and an EGC face uncertainty as to their status after going public. See Section 4 below).  Instead, issuers should be allowed to maintain their EGC status based on the JOBS Act definition.  The Report suggests that the SEC could still set a public float or other threshold requirement to limit the size of company that could benefit from the change in phase out triggers.[4] 2. Encourage More Research  Research coverage can increase interest from investors in a company, and a lack of research coverage can adversely impact liquidity for certain companies.  However, the Report notes that 61% of all companies listed on a major exchange with less than a $100 million market capitalization have no research coverage.  To address this disparity, the Report makes the following three recommendations: Amend the Securities Act Rule 139 research safe harbor to allow continuing research coverage for all issuers during an offering. The Report recommends that Rule 139 of the Securities Act be amended to provide that continued research analyst coverage does not constitute an offer or sale of securities, before, during, or after an offering by such issuer, regardless of whether the publishing broker-dealer is also an underwriter in the offering.  Currently, only issuers who are eligible to use Form S-3 qualify for the Rule 139 safe harbor.  As the Report notes, if an analyst has already been covering an issuer, there is no obvious logic to distinguishing companies that are S-3 eligible for the purposes of research coverage. Allow investment banking and research analysts to attend “pitch” meetings together. While the JOBS Act permits investment banks and analysts to jointly attend pitch meetings, given other restrictions on the content of what those discussions may contain, bankers and analysts typically refrain from jointly attending pitch meetings with IPO candidates.  The Report proposes that the SEC consider the removal of barriers prohibiting investment banks and analysts from jointly attending these meetings, as long as no direct or indirect promise of favorable research is given.  The Report also endorses reviewing the 2003 global research settlement between many large investment banks and the SEC, self-regulatory organizations, such as Financial Industry Regulatory Authority (“FINRA”), and other regulators regarding research analyst conflicts of interest (the “Global Research Settlement”).  The Global Research Settlement precludes settling firms from having research analysts attend EGC IPO pitch meetings, irrespective of the regulatory easing afforded by the JOBS Act.[5] Investigate why pre-IPO research remains limited. Despite the liberalization of “gun jumping” rules related to research as part of the JOBS Act, the Report states that very few investment banks have published any pre-IPO research.  The Report urges the SEC to investigate why the JOBS Act has not led to an increase in pre-IPO research.  This may be due to existing FINRA rules, the Global Research Settlement, and federal and state law liability concerns.  The Report advocates for the SEC to examine this issue in an effort to increase pre-IPO research coverage. 3. Improve Certain Corporate Governance, Disclosure and other Regulatory Requirements According to the 2011 IPO Task Force, a group convened in response to a capital access roundtable sponsored by the Department of the Treasury, 92% of U.S. public company CEOs have found the “administrative burden of public reporting” to be a significant barrier to completing an IPO.  In addition, pressure from activist investors (often supported by proxy advisory firms) can distract management from carrying out their management duties, which in turn costs shareholders.  In response to these and other pressures, the Report recommends the following eleven improvements to help deal with some of these issues: Institute reasonable and effective SEC oversight of proxy advisory firms. Proxy advisory firms have become so influential over public companies that they have in essence become the standard setters for corporate governance.  Two advisory firms effectively control the market: Institutional Shareholder Services (“ISS”) and Glass Lewis.  According to the Report, these firms operate with significant conflicts of interest and lack transparency, discouraging small and midsized companies from tapping into the public markets.  Legislation introduced in December 2017 would require proxy advisory firms to register with the SEC and to (1) disclose and manage their conflicts of interest, (2) provide issuers with reasonable time to respond to errors or flaws in advisory voting recommendations, and (3) demonstrate that they have the proper expertise to make accurate and objective recommendations.  The Report endorses the passage of this or similar legislation, and at a minimum, recommends the SEC’s withdrawal of the Egan-Jones Proxy Services (avail. May 27, 2004) and Institutional Shareholder Services, Inc. (avail. Sept. 15, 2004) no-action letters that minimize scrutiny of proxy advisory firms with respect to conflicts of interest. Reform shareholder proposal “resubmission thresholds” under Rule 14a-8 of the Securities Exchange Act of 1934 (the “Exchange Act”) to facilitate more meaningful shareholder engagement with management. Rule 14a-8 allows shareholders who own a relatively small amount of company shares to include qualifying proposals in a company’s proxy materials.  Under current law, Rule 14-8a(i)(12) (the “Resubmission Rule”) allows companies to exclude certain shareholder proposals that were voted on in recent years.  Specifically, a company may exclude a resubmitted proposal if in the last five years the proposal: was voted on once and received less than 3% of votes cast; was voted on twice and received less than 6% of votes cast the last time it was voted on; or was voted on three or more times and received less than 10% of votes cast the last time it was voted on. The Report asserts that the proxy process is currently subject to abuse by a “minority of special interests that use it to advance idiosyncratic agendas.”  The Report argues that raising these resubmission thresholds, as the SEC proposed in 1997 (6%, 15%, and 30%), is a “good starting point” to modernize the SEC’s shareholder proposal system. The Report also notes that the SEC should withdraw Staff Legal Bulletin 14H (Oct. 22, 2015), which effectively declawed Rule 14a-8(i)(9) that allowed companies to exclude certain shareholder proposals that directly conflict with a management proposal. Simplify quarterly reporting requirements. Due to the increased size and complexity of annual (Form 10-K) and quarterly (Form 10‑Q) reports, compliance has become increasingly costly and more difficult, especially for smaller companies.  The Report recommends granting EGCs the option of issuing a press release that includes quarterly earnings results in lieu of a full Form 10-Q.  This approach would simplify the quarterly reporting process for EGCs and reduce the burdens related to financial quarterly reporting, while at the same time still providing investors with necessary material information. The “materiality” standard for corporate disclosure should be maintained and certain disclosure requirements should be scaled for EGCs. The Report suggests that the SEC should maintain the longstanding “materiality” standard with respect to corporate disclosures.  The Report points to the conflict minerals and pay ratio rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) as examples of disclosure requirements that veer the application of securities laws away from their original mission to provide material information to investors.The Report also recommends that policymakers continue to scale down disclosure requirements for EGCs.  For example, the Report proposes exempting EGCs from conflict minerals, mine safety, and resources extraction disclosures implemented under the Dodd-Frank Act. Allow purchases of EGC shares to be qualifying investments for purposes of Registered Investment Adviser (“RIA”) exemption determinations. Under the Dodd-Frank Act, venture capital funds were meant to be exempt from the certain costs and requirements to become an RIA.  However, the definition of “venture capital fund” under the Investment Advisers Act is viewed by the Report as narrow, which limits the ability of these funds to invest in EGCs.  The Report argues that shares of EGCs should be considered qualifying investments, which would potentially expand investment in EGCs. Allow issuers of all sizes to be eligible to use Forms S-3 and F-3 for shelf registration. Many EGCs and small issuers are precluded from using the simplified registration statement Forms S-3 and F-3, which allows faster and cheaper access to public capital markets.  The Report, along with the SEC’s Annual Government-Business Forum on Small Business Capital Formation, recommends that all issuers be allowed to use Forms S-3 and F-3.[6]  In addition, the Report suggests eliminating the “baby-shelf” rules applicable to companies with a public float of less than $75 million, which limit the amount of capital a small-market cap company can raise using a shelf registration statement. Address unlawful activity related to short sales. There are currently no disclosure requirements applicable to investors who take short positions in publicly registered stock.  Although short selling can have positive effects on the overall market, the Report argues that such transactions can also lead to abusive activity that unduly harms investors or the reputation of a company.  The Report recommends that the SEC continue to take action against market manipulators who engage in unlawful activity that harms the market and ensure that there is sufficient public information with respect to potential market manipulation. Allow prospective underwriters to make offers of well-known seasoned issuer securities in advance of filing a registration statement. Since 2005, “well-known seasoned issuers” (or “WKSIs”) have been permitted to engage in oral or written communications in accordance with Securities Act Rule 163 in advance of filing a registration statement without violating “gun jumping” rules.  The SEC proposed an amendment in 2009 that would permit underwriters or dealers to engage in communications “by or on behalf of” WKSIs under similar circumstances, which would allow WKSIs to better gauge investor interest and market conditions prior to an offering.  The Report argues that this amendment should be enacted. Make eXtensible Business Reporting Language (“XBRL”) compliance optional for EGCs, smaller reporting companies (“SRCs”), and non-accelerated filers. Public companies are required to provide financial statements in XBRL, which imposes significant costs on EGCs and SRCs, and in the view of the Report, minimal benefit to investors.  Accordingly, the Report recommends exempting EGCs, SRCs, and non-accelerated filers from XBRL reporting requirements. Increase the diversified funds limit for mutual funds’ position in companies from current 10% of voting shares to 15%. Due to the increased size of mutual funds, the diversified fund thresholds have limited mutual funds’ ability to take meaningful positions in small-cap companies.  The Report argues that moving the threshold up from 10% to 15% would make investments in EGCs and other small-cap companies more attractive to mutual funds. Allow disclosure of selling stockholders to be done on a group basis. The Report recommends that disclosure of selling stockholders in registration statements should be permitted on a group or aggregate basis if each selling stockholder is (1) not a director or named executive officer of the registrant, and (2) holds less than 1% of outstanding shares. 4. Financial Reporting The SEC should consider aligning the SRC definition with the definition of a non-accelerated filer and institute a revenue-only test for pre- or low- revenue companies that may be highly valued. In 2016, the SEC proposed increasing the public float cap for SRCs from $75 million to $250 million, but did not do so with respect to non-accelerated filers that are subject to the same limit.  In the Report’s view, raising this cap for SRCs would help promote capital formation and reduce compliance costs for small companies, including scaled disclosure obligations under Regulation S-K for SRCs.  In addition, consideration should be given to whether the exemption available to non-accelerated filers from the requirement for auditor attestation over internal controls should also be extended to SRCs.  In particular, the Report points out that many companies may still choose to comply with auditor attestation requirements, noting that shareholders could also encourage issuers to maintain internal control systems similar to those called for by Sarbanes-Oxley Section 404(b).In addition, the 2016 SRC proposal introduced an alternative “revenue only” test for companies to qualify as an SRC if the company had less than $100 million in revenue, regardless of its public float.  The Report proposes that a revenue-only test should be considered as an alternative standard. Modernize the Public Company Accounting Oversight Board (“PCAOB”) inspection process related to internal control over financial reporting (“ICFR”). In 2007, the SEC issued Commission Guidance Regarding Management’s Report on Internal Controls over Financial Reporting under Section 13(a) or 15(d) of the Exchange Act (the “2007 Guidance”).  The 2007 Guidance was meant to allow companies to prioritize and focus on “what matters most” in assessing ICFR, principally those material issues that pose the greatest risk of material misstatements.  However, companies have continued to experience unintended ICFR-related burdens due to audit processes and PCAOB inspections.  The 2007 Guidance has not been effective due to changing interpretations of PCAOB standards for attestations during the inspection process.  Accordingly, the Report proposes that the 2007 Guidance should be updated to ensure that it is working as originally intended.  The Group also suggests that the PCAOB should consider an ICFR task force to address issues companies face as a result of the PCAOB inspection process and its consequences for audit firms and auditors.  Pre- and post-implementation reviews by the PCAOB would improve audit standard setting, prevent harmful impacts, and address the unintended consequences that result from implementation of new PCAOB auditing standards. 5. Tailoring Equity Market Structure for Small Public Companies While the overall U.S. equity markets have become more efficient due to venue competition and increased liquidity, some of these benefits have failed to reach small and mid-size stocks.  The Report makes two recommendations to address market structure challenges faced by these issuers: Examine tick sizes for EGCs and small capitalization stocks. The Report argues that the SEC should examine the appropriate tick size, which is the minimum price movement of a trading instrument, for EGCs and small capitalization stocks.  The Report notes that while stocks trading in penny increments may be an appropriate trading increment for large capitalization stocks, it may not be the best option for EGCs.  This is because narrower spreads resulting from penny increments may disincentivize market makers from trading in EGCs and small capitalization stocks.  Instead, individual exchanges should have the flexibility to develop tick sizes that are tailored for a limited number of stocks with distressed liquidity.[7] Allow EGCs or small issuers with distressed liquidity the choice to opt out of unlisted trading privileges. The Report recommends that a limited number of SRCs with distressed liquidity be able to opt out of unlisted trading privileges.  This would allow these less frequently traded stocks to focus their trading on fewer exchanges, thus enabling buyers and sellers to more easily find each other, providing more liquidity in these stocks.  This would also enable these companies to reduce fragmentation in trading, and simplify market making for these stocks. Conclusion Since at least 2012, the SEC and Congress have proposed various reforms[8] aimed at improving the attractiveness and competitiveness of the U.S. public capital markets.  In the last year, consistent with Chairman Clayton’s core principles,[9] the SEC has taken steps to further expand the benefits of the JOBS Act and the FAST Act to a broader range of companies, such as allowing non-EGCs to make confidential submissions of initial registration statements, permitting all companies to confidentially submit registration statements in connection with offerings within one year of an IPO and granting more waivers of financial statement requirements.  In addition, there have been a number of legislative proposals intended to further expand the benefits of the JOBS Act and the FAST Act.  The Report is consistent with these themes.  Congress and the SEC must now consider comprehensive reform in this vein and also consider how a complex system of regulations could be further simplified.  Ultimately, a company’s decision whether to go public is driven primarily by business rationales, including valuation, liquidity and investor considerations.  However, reducing the burdens of becoming and staying a public company without compromising investor protection will benefit both companies and investors, help ensure that the U.S. public capital markets remain attractive and competitive in the face of global competition, and provide more diverse investment opportunities for all investors.    [1]   SIFMA, Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public, available at https://www.sifma.org/resources/submissions/expanding-the-on-ramp-recommendations-to-help-more-companies-go-and-stay-public (last visited April 27, 2018). Other organizations joining SIFMA in the Report included, among others, the U.S. Chamber of Commerce, the National Venture Capital Association, Biotechnology Innovation Organization (Bio), Technet and Nasdaq.    [2]   Id.    [3]   Under the JOBS Act, EGCs are defined as companies with less than $1.07 billion of annual revenue.    [4]   For a more complete discussion on the transition from EGC status, see our Alert from March 12, 2014, which is available at the following link:  https://www.gibsondunn.com/emerging-from-egc-status-transition-periods-for-former-egc-issuers-to-comply-with-reporting-and-corporate-governance-requirements/    [5]   For a more complete discussion of the interaction between the JOBS Act and the Global Research Settlement, see our alert from October 11, 2012, which is available at the following link: https://www.gibsondunn.com/jobs-act-finra-proposes-rule-changes-relating-to-research-analysts-and-underwriters/    [6]   See generally SEC Government-Business Forum on Small Capital Business Formation, which is available at the following link: https://www.sec.gov/files/gbfor36.pdf    [7]   For additional information, see the SEC’s investor alert titled “Investor Alert: Tick Size Pilot Program – What Investors Need to Know” which is available at the following link: https://www.sec.gov/oiea/investor-alerts-bulletins/ia_ticksize.html    [8]   For more information, see our post from October 13, 2017 titled “SEC Proposes Amendments to Securities Regulations to Modernize and Simplify Disclosure,” which is available at the following link: https://www.gibsondunn.com/sec-proposes-amendments-to-securities-regulations-to-modernize-and-simplify-disclosure/    [9]   See, e.g., “SEC to Tailor Disclosure Regime Under New Chair Clayton” (July 12, 2017), which is available at the following link: https://www.bna.com/sec-tailor-disclosure-n73014461648/ 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: Glenn R. Pollner – New York (+1 212-351-2333, gpollner@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Jessica Annis – San Francisco (+1 415-393-8234, jannis@gibsondunn.com) Nicolas H.R. Dumont – New York (+1 212-351-3837, ndumont@gibsondunn.com) Sean Sullivan – San Francisco (+1 415–393–8275, ssullivan@gibsondunn.com) Victor Twu – Orange County, CA (+1 949-451-3870, vtwu@gibsondunn.com) Please also feel free to contact any of the following practice leaders: Capital Markets Group: Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com) Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@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) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 14, 2018 |
Important Lessons From ‘In re Oxbow Carbon’ for Drafting Joint Venture Exit Provisions

Dallas partner Robert Little and Dallas associate Eric Pacifici are the authors of “Important Lessons From ‘In re Oxbow Carbon’ for Drafting Joint Venture Exit Provisions,” [PDF] published in Delaware Business Court Insider on March 14, 2018.

March 12, 2018 |
Brexit – converting the political deal into a legal deal and the end state

Click for PDF In our client alert of 8 December 2017 we summarised the political deal relating to the terms of withdrawal of the UK from the EU with a two year transition.  It is important to remember that this “Phase 1” deal only relates to the separation terms and not to the future relationship between the UK and the EU post Brexit. In her Mansion House speech on 2 March 2018 UK Prime Minister Theresa May set out Britain’s vision for a future relationship.  The full text of her speech can be found here.  It continues to make it clear that the UK will remain outside the Single Market and Customs Union. On the critical issue of the Irish border, the UK Government’s position remains that a technological solution is available to ensure that there is neither a hard border within Ireland nor a border in the Irish Sea which would divide the UK.  Neither the EU nor Ireland itself accept that a technological solution is workable, and there remain doubts whether such a solution is possible if the UK is outside the EU Customs Union (or something equivalent to a customs union).  The terms of the political deal in December make it clear that, in the absence of an agreed solution on this issue, the UK will maintain full alignment with the rules of the Single Market and Customs Union. The UK’s main opposition party, The Labour Party, has now shifted its position to support the UK remaining in a customs union. The Government is proposing a “customs partnership” which would mirror the EU’s requirements for imports and rules of origin. Theresa May has acknowledged both that access to the markets of the UK and EU will be less than it is today and that the decisions of the CJEU will continue to affect the UK after Brexit. On a future trade agreement, the UK’s position is that it will not accept the rights of Canada and the obligations of Norway and that a “bespoke model” is not the only solution. There is, however, an acknowledgement that, if the UK wants access to the EU’s market, it will need to commit to some areas of regulation such as state aid and anti-trust. Prime Minister May has confirmed that the UK will not engage in a “race to the bottom” in its standards in areas such as worker’s rights and environmental protections, and that there should be a comprehensive system of mutual recognition of regulatory standards. She has also said that there will need to be an independent arbitration mechanism to deal with any disagreements in relation to any future trade agreement. Theresa May has also said that financial services should be part of a deep and comprehensive partnership. The UK will also pay to remain in the European Medicines Agency, the European Chemicals Agency and the European Aviation Safety Agency but will not remain part of the EU’s Digital Single Market. Donald Tusk, the European Council President, has rejected much of the substance of the UK’s position, stating that the only possible arrangement is a free trade agreement excluding the mutual recognition model at the heart of the UK’s proposals.  Crucially, however, he has said that there would be more room for negotiation should the UK’s red lines on the Customs Union and Single Market “evolve”. It is clear that this is an opening position for the two sides in the negotiations and that there is a long history of EU negotiations being settled at the very last minute.  The current timetable envisages clarity on the final terms of the transition and the “end state” by the European Council meeting on 18/19 October 2018. This client alert was prepared by London partners Charlie Geffen and Nicholas Aleksander and of counsel Anne MacPherson. We have a working group in London (led by Nicholas Aleksander, Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) that has been considering these issues for many months.  Please feel free to contact any member of the working group or any of the other lawyers mentioned below. Ali Nikpay – Antitrust ANikpay@gibsondunn.com Tel: 020 7071 4273 Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225 Nicholas Aleksander – Tax NAleksander@gibsondunn.com Tel: 020 7071 4232 Philip Rocher – Litigation PRocher@gibsondunn.com Tel: 020 7071 4202 Jeffrey M. Trinklein – Tax JTrinklein@gibsondunn.com Tel: 020 7071 4224 Patrick Doris – Litigation; Data Protection PDoris@gibsondunn.com Tel:  020 7071 4276 Alan Samson – Real Estate ASamson@gibsondunn.com Tel:  020 7071 4222 Penny Madden QC – Arbitration PMadden@gibsondunn.com Tel:  020 7071 4226 Selina Sagayam – Corporate SSagayam@gibsondunn.com Tel:  020 7071 4263 Thomas M. Budd – Finance TBudd@gibsondunn.com Tel:  020 7071 4234 James A. Cox – Employment; Data Protection JCox@gibsondunn.com Tel: 020 7071 4250 Gregory A. Campbell – Restructuring GCampbell@gibsondunn.com Tel:  020 7071 4236 © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 1, 2018 |
Joint Venture Traps to Avoid

Houston partners Gerry Spedale and Hillary Holmes are the authors of “Joint Venture Traps to Avoid,” [PDF] published in Midstream Business in March 2018.

February 14, 2018 |
Webcast: IPO and Public Company Readiness: Oil and Gas Industry Issues

Oil and gas prices are recovering and there is a friendlier regulatory climate in Washington for capital raising. Times may never be better for considering an initial public offering for your company. There are many advantages and challenges to becoming a public company. This panel identifies the issues and opportunities for companies in the oil and gas sector to consider in deciding whether to become a public company. View Slides [PDF] PANELISTS: Hillary Holmes focuses on securities offerings and SEC and governance counseling for master limited partnerships (MLPs) and corporations in all sectors of the oil & gas energy industry. She represents public companies, private companies, MLPs and investment banks in all forms of capital raising transactions, including IPOs, registered offerings of debt and equity securities, private placements of debt and equity securities, and spin-offs. She also advises boards of directors, conflicts committees, and financial advisors of energy companies in complex transactions. Gerry Spedale focuses on capital markets, mergers and acquisitions, joint ventures and corporate governance matters for companies in the energy industry, including MLPs. He has extensive experience representing issuers and investment banks in both public and private debt and equity offerings, including initial public offerings, convertible note offerings and offerings of preferred securities. He also has substantial experience in public and private company acquisitions and dispositions and board committee representations. James Chenoweth counsels clients regarding tax-efficient structuring of energy transactions, including MLPs, IPOs and follow-on offerings, as well as acquisitions and dispositions, taxable sales and the formation of joint ventures, particularly in the oil and gas upstream and midstream sectors. James represents clients regarding the funding, formation, transfer and acquisition of upstream drilling joint ventures in cash and carry transactions and similar arrangements forming tax partnerships in various shale plays, including the Eagle Ford, Utica, Three Forks, Marcellus and Niobrara. Brian Lane counsels companies on the most sophisticated corporate governance and regulatory issues under the federal securities laws. He is nationally recognized in his field as an author, media commentator, and conference speaker. Brian ended a 16 year career with the Securities and Exchange Commission as the Director of the Division of Corporation Finance where he supervised over 300 attorneys and accountants in all matters related to disclosure and accounting by public companies (e.g. M&A, capital raising, disclosure in periodic reports and proxy statements). In his practice, Brian has advised on dozens of IPOs. 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 1.00 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 Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@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 1, 2018 |
Public Company Virtual-Only Annual Meetings

Palo Alto partner Lisa Fontenot is the author of “Public Company Virtual-Only Annual Meetings,” [PDF] published in The American Bar Association’s The Business Lawyer Vol.73, Winter 2017-2018.

December 8, 2017 |
Brexit – Initial deal agreed

The UK Government and the European Commission have issued a joint report setting out the progress of the phase 1 negotiations for the Brexit divorce terms. This report is being put forward with a view to the European Council recommending the commencement of phase 2 negotiations on the future trading relationship between the UK and the EU.  It is issued with the caveat that “nothing is agreed until everything is agreed”. A copy of the text of the UK-EU report is here. The key provisions are: Citizens’ rights: All EU citizens resident in the UK and all UK citizens resident in the EU at the date of Brexit will have ongoing rights to remain together with their immediate families (and future children) subject to various restrictions. After Brexit there will be a simple registration system for EU citizens coming to live and work in the UK. Ireland and Northern Ireland: In the absence of alternative agreed solutions (i.e. a satisfactory free trade deal between the UK and the EU), the UK will maintain full alignment with the rules of the single market and the customs union which support North-South cooperation in Ireland; the UK will also ensure that no new regulatory barriers develop between Northern Ireland and the rest of the UK. Financial settlement: There is no specific figure but the broad principles of the financial settlement have been agreed.  The UK government currently estimates the bill at around £35-£40 billion. Other high-level provisions relate to ongoing EU judicial procedures, the functioning of the EU institutions, agencies and bodies and police and judicial cooperation in criminal matters. The EU has dropped its demand for the divorce settlement to come under the direct jurisdiction of the Court of Justice of the European Union (CJEU).  However, the UK will pay “due regard” to European court rulings on citizens’ rights.  For at least eight years, British courts may also refer questions on EU law to the CJEU. The European Council is expected to approve the joint report on 14/15 December 2017.  This will mean negotiations can move on to details of a transitional period and the final post-Brexit EU-UK relationship. There are reports that the UK is expected to remain within the single market and customs union for a two year transitionary period.  Whilst there is no certainty on what will follow, there is a possibility that the EU and UK concessions on Ireland and Northern Ireland may help the UK to strike a long-term deal on staying in the customs union and single market (the so-called “soft Brexit”). There is still much to be discussed.  “We all know breaking up is hard, but breaking up and building a new relationship is harder,” commented Donald Tusk, European Council president.  “The most difficult challenge is still ahead.” This client alert was prepared by London partners Stephen Gillespie, Charlie Geffen and Nicholas Aleksander and of counsel Anne MacPherson. We have a working group in London (led by Stephen Gillespie, Nicholas Aleksander, Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) that has been considering these issues for many months.  Please feel free to contact any member of the working group or any of the other lawyers mentioned below. Ali Nikpay – Antitrust ANikpay@gibsondunn.com Tel: 020 7071 4273 Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225 Stephen Gillespie – Finance SGillespie@gibsondunn.com Tel: 020 7071 4230 Philip Rocher – Litigation PRocher@gibsondunn.com Tel: 020 7071 4202 Jeffrey M. Trinklein – Tax JTrinklein@gibsondunn.com Tel: 020 7071 4224 Nicholas Aleksander – Tax NAleksander@gibsondunn.com Tel: 020 7071 4232 Alan Samson – Real Estate ASamson@gibsondunn.com Tel:  020 7071 4222 Patrick Doris – Litigation; Data Protection PDoris@gibsondunn.com Tel:  020 7071 4276 Penny Madden QC – Arbitration PMadden@gibsondunn.com Tel:  020 7071 4226 James A. Cox – Employment; Data Protection JCox@gibsondunn.com Tel: 020 7071 4250 Gregory A. Campbell – Restructuring GCampbell@gibsondunn.com Tel:  020 7071 4236 Selina Sagayam – Corporate SSagayam@gibsondunn.com Tel:  020 7071 4263 © 2017 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, 2017 |
Sentiment Analysis & Natural Language: Processing Techniques for Capital Markets & Disclosure

New York counsel Nicolas H.R. Dumont is the author of “Sentiment Analysis & Natural Language: Processing Techniques for Capital Markets & Disclosure,” [PDF] published by The Corporate Governance Advisor in December 2017.

November 1, 2017 |
Webcast: IPO and Public Company Readiness: Regulatory Compliance Issues

​Public companies face unique challenges as they confront and seek to manage OFAC, AML and FCPA compliance risk. Disclosure obligations and market reactions can intensify the pressures arising from alleged or actual violations of these laws. Companies preparing to go public must assess their compliance programs in order to avoid or mitigate incidents that could harm their business, disrupt the IPO process or damage their reputation as a newly public company. Companies also must be prepared to successfully respond to the scrutiny regarding compliance issues in the diligence and disclosure process associated with an IPO. Our highly experienced and distinguished panel of Gibson Dunn partners from the Capital Markets, Financial Institutions and White Collar Defense and Investigations Practice Groups will provide invaluable and practical advice and tips on how companies can prepare for public company reporting and scrutiny of their compliance programs. View Slides [PDF] PANELISTS Stephanie L. Brooker is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher where she is Co-Chair of Gibson Dunn’s Financial Institutions Practice Group and a member of the White Collar Defense and Investigations Practice Group. Ms. Brooker is a former Director of the Enforcement Division at the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) and a former federal prosecutor, where she served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia, tried 32 criminal trials, and briefed and argued criminal appeals. Ms. Brooker’s practice focuses on internal investigations, regulatory enforcement, white collar criminal defense, and compliance counseling involving anti-money laundering (AML)/Bank Secrecy Act (BSA), sanctions, anti-corruption, securities, tax, and wire fraud. Joel M. Cohen is a partner in the New York office of Gibson, Dunn & Crutcher where he is Co-Chair of Gibson Dunn’s White Collar Defense and Investigations Practice Group and a member of its Securities Litigation, Class Actions and Antitrust and Competition Practice Groups. Mr. Cohen’s experience includes all aspects of FCPA/anti-corruption issues, insider trading, securities and financial institution litigation, class actions, sanctions, money laundering and asset recovery, with a particular focus on international disputes and discovery. Mr. Cohen was the prosecutor of Jordan Belfort and Stratton Oakmont, which is the focus of “The Wolf of Wall Street” film by Martin Scorsese. He was an adviser to OECD in connection with the effort to prohibit corruption in international transactions and was the first Department of Justice legal liaison advisor to the French Ministry of Justice. Andrew L. Fabens is a partner in the New York office of Gibson, Dunn & Crutcher where he is Co-Chair of Gibson Dunn’s Capital Markets Practice Group and a member of the 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. Stewart L. McDowell is a partner in the San Francisco office of Gibson, Dunn & Crutcher where she is Co-Chair of Gibson Dunn’s Capital Markets Practice Group and a member of the Steering Committee of the Securities Regulation and Corporate Governance Practice Group. Ms. McDowell’s represents business organizations as to capital markets transactions, mergers and acquisitions, SEC reporting, corporate governance and general corporate matters. She represents both underwriters and issuers in a broad range of both debt and equity securities offerings, in addition to buyers and sellers in connection with U.S. and cross-border mergers, acquisitions and strategic investments. Adam M. Smith is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher where his practice focuses on international trade compliance and white collar investigations with a focus on economic sanctions and export controls. Mr. Smith served as Senior Advisor to the Director of the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and as the Director for Multilateral Affairs on the National Security Council. While at OFAC he played a primary role in all aspects of the agency’s work, including briefing Congressional and private sector leadership on sanctions matters, shaping new Executive Orders, regulations, and policy guidance for both strengthening sanctions and easing measures. Mr. Smith counsels a global roster of clients in the financial, services, manufacturing and technology sectors to help them understand, navigate and comply with increasingly complex financial regulations. Peter W. Wardle is a partner in the Los Angeles office of Gibson, Dunn & Crutcher where he is Co-Chair of Gibson Dunn’s Capital Markets Practice Group. Mr. Wardle represents issuers and underwriters in equity and debt offerings, in addition to 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. 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 1.50 credit hours, of which 1.50 credit hours 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 Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@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 1.50 hours. 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.

July 20, 2017 |
French Market Update – July 2017

France is great again? Many of you have read positive articles on the new government in France and its freshly elected President, Emmanuel Macron. Is it real? First, one needs to understand the context: a quasi-unknown individual a year ago, Mr. Macron has stunned all by winning the first, then second, round of the presidential election, as an "anti-populist", pro-European, candidate. Almost as surprisingly, his party (called "Republic on the Move!"), which has been in existence for less than a year, won an absolute majority (with 350 seats over 577) in the subsequent parliamentary election, held on June 11 and 18, 2017, reducing, for example, the Socialist representatives to 28 from 280 in 2012. This, in turn, means that for the next five years, Mr. Macron has both a mandate and an ability to implement his program. France, in electing him with such latitude, rejected the extreme right (with a Frexit program) and the extreme left (with a very high taxation program). One of Mr. Macron’s key strengths has been his "extreme centrist" positioning, based on the simple concept that necessary policies are neither leftist or rightist ones; they are just common sense and should be supported by all reasonable politicians regardless of their original party. He also promoted a very large number of non-politicians to political positions, thus considerably altering the political landscape. Being an ex-Rothschild banker, Mr. Macron is guided by a resolute desire to "open the country for business" and eliminate the disincentives to investment in France, particularly at a time when Brexit causes potential issues for businesses based in the UK. He also understands the need to act fast, and intends to pass his most emblematic promises, aiming at triggering a supply-side shock and boosting confidence, before the end of 2017. What are these promises? An extensive labor reform to "move the rules of the game" aiming at lowering the unemployment rate to 7% at the end of his term in 2022. Proposed measures include caps on financial penalties for companies sued for firing employees, allowing businesses more flexibility to define internal working rules, merging the various employee representative bodies currently existing in French business organizations to improve social dialogue. To achieve this reform expeditiously, the French Government wants to use a special procedure to pass the measures this Summer without extended debate in parliament. The details of the reform are expected to be announced at the end of August. Strong workers antagonism is likely, but the climate has changed and popular support for movements has weakened.  Tax reform aimed at restoring France’s attractiveness: Among the key signals sent to the business community: a decrease of the corporate income tax (from 34.3% today to 25% in 2022), and, as from 2019, the replacement of the tax credit for competitiveness and employment (CICE) by a substantial reduction in the employers’ social contributions.     Another aspect of the proposed tax reform will be the replacement of the general wealth tax by a special wealth tax limited to real estate and the creation of a "flat tax" on capital gains and dividends at a rate of about 30%. The purpose of this proposal is to favor financial investments over real estate ones.  These long-awaited measures will kick-in as soon as 2018. A 50-billion euro investment program: Although not yet fully financed, this plan will likely rely on the existing program "Investing for the Future" launched by President Sarkozy and on a new wave of privatizations. This program embraces huge investments in training (up to €15bn), supports to the ecological transition, the digitalization of the healthcare system, investments in infrastructures (such as transports) and modernization of the State services, all of which will favor future business fluidity. A large number of these projects will be open for bidding to non-French entities. An additional 10 billion euro "innovation program" is planned to invest into Cleantech, Greentech, AI, all in order to attract and retain start-ups. A new momentum for foreign investments in France After seven years of profound economic crisis, and five years of French bashing due to the former president’s administration, his tax increases and anti-business stance, France now benefits a true shift in perception. These changes have the effect to make France a desirable investment target, especially for business and real estate. Opportunities for foreign investors are relatively cheap, especially given the quality of the administration, education, health and infrastructure and the stability of the political system. France has numerous fundamental strengths including its central location in Europe, excellent communication and transport infrastructure, significant industrial achievements in a wide range of sectors, high productivity, and a well-qualified workforce. All these strengths support opportunities for foreign investments, from the United States and elsewhere. 2017 marks Gibson Dunn’s 50th year in France.  With 45 lawyers, whose expertise covers all aspects of business law, such as corporate transactions, restructuring/insolvency, private equity, litigation, compliance, public law and regulatory, technology and innovation, and finance, as well as tax and real estate, our Paris office,  is well-positioned to assist all the Firm’s clients as their strategy shifts towards France. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyers with whom you usually work, or the following authors in the firm’s Paris office: Bernard Grinspan (+33 1 56 43 13 00, bgrinspan@gibsondunn.com) Judith Raoul-Bardy (+33 1 56 43 13 00, jraoulbardy@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.