On April 9, 2021, the Division of Examinations (“Division” or “staff”) of the US Securities and Exchange Commission issued a risk alert that highlighted its observations from its recent examinations of investment advisers, registered investment companies and private funds offering ESG products and services. The risk alert also provides observations of effective practices.

Noting that the US Investment Company Act of 1940, the US Investment Advisers Act of 1940 (“Advisers Act”) and the rules under those statutes do not define “ESG” or include ESG-specific provisions, the Division made it clear that its interest in the accuracy and adequacy of disclosures provided by advisers and funds offering clients ESG investment strategies is the same as it would be for advisers and funds offering any other type of investment strategy.

This Legal Update provides further detail.

Lexis Practice Advisor

This practice note focuses on recent market trends in risk factor disclosure required in US Securities and Exchange Commission (SEC) filings and provides recent risk factor disclosure examples, covering COVID-19, Brexit, London Interbank Offered Rate (LIBOR) cessation, cybersecurity, and China-based issuers. Additionally, this practice note discusses recent amendments to the description of the risk factor disclosure requirement, and how the amendments to the rule may affect risk factor disclosure going forward.

Read the full practice note here.

On April 7, 2021, the proposed New York “legislative solution” for legacy USD LIBOR contracts became Article 18-C of the New York General Obligations Law. Article 18-C is primarily aimed at USD LIBOR contracts, securities or instruments (e.g., floating rate notes (“FRNs”), loans, securitizations and mortgages) with the 2006 ISDA Definitions LIBOR fallbacks, or no fallback provisions at all, and which are governed by New York law. This article focuses on the law’s effect on USD LIBOR FRNs.

Article 18-C has no effect on USD LIBOR FRNs that have the Alternative Reference Rate Committee’s (“ARRC”) recommended fallback provisions to the secured overnight financing rate (“SOFR”), nor does it have any effect on non-USD LIBOR FRNs.

For USD LIBOR FRNs that have a discretionary replacement fallback to an industry-accepted replacement rate standard, Article 18-C confirms that the choice of SOFR to replace USD LIBOR under the terms of the FRN is a commercially reasonable substitute for USD LIBOR, a reasonable, comparable or analogous term for USD LIBOR under the terms of the FRN, a replacement that is based on a methodology similar to LIBOR and substantial performance by any person of any right or obligation under such FRN.

On March 5, 2021, ICE Benchmark Administration Limited, the LIBOR administrator, and the U.K. Financial Conduct Authority, the LIBOR regulator, announced dates for the cessation of LIBOR. Under Article 18-C, a “LIBOR discontinuance event,” as defined, occurred with respect to all USD LIBOR tenors. Consequently, once Article 18-C came into law, the polling provisions in USD LIBOR FRNs were deemed null and void and without any force or effect. This will have no practical effect on legacy USD LIBOR FRNs because the polling provisions would only be looked to once USD LIBOR ceases (December 31, 2021 for 1-week and 2-month USD LIBOR, and June 30, 2023 for all other USD LIBOR tenors) and, at that point, Article 18-C would automatically change the USD LIBOR provisions to the ARRC recommended fallback provisions to SOFR.

With the New York legislative solution now effective, similar federal legislation is advancing, which would address FRNs governing by non-New York law.

This article was originally published on the Mayer Brown blog, Eye on IBOR Transition

Acting Director of the Securities and Exchange Commission’s Division of Corporation Finance, John Coates, provided additional comments on SPACs on April 8, 2021.  Acting Director Coates noted the “unprecedented surge” in SPAC activity.  He focused his comments on the legal liability that attaches to disclosures made in connection with the de-SPAC transaction and, in particular, to claims that he says have been made by “practitioners and commentators” that “an advantage of SPACs over traditional IPOs is lesser securities law liability exposure for targets and the public company itself.”  In particular, the Acting Director pointed to the safe harbor for forward-looking statements and commented on the fact that many commentators note that the availability of the safe harbor, in the case of a de-SPAC transaction, allows for the use of projections whereas, by contrast, the safe harbor is unavailable in the case of IPOs.

The Acting Director then went on to raise various interesting interpretive questions regarding the applicability of the Private Securities Litigation Reform Act (PSLRA).  He noted that the PSLRA specifically excludes from the safe harbor statements made in connection with specified types of securities offerings, including:  those made in connection with an offering of securities by a blank check company, those made by a penny stock issuer, and those made in connection with an initial public offering.  Acting Director Coates points out that the statute does not define “initial public offering” and raises the possibility that perhaps this phrase in the statute may include de-SPAC transactions, as well as other transactions.  He then goes on to present a number of different types of transactions in which a company first becomes subject to SEC reporting and becomes “public,” and raises the possibility that the “PSLRA safe harbor should not be available for any unknown private company introducing itself to the public markets. Such a conclusion should hold regardless of what structure or method it used to do so. The reason is simple: the public knows nothing about this private company. Appropriate liability should attach to whatever claims it is making, or others are making on its behalf.”

The Acting Director ends by identifying potential action items that might be taken in this area, including, having the SEC use its rulemaking process to reconsider and recalibrate the applicable definitions in the PSLRA, and having the SEC Staff provide guidance explaining its views on how, or if at all, the PSLRA safe harbor should apply to de-SPACs.  He also asks whether it might be useful for the SEC to reconsider the concept of “underwriter” in the context of the new approaches to going public, like SPACs and direct listings, as well as to consider whether guidance is needed about how projections and related valuations are presented and used in the documents for these transactions.

Acting Director Coates notes the value of forward-looking information, while striking a cautionary note regarding the potential for such information to be misleading in certain instances.  Coates also cautions against false or misleading claims made in articles and other public commentary regarding reduced liability exposure for SPAC participants.  In his comments, he reminds market participants that “any material misstatement in or omission from an effective Securities Act registration statement as part of a de-SPAC business combination is subject to Securities Act Section 11.”  Similarly, “any material misstatement or omission in connection with a proxy solicitation is subject to liability under Exchange Act Section 14(a) and Rule 14a-9, under which courts and the Commission have generally applied a “negligence” standard.  Any material misstatement or omission in connection with a tender offer is subject to liability under Exchange Act Section 14(e). De-SPAC transactions also may give rise to liability under state law. Delaware corporate law, in particular, conventionally applies both a duty of candor and fiduciary duties more strictly in conflict of interest settings, absent special procedural steps, which themselves may be a source of liability risk. Given this legal landscape, SPAC sponsors and targets should already be hearing from their legal, accounting, and financial advisors that a de-SPAC transaction gives no one a free pass for material misstatements or omissions.”

See the full text of the Acting Director’s comments here.

On April 2, 2021, the Securities and Exchange Commission (“SEC”) approved changes initially submitted by the New York Stock Exchange (“NYSE”) in December 2020 that amend certain of its shareholder approval rules.  The NYSE proposed the changes because the prior requirements made it unnecessarily difficult for listed companies to raise necessary capital in private placement transactions that were in the interests of the company and its shareholders.  The changes to the NYSE’s rules are consistent with the temporary relief measures adopted by NYSE last year and approved by the SEC in response to the COVID-19 pandemic, and also bring the NYSE’s shareholder approval requirements into closer alignment with those of Nasdaq and NYSE American.

The amendments modify the class of persons with respect to which an issuance of common stock would require a listed company to seek shareholder approval. Specifically, Rule 312.03(b), as amended, will require prior shareholder approval for certain issuances of common stock to directors, officers, and substantial security holders of the company (“Related Parties”).  The amended rule would no longer require such approval for issuances to such Related Parties’ subsidiaries, affiliates, or other closely related persons, or to any companies or entities in which a Related Party has a substantial interest (except where a Related Party has a 5% or greater interest in the counterparty).

In addition, Rule 312.03(b), as amended, will require shareholder approval of cash sales to Related Parties only if the price is less than a specified minimum price.  Cash sales to a Related Party relating to more than 1% of the issuer’s common stock or voting power prior to the issuance for prices below the specified minimum price will continue to be subject to shareholder approval.  However, cash sales to Related Parties that meet the specified minimum price threshold would be subject to the same limitations as cash sales to all other investors.

With respect to the NYSE’s requirement to obtain shareholder approval in connection with an issuance of 20% or more of an issuer’s securities, the amendments replace the reference to “bona fide private financing” in Rule 312.03(c) with “other financing (that is not a public offering for cash) in which the company is selling securities for cash.”  This change effectively eliminates the requirement that the issuer sell securities to multiple purchasers, and that no one such purchaser or group acquires more than 5% of the issuer’s common stock.  However, shareholder approval will be required if securities are issued in connection with an acquisition and the issuance is equal to or exceeds either 20% of the pre-transaction shares outstanding or 20% of the voting power outstanding before the issuance.

Finally, Rule 314 is amended to require that a listed company’s audit committee conduct reasonable prior review and oversight of all related party transactions for potential conflicts of interest.

The SEC’s release granted the approval on an accelerated basis allowing the rule changes to become effective prior to the 30th day following their publication in the Federal Register.  A link to the SEC’s approval is available here.

SEC Division of Corporation Finance Acting Director John Coates participated in a fireside chat on April 7, 2021 during the annual Global Capital Markets & the US Securities Laws program hosted by the Practicing Law Institute (PLI).

Acting Director Coates, when asked about his priorities at the SEC, mentioned three items: the “unprecedented surge” in special purpose acquisition company (SPAC) filings, reporting company ESG disclosures (including disclosure of climate change and potentially political spending), and improvement of the proxy voting system (commonly referred to as “proxy plumbing”).

With respect to ESG issues on a global scale, Acting Director Coates provided insight into the International Organization of Securities Commissions’ recent statement announcing the creation of a Technical Expert Group co-led by the SEC to undertake an assessment of the recommendations to be developed as part of the IFRS Foundation’s sustainability project. He explained that, while the outcome of the assessment remains to be seen, it is his hope that this project will result in a consistent, harmonized global standard for ESG disclosure.

Acting Director Coates also addressed the SEC’s interim final rules implementing the Holding Foreign Companies Accountable Act, highlighting the fact that the SEC will need to wait for the Public Company Accounting Oversight Board to put a process in place to identify jurisdictions in which authorities restrict the ability for audit firms to comply with US requirements. He also stated that there would likely be no disclosure required from reporting companies to the SEC until 2023.

In closing, Acting Director Coates returned to the topic of SPACs, warning the audience to “be careful what you wish for” and noting that there may be significant issues that have yet to be discovered.

Lexis Practice Advisor

This practice note focuses on recent market trends covering the US Securities and Exchange Commission’s (SEC’s) pay ratio rulemaking, which was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, and provides recent pay ratio disclosure examples. The SEC originally proposed pay ratio disclosure in 2013, and the proposal generated a great deal of interest and debate. The final rule was adopted in 2015 and required pay ratio disclosure by companies with respect to their first full fiscal year that began on or after January 1, 2017. For calendar year companies, we’ve now seen three years of pay ratio disclosure.

Read the full practice note here.

Privately held companies preparing for an initial public offering often undertake a public company readiness assessment and seek to identify the gaps that must be addressed prior to their becoming subject to the corporate governance and other rules applicable to public companies. Often, this assessment is conducted over a period of months and the IPO preparations may span many more months. However, given the intense interest in mergers with SPACs, many attractive private company “targets” may not have had the opportunity to undertake their readiness assessment. The public company readiness process may have to be compressed and often will be undertaken in parallel with the negotiation of the initial business combination agreement and the Securities and Exchange Commission’s review of the proxy or proxy/prospectus.

This interactive chart aligns the principal elements of the public company readiness process with the de-SPAC process and is intended to serve as a reference for private companies considering the tasks ahead of them, which were recently the subject of comment by the Staff of the SEC’s Office of Chief Accountant, as discussed in our prior post.

In this microtalk video, Anna Pinedo provides an analysis of the SEC Staff’s recent statements relating to special purpose acquisition companies (SPACs) released on March 31, 2021.

The video provides further detail on the statement issued by the Staff of the Division of Corporation Finance, which notes considerations that private companies should keep in mind before entering into an initial business combination with a SPAC. Additionally, Anna discusses details related to the statement issued by the Office of the Chief Accountant also directed at private companies, as well as their boards and audit committees.

To learn more about SPACs, please see our What’s the Deal?: SPACs.

Visit our MB Microtalk page for more topics and talks.