On January 10, 2019, the staff of NYSE Regulation released its annual memorandum detailing important rules and policies applicable to listed companies. The memorandum provides helpful reminders for issuers (noting important rule differences for domestic and foreign private issuers) with securities listed on the NYSE and also highlights new compliance items. In particular, as previously announced, the memorandum notes that NYSE-listed companies are now required to provide notice to the NYSE at least ten minutes before making any public announcement with respect to a dividend or stock distribution, including when the notice is outside of NYSE trading hours. Additionally, NYSE-listed companies are now no longer required to provide physical copies of proxy materials to the NYSE if such proxy materials are publicly filed with the Securities and Exchange Commission (“SEC”) on EDGAR. The memorandum also provides important reminders specific to foreign private issuers, including with respect to semi-annual reporting. NYSE-listed foreign private issuers are required to submit a Form 6-K to the SEC containing semi-annual unaudited financial information no later than six months following the end of the company’s second fiscal quarter. The memorandum also includes the latest NYSE staff contact information for purposes of complying with notification requirements and contacting the NYSE in the event material news is released. A copy of the full memorandum can be obtained by clicking here.

A comfort letter is a letter delivered by an issuer’s independent accountants to the underwriters or initial purchasers that provides certain assurances with respect to financial information included in a registration statement, prospectus or offering memorandum used for a securities offering. Underwriting agreements and purchase agreements typically require the delivery of one or more comfort letters, in form and substance reasonably acceptable to the underwriters, initial purchasers or their counsel, as a condition to closing the securities offering. Comfort letters assist underwriters in establishing a due diligence defense under Section 11 of the Securities Act and in creating a record of their reasonable investigation of the issuer and its financial condition to ensure there are no material misstatements or omissions in the offering document.

In this Lexis Practice Advisor® Top 10 Practice Tips, we provide 10 practice points that can help you, as counsel to underwriters or initial purchasers, skillfully navigate the task of reviewing and negotiating comfort letters.

In connection with securities offerings, the underwriters or placement agents generally negotiate a lock-up agreement with the issuer, as well as with the issuer’s directors, officers, and, in the case of initial public offerings, control persons. The lock-up agreements provide the underwriters or placement agents with some assurance that new issuer securities will not be sold immediately following the proposed offering the sale of which might disrupt the trading market for the offered securities.

In this Lexis Practice Advisor® Top 10 Practice Tips, we provide 10 practice points to consider in drafting and negotiating lock-up agreements.

On December 18, 2018 the Commission published a Request for Comment on Earnings Releases and Quarterly Reports (the “Request”), which solicits public comment on both earnings releases and the frequency of periodic reporting. In the Request, the Commission notes that it is seeking to reduce administrative and other burdens for U.S. public companies without compromising investor protection.

To learn more, read our Legal Update.

The Securities and Exchange Commission adopted final rules requiring public companies (other than foreign private issuers and certain fund issuers) to disclose in proxy statements their policies regarding hedging transactions in the company’s securities by directors and employees.  The Commission was required by Section 955 of the Dodd-Frank Act to adopt such rules.

The Commission’s fact sheet notes that new Item 407(i) of Regulation S-K will require a company to describe any practices or policies it has adopted regarding the ability of its employees (including officers) or directors to purchase securities or other financial instruments, or otherwise engage in transactions, that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities granted as compensation, or held directly or indirectly by the employee or director.

The final rule text has not been released yet.

In 2017, the Public Company Accounting Oversight Board (“PCAOB”) adopted a new standard for auditor’s reports that requires a description of critical audit matters (“CAMs”) designed to provide investors with information that relates to accounts or disclosures that are material to a company’s financial statements and involve especially challenging, subjective or complex auditor judgment. The CAM standard will be required for audits for fiscal years ending on or after June 30, 2019 for large accelerated filers.

On December 10, 2018, in anticipation of the implementation of the CAM standard, the Center for Audit Quality released a paper titled “Lessons Learned, Questions to Consider, and an Illustrative Example” highlighting observations made from practice dry runs of the CAM standard. The paper seeks to identify and provide clarity on the numerous factors that can influence an auditor’s CAM decision. The paper reminds audit committees that the determination of CAMs, and resulting disclosure, is not meant to be indistinguishable between companies but rather unique to each particular audit and company. Nonetheless, the following early themes noted in the paper from the practice dry runs should be valuable for audit committee members, auditors and financial executives as compliance becomes mandatory:

  • As the PCAOB standard requires a CAM to be material to a company’s financial statements, a relationship must exist between the CAM communicated in the auditor’s report and the accounts or disclosures in the financial statements to which the CAM relates.
  • An auditor may determine that certain critical accounting estimates or assumptions meet the definition of a CAM. The paper identifies legal contingencies as a critical accounting estimate that may be considered a CAM depending upon the facts and circumstances of the particular audit.
  • Not every significant risk will be subject of a CAM. The paper notes that fraud risks are considered significant but may not involve especially challenging, subjective or complex judgment and therefore may result in a CAM.
  • CAMs are most likely to relate to areas that involve a significant degree of estimation or assumptions that necessitate management judgment. The paper identifies auditing goodwill, impairment, intangible asset impairment, business combinations, aspects of revenue recognition, income taxes and fair valuation of financial instruments as areas that are likely to result in a CAM.
  • Most audits will identify at least one CAM, although the paper notes it is possible that an auditor may determine that no CAMs are present.

A copy of the full paper may be obtained using the below link: https://www.thecaq.org/critical-audit-matters-lessons-learned-questions-consider-and-illustrative-example

 

Thursday, December 13, 2018
1:00 p.m. – 2:00 p.m. EDT

Despite market volatility, 2018 has proven to be a strong year for IPOs. Under the right circumstances, an Up-C structure implemented in connection with an IPO has the potential to deliver significant economic and tax benefits to financial sponsors and other selling shareholders.

During this session, Partners Anna T. Pinedo and Remmelt Reigersman will explain:

  • When an “Up-C” structure might be appropriate for an IPO candidate
  • Documenting the arrangements
  • Addressing the tax receivable agreement
  • The benefits to various stakeholders
  • Life as a public company with an up-C structure and how it impacts financial and SEC reporting
  • Undertaking acquisitions using an up-C structure
  • Unwinding an up-C structure

After this session, attendees will:

  • Understand the components of an up-C structure and when to implement
  • Counsel clients on the benefits of an up-C structure
  • Understand the economic and tax benefits to financial sponsors

Intelligize will provide CLE credit. For more information, or to register for this session, please visit the event website.

In September, California mandated women directors on corporate boards.  In a new paper titled “Mandating Women on Boards: Evidence from the United States,” authors Sunwoo Hwang, Anil Shivdasani, and Elena Simintzi review the effects of mandating the inclusion of women on boards.

The California law requires that public companies headquartered in the state of California have at least one female director by end of 2019.  By year-end 2021, companies with six or more directors must have three female directors, boards with five members must have two female directors, and boards with four or fewer directors, must have at least one female director.  Noncompliance would result in potential fines. There are approximately 450 public companies in the Russell 3000 index headquartered in California with a market cap of nearly $5 trillion.

The authors present evidence that mandating gender diversity through legislation is expensive for shareholders.  This results from heightened costs for female directors, because there is a small supply and public companies will be pressed to comply at the same time resulting in competition.  In addition, the authors find costs will increase as a result of the possibility that companies will expand their boards in part to comply with the requirements.   Although the paper concludes that there is a lack of a consensus on the impact of regulations mandating gender diversity, it raises concerns.

Separate from the paper, commentators have raised concerns regarding the constitutionality of the California law.

Partner Anna Pinedo joined IFR’s US ECM Roundtable for a panel discussion that assessed the current state of the market, discussed the latest trends and developments, and gave an outlook for the remainder of the year and beyond.  Topics included the state of the IPO market; private capital to public markets; JOBS Act 3.0; SPACs as an alternative to IPO; areas of success; and the convertible bond market renaissance.

Read IFR’s special report on the Roundtable here: https://goo.gl/qJWaqR.