CURRENT MONTH (April 2020)

Securities Regulation

Delaware Validates Federal Forum Provisions for 1933 Act Claims

By Lisa Stark, K&L Gates LLP

In Salzberg v. Sciabacucchi, C.A. No. 346, 2019 (Del. Mar. 18, 2020, revised Apr. 14. 2020), the Delaware Supreme Court, upheld the facial validity of federal forum provisions (“Federal Forum Provisions”) contained in the certificates of incorporation of Delaware corporations which require all claims under the Securities Act of 1933 (the “1933 Act”) to be brought exclusively in federal courts. The Delaware Supreme Court’s decision overturned a Delaware Court of Chancery ruling which held that Federal Forum Provisions were not valid under Delaware’s General Corporation Law (the “DGCL”). Specifically, in its opinion, the Delaware Supreme Court held that the Delaware Court of Chancery erred when it determined that (1) the DGCL did not authorize charter provisions which regulate matters not governed by Delaware law, and (2) Section 115 of the DGCL, which generally provides that a corporation’s organizational documents may require that “internal corporate claims” be brought solely in a Delaware court, prohibits Federal Forum Provisions. Many Delaware corporations adopted Federal Forum Provisions after the US Supreme Court held in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), that a securities action brought under the 1933 Act in state court could not be removed to federal court. Unlike securities actions brought under the Exchange Act of 1934, 1933 Act claims may be brought in state or federal court.

SEC Chair and Division of Corporation Finance Director Hinman Urge Robust Forward-Looking Disclosure

By Rani Doyle, EY*

In an April 8 statement, Securities and Exchange Commission (“SEC”) Chair Jay Clayton and Division of Corporation Finance Director William noted the heightened importance of issuer-investor engagement in “this uncertain time” during the COVID-19 pandemic and urged “companies to provide as much information as practicable regarding their current financial and operating status, as well as their future operational and financial planning,” with a focus on forward-looking disclosures.

Among other observations, the two stated that:

Company disclosures should reflect [the current] state of affairs and outlook and, in particular, respond to investor interest in:  (1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress. Historical information may be relatively less significant.

Clayton and Hinman also requested that companies provide detailed discussions of current liquidity positions and expected financial resource needs. They also asked companies to disclose governmental financial assistance, such as under the CARES Act, that have materially affected or are reasonably likely to have a material future effect upon their financial condition or results of operations.

Noting the challenges of providing robust forward-looking disclosures, Clayton and Hinman encouraged companies to take advantage of the safe-harbor liability protections provided by the Securities Act and the Exchange Act and said they do not expect the SEC to second-guess good-faith efforts to provide appropriately framed forward-looking information.

SEC Chief Accountant Emphasizes Need for High-Quality Financial Reporting Re: COVID-19

By Rani Doyle, EY*

The SEC’s Chief Accountant Sagar Teotia issued a statement on April 3 emphasizing the need for high-quality financial reporting related to the COVID-19 pandemic. He stated that some of the many accounting issues that may involve significant judgments and estimates in light of COVID-19 include:

  • Fair value and impairment considerations;
  • Leases;
  • Debt modifications or restructurings;
  • Hedging;
  • Revenue recognition;
  • Income taxes;
  • Going concern;
  • Subsequent events; and
  • Adoption of new accounting standards (e.g., the new credit losses standard).

Teotia stressed the importance of required disclosures of judgments and estimates in these and other areas.

Additionally, for eligible entities that elect to apply the temporary relief from troubled debt restructuring accounting or elect to defer the adoption of the new credit losses standard as provided by the CARES Act, Teotia stated that the SEC staff will not object to the conclusion that these actions comply with US GAAP for the periods the relief is provided.

 SEC Forms Covid-19 Cross-Divisional Market Monitoring Group

By Alan J. Wilson, WilmerHale 

On April 24, the SEC announced that it had formed an internal COVID-19 Market Monitoring Group. The temporary, cross-divisional group will assist the Commission with (1) actions and analysis regarding COVID-19’s impact on markets, issuers and investors and (2) responding to information requests from other regulators and public sector partners. The group is chaired by S.P. Kothari, the SEC’s Chief Economist and Director of the Division of Economic and Risk Analysis, who will be assisted by Jeffrey Dinwoodie, Chief Counsel and Senior Policy Advisor for Market and Activities-Based Risk in the Office of the Chairman. SEC Chair Jay Clayton highlighted the group’s role in expanding the SEC’s interdisciplinary work related to COVID-19 and aiding the SEC’s efforts to support work being undertaken by the President’s Working Group on Financial Markets, Financial Stability Oversight Council and the Financial Stability Board (FSB), among others.

Corp Fin Allows Form 144 Filings via Email in Light of COVID-19 Concerns

By Ryan Castillo, Mayer Brown

Recognizing the logistical difficulties of submitting Forms 144 in paper in light of COVID-19 concerns, the SEC’s Division of Corporation Finance (“Corp Fin”) announced on April 10 that it will not recommend enforcement actions for failure to submit Forms 144 in paper if they are emailed instead. Filers can attach a complete Form 144 as a PDF attachment to an email sent to [email protected] in lieu of paper filings under Rules 101(b)(4) or 101(c)(6) of Regulation S-T. The Corp Fin statement applies to Forms 144 submitted from April 10, 2020 to June 30, 2020.

If a person is unable to provide a manual signature on the Form 144 PDF, Corp Fin will not recommend enforcement action to the SEC if a typed form of signature is provided in lieu of the manual signature and:

  • the signatory retains a manually signed signature page or other document authenticating, acknowledging, or adopting the person’s signature that appears in typed form within the electronic submission and provides such document, as promptly as practicable, upon request by Corp Fin;
  • the authenticating document indicates the date and time when the signature was executed; and
  • the filer or submitter (with the exception of natural persons) establishes and maintains policies and procedures governing this process.

While filers and submitters may continue to submit paper Forms 144 to the SEC mailroom, Corp Fin noted that there may be delays in the processing of such documents.

SEC Approves Nasdaq’s Tolling of Compliance Period

By Brian Hirshberg, Mayer Brown

On April 17, the SEC approved, with immediate effectiveness, the proposal filed by The Nasdaq Stock Market (“Nasdaq”) to permit a longer period of time for Nasdaq-listed companies to regain compliance with the exchange’s bid price and market value of publicly-held shares continued listing requirements by tolling the compliance periods through June 30, 2020. Nasdaq’s continued listing standards require that companies maintain a minimum $1 bid price and market value of publicly-held shares of at least $5 million or $15 million depending upon the applicable Nasdaq standard. This temporary relief allows companies that are out of compliance with Nasdaq’s price-based requirements additional time to regain compliance. However, throughout the tolling period, Nasdaq will continue to notify companies of new instances of non-compliance. Companies that are notified about non-compliance are required to make a public announcement disclosing receipt of the notification by filing a Form 8-K with the SEC or by issuing a press release notwithstanding the tolling period. Starting on July 1, 2020, companies would receive the balance of any pending compliance period in effect at the start of the tolling period to come back into compliance with the applicable Nasdaq requirement. Companies that are newly identified as non-compliant during the tolling period would have 180 days to regain compliance beginning on July 1, 2020. Nasdaq will continue to monitor companies to determine if they regain compliance during the tolling period.

SEC Approves NYSE’s Tolling of Compliance Period

By Brian Hirshberg, Mayer Brown

On April 21, the SEC approved, with immediate effectiveness, the proposal filed by the New York Stock Exchange (the “NYSE”) to permit a longer period of time for NYSE-listed companies to regain compliance with the exchange’s continued listing standards by tolling the applicable compliance periods through June 30, 2020. The relief approved by the SEC is similar to the relief provided to Nasdaq-listed issuers (as described above). The NYSE’s continued listing standards require that companies (1) have either stockholders’ equity of at least $50 million or an average global market capitalization over a consecutive 30 trading day period of at least $50 million and (2) maintain a minimum average closing price of at least $1.00 over a consecutive 30 trading day period. This temporary relief allows companies that are out of compliance with the NYSE’s price-based requirements additional time to regain compliance. However, throughout the tolling period, the NYSE will continue to notify companies of new instances of non-compliance. The NYSE will also continue to attach a .BC indicator to the tickers of companies that fall below the continued listing standards during the tolling period. Companies that are notified about non-compliance are required to make a public announcement disclosing receipt of the notification by filing a Form 8-K with the SEC or by issuing a press release notwithstanding the tolling period. Starting on July 1, 2020, companies would receive the balance of any pending compliance period in effect at the start of the tolling period to come back into compliance with the applicable NYSE requirement. This relief is in addition to the ongoing temporary suspension of the NYSE’s $15 million market capitalization standard through June 30, 2020 that was previously approved by the SEC.

Risks in Emerging Market Investments

By Gonzalo Go, Mayer Brown

On April 21, the SEC Chair, Chief Accountant and Divisions of Corporation Finance and Investment Management Directors, together with the Public Company Accounting Oversight Board (“PCAOB”) Chair, issued a public statement to companies based in or with significant operations in emerging markets.

The Statement advised the issuers, their respective audit committees and auditors to (1) prepare and provide high-quality, reliable financial information and other disclosures and (2) provide accurate and complete risk disclosures peculiar to their businesses and operations in emerging markets, including:

  • the issuers’ greater industry- and jurisdiction-specific risks and uncertainties compared to those based or operating in established markets;
  • the difference in scope and quality of disclosure requirements in emerging markets despite appearing similar in form;
  • the PCAOB’s lack of access to the work of PCAOB-registered accounting firms in China, the largest emerging market economy;
  • the limited ability and substantial difficulty of SEC, U.S. Department of Justice and other authorities to pursue non-U.S. bad actors in certain emerging markets;
  • the difficulty or impossibility for shareholders to enforce their rights or pursue shareholder claims as a matter of law or practicality in many emerging markets; and
  • the absence of regard to the investor’s exposure to emerging market risks by index funds tracking a specific emerging market index.

The Statement urged investment advisers that are recommending investments in emerging markets to consider, as part of their due diligence, the sufficiency of an issuer’s emerging market risk disclosures, whether there are limitations on the quality or availability of financial information with respect to these investments, possible limitations on investors’ legal remedies, the effect of market closures on investments and ability to gain access to investors’ assets.

Interim Analysis of Critical Audit Matters

By Alan J. Wilson, WilmerHale 

The PCAOB is conducting an interim review of its critical audit matters (“CAMs”) disclosure requirement, the first phase of which commenced with audits of large accelerated filers for fiscal years ending on or after June 30, 2019. The CAMs requirement was adopted in 2017 as part of amendments to AS 3101 and requires auditors to disclose in their audit reports those matters arising from the audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex auditor judgment.

With preliminary perspectives available from the first phase of implementation, the PCAOB’s Office of Economic and Risk Analysis is asking for feedback from audit firms, preparers, audit committees, investors, and other financial statement users about their initial CAMs experiences, including the costs, benefits, and unintended consequences. The PCAOB expects to use the data collected to determine whether additional guidance or other steps may be appropriate. A report on the PCAOB’s findings is expected to be released in the fourth quarter of 2020, in advance of the second phase of implementation, which impacts audits of all other companies to which the CAMs requirements apply for fiscal years ending on or after December 15, 2020.

The request for comment contains a number of questions by stakeholder type and seeks responses no later than June 15, 2020.


*Material included in this Month-In-Brief publication is for general informational purposes only and does not represent the advice of Ernst & Young LLP or any of its professionals as to any client or particular set of facts; nor does it represent any undertaking to keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome.

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