CURRENT MONTH (July 2018)
Securities Regulation
SEC Amends Rule 701’s Additional Disclosure Threshold from $5 Million To $10 Million – More Changes on the Horizon
By Howard Dicker and Aabha Sharma, Weil, Gotshal & Manges LLP
The U.S. Securities and Exchange Commission (SEC) approved an amendment to Rule 701(e) under the Securities Act of 1933, on July 18, 2018 — increasing, from $5 million to $10 million, the threshold in excess of which a private company is required to deliver additional disclosures, such as financial statements, to employees in a compensatory securities offering. The change became effective on July 23, 2018, and was dictated by Congress.
The SEC also approved the issuance of a Concept Release soliciting public comment on possible ways to update the requirements of Rule 701 and Securities Act Form S-8, which provides a simplified registration form for compensatory offerings by public companies. In so doing, the SEC has signaled its willingness to consider modernization of its regulation of compensatory securities offerings and sales beyond the legislatively-mandated change to Rule 701(e).
JOBS & Investor Confidence Act Advances
By Carlos Juarez, Mayer Brown LLP
On July 27, 2018, the House of Representatives passed the recently unveiled JOBS & Investor Confidence Act on a vote of 406-4. The almost unanimous decision advances the bill, commonly referred to as JOBS Act 3.0, which is comprised of 32 individual capital formation-related pieces of legislation. Among other reforms, the bill proposes changes to existing rules that would affect regulations on angel investors; the definition of an “accredited investor”; the expansion of “IPO on-ramp” benefits now limited to expeditions for emerging growth companies; and the easing of certain securities regulations to further facilitate IPOs. House Majority Leader Kevin McCarthy, co-author of the original JOBS Act, noted that the Act is “…evidence of this House’s commitment to expanding opportunity for American workers and investors.”
SEC Increases the Number of Companies Eligible for Reduced Disclosure
By Brian North, Jennifer Minter, Buchanan Ingersoll & Rooney PC
The Securities and Exchange Commission (SEC) has increased the number of companies eligible for reduced disclosure by amending its definition of “Smaller Reporting Company.” Certain of the SEC’s disclosure requirements are reduced or eliminated for Smaller Reporting Companies. Under the amended definition, a company will now be a Smaller Reporting Company if it has a public float of less than $250 million instead of the current $75 million. In addition, a company with a public float of less than $700 million can now also be a Smaller Reporting Company if it has annual revenues of less than $100 million. The SEC staff estimates that the amendments will initially result in an additional 966 companies becoming Smaller Reporting Companies. The amended definition will be effective September 10, 2018. A company that qualifies as a Smaller Reporting Company can elect, but is not obligated, to reduce or eliminate some disclosures in its Form 10-K Annual Reports, Form 10-Q Quarterly Reports, proxy statements, and registration statements.
Private Equity and Venture Capital
Director’s Refusal to Sign Documents Curing Defective Stock Grants Constitutes A Breach of Fiduciary Duty
By C.J. Voss and Rich Minice, K&L Gates LLP
In CertiSign Holding, Inc. v. Sergio Kulikovsky, the Delaware Court of Chancery found that Sergio Kulikovsky (“Kulikovsky”), a former director of CertiSign Holding, Inc. (“CertiSign”), breached his fiduciary duty of loyalty to CertiSign by refusing to sign board consents which would have ratified potentially defective stock issuances pursuant to Section 204 of the General Corporation Law of the State of Delaware. The Court awarded CertiSign damages in the amount of $390,455.20 for its legal fees and expenses.
In 2012, Certisign asked Kulikovsky, as one of CertiSign’s directors, to sign board consents, ratifying potentially defective stock issuances under Section 204. Section 204 provides for the ratification of potentially defective corporate acts by board and, in some cases, stockholder action. Kulikovsky refused to sign the consents until another director repaid him a personal debt and CertiSign’s controlling stockholder transferred to Kulikovsky certain shares of CertiSign stock. In response, CertiSign sought validation of the defective stock under 8 Del. C. § 205, a judicial path for the validation of potentially defective corporate acts. The Court entered an order validating the company’s outstanding stock.
CertiSign then initiated an action against Kulikovsky, alleging that he had breached his duty of loyalty by refusing to sign the consents to further his own interests. The Court found Kulikovsky’s actions to be a “quintessential breach of the duty of loyalty.” This case serves a cautionary reminder that a director’s refusal to consent to corporate action may be a breach of fiduciary duty when the refusal serves the director’s personal interests to the detriment of the corporation.
