Originally published June 10, 2010
Keywords: SEC, Division of Corporation Finance, Compliance and Disclosure Interpretations, C&DIs, Securities Act form, Regulation S-K, Exchange Act rules, Form 8-K, Regulation FD
On June 4, 2010, the Division of Corporation Finance of the U.S. Securities and Commission updated its Compliance and Disclosure Interpretations (C&DIs) regarding Securities Act sections (http://www.sec.gov/divisions/corpfin/guidance/sasinterp.htm), Securities Act rules (http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm), Securities Act forms (http://www.sec.gov/divisions/corpfin/guidance/safinterp.htm), Regulation S-K (http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm), Exchange Act rules (http://www.sec.gov/divisions/corpfin/guidance/exchangeactrules-interps.htm), Exchange Act Form 8-K (http://www.sec.gov/divisions/corpfin/guidance/8-kinterp.htm), and Regulation FD (http://www.sec.gov/divisions/corpfin/guidance/regfd-interp.htm). We have selected some of the key questions and answers from the updated C&DIs and set them forth below.
Regulation FD Implications of Directors Speaking Privately with Shareholders
Question 101.11
Question: Does Regulation FD prohibit directors from speaking privately with a shareholder or groups of shareholders?
Answer: No. Regulation FD prohibits a company or a person acting on its behalf — such as directors, executive officers and investor relations personnel — from selectively disclosing material, non-public information to a shareholder under circumstances in which it is reasonably foreseeable that the shareholder will purchase or sell the company's securities on the basis of that information. If a company's directors are authorized to speak on behalf of the company and plan on speaking privately with a shareholder or group of shareholders, then the company should consider implementing policies and procedures intended to help avoid Regulation FD violations, such as pre-clearing discussion topics with the shareholder or having company counsel participate in the meeting. In addition, because Regulation FD does not apply to disclosures made to a person who expressly agrees to maintain the disclosed information in confidence, a private communication between an independent director and a shareholder would not present Regulation FD issues if the shareholder provided such an express agreement.
NEO Status of Principal Financial Officer Serving Part of a Year
Question 117.06
Question: An individual who was the company's principal financial officer for part of the last completed fiscal year was serving the company as an executive officer in a different capacity at the end of that year, and was among the company's three most highly compensated executive officers. Does the company include this individual as a named executive officer pursuant to Item 402(a)(3)(iii), as one of its three most highly compensated executive officers other than the principal executive officer and principal financial officer who were serving as executive officers at the end of the last completed fiscal year?
Answer: No. The company includes this individual as a named executive officer pursuant to Item 402(a)(3)(ii), as an individual who served as principal financial officer during the fiscal year. The company identifies its three most highly compensated executive officers pursuant to Item 402(a)(3)(iii) from among individuals serving as executive officers at the end of the last completed fiscal year who did not serve as its principal executive officer or principal financial officer at any time during that year.
Reporting of Options Assumed in Merger
Question 119.27
Question: In 2010, Company A acquires Company B and, as part of the merger consideration, agrees to assume all outstanding Company B options. The Company B options have not been modified other than to adjust the exercise price to reflect the merger exchange ratio. For Company B executives who are now Company A executives: Should the Company B options that were granted in 2010 be included in total compensation for purposes of determining if an executive is a named executive officer of Company A for 2010 and reported in the Summary Compensation Table and Grants of Plan-Based Awards Table for 2010? Should Company A report the Company B options in its Outstanding Equity Awards at Fiscal Year-End Table and Options Exercised and Stock Vested Table, as applicable, for 2010 and in subsequent years?
Answer: Because the assumed Company B options are part of the merger consideration, they do not reflect any 2010 executive compensation decisions by Company A. Therefore, Company A should not include Company B options granted in 2010 in total compensation for purposes of determining its 2010 named executive officers, and should not report the Company B options in its 2010 Summary Compensation Table and Grants of Plan-Based Awards Table. Because the Company B options are now Company A options, Company A should report them in its Outstanding Equity Awards at Fiscal Year-End Table and Options Exercised and Stock Vested Table, as applicable, for 2010 and subsequent years, with footnote disclosure describing the assumption of Company B options.
Form 8-K Vote Reporting
Question 121A.02
Question: Does the Item 5.07(b) requirement to report the number of shareholder votes cast for, against or withheld with respect to a matter apply only to matters voted upon at a meeting that involves the election of directors?
Answer: No. This reporting obligation applies with respect to any matter submitted to a vote of security holders, through the solicitation of proxies or otherwise.
Rule 144(d) Tacking in Section 4(2) Exchange Transaction
Question 132.17
Question: Is tacking under Rule 144(d)(3)(ii) available when the securities to be sold were acquired in an exchange transaction that was exempt under Securities Act Section 4(2) instead of Section 3(a)(9)?
Answer: Yes, provided that the conditions in Rule 144(d)(3)(ii) are satisfied.
Statutory Underwriter Status in At-the-Market Offering
Question 111.01
Question: Securities Act Rule 415(a)(4) was amended in 2005 to permit an issuer to register an at-the-market offering of equity securities without identifying an underwriter in its registration statement and without a limitation on the amount of the offering. Did this amendment also change the Commission's interpretation, as set forth in Securities Act Release No. 6334 (Aug. 6, 1981), that "any market professional — a market maker, specialist, or ordinary broker-dealer — who purchases a registered security as principal from the registrant or who sells that security for the registrant as agent ordinarily would be deemed a statutory underwriter under Section 2[(a)](11) of the Securities Act even in the absence of a specific written agreement between the issuer and that market professional"?
Answer: No.
Registration of Payment-in-Kind Interest or Dividends
Question 139.31
Question: May an issuer registering for resale shares underlying convertible debt or convertible preferred shares include in the registration statement additional shares that may be issued pursuant to the terms of the debt or the preferred shares as payment-in-kind interest or dividends?
Answer: Yes.
Dividend Reinvestment Plan Registration
Question 212.30
Question: May a registrant continue to use a non-automatic shelf registration statement that registers offers and sales pursuant to a dividend reinvestment plan (DRIP) more than three years after the initial effective date of the registration statement if the DRIP also permits new investors to purchase shares through the plan?
Answer: Dividend reinvestment and existing investor direct stock purchases are continuous or delayed offerings that may be made in reliance on Rule 415(a)(1)(ii). The registration of these offers and sales does not expire pursuant to Rule 415(a)(5). On the other hand, new investor direct stock purchases may only be made pursuant to Rule 415(a)(1)(ix) or Rule 415(a)(1)(x) because they do not fit within the definition of "dividend or interest reinvestment plan" in Rule 405. Consequently, the registration statement may not be used for new investor direct stock purchases upon expiration of the Rule 415(a)(5) three-year period. If the issuer continues to use the registration statement for dividend reinvestment and existing investor direct stock purchases, then the prospectus should be revised to reflect the changes to the offering.
Registration of Securities Underlying Securities Exchangeable at the Option of the Issuer
Question 212.31
Question: If an issuer registers the offer and sale of securities immediately exchangeable at the option of the issuer into other securities of that issuer, does the registration statement also have to register the offering of the underlying securities and, if so, does Rule 415 apply to the offering of the underlying securities?
Answer: Because the exchange is at the option of the issuer only, the investor's decision to purchase the exchangeable security is also, in effect, a decision to accept the underlying security whenever the exchange takes place. Accordingly, both offerings must be registered, and the offering of the underlying securities is deemed to be completed at the same time as the offering of the exchangeable securities. As there is no continuous or delayed offering of the underlying securities, Rule 415 would not apply.
Rule S-3 Eligibility
Question 115.16
Question: If a company defaults on indebtedness, which default is material to the company as a whole, or fails to pay a dividend on preferred stock, can the company satisfy the eligibility requirement in Instruction I.A.5 of Form S-3 in the following fiscal year even if the default has not been cured, or the dividends have not been paid?
Answer: Yes, provided that the company has filed a Form 10-K including audited financial statements covering the period in which the material event of default or failure to pay preferred dividends occurred. If, after the end of the fiscal year, the company has a new material event of default or a new failure to pay dividends on preferred stock, then the company would not be eligible to use Form S-3 until the filing of its next Form 10-K. See Securities Act Release No. 6331 (Aug. 6, 1981).
Question 115.17
Question: If a company declares bankruptcy and subsequently fails to make interest or principal payments on indebtedness as required pursuant to the terms of the indebtedness, can the company nonetheless satisfy the eligibility requirement in Instruction I.A.5 of Form S-3 since the filing of bankruptcy results in an automatic stay of creditors' rights with respect to the company's indebtedness?
Answer: No.
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