May 21, 2019

May 21, 2019

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May 20, 2019

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Companies Quarterly: 2018 Proxy Season Pointers, Disclosing the “Tax Cuts and Jobs Act,” Shareholder Proposals and ICOs

Summary

The end of a year and beginning of the next generally starts the countdown to the public company proxy season. But before moving into 2018, registrants would be well served by first looking back to the guidance that came out of the SEC at the end of 2017.

During the last quarter, the SEC staff had their hands full preparing for new standards impacting registrants’ filings this year, keeping pace with tax reform, tweaking the shareholder proposal process and corralling a burgeoning cryptocurrency market.

In Depth

Getting Ready for 2018 Annual Meeting and Proxy Season

For certain, the biggest change that registrants are preparing for in the 2018 proxy season is the inaugural year of CEO pay ratio disclosure. A lot of ink has been spilled on this controversial new disclosure rule, including on the US Securities and Exchange Commission (SEC) staff’s recent interpretive guidance for issuers.

In addition to CEO pay ratio, registrants need to remember the following as they prepare to file their Form 10-K and proxy statement:

  • New Auditor Report Requirements – In October 2017, the SEC approved the Public Company Accounting Oversight Board’s (PCAOB) changes to the content of auditors’ reports. While the more controversial disclosure requirements of “critical auditing matters” will only be effective for audits of years ending on or after June 30, 2019, other aspects of the new rule are effective for audit reports on years ending on or after December 15, 2017. These changes include disclosure of the year in which the auditor began serving consecutively as the company’s auditor and other improvements to clarify the auditor’s role and responsibilities.
  • New Revenue Recognition Standard – The new accounting rule for revenue recognition (ASU 2014-09) goes into effect in 2018. Calendar year companies will need to apply the new standard in their first quarterly report for 2018. Companies should continue to include the required transition disclosures in their annual reports to prepare shareholders for the anticipated impacts of the new accounting standard.
  • Exhibit Hyperlinking – The new exhibit hyperlinking requirement has been in place since September 2017, but the 10-K exhibit index is the “master” exhibit index for publicly traded companies and more time may be needed to include appropriate hyperlinks for the exhibits referred to on that list.

Accounting, Financial Reporting and Related Disclosures after the “Tax Cuts and Jobs Act”

On December 22, 2017, H.R.1, known as the “Tax Cuts and Jobs Act” (TCJA), was signed into law. The new law has sweeping effects on public companies, including the reduction of the corporate tax rate to 21 percent from the existing maximum rate of 35 percent and the elimination or revision of many business-related exclusions, deductions and credits.

On December 22, 2017, soon after TCJA was signed into law, the SEC issued interpretive guidance, in the form of Staff Accounting Bulletin (SAB) No. 118, addressing reporting companies’ concerns about the impact of the new tax law on 2017 accounting and financial reporting. SAB 118 elaborates on Accounting Standards Codification (ASC) Topic 740, specifically with regard to the accounting for income taxes upon a change in tax laws or tax rates. According to ASC Topic 740, such changes are to be reflected in a reporting company’s financial statements for the reporting period in which the law is enacted.

Under the guidance provided in SAB 118, to the extent a reporting company does not have the necessary information available, prepared or analyzed to complete the accounting under ASC Topic 740, the staff will accept the reporting of a reasonable estimate as a provisional amount for such income tax effects. However, the staff indicated that a reporting company should not adjust its current or deferred taxes for those tax effects of TCJA until a reasonable estimate can be determined. Therefore, if the reporting company does not have the necessary information available, prepared, or analyzed to determine a reasonable estimate to be included as a provisional amount, the staff expects that no provisional amount will be included for those specific income tax effects. Instead, the reporting company should continue to apply ASC Topic 740 using the provisions of the tax laws that were in effect immediately prior to TCJA’s enactment.

Reporting companies are to provide provisional amounts in the first reporting period in which a reasonable estimate can be determined. The staff expects that reporting companies will complete the accounting requirements under ASC Topic 740 on a timely basis, which under no circumstances should extend beyond one year from the enactment of TCJA.

The staff guidance provided in SAB 118 further describes supplemental qualitative disclosures that should accompany any incomplete assessment, including the disclosure of any items reported based on tax laws in effect prior to the enactment of TCJA, the disclosure of items reported as provisional amounts, the reasons for the incomplete accounting, the additional information or analysis that is needed to complete the company’s analysis, and other information relevant to why the registrant was unable to complete the accounting required under ASC 740 in a timely manner.

Beyond accounting and financial reporting requirements, qualitative disclosures regarding TCJA are expected to have a pronounced effect in upcoming SEC filings. As they prepare their upcoming filings, reporting companies should be looking to supplement qualitative disclosures in areas such as risk factors, management discussion and analysis (MD&A), compensation (including provisions for new equity compensation plans), forward-looking statement disclaimers and others.

For more comprehensive coverage of the provisions and effects of TCJA, including strategies and tools that may assist public companies in their assessment of the opportunities and risks of the new law, you may visit our Tax Reform Resource Center.

Staff Legal Bulletin 14I: SEC Signals Deference to Company Boards

On November 1, 2017, the SEC staff issued interpretive guidance, in the form of Staff Legal Bulletin No. 14I (SLB 14I), addressing the procedural and substantive requirements of shareholder proposals submitted pursuant to Exchange Act Rule 14a-8.

The most noteworthy guidance provided by SLB 14I is its commentary on, and potential expansion of, two of the thirteen substantive bases for exclusion of a shareholder proposal provided in Rule 14a-8: the “ordinary business” exception (Rule 14a-8(i)(7)) and the “economic relevance” exception (Rule 14a-8(i)(5)). Both bases for exclusion are dependent upon whether the policy issue raised by the proposal is significant to the registrant’s business. Through its guidance, the staff acknowledged that such determinations often raise difficult judgment calls.

The staff guidance provides that these determinations are, in the first instance, matters to which the staff will show deference to the company’s board of directors. Thus, in a no-action request submitted under either the “ordinary business” or “economic relevance” exclusion principles, the staff will expect to see the analysis of the company’s board of directors regarding the policy issue and its significance to the company’s business. The staff notes that it would also be helped by a detailed discussion of the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.

In speaking appearances since the release of SLB 14I, members of the staff have further indicated that the guidance is not meant as a requirement for companies requesting relief under either of these substantive exclusions. In other words, companies may still receive no-action relief without including a determination made by their board of directors. Companies may still look to precedent for examples of policy issues that clearly fall within the ordinary business and economic relevance exclusions.

However, in cases where the staff has recognized a significant policy issue in the past, a company’s request for no-action may benefit from the analysis of its board. In such instances, a board’s determination may be persuasive to the staff in determining the significance of the policy issue raised by the proposal. A determination by a registrant’s board indicating a lack of nexus between the proposal and the company’s operations may clarify a basis for exclusion where the SEC would have previously been inclined to let the proposal through.

In addition to its commentary on substantive exclusions, SLB 14I also includes new criteria for providing proof of eligibility when a proposal is being submitted on behalf of a shareholder by a designated representative or proxy. The guidance further confirmed the staff’s acceptance of the inclusion of images in shareholder proposals.

As illustrated by SLB 14I, the rules governing the submission of shareholder’s proposals are steeped in procedural requirements and strict deadlines. As such, best practices suggest that management remain vigilant and prepared to respond to proposals in a timely manner.

SEC Brings Enforcement Actions against ICOs

The buzzword of Q4 2017 was “bitcoin.” And with the rise of bitcoin came the rise of other cryptocurrencies, tokens and initial coin offerings (ICOs). The tidal wave of interest and excitement has pushed the reported value of all cryptocurrencies and coins above $700 billion during the first week of 2018. 

While the regulation of the cryptocurrency and ICO market is still emerging, the SEC has begun to make a concerted effort to monitor the ICO market and address transactions and behaviors it believes are both inconsistent with and in violation of US securities laws. On December 4, 2017, and December 11, 2017, the SEC announced enforcement actions relating to the PlexCoin and Muncheetoken launches, respectively. On December 11, 2017, SEC Chairman Jay Clayton published a public statement entitled Cryptocurrencies and Initial Coin Offerings.

The broader message of these enforcement actions and guidance is that the SEC does not appear to be taking a one-size-fits-all approach with regard to ICOs. Instead, the SEC appears to be analyzing each ICO on its own merits. Through its enforcement actions, the SEC has shown increased scrutiny where the statements and actions of those promoting the ICO “tout” its investment qualities, or where individuals behind the ICO have engaged in prior bad acts. However, as is true at the beginning of all great shifts in law and technology, the context may be starting to form but several questions have yet to be answered or even addressed.

Eric  Orsic and Heidi J. Steele also contributed to this post. 

© 2019 McDermott Will & Emery

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Robert H. Cohen, Corporate Attorney with McDermott Will law firm
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Robert H. Cohen is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s New York office.  He focuses his practice on transactional and securities work for a broad range of clients, including initial and follow-on public offerings, registered direct and PIPE financings, private placements, bridge financings, equity line and reverse mergers.

Bob has extensive experience in the areas of mergers and acquisitions, joint ventures, 1933 & 1944 Act representation and licensing and distribution arrangements...

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Thomas P. Conaghan is a partner in the law firm of McDermott Will & Emery and is based in the Firm’s Washington, D.C., office.  Tom represents both publicly held and closely held businesses, underwriters and other sources of capital, corporate boards and board committees and corporate executives.  He advises both U.S. and foreign-based public companies on issues relating to public and private offerings of securities, disclosure, periodic reporting, corporate governance, executive compensation, the rules of the New York Stock Exchange and the Nasdaq Stock Market and compliance with the Sarbanes-Oxley Act of 2002.

He advises US- and foreign-based public companies on issues relating to mergers and acquisitions (M&A), joint ventures, strategic investments, spin-offs, public and private offerings of securities (including initial public offerings (IPOs)), disclosure, Securities and Exchange Commission (SEC) reporting, corporate governance, executive compensation, and the stock exchange-listed company rules. Tom is co-head of the Firm's Capital Markets and Public Companies Group, and partner-in-charge of the Corporate Group in the Firm's Washington, DC office.

Tom is rated in Chambers USA and The Legal 500 for his M&A work, and is cited for being a "strong M&A lawyer who anticipates clients’ needs, exhibits strong management over deals, and translates his breadth of knowledge in a way that clients can easily understand and use." Tom has led several M&A transactions for alcohol beverage clients in conjunction with the Firm's Chambers USA top-rated beverage practice.

Tom represents real estate investment trusts (REITs) in connection with IPOs and M&A transactions. He also advises clients on large-scale global corporate reorganizations and spin-offs. His experience includes advising Tyco International (NYSE: TYC) in connection with is spin-offs of Covidien, TE Connectivity and The ADT Corporation.

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Gary Emmanuel is a partner in the law firm of McDermott Will & Emery and is based in the Firm’s New York office. He focuses his practice on corporate securities matters.

With over 15 years of experience, Gary represents both domestic and foreign companies that are navigating the process of capital raising including initial public offerings, registered direct offerings, follow-on offerings, private placements, PIPEs and bridge financings. Gary has worked extensively with biotechnology and other life science companies, both as company counsel...

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William Hadler, Partner
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William (Bill) Hadler counsels clients on mergers and acquisitions, private equity transactions, securities offerings and general corporate matters. Bill has advised public and private companies, as well as private equity funds and their portfolio companies, in connection with mergers, acquisitions and divestitures across multiple industries, including health care, specialty retail, consumer products and financial services.

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Mark J. Mihanovic, McDermott Will Emery, Corporate Finance Attorney, Mergers Acquisitions Lawyer,
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Mark J. Mihanovic is a partner in the law firm of McDermott Will & Emery LLP.  Mark heads our Firm’s California corporate practice and serves as corporate liaison partner in the Firm’s strategic alliance with MWE China Law Offices based in Shanghai.  His practice is primarily focused in the areas of corporate finance and mergers and acquisitions involving companies in a broad range of industries, with a particular emphasis on technology, life science and health care companies.  Mark has served as lead counsel on behalf of issuers and underwriters in numerous public...

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