Francois Janson and Frode Jensen are partners in our New York office.
Legislative reaction to the financial crisis has resulted in the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act"). While much of the Act is focused on the regulation of financial institutions, it also contains significant provisions that affect all public companies which have securities registered with the Securities and Exchange Commission (the SEC).
Foreign private issuers are subject to certain provisions of the Act, are expressly exempt from other provisions, and will not be subject to certain other provisions unless the SEC expressly so provides in its rules. This alert briefly describes the Act's impact on foreign private issuers generally.1
Corporate Governance
Proxy Access: The Act gives the SEC authority to implement rules requiring public companies to include in their proxies nominees designated by shareholders for election to the board of directors. This provision is designed to put an end to the controversy that arose last year when the SEC proposed proxy access rules.2 A number of interested parties argued that the SEC lacked jurisdiction to regulate the director election process because it is a matter governed by state law. Now that its authority to do so has been clarified, it is likely that the SEC will implement proxy access in the near future, but that it will exempt foreign private issuers from that requirement. Foreign private issuers are not subject to the rules governing solicitation of proxies applicable to U.S. public companies.
Disclosure of CEO/Chairman Structure: The Act requires the SEC to issue rules mandating U.S. public companies to disclose in their annual proxy statements the reasons why the positions of chief executive officer and chairman of the board are filled by the same person or by different individuals. This provision has already been substantially implemented for U.S. public companies.3 Because this is a disclosure requirement for proxy statements, it will not apply to foreign private issuers unless the SEC takes additional steps to extend that requirement.
Broker Discretionary Voting: The Act requires U.S. stock exchanges to amend their rules to prohibit brokers from exercising discretionary authority to vote in connection with the election of directors, executive compensation (including say on pay), or any other significant matter as determined by the SEC. Effective for the 2010 proxy season, the NYSE had already amended its rules to eliminate broker discretionary voting for the election of directors, whether or not the election was contested. The prohibition affects not only companies listed on the NYSE, but also companies listed on other exchanges, such as NASDAQ, because most large brokerage firms are NYSE member organizations. The NYSE rule applies to foreign private issuers listed on U.S. stock exchanges, and this provision of the Act will apply to them as well.
Majority Voting: The Act does not contain a provision requiring public companies to apply a majority voting standard to the election of their directors, as was initially contemplated in the financial reform bill adopted by the Senate prior to the reconciliation process.4
Securities Offerings
Private Placement Exemption: The Act excludes the value of a primary residence from the calculation of the net worth of a natural person for the purpose of determining whether such a person qualifies as an accredited investor which may be sold securities in an exempt private placement. This provision is effective immediately. Issuers, including foreign private issuers that offer securities in U.S. private placements, should amend the definition of an accredited investor in their subscription documentation to exclude the value of a primary residence from an investor's net worth.
Beneficial Ownership Reporting
Reporting of Five Percent Positions: The Act empowers the SEC to accelerate the deadline by which certain acquisitions of more than five percent of the shares of public companies, including foreign private issuers, must be reported to the SEC. (The current timeline is 10 days.) Copies of such reports and related amendments will also no longer be required to be provided to the issuer or the stock exchange on which the shares are listed.
Executive Compensation
Compensation Committee Independence: The Act mandates rules that will require all U.S. stock exchanges to impose on listed companies the requirement that compensation committees of the board be exclusively composed of independent directors. The New York Stock Exchange already imposes on listed companies a requirement that the compensation of the CEO be set by an independent compensation committee,5 and Nasdaq requires that it be determined either by a majority of the independent directors or an independent compensation committee.6 However, both exchanges allow a foreign private issuer to follow the corporate governance practices of its home country instead of those prescribed by the listing standards, provided it discloses the ways in which such practices differ from those followed by domestic U.S. issuers under the listing standards, a disclosure which the SEC also requires in the annual report on Form 20-F. The Act follows a similar approach by expressly exempting foreign private issuers from the requirement to have an independent compensation committee as long as they disclose why they do not have such a committee. For foreign private issuers which opt to follow this requirement, the Act provides guidance on the factors that the U.S. stock exchanges should consider in defining who is an "independent" director, and in particular whether the director receives any remuneration from, or is affiliated with, the issuer.
Responsibilities for Consultants, Legal Counsel and Other Advisors: The Act requires that compensation committees be empowered to retain, oversee and compensate consultants, independent legal counsel and other advisors. While not requiring that compensation committees retain only independent consultants and advisors, the Act imposes an obligation that they consider the SEC's definition of independence. These listing standards will apply to foreign private issuers listed in the U.S., unless the SEC uses its exemptive authority to continue its practice of allowing foreign private issuers to follow the corporate governance practices of their home country, provided that the differences are disclosed.
New Compensation Disclosures: The Act requires that public companies provide additional compensation disclosure regarding: (i) the relationship between "executive compensation actually paid" and the financial performance of the issuer, "taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions"; and (ii) whether directors and employees are permitted to purchase financial instruments designed to "hedge or offset any decrease in the market value of equity securities," whether granted to the director or employee as compensation or held, directly or indirectly, by the director or employee. These disclosure changes will be accomplished through future SEC amendments to the proxy rules. Because foreign private issuers are not presently subject to the proxy rules, these new disclosures should not be applicable to them.
Say on Pay: The Act provides that U.S. public companies shall be required to submit to a non-binding shareholder vote not less than every three years the compensation of executives disclosed in their proxy statements and not less than every six years the question of the frequency at which such vote shall be required. In addition, when soliciting shareholder approval of a proposed acquisition, merger, consolidation or sale of all or substantially all their assets, public companies will be required to disclose information on all golden parachutes that relate to the proposed transaction and to submit those payments that have not already been approved to a non-binding shareholder vote. These provisions impose new requirements concerning the content of proxy statements and therefore will likely not apply to foreign private issuers.
Clawbacks for Accounting Restatements: The Act mandates U.S. stock exchanges to adopt listing standards requiring that listed companies develop and implement a clawback policy for accounting restatements. The policy must provide that in the case of an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement, whether intentional or not, the company will recover from all present and former "executive officers" any incentive-based compensation (including stock options) received in excess of what would have been paid based on the company's results after giving effect to the accounting restatement during the three-year period preceding the date on which the company is required to prepare the restatement. This provision is broader than a similar provision contained in Section 304 of the Sarbanes-Oxley Act in that it covers all executive officers and not only the CEO and CFO, does not require that the restatement results from misconduct, and the look-back period is three years instead of one year. As is the case with Section 304 of Sarbanes-Oxley, there is no express exemption for foreign private issuers from this clawback policy and, unless the SEC adopts an exemption, it will cover all companies listed on a U.S. stock exchange.
Auditor Attestation on Internal Control
Exemption for Smaller Issuers: The Act exempts companies, including foreign private issuers, which have a market capitalization of less than $75 million from the requirement to include an auditor attestation regarding their internal control over financial reporting in their annual reports filed with the SEC.
Credit Ratings
Liability of Credit Rating Agencies in Public Offerings: The Act repeals Rule 436(g) under the Securities Act of 1933, as amended (the "Securities Act"). This Rule provided that, when included in a registration statement, a rating assigned to debt securities or preferred stock by a nationally recognized statistical rating organization was not considered an expert statement under the Securities Act. This meant that these rating organizations did not face the enhanced liability for mistatements or omissions that is applicable to these kinds of statements when included in registration statements regarding public offerings of covered securities under the Securities Act. This change is effective immediately and is applicable to the registration statements filed by foreign private issuers.
New Required Disclosure
Disclosure Relating to "Conflict Minerals": The Act amends the Securities Exchange Act of 1934 (the "Exchange Act") to require certain new disclosure regarding columbite-tantalite (coltan), cassiterite, gold, wolframite and their derivatives, and any other mineral or its derivatives determined by the Secretary of State to be financing a conflict in the Democratic Republic of the Congo (collectively, "Conflict Minerals"). These new disclosure requirements are applicable to every reporting company (including foreign private issuers) for which the specified minerals are necessary to the functionality or production of a product manufactured by the reporting company (a "covered person"). Under the Act covered persons must disclose annually whether any Conflict Minerals originated in the Democratic Republic of the Congo or any adjoining country and, if so, then the covered person must describe in an independently audited report the measures that it took to exercise due diligence as to the source and chain of custody of those minerals. The report must also describe any products manufactured or contracted to be manufactured that contain minerals that directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or an adjoining country, the entity that conducted the required independent private sector audit, the facilities used to process the Conflict Minerals, the country of origin of the Conflict Minerals and the efforts used to determine the mine or location of origin "with the greatest possible specificity." The issuer submitting a report must certify the required audit. If the SEC concludes that the audit is not reliable, the report will be deemed not to satisfy the reporting requirement. The reporting company is also required to post the report on its website.
Disclosure Relating to Mine Safety: The Act provides that any reporting company (including a foreign private issuer) that is an operator of a coal or other mine must include, in each periodic report it files with the SEC, detailed information regarding the safety record of each mine, related administrative proceedings, and pending legal actions involving each mine before the Federal Mine Safety and Health Review Commission. In addition, such reporting companies must file periodic reports on Form 8-K regarding any shutdowns and patterns of violations of mandatory health and safety standards at the mine. The Act provides that a violation of these provisions will be treated for all purposes as a violation of the Exchange Act subject to SEC enforcement, and authorizes the SEC to issue rules to carry out the purposes of this disclosure provision.
Disclosure Relating to Payments by Resource Extraction Issuers: The Act requires reporting companies (including foreign private issuers) that engage in the commercial development of oil, natural gas or minerals, to include in their annual reports filed with the SEC disclosure about all payments (including taxes, royalties, fees and other amounts) made by the reporting company or an entity controlled by the reporting company to the United States or to any non-U.S. government for the purpose of commercial development of oil, natural gas or minerals. The new disclosure must be provided in an interactive data standard with electronic tags for six specific categories, and the SEC is directed to make such information, in compilation form, publicly available on the Internet to the extent practicable.
For additional information on the corporate governance and executive compensation provisions of the Act, please see our August 3, 2010 alert, Corporate Governance and Executive Compensation Provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Footnotes
1. The provisions of the Act that regulate financial institutions generally apply to all financial institutions operating in the United States, including those that qualify as foreign private issuers. This alert focuses on the provisions of the Act that apply to all public companies regardless of the type of business they conduct.
2. See Holland & Knight's Public Companies Alert, SEC Proposes Significant Changes to Director Election Process for U.S. Public Companies (July1, 2009), available at http://www.hklaw.com/id24660/publicationid2693/returnid31/contentid54270/.
3. In December 2009, the SEC amended the proxy rules to require that U.S. public companies describe the leadership structure of their board and why that structure is appropriate. This requirement is not applicable to foreign private issuers because they are not subject to the U.S. proxy rules.
4. Restoring American Financial Stability Act (May 2010).
5. NYSE Manual s. 303A.05(a) and (b).
6. Nasdaq Rule 5605(d)(1).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
